Expert Financial Analysis and Reporting

Investment Overview

I first recommended Repligen in an initiation report published on December 4, 2012  at a price of $6.12. Now selling at a price of $223, it has been a good recommendation. My original reason for recommending the stock was that its business model was to support manufacturing of biologics and in particular monoclonal antibodies. This category of drugs has emerged as the major driver of the world biopharma industry. At the time, its major product was protein A which is used to purify monoclonal antibodies during the manufacturing process. Repligen supplied over 95% of the world market at the time. The business model envisioned growing the business through acquisitions and to continue to expand its bioprocessing footprint. To use an analogy, Repligen aimed to provide picks and shovels to the monoclonal antibody gold rush.

Over the next four years, I wrote 14 company specific reports, each time reiterating a buy. Since then I have written only one company specific report. My only comments were in periodic blogs that summarized my recommendations in which I maintained my buy, but didn’t go into any in-depth analysis. Why the lack of comment?

Repligen brought in Tony Hunt, an experienced bioprocessing executive in 2014 who has built a management team that has executed far beyond my wildest dreams in 2012. They made brilliant acquisition after brilliant acquisition. So why the lack of writing on my part? There are no metrics for an analyst to follow in regard to bioprocessing. In biopharma, an analyst can follow product sales trend and clinical trial development. There are no such measures in bioprocessing. There are many, many steps in bioprocessing that include filtration, chromatography, process analytics and fluid management. There is no way for an outside analyst to understand the competitive dynamics in each of these areas.

Repligen is unanalyzable-at least to me- from a microeconomic level. One can only look at the end markets that the Company serves to gauge the potential for the Company and these have powerful growth prospects. In addition to monoclonal antibodies Repligen also services cell and gene therapy and COVID vaccines and therapeutics. Repligen is one of the best COVID beneficiary plays in the market. Obviously, each of these technologies is experiencing explosive growth. However trying to gauge the prospects of the company from a microeconomic standpoint is nearly impossible. Adding to the difficulty is that acquisitions are an integral part of the business model and of course are impossible to predict.

Analysts and investors then, are dependent on company guidance and the record of management in achieving that guidance. The results have been beyond spectacular. At the end of 2012, Repligen had product revenues of $41 million and for 2020 revenues were $366 million. Every acquisition so far has been somewhere between great and awesome and management has built an impressive infrastructure for marketing and manufacturing on a global basis.

2020 Results and Management Guidance for 2021

All of this is to say that I can’t really add much value beyond regurgitating reported results and the guidance of management. So here goes. For all of 2020, key results were as follows:

• Total revenue increased 36% to $366.3 million. The year over year increase was 36% as reported and 35% based on constant currency. Organic growth was 29% with acquisitions adding the balance.
• COVID related products provided a major tailwind but non-COVID related revenue grew 18% overall for the year.
• Operating income on a non-GAAP basis was $98.1 million, an increase of 54%.
• Net income on a non-GAAP basis was $89.1 million, an increase of 70%.
• EPS on a non-GAAP basis was $1.65 an increase of 54%

Fourth quarter results were even better:

• Revenue increased by 56% year-over-year as reported and 47% organically, to $108.6 million
• COVID related orders accounted for 22% of overall Q4 revenue, which was up sequentially from 15% in Q3.
• On a regional basis Asia sales increased more than 100%, Europe 70% and North America 40%.
• Operating income on a non-GAAP basis was $27.3 million, an increase of 115%
• Net income on a non-GAAP basis was $28.7 million, an increase of 165%
• Earnings per share on a non-GAAP basis were $0.52 an increase of 160%.

Guidance for 2021 on a non-GAAP Basis

• Total revenue is expected to be in the range of $500-$525 million, reflecting overall revenue growth of 37%-43% as reported (assumes constant currency rates) and organic growth of 26%-33%.
• Revenue contribution from COVID-related programs is expected to be in the range of $90-$100 million (18% of sales), representing an incremental COVID related revenue increase of $44-$54 million over 2020. This represents 12%-15% points of overall revenue growth. Incremental acquisition-related revenue is expected to be in the range of $37-$40 million, representing 10%-11% points of overall revenue growth.
• Adjusted (non-GAAP) income from operations is expected to be in the range of $134-$140 million, an increase of 37% to 43%.
• Net income is expected to be in in the range of $106-$111 million, an increase of 19% to 25%. This slower rate of EPS growth as compared to growth in sales, operating income and net income reflects a tax rate of 20%; essentially no taxes were paid in 2020
• Fully diluted non GAAP EPS is expected to be in the range $1.86-$1.94 an increase of 13% to 18%.
• This guidance obviously does not include any contribution from new acquisitions. The Company is free cash flow positive and has a war chest of $717 million that will be directed at acquisitions.

2025 Sales Goal

The company’s stated goal is to reach sales of $1 billion in 2020. If EPS grow apace of sales, EPS in 2025 would reach $4.50.

Management states that they traditionally achieved a 10% to 15% organic growth rate in pre-COVID days. This organic growth is expected to increase to 15% to 20% for non-COVID businesses for the foreseeable future. The reason is increased traction in the market place, innovation and the enormous innovation just beginning in in cell and gene therapy which expands the market opportunity meaningfully beyond monoclonal antibodies. The very significant opportunity for COVID related drugs, monoclonals) and vaccines, adds a new layer. On top of all of this, acquisitions are likely to add substantial growth.

Valuation Discussion

Repligen is certainly not an undiscovered stock as reflected in 2021 P/E of 115+ based on management’s EPS guidance. The current market valuation is $11.4 billion which is a multiple of sales of 24 times. These valuations don’t provide any cushion for a disappointment. This level of valuation characterizes so many of the great growth stories of the current time across all industry categories. Some say we are in a bubble caused by artificially low interest rates engineered by central banks trying to stimulate growth in this COVID pandemic. They maintain that at some point in the future- not likely in 2021- as interest rates rise to more normal levels, the price earnings ratios will collapse even if expectations for growth are met. This argument certainly has merit.

From a company specific standpoint, the macroeconomic outlook for the technologies that Repligen services is incredibly bright. Monoclonal antibody development is the most important dynamic that will drive the biopharma industry for the next 10+years. Cell and gene therapy is in its infancy and may eventually supplant the leading position of monoclonal antibodies. COVID vaccines and therapies will not just be a one or two year event; we are only at the beginning. Vaccination and monoclonal therapies are just becoming available in developed countries and it will take several years to vaccinate the world. Currently, there are about 1.4 billion people who live in developed countries and 6.3 billion in developing countries. It is likely that COVID like flu will be endemic and stay with us for many years/ forever. There will likely be a need for booster shots and new vaccines to address COVID variants. In addition, COVID has caused a revolution in vaccine development that will lead to much development for other viruses.

So the valuation is very rich and the fundamental outlook is exceptional for the next ten, twenty or thirty years. Repligen represents an outsized position in my portfolio to the extent that if naysayers are correct about a bubble and coming collapse in valuations, it would be quite painful. Nevertheless, I will hold my stock. I seldom make an investment judgment based on valuation for great companies like this. I also think that Wall Street analysts and investors seem to always under estimate the potential for dynamic growth stories. As I think back to 2012, I didn’t really conceive that sales by 2020 would reach $366 million. It could very well be the case that the $1 billion sales goal for 2025 could be bested. Maybe in 2025 management will have a goal of $10 billion of sales in 2030.