Q4 2021 Rapid Micro Biosystems Inc Earnings Call
Good day and welcome to the rapid micro Biosystems fourth quarter 2021 earnings conference call. At this time, all participants are in listen only mode.
After the speaker's presentation, there will be a question answer session.
I'll ask a question. During this session you will need to press Star then one on your touch tone telephone if anyone should require assistance during the conference. Please press Star then the most recent operator.
As a reminder, this call maybe recorded.
I would like to turn the call over to Mike Boyle Investor Relations you may begin.
Good morning, and thank you for joining the rapid micro biosystems fourth quarter and full year 2021 earnings call joined.
Joining me on the call today are Rob <unk>, President and Chief Executive Officer, and Shaun <unk> Chief Financial Officer.
Earlier today, we issued a press release announcing our fourth quarter and full year 2021 financial results.
Copy of the release is available on the company's website at rapid micro bio dot com under investors and the news and events section.
Before we begin I would like to remind you that many statements made during this call maybe considered forward looking statements within the meaning of federal Securities laws, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
Statements contained in this call that relate to expectations or predictions of future events results or performance are forward looking statements, including but not limited to statements relating to rapid micro's financial condition.
Expectations for business development and growth customer interest and adoption of the growth direct system and the potential impact of COVID-19 on rapid micros business.
Actual results may differ materially from those expressed or implied in forward looking statements due to a variety of factors.
For a list and description of the risks and uncertainties associated with rapid micros business. Please refer to the risk factors section of form S. One filed with the Securities and Exchange Commission on July 12 2021.
We urge you to consider these factors and you should be aware that these statements should be considered estimates only and are not a guarantee of future performance.
This conference call contains time sensitive information and is accurate only as of the live broadcast today March four 2020 to.
Rapid micro disclaims any intention or obligation, except as required by law to update or revise any financial projections or forward looking statements, whether because of new information future events or otherwise.
And with that I'll now turn the call over to Rob.
Thank you Mike Good morning, everyone and thank you for joining us to review, our fourth quarter and full year 2021 results before getting into the details of our performance I would like to remind everyone of our emission that rapid micro biosystems.
We're focused on revolutionizing microbial quality control or MQ C, which is a critical regulated aspect of the global pharmaceutical manufacturing process. This process includes a constant testing of raw materials production environments personnel and process materials and final sterility of drug products.
For microbial contamination, such as bacteria mold and other harmful organisms.
Our growth rate platform fully automate and replaces the traditional manual mtc process setting the foundation for end to end quality control automation to enable the future of advanced pharmaceutical manufacturing.
We remain very excited about our commercial opportunity.
QC testing market is large at approximately $10 billion and growing it is ripe for disruption and under pressure to modernize with little competitive intensity, we count over half the global top 20 pharmaceutical manufacturers as our customers and our value proposition is resonating strongly and while we address all pharmaceutical.
Modalities were especially strong in the fast growing biologics and challenging therapy segments.
Turning to full year 2021 results total revenue was $23 2 million, which increased 45% compared to the prior year. This includes commercial revenue of $21 6 million, which increased 54% compared to 2020.
For the full year 2021, we placed 29 systems and completed the validation of 33 systems.
On a cumulative basis, we have placed 116 systems as of the end of 2021, a 33% increase compared to the end of 2020.
Additionally, we have validated 84 systems, a 65% increase compared to last year end.
Recurring revenue increased by 100% in 2021, driven by higher consumable utilization and annual service contracts.
While still early in our commercial growth recurring revenue represented 36% of commercial revenue in 2021 compared to 28% in the prior year.
In 2021, approximately two thirds of new systems were placed with existing customers and one third with new customers moving forward quarterly variability notwithstanding we expect a good balance of systems to be placed between new and existing customers.
Demonstrates that as we continue to expand our footprint with new customers existing customers are recognizing the value proposition of our growth direct solution and are purchasing additional systems.
Geographically about 60% of the systems were placed with customers in North America, and about 40% replace with customers in Europe and Asia Pacific.
And finally, approximately 70% of the systems placed are being used to support manufacturing of biologics and cell and gene therapies.
Together these points demonstrate the progress of our land and expand strategy, where we seek to place an initial set of systems with a customer and then expand to other sites and regions within our customers' manufacturing network.
We fully expect the investments we are making across our commercial organization to drive future growth and success.
Entering 2022, we have a robust funnel of growth or X system opportunities that is balanced between new and existing customers and includes a diverse mix of manufacturers, including top global pharma companies and CDM OS.
While the funnel includes opportunities across several modalities is most heavily weighted towards the fast growing biologics and cell and gene therapy segments. We believe the size and quality of our growth direct system funnel, coupled with our continued investments in our commercial teams and capabilities will enable us to drive significant continued growth and achieve our goals in 2022.
In summary, 2021 was a transformative year at rapid micro despite some headwinds we executed against our land and expand strategy, we significantly expanded our commercial operational and product development teams, including key leadership positions and importantly, we strengthened our financial position following the initial public offering.
That provide the capital to execute a multiyear strategic plan, including critical investments to drive commercial growth product development and operational expansion.
Looking forward to 2022, we will continue to target investments in our commercial capabilities, including nearly doubling the size of our global direct sales and marketing team as well as expanding sales operations and support investing in training and developing digital marketing and tools aimed at increasing sales force productivity and effectiveness.
We are also excited about our expanded team and capability in the Asia Pacific region, where we have not had previously a meaningful presence.
We are also investing in new innovative products that will further demonstrate our leadership position in automated microbial quality control or.
Our product and service strategy is focused on leveraging the growth direct platform to provide additional upstream and downstream.
And our customers workflow, we are pleased with the progress of our product development teams have been making and I'd like to provide a few updates to our product pipeline.
We are on track to begin customer beta testing of our mobile protection advanced software. Later this year. This product will enable customers to differentiate mall from other categories of micro organisms. This is an important capability that supports our goal of giving customers early information to make decisions and respond to contamination events more quickly.
We have integrated this feature into our core vision system further enhancing and expanding growth of ex capabilities within customer workflows.
We are also excited to announce that in Q2, we plan to start beta testing with a global top 20 pharmaceutical customer for a rapid sterility application.
This customer has adopted several of our other applications and we're excited to get the beta underway.
As we have discussed integrating rapid sterility testing into our automated growth direct platform will accelerate final product release and enable customers to ship their products more quickly.
This application is especially important for sterile and time sensitive products, such as vaccines biologics sterile injectables and cell and gene therapies. Moreover, delivering a rapid sterility test to customers on the growth platform, we will extend our automation and data integrity benefits and offer compelling differentiation versus existing so really a product.
On the market.
We are also investing in global manufacturing to expand capacity.
Our supply chain infrastructure and drive operational efficiencies to deliver product cost reductions around mid year. We are looking forward to the completion of our new consumables manufacturing site in Lexington, Massachusetts. The second manufacturing site will enable even more robust continuity of supply to serve our customers and is critical.
To our long term growth.
To summarize we are very excited about the opportunity in front of US. We are building a strong recurring revenue business as we increase our accumulative system placements and drive higher consumable utilization. Additionally, we have a strong balance sheet and the financial flexibility to continue to make strategic investments to expand and enhance our commercial and operational capability.
<unk>, including new product development to drive growth and create shareholder value in 2022 and beyond with that I will turn the call over to Sean to discuss our financial results John .
Thanks, Rob and good morning, everyone.
This morning, we reported total revenue for the fourth quarter of $5 $2 million, which was essentially flat compared to Q4 last year.
<unk> revenue was $4 $9 million down slightly from $5 1 million in the fourth quarter last year.
Both total and commercial revenue were at the high end of the range as we pre announced in early January .
Within commercial revenue product revenue was $2 9 million compared to $4 1 million in the fourth quarter of 2020.
This decline was due to lower placements of growth direct systems was partially offset by strong growth of consumables, which increased over 100% compared to Q4 2020.
As we discussed in January the decline in system placements was due to customer site access limitations caused by the rapid onset of omicron and other specific customer timing issues that resulted in the placement of three growth <unk> systems in the fourth quarter compared to 10 placements in Q4 2020.
Systems revenue declined at a rate slightly less in system placements. In contrast, the significant increase in consumables revenue was driven by newly validated systems coming online and increased utilization by some existing customers.
Commercial revenue also includes service revenue, which was $2.01 million in the fourth quarter, an increase of 91% compared to Q4 2020.
The increase was largely due to higher revenue from validation services and to a lesser extent recurring service contract revenue.
During the quarter, we completed the validation process on 16 systems, including several that shifted from Q3 into early Q4.
On a combined basis. The 21 validation we completed in the second half of 2021 met our expectation and sets us up well for continued consumables growth in 2022.
Nonrecurring revenue was $2 6 million in the fourth quarter with the impact of lower system placements, partially offset by good growth in validation revenue.
Fourth quarter recurring revenue, which includes consumables and service contracts increased 91% to $2 $3 million.
Growth in our recurring revenue is primarily driven by increases in our cumulative validated systems and higher customer utilization of our consumables. During 2021, the cumulative number of validated systems in the field grew from 51% to <unk> 84, an increase of 65% and consumable revenue per average validated system was around $80000.
It's important to keep in mind that this metric includes a number of recently validated systems that have not yet fully transitioned into full commercial routine use looking only at those systems, we consider to be in routine use consumable revenue per average system was well over $100000 in 2021 with several individual customer systems that run rates well over $200000 for the year.
These metrics are important factors in our forecasting and give us confidence in the contribution we expect recurring revenues to make to our long term growth. While we expect these metrics to continue to trend up over time, they can and do vary from quarter to quarter due to several factors, including the pace and timing of validation and the transition to routine use for new systems to finish up on revenue.
Noncommercial revenue related to our contract with BARDA was zero point $4 million in Q4 as a reminder, we completed our existing contract with BARDA in Q4, and do not anticipate recognizing any non commercial revenue in 2022.
Turning to gross margins product margins were negative $2 7 million or negative <unk>, 92% in Q4 compared to negative 3.0 or.
Were negative 74% in the same period last year.
The decrease in product margins was due mainly to the lower system volume in the quarter to help illustrate this had system placement has been flat with Q4 last year.
Product margins would've improved substantially compared to that period, reflecting both the progress we've made in reducing product costs over the past year and the impact that variability in system placements can have on our margins. We continue to execute against a number of product cost reduction and efficiency initiatives across both systems and consumables and expect these efforts as well as increasing sales volumes to dry.
The sequential improvement in product margin as we work our way through 2022.
Service margins were 3% in the fourth quarter compared to 12% in Q4 last year. The slight decrease was mainly due to investments we made an incremental field service and validation personnel. During 2021, we expect these investments to drive significant service margin improvement over the course of 2022 as both our activity volume and employee productivity continued to increase.
<unk>.
On a combined basis commercial gross margins improved slightly from negative 57% to negative 54% in Q4 with the impact of lower system placements more than offset by a higher mix of service revenue and improved consumable margins.
We continue to actively manage inflationary pressures in some material freight and labor costs and did not experience any material business impact from them in the fourth quarter.
Moving down the P&L total operating expenses were $12 1 million in the fourth quarter, consisting of $3 4 million in sales and marketing $2 $9 million in R&D and $5 8 million in G&A. This compares to total operating expenses of $6 6 million in the fourth quarter of 2020.
The increase was largely due to higher employee related costs due to increased investment in commercial and product development as well as higher G&A expenses incurred to operate as a publicly traded company.
Net loss in the fourth quarter of 2021 was $14 6 million. This compares to a net loss of $11 3 million in the fourth quarter of 2020.
The increase in net loss was primarily due to the higher operating expenses that I just discussed.
Net loss per share attributable to common shareholders was <unk> 35 in Q4 2021 as compared to $36 66 in the prior year quarter. As a reminder, the number of weighted average common shares outstanding in Q4. This year was materially higher than Q4 last year because of the conversion of our outstanding preferred stock to common stock in connection with our IPO and <unk>.
<unk> 2021, this accounts for a substantial portion of the decrease in net loss per share between periods.
With respect to noncash expenses and Capex depreciation and amortization expense was zero point $5 million stock comp expense was <unk> 7 million and capital expenditures were $2.0 million in the fourth quarter of 2021.
We ended 2021 with $203 $5 million in cash cash equivalents and investments we believe the strength of our balance sheet gives us the flexibility to invest in our growth initiatives as we scale and continue on the path towards profitability.
Now turning to guidance on our 2022 outlook we.
We are reaffirming the guidance we provided on January 9th for full year commercial revenue of between $27 million and $32 million representing.
Representing growth of approximately 25% to 50%.
System placements are the largest source of potential variability between the high end and low end of this guidance range.
As we expected back in January omicron headwinds continue to impact our ability to access customer sites and interact with customers in person thus far in Q1.
While we have recently seen early signs of these limitations starting to lessen in some geographies. We continue to expect Q1 system placements and commercial revenue to look similar to Q4 and represent the lowest quarter of the year from there our guidance assumes that commercial revenues increased sequentially as the year progresses, peaking in Q4 driven by two primary factors.
<unk>, one increasing system placements due to ramping benefits from our ongoing commercial investments and expected lower impact from COVID-19 related headwinds as well as normal seasonal trends and to increasing recurring revenues from consumables and service contracts as we continue to grow our base of validated systems and move them into routine commercial use.
Looking at the year in halves, our 2022 outlook assumes that roughly 40% of our revenue will be delivered in the first half of the year with the remainder in the second half we expect the number of new systems validated in 2022 to be in line with or slightly higher than 2021.
Although we currently expect the quarterly cadence of system placements and validation to increase gradually as the year progresses and.
It is important to note that we've historically seen some variability between quarters.
That concludes my comments on our 2022 outlook. So at this point, we'll open the call up for questions operator.
As a reminder to ask a question. Please press Star then one.
To your question has been answered and you'd like to move yourself in the queue.
Okay.
Our first question comes from Matt <unk> with Cowen Your line is open.
Hi, Thanks for taking the questions.
So first one is just around.
The timing of growth direct implementation.
For Biopharma companies.
Are conducting their drug development manufacturing in house and Im sure it varies pretty small molecule versus biologic in cell and gene therapy customers, but.
Are you seeing companies customers implement growth direct systems automated testing capability is that before or after filing.
Just curious one.
Time is to introduce a drug direct system.
Yeah, Matt it's Rob good question, so most of our of our placements and installations are.
Our after commercialization of the product.
Within within again, our broader segment is biologics and cell and gene therapy, Although we do have we.
We do have examples of where we've been purchased.
And installed.
In phase III trials, especially in cell and gene therapy.
So that's.
That's the that's the composite I would say of our current portfolio that being said, we see opportunity to work upstream in the process.
In the face certainly phase III, possibly even phase III to become part of the manufacturing quality process earlier and it is one of the key elements of our of our commercial strategy.
Great and then maybe just.
Thinking about demand by customer type.
Can you just give us a sense for the demand trends youre seeing for Biopharma customers versus <unk> and then maybe then if we can split it.
Between.
<unk> companies cell and gene therapy companies and small molecule just be curious to hear.
How do how demand trended for each of those customer types.
2021 and expectations in 'twenty two.
Right, So I would say with.
The way, we look at it and what we've seen is demand was strong I think you've heard in the prepared remarks with regard to biologics and cell and gene therapies.
Both from a principal manufacturer standpoint, as well as CDM OS.
The majority of our cheat and most of the strong segment for us and the majority of those sales are into the biologics and cell and gene.
Therapy categories, but also those companies that are performing principal manufacturing of biologics and cell and gene therapy.
As discussed in the prepared remarks, our value prop is resonating is resonating quite strongly.
The value prop resonates strongly in small molecule in sterile injectables, it's just less of it.
Less of a current.
Feature of our of our current portfolio based on the <unk>.
Composite I'll walk you through it in the prepared remarks and previously.
And thats as much to do with our current focus is any end market demand and as we expand our commercial team expansion of our capture of those other segments is certainly certainly in scope.
But the demand and value proposition around biologics generally in cell and gene therapies is remained strong across the.
I'd call it the manufacturer tight principal manufacturer or CMO.
Great maybe just a final quick one just on <unk>.
Variant.
The variance impact has cooled off the bat.
You are serving a global customer base, but if there is anything you can offer around.
Rebounds, the readout and you've seen in the U S versions, maybe the EU and rest of world.
Yes.
Called out that would be helpful.
Yes, yes.
The first part of the quarter looked a lot like.
Q4, yet but per sean's comments, although we are seeing green shoots and things getting better.
In the U S. In particular, just for example, we had one of our major customers on site last week.
So first time, that's happened in a very long time.
Asia I would say is probably the most based on our experience at least the most still in.
I wouldn't call it a lockdown mode.
In a more of a Covid protocol mode, and then in Europe or somewhere in between North America.
And Asia now that being said, we are planning a significant customer visit trip in the early part of Q2, which we expect to.
Go through with so.
We're kind of cautiously optimistic about about the.
The restrictions alleviating it's still company to company and case by case, but we're incrementally optimistic.
Great. Thanks for taking the questions.
Thank you.
Our next question comes from Tycho Peterson with Jpmorgan. Your line is open.
Hi, guys. This is Casey on for Tycho, Thanks for taking my questions.
I wanted to get a sense of.
Hey.
So what's the implied.
Pull through per system in the 2022 guide both in terms of total instruments and about it.
Then for the routine.
Instruments, and then can you give us a sense of how many of the debates right now is routine and where do you think that would go by the end of 2022.
Yes, Casey Sean So on the first question focusing on the validated system base I think what we've got modeled in as a relatively modest increase in that number that $80000 number that I mentioned in my remarks.
We will expect to see that accelerate over time as we continue to grow that base and more and more of that overall basis is already into routine use so think.
Think about routine use.
In the past about kind of a lag in the process to get from validation to routine use different for different customers. It goes typically goes faster for existing customers than new customers.
Got our targets three months.
We don't have every customer there yet some take longer than that we're continuing to work with them to accelerate that process.
We do see significant opportunity in our going out that a number of different ways and we've talked about some things we're doing to project manage more directly and shrink those timelines down so both that and they are there.
There are opportunities with customers, we're going after to increase utilization of their systems, whether it be adding applications.
They naturally do it sometimes as they ramp up production.
Both of those factors are things that we see as drivers of that metric increasing and accelerating over time.
Got it that's helpful.
And then on the margin profile of the <unk>.
Super Bowls, usually in our space the consumables are the higher gross margin than the instrument.
So just wanted to get a better understanding of what goes into the consumables manufacturing process here and if there's any way to optimize costs. There and then ultimately where do you see the long term consumable margin shaking out once you guys here at scale.
Yes sure.
There are lots of opportunities to optimize cost and we're going after many of them right now.
When you think about us and we talked about this before as well.
One of the bigger challenges the consumable margins for US today is just scale.
The volume is relatively low we have made significant multimillion dollar investments in an automated line and infrastructure to support.
The growth of ourselves and our customers.
Adding facilities, we just talked about the Lexington facility that we're adding in.
We expect to bring online mid year so.
What's going to drive.
Gross margins for us moving from negative to positive and trending up into the 70% range is where we which is where we ultimately expect them to get long term is going to be us taking cost out of the product at low volumes you don't have a lot of leverage with suppliers.
There are different things, we can do as we grow that will help get cost out of product that we've talked about in the past.
But volume is a very big.
Provider of leverage in the margins for consumables going forward as well.
Cost base, we built that we do not expect to grow at anything close to our consumables growth rate and therefore, the amount of overhead that gets allocated to individual consumable over time is going to shrink relatively rapidly and that will drive a lot of improvement and expansion and consumable margins going forward. So we look out a couple of years.
Now we would expect to be in a space, where we're moving positive and we'd expect that trajectory to be pretty steep in terms of getting ourselves up to where we ultimately think we can get on the consumable margin overall.
Got it. Thank you for all the color there and then maybe just curious.
How you guys are thinking about clients staffing shortages already both in terms of near term impacts, placing and validating instruments, but also on the customer demand side.
This dynamic will likely drive some incremental demand towards an automated.
High throughput.
So, yes, I think any color there. Thank you.
Yes, Casey, it's certainly part of our value proposition customer.
Customers view our system.
As a way to.
To manage the risk of a human labor. So it's definitely a core part of our value prop and resonating as you may imagine strongly in the current market.
As I touched on in previous conversations. It's also not it hasnt been a great idea historically to have.
Certainly through Covid to have a number of people in our <unk> and <unk>.
Lab side by side looking at Patriot issues, so that automation.
Note data and data enablement capability, we bring as part of the strong value prop.
Got it.
As well as our customers can put a my comments in the intro remarks.
Our next question comes from Dan Arias with Stifel. Your line is open.
Good morning, guys. Thanks for the questions Sean when you look at the bucket of routine use systems that drive those consumables pull through levels that are pretty high 100, K and I think you said there were some that are over 200 K.
What is the average timeline that it took to get to those levels.
And then I guess what are the characteristics of those customers have in common and that we can kind of use to conceptualize, who should be getting to what level and when I mean im sure overall customer size plays into it but I'd be curious just to hear.
When you try to understand.
Who gets to where and when and what the expectation should be there how we could go about thinking about that.
Yes.
I'll start and I think Rob may have some comments here too.
Yes, so in the timeline to get customers from validation routine use it varies quite a bit and historically.
As I said earlier trying to narrow that that both shrink it and to make it more consistent.
We're making some progress on that but we've got some work to do we think theres a lot of opportunity, there, which is going to benefit us and get consumables going sooner.
Three months I said was a target we have some that are three months.
Some that are to be Frank more than a year. Most are in between that so I don't have an average number for you, but I would think about.
Somewhere in the middle of that range, being where where our typical customer.
Would be taken at the time that we'd be taking a typical customer today to get from validation in routine use.
In terms of where who is at the 200 plus who is that.
Less than that it really has to do with use cases for a specific customer I think we've said before that cell and gene therapy. The level of testing intensity for <unk> within that that sector is very high. So we would typically expect those kinds of customers and generally biologics as well maybe slightly lesser extent.
<unk>.
And particularly to be pulling through high volumes of consumables and generating high volumes of revenue, but it does ultimately come down to use case in <unk>.
Rob I'll, let you comment a little bit on that as well, yes, sure I think just to jump off of <unk> comments I think that's that's.
It was spot on I think of it as right now mostly application driven Dan So environmental monitoring.
Is are any given manufacturing facility.
70, plus percent of the volume and our footprint tracks pretty closely to that so our higher volume.
And the higher yielding systems tend to be the environmental monitoring systems in both LNG and biologics we have some very high examples in both segments.
So our water and bio burden tests are tend to be a bit lower volume, but I can also tell you that we've got a focused.
Energy against continuing to maximize system.
Capacity there is latent capacity in some of our systems around the world and we've got a dedicated team out there that is growing focused on.
Improving application utilization, bringing on for example, if if the site has a water system thats being used not a full capacity partnering with the customer on different parts of the site or campus to bring more water testing on to maximize the.
The utilization and ultimately consumable revenue, but.
But at the highest level of think of it as we're focused on biologics and cell and gene therapy. It tends to be a very very high test volume environment for <unk> and other and the majority of our sales and forward looking funnel.
To note is environmental monitoring.
The only other thing I'd add to that Dan is just remember that between water bio burden in <unk>. The pricing is quite a bit different roughly three X or more right.
For water and Barbara and so volume is not the only driver prices is important as you think about how that how that's working out in the market right. So some of that latent capacity in some of the systems around the world becomes an interesting lever over time as well.
Yes, okay.
Okay helpful. And then just to go back to some of the dynamics in the quarter and some of the things that you mentioned can you just talk to the policeman factors that you saw that arent related to COVID-19 and the extent to which.
Some of them are sort of idiosyncratic or one time situations and then looking into the first half of the year or are you getting the sense that there might be any of those that would crop up and that we should kind of factor in when we're thinking about <unk> placements aside from what you mentioned.
Yes, Rob I'll start and Tom you had a couple of comments as well so the non COVID-19 and maybe customer related timing issues and one. Good example is we had a.
A decent sized multi system order pushed to the right due to construction delays now.
Details of that could be related to COVID-19 underlying impacting construction it's.
Hard to flesh that out at times, but fundamentally at the sites not preparing for the customer is not ready.
STREAMWAY difficult to.
To place this system so that as that is an example of.
Idiosyncratic case that was meaningfully sized multi unit order in the quarter Youre looking into the first half.
Do risks of that nature exists at some level, yes, but.
The quality and scale of our of our funnel that we're managing.
We're managing around the hedge any any risk associated with that type of risk will exist but.
As we build our sales team out and build our funnel around it that's really one of the major countermeasures, we have against these types of.
Challenges and having better site access can also help us get ahead of some of these risks as well, yes, just one bit of color on that deal that Rob talked about to the reason that the construction pushed out or we needed construction at all I guess are they needed it but it was because they decided to increase the size of their order so they needed to put it into.
Different facility, which ultimately needed construction to fit the systems. So it's a good answer for us it just it impacted timing.
Yes, but it should fall into 2022, so if they wanted to if I was thinking initially two and in Q4 I could be thinking three in 2000 22022 at some point I mean, the point is like you will capture that order in the <unk>.
Yes sure.
Is it a good assumption yes.
Okay, and then just lastly on that funnel that you mentioned just to kind of calibrate where we are now versus where we were I think when we were going through the IPO process. The way that it look the funnel looked by customer type was kind of just over two thirds biopharma and then the rest with the CMO and other is that generally the way that it looks now or are you growing the biopharma.
Because to your point LNG and things like that are picking up and contributing more to the.
So the overall demand profile.
So I would say that the biopharma principal manufacturer.
It's still probably in that two thirds.
And a big chunk of the rest of the CDM MAU, we tend to look at it as a bit more on and.
Product manufacturing modality. So the combination of Biopharma and CMO is is better than 85 plus percent and the funnel of those in our funnel theyre manufacturing, specifically biologics and cell and gene therapies.
So think of it is.
The vast majority of our funnel is in the biologics and challenging therapy category. The biggest single segment is biopharma followed by CMO.
Got it okay very good thank you guys.
Sure.
Our next question comes from Tejas Savant from Morgan Stanley . Your line is open.
Hey, guys good morning.
So one one on the <unk> versus <unk> dynamic here Robert John .
Can you just walk us through why you think the site access issues impacted validated system.
In <unk>, but the impact shifted predominantly to.
System placements in the <unk>.
Yes so.
If you recall we.
We picked up the validation is pretty quickly in Q4.
And what.
That is <unk>.
Related to how customers view critical access and essential activities. So once the system is purchased and is going through the installation process and validation process.
That can tend to get.
It's viewed as more of an essential type of function and allows our folks again onsite theres always some noise in that which caused a little bit of a little bit of delay in between Q3, and Q4 and a validation as you know we picked them back up new sales opportunities a little bit different with regard to our ability to get.
Onsite and get site access.
Especially with some of our newer opportunities out there is that just a practical issue associated with how customers ran their business and allowed US site access based on the kind of activity that we were performing.
Hey, Jeff just to add to that I think just more broadly it's important to remember that we at any given point in time, we have.
A number of validation is in process.
We measure the metric at the end of the quarter in that case because of the factors that we were seeing.
A handful of them slipped a few weeks.
If you look back at our historical quarterly validation numbers, they have tended to bounce around because those kinds of things have happened historically to just where it had been exacerbated with COVID-19 and some of the access issues that they've created although as Rob said that it's a bigger issue with the system new system placements than it is with the with validation so.
I want to set an expectation that these things can bounce around between quarters and we look at it on an annual basis and say did we meet our goals in 2021, we met our goal.
And we will continue to do that the critical question as is.
Is what's happening with timing going to impact future <unk>.
<unk> sales I think when we look at the Q3 Q4 example, not in any meaningful way, we don't think so.
To the extent that things split materially in the future, we'll need to talk about that but we do see variability and I just want to make sure that we're clear that thats part of the normal business cycle for us.
Got it.
Helpful and then.
<unk>.
Just a couple of quick ones on <unk>.
The margins here.
I think you've pointed to sort of some of the.
Mix in the fourth quarter here on the gross margin line, but are you still targeting gross margin breakeven in 'twenty two on a consolidated basis.
Yes, we are at the midpoint of our guidance range, we will be positive on gross margins in the fourth quarter.
Got it great and then Sean on Opex, I mean should we be thinking of.
Sort of mid to high 40% is fair with another sort of $8 million or so allocated for the Lexington facility build out.
Opex or capex to adjust.
Both actually yeah, okay. Yeah. So on Opex I would think about that as being a little bit below what our commercial revenue growth rate will be.
We wont have quite the same level will be a little bit lower.
That's really driven by a couple of things investments, we made in 2021 annualized <unk> <unk>. The other big thing in there is that we're a public company now this will be the first year that we have those costs that we carry with us for an entire year. So the annual inflation of those drives a little bit higher growth rate in those costs and as we look forward. We would expect there to be a bigger gap between revenue growth and opex growth after.
This year as we drive toward profitability over time.
On Capex the Lexington site is a consideration theres a couple other relatively significant things in capex. This year. So the number that you threw out there is probably a relatively fair number.
To think about Capex for us this year.
Got it helpful.
Yes.
It's come up a couple of times.
But I just wanted to talk about like some of the more recent proactive measures you've taken to ensure your customers regarding business continually.
A big point of focus, especially given not just the supply chain pressures, but now also all the geopolitical tensions.
Over here.
And in that context, Rob.
Can you, possibly think about sort of plans to accelerate that European facility build out.
Well, yes to that point Hs during I mentioned, a visit to see customers early in Q2.
The second part of that business to look at.
Various sites in Europe as well so it is top it is top of mind for us just more more generally.
Continue to hold both upstream and downstream finished goods inventory in both North America and Europe for our customers we haven't seen.
Any major supply chain disruptions through COVID-19 up into including kind of current times, we have our principal manufacturing in low.
Emmanuel back up there and then of course, we're as you know we're investing here in Lexington for backup manufacturing as well and as we discussed ultimately Europe as well and but.
Anyway good.
Timing on the question because we are.
We are we are focused now on the as lessons and is coming to conclusion looking into the European.
Site selection and Gopro, we're still TBD on the actual project plan around that but it's very much it's very much on our plate for 2022 and that will be probably our number one capex investment over the next couple of years. After this year.
Got it that's helpful. And then one final one for me on Sterility.
Rob any color on.
Seatback from customers following the announcement I think you mentioned.
First customer beta starting here in the second quarter.
Any color on whether a customer could adopt grow direct so leave foster reality or is it more often optionality for existing customers to add a new application to the platform.
Oh, yes, what's the general feedback that we're getting from customers, especially those.
Of which we are working with on beta is quite excited so I think there is a.
There is a need for a rapid sterility application in the market that that is that is married with a system like the growth direct where you have the full walkaway automation and all the data integrity benefits and to the second question no. We absolutely see a a value prop of selling sterility to not only our.
Existing customer base, but new customers as well.
It's the value prop resonates strongly in our core market of biologics and cell and gene therapies, but we also touch a bit about the top of the call here in the Q&A about other segments like sterile injectables and other types of small molecule markets. It also has very high value proposition fit there as well.
We view it as certainly related.
With regards to the full assay profile that we currently have but also it can be adopted.
As a standalone assay and system basis. Our goal. Obviously is to is to is to acquire the entirety of the workflow in any given customer, but there is we do envision.
Maybe being the lead dog, if you will our lead.
Kind of.
Instrument.
An assay and new customers.
Very helpful. Thank you Rob.
Sure.
There are no further questions I'd like to turn the call back over to Rob for any closing remark.
Great well. Thank you for joining us today. We appreciate your interest in our company next week were attending the Cowen Health care Investor Conference and look forward to speaking with many of you there.
This concludes the program you may now disconnect everyone have a great day.
Okay.
Sure.
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