Good day, ladies and gentlemen, and welcome to the Repligen Corporation's Second Quarter of 2021 Earnings Conference Call. My name is Matt, and I will be your coordinator. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to your host for today's call, Sondra Newman, Head of Investor Relations for Repligen. Please go ahead.

Thank you, Matt. Good morning to everyone on the call. We appreciate you joining again. This morning, we'll be covering financial results and business highlights for the 3- and 6-month periods ended June 30, 2021. We'll also update our financial guidance for the current year. We've got President and CEO, Tony Hunt, who will cover business updates; and our CFO, Jon Snodgres, will cover our financial results and guidance. As a reminder, the forward-looking statements that we make during this call, including those regarding our business goals and expectations for the financial performance of the company are subject to risks and uncertainties that can cause actual events or results to differ. Additional information concerning risks related to our business is included in our annual report on Form 10-K, our quarterly reports on Form 10-Q, 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 are 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 and on sec.gov. Non-GAAP figures in today's report include the following: revenue growth at constant currency; gross profit and gross margin; operating expenses, including R&D and SG&A; operating income and operating margin; other income and expense; income tax expense; net income; and earnings per share; as well as EBITDA and adjusted EBITDA. These adjusted financial measures should not be viewed as an alternative to GAAP measures, but are intended to better enable investors to benchmark Repligen's current results against historical performance and the performance of peers when evaluating investment opportunities. Now I'll turn the call over to Tony Hunt.

Thank you, Sondra, and good morning, everyone, and welcome to our Q2 earnings call. We're very pleased with our performance in the second quarter and through the first half of 2021. Our reported organic revenue growth of 69% year-over-year along with significant margin expansion reflects the outstanding efforts by our entire team as we focus on capacity expansion and capital project programs to meet accelerating demand, on fast tracking the hiring of more than 300 people, completing the next phase implementation of SAP while delivering critical products to our expanding customer base. We also executed on our M&A strategy, adding an important player in hollow fiber technology to our fast growing filtration franchise. As noted in prior quarters, we continue to see very positive performance in our non-COVID base business, which was up 35%, accounting for 66% of revenue and 31 points of total growth. We had another strong COVID quarter, which represented 27% of our revenue or 42 points of our total growth. Finally, revenue from acquisitions we made in 2020, namely ARTeSYN, EMT and NMS, represented 7% of our revenue and 13 points of growth. We continue to be encouraged by the sustained strength in our non-COVID business where all our franchise continued to perform above our expectations, led by our filtration franchise, which was more than doubled through the first 6 months of 2021. On the orders front, we continue to see strong momentum with orders up approximately 140% in the first half of this year compared to 2020, as customers continue to fill out the order book for the second half of 2021 and first half of 2022. In the quarter, COVID orders represented 28% of the order book. Given the strength in orders and overall first half revenue performance, we now expect 2021 to finish…

Thank you, Tony, and good morning, everyone. Today, we are reporting our financial results for the second quarter of 2021 as well as updating our financial guidance for the year. Unless otherwise mentioned, all financial measures discussed reflect adjusted non-GAAP measures. As shared in our press release this morning, we again delivered record revenue and strong earnings growth for the second quarter of 2021. We are also seeing significant order intake, supporting our outlook for the second half of 2021 and into 2022. As Tony highlighted, our base business continues to perform very well, up 35% year-over-year and contributing 31 points to overall revenue growth of 86%. The strength of our base business, which excludes COVID-related revenue and inorganic M&A revenue, was driven by across-the-board gains in each of our 4 product franchises. We also continue to see robust sales and orders from our COVID-related business, which contributed 42 points to overall revenue growth in the second quarter. Finally, inorganic growth from our 2020 acquisitions of EMT, NMS and ARTeSYN drove 13 points of the 86% growth in the second quarter. Overall, we continue to benefit from an acceleration in demand for our products from a robust biologics market that continues to pivot towards more flexible and efficient manufacturing solutions. During the second quarter, our operational focus was on capacity expansion, integrations of our 2020 acquisitions and the completion of deal-related activities for our Polymem acquisition that closed on July 1. We also completed Phase 3 of our SAP implementations with our Sweden, Germany and Clifton Park, New York locations going live in May. On the hiring front, we've continued to expand our R&D and global commercial teams and operating infrastructure. During the first half of 2021, we added over 300 individuals to our team, a 30% increase from year-end…

[Operator Instructions] Our first question will come from Dan Arias with Stifel.

Congrats on the quarter. Jon, I wanted to start with the gross margin performance and the margin guide for the year, well above what we were looking for, for the quarter. How should we think about the impact of just the leverage on the higher volume and the capacity changes versus the timing element on, I think, payments that you mentioned? If I look at the gross margin outlook for the year, it kind of looks like you need to dip down a couple of hundred basis points in order to get to the middle of the 59% to 60% range. So is there something discrete there? And to what extent should we kind of think about a new floor going forward at the gross margin line?

Yes. So I can give you a good overview of that, Dan. For Q2, obviously, we're at 62% adjusted gross margin. And then year-to-date, we're at about 60.8%. So as a result of the first half performance, we did see very nice volume leverage. We also saw some mix benefits that we touched on within our OPUS product line. As well as a high degree of volume from proteins and filtration, which was favorable from a mix perspective in the first half. As we look at this, we raised our overall guidance by about 2 points, up from that 57% to 58% up to 59% to 60%. And what this implies actually for the second half is a midpoint of gross margin for the second half of the year of 58% to 58.5% in that range. And so what we expect to see for the second half of the year is just a number of investments that we've been making throughout the year. But should intensify with our expanded footprint, with more depreciation expenses and more headcount expenses as we come through the second half of the year. But definitely a little dip down, but 58.3% or 58.5% is pretty formidable for the second half compared to historical margins we've had.

Okay. Any thought on next year? I mean, I know we're not there yet, but just given where you went to this quarter, you sort of like level-set where you might come back to for 2022?

Yes. A lot is going to depend on volumes and what we're able to see coming into the revenue forecast. It's a little bit early to say that. But I would say, Dan, if we're finishing the year -- second half of the year in that 58% to 58.5%, that's probably likely a good starting point for the year. And hopefully, it would ramp up a bit through the year.

Yes. Okay. Tony, maybe just one for you. Obviously, pretty strong performance on the non-COVID business to your point. Can you just maybe walk through some of the factors that you think are driving acceleration just when it comes to clinical development advancements, Phase 1 to 2s, 2s to 3s, larger orders. I mean, I know you've mentioned selling capabilities when it comes to the portfolio. So just curious to get your thoughts on what you think is driving the acceleration there. And then along those lines, I mean, one of the other things that you mentioned, you just referenced anyway is just that some of the COVID work that you've done for the government that you've been obligated to do has at times put a bit of a constraint on the non-COVID business at some point. So is there anything to read into the results here that says that maybe that's easing a bit? Or is it just sort of a different dynamic altogether?

Yes, I mean when you look at the overall performance in Q2, and honestly, when you look at it for a full year for we're projecting out now 30% growth for the non-COVID business, it is across the board. We're really pleased with the filtration portfolio when you look at our hollow fiber modules, you look at our systems, the flat sheet cassette business, the ARTeSYN systems that we've now added in, all of those have really added to the overall growth. I think it's more of a reflection of the work that's been done over the last 4 or 5 years. We have a pretty healthy funnel of early-stage to mid-stage opportunities that continue to move through the clinical pipeline. I think ATF is a great example. I think for the last maybe 5-plus years ATF, we have lots of Phase 1, Phase 2. We've seen a lot more companies bring the technology through to Phase 3 commercial and we've definitely benefited from that. Other product lines, our analytics business is up 40% again year-over-year. This is just the focus of putting a commercial organization in place. So if I had to summarize, I would say, it's the investment we've made in commercial over the last few years to really make our territories a little smaller, a little bit more focused. And then I would say over the last 12 months, it's the investment we made in capacity that many of our product lines, we've really got ahead of the capacity challenge. And we're benefiting a little bit from sort of shorter lead times.

Our next question will come from Puneet Souda with SVB Leerink.

And Tony, congrats on the strong quarter here. First one on COVID, the $170 million to $180 million. I know historically, you have said that, that could potentially be from new vaccines and the $200 million number that you're giving for 2022, that could be from sort of new vaccines and therapies that are in the Phase II, Phase III and sort of trials right now. But at this point, we have seen a significant adoption of mRNA-based vaccines. And some of the protein ones have lacked a bit or had limited traction and not so remarkable data. So when you look at this number in sort of 2022, and it's great to see that it's up, as you pointed out, even before. Just trying to understand, is that still from the new vaccines that could emerge here? Or is it just the expansion of the current volumes. And just wondering if you're baking any boosters into that as well.

Yes, maybe I'll start with the last question. Yes, when you look at next year on COVID, obviously, the last, I would say, 4 to 8 weeks, we've seen a significant number of orders come in for 2022. And so that's why we have well over $100 million in booked orders for next year coming from the commercial vaccines that we're in, which is the majority -- we're definitely in the therapeutics as well, but the majority of our revenue is coming from vaccines. I think in terms of companies that are still Phase II, Phase III, I think their orders really go out to the end of this year, but we have forecast of where we think people are going to be next year. So we feel confident about the $200 million number, Puneet. We think halfway through the year, we're well over 50% of what we see as the order book for COVID for 2022. And we think that that's a fair reflection of up where we think COVID is going to be. On the $170 million to $180 million this year, again, some of the revenue in the second half of the year is definitely coming from Phase II, III and potentially commercial drugs or commercial vaccines, and expect that most of our large customers have placed their orders for this year. So I think that's a pretty solid number.

Got it. Okay. That's very helpful. And then on the capacity side of things, obviously, you're pointing to higher demand here, continued strong acceleration in the market and thus the capacity expansion. Could you maybe just give us a sense of sort of where the sentiment sits today? We've seen industry -- expansion across the industry and across Repligen in capacity so far. Your CapEx commitment is now still -- remains the same. And we saw a peer announced this morning a significant capacity expansion, too. So maybe if you could give us your view on just continued capacity expansion as we go into 2022. And just sort of trying to get a sense of we've seen continued expansion and demand in this market, are we reaching some of those peak levels at this point in time? So I'm just trying to get a sense of that.

Yes. I don't think Repligen is doing anything different than any of our peers, right? Everybody is expanding capacity, everybody is investing. You saw the announcement this morning from some of our peers in terms of what they're doing. We've seen this over the last 4 or 5 months. We're investing about $100 million in capacity expansion programs. I think when you look out for we're trying to go in terms of capacity plans, what we've done just in the last 1.5 months in terms of taking a lease on the Hopkinton facility, also doing a lease on the Waterford building. That gives us tremendous capacity in 2022. And now on top of that, we've got the Marlborough building. You shouldn't discount the fact that Polymem is an immediate capacity play for us as well because on the hollow fiber, that we've gone ahead in a part of a company. We really like their technology. We like what they have in terms of manufacturing capabilities and we get immediate boost in capacity. So our view of the world is you have to have really good lead times and everybody in our industry is working towards that goal. I don't think there's an overcapacity right now or that we're -- I don't know if we're reaching our highs, I don't think anyone can really predict that. But our order books have been good. I think everybody else in the industry is indicating their order books are also very strong. So I think there's a high degree of confidence that this growth that we're all seeing is going to go well into 2022.

Our next question will come from John Kreger with William Blair.

Tony, could you just expand a little bit more on the lead time comment that you just made? If you kind of reflect back a couple of years ago in a more sort of normal market environment, what would sort of typical competitive lead times have been versus what -- where they're running now? And then maybe as a follow-on, I know Polymem, you talked about having a -- gaining a competitive advantage in the hollow fiber area. Again, can you just sort of talk about what your lead times were before that deal?

Yes. So on the lead times, if you went back a few years ago, I think if it was a consumable, obviously, you have some consumables that are off the shelf, but I would say 6- to 12-week lead times pretty common in our industry. And then on capital equipment, it could be anywhere from 9 weeks to 15, 16 weeks. I would say when COVID hit, pretty much lead times doubled, and in some cases, went out even further than that across our industry. We've worked really hard to keep our lead times as short as possible. Sometimes that works, right? Sometimes we're challenged even on the supply side. Great example is our prepacked columns. We have just great capacity right now, but there's still some constraints in the industry on supply of chromatography resins. So that's a little bit outside our control. But I think in general, every product line in our portfolio is at a different stage of its journey in terms of where we want to get to lead times. But we're trying to get back to lead times that we had 3, 4 years ago. When it comes to Polymem, I think the impact of Polymem will really be felt in 2022. Right now, we're just going through the integration piece. There are online producing fibers and modules for us. And they will drive down lead times when we get into next year, which will be back to more normal ranges that I spoke about earlier.

Great. And then maybe just a follow-up for Jon. Your margins would suggest not much of this, but are you seeing any sort of supply chain constraints that are limiting your ability to ramp capacity on schedule?

I think the most significant supply chain constraint that we have is the resin situation for OPUS that Tony talked about. We, like everybody else, are hiring a lot of people. So there's some -- there's definitely undersupply and over demand on the personnel side. But we continue to work through it like our competitors do. And we've been able to pretty much overcome any major issues. But there's definitely pent-up -- too much demand, not enough supply. And there's a little bit of inflation that we're absorbing, but that's the same as all of our competitors. But nothing showstopping there.

Our next question will come from Julia Qin with JPMorgan.

Congrats on the quarter. I want to take a step back and look at maybe more lasting impact of the pandemic. Obviously, the entire industry has seen broad-based supply chain challenges. And you and a few peers have previously noted that customers are ordering more in advance. I'm curious if you've also seen increased customer dual sourcing as a result of this? Or if you expect the pandemic to have an impact on customer dual sourcing behavior in the future? Basically trying to understand what this could mean in terms of creating incremental opportunities for Repligen.

Yes, the line's a little -- was a little hard, but this is -- you're asking a question on increased...

Dual sourcing.

Dual sourcing.

Yes. Benefits in..

Okay. So I would say that right now, if a customer has a supply issue, they are definitely going to look at dual sourcing. There's no doubt about it, Julia. So it just really depends on the product line. I think that our customer base realizes after going through the first year and a bit of COVID that having multiple suppliers is only a benefit. You'll always have a primary supplier, but I think there will be opportunities for companies that have not been at accounts to be able to come in as a second supplier, especially when some of the products might have long lead times.

Great. And then in relation to recent kind of headlines, can you talk about Repligen's exposure to Alzheimer's therapeutics and how big the opportunity can be for Repligen?

To? I'm sorry...

Alzheimer's.

Alzheimer's. Yes. On the -- I would say, it's early days on Alzheimer's. I think when we look at accounts, we look at accounts really from how do we get platformed into an account, so we don't worry about the individual drug. I think as a class of drugs around Alzheimer's begins to take off, you'll see multiple companies moving forward with Phase III commercial approvals. It will start to move through the CDMO-type organizations that traditionally happens with large blockbuster drugs. So I think Repligen will get its fair share. But I think our #1 priority is really around penetration of accounts and getting in as platform technology, whether it's an ATF technology or it's OPUS prepacked columns or its systems. That's always been our approach, we don't really look at it drug by drug. And in fact, most of our customers don't really talk about which drugs you're in. They just talk about what's required and you're in a Phase I or Phase II or you use it as a platform across multiple drugs.

Our next question will come from Jacob Johnson with Stephens.

Maybe a question on the gene therapy side as it relates to viral vector yields. I think they're relatively low today, but everybody seems to be working on kind of optimizing those workflows. How do you see it trending, Tony? And maybe what opportunity does it present for you? It seems like ATF is benefiting here.

Yes. So the viral vector side, look, I would say that almost every company is looking to optimize their manufacturing process or processes, and yield is king. And if you can improve yield, then you're going to get a fair evaluation and an opportunity to move into many of these drugs. So from a Repligen perspective, I would say that our upstream portfolio of ATF and TFDF is really well positioned to focus on what you just referred to as viral vector yield improvements. And that's something that we've been working on over the last couple of years. We've definitely made some progress. We've had some nice wins. But there are other technologies out there as well that people will evaluate. But we feel pretty bullish about the impact of ATF, TFDF in the space.

And then just on the fluid management capabilities, you added via the, I think, EMT and NMS deals. Can you just remind us of the strategy here? It seems like that is something that could be, especially as cell and gene therapy customers look to develop close manufacturing processes. Is that a piece of it? Or maybe it's broader than that?

Yes. When you look at -- I think it's all centered on our system strategy, which obviously, in 2017, we did the Spectrum deal, which gave us the hollow fiber systems from bench-top all the way to production. By acquiring ARTeSYN last year, we added in high-pressure quad fuel pump systems for downstream chromatography systems with low hold-up volumes and other systems for media prep and for viral filtration. So when you think about consumables around systems, a lot of customers use what we call fluid management flow paths. So when we talk about ProConnex, that's kind of a perfect example of hollow fiber module with the whole fluid management components added into it. So as we think about fluid management, we're thinking about fluid management around the systems we have as opposed to selling the flow paths independent of our systems. Now we do that, but I think our goal is to have the flow path sold with our systems. And so the customers have an ability to get not only the system to do the work, whether it's upstream or downstream, but also the fluid management components that go side-by-side with it.

Our next question will come from Matt Hewitt with Craig-Hallum Capital Group.

Congratulations on the strong quarter. Just a couple for me regarding some of the newer products, specifically FlowVPX last quarter was the launch. You commented that it was off to a very strong start. Just curious if we can get an update there. And then regarding the COVID-19 spike protein affinity resin that was being evaluated. Have you seen any orders come in for that? And how is that looking?

Yes. Maybe start with the spike protein resin. Yes, we definitely have had orders through the first half of the year, and we'll have more orders in the second half. As we said, I think the spike resin will play a role in next-generation vaccine. So I'm not -- I wouldn't expect a whole lot of revenue from that product in 2021, and we'll see where we get to 2022. On the FlowVPX, I think this is a technology -- very like the excitement that we feel around TFDF, we have the same level of excitement around FlowVPX. We think that PAT technologies are definitely on the rise and customers -- our customers are definitely looking to get real-time process monitoring data. That's what FlowVPX brings to the equation. We've seen really nice adoption of the new product through the first half of the year, expected to accelerate further as we go through 2021 and 2022. And we think we're at right at the beginning of the journey of finally seeing PAT technologies get adopted in bioprocessing, which sets up a very long runway for products like FlowVPX as we go through the next few years.

Our next question will come from Paul Knight with KeyBanc.

Tony, on the capacity expansion you mentioned earlier, is it the Waterford, is it the existing prebuilt IDB facility there? And then on the French acquisition, it sounds like you're ramping very quickly, what's enabling that?

Yes. So maybe start with the French acquisition, Paul. The Polymem facility was already set up in terms of their manufacturing capabilities to pivot to making bioprocessing, fiber and modules. So they had a lot of core competency that complemented exactly what we have. So because we've been working with them for the best part of the year, really the first half of this year has been around ramping up their manufacturing, qualifying it in and then working with our customers to qualify in a second supplier for membranes and modules, and that's exactly what we've been doing through the first half. And we're starting to ship modules to our customers here in Q3. In terms of the Waterford site, it's the -- it's an IDA building, brand-new building. It's very close to the ARTeSYN headquarters, probably about 3 or 4 kilometers away. Our goal, Paul, would be over the next 12 months to build that out as a European assembly center. So not only will it make the flow paths for, say, the ARTeSYN skids, it will also make flow paths for what we call the ProConnex product line. So I think it's really an important addition for us because we feel like we need dual manufacturing, especially for European and North American customers. This gives us a European center of excellence for our flow paths and fluid management products and expect that, that will come online in 2022.

And lastly, Tony, with industry growth perhaps what, 20%, and you're well above that. Is it your novel products like ATF, do you think that kind of thinking is clear?

Yes. Look, I would say that everybody in bioprocessing has great products in their portfolio that are growing probably close to where we're growing. I just think we're a smaller company with very focused, highly differentiated technology. So we haven't moved into the commodity side of bioprocessing. I think that's our differentiator. I mean, all our products are technology leaders and for the most part, actually market leaders where we play. I think that allows us to basically accelerate our growth. I think the other part is that when you look at our pipeline, I think we probably -- we don't have as many products or customers who have put our products into commercial processes. We've got a big customer base that are using our products in Phase I, Phase II, Phase III. We definitely have commercial wins, but those products come through than the consumables associated at the commercial level definitely become an accelerator of growth for us. So I think that's part of why we're growing above the market growth rate.

[Operator Instructions] Our next question will come from Ram Selvaraju with H.C. Wainwright.

Both related to COVID. Can you comment on what the implications might be for future approvals of boosters for the main marketed COVID-19 vaccines, the extent to which this might impact durability, recurrence on the COVID-19 revenue front? And also if you could comment on the COVID-19 therapeutics side, what category of COVID-19 therapeutic is likely to be the most significant long-term driver of revenues? And I'm asking these specifically in the context of the fact that it appears to be the case that with these new variant strains, the highlight is that COVID-19 is on its way to becoming endemic.

Yes. On the therapeutic side, I would say that I really can't comment on which therapeutics are going to be the major drivers of growth. The way we look at it is the majority of companies that are working on therapeutics and vaccines, we're working with them. They're using our products. I think we've benefited, over the last 1.5 years, more on the vaccine side because the volumes have been high, and we've had the right technology at the right time to be able to work with those customers to move forward. I think there will be opportunities for us on the therapeutic side above and beyond what we're doing today. In terms of the boosters, I think it's a little early. I think the decision on when boosters -- if and when boosters get approved, will happen later this year. And you can see that there's different parts of the world that have different opinions on it. I think Europe is very much in favor of putting boosters into the equation. I don't think boosters have become part of the long-term planning in terms of volume and revenue. And so if boosters get approved, I would see it as an upside to overall market demand as we move through 2022 and 2023.

Our next question will come from Brandon Couillard with Jefferies.

Tony, you kind of snuck in a comment there about pulling forward your $1 billion revenue target into '24. Just want to confirm if that's all organic? And just your comment on the amount of COVID revenue that might be still included in that number as you kind of look out a few years.

Yes. It's definitely an organic number that gets us to the $1 billion in 2024. When we look at where we're going to be next year with a couple of hundred million dollars in COVID revenue, you can see that getting to $1 billion by 2024, given the sort of portfolio of products that we have, the growth trajectory that we're on, we feel pretty confident that, that's something that we can accomplish and achieve. Now will we do deals between now and then? Yes, I'm sure we will. And that will kind of add to the overall number. And the second part, Brandon, again, I'm sorry, could you repeat it?

Yes. I guess just if you care to comment, I think, on kind of the magnitude of the COVID revs. And what that might be in terms of that 2024 build?

Yes. Yes. Yes. As we go through the next few years, I think it's a little unclear. I think we're trying hard to give people a view of 2022 right now. And I think the 2023, 2024 demand will definitely depend on what's the effectiveness of the vaccine, how long the antibodies last or are boosters going to be required? I think all of those play a big role in 2023 and 2024. But I definitely think COVID is around for the foreseeable future.

This concludes our question-and-answer session. I would like to turn the conference back over to Tony Hunt for any closing remarks.

Just like to thank everybody for joining us this morning. Appreciate all the questions. Look forward to catching up with everybody at the end of the year, and thank you again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.