Sondra Newman - Senior Director, IR Tony Hunt - President & CEO Jon Snodgres - CFO.

Drew Jones - Stephens Incorporated Matt Tiampo - Craig-Hallum Bill March - Janney Brandon Couillard - Jefferies.

Good day, ladies and gentlemen and welcome to the Repligen Corporation's Third Quarter of 2016 Earnings Conference Call. My name is Chanel and I will be your coordinator. At this time, all participants are in a listen-only mode. [Operator Instructions]. Please note that there will be a question-and-answer period following the company's formal remarks.

In order to accommodate all individuals who wish to ask questions, there will be a limit of three questions at a time. I would now like to turn the call over to your host for today's call, Sondra Newman, Senior Director of Investor Relations for Repligen..

revenue growth at constant currency; adjusted operating income; EBITDA and adjusted EBITDA; adjusted net income; and adjusted earnings per share. A reconciliation of GAAP to non-GAAP financial measures is included as an attachment to our press release issued this morning.

While these adjusted financials should not be viewed as an alternative to GAAP measures, the Company believes that the use of non-GAAP measures better enables investors to benchmark its results against historical performance and the performance of peers and to evaluate investment opportunities.

With that, I will turn the call over to Tony Hunt for a business update..

Thank you, Sondra and good morning.

Quarter three was another excellent quarter for the company as we continued to execute on our strategic goals and build on the foundation established in the first half of 2016 where we saw significant acceleration in the adoption of our proprietary products and an expansion from our core CMO base of customers to include an increasing number of large pharma.

We are very encouraged by the increased use of our products in our core customer base and we believe that the investments we have made over the past two years are having a significant impact as Repligen has fast become a key player in bioprocessing.

Beyond execution on our financial targets for the quarter, business highlights this quarter included important new product launches; expansion of our operational capacity for OPUS products; and the full integration of Atoll GmBH into our commercial organization.

During the quarter, we continued to be very active in evaluating M&A targets with a strong focus on building out our market-leading portfolios in pre-packed columns and filtration and expanding our presence in upstream or downstream markets, the key technologies that can be leveraged by our commercial team.

With our strong brand recognition and resources, we remain confident in our ability to execute on M&A. For the third quarter, let me start with our new product launches that were formally introduced at the Biotech Week in early October.

We are now on the market with single use versions of our XCell ATF2 and ATF6 systems and the feedback from our customers on performance and ease of use has been very positive. Customers have observed up to 80% implementation time savings and an overall 50% reduction in initial purchase price when compared to the stainless steel system.

We have already shipped units and expect to ship several systems here in Q4 as customers make end-of-year capital decisions. We expect that there will continue to be a clear market for both ATF formats as our end-users have a combination of stainless steel and single-use facilities.

We are also in the final stages of development of the larger scale, single-use ATF system where there is strong demand from our installed customer base with an anticipated technical launch in Q1 2017. Second, we developed and completed the technical launch of OPUS(R).

The R refers to a new resin recovery feature on certain production-scale OPUS columns. This is an important differentiator that customers have been asking for and that our development team has delivered on.

The unpacking port on our larger OPUS columns will allow customers to recover their chromatography resin following a campaign and to utilize this resin for other applications and study.

Our customers have been very receptive to OPUS(R) and we expect to begin shipping 45 to 60 centimeter columns with this new resin recovery feature during the first quarter of 2017. As highlighted in our Q2 call, we made the decision to expand the production suite for OPUS by the end of Q3.

We brought two more column packing suites online in September and we now have five suites up and running in Waltham, which is helping to lower our lead times on columns during Q4. We will also bring two more suites online in January as we leverage the factory expansion completed in September.

This will give us a total of seven production suites as the demand for pre-packed columns continues to increase. Obviously, we are very encouraged by the adoption rate for OPUS and we believe that new products like OPUS(R) will further drive the adoption of pre-packed columns as end-users migrate away from self-pack options.

Finally, our process development scale portfolio acquired with Atoll GmBH is performing well. Our commercial team continues to make good progress with an uptick in cross-selling opportunities between small screening columns and our larger clinical production columns.

During the quarter, we completed a rebranding of Atoll columns to OPUS, which has helped streamline the messaging to our customers that Repligen is an end-to-end solution provider in pre-packed columns.

In Weingarten, a new customer-facing center will be up and running in the first half of 2017, and, in addition, product service for our European customers will be based out of Weingarten by the end of this year.

On the commercial front, we have added in field application specialists and brought onboard a head of service to build out our service organization, or AGF. Our sales, marketing and support organization is now approximately 30 people, a significant increase from where we started in early 2014 when we were just seven FTEs.

I'm also pleased to announce that Ralf Kuriyel has joined Repligen as Senior Vice President of R&D. Ralf comes to us from Pall Corporation where he spent 11 years working on bioprocess applications, including single-use technologies. Prior to that, he was at Millipore. He will take over from Jim Rusche, who is retiring after 30 years at the company.

So moving now to our quarterly results, as reported today, we had a very strong quarter for our bioprocessing products with $24.7 million in revenue, an increase of 25% over 2015. XCell ATF was a major driver of growth in Q3 as customers continue to adopt the technology in perfusion and hybrid perfusion processes.

The product line has outperformed our expectation as reflected in the contingent consideration we have accrued. While Asia continues to be a strong adopter of the technology, North America had a very strong quarter with a significant number of large pharma companies scaling up with the technology.

We shipped over 20 large-scale ATF systems in the quarter, which contributed almost 50% of ATF revenue. Our overall system growth was in excess of 20% and our consumable growth was in excess of 50%, another strong quarter for this business.

With the launch of our single-use product line, we believe that the ease of use features and overall savings and set-up time will drive further adoption for XCell ATF technology in 2017. Our growth factor and Protein A ligands businesses came in as expected for the quarter.

Our growth factor business has performed very well throughout 2016 with double-digit growth through the first three quarters of the year. Growth in our ligands business during the quarter was partially offset by the impact of FX.

We expect ligand growth to remain at historical growth rates of 8% to 10% over the next few years as we see no slowdown in the number of approvals or [indiscernible] of the clinical pipeline. In fact, eight monoclonal antibodies have been approved by the U.S. FDA so far in 2016 approaching the record of nine approved in 2015.

Our OPUS business had another strong quarter with a significant uptick in the number of large-scale 45 and 60 centimeter diameter columns and over 100% year-on-year growth in the number of these columns delivered in the third quarter.

OPUS adoption by large pharma companies continues to accelerate with greater than 50% of the revenues in Q3 coming from large pharma. Regionally, we saw the biggest gains in North America and Europe with a developing pipeline of opportunities in Asia.

The reaction to our OPUS(R) product has been very positive with key influencers seeing the unpacking port as a major advantage to manufacturing groups, especially those groups with internal column packing capabilities. In summary, this has been a very strong quarter and year for the company.

We continue to diversify our portfolio and our direct to end-user products are having a significant impact.

As we finish out 2016 and we look to 2017, I expect the move towards disposable and single-use solutions in parallel with the migration towards continuous processing at the customer level will have a positive impact on our business and overall product sales. I will now turn it over to Jon for a financial update..

Thank you, Tony. Good morning. Today, we are reporting our financial results for the three and nine-month periods ended September 30, 2016. We will also be updating our financial guidance for the full year.

Our financial results for the third quarter of 2016 were highlighted by strong sales of our bioprocessing products where we are reporting revenue of $24.7 million, an increase of 25% as reported and 26% at constant currency compared to the third quarter of 2015. Our revenue growth continues to be driven by strength from our direct product portfolio.

Our gross profit for the third quarter was $13.4 million, an increase of $2.1 million, or 18% over the third quarter of 2015. Our gross margin was 54.4% for the third quarter of 2016 compared to 57.4% in 2015.

The change in year-over-year gross margin is a result of product mix, predominately driven by strong sales of OPUS and from the impact of operational investments made in our facilities to support the growing demand for our products. Now, moving on to our operating expenses.

Research and development expenses were $1.9 million for the third quarter of 2016, an increase of $0.4 million compared to the same period in 2015. Our increased R&D spend is a direct result of our continued investment in programs related to single-use ATF development and validation in addition to development of our OPUS(R) product line.

SG&A expenses were $7.1 million in the third quarter of 2016 versus $6 million in the third quarter of 2015.

The year-over-year increase was driven by Atoll acquisition costs of $0.1 million, ongoing Atoll business costs of $0.4 million, and $0.6 million in ongoing costs supporting the expansion of our commercial organization, operating personnel, and systems infrastructure to sustain the ongoing growth of the company.

Our third-quarter operating expenses also include $0.7 million of contingent consideration expenses resulting from continued stronger than expected growth of our XCell ATF systems and the recently rebranded OPUS process development chromatography columns from Atoll.

The company is now holding accruals of $5.2 million and $1.1 million respectively for the Refine and Atoll contingent consideration obligations with the maximum potential for additional expense of $0.4 million for the remainder of 2016.

In the unlikely event that the minimum required sales milestones for these programs are not achieved, the company will reverse the respective components of the $6.3 million of accruals. As a reminder, 2016 is the company's final year of the Refine and Atoll contingent consideration programs.

GAAP operating expenses for the third quarter were $9.7 million compared to $7.7 million in the same period of 2015. GAAP operating expenses for the third-quarter periods include the aforementioned $0.8 million of acquisition and contingent consideration expenses in 2016 and the $0.2 million of contingent consideration expense in 2015.

Now moving to income and earnings for the quarter. On a GAAP basis, operating income was $3.7 million in the third quarter of 2016, consistent with the same period in 2015. Adjusted operating income for the third quarter grew to $4.6 million, an increase of $0.6 million, or 16% compared to the third quarter of 2015.

The year-over-year increase was driven by margin pull-through from our sales growth resulting in an adjusted operating margin of 18.5%. Adjustments to operating income include the aforementioned acquisition and contingent consideration expenses.

Interest expense for the third quarter of 2016 was $1.6 million, primarily attributable to cash and non-cash interest of $0.6 million and $0.9 million respectively related to our convertible debt financing that closed in May. Interest expense was de minimus during the third quarter of 2015.

Income tax expenses for the third quarter of 2016 totaled $1.1 million, consistent with the same period in 2015. The higher tax rate percentage in 2016 is a direct result of higher year-over-year profitability in our Swedish entity where we have a 22% tax rate and a larger loss position in our U.S.

entity driven by contingent consideration and interest expenses. On a GAAP basis, net income for the third quarter of 2016 was $1.2 million compared to $2.5 million in the same quarter of 2015. Adjusted net income for the third quarter of 2016 was $2.9 million compared to $2.8 million for the same period in 2015.

Adjustments to net income totaled $1.8 million, which include the aforementioned acquisition and contingent consideration expenses and the non-cash interest associated with our convertible debt financing. As a reminder, both GAAP and non-GAAP net income include the debt-related cash interest, which was $0.6 million for the quarter.

On a GAAP basis, third-quarter 2016 fully diluted EPS was $0.03 compared to $0.08 for the 2015 quarter. Adjusted non-GAAP diluted EPS for the third quarter of 2016 was $0.08, consistent with the third quarter of 2015.

Adjustments to diluted EPS include $0.05 from the previously mentioned combined impact of contingent consideration, Atoll acquisition and convertible debt non-cash interest expenses for the third quarter of 2016 and $0.01 from contingent consideration expense in the third quarter of 2015.

EBITDA for the third quarter of 2016 was $5 million compared to $4.8 million for the same period in 2015. Adjusted EBITDA for the third quarter of 2016 was $5.9 million compared to $5 million for the same period in 2015, an increase of 16%.

In the 2016 quarter, adjustments to EBITDA include $0.8 million of the aforementioned acquisition and contingent consideration expenses. In the 2015 quarter, adjustments of $0.2 million were made for contingent consideration.

I will now report on our year-to-date 2016 financial results for the nine-month period ended September 30, where we have driven strong revenue growth and operational performance.

Year-to-date, in 2016, we are reporting product revenue of $78.9 million, an increase of 27% as reported and 28% in constant currency compared to $62.1 million reported in 2015. This growth reflects particular strength in our OPUS and XCell ATF product lines.

We are reporting year-to-date 2016 gross profit of $44 million, an increase of $7 million, or 19% compared to the same period in 2015. Year-to-date gross margin of 55.7% compares to 59.6% in 2015 driven by a combination of product mix from very strong OPUS growth and capacity expansion activities predominately in our OPUS product line.

Year-to-date 2016 operating income was $13.1 million compared to $12.3 million for the same period in 2015. Year-to-date adjusted operating income grew to $17.6 million, an increase of $3.2 million, or 22% compared to the same period in 2015.

This increase was driven by margin pull-through from our year-over-year sales growth resulting in year-to-date operating margin of 22.4%. Adjustments to 2016 operating income include $1.3 million of acquisition expense and $3.3 million of contingent consideration expense.

In the 2015 period, adjustments included $2.1 million of contingent consideration. Year-to-date 2016 interest expense was $2.2 million attributable to the previously mentioned cash and non-cash interest of $0.9 million and $1.3 million respectively related to our convertible debt financing.

Interest expense was de minimis during the comparable period in 2015. Year-to-date 2016, other expense was $1 million, primarily due to non-operational foreign currency expense recorded in the first quarter of this year. Other expense was $0.2 million for the comparable period in 2015.

Year-to-date 2016 net income was $6.7 million compared to $9.1 million for the same period in 2015. Adjusted net income for the year-to-date 2016 was $12.6 million, an increase of $1.4 million, or 12% compared to the same period in 2015.

Adjustments to 2016 net income of $5.9 million include acquisition and contingent consideration expenses, as well as non-cash interest expense. Adjustments to 2015 net income include $2.1 million of contingent consideration expense. On a GAAP basis, year-to-date 2016 fully-diluted EPS was $0.20 versus $0.28 for the same period in 2015.

Adjusted earnings per diluted share for year-to-date 2016 were $0.37, an increase of $0.04 from the same period in 2015. For year-to-date 2016, adjustments to EPS total $0.17, which include the impact of previously mentioned contingent consideration, acquisition and convertible debt non-cash interest expenses.

In the 2015 period, adjustments to EPS of $0.06 reflect the impact of contingent consideration. EBITDA for year-to-date 2016 was $15.9 million compared to $15.6 million for the same period in 2015. Adjusted EBITDA for year-to-date 2016 was $20.5 million compared to $17.7 million for the same period in 2015.

In both periods, adjustments from EBITDA include the aforementioned acquisition and contingent consideration expenses. Our cash, cash equivalents and marketable securities at September 30, 2016 were $178.7 million, reflecting a net increase of cash of $105.3 million from year-end 2015. Now, moving to full-year 2016 guidance.

Please keep in mind that our 2016 guidance may be impacted by fluctuations in foreign exchange rates beyond the current levels and does not include the potential impact of additional contingent consideration expenses or any reversal of the $6.3 million total of Refine and Atoll contingent consideration accruals or potential new acquisitions.

Today, we are raising the lower end of our revenue guidance. We expect 2016 revenues in the range of $102 million to $105 million compared to the previous guidance of $101 million to $105 million. This reflects growth in the range of 22% to 26% as reported, or 23% to 27% on a constant currency basis.

Based on recent FX rates that we use as a proxy for the remainder of the year, we expect a foreign exchange headwind of 1% to 2% on sales for the year.

We are updating our gross margin guidance to 55% to 56% from our previous guidance of 56% to 57% based on the continuing stronger than expected growth of OPUS and the associated change in mix, plus related capacity expansion costs.

With multiple factors at play, including increased utilization of our factories, we expect gross margin improvements to return in 2017. GAAP operating expenses are expected to be in the range of $39 million to $41 million, consistent with our previous guidance despite the additional contingent consideration expense recorded in the third quarter.

We are also maintaining our expectations for adjusted operating expenses in the range of $34.5 million to $36.5 million. R&D expenses are expected to be approximately $7 million, consistent with previous guidance. GAAP SG&A expenses are expected to be in the range of $29 million to $31 million, consistent with previous guidance.

We are also maintaining our guidance for adjusted SG&A in the range of $27.5 million to $29.5 million. We are maintaining our GAAP operating income guidance for 2016 of $17 million to $19 million despite the additional $0.7 million of additional contingent consideration expense reported in the third quarter.

We are maintaining our guidance for adjusted operating income at $21 million to $23 million. Our adjusted operating income guidance excludes $4.6 million of year-to-date acquisition and contingent consideration expenses already incurred.

We are maintaining guidance for full year interest expense of $3.7 million, inclusive of $1.5 million of cash interest and $2.3 million of non-cash interest related to our convertible debt financing.

We are guiding full year other expenses to $0.9 million due to the non-operational foreign exchange expense already recorded in our year-to-date P&L, consistent with prior guidance. We are expecting 2016 net income expenses of $4.5 million to $5 million, an improvement from our previous guidance of $5 million to $5.5 million.

We are maintaining guidance for GAAP net income at $8 million to $10 million for the year. We are also maintaining our adjusted net income guidance of $14.5 million to $16.5 million for the full year 2016.

Our adjusted net income guidance includes cash interest and foreign exchange expenses and excludes $6.9 million of expected acquisition, contingent consideration and non-cash interest expenses. We expect GAAP EPS for the year 2016 to be in the range of $0.23 to $0.29 on a fully diluted basis, consistent with previous guidance.

We're also maintaining our guidance of $0.42 to $0.48 for adjusted EPS. Adjusted EPS guidance includes the unfavorable impacts of $0.04 from the cash interest expense and $0.02 from foreign exchange expense and excludes $0.20 impact from the aforementioned acquisition, contingent consideration and non-cash interest expenses.

EBITDA is expected to be in the range of $22 million to $24 million for 2016, consistent with the previous guidance. We are also maintaining our guidance for adjusted EBITDA, which we expect to be in the range of $26 million to $28 million.

We expect 2016 depreciation and amortization expenses to be in the range of $5.3 million to $5.5 million, a reduction from previous guidance of $5.5 million to $6 million.

The company expects to generate free cash flow in the range of $10 million to $12 million in 2016, including $5 million to $6 million of capital expenditures to support the maintenance and continued factory capacity expansion initiatives.

This compares to our previous free cash flow guidance of $13 million to $15 million with reductions attributable to increased capital expenditures and working capital requirements for further expansion and growth associated with our rapidly growing OPUS product line.

We are expecting year-end cash, cash equivalents and marketable securities of $184 million to $186 million, a reduction from our previous guidance of $187 million to $189 million. This completes our financial report and I will now turn the call back to the operator to open the lines for questions..

[Operator Instructions]. And our first question comes from Drew Jones of Stephens Incorporated..

Wanted to dive into the resin recovery system quickly.

Is that an option, or is it standard now on 45s and 60s and what does that do to pricing and does it have any impact on margins?.

Sure. Yes, right now, the resin recovery, we're going to launch it -- it will be launched in Q1 and start shipping in Q1. Our goal will be to have it as a standard on 45s and 60s. There might be a few customers that don't want that initially, but I think by the time we finish Q1 and get into Q2, it should be a standard on all 45s and 60s going forward.

There will be a small price increase associated with it that will improve margins a little bit, but it's really a differentiator for us in the whole pre-packing space. No one else is putting an unpacking port onto pre-packed columns. So we think this really puts some distance between us and anybody else that's offering pre-packed columns..

And you said this is something that the market asked for.

Is it smaller, mid-sized players have asked for it, or is it across the board?.

No, it's across the board. The reason people want something like this; it's a little bit like an insurance policy, right. If something goes wrong with a chromatography column during operation, they would like to be able to get the resin out of there.

So even during startup, if there was a mistake made, you would like to be able to recover the resin and then long-term people at the very end of a run like to take a resin and use it for other studies. So it's giving that optionality to the customer..

Okay. Last one from me. Jon, just on the gross margin contraction year-over-year, understanding the seasonality that typically goes here with 3Q, could you just parse out the impact may be from the OPUS mix, kind of getting the disposable ATF product up and running and then you mentioned facility improvements as an impact as well.

May be kind of getting that up to speed and ramping, what was the impact there in the quarter?.

Sure. I think, on previous calls, we've guided that it was about a 50:50 mix between OPUS mix versus investments.

And what we would like to say with this call is we indeed have seen some softer gross margin in Q3, but you have to remember that we've seen exceptional growth in OPUS and ATF this year, both of them far exceeding the original expectations we had in our budget.

And this growth has actually pulled -- all the growth combined has pulled about $7 million of gross margin into our P&L. So it's impacted gross margin a little bit, but it's been very successful and we do expect as we move into 2017 that we will be able to continue to expand gross margin.

We've got some plans we are putting in place for next year that will help us improve margin on OPUS, as well as across other product lines in the company..

Thank you. And our next question comes from the line of Matt Tiampo of Craig-Hallum. Your line is now open..

Good morning, gentlemen. Congratulations on a nice third quarter. I want to follow-up on Drew's line of questioning around the recovery system.

And may be just broader strategically, is this something that allows you to -- or maybe just, Tony, how does this fit into the longer-term development of the OPUS product line?.

Yes. So when you look at our OPUS product line and how it's developed over the last few years, clearly, we were the first company to launch 45 and 60 centimeter diameter columns and it's had a big impact in terms of driving the adoption of not only pre-packed columns, but obviously making OPUS a standard in the industry today.

By now adding in an un-packing port, it clearly differentiates us versus others in this space with their pre-packed column lines. I think we are reacting in a very positive way to the needs of the customers.

I think having an unpacking port now does open up for us opportunities to go larger with OPUS and we will be making those decisions over the next few months and will allow also down the road to potentially add some additional services that customers have been asking for.

So for us, the unpacking port is very strategic and I think it will allow us over the next one to two years to continue to expand the OPUS product line through innovation and address additional needs that our customers are asking us for..

Great. Thanks. And then on the gross margin line as well, the thesis has always been that there will be a shift to more drop shipped resin over time and that will alleviate some of the pressure on the OPUS pre-packed column line.

Are you beginning to see any of that on some of the larger orders, especially -- there are a lot more larger column orders this quarter -- or is that still yet to emerge?.

I think it's maturing. For sure, we believe that as we go out over the next 12 to 18 months, we are going to see a lot more drop shipping of resin than what we've seen in the past. I think when we were together back in August, we talked about I think it was a 50:50 mix. It hasn't changed that much in Q3.

But as we have the discussions, especially with the large biotech companies, it's pretty clear to us that as we see more and more large biotech evaluate the technology and adopt it in a way that's not just a one column purchase, but more like 5, 10, 20 column purchases, that they will drop ship resin.

And so as we go into next year, we'd fully expect that we are going to see an increase in drop shipping of resin..

Thank you. And our next question comes from the line of Paul Knight of Jenney. Your line is now open..

Hey, guys. This is actually Bill on for Paul.

How are you doing?.

Good.

How are you doing, Bill?.

Great..

Doing well. First question, if we could, on ATF and OPUS, you've seen really, really strong growth from both of those product segments to start the year off; pretty tough comps.

What are you seeing in terms of growth? Is it from existing customers either reordering or scaling up, or is it new customers? What's driving the growth?.

Yes. And we definitely -- second half of this year versus last year, definitely tough comps and I think two things are going on. One is we -- the sales team is doing a very good job of developing the pipeline and there's no doubt that customers who adopted ATF and OPUS but let's just maybe speak to ATF for a few minutes.

But customers who have adopted ATF over the last few years have come back and ordered additional systems, so we are definitely seeing existing customers order more. We are seeing existing customers outsource manufacturing late-stage commercial/commercial processes to CMOs. So those CMOs have followed through and ordered ATF systems from us.

And then, I think in parallel, obviously, our commercial team continues to build out the pipeline.

ATF is the standard in the industry when it comes to cell retention and I believe and I can see it is that the broader customer base is embracing that and we're seeing just a broader number of customers, a deeper pipeline and that's why we've been able to execute the way we've executed in 2016..

And then may be just a little bit on OPUS in terms of what you are seeing there and customers migrating either up from the 30s to the 45s and 60s or what's driving that growth as well?.

It's across the board. I actually think it's more that customers now see pre-packed columns as a real option for them.

If you went back two years ago, most customers were doing their own packing in glass columns and as our sales team sits down with decision makers, whether it's at large pharma or CMOs, it's a straightforward conversation around what's the value proposition.

And so when someone wants to order 20 columns and you can see what the cost savings are, it becomes a decision for the end user to say let's move to pre-packed columns.

Now, Repligen, over the last four years, we have established ourselves as having a very strong reputation in terms of, A, delivering columns and, B, the performance of the columns once it's been delivered to the customer. So I think it's a combination of both.

The market is maturing; the customers are becoming more comfortable with pre-packed columns, and it's across the board. We clearly see really good growth in 45s and 60s, but we are also seeing plenty of demand for our smaller columns as well and I think having Atoll onboard now and being able to cross-sell is a really good thing for us.

So we can cross-sell on validation columns into our OPUS base and we can upsell on the Atoll customer base to larger OPUS columns. So I think that's a good position for Repligen to be in..

And then last one, just on the Protein A business, what are you seeing from your customers in that end market? I know it's more OEM type shipments, so it's probably a little lumpier for you, but what's going on in that end market in terms of demand, may be what you've seen this year and the outlook for next year? Thanks, guys..

Sure. I think last year was a fantastic year for our Protein A ligands business and this year has definitely been a little bit more challenging and I would say the quarters have been lumpy. So, Q3, for example, we had growth in our ligands business, but it was offset by FX. We had about a 4% FX headwind in Q3.

So I would say there's two factors going on. One is that some of the blockbuster drugs that were approved last year just have been really -- been slow to take off.

So I suspect that not only the biotech companies that are producing those drugs, but in addition our partners, are probably burning off some inventory this year, so we are seeing a little bit of that.

But I think when you look at the strength of the business overall and you look out over the next few years; we are seeing no slowdown at all in the number of drugs approved.

We think -- you see the clinical pipeline, we see what's going on in biosimilars, so we think our long-term 8% to 10% growth rate is something that we should expect to see over the next few years.

Now saying that, we will get an update at the very end of the year from our two partners in terms of what they see as the demand for 2017, but I think our historical growth of 8% to 10% is definitely a good proxy for the future..

Thank you. And our next question comes from the line of Brandon Couillard of Jefferies. Your line is now open..

Good morning.

Tony, as you look at the commercial organization, do you feel like at this point you've achieved critical mass with the additional headcount? And can you give us some sense of the type of paybacks you are seeing from feet on the street investments outside the U.S.? And as you look into next year, is there a lot more things that you'd like to do from a commercial field sales and service perspective?.

Sure. Yes, I think you have to go back to 2014. We had a very small commercial team when we really started to kick off the push into the marketplace of direct products for Repligen, and with that team of seven people, which really was three salespeople and four internal people, we started the journey.

And, as I said in my remarks earlier, we're at -- we have a team now of 30 people. So we have made a lot of progress.

We definitely have critical mass, but there are areas where we know there are opportunities for us to grow and expand, and I think the emphasis that we are going to place over the next say 12 months or so is going to be more on field applications and service. So we see service as an opportunity because our ATF business continues to grow and expand.

We really haven't put a whole lot of focus on turning service into a business for Repligen and so we hired a head of service in the last few weeks and we will be building out that group over the next say 12 months or so.

On the applications front, it's well known within our industry that to be successful you have to have strong sales, but you have to have an equally strong field applications team. So we've added in -- and we've been really able to take advantage of our R&D team, which has a very strong applications group. So North America is well-served from the U.S.

R&D team. But as we look to other regions, like Europe, like Asia, we have started to add in field applications people and they are the types of investments we are going to make. I think when I look at the commercial team in general, the average dollars per rep and the size of the territory is pretty significant and each year, it goes up.

And so I think we are pleased with the return on investment we are getting from our sales team, and of course, that's one of those things that, as we grow and expand and if we add in more salespeople, we will have to rejigger the territories and that's something that we will look at over the next few years as well..

That's helpful.

Secondly, did you give the revenue contribution from the Atoll deal in the third quarter? Is there any change to the 2016 expectation from that asset? Secondly, Tony, any update to share in terms of the quality of the pipeline?.

Quality of the pipeline on --?.

An M&A perspective..

Okay. Yes, so let me answer the Atoll piece first. So when announced the deal, we said, look, we will be between $3 million and $3.5 million for the nine months of 2016 and we are absolutely on track for that. No real change in terms of the revenue line.

I think it's exactly as we expected, and I think what we are seeing as we hit Q4 is the commercial team is really fully engaged and we are definitely seeing some good uptick in cross-selling opportunities and we expect that the Atoll business will continue to accelerate into Q4. So very confident about the range that we guided to six months ago.

On the M&A front, we've been obviously working on this for quite a while and I think we have a solid pipeline of opportunities. We continue to be very engaged with different groups and I think we have the resources; we have the people; we have the cash to be able to go and execute.

So, obviously, over the next 12 months or so, we would expect that we can execute on M&A..

Thank you. And I'm showing a follow-up question from the line of Drew Jones of Stephens. Your line is now open..

Thanks. Tony, you touched on this, but the one thing we've underappreciated has been the tail on that legacy ATF business.

Could you maybe talk a little bit around what is the penetration of the perfusion market at this point and if that's the right way to think about it and how much longer you've got to go?.

Yes. I think that it's probably less about how much longer we have to go with it. I think when you look at perfusion, ATF is by far the standard technology used by customers who are using perfusion technology. I think what's interesting is that perfusion 5 to 10 years ago was some people do it and groups have sort of shied away from it.

I would say in the last four or five years, perfusion has come back. There are a lot more companies, especially in Asia, using perfusion processes and we are seeing now a little bit more of what we call hybrid perfusion, which is a combination of fed batch and perfusion especially in the seed train.

So we see actually expanding applications for ATF and with that comes opportunity. So having Ralf Kuriyel onboard and being able to generate applications data around ATF, we are going to be able to drive that into our sales team.

We just see a lot of runway for ATF and it's around the fact that perfusion is getting more and more adopted and the fact that there are hybrid processes out there that will allow ATF technology to be evaluated and implemented. So we feel really good about the business and the growth prospects going forward..

So safe to say with incremental opportunities that are presenting themselves, this is still a growth product into 2017?.

Yes. Absolutely..

Thank you. And I'm showing no further questions at this time. I would now like to turn the call over to Mr. Tony Hunt for closing remarks..

So just to reiterate, just a very strong quarter. Looking forward to finishing off the year strongly and updating everybody in February on our 2017 projections. So thanks everyone for joining us..

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day..