Repligen (RGEN) is about as close as I’ll get to “forget the valuation and just buy”, as although these shares do carry a high multiple, Repligen is a share-gainer in the fast-growing bioproduction market. Between expanding the line-up of products on offer, gaining share within its existing portfolio, and leveraging growth in antibodies and gene therapies, I see Repligen as fully capable of generating more than 20% annualized growth for some time to come, provided the company doesn’t accept a buyout offer before then.
These shares have risen more than 50% since my last update, outperforming more diversified large rivals like Danaher (DHR) and Thermo Fisher (TMO) and more or less keeping pace with Sartorius (OTC:SARTF). The development of therapeutics and vaccines for COVID-19 should provide a multiyear boost to revenue, but the main opportunity here is in growing the business to address more opportunities in areas like flow control/fluid management, analytics, and possibly fermentation and cell culture media. The valuation is not low, and I’d much prefer to pick up shares on a pullback, but I don’t believe high multiples are necessarily an impediment to further appreciation from here.
COVID-19 Provides A Boost
Repligen isn’t going to see the same growth leverage from COVID-19 that other life sciences companies like Thermo or PerkinElmer (PKI) are experiencing, but the pandemic has nevertheless created some expanded opportunities for the company.
There have been over 250 COVID-19 therapeutic and vaccine programs identified, and that is driving demand for cell culturing, filtration, chromatography, and analytics products and systems. Repligen believes that COVID-19 is adding about 5% to 10% to its revenue in 2020, with demand coming in across the board for the company’s products. COVID-19 is also driving increased demand from customers like Danaher and Merck KGaA (OTCPK:MKGAY) (the Millipore business) for Protein A ligands and growth factors. While some of the intensity of pandemic-driven capacity additions is likely to fade in 2021, it’s unlikely to vanish even if an effective vaccine is available around the end of the year.
Strong Core Growth Continues
The pandemic has created some disruptions to business for both Repligen and its customers, but it’s not really knocking the underlying growth of bioproduction capex off stride to any meaningful degree. Since my last update on the company, Repligen has announced organic growth of 25% in Q4’19, 16% in Q1’20, and 19% in Q2’20, with management also raising revenue and margin guidance.
In the most recent quarter, filtration grew by more than 30%, and Repligen is seeing growth across its product portfolio. As a reminder, Repligen’s filtration products are used in multiple stages of bioproduction, including cell line development, cell culturing, purification, and formulation, and the company’s xCell ATF product is taking share from companies like Danaher and Sartorius in upstream (cell culture) applications, while the company is also taking share in the downstream applications as well.
Recent improvements in manufacturing capacity are helping drive single-use xCell ATF revenue (single-use is increasingly popular in bioproduction) as an alternative to stainless steel tangential-flow filtration systems, and I see a lot of opportunities in the roughly $1.5 billion addressable filtration market.
Improved product availability is also helping the chromatography business. Repligen’s product offerings are more limited here, but the company still enjoys good share (around 20%) with its OPUS offerings, as shipping the columns pre-packed with the customer’s choice of resins saves considerable time and effort for the customer (and Danaher only offers columns pre-packed with their resins).
Ample Opportunities To Grow
I continue to be impressed with the growth opportunities Repligen has in front of itself. For starters, there is the underlying growth of bioproduction – a market growing somewhere between the high single-digits and low double-digits overall today and likely to continue growing at a high rate for many years to come. As I’ve mentioned in other articles on the subject, biological products like antibodies, cell therapies, and gene therapies are not only making up an increasing percentage of top-selling drugs, they’re likewise making up more and more of biopharma’s clinical pipelines.
I see plenty of opportunities for Repligen to grow. First, there’s leveraging the underlying market growth. Second, there are opportunities to expand the business to new customers – management’s commentary after second quarter earnings made it clear that they don’t have quite the same leverage to COVID-19 product development as larger rivals, mostly because their business is still more customer-specific. With expanded portfolio offerings and improved manufacturing capacity/lead times, though, I believe the company can and will add new customers. Gene therapy, for instance, has historically been a relatively smaller part of the business, but management is extending its VPE process analytics portfolio into this area (spectroscopy for real-time monitoring), and they believe the gene therapy market can grow 30% to 40% for the company in 2020.
Adding new products and capabilities is also a significant part of the story. Repligen is relatively weak in the fluid management/flow control side of bioproduction, but recently acquired a manufacturer of single-use silicone connectors and tubing, marking a small step in that direction. I don’t see Repligen looking to take on companies like Spirax-Sarco (OTC:SPXSY) in areas like specialty pumps, but there are plenty of opportunities in flow control products that require less engineering expertise. Repligen could also be stronger in areas like fermentation and cell culture, and I believe there are buyable properties out there that would still make a positive difference for the company.
Repligen did almost exactly what I expected in 2019 (the full year revenue was $1M different from my model), but so far, the company is doing a little better than I’d expected in 2020, leading me to increase my revenue growth assumptions. I’m expecting low-to-mid 20%s compound revenue growth over the next five years, slowing more toward the lower 20% range further down the line. Clearly, I’m expecting Repligen to outgrow the market, and I expect that to come from a combination of expanded product offerings and market share growth.
Repligen already generates attractive margins, and I expect FCF margins to move toward the mid-20%s over time, supporting a high-20%s FCF growth rate and generating plenty of free cash flow to reinvest in M&A to further grow the business.
I do see bioproduction as something of a “gold rush” today, and this robust investment cycle won’t last indefinitely. So, there is a risk to my numbers if biopharma capex spending slows more significantly and/or more quickly. Likewise, there is the risk that Repligen finds itself outmaneuvered by larger rivals and more limited in its market share gains. I also see an industry-wide risk that the attractive growth and margins attract more competition and that that competition pushes down prices – given the engineering demands, I don’t see that as too likely, but I don’t dismiss it.
The Bottom Line
Repligen looks priced for a roughly mid-single-digit annualized return based upon today’s price and the free cash flows I expect. That’s not a bad return on a relative basis compared to many life sciences companies, but I can also understand if investors more sensitive to valuation find these multiples uninvestable. I believe this is a rare secular growth story that is worth paying up to leverage, but I would also much prefer to pick up Repligen shares on a pullback if that were to be possible over the next six or so months.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.