Repligen Corp Q3 FY2022 Earnings Call

Thank you, Chris, and welcome, everyone, to our third quarter report. On this call, we will cover business highlights and financial performance for the three and nine-month periods ended September 30, 2022. We’ll also provide updates to our financial guidance for the full year. Repligen President and CEO, Tony Hunt; and our CFO, Jon Snodgres, will deliver our report, and then we’ll open up the call for Q&A. As a reminder, the forward-looking statements that we make during this call, including those regarding our business goals and expectations for the financial performance of the company are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning risks related to our business is included in our annual report on Form 10-K, our quarterly reports on Form 10-Q, the current report of Form 8-K, which we’re filing today, and other filings that we make with the Securities and Exchange Commission. Today’s comments reflect management’s current views, which could change 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 are providing non-GAAP results and guidance. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this morning, which is posted to Repligen’s website and on sec.gov. Non-GAAP figures in today’s report include the following: revenue growth at constant currency; gross profit and gross margin; operating expenses, including R&D and SG&A; operating income and operating margin; income tax expense; net income and earnings per share; as well as EBITDA and adjusted EBITDA. These adjusted financial measures should not be viewed as an alternative to GAAP measures but are intended to better enable investors to benchmark Repligen’s current results against historical performance and the performance of peers while evaluating investment opportunities. Go ahead, Tony.

Okay. Thank you, Sondra, and good morning, everyone, and welcome to our Q3 earnings call. As you saw in our press release this morning, we delivered on another very productive first nine months of the company. In addition, we entered into two strategic collaborations that advance our analytics and proteins franchises which I’ll speak to later. Quarterly revenue came in at $201 million despite $11 million of FX headwinds and slowing COVID-related revenue. Revenues for the first nine months came in at $615 million, up 28% organically, which takes into account a 9% decline in COVID revenue during this period and 5 points of FX headwinds. Our base business continues to perform well, finishing up 29% for the quarter and 35% through the first nine months of the year. Our filtration and chromatography businesses were again the major drivers of growth in the quarter. The growth in these two franchises more than offset the decline in COVID revenues, which were down by $19 million or 40% year-on-year. We continue to see strength in gene therapy accounts where revenue growth exceeded 50% through the first nine months of the year. More importantly, we now have over 20 accounts with revenues in excess of $1 million per year, up more than 70% from a year ago. We remain on track to finish the year above our 40% growth target or over $105 million in gene therapy revenue. As mentioned earlier, we again saw a predicted drop off in COVID revenues in the quarter, and we now expect COVID-related revenues to come in at $135 million to $140 million for the year, an adjustment of $7.5 million from the midpoint of our previous guidance and down 28% versus our 2021 finish. Looking ahead, we expect COVID revenues for 2023 to be in the range of $30 million to $40 million. On the orders front, we had a lighter quarter in Q3, reflecting the minimal contribution from COVID accounts, approximately 7% of the order book and a return to more normal ordering patterns by our customers based on shorter lead times for our products. Our base business orders were up slightly year-on-year. Book-to-bill on total orders through the first nine months was 0.9, while base business had a book-to-bill of 1.0. Looking to our full year 2022 finish, we’re tightening our reported revenue to a range of $795 million to $805 million, representing total revenue growth of 19% to 20% and 24% to 25% at constant currency. We’re also increasing guidance for our base business growth to 33% to 34%, up 1.5 points at midpoint from our previous guidance, and we anticipate organic revenue growth in the range of 21% to 22%. Returning now to our strategic collaborations. During the quarter, we executed on two agreements that strengthen and expand our process analytics and proteins franchises. In September, we signed a 15-year strategic licensing and collaboration agreement with DRS Daylight Solutions who are experts in mid-infrared technology. As part of the agreement, Repligen will focus on the commercialization of Daylight’s Culpeo technology, while Daylight and Repligen’s R&D team will jointly focus on next-generation product development. Culpeo is an advanced in-line technology that complements our Flow VPX offering from C Technologies. What’s really important about this deal is that we now have two highly differentiated process analytics technologies in the marketplace that will be integrated into our systems portfolio. In October, we signed an expanded agreement with Purolite, an Ecolab company to extend our exclusive NGL Protein A agreement out until 2032. In addition, we broadened the agreement to now include ligands developed by Avitide for mAb fragment purification. The first of these ligands, CH1, was launched at the recent BPI Boston Show in September. Since signing the original NGL agreement with Purolite in 2018, the combination of our NGL ligands with Purolite’s agarose Jetted B technology has resulted in rapid adoption by bioprocess end users. We are very confident about the long-term success of this strategic partnership and the growing revenue contribution to our proteins business. So moving now to our quarterly performance. The story of the quarter was continued strength in our filtration and chromatography businesses. In filtration, our business was up 15% organically, driven by the ATF and hollow fiber portfolios. Organic growth from these two businesses was north of 20% year-over-year. Base business growth for the same businesses, which exclude COVID-related revenue and inorganic M&A was up almost 40%. We now expect our filtration business to grow at approximately 25% here in 2022. As highlighted at our Investor Day in September, we are very excited about our filtration systems business, which we just strengthened with the launch of a dedicated system for gene therapy and mRNA and an expanded set of artisan systems focused on TFF applications. Systems revenue through the first nine months of 2022 are up greater than 40%, reflecting the differentiated nature of this portfolio. With the build-out of our Fluid Management business, we expect customers purchasing systems to order more fluid management consumables, potentially generating additional revenue for the company. So moving to chromatography. Our OPUS pre-packed column business had an excellent quarter, up greater than 35%. As noted in other quarters, we continue to transition customers to customer-supplied resins in North America and Europe. We saw a welcome improvement in resin supply in Q3, which contributed to the overall performance of our chromatography business, which was up in the quarter. For the year, we now anticipate that the chromatography franchise will grow in the range of 35% to 40%, an increase from the 25% to 30% of our Q2 call. Our proteins business came in flat for the quarter, with revenues from growth factors and Purolite offsetting a decline in revenues from Cytiva. We continue to make good progress with AAV resin customer evaluations and expect some of these evaluations and opportunities to materialize in 2023 as customers implement and scale with these resins. We continue to expect proteins to be down approximately 10% in 2022. Finally, our Process Analytics business had a solid quarter with continued adoption of FlowVPX, with Europe being a standout. We now anticipate growth of approximately 20% for the year for this business. So overall, we had another strong quarter in Q3 with continued strength in our base business. We are excited about the potential of our new strategic partnerships with DRS Daylight Solutions and Purolite to strengthen our analytics and proteins franchises. We believe we’ve developed one of the strongest and most innovative bioprocessing portfolios in our industry, and we’re confident about our finish in 2022 and continued success in the coming years. With that, I will turn the call over to Jon for the financial update.

Thank you, Tony, and good day, everyone. Today, we are reporting our financial results for the third quarter as well as updating our financial guidance for the year. Unless otherwise mentioned, all financial measures discussed reflect adjusted non-GAAP measures. All growth figures provided for the third quarter and nine-month year-to-date periods are year-over-year comparisons to the same period in 2021. As shared in our earnings press release this morning, we reported strong revenue of $200.7 million in the third quarter and $615 million for the first nine months of 2022. This includes significant FX headwinds, which reduced our reported revenue by approximately $11 million in the quarter and $24 million year-to-date. Our base business continues its positive trajectory, growing at 29% for the quarter and at 35% on a year-to-date basis. Our base business represented 83% of total revenue during the third quarter, while COVID-related revenue and inorganic M&A represented 14% and 3%, respectively. At the market level, in cell and gene therapy, we are reflecting year-to-date growth of greater than 50%, excluding COVID-related revenue at gene therapy accounts. We continue to see customers with our appetite for AAV resins and remain confident in our potential to gain market share in this area. Overall, our cell and gene therapy accounts comprised 14% of year-to-date reported revenue. We continue to be excited about our opportunities in cell and gene therapy and the recent successes in these modalities with three U.S. FDA approvals this year. At the same time, we continue to see steady growth across the MAPS market with six U.S. approvals so far this year, including one biosimilar. From a capacity perspective, we met the goal shared on our second-quarter call, going fully online here in the third quarter with our Marlboro, Massachusetts, and Rancho, California filtration facilities expansions. As we’ve mentioned, we are prepared to scale up the variable component of our capacity investments, hiring additional employees when necessary to support our business growth. Turning now to capital expenditures. We spent $67 million on CapEx year-to-date, and we continue to focus on scaling up and expanding our fluid management capacity with the build-out of our assembly centers in Hopkinton, Massachusetts, and Waterford, Ireland. We continue to expect to spend a total of $85 million of capital expenditures in 2022, mostly in support of expansion projects to ensure capacity for future growth and to continue to drive down lead times. Now returning to our third quarter revenue commentary. On our top line, we delivered revenue of $200.7 million in the third quarter, representing 19% growth at constant currency, 16% organic and 13% growth as reported. We absorbed significant FX headwinds of 6 points in the quarter as international currencies weakened compared to the U.S. dollar. We anticipate a fourth quarter and full year foreign exchange headwind of approximately 5%. Looking ahead to 2023, if rates stand at today’s levels, we anticipate FX headwinds in the range of $25 million to $30 million. Breaking down our third quarter reported revenue growth of 13%, our base business contributed 21 points of growth and organic M&A added 3 points of growth, which were partially offset by reduced COVID-related growth of 11 points. We continue to see positive regional revenue growth in the third quarter in Asia and North America. Asia/rest of world growth of 78% led the way. Our North America region grew at 10% and Europe is down 7%, with both of these regions seeing later-folded revenues. Our regional revenue distribution for the third quarter year-to-date period included Asia/rest of world at 20%, Europe at 38%, and North America at 42%. Now moving down our income statement. Adjusted gross profit was $114.4 million in the third quarter of 2022, increasing by $10.6 million or 10% compared to the same period in 2021. Adjusted gross margin of 57% for the third quarter compares to 58.3% in the same period in 2021, where we had significant revenue acceleration pacing ahead of our capacity from personnel expansion activities. We continue to manage through the impact of FX headwinds on our margins as well as continued inflation challenges, which we have been offsetting with price increases to our customers here in 2022. Now transitioning down the P&L to adjusted operating expenses. Adjusted research and development expenses for the third quarter were again about 5% of total revenue. R&D spend continues to support the development of innovative new products including our new chromatography and flat sheet filtration systems from our Artisan business, along with the development by Avitide of novel chromatography ligands and resins. Third quarter 2022 adjusted SG&A expenses were approximately 23% of total revenue, an uptick from 21% in the same period in 2021. Year-over-year dollar increases in spend continue to be related to the timing and integration of our 2021 acquisitions and our continuing investments in personnel, facility, and systems expansions to support our growth. Now moving to adjusted earnings and EPS. Third quarter adjusted operating income was $58.2 million, an increase of $1.2 million compared to the same 2021 period. Our adjusted operating margin was 29% in the third quarter of 2022 compared to 32% in the prior year period, where our rapid revenue acceleration outpaced our investments to scale up the business at that time. Moving to adjusted net income. In the third quarter of 2022, our adjusted net income was $44.4 million, a slight reduction of $0.3 million compared to the same 2021 period. Adjusted EPS was $0.77 per fully diluted share in the third quarter 2022, a minor reduction of $0.01 compared to $0.78 in the 2021 quarter. And finally, our cash and cash equivalents, which are GAAP metrics, totaled $573.4 million at September 30, 2022, net of upfront payments made for our licensing agreement with Daylight Solutions. We’ll now transition to our 2022 full-year guidance. Our GAAP to non-GAAP reconciliations for our 2022 financial guidance are included in the reconciliation tables in today’s earnings press release. As previously mentioned, unless otherwise noted, all 2022 financial guidance discussed will be non-GAAP. Please also keep in mind that our 2022 guidance may be impacted by fluctuations in foreign exchange rates under our current projection of a 5% headwind on full-year sales and does not include the potential impact of any future acquisitions the company may make. Overall, we are tightening our 2022 full-year revenue guidance to $795 million to $805 million, which continues to reflect increased projected demand for our base business, offset by significant foreign exchange headwinds and lower projected COVID-related revenue. We now expect overall revenue growth in the range of 19% to 20% as reported and 24% to 25% at constant currency. We anticipate organic growth in the range of 21% to 22%, and we are increasing our expectations for base business growth to a range of 33% to 34%. We are increasing our guidance for base business reported revenue to reflect an increase of $7.5 million at midpoint to $640 million to $645 million. We now expect $135 million to $140 million in COVID-related revenue, a reduction of $7.5 million at midpoint, and we continue to expect about $20 million from inorganic acquisition revenue. We are maintaining our 2022 adjusted gross margin guidance at 57.5% to 58.5%. We are slightly lowering our adjusted operating income guidance to a range of $231 million to $235 million, and we are reducing our adjusted operating margin guidance by 50 basis points to the range of 28.5% to 29.5% of revenue for the year. Adjusted other income and expense is expected to be $8 million of expense for the year, an increase of $2 million of expense from our previous guidance of $6 million due to significant transactional foreign exchange impacts. We are improving our 2022 adjusted income tax guidance by 200 basis points to approximately 19% of adjusted pretax income for the year. We are increasing the lower end of our adjusted net income guidance to the range of $181 million to $184 million. And our adjusted EPS guidance to $3.15 to $3.20 per fully diluted share. Our adjusted EPS guidance continues to reflect an estimated 57.5 million weighted average fully diluted shares outstanding at year-end 2022. Adjusted EBITDA is now expected to be in the range of $244 million to $248 million compared to our August guidance of $256 million to $262 million with depreciation and intangible amortization expense is now expected to be approximately $24 million and $27 million, respectively. We expect year-end cash and cash equivalents, a GAAP metric, to be in the range of $590 million to $610 million. With our $85 million of CapEx investments being fully funded by cash generation from our operations. This completes our financial report and guidance update, and I will now turn the call back to the operator to open the lines for questions.

We will now begin the question-and-answer session. Today’s first question comes from Puneet Souda with SVB Securities. Please go ahead.

Hi, guys. Thanks for taking the question. So first one, obviously, a topical one for the bioprocessing industry, if I may, the destocking question. So obviously, a number of your larger peers are seeing destocking from COVID accounts. Could you maybe just elaborate on what you’re seeing? Tony, and to what extent of destocking is this? When do you think we can see a trough in the inventory here and recovery again? And how does this differ from sort of the 2017, 2018 timeframe? And could you elaborate what you’re seeing on your end? Thank you.

Thanks, Puneet. Yes, look, our perspective on destocking seems to align with what we’ve heard from others. But I would say that we see the industry is going through a transition as it moves away from COVID. We’re clearly seeing a change in order patterns, and I’ll speak a little bit to what we’re seeing. We definitely see pockets of inventory related to COVID. We’re seeing these at the COVID vaccine accounts, and we’re also seeing that CDMOs and probably a little bit in the integrator side, which are companies like bioprocessing companies that are buying components that go into the manufacturing of products. And that’s all in an environment where our customers are highly active. As we’ve gone through the summer, our funnel has strengthened. So maybe I’ll take each one of those, Puneet, and kind of walk you through it, and then I’ll speak to Part B and C of your question. So on the order pattern, right, if we went back a year, our customers were, in general, ordering products and getting them delivered within six months, but 80% of the product would be delivered within six months and 100% in 10 to 12 months. As we’ve sort of gone through the middle of this year, and into the fall, 80% of our customers are now ordering and getting products delivered within three to four months and 90% within six months. So there’s definitely a real shift happening in terms of order pattern and people just ordering out three months, four months in advance. On the inventory side, I think where we see the pockets of inventory, we definitely see at any of the vaccine accounts that we’ve been working with. We’ve seen that some of the CDMOs that have been parked on the vaccine side. And as I said a few minutes ago, also with the integrators. So the other bioprocessing entities that have stocked up on various components that are used in the manufacturing of their particular products. And then the final part is the opportunity. We see the funnel strengthening if we look from the beginning of the year, the middle of the year, and where we are right now. So we started the year off strong, and the last few months of the fall have really started to strengthen. The next four months are probably going to determine a lot of where 2023 is going to end up. I think we’ve probably got another quarter or two of managing through this transition before we’re kind of back in smoother air versus what everybody is experiencing right now. And then your Part B of your question, which was 2017. I think it’s hard to compare. I think this is a post-COVID transition that we’re going through, whereas 2017 was pure inventory burn off across the whole industry. And we’re seeing more pockets than broad burn off of inventory. So that’s the comparison with 2017.

Got it. That’s super helpful, Tony. I really appreciate that. And just a quick one maybe on the guidance. I know I appreciate the guidance for this year. But just looking into sort of 2023, you were lowering your COVID revenues for 2023. But thinking about the base business, you said 33% to 34% this year. How should we think about the base business strength going into next year? And is that a – you’ve historically talked about a 20% number for the core. Is that something we should keep in mind or something higher? Could you walk us through that as much as you could? I appreciate it. Thank you.

Yes. So COVID’s come down, and that’s based on the forecast we’re getting now from our vaccine customers. As I said, we don’t think it’s too different than where most analysts are looking at what the range for next year could look like. It’s early to talk about growth in base business for 2023. But I’ll throw a few numbers out there. If you look at Repligen’s situation, we’re going to be dealing with a $100 million headwind in COVID. As Jon pointed out, we’ve got probably a $25 million to $30 million FX headwind. So those are the challenges. The positive is that we’ve got a great product portfolio and are well-positioned. Over the last five years, Repligen has delivered approximately 26% base business organic growth. When we did our Analyst Day in September, we said we expect to grow in the 15% to 20% range. I think next year will be more modest growth than what you’ve seen over the last five years and likely more in line with the range pointed out in September.

The next question comes from Dan Arias with Stifel.

Thanks for the questions. Tony, one of the questions that we’ve gotten a bunch in the last couple of weeks is just where and what portion of your portfolio might be fungible when it comes to non-COVID and COVID work? Is there anything that you can share with us that sort of helps us conceptualize what the transition might look like when we think about the product offerings over the next couple of quarters?

Yes. I don’t think, Dan, it’s any of the product lines per se. I just think it’s the pockets of inventory build. So, if you think about customers that we’ve had on the vaccine side and these specific inventories. What I’m most encouraged by is the fact that our funnel of opportunities is strengthening. We have to work through that. The next four months will determine a lot around what the growth rate is going to be in 2023.

Yes. Okay. And then maybe on the chromatography side, how do you think the resin availability situation looks as we enter 2023, just given where things are trending? I don't know if you’ve given a number for this year, but I do remember you saying that 2021 results would have been two times if availability wasn’t an issue. So can you just sort of catch us up on that as you start the year off.

Dan, I’m really glad that you remember all my comments. So no doubt that resin availability has improved over the last quarter. We know from talking to our peers that capacity is coming online. That change in capacity is also driving the order patterns that I spoke about a few minutes ago. So, I think on the resin supply side, capacity is easing. It’s not perfect yet, but it continues to improve. And I think in the second half of next year, based on everything we know, capacity will be fully online, and you’re looking at a kind of highway of no restrictions in terms of supply ability. The OPUS business is growing at around 20% and is now above 35%. So that’s the positive takeaway here.

The next question comes from Julia Qin with JPMorgan.

Hi, good morning. Thanks for taking a question and congrats on a quarter. So just a follow-up on the destocking point. I was wondering if there’s any way for us to quantify the magnitude of headwind that you’ve already seen so far? And I know you previously mentioned there are probably one or two more quarters for many to go through before ordering patterns normalize. Is there a way to think about what the magnitude of the headwind is remaining compared to what we’ve already seen so far?

I don’t think there is, Julia. Clearly, summer was lighter. Our book-to-bill through nine months on our base business is 1.0, right? Prior to COVID, I think book-to-bill tended to be at 1.0 to 1.1, kind of working in that range. So we’re not too far off where we were in the past. What we have to see is coming out of the summer is strengthening on the order side and execution on closing the opportunities that are out there. So I think when we get to the end of February, we’ll be in a better position to speak to where things are and how long the headwinds are. I know everybody is focusing on destocking, but the destocking is in pockets. What we’re seeing is just a change in order patterns.

Got it. Appreciate all the additional color. And then regarding the book-to-bill, I appreciate you gave the year-to-date metric. Is there any way you could share with us how the book-to-bill trend is specifically in Q3 for both the base business and overall?

Yes. The overall is probably one of those comparisons where we had the highest orders for COVID in 2021. On book-to-bill for the base business, the book-to-bill in the quarter was about 0.9.

Our next question comes from Jacob Johnson with Stephens.

Hey, good morning, Tony. I’ll apologize in advance as I’ll jump on the destocking question as well. But just you and your peers are talking about a lot of the stocking that you’re seeing is largely COVID customers, and you’re guiding to a COVID number in 2023. To Julia’s question around quantifying this, is it fair to say there’s a component of this destocking that’s contemplated in your COVID expectations for next year and we’ll see kind of what happens with lead times on the base business?

Yes, I think maybe I would look at it a little differently, Jacob. The forecast we put out there for 2023 on COVID is based on forecasts we’re getting from the companies that we’re working with. What sometimes people forget about is companies that have been working on COVID have products from bioprocessing suppliers, but they can use it elsewhere in their manufacturing. So that’s kind of how I think about it. They can use it, but they’ll use it in other processes.

Okay, got it. And then just, Tony, on your comment about next year, your growth has been north of 20% the last five years on a base business perspective. You’ve got the 16% to 20% range. You said next year is going to be more modest. Just so we’re clear, next year being more in line with that 16% to 20% range, is that an overall organic growth comment? Or is that kind of specific to the base business?

That’s specific to the base business.

The next question comes from Paul Knight with KeyBanc.

Hey Tony, there’s a lot of biotech skepticism about and cell and gene therapy market. Your comments are pretty upbeat obviously. Could you talk about the product lines related to cell and gene therapy and where we are in this development?

Yes. Thanks, Paul. The cell and gene therapy market has been a great market for us over the last few years; we’re up north of 50% again this year. The key here is the approval rate. It’s encouraging that there are more approvals this year than last year. As that approval rate increases, that’s a positive for everybody in bioprocess. We currently have 20 gene therapy accounts generating over $1 million per year, up 70% versus a year ago. That should give people some encouragement that our processes are scaling. What we can’t control is whether those processes continue to scale and progress through the clinical trial approval process. That’s the key. Overall, long-term gene therapy and cell and gene therapy will be a cornerstone of our industry for the next 10-plus years. The key products that we provide for that market mainly come from our filtration portfolio. The gene therapy industry likes pre-packed columns, but we’re not running a huge variety. Our systems have been strengthened with the launch of a dedicated system for gene therapy and mRNA. We expect to see more traction with our affinity resins as we drive them into this part of the market. The future will be a broader portfolio than the current state, which is a combination of filtration with feedback components.

The next question is from Madeline Mollman with William Blair.

Hi, thanks so much for taking my question. This is Madeline Mollman on for Matt Larew from William Blair. I was just wondering – I know in your Investor Day, you talked a lot about your systems and your integrated systems. I was wondering long-term how many of your customers do you see converting over to platformed accounts? And do you see those as converting existing customers over to platformed accounts? Or is that mainly going to be new client adds that will be joining as accounts that are interested in the systems?

Yes. I would say it’s both, Madeline. Our systems portfolio has been new in the last three to five years. We’ve put significant investment into it, and our expansion strategy continues. We’ve always had consumables going into accounts. There’s definitely an opportunity to sell into existing accounts that have been buying filtration or chromatography products to now buy systems and eventually fluid management components. It’s also about acquiring new accounts. Regions like mRNA present new opportunities to get in with a whole solution that includes systems, consumables, fluid management components, and flow backs.

The next question comes from Liza Garcia with UBS.

Good morning, guys. Thanks so much for taking the question. I just wanted to maybe touch on the pricing environment. I wanted to kind of understand kind of what you’re seeing in terms of pricing and how you’re feeling about kind of your ability to take price, given the inflationary environment at the moment and how you’re feeling about that outlook. There have been questions around kind of pricing given just the destocking environment.

Yes. Maybe I’ll start and I’ll hand it to Jon. In general, we’ve been trying to address inflation that’s happening in our industry and work with our customers to match up with what we’re seeing on inflation. I hope Jon can add more detail.

Yes, sure, happy to do that. If you remember last year, we did implement a 7% price increase on list prices December 1, 2021, to carry us into this year. We came back in July and implemented another 4% increase. We’ve really focused on areas where we are seeing cost inflation coming from our suppliers as well. Historically, we’ve seen about 1.5% to 2% price increase. This year, we’re expecting to top 5% and maybe be slightly higher than 5% overall net achievable price. So that’s where we’re at; it’s a good offset to cost inflation.

Great. Super helpful. And then Asia seems to really be a source of strength for you. I’d love to kind of just dive a little deeper into trends in the region and how you think about the sustainability of the growth levels that you’re seeing there.

Yes, it’s been a stellar year for us in Asia. There are many bumps, especially looking at China, where there was a significant shutdown in Q2. The team has done a remarkable job managing through that. I think the portfolio we have is strong, we’re well positioned, and we’ve got a good commercial organization. Given the differentiation we have, that’s going to be critical over the next 12 months.

The next question comes from Matt Hewitt with Craig-Hallum Capital Group.

Good morning. Thanks for taking the question. Maybe I’ll ask one about the Purolite agreement. Ten years seems a little bit longer than typically sees. So what prompted the longer terms? And more importantly, is this expansion into the mAb fragments, and what’s driving that expansion? Thank you.

Yes. Thanks, Matt. The strategy with Purolite goes back to 2018. Our initial question was about what’s happening with GE and our Protein A business with GE. We developed best-in-class ligands, collaborated with Navigo, and then partnered with Purolite. Those collaborations have gone very well, and extending from 2026 to 2032 makes sense for both companies. We're the exclusive supplier of Protein A ligands and also exclusive manufacturers. This agreement is a strong endorsement of how well the partnership has developed into the mAb fragment space. We believe it’s a win-win for both companies.

The next question comes from Brandon Couillard with Jefferies.

Hey, thanks. Good morning. Jon, will you just remind us how COVID and FX kind of flow through the P&L? Given those two headwinds next year, is it reasonable to expect margins may be flat to down in 2023?

Yes. We’ve talked about this a bit in the past. We’re seeing some margin declines as we go through this year, as projected. One of the things we expected was cost inflation and the costs associated with capacity expansion and added headcount. Those costs put pressure on margins, and we expect to see what comes out in Q4. Our Q3 numbers will serve as a starting point for next year. We do expect some compression as we absorb these capacity additions.

The next question comes from Raghuram Selvaraju with H.C. Wainwright.

Thanks very much for taking my questions. Could you comment on what you expect the dynamics to look like going forward in terms of your relationships with both Purolite and Cytiva in the affinity ligand space? And I think you mentioned earlier about how you were thinking about the mAb fragment segment. What do you expect to drive growth in that specific area within the context of the extended agreement with Purolite? That would be very helpful. Thank you.

Yes. The relationship with Purolite and Ecolab is strong, and our relationship with Cytiva is absolutely fine. We know what the projected volumes are and expect that it will begin to drop off in 2023. We don’t expect it to be anything significant. The focus on Purolite and Avitide is to have a partner working on mAb fragments. It makes sense for us to tie that all together, ensuring that we focus on gene therapy, mRNA while providing access to new ligands for Purolite’s success.

At this time, there are no further questioners in the queue. And this concludes our question-and-answer session. I would now like to turn the conference back over to Tony Hunt for any closing remarks.

I just want to thank everybody for joining us today. It’s been a very busy year, and I’m delighted with the performance of the company. We look forward to catching up with everybody in February and talking about how we’re going to finish the year and what our outlook is for 2023. Thanks again for joining us today.

The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.