Sondra Newman - Director of Investor Relations Walter C. Herlihy - Chief Executive Officer, President, Director and Chairman of Science & Technology Committee.

S. Brandon Couillard - Jefferies LLC, Research Division Andrew L. Jones - Stephens Inc., Research Division Michael Wood - LifeSci Advisors, LLC James Gowen.

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Repligen Corporation Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Sondra Newman, Director of Investor Relations for Repligen. Please go ahead..

Thank you, Nova, and good morning, everybody. The purpose of today's call is to discuss our first quarter 2014 results, to update our financial guidance for the year 2014 and to discuss recent business highlights. Joining me today is Walter Herlihy, our President and CEO.

At the outset, I would like to state that this discussion may contain forward-looking statements. These statements are subject to risks and uncertainties, which may cause our plans to change or results to vary. In particular, unforeseen events outside of our control may adversely impact future results.

Additional information concerning these factors is discussed in our annual report on Form 10-K, the current reports on Form 8-K filed today and other filings we make with the Securities and Exchange Commission.

The forward-looking statements in this discussion reflect management's current views and may become obsolete as a result of new information, future events or otherwise. We may not update such forward-looking statements, except as required by law. Now I'll turn the call over to Walter Herlihy for financial and business updates..

Thank you, Sondra. Today, we reported our financial results for the first quarter of 2014, which was highlighted by strong sales of our key bioprocessing products and continued operational strength demonstrated by improved gross margins. We reported record product sales of $14.3 million, an increase of 20% compared to Q1 of 2013.

We also recorded $2 million of other revenue from the previously announced transaction with BioMarin for our therapeutic HDAC assets, bringing total revenue to $16.3 million.

Product revenue growth was driven by increased demand for Protein A affinity ligands from our partners and strong growth in demand for our Opus Pre-Packed Chromatography Columns, which increased to approximately 10% of sales.

We also continued to improve our operating efficiency, with product gross profit margin of 55.8% for the quarter, the highest level recorded since our 2011 acquisition of Repligen Sweden.

This compares to 42.2% for the same period in 2013 and is a result of improved capacity utilization in our Swedish facility and increasing manufacturing efficiencies. The growth in revenues, combined with the improved gross margin, resulted in gross profit of $8 million for the quarter, a 59% increase over the first quarter of 2013.

We recorded lower R&D expenses primarily as a result of discontinued investment in our therapeutic development programs and SG&A expense increased slightly, resulting in an operating profit for the quarter of $5.3 million compared to an operating profit of $3.5 million in 2013.

Our tax rate was 20.8% of income before taxes, resulting in net income of $4.3 million for the first quarter of 2014 compared to $2.3 million in 2013. This increase was achieved despite lower royalty and other revenue in the current quarter.

Cash and investments as of March 31, 2014, totaled $81.7 million compared to $73.8 million as of December 31, 2013. Today, we are updating our financial guidance for 2014.

We continue to expect total revenues of between $54 million and $57 million, including $52 million to $55 million of product sales, an increase of approximately 10% to 15% from 2013.

We expect bioprocessing product gross margins of approximately 53%, which is consistent with our previous guidance and our longer-term goal to increase gross margins to 55%.

We continue to anticipate R&D expenses of approximately $5 million and SG&A expenses of $14 million to $15 million, and operating income is now projected to be between $11 million and $13 million for 2014 compared with our prior guidance of $10 million to $12 million. We now expect that our effective U.S.

tax rate and cash taxes for 2014 will be between 20% and 22% of pretax income compared to our prior guidance of 24% to 28%. Our tax rate is a blend of the 22% rate we pay in Sweden and a tax rate of approximately 5% in the United States as a result of our net operating loss tax credits.

The reduction in the expected tax rate is a result of an earlier-than-anticipated shift of our U.S. operations from a modest loss to modest profitability. Our net income therefore, is projected to be between $8 million and $10 million compared to our prior guidance of $7 million to $9 million.

Capital expenditures continue to be forecast at approximately $4.5 million, which consists of $3 million to expand our Waltham, Massachusetts, facility and $1.5 million for maintenance of existing facilities and equipment. Based on the above, we are expecting year-end cash of between $84 million and $87 million.

Our 2014 guidance does not include the potential impact on our revenue and expenses of milestone payments from Pfizer or BioMarin, any future bioprocessing acquisitions or fluctuations in foreign currency exchange rates.

To summarize, we had a very strong quarter, highlighted by record bioprocessing product revenue, improved product gross margin and significant cash flow. Turning now to some business highlights. Earlier this week, we announced that Tony Hunt has joined our organization as Chief Operating Officer.

Tony was, most recently, President of the BioProduction platform at Life Technologies, a global life sciences company acquired by Thermo Fisher earlier this year. One of Tony's key responsibilities will be to lead the expansion of our commercial operations.

This expansion will include additional sales managers in diverse geographies, and additional field technical support personnel. We are also increasing our investment in marketing and product promotion to build our brand and promote the breadth of our product offerings.

Tony will be focused on bolstering our efforts to sell our growth factor products to a wider range of customers and to maximize the opportunity for our Opus chromatography business.

As many of you know, our lead growth factor product, LONG R3 IGF-1, is used in the production of several marketed biologic drugs, and there are also several products in mid- to late-stage developments which use IGF-1.

These examples prove the value proposition for this product, and our goal now is to see IGF-1 into clinical-stage products at a broader range of customers to maximize its growth potential in the years ahead. In our chromatography products group, we expect sales of Opus Pre-Packed Columns to grow by 100% in 2014.

The recent launch of our 45-centimeter Opus column is off to a strong start, and in addition, we are seeing a high repeat order rate across the product line from several early adopters. We have also seen early interest in using Opus to manufacture vaccines and other non-antibody products.

This momentum continues into the current quarter, confirming that Opus is filling an unmet need in the market. Now our goal is to make it the leading platform in the world for pre-packed columns through an expanded direct marketing effort.

One area in particular where we are under-represented and see opportunity is in markets outside of the United States and Europe, from which we currently derive less than 5% of our revenue. We expect that with an expanded commercial footprint, we will -- will enable us to expand our sales to an increasingly diverse customer base.

Finally, we continue to be excited about the progress of the monoclonal antibody pipeline. One of the most exciting new applications is the development of monoclonals to treat cancer by activating the body's immune system to eradicate cancer cells.

One of the leaders in this area is Merck, who, just this week, announced that its anti-PD-1 product candidate has been submitted to the FDA for approval to treat metastatic melanoma, a deadly skin cancer. The FDA has given this product accelerated review, and a decision is expected in October.

Importantly, Merck also announced that the ongoing PD-1 development program includes testing against 30 tumor types in clinical trials. As a class, these immune-activating antibodies are possibly one of the significant developments in oncology in the past decade and are likely to drive further growth in the overall market for monoclonals.

Let me conclude by reiterating that we are very bullish on the opportunity in our industry and the growth potential of our product lines. I look forward to updating you on our progress throughout 2014. I would now like to turn the call over to the operator for our question-and-answer period..

[Operator Instructions] Our first question comes from the line of Brandon Couillard of Jefferies..

Walter, obviously, a strong start to the year for the bioprocessing business.

Can you give us a sense of how we should expect the cadence of revenue to progress over the balance of the year? And just remind us of how much visibility you have between each of the 3 segments?.

Sure. So let me answer your second question first. In terms of visibility, from our partners who we sell Protein A affinity ligands to, primarily GE Healthcare and Millipore, we do get rolling annual forecasts. So we can see out, now to the first quarter of 2015, what their expected demand is.

These aren't binding, of course, but they're a pretty good indicator of the market uptake in the next 4 quarters. For other products, which we sell directly, we have a pipeline of leads that our sales reps are working on. And so we have fair visibility there.

But I must say, and particularly for Opus, things have outstripped our forecast in the last couple of quarters, and we see that continuing in the second quarter.

The only comment I would make about the cadence of revenue, Brandon, is that sometimes the fourth quarter is a little bit lighter than the other 3 quarters as companies shut down for end-of-year maintenance or push inventories down to tidy up their balance sheet a little bit. But in general, it's pretty steady other than that..

And then with respect to the product gross margins in the first quarter, I know you're maintaining the guidance of 53% for the year, but that would suggest a low-50s outcome for the next 3 periods.

Is it just an abundance of conservatism? Or were there some discrete perhaps mix tailwinds in the first quarter?.

Yes, good question. No, there were not mix tailwinds in the first quarter. In fact, if anything, Opus was a little bit higher than planned in the first quarter, slightly higher.

And I think that as the chromatography products are in the somewhat lower margin rate and growing faster, we're just being cautious to ensure that even further growth than projected in Opus, in particular, still allows us to hit the 53% number..

Our next question comes from the line of Drew Jones of Stephens Inc..

Walt, can you quantify a little more where we are with the sales force now? And it sounds like the incremental adds under Tony might be a little more than what you guys have previously talked about..

I think that's fair to say. Yes, we did previously talk about, in our call in November, adds to the sales force. We have done a couple of those. We've got a couple of reps that we're recruiting against right now. But I think it's likely that, as we go through this year -- and it will particularly impact in 2015, Drew.

That will expand beyond that first tier of expansion that we discussed previously, particularly with field technical support. So these are technical people who can go out and work side-by-side with the sales reps to help customers use our products optimally or deal with any problems that might arise..

And then transitioning over to Opus. Obviously, a great start to the year for that product.

Can you give us a little color on strength in new customers and -- versus recurring? Maybe quantify that a little bit? And how are the larger columns coming out of the gate in terms of demand?.

Well, the larger columns are coming out of the gate extremely well. I suspect that we'll beat our target for the larger columns. Still early to say, but I think we're getting a lot of interest because here's a product that's never been available before.

So it might actually be the way in to some customers who are not current customers of the smaller columns. In terms of the pace of new customers versus repeating customers, I was struck this quarter by the number of repeat customers.

These are people who have maybe bought 1 or 2 columns in 2013, either the fourth quarter of 2013 or the first and second quarters of 2014, are now ordering multiple -- had multiple orders of multiple columns. There's 3 or 4 customers who were some of our earliest adopters who have now stepped up to another level of ordering.

So I think that provides some hope that as we now have other customers, a couple of new customers coming in this quarter, that if we can convert them such that Opus is the standard at their facility, they'll turn into multi-column orders, serial orders as well..

And then last one for me, you talked -- you gave a little more color on Opus in terms of breaking out the revenue contribution.

Could you do the same for growth factor either with the year-over-year growth rate or percentage of revenues?.

Growth factors this quarter were spot on. They didn't exceed our expectation or lag behind. And that's what I was mentioning earlier. There was no -- other than higher Opus, there's no real mix effect in this quarter, so they were right on line where we expect them to be..

[Operator Instructions] Our next question comes from the line of Michael Wood of LSA..

Can you give us a little bit more detail -- you mentioned earlier the change in the tax guidance for the year.

Can you give us more detail on the explanation around that?.

Sure. It's a good question, Mike. The tax rate, as I mentioned, has these 2 components. And since the U.S. operation bears the expense of SG&A and R&D, which we don't have that much of in Sweden, the Swedish subsidiary tends to be more profitable. So those profits are taxed at a 22% rate.

And say, for example, if Sweden makes a $10 million profit, which is not far from the actual number, we'll pay $2.2 million in taxes. And previously, we had thought the U.S. would be in a very modest loss position, say minus $1 million, and therefore, we will be paying $2.2 million on $9 million of profit, resulting in a 24% tax rate.

We now think that the U.S. operation is going to be slightly profitable. Let's say, $1 million profitable, as we've shifted a little bit of the production from Sweden to the U.S. And so if on $10 million of earnings in Sweden, we had $1 million of earnings in the U.S., we would still only pay $2.2 million taxes, and you see tax rate drop to 20.5%.

So even a modest shift in that U.S. profitability has a fairly material -- drives a fairly material change in the tax rate..

And our next question comes from the line of James Gowen of Kalmar..

I wonder if you could just update us on your efforts to ship Opus with proprietary media, in terms of the timing on that..

Good question. So I mentioned in our last call that we had our first sale of Opus with our proprietary media, as opposed to the one that we acquired from another company and then pass on to the customer. And we do have a couple more orders in the queue that we'll be filling this quarter, which have relative [ph] proprietary media.

And that's very important for us because it allows us to capture the gross margin not just on the column itself, but also the media inside, making it a very nice high-margin sale. The media that we're currently selling in these pre-packed columns is a rather low-performance media, good for short, small campaigns, such as clinical trial materials.

And as I mentioned before, we are making good progress in developing a slightly higher-performance media that we think will have an even broader appeal and allow us to leverage Opus even more efficiently and capture that margin on both sides of the product..

And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Sondra Newman for closing remarks..

Thanks, everybody, for joining us today. We look forward to updating you on our progress throughout the year. Should you have any questions, feel free to reach out to the company in the Investor Relations department. Have a great day..

Thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a wonderful day..