RGEN - Repligen: A Rare Pure Bioprocessing Play

2023-06-05 12:50:16 ET

Summary

• Repligen has seen significant growth in the past decade and is well-positioned to benefit from the increasing popularity of biologics.
• Recent growth has been impacted by unfavorable comparability due to COVID-related revenue, but it is expected to rebound next year.
• Despite a nearly 50% drop in share price, the current valuation remains elevated, which will likely limit its upside potential.
• I rate the company as a hold.

Investment Thesis

While Repligen ( RGEN ) is not a widely-known name, the company has returned nearly 2,000% in the past decade, making it one of the best-performing mid-cap companies in the market. The company is a rare pure bioprocessing play that should continue to benefit meaningfully from the increasing popularity of biologics.

Recent growth has been dragged down by unfavorable comparability due to COVID-related revenue but should start to rebound next year. The company's share price has fallen nearly 50% since late 2021 but the current valuation remains pretty elevated. The current price level is not compelling enough for me to buy, therefore I rate it as a hold and will wait for further pullbacks.

The Backdrop Of Bioprocessing

Repligen is a US-based life science tools company that provides different products and solutions for the bioprocessing industry. It is a rare company with 100% of its sales exposed to bioprocessing, involved in both the upstream and downstream. Around 60% of the company's sales come from filtration products, followed by chromatography and protein products which account for 16% and 14% respectively.

Bioprocessing can be defined as the process of producing a product through the use of living cells or their components (e.g. bacteria and enzymes). In Repligen's case, it can be generalized as the production of biological drugs or therapies, also known as biologics. Biologics are often more advanced therapies such as COVID-19 vaccines and gene therapies.

The bioprocessing market is huge and growing rapidly. According to Grand View Research , the market size of bioprocessing is forecasted to grow from $27.9 billion in 2023 to $80.1 billion in 2030, representing a strong CAGR (compounded annual growth rate) of 16.2%. The market expansion is mostly driven by the increasing popularity of biologics.

Growth Opportunities

Biosimilar (a type of biologics) is a major growth driver of biologics. Biosimilars are clinically equivalent alternatives to branded biological products. According to Markets and Markets , the market size of biosimilars is forecasted to grow from $15.6 billion in 2021 to $44.7 billion in 2026, representing a strong CAGR of 23.5%. The popularity of biosimilars is growing rapidly due to their affordability, as their prices can be 15% to 35% cheaper than the original branded drug, according to the National Conference of State Legislatures .

While biosimilars are seeing increased traction, their penetration rate is still very low. According to Cigna , biosimilars currently only account for just 7% of specialty drug spend and the company expects the number to reach over 25% by 2026. For instance, AbbVie's ( ABBV ) Humira is expected to take a huge hit due to the launch of its biosimilars. The growing penetration of biosimilars is huge as they accounted for 68% of Repligen's revenue in 2022.

mRNA and cell & gene therapies are also a catalyst for the increasing popularity of biologics. After COVID, more companies are now developing therapies using mRNA technologies. For instance, Moderna ( MRNA ) and BioNTech ( BNTX ) are currently advancing 20 and 15 non-COVID-related programs respectively.

Tony Hunt, Repligen CEO, on mRNA as a growth catalyst

We are seeing the benefits of our relationships established during COVID as many of these companies have pivoted to mRNA programs in vaccines and therapeutics. We expect mRNA to be a catalyst of growth in the next few years as new vaccines and therapeutics make their way through clinical trials.

The same trend is seen in cell & gene therapies, as more companies are trying to leverage these technologies to tackle complex diseases. According to Repligen , the cell & gene therapy market is expected to grow at a strong CAGR of 25%. Given Repligen's massive exposure to the industry, it should be well-positioned to benefit from these opportunities.

Unfavorable Comps From COVID

Repligen's first-quarter earnings continue to be underwhelming due to unfavorable comparability from COVID. The company reported revenue of $182.7 million, down 12% YoY (year over year) compared to $206.4 million. COVID-related revenue declined 56.6% from $53 million to $23 million.

Excluding COVID-related revenue, the base business actually grew 4.6% (7% at constant currency) from $153 million to $160 million. During the quarter, the company saw an increase in orders for cell & gene therapy and mRNA. The management team expects revenue growth to return to 20%+ in FY24 as the headwind from COVID normalizes.

Tony Hunt, CEO, on growth rebounding:

As we look to 2024, our goal is to be back to 20% plus growth from our base business armed with a broader portfolio of products and to return to more historical growth levels across the regions.

Valuation

Repligen's lofty valuation continues to be my major issue with the company. Despite the recent drop in share price, it is still trading at a PE ratio of 56.7x, which is pretty expensive even if growth were to rebound to 20%+ in the coming year. While the current multiple is actually near its 5-year low, I simply do not see any margin of safety considering the premium it is trading at.

I believe other bioprocessing companies such as Sartorius Stedim Biotech ( SRTOY ) and Danaher ( DHR ) offer better value currently. While they are not pure plays and are expected to grow slower in the long run, their valuations are also much more compressed and offer better downside protection in my opinion.

Investors Takeaway

I really like Repligen's growth prospects as the company should continue to benefit substantially from the rising popularity of biologics such as biosimilars, mRNA therapies, and cell & gene therapies. It is also a rare pure play that gives investors full exposure to bioprocessing. While the company is poised to generate long-term double-digit revenue CAGR, the current valuation is simply too elevated in my opinion, and will likely limit its near-term upside. As mentioned above, there are currently better alternatives for investors that want some exposure to the bioprocessing industries. Therefore, I rate the company as a hold and will patiently wait for a more compelling entry point.

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