Q3 2024 Maravai Life Sciences Holdings LLC Earnings Call
Good afternoon, ladies and gentleman and welcome everyone to the Mifi Lifesciences third quarter 'twenty Identive earnings Conference call.
Speaker Change: Have been placed on mute to prevent any background noise.
Speaker Change: After the Speakers' remarks, there will be a question and answer session. If you would 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 Crestar. One again, thank you all.
Speaker Change: I'd now like to turn the call over to Deb Park. Please go ahead.
Deb Park: Thank you good afternoon, everyone. Thanks for joining us on our third quarter 2024 earnings call. Our press release and the slides accompanying today's call are posted on our website and available at investors <unk> Dot com.
Deb Park: As you can see from our agenda on slide two train Martin Chief Executive Officer, and Kevin <unk>, Chief Financial Officer are joining me today.
Deb Park: Birch president of nucleic acid production, and Becky <unk>, our executive Vice President and Chief Commercial Officer will join the call for the question and answer session. Following the prepared remarks.
Deb Park: We remind you that management will make forward 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.
Deb Park: We refer you to slide three for more information about forward looking statements and our use of non-GAAP financial measures.
Deb Park: <unk> issued press release provides reconciliations to the most directly comparable GAAP measures. Please also refer to <unk> SEC filings for additional information on the risks and uncertainties that may impact our operating results performance and financial condition now I will turn the call over to Trey.
Trey: Thank you Deb and good afternoon, everyone. We appreciate you joining our call today.
Trey: I'll give a quick recap of the third quarter and provide some commentary on the market dynamics, we are experiencing.
Trey: Then provide a few business updates and discuss our plans to acquire the DNA and RNA business of <unk> bio.
Trey: Let's start with our third quarter results on slide five.
Day, we reported $65 million in revenue $13 million in total adjusted EBITDA and a loss of <unk> <unk> and adjusted fully diluted earnings per share.
Trey: Our nucleic acid production or <unk> segment had revenue of $50 million <unk>.
Trey: Biologic safety testing or BSG had revenue of $15 million.
Trey: Q3 results were slightly below our expectations, primarily due to a few customer requested program timing shifts muted demand in research and discovery products within our businesses and persistent softness in the global biologics market, which impacted our PST segment.
Trey: And our <unk> businesses, we recently achieved a key milestone celebrating our largest service built to date at our water rich site, consisting of 26 grams of mrna material for our preclinical cell and gene therapy customers.
Trey: This cut this program was initially slated for completion during Q3, but was delayed by one week into Q4 at the customer's request.
Trey: Therefore, only a portion of the service revenue was recognized in Q3 versus the full amount we had assumed in our forecast.
Trey: We'll recognize the remainder of the revenue related to this program in Q4.
Trey: This is an example of the way customers clinical program timing can affect our service revenue realization.
Trey: Yes.
Trey: We also commenced our first customer build that Flanders to meeting another major milestone in our <unk> segment Youll see some photos on slide six.
Trey: This program is for a cell and gene therapy customer using mrna as an ex vivo tool to create that therapy.
Trey: The engineering run is complete and work is underway preparing for batch one of GMP. During Q4, we remain committed to advancing the field by playing a key role in the development of mrna based in vivo gene editing gene edited cell therapies protein replacement therapies cancer vaccines and infectious disease.
Trey: Vaccines.
Trey: Flanders to codify his commitment to our customers through phase III and commercial production.
Trey: The fact that this customer chose to be the very first in our new facility is a testament to their confidence in our team's capabilities expertise and commitment to high quality and we are delivering on all fronts.
Trey: We built a robust funnel for GMP services for our Flanders too and.
Trey: And we're excited to be underway producing our first revenue in Q3.
Trey: In the near term I would expect the revenue contribution from Flanders to be a bit lumpy as we scale up.
Trey: Similar to the customer request to delay at water rates in Q3 off.
Trey: There is two customer with a Q4 scheduled service build as requested in the program to early 2025 due to clinical trial delays on their end.
Trey: Our enhanced commercial team is working diligently with our customer funnel to fill capacity in the near term.
Trey: We're.
Trey: Courage by research that shows improved biotech financing and healthy new program starts and the industry related to our businesses.
Trey: However, we continue to transition through a period of contracting mrna clinical trial starts led by the steady annual decreases of new Covid mrna vaccine and therapeutic clinical trials.
Trey: Let's turn to slide seven to understand what I mean by that.
Trey: Yes.
Trey: The chart on the left side of the slide shows mrna clinical trials initiated each year as you can see 2021 saw the highest number of trials initiated but a very high percentage, 77% of those were related to COVID-19 vaccines and therapeutics.
Trey: You can see those declined by about 20% each year for the past few years.
Trey: The good news is that during this timeframe the non COVID-19 mrna trials represented by the Orange portion of the chart has steadily increased each year and are up 29% year to date through Q3.
Trey: At some point indication diversity will overcome the impact of the Covid driven decline in starts and we believe the Covid program proportional impact is nearly behind us.
Trey: Sure.
Trey: We believe we are the innovation leader and well positioned to service the growing segments of mrna therapeutics discovery and development.
Trey: The right chart shows clinical trials initiated for guide RNA mediated gene editing, which is an exciting emerging opportunity for us.
Trey: This market has been primarily car Ts using LINTA viral delivery approaches.
Trey: Developers are increasingly choosing mrna is the preferred cash delivery vehicles.
Trey: We can and do support this market from our U O to GNP inputs and with <unk> to commercial scale production across water rich and now Flanders too.
Trey: As you can see this market growth is far outpacing prior years up 75% year to date through Q3.
Trey: Gene editing is a market we're excited about as a driver for our future growth potential.
Trey: In both charts. This data reflects new program starts not total active programs. Our research shows the total mrna programs continue to increase and we are now tracking close to 1500 active programs.
Trey: We will continue to focus on innovation to move the industry forward and build new revenue streams, as a leading supplier mrna producer and raw material supplier.
Trey: In that regard I would like to highlight three areas on slide eight.
Trey: Thanks.
Within our business segments, we've introduced 21, new products year to date and continue to drive innovation is a critical kpis for our return to growth strategy.
Trey: We've expanded our discovery mrna synthesis services offerings with new customer sets of mrna, providing flexible options that customers need for screening and hits lead optimization.
Trey: This plate based mrna launch supports our efforts to enable and lead the field by launching it sets us up to 96 mrna construct.
Trey: These custom mrna construct libraries enabled testing of multiple candidate sequences with different combinations of five prime caps modified ntp's in pollyanna tails, all with industry, leading cost and turnaround times.
Trey: This new service enables our customers to optimize the performance of their specific targets.
Trey: Accelerating their development and improving the efficacy of life changing mrna based therapeutics.
Trey: Notably this quarter Alpha Zyman Trialing collaborated to launch clean scribe R&D preliminaries.
The clean scribe RNA polymerase is a novel enzyme that catalyzes the in vitro transcription or IDT of a recombinant gene regulated by the T seven promoter.
Trey: During the IGT reaction DS RNA can be produced as a byproduct and trigger undesirable inflammatory responses in the cells.
Trey: The clean scribe enzyme <unk> reduces double stranded RNA formation during the IGT compared to wild type two seven RNA polymerase, which is the current industry standard.
Trey: This new product reduces double stranded RNA by up to 85% and is positioned to help our customers develop safer more potent mrna therapeutics.
Trey: Yes.
Trey: Furthermore, we and our customers have found that this product is a very natural and easy substitution into existing IDT protocols and does not require extensive rework or further workflow optimization to achieve the exceptional performance.
Trey: This product's robustness reproducibility and double stranded RNA reduction make it ideal for mrna synthesis self amplifying RNA synthesis.
RNA pro preparation and RNA construct development for additional studies.
Trey: In addition to improving the final product.
Trey: Further improved the economic and process advantages that already meet co transcriptional capping with clean cap the preferred approach for producing mrna.
Trey: Initial feedback on clean scribe has been very positive in fact, the top pharma customers shared that they saw a 50% reduction in double stranded RNA in their self amplifying IBP process.
Trey: This impress them so much they plan to switch over to claim describe as their default enzyme for self amplifying RNA production.
Trey: Yes.
Trey: <unk> continues to work closely with Trialing and external partners to collaborate on the next generation of enzymes.
Trey: As for claim described.
Trey: X generation enzymes have the potential to boost the efficiency yield and cost effectiveness of mrna marketing menu.
Trey: Manufacturing excuse me and we are committed to being the innovation leader in this area.
Trey: Finally, we expanded our trailing owned IP around co transcriptional capping technology with the issuance of an additional patent in the U S. We now hold over 20 U S and international patents on our clean cap capping technology.
Trey: Let's turn to slide nine.
Trey: Yes.
Trey: We continue to foster key academic partnerships to enhance innovation and accelerate market adoption of the latest technologies.
Trey: Currently have active research collaborations with nine top tier academic institutions, some of which are listed here.
Trey: The most recent is our collaboration with the University of California, San Diego.
Trey: We believe investing in new product innovation, and partnering with leading academic and industry partners is a key driver for creating long term value.
Trey: Now, let's turn to slide 10, and discuss the pending acquisition of <unk> by Us.
Trey: We have signed a definitive agreement to acquire the DNA and RNA businesses of <unk> bio and.
Trey: <unk> is a provider of precision DNA and RNA services through an AI driven digital platform that automates and iteratively improves large and complex DNA Assembly from Oligos gene fragments.
Trey: Yes, mrna synthesis and downstream cell based screening.
Trey: The team includes bioinformatics and data scientists developing end to end software and synthesis automation solutions, enabling the design build test cycles for mrna therapeutics candidate discovery.
Trey: Yeah.
Trey: During the discovery phase customers need to be able to experiment and develop multiple constructs as they test to find the most promising candidate to advance to the next phase.
Trey: Today, there are many barriers to efficiently and effectively moving through these phases and <unk> has created a solution set that enables this process.
Trey: Just as our Alfa <unk> acquisition expanded our offering for mrna transcription tools and key enzymes.
Trey: <unk> will enhance our mrna offering for early phase discovery work.
Trey: The addition of the <unk> front end development and production expertise is expected to add complementary capabilities tomorrow revised and AP product product portfolio and allow us to offer our customers, even more complete and timely our mrna solutions.
Trey: As has been the case with our past acquisitions of <unk> as a founder led.
Trey: And comprised of an experienced team focused on cutting edge science bioinformatics.
Trey: And software services.
Trey: We expect this acquisition will accelerate and de risk our e-commerce roadmap enable mrna discovery offerings and portfolio attachment and access differentiated mrna design in bioprocess optimization capabilities to enhance our customer experience using AI and machine.
<unk> learning.
Trey: As many of you are aware our trailing discovery business unit is focused on working with customers at the front end of the drug development funnel.
Trey: Trailing discovery includes all research use only products and services.
Trey: Including all reagents are custom chemistry business and mrna manufacturing for screening and target discovery.
Trey: This is where the majority of our traveling customers are today and the discovery and preclinical stage and why this acquisition fits so well.
Trey: The <unk> front end ordering platform is expected to provide traveling customers with a home for construct design and integrates a full catalog of cap and novel Chemistries.
Trey: Yes.
Trey: We believe the addition of this e-commerce and AI offering will help our trailing discovery customers get to the next stage of development faster and more effectively with the best possible candidates.
Trey: We know our ability to provide end to end service from sequence to drug product is a resounding value proposition for customers choice.
Trey: With the acquisition of <unk>, our enzyme portfolio expansion through alpha assigned our trailing discovery products and trying to make GMP capabilities, we can incorporate raw materials and production expertise into our end to end service and supply offering which is totally unique in the industry.
Trey: Now, let's turn to slide 11, and highlight innovation within the biologics safety testing segment.
Trey: Sure.
Trey: Collaboration with the Trialing team thickness launched the first kit in their new generation of DNA quantification products that show Accuray's kit.
Trey: This residual host cell DNA quantification kit and all future kits. In this portfolio include a probe based master mix that contains trailing <unk> clean empty in TPS and the hot start tack DNA preliminaries.
Trey: The assay has higher sensitivity and specificity than the industry standards and the kits will help biopharma manufacturers ensure drug safety and stability for their patients.
Trey: The sickness DNA extraction kit, which is sold separately.
Trey: To isolate the residual DNA from any cell line, the resulting purify DNA can be quantified and its corresponding DNA amplification and quantification kit that show Accuray's kit is the first of many products. We have in development to grow our host cell DNA portfolio and we expect to launch two more products in this portfolio by the end of the year.
Trey: Like the alphas I'm in Trialing launch of the clean scribe RNA preliminary this new product demonstrates collaboration between our brands as the signature DNA extraction kits. He is trailing as clean air technology.
Trey: Now turning to slide 12.
Trey: We've continued to evolve through what we knew would be a transition year in 2024 as we prepare for 2025. We believe we have innovative technologies has built the right capabilities and infrastructure and are in the right markets to position us to achieve long term growth.
Trey: <unk>.
Trey: We've expanded our market position throughout the year with the industry and academic partnerships and look forward to welcoming the <unk> team when the acquisition closes.
Trey: I remain excited about our future our capabilities and what we can achieve together with the mission to make a meaningful impact in improving human health through the next generation of medicines.
Trey: I'll now ask Kevin to provide details on our third quarter performance and our updated guidance Kevin.
Kevin: Thank you Trey and good afternoon, everyone.
Kevin: Starting on slide 15.
Kevin: As you saw in our press release. This afternoon. Our Q3 2024 revenues were 65 billion slightly below our expectations for the quarter.
Kevin: Both business segments lagged our expectations with the napp segment impacted by softer clean cap demand in both <unk> and <unk> businesses as well as the customer request to delay a preclinical program building.
Kevin: <unk> performance continues to be pressured.
Kevin: Bioprocess and market backdrop.
Kevin: In the third quarter, we took a GAAP noncash goodwill impairment charge of $154 million as we revisited our long term model assumptions for all of our business units. The write down is it related to truck trailer business unit within our <unk>.
Kevin: Specifically the write down of goodwill associated with the acquisitions of trailing can Mike.
Kevin: Our GAAP based net loss before the amount attributable to Noncontrolling interests was 176 million for the third quarter of 2024.
Kevin: $154 million of that associated with the noncash goodwill impairment charge.
Kevin: As for earnings per share, both our GAAP basic and diluted EPS by <unk> 70 per share loss, while adjusted fully diluted EPS was <unk> <unk> per share loss for the quarter.
Kevin: Adjusted EBITDA, a non-GAAP measure was $13 million for Q3 2024 up from $12 million in Q3 2023.
Kevin: Our adjusted EBITDA margin was 20% in Q3 2024 that brings our year to date adjusted EBITDA, a non-GAAP measure to $37 5 million adjusted EBITDA margin of <unk>.
Kevin: Turning to slide 16.
Kevin: We ended Q3 with $570 million in cash up $5 million from the end of the second quarter.
Kevin: Based on $32 million cash flow provided by operations in the quarter and our Capex was $8 million in the quarter.
Kevin: Gross debt, which has a term until late 2027 is that $529 million, resulting in net cash position.
Kevin: Of nearly $50 million.
Kevin: As you may have seen via our 8-K filed in October we amended and extended to the revolving credit facility component of our overall debt position increased maturity by up to five years, and we slightly lowered the overall revolver from $180 million to $167 million.
Kevin: Based on the changing interest rate environment, and depending expiry of our interest rate cap in Q1, 2025, and our view of the M&A landscape. We are actively reviewing our current debt structure, which has a maturity on the term loan at about three years. As you are aware, we have managed to grow step structure to be opportunistic with M&A and also have the ability to voluntarily pay down of term.
Kevin: Loan.
Kevin: We have tremendous flexibility here for.
Kevin: For the first nine months of 2024, our net interest expense of $15 million on an average balance of around $530 million of debt or an annualized effective rate of under 4%.
Kevin: Now turning to slide 16, I will provide more insights into our business segment financial performance for the quarter.
Kevin: The nucleic acid production business revenues were $50 million in the quarter, representing 77% of the company's total revenue.
Kevin: <unk> generated $15 million and adjusted EBITDA in the quarter for a segment margin of 31%.
Kevin: Our biologic safety testing business revenues were $15 million in the quarter contributing 23% of our total revenues, our BST contributed $11 million of adjusted EBITDA margin of 72% in the quarter.
Kevin: Corporate expenses that are not included in this segment adjusted EBITDA totaled just spoke to were $14 million in the quarter continuing to trend downward from recent quarters.
Kevin: Now turning to slide 17, and updated financial guidance for 2024.
Kevin: Overall, I would say, it's been a frustrating year as it relates to our overall financial performance, particularly on the revenue line.
Kevin: It's frustrating as we've accomplished many of our key goals and initiatives from both an operational and strategic perspective, but have yet to see that reflected in our financial results. For example for 2024, we're surpassing our targets related to new product introduction lunches customer NII turnaround time on time delivery.
Kevin: While strengthening our position in the key academic market and adding more unique capabilities with the <unk> acquisition.
Kevin: We believe our core product market share remains strong.
Kevin: Have been impacted by the continued market weakness globally in bio processing as well as the challenges in that market based on the point of large orders, we had historically seen from pipeline progression.
Kevin: We've also been impacted by the re prioritization and timeline shifts customers programs.
Think for most of our space 2024 continues to be impacted by global macro pressures that have impacted buying decisions have created a challenge to return to growth.
Kevin: That said, we remain committed to making the best decisions for long term success.
Kevin: We've strongly that we are positioning our business to be a critical part of the broader ecosystem in which we participate and we'll continue to lean forward into the great opportunity that we believe are addressable markets present.
Kevin: We are lowering our expected range of revenues for 2024 to between 255% to $265 million at the midpoint. This is a $15 million or 5% reduction anticipated revenues for the year.
Kevin: This reduction results from a $5 million shortfall to our internal expectations for Q3, and about a $10 million lower outlook for most the most likely outcome for Q4. The lowered Q4 estimate is due to the shift of some customers GMP programs. Initially slated for 2024 being pushed to 2025. Additionally, the large clean capital orders we had historically.
Kevin: Dropping into our results have not occurred at the anticipated rate and our current order book entering Q4 leads us to a lower a more cautious outlook for the quarter and our napp segment.
Kevin: Our BSG segment revenue for China was up nearly 30% from Q2 2024, but still not back to historical levels, we anticipate a lower level of PSD revenues. We saw in Q3 to also be impacted as usual by the end of the year manufacturing slowdowns.
Kevin: Breakdown the updated full year revenue guide, we expect a nucleic acid production segment to be around 193 million to $202 million, we expect to see our biology safety testing revenues this year to be about $62 million to $63 million shifting to a full year that wont be now down in the low single digits versus 2023.
Kevin: Based on this updated full year guidance and the $203 million that are in the books, thus far the resulting expectations for the fourth quarter or for total revenues between 52 and $62 million with the napp segment at around $43 million at the midpoint and the BSG segment to be around 14 million or so at the midpoint of our range for Q4.
Kevin: As a result of the lower revenue expectations, the high variable contribution margins of our business and our forecast for slightly higher sales expense based on less favorable tax variances for 2024, we have updated our estimated earnings metrics. We now anticipate adjusted EBITDA margin to be 16% to 18% on this updated revenue guidance to 400 basis.
Kevin: The decline from our previous midpoint, 21% is mostly due to lower revenue projections in our higher margin products, including GMP products in nap and lower revenues for our high margin BSG segment.
Kevin: Additionally, we expect the following additional financial expectations as listed on Slide 17.
Kevin: Interest expense net of interest income between $20 million and $25 million depreciation and amortization between $45 million 50 million stock based compensation, which we show as the reconciling items from GAAP to non-GAAP EBITDA to be approximately $50 million.
Kevin: This also includes an as it fully converted share count of about 254 million shares and adjusted effective tax rate at 24% and we see our net capital expenditures to be around $30 million for the year.
Speaker Change: Before I turn it back to Trey I want to mention that we plan to close the acquisition of <unk> around the beginning of 2025 and Thats do not see it impacting our financial results for 2024 as it relates to fiscal year 2025, we believe it is prudent to focus on closing out our current year working with our customers and leadership teams to best.
Speaker Change: <unk> 2025, and then provide financial guidance with our first quarter in 2025.
Trey: I'll now turn it back over to Trey.
Speaker Change: Yes.
Speaker Change: Thanks, Kevin.
Speaker Change: So to wrap up our prepared remarks on slide 19.
Speaker Change: So market conditions remained challenging in the near term we are confident in the long term growth rates of our target market and believe we offer differentiated technology products and services.
Speaker Change: We expect to close the <unk> acquisition early next year, and we will continue looking for inorganic investments in additional partnerships to bolster our market position and provide our customers with additional solutions to accelerate our growth.
Speaker Change: We are encouraged by the pipeline progression, we see for mrna gene editing and cell and gene therapies, and we believe the new clinical trial starts bode well for long term growth in our markets.
Speaker Change: Our strong balance sheet strong cash position and manageable debt position gives us strategic flexibility and we will remain diligent in our cost control and operational efficiency.
Speaker Change: We are committed to building a strong foundation for long term profitable and sustainable growth of our base businesses.
Speaker Change: Kevin Becky drew and I are happy to answer your questions.
Speaker Change: So now I'll turn the call back to the operator for instructions.
Speaker Change: Thank you we will now begin the question and answer session. At this time I would like to remind everyone I'd like to ask a question Press Star then the number one on your telephone keypad. Please limit yourself to one question and one follow up thank.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: Your first question comes from the line of Dan Liana I think UBS. Please go ahead.
Speaker Change: Thank you.
Speaker Change: You've talked about a firm commitment number throughout the year, how much of that firm commitment is now left by Q4.
Speaker Change: Yeah, So Dan it's coming in as anticipated here in the third quarter and then the fourth quarter, we have roughly another $14 million to ship in the fourth quarter tied to committing to fulfilling that original expectation.
Speaker Change: Okay. Thank you and then just my follow up Kevin is the sequential decline in NAV from about I think it was $49 million in Q3 dollars $50 million rounding.
Speaker Change: $43 million at the midpoint for Q4, how much of that is the project push you mentioned into 2025 versus a weaker market.
Speaker Change: Yes, it's probably.
Speaker Change: Project, plus probably a couple million dollars.
Speaker Change: We can market and we go to market being the remainder.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Justin Bowers with Deutsche Bank. Please go ahead.
Speaker Change: Justin are you there.
Justin Bowers: Hi, good afternoon pardon I was on mute.
Justin Bowers: What are can you talk about some of the swing factors for <unk>.
Justin Bowers: As it relates to to the nabs business realistically, there's probably six or seven weeks in the quarter.
Justin Bowers: Lastly in the Western World.
Justin Bowers: And then just a quick follow up would be is there any is there any revenue associated with.
Justin Bowers: With the acquisition for 2025 or is that is that just.
Justin Bowers: Technology acquisition.
Speaker Change: Yes, sure I'll start.
Speaker Change: I'll take the second question first yes, obviously, it's predominantly a software acquisition for us and putting their front end onto our trailing discovery platform and Thats really what we want to do there to sort of buy versus build decision. Both from the exceptional platform. They have as well as the timing to get that plugged in.
Speaker Change: And to market. They do have a business that you have revenues it'll be.
Speaker Change: Looking at low single digit millions.
Speaker Change: The business again that are self funding, meaning it's not going to be dilutive to our overall business. So a small group, but I think that formed something that's really unique and it fits perfectly into our acquisition model of finding good unique founder based companies with great technology to participate in this space and we believe that provide a lot of value and we will.
Speaker Change: Get a little bit more information, obviously, as we close that deal and get closer to an.
Speaker Change: And then tomorrow by in the first quarter and 25.
Speaker Change: As it relates to the range of potential sensitivities.
The one thing that throughout the course of the year frankly.
Speaker Change: Continue to monitor are sort of the rates of VR.
Speaker Change: Our discovery business I think there's probably a $1 million on each side of that business as far as flexibility there on how those orders come in again Thats, a long tail of the lower volume orders while we.
Speaker Change: Haven't seen that.
Speaker Change: This year both on the <unk> side are these larger drop ins that we periodically get as companies move from one stage to another just sneak frankly clean cap to cover a variety of programs that might be in there and theyre stable.
Speaker Change: Typically those are bad and you'll have a $1 million up to $5 million type of drop in orders that we don't get a lot of visibility to and they just have it that occurring.
Speaker Change: So we're not counting on those prospectively.
Speaker Change: That having been said, we do have a range of outcomes for some of our GMP builds as we get through that work this year and that's probably another couple million either way as we go through that and then the rest of our business is just that theyre not normal volatility in and around those ranges.
Speaker Change: But certainly with the high volume clean cap number that Dan mentioned on his question was that as certainly locked in so we do still have a little bit of variability on the rest of the night business and again, its just getting back to the fact that we haven't seen those larger pose come in.
Speaker Change: And so a lot of this is a little bit based on smaller orders, which are just more volatile and then theres a little bit of work in and around getting things done on the GMT services side certain revenue recognition aspects et cetera, and then we're going to see a little bit of volatility as we've seen throughout the course of the year as it relates to the <unk> segment as well, even though that's much tighter range.
Speaker Change: Thanks, Kevin.
Speaker Change: Your next question comes from the line of Joseph Bank with Morgan Stanley. Please go ahead.
Speaker Change: Hello. This is Hugo on the call for T cells. Thank you for taking our questions.
I know that you'll be providing a formal guidance at a later date in light of your business being largely skewed towards non discretionary cost items.
Think about guardrails for margin expansion next year.
Speaker Change: Well I'll speak generally.
Speaker Change: Look again, we continue to be a company that is predominantly.
Speaker Change: Im going to go up and down from a margin expansion perspective.
Speaker Change: Based on our revenue base.
Speaker Change: As you look at us today.
Speaker Change: We have as you look at our midpoint and roughly our adjusted EBITDA 20 at the midpoint of $260 million revenue company with roughly a $235 $40 million cost basis, theyre not that cost basis, a big chunk of it roughly half is labor related so that's sort of semi text if you will.
Speaker Change: More variable in the long term than the facility costs on top of that.
Speaker Change: Another big component of the operating cost base of about $6 seven different facilities.
Account Flanders as one or two buildings.
Speaker Change: And Thats, a big fixed cost for us.
Speaker Change: Sorry about that fixed cost as it supports our business model prospectively, we don't need to add any more buildings and all the capabilities, we need to grow into what we have and expand our margins and then the last is just the variable piece of our Cogs, which is very very small as you know we have very high variable margin and sort of everything else. So the largest being some of the.
Speaker Change: The G&A costs that we need to be standalone.
Speaker Change: A standalone public company.
And some of the legal costs, we have as we pursue protecting clean cap in our IP. So I think for our perspective, its a matter of filling the factory and leveraging that cost base that I said I think that.
Speaker Change: I'm going to say it was a poor out earlier in the year that put us in a very nice light as far as revenues per employee and we do not have a big cost base and we're very efficient at what we do and to the extent, we're able to profitably grow on the topline that flow through is going to be very evident as it has been historically and that none of those dynamics have changed.
Speaker Change: Got it yeah, I think color.
Speaker Change: Go ahead.
Speaker Change: Ill just add that to Kevin's point the.
Speaker Change: The process of stepping into the new capabilities of Flanders wanted to obviously added.
Speaker Change: Our cost base, but we've been bearing those costs largely for the last four quarters and so some of the dynamics, we see here on the low and high balance of each quarter or.
The reason that we put lumpiness in the comments because again the cost base for all of these capabilities is largely fixed and the incremental flow through on margin is significant.
Speaker Change: As we as we go above them.
Speaker Change: The dynamic range of course looks extreme as we have.
Speaker Change: As we have a quarter that gets close to that cost basis versus even say the prior quarter.
Speaker Change: Okay.
Speaker Change: Okay. Thank you for that color and then.
Speaker Change: Do you expect any changes to two government contracts, including one with BARDA based on the recent election outcome.
Speaker Change: I don't think so in fact BARDA was recently here celebrating.
Speaker Change: The opening of Flanders one.
Speaker Change: Pandemic preparedness capacity that comes from that and reiterated that that's a 10 year arrangement.
Speaker Change: So I think that.
Speaker Change: Should not be subject to any political changes.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Matt <unk> with Craig Hallum Capital Group. Please go ahead.
Speaker Change: Good afternoon, and thank you for taking the questions. Maybe first one I was hoping to dig in a little bit on your commentary regarding the soft bio processing backdrop.
Obviously, there's been some mixed reports so far this earnings season that some I guess more on the consumable side outside of China have commented that the market is showing signs of improvement.
Speaker Change: Others, where its more equipment heavy or more Asia Pacific China related are still seeing headwinds.
Speaker Change: What are you seeing and when you when you were seeing the soft bio processing backdrop, I guess kind of what exactly are you referring to.
Speaker Change: Yes.
Speaker Change: An insightful question because I like how you've divided that up we of course look at all of our peers in bio processing.
Speaker Change: Both the peers, who sell the equipment.
Speaker Change: And it appears in <unk>, a significant proportion of this sickness customer base as CMO related.
Speaker Change: Hello.
Speaker Change: What we are sensitive to his program starts specifically and actually heavier weighted on the early side of the funnel, so phase preclinical and phase one.
Speaker Change: Phase II and so on used proportionately more of the Cigna wholesale protein detection kits than the late phase.
Speaker Change: So as people.
Speaker Change: Focus on their downstream or their late phase projects and de prioritize their early phase projects. It actually has.
Speaker Change: An outsize impact on the number of kits that cigna cells.
Speaker Change: That said.
Speaker Change: Overall, the peer set we look at is it.
Speaker Change: Has centered around flat year over year to minus mid to high single digits.
Speaker Change: Cigna is performing basically in the middle of that range this year with the new guidance.
Speaker Change: So we think there are essentially at the bioprocess an industry norm.
Speaker Change: And that's across the whole peer set whether it would be primarily capital equipment based <unk>.
Speaker Change: Consumable based or the CD months.
Speaker Change: That's really helpful. Thank you and then maybe separately regarding the <unk> acquisition.
Speaker Change: Obviously software, but I'm just curious so when you look at that is there some customer overlap is what drove you to.
Speaker Change: To start those conversations was at a customer.
Speaker Change: Asking for it was this you are looking at your portfolio, saying boy, we could really use some help in in this area just any more color on why there.
Speaker Change: Yeah.
Speaker Change: <unk>.
Speaker Change: Youre exactly right with your former comment earlier prior appear flatter excuse me comment which was.
Speaker Change: We needed help we have the capability from the perspective of input chemistry, the variety of chemistry, and now with our new <unk>.
Speaker Change: <unk> 96, well plate based mrna screening product, we have the capability to let people do combinatorial optimization that they've never been able to do before what we lacked for train link was a front end design environment.
Speaker Change: One that was informed by bioinformatics and in particular, one that could accelerate and improve the efficacy of design ins using AI and machine learning.
Speaker Change: <unk> it was.
Speaker Change: Startup that really started their software as a service and a design environment.
Speaker Change: That we're going to bolt right onto the front end that leads to e-commerce that links directly to our lens to create not only a seamless design experience for the customer, but a really rapid high throughput experienced for mrna construct experiments.
Speaker Change: And optimization. So it was really primarily driven there I would say there was no customer overlap.
Speaker Change: It's a different go to market for their DNA and RNA construct services.
Speaker Change: It will be expansionary for us and reach a slightly different target market than we do with our pure play service business.
Speaker Change: Got it alright, thank you.
Speaker Change: Your next question comes from the line of Ben <unk> with Stifel. Please go ahead.
Speaker Change: Hi, guys. Thanks for the questions Trey in rough terms, what percentage of the <unk> trial starts that you have on that Bar chart. There are being sponsored by companies that are customers that you think have a good chance of being customers and do you see that activity as needle moving for <unk> next year.
I think we do see it as needle moving for MIP, we have reported as you know many times.
Speaker Change: Overall active mrna program percentage of clean cap, which by the way remains <unk>.
Speaker Change: 30%, we haven't disclosed and frankly, it's rather new data.
Speaker Change: For the guide RNA portion of that so keep in mind. Those trials include two shots on goal for us.
Speaker Change: The existing mrna that would express the cash into nuclease in vivo.
Speaker Change: And.
Speaker Change: The newer area, which is for Jim.
Speaker Change: G&P Guide RNA.
Speaker Change: I'll pass that to drew for a few more comments.
Drew: Yeah sure look I would say the.
We don't see any sign that that percentage participation of clean cap is any different.
Drew: Not not all of those programs use mrna, but I think that the dissipation best we can tell is likely the same we certainly anecdotally, we see a lot of activity there.
Drew: The.
Drew: Participation of mrna in that universe appears to us to be growing versus other modalities.
Drew: But we only see what we see.
Drew: Percentage wise, we don't see any difference.
Speaker Change: Yes, okay.
Speaker Change: And then just a follow up Kevin on the EBITDA guidance have de risked do you think the <unk> outlook. There is and then.
Speaker Change: Performance has been pretty tied to the hip with revenues that you've talked about do you think as you come off of some of these things that are going on in 2024 that can maybe decouple a bit do you see yourself, having some additional flexibility.
Speaker Change: But just sort of gives you some wiggle room to topline doesn't materialize the way that you forecast or is the P&L relationship pretty much what it is to <unk> point. There is a lot of fixed cost there, yes, I think following our restructuring.
Speaker Change: In the fourth quarter of last year, I think we've got the cost structure to a place that we flex appropriate lean it allows us to best care for our customers and do what we want to do well not only staying lean, but also continue to make some incremental investments in commercial I think.
Speaker Change: Thats continues to be the one area that.
Speaker Change: We never never really came out of the box very strong most of our acquisitions and energy from this company has spent very science based very operational.
Speaker Change: And I think in a much more competitive landscape today, and I think having those feet on the street and getting customer intimacy will continue to be important. So we're going to continue to invest there as we had been over the.
Speaker Change: Last couple of years.
Speaker Change: I don't see the business model changing such that we will have more discretionary spend to offset changes in revenue I think is I think the model is a good one frankly.
Speaker Change: It's about filling up the factory in driving the top line and I think that's going to be a continued focus here for the fourth quarter and as we as we move into 2025.
Speaker Change: Okay. Thank you.
Speaker Change: Okay.
Speaker Change: Can we go to the next question please.
Speaker Change: Just checking here.
Speaker Change: Operator can you queue. The next question.
Speaker Change: Okay.
Speaker Change: Apparently we're having some technical difficulties so if you'll bear with US we'll try to sort this out.
Speaker Change: Got it.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Operator.
Speaker Change: Are you there can you hear us and can you. Please queue. The next question.
Speaker Change: Okay, well everyone. It appears we're having some technical difficulties I apologize to anyone still in the queue. We will try to follow up with Yale individually alright. Thank you for your time again apologies for this technical issue.
Speaker Change: And now we hope we can connect with you will be at a couple of comprehensive during the months of November and hope to see that.
Speaker Change: Your next.
Question comes from the line of Matt Thornton with Jefferies. Please go ahead.
Speaker Change: Excuse me Hello.
Speaker Change: If anyone still on the line.
Speaker Change: Alright.
Speaker Change: Hi, everyone.
Speaker Change: Okay.
Speaker Change: Hello.
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Speaker Change: Okay.
Speaker Change: This concludes today's conference call. Thank you for your participation and you may now disconnect.
Speaker Change: Please wait the conference will begin shortly.
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