RGEN - Repligen Corporation: Not Able To Replicate The Strong Results

2023-06-05 12:11:00 ET

Summary

• Repligen Corporation is facing tougher comparables with the pandemic-related revenue contribution vanishing.
• This is expected, but the softer organic growth in the base business is disappointing.
• With valuations still being demanding, I am fearful of Repligen Corporation's high valuation given the interest rate environment and softer operating performance.

In the spring of 2022, I concluded that shares of Repligen Corporation ( RGEN ) were replicating great returns. I praised the company and its management for its capital allocation practices, its track record, and strong performance, which even saw a boost from the pandemic.

While shares were still trading at demanding valuations despite a recent pullback, valuations remained demanding but probably worthwhile in the long haul. As it became evident, the company has seen operational headwinds with the pandemic revenue contribution being on its retreat, but this is now accompanied by some real and unexpected operational weaknesses.

The Business

Repligen is a business which focuses on bioprocessing innovation, addressing the need and desire for single-use and flexible manufacturing. By focusing on differentiated products and disruptive technologies, Repligen aims to compete in niche segments, commanding strong margins in the meantime.

In 2019, the company generated about $200 million in revenues from products and applications such as filtration, proteins, and chromatography, with adjusted earnings margins seen near 20%. At the time a $70 stock, the 46 million shares outstanding valued the business (on an operating basis) at around $3.0 billion. This was a demanding multiple at around 15 times sales and about 75 times adjusted earnings.

The market was upbeat on the prospects of the business amidst the outbreak of the pandemic, as shares traded around the $100 mark at the time, as strong momentum pushed shares up to $200 by the end of 2020, and to more than $300 in 2021. Ever since, shares sold off to $190 in February 2022, when I last covered the shares.

This boom was in part driven by strong operating performance as 2020 sales (ending December 2019) rose 39% to $270 million, with adjusted earnings improving to $1.07 per share. 2021 sales (ending in December 2020) rose by another 36% to $366 million, largely driven by organic growth as well as some relatively substantial deals. A spectacular improvement was seen on the bottom line as well, with earnings advancing to $1.65 per share.

With the company on track to announce a very strong 2022 results (ending in December 2021) and shares having come down, I was getting more constructive, but found the overall valuation too demanding at around 60 times earnings, although the company was well positioned to continue to outperform its peers.

Coming Down Further

Having become a bit more upbeat on Repligen in the spring of last year, although not enough to enter a position, we saw shares rise from $190 to $250 by August of last year. Ever since, shares have come down as shares now trade at $163 per share, after trading at a low of $150 in recent weeks.

It has been relatively quiet on the corporate front, with the company not engaging in substantial dealmaking, as 2022 was all about the operating performance with the pandemic contribution to its retreat. Second quarter sales for 2022 rose 27% to nearly $208 million, third quarter sales were up just 13% to $201 million and fourth quarter sales were flat at $187 million, as a clear testament that the retreat of the pandemic was hurting the business.

For the year, sales were still up from $671 million to $802 million, as operating profits of $225 million translated into net earnings of $186 million, equal to $3.24 per share with adjusted earnings coming in at $3.28 per share. Net cash was equal to $414 million, including some debt related to earn-outs as well, as the net cash holdings are equal to about $7 per share. This means that trading at $167, the company effectively trades around 50 times earnings, a demanding multiple, certainly in this interest rate environment.

Moreover, 2023 will become a somewhat challenging year amidst the pandemic on the retreat. Revenues for the year were originally seen between $760 and $800 million, suggesting modest revenue declines for the year. The company anticipates to see a $100-$110 million revenue decline from the pandemic and Covid-19 related revenues. The modest decline in revenues will have a big impact on the bottom line, with adjusted earnings seen at a midpoint of $2.65 per share.

More Bad News

In May, Repligen posted first quarter revenues of $183 million, down 11% on the year before. GAAP earnings fell to $0.51 per share, with adjusted earnings reported at $0.64 per share. Amidst these softer-than-expected results, the company cut the full year sales guidance by forty million to $720-$760 million, with adjusted earnings now seen between $2.35 and $2.42 per share, being somewhat of a dismal outlook.

This means that at $167, the company still commands a $9.5 billion market value, including a just over two hundred million net cash position. This makes that Repligen is valued at 12-13 times sales and amidst the lower adjusted earnings guidance, the unleveraged business trades at a near 70 times earnings multiple.

Given this softer operating momentum, it is very easily understood that I am still very cautious on Repligen here. While the comparables would become tougher amidst the retreat in pandemic-related revenues, the company sees some real organic softness as well, as it appears. With the earnings yield and earning power providing little support, I am simply very cautious here about Repligen Corporation on the back of the combination of a softer operational performance and high-interest rate environment.

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