Repligen Corp

NASDAQ:RGEN

Earnings Call Transcript 2017-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to Repligen Corporation Fourth Quarter and Full Year 2017 Earnings Conference Call. My name is Nichole and I will be your coordinator. [Operator Instructions]. I will now turn the call over to your host for today's call, Sondra Newman, Senior Director of Investor Relations for Repligen. Please go ahead.

[Sondra Newman, Senior Director IR]

Thank you, Nichole, good morning everyone. On today's call, we are reporting our financial results for the fourth quarter and full year 2017 and we’ll be providing financial guidance for the year 2018. Our President and CEO, Tony Hunt will discuss recent business highlights and our CFO, John Snodgrass, will provide financial report.

During this call, we'll be making forward-looking statements regarding our business goals and our expectations for the financial performance of the company. So, we remind you, that such statements are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning risk factors as discussed in our annual report on Form 10-K, the current report on Form 8-K, which we filed today, and other filings that we make with the SEC.

Today's comments reflect management's current views, which could become obsolete as a result of new information, future events or otherwise. The company does not obligate or commit itself to update forward-looking statements except as required by law.

During this call, we will be providing non-GAAP results and guidance. Reconciliations of GAAP to adjusted non-GAAP financial measures are included in the press release that we issued this morning, which is posted to our website as well as on sec.gov. Adjusted figures will include the following, revenue growth at constant currency, operating expenses, gross profit and gross margin, operating income and operating margin, net income, earnings per share, EBITDA and adjusted EBITDA. While these adjusted financial measures should not be viewed as an alternative to GAAP measures, the company believes that non-GAAP measures better enables investors to benchmark Repligen's current results against historical performance and the performance of peers and to evaluate investment opportunity.

With that, I'll turn the call over to Tony Hunt for business update.

[Tony Hunt, CEO & President]

Thank you, Sondra, and good morning, everyone and welcome to the 2017-year end update. As you saw in our press release this morning we finish the year strong with an excellent fourth quarter in terms of revenue growth and expanding margins and overall another outstanding year for the company.

Our performance fully supports our mission to become an industry leader and delivering innovative technology solutions that sets new standards and by processing bioprocessing our market share and filtration in chromatography. Combined with new products and developments and strong order demand coming out of Q4, we're well positioned to deliver robust performance this year.

Before jumping into the quarter details in want to spend a few minutes discussing our accomplishments and the strategic priorities set at the beginning of 2017. Execution on our core strategy of accelerating our direct presence and bioprocessing with the focus on single use and flexible solutions has come a long way in the last 12 months.

A year ago, we surpassed a 100 million in sales and discussed the importance of continued diversification and expansion of our direct portfolio. We discussed the strategy to drive further adoption of our chromatography and filtration products through technology leadership, our customer first culture and potential M&A. We said 2017 will be a year of execution today I will share some points and how we have delivered on these investments.

We accelerated the adoption and sales for direct products which jumped over 60% of total revenue in 2017, up from 48% in 2016. And in 2018 we expect direct sales to reach over 70% of revenue. We completed the integration of TangenX and accelerated the adoption of simple use because of that through our expanded sales force.

We guided to revenue to 7 million to 7.5 million and we achieve 7.9 representing 37% year-over-year growth. We acquire Spectrum, our most transformative deals today, Spectrum significantly expands it not only our filtration portfolio with hollow fiber technology in systems but also expanded our commercial presence and grew our addressable markets to 1.5 billion. We guided to 17 million to 18 million in sales for Spectrum in our first nine months of ownership and we achieved 19.3 million which represents 24% year-on-year growth as a comparable period. We expected the deal to be breakeven to adjusted EPS in 2017 and it's already accretive.

We’ve raised over 129 million in cash and a follow-on equity offering providing flexibility for future investments. We expanded our operations as searching in our OPUS pre-packed Column line, where we increased our production capacity to seven suites, reducing lead times for our customers, we moved our pre-packed column operations in Germany, to a new facility and staffed up to stay ahead of increasing demand. We identified and signed a leased earlier this quarter for a 64,000 square foot facility in Marlboro Mass, which will house the manufacturing of TangenX flat sheet cassettes and Pilot Scale Spectrum TFF systems.

We launched exciting new products this year, last year including OPUSR, pre-packed columns and our single used Xcell ATF-10, used in precision processes. We also launched TFTF Filtration products from Spectrum, a real innovation in hollow fiber technology, that's for the first time in the market combines the benefit of Tangential flow and depth filtration.

We expanded our commercial organization and we now have a 95-person team, with 54 field employees in the US and Europe and a much deeper direct presence in Asia. We hit close to the high end of our revenue target for the year, up 35% to reach a $141 million with operating margins above 22%. More than 60% growth in adjusted net income and over 40% growth in adjusted earnings per share. And finally, we achieved organic growth of 9% across our businesses, despite a flat year in our OEM Protein franchise.

Excluding OEM Proteins, our direct to customer products infiltration chromatography had organic growth of 19% well above the industry average for the year. We accomplished all of this through a remarkable team of employees, now 475 worldwide that has done a great job staying focused on our goals, balancing expansion and integration demands and delivering another outstanding year for the company, our customers and our shareholders. Truly an exceptional year.

So, moving now to Q4 and full year 2017 performance. As reported today, we had a record quarter with $41.6 million in sales and expanding margins. The story of the quarter was the performance of our direct filtration business, supported by the addition of the Spectrum product line which contributed to a 150% growth in filtration for the full year.

Our ATF product line had a record quarter, up over 30% year-on-year driven by strong adoption of our technology and - and one applications. We also continue to see robust adoption of our single use ATF products. For the quarter single used revenues represented greater than 20% of sales and for the year at 15%.

The key trend in Q4 and indeed for the full year was the expansion of our customer base, with the 33% increase in the number of new customer in the quarter. Regionally in North America new projects emerged at top Pharma accounts and we now have a growing pipeline of opportunities for 2018.

Our Sius flat sheet TFF cassettes business also had a strong quarter and year. The story here was around new accounts and increased stimulus activity. With healthy Q4 order load, we expect another double-digit growth year here in 2018 for the TangenX business.

Finally, our Spectrum filtration portfolio had a great quarter, sales were up 19% year-on-year and 24% for the first five months of ownership. The story here was around the robust demand for cross load systems including a record quarter for bench-top TFF systems. We also saw a nice rebound in pro-connect single-use flow path products, which had been flatten the first half of the year, but accelerated in Q4 with greater than 80% growth year-on-year. Overall the Spectrum business exceeded our expectations in the first five months and similar to all our direct products, order demand was up in Q4.

In 2018 we expected our Spectrum business will grow approximately 15% on a full year pro forma basis and that overall our filtration business will grow in the range of 15% to 20%.

Moving to chromatography, which is driven by our OPUS family of pre-packed columns not so include [legislates] [ph] and chromatography resins. Our OPUS business had a very strong quarter and year fetching up over 40% growth for the year.

What was really impressive about the year was the increase from total column shift which more than doubled to over 500, we saw strong order loads going into 2018 and we've made the decision to further expand the terms of operators and additional packing suits which we expect will come online in the second half of 2018. We expect this to be another strong year for our chrome business with revenue growth in excess of 20%.

Our OEM approaching business had a predicted like quarter in Q4 and was flat for the full year. As mentioned earlier this business is highly dependent on two large OEM customers who resale to end users, so our quarter by quarter sales do not always reflect end user demand. We were however encouraged by additional orders that came in late November and early December. Our forecast for ligands and growth factors have strength during in 2018 versus the initial forecast, we anticipate further strengthening as we go through the year and expect that our approaching business will achieve mid-single digit growth for the year.

Beyond our product performance in Q4, we spend a significant amount of time focusing on the Spectrum integration. With the addition of the Spectrum sales team, we now have 36 sales managers around the world, a fourfold increase in the number of sales people or velocity there. We're confident that the combination bio process accounts specialty and bioprocess sales specialist in filtration and chromatography will meet the needs of our growing customer base. I spend time in Q4 traveling with our Spectrum reps in Europe and in the U.S. and I was really encouraged by our customer's reaction to the deal. And the opportunity to cross sells the broader portfolio products.

In addition, with an expanding direct sales present in Asia we will be able to increase our phase time with our customers and move us beyond the time strategy in the region. We're excited about the future as the new commercial team moves into their territories beginning in Q2. As is expected with the large acquisition, we still have works doing integration but the team of Spectrum has been great, the products have differentiated in the markets and customer opportunities are increasing with selling opportunities emerging.

So, as we move into 2018, our strategic priorities will center on five areas. Commercial and operational integration of Spectrum including revenue and cost synergies, acceleration of market adoption in Asia, capacity expansion programs in operating margin improvements, next generation product development and new product launches in filtration in chromatography and finally continued expansion of market share to organic growth and M&A.

In summary we had a successful 2017 and we’re very excited about our growth prospects to this year. Our investments in our direct customer chromatography and filtration businesses continues to pay off and our expectation is that these businesses will continue to be the major drivers of growth for the company in 2018 and beyond. Our R&D pipeline is rich and you can expect to see continued new product offerings spanning OPUS, ATF, CS and Spectrum TFS systems and filters...

Finally, I wish to thank our employees around the globe, our loyal shareholders and customers for their parts in Repligen's progress towards becoming a best in class bioprocessing technology company and a trusted partner in the production of biological drugs. I believe we have the right mix of people, products and preparedness to continue to enhance our growth trajectory and deliver outstanding results.

With that, I'll turn the call over to Jon, for a more detailed financial report.

[Jon Snodgres, CFO and Secretary]

Thank you, Tony and good morning, everyone. Today we are reporting our financial results for the fourth quarter and full year 2017, as well as providing our financial guidance for the year 2018. Unless otherwise mentioned all 2017 and 2018 financial measures discussed reflect adjusted non-GAAP measures.

We were reporting fourth quarter 2017 GAAP revenue of $41.6 million, an increase of 63% as reported and 61% in constant currency compared to the fourth quarter of 2016. We experienced a 1.2% tailwind in sales due to foreign currency fluctuation, which most significantly impacted our proteins business. This FX tailwind was primarily driven by strength in the Swedish Krona, versus the US dollar.

Our strong fourth quarter of 2017 revenue performance was driven by growth in our direct-to-customer filtration and chromatography businesses. In our filtration business, we continue to gain traction with our single-use ATF systems as well as with our TangenX single-use cassettes which grew 85% on a pro forma basis.

We also saw a sequential uptick in Spectrum product sales to $11.8 million for the quarter, which on a pro forma basis represented 19% year-over-year growth. In our chromatography business, growth continues to be driven by OPUS family of pre-packed columns. The continued strength in OPUS is supported by our expanding customer base and deeper penetration within accounts.

Our adjusted gross profit for the fourth quarter was $22.5 million an increase of $9 million 67% over the fourth quarter of 2016. Our adjusted gross margin was 57.1% for the fourth quarter of 2017 a 380-basis points improvement versus the comparable 2016 period.

Gross margin impacts were in line with our forecast for the quarter, and were driven by strong sales of filtration products on an overall mix, synergies have now owning the Spectrum filter component of our ATF devices and from improved column to resin mix on our OPUS product lines driven by an increase of customer supplied resins in our 45 and 60-centimeter columns.

Now moving to operating expenses. On a GAAP basis research and development expenses for the fourth quarter of 2017, were $3.1 million, compared to $2 million in the comparable period for 2016. The increase in year-over-year spend is attributable to the addition of Spectrum product development activities into Repligen and also due to the timing of milestones for next generation ATF and OPUS development projects.

Adjusted SG&A for the fourth quarter of 2017, was $12.3 million compared to $7.2 million for the fourth quarter of 2016. Approximately 70% of our year-over-year increase is related to ongoing expenses from our Spectrum and TangenX acquisitions which were not included in our prior year comparable figures. Approximately 10% of the increase is related to investments in our commercial organization and the remaining 20% is related to general infrastructure activities.

Now moving to adjusted earnings and EPS. For the fourth quarter 2017, our adjusted operating margin was 20.3%, a 310-basis point improvement year-over-year. Our adjusted operating income grew to $8.5 million, an increase of $4 million or 92% compared to the fourth quarter of 2016. The year-over-year increase was driven by margin pull-through from both organic and acquisition-related sales growth, partially offset by ongoing costs from acquired companies and investments in our global commercial team and infrastructure to support current and future growth.

Adjusted net income for the fourth quarter of 2017 was $8.7 million compared to $3.1 million for the same period in 2016. And adjusted EPS for the fourth quarter of 2017 was $0.20 per fully diluted share, a 116% increase from $0.09 per share for the fourth quarter of 2016.

In addition to delivering strong adjusted operating income in the fourth quarter, the company adjusted net income also benefited from favorable tax provision adjustments of 2.8 million mostly related to one-time benefits from investing of stock compensation and favorable handling of tax treatments on M&A transition cost, transaction cost, which combined more than offset tax expenses from our operations. On a GAAP basis the company realized a 9. 6mm net tax benefit in the fourth quarter of 2017 from new U.S. tax reform. This net GAAP tax benefit was adjusted from the company’s non-GAAP financial results.

I will now report on our full year 2017 financial results where we’ve driven strong revenue growth and operational performance. For the full year we're reporting 2017 GAAP revenue of 141.2 million reflecting an increase of 35% compared to 104.5 million reported in 2016. We fully understand this 35% increase I will break out organic, acquisition and foreign exchange impact on overall growth.

First, we’re reporting 9% overall organic growth inclusive of 19% organic growth in our direct to customer filtration in chromatography businesses.

Second, acquisitions accounted for 27% percentage points of our growth for the year and we continue to be very encouraged by this performance of Spectrum, TangenX and Atoll our most recent acquisitions.

And third, we experienced a net 1% headwind from foreign exchange for full year of 2017. Primarily related to the weakness of the Swedish krona versus the U.S. dollar in our proteins business in the first half of the year.

Full year 2017 adjusted operating income grew to 31.6 million an increase of 4 million or 34% compared to 2016. Our year-over-year increase was driven by margin pull through from both acquisitive and organic sales growth and gross margin expansion actions partially excuse me offset by investments in new product development sales marketing and infrastructure. Full year adjusted operating margin was 22.3%.

Full year 2017 adjusted net income was 27.2 million, an increase of 10.3 million or 61% compared to the same period in 2016. Full year 2017, adjusted earnings per diluted share, was $0.69 an increase of $0.20 for the same period in 2016. Our cash and cash equivalents which are GAAP metrics were $173.8 million at December 31, 2017. We generated operating cash flow of $17.5 million in 2017 and reinvested $5.5 million into capital expenditures for capacity expansion, system improvements and maintenance activities.

Now moving to 2018 full year guidance. Our GAAP to non-GAAP reconciliations of net income and EPS for 2018 financial guidance are included in the reconciliation tables in today's earnings press release. As previously mentioned, all 2018 financial guidance discussed will be adjusted non-GAAP.

Please also keep in mind that our 2018 guidance maybe impacted by fluctuations and foreign exchange rates beyond our current projection of a 1% tailwind on sales. And does not include the potential impact of new acquisitions.

Today we are setting our 2018 full year revenue guidance, a GAAP metric at $180 million to $186 million, reflecting growth in the range of 27% to 32% as reported and 26% to 31% on a constant currency basis, including 10% to 14% organic sales growth.

Within these growth projections we expect our OEM proteins businesses to grow approximately 5% in 2018 and our direct-to-customer filtration and chromatography businesses to grow at 15% to 20%.

Finally, we expect Spectrum on a pro forma basis, to grow at or above 15% and contribute revenues in the $47 million to $50 million range. Our adjusted gross margin guidance for 2018 is 56% to 57%, reflecting roughly a 50 to a 100-basis points improvement versus 2017, from expected synergies from the acquisition of Spectrum improving OPUS margin and from benefits from our material sourcing activities.

Adjusted operating income is expected to be in the range of $40 million to $42 million and our adjusted operating margin guidance is 22% to 23%. We are expecting 2018 adjusted income tax expense of approximately 19% of pretax income, inclusive of the impact of new US tax reform.

Adjusted full year 2018 net income is expected in the range of $30.5 million to $32 million for the year and our adjusted EPS is in the range of $0.68 to $0.72 per fully diluted share. The company expects to invest an estimated $15 million in 2018 for capital expenditures inclusive of $5 million to $6 million in our new [indiscernible] facility. This also includes $4 million to $5 million for the first wave of our expected global ERP implementation with investments expected in the second half of 2018.

We anticipate 2018 year-end cash, cash equivalents and marketable securities, a GAAP metric in the range of $194 million and $196 million with our CapEx investments being funded by cash generation from our operations.

In closing, 2017 was another year of excellent performance for the company and we exited the year with a strong and healthy balance sheet giving us ongoing flexibility to continue to drive meaningful growth. We are confident in our efforts towards our 2018 goals and look forward to reporting on our results in the months ahead. This completes our financial report and I will now turn the call back to the operator to open the line for questions.

[Operator]

[Operator Instructions] Our first question comes from Dan Arias of Citi Group. Please go ahead.

[Dan Arias, Citi Group]

Tony in filtration seems like some good momentum there and the single use product, can you just talk about how much of the ATF filtration business that you do in 2018 come from singly use and then may be just put some color around the new customers that you have taken there and the opportunity for new your customer that you see this seems like that’s an important portion to user base right now.

[Tony Hunt, CEO & President]

And when you look at 2017, 2017 was a first year that we really had the whole portfolio for single use ATF systems and because these systems are very, very simple to use we have lowered of barrier for adoption and trials, so that’s why we see, we seen such a nice increase in the number of new customers.

Now when I look at 2018, we expect that single use will be north of 20% in terms of contribution to ATF revenue for the year. And the new customers as I said are really coming from the simplicity of the technology and just more people are willing to try because now they don’t really need an order plate to do the initial evaluation of an ATF system.

[Dan Arias, Citi Group]

Okay great and then may be on expectations for TangenX and hollow fiber, can you just may be comment on this selling synergies that you see there, I'm curious what if anything think about incremental corporate opportunities in 2018 and then may be in a similar vein , we think about capitalizing on the synergies between Spectrum and some of the other stuff in the portfolio, is there still a sales force investment that you think you make in order to maximize that opportunity or you kind feel like you have the team in place for 2018, just given the comments that you made.

[Tony Hunt, CEO & President]

So on TangenX what's nice about that business is that our sales force and look at that as really the combined sales force at this stage, when we go to an account now, we have two opportunities to really solve a problem, right we have the opportunity with hollow fiber technology to solve a problem and we have the opportunity with flat sheet cassettes We didn’t have that neither Spectrum have that in the past, we did not have that in the past, so we're getting some nice winds for the TangenX business, just by having a product portfolio of products.

Where we're seeing some nice cross selling, opportunities are with the TFF systems from Spectrum, those TFF systems typically run hollow fiber cartridges but they can easily run [indiscernible] as well. And because the TangenX business didn’t have any systems associated with that portfolio when we acquired it a little over a year ago, it's been a really nice cross selling opportunity for us and we're beginning to push some of the TFF systems from Spectrum into TangenX's install base.

The second part of your question which is around the sales force investment, I think we made a lot of progress there. We have 36 sales managers and the way we divided up our sales team now as we move through 2018 is for the most part everybody is a bioprocess account manager and we put in each region bioprocess accounts specialist or sales specialist, or either specialist in filtration or specialist in chromatography, so they will complement the bioprocess account managers that we have in each region.

Obviously, we have the luxury now of having 10, 12 more direct sales people in Asia and I think that's going to play a big role for us because up till now we have been really operating on a key account basis, we're going to get more face time in every region because we have really increased the number of sales people in North America, in Europe and in Asia. When I look to investments down, I really think it's going to be around field applications and field service.

We have a really nicely growing portfolio of systems at [indiscernible] between our TFF systems from Spectrum and the ATF systems from legacy Repligen [ph] and so together we are really focused now on building a service organization, we started that journey last year, we made some nice progress, but it’s a scenario where we're going to double down on here in 2018 and I think on the field application side, that's a scenario where it's a matter of having one field application specialist per two or three reps and we will build that out as we see the need.

[Dan Arias, Citi Group]

Okay, that's helpful color, maybe if I could just ask one last one, I am sure at this point you had plenty conversations on the topic, so I guess what is your sense for GE's long-term and pension with respect to moving manufacturing in-house is there anything incremental you have heard or considering or is that you kind of pretty much unchanged from the way that you were thinking about at end of the Analyst Day.

[Tony Hunt, CEO & President]

Yes, the few is really unchanged, [indiscernible] is moving to business continuity plan, they are going to make their new latent in-house and we expect over the next few years that certain volume will definitely move across into that facility from a manufacturing today at Repligen, so no different than what we said at the Analyst Day.

[Operator]

Our next question comes from Tycho Peterson, of JPMorgan. Please go ahead.

[Unidentified Analyst]

This is, actually, Julia on for Tycho. My first one, I know you guys have been talking about prioritizing, accelerating your penetration in Asia over the next year. So, when do you expect the sales in Asia to ramp up?

[Tony Hunt, CEO & President]

Yeah, I think in terms of where we are today, we have made -- 2017 was a very good year for us in Asia for Repligen and for Spectrum, so I expect that will see a ramp up in 2018 and further acceleration in 2019 and 2020. So, it's just a matter of getting everyone on the sales force trained on all the products we are doing in that Q1, so fully expect that will start to see an impact this year.

[Unidentified Analyst]

And is that already factored into your guidance? Or is -- does that represent an upside to number?

[Tony Hunt, CEO & President]

I think for this year, we factored most of that in obviously as you train essentially a new sales team there are going to be other opportunities that will emerge and we'll assess that and give an update my guess is quite timely we get to the Q2 earnings call in August, that's probably going to be good time to follow up and give some insight into how we are doing in Asia.

[Unidentified Analyst]

Okay, great. And then my next question, you guys have been talking about the opportunity to build out service as a business. So, could you just maybe elaborate on that a little bit? What is the progress that you've made so far and how big is the opportunity?

[Tony Hunt, CEO & President]

Yeah so, the service strategy really started a little over a year ago. We built out of service department here at Repligen really focused on the ATF portfolio with the addition now of the Spectrum products, there is a fairly broad portfolio of systems there, there is a need to really ramp up on our service organization and that something that we're focusing on here in Q1. My expectation is that when we get into the second half of this year, we will have a larger service group and we will be able to really generate revenues for the whole portfolio of systems that we have today.

[Unidentified Analyst]

And what would be the margin implication of this -- the service component? Would that be accretive or -- to the overall business or...?

[Tony Hunt, CEO & President]

We haven't really run the calculations on the margins for the service yet, because we really need to dig through exactly what we're going to do with this Spectrum portfolio, right now there is not a whole lot of service associated with the service revenues we will see it with Spectrum portfolio and we believe that something that we're going to execute on. So again, I think that another quarter we will be able to give a little bit more guidance on margins.

[Jon Snodgres, CFO and Secretary]

I would just add into that, the part sourcing fees, we should make the margins on, the labor rates will be a little bit lower margin overall typical of a global service business.

[Unidentified Analyst]

Got it. And then my last one on OPUS. Could you maybe break down how much was the process development versus production scale products in the quarter? And I know you guys talked about your market share in OPUS growing to 40% now, so that's pretty impressive. What is the long-term target that you think can drive towards? And do you, kind of, see your competitors trying to make similar move in terms of padding the columns and the resins and just in general, how do you maintain your pricing in the prepacked column business?

[Tony Hunt, CEO & President]

Okay in terms of OPUS large sales versus like process development products. The large-scale products is really what we're referring to in the script this morning, 40% growth year-over-year that’s all large scale.

In terms of OPUS PD which is our small-scale process development portfolio, that had an exceptional year as well. We didn’t call out what they percentage growth but I believe it was pretty similar to the large-scale OPUS somewhere close to 40%. Again, the customer is a little different on the OPUS PD side, where we really focusing on customers who are either doing small scale clarification, validation study some scale down by our current studies, they tend to be the customers that we focus on and then large scale it's really the clinical manufacturing and commercial manufacturing customers. So again, I think large scale OPUS clearly another strong year, hence our decision to continue to invest in that portfolio products and in capacity.

In terms of market share our goal obviously is to continue to take the lion's share of this market and we make huge progress in the last four to five years, we've years now where we either grown 50% to 100%, last year 40% plus. So, we still think there is lot of runway for our products, we're excited about bringing new OPUS products to the market, we think that will solidify our technology and market leadership position and our goal is definitely over the next two, three years get up north of 50% and 60% share in the overall market.

[Jon Snodgres, CFO and Secretary]

And just add, I think to add to your question. We saw roughly 80% as a large column 20% of the revenues comes from smaller columns directionally and that moves quarter-to-quarter but that's a good approximation for you.

[Operator]

Our next question comes from Amanda Murphy of William Blair. Please go ahead.

[Amanda Murphy, William Blair]

Thanks, good morning. Just a question on organic growth in the quarter, I think we were coming are backing into your kind of mid-single-digits. I was just wondering if it was directionally accurate and I am assuming if so that, if there was a sequential decline and that was related to proteins business. Obviously, you are giving the guidance for next year so we should expect an acceleration but, just trying to make sure that that was an accurate statement?

[Tony Hunt, CEO & President]

Yeah, so overall for the year we had 9% organic and our filtration and chromatography products were around 19% and that actually mirrors where Q4 was pretty closely. So, I think your number is on the low side, we were closer to the high end of the range single-digit range. So, we were pleased with the performance given that we knew going into the quarter that the proteins business was going to be light and even though we did see a little bit of increase in orders in Q4 overall the performance was really strong given what we are dealing with under the proteins business.

[Amanda Murphy, William Blair]

Yes, okay, it makes sense. And then - that's actually I know it's becoming a smaller part of your business but again on the protein side, I guess even I think you had thought maybe we would see an increase in or you have seen more positive signs around proteins coming into this quarter as well. So just in terms of how you are thinking about guidance for that part of the business in 2018, do you feel pretty comfortable and I know others have said that the overall market is looking better in 2018 versus 2017. But wanted to get a sense of your comfort level there?

[Tony Hunt, CEO & President]

Yeah so on the market side, completely agree, 2017 was a tough year for the bioprocessing industry, I think Repligen did really well in the year, our direct businesses really did not see that slowdown because we obviously grew close to 20% organically last year. As we move into this year, clearly the market is improving, we saw that in Q4 in terms of our order load, our order load was strong I think that's very similar to what many of our peers witnessed as well.

And then I think on the protein side, we are working through as we said it in November, we are working through the inventory burn up, which is not necessary the ligands and it's probably more the resin reduction at our key accounts. And we are working through that in Q1 and we expect that as we go to the year that the overall proteins business ligands growth factors is going to strengthen.

[Amanda Murphy, William Blair]

Got it. And then just last one, obviously you have talked about the strength in OPUS side of the business in the pre-packed columns. And you have got this kind of [main] advantage because you're -- you can have these customs solution, just curious like given the strength there, what are you seeing from a competitive standpoint is anyone -- are you seeing any change in the larger player's willingness to sort of be able to be more willing to pack other resins or that type of things, just curious there, what are you seeing on the competitive side?

[Tony Hunt, CEO & President]

On the competitive side, really there are two competitors in pre-packed columns that one is GE and the other is [indiscernible] GE did in 2017, bring to market an equivalent 45-centimeter diameter column to what we do, so there is some competition there. We haven't seen any change in strategy at any of the other players in terms of willingness to pack other resins beyond their own internal resins, I think that that will change but at least we've haven't seen any indication from our customers or from our sales teams that that’s changing.

You know, look this is a great business, we expect competition, we believe that, we really created this market over the last five years with technology innovation and as I said at Analyst Day, we're completely committed to bringing additional larger columns into the market place and other services that I think will continue to differentiate Repligen in this space over the next few years. And when we look at the competition, yes GE and [indiscernible] are our competitors but we really believe that the major players here are self-packed columns done by the customer themselves, so we're really trying to convince customers to move away from glass columns to pre-pack columns and that’s where the majority of our focus is.

[Operator]

Our next question comes from Drew Jones of Stephens. Please go ahead.

[James Rutherford, Stephens]

Good morning this is James Rutherford on for Drew. Just to start, digging in a little on Spectrum growth, just given the strong performance since you acquired the business, well above 50% growth and then just thinking about the cross-sell opportunities, the investments you are making in operation. I just kind wondering if there a reason that growth wouldn’t continue to track north of that 15% through 2018 and then I guess is there something unique about the last couple of quarters of growth that would not repeat through 2018.

[Tony Hunt, CEO & President]

With Spectrum historically they’ve had a stronger second half of the year than the first half of the year, so if you remember they had about 7% growth in H1 of 2017. And clearly, we had 24% growth in second half, so essentially, they finished the year probably close to 14%, 15% in that range. So right inline where you would expect the business to finish. Obviously second half opened much stronger.

Same thing in 2016, I don’t the exact percentages but the first half of the year was lighter than the second half of the year. And so, it’s a trend that we're trying to really get our arms around and as we go through this year, we do think there are some obviously upsides and so if you think about the $47 million to $50 million guidance on revenue, the $47 million is 15%. So, we're expecting that we can at least hit 15 or may be achieve a few more million dollars on top of that.

[James Rutherford, Stephens]

Okay that’s all, now the revenue is only kind seasonally stronger than second half but the growth, likely would be as well case for 2017.

So, on single use clearly, you're having a good momentum there and 20% revenue in the quarter, but just stepping back a little, do you think there is an opportunity for single use to find a place in commercial production, if so when that might kind take place.

[Tony Hunt, CEO & President]

Absolutely, I think with the launch of the single use ATF 10, product line really at the end of Q2 into Q3 of last year, ATF10s are used in production. So, for sure, we're in late stage, I'm not 100% sure if we got any single use 10s in commercial processes but fully expect that that will happen.

[James Rutherford, Stephens]

Okay excellent and then last question, just can you share your expectations for adjusted EBITDA in 2018?

[Tony Hunt, CEO & President]

Sure, we are looking at about $46 million to $48 million for adjusted EBITDA for 2018.

[Operator]

Our next question comes from Matt Hewitt, of Craig Hallum. Please go ahead.

[Matt Hewitt, Craig Hallum]

Good morning, just a couple of questions for me. First one, you have been investing a fair amount into R&D and you mentioned some of that was related to Spectrum here in the fourth quarter, but how should we be thinking about cadence of new product launches in 2018 and will there be any timing related payments that could create some variability in that segment or the operating expense line in 2018?

[Tony Hunt, CEO & President]

Yes, I think our R&D spend in 2018 is not too dissimilar to 2017, on a percent basis, so it's around 6%, we have a number of products that we are teaming up to launch. And I think one of the real benefits of the deals that we have done and actually I will say for all the deals we have done over the last few years, so if you take TangenX and you take Spectrum and you take what we are doing internally with the ATF product line and with the OPUS product line, I think you should expect to see a steady stream of new product launches over the next one to two years and that it should -- I think what we are look on a look at as we go through 2018, and as we move into 2019, how much of an increase are we going to put in R&D especially as we get a better handle on all the opportunities we have to bring new products to market.

[Jon Snodgres, CFO and Secretary]

And that in terms of the linearity of spend you asked about, it will be slightly higher at least we expect it to be in the first half of the year versus the second half, that gives you an indication.

[Matt Hewitt, Craig Hallum]

I know, that's great. Thank you. And then maybe one other question, regarding the tax rate, how should we be thinking about that beyond 2018 and 19% does that tick up going forward to the 21% that many companies are moving to or is there another reason why it would stay down a little bit lower as we get past this year? Thank you.

[Jon Snodgres, CFO and Secretary]

Yes, from a non-GAAP perspective, again we're forecasting 19%. I think as we move forward, and continue to be more profitable in the international locations particularly in Asia and such, we should see a slight uptick in the overall tax rate.

[Operator]

Our next question comes from Brandon Couillard of Jefferies. Please go ahead.

[Unidentified Analyst]

This is Christian on for Brandon. Thank you for taking the questions. Just a quick on the 2018 outlook, is there anything you would call out in terms of pacing of core growth in 2018, maybe first half relative to second half.

[Tony Hunt, CEO & President]

Yes, we would, look at our year and say that's when we look at the whole portfolio between our proteins business, our filtration and chromatography business and with the seasonality that we observed over the last couple of years with Spectrum that the second half of the year will be slightly stronger than the first half.

[Unidentified Analyst]

Got it. And Tony, in your prepared remarks you had talked about, five strategic objectives in 2018 with the fifth being M&A, so to that end, would you comment at all on M&A pipeline and do you think at this point that you have maybe internal capacity resources to digest another deal given everything going on in the Spectrum? Thanks.

[Tony Hunt, CEO & President]

Yeah, on the M&A front, clearly the last two years have been pretty busy for Repligen in terms of the deals that we have done, clearly Spectrum is a transformative deal and you're right, a lot of people within the organization are very focused on it. I will say that we continue to have a very active pipeline of opportunities and I think that our strategy continues to be the same which is find great technologies, whether they are transformative or tuck-ins really just depends on the type of companies but we have an active pipeline and it is part of our strategy over the next couple of years. We expect that we will do more M&As and obviously I think the other part is that with the rich pipeline that we have in R&D that we should see organic growth being driven by some of the products we are going to launch as well.

[Operator]

Our next question comes from Paul Knight of Janney. Please go ahead.

[Paul Knight, Janney]

Hi Tony, can you talk to Purolite are they, they already up and running, I think they are going to be a customer of yours, any color there.

[Tony Hunt, CEO & President]

Sure, Purolite, they are a customer today. I think they are in the process of building their larger facility, I don’t have an exact date but I believe it will come online this year, but again I think they are one of the emerging players in the ligands and Protein A resins among the Protein A resin market and expect that they will continue to be player over the next few years for sure.

[Paul Knight, Janney]

And you know the GE talks up their MabSelect like PrismA a lot is that technology using your ligands or is that in house and the other follow on to that is in the advancement of protein A or others saying your product isn’t necessary, I mean any color you could add to that?

[Tony Hunt, CEO & President]

On the PrismA, that’s really the announcement that happened back in September, so essentially GE will make that the ligand for the PrismA resin internally and through an OEM partner as well, so we're not involved in that. And I think we have gone through that a number of times. The impact of that ligand on overall revenue for Repligen is really small based on the forecasts. And I think may be the piece that I think we've spent fair amount of time all taking about this is really the longer-term impact, fairly GE have a business continuity strategy and as I said a little earlier, we expect that some volume will go across over the next few years as they ramp up their manufacturing in Sweden.

[Paul Knight, Janney]

And then last the ATF technology seems to be, it appears to increase productivity by a large factor, what's the penetration rate of bioreactors of ATF, I mean last I remember it was slow but what’s the addressable market, is all bioreactors could use it or is it half and then where you would penetration today.

[Tony Hunt, CEO & President]

So, the ATF technology is really being used in continuous manufacturing or in perfusion, and perfusion is probably 20% to 30% of the market versus fed-batch 70% of the market. So, the vast majority of bioreactors are operating in a fed-batch note. So, they typically would not use ATF technology. So, we're really the market leader in perfusion or continuous manufacturing in that segment. I think we're well penetrated, I don’t have an exact number and I think where we're beginning to make some progress is within the fed-batch marketplace, there is this whole process called seed train where you go from a very small by reacted to the production, bioreactor over the course of let's say 10, 12 days and so what we are doing there is using ATF technology and what's called the n-1 application. So, you're concentrating the cells in a smaller bioreactor and you are not giving that into the large production vessel and eliminating one of the steps in the process.

So that's really where we are making some in roads in the fed-batch and manufacturing space is really in the seed train application. So, ATF single-use has really helped us because it allows customers to immediately evaluate the technology without worrying about on their capital expenditures that they have to do and I think that's really one of the benefits of what we have been able to do by launching the single-use portfolio.

[Operator]

[Operator instructions]. Our next question comes from Steve Schwartz of First Analysis. Please go ahead.

[Steven Schwartz]

My one question is just, really, around some help in bridging your 2018 guidance. Organically, you're looking for revenue growth at 10% to 14%. You're guiding up on gross margin. But if we look at the EPS versus $0.69 you reported for '17, you're really only on the top end looking for 4% EPS growth. You do call out the $1.2 million additional tax and that's about $0.03, but beyond your comment about R&D, I'm just wondering why EPS growth is a little higher for 2018?

[Tony Hunt, CEO & President]

Sure, I think I can help you with that Steve. If you look at the tax that's going to be your primary driver you can see from a non-GAAP basis in 2017 we only incurred about $1.6 million of tax expense and then if you look at the 19% of PDT, rate that we gave in our guidance, obviously that's going to add a significant amount more of tax somewhere in the range of $5 million to $6 million more.

[Steven Schwartz]

Okay, got it. And then you're adjusting -- you made changes to your non-GAAP adjustments, the expenses that are now included in that. And it looks like it added -- it was a benefit of about $0.05 in 2016. What -- how did that work out for 2017? Because if I kind of add up what you reported for first 3 quarters, close to $0.20 in the fourth quarter, it's not obvious to me that there was, in fact, a benefit from the non-GAAP accounting?

[Tony Hunt, CEO & President]

I think there was a benefit from the non-GAAP accounting. If you look - you take Spectrum or TangenX acquisitions for an example, we capitalize pretty significant pieces of intangible assets, that we amortize obviously through the years and those items are non-GAAP and we take deal costs out of the equation as well from a non-GAAP perspective. So, it's definitely helping from a GAAP to non-GAAP basis.

[Steven Schwartz]

Okay. So, for example, in the first 3 quarters of 2017, you reported non-GAAP EPS was $0.50. And then today you announced that you're adjusting how you calculate non-GAAP EPS. What is the first 3-quarter EPS tally now, today, after those adjustments in the non-GAAP accounting? It would be higher than the $0.50 you previously reported?

[Tony Hunt, CEO & President]

Steve I'm not sure that we’ve made a change to our non-GAAP, so I think we're all looking at each other and trying to understand better your question.

[Jon Snodgres, CFO and Secretary]

So, may be offline Steve we can cover that in little bit more detail but we haven't changed our accounting.

[Steven Schwartz]

Okay. I thought I read in the press release that you were changing, and certainly, what you reported for the fourth quarter last year was a penny lower than what you're reporting as the comparable quarter this year. So -- but certainly we can take it offline.

[Operator]

This concludes our question and answer session. I would like to turn the conference back over to Tony Hunt for any closing marks.

[Tony Hunt, CEO & President]

I'd just like to thank everybody for joining us this morning and look forward to catching up with you in a few more months and we will report on our Q1 results okay, thank you.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.