Tony Hunt: I personally think it’s more Q3 improving, so second half of the year being better than the first half of the year. The piece, Dan, that I found really encouraging was that on our — when we looked at our pharma orders in Q4, right, it was — highest quarter we had in orders in all of 2022 was in Q4 for pharma. When you look at the book to bill, it was nicely over 1. So that’s actually really encouraging. And if you look at pharma for the year for Repligen, we were also over 1 on a book to bill. The places where we see the challenges are at the CDMO level. So I think if the CDMOs begin to bounce back, and we definitely saw some improvement in Q4, but not enough for me to say, hey, that’s going — how much does it continue Q1, Q2?
So looking at it right now, I would say it’s second half of the year stronger than the first half of the year. The other thing to remember is our COVID revenues are going to be pretty much in Q1, evenly split in Q1 and Q4 with very little revenue in Q2 and Q3. So base business, I would expect we would see orders definitely beginning to pick up in Q2. But I think from a revenue point of view, it’s the second half of the year.
Dan Arias: Yes, okay. And then, Jon, maybe on the op margin, 22.5 to 23.5, it feels like in order to land at the midpoint of ’23, you should be or we should be thinking about a step down from 4Q to 1Q rather than being flattish as a jumping off point for the year, which I think is maybe the way that you were describing things at the end of the year. Is that right? And then you called out mix as a factor. It also feels like it’s a little bit of a deviation just given that it felt like more of a volume thing and a leverage thing at the end of the year rather than a mix phenomenon. So can you just add some color to the moving pieces at the margin line and then the flexibility that you might or might not have on cost and spending? Thanks so much.
Jon Snodgres: Sure. Yes. So I think the first part of your question was around operating margins and kind of the stepping off point into 2023 from 2022. Yes, I think we’ll start on the kind of the lower end or slightly below guidance in Q1 and then we’ll build on that as we move through the full year, getting back to that — hopefully back to the midpoint of that range at 53%. But definitely hopefully between that 52.5 and — sorry, 22.5% and 23.5% level. So that’s where I’d start it. If you look at the gross margin, I can give you a bit more color there, Dan. It’s really two overarching themes that we’re looking at here. The first one is the most significant here in the quarter, in the fourth quarter, which was material costs as a percentage of our overall revenue increasing, and I’ll break that down a little bit further for you.
And then also the higher facilities and depreciation costs that we’re seeing related to our capacity expansions and business continuity work that we’ve been doing. I’ll give kind of a comp, a sequential comp Q3 ’22 to Q4 ’22. We finished Q3 ’22 at 57%. Q4 ’22 was about 51.5%. That’s a decline of about 550 basis points. So when we break this down a little bit on the material cost side, cost inflation from materials coming from our suppliers, cost us about 150 basis points of market decline Q3 to Q4, Dan. And then product mix and volume was another decliner at about 300 basis points. So those were the two primary components, about 450 basis points on the overall material side. And then the facilities and depreciation-related costs were about 100 basis points of decline in the fourth quarter.
So that gives you the breakdown.
Dan Arias: Okay. Thanks very much, Jon.
Operator: The next question will come from Puneet Souda with SVB Securities. Please go ahead.
Puneet Souda: Hi, Tony and Jon. Thanks for taking the questions. So first one, just given on the top line, Jon, wondering if you can provide us what’s the base business growth for the first quarter should be. I’m not sure if I heard that. And then do you still stand by your long-term base business ex-COVID growth of 20% and the 2027-’28 revenue estimate of $2 billion?
Tony Hunt: Yes. Let me take that one, Puneet. So long term, absolutely. We believe in our company and our products and how we’re doing in the market and how differentiated we are. I think 2023 is a unique year. Everybody in our industry has to kind of get through the year. And yes, we don’t have guidance for Q1 on base business growth. What we’re saying is 12% to 16% organic growth for the year. And obviously, as we go through the year, I will comment on exactly what happens in Q1, H1 versus H2. But this is kind of a unique year. I think — don’t forget that even though 2022 is finished, we grew 39% organically with our base business. That is so far ahead of where our industry has been growing. So I think there’s a lot of goodness, a lot of momentum that the company has built up over the years.
This is going to be a challenging year, guys. We’re going to be in that 12% to 16% range. I said what the challenge is really on the chromatography end, but medium, long term, we love what we’re doing and we love our products. We like the position we have in the market. And yes, we don’t see any reason why we can’t grow 20% plus for the foreseeable future with the exception of 2023 as we work through these headwinds.
Puneet Souda: Got it. Okay, that’s helpful. And then on the gross margin side, Jon, was just wondering if there was any pricing pressure that you are accounting for? And Tony, maybe just on product obsoletion, product expiration, any write downs that CDMOs might be taking there? Could you elaborate a bit more on that? And if I could just squeeze in on PAT question. There was a large acquisition in this space for PAT, at least. So wondering how DRS Daylight Solutions is positioned versus the sort of light scattering capabilities that were acquired recently by a competitor? Thank you.
Tony Hunt: Yes. So maybe I’ll start with the Waters acquisition of Wyatt. Great company, great technology, you know them pretty well. I think laser light scattering key technology in our industry. When I look at what we’re doing with our C Technologies and with DRS, we’re really in a good position in terms of in-line technologies, right? I think when you look at what we have, you can put FlowVPX in line in a manufacturing setting. We will be able to put the DRS Daylight technology in line. And our strategy is more around getting to in-line monitoring, real-time monitoring as opposed to quality control testing or offline monitoring. So I think that piece is kind of how we view it. We’re more an in-line company. In terms of the question on obsolescence —
Puneet Souda: Just the pricing in obsolescence. Thank you.
Tony Hunt: Yes, I was going to answer it. So obsolescence, we’re not seeing that as an issue, right? And I think it’s really the inventory buildup at our customer level that just has to work through it. And then Jon can answer the question on margin.
Jon Snodgres: Could you repeat the question on margin? Just want to make sure I get it right.
Puneet Souda: Yes, Jon, just pricing, are you seeing a decline in pricing or pricing impact? And what’s the pricing assumptions that you have for ’23? Just wondering if there’s an impact from that in gross margin? Thank you.
