Good day, ladies and gentlemen, and welcome to Repligen Corporation's Second Quarter of 2018 Earnings Conference Call. My name is Chris, and I will be your coordinator. All participants will be in listen-only mode. [Operator Instructions] This event is being recorded. Please note that there will be question-and-answer period following the company's formal remarks [Operator Instructions]. I would now like to turn the call over to your host for today's conference, Sondra Newman, Senior Director of Investor Relations for Repligen. Please go ahead.

Thank you, and good morning. On today's call, we're reporting financial results for the second quarter of 2018, updating our financial guidance for the year. Our President and CEO, Tony Hunt, will share our business highlights for the quarter and our CFO, Jon Snodgres will provide a financial report. During this call, we'll be making forward-looking statements regarding our business goals and expectations for the financial performance of the company. So we remind you that such statements are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning risk factors is included in our annual report on Form 10-K, the current report on Form 8-K which we filed today and other filings that we make with the Securities and Exchange Commission. Today's comments reflect management's current views which could change as a result of new information, future events or otherwise. The company does not obligate or commit itself to update forward-looking statements except as required by law. During this call, we will be providing non-GAAP results and guidance. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this morning, which is posted to Repligen's website as well as on sec.gov. The non-GAAP figures that we will include are the following: revenue growth at constant currency, operating expenses and income tax expense, gross profit and gross margin, operating income and operating margin, net income, earnings per share, EBITDA, and adjusted EBITDA. While these adjusted financial measures should not be viewed as an alternative to GAAP measures. The company believes that the use of these non-GAAP measures better enables investors to benchmark Repligen's current results against historical performance and the performance of peers and to evaluate investment opportunity. I`ll now turn the call over to Tony Hunt for business update.

Thank you, Sondra, and good morning, everybody, and welcome to our Q2 earnings call. 2018 continues to be a very strong year for Repligen as we grow and expand our applications and build market share in the bioprocessing space. Our overall performance was ahead of our expectations for the quarter, delivering top-line revenue growth 47% and reflecting a stronger-than-expected EPS when adjusting for the $0.04 impact on EPS of the upfront payment to Navigo Proteins of $2.3 million. Our direct-to-customer portfolio again performed well in the second quarter with Filtration and Chromatography revenues doubling year-over-year. Organic revenue growth for our direct portfolio was greater than 25% year-over-year and Spectrum revenue growth of 29% exceeded our forecasts. We also continued to see sequential gains in our Proteins franchise, where revenue increased nearly 10% over the first quarter. Our order load continues to strengthen across our entire portfolio and we still anticipate the second half of 2018 to surpass the first half in terms of top-line revenue. We are therefore raising our revenue guidance for the year to $185 million to $190 million with overall organic growth in the range of 11% to 15%. Before jumping into the quarter, I want to highlight our accomplishments in a few key areas from strategic partnerships to new product innovation, to the spectrum integration. First, strategic partnerships. We executed on agreements in June with both Navigo Proteins and with Purolite Life Sciences. Both collaborations strengthened our long-term Repligen-owned affinity ligand strategy within our proteins franchise. With Navigo Proteins, we signed a long-term agreement to co-develop a series of affinity ligands focused on monoclonal antibody on non-Mab targets. This partnership has already delivered NGL-Impac A of Protein A ligand for performance characteristics that stand up to those of the newest ligands that have come on to…

Thank you, Tony, and good morning, everyone. Today, we are reporting our financial results for the second quarter of 2018 as well as updating our financial guidance for the year. Unless otherwise mentioned, all financial measures discussed reflect non-GAAP measures. We are reporting second quarter 2018 revenue of $47.7 million, an increase of 47% as reported and 46% at constant currency compared to the second quarter of 2017. As Tony mentioned earlier, our direct-to-customer filtration and chromatography franchises continue to perform well with organic growth well over 25% for the quarter. Our direct products now represent close to 70% of the company's total revenue base. Our geographical revenue split was very similar in Q2 compared to Q1 splits, 47% of total sales were in North America, 41% in Europe and 12% in Asia. When you take out the impact of our proteins business where sales were predominantly in Europe, the revenue split in Q2 was 51% in North America, 33% in Europe and 16% in Asia. And looking at the performance of our direct franchises by region for the year-to-date period, our filtration growth has been strong in all regions, particularly in Asia where year-over-year pro forma growth was greater than 50%. Chromatography strength came from Europe and North America when we continued to develop accounts in Asia with our OPUS and OPUS process development product lines. Now moving to our income statement. Adjusted gross profit for the second quarter was $26.8 million, an increase of $8.2 million or 44% over the second quarter of 2017. Our adjusted gross margin was 56.3% for the second quarter of 2018, in line with our guidance of 56% to 57% for the year and compared to 57.5% for the second quarter of 2017. During the 2018 quarter, we saw solid contribution to margin…

Thank you very much sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question is from Drew Jones of Stephens Inc. Please go ahead.

Thanks. Good morning, guys.

Good morning.

You guys have talked so much about new products being a driver and you're investing in innovation, when I look at the Navigo partnership, the Purolite partnership, are there other external relationships that you guys could see bolting on here to help drive new product innovation?

Yes, great question, Drew. I think part of our strategy is and really put in place over the last couple of years is to form -- own partnerships with various companies that we think have technology that can fit into our platform and what we're doing, whether it's in chromatography or filtration, and I think Navigo and Purolite are examples of the types of partnerships that we can put in place and our plan would be over the next year to have additional partnerships that would further strengthen the portfolio whether it's in filtration or chromatography.

Great. And then just on margin -- quick margin question. If we exclude that Navigo payment in the quarter, it looks like you guys would have raised the adjusted EBIT guide by about $1.5 million, that's pretty good incremental margins given you guys raised the revenue guide by about $3 million. So I guess the question is, as far as OP margin is concerned, what's trending better than you expected?

Yes, I think as we went out at the beginning of the year, we always like to try to guide to the higher end of our -- to the -- was like to be in the higher end of our guided range. So we had a little bit of room there and -- otherwise, the business is just executing as we planned it, Drew, on all fronts. Yes, and I think, Drew -- I think it was a combination of being up on revenue and then we had obviously the expense in R&D, but we had some offsets -- positive offsets on interest income that offset the whole Navigo payment, so that's where it came from.

Yes and that does come below the operating income line though, Drew, the interest income.

Thanks guys.

Thank you very much. Our next question is from Amanda Murphy from William Blair. Please go ahead. Amanda, your line is open. Would you like to ask a question?

Sorry about that. Can you hear me okay now?

Yeah we can here you, Amanda.

Okay. So my first question was on the Proteins business. So it sounds like you're getting some good traction with the new Navigo Purolite product. I just wanted to know -- and I think you kind of touched on this a little bit, I just wanted to get a sense of whether that is expected to contribute this year or just more of 2019 type opportunity as you build up the order book for that resin?

Yes. So NGL-Impact A as a ligand, it's not really going to have any impact here in 2018, it will have some impact in 2019, but I think it's more likely 2020, '21, '22 time frame. I think our strength in our proteins business is really coming from existing customers whether it's Millipore, GE, Purolite, our growth factors business also had a good quarter. So I think across the board it was just good strength in proteins and we're seeing that again here in Q3.

Okay. And have you given any context around what portfolio might look like over time with Purolite in terms of what -- when we might see another product for example or what type of specific resin qualities you're targeting in addition to the new ones?

Yes. So the portfolio of ligands will come out of the Navigo collaboration. So our expectation is every 12 to 18 months, we should be able to launch a product that comes through that collaboration. And then we -- in terms of bringing it to market, some of those products will definitely go through on Purolite and we just have to see which products were developed, the timing and then impact is probably going to be a year to 18 months after product gets launched before you start to see really any impact. But the strategy here is just around developing a broader portfolio of ligands for Repligen that are Repligen owned and I think that's really the essence of what we are doing in terms of putting a strategy together around the proteins business.

And then I have also on -- and you talked about this a bit on the call in terms of one of the strategies being extending beyond antibodies into vaccines and gene therapy and something that's going well. I guess have you put any numbers around that in terms of market opportunity, more concrete, I know you've talked about the synergy potential with Spectrum and just trying to get a sense of what that might add over time to the business. I know you originally gave some market numbers, but just trying to get a better sense of what the revenue potential is there. I guess, over the next year or so?

Yes. The way we look at it is obviously Repligen for many years has been very much focused on the monoclonal antibody industry and we still are and a lot of our revenue comes from there. In terms of vaccines, that's definitely something that came as part of the whole spectrum deal. And so they actually had more revenue coming from vaccines than they had from monoclonal antibodies. So really we're a year into it now and clearly we have a very nice customer base in basically human and animal vaccine markets where we can sell our hollow fiber portfolio. What's interesting is that both our flat sheet cassette business and our hollow fiber business has about 15% to 20% of revenue coming from gene therapy. So we feel like we're in a really good position there in terms of putting our products into processes working with some of the leading companies and the world of gene therapy, and it's something that our R&D team is looking at as part of how we expand the overall gene therapy portfolio over the next few years. But I don't really have a growth projection on that except to say that we feel like we have good traction now in mAbs, vaccines, gene therapy and that positions us well for the future.

Okay. Got it. Thank you.

Thank you very much. Our next question is from Dan Arias of Citigroup. Please go ahead.

Good morning guys, thank you. Tony, maybe on the outlook for OEM, some nice improvement in protein this quarter and you sound pretty encouraged on the back half. So it seems like there should maybe be some room for full year growth to be high single-digits, 7%, 8%, maybe, versus the 5%, 6% number that you're kind of speaking to here. So I guess how would you characterize the upside potential, so to speak of OEM?

Yes. When you look at the proteins business and we were exactly in this position at the beginning of the year, we felt that the business could grow mid-single digit for the year, we knew we had a tough comp in the first half of the year. We have visibility obviously through the end of Q3. We're confident about the mid-single-digit growth. I really don't want to speculate beyond that done, but it's nice to see that we've had sequential growth in Q1 and in Q2. And the order load that we have in Q3 is very encouraging. And we just really have to see what happens in Q4, before we say that there is upside beyond the mid-single-digit growth that we've forecasted.

Okay. And then maybe on the OP margins. I'm just curious about R&D going forward, you guys have talked about stepping up R&D as a percentage of revenues. That was before the two ligand collaboration. So I guess that the magnitude of the step-up that you're contemplating prior, is that still hold with these two deals? Or is there some additional expense maybe that's going to come out of those? And then along those lines, when should we expect these additional payouts that presumably should be coming?

Yes, I'll start with the payout piece. As I said earlier, I think every 12 to 18 months, we expect we'll have some product settled, will have developed with Navigo, payments on those are probably going to be in that $1 million to $2 million range. So expect to have that on an annual basis going forward. And then what was the second part, I'm sorry?

It was just a matter of -- basically whether or not the view that you had on R&D, I believe it was 7% of revenues plus prior to the deals is kind of still what holds today.

Yes, I think when I look at -- as we go forward, I think we're going to be in that 7% to 8% range, probably closer to 8% as we look at 2019 and 2020, but that will be the plan. I don't think it's going to be higher than that.

Dan, we raised up to 8% versus 6.5% to 7% for our last guide.

Yeah very good. Thank you.

Thank you very much. The next question is from Brandon Couillard of Jefferies. Please go ahead.

Thanks, good morning. Tony, on the Spectrum business, obviously off to a great first half. Can you sort of speak to how much of that strength might be in markets relative to commercial execution or some of the new products that Spectrum has? And you alluded to that business coming in at the high end of the $47 million to $50 million range for the year. This seems to have some conservatism embedded in it relative to what you did in the first half of the year. You've sort of talked to the factors that we should be aware of and thinking about the comps, perhaps, in that business in the back half?

Yes, so Spectrum, first half of this year around $24 million. So when you think about historically Spectrum's being stronger in the second half versus the first half. We expect that'll happen again this year. So we still think guiding towards the high end of the range is really the right approach here. We can see where we are in Q3. Obviously, when you think about a business like filtration business that has consumables and capital equipment, it does come down a little bit to Q4 and what sort of larger CapEx spend comes through that would potentially be upside to what we're talking about. Overall, I think the spectrum business has -- is very diversified, right. It has a lot of customers in the vaccine world, as I said earlier, in human vaccines, animal vaccines, it's in gene therapy, it's in nanoparticle filtration, it's in monoclonal antibody. So it's got a healthy pipeline. I think there has been really good focus from the commercial organization, both the legacy Spectrum team and the broader Repligen team on just closing out opportunities. And I think it's just bringing Spectrum from being a private company into a public company setting and just putting the expectations around what we want to accomplish in any given quarter. So in terms of new product impact, I don't think it's been significant yet, but we're really happy to be able to get the conduit detection module out that will have some impact in the second half of the year, more of an impact next year. And then we have some other products that are in development that should hit the market towards the end of this year, beginning in next year. So puts us in good shape for 2019.

Thanks. And one more for you, I would be curious to hear your latest thoughts on the M&A pipeline how it stand right now, whether you've seen the attractive assets or valuations and given now it's been passing the one-year mark on the Spectrum acquisition just through appetite and capacity to perhaps absorb another deal here in the next six or 12 months?

Sure. I think on the M&A side, we've continued to stay active post Spectrum deal and it really just comes down to, are the right assets available that we like that strengthen what we're doing in chromatography or in filtration, we continue to talk to companies. And I would think over the next one to two years, it shouldn't be that different than what we've done in the past, right. We like the idea of adding on bolt-on type acquisitions, that's kind of our strategy. And as those assets become available, I think our appetite is absolutely there, it's just a matter of really bringing some of the opportunities that we like closer to an endpoint. And valuations are not that different, Brandon, than where we were a year ago. So it's similar, just depends on the asset and what the technology is and how differentiated it is in the marketplace, that really will determine a little bit of the overall multiple that you'll pay for them.

Superb, thanks.

Thank you very much. The next question is from Charlie Eidson of Craig-Hallum Capital Group. Please go ahead.

Good morning. Thanks for taking my questions. Can you comment a little bit on the early response from customers now that the sales force has been cross-trained on all products, particularly in Asia, where it's been for a couple of quarters now?

Yes. So if you take Asia, Charlie. the integration wasn't the most significant integration in the world, because we had two managers who were managing really a broad distributor group. And so they've integrated in with the 12, 13 salespeople from Spectrum. So for me, what we've been looking at more is really trying to get the whole portfolio into the hands of all the reps. And I think the parts of the business that has benefited the most is probably our flat sheet cassette business and our bench-top TFF systems piece. So they've done very well. We're beginning to get some traction with our pre-pack columns with the broader sales force. But overall, it was a pretty straightforward integration. It's not that dissimilar in Europe and North America. Everybody on the team whether you are a Repligen, legacy rep or you are Spectrum legacy rep sold filtration, the only difference was that the Spectrum team hadn't really sold chromatography like OPUS. And so most of the training has been around, okay, training filtration reps on how to sell a broader filtration portfolio and training some reps on how to sell the OPUS product line. So that's kind of what we've been doing.

Okay, that's helpful. And then I guess related to the sales force. Again, it looks like you had 36 salespeople as of last update. Do you anticipate adding to that and what do you see from that -- from a headcount perspective through the balance of the year?

Yes. So we're -- I think in terms of additional salespeople, it might be one to two for the rest of this year. If you go into next year, it's going to be in the same range of couple of salespeople on an annual basis. We're really focusing right now on continuing to build out our FAS team, which is our field applications team. When you look at the portfolio of products that we have, especially in the filtration arena, it's highly technical sales. So we need the balance of reps and field applications people. And the other area, we're continuing to add people on an as-needed basis is in the service area, because now we have a much broader service portfolio. It used to be ATF, now it's ATF in the Spectrum systems. So again, we need to sort of systematically build out those teams over the next -- we're doing it this year. They'll be more buildouts next year. Again, we're not talking about a whole lot of people here, but expect next year we'll probably be adding 4-6 people into field applications/service and I don't really have the split of what that would be.

Okay, great. Thanks for taking my questions.

Thank you. The next question is from Tycho Peterson with JPMorgan. Please go ahead.

Hey, thanks. I'll start with filtration and really a question around ATF. Can you talk about the rate of perfusion adoption so far and are we kind of starting to hit an inflection point? And what is the strategic importance of moving from perfusion into fed-batch?

Yes, great question. So I think the perfusion market -- or the adoption of perfusion and the mindset around perfusion has really changed over the last couple of years. If you went back a few years ago, Tycho, I think the split would have been 20% of the market is using perfusion and then 80% of the market is using fed-batch. What we've seen over the last, I would say, 24 months is the emergence of using perfusion and fed-batch processes and that's where the N-1 application fits. We're seeing some other applications within fed-batch where customers are taking advantage of perfusion. I don't want to say we're hitting an inflection point quite just yet, but definitely there is a broader appetite in the industry to implement perfusion-type approaches and technologies into fed-batch processes and I think that's a very positive sign for Repligen. And I think having single-use ATF out there and having the TFF systems from Spectrum allows us to position either at TFF hollow fiber solution or an ATF hollow fiber solution right into that market. So I expect that part of our business is going to continue to grow rapidly over the next few years.

And then I guess on the operations side of things, are you able to talk at all, I mean, hosting facility expansions last year where you are in terms of capacity utilization, you need further investments as well to get to the two to three weeks of lead time that you talk about?

Yes, I think if you take it by business, there's definitely investments going on in almost every business to drive lead times down, I think the biggest investment we're making is really building out the Marlboro facility which comes online in Q4 of this year, that gets us to -- we are able then to move the TangenX cassette business which has a lease that expires at the end of 2018. So that moves across really in Q3 where we were back up and running within a couple of weeks and then we're able to move the systems -- larger systems manufacturing for Spectrum into that facility and we really want to make that facility, which is 64,000 square feet, the center of excellence for basically TFF Systems, cassettes and then over time we'll look at other products that would fit. But it will be a filtration center of excellence and that's where the biggest investments going to be.

Okay. And then last one, I know you said you'd update us on GE at the end of the year. Are you able to say whether those discussions have begun and does the pending spin change anything from your perspective about how that goes out?

I missed the last part of pending...

Healthcare spin.

Yes, I'll start with that, I don't think the healthcare spin really impacts us. I think GE continues to be one of the biggest players in the bioprocessing space. They've got a broad portfolio, obviously anyone who's in bioprocessing competes with GE. So I just don't think there'll be any impact there. It's really business as usual for everyone.

Okay. Thank you.

Thank you very much. Our next question is from Paul Knight from Janney Montgomery Scott. Please go ahead.

Hi Jon, what should the tax rate be the rest of the year and going forward in the years in the future?

Yes. So if you look at the GAAP tax rate, somewhere in that range of 28% to 29% for the year. Non-GAAP should be somewhere in the range of 18% to 19%. And as we go forward, I would expect it to be somewhere in the mid-20s to 30% range.

On GAAP?

On a GAAP basis and then obviously you can take the differential from this year and apply that.

GAAP, again, would you repeat that?

Yes. The GAAP should be somewhere in the, I would say in the range of 25% to 30%.

Okay. After 28%, 29%?

Yes.

And then, Tony, on Navigo, one, why the upfront payment, why not paying for billable hours? And two, who will their customer be, is it just Purolite, is it the industry. Could you talk to Navigo?

Yes. So Navigo is a ligand development company, so they have a high throughput screening platform that allows them to screen millions and millions of targets to specific proteins of choice. So in our case, we worked with them on a very high-capacity Protein A ligand. The customer for Navigo is us. There will be -- obviously Navigo is working with other companies whether it's bioprocessing companies like Repligen or pharma companies that are interested in developing very specific ligands for target molecules that they are working on in development. So in terms of the upfront, it was really around agreeing on a set of targets and then putting basically exclusivity and IP in place for Repligen and that's what the upfront payment was. So it really -- it was less about billable hours and less about trying to say, hey, we want to do target X and Y and was more around securing exclusivity for Repligen on those handful of ligands that we want to co-develop with Navigo.

Okay. And my last couple would be on 80, is it providing the customer intros that you had hoped on the acquisition. And on the other end of that Spectrum, do you think about how Repligen could be in the latter stages of the markets, specifically Phase III and post approval, could you be there someday?

With a broader portfolio. Paul, or with any, I assume you mean the broader portfolio?

Broader portfolio, would you have to buy stuff to be there?

No, I think we're already there in late phase and in commercial. If you look at our filtration portfolio, we're in a significant number of commercial processes today. I think our OPUS portfolio is somewhat unique in the sense that it's perfectly positioned for preclinical Phase I, Phase II. I think with the addition of OPUS 80, it definitely opens up more doors to get into commercial processes. We are now in -- just even with the existing portfolio before we launched the OPUS 80, we're in a couple of commercial processes with our 45 and 60 centimeter diameter columns. In terms of 80, that portfolio has done really well, it's ahead of where we expected in terms of the deal model we put in place back in 2016. We really like the portfolio of products, it's a great way when we're selling large scale OPUS to talk to customers about scale down, work that they need to do and we have a perfect portfolio of products that fits into those scale downs whether it's scale down of a processor or doing viral clearance study. So again it's -- it goes hand-in-hand with our large-scale OPUS products.

Thank you.

Thank you very much. And we have no further questions in the queue. So I would like to hand the call back to Mr. Tony Hunt for some closing comments.

Great. I'd like to thank everybody for joining us today. Clearly excited about what's happened in Q2. I think we've had a great quarter. I think we're setting ourselves up very nicely for the second half of the year. Look forward to getting back in touch with everybody back in November and bringing up to speed on how we're doing. So thank you very much.

Thank you very much. Ladies and gentlemen, that concludes this conference call. You may now disconnect your lines.