All right, great. Morning, everyone. I'm Puneet Souda. I cover life science tools and diagnostics here at Leerink, and it's my pleasure to be hosting this morning CFO Jason Garland, and also joining from Repligen and from Investor Relations, Sondra Kuehn is with us [?] . Glad to have you guys here.
Morning. Thank you. Morning.
So, maybe, Jason, just to sort of kick off and set the stage, I mean, it's been some time now that you've been at Repligen. You've looked,
Eight months now. Yeah.
Eight excellent months, and you have seen the industry at a time. It's an interesting time point, right?
Yeah.
It gives you a greater appreciation, greater insight. So maybe, just tell us, you know, what have you liked at Repligen worse than, and you obviously have experience coming in from GE and other industries, and maybe tell us where there's potentially more room for improvement from your vantage point.
Yeah, no, absolutely. So, I mean, yeah, I was 20 years with GE, and then I was in MedTech for about 5 years before I joined Repligen. And the thing that's impressed me the most is the focus on innovation and differentiation in the market, the speed at which we drive that, as well as the speed at which we take decisions internally, and then also just the customer centricity in terms of what are we delivering and how does it create value for them, right? And that's in the culture. And kind of this, again, Tony's work, like, scrappy sort of culture is, hey, what we need to do to meet those. Love, love all of that.
I think for us, the biggest opportunity is as we can how do we continue scaling up our processes as the business grows? So that's scaling in how you manage more things, how the sophistication at which we drive processes. And I think with that, you can also generate more efficiencies with it. So again, how do you, you know, operate as a bigger company as you grow in a more sophisticated way? And that's probably the place that I would focus on as we continue to improve.
Got it. Okay. Excellent. Obviously, book-to-bill is a major focus for investors. Wondering, you know, if the trends you saw in the quarter are still sort of continuing, maybe talk to us about what you're, you know, hearing from the field, how the sales funnel and opportunities are trending. And the question obviously always remains, is there a risk that, you know, sort of that can fall below 0.9, you know, given, you know, what's happening in the market? I know it's never a straight line, but maybe just tell us a little bit about sort of what you're seeing if those trends are still continuing.
Yeah, no, that's a good question. I so book-to-bill, I think, is, it's a great lens, but it's one lens, right, to look at how things are evolving. And again, for us, if we go back to the second half of 2022 and the first half of 2023, that 12-month period, our book-to-bill over that time was an average of about 0.85, right? So again, clearly eating more backlog than you're building, right? From the second half of 2023 through the first quarter, right, so that nine months, we're at 1.03. So that trajectory change or that inflection has been important for us to see that there's, hey, a different path.
You know, so now I think for us, it's less maybe about the book-to-bill and more about the absolute order of dollars that we bring in relative to our revenue projections and guidance, right? And so, I mean, technically we could get 1.0 for the rest of the year and still, you know, achieve the guidance. And so for us now it's about, again, what orders are we booking? And then so to your point, then what's the funnel behind that to support it? Our funnel, you know, at the end of first quarter was up 20% over last year. And that's our funnel. We talk about our funnel as all the opportunities that have greater than 50% probability of closing. So for that population of funnel, we were up 20% first quarter versus last year first quarter.
So again, that's gonna be that pipeline of opportunities that ultimately translate. So, you know, we said in April that, you know, things were as expected. And now we've gotta watch over the next couple months here to see how that still plays out. But we've a lot of great activity in the field with Olivier, you know, joining as our Chief Commercial Officer. He's been doing a lot of, I'll say, you know, reallocating our commercial resources, bringing in great new talent. We continue to focus on our key account strategy. I mean, that's really important, right?
How do we move the needle more by getting a bigger share of wallet with the big players in the industry and demonstrating to them that we have maybe a larger portfolio of product that they may not have either known about or that they've been able to utilize for us. So a lot of great activity towards achieving that.
Yeah. No, Tony has talked about the systems approach more to serve some of the larger customers. So I wanna come back to that.
Yeah. And then that pulls consumables through and you know, that connectivity. But, again, it's still always back to how do we differentiate or how do our products differentiate in the market, and then how do they create value for our customers? And so a lot of great activity there.
Okay. I was gonna continue with the other set of questions, but maybe let me ask you as a bit of a broader question. One of the questions we get from investors is, you know, the ability of Repligen to grow well above the market growth rate. In your, I wanna hear from your lens, you know, having looked at it in a fresh way, what do you think are the key sort of drivers to that and how sustainable that is?
Yeah. I mean, so first you just gotta look at the math aspect of it, right, when you're not the biggest player, right? Some of the big, you know, one of the big players out there is the market, right? And so how do they ever grow faster than themselves, right? And then so, so being one of the smaller players today on the market, in the scene, that allows us to, you know, grow at a faster rate, capturing more business. And I think one of the things too that really helps us is today, it's that split between commercial and clinical, right? So we're still 65% clinical, you know, 35% commercial.
We get to take a lot of swings, and especially if you play that into some of the new modality areas where there's not incumbents, right, necessarily in that space, you know, you're getting new markets that are created without incumbents. And then again, we can bring our technology in and demonstrate that we can be big players there. So I think it's that again, this, the thing I mentioned earlier is that speed of innovation, bringing product to market helps us grow faster, again, being able to differentiate ourselves in these new markets, if you will, new modalities that are developing. And that helps us to be able to grow faster.
You know, just talking a bit on that, in first quarter, we saw, you know, biotech funding uptick. There was more commitment towards, we, you know, not necessarily preclinical, more clinical targets that are heading into phase two where data looks robust. Just wanted to see if you're seeing any benefit from that. Q2 hasn't been as phenomenal as sort of Q1, but still not bad. But so wondering if you're seeing.
Yeah, you know, this will be a tailwind for us. I think there's a bit of a lag. I mean, we've estimated, call it 9 months plus, right, before that stuff really will close through. It depends, right? Was there funding that paused and you had a company that could just kind of pick up where they left off versus, all right, I gotta start over. And so all that can will add some, you know, I'll say differences in the speed, but we think there's a bit of a lag before we see that. But we absolutely feel that it's gonna be a tailwind for us, you know, with either the new modality space or even it's those smaller players that are gonna have to leverage CDMOs, likely smaller CDMOs, right?
'Cause these new players don't have, you know, the production capability. And it's, again, when we look at our CDMO space, we're seeing that the bigger players, you know, still lumpy, but more stability there. But it's the smaller CDMOs that we haven't, you know, seen pick up. So I think there's a trickle that will happen through the flow, but there's gonna be a lag for sure.
Okay. Yeah. I wanna follow up on this. And since you mentioned CDMOs, can you maybe talk to us about different customer types and sort of what are the trends and order patterns that you're seeing there? CDMOs, you talked about large versus small, but what about pharma and smaller biotechs that are, you know, maybe doing more process development to move their drugs into, you know, production mode eventually? And then we'll maybe since you're touching on that, if you could talk about the newer modalities as well, cell and gene therapy, mRNA, and in-house.
Yeah, sure. So if you think about our overall exposure to kind of those end customers, call it about half of our exposure's coming from pharma, which is including the small biotechs. And then about 25%-30%'s coming from the CDMOs. So if you think about the order cadence kind of over the last couple of quarters, overall orders have somewhat stabilized in, call it, $150 million-$160 million range. Where we're seeing continued strength and momentum is really within our pharma base. And so year-over-year, pharma orders were up roughly in line in Q4. And so our thoughts are the inventory destocking component is largely behind us. There is some capital conservatism within pharma, but overall it's maintaining its strength. So there are some green shoots there. When you look at CDMOs, they are tending to be a little more lumpy from an order base.
They were down year-over-year. They were down sequentially. Q4 was kind of a high watermark for the year for CDMO orders. And so we haven't really seen a sticky rebound for us to feel really confident that the headwinds are largely behind us from the CDMOs. But if you think about CDMOs from a biotech exposure, we were just talking to the biotech funding. That has improved in Q1. Remains to be seen how that'll play out throughout the year. But when the biotech funding starts to come back, hopefully that will start to spur activity at typical tier two CDMOs. And that's what we're hopeful for going kind of the back half of this year.
Okay.
And you were talking about.
New modalities, yeah.
Yeah. So we've seen continued strength in new modalities, over the last couple of years despite kind of the biotech funding and, and our peers seeing headwinds there. And where I think we're seeing our strength is it's a new workflow, new modality. So there isn't really any incumbent that's really well ingrained in those workflows that we're really battling against. And if you think about our product offerings, they're very well suited to the new modality space. They're, they're closed systems. They're sterile, less prone to contamination. And at the end of the day, what our products do is they increase yield or they make the process more efficient for our customers. And so we're really scaling with our top 20-25 customers from phase one, two, three, and commercial.
So we're hopeful that, for this year, we'll be growing those new modalities and kind of that mid to high single digits.
Got it. Okay. Excellent. And just rounding out the destocking question, just at this point in time, Sondra [?] , what's the level of sort of visibility into, you know, these customers? I mean, again, you're offering, you know, products that are now turning into systems, but to a different degree, you have visibility into each customer. So maybe just help us understand sort of like, has that improved over time?
From an inventory level?
Yeah.
So it's really hard for us to know what inventory levels are really sitting at our customers. When we're having the discussions, it's not around inventory levels. It's about the capacity, their programs that are going through. When we're talking about inventory destocking, we're talking about Repligen largely behind us. Just another point on the CDMOs, it's not a destocking component that's the softness of CDMOs. It's more project-based.
Okay. Got it. Okay. Makes sense.
Yeah. We just haven't gotten into that, you know, customer inventory management level. Then we're just using their longer-term views and the guidance they're giving us and protecting that line.
Got it. Okay. Excellent. Maybe just shifting gears to margin, you know, maybe just walk us through, you know, key levers of, you know, op margin, op margin improvement for Repligen. Obviously, we saw during COVID times, volume leverage came through, significant, margin improvement then. But where are, you know, there's expectation to recover back. I'm not sure back to those levels, but maybe just help us understand where we are today and where we can be in the drivers.
Yeah. I mean, I think the COVID days margin rates, I you know, I haven't seen the path yet in the short term, right, to get there. I think those products that we sold had incredibly high margin rates. You know, it was and it was a high mix towards that. And I think that we need to think about also the structure of the business has changed since that time too, right? I mean, we've done a lot of acquisitions since 2020, right, in building out our fluid management systems. And so with those acquisitions also come, you know, a footprint and structure with them. And so certainly that's a place we'll optimize.
So to your question about what our margin levers are, one is how do we, you know, find the right optimal footprint, right? Continuing. We've talked about site consolidation. Is there more that we can do there? Certainly volume leverage will help. But I think there's leverage you get on your fixed cost structure, which is like real volume leverage flow-through. And then there's the other piece, which is, hey, we may be operating at a capacity today for people and equipment that could do more than it's being done today, right? And you could say, well, why aren't we reducing that structure?
And then it's that question of, okay, do I reduce now or and then that puts me at risk to grow six months, nine months from now, or do I have to absorb, if you will, you know, that, that, that, you know, less than a hundred, you know, less than it will never be 100%, but lower utilization that you're absorbing now. And I think that that's another key lever for us as, as but I, I differentiate that from pure volume leverage. I, I look at it as the efficiency of being able to do more than with the same amount of resource. And so I think those are gonna be the, the big drivers.
I don't again, I think the mix of business is something that, you know, this year we're very much impacted also with the proteins being down so much, right? That's a above average margin, you know, product client franchise for us. So as that comes back, you know, we'll see some lift. Again, this year, you know, we're operating around a flat price, right? So, but next year, you know, we think we get back to, you know, growing some, maybe it's 1%-2%, you know, a price next year. So again, that becomes a volume or sorry, a margin lever for us as well. So we're looking at all the pieces. I think that, you know, continuing to optimize at the cost of goods sold level.
And then also the other area then would be our OpEx, right? And we do, you know, even embedded in our guide for this year, you know, there's gonna be a reduction of OpEx through the course of this year that again allows us to get some volume leverage both in the year as well as then for next year.
Got it. Okay. You know, I recall Tony's slide where, you know, it wasn't too long. It feels like not too long ago when, you know, these some of the capacities were expanding 7-9 times on each product. Maybe just, maybe double click for us sort of how much do you think, and how long do you think it'll take us to, to sort of, you know, see this sort of underutilized capacity and how much of that is sort of driving the, you know, margin weakness?
Yeah. I mean, so I would say there's the physical space, right? The footprint. And that's some of those numbers there. I think we feel like we still have a good up to 5 years of runway, you know, in terms of physical space. That doesn't mean obviously that we'd have to purchase certain equipment, right? Certainly, you know, labor resources would go up. So it's not just, oh, we can just automatically do more. But from a physical space, I think we still, you know, call it 3-5 years for sure runway. And for me, again, it's hard to do the math on, well, how much, you know, are you losing because you're not at full capacity? But I'll put it in this context, right?
If we kind of keep our fixed cost structure about the same into next year and we get to a double-digit growth, you'll get, you know, at least 50 basis points of fall through there, maybe more at the gross margin level. So that's the way to think about it, right? How much more can I, as my volume and sales comes back, how much more, you know, leverage can I get on the fixed cost structure that I have? And so that's how I kind of quantify 'em.
Got it. Switching gear to a topic that's maybe on investors' mind today. I mean, just China. I know that's a smaller number for you today, but maybe any updates on China or China CDMOs. And I mean, one of the peer companies reported last night and they had, obviously, you know, they're expecting even sort of down in China and they lowered their guide. So just wondering if there are considerations as you look at China, how does it look to you in different end markets as well?
Yeah. That's a great question. I, to your point, it's a good news, bad news, 'cause we're, we're gonna be at about 5% of our sales is China, in 2024. So again, good news in that the exposure's limited, but bad news is that, hey, you'd love to see that the other way. But, and we were 10% two years ago. So that's a little bit of the order of magnitude of change. Yeah, you know, we, we are still, very cautious on, on China. I mean, I, I think if you ask me what are, you know, we have lots of puts and takes as you go through the year, opportunities and risks. And, and I'd put China more on the, the question mark risk side, right? As we look through the, the rest of 2024.
You know, we do see that it, you know, I don't know that we think that it drops significantly more into next year. So it probably becomes more of a neutral, you know, sort of, driver in 2025, right? When we think about 2025 growth, you know, it won't be the same order of magnitude of headwind that we've had this year. But right now we're, there's still a lot of question marks. You've got BIOSECURE Act. Now there was some, you know, some positive news there in terms of the grandfathering period, right? Was extended to, I think it was eight years from now. I know there's a lot of activity, but just a lot of question marks, right? In that region. And I think that, you know, we're very cautious and watching it closely.
Got it. Just, rounding out China. There's discussion of stimulus, but then again, how much of that truly ends and ends up in bioprocessing and maybe process development? It's hard to say. So, what's your latest?
No, same view. It's hard to say, you know, what really gets allocated into that, to this industry. And then I'd go one step further is, you know, how much of that then in the industry gets steered towards local, you know, businesses, local CDMO, local labs, right? I mean, we've heard that many of those are, you know, new and empty, right? Or low, low capacity. And so again, if I'm thinking about, you know, the local view of the government there, I'm gonna wanna incentivize recovery in those local businesses more so than, you know, foreign companies to live selling in. So I think it's still a big question mark for us how it ultimately helps.
I see. Okay. Just circling back on questions around pharma. There was. BMS had talked about R&D, you know, rationalizations, and there are some. There were already some ongoing cuts at Pfizer. How much does a single large pharma change in R&D or does that—how much does that impact?
It's hard to say. I mean, again, the good news for us is that there's no single customer that is, you know, this huge exposure for us, you know, from a, you know, a percentage of our sales. So again, we're well diversified across, you know, across the industry and that's helpful. Certainly we'd love to grow some of those, like I said, key accounts of which some of those names you said certainly would fit there, and love to grow with them. But, but again, because of the diversity as one maybe slows down, you know, we're, we're able to manage some of that, that overall impact. Again, the R&D cut today, how does that trickle through? Does it really affect this year? Maybe not next year, right?
It's a, how do you project the impact on that for the future years when it would be coming to us for equipment?
That's right. I wanna switch to proteins. I mean, expected to be down 30%-35% this year. How should we be thinking about the pacing and cadence of that and just maybe tell us what's sort of behind that with, you know, Purolite and Millipore?
Yeah, yeah. That's great. So again, we, we talked about proteins being down 30%-35% for the year. So call it 32-ish, you know, the midpoint. What we've been sharing is think about that has spread kind of evenly across the, you know, the year, about eight a quarter, if you will, of, of headwind. And so, so that will, you know, we still, still see that playing out. I mean, you're right. The, the big drivers there, it's one, it's just the Cytiva, the insourcing that they've done. You know, we, we had $10 million of sales last year and we'll have, you know, very little, this year. So that's a, you know, and then we've had some, product discontinuations. That's another one that, that we get to put behind us this year.
And then, and then some of our other partners, I think had, you know, it's kind of like a mini destocking sort of dynamic in that there was inventory buildup in 2023 that they're burning through in 2024. And so I, I think for us, then we look at these are discrete headwinds in 2024 that we're able to put behind us. And then in 2025, we see ourselves getting back to, you know, good double-digit growth. You know, Purolite, you mentioned, is a really important partner for us. And so, you know, they'll certainly be a big part of helping us get to that growth trajectory.
Then you're saying sort of normalized double digit growth in 2025 for this Proteins?
Yeah. For proteins I'm talking about. Yeah. Yeah. Yeah. Yeah. I mean, again, you put $30 million headwind both sides, you know, it really helps. It's fair enough.
Okay. I wanna switch to M&A. You know, you had a Metenova FlexBiosys. Tell us about sort of the integration that's going on with those deals. And maybe just, you know, tell us a high-level thinking on M&A at this point and sort of the capital allocation as you're thinking about it.
Yeah. So yeah, I mean, the integrations are going really well. You know, we announced some new single-use bags that came as a part of the FlexBiosys. We got their technology, some of the equipment they had, and we integrated our technology and development in with them. And we just launched, again, some new single-use bags. The next step of that will be to take the single-use mixing technology that Metenova has. Again, as you know, they're primarily a repeat business, stainless business, but they have been, you know, applying that technology to single-use. And so now we can couple that together in those bags we just launched and see that happening in the second half. And so, again, back to your question earlier about what are the things that impressed you about Repligen?
Our ability to integrate product technologies with acquisitions is, it's phenomenal. I mean, the fact that we're launching new products with new acquisitions that are, you know, not even 12 months older, it's pretty amazing. And so those, those continue to go well. You know, M&A remains a, a priority for us. You know, got a, an active, you know, you know, game board, if you will, of, of, of opportunities that we're looking at. And, again, it's, it's, it's the staying, staying in our, you know, bioprocessing space, right? And, and it could be, again, those, those tuck and bolt ins, and we'll continue to look at what else is out there. You know, it's, it's always about the match of what we want and what's available, right? And so, a lot, a great activity there.
Got it. When you think about, as you, as you said, you know, taking a product the first 12 months, adding new products into it, and maybe building the solutions approach that Tony has talked about too, do you, you know, does that give you a path for more pricing improvement, or, you know, is the, or does it essentially get you sort of more, again, product-based so it gives you more volume?
Yeah, it's a little of both, right? I think we would say that for the vast majority of our products, you know, we believe they're a value creation. And so the pricing is, it's the premium that we think is fair, right? To be able to capture for the creation, the value creation, and less about, oh, I'm competing head to head on with a competitor, right? I think as we build out the fluid management portfolio, that's where, again, as we launch new products, what we'll be, you know, balancing that to your point, the volume side, right? How do we get more out in the market, you know, and more, you know, I'll say, examples and cases, right? That we can lean on. And so, you know, you may take a different pricing approach with that type of product.
But, again, I think that this year it's just because there's, you know, a lot of question marks, we did feel like this was the year to be aggressive on pricing, right? And especially after the last couple of years as well, our customers have been taking a lot of inflation. And so I think that evolves as we get into next year.
Okay. In the last minute, I just wanna touch on, you know, two sort of larger areas. One is Alzheimer's drugs. You know, we get this question sort of how is Repligen positioned into that and what's the potential upside if those were to sort of, grow. And then, another part of the question is on GLP-1, but that's sort of mixed because there's obviously synthetic production as well as culture-based production there.
Yeah. So to your point, we'll start with the GLP-1. So there's two ways to manufacture. One synthetic, one biologic-based. There is no opportunity for Repligen in the synthetic process. When you think about kind of the biologic process, there may be opportunity for us through the Metenova acquisition, in filtration, very, very small though. So I wouldn't think that that's a large catalyst for Repligen going forward. In the Alzheimer's, I mean, it, it's great for the industry. But again, similar to GLP-1s, we're not baking that in as a huge catalyst for Repligen. The sweet spot for us is really in the mAbs and the new modality of cell and gene therapy, mRNA, which encompasses the majority of the new modalities revenue for us.
Got it. Okay. Well, that's all the time we have. This was a great discussion. Thanks for being here.
Thanks for having me.
Thanks, guys.