Repligen Signals Gene Therapy Strength With 2019 Earnings Report

When is achieving year-over-year growth of 39% for both revenue and operating income not enough? When guidance for the next year disappoints, apparently.

Repligen (RGEN 3.98%) delivered a solid fourth-quarter and full-year 2019 earnings report yesterday. A combination of new product launches, continued contributions from past acquisitions, and growing demand for bioprocess products drove significant increases in nearly every financial metric. The company also reported that gene therapy customers were responsible for 15% of total revenue in 2019 and remain one of the best sources of growth.

Despite the progress, investors appear to have been disappointed by full-year 2020 guidance for revenue growth of 14% to 18%. That's much lower than the most recent annual period. Considering Repligen is one of the more closely watched growth stocks on the market, it's not surprising that shares took a tumble on the relatively weak guidance. But it might be just a matter of perspective.

Image source: Getty Images.

By the numbers

Repligen develops bioprocessing equipment. It sells the products required to manufacture biologic drugs such as monoclonal antibodies, recombinant proteins, vaccines, gene therapies, and cellular therapies. For instance, it sells products needed to grow cell cultures, equipment required to separate and filter the components of gene therapy vector manufacturing, and the products that make it possible to efficiently purify therapeutic proteins.

It might be an overlooked niche, but it's a lucrative one. Repligen has leaned on acquisitions to bolster its product portfolio and in-house expertise to develop new products. Acquisitions were responsible for roughly 40% of all revenue generated from 2014 to 2019. Meanwhile, the company launched 12 new products from research and development efforts during that span. 

That blueprint drove significant growth in 2019 and delivered the most profitable year yet for Repligen. 

Data source: Press release. YOY = year over year.

Coincidentally, the company's product portfolio is well suited to serve the fledgling gene therapy and cell culture markets. The product-market fit may not have been the primary factor supporting every acquisition made in recent years, but each has contributed to the opportunity.

Gene therapy customers were responsible for an estimated 15% of total revenue in 2019. By comparison, gene therapy applications were responsible for an estimated 4% of sales in 2017. That suggests revenue from gene therapy customers has grown from less than $6 million in 2017 to $40 million in 2019.  

If gene therapy is a strength, why is 2020 guidance weak? 

Investors might be having a difficult time squaring the strength in gene therapy markets with relatively weak full-year 2020 guidance. After all, annual revenue jumped 39% in 2019, but Repligen expects to grow at half that rate in a best-case scenario for 2020. 

Data source: Press release. YOY = year over year.

What's going on? CEO Tony Hunt explained on the fourth-quarter 2019 earnings conference call that the weak year-over-year comparisons for 2020 have more to do with a stronger-than-expected performance last year than any real weakness in the year ahead. The OPUS business (chromatography columns used to purify cell culture products) had a big year, while the fast rise of gene therapy has surprised everyone:

Our OPUS business came off a massive year last year, up over 50%. And our filtration product line also had a really, really big year. ...

I think the other factor last year is that no one really in the industry predicted how fast the gene therapy market was going to grow. And I think we all kind of missed that a little bit. And so that's kind of the explanation for last year.

It's also worth pointing out that the oldest part of the business is providing a non-negligible headwind. Repligen is a leading provider of protein A ligands, the secret sauce that allows chromatography columns and other purification products to work. It manufactures proteins for its own OPUS columns and also sells them to others in the industry as an original equipment manufacturer. 

While the company has reduced its dependence on the protein segment from 72% of total revenue in 2014 to just 24% in 2019, it's still a sizable part of the overall business and can weigh on results when headwinds emerge. 

Don't be spooked by "weak" 2020 guidance

On the one hand, Repligen's stock trades at a healthy premium. Any sign of real or perceived weakness is bound to have a negative effect on the share price. 

On the other hand, investors with a long-term mindset should see no real cause for concern. There are slightly over 100 monoclonal antibody products on the market today, but over 550 in clinical trials. Similarly, there are eight gene therapy and cell therapy products on the market today, but over 1,000 in clinical trials. That provides a healthy pipeline of growth for Repligen, which can monetize the opportunity from clinical trials all the way through commercial-scale production. 

Additionally, Repligen has set the goal of achieving $500 million to $600 million in annual revenue by 2023. That means it expects to roughly double revenue in the next four years. Considering it began the year with $528 million in cash and has a history of making growth-focused investments and acquisitions, investors shouldn't be surprised if management makes an acquisition before the end of 2020.