RGEN - NASDAQ

Good day, ladies and gentlemen, and welcome to the Repligen First Quarter of 2023 Earnings Conference Call. My name is Vaishnavi, and I will be your coordinator. All participants will be in a listen-only mode. [Operator Instructions] In order to accommodate all individuals who wish to ask questions, there will be a limit of two questions at a time. Please note this event is being recorded. I would now like to turn the call over to your host for today’s call, Ms. Sondra Newman, Head of Investor Relations for Repligen. Please go ahead.

Thank you. And welcome everyone to our first quarter of 2023 report. On this call, we will cover business highlights and financial performance for the three months periods ended March 31, 2023. We’ll also provide updates to our financial guidance for the full year. Repligen’s President and CEO, Tony Hunt; and our CFO, Jon Snodgres, will deliver our report, and then we’ll open the call up for Q&A. 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 may cause actual events or results to differ. Additional information concerning risks related to our business is included in our quarterly reports on Form 10-Q, our annual report on Form 10-K, and the current report on Form 8-K 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; 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 our peers when evaluating investment opportunities. Now I’ll turn the call over to Tony.

Okay, thank you, Sondra, and good morning, everyone, and welcome to our Q1 earnings call. As shown in our press release this morning, we delivered an excellent first quarter, given the bioprocessing industry market dynamics with 7% revenue growth for our base business at constant currency and stronger than expected gross and operating margins. Overall revenues of $183 million for the quarter were down 9% at constant currency due to the predicted reduction in COVID-related demand. The starting in the quarter was forwards of our proteins and chromatography businesses where we saw solid gains in an increased competition from non-COVID mRNA programs in the cell and gene therapy space. COVID-related, revenues came in as expected at around $23 million, a decrease of approximately 60% year-over-year. On the orders front, we saw book-to-bill for the base business of the quarter of 29.4, cell and gene therapy orders were strong, up 40% sequentially and 20% versus the average quarterly order intake in 2022. The region where orders were soft was China, down 40% sequentially and 60% versus a year ago. Challenges in the region were driven by a combination of inventory burn-off that was built up during COVID and lower demand from ceiling in pharma. Based on current projections, we expect it will take another few quarters for China to return to more normalized level of demand. Base orders in the other regions performed reasonably well in Q1 with a combined book-to-bill 1.0. Activity and interest at our customer level remains high with many customers scaling here in 2023. However, given the lack of order growth across the regions, and the situation in China and APAC to a lesser extent, we feel it's prudent adjust 5 plus for the year. We do expect overall orders for the company to pick up the second half of the year and continue to strengthen as we move into 2024. Our expectation now is 4% 8% organic growth in our base business with our COVID orders unchanged, at $30 million to $40 million. Strategically, we continue to make selective investments across our product portfolio. We see 2023 as an important year to complete several key R&D programs. And our intent is to increase our spend to approximately 60% of revenue. We have four new product launches planned by mid-year, supporting our filtration, and analytics franchises with additional launches in the second half positioning us well into 2024. We continue to see strong traction for many of the new products we launched in ’21 and ’22, which contributed 10% of our overall revenues in the first quarter. We saw strong demand for ARTeSYN chromatography filtration systems and high level of activity around her most recent launch our RPM system with inline analytics. On the M&A front, we closed on the acquisition of FlexBiosystems in mid-April giving us another play include managements with the addition of single-use bags. We focused our M&A efforts over the last few years in building out the management’s vision, and we believe that FlexBiosystems Technology in 2D and 3D bag manufacturing is a core competency to the company and something we can build upon over the next few years. With the newly built 7,000 square foot manufacturing space, we expect to increase the number of opportunities for FlexBiosystems to our dedicated commercial team and deliver approximately $5 million in revenues this year with the business ramping up quickly in 2024. As we look to 2024, our goal is to be back to 20% plus growth from our base business armed with a broader portfolio of products and to return to more historical growth levels across the regions. So moving down to our quarterly performance, as mentioned earlier, the starting of the quarter was performance of our proteins and chromatography franchises and the overall performance of cell and gene therapy. In chromatography, our OPUS pre-packed column business had an excellent quarter for orders and revenue. Overall revenue for chrome came in at close to 20% against the lighter comp in Q1 of last year. We saw a greater than 50% increase in revenues and orders from new modality accounts focused mRNA, viral vector and plasma manufacturing. As highlighted in our year end call, chromatography investment supply remains tight through the first three months of this year and pharma results were strong year-on-year, our base target in revenues were down 15% sequentially. Our expectation is that, Q2 will be similar to Q1 with revenues picking up from second half of 2023, as more resin supply comes online. We continue to expect our chromatography franchise to grow approximately 10% this year. Our proteins business had a good quarter with year-over-year reported growth in the high-single-digits in Q1 the expected drop off in Cytiva ligands demand in first quarter was more than offset by the performance of other ligands and growth factors as we continue to transform our proteins business with Repligen developed products. We expect proteins to be flat here in 2023. In filtration, our business was down approximately 20% as reported, driven by a predicted sharp decline in COVID-related revenues. For the base filtration business, revenues were down less than 5% against a tough come in Q1 last year. Base filtration revenues in Q1 were essentially in line with the revenue in the previous quarter. Our ARTeSYN systems and flow paths and Excel ATF performed well in the quarter with our systems and flow path revenues up over 200%. New modality strengths came from challenging therapy including mRNA. We are seeing the benefits of our relationships established during COVID as many of these companies have pivoted to mRNA programs in vaccines and therapeutics. We expect mRNA to be a catalyst of growth of the next few years as new vaccines and therapeutics make their way through clinical trials. Overall, filtration orders for the quarter were down versus a year ago, which is driven by the aforementioned weakness in China and APAC where management soft. We expect our filtration franchise will start to recover during Q3 as the macro headwinds subside and customers complete their destocking activities. We expect this franchise to be down, 13% to 20% overall, and flat to up 8% on base business. Finally, our process analytics business had an excellent quarter on orders, which were up over 30% year-on-year while revenues were up slightly versus prior year, new order growth rate is very encouraging. We continue to expect this business to deliver 15% to 20% growth here in 2023. So overall, we're off to a solid start for the year. However, given the macroenvironments, 2023 will be a challenging year for our industry and for the company. Repligen continues to be well positioned with a great suite of innovative products and strong traction in key areas of market to manage to the next six to nine months. We do expect to see order pick up during the second half of the year which will put us in a good position for 2024. We remain very optimistic about medium to longer term potential in bioprocessing once we navigate through the next few quarters. With that, I will turn the call over to Jon for the financial update.

Thank you, Tony, and good day, everyone. Today, we are reporting our financial results for the first quarter 2023, as well as updating our financial guidance for the year. Unless otherwise mentioned, all financial measures discussed reflect adjusted non-GAAP measures. As shown in our press release this morning, we delivered revenue of $182.7 million in the first quarter. The highlight continues to be the performance of our base business, which grew by 7% in constant currency, driven by the performance of our chromatography and proteins businesses, despite challenging market conditions. For the first quarter, our total revenue decreased by 12% as reported and 9% at constant currency. FX impact for the quarter was about $5 million, creating a three-point headwind on reported growth. Based on current conditions, we expect FX headwinds to continue through the first half of 2023 and then shift to tailwinds in the second half netting out to a zero impact for the full year. For our overall revenue performance, we saw year-over-year reduction in COVID revenue of $30 million. This was partially offset by performance on our base business, which grew by $10 million or 4% as reported and 7% at constant currency. As it relates to regional revenue growth, we saw strong performance in Asia, with Europe and North America down as expected due to COVID revenue declines. For the quarter, overall, revenues from Asia, rest of the world increased by 21%, while North America and Europe contracted by 15% and 21% respectively. While revenue growth in Asia was strong, orders in the region especially in China, dropped off significantly setting us up for tougher last three quarters in 2023 for this region. Regarding overall revenue distribution by region for the first quarter, Asia represented 23%, Europe represented 39%, and North America represented 38% of our global business. Now, moving down to our income statement. First quarter 2023 adjusted gross profit was $100.8 million, a reduction of $23.8 million or 19%, compared to the 2022 first quarter. Adjusted gross margin of 55.2% in the quarter goes down from 60.4% in the 2022 first quarter. Gross margins declines compared to the 2022 first quarter are related to volume deleverage, less favorable product mix tied to COVID revenue declines, material cost inflation and higher expenses tied to our capacity expansions. Sequentially, gross margins in the quarter improved by 370 basis points from our fourth quarter ‘22 performance of 51.5% driven by improved product mix benefiting our material costs, price increases covering material cost inflation from suppliers and operational cost optimization in our business. Now transitioning down the P&L to adjusted operating expenses. Adjusted research and development expenses for the first quarter 2023 were 6.7% of revenue. As Tony mentioned, we are focused on ramping up our R&D efforts here in 2023 in order to launch key new products into the market this year with our primary focus areas being filtration systems. Adjusted SG&A expenses for the first quarter 2023 were 26% of total revenue, compared to 22% in the same ‘22 period. Year-over-year percentage increases were tied to capacity expansion and investments in commercial resources to continue to drive growth and market share gains in the short and long-term. Now moving to adjusted earnings and EPS. First quarter 2023 operating income was $40.9 million, compared to $67.4 million in the prior year quarter and adjusted operating margin was 22.4%, compared to 32.6% in the same prior year period. Adjusted net income for the first quarter of 2023 was $36.3 million, compared to $53.7 million in the same quarter of 2022, a 32% reduction. Adjusted fully diluted EPS for the first quarter of 2023 was $0.64, compared to $0.92 in the same ‘22 period, a decline of $0.28 or 31%. Our cash, cash equivalents, short-term investments, which are GAAP metrics totaled $618 million at March 31st 2023. We will now transition to our 2023 full-year guidance. Our GAAP to non-GAAP reconciliations for our 2023 financial guidance are included in the reconciliation tables in today's earnings press release. As previously mentioned, unless otherwise noted, all 2023 financial guidance discussed will be non-GAAP. Please also keep in mind that our 2023 guidance may be impacted by fluctuations in foreign exchange rates, beyond our current projection of flat on full year sales and includes financial estimates for our FlexBiosys acquisition closed on April 17. Guidance does not include potential impact of any future acquisitions that the company may pursue. Based on our current view of market conditions, we are revising our 2023 full year revenue guidance, the GAAP metric to a range of $720 million to $760 million, a reduction of $40 million at the midpoint compared to our February guidance. This revised guidance reflects overall reported and constant currency growth of minus 10% to minus 5% and organic growth of minus 11% minus 6%. Our overall revenue guidance includes COVID revenues of $30 million to $40 million consistent with our February guidance and we have included $5 million of revenue from our FlexBiosys acquisition. We are updating our base business revenue guidance to a range of $685 million to $715 million, growing at 4% to 8% as reported and at constant currency. This compares to our February guidance of $730 million to $760 million growing at 11% to 15% as reported and 12% to 16% at constant currency. We are revising our 2023 adjusted gross margin guidance to the range of 52% to 53%, 50 basis point reduction from our previous guidance of 52.5% to 53.5%, driven primarily by lower revenue projections for the year. We are modifying our adjusted operating income guidance to a range of $153 million to $158 million for the $23.5 million at midpoint from our February guidance of $176 million to $182 million. Our adjusted operating margin guidance is now in the range 20.5% to 21.5% for the year compared with our February guidance range of 22.5% to 23.5% of revenue. Adjusted other income guidance is being increased to $14 million, compared to prior guidance of $10 million. And we continue to expect 2023 adjusted income tax expense to be approximately 20% of adjusted pre-tax income. We're revising our adjusted net income guidance to the range of $134 million to $138 million, a difference of $15.5 million at the midpoint from our February guidance of $149 million to $154 million. We are revising our adjusted EPS guidance to the range of $2.35 to $2.42 per fully diluted share, a reduction of $0.27 from our previous guidance of $2.61 cents to $2.69. Our adjusted EPS guidance assumes 57.1 million weighted average fully diluted shares outstanding at year-end 2023. Adjusted EBITDA is now expected to be in the range of $190 million to $194 million, a reduction of $24 million at the midpoint from our prior guidance of $213 million to $219 million with depreciation and intangible amortization expense is expected to be approximately $35.7 million, and $30.2 million respectively. Adjusted EBITDA margins continue to be strong and are expected to be in the range of 25.5% to 26.5% for the year reflective of the exclusion of fixed depreciation cost from our capacity expansions from this metrics. We expect year-end cash and cash equivalents, a GAAP metric to be in the range of $620 million to $640 million with $60 million of CapEx investments being fully funded by cash generation from our operations. This provides any cash figures inclusive of cash payments made for our April acquisition of FlexBiosys. This completes our financial report and guidance update. And I will now turn the call back to the operator to open the lines for questions.

Thank you. [Operator Instructions] Our first question comes from Dan Arias with Stifel. Please go ahead.

Hey, good morning, guys. Thanks for the questions. Tony, maybe just to start on where things might be improving a little bit here. Is there an overlap between the new modality accounts where you are seeing a pickup in order activity and those that look to be, some of the heavy inventory builders during the COVID trough? Or do you feel like those two dynamics are separate right now? And then, within that is, this question of small and emerging biotech, just given where those companies tend to play. How should we extrapolate the comments there to that customer bucket overall? Obviously, there is a quite a bit of discussion on that subset last week.

Yeah. So, thanks Dan. So if we touch your first question, I don't think they're related between any kind of inventory buildup would be going on at the companies that were involved in COVID, plus the companies focusing on mRNA in the new indications. So, there is a significant number of companies that have really focused on new mRNA-based vaccines, mRNA-based therapeutics, I think a lot of the work we've done over the last two or three years put us in a good position to be able to get involved in many of those programs. And that's kind of setting us up well in terms of what you saw in terms of revenue growth and order growth. And I think that's again going to be a nice catalyst for us as we go through the next few years. On the small emerging biotech, no revenue from a discussion from last week, where we look at our accounts, right? The most exposure that we have is probably in the cell and gene therapy space. And obviously there's some exposure in the biotechs that are looking on long term in that place, as well. So we're at them. We're at be – that’s just a little north of 10% of our revenue comes from the small biotechs with one caveat, right? We - that does not impede what percent of CDMOs focus is on small biotechs. We just don't have any idea. We would split our CDMO revenue into small biotech versus large biotech. So, but in general, it's like, a little north of 10% closer to 10%.

Okay. It’s helpful. And then just maybe on some of the comments that you made around relationships that were made during the pandemic. One of the pieces in the equation seems to be this idea that there may have been some gear shifts or just new business wins during COVID as some of the larger players felt themselves constrained. Now that we're decently removed from the height of the situation, can you maybe just comment on what you're seeing from you're seeing in terms of, share gains you think should stick versus business that maybe moves back to the big guys. Anything notable that you're taking away and just in terms of the current state of affairs there?

Yeah, I would say that, for the most part the players that we were deeply involved with during COVID have continued to work with us. And I can't honestly say that they were share gains. We had the right products with the right capacity to be able to serve many of the companies that were deeply involved in COVID vaccine fracturing. The relationships of those companies have continued and that's rolled into other programs. And we continue to get our share of those opportunities. And all the other players in bioprocessing are also working those companies, as well. So it's not like this, it's unique to Repligen. I think the broader, the broader comment I would make is that, the overall market, it's a tough market out there. And everybody is kind of working, every company in the bioprocessing space is working hard to secure orders and gets traction at various accounts. But it's just a tough macroenvironment right now that everybody's working through.

Yes. Okay. Thank you, Tony.

Thanks Dan.

The next question comes from Jacob Johnson with Stephens. Please go ahead.

Hey. Thanks. Good morning, Tony. Maybe turning off where you just ended on a tough macro environment and the weakness in Asia-Pacific. Can you just unpack what you're seeing from that region? It sounds like some of this is destocking. But I think there's also been some scuttlebutt around local competition in China. Maybe some reshoring going on to just, just - what can you unpack what you're seeing in Asia-Pacific?

Yeah, I'm just to be very specific about it. Most of the challenges we are seeing are in China. And if we look at the order patterns that we saw in 2022, China and APAC kind of followed very much in line with what we saw in North America and Europe with strong first half of the year and then dipping down in Q3. China recovered in Q4, then just down significantly in Q1 up this year. And our view of it is, that it is a combination of stocking that happens not because, because of COVID, it’s not because of COVID vaccine manufacturing. Just that there was such a stride stop in China throughout the second half of last year that I don't think that the amount of product that was procured in the first half was just actually used for the manufacturing that maybe scheduled for the year. That said, I do think that there's a bit of a reset going on in China and we think that demand is soft and it's beyond just destocking. This demand has been relatively soft in a good quarter on revenue. The orders were weak and we expect that that's going to continue through most of the year. On the competition side, there's always going to be local competition in China. That hasn't changed over the last five to ten years. And there are more players popping up. So there's always that there's always going to be some competition and some probably, changes in share. But it's not, it's not a primary or secondary reason what we are observing right now.

Got it. Thanks for that Tony. And then, just the follow-up going back to last week, I think one of your peers talk about kind of less visibility in the current environment. And I'd be curious, kind of how you compare to address your visibility right now versus maybe pre-COVID, especially in light of the comment around, kind of 20% - returning to 20% growth in 2024, kind of what gives you confidence in that. Thanks.

Yeah, what's good about our industry is there's a ton of activity going on. There's a lot of scale up happening North America Europe, Asia. The conversations we have with our customers is definitely about projects and timing and the scale of activities that they're going through. So there is lots of opportunities. Our funnel of opportunity continues to strengthen. What we have seen and I think other companies in bioprocessing, Philips commented on this is that, it's taking a little longer for those orders to materialize. We are seeing projects getting pushed out into the second half of the year and into early 2024. We're seeing just longer, just time to get orders secured versus what we might have seen over the last three or four years. So, that's really the dynamic. We're not seeing any kind of slowdown in overall activity of the accounts. That's just a timing issue and it's also some project delays.

Got it. Thanks for taking the questions, Tony.

The next question comes from Puneet Souda with SVB Securities. Please go ahead.

Yeah, hi, Tony. Thanks. So, maybe just first one. I appreciate the comments on emerging biotech being about 10%, but just could you remind us what's your exposure for Phase 1 and 2? Obviously, that's an important question. In terms of what you're seeing within that segment for you obviously, you've been levered to more of the innovators and early adopters of the technologies in Phase 1 and 2?

Yeah, so, maybe your maybe a broader way asking that question, Puneet, I think in general right, 65% of our revenue comes from clinical, 35% is coming from commercial and that's ex-COVID. So that's looking at our base business. I don't have a split on Phase 1 and 2. But you could assume that part 10% emerging biotech it is all pre-clinical phase 1, phase 2, a small, maybe a small percentage in phase 3. But that's that would be my sense. And again, I would add the caveat that we don't know what percent of the CDMO part of our customer base, how much that is serving small biotech as a percent.

Got it. And then, just a clarification on, excluding FlexBiosys, should we be looking at a 3% to 7% guide for the year versus 4% to 8%. Just wanted to confirm that. And then, Tony on, the resin side, it seems like things are improving, but obviously you were pointing out that, this is still recovery into the second half things should improve more. Can you just elaborate a bit on your conversations and sort of the visibility that you have for the chromatography segment and drop shipments that you are getting? Thank you.

Yeah, so, the 4% to 8% does not include the effect of Flex, right? So it's 4% to 8% on base. The resin supply I think was tight throughout Q1, right? I think, we - in our February call for the year-end 2022, we called out that we had seen a slowdown in terms of resin supply versus what we saw in Q3, Q4 last year and that's why I provided that 15% sequential drop-off in revenue versus Q4. That said, I have, our conversations are indicating that as we move through Q2 and into Q3, supply is going to get better. So, we feel fairly confident based on the conversations that we've been having. Things will start to open up in the second half of the year. Our order, the order strength on our pre-packed columns has stayed high. And so, we have a nice backlog of orders that need to be fulfilled. But it's all dependent on dropshipping of resin. And again we expect that that to open up in the second half of the year.

Got it. Okay. Thank you.

Thanks, Puneet.

The next question comes from Julia Kim with JPM Chase. Please go ahead.

Hi, good morning. Thanks for taking the question. So, Tony I want to follow up on that order trends you mentioned, book-to-bill during the quarter was 0.94 and some strength at mRNA customers. Could you talk about order trends excluding mRNA customers? And what have you been seeing in terms of book-to-bill coming out of 1Q? And generally, what is for the quarter and through the rest of the year? And then, in light of the pressures that you mentioned, how is pricing holding versus your prior expectations?

Could you repeat the last part again, Julia I missed that one.

How is pricing holding up versus your prior expectation?

Okay. Maybe start with pricing. Pricing has held pretty well. It's covering our inflation. So, I think that's going exactly the way John and myself and the team figured it would, it would play out during 2023. The book-to-bill, I know that - I would say that, it's - I don't have the exact book-to-bill with how mRNA. But it is obviously, it'll be a little lower than the 0.94, but it's not a massive contributor. Obviously this is a market that's just taking off. So I - beyond the fact that we're getting really strong traction and actually reasonable orders, multimillion-dollar type orders, it's just not big enough to really move the needle up or down. So, it's there's nothing really a whole lot less, maybe it's 0.9. I'm not sure. exactly. But it's not a big detractor when he, when you take it out. Order trends, we're expecting that orders will pick up in the second half of the year. But it's slower pace than what I think we all thought back in February. So that's really the piece that we all have to keep an eye on as we go through Q2 and we get into Q3 and Q4. But the expectation is that the orders will pick up in the second half of the year and that contribute towards overall revenue for us in 2023 and obviously sets us up for a better 2024.

Got it. That’s helpful. And then a follow-up on China dynamics. Are you seeing any differences in terms of activity or order patterns between different types of customers or between your different product lines? And that within your guidance, what kind of recovery expectation have you baked in? And if any, what supports your confidence for a return to normal in China? Thanks.

Yeah, in China, it is a challenging situation. I would say the CDMOs in China are down more than the pharma companies. That said, it's a, it's a significant drop-off in what I think everybody was expecting for the year. So we have taken out - we've derisked China for the year. We expect that orders will start to pick up the Q4, but not soon enough to have any meaningful contribution to Q4 revenue. But the conversations we’re having with customers it’s still around a lot of activity and investment. And I don't think there's anyone in bioprocessing that believes that China is going to stay in a prolonged slump. I think this is a few quarters that everybody has to work or at least we have to work through, per se and I can only speak to our situation in China. And now we expect that we'll get carried out by the end of the year and returns to more normal growth rates that we've seen in the past for China, even pre-COVID.

Okay. Thank you.

The next question comes from Matt Larew with William Blair. Please go ahead.

Hey, good morning. Just thinking about the guidance reduction here and trying to assesswWhether there might be additional risk or enough for the guidance in the balance of the year. When you talk about an expectation for orders picking up in the second half of the year, could you give us a sense as for what underlies that? Is it sort of actual on-the-ground order activity? Is it customer surveys, assessment of product shelf lives within customer inventory, more qualitative conversations? Just what are the kind of other metrics internally that treat into that optimism for the second half of the year?

Yeah, I think that when you look at our - we look at our funnel and we look at the progression of opportunities as those opportunities move through the funnel up to the higher probability level, that is getting better. We are talking to a lot of customers around second half of the year programs and activities. So, again that gives us some confidence. So it's really based on the heat on the street and conversations that we expect the second half of the year it’s going to pick up. And obviously, as we go through the next 3 to 6 months, we will laps if all of that's going to materialize or not.

Okay. And then, just for Jon, gross margins were obviously strong in the first quarter COVID maybe with a part of that. But I think to sort of balance the year, it looks like the guide would imply something 51.5% the initial conversation for the year I think was to start a 51% and then build throughout the year. I think the quarterly revenues for Q2 through Q4 are just based on your guidance above that within Q1. Again, I know, the majority of COVID was in Q1. But maybe just help us understand what exactly is going on from a gross margin perspective for the rest of the year?

Sure. Just to give a little bit of color on Q1. Q1 came in with a better product mix than we were originally projecting. So our proteins came in a bit higher. Our OPUS revenues came in a bit low with some of the pressure on resin supply being a little bit more than we even expected. And then we had some favorable product mix within our overall filtration business or higher mix consumable products versus equipment. So, that was a positive. The challenge with that though is, as we move through the year, we expect that to correct itself and go back to the original budget assumption for the full year. So, that's creating some pressure on mix in the second half of the year. The other thing is, we’ve taken $40 million out of our top-line revenue at this point. And with that, most of the, that the cost have dropped – actually this year material costs, right, all your overhead costs, facilities costs and all those types of things do not come out of the equation. So, as we see that dropping through, that's putting pressure on the overall margins. And I'll call it volume deleverage, right as the major headwind there. So, those are the drivers. The revenue impact in the second half of the year we expect to be stronger than the first half of the year for overall revenue. But again with some of these other headwinds bringing down the overall revenue projection, that's the impact. And if you look at phasing, we expect the phasing on the gross margin that, that’s roughly 51.5% at midpoint should be a good gauge for - through the rest of the year at this point.

Okay. Thank you.

The next question comes from Paul Knight with KeyBanc. Please go ahead.

Could you give us a little color, I know you're building a factory or you are positioning a product to get to the next year's growth. So, what should we think about for 2024? Is it Sea Technologies? Is it fluid management? Is an ARTeSYN? Expansion of manufacturing at the whole fiber? I mean, what kind of the three levers you're looking at and doing this year to get ready for ‘24.

Yeah, great question, Paul. I think that, when you look at it, I think it's exactly the three areas that you highlighted. I think fluid management is a big lever for us, right? Obviously, there's a clear destocking challenge that goes on with the component side of the fluid management. But we are investing very heavily on the assembly side of fluid management. We expect that that's going to be a growth driver for us next year. There's a lot of work going into our systems portfolio and ever since, we did the acquisition of ARTeSYN, we've been really trying to transform that business from a custom system shop to a more standardized system shop, which we were able to do for the most part in 2022. But what we're trying to do right now is, continuing to build up the overall systems portfolio, whether it's the benchtop, care to eyes that have been around for a number years that came out of Spectrum by adding in advanced analytics. It's a combination of advanced analytics with our systems. That's going to be a big driver for us next year. And there is some other products that we'll talk about as we go to the year that I think will serve as a catalyst for growth for us. But you can see that the evolution of the company is really happening right, in fact two years ago, Paul you would have seen us a individual product-by-product company. And now we're a lot more integrated between our consumables and our systems and our fluid management solutions. So, it's that kind of integrated offering. But I think it's going to be a driver for us as we get to 2024.

Thanks.

Our next question comes from Lisa Garcia with UBS. Please go ahead.

Good morning, guys. Thanks for taking the question. So, I think, you guys called out that new products were about 10% of revenue this quarter. Is the 14% kind of still the right number to think about for this year, kind of, how are you guys thinking about 2023 and kind of the new products build? I know you guys also kind of through in the new acquisition this year?

I think 14% is still a very good number for the year. Remember, a number of the products were launched in mid to late last year. So, picking up at around 10% I think is very encouraging and I fully expect that we will be closer to that 14% by the time we get to the end of the year.

Great. And then, I think last quarter, you’ve kind discussed the order book by customer type kind of thinking about pharma versus CDMO. And I don't know if you have these numbers at your fingertips. But maybe are you able to even speak qualitatively about kind of where kind of, the build ratios are, and kind of - kind of thinking about parking between those two customer types and kind of where we sit?

A little bit, I would say that on the CDMO side for the sort of second quarter in a row, we saw a positive uptick, which is, encouraging, but not back to where we were a year ago. So there is a bit of a journey that we all have to go on to get CDMOs back to where CDMOs were, right? And clearly, having a very low order book in China, and APAC didn't help on that. Right? So, but in general, CDMOs have moved back up. I think if you look at pharma, if you take pharma, excluding China, APAC, I think pharma in Q1 versus the average pharma intake in 2022 is pretty much in line. So, we had an outstanding Q4 was lower in Q1. But versus the average order intake where pharma was strong last year, it was very much in line.

Great. Thanks so much, guys.

The next question comes from Matt Hewitt with Craig-Hallum Capital Group. Please go ahead.

Good morning. Thank you for taking the questions. May be first up, I'm just curious what feedback you've gotten on the large-scale controller that you launched during the quarter. How do you expect that to ramp over the course of the year?

Yeah, this is just an evolution really of our ATF portfolio. So we've been making probably custom large-scale controllers for a handful of companies over the last 12 to 18 months. Feedback from those companies have been really, really very positive. And so we did a technical launch of it in Q1, you'll probably start to see more of a marketing launch done on the controllers as we go through Q2 here. But in general it's a modernization of ATF. We've done that on the lab controller which was done really last year, large-scale controllers which are with a much larger ATF units is what's happening right now. They said, I think our customers expect it. They wanted they like what we've added in terms of feature sets and I think it's a lot more around ease of use customer satisfaction than anything else. But it's where we should be taking that portfolio.

Got it. And I guess along those lines, as you look at the remainder of the year and the number of launches of new products that you plan to introduce in the market, is that - are the majority of those more evolution type products? Or is there one or two in there that you think could really move the needle as you get into ‘24 and beyond.

It's definitely some transformer products that are going to get launched this year. But as it's going to take a little while, remember when we had those conversations that about TFTF, and how long it takes to get market traction I just think it takes a while to even when you have some great products to get customers to not only adopt, but start to platform the technologies had an account. So you get into a process but what you really want to be is platforms. We have a number of products this year that I would say are disruptive products. And I think we're looking forward to getting those into the market. Expect that, what we're going to be talking about as we go through the year is really around, systems, analytics, and filtration products. They're the kind of the buckets where most of the products fall.

Understood. All right. Thank you.

Yeah, thanks, Matt.

The next question comes from Brandon Couillard with Jefferies. Please go ahead.

Hey, thanks. Good morning. Tony, just on China, will you remind us how big China is, is it the pursuit of the mix. What were you assuming for growth there previously? And what's embedded in the new guide. And longer-term, do you think you need to have more in China, for China manufacturing to be competitive locally?

Yeah, great question, Brandon. In general our China exposure is that 10% of revenue last year. So that kind of gives you an idea of how big China is for Repligen has grown quite rapidly. That 10% did include COVID-related accounts, as well. In terms of assumptions going into this year, I don't have the exact growth at my fingertips, but it would have been probably on base business, probably close to 20% growth going into the year. Fairly that's going to be a real challenge given the dynamics that we're dealing with. The in China for China, that's a - clearly there is plenty of manufacturing going on at our peer level and also with other local competitors in China. And that's something that we talk about internally. But right now, I think we're continuing to get a manufacturer outside the region and with the really great team in China, we've been able to compete well. Just to mean we won't do manufacturing in China's in the future. It’s just where we are today.

Thanks.

This concludes our question and answer session. I would like to turn the conference back over to Tony Hunt for any closing remarks. Yeah, thanks everybody for joining. Good discussions today. Look forward to connecting with everybody in a few months time and talking through how the rest of the year has gone for us. So thanks everybody for joining.