Good day, ladies and gentlemen and welcome to the Repligen Corporation's Third Quarter of 2016 Earnings Conference Call. My name is Chanel and I will be your coordinator. At this time, all participants are in a listen-only mode. [Operator Instructions]. Please note that there will be a question-and-answer period following the company's formal remarks. In order to accommodate all individuals who wish to ask questions, there will be a limit of three questions at a time. I would now like to turn the call over to your host for today's call, Sondra Newman, Senior Director of Investor Relations for Repligen.

Thank you, Chanel. Good morning to all participants today. Today, we are reporting our financial results for the third quarter of 2016 and we'll update our financial guidance for the full year. We will also be discussing recent business highlights. Joining me today are Tony Hunt, President and CEO; and Jon Snodgres, our CFO. During the course of this call, we will make forward-looking statements regarding business goals and our expectations for the financial performance of the Company. We caution you that such statements are subject to risks and uncertainties that could cause actual events or results to differ. Unanticipated events outside of our control may adversely affect future results. Additional information concerning these Risk Factors is discussed in our Annual Report on Form 10-K, the report on Form 8-K that we filed this morning, and other filings that we make with the SEC. The forward-looking statements in today's discussion reflect management's current views and may become obsolete as a result of new information or future events. The Company doesn't obligate or commit itself to update forward-looking statements except as required by law. During this call, we will be presenting our financial results and providing guidance on both adjusted or a non-GAAP basis, as well as a GAAP basis. Adjusted figures will include the following: revenue growth at constant currency; adjusted operating income; EBITDA and adjusted EBITDA; adjusted net income; and adjusted earnings per share. A reconciliation of GAAP to non-GAAP financial measures is included as an attachment to our press release issued this morning. While these adjusted financials should not be viewed as an alternative to GAAP measures, the Company believes that the use of non-GAAP measures better enables investors to benchmark its results against historical performance and the performance of peers and to evaluate investment opportunities. With that, I will turn the call over to Tony Hunt for a business update.

Thank you, Sondra and good morning. Quarter three was another excellent quarter for the company as we continued to execute on our strategic goals and build on the foundation established in the first half of 2016 where we saw significant acceleration in the adoption of our proprietary products and an expansion from our core CMO base of customers to include an increasing number of large pharma. We are very encouraged by the increased use of our products in our core customer base and we believe that the investments we have made over the past two years are having a significant impact as Repligen has fast become a key player in bioprocessing. Beyond execution on our financial targets for the quarter, business highlights this quarter included important new product launches; expansion of our operational capacity for OPUS products; and the full integration of Atoll GmBH into our commercial organization. During the quarter, we continued to be very active in evaluating M&A targets with a strong focus on building out our market-leading portfolios in pre-packed columns and filtration and expanding our presence in upstream or downstream markets, the key technologies that can be leveraged by our commercial team. With our strong brand recognition and resources, we remain confident in our ability to execute on M&A. For the third quarter, let me start with our new product launches that were formally introduced at the Biotech Week in early October. We are now on the market with single use versions of our XCell ATF2 and ATF6 systems and the feedback from our customers on performance and ease of use has been very positive. Customers have observed up to 80% implementation time savings and an overall 50% reduction in initial purchase price when compared to the stainless steel system. We have already shipped units and…

Thank you, Tony. Good morning. Today, we are reporting our financial results for the three and nine-month periods ended September 30, 2016. We will also be updating our financial guidance for the full year. Our financial results for the third quarter of 2016 were highlighted by strong sales of our bioprocessing products where we are reporting revenue of $24.7 million, an increase of 25% as reported and 26% at constant currency compared to the third quarter of 2015. Our revenue growth continues to be driven by strength from our direct product portfolio. Our gross profit for the third quarter was $13.4 million, an increase of $2.1 million, or 18% over the third quarter of 2015. Our gross margin was 54.4% for the third quarter of 2016 compared to 57.4% in 2015. The change in year-over-year gross margin is a result of product mix, predominately driven by strong sales of OPUS and from the impact of operational investments made in our facilities to support the growing demand for our products. Now, moving on to our operating expenses. Research and development expenses were $1.9 million for the third quarter of 2016, an increase of $0.4 million compared to the same period in 2015. Our increased R&D spend is a direct result of our continued investment in programs related to single-use ATF development and validation in addition to development of our OPUS(R) product line. SG&A expenses were $7.1 million in the third quarter of 2016 versus $6 million in the third quarter of 2015. The year-over-year increase was driven by Atoll acquisition costs of $0.1 million, ongoing Atoll business costs of $0.4 million, and $0.6 million in ongoing costs supporting the expansion of our commercial organization, operating personnel, and systems infrastructure to sustain the ongoing growth of the company. Our third-quarter operating expenses…

[Operator Instructions]. And our first question comes from Drew Jones of Stephens Incorporated.

Wanted to dive into the resin recovery system quickly. Is that an option, or is it standard now on 45s and 60s and what does that do to pricing and does it have any impact on margins?

Sure. Yes, right now, the resin recovery, we're going to launch it -- it will be launched in Q1 and start shipping in Q1. Our goal will be to have it as a standard on 45s and 60s. There might be a few customers that don't want that initially, but I think by the time we finish Q1 and get into Q2, it should be a standard on all 45s and 60s going forward. There will be a small price increase associated with it that will improve margins a little bit, but it's really a differentiator for us in the whole pre-packing space. No one else is putting an unpacking port onto pre-packed columns. So we think this really puts some distance between us and anybody else that's offering pre-packed columns.

And you said this is something that the market asked for. Is it smaller, mid-sized players have asked for it, or is it across the board?

No, it's across the board. The reason people want something like this; it's a little bit like an insurance policy, right. If something goes wrong with a chromatography column during operation, they would like to be able to get the resin out of there. So even during startup, if there was a mistake made, you would like to be able to recover the resin and then long-term people at the very end of a run like to take a resin and use it for other studies. So it's giving that optionality to the customer.

Okay. Last one from me. Jon, just on the gross margin contraction year-over-year, understanding the seasonality that typically goes here with 3Q, could you just parse out the impact may be from the OPUS mix, kind of getting the disposable ATF product up and running and then you mentioned facility improvements as an impact as well. May be kind of getting that up to speed and ramping, what was the impact there in the quarter?

Sure. I think, on previous calls, we've guided that it was about a 50:50 mix between OPUS mix versus investments. And what we would like to say with this call is we indeed have seen some softer gross margin in Q3, but you have to remember that we've seen exceptional growth in OPUS and ATF this year, both of them far exceeding the original expectations we had in our budget. And this growth has actually pulled -- all the growth combined has pulled about $7 million of gross margin into our P&L. So it's impacted gross margin a little bit, but it's been very successful and we do expect as we move into 2017 that we will be able to continue to expand gross margin. We've got some plans we are putting in place for next year that will help us improve margin on OPUS, as well as across other product lines in the company.

Thank you. And our next question comes from the line of Matt Tiampo of Craig-Hallum. Your line is now open.

Good morning, gentlemen. Congratulations on a nice third quarter. I want to follow-up on Drew's line of questioning around the recovery system. And may be just broader strategically, is this something that allows you to -- or maybe just, Tony, how does this fit into the longer-term development of the OPUS product line?

Yes. So when you look at our OPUS product line and how it's developed over the last few years, clearly, we were the first company to launch 45 and 60 centimeter diameter columns and it's had a big impact in terms of driving the adoption of not only pre-packed columns, but obviously making OPUS a standard in the industry today. By now adding in an un-packing port, it clearly differentiates us versus others in this space with their pre-packed column lines. I think we are reacting in a very positive way to the needs of the customers. I think having an unpacking port now does open up for us opportunities to go larger with OPUS and we will be making those decisions over the next few months and will allow also down the road to potentially add some additional services that customers have been asking for. So for us, the unpacking port is very strategic and I think it will allow us over the next one to two years to continue to expand the OPUS product line through innovation and address additional needs that our customers are asking us for.

Great. Thanks. And then on the gross margin line as well, the thesis has always been that there will be a shift to more drop shipped resin over time and that will alleviate some of the pressure on the OPUS pre-packed column line. Are you beginning to see any of that on some of the larger orders, especially -- there are a lot more larger column orders this quarter -- or is that still yet to emerge?

I think it's maturing. For sure, we believe that as we go out over the next 12 to 18 months, we are going to see a lot more drop shipping of resin than what we've seen in the past. I think when we were together back in August, we talked about I think it was a 50:50 mix. It hasn't changed that much in Q3. But as we have the discussions, especially with the large biotech companies, it's pretty clear to us that as we see more and more large biotech evaluate the technology and adopt it in a way that's not just a one column purchase, but more like 5, 10, 20 column purchases, that they will drop ship resin. And so as we go into next year, we'd fully expect that we are going to see an increase in drop shipping of resin.

Thank you. And our next question comes from the line of Paul Knight of Jenney. Your line is now open.

Hey, guys. This is actually Bill on for Paul. How are you doing?

Good. How are you doing, Bill?

Great.

Doing well. First question, if we could, on ATF and OPUS, you've seen really, really strong growth from both of those product segments to start the year off; pretty tough comps. What are you seeing in terms of growth? Is it from existing customers either reordering or scaling up, or is it new customers? What's driving the growth?

Yes. And we definitely -- second half of this year versus last year, definitely tough comps and I think two things are going on. One is we -- the sales team is doing a very good job of developing the pipeline and there's no doubt that customers who adopted ATF and OPUS but let's just maybe speak to ATF for a few minutes. But customers who have adopted ATF over the last few years have come back and ordered additional systems, so we are definitely seeing existing customers order more. We are seeing existing customers outsource manufacturing late-stage commercial/commercial processes to CMOs. So those CMOs have followed through and ordered ATF systems from us. And then, I think in parallel, obviously, our commercial team continues to build out the pipeline. ATF is the standard in the industry when it comes to cell retention and I believe and I can see it is that the broader customer base is embracing that and we're seeing just a broader number of customers, a deeper pipeline and that's why we've been able to execute the way we've executed in 2016.

And then may be just a little bit on OPUS in terms of what you are seeing there and customers migrating either up from the 30s to the 45s and 60s or what's driving that growth as well?

It's across the board. I actually think it's more that customers now see pre-packed columns as a real option for them. If you went back two years ago, most customers were doing their own packing in glass columns and as our sales team sits down with decision makers, whether it's at large pharma or CMOs, it's a straightforward conversation around what's the value proposition. And so when someone wants to order 20 columns and you can see what the cost savings are, it becomes a decision for the end user to say let's move to pre-packed columns. Now, Repligen, over the last four years, we have established ourselves as having a very strong reputation in terms of, A, delivering columns and, B, the performance of the columns once it's been delivered to the customer. So I think it's a combination of both. The market is maturing; the customers are becoming more comfortable with pre-packed columns, and it's across the board. We clearly see really good growth in 45s and 60s, but we are also seeing plenty of demand for our smaller columns as well and I think having Atoll onboard now and being able to cross-sell is a really good thing for us. So we can cross-sell on validation columns into our OPUS base and we can upsell on the Atoll customer base to larger OPUS columns. So I think that's a good position for Repligen to be in.

And then last one, just on the Protein A business, what are you seeing from your customers in that end market? I know it's more OEM type shipments, so it's probably a little lumpier for you, but what's going on in that end market in terms of demand, may be what you've seen this year and the outlook for next year? Thanks, guys.

Sure. I think last year was a fantastic year for our Protein A ligands business and this year has definitely been a little bit more challenging and I would say the quarters have been lumpy. So, Q3, for example, we had growth in our ligands business, but it was offset by FX. We had about a 4% FX headwind in Q3. So I would say there's two factors going on. One is that some of the blockbuster drugs that were approved last year just have been really -- been slow to take off. So I suspect that not only the biotech companies that are producing those drugs, but in addition our partners, are probably burning off some inventory this year, so we are seeing a little bit of that. But I think when you look at the strength of the business overall and you look out over the next few years; we are seeing no slowdown at all in the number of drugs approved. We think -- you see the clinical pipeline, we see what's going on in biosimilars, so we think our long-term 8% to 10% growth rate is something that we should expect to see over the next few years. Now saying that, we will get an update at the very end of the year from our two partners in terms of what they see as the demand for 2017, but I think our historical growth of 8% to 10% is definitely a good proxy for the future.

Thank you. And our next question comes from the line of Brandon Couillard of Jefferies. Your line is now open.

Good morning. Tony, as you look at the commercial organization, do you feel like at this point you've achieved critical mass with the additional headcount? And can you give us some sense of the type of paybacks you are seeing from feet on the street investments outside the U.S.? And as you look into next year, is there a lot more things that you'd like to do from a commercial field sales and service perspective?

Sure. Yes, I think you have to go back to 2014. We had a very small commercial team when we really started to kick off the push into the marketplace of direct products for Repligen, and with that team of seven people, which really was three salespeople and four internal people, we started the journey. And, as I said in my remarks earlier, we're at -- we have a team now of 30 people. So we have made a lot of progress. We definitely have critical mass, but there are areas where we know there are opportunities for us to grow and expand, and I think the emphasis that we are going to place over the next say 12 months or so is going to be more on field applications and service. So we see service as an opportunity because our ATF business continues to grow and expand. We really haven't put a whole lot of focus on turning service into a business for Repligen and so we hired a head of service in the last few weeks and we will be building out that group over the next say 12 months or so. On the applications front, it's well known within our industry that to be successful you have to have strong sales, but you have to have an equally strong field applications team. So we've added in -- and we've been really able to take advantage of our R&D team, which has a very strong applications group. So North America is well-served from the U.S. R&D team. But as we look to other regions, like Europe, like Asia, we have started to add in field applications people and they are the types of investments we are going to make. I think when I look at the commercial team in general, the average dollars per rep and the size of the territory is pretty significant and each year, it goes up. And so I think we are pleased with the return on investment we are getting from our sales team, and of course, that's one of those things that, as we grow and expand and if we add in more salespeople, we will have to rejigger the territories and that's something that we will look at over the next few years as well.

That's helpful. Secondly, did you give the revenue contribution from the Atoll deal in the third quarter? Is there any change to the 2016 expectation from that asset? Secondly, Tony, any update to share in terms of the quality of the pipeline?

Quality of the pipeline on --?

An M&A perspective.

Okay. Yes, so let me answer the Atoll piece first. So when announced the deal, we said, look, we will be between $3 million and $3.5 million for the nine months of 2016 and we are absolutely on track for that. No real change in terms of the revenue line. I think it's exactly as we expected, and I think what we are seeing as we hit Q4 is the commercial team is really fully engaged and we are definitely seeing some good uptick in cross-selling opportunities and we expect that the Atoll business will continue to accelerate into Q4. So very confident about the range that we guided to six months ago. On the M&A front, we've been obviously working on this for quite a while and I think we have a solid pipeline of opportunities. We continue to be very engaged with different groups and I think we have the resources; we have the people; we have the cash to be able to go and execute. So, obviously, over the next 12 months or so, we would expect that we can execute on M&A.

Thank you. And I'm showing a follow-up question from the line of Drew Jones of Stephens. Your line is now open.

Thanks. Tony, you touched on this, but the one thing we've underappreciated has been the tail on that legacy ATF business. Could you maybe talk a little bit around what is the penetration of the perfusion market at this point and if that's the right way to think about it and how much longer you've got to go?

Yes. I think that it's probably less about how much longer we have to go with it. I think when you look at perfusion, ATF is by far the standard technology used by customers who are using perfusion technology. I think what's interesting is that perfusion 5 to 10 years ago was some people do it and groups have sort of shied away from it. I would say in the last four or five years, perfusion has come back. There are a lot more companies, especially in Asia, using perfusion processes and we are seeing now a little bit more of what we call hybrid perfusion, which is a combination of fed batch and perfusion especially in the seed train. So we see actually expanding applications for ATF and with that comes opportunity. So having Ralf Kuriyel onboard and being able to generate applications data around ATF, we are going to be able to drive that into our sales team. We just see a lot of runway for ATF and it's around the fact that perfusion is getting more and more adopted and the fact that there are hybrid processes out there that will allow ATF technology to be evaluated and implemented. So we feel really good about the business and the growth prospects going forward.

So safe to say with incremental opportunities that are presenting themselves, this is still a growth product into 2017?

Yes. Absolutely.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call over to Mr. Tony Hunt for closing remarks.

So just to reiterate, just a very strong quarter. Looking forward to finishing off the year strongly and updating everybody in February on our 2017 projections. So thanks everyone for joining us.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.