Maravai LifeSciences Holdings, Inc.

Q1 2022 Earnings Conference Call

5/5/2022

spk08: Good day and thank you for standing by. Welcome to Maravai Life Sciences' first quarter 2022 earnings conference call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Ms. Deborah Hart, Head of Investor Relations. Deborah, please go ahead.
spk00: Thank you, Patrick. Good afternoon, everyone. Thanks for joining us on our first quarter 2022 earnings call. I'm joined today by Carl Hull, our Chairman and Chief Executive Officer, and Kevin Hurdy, our Executive Vice President and Chief Financial Officer. Our press release and the slides that accompany today's call are posted on our website and are available at investors.maravai.com under Financial Information, Quarterly Results. As you can see on slide two, Carl will first provide you with a business update, and Kevin will review our financial results and guidance. We will then open the call for questions following the prepared remarks. On slide three, we remind you that the forward-looking statements that we make during today's call, including those regarding our best business goals and expectations for the financial performance of the company, are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning these risk factors is included in the press release we issued today, as well as those that are more fully described in our various filings with the FCC. Today's comments reflect our current views, which could change as a result of new information, future events, or other factors. And the company does not obligate or commit itself to update these forward-looking statements, except as required by law. During this call, we will be using non-GAAP measurements of certain of our results and in providing guidance. Reconciliation of GAAP to non-GAAP financial measures are included in the press release that we issued today. The metrics we will be discussing in today's call include net income, adjusted EBITDA, income tax expense, and adjusted earnings per share. These adjusted financial measures should not be viewed as an alternative to GAAP measures, but are intended to better enable investors to benchmark our current results against historical performance and the performance of our peers. I'll now turn the call over to Carl.
spk09: Well, thank you, Deb, and good afternoon, everyone. We appreciate having you join us for our call today. Let's start with our first quarter results on slide five, please. Moravai had a record quarter for the company as a whole and for each of our operating units. Today, we reported $244.3 million in revenue for the quarter, growing 65% compared to the prior year and up 7% sequentially over the fourth quarter. Our base business revenue which excludes clean cap revenue from COVID-19 vaccines, was up 25% over the prior year. Our adjusted EBITDA of $187 million was up 85% over the prior year, and we reported a record 77% adjusted EBITDA margin for the quarter. Our outstanding top line and adjusted EBITDA performance resulted in adjusted earnings per share of 54 cents per share for the quarter. We also have record adjusted free cash flows in the quarter of $182.5 million. So you can see that 2022 is off to an incredibly solid start. Our base business continues to deliver impressive growth across the board, reflecting strong demand for our products, on top of the COVID vaccine tailwinds we have experienced over the last two years. We have seen and expect to see continued momentum across our global customer base as mRNA research and cell and gene therapy development accelerates. Turning to slide six, growth across the nucleic acid production business was very robust and remains, I'd say, somewhat underappreciated by the broader market. Our nucleic acid production business had record revenue of $223.7 million in the first quarter, up 80% year over year, and up 5% sequentially. Excluding those COVID-19 related clean cap revenues, our base nucleic acid business grew a remarkable 55% year over year. We continue to focus on this base nucleic acid production business as a key driver of long-term value creation. Demand for our messenger RNA CDMO services is expected to consistently grow as we are uniquely positioned with the right toolkit to support an increasing number of these customers. And most importantly, 90% of our GMP services customers are incorporating CleanCap into their own products. We have also observed nice traction on the product side of the business as CleanCap and our other small molecules are incorporated into new programs by both existing and new customers. We have a unique opportunity to drive CleanCap inclusion across our growing messenger RNA customer base while providing other critical GMP raw materials and our newest technology to improve in vitro transcription reactions. These programs should continue to bring value to our customers and help improve the quality of manufactured messenger RNA for years to come. Turning to slide seven. We know that there's a great deal of focus on expectations for the balance of 2022 and for 2023 as it relates to demand for COVID-19 vaccines. The COVID-19 vaccine space remains highly dynamic with uncertainty around a number of variables, including the ultimate impact of vaccine hesitancy on worldwide demand for primary vaccines, the next variants of concern and their potential clinical severity, waning immunity and its impact on disease spread and severity, and what the ultimate end-user demand will be for boosters on an ongoing basis. Earlier this week, the senior leaders of the FDA, writing in the Journal of the American Medical Association, made the following points. First, it is now time to accept that the presence of SARS-CoV-2 is the new normal and that the virus will circulate globally for the foreseeable future. And secondly, the COVID-19 vaccine compositions will need to change annually for both primary and booster doses to reflect future variants that are then in circulation. The authors conclude by saying that, quote, society is moving towards a new normal that may well include annual COVID-19 vaccination alongside seasonal influenza vaccination, close quote. Those of you who have been following us for the last couple of years will recall that this is the exact scenario that we have predicted as the most likely long-term outcome following the peak pandemic years. Now we can't lose sight of the evidence that demand for the current versions of the vaccines is variable from period to period. And recent statements from our customers and other manufacturers with direct exposure to the COVID-19 market regarding their own uncertainties about future demand reflect some of this variability. We fully expect the demand for COVID-19 vaccines will continue to be a meaningful revenue contributor for Marabai going forward, even though the exact landscape for 2023, excuse me, remains unclear at this point. As for this year, we are maintaining our overall 2022 guidance for COVID-19 related revenue which is a combination of demand from commercialized and on-market products, later phase demand from potential new market entrants who are already Mar-a-Lago customers, and early development work that is being done by other customers for next generation vaccines, such as the previously announced collaboration between GSK and CureVac. This means that we are reaffirming our estimated growth rate in 2022 for COVID-19 clean cap revenues, which we provided to you on our year-end earnings call of 12% to 14% growth over 2021 levels. This is based on the current order book and material requirements from our biggest customers that helps determine our revenue forecast and manufacturing plans. And as we discussed in February, we say estimated growth here since CleanCap can be used interchangeably by our customers for different end uses. These figures represent just those orders that we believe are COVID-specific. So for the reasons cited above and others, we do not yet have a specific line of sight from our largest customers into 2023 and what their overall COVID-19 vaccine production levels are expected to be. As an example, Pfizer just commented that they expect that they will be in a position to provide 2023 revenue guidance for Comirnaty only during their fourth quarter earnings call. What we do know right now is that the development of new generations of COVID-19 vaccines continue up pace, with a particular focus on vaccinations and boosters for the youngest children and booster designs that include the most recent COVID variants of concern. And we still believe that the mRNA technology provides the most rapid and flexible platform for new vaccine development and real-time design modifications. Recognizing the longer-term COVID-19 vaccine demand is subject to a variety of factors, mostly outside of our direct control, we're focused on those things that we can control, expanding our product portfolio, market leadership, and customer-focused solutions, continuing to invest in operations, manufacturing, and people to support our base business growth, which we are truly excited about, and innovating in ways that will support our customers' rapidly evolving needs. Now, turning to slide eight, one of the reasons we are so bullish on our nucleic acid production business is our global blue chip customer base. Looking at our customers by category, they span the spectrum of drug discovery and development from innovative biotech companies to potentially transformative RNA manufacturing platforms to large pharma. Notably, in the large pharma category, we estimate that we are collaborating on at least one mRNA program with 18 out of the 20 top R&D spenders in 2021. As I've said before, we believe that mRNA and CLEAN-CAP are here to stay in a durable and meaningful way. Maravai is right in the thick of this action with a solid piece of the market for both infectious disease vaccines and mRNA therapeutics. Turning now to slide nine. Given that this is the time of year for several key cancer and oncology conferences, including AACR and ASCO, We thought we should highlight some of the exciting programs we are involved with that are tackling cancer treatment through the development of messenger RNA vaccines and therapeutics or through cell therapies utilizing messenger RNA technology. Through our work with an outside consultant, we've completed a deep dive into the preclinical and clinical trials that are underway. Of the 183 messenger RNA programs that we know are using CleanCap, Roughly 30% or approximately 50 of these programs are working on oncology therapeutics. These include preclinical and clinical trials for indications such as melanoma, pancreatic cancer, head and neck cancer, and other HPV associated cancers to name just a few. While these programs are still in their early days in preclinical through phase two trials, they provide an exciting roadmap for the future applications of messenger RNA. The other 110 mRNA programs using CleanCap include therapeutics for a number of human health issues, such as autoimmune diseases, cardiovascular disease, and metabolic disorders. And of course, this number includes messenger RNA vaccines for infectious diseases like influenza, shingles, Zika, and Ebola, as well as for additional coronavirus vaccines. Now turning to slide 10 in our biologic safety testing business, our products and services in this business support high growth markets in cell and gene therapy, vaccines, and biologics drug manufacturing. by providing process-related impurity analytics along with offering innovative viral clearance prediction solutions that help our customers ensure the safety of their biopharmaceutical products. Our first quarter revenue of $20.6 million set a new revenue record in biologic safety testing and was up nearly 17% from last year. This notably strong revenue growth was primarily driven by demand for our industry-leading CHO and E. coli host cell protein ELISA kits and our impurity testing kits, specifically our protein A portfolio, which saw strong growth in the quarter. We also had solid performance from our mock fee and automation product lines. We continue to gain new customers for the wide range of our biologic safety testing products. Additionally, a number of our customers entered into agreements with us to develop custom host cell protein assays to support their proprietary biologics programs. Notably, we just announced a further collaboration with Biotechni's Protein Simple business and the launch of the SimplePlex HEK293 3G assay for automated process and purity testing on the ELA immunoassay platform. This new assay provides an automation solution for fast and efficient bioprocess impurity testing. We plan to continuously innovate and scale our offerings in biologics to ensure superior technical support to offer the highest quality services and products and the most comprehensive catalog of products to meet our customers' needs. Now, moving on to slide 11 and some organizational updates. First, we are happy to welcome Deb Barbara to our leadership team. Deb joined us in April as Vice President, Strategy and Business Development, reporting to me. In this newly created role, Deb has responsibility for leading our global growth strategy and will drive the company's strategic and business development goals. Deb will also manage the company's mergers and acquisition function, including oversight of all equity investments, acquisitions, and integration planning for Maravai. For those of you not familiar with Deb, she has over 30 years of life sciences experience and a variety of business development roles. I look forward to her playing an incredibly important role on our team as Maravai continues to scale and differentiate itself as a trusted supplier of components, nucleic acids, and biologics assays for the life science industry. The integration of the MyChem acquisition is going well. We are actively merging their product development activities with TriLink's R&D and commercial teams. The addition of MyChem extends our capabilities in the manufacturing of critical raw materials that are used in cell and gene therapy, molecular diagnostics, and messenger RNA manufacturing. Third, we're committed to increasing our investment in messenger RNA innovation as we scale our R&D operations, facilities, and quality systems, and partner ever more closely with our customers. To this end, our facility expansion plans are progressing nicely, and Kevin will expand on this later in the call. Our nucleic acid production project nearby in San Diego, which we call the Flanders Site Expansion, is on schedule, and we expect to have occupancy for the Phase I of this project later this year with phase two occupancy in the first half of 2023. As a reminder, the first phase will provide us with an additional GMP manufacturing suite with two clean rooms. By moving some of our operations to the new Flanders site, we will further increase capacity for commercial clean cap production here at Water Ridge, expanding the rest of our small molecule platform and adding GMP API manufacturing capacity. Likewise, the biologic safety testing relocation from Southport to a new state-of-the-art facility in Leland, North Carolina is progressing nicely. The building is framed and work is moving towards a move-in date by the end of the year. This new facility more than doubles our operational square footage to support current and future growth. The fully customized design will provide room for a mass spectrometry center of excellence and specialized cell culture facilities. It will significantly increase our cold storage capacity while providing other R&D laboratory and automation upgrades. Extensive process flow analysis has been incorporated into the design process to optimize and enhance both our manufacturing and kit packaging operations. These new facilities are one example of how we continue to make investments to further accelerate growth in our base business. We also remain active in pursuing inorganic growth opportunities and look forward to being able to announce additional acquisitions sometime in 2022. We are committed to expanding our reach as a key specialized raw materials supplier, and we are actively working to expand our international footprint so that we may improve our ability to directly serve our global customer base. I'll now ask Kevin to cover our first quarter performance and some more details on our 2022 guidance. Kevin?
spk03: Thank you, Carl. Good afternoon, everyone. I'm happy to review our financial results for the first quarter and to discuss the components of our current guidance for the full year of 2022. Given that Carl's presented some of the financial highlights already, I'll briefly cover some more details regarding the first quarter results and then dive into our detailed financial guidance for 2022, starting on slide 13. Beginning with the GAAP numbers, our net income before the amount attributable to non-controlling interests was $146.9 million for the first quarter of 2022. This compares to $75.5 million for the first quarter of 2021. Income from operations was $167.4 million in the quarter for an operating margin of 69%. Our R&D spend in the quarter was $3.7 million, which compares to $2.2 million from Q1 2021 as we continue to increase our R&D spend. I'll remind you that the $9.2 million R&D from Q4 2021 was unusually high due to the one-time third-party expenses incurred to assess and improve our clean cap manufacturing process. Moving to slide 14. Adjusted EBITDA, a non-GAAP measure, was $187 million for Q1 compared to $109 million for Q1 2021. This represents an 85% increase year-over-year. The net adjustments from GAAP EBITDA to adjusted EBITDA total about $10 million or only about 5% of our adjusted EBITDA for the quarter. Our adjusted EBITDA margin was a record 77% up from the 68% reported in Q1 of last year. And better than we had forecasted, as a result of favorable gross margins in the quarter. The increase in adjusted EBITDA was primarily driven by overall sales volume increases and margin improvements from our nucleic acid production business. On to slide 15. Here we present basic EPS, diluted EPS, and adjusted fully diluted EPS. Basic EPS is a gap measure. It's net income attributable to our Class A shares divided by the weighted average Class A shares. Our diluted EPS, also a gap measure, starts with basic EPS, and to the extent that the assumed conversion of Class B shares and other equity awards are diluted, then net income and weighted average shares outstanding use in the calculation will be adjusted to reflect the diluted effect of this conversion. They were, in fact, diluted in Q1 2022 and thus included in the calculation. Lastly, and the simplest and most comparable metric of focus for us, is adjusted fully diluted EPS, a non-gap measure which equals adjusted net income divided by the weighted average of both our Class A and B shares and other dilutive securities. Our basic EPS for the first quarter was $0.51, diluted EPS was $0.50, and our adjusted diluted EPS was $0.54 per share. EPS was slightly better than we had forecasted as a result of some revenue shifting from Q2 to Q1 that I'll talk about further, as well as some strong gross margins and production levels in the quarters, and slightly lower net interest expense. Moving to slide 16. We ended the quarter with $431 million in cash and $543 million in long-term debt. Our strong EBITDA performance continues, led to robust adjusted free cash flow for the quarter of $183 million. That calculation, adjusted free cash flow, is a non-GAAP measure, which is based on our adjusted EBITDA of $187 million less capital expenditures in the quarter of $4.5 million. As we've repeatedly discussed, our strong financial performance, balance sheet, and cash flows provide us tremendous financial flexibility to make both organic and inorganic investments that will drive innovation, build capacity, address customer needs, and contribute to our long-term growth. This was demonstrated by our announcement in late January when we put about $240 million of cash from our balance sheet to work to acquire MyChem. Additionally, we plan to invest approximately $65 to $75 million dollars into the expansion of our capacity with our two new facilities coming online in 2022 and 2023. This is up from our prior expectations of $50 to $60 million due to additional investments being made for the Flanders build. We recently made the decision to increase our level of investment here by about $15 million this year to provide us the optionality downstream to manufacture materials beyond current quality requirements for mRNA raw materials, including clean caps. These upgrades include the introduction of integrated manufacturing systems, quality of water improvements from reverse osmosis, deionized grade water to WFI or water for injection, which is pharmaceutical grade water, and other facility infrastructure investments to support potential customer needs related to quality. All these upgrades will also support an additional increase to batch run sizes and our overall throughput. With $543 million in long-term debt, $431 million in cash and trailing 12-month adjusted EBITDA of $669 million. We have an eight times gross debt to adjusted EBITDA ratio and 0.2 times net adjusted EBITDA ratio. As we look at the capital allocation from our free cash flows and strong balance sheet and debt capacity, we remain focused on strategic investments for growth and increasing our capabilities in support of the markets and customers we serve. For us, that involves organic investments in people, processes, systems, innovation, and facilities to further our offering and solidify the foundation for long-term growth for our base business. In addition, we continue to look to evaluate and potentially acquire businesses or technologies that can further expand our offerings. This combination of organic investment along with an inorganic M&A strategy, continues to be our near-term focus for capital allocation, as we believe strongly in growth investments that include breadth of offerings, commitment to quality, and the dependability that comes with available and increasing capacity. Now, to provide some more insights into our business segment financial performance for the quarter, let's advance to slide 17. As Carl mentioned earlier, our nucleic acid production business fueled the most significant portion of the revenue growth for the first quarter. Nucleic acid production represented 92% of the company's total revenue in the quarter and generated $182.8 million in adjusted EBITDA. The 82% adjusted EBITDA margin in this business is a record margin for our nucleic acid production business and reflects the increasing value of our new products as well as the productivity gains and efficiencies from our state-of-the-art San Diego manufacturing facility. Our base nucleic acid production business, excluding clean cap revenues from our major COVID-19 vaccine customers, grew 55% year over year, with over 90% of that growth in our base nucleic acid production coming organically as the net revenue contribution from our Q1 MyChem acquisition was not material in the quarter. As Carl mentioned, our focus with the MyChem acquisition was in securing a strong domestic supplier of ours, extracting and applying their core competencies to further improve and differentiate the quality and purity of our products, and increasing our commitment to innovation with their unique scientific knowledge. We have also spent time evaluating the customers that did not overlap with our existing customer base and are excited about the long-term opportunity presented by these incremental customers. Overall, our base nucleic acid production business was a bit above our internal forecast for Q1, as we saw an mRNA services job for one of our oncology customers complete in Q1 versus the Q2 timing that we had previously forecasted. Clean cap revenues from our major COVID-19 vaccine customers were approximately $172.9 million in the first quarter of 2022. This compares to $91 million in Q1 2021. COVID-related clean cap revenues for the quarter came in about $5 million higher than we had internally forecasted as some product that we had forecasted to ship in Q2 was requested early by one of our pre-commercial customers and was shipped in the first quarter. Our biologic safety testing business contributed 8% of the company's revenue in the first quarter, slightly above our internal estimates, mostly attributable to timing. Our Cygnus branded products, which comprise virtually all of the Cygnus business, grew to a record $20.6 million in the quarter, representing growth of 17% from Q1 2021. The growth was driven by the increased number of biologics and biosimilar drug development programs, as well as new customers gained in the quarter attributed to the high quality and breadth of our host cell protein ELISA kits. This includes strong growth from our industry-leading CHO and E. coli HCP ELISA kits, and ELISA and purity kits, specifically our Protein A Portfolio. Our biologic safety testing business delivered $16.5 million of adjusted EBITDA in the quarter, an 80% EBITDA margin. Corporate expenses that are not included in this segment adjusted EBITDA totals I just spoke of were $12.3 million in the quarter, up from Q1 2021 levels of $10.3 million, mainly due to investments in key personnel and systems to drive and support growth. We continue to be pleased with our ability to attract and retain key talent at all levels from RFI. We sit here today with about 532 full-time regular employees, up from 476 at the end of the year, and continue to add key personnel in a very competitive labor market. So as you can see, it was a strong quarter for Marvi across the board and a solid start to 2022. Onward to slide 18 in our 2022 guidance. Today, we are updating our 2022 full-year guidance. We continue to expect revenue of $920 to $960 million for the year, So no changes there. As I previously mentioned in my second commentary, we had a favorable Q1 to our internal forecast primarily due to timing and see the full year of 2022 in consideration of various risks and opportunity sensitivities that we evaluate to have not materially changed from our view from about 10 weeks ago when we last discussed our full year 2022 expectations. Included in that range is our estimate for 2022 clean cap revenues directly attributable to our major COVID-19 vaccine customers to grow 12% to 14%, which would imply about $630 million for the year at the midpoint. Our base business, which combines the non-COVID clean cap nucleic acid production business and our biologic safety testing business, remains incredibly strong, as Carl discussed, with implied growth expectations around 30% overall for the year and over 50% for our base nucleic acid production business. Now, based on our strong Q1 margin profile, we are increasing our EBITDA guidance. We now expect adjusted EBITDA, a non-GAAP measure, to be in the range of $650 million to $690 million, up approximately $20 million at the midpoint, as compared to our previous guidance range of $630 to $670 million. Based on this updated adjusted EBITDA guidance, adjusted fully diluted EPS, a non-GAAP measure is expected to be in the range of $1.74 to $1.90 per share, up from our prior guidance of $1.70 to $1.84 per share. Now, looking at the second quarter, we see revenues relatively flat to Q1 levels within nucleic acid production. We expect biologic safety testing revenues to sequentially decline slightly and come in closer to Q2 2021 levels. As we have discussed previously, we do see some inherent shoppiness in our business based on our customers' demand and timing of their underlying programs. Combined with increased investments in labor, commercial, and R&D, we anticipate Q2 adjusted EPS to be in the high 40 cents per share range. Progressing to slide 19, you'll see our other guidance assumptions. Adjusted fully diluted EPS is based on the assumption that all Class A B shares are converted to Class A shares, which results in a forecasted fully diluted share count remaining at our estimate of 255 to 257 million for the full year of 2022. Additionally, our adjusted full-ability EPS, including certain adjustments that do not reflect our core operations, are still based on an adjusted effective tax rate range of 23% to 25%. As it relates to the certain other adjustments needed to get to our non-GAAP-adjusted EBITDA range, our expectations for 2022 include interest expense between $22 and $25 million, depreciation and amortization increasing to $30 million to $35 million to incorporate updated estimates for amortization tied to finalizing the MICAM purchase price accounting. Equity-based compensation, which we show is a reconciling item from GAAP to non-GAAP EBITDA to be $15 million to $20 million. And as stated earlier, for 2022, we expect to invest an estimated $65 million to $75 million for capital expenditures, the vast majority tied to new facility expansion. Now our reconciliation of net income to GAAP EBITDA and from GAAP EBITDA to adjusted EBITDA is presented in our press release and at the end of this slide presentation. In addition, our segment-related information will be in our Form 10-Q, which we plan to file very soon. So thanks for your time today. Now I'll turn it back to Carl for some closing remarks on slide 21.
spk09: Thanks, Kevin. And so to wrap up on that slide 21, We are playing in the right target markets with strong leadership positions and exceptional growth in our base business as we build our product portfolio in other high-value areas. We are putting our strong cash flow to work with organic investments in our facilities, human capital, and product innovation. We will also look for opportunities for inorganic investment to bolster our market positions and provide our customers with additional solutions. We're committed to building a strong foundation for long-term sustainable growth of our base business, and we'll continue to focus on operational excellence, innovation, and people as our three strategic pillars. I would now like to turn the call back over to Patrick to open the line for your questions.
spk08: Patrick? Thank you. We'll now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selections. If you have a question, please press star one on your device's keypad. You may cancel your question at any time by pressing star two. Please press star one at this time if you have a question. First question is from Matt LaRue from William Blair. Please go ahead.
spk05: This is actually Max on for Matt. I appreciate the commentary around the COVID revenue here in the first quarter and what to expect in the second quarter, but I just wonder if you can provide any commentary around how to think about the back half of the year, particularly into 2023. It sounds like, you know, relative to the prior quarter, I think you mentioned that your customers indicated that they weren't expecting any massive drop-off in volume in 2023. It sounds like maybe the outlook is a little bit more uncertain next year. So just trying to get your thoughts on how to think about 2023 and the back half of this year.
spk09: Yeah, look, Max, I think that our ability to offer any kind of final or firm commentary on 23 is limited by the factors that I mentioned during my remarks. I would just say that we feel pretty good about the 2022 numbers we have in front of us. The guidance is based on what we see coming down the pike. And I think some of the noise in the marketplace is just what I said, the little bit of variability and different people may see variability in this market at different points in time, depending on where they are in the supply chain. But beyond that, Kevin, do you want to make any comments about sort of relative size of the back half of 22?
spk03: Yeah, certainly. I mean, we've had a big quarter in the last quarter in Q4 and this quarter in Q1 with regards to our COVID-19 vaccine revenues. As per my remarks, we see the nucleic acid business roughly in line in the second quarter as it is in the first quarter. So I know you all can do math pretty well, so if you add those numbers up and you look at our guidance, then you will see the second half of the year a little bit below the first half, and that is attributable to some COVID revenues related to the vaccines being less than the current forecast in the first half of the year. But certainly what we're really happy on and focused on as well is the core base business growth throughout the year, and that's looking really solid for the full year.
spk05: Got it. Appreciate the color there. And then for my follow-up, I wanted to follow up on something that you talked about at the analyst day, which is actually your customer funnel. And I know at the analyst day you mentioned about 85% of your MRNA service customers are using CleanCap today. You indicated earlier that that number has actually stepped up to about 90%. But I was wondering if we could talk about how many of the 60 CleanCap supply agreements that you have in the pipeline include services outside of CleanCap? I know you mentioned last quarter that the customers you're bringing on and signing new CleanCap supply agreements, those relationships are looking more expansive than some of the initial CleanCap supply agreements. So any insight you can provide around, you know, how many of those agreements expand just beyond providing CleanCap?
spk09: Yeah, Max, I don't think we're going to go through on a quarter-by-quarter basis those metrics necessarily each time just because they get a little involved and you know, timing at the end of the quarter. It may be different from one quarter to the other. I think you can expect us to periodically update those numbers and give it to you overall. But I would say we're seeing more customers come to us looking for, I would say, all-inclusive services. So they do really want to go from plasmids up front all the way through the mRNA manufacturing process. So the jobs that we're being asked to quote not only can be more expansive in that sense, but then they also can extend further downstream into later stage development, and that's a growing focus for some of our customers who are pretty optimistic about how their development programs will turn out.
spk05: Got it. Thank you.
spk08: You bet. Thank you. The next question is from Matt Sykes from Goldman Sachs. Please go ahead.
spk07: Hey, this is Nick on from Matt. Appreciate the questions. First question is, so it sounded like a lot of the CapEx spend increases going towards quality-focused investment in your facility. So I was wondering if you could broadly talk about trends you're seeing in GMP-grade demand and specifically GMP-grade demand versus RUO demand.
spk09: Yeah, I think that's a great question, Nick. We're seeing more and more concern from our customers about the conditions and the grade of the product that they are purchasing. I think that reflects the conservatism of big pharma, frankly, as they've come into an area that's relatively less mature than, say, small molecules or even monoclonal antibodies. And I think there's an expectation that whether it's them as the customer or it's ultimately the regulators such as the EMA or the FDA who are going to require greater scrutiny of the raw materials and the inputs that go into these novel technologies. So I would say it's becoming a much more significant issue or consideration, and that is the primary reason that we decided to invest a little bit more in this facility in order to be sort of turnkey ready in the event that that's where the market heads.
spk07: Got it. I appreciate that. Really helpful. And then if I'm doing the math correct, the midpoint of the guide implies a 2% increase in EBITDA margins for the full year versus the previous expectation. Is that increase coming from pricing? Is it coming from cost savings? And if it's coming from cost savings, does myChem have anything to do with that?
spk03: Yeah, thanks for the question, Nick. Yeah, certainly it really has to do with us having a real big output quarter here in the first quarter. I think we're not seeing the year all that differently. I think some of the things with regards to timing I mentioned, but we did see, again, some positive manufacturing variances here for us in the first quarter. We're kind of banking those and passing those through. The rest of the year is pretty in line, but that pull-up from the strong first quarter is what's being reflected in the full year.
spk07: Got it. And then maybe if I could just sneak one more in. When we look at the data in terms of of IPO funding, number of IPOs, and the dollar spend on IPO so far this year. It's down significantly from last year. Have you guys been seeing any slowdown in demand in preclinical or one product, you know, biotech or new modality startups, or you're not really seeing that so far?
spk09: No, we're definitely not seeing that. We're seeing kind of the opposite, which is a continuous increase in activity. And I think it is probably attributable to the fact that a lot of the companies in our space, our customers, got their funding in that 2020-21 window and had secured the funding and then begun their development programs already. So that's still fueling this leg of growth for us.
spk07: Appreciate it. Thanks, guys.
spk08: Thanks. Thank you. The next question is from Tejas Savant from Morgan Stanley. Please go ahead.
spk04: Hey, this is Neil on for Tejas. So just wanted to start on the biologic safety testing business. It seems to be trending just ahead of your previous expectations for around 15% growth. As of today, how would you characterize the opportunity for upside or downside to the previous expectations you provided during guidance?
spk03: Yeah, thanks. Yeah, thanks, Neil. We're, you know, again, we see the business relatively the same as we did a few months ago. Look, I'd say the first quarter was a little bit higher than we were guiding for the year. We had a good quarter with regards to our distributor relationships. Those are mostly in Asia. We also had a really strong quarter, and this continues to be a nice trend for us, with some of our other contaminant testing kits, particularly Protein A, in this case, was a very strong quarter for us. a little bit ahead of our expectations for the year. Full year, we see that moderating a little bit, again, closer to that 15%-ish growth area. There is some direct impact with regards to some business we did lose in the Eastern European region or won't be shipping into, as well as a little bit of uncertainty, certainly with our Chinese distributor and the timing of some of that revenue. I think we're continuing to watch that very carefully as of now. It has an impact on a year-to-date basis in China, but that's certainly something we're keeping a sense to. Those are the main areas right now, but we're pretty comfortable right around that mid-teens growth for the year.
spk04: Got it. And then a quick two-parter. So in light of the ongoing funding concerns for biopharma customers, can you give us any color of what you're seeing here as far as near or medium-term spending trends for these customers? And would you be able to also quantify your exposure to pre-commercial or early-stage biotech customers, X code?
spk09: Well, certainly on the funding concerns, as I mentioned a little bit earlier, we're not seeing that. And I do think it's maybe because when people are talking about biotech funding concerns, they're using pretty broad brush when they do that. But if you look at the specific area of RNA therapeutics, especially messenger RNA and its related delivery systems, the opposite is occurring. So we can't say that we have seen any kind of slowdown or pass through of those trends that perhaps have been highlighted in other parts of the life sciences market. And on the pre-commercial side, Kevin, I don't know that we have a breakout of purely pre-commercial, but the majority of our historical business outside of COVID-related revenues has always been pre-commercial, mainly because up until very recently, nobody was even in phase one testing with a number of these therapeutics. So my guess is that would still pertain. But, Kevin, I don't know if you have something better.
spk03: Yeah, no, that's absolutely right, Carl. I mean, when we talk about all those programs, again, that we're involved in, you know, two-thirds of those are sitting in the preclinical stage. And that's historically been the case for a lot of these revenues. Not many things have advanced, even into the clinic, and certainly only one product for us into the commercial space.
spk04: Thank you. That's a helpful caller. And then one last one from me. So following Mike, any updates on the M&A deal pipeline? And with the pullback to public valuations, are you starting to see a similar dynamic on the private side as well that has opened up any new or interesting opportunities?
spk09: Yeah, well, certainly the price sensitivity of founders and owners of private companies is a little bit sticky downward. So I'm not sure how fully priced through that may be in people's expectations. Obviously, there's been so much turmoil in the market. I think a lot of people have stayed on the sidelines in terms of transacting, trying to figure out where the equilibrium point is going to be. But we're certainly seeing a number of different opportunities in our pipeline. We're actively pursuing those, and we think we'll keep Deb and her team quite busy over the next six to nine months as we run some of those to ground. Great, thank you. You bet.
spk08: Thank you. The next question is from John Sorbier from UBS. Please go ahead.
spk02: Hi, hello, this is for John. I've got a quick question on the MICAM. Can you share a little bit more about the revenue, Q1 revenue of MICAM and performance in general in Q1? And what is the outlook for MICAM for fiscal year, please? Thank you.
spk03: Yeah, thanks for your question there. You know, we did not give the exact number of MICAM. It's pretty small and immature on the quarter. What we did say was the nucleic acid production business growth year over year was over 90% organic, so you can certainly look back and do the numbers there to figure out what it was at least below for the quarter. And we previously said that we expect that business to look a lot like our divested protein detection business. That was roughly a $20 million business before, but we were a big customer of MyChem, so you're not going to see all that run through the top line. With regards to performance thus far, you know, we, again, required them. They're enclosed in January. We've been very happy with the integration with our team and really taking their expertise and really looking to apply it to some of our other manufacturing processes, also get some of their top scientists focused and back onto the bench, and then looking at the customer overlap and where they had incremental customers that we didn't have a relationship with and exploring that further, you know, for the betterment of the overall nucleic acid business segment. So very happy with how things have been going thus far.
spk02: Thank you very much for the color. If I can just have one quick follow-up. So your 77 percentage into the margin looks pretty great. So any thoughts on the outlook for the margin? And also, can you provide more color into the margin differential from COVID and non-COVID, Clint Kapp, please?
spk03: Yeah, certainly. We don't exactly look at it that way. We look at total clean cap. That's certainly a product line, and it's not a COVID-specific product per se. So any clean cap that's manufactured and sold at volume has a strong margin. It's one of our strongest incremental gross margin businesses that we have. Overall, we're guiding, I think, at our midpoints to EBITDA margins roughly around 71% to 72% between the middle and the top end of our guidance range. we continue to have a very strong margin. Certainly the first quarter is extremely strong, but based on the growth of the business and that we have a lot of fixed costs that we can leverage there and that loads some expansion. As I talked about, the back half of the year looks to be a little bit down just due to tied to what we're seeing with the vaccine numbers and that's a high incremental product for us. You'll see a little bit of temperament in margins and continued need to invest in both the commercial and the R&D infrastructure. So, you know, we're continuing to see nice margins, certainly, but we're bringing, you know, kind of tempering the back half of the year a little bit to bring that overall estimate for the year. Around that 71% to 72% exiting at 77% per quarter.
spk02: Thank you very much. This is very helpful. Congratulations on the quarter.
spk08: Thank you very much. Thank you. The next question is from Michael Riskin from Bank of America. Please go ahead.
spk06: Hi, good afternoon. This is Peter on for Mike. Could you comment on how your contracts are structured, particularly with larger customers? Are they take or pay or kind of what extent of flexibility do you offer in terms of ability to cancel?
spk09: Kevin, do you want to do that or do you want me to?
spk03: I'm certainly happy to, Carl. So our LSAs, which are our license and supply agreements for our large customers for Clean Capital, and we talked about before, we lock people in. Those are take or pay. That hasn't certainly been an issue for us, given the man we've seen thus far. And those are basically staggered. They're not all identical, but in general, we have POs supporting them. certainly the next three months, generally the next six months, and then some parameters inside the contracts for the seven, eight to nine months. And then, you know, we always look for our customers to try and give us as much forward-looking information as they can and like to see a year's worth of forecast, knowing that that last quarter would not be binding contractually or via POs unless they've already submitted them. So, you know, as we look at the current year business, I think as was the case that we've talked about last quarter, nothing's changed there. We continue to have that high degree of coverage with either firm support commitments or POs in-house, and those are our take-or-pay contracts. Again, not all of our large customers or not all of our customers, particularly if they're using different product lines of ours or fall under that exact structure. Certainly on the mRNA services side, those are all constructed a little bit different and a lot of times are kind of master agreements that have specific statements of work related to what they need in a given time frame. So, you know, those are going to be booking in GMP clean rooms, doing specific runs, doing highly modified mRNAs with CleanCap and completing that sort of statement work on a custom order within a given period of time. So because of that, we don't have sort of some of those take-or-pay structures. They are, by their very definition, sort of take-or-pay on a custom level, as you would see with a lot of the services businesses that run CDMOs.
spk06: Okay, thank you for that detail. And then can you, I guess, can you discuss the extent of maybe any incremental traction you've seen recently in China, given some of the vaccine updates there in the past month or so? If there's maybe anything you could spike out in terms of customers or point to anything quantitatively, that would be great.
spk09: Yeah, we've seen some activity out of China over the course of the last, I'd say, two quarters. As you know, our original relationship is with Biontech and the Biontech Fosun collaboration falls under their remit. So that's a little bit indirect for us. We don't directly serve the Fosun customer base. And then there are two other collaborations that we've been involved in that are targeting the China market. But I would say that as has been commented on before, the Chinese government has not approved a foreign mRNA vaccine yet for distribution. And I really don't, I'm not close enough to know what the prospects are for that changing anytime soon.
spk06: Okay, and just one last one on the 183 mRNA programs leveraging CleanCap. Could you give maybe a bit more precision on maybe the distribution of programs using CleanCap across each stage?
spk09: We will be able to do that at a later date. We're still in process on some of the work that we're doing there and don't have the final readout yet. So it would be a little premature, but that's something we're working towards.
spk06: Okay, thank you guys so much. Appreciate it.
spk09: Thanks. And Patrick, we have time, I believe, for one more question, if you have one.
spk08: Certainly. The last question will be from Paul Knight from KeyBank. Please go ahead.
spk01: Thanks for getting me in here. On a non-Pfizer nucleic acid business, should we assume that to be fairly lumpy because it's likely, what, linked to clinical trial activity?
spk09: Yeah, certainly it will behave differently than what you see in full production, and that lumpiness is related to when you need the clinical materials or, in some cases, the preclinical tox materials. And it goes campaign by campaign. So, yeah, that's a fair assumption.
spk01: And what should we think about growth in that business, product line rather?
spk09: That's a little bit harder to tell because we have to parse out what is COVID and what's not COVID if that's a vaccine customer. And they're a little bit, I don't want to say coy about that, but there's just so much happening right now that it is sometimes hard to get that with any precision and I wouldn't feel comfortable laying a number on you right now, but I think it's something that if we have a couple more quarters under our belt, we're going to feel better about projecting that.
spk00: Thanks, Paul, and thanks, everyone, for joining us today. We will be having our annual meeting of shareholders next week on May 12th. We're also going to be participating at several financial conferences this quarter, so please check out our events calendar on our website, and we look forward to catching up with you there. Feel free to contact me with any questions, and I hope you all have a great night. Thanks so much.
spk08: Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.
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