Q1 2022 Maravai LifeSciences Holdings Inc Earnings Call
So one of the best guilty.
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This conference is being recorded.
Sales at all or as you see.
Good day, and thank you for standing by welcome.
Welcome to life Sciences first quarter 2022 earnings conference call.
Please be advised that today's conference is being recorded.
I'd now like to hand, the conference over to MS. Deborah Hearts head of Investor Relations. Deborah. Please go ahead.
Thank you Patrick good afternoon, everyone. Thanks for joining us on our first quarter 2022 earnings call I'm joined today by Carl Hall, Our Chairman and Chief Executive Officer, and Kevin Hardy, Our executive Vice President and Chief Financial Officer.
Our press release and the slides that accompany today's call are posted on our website and are available at investors Dot Mario by Dot Com under financial information quarterly results.
As you can see on slide two Karl will first provide you with a business update and Kevin will review our financial results and guidance. We will then open the call for questions. Following the prepared remarks on slide three we remind you that the forward looking statements that we make during today's call, including those regarding our best business goals and expectations.
Patients 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 these risk factors is included in the press release, we issued today as well as those that are more fully described in our various filings with the SEC today's comments reflect our current views which could change.
As a result of new information future events or other factors and the company does not obligate or commit itself to update these forward looking statements except as required by law.
During this call we will be using non-GAAP measurements of certain of our results and providing guidance reconciliation of GAAP to non-GAAP financial measures are included in the press release that we issued today and metrics we will be discussing in today's call include net income adjusted EBITDA income tax expense.
Adjusted earnings per share. These adjusted financial measures should not be viewed as an alternative to GAAP measures.
Our intended to better enable investors to benchmark our current results against historical performance and the performance of our peers.
I'll now turn the call over to Carl.
Thank you Deb and good afternoon, everyone. We appreciate having you join us for our call today.
Let's start with our first quarter results on slide three.
Yes.
<unk> had a record quarter for the company as a whole and for each of our operating units today, we reported $244 $3 million in revenue for the quarter.
Growing 65% compared to the prior year.
7% sequentially over the fourth quarter.
Our base business revenue, which excludes clean cap revenue from COVID-19 vaccines was up 25% over the prior year.
Our adjusted EBITDA of $187 million was up 85% over the prior year.
And we reported a record 77% adjusted EBITDA margin for the quarter.
Our outstanding top line and adjusted EBITDA performance resulted in adjusted earnings per share of 54 cents per share for the quarter.
We also had record adjusted free cash flows in the quarter of $182 $5 million.
So you can see the 2022 is off to an incredibly solid start.
Our base business continues to deliver impressive growth across the board.
Selecting strong demand for our products on top of the Covid vaccine tailwind we have experienced over the last two years.
We have seen and expect to see continued momentum across our global customer base.
Lauren a research and cell and gene therapy development accelerates.
Turning to slide six.
Growth across the nucleic acid production business was very robust and remains I'd say somewhat.
Underappreciated by the broader market.
Our nucleic acid production business had record revenue of $223 $7 million in the first quarter.
Up 80% year over year and up 5% sequentially.
Excluding those COVID-19 related clean cap revenues.
<unk> nucleic acid business grew a remarkable 55% year over year.
We continue to focus on this base nucleic acid production business as a key driver of long term value creation.
<unk> for our messenger RNA <unk> services is expected to consistently grow.
As we are uniquely positioned with the right toolkit to support an increasing number of these customers.
And most importantly, 90% of our GMP services customers are incorporating clean cap into their own products.
We have also observed nice traction on the product side of the business as clean cap and our other small molecules are incorporated into new programs by both existing and new customers. We have a unique opportunity to drive clean cap inclusion across our growing messenger RNA customer base.
While providing other critical GMP raw materials, and our newest technology to improve in vitro transcription reactions.
These programs should continue to bring value to our customers and help improve the quality of manufactured messenger RNA for years to come.
Turning to slide seven.
We know that Theres, a great deal of focus on expectations for the balance of 2022 and for 2023 as it relates to demand for COVID-19 vaccines for.
The COVID-19 vaccine space remains highly dynamic.
With uncertainty around a number of variables, including the ultimate impact of vaccine hesitancy on the worldwide demand for primary vaccines the.
The next variance of concern and their potential clinical severity.
Waning immunity and its impact on disease spread and severity.
What are your ultimate end user demand will be for boosters on an ongoing basis.
Earlier this week the senior leaders of the FDA, writing in the journal of the American Medical Association made the following points.
First it is now time to accept the presence of Sars Cov, two is the new normal and that the virus will circulate globally for the foreseeable future.
And secondly, the COVID-19 vaccine compositions will need to change annually for both primary and booster doses to reflect future variants that are then in circulation.
The authors conclude by saying that quote the society is moving towards a new normal that may well include annual COVID-19, vaccination alongside seasonal influenza vaccinations close quote.
Those of you who have been following us for the last couple of years will recall that this is the exact scenario that we have predicted as we most likely long term outcome. Following the peak pandemic here.
Now we can't lose sight of the evidence of demand for the current versions of the vaccines is variable from period to period and.
In recent statements from our customers and other manufacturers with direct exposure to the COVID-19 market.
Guarding their own uncertainties about future demand reflect some of this variability.
We fully expect that demand for COVID-19, vaccines will continue to be a meaningful revenue contributor for Moreover, going forward.
Even though the exact landscape for 2023 two.
2023, excuse me remains unclear at this point.
As for this year, we are maintaining our overall 2022 guidance for COVID-19 related revenue.
It is a combination of the demand from commercialized and on market products.
Later phase demand from potential new market entrants, who are already more of our customers.
<unk> early development work that is being done by other customers for next generation vaccines, such as the previously announced collaboration between GSK and cure that.
This means that we are reaffirming our estimated growth rate in 2022 for COVID-19, clean cap revenues, which we provided to you on our year end earnings call of 12% to 14% growth over 2021 levels.
This is based on the current order book of material requirements from our biggest customers that helps determine our revenue forecast and manufacturing plants.
And as we discussed in February we say estimated growth here since clean cap can be used interchangeably by our customers for different end uses these figures represent just those orders that we believe are COVID-19 specific.
So for the reasons cited above and others, we do not yet have a specific line of sight from our largest customers into 2023 and what their overall COVID-19 vaccine production levels are expected to be as an example, Pfizer just commented that they expect that they will be in a position to provide.
2023 revenue guidance for <unk>, not only during their fourth quarter earnings call.
But we do know right now is that the development of new generations of COVID-19 vaccines continue a pace with a particular focus on vaccinations and boosters for the youngest children and booster designs that include the most recent COVID-19 variance of concern.
And we still believe the mrna technology provides the most rapid and flexible platform for new vaccine development and real time design modifications.
Recognizing the longer term COVID-19 vaccine demand is subject to a variety of factors, mostly outside of our direct control. We're focused on those things that we can control expanding our product portfolio market leadership and customer focused solutions.
<unk> to invest in operations manufacturing and people to support our business growth, which we are truly excited about.
And innovating in ways that will support our customers' rapidly evolving needs.
Now turning to slide eight.
One of the reasons, we are so bullish on our nucleic acid production business is our global Blue chip customer base.
Looking at our customers by category they span the spectrum of drug discovery and development from innovative biotech companies to potentially transformative RNA manufacturing platforms to large pharma.
Notably in the large pharma category, we estimate that we were collaborating on at least one mrna program with 18 out of the 20 top R&D spenders in 2021.
As I've said before we believe that mrna in clean cap prohibited state and a durable and meaningful way.
Our revised right in the thick of this action with a solid piece of the market for both infectious disease vaccines and mrna therapeutics.
Turning now to slide nine.
Given that this is the time of year for several key cancer and oncology conferences, including ACR and <unk>.
We thought we should highlight some of the exciting programs. We are involved with that are tackling cancer treatment.
Through the development of messenger, RNA vaccines, and therapeutics or through cell therapies utilizing messenger RNA technology.
Through our work with an outside consultant, we've completed a deep dive into the preclinical and clinical trials that are underway.
Of the 183 messenger RNA programs that we know are using clean cap roughly 30% or approximately 50 of these programs are working on oncology therapeutics.
These include preclinical and clinical trials for indications such as melanoma pancreatic cancer head and neck cancer and other HPV associated cancers to name just a few.
These programs are still in their early days in pre clinical through phase II trials. They provide an exciting roadmap for the future applications of messenger RNA.
The other 110 mrna programs using clean cap include therapeutics for a number of human health issues, such as auto immune diseases cardiovascular disease and metabolic disorders.
And of course this number includes messenger RNA vaccines for infectious diseases, like influenza shingles, Zika and Ebola as well as for additional coronavirus vaccines.
Now turning to slide 10, and our biologics safety testing business.
Our products and services in this business support high growth markets in cell and gene therapy vaccines, and biologics drug manufacturing by providing process related impurity analytics, along with offering innovative viral clearance predictions solutions that help our customers ensure the safety of <unk>.
They're biopharmaceutical products.
Process impurity testing on the Ella Immunoassay platform.
This new assay provides an automation solution for fast and efficient bioprocess impurity testing.
We plan to continuously innovate and scale, our offerings and biologics to ensure superior technical support.
For the highest quality services and products and the most comprehensive catalog of products to meet our customers' needs.
Now moving on to slide 11, and some organizational updates.
First we are happy to welcome Deb Barbara to our leadership team Doug.
Doug joined US in April as Vice President strategy and business development reporting to me.
In this newly created role Deb has responsibility for leading our global growth strategy and.
And we will drive the company's strategic and business development goals dub will also manage the companys mergers and acquisition function, including oversight of all equity investments acquisitions and integration planning for more volume.
For those of you not familiar with did she has over 30 years of life Sciences experience in a variety of business development roles.
I look forward to her playing an incredibly important role on our team is more of a continues to scale and differentiate itself as a trusted supplier of components nucleic acids and biologics assays for the life science industry.
Second the integration of the <unk> acquisition is going well, we are actively merging their product development activities with <unk> R&D and commercial teams.
The addition of Mike him extends our capabilities in the manufacturing of critical raw materials that are used in cell and gene therapy, molecular diagnostics and messenger RNA manufacturing.
Third we're committed to increasing our investment in messenger RNA innovation as we scale, our R&D operations facilities and quality systems and partner ever more closely with our customers.
To this in our facilities expansion plans are progressing nicely and Kevin will expand on this later in the call.
Our nucleic acid production project near volume, San Diego, which we call. The Flanders site expansion is on schedule and we expect to have occupancy for the phase one of this project later this year with phase two occupancy in the first half of 2023.
As a reminder, the first phase will provide us with an additional GMP manufacturing suite with two clean rooms.
By moving some of our operations to the new Flanders site, we will further increase capacity for commercial clean cap production here at water ridge, expanding the rest of our small molecule platform and adding GMP API manufacturing capacity.
Likewise, the biologic safety testing relocation from South port to a new state of the art facility in Leland North Carolina is progressing nicely.
The building is framed and work is moving towards a move in date by the end of the year.
This new facility more than doubles, our operational square footage to support current and future growth.
Our fully customized design will provide room for a mass spectrometry center of excellence and specialized sole culture facilities. It.
It will significantly increase our cold storage capacity, while providing other R&D laboratory and automation upgrades.
Extensive process flow analysis has been incorporated into the design process to optimize and enhance both our manufacturing and packaging operations.
These new facilities are one example of how we continue to make investments to further accelerate growth in our base business.
We also remain active in pursuing inorganic growth opportunities and look forward to being able to announce additional acquisitions. Some time in 2022.
We are committed to expanding our reach as a key specialized raw materials supplier and we are actively working to expand our international footprint. So that we improve our ability to directly serve our global customer base.
I'll now ask Kevin to cover our first quarter performance at some more details on our 2022 guidance Kevin.
Thank you Karl good afternoon, everyone I am happy to review our financial results for the first quarter and to discuss the components of our current guidance for the full year of 2022.
Given the cost presented some of the financial highlights already I'll briefly cover some more details regarding our first quarter results and then dive into our detailed financial guidance for 2022.
Starting on slide 13.
Beginning with the GAAP numbers, our net income before the amount attributable to Noncontrolling interests was $146 9 million for the first quarter of 2022. This compares to $75 5 million for the first quarter of 2021.
Income from operations was $167 4 million in the quarter for an operating margin of 69%.
Our R&D spend in the quarter was $2 7 million, which compares to $2 2 million from Q1 2021, as we continued to increase our R&D spend.
Ill remind you that the $9 2 million R&D from Q4, 2021 was unusually high due to the onetime third party expenses incurred to assess improve our clean cap manufacturing process.
Moving to slide 14.
Adjusted EBITDA, a non-GAAP measure was 187 million for Q1 compared to $100 9 million for Q1 2021. This represents an 85% increase year over year.
Net adjustments from GAAP EBITDA to adjusted EBITDA totaled about $10 million or only about 5% of our adjusted EBITDA for the quarter.
Our adjusted EBITDA margin was a record 77% up from the 16% reported in Q1 of last year.
And better than we had forecasted as a result of favorable gross margins in the quarter the.
The increase in adjusted EBITDA is primarily driven by overall sales volume increases and margin improvements from our nucleic acid production business.
Onto slide 15.
Here, we present basic EPS diluted EPS and adjusted fully diluted EPS.
Basic EPS is a GAAP measure net income attributable to our class a shares divided by the weighted average class a shares.
Our diluted EPS also GAAP measure starts with basic EPS and to the extent that the assumed conversion of class B shares and other equity awards are dilutive than net income and weighted average shares outstanding used in the calculation will be adjusted to reflect the dilutive effect of this conversion.
Were in fact dilutive in Q1 2022 and Thats included in the calculation.
Lastly, in the simplest and most comparable metric of focus for US is adjusted fully diluted EPS, a non-GAAP measure, which equals adjusted net income divided by the weighted average of both our class a and B shares in other dilutive securities are.
Our basic EPS for the first quarter was 51.
Diluted EPS was <unk> 50.
And our adjusted diluted EPS was <unk> 54 per share.
<unk> was slightly better than we had forecasted as a result of some revenue shifting from Q2 to Q1 that I'll talk about further as well as some strong gross margins and production levels in the quarters.
And slightly lower net interest expense.
Moving to slide 16.
We ended the quarter with $431 million in cash and $543 million in long term debt our strong EBITDA performance continues.
Led to robust adjusted free cash flow for the quarter of $183 million.
That calculation adjusted free cash flow as a non-GAAP measure, which is based on our adjusted EBITDA of 170 <unk>.
Third 87 million less capital expenditures in the quarter of $4 5 million.
As we have repeatedly discussed our strong financial performance balance sheet and cash flows provides us tremendous financial flexibility to make both organic and inorganic investments that will drive innovation build capacity address customer needs and contribute to our long term growth.
This was demonstrated by our announcement in late January when we put about $240 million of cash from our balance sheet to work to acquire might come.
Additionally, we plan to invest approximately $65 million to $75 million into the.
<unk> of our capacity with our two new facilities coming online in 2022 and 2023. This is up from our prior expectations of $50 million to $60 million due to additional investments being made for the Flanders build we recently made the decision to increase our level of investment here by about $15 million this year.
To provide us the optionality downstream to manufacturing materials beyond current quality requirements for mrna raw materials, including clean cap.
These upgrades include the introduction of integrated manufacturing systems quality of water improvements from reverse osmosis.
<unk>, great water to Wi Fi, our water for injection, which is pharmaceutical grade water and other facility infrastructure investments to support potential customer needs related to quality.
All of these all of these upgrades will also support an additional increase to batch run sizes and our overall throughput.
With $543 million in long term debt $431 million in cash and trailing 12 month adjusted EBITDA of $669 million, we have a eight times gross debt to adjusted EBITDA ratio and two times net.
Net.
Adjusted EBITDA ratio.
As we look at capital allocation from our free cash flows and strong balance sheet and debt capacity. We remained focused on strategic investments for growth and increasing our capabilities in support of the markets and customers. We serve for that for us that involves organic investments in people processes systems innovation and facilities to further our offering and solidified.
The foundation for long term growth for our base business. In addition, we continue to look to evaluate and potentially acquire businesses or technologies that can further expand our offerings. This combination of organic investment along with an inorganic M&A strategy continues to be our near term focus for capital allocation as we believe strongly in growth.
<unk> that include breath of offerings commitment to quality and dependability that comes with available and increasing capacity now.
Now to provide some more insights into our business segment financial performance for the quarter, let's advance to slide 17.
As Carl mentioned earlier, our nucleic acid production business fueled the most significant portion of the revenue growth for the first quarter.
Nucleic acid production represented 92% of the company's total revenue in the quarter and generated $182 8 million and adjusted EBITDA to 82% adjusted EBITDA margin in this business as a record margin for our nucleic acid production business and reflects the increasing value of our products as well as the productivity gains and efficiencies from.
Our state of the art, San Diego manufacturing facility.
Our base nucleic acid production business, excluding clean cap revenues from our major COVID-19 vaccine customers grew 55% year over year.
90% of that growth in our base nucleic acid production coming organically at the net revenue contribution from our Q1 <unk> acquisition was not material in the quarter.
As Carl mentioned, our focus with the <unk> acquisition was in securing a strong domestic supplier of ours, extracting and applying our core competencies to further improve and differentiate the quality and purity of our products and increasing our commitment to innovation with our unique scientific knowledge. We have also spent time evaluating the customers that did not overlap.
With our existing customer base and are excited about the long term opportunity presented by these incremental customers.
Overall, our base nucleic acid production business was a bit above our internal forecast for Q1 as we saw on mrna surfaces job front of our oncology customers complete in Q1 versus Q2 timing that we had previously forecasted.
Clean cap revenues from our major COVID-19 vaccine customers or approximately $172 9 million in the first quarter of 2022. This compares to $91 million in Q1, 2021, Covid related clean cap revenues for the quarter came in about $5 million higher than we had internally forecasted as some product that we had forecasted to ship in Q2.
<unk> was requested early by one of our pre commercial customers and was shipped in the first quarter.
Our biologic safety testing business contributed 8% of the company's revenue in the first quarter slightly being slightly above our internal estimates mostly attributable to timing.
Our segments branded products, which comprised virtually all of this segment's business grew to a record $26 million in the quarter representing growth of 17% from Q1 2021.
Growth was driven by an increased number of biologics and Biosimilar drug development programs as well as new customers gained in the quarter attributed to the high quality and breadth of our host cell protein Elisa kits.
Includes strong growth from our industry, leading show an E coli HCP Elisa kits analyze the impurity kits, specifically our protein a portfolio.
Our biologic safety testing business delivered $16 5 million of adjusted EBITDA in the quarter and 80% EBITDA margin.
Corporate expenses that are not included in this segment adjusted EBITDA totals I just spoke up were $12 $3 million in the quarter up from Q1 2021 levels of $10 3 million, mainly due to investments in key personnel and systems to drive and support growth. We continue to be pleased with our ability to attract and retain key talent at all levels from <unk>.
We sit here today with about 532 full time regular employees up from 476 at the end of the year and continue to add key personnel in a very competitive labor market.
As you can see it was a strong quarter from our buy across the board and a solid start to 2022.
Onward to slide 18, and our 2022 guidance.
Today, we are updating our 2022 full year guidance, we continue to expect revenue of $920 to $960 million for the year. So no changes there as I previously mentioned in my segment commentary, we had a favorable Q1 to our internal forecast, primarily due to timing and see the full year of 2022 and consideration of various risks and opportunities.
<unk> that we evaluate to have not materially changed from our view from about 10 weeks ago. When we last discussed our full year 2022 expectations.
Included in that range is our estimate for 2022 clean cap revenues directly attributable to our mutual COVID-19 vaccine customers to grow 12% to 14%, which would imply about $630 million for the year at the midpoint.
Our base business, which combines the non COVID-19 clean cap nucleic acid production business and our biologics safety testing business remains incredibly strong as Karl discussed with implied growth expectations around 30% overall for the year and over 50% for our base nucleic acid production business.
Now based on our strong Q1 margin profile, we are increasing our EBITDA guidance. We now expect adjusted EBITDA, a non-GAAP measure to be in the range of $650 million to $690 million up approximately $20 million at the midpoint as compared to our previous guidance range of $6 $30 million to $670 million based on this updated adjusted EBITDA.
Our guidance adjusted fully diluted EPS and non-GAAP measure is expected to be in the range of $1 74 to $1 90 per share up from our prior guidance of $1 70 to $1 84 per share.
Now looking at the second quarter, we see revenues relatively flat to Q1 levels within nucleic acid production.
We expect to biologics safety testing revenues to sequentially decline slightly and coming closer to Q2 2021 levels as.
As we have discussed previously we do see some inherent choppiness in our business based on our customers' demand and timing of their underlying programs combined with increased investments in labor commercial and R&D. We anticipate Q2 adjusted EPS to be in the high 40 <unk> per share range for.
Progressing to slide 19, you'll see our other guidance assumptions.
Adjusted fully diluted EPS is based on the assumption that all class a b shares are converted to class a shares which results in a forecasted fully diluted share count remaining at our estimate of $255 million to $257 million for the full year of 2022.
Additionally, our adjusted fully diluted EPS include including certain adjustments that do not reflect our core operations are still based on an adjusted effective tax rate range of 23% to 25%.
As it relates to the certain other adjustments needed to get to our non-GAAP adjusted EBITDA range, our expectations for 2022 include.
Interest expense between 22% and $25 million depreciation and amortization, increasing to $30 million to $35 million to incorporate updated estimates for amortization tied to finalizing the <unk> purchase price accounting.
Equity based compensation, which we show as a reconciling item from GAAP to non-GAAP EBITDA to be 15 million to $20 million.
As stated earlier for 2022, we expect to invest an estimated 65 to 75 million for capital expenditures the vast majority tied to new facility expansion.
And a reconciliation of net income to GAAP EBITDA and from GAAP EBITDA to adjusted EBITDA is presented in our press release and at the end of the slide presentation.
In addition, our segment related information will be in our Form 10-Q, which we plan to file very soon.
So thanks for your time today now I'll turn it back to Karl for some closing remarks on slide 21.
Yes.
Thanks, Kevin and so to wrap up on that slide 21, we are playing in the right target markets with strong leadership positions and exceptional growth in our base business as we build our product portfolio and other high value areas.
We are putting our strong cash flow to work with organic investments in our facilities human capital and product innovation.
We will also look for opportunities for inorganic investment to bolster our market positions and provide our customers with additional solutions.
We're committed to building a strong foundation for long term sustainable growth of our base business and we will continue to focus on operational excellence innovation and people as our three strategic pillars.
I would now like to turn the call back over to Patrick to open the line for your questions Patrick.
Thank you we will now take questions from the telephone lines. If you have a question and using a speaker phone. Please sit giant since before making your selection.
I have a question. Please press star one on your devices keep that you.
You can make answering your question at any time by pressing star two.
Press Star one at this time he type question.
First question is from Matt <unk> from William Blair. Please go ahead.
Hi, This is actually Matt on for Matt I appreciate the commentary around the color.
Total revenue here in the first quarter on what it takes to commencing in quarter, but.
Just wondering if you can provide any commentary around how to think about the back half of the year and.
Particularly into 2023, it sounds like relative to prior quarter. I think you mentioned that your customers indicated that they weren't expecting any massive drop off in volume in 2023, it sounds like maybe.
The outlook is a little bit more uncertain next year. So just trying to get your thoughts on how to think about 2023 in the back half of this year.
Yes look Max I think that our ability to offer any kind of final or firm commentary on 2003 to use limited both factors that I've mentioned.
During my remarks, so I would just say that we feel pretty good about 2022 numbers, we have in front of us but guidance was based on what we see coming down the Pike and I think some of the noise in the marketplace is just what a little bit of variability and different people may see variability in this.
Market at different points in time, depending on where they are in the supply chain would be on that Kevin do you want to make any comments about sort of relative size of the back half of 'twenty two.
Yes, certainly when we've had a had a bad quarter in the last quarter in Q4 in this quarter in Q1 with regards to our COVID-19 vaccine revenues.
For my remarks, we see the nucleic acid business.
Roughly in line in the second quarter as it has in the first quarter. So I think if you I know you all can do math pretty well. So you add those numbers up and you can look at our guidance and you will see the second half of the year a little bit below the first half and that is attributable to some COVID-19 revenues related to the vaccines being less than the current forecast in the first half of the year.
But certainly what we're what we're really happy on a focused on as well as the core base business growth for throughout the year and Thats looking really solid for the full year.
Got it I appreciate it.
Any color there and then.
For my follow up I wanted to follow up on something that you talked about at the analyst day, which is actually a customer funnel and I know at the analyst Day, you mentioned about 85% of the mrna service customers using clean cafe.
You indicated earlier that that number is actually stepped up to about 90%, but I was wondering if we could.
Talk about how many of the 60 clean cap supply agreement that you have in the pipeline includes services outside of clean cap I know you mentioned last quarter that the customers are bringing on and finding new clean capa supply agreements those relationships are looking more expansive than some of the initial clean cut spyglass. So any insight you can provide around how many of those agreements.
Expand just beyond providing clean cap.
Okay.
Yes.
I don't think were going to go through on a quarter by quarter basis excludes metrics necessarily each time, just because they get a little involved in.
Timing at the end of the quarter maybe.
Different from one quarter to the other I think you can expect us to periodically update those numbers and give it to you overall, but I would say, we're seeing more customers come to us looking for.
I would say all inclusive services. So they do really want to go from plasma approved all the way through the mrna manufacturing process. So the jobs that were being asked to quote.
We can be more expansive in that sense, but then they also it could extend further downstream into later stage development.
And that's a growing focus for some of our customers who are pretty optimistic about how their development programs will turn out.
Got it thank you.
You bet.
Thank you.
The next question is from Matt <unk> from Goldman Sachs. Please go ahead.
Hey, this is Nick on for Matt I appreciate the question.
First question is so it sounded like a lot of the capex spend increases going towards quality focused investment in your facility. So I was wondering if you could broadly talk about trends youre seeing in GMP grade demand and specifically GMP, great demand versus <unk> demand.
Yes, I think Thats a great question.
We're seeing more and more concern.
From our customers about the conditions and the grade of the product nuclear purchasing I think that reflects the conservative as a big pharma frankly.
As we've come into an area that's relatively less mature.
Small molecules are even monoclonal antibodies and I think there is an expectation whether it's the <unk> of the customer or it's ultimately the regulators such as the EMEA or the FTA, who are going to require greater scrutiny of the raw materials and the inputs that go into these novel techniques.
So I would say, it's becoming a much more significant issue of consideration and that is the primary reason that we decided to invest a little bit more on this facility in order to be sort of turnkey ready in the event that thats, where the market hubs.
Got it I appreciate that very helpful and then if I.
I'm doing the math correct the midpoint of the guide implies a 2% increase in EBITDA margins for the full year versus the previous expectation is that is that increase coming from pricing is it from coming from cost savings that just coming from cost saves just Mike can have anything to do with that.
Yes. Thanks for the question, Nick Yes, certainly it really it really has to do with us having a real big output quarter here in the first quarter I think we're not seeing year all that differently I think some of the things with regards to timing I mentioned, but we did see again some positive manufacturing variances here for.
For us in the first quarter were kind of banking those in passing those through.
Rest of the year is pretty in line with that pull up from the strong first quarter is whats being reflected in the full year.
Got it and then maybe if I could just sneak one more in when we look at the data in terms of.
IPO funding number of Ipos in the dollar spend on IPO. So far this year, it's down significantly from last year have you guys been seeing any slowdown in demand and in preclinical or one product.
<unk>, our new modality startups or youre, not really seeing that so far.
No we're definitely not seeing that we're seeing kind of the opposite which is.
Continuous increase in activity and I think it is probably attributable to the fact that a lot of the companies in our space. So our customers got their funding in the 2020 'twenty one window.
<unk> secured the funding and begun the development programs already so thats still fueling this leg of growth for us.
I appreciate it thanks guys.
Thank you.
The next question is from Tejas Savant from Morgan Stanley . Please go ahead.
Hey, this is neal on for pages. So just wanted to start on the biologics safety testing business.
To be trending just ahead of your previous expectations were around 16% growth.
As of today, how would you characterize the opportunity for upside or downside to the premium segment expectations you've provided guidance.
Kevin Yes, thanks, Doug.
Yes, thanks Neil.
Again, we see the business relatively relatively the same as we did a few months ago look I'd say, the first quarter was a little bit higher than what you're guiding for the year.
We had a good quarter with regards to our distributor relationships. Those are mostly in Asia. We also had a really strong.
Quarter and this continues to be a nice trend for us with some of our other contaminant testing kits.
<unk> protein in this case it was a very strong quarter for us so a little bit ahead of our expectations for the year full year, we see that moderating a little bit again closer to that 15% ish growth area, where there is some direct impact with regards to some business. We did lose in the eastern European region or won't be shipping into.
As well as a little bit of uncertainty certainly with our Chinese distributor and the timing of some of that revenue. So I think we're continuing to watch that very carefully as of now it has an impact us on a year to date basis in China, but that's certainly something we're keeping a sense too.
Those those are the main areas right now, but we're pretty comfortable right around that mid teens growth for the year.
Got it and then a quick two parter so in light of the ongoing funding concerns from Biopharma customers can you give us any color of what you're seeing you're seeing here as far as near or medium term spending trends for these customers and would you be able to also quantify your exposure to pre commercial or early stage biotech estimates X code.
No.
Well certainly on the funding concerns as I mentioned.
But earlier, we're not seeing that.
Do you think it's maybe because when people are talking about biotech funding concerns that are using pretty broad brush when they do that but if you look at the specific area of RNA therapeutics, especially messenger RNA.
Related delivery systems, the opposite is occurring so.
We can't say that we have seen any kind of slowdown or pass through of those trends that perhaps has been highlighted in.
Other parts of the life Sciences market.
On the pre commercial side, Kevin I don't know that we have a breakout.
Purely pre commercial but the majority of our historical business outside of Covid will be.
Related revenues has always been pre commercial mainly because up until very recently nobody was even in phase one testing a number of these therapeutics. So my guess is that still pertain, but Kevin I don't know if you have something better.
Thats absolutely right Carl I mean, when we talk about all of those programs again that we're involved in.
Two thirds of those are sitting in the preclinical stage cell and that's that's historically been the case for a lot of these revenues not many things have advanced and even into the clinic and certainly only only one product for us into the commercial space.
Thank you.
For color and then one last one for me so.
Following Mike.
Any updates on the M&A deal pipeline and with the pullback public valuations are you starting to see a similar dynamic on the private side as well it has opened up any new or interesting opportunities.
Yes, we will certainly be the price.
<unk> founders and owners of private companies.
A little bit sticky.
Downward so im not sure out fully priced through that may be in People's expectations, Obviously theres been so much turmoil in the market I think a lot of people have stayed on the sidelines in terms of transacting.
Trying to figure out where the equilibrium point is going to be but we're certainly seeing a number of different opportunities in our pipeline.
We're actively pursuing those and we think we will keep Deb and her team quite busy over the next six to nine months.
Run some of those to grow.
Great. Thank you.
You bet.
Thank you.
Next question is from Jon <unk> from UBS. Please go ahead.
Hello, This is Tim cheap auditing for job.
I've got a quick question on the <unk> can you share a little bit more about the revenue Q1 revenue of <unk> and the performance in general in Q1, and what is the outlook for my Kim.
For fiscal year. Please thank you.
Yes. Thanks for your question there we did not give the exact number of my comments pretty small and immaterial in the quarter. What we did say was nucleic acid production business growth.
Year over year was over 90% organic so you can certainly look back and do the numbers there to figure out what it was at least below for the quarter and we previously said that we expect that business to look a lot like our divested protein detection business that was roughly a $20 million business before but we were a big customer.
<unk> seen occupancy all that run through the top line with regards to performance, thus far and away again required them and they are in closed in January then very happy with the integration with our team and really taking their expertise and really looking to apply it to some of our other manufacturing processes also get some of their top scientists focused on back onto the bench and then.
Looking at the customer overlap in where they had incremental customers that we didn't have a relationship with exploring that further for the betterment of the overall nucleic acid business segment, so very happy with how things have been going thus far.
Thank you very much for the color.
If I can just have one quick follow up so youre 70.
77 percentage EBITDA margin looks pretty great.
So any thoughts on the outlook for the margin and also can you.
<unk> more color into the marginal margin differential from Covid and non COVID-19 clean cap piece.
Yes.
Yes, certainly we don't exactly look at it that way, we look at total clean cap on that certainly our product line and it's not a specific product per se.
So any claim cabinets manufacturer and so that volume has a strong margin as one of our strongest incremental gross margin businesses that we have.
Overall, we are guiding to think of our mid points to EBITDA margins roughly around 71% to 72% between the middle and the top end of our guidance range. We continue to have a very strong margins certainly in the first quarter was extremely strong but based on the growth of the business.
And that we have a lot of fixed costs that we can leverage there in that load some expansion as I talked about the back half of the year it looks to be a little bit down.
Just just due to tight tied to.
What we're seeing with the vaccine numbers and as Thats, a high incremental product for us youll see a little bit of temperament and margins and continued need to invest in both the commercial and the R&D infrastructure. So we're continuing to see a nice margins certainly, but we're bringing kind of tapering tempering the.
The back half of the year, a little bit to bring that overall estimate for the year around that 71% to 72% exiting at 77% per quarter.
Thank you very much. This is very helpful. Congratulations on the quarter.
Thank you. Thank you very much.
Thank you. The next question is from Michael <unk> from Bank of America. Please go ahead.
Hi, Good afternoon. This is Peter on for Mike could.
Could you comment on how your contracts are structured, particularly with larger customers are they are they take or pay or kind of what extent of flexibility.
Do you offer in terms of the ability to cancel.
Kevin do you want to do that or you want me to.
I'm certainly happy to Carl So are our LSA, which are our license and supply agreements for our large customers for clean cap one that we've talked about before we lock people in and those are take or pay that hasnt been it's certainly been an issue for us given the men we've seen thus far and those are basically staggered theyre not all identical but.
And generally we have supporting certainly the next three months are generally the next next.
Six months and then some parameters inside the contracts for the 7% to nine months and then we always look for our customers to try and give us as much forward looking information as they can and like to see a year's worth of forecast knowing that those last that last quarter would not be binding contractually or <unk> unless they've already submitted them. So as we look at the current year.
I think as was the case that we talked about last quarter. Nothing has changed there. We continue to have that high degree of coverage with either firms port commitments or pose in house and those are take or pay.
Contracts not all of our large customers or not all of our customers. Our tickets are using different different product lines of ours or fall under that exact structure certainly on an RNA services side. Those are all constructed a little bit different.
A lot of times, our kind of master agreement and have specific statements of work related to what they need in a given timeframe. So those are going to be booking in GMP clean rooms doing specific runs doing highly modified mrna is with clean cap and completing that sort of statement of work on a custom order within a given period of time.
And so because of that we don't have a set of some of those take or pay structures. They are by their very definition sort of take or pay on a custom level as you would see with a lot of the services businesses that run CD Atmos.
Okay. Thank you for that detail and then can you I guess can you discuss the extent of maybe any incremental traction you've seen recently in China, given some of the vaccine update there in the past month or so theres, maybe anything you could spike out in terms of customers or point to anything quantitatively that would be great.
Yes, we've seen some activity out of China over the course of the last two.
Two quarters.
Even though our original relationship with beyond took.
And beyond took Fosun collaboration falls under their remit, so that's a little bit.
Indirect for US we don't directly serve the fulsome custom.
Customer base and then there are two other.
Collaborations that we've been involved in that are targeting the China market, but.
I would say that as has been commented on before the Chinese government has not approved a four.
For an mrna vaccine yet for distribution and really don't I'm not close enough to know what the prospects are for that changing any time soon.
Yeah.
Okay, and just one last one on the 183 or an mrna programs leveraging clean cap could you give maybe a bit more precision on maybe the distribution of programs using clean cap across each stage.
We will be able to do that at a later date, we're still in process on some of the work that we're doing there and don't have the final readout, so it'd be a little premature but.
Something we're working towards.
Okay. Thank you guys. So much appreciate it.
Thanks, Patrick we have time I believe for one more question if you have one.
Certainly the last question will be from Paul Knight from Keybanc. Please go ahead.
Getting me in here.
On its only non Pfizer on nucleic acid business.
Should we assume that to be fairly lumpy because its likely want linked to clinical trial activity.
Yes, certainly it will behave differently than what you see in full production and that Lumpiness is related when you need the clinical materials or in some cases, the preclinical talks materials.
It goes campaign by campaign, so, yes, that's a fair assumption.
What should we think about growth in that business.
Product line rather.
That's a little bit harder so because we have to parse out what is COVID-19 and what's not COVID-19 at that.
<unk> customer.
They're a little books.
I don't want to say coy about that but there's just so much happening right now, but it is sometimes hard to get that with any precision I wouldn't feel comfortable weighing a number on it right now, but I think it's something that we have a couple of more quarters under our belt, we're going to feel better about projecting that.
Okay.
Thanks, Paul and thanks, everyone for joining us today.
We'll be having our annual meeting of shareholders next week on May 12.
So that'd be participating at several financial conferences. This quarter. So please check out our events calendar on our website and we look forward to catching up with you there feel free to contact me with any questions and I Hope you all have a great night. Thanks, so much.
Thank you. The conference has now ended please disconnect your lines at this time and thank you for your participation.
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