Q1 2023 Maravai Life Sciences Holdings LLC Earnings Call
Good afternoon, My name is Rob and I will be your conference operator today at this time I would like to welcome everyone to the marrow by life Sciences first quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer.
Session, if you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press. The star one. Thank you Deb our head of Investor Relations you May begin your conference.
Thank you Rob and good afternoon, everyone. Thanks for joining us on our first quarter 2023 earnings call. Our press release and the slides that accompany today's call are posted on our website and are available at investors got more alive Dot com.
As you can see on our agenda for today on slide two Karl will first provide you with a business update and Kevin will review, our financial results and guidance trade Martin President of our Biologics safety testing drew Burke executive Vice President nucleic acid products, and Bucky Becky Buzzy O our chief commercial officer.
Will join the call for the question and answer session. Following the prepared remarks, we remind you management will make progress looking statements and refer to GAAP and non-GAAP financial measures. During today's call. It is possible that actual results could differ from management's expectations. We refer you to slide three.
For more detail on forward looking statements and our use of non-GAAP financial measures are just issued press release provides reconciliations to the most directly comparable GAAP measures. Please also refer to tomorrow by the SEC filings for additional information on the risks and uncertainties that may impact our operating results performance and.
Financial condition.
Now I'll turn the call over to Carl.
Well, thank you Doug and good afternoon, everyone. We appreciate having you join us for our call today I'm.
Let me give a quick recap of the quarter highlights and innovative new products that we're introducing and provide a few business updates before turning the call over to Kelvin.
Let's start with our first quarter results on slide five.
Today, we reported $79 million in revenue for the quarter.
$4 million in total adjusted EBITDA and <unk> adjusted fully diluted EPS for the quarter.
Revenue results were within the range of expectations for the first quarter that we shared with you during our fourth quarter conference call.
Our performance this quarter was consistent with our expectations like other players in the field, we do know that broader market factors will likely continue to impact the business into the second quarter.
Kevin will go into more detail on the results.
Volumes guidance later in the call.
Our nucleic acid production business had revenue of $61 million in the first quarter.
This includes an estimated $45 million base nucleic acid production rather than.
The biologic safety testing it was $18 million first quarter.
On slide six you'll see that our adjusted free cash flow in the quarter was $23 million.
Cash on hand at the end of the quarter was $628 million down only $4 million from the euro despite our having paid $70 million upfront in the quarter or the alpine acquisition.
That sits at $537 million gross.
We maintain about $91 million net cash position.
This puts us in a great position to fund our long term strategy of growth through organic investments and our own capabilities, while we simultaneously pursue external M&A.
We continue to see multiple strategic opportunities in our space, but we will endeavor to responsibly deploy some of those cash.
It doesn't close out the first quarter of the year, we remain focused on first expanding our product portfolio.
Second advancing our market leadership, and Yamaha Bay space and.
And finally accelerating the introduction of scientific innovations.
Waves, which support our customers' rapidly evolving needs, while continuing to invest in operations manufacturing and people to support our base business growth.
So the first point on product portfolio expansion and our focus on innovation, let's now turn to slide seven.
As many of you know clean cap is not a single product, but rather a portfolio of capping analogs we.
We have several versions of clean cap that we have developed for both messenger RNA synthesis and for self amplifying Messenger RNA.
Yesterday at the tides USA scientific meeting held here in San Diego, Our Chief Innovation Officer, Dr. Kate Brodrick introduced the newest addition to the clean cap product portfolio.
Clean cap six which we are extremely excited about.
Clean kept in service of our most robust capping out of log today.
Represents a significant advancement in the field of messenger RNA Catherine.
We believe this innovative capping analog to be the most efficient capital strategy now available in the market.
We believe that will represent the next generation novel mrna caps.
Particular note is the fact that it produces the highest in vivo protein expression, we have seen for any clean cap analog so far.
And our comparison studies clean cap and six consistently produce 30% plus higher protein expression.
Comparable and somatic capping methods.
Higher expression can result in greater potency.
More effective dosing of messenger RNA drugs.
Similar to our other clean products clean cap and six generates a naturally occurring cap one structure.
Cotto transcriptional capex.
This provides our customers with a benefit with simplified and hire new messenger RNA manufacturing process with a shorter manufacturing time, which leads to better economics and mrna production.
Slide eight provides a quick recap of the favorable attributes of clean cap.
<unk>.
We know the Queen-cup already has the most economically favorable capping process on the market.
We recently commissioned a strategic consulting firm studied manufacturing costs associated with the three methods.
We're on a cabinet.
Enzymatic barco, which stands for anti reverse cap analogue and clean cap.
The study considered the complete.
Picture around mrna capping, including actual customer experiences costs and future needs.
Due to messenger earnings inherent instability.
Vitro synthesis of tomorrow, and it can be a challenging biochemical reaction.
And the need for high purity necessitates stringent purification and QC testing.
We saw in the recent study.
Depending on the technology equipment downstream purification processes and user expertise the expectant overall yield or cap mrna converting great range.
Ranging from 50% within the amount of capping.
95% associated with the use of clean chip technology.
And I'm just back from visiting one of our customers who has been conducting pre market evaluations.
And some of them are even newer capping out at once and they're very excited about the performance improvements being seen in their own hands.
In fact, we've already begun to take initial orders for this new product.
Slide nine shows the direct reagent costs for the GMP manufacturing of one Gram of messenger RNA using each of the three outlined mrna capping methods.
This figure demonstrates how in somatic capping and Arco require additional reagent costs for the same amount of product due to their reduced yields per reaction.
It is estimated that both into meta capping and architect apologies will lead to higher total reagent cost per quantity you produce them on it.
$248000 friends Maddock.
$221000 for Arco and $215000 per clean cap technology.
This data demonstrates how influential recovery read or yield is on the total reaction reagent costs.
Beyond this there are additional advantages to clean cap, including the reduced purification cost time savings and producing products for that simple manufacturing process and labor suits.
Slide 10 compares the total manufacturing costs of clean cap versus Arca and an amount of capex.
You can see clean cap is 30% less in somatic capping and 20% loss Marco.
As a result of this third party analysis, we have done it all robust selling tools for our business development and commercial teams can use to help drive share gains for the clean cap portfolio.
Especially versus EMS amount accounting methods.
The clean cap and six analog adds to these economic benefits with the additional enhancement of higher protein expression from the equivalent amount of mrna.
Together, we think this is a game changing analogue for manufacturing more potent messenger RNA therapeutics and vaccines.
Sticking with this new product innovation team, let's turn to slide 11.
Also at the <unk> scientific meeting this week, Glenn research, our high quality provider of Flor stores, Quenchers labels and modifiers for oligonucleotide synthesis.
One report 35.1.
Glen report has been consistent or constant publication 1987.
Serves as a well regarded resource for the many scientists engaged in DNA and RNA research and oligonucleotide synthesis.
New products were announced in our latest issue.
<unk> continues to expand the breadth of its <unk>.
Oligonucleotide synthesis products.
One I'd like to highlight today is the expansion of our client Terry sharing all product line with the launch of three prime.
<unk> modifiers journal CPG or controlled pour glass.
<unk>.
Click chemistry is a really popular method of conjugation and bio conjugation and its discoverers were awarded the 2022 Nobel Prize in chemistry.
Most people use one molecule label with an alkane group and another labeled with the name of that group.
Mix linkage formed between the two entities can feel as simple and easy.
Nick.
Glenn Research has now expanded our said.
Products and facilitate use of oligonucleotides input chemistry.
The three prime is either modifier sternal CPG is convenient to use from this application and produces excellent results due to its advantages over other approaches. It is possible that this new support maybe become the most popular method for preparing is I'd label oligonucleotides.
As you can see we believe that investing in new product innovation is key driver for creating value in this part of our business as well.
We are in an exceptional position to win customers early for both product and technology adoption.
Turning to our commercial strategy.
By winning early in the discovery process, especially with our clean cap technology.
We are able to cross sell and TPS and other raw materials at earlier stages of the clinical pipeline.
And that is exactly what our commercial team for MIP as tests to do well.
First with clean cap.
At the earliest stages of the clinical pipeline.
Ross, So MTP and other raw materials, and then grow with our customers to support them with their later stage developments.
This can include supporting them with both our UO and GMP materials, depending on their needs.
And when they choose to move to higher grade inputs.
Let's turn now to slide 12, and let me share some data with you on our progress with customer adoption.
One year ago in the first quarter 'twenty, two we had 185 clean cap reagent customers on a rolling 18 month basis.
As we closed Q1 of this year that number is now 312 customers up 69%.
These are customers that order clean cap as a standalone region product we.
We ship it to them or their preferred contract manufacturer and they then use our capping analogs and their own messenger RNA manufacturing processes.
This can be for research and discovery activities pre.
Preclinical development.
And with our G&P offering clinical manufacturing of messenger RNA.
We also track our clean cap mrna discovery customers.
These are customers at the very early stages of their programs look to traveling to manufacturer messenger RNA on their behalf using clean cap as their capping.
Their activities on mostly for early research and discovery.
<unk> assay development target identification and in vitro cell models.
This group of customers has grown from 585 last year to over 600 customers.
Roughly 3%.
Hasnt early customers continues through their discovery work, we expect many will mature.
Mrna GMP services, where they would take several of their top candidates and upgrade them to our GMP manufacturing process, which includes process development to a larger scale.
As appropriate methods validation and collecting documentation that would support IND filings.
Our GMP mrna customers have grown from <unk>.
55 to 61 over the last year.
Persona.
And lastly, the number of our GMP mrna customers, who would have advanced to the clinic is now 26 programs.
So let me now share a couple of examples of what this customer journey means over time tomorrow by.
Our revenues from core <unk>.
Slide 13 shows an example of a customer we started working with a few years ago.
The early discovery phases.
We know of several programs underway for precision genetic medicine.
In 2018.
We're less than a million dollar revenue contributor.
2022, they were ready to move to a phase one trial and order nearly $8 million products from us.
This particular customer uses clean cap.
And our <unk> knuckles pseudo uridine triphosphate.
This customer is also currently.
Valuation using Alpha XI enzymes.
Slide 14 is an example of a different customer.
We've worked with on nucleic acid services there.
Their target is a personalized cancer vaccine.
This customer represented $102000 in revenue in 2018.
And in 2022 was over 2 million dollar customer.
This customer uses our GMP clean cap tomorrow in a manufacturing and began their product development journey with us during initial R&D construct screening.
We worked closely with them to facilitate their construct selection and manufacturing of their various GMP batches.
As these customers progress through our GMP services with their preclinical and early clinical phase work. We also want to support them through later stage development, which is why we invested in our new Flanders facility.
So you can see we have a unique opportunity to drive clean cap inclusion across our growing <unk> customer base, while providing other critical GMP raw materials to improve in vitro transcription reactions and grow with our customers as they advance their own programs.
Now turning to slide 15, and our biologics safety testing business.
Our products and services in this business support the cell and gene therapy vaccines, and biologics drug manufacturing markets by providing process related and pure analytics.
Along with offering innovative viral clearance predictions solutions.
Help our customers to ensure the safety of their biopharmaceutical products.
We continue to innovate here to bring improved products to market to support our customers.
Late last year, we announced the launch of the Mark or B R. E. L. P kit.
This kit enables bioprocess sciences to quantify the removal of retro virus like particles or RV Lps produced endogenously by Chinese hamster ovary chose cells during bio pharmaceutical manufacturing.
We are happy to report strong market uptake of this kit and technology by several major biopharma companies and CD loans.
In addition, we are closely monitoring our recently published draft revision of the IC H, which is the international conference on harmonization guideline on viral safety evaluation.
Of biotechnology products.
Right from cell lines of human or animal origin.
This considers the use of <unk> drive the endogenous viral particles or RV LP.
For lateral clearance experiments.
If recommended in the final published guideline this can be a very positive tailwind for the entire BSP business.
In March our BST team launched the PG 13, HCP Elisa kit.
Bioanalytical customers can use this kit during purification and process development.
As well as in quality control and product release testing.
The PG 13 kit represents the 24th expansion plant.
Excuse me expression platform.
Provide analytics for.
Our commitment to supporting saw in gene therapy.
As we continue to.
Yeah.
Innovate and scale our offerings can be S T to ensure superior technical support.
The highest quality services and offerings and most comprehensive catalog of products to meet our customers' needs.
Now moving on to slide 16, and some organizational updates.
First we're happy to welcome drew Burch to our leadership team.
<unk> joined Us in April as executive Vice President of nucleic acid products.
For those of you not familiar with drew.
With 30 years of strategic operational commercial and financial experiences.
Life Sciences industry.
I look towards employing an incredibly important role on our team is more of a continues to scale and differentiate itself as a trusted supplier of nucleic acid and chemistry products for the life Sciences industry.
Im confident he will build on the momentum of the AAP operating division and help US continue to provide best in class products.
For the important work of our customers.
Second the integration of the Alpha Zion acquisition is going very well, we are actively qualifying therein lines into our nucleic acid services workflow.
Building their commercial team.
We've also decided to add to the Alzheimer's facility footprint with the addition of an adjacent 4000 square feet to provide an expanded R&D space.
<unk> extends our capabilities and the manufacturing of critical and volumes that support flexible scalable production.
Within a universally acceptable infrastructure and we remain incredibly enthusiastic about our combined opportunities.
We also remain active in pursuing other inorganic growth opportunities and look forward to being able to announce additional acquisitions in 2023.
We are committed to expanding our reach as a key specialized raw material supplier.
And we are actively working to increase our international footprint.
So look we may improve our ability to directly serve our global customer base.
Before I turn the call over to Kevin I'd like to let you know that in late March we published our second environmental social and governance report.
This report covers the 2022 fiscal year and provides an expansive look and Claire are rapidly evolving ESG program.
With tangible examples of how we are making a positive impact on stakeholders and positioning our business for sustainable growth.
I highlighted some key aspects of our progress during our fourth quarter call.
Encourage you to review the report on the Investor section of our website.
The comprehensive 41 page report is the culmination of our enterprise wide effort.
To deliver holistic value to our stakeholders, while scaling operations.
And managing rapid growth in a socially and environmentally responsible manner on.
On slide 17, you'll find some of the highlights from the report.
We are very proud of the team's work to date and are committed to being a strong corporate citizen.
We look forward to keeping you apprised on our journey.
I'll now ask Kevin to cover more details on our first quarter performance and.
And provided an update on our multiple facilities expansion projects Kevin.
Thank you Carl and good afternoon, everyone I'm happy to review our financial results for the first quarter and to provide an update on the multiple facilities expansions we have underway.
Starting on slide 19.
As you've seen in our press release. This afternoon. Our Q1 2022 revenues were $79 million as we stated in our Q4 2022 earnings call. We anticipated Q1 2023 revenues to be in the range of between 75 million to $80 million and thus our performance for the quarter was in the high end of our anticipated range.
And was consistent with our expectations.
We present basic EPS fully diluted EPS and adjusted fully diluted EPS basis.
Basic EPS as net income attributable to class a shares divided by the weighted average class a shares our fully diluted EPS equals net income prior to Noncontrolling interest divided by the weighted average for both class a and class B another dilutive securities to the extent they are dilutive.
And adjusted fully diluted EPS equals adjusted net.
Net income divided by the weighted average of both class a and class B shares and other dilutive securities. Both our basic in Follicular that EPS for the quarter or zero cents, while adjusted diluted EPS was <unk> <unk> per share. This was also in line with our internal expectations for the quarter.
Our GAAP based net loss before the amount attributable to Noncontrolling interest was $1 3 million for the first quarter of 2023, reflecting the lower revenues and the impact of acquisition related costs.
Alright, adjusted EBITDA, a non-GAAP measure was 24 million for Q1, resulting in an EBITDA margin of 30% in Q1 2023.
Certainly our EBIDTA margin was lower than we had seen in a while as a result of the lower revenue base. However, even with our revenue base being the lowest we've seen in almost three years. Our margin is still very strong when compared to most companies in our space, including much larger more mature companies in fact, when we look at the collection of six companies that have reported here already in Q1 2023.
And had adjusted EBITDA, including an alphabetical order <unk> biotech knee Danaher, <unk> and Thermo Fisher, our EBITDA margin of 30% compares well to the average of that group of six companies of 29%.
This is true even in a low revenue quarter, Andrew substantial ongoing investments in our overall infrastructure to support our future growth.
Continue to invest to stay laser focused on our long term strategic objectives, which require the continued investment in our overall capabilities.
Move to slide 20.
As Carl mentioned, we continue to have a strong balance sheet and cash flows our cash and cash equivalents, which are GAAP metrics totaled 628 million at March 31, 2023, and we generated $85 million in cash flow from operations in the first quarter, mostly based on the AR collections from our strong Q4 2022.
This strong operating cash flow allowed us to fund both the <unk> acquisition in the quarter as well as our capital expenditures in the quarter, our adjusted free cash flow for the quarter was $23 million <unk>.
Adjusted free cash flow, a non-GAAP measure, we define as adjusted EBITDA less capital expenditures.
We ended Q1 with $537 million long term debt and $620 million in cash this cash and debt structure allows us maximum flexibility as we continue to actively evaluate additional M&A opportunities as we look at our treasury operations, we've been tightly managing our cash with the interest cap contract we have in place on gross interest.
Expense is effectively capped at six 5% and with our excess cash sweep activity and 90 yields on liquid overnight investments. Our overall net interest expense sits below 4%.
Now slide turning to slide 21, I'll provide some more insights into our business segment financial performance for the quarter.
As Carl mentioned earlier, our nucleic acid production business represented $61 million in revenues for the first quarter nucleic acid production represented 78% of the company's total revenue in the quarter and generated $28 million and adjusted EBITDA in the quarter for a segment margin of 45%.
Clean cap revenues from our COVID-19 vaccine customers for approximately $16 million in the first quarter of 2023 in line with our expectations for the quarter.
Now we see this going down to about $10 million here in the second quarter of 2020 and maintain our guidance of $100 million in total contributions to our 2023 revenues. We did see additional orders for Covid related clean cap demand and had brought the total percentage of our full year total shift.
We're committed up to about 65% of our full year estimate.
Our biologic safety testing business contributed 22% of the company's revenue in the first quarter, our biologic safety testing business delivered nearly $18 million in revenues in the quarter and $14 million of adjusted EBITDA in the quarter a margin of 78%.
Our biologic safety testing business had the highest revenue level since Q1, 2022 and was up 14% from the last quarter of Q4 2022. We believe we are seeing the leveling out of impact at the impact of China shutdowns. We believe it will see a return to normal business in the China region in the mid to late second quarter here of 2023.
Corporate expenses that are not included in the segment adjusted EBITDA totals above were $18 million in the quarter, increasing from both the prior year first quarter and slightly from our most recently completed fourth quarter of 2022. These expense increases are associated with the continued buildout of our shared services functions.
Now moving to slide 22, and an update on our facility expansion project.
We have completed building construction of lenders, one and taken occupancy and we expect the same for <unk> two in the second quarter. We also began working out of our new building for our biologics safety testing business.
Our teams remain.
Greenlee, Louisiana tick about the unique capabilities, we can offer our customers from our expanding facility footprint.
Turning to slide 23, and our guidance.
Our first quarter results came in as anticipated that we acknowledged at the brighter biotech market is sluggish and will likely impact our original growth projections for the year. Thus we are updating our 2023 full year revenue guidance down $20 million at the midpoint to a range of 400 to 440 million.
This puts our base business revenues in the range of $300 million to $340 million.
With regard to the gating of overall revenues, we see Q2 had a total of around $70 million or so which includes the previously mentioned approximately $10 million contribution from Covid clean cap demand.
We then anticipate a more normal growth in the second half of the year, but the remaining COVID-19 clean cap contribution most likely occurring in Q4.
We estimate our adjusted fully diluted EPS in the range of 27 to 33.
And adjusted EBITDA of between $155 million and 175 million.
Our guidance is also based on the following expectations as listed out on slide 24.
Interest expense net of interest income between $18 million and $22 million depreciation and amortization between $38 million and $42 million.
<unk> based compensation, which we show as a reconciling item from GAAP to non-GAAP EBITDA to be $34 million to $38 million. This also includes an as if fully converted share count of 252 million shares and an adjusted effective tax rate of 24%.
Thank you for your time today and for your support of <unk> now I'll turn the call back to Carl for some final remarks.
Thanks, Kevin.
To wrap up on slide 26.
We are playing in the right target markets with strong leadership positions and exceptional opportunities for base business growth as we continue to innovate in messenger RNA and build our product portfolio and other adjacent 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 continue to look for opportunities.
In organic investment to bolster our market position and provide our customers with additional solutions.
We are committed to building a strong foundation for long term sustainable growth of our base business and we will continue to focus on people innovation and operational excellence.
Our three strategic pillars.
I would now like to turn the call back over to Rob.
<unk> for your questions Rob.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Could you please limit yourself to one question and one follow up.
First question comes from the line of Conor Mcnamara from RBC capital markets. Your line is open.
Hey, guys. Thanks for taking the question I appreciate it and.
Thanks for all the color on clean cap cost.
Some of the slides are very helpful and they clean cap cost.
The total production cost, but thank you for that.
One financial question and one kind of business questions. So first on the $20 million revenue hit Kevin can you.
Maybe parse out what where is that coming from because you did call out some inventory normalization in the press release and you talked about some biotech slowdown, so just which customers.
And kind of where that impact falls.
I'll start.
Yes, Thanks, Conor I would say, we currently are seeing softness in both the businesses I would say what we thought was kind of a sort of contained more to probably the first quarter has tripled in here to the second quarter I think now we see in our biologic safety testing business is probably more in that mid single digits growth for the year.
And then the base mass business, probably more in the mid teens. So I think youre seeing a few hundred basis points step to 500 basis points kind of coming out of both of those full years and really just reflecting kind of what we're seeing here in the current quarter being Q2 as opposed to our original expectations and the ones we shared on our last call.
Got it thanks for that.
And then just on the G&P customers.
Can you just help clarify I think the last time you shared that was Q3 2022, and if I remember that the customer's number was higher so I don't know if thats just <unk>.
Programs falling out of the clinic or can you just comment on how that.
How that number progresses, and how we should think about that.
You went from 55% to 61, I think the number was higher than that.
I honestly don't recall, Kevin and I don't know if you have in front of you.
Or anything that would.
Give us some color there.
No I am just curious if thats like net customers because I'm, assuming you have customers that go into the clinic and customers that come out of those programs.
Maybe it makes the next then quite so I was just curious if there's a way to think about kind of the.
The progression of that and if it's seasonal or anything like that.
Okay.
Kevin.
I was just.
Yes look I think the GMP mrna clean cap customers or 61.
Is up from where we were a year ago I think it was closer to 58 at that point in time and then in the clinic. We have 26 that we're currently tracking that is roughly the same number it spend for a few quarters now and again I don't just because you really haven't seen too many people move out of the preclinical phase into the clinical phase at least in our pipeline and then obviously not too many people.
Exit as we still just abrogate or one product on market. So there is not really a lot of churn in that right now I'd say, it's just sort of a slow progression of those two pipelines.
Okay and can I sneak one more in I'm sorry.
Just on.
<unk>. Thanks, guys on the <unk> does that does that expand the Tam does that give you more potential markets to go after or is that just make you a lot more competitive in the market.
As you call them customer.
Well I think right now we're focused on competitive share gains using them stocks and we think that that will go directly against the enzymatic capping methods.
The bottom line. The reason for that is that with an increase in yield.
The protein production capability.
For an equivalent amount of mrna that will get everybody's attention, even if they've been long time users of enzymatic methods and it <unk> in the original clean cap relatively close.
It was easy for them to stay with the enzymatic methods.
With this substantially improved performance it will make them take them much more serious look at clean cap than they might have before.
Got it. Thank you guys really appreciate the time.
You bet.
And your next question comes from the line of Catherine <unk> from Baird. Your line is now open.
Hey, guys. Thanks for the questions.
I guess first you highlighted a couple of customer examples in terms of the ramp of sales over a four year period, that's clearly a meaningful driver for you guys programs progress.
Wondering for guidance for this year, if we look at your base guidance.
Is there a way to think about how much of that is being driven by new program starts versus programs.
Boston that are ramping up.
Well, yes, it's a good question.
I think Kevin can comment on his view it also went up.
Afterwards.
Yeah. Thanks, Catherine I would say at this stage most of what we're seeing is really the progression <unk> existing customer base and that really goes to our to our strategy of really locking in the base technology as early as we can and then rolling with these customers both.
From our phase perspective, as well as a share of wallet perspective, as well as the migration from already low to GMP level products and Thats really our focus so embedded in our guidance is really that existing customer base.
It does not incorporate picking up really meaningful additional customers that haven't been part of our customer family thus far.
Yeah, and I would just simply add Catherine but given the size of orders from customers in their initial year or two as we go through the discovery process.
A relatively less significant to us.
The growth of those programs.
It's down the road.
You can see in both of those customer examples.
Yes, Okay got it and then on EBITDA margin and if youre expecting to reach about 39% for the full year net plans the guide.
<unk>.
We anticipate exiting the year more like in the mid Forty's. If we think about the back half ramp and is that a way to fair way to think about the starting point or 24.
Yes, it's certainly that is what the guidance would imply we would be back up in that 40% to 50% level area in particular.
Essentially at the higher end just given the assumption of the additional COVID-19 revenues in the fourth quarter frankly.
From where we are sitting you know, it's really a revenue contribution kind of over our assembled workforce and facility infrastructure Youll see here, even in a low quarter I think we actually at 30% margin, which is slightly above our peer average is I went into some detail, but the nice thing about what we have here is certainly of a great control of our costs really well done.
Time inputs and facilities that will enable us to rapidly expand our margin as the revenue base increases so.
It's really going to be a function of what that revenue number is when we go into 2024 and as we model our business long term certainly that margin expansion is a big part of that modeling exercise.
Alright, great. Thank you.
Thank you Kevin.
And your next question comes from the line of Matt <unk> from Goldman Sachs. Your line is open.
Hey, good afternoon. Thanks for taking my question, maybe if I could just kind of dig.
Digging into one of the previous questions just about the softness that youre seeing into Q2 just.
There's obviously a couple a number of headwinds whether it's emerging biotech spend or inventory overhang. So would just love to get a little bit of additional color. If it's one or the other or both just so we can help kind of frame our modeling given that both of these probably have a finite and we just wanted to make sure that.
I understand the dynamics of that softness in the sort of duration of it.
Matt I really don't think we have got anything to add to the eight or 10, guys who've already reported this quarter I think our.
<unk> seen there are slight differences in different parts of the business.
So you might have.
You definitely had some inventory build.
The COVID-19 side of the business, which everybody is reflected.
<unk> been involved in the globe.
<unk> production.
And then other places you might see more softness related to CD of MAU growth rates or China.
China would probably so all of those things are part of it I can't call out one more than the other significant Kevin I don't know if you want to take Charlottesville.
No I think thats spot on Karl I think we're seeing a multitude of factors, it's very hard to parse out the individual contributors each but at this stage I think we certainly see at least some of the China impact on inventory burn off as being temporal and obviously I'm rolling off here in the first half based on our guidance.
From then it's going to come down to the certainly the underlying demand from the existing customers and as we continue to look at the customer base and how thats growing.
The number of programs and how that's growing as well as additional products that we have and capabilities I think we feel good about our ability to build once those once those headwinds kind of subside going into the second half and into 'twenty four.
Got it thank you I appreciate it.
And then just my next question is just if you look at the Flanders build out.
<unk> complete and then we can take and the other one in the second quarter.
I know in the past that there has been some customers have not been able to transition.
To GMP or if you have not been able to transition with them.
In terms of closing that gap and being able to solve for GMP production for what Youre doing in <unk> do you feel that once we get through sort of the fully completed Flanders facility that youll have alleviated a lot of those issues that you might have had in the past with some of those customers.
Well why don't we ask <unk> to comment on that from her dual roles both.
The services side of the business as well as the commercial side.
Hi, Thank Carl.
Yes, Joe.
Just wondering today with you or are you well and phase one manufacturing.
The mrna and we do believe with the addition of our Flanders two facility that we'll be able to meet customer needs to want to go beyond phase. One so that is the intent of our Flanders to building.
Now in two late stage manufacturing.
And have the ability to <unk>.
Right.
Tech transfer those kinds over very easily and it's only a couple of miles up the road here.
And have a nice strong chat team to do that tech transfer and be able to follow the journey of that molecule into late stage manufacturing.
Got it thank you very much I appreciate it.
Thank you Matt.
And your next question comes from the line of Dan Leonard from Credit Suisse. Your line is open.
Okay. Thank you. So my first question the decremental EBITDA margins on the $20 million reduction in your revenue forecasts are pretty steep.
Suggest that the change in sales forecast is fully dropping through.
Can you clarify whether that's accurate and that youre not taking any counter measures in response to the change in sales forecast or are there other moving parts to consider.
Yes, Thanks, Dan I think specifically the midpoint of the revenue decline is about $20 million at least the midpoint of the.
Adjusted EBITDA guidance by 15, so it's about 75% of that dropping through and really that just goes to some of the things I mentioned previously we have a very high variable contribution margin and that's that's great when things go up it.
Painful as things go down, but that's just sort of the nature of what we have here.
We don't have a lot of variable cost sort of below the.
The gross margin line and from our perspective, a lot of what we're investing in is really for the future and we can continue to do so so if you look at our investments in innovation a lot of which you saw some of the fruits of which we're here with them six.
Actually the commercial build out which is incredibly important to us as far as driving and seeking and realizing that long term growth rates and making sure we get all the customers we can globally.
Being clean cap and using our products and services is a commitment and investment we are committed to and then lastly, the finish of the facility's footprint again, something we started a couple of years ago. We think is as critical to our strategy as we move forward. So.
As you see the revenue line move Youre going to see a high proportion of that impact our adjusted EBITDA, just because of the lack of the below the line variable costs.
I appreciate that and then my follow up question, Kevin is on the phasing of the year on both revenue and margins did I hear correctly that the COVID-19 clean cap expectation for Q4 is around $75 million and if that's the case what are the implications for margin phasing throughout the year.
That is not what we said I do not believe habits.
No what we said was and.
Anticipating about another $10 million or so of Covid related claims have contributions here in the second quarter.
We also mentioned that between what is shipped and what is committed and we have about 65% of our $100 million guidance in the book and then the remainder which would imply roughly $35 million would likely be in the fourth quarter.
So I was taken 100 minus <unk> 15 in Q1, and the expectation of $10 million in Q2, so $75 million remainder plugging that into Q4. The bad is not what you were saying in the back half and then there would be in the back half in the back half I would say that.
Some of that committed 65% is shipping in the third quarter as well okay.
Referring to the Delta between the $65 65 billion roughly in the $100 million, which we would then be dissipating that would spike up in the fourth quarter part of the of the year.
Got it thanks for clarifying.
Sure.
You bet. Thank you.
Your next question comes from the line of Dan Arias from Stifel. Your line is open.
Afternoon, guys. Thanks for the questions Karl I appreciate the update on the number of customers that you now have in the mix here is there anything you can say about that.
Kris if we'd just separate out the non COVID-19 accounts or maybe even the vaccine accounts entirely.
Just trying to get a sense for the way in which things are tracking and some of these emerging areas that are that are obviously a big help.
Mr <unk>.
Well the only thing I would say is that we're obviously not seeing new accounts. That's for sure. But we are seeing continued activity from the existing players that we've been servicing at various stages along the way. So obviously the biggest.
Beyond that program.
There are a number of others beneath that it's hard in many cases, both for us to truly separate.
What is the therapeutic application versus a vaccine application.
We've spent most of the reason for that isn't the same companies doing both right. All you have to do is look at the pipelines from guys like beyond the cure.
Pfizer or others, you will see that they are trying to leverage the platform technology across multiple different shots on goal. So it is hard for us to know with certainty. There. We've spent a lot of time assessing those that are doing shows to COVID-19 and we think we've got a good feeling for that.
But theres still some pursuing those numbers.
Okay.
Okay, and then maybe on safety testing biologic safety testing, Kevin you mentioned expecting some normalization in China in the back half does that mean that we should think about sort of steady acceleration for DST across the quarters or is it better to think of some backend loading in order to get to that I believe is a mid single digit number that you talked to for the year.
Yes.
True.
Kevin what do we have traded a comment on the commercial side and when you can back it up with the numbers.
Yes.
Yes sure Thanks Carl.
We are.
As so many others have been.
Seeing softness generally across the Geos, we reported the China softness that really started in the second half of 'twenty two.
Getting some encouraging signs from customers.
Mr. Here that we will see a climb out of that so in our mind, it's definitely not a matter of if but when.
And we're optimistic for a recovery back to what we would consider to be the.
The expected market growth rates in the second half, which averages out to the mid single digits that Kevin called out.
Yes.
Okay.
Okay.
Thanks, Kevin anything to add there.
No I agree I think Trey summed it up perfectly.
Okay.
And your next question comes from the line of Jon <unk> from UBS. Your line is open.
Good evening and thanks for the question I guess, it's on the base nucleic acid.
I was wondering if you could break down even a little bit more there on what percentage of those customers are pre revenue biotech.
Is that really where you're seeing the slowness or has it been more.
Broad based within within that.
The updated guidance.
Yes, John I would say.
As we planned it this couple of times in the past.
See any of the.
Rather the new biotech customers just completely shutting down programs that were running away.
In some cases reduce the number of programs going after or re prioritize those focus on.
Focus their resources on.
Fewer numbers of programs to manage the burn rates, but it's not like we're seeing proof.
Pre revenue biotech.
Just shut down the road away from Nomura.
Their focus.
Got it and have you quantified what percentage of revenues that would be.
We have a couple of clubs added as you might imagine we have to do not only our own work on our board put some primary research I would say the numbers I have seen to date are a little bit.
Immature.
Actually wanted to hold off.
It was a little bit better or more comfortable insights until the next quarter. So we think we will have something for you by the.
Great and then just one last one here you mentioned a couple of times I think in the prepared remarks looking to do something inorganic.
Just additional color on where you think there is opportunities to fill in and it should be something similar to some of the tuck in deals that you've done over the last year.
Yes look I mean, we're super happy with the Alfa designed scheme and delighted to have them as part of the organization I think that the historical model of Moreover, exceptionally well I think we will continue to look for those gyms, when we can find them.
And then we're trying to be a little bit more creative.
There may not be a number of assets currently on the market or at prices that we would consider to be reasonable to look at deals that might be slightly more complex, but could involve the carve out of businesses of other companies.
<unk> unique structures the cold some businesses into us. So I think you may see a little bit more.
Creativeness in deals hopefully there'll be a little bit larger in size in terms of immediate revenue contribution.
Volume still remains one of our sweet spot.
Thanks for taking the questions.
You bet.
And your next question comes from the line of <unk> <unk> from Morgan Stanley . Your line is open.
Hey, guys good evening and thanks for the time here.
Kevin I wanted to go back to an earlier question right at the top of the call Lastly.
Around those GMP customers within map. So I think the question is basically that <unk> you add about 68 of them today, you've shown 61. So perhaps can you just bridge us to the number of customers you have today versus last fall. It's an important metric for a lot of investors in light of the loss of business you've highlighted you already do.
Not having GMP ahead of Flanders. So just any context color a bridge you could provide would be helpful.
As I said phase I.
Don't have the numbers in front of me so I can't.
Got it okay.
Then perhaps on biologics safety testing you highlighted this.
<unk> conference and harmonization guideline change.
Over what timeframe do you expect that to be meaningful for your business. If all goes to plan.
And on the other side of that I mean, as they think about sort of the guideline.
<unk> update.
How disruptive could it be for customers who are.
Already using sort of alternatives or is that not really a consideration.
Well look I think that it can be very disruptive mainly because of the costs and risks associated.
Late stage viral clearance costing the way its currently profitable.
So you've got everything on your final Bob.
At the end of the day, if you Taylor closed when you walk through the key development of your processes in such a way that.
Remediate problems when you saw kind of go around looking at months not years towards development program. So we think that the availability of <unk>.
The product coupled with the discussion about the guideline changes problems really a perfect time and even if customers are not immediately and some could change their historical gold standard final clearance testing.
Certainly be very interested in utilizing along the way.
A surrogate marker for whether they might have a product into the world.
Got it that's helpful.
And then last one from me I know you mentioned you want to hold off until the next quarter on your smid cap biotech exposure, but just anecdotally as you talk to your salespeople any color you can share on.
For how many of these as your existing customer base.
Is raising money here in the next 12 months or so.
Something that sets.
Front and center on that radars.
I know you've talked in the past that a lot of these customers raised a lot of money during the pandemic given the excitement around mrna, but just any updates around those conversations would be helpful.
Yes, we have certainly not seen new money from them change also if youre looking at it from that perspective, because we obvious factors moving away all over the last 18 months. So I think the demand that we're seeing here is from.
Pre established.
Company News, who leaves a significant a significant amount of capital during a period of time, we've talked about.
Are they holding that capital a lot more than.
When they were.
Probably yes.
And are they less certain about their ability to get another wrong.
But we can certainly in the us so I think it's.
Mexico, we were fortunate.
It was a very wide open window and lubes.
Okay.
2000, 22021 time frame.
But still sustaining us others may have a little bit different.
Exposure in particular, we've been thinking about biologics or small molecules that trajectory appears to be different.
And gene therapy World.
Got it Super helpful. I appreciate it the diamond all that color. Thank you.
You bet.
Rob I think that's about it in terms of our timing today, so perhaps if you'd like to turn the call over to Deb.
Certainly I will now turn the call over to Deb for some final closing remarks.
We just wanted to thank you all for joining us today and taking time out of your day for free to contact me.
Any additional questions and apologies to anybody that was done on the K that we didn't have time to get to.
So very much have a nice evening.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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