RGEN - NASDAQ

Good day, ladies and gentlemen, and welcome to Repligen Corporation's Fourth Quarter of 2023 Earnings Conference Call. My name is Sabrina, and I will be your coordinator. [Operator Instructions]. I would now like to turn the call over to your host for today's call, Sondra Newman, Head of Investor Relations for Repligen.

Thank you, and welcome to our fourth quarter of 2023 report. On this call, we will cover business highlights and financial performance for the 3- and 12-month periods ending December 31, 2023, and we will provide financial guidance for the year 2024. Repligen's CEO, Tony Hunt; and our CFO, Jason Garland, 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 filings with the Securities and Exchange Commission, including our 2023 annual report on Form 10-K, last year's annual report, our quarterly reports on Form 10-Q and our current reports on Form 8-K, as well as other filings that we make with the 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 financial results and guidance, unless otherwise noted. 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. Adjusted non-GAAP figures on this call include the following: book-to-bill ratios, organic revenue growth, base business revenue which excludes COVID and M&A, non-COVID revenue, cost of sales, gross profit and gross margin; operating expenses, including R&D and SG&A, income from operations and operating margins, other income, pretax income, effective tax rate, net income, diluted earnings per share as well as EBITDA, adjusted EBITDA and adjusted EBITDA margins. These adjusted financial measures should not be viewed as an alternative to GAAP measures but are intended to best reflect the performance of our ongoing operations. Now I'll turn the call over to Tony Hunt.

Thank you, Sondra. Good morning, everyone, and welcome to our 2023 fourth quarter and year-end report. In addition to reporting out on our financial results today, the key objective for this call is to provide insight into how we see 2024 playing out for Repligen and the pacing of revenue as we go through the year. Having had a few months to reflect on our Q4 results, in 2023 in general, we believe we are seeing some clear indicators that our markets are beginning to turn in a positive direction, especially given the strength in orders coming out of last year. This will help drive growth for the company, especially as we move into the second half of 2024. As we all know, 2023 was a challenging year for Repligen in the bioprocessing industry. The first half of the year saw elevated stock levels at both CDMO and pharma accounts, conservative capital spending and project delays at pharma companies and the deterioration in China where orders dropped off rapidly and new opportunities for products declined. In the second half of the year, we started to see some positive signs of recovery. We aren't ready to call a full recovery yet but there is good reason for optimism. We see 4 indicators for Repligen; opportunity funnel growth, improving pharma ordering patterns, early indications of CDMO recovery and overall book-to-bill strength. So let's start with our opportunity funnel. Our sales funnel improved in 2023 with our 50% and above opportunities up more than 50% compared to the start of the year. This is an important metric that we believe reflects the likelihood of customers placing orders in the near term. We also saw a rebound in pharma demand, especially in Q3, where pharma orders were up 50% versus prior quarter. We finished the year with second half pharma orders up greater than 30% versus H1. The CDMO market has also improved in the second half of 2023 with orders up more than 25% in Q4 versus Q3 and up more than 20% versus the fourth quarter of last year. Again, some positive signs from more customers for the first time since the first half of 2022. Overall, our book-to-bill improved in the second half of the year, coming in at 1.07 in Q3 and 1.03 in Q4. Our Filtration franchise also had a positive book-to-bill in both Q3 and Q4 at 1.15 and 1.03, respectively. Ex-COVID, the Filtration book-to-bill was 1.13 in Q4. So 2 strong quarters in a row of orders largest and most impacted by COVID franchise. When I look at the full year, I was also very pleased with the way the Repligen team executed, staying focused on the key goals we set for ourselves at the beginning of 2023, namely: one, we want to make further inroads into new modalities; two, we wanted to strategically manage key accounts to accelerate adoption of our technologies, especially in our top pharma and CDMO accounts; three, we wanted to launch new products with a focus on advanced Analytics, systems and Filtration; and four, we wanted to rebalance the organization to address margin challenges. First, on new modality inroads. Our new modalities business, which covers cell and gene therapy and mRNA continues to gain ground. Driven by several late stage and commercial wins in 2023, new modality revenues in the fourth quarter were up 9% year-on-year. For the full year, new modalities represented 18% of total revenues and while up only slightly versus 2022, the results are still impressive in light of the double-digit decline in sales across our industry. On the orders front, new modality accounts were up more than 10% in the second half of 2023 versus the first half of the year and up greater than 15% for the full year compared to 2022. The order strength was driven by Chrom, Filtration and Analytics franchises with notable product line strength from OPUS, Fluid Management assemblies and ARTeSYN systems. We also added more than 85 new accounts in 2023. So we're really encouraged by our position and differentiation in this important market. Next, on managing key accounts. A key objective for us in 2023 was to build out a key account program and team to drive growth at our top pharma and CDMO accounts. With the key accounts team in place by midyear, we were able to focus this group on improving our portfolio visibility. In 2023, orders from our top 10 pharma accounts were up 50% from the second half of 2023 compared to H1 and 20% for the full year compared to 2022. Of our top 10 CDMO accounts, orders in the second half of 2023 were flat versus H1, but up nearly 15% when compared to full year 2022. Again, directionally positive signs that our top accounts are beginning to show growth momentum. Moving now to new product launches and adoption. Each year, it's been our goal to launch 8 to 10 new products. And in 2023, we launched 10. Although these were first year [indiscernible] product offerings, they generated over $12 million in revenue in 2023. So despite the year's challenges, we're really proud of our innovation track record. In 2023, 13% of our total revenue came from products launched between 2021 through the end of 2023. In the fourth quarter alone, that number was 16%. This past year, the success of our new products was in 3 areas. The first was RPM, where our Analytics customers are seeing the benefits of real-time process monitoring. Second was our ARTeSYN RS systems where we have a market-leading single-use system portfolio. And third was ATR, where the new XCell controllers are doing well in the marketplace and providing value in the from of more automation and control for our process intensification customers. And finally, regarding rebalancing resources. Our entire team from top to bottom focused on cost containment and the leadership team rolled out programs to rightsize our organization. Through this difficult but prudent process, we reduced our workforce by more than 15%. We are consolidating facilities, merging 3 of our facilities into sister plants. We are adjusting inventories and we are controlling expenses. By year-end, we were back to nearly 50% gross margin for the company. We expect to be complete our rebalancing and streamlining activities by the end of Q2. And from there, we anticipate that margins will improve as our volumes improve over the next few years. So moving now to our Q4 business results. As you saw in our press release this morning, we delivered $156 million in revenue with our base business, which excludes COVID and M&A, up 1% sequentially, down 13% year-on-year and down 9% for the full year. Base revenue highlights in the fourth quarter included modest year-over-year growth and nice sequential growth for both our Analytics and Protein franchises, as well as the aforementioned positive impact from new modality accounts. At a customer level, our non-COVID Q4 pharma revenues which includes M&A were flat year-on-year. For CDMOs and integrators, Q4 revenues were down 20% and 10%, respectively, compared to Q4 of 2022. Metenova came in right on track at $5 million of revenues in Q4. The team continues to work through the early phases of integration. We are happy with the progress we are making and expect to further integrate Metenova mixing solutions into our Fluid Management portfolio as we go through the year. Moving to orders. Base business orders for the fourth quarter were up 3% year-over-year. Non-COVID orders for the fourth quarter were up 6% year-over-year. From a customer perspective non-COVID pharma and integrated orders were flat year-on-year, but CDMOs were up greater than 20%, both year-on-year sequentially. The order performance in Q4 is very encouraged, especially at CDMO accounts where we are starting to see some early signs of recovery. Moving now to franchise-level business highlights. In Chromatography, our year-over-year revenues were down approximately 25% in the fourth quarter and down 4% for the full year. The fourth quarter decline was primarily driven by the higher mix of columns versus resin demand. On orders, Chrom was down 4% for the quarter and for the full year 2023. The opportunity for our OPUS product lines continues to increase. And for 2024, we expect Chromatography revenue growth in the range of 0% to 5%. In Protein, our year-over-year revenues were up 7% in the fourth quarter and down 9% for the full year. Our Protein franchise had a solid revenue and orders quarter driven by growth factors and Custom Affinity Resins. That said, we expect weak demand for Protein in 2024, reflecting the Cytiva drop-off of approximately $10 million and lower forecast for ligands from our other customers, including the discontinuation and ramp-down of some legacy resins by one of our partners. This is the one franchise where we see excess finished goods inventory in the channel, and we think it will take 2024 for this to reverse. As our Protein forecast in 2024 will be down 30% to 35%, we expect the Protein business to have a strong bounce-back year in 2025 as new products targeting antibody and antibody fragment purification gained traction. We have built a market-leading set of ligands over the last 2 years, firmly establishing ourselves as the technology leader in this space, and we will be working closely with Purolite to drive market adoption for these products. In Filtration, our year-over-year revenues were down approximately 20% in the fourth quarter and 30% for the full year. The declines were driven by the drop-off in COVID-related revenue, which was approximately $23 million in Q4 of 2022 compared to $8 million in Q4 of 2023. Filtration orders in Q4 were again strong with a book-to-bill ratio of 1.03. Excluding COVID contributions in Q4, our Filtration book-to-bill was 1.13 driven by strong demand for XCell ATF, ARTeSYN systems and Fluid Management assemblies. With a strengthening order book, our expectation in 2024 is that this franchise will be up 10% to 15% on our base business or 5% to 10% on a reported basis. Finally, our year-over-year Analytics business was up 2% in the fourth quarter of 2023 and up 6% for the full year. We're seeing solid orders for Analytics, which were up 10% for the year. The Analytics story of the quarter and the year was the strong traction for our FlowVPX and our RPM product lines and the continued adoption of VPE technology by new modality accounts. As the markets pick up, we expect the Analytics business to grow 10% to 15% in 2024. In summary, despite the headwinds in Proteins, our other 3 franchises combined, are showing solid growth potential in 2024, projected to be up 9% on base business and 6% as reported at the midpoint of our guidance. So what do we expect to see as we move through the year? As we have repeatedly stated over the last 6 months, we see 2024 as a transition year for the company and the industry, and we don't expect a full recovery until the second half of this year. We do expect revenues in the first half of 2024 to be modestly better than the second half of 2023. We believe the strength we've seen in orders over the last 6 months supports our ability to reach our 2024 revenue targets, including $300 million in the first half. We expect stronger revenues and orders in the second half of the year with revenues in H2 projects to be up 10% to 15% over H1 or $335 million at the midpoint of our guidance. All in, our guidance for 2024 is in the range of $620 million to $650 million, up 2% to 7% for non-COVID business with M&A contributing 3 points of growth. We also expect that we will return to double-digit revenue growth for our businesses in 2025. We believe that the increased emphasis we've placed on commercial execution is really helping to reshape and expand our opportunity funnel. The stronger funnel, combined with our investment in the key account management team along with an improving book-to-bill environment provides some real momentum as we head into 2024. As we move through the year, our strategic priorities will center on the following. Number one is to further expand our opportunity funnel and strengthen our order position on top accounts. Two, is around launching new products with a focus on Fluid Management and integrated PAT systems. Three, is around building up our wins in new modality markets. Four, is around successfully integrating Metenova into Repligen and launching a portfolio of mixing solutions in the marketplace. And finally five, is around controlling our costs and increasing our margins as we go through the year. In summary, we are happy to be moving forward here in 2024. We have the right team and expertise in place across all aspects of our business from operations to finance to commercial. We'll continue to focus on bringing flexibility and efficiency to bioprocessing through internal R&D and M&A. We've entered 2024 with a stronger balance sheet and a care plan for delivering long-term reward for our shareholders. Now I'd like to turn the call over to Jason for the reports on our financial performance.

Thanks, Tony, and good morning, everyone. Today, we reported our financial results for the fourth quarter and full year of 2023 and provided financial guidance for 2024. As we expected, revenue in the fourth quarter stepped up nearly [indiscernible] million over third quarter low point. We delivered total revenue of $156 million, with approximately $8 million of COVID sales in the quarter. This is a reported decline of 17% for the fourth quarter or down 21% on an organic basis, which excludes the impact of acquisitions and currency fluctuations. Our total year 2023 revenue was $639 million, aligned with our October guidance. This was a year-over-year decrease of 20% as reported and down 21% on an organic basis. FX provided a slight tailwind in the quarter. And for the total year, FX had a negligible impact of less than 30 basis points of growth headwind. For the total year, our base business, which excludes COVID revenue and M&A, was down 9% on a reported basis. We recognized $32 million of COVID revenue and approximately $7 million in M&A sales from our FlexBiosys and Metenova acquisition. Therefore, our base sales were $599 million. Included in the $599 million is just over $10 million of ligand sales to Cytiva which will be negligible in 2024. Tony shared the revenue performance of our franchises, but let me highlight the revenue performance across our global regions. For context, the total year 2023, North America represented approximately 44% of our global business, while Europe and Asia Pacific and the rest of the world represented 37% and 19%, respectively. The challenges of the year were global in nature, and we saw declines across all regions, but Europe demonstrated the most positive momentum in the quarter. Year-over-year, on a reported basis, sales declined in North America by 20% for the fourth quarter and by 19% for the total year 2023. Europe was flat for the quarter, but down 19% for the year. And Asia Pacific was down 35% for the quarter and down 26% for the total year. China remained as the most significant driver of the region's decline, down 62% in the fourth quarter and down 41% for the total year 2023. Fourth quarter 2023 adjusted gross profit was $77 million, a 20% decrease year-over-year and nearly $31 million of lower revenue, delivering a 49.1% adjusted gross margin. Though still down about 2 percentage points versus the fourth quarter of 2022, this was a 700 basis point increase from the third quarter. This increase was driven by approximately 300 basis points from our lower level of inventory adjustments in the third quarter, 200 basis points from positive mix from higher Protein and COVID Filtration sales, 200 basis points from improved labor and overhead efficiencies and higher leverage on depreciation and capacity costs. With this fourth quarter, adjusted gross margin [indiscernible], total year gross margin was 49.5%. This is down 750 basis points from 2022 and $163 million of less revenue. As Tony shared earlier, we have remained focused on cost management and rebalancing our resources through the second half of 2023. The majority of our restructuring actions will be complete within the first half of 2024, but we will remain diligent on our spending, investment prioritization and we will remain focused on driving productivity and efficiencies across our manufacturing network. That said, for 2024, we expect our gross margin to remain at the 49% to 50% level. We believe we are turning the corner on profitability based on the actions we have taken in 2023 and will continue to take in 2024, coupled with higher leverage on increasing volumes going forward. Related to our actions, we incurred $8 million of restructuring charges in the fourth quarter, down from $24 million of charges in the third quarter. This was mostly driven by noncash charges related to inventory revaluation and facility consolidations. All of these charges are nonrecurring in nature and are reflected only in our GAAP P&L in the fourth quarter and total year. Though our current restructuring activities are primarily complete, we evaluate the need for future discrete actions as we continue our margin expansion journey. Continuing through the P&L, our adjusted operating income was $19 million in the fourth quarter, down $22 million compared to the prior year. This is driven by the $20 million drop in adjusted gross profit just described with only a slight increase in SG&A from our investment in our sales organization. Total year 2023 adjusted operating income was $94 million, down 59% on lower sales and gross margin, offset by a nearly $3 million year-over-year reduction in total operating expenses. Total year adjusted SG&A was down 1% on a reported basis and adjusted R&D spend which is slightly down year-over-year as we essentially held our investments in technology development flat, while continuing to introduce innovative new products. Our total year 2023 operating income margin of 14.8% includes about a 5-point headwind from depreciation, which was only a 3-point headwind in 2022. This is reflective of the critical investments we have made in our capacity. For total year 2023, EBITDA margin rate was 20% and more reflective of our profitability excluding the impact of the increased depreciation. Adjusted net income for the quarter was $19 million, down $20 million versus last year. Total year adjusted net income was $98 million, down $90 million. This was driven by $138 million drop in adjusted operating income, and that drop was offset by just over $25 million of higher interest income, net of interest expense from our improved interest rates on our cash position and approximately $20 million less tax provision. Our total year adjusted effective tax rate was 16.2%. This tax rate benefited from the efficient use of cash in our Swedish operation related to the funding of our Metenova acquisition in the third quarter and from stock-based compensation. We have not assumed a repeat of these benefits in 2024. Adjusted fully diluted earnings per share for the fourth quarter was $0.33 compared to $0.68 in the same period in 2022. Consistent with our October guidance, our total year adjusted fully diluted EPS was $1.75, a year-over-year decline of 47%. Finally, with operating cash flow generation and the proceeds from our convertible debt exchange, we ended the quarter with $751 million of cash and cash equivalents. I'll now move to our guidance for total year 2024. I'll speak to adjusted financial guidance. So please note that our GAAP to non-GAAP reconciliations for our 2024 guidance are included in the reconciliation tables in today's earnings press release. And for further clarity, our guidance is fully inclusive of the FlexBiosys and Metenova acquisitions we made in 2023. As Tony shared earlier, our revenue for 2024 is expected to be in the range of $620 million to $650 million. We expect 2% to 7% on growth for our non-COVID business with M&A contributing 3 points of that growth. As a note, we will not be reporting on COVID sales in 2024, as this will be de minimis. As Tony shared, we expect revenues in the first half of 2024 to be better than the second half of 2023, and we expect revenue for the second half of '24 to step up again. As I mentioned earlier, we expect to deliver adjusted gross margins in the range of 49% to 50%, essentially flat with 2023. We see about 200 basis points of headwind from mix with our reduced Protein sales forecast, salary increases, material inflation and from resetting our incentive compensation back to normal levels for our employees in 2024 after being far below that in 2023. The impact from these headwinds is expected to be entirely offset by the manufacturing productivity, which is forecasted to generate roughly 200 basis points of year-over-year adjusted gross margin improvement. I'll also note that price is assumed to be flat this year though we may raise prices selectively. We expect our adjusted income from operations to be between $83 million to $88 million or 13% to 14% adjusted operating income margin rate, which is down about 100 basis points from our midpoint from 2023. In our adjusted operating income, we see line of sight to delivering 400 basis points of year-over-year productivity. However, total salary increases, material inflation, mix from lower Protein sales and volume deleveraging creates greater than 300 basis points of headwind. And the headwinds from resetting our incentive compensation is a total of 200 basis points of headwind at the adjusted operating income level with the majority of our incentive costs in SG&A. We remain focused on balancing our cost structure, taking immediate actions while protecting the resources and investments needed to grow long term. As our volume grows, we expect profitability to grow with it. Adjusted EBITDA margins are expected to be in the range of 18% to 19% for the year, reflective of the exclusion of roughly 500 basis points of headwind fixed depreciation costs and the critical capacity expansions we have made. Continuing down the P&L, we expect our adjusted other income to be down year-over-year by an estimated $4 million to $5 million. This reflects the favorable but higher coupon on our convertible debt, increasing from 0.375% to 1.0%. It also reflects an assumption that interest rates that we earn on our money market cash investments will reduce through the course of 2024 as most forward forecasts indicate a similar profile. Our 2024 adjusted effective tax rate is expected to increase to an estimated 21%. This increase versus 2023 ending rate of 16.2% is driven by the 2023 benefits that I cited earlier and not repeating in 2024 related to the acquisition funding and stock-based compensation. Incorporating all of these items, we expect our adjusted earnings per share to be between $1.42 and $1.49, down 33% to , respectively, versus last year. Approximately half of this reduction is from lower operating income and the other half is from both lower other income and the increased tax rate. We've entered 2024 with a stronger balance sheet with $751 million of cash and cash equivalents. We will remain prudent in our spending while maintaining flexible dry powder. Our FX spending is expected to be flat to down 5% versus 2023. After 2023, was cut by more than 50% off of our 2022 peak spend. Now as we wrap, let me reiterate our excitement to move forward in 2024 and our optimism about the bioprocessing market improving through the course of the year. We will remain laser-focused on the execution of our strategic priorities, continuing to expand our position in top accounts, delivering more innovation with differentiated new products, building up our wins in new modalities, successfully integrating Metenova and remaining diligent on our cost control and productivity to support increasing margins as we go through the year. With that, I will turn the call back to the operator to open the lines for questions.

[Operator Instructions]. First question is from Dan Arias with Stifel.

Tony or Jason, on the outlook for the year, maybe just to start there, the $620 million to $650 million in revenues. I'm wondering if you could just maybe talk to the cadence of the year on your way to that total. I mean, it sounds like you're still calling for acceleration in the back half of the year that you've alluded to before. So can you just maybe help us with what under the assumptions that you have today, you're looking for when it comes to a spread between the beginning of the year and the end of the year, 1Q to 2Q -- sorry, 1Q to 4Q? Just trying to think about how the order book and the momentum that you kind of highlighted translates to that second half step-up and just how you progress here?

Yes. Thanks, Dan. I think the orders that we brought in, in the second half of the year, especially in Q4, definitely helps us in Q1 and Q2. Typically, the order book spreads out over a couple of quarters. It's not just the quarter ahead. Our expectation, we're going to be in that $300 million, probably $310 million in the first half of the year and then the remainder in the second half of the year probably around that $325 million to $335 million to get to the midpoint. We're just looking at it from a midpoint. So I don't think there's going to be a huge amount of difference between Q1 and Q2, and obviously, the next couple of quarters are going to be very important from an orders point of view because they will dictate a little bit of what happens in Q3 going into Q4.

Okay. Helpful. And then, Jason, maybe on the margins, EBITDA margin is down a couple of hundred basis points for the year. It sounds like there are a handful of factors at play there. If we look out a bit further, I know you're not guiding to long-term margins here, but it does sound like that's something that you spent a good time -- a good amount of time thinking about. As you've done that, do you have any loose thoughts on just how we should think about the potential for post-COVID Repligen to kind of come closer to resembling pre-COVID Repligen when it comes to the margins? Do you think that's something in that low to mid-20s EBITDA margin level comes back into the picture at some point once you normalize on cost and the top line comes back to a more normalized place?

Great question, Dan. Thanks. Look, I think, hopefully, you heard that we tried to provide a bit more details in context on the profit bridge and it's -- to highlight a lot of the moving pieces. I'm really pleased with the productivity and the cost efficiencies we're driving. And again, for '24, a lot of that was even executed with our actions in the second half of '23. I know we're not probably the first company that talked about some of the headwinds on resetting compensations. So that's a real headwind for us this year as well. The other thing I'll note is, again, we don't have the benefit of price, right? We're assuming flat for the year, which again is typically a profitability driver as well. I think -- like we've talked about 2024 as a transition year for the top line, that's where I see for that profitability as well. And I think the actions we're taking are setting ourselves up for that longer-term improvement. I think to your question about how long it takes. That's why we're continuing to see. It could take a couple of years, few years to ensure that we've got the right structure. And then as volume picks up over the coming years, we'll be able to really benefit from a leverage on that. But I think we're still absolutely positive about where this heads. It's just going to take the right time to get there.

The next question is from Matt Larew with William Blair.

I just wanted to follow up, Jason on the OpEx side. And I wonder if you could just maybe give a little more color on the way on the cost savings will layer into the year and sort of how the profitability cadence may or may not match what the revenue cadence looks like throughout the year?

Yes. So from an OpEx specifically, Matt, from a -- the first -- your second part there, the cadence will follow the top line, right? So we'll continue to see more leverage in the second half as volume picks up. So we absolutely believe that. From an OpEx, again, you think about, it will be up $5 million, $6 million, right, at the midpoint. Again, I remind, we've got, I think it's around $8 million of the year-over-year acquisition, right? So that's just from Metenova primarily, but that's not in the baseline. Again, there's a bit more than that from an impact on the return on our incentive compensation piece. And then we've got normal merit salary increases as well. And so those are a lot of the pieces that go up, and then we're driving, call it, $20-plus million of savings on productivity. So I think again, we're facing some of those headwinds head-on with driving lot of cost actions and savings.

And Matt, I would add that all the changes we made in the company in the second half of last year, that's going to help us as we go through the year. And Jason's comment on volume, volume is going to drive everything that we need to see in the year. So second half of the year, revenues are going to be higher, and therefore, most of the leverage we're going to see is going to be on the OpEx side.

Okay. And then you spoke on the call about some trends you've seen in pharma and CDMOs. Couple of the other categories that were headwinds last year were kind of early stage, which I know was a nebulous term and then China. So I'm just curious what's contemplated in the outlook in terms of how those 2 buckets will trend throughout the year?

So the China bucket, there's no doubt that China is going to be weak again in 2024. As you might recall, the first half of last year, we had really good revenue in China because it was coming from orders that were placed in 2022. And we actually looked at it purely on an order basis. Orders in Q1 and Q2 were much lower than the revenue that we brought into the company. So the outlook for China in 2024 is really driven by the order pattern that we saw in 2023. And so we would expect China to be about 5% to 6% of our revenue this year. On the pharma side, on CDMO side, I think pharma has shown some nice resilience over the last couple of quarters. We had an exceptionally strong order quarter in Q3. We had a good order quarter in Q4 for pharma, probably the best order in the last -- outside Q3, best order over the last 4 or 5 quarters. So we think that pharma is in reasonably good shape. The CDMO part of our market -- like everybody else in the industry, the CDMO part really hasn't rebounded. Now that said, we had a very nice quarter in Q4. And if we look at the orders in and CDMOs in Q4 and compared it to the average of the prior 5 quarters, we're up probably 20%, 25%. So that's an encouraging sign, but it's one quarter. And I think we need to see a few more quarters from CDMOs before we say how the market is beginning to turn.

The next question comes from Puneet Souda with Leerink Partners.

Tony, maybe if I could pull it to a little bit of high level. When we look at the full year guide, which appears to be [Technical Difficulty] low single digit at the midpoint. The question we're getting from investors is why is that the right number given all the backdrop and improvement that you're seeing across pharma? You talked about CDMO orders growing 25% quarter-over-quarter, Filtration business or book-to-bill is improving, I mean, a number of factors across the business are improving, so maybe just talk to us about...

Puneet, we're not -- you're really -- it's really breaking up a lot. We got the guide at mid-single-digit there and Filtration. So why don't we address...

I was able to make out, Puneet. You might be on a phone, there's a ton of static. So it might be if you mute, because it's all static. But I got your question, why is the guy the right guy given -- okay, given what's going on in the market? I think the way to look at it, honestly, is we have a 2% to 7% guide on our non-COVID part of our business for 2024. And if you take 3 points out for M&A, which is essentially Metenova, we're minus 1% to plus 4%. If you actually look at it -- if you take the headwinds we're seeing in Protein out of the equation, we're actually seeing about 9% growth on our other 3 franchises for the base business, and year-on-year as reported it would be 6%. So I actually think the guide is actually -- really solid and showing the impact of a stronger book-to-bill, which is predominantly coming from our Filtration platform. Our Filtration platform in -- franchise in Q3 had a book-to-bill of 1.15 and in Q4, it was 1.03, but if we took COVID out because we had COVID revenue in Q4 on the revenue side, it was 1.13. So our biggest franchise is showing some real strength, which for me is really encouraging. So I think to look at the guide, while it may seem conservative and lower than you might expect, it's really driven by the fact that Protein is down and our other franchises are actually really, really solid. So we think it's the right guide as we start the year.

Hopefully, you can hear me okay now, but just if you can, just a very brief question. On the Protein, could you provide more...

Puneet, we really -- in all due respect, it is so staticky. I think it would be better to just leave it with one question. I think it's almost impossible to make out the questions. I think it's the phone line. I don't think anyone else has had that issue. Is that okay? It's just really hard to hear. So maybe next question.

The next question is from Jacob Johnson with Stephens.

Tony, maybe just following up on that last question, the other thing we're getting inbound this morning about is, if I take the orders in 4Q and I annualize that, that would seem to get me at least to the midpoint of your guidance. So can you just talk about how much of a recovery in further -- are you assuming much or any of a recovery in orders from what you saw in 4Q in this revenue guidance?

Yes. Clearly, when you look at the orders that came in, in Q3 and Q4, they definitely have an impact in the first half of the year. I think the piece that maybe gets lost in this is that our Protein business will be down 30%, 35%. So we're kind of counteracting kind of that trend. And look, every business, every product line has challenges. And so we're not making any excuses on that. It's just it is what it is. But I think if you look at the growth of the other 3 franchises, they're coming in really around that 6% to 9% range. So I think it's actually really good given the environment in the market that the whole industry has gone through and we've gone through over the last year. So I think it's been masked a little bit by the weakness in Protein.

Got it. And maybe following up, I think, or maybe Puneet was going to try to go. Just on the Protein business, Tony, can you just flesh out why -- what's going on there? And is this kind of a onetime impact in 2024?

Yes. So I think it's a onetime impact. I think everybody going into the year, we all kind of knew about Cytiva, and Cytiva is going away. I think what happened as we ticked off Q1 was the forecast from our other 2 partners for ligands was down versus what we were expecting. And the reason is that starting in Q4 of 2022 through midyear of 2023, our partners were buying ligands in anticipation of a really good year, a decent year, and that didn't materialize. So it's not like the COVID inventory build, Jacob. It was more -- people were expecting last year to be a better year. It turned out it wasn't and they're sitting on ligand inventory. So they have to burn it off. So it's a onetime real issue in 2024. But I can tell you, the strategy we've put in place of the products that we have developed on the Protein A ligands side, we are by far the leader now in terms of getting innovative Protein A ligands into the marketplace. And Purolite has been ramping up in terms of their commercial organization. So we continue to be really bullish about the long-term growth for ligands and for the Protein business. And next year, 2025, we expect that's going to be a 10%-plus grower for us.

The next question comes from Dan Leonard with UBS.

My first question is on China. I appreciate that you have a tough comp in the first half of 2024. But can you speak to the sequential trends in China? Has the revenue outlook there bottomed? Or are you still seeing further deterioration quarter-on-quarter?

Yes. Thanks, Dan. I would say that if we looked at our orders in China in 2023, they were pretty stable, right? They were pretty consistent across the 4 quarters, plus or minus $1 million. It was really -- they were really close to each other. So I would say, China has definitely bottomed from an orders point of view. And if you look at it then from a revenue in 2024, we essentially annualized our orders and said that's going to be it for 2024. So if there is a pickup, and there could be in the second half of the year, there's probably a little bit of goodness that could come from China in H2, but we don't expect it to be in the first half of the year. So it is a conservative, I think, forecast for China at 5% to 6%. And -- but it's only conservative if China starts to turn around in the second half of the year.

Appreciate that. And then for my follow-up, Tony, could you elaborate on how you're thinking about cell and gene therapy trends in 2024 in your business? So what growth is baked into that forecast? And how concentrated is that customer base for you?

Yes. I think we've been consistent, Dan, in 2023 describing cell and gene therapy and mRNA. So we're using new modalities as kind of the bucket now because it is broader than cell and gene therapy. We have about 20, 25 accounts that contribute to the vast majority of the revenue for us. And we have benefited in 2023, and we will benefit in 2024 from customers who have put us into commercial processes and into late-stage processes. The majority of the growth, and it wasn't really growth last year, we were flat year-on-year in terms of revenue for new modalities in '23 versus '22, but it was driven by the commercial late-stage top 20 opportunity as opposed to the long tail of cell and gene therapy mRNA companies. And as we look at 2024, our expectation is those same companies that gave us a solid year in 2023 are the same companies that will give us a solid year in 2024. And so we're baking in probably mid-single digit to a little -- maybe that 5% to 7% range for 2024 because we haven't really seen the long tail of accounts recover yet.

The next question comes from Conor McNamara with RBC Capital Markets.

Just on orders, can you talk about the progression of orders throughout Q4 and how things are looking at the start of the year? And maybe start there, and then I have a follow-up.

I missed the second part, Conor. So the progression of orders in Q4?

And then how things are looking at the start of the year?

Versus the start of the year -- starting '23 or starting '24?

Starting 2024, how things are progressing this year so far?

Yes. Okay. So I think -- I'll actually give you the last 4 months of 2023. We had an exceptionally strong September, which obviously contributed to a really good Q3. We had very consistent order patterns in Q4. I would say, very evenly distributed October, November and December. And I'd say, we're on track as we kick off the year in terms of how the pacing is, we're about halfway through the quarter. So we're tracking to where we thought we would be.

Okay. Great. And then my follow-on there is, if you look at your guidance for this year, what are you assuming for order growth progression through the year? And where would you need to be on a book-to-bill basis exiting the year to hit that guidance? Are you basically assuming no real improvement in book-to-bill throughout the year in your guidance?

No, no. I would say that -- the way we look at it is if you go back over 6 quarters, when the bottom started to happen in the industry on the order side, which was really mid-2022. So if you look at Q3 '22, Q4, Q1 and Q2 2023, we had 4 quarters in a row, Conor, where our book-to-bill was about 0.8. And now we've gone through 2 quarters, which is like 1.07, 1.03. We expect the first half of this year to average out around 1:1 -- book-to-bill of 1. And then in the second half of the year, we're expecting a pickup of 10% to 15%. So the book-to-bill will improve in the second half of the year. I think a key quarter is going to be Q2, right? So for us to hit the targets, will require Q2 to be obviously a little stronger, but then Q3 and Q4 has to be 10%, 15% up. So 4 quarters -- so think about it this way. Four quarters with book-to-bill, it's about 0.8. Four quarters with book-to-bill around that 1 to 1.05. And then moving on from there where you're up around the 1.1 where you would expect historically to be if you're going to be growing at the rate Repligen typically grows at.

Okay. Perfect. That answers my final question of you talked about double-digit growth in 2025, but you'll need to be above 1 -- at or above 1.1 book-to-bill actually and it sounds like you're confident...

Absolutely. And Conor -- and what's encouraging, Conor, is that our Filtration business has been above 1.1 for the last couple of quarters. So that's what -- that's probably the most encouraging part for us.

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

Maybe the first one, you talked in your press release about getting back to double-digit growth in '25. Previously, I think you've talked about maybe getting back to 20%. But as you look at that kind of target, the double-digit growth in '25 and had to rank what the key drivers of that are between funding inventory levels at CDMOs, M&A, China, like how should we be thinking about what -- maybe what the key lever or 2 is to get you back to that faster growth rate?

Yes. Thanks, Matt. I would say that for us, it's the markets have to broadly come back, right? So when you look at where we are starting 2024, clearly pharma is in better shape than what we were seeing with the CDMO market. We had a decent order quarter for CDMOs in Q4. So we went out 12 months from now, it's CDMOs back to growth mode, pharma consistently moving forward in growth mode and then I think the Protein business back in recovery mode in 2025. Those are the things that will really drive. Our exposure in China is not huge. So any growth in China in 2025 is just going to be a positive because I think we have bottomed out in terms of -- where we're at in terms of revenue.

Got it. All right. That's helpful. And maybe just one more. On the CDMO side, obviously, it sounds like you're starting to see some improvement there. Is the inventory adjustments or the corrections that you're seeing at the CDMOs, is that pretty broad-based? Or are there specific products that are still sitting on their shelves. I'm just trying to think, I mean, is it OPUS columns that they need to work through? Or is it Filtration? Or is it broad based? Like they bought a ton of inventory and still there's pieces of equipment and products that they're still working through?

Yes. On the CDMO side, I would say that if I had to pick one product category where they overstocked and has impacted Repligen is probably on the components side of Fluid Management. So you think about and you think about tubing and you think about valves, all the things that people would buy that they would stock up on with multiyear quantity. So I think that's probably the area that impact us the most. It's definitely not OPUS columns. I think the other dynamic that people forget about, Matt, on CDMOs in 2023 is that there are less projects, right? It just -- it wasn't just a destocking phenomenon. It was also -- there were less projects being run. And I think for the CDMO markets to come back, then the -- the biotech companies have to be running more projects, outsourcing more projects, large pharma has to be outsourcing more projects. We are seeing some really nice positive momentum at our top 10 CDMO accounts as you heard in my prepared remarks, but it's not the long tail yet. I think the long tail of CDMOs has to recover, and that's going to come with a healthier biotech environment, increased funding, et cetera, et cetera.

The next question comes from Paul Knight with KeyBanc.

I guess I'll give you a break, Tony. But the question is for Jason. With the EBITDA margins you've guided to here, I think, around 18% to 20%. What are you -- what does Repligen aspire to as we think about 1 or 2 years beyond 2024? I mean, Repligen you've done 30% in 2022. What's kind of the goal if I could express it like that?

Yes. I think for sure, 25% really is where we're looking to drive, but it's kind of mid-20s in the next milestone. And then we'll continue to see if there's opportunity to get north of that. Again, in those -- at the 30 points [indiscernible] COVID, volume profitability and margins are just -- really aren't what we see as a sustainable way to think about the mix of the business. But certainly, that mid-20s is absolutely where we're going to get back to you.

And Tony, the [indiscernible] Association thinks we might have 14 cell and approvals this year. Do you see that in customer orders? And what products do you make for this market as well?

Maybe start -- let's start with the products in the marketplace. I would say that the drivers and new modalities for us are definitely our Filtration portfolio, products like ATF and our hollow fiber technology. Also, our systems are doing quite well, like our ARTeSYN systems and then OPUS comps. That would probably be the 3 main product lines. We are, obviously -- almost every company likes to use our analytics technologies like SoloVPE. So that would probably be the fourth product that does quite well in cell and gene. In terms of 14 approvals, yes, look, if there's more approvals this year, I think it's going to benefit Repligen. I haven't gone through the 14 to see which ones we have customer opportunities or were already spec-ed into the Phase II. But as I said, we have 20, 25 accounts that are scaling. So if those are part of the 14, then yes, we'll benefit from that.

The next question comes from Rachel Vatnsdal with JPMorgan.

Perfect. A lot already been asked, and maybe I'll just put one in around M&A. For Metenova, you've had that asset for a few months here. So can you talk about how integration is going there? And then any expectations for M&A and just talk about the state of the environment there for this year as well?

Yes. Thanks, Rachel. Yes, Metenova, so far, it's gone exactly as expected. Integration is going well. There's a real synergy between what Metenova is doing and about the Fluid Management business that Repligen is doing. So we've integrated well. The sales forces are trained. We're working very closely with their team. So expect -- everything has been very positive so far. And then from future M&A, obviously, there's nothing's really changed. I mean, the portfolio of companies that are out there, that are available, hasn't really changed that much over the last 12 months, and we'll continue to be selective in terms of what we go after. And apologies for the background noise, someone's decided to hammer on our roof.

Our next question comes from Justin Bowers with Deutsche Bank.

Just a 2-parter from me. Can you talk about some of the underlying assumptions for the return to double-digit growth into 2025 and sort of what you're seeing that gives you the confidence in that trajectory? And then in terms of the site consolidations, at one point, would you -- at what point would you have to start adding capacity as you return to your double-digit growth trajectory next year and beyond?

Yes, maybe I'll start with the site consolidation piece. I think we're in great shape in terms of what we have for facilities, we're doing a little bit of site consolidation. But in terms of capacity, we have capacity that's going to get us out for the next 5 years. So I don't think there's a lot more investment than we have to do. Of course, if we did an M&A and it required a capital investment, then that probably would be the exception. In terms of kind of assumptions around getting back to double-digit growth in 2025, it's really around broad market recovery, it's kind of what I said earlier, broad market recovery. We are in a significant number of late-stage processes. So as those go into commercial, I think we get a nice pickup from going from Phase III into commercial. And we're seeing that, honestly, in 2024 for some of our product lines. So I think that's a positive. And then, it's the new products. Like we've been launching some great products over the last few years. We're really proud of what we've done on the systems side. You're going to see as we go through this year, a number of new products are going to come out on the Protein A ligand side as well. I think all of those contribute in a very positive way to the double-digit growth in 2025.

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

Yes. Thanks, Sabrina. Look, it's great for everybody to join us today, obviously, right at the start of 2024. I look forward to getting back together with everybody in May and talking about the progress we're making. So again, thanks, everybody, for joining.