Life science tools and services analyst here at Stephens. Really pleased to be joined by the Repligen team. We have President and CEO Olivier Loeillot and CFO Jason Garland up here with me, and Steven from IR in the audience. Before we get started, this will be a fireside chat. I'll try. I've got plenty of questions, but I'll try to pause along the way if anybody in the audience has questions. So that preamble out of the way, Olivier or Jason, I'll turn it over to you for any introductory comments you'd like to make, and then we'll launch into Q&A.
Oh, well, good morning, everybody. We are really happy to be here with you today, and it's always a pleasure to join the conference that Jacob and the team organize here. So, yeah, as Jacob mentioned, very happy to answer any question you might have. We were very happy about our quarter three results, so we're going to be happy to give you more details today and, again, answer any question you have. Yeah.
Perfect. So, Olivier, maybe we'll just start super high level. A lot of things going on in the bioprocessing space the last five years. Just maybe on the current state of the bioprocessing industry, you know, how confident are you behind or how confident are you that destocking is behind you? And then what are the kind of key macro swing factors from here that that'll determine the kind of pace of recovery?
Yeah, no, maybe I start taking a bit of a step back. I mean, as you all know, we enter into 2024 having quite a lot of headwinds. I mean, we you know, we had the protein headwind, we had the COVID headwind, we had the China headwind. So when I look at where we are after three quarters, I mean, we are doing really well across the board finally. And I just give you a couple of numbers. The first one, our orders year to date on the pharma side are up mid-teens. Our order year to date on the consumable side are up high-teens. So when you take into consideration all of the headwinds we had to manage, it's a really great performance overall. So we are very happy.
I just gave those numbers to kind of illustrate that, yeah, destocking is certainly pretty much completely behind us. I always mention there might be just a couple of very small pockets of inventory still existing, and these are mostly on the single-use side where, again, during COVID, everybody was desperately looking for tubing, clamps, all of these basic single-use components, and some companies just probably bought worth five to 10 years of this component. So that's probably really the only remaining area where you would say there are some pockets of inventory. But overall, we definitely think it's very much behind us at this stage.
So maybe just for context, as we kind of come out of this super cycle of sorts we've been in the last couple of years, I can't remember the last normal year we've had in the bioprocessing space. So maybe looking back to look forward, I think historically there were good, great, and maybe not so good years for the space for the bioprocessing industry. Can you just talk about historically, what were the key drivers of the great years and then what happened in the kind of more muted years for the space, and what did those cycles look like historically?
Yeah, no, that's a great question, Jacob. I mean, the beauty of the bioprocessing industry before COVID was it was very predictable. I mean, yeah, and I've been in that industry for about 30 years. I mean, a bad year for the industry was about 8% growth, and a good year was about 12%. So when you were entering into a new year, you were just debating whether it's going to be the lower end 8% or more the higher end 12%. And obviously, if you were a company like Repligen, you would always think, "I'm going to do better than that anyway." But I think what made a year being better or maybe lower was there are two potential factors. One could have been some geopolitical effects, even though this is an industry that was never very impacted by that. But there were some specific events.
I mean, if you think a bit about the big crisis, financial crisis, it did have some impact a little bit on the industry. That was probably a year that was toward the lower end of the bracket. So there is a little bit of that, even though it's one of the industries that probably suffers the less from this type of event. The other factor that I think has impacted more in the past was when there was a new class of drugs coming that had a huge potential. I remember when these anti-cholesterol monoclonal antibody drugs made it to the market. I mean, this gave a huge boost to the market. So that was a year where probably the overall growth was even more than 12%, probably 13%, 14%, or so.
When there is a new class of drug coming, it can have a huge impact on the overall market growth as well. Obviously, we're probably going to talk about it. There are some of these new class of drugs coming right now, which should definitely be one of the tailwinds for the industry in the coming few years, for sure.
Got it. And then just to one follow-up on destocking, you mentioned maybe that there's still some pockets out there. But, you know, I think what's been tough for us to see is you kind of maybe had artificially high demand during the COVID years as people built up inventories. And then presumably more recently, people have been utilizing your products probably more than they were buying from you as they worked down inventories. Do you think the kind of revenue trends you're seeing right now represent the utilization rates from customers, or do you think there's still a little bit of an opportunity to see some catch-up, as customers, some customers return to more normalized levels?
Yeah, so that's a very broad question, Jacob, because and I will try to be concise, but maybe there are three sides I'd like to cover here. The first one is, unfortunately, we are dealing with an industry that has never been particularly strong at forecasting. And it's a nice way to say it. I mean, we are always struggling to get very accurate forecasts from customers. And I don't think COVID has improved it from any angle at all, because on the contrary, it has added another dimension where people rush to buy even more and then realize, "Oh, now we've got probably too much for the next two, three years." We're out of that cycle. But let's say the first factor is forecasting has never been the biggest strength of the industry here.
The second factor that I think we need to think about as well in terms of potential growth of demand and so on is there are a lot of new modalities, so as we all know, and we're not sure yet how fast the pickup is going to be on that side, and I mean, take the example of the Sarepta drug. I mean, this has been like going back and forth, and those guys obviously were very optimistic, and they probably built a lot of inventory, and then they got only the partial approval.
So then probably all of the suppliers said, "Oh, now we won't see any color of any demand for the next five years and so on." And then they got the extension, and now probably we are back to, "Oh, demand is going to increase a lot." So I think new modalities are so new for everybody, including FDA and so on, that it's becoming less predictable to really know when are these guys really going to make it to the market and what's going to be the exact demand signal on that side. So I think that's another piece really to take into consideration. And then the last piece really, I would say, is Asia. And I call it Asia this time because I think Asia has become a totally different Asia today than it was for sure prior to COVID.
Prior to COVID, you really had China like was generating more than high-teens growth, probably above 20%-25% growth year -on -year for the previous five, 10 years before COVID hit. But the rest of Asia was somewhat a little bit less growth, less speed, and so on. And now the picture has flipped completely the other way around, where a country like South Korea, Japan are growing extremely fast, and China has been like much more challenging for the last few years. And so what's going to happen? Is China going to pick up again at what speed? What's going to be the play for a U.S. European supplier and so on? And then what's going to happen in South Korea, Japan, Singapore, and so on?
So that's the other dimension that probably will also potentially generate some more tailwind from my point of view.
But a couple of things to unpack from that as you laid that out. Maybe let's first just go to new modalities. I think actually what might be helpful, and I think you've talked about it before and others have, but nascent industry, still early days, probably a lot of people, myself included, following the space were not around for the advent of biologics. Could you maybe give us a history of, you know, are there any parallels between the RAMPs of cell and gene therapy and biologics?
Yeah, no, absolutely. I mean, again, what's interesting in life sometimes is, you know, you learn from experience of what happened. I mean, again, I remember I used to work for Lonza at the really beginning of the CDMO business model. And we were like really ahead of anybody else in terms of antibody drug conjugates as early as towards the end of the 1990s, beginning of 2000 and so on. And everybody thought like antibody drug conjugate will just kill the market completely and there will be no more mAbs and everybody will switch to antibody drug conjugates. So company, specific companies invested a huge amount of money building manufacturing sites.
And then there was a bit of a hangover period after two to three years where people realized, well, you know, it's more complex to manufacture, there are more side effects potentially, handling the toxin is very challenging and so on. So then everybody like flipped the other way around, which is, oh, it's bad, no antibody drug conjugate. And here we are now 20 years, 25 years later where it's like the fastest growth growing new modality. So same happened with CAR-T exactly, well, oligonucleotide in between then CAR-T and now with gene therapy. So I think everybody needs to visualize those new modality like in like a curve where you've got two phases and you've got the first three years where it's probably going to grow like very highly because every consultant for the pharma company, you should all do that and nothing else.
And then there is always a bit of a hangover for a period that can be sometimes like up to three, five, 10 years in some cases. But then when the second wave starts, then typically this is where you start to see a very, very solid and then very, very long-term type of growth that I think we're going to see with most of these new modalities in the future.
Got it. And then maybe kind of double-clicking on that, you know, I think we call them emerging modalities now, which includes cell and gene therapy. I think record quarter in Q3, can you just talk about what's driving that strength? Is it specific commercial customers? You mentioned one that is topical for people. Is it cell and gene therapy CDMOs? Is it your product portfolios and all the above?
Yeah, no, I mean, we are very delighted by what we're doing on that side, to be honest with you. And coming from another side earlier and so on, I know like we are the right size company to be able to support this type of smaller products. And when I say smaller products, a lot of them are coming from big pharma, by the way. It's not like new modalities are only coming from small biotech. In fact, the majority is coming from big pharma. I mean, if you are a big pharma today, it's very often like more than half of your funnel is on new modalities. So what I think we've always done and we will do in the future is make sure we better cross the board. You can't just go full speed on one modality versus the other.
I mean, we have a play everywhere. And we said last year new modality were about 18% of our sales. Majority last year was gene therapies and mRNAs and antiviruses cell therapy. I think this year might be a little bit different. I don't have the exact number yet, but we are making sure we are really well positioned on each of these different buckets. And what we love is we have a very broad range of customers. I mean, we've got probably, I think, about 25 customers that are above $1 million of sales per year for us. And we love that because it means like, yeah, we can absorb potentially a couple of bad news and compensate with other customers. So that's how we see the market here.
Maybe just to get out of the way, new modalities includes mRNA, which you mentioned. Obviously, vaccines a bit topical the last week. I think Dan beat me to the punch on quantity, or you quantified it for Dan yesterday, I think 4% vaccine exposure. But any other comments you want to make about kind of vaccine exposure, any kind of macro risk? And then maybe while we're on it, just mRNA beyond COVID, I think that's been something debated. If you have any thoughts on that.
Sure. No, maybe the only thing I would add to what we talked about yesterday is the new vaccines that are being developed based on new modality are not real vaccine when you think about it. Remember when we were kids and we got this vaccine shot and so on, that was indeed to get protected against potentially getting polio or getting meningitis or getting one of these bad diseases five years, 10 years, 20 years down the road. The vaccine that are called vaccine today are not really vaccines from the point of view. They are here to cure. I mean, they are here to cure you from a cancer, for example. I mean, if some of these mRNA vaccines that are being developed right now are focusing on some of these the worst cancers that you can get diagnosed with, they are just here to cure you.
So they are called mRNA vaccine, but in principle, they are like any type of other drug. So even though we said it's part of the 4% of our sales exposure, I don't think it's a real vaccine. I mean, that's probably going to be treated like a normal drug. So our exposure is somewhat really limited at this stage.
Okay, and then maybe just following up on Asia Pacific, just to double-click on, you know, I think when people think of APAC, they think of China and for good reason of the growth that we've seen there over the last decade. But to your point, there's a lot going on in South Korea. There's some big CDMOs, and we'll get to the CDMO space in a bit. But can you just talk about APAC beyond China? And then just on China, you know, a good grower historically, do you think anything's changed about the growth trajectory? I think local competition's kind of picked up. Any thoughts on that?
Yeah, no, absolutely. I'll start maybe by the outside of China picture because I mentioned two countries, mostly South Korea and Japan, and they're growing very fast, but for very different reasons right now. South Korea is growing very fast because the country has decided like almost 20 years ago or so that biotech should be a big area of focus. And you're right. I mean, the biggest CDMO in the world is there. The biggest, one of the biggest biosimilar companies there. And then you've got another couple of very big companies there. But what I think is even more important to know about South Korea, there is a tailwind of probably, I would say, 20-30 mid-sized biotechs that are growing very fast as well.
For that reason, the Korean market has been growing very nicely and will certainly keep on growing very nicely for the next few years. Japan is a totally different picture because Japan kind of missed the biopharmaceutical wave completely in the early days. They never really managed to be fast enough to position themselves into monoclonal antibodies and so on. So then they tried to be fast and succeed on the cell therapy side, but they've been also a little bit too slow on that side. What has really changed drastically now between COVID and now is like the government has realized there is an urgent need now to push local companies, local manufacturing of biopharmaceuticals because we need to become more self-sufficient in case a new pandemic situation comes or in case anything else could happen.
The government in Japan has invested a huge amount of money into the biopharma industry over the last three, four years. In fact, there are a couple of companies that just didn't exist before COVID that have just gotten birth and were just focused 100% on ensuring Japan has got some more of an own play in the future. Those two countries are definitely growing very, very nicely for different reasons. Talking about China, I've always been very bullish about China. I spent a lot of time in China doing business there in the past. The market has changed completely, Jacob, and you kind of alluded to it.
It has changed completely because, first of all, the government focus has changed completely, where the government was just focused on biosimilars up to probably a year and a half, two years ago. They started to realize like having 10, 15 versions of the same monoclonal antibody as a biosimilar didn't make any more sense for them and that they had little appetite to continue investing into a number 16, 17 biosimilar of Avastin or Herceptin. So they have kind of decided to really push pharma companies to become innovative. And I mean, as you can imagine very well, you're not exercising the same muscle developing a biosimilar or developing a brand new drug. And there was really basically only one company that was doing that, a company called BeiGene. They just changed name last week, by the way.
But there is a couple of others, Akeso Bio and probably Innovent as well is trying now. But we are at the point where, first of all, these local companies have to change their area of focus completely, but also they are facing reimbursement prices that are a fraction of the prices that is getting reimbursed. Here you look at PD-1 drugs, and I'm going to tell you the reimbursement is about 5% of the reimbursement here. So when you get 100% reimbursement here, you get 5% in China. So you can imagine that you have to be very efficient on costs and you have to find a way to survive. So that's why local manufacturing has picked up very significantly here. I think for a company like ours, there will be a play again, but you're only going to be successful if you really bring innovation.
Because if you have me-too products, I mean, there is going to be much more than enough locally. So I think we're going to be successful because we're an innovation company.
Got it. Just a couple more on the macro. Maybe just CDMO demand. I think tier two CDMOs kind of came back in Q2. It seems like the bigger guys came back in Q3. I think Catalent's inventories have been down the past couple of quarters. Can you just remind us, you know, how much of your revenue comes from these CDMOs and maybe flesh out what you're seeing from that customer base?
Yeah, no, absolutely. Last year, approximately 25% of our business was coming from pharma and about 55% coming, sorry, 25$ from CDMO and 55% coming from pharma. I think it's going to change for different reasons. First of all, obviously, we are seeing like a huge order increase, sales increase on the CDMO side from now the last couple of quarters. I mean, in fact, our sales at CDMOs in quarter three was back to the 2022 level, which is a great signal for us. We're very excited. We've always talked a lot about CDMOs because for us, we know like when CDMOs do well again, it means that the overall ecosystem is really doing well. CDMOs always recover typically about a year after pharmas from the point of view.
As long as pharma are not doing very well, the last thing they want to do is to outsource because probably they have less demand for new products. They probably have less demand even for some of the commercial drugs, so the first thing they do is they close the CDMO tap. Whenever they start to get better, the first thing they do, they open it again and go to CDMO, so it's not unusual to have a year of lapse between the time pharma recovers and CDMO recovers, so for us, we've seen pharma recovering indeed already five, six quarters ago, so now to see CDMOs recovering that much is a very good signal for us for sure, and what we liked a lot was also we saw really improvement on both sides, both the large CDMOs as well as the small ones.
Large ones, you've read a lot of announcements from the big guys lately signing very big contracts. What was a better surprise for us was the small CDMOs. And I maybe you remember in quarter two, we mentioned like we had both recovery of small biotech and small CDMO. We didn't have the same in quarter three. And we had a very nice recovery still of small CDMOs, but we didn't have a small biotech. So we tried to understand why are small CDMOs doing better. We think there are two potential explanations. The first one is a BIOSECURE Act. And I know for sure, talking to a couple of CEOs, like they are started now to get projects coming from the China CDMO that has landed into their pocket.
And then I think the reason why they start to do better, even though small biotech are not doing very well, is because the large CDMOs are doing much better. And somehow when they do much better, they start to be more picky. And when you are large CDMOs, you don't like early phase projects because they are like blocking all of your R&D resources and you want to just focus on the large scale processes. So from that point of view, I think the tail end of CDMOs is also probably benefiting from that right now.
Got it. And then you alluded to kind of biopharma trends, but maybe we'll also just double back on that. I think early stage customers, small piece of your business, the ones you're sensitive to funding, but kind of what are any thoughts of why those were better in 2Q and maybe a little bit lighter in 3Q? And then just again, kind of similar question on pharma side, which has been stronger, obviously.
Yeah, no, absolutely. We're trying to understand that to be very open, Jacob. I mean, we were very happy in quarter two to see both the small biotech and small CDMOs say, "Hey, we're back. Everything is fine. We're back on track. No issue anymore." So to see small biotech down in quarter three was the only real negative news we had from our business side. I think there are a couple of potential reasons. The first one is where biotech funding has been doing pretty well this year. I mean, it has been now going down for two quarters in a row. And so year to date, the biotech funding is still up like 43%-44% versus last year, which is great. But when you look at the quarterly pattern, it went from $18 billion to $15 billion to $12 billion.
So again, small biotech CEOs who have been burned so much over the last two to three years, I can imagine they are like watching that very carefully, thinking, "Is it now going to go down from 9 to from 12 to 9 and then we're back to a bad cycle?" So that's something to watch. Again, overall this year, the number is still good. So we need to watch quarter four. And then the other indicator you want to look at is obviously clinical trial start. Here there are a couple of data circulating. One suggests the number of clinical trial starts this year is pretty flat. Another one suggests in the U.S. in particular, year to date, it would be down 17%, which would kind of confirm that some of these small biotech are still waiting a little bit to kick off more of this clinical trial.
Something to watch. Again, that's the only kind of little area of concern for us. It's only 10% of our sales, small biotech, but that's the last piece we would like to see recovering fully in the next few quarters for sure.
Got it. And maybe that's the last kind of macro question for me, just this clinical versus commercial, as we're thinking about next year. I think there's a view from investors that commercial will recover better next year and maybe clinical. There's some questions and anything you're monitoring on that piece of it besides the funding environment. And then I think just kind of longer term, I think there's been a thesis from people for some time of, "Hey, you've got more clinical customers. Ultimately, the pipeline progresses. A lot of these products you've launched in the last seven years have been seeded." And at some point, a lot of analysts would suggest we get some commercial approvals and the volumes that are bigger. Just thoughts on that opportunity longer term?
I can tell you, Jacob, I love the fact we are 65% clinical, and that's not going to last forever. I mean, I've gone through that journey myself. I mean, when I joined what was GE Life Sciences in 2010, what was about the same story here, so we are going to slowly but surely move toward more commercial exposure. I think we enjoy being there, and I mean, if you remember when we talked about our quarter three results, our ATF franchise sales went up more than 50% in quarter three. That's a perfect example of being in clinical product being real tailwind because when you have these projects moving to the later phase, I mean, suddenly the demand is increasing drastically, and so we're very happy to be there.
Again, we're going to enjoy it probably for the next three to five years until commercial becomes really bigger than clinical. But at the end of the day, what you want is to be diversified. You need to be across multiple products because you're right. I mean, if you only are on two advanced clinical phase products and they both fail, then you're like, "What's going on?" We don't have that problem. We are like across so many different products right now. And as you know, I've been particularly focusing on rebuilding or, let's say, building an extraordinary sales organization over the last one year. I want to say we've got a really, really good team right now, and we're just gaining new opportunities every single week at bigger accounts.
So we're just making sure, like, the portfolio of opportunity becomes even wider so that if there is a couple of bad news, well, that's the way it is. It will always happen. And we are going to still be able to benefit from being clinical today.
Got it. Maybe I'll pause there and see if anybody has any kind of higher level macro questions before we dive into some other pieces. Okay. Maybe just one more macro question. And Jason, it might be for both of you if you want to give Olivier a break. Just on 2025, obligatory having guided to 2025. We'll learn more on that next year. But I think you've pointed to kind of low double digit growth next year. I think we're modeling 10% organic growth overall, call it 12.5% ex-COVID. For Repligen outpacing the industry by 500 basis points to 1,000 basis points. 1,000 basis points, that would suggest industry is maybe growing mid to high single digits next year. Do you think that's kind of a reasonable view for next year? Or outside of COVID, are there any other factors that would be kind of impacting Repligen specifically versus the industry?
Yeah, I'll jump in and then Olivier, please. But so again, it's that we've got about $11.5 million of COVID headwinds. So that's that point that you made there. Low double-digit ex that. I think for us, the way we're looking at that framework for 2025 today, this is what we see a line of sight to. And that 2025 may still be maybe there's a little noise around, "Okay, here's the market, and then here's Repligen's growth above that," right? We see that we absolutely can grow above the market. But right now, we're giving you that framework with, "Okay, here's what we can see and have a line of sight," momentum that we've had, all the green shoots and positive things that Olivier has been talking about.
If the market drastically changes right between there, then we'll have to adjust and reflect both up or the other direction.
Maybe one follow-up on that. The next couple of months, presumably people are finalizing budgets. Do you think you get a lot more information kind of November, December that inform?
Yeah, no, absolutely. Yeah. So yeah, we'll continue to finalize our budget. And then again, it's really then February. So you've got three solid months really before we're out with the guide and again, have a lot more information from what peers and the other folks in the industry are saying, what they're seeing, and then how we are relative to that. But I mean, we feel like we still have the strong algorithm to grow above market. But right now, we're giving you that framework as to what we've got line of sight to.
Got it.
The only thing I would add, Jacob, I've been here exactly 14 months now. I mean, if I compare to where the market was a year ago and where we are today, I mean, we see like a lot, a lot of improvement for sure. There was a lot of question mark a year ago. There are still maybe a couple still remaining, but compared to where we were a year ago, I mean, the situation is totally different for sure.
Got it. So kind of pivoting over to the product portfolio, Olivier, you mentioned a lot, using Tony's word now too, a lot of goodness in the third quarter. But I think maybe the most interesting one is capital equipment picked up. So just maybe kind of broadly on the system strategy, how is that effort going and how much of an opportunity is there to transition customers who've been using some of your really innovative products and having them adopt Repligen systems as well?
That's going to be my favorite question of the day, Jacob. I say that just because I have to say for me, the successes we are encountering right now on the system size is a perfect image of the strategy Repligen had and how we can just change a market quite drastically. So let me try to explain to you. So when we acquired the business called ARTeSYN about four, five years ago or so, we love the technology, but we realized like if we wanted to be successful, we really needed to upgrade the offering to be able to compete and gain market share. So we spent in it probably the first 18 to 24 months in the plants in R&D to redesign some of the equipment, build a real state-of-the-art product portfolio. And we really started selling those, I would say, almost now 18 months, 24 months ago only.
When I joined, indeed, a year and two months ago or so, I mean, we were just at the beginning of this cycle. We could see we had traction, but it was still the early days. Then we, at the same time, as you know, we put in place the key account management team and people started to buy some of this equipment, test them, like them a lot. We added the FlowVPX, which is this inline protein concentration tool to our system coming from R&D as well. Now, I mean, it's unbelievable because I mean, people are just knowing about the portfolio we have. They realize it's better than what they see somewhere else.
And not only is it like the systems themselves, but with the tool, this FlowVPX tool we have on it, they realize that's becoming something they really want to have. And in fact, a lot of our competitors are asking us, "Now, can we buy FlowVPX, put it on our own system?" and so on. So we've got great traction. So again, we're very small and we need to be humble here. I mean, we are like gaining market share, obviously, because we start from nowhere more or less, but we have a huge traction lately on this part of the business for sure. And considering the market environment is challenging and we don't really see that because we are like gaining new stuff we didn't have before, we think like we're in a really great spot here.
Among all the different businesses we have, that is one where we have really a lot, a lot of ambition for the future for sure.
The other dynamic there too, it's maybe even beyond just taking share, right? That's where the RS10, the lab scale system comes in where oftentimes customers have kind of created that homegrown, right? Or they've created a system and now we're coming in and saying, "Here, here's something that's automated that you can take," and so is that a new market, right, versus a market share, so that's the other dynamic that I think is happening.
Maybe a follow-up on that. I mean, how much of some of these systems is informed by what customers are asking for or doing?
Yeah, no, I would say to make sense for bringing RS10. I forgot that one. You're right, Jason. RS10 is a perfect example where it came from customers. Basically, you know, voice of customer, guys, there is no small scale TFF system capable of fulfilling our requirement for new modalities. Can you try to help us on that side? And we literally developed and launched that product in 15 months, which is quite unbelievable. I mean, I don't think many companies are capable to be that fast to launch products. And the traction has been great. One thing I also didn't mention about the beauty of system is it's not a one-off sale. I mean, we've got full stickiness on the consumable that go alongside.
Now, obviously, with this expanded install base, we start to have on system. This is going to start to generate recurrent sales of consumable for the next 10 years or so, which is something we love very much as well. Particularly for RS10, by the way, for new modalities, you know, when you are selling system for large monoclonal antibodies, there is typically a lapse of about a year between the time you install the system and the time you start to see orders for consumable for new modalities much faster. In fact, the systems are so small that the company who buys the systems, they plug them in their lab directly or manufacturing plant. They start using it within two to three months.
So the one thing we love among others with RS10 is we get a lot of consumable sales happening right after we sell the hardware as well.
One follow-up that kind of struck me as we're sitting here, a piece of that consumable is the fluid management portfolio. We got to go see the new innovation center. The reality is a lot of these deals were during COVID. I feel like there's some fog and we forget about all the things you bought. I think, you know, maybe it's further complicated by the fact that some of that fluid management stuff was, there's probably some destocking dynamics around it. Maybe just talk about that portfolio and where it stands today. Like, is that something that is still early in implementing the system strategy? There's been some headwinds there at some point. Is that something that could come back as well?
Yeah. So I would compartmentalize probably the fluid management portfolio we have in three different buckets. So the first one is the one you mentioned, which is what goes directly alongside all of our system, full stickiness. So we need to continue selling our system successfully. And I didn't mention, but on the equipment side, our sales this year are at high single digit year to date. So where the entire market is like, "Oh, it's difficult." In fact, we're seeing pretty nice traction here. But for that specific segment, any system we sell, we're going to see the recurrent sales of consumable, which are single-use consumable. The second bucket is the one we talked about earlier, which is more what we call components, which are more basic. There is still probably a bit of destocking happening.
We start to see some improvement there, but that's probably the subsegment of our fluid management that is still not growing very fast, and then the last piece, which is the other one we're very excited about, is the new products we've developed and launched or we are going to launch very soon, which are bags, which are mixing bags, which are mixers, single-use mixers based on Metenova technology. This will be launched in quarter one of next year. We know that the mixing technology for Metenova is like the best in the industry, and people who have been buying those stainless steel mixers from Metenova for the last 10 years or so, they are just waiting for us to be able to launch the single-use version, so that's also going to generate recurrent sales of bags for the next 10 years as well.
That's something we are also very much looking forward to.
Got it. You mentioned ATF earlier. I think that was another bright spot in the quarter, up 50% year -over -year. You mentioned, I think earlier this year, nine late-stage commercial customers. And then last quarter, you mentioned a blockbuster customer that had adopted it. And I don't think you have revenue from that quite yet. How should we think the potential timing and magnitude of some of those customers and what commercial volumes could look like? And how easy or difficult is it to get ATF spec'd into an existing commercial therapy?
Yeah, no, the reason why when I wrote the script for quarter three earnings, I thought we talked about those nine projects we got designed in late phase at our quarter one earnings, and then we didn't mention anything in quarter two. I thought I need to at least tell our investors and friends that we are succeeding still designing in a lot of new products, and in fact, it's not only one. The reason why I mentioned that one in particular is because it's one of the top 10 biopharmaceutical drugs. And obviously, when you have a technology like ATF, one of your big area of focus are going to be those very big biopharmaceutical drugs because, as you can imagine, first of all, this is where most of the need is.
I mean, if you are a pharma company and you've got one of these gigantic monoclonal antibody drugs, instead of having to build three new plants that will cost you each $300 million-$400 million, if you can implement a technology like that, that will enable you to probably increase your yield and productivity so much that you can delay further investment, that's a big advantage. And obviously, for us, being designing in those big products will generate a lot of consumable sales. So that's why we mentioned that one. This one, indeed, you're right, has not generated any sales yet. I mean, we are just starting to get some orders and most of the sales are going to start to kick in next year.
But yeah, we are very focused on getting our ATF design in both early phases because we've got a beautiful XCell Lab that is a small scale version. I think you've seen it in a kit of ATF, but also in the larger scale. And then this is where the regulatory story pops in. You're absolutely right, Jacob. And here, I mean, it depends from one pharma company to another. You know, every company has got its own regulatory strategy. The beauty of ATF is not considered to be a very significant process change. I mean, it's not like if you're changing a resin or a cell culture media or whatever, you're just adding a loop into your upstream process. And so some customers seem to be able to get that approved in a very short period of time.
Some others who are more careful will probably consider doing a refiling. We don't know exactly the details, but we've seen plenty of customers being able to implement that very, very fast.
Got it. I've got a couple other product questions, but Jason, I think one that I don't want to run out of time to touch on just is kind of the expense outlook. You've talked about the potential to drive 100 basis points to 200 basis points of gross margin expansion annually. I think that's potentially in play next year even due to some kind of unique dynamics around the 2024 numbers and the TFF. But you're also pointing to something similar on EBIT margins. And I think people kind of look at this and are like, "Shouldn't we see some operating leverage there?" And so I think, you know, if you want to talk through the dynamics of the numbers, but I think maybe also kind of strategically, can you talk about the investments you are making right now in the commercial effort and elsewhere?
Why do this now versus trying to maybe drive a little bit more margin expansion? How should investors think about the ROI on those investments?
Yeah, so you're right. So, see that 100 point gross margin-200 point gross margin. And to your point, when we have wrapped up the impact of the restatement with some of the changing of the revenue timing, we ended up, we're going to end up now 2024, about 0.5 point higher, but yet still see 100 points-200 points. But at the operating margin level, we actually see 1 point higher, right? Because of the COVID transaction. And I mean, that's just pure leverage at the end of the day, right? You had this 100% sort of income fall through. So that's why at that jump point, you know, when we were talking, I'll say 200-300 or whatever, you know, more than that 100-200 of the gross margin to op margin, that jump-off point has now gotten higher.
So that's why, you know, from where we were, call it four or five months ago, we're kind of at the same end point or the next point. It's just that that expansion piece has changed. But to your point, underneath that though, is still looking at how we remain prudent on our spending, but not being pennywise and pound foolish, right? In terms of the investments that we want to make. I mean, you've seen that R&D is something this year that we've really, you know, I'll say kept very tight. And so that's an area that, I mean, everything we're talking about here today is a lot about new products that's got to come from our R&D and innovation. And so we want to make sure that we fund that for the long-term growth.
And then, to your point, the other area that we see still needs to get maybe an unfair share portion of investment is the S part of SG&A, right? And it's the commercial resources getting more coverage. We're finding there it's kind of a mix of, you know, filling gaps of coverage that we have, you know, globally, technically. And then sometimes it may just be also bringing in high, you know, high-caliber talent as well. Sometimes you pay more for that. And again, it's part of that return equation. So that's how we're thinking about the, you know, next year in terms of where there may be more investments, but still trying to drive some operating margin leverage. But, you know, I think again, just from a year-over-year expansion, there's less of it given that baseline.
I've got one more, but I'll see if anybody from the audience has one. Maybe Olivier, just to wrap up, maybe just one on Process Analytics . You talked about it some of it with the system strategy. I think makes a ton of sense. You hear the industry talk about continuous manufacturing and digital twins and blah, blah, blah, blah, but it's kind of been a slower ramp than I think we would have expected a couple of years ago. But it also seems like maybe some traction now with the system strategy. So maybe how is that going? And then one follow-up from a comment earlier. I'm just curious, you mentioned competitors maybe looking to leverage VPX. Does that increase the opportunity set in your mind or has it changed?
Yeah, no, I just thought maybe with the last question here. We like it, obviously, on one hand, because it seems like it's a really good technology, but we want to make sure, obviously, it's going to be helping selling our system mostly on that side for sure. So yeah, I think Tony and the team have been really focused on PAT. And what I like is that we didn't only talk about it, we just made it happen. Now we are really at the point where we need to keep on going on that side and adding probably one or two technologies there to make sure.
And as you know, we are working on another one, which is a DeltaV technology that is taking a bit of time to develop because it's a beautiful technology and we need to make sure we've got a state-of-the-art system to offer there, which we're working on. But yeah, the PAT journey has been a great success for us and we're still going to go in that direction for sure. And then if I just mentioned about the C Technologies business, this year has been probably a bit lower than we expected because that's probably the part of the portfolio where we are a bit in the same situation as a company like Agilent and Waters selling to kind of the same market segment and so on. And as you all know, this year has been a bit more changing in terms of CapEx spending.
We start to see a really nice recovery, I mean, particularly in quarter three and beyond, but this year has definitely been a little bit tougher.
Got it. Well, we'll leave it there. Olivier, Jason, thanks for the time today.
Thank you so much. Thanks.