Maravai LifeSciences Holdings, Inc.

Thank you for standing by. I would like to welcome everyone to the Q2 2023 Mara Vai Life Sciences Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. I will now turn the conference over to Deborah Hart. Deb, please go ahead.

Good afternoon, everyone. Thanks for joining us on our second quarter 2023 earnings call. Our press release and the slides that accompany today's call are posted on our website and are available at investors.maravai.com. As you can see on our agenda on slide two, joining me today are Trey Martin, our new CEO, Kevin Hrdy, Chief Financial Officer, and Carl Hull, Executive Chairman of the Board. Drew Burch, Executive Vice President and General Manager of our nucleic acid products, and Becky Buzio, our Chief Commercial Officer, will join the call for the question and answer session following the prepared remarks. We remind you, management will make forward-looking statements and refer to GAAP and non-GAAP financial measures during today's call. It's possible that actual results could differ from management's expectations. We refer you to slide three for more details on the forward-looking statements and our use of non-GAAP financial measures. Our just-issued press release provides reconciliations to the most directly comparable GAAP measures. Please also refer to Maravai's SEC filings for additional information on the risks and uncertainties that may impact our operating results, performance, and financial condition. Now I'll turn the call over to Carl.

Well, thank you, Deb, and good afternoon, everyone. We appreciate having you join us for our call today. During this call, we will provide the details of our financial results for the last quarter and our updated guidance. But first, I want to officially introduce and welcome Moravai's new CEO, Trey Martin, who took over his role on July 27th. As many of you know, Trey is a seasoned global life sciences executive with highly relevant industry experience from his time at IDT and Danner. He brings to Moravai an ideal mix of strategic, operational, and scientific acumen, combined with an outstanding operational track record. Over the course of his career, he has built and led complex global operations and successfully integrated multiple acquisitions, experiences particularly well aligned to lead the execution of Maravai's long-term strategic growth plan. I have already seen firsthand that Trey is an excellent cultural fit at Maravai. He is a results-oriented leader with the ability to guide and motivate teams within a culture of high integrity and high performance. I know he's the right CEO to take Maravai through its next phase of innovation and growth. Before I turn it over to Trey, I want to share with each of you the observation that leading Maravai has been the single most rewarding experience in my career. I could not be more proud of what we have accomplished together. I extend my sincere thanks to our leadership team and to the dedicated employees across the world who enthusiastically serve our customers and their communities every day. I'm excited about the company's future, where we are going, and what we can achieve together. I'm confident that we have the team, the talent, and the technology needed to deliver on our long-term objectives. If you'll turn to slide five, I'll now ask Trey to introduce himself and share some early observations. Over time, you'll have many other opportunities to get to know him better. Trey?

Thank you, Carl. It's an honor and a privilege for me to become the CEO of Maravai at this important juncture for the company. I believe we have immense potential to deepen our connections with the scientific and biopharma communities and further serve our customers while elevating the company as the life science tools provider of choice. During my 29-year career in genomics, I've had the good fortune to participate in several overlapping waves of technology, from QPCR to next-gen sequencing, from synthetic biology to CRISPR gene editing. What I see now with the opportunities in mRNA is a convergence of technologies and experience that also leverages the many recent learnings from the pandemic and is driving the rapid growth of the mRNA therapeutics field. I believe Maravai has a particularly strong position with our technologies, expertise, and long history in mRNA in the broad field of nucleic acid chemistry. I strongly believe that this conversion gives us a unique opportunity to move the needle for human health. This is a unique opportunity, and I'm excited to be leading the company at a time where we're focused on expanding the many growth opportunities in our base business and innovating to support the rapidly evolving needs of our mRNA, genomics, cell, and gene therapy customers. It's been fantastic serving as the president of biologic safety testing here at Mara Vi, as it enabled me to focus deeper into that part of the business, to work with the team, to help navigate the post-pandemic transition, and to understand the future value levers for the business. I look forward to bringing the insights I gained over the past seven months to my new role as I transition to lead the full company and as we work to unlock the potential we have across Marabai. In my first 11 days as CEO, I've already had the opportunity to meet with many of the team members in the nucleic acid production segment, spend time in our labs, hold strategy sessions with the leadership team, and meet with customers and commercial partners. Across Mar of I, we have gold standard tools and technologies and a highly motivated employee base with a strong will and determination to meet our customers' needs through innovation and value-added products and services. My learning has only just begun, but let me share what I'm most excited about, starting on slide six. We have a broad and diverse footprint of products and services that span many of the fastest growing segments of biologics, genomics, and cell and gene therapies. particularly at the front end of the drug development funnel, where we have the ability to win early and then to grow with our customers as they advance through the various phases of therapeutics development. We are the go-to nucleic acid chemistry provider in mRNA modalities and now have the opportunity to leverage our technology leadership to expand wallet share in mRNA and adjacent growth areas. We have a strong balance sheet that provides us the ability to augment our internal investments through strategic M&A and we're planning to have M&A continue to be a key part of our capital allocation strategy. If we examine each of these a little more closely, starting on slide seven. In products and services, CleanCap has positioned us as the leader in co-transcriptional capping and MR&A manufacturing technologies. Our CleanCap franchise is a strong and meaningful technology differentiator with the flagship brand in the marketplace. CleanCap reagents have been cited in over 950 publications in the last eight years, including over 250 in 2022 alone, incorporated in three clinically approved products, and dosed in billions of patients worldwide. We continue advancing the science, and I'll provide an update on our newest CleanCap analog, M6, in a few minutes. In addition to our leadership there, Our services team has completed over 110 GMP manufacturing batches across 70 different products. That type of expertise is a key differentiator for us in a competitive industry where we remain very focused on mRNA and nucleic acid chemistry. mRNA manufacturing is not a commodity. Expertise with flexible custom services like we offer is unique and can support all facets of product realization to make our customers successful. We're actively and continually making improvements to meet the evolving needs of our customers, both in RUO and GMP. Again, we believe we can win in discovery and assist our clients to smoothly move to GMP for phase one and then beyond. First, in RUO, our turnaround time suffered through the pandemic demand. We've engaged in programs to dramatically accelerate our turnaround time since late 2022. Additionally, we streamlined our ordering and manufacturing processes through automation and added enhanced training for our commercial teams and added in-house analytics expertise. Through these efforts, our team has been able to sustain more than a 50% reduction in turnaround time for the past six months. Our proactive efforts to improve customer experience are paying off. In June, we saw an increase in commitments for RUO services, indicating we're meeting our customers' demands. In our GMP manufacturing services, we saw a doubling of signed contracts in Q2 versus Q1, as well as strong funnel growth to support expected revenue recognition for GMP services in 2024. We are seeing investments in our capacity and capabilities strongly resonate with our GMP customers who need to see a path to commercialization for their molecules. We are addressing those opportunities with our Flanders II facility expansion that is nearly complete. With the Flanders II site, customers will be able to continue manufacturing post-phase one and tech transfer their late-phase programs into our state-of-the-art GMP mRNA manufacturing facility. Our key differentiator is that we've been making mRNA for over 20 years and give customers direct line to our experienced team to use our process and or develop processes optimized to each program with scale-up, validation, analytics, and qualification capabilities. This is what customers need from reliable manufacturing partners and for a successful supply chain. The capabilities we're building in Flanders, too, should provide our customers with a seamless path to late phase manufacturing and commercial GMP manufacturing of drug substances. On slide eight, you'll see the clinical pipeline continues to accelerate, and there are a growing number of these customers. In 2019, there were 14 new clinical mRNA entries during the year. We've already seen 30 non-COVID programs enter the clinic in the first half of 2023, indicating the pipeline stands to be four times larger than pre-pandemic levels by the end of this year. This velocity of mRNA drugs moving into clinical phases demonstrates our investments are well positioned to be our customers' first choice from discovery through commercialization. With our broad and diverse footprint of products and services that support the development of biologics, genomics, and cell and gene therapies, our goal is to win in discovery, or the front end of the funnel, and then pull through our phase one enablement and stay with our customers through the life cycle of their products. In addition to having products and services that enable us to serve as a trusted partner for different customer needs, we also have both deep chemistry and biology capabilities under one roof. Let's turn to slide nine. We have a reputation as the go-to nucleic acid chemistry provider and a real expert in mRNA-related modalities. By leveraging this technology leadership position and continuing to innovate, we have opportunities to gain wallet share in mRNA and adjacent advanced therapy areas such as cell therapy and gene editing. Our commitment to innovation advances the technology in key areas, allowing us to be a multi-modality supplier. For example, we have customers performing novel in vivo gene editing techniques that rely on us to initially deliver key raw materials for their research grade mRNA manufacturing, and then perform CDMO services to produce their mRNA drug substance, and thirdly, supply them with long oligonucleotides. We believe our longstanding expertise in oligomanufacturing makes us the supplier of choice when looking to work on the leading edge of technology. It's very common for our nucleic acid production customers to need multiple products, from cap analogs to other NTPs like N1 methyl pseudouridine, to oligonucleotides to enzymes. In fact, almost three-fourths of our NAP customers buy multiple products, and we strive to consistently build our technology portfolio, production capabilities, and trusted supplier relationships. We continue to add new customers under formal license and supply agreements, During the first half of the year, we've executed three new agreements. The newest members of this valued class of customers include innovators in gene editing, as well as developers of key vaccines for infectious diseases in the Asia Pacific region. Top L&T developers and manufacturers of multiple delivery systems frequently use CleanCap in their mRNA manufacturing and see this as the standard for drug substance use in their studies. The reliability and quality of the mRNA produced is critical for the discovery and development of novel lipid technologies. Similarly, many customers are looking for our partnership to provide guidance and enable their encapsulation of mRNA and progression from drug substance to drug product. Our commercial team is expanding globally to bring our expertise to customers in key markets, including Europe, Japan, and Korea, and we are finding strong engagement and adoption with innovators in each of these markets. There are many customers around the world doing exciting work in mRNA and cell and gene therapy who need products we provide. These are just a few examples of how we're actively expanding our reach and ensuring even more customers benefit from our leading nucleic acid chemistry solutions and mRNA expertise. Moving to slide 10. Our balance sheet remains exceptionally strong, which will allow us to pursue additional MNA to augment our organic growth initiatives. Our efforts here are focused on acquiring additional differentiated technologies to serve our customers and help them succeed. As we look ahead to the completion of 2023 and prepare for 2024, we remain focused on growing our base business and expanding margins with revenue leverage. I'm excited about our future, our capabilities, and what we can achieve together to make a meaningful impact improving human health. I'm confident that we have the team, technologies, and the talent to deliver on our long-term objectives. Now let me turn to our Q2 results on slide 11. Q2 revenue came in at $69 million, roughly in line with the $70 million or so we mentioned in last quarter's call as we navigated strong headwinds to our NAP services and products during the quarter. Those headwinds include the inventory rebalancing dynamics, as we discussed in our earnings call for Q4 22, and the broader biotech market sluggishness that we discussed in our Q1 2023 earnings calls. Industry-wide, we're seeing customers changing their spending priorities in the wake of broader economic uncertainty and lower levels of venture and private equity-backed investment. As a result, key customers have become more focused on capital conservation efforts, which has constrained research and development budgets, and is leading to longer decision-making process, causing customers to strategically prioritize and stage their programs. We continue to see customers utilize inventory levels built up during the pandemic, leading to lower near-term demand for some products as they return to a business as usual inventory approach. From what we can gather, this situation has clearly affected all players in the bioprocessing and CDMO services industries. Despite the slightly softer than expected performance, I'm highly encouraged by the positive performance we saw in several pockets of our business during Q2, including non-COVID CleanCap sales, which were up 21% year over year in the quarter. We announced our new CleanCap M6 product on the Q1 call, and product uptake has been especially encouraging, as we saw orders from approximately 70 different innovators and have already received many repeat orders. This interest has come from a broad group of vaccine leaders, from non-vaccine large pharma customers, and from smaller mRNA-focused companies. Early feedback from customers has been encouraging, and I believe that M6 is a truly differentiated product that positions us to gain share from alternate capping methods. We think this is a game-changing innovation for manufacturing more potent mRNA therapeutics and vaccines, and that its higher protein yield may offer the opportunity for higher efficacy, lower dosing, or both. Within the biologic safety testing segment, we continue to expand our presence in the cell and gene therapy space. Cygnus now supports all 17 out of 17 approved CAR-T cell and gene therapy products, plus the first-ever CAR-T approval in China. We are also seeing continued positive early interest in our Mach-V product line within BST. Additionally, we realized solid cash flow from operations during the second quarter of $19 million. bringing the first half cash flow from operations to a total of $104 million. Our revised market outlook for 2023, which Kevin will discuss in greater detail in a moment, takes into account the Q2 results and more modest expectation for the second half of the year. We are removing approximately $35 million of COVID-related revenue and reducing our outlook for the base business due to changes in our customers' spending priorities an ongoing weakness in early-stage biotech funding as a result of slower-than-anticipated improvement to the broader market as previously discussed, and a lack of anticipated improvement to the economic activity in China, all of which is pressuring the business. We believe this revised stance for the full year properly accounts for the current industry trends and economic uncertainties and mitigates the risk of shortfall relative to the expectations in the second half. Although I'm taking the helm during a uniquely challenging time and micro environment, my belief and enthusiasm for the company have not wavered. The strategic priorities, investments in innovation, and a superior customer experience that Carl and the team have previously laid out remain unchanged. Strengthening our commercial operations, driving long-term base business revenue growth through market share gains with CleanCap, cross-selling products and product portfolio expansion, and our relentless focus on new innovation. All of these are longer-term priorities that will enable us to emerge from the short-term pressures as a stronger company. And speaking of innovation, let's move to slide 12. I'm excited to share that we'll be hosting an Investor R&D Day in New York on September 28th. The day will provide a deeper dive into our company-wide initiatives to deliver sustainable long-term growth and showcase our leadership team. Deb will be providing more details and registration information as we get a little closer, and I look forward to meeting many of you in person. I'll now ask Kevin to provide details on our second quarter performance and our updated guidance. Kevin.

Thanks for the handoff, Trey, and good afternoon, everyone. As Trey mentioned, I will dive deeper into our Q2 and year-to-date financial results and discuss our updated outlook for 2023. Starting on slide 14, As per our press release this afternoon, our Q2 2023 revenues were $69 million, roughly in line with our expectations for the quarter. As for earnings per share, both our GAAP-based basic and diluted EPS read a 5 cent per share loss, while adjusted fully diluted EPS was 0 cents per share for the quarter and was 3 cents per share for the first half of 2023. Our GAAP based net loss before the amount attributable to non-controlling interests was $11.9 million for the second quarter of 2023. Adjusted EBITDA, a non-GAAP measure, was $9.1 million for Q2, resulting in an adjusted EBITDA margin of 13% for the quarter. For the first six months of 2023, our adjusted EBITDA, a non-GAAP measure, was $32.9 million, resulting in an adjusted EBITDA margin of 22%. The overall lower revenues over our cost structure led to the lower margin in the second quarter. In the second quarter, we also saw higher overhead and related direct labor expense versus first quarter levels. These incremental expenses reflect the lower manufacturing throughput in the quarter and the assessment of inventory returns in light of the lower projections for 2023. It was these expenses combined with the higher depreciation and amortization associated with our organic and inorganic investments that offset the lower variable material portion of cost of revenues. We remain focused on balancing our investments in our facilities and our labor to best position us for the future while also actively managing our expense structure to address our current revenue outlook. This balance is critical to ensure we have the right capacity, capabilities, and resources to be the best solution for our customers' needs and best position ourselves for long-term opportunity we see in our addressable markets. Overall, given our low variable cost of revenues, we expect we'll continue to see dynamic margin fluctuations that correlate to our revenue performance. When revenues meet certain levels, we see good leverage in our cost structure. This was exemplified by our performance within the recent quarter, as we saw an adjusted EBITDA margin of 35% in the month of June, with approximately $31 million in revenue. Turning to slide 15, as Trey mentioned, we continue to have a strong balance sheet. Our cash and cash equivalents ended Q2 at $580 million, up approximately $30 million from a year ago, reflective of our strong cash generation over the last 12 months, offset by capital outlays for both organic investments and overall capabilities, and the inorganic cash used to acquire unique additional capabilities, such as our AlphaZyme acquisition earlier this year. Our adjusted free cash flow of the quarter was a negative $18 million, Adjusted free cash flow is a non-GAAP measure that we define as adjusted EBITDA less capital expenditures. The negative free cash flow in the quarter reflected net capital expenditures of $27 million tied to the completion of our biologic safety testing new facility in Leland and the Flanders build-out for our nucleic acid production business for which we now have full occupancy of both components of that building. So we sit here today with $580 million in cash and gross debt of $536 million. which does not have a term maturing for over four years. This grossed-up cash and debt structure continues to allow us maximum flexibility to actively evaluate additional M&A opportunities. We had a net interest expense in the first half of 2023 of $6 million, which is an effective net annualized rate of below 3%. I am very proud of our Treasury and Cash Managed team's efforts over this year. Now turning to slide 16. I'll provide some more insights into our business segment financial performance for the quarter. The nucleic acid production business revenues were $53 million for the second quarter. Nucleic acid production represented 77% of the company's total revenue in the quarter and generated $14 million in adjusted EBITDA in the quarter for a segment margin of 27%. On a year-to-date basis, adjusted EBITDA for this segment was $42 million, a margin of 37% on the first half revenues of $115 million. Included in the results of the nucleic acid production segment for the second quarter is our estimate of clean cap revenues from our large COVID-19 vaccine customers of $11.6 million. This brings this total to $27.5 million for the first half of 2023. I will touch more on the remaining 2023 expectations for this in a moment. Our biologic safety testing business revenues were $16 million in the second quarter, contributing 23% of our total revenues. Our biologic safety testing business contributed $10 million of adjusted EBITDA on the quarter, a margin of 66%. Corporate expenses that are not included in the segment adjusted EBITDA totals I just spoke to were $15 million in the quarter, decreasing $3 million from Q1 levels. Turning to slide 17 and our updated financial guidance for 2023. As Trey touched on and many of our peers have noted recently, it appears that the improvements in the broader biotech market sluggishness noted in our Q1 2023 call may be slower than anticipated, reflecting the changes in our customer spending priorities and more stringent budgetary practices that are negatively impacting what was already a transitional year for Maravai. I will do my best to discuss the changes to our full year guidance. Since our last call, we received updates from our large LSA, License and Supply Agreement, customers that resulted in less demand than we anticipated, mostly for COVID-related clean cap. This, combined with many of our repeat product and technology customers delaying, canceling, decreasing, or foregoing purchases of our products and services, particularly for nucleic acid raw materials, polygons, and chemistry products, have resulted in lower overall expectations for this segment. Additionally, the increased capacity across the industry combined with customers' project rationalization and slower decision-making has impacted our 2023 revenues for the services part of this business. Now, overall, we are lowering our expected range of total revenues for 2023 to between $300 million to $325 million. At the midpoint, this is slightly over a $100 million reduction in revenues for the year. Let me break out this reduced view in more detail. We're reducing our estimate for COVID-related clean cap revenues down from $100 million to $65 million. The $65 million is roughly a 90% decline from 2022 levels. The remaining portion of the $65 million for 2023 is all on non-cancellable purchase orders. The $65 million for 2023 has zero related revenues under our supply chain agreement with Pfizer and BioNTech for 2023. With $28 million recognized in the first half of 2023, this implies $37 million will ship in the second half, split between $15 million in Q3 and $22 million in Q4. We will continue to break out revenue related to COVID Clean Cap for the remainder of 2023. However, as Clean Cap continues to be adopted more broadly, including for combination respiratory vaccines post-pandemic, we will likely consider this as part of our base business for 2024 and beyond. We expect to see our biologic safety testing business revenues this year in a range of 65 million to 70 million. This business is currently seeing a leveling of demand in the 15 million to 18 million per quarter ranges that we've seen since Q2 of 2022. This lower range accounts for about 5 million to 10 million of our lower revenue guidance. This considers that China is not a growth region for this business as it has been in the prior years. The remainder of the reduction in our overall guidance is tied to lower expectations for our nucleic acid production business. Our nucleic acid production business, which excludes any estimated clean cap COVID revenue demand, is now anticipated to be in the range of $170 million to $190 million, which at the midpoint reflects an annual decline of about 15% from 2022 levels. This is, frankly, a disappointing reduction in our views for this segment, a segment that has seen a growth higer of over 35% from 2018 to 2022, but is reflective of the ongoing macroeconomic challenges and the impact of those challenges on our customers and their research and development budgets. This lowered expectation represents an extended softness in demand from existing customers versus our view from last quarter that product-related demand would recover in the second half of 2023. Further, our services business, which has been growing at it faster than the overall segment CAGR in recent years, is now anticipated to decline in 2023. The service contracts and opportunities we expected to be achievable earlier this year have not come to fruition at the rate anticipated. This is due to a combination of factors, but mostly from customers rationalizing program spend, shifting programs to later dates, and dynamics tied to the overall expansion of industry-wide capacity, which has led to more companies competing for fewer service contracts in 2023, which has also slowed the timing of commitments. Overall, as Trey mentioned, we believe we have a unique combination of best-in-class products, technologies, qualities, and capabilities to support customers' and markets' needs in a market with very exciting long-term growth drivers. But at least in 2023, we are seeing a smaller overall revenue opportunity, and that is reflected in our updated guidance. We will manage through this challenging year while we set ourselves up for the future, a future that we strongly believe in, With regards to the gating of the remaining 2023 revenues, we estimate the third quarter total revenues in a range of $75 million to $80 million, which includes $15 million of scheduled COVID-related clean cap revenues. This implies our fourth quarter will be slightly higher, or in the range of roughly $80 million to $95 million in total revenues, up sequentially from Q3, partially due to the $7 million and higher COVID clean cap revenues, which should total about $22 million in Q4. As a result of the lower revenue expectations for 2023, we have updated our estimated earnings metrics. We now anticipate adjusted fully diluted EPS in the range of $0.04 per share to $0.08 per share and adjusted EBITDA between $70 million and $80 million. Additionally, we expect the following additional financial expectations as listed on slide 18. Interest expense net of interest income between $16 million and $18 million. Depreciation and amortization between $38 million and $40 million. Stock-based compensation, which we show as a reconciling item from GAAP to non-GAAP EBITDA, between $34 million to $38 million. This also includes an additive fully converted share count of 252 million shares and an adjusted effective tax rate of 24%. Further, we see net capital expenditures to be in the range of $55 million to $65 million this year. Now before I turn it back over to Trey, I want to personally thank Carl for the honor of being his financial wingman for the better part of 15 years. From our early days working together through a complex global blood screening collaboration to ensure the safety of the global donated blood supply, to the development and launch of arguably the most successful medical diagnostic instrument ever with Panther, to the successful sale of GenProbe to Hologic, and over the past six plus years building out Maravai, where our investments in the miracles enabled by mRNA technologies played a critical role in helping end a global pandemic. Carl, you have undoubtedly left a meaningful mark on the history of life science tools and diagnostics, and I sincerely thank you for letting me be a small part of that journey. May your lust for life continue to rock on. Now back to Trey. Trey?

Thanks, Kevin. So to wrap up on slide 20, I couldn't be more pleased to be leading Maravai. While we're facing some near-term headwinds, I'm confident in our resiliency and our longer-term opportunities as we continue to innovate in MRNA and build our product portfolio and other high-value areas. Even at these post-pandemic low levels, we're still a profitable company and generating solid cash flow. We are putting our cash flow to work with organic investments in our facilities, human capital, and product innovations. We will also continue to look for opportunities for inorganic investment to bolster our market position and provide our customers with additional solutions. We are committed to building a strong foundation for long-term sustainable growth of our base business and will continue to focus on operational excellence, innovation, and people as our three strategic pillars. Carl, Kevin, Becky, Drew, and I are now happy to answer your questions. So I'll turn the call back over to the operator and he will open the line for Q&A.

I would like to remind everyone in order to ask a question, press the star then the number one on your telephone keypad. Your first question comes from the line of Matt Sykes from Goldman Sachs. Matt, your line is open.

Hey, good afternoon. Thanks for taking my questions. Maybe the first one, just on sort of the weakness in demand in the industry. You guys talked a lot about sort of where some of the issues in demand were emerging biotech in China. I'm just curious on the inventory side. Obviously, that's another dynamic in the industry. Any commentary you would have in terms of customer inventory levels and any issues on that front, or is it really just sort of the demand weakness that we've been witnessing throughout the sector?

Well, I think that it's more of the latter. It's the general demand weakness across the sector. You can see by the fact that we talk about our large customers, largest customers, not having reordered COVID-19 during 2023. I'm sorry, clear clean cap during 2023, that they clearly have been burning off that inventory. But I think the bigger factor for us is really just the combined headwinds that we're seeing.

Got it. And then, Kevin, just one for you. I mean, how should we be thinking about sort of normalized margins? Understanding there's a lot of dynamics here with the revenue declines, but also the high fixed costs. But just given the volatility we've seen in margins, how it's stepped down, how would you kind of help us from a modeling perspective think about normalized margins for this business, mostly focused on nucleic acid rather than BST?

Yeah, thanks, Matt. Yeah, you're right. I mean, certainly margins have bounced around a bit and are pretty much tied to the changes in revenues. If you look at what we did in the first quarter, about 35% EBITDA margin, and then the decline in margin down about $50 million to $9 million, or roughly 12%, 13% range. And really two things there. You have the high variable contribution tied to our revenues, which are north of 75%. So that's roughly half of that on the lower $10 million of revenue. And then, you know, one of the dynamics we haven't seen or hasn't been as transparent just because of our high revenue levels has been the impact within the nucleic acid production segment on manufacturing throughput and inventory levels, as I referenced. And we had a favorable $3.5 million absorption variance in the first quarter as inventory levels went up, and we had manufacturing outputs there that are unfavorable. So we'll continue to see those sort of variations. They were a little bit masked by the super high revenue levels we had over the last 12 quarters or so. But you'll see that a little bit more apparent as manufacturing levels go up and down throughout the year. I would say a better proxy for the margin prospectively is what we've seen over the last 12 months. I think that's around a 22% EBITDA margin. We should see some leverage on that as we increase revenues and control costs over that base.

Your next question comes from the line of Connor McNamara of RBC Capital Market. Connor, your line is open.

Great. Thanks for taking the questions, guys. And first off, Carl, congrats on the retirement. Just to reiterate Kevin's point, it's been great working with you over the years, and you've done a fantastic job between Panther and Clean Cap of combating the global pandemic. So thank you, and best of luck. Thanks, Connor. Yep. uh so one question for trey one question for kevin trey just if you think about the long-term growth of in markets within the nucleic acid market you know six months ago we were talking about a 20 growth market you know longer term do you think there's anything then that that's going on right now that has impacted the long-term views of where this market could go and then kevin on the financial side just how much of the revenue uh guide down was a push out from 2023 to 2024 versus just kind of a more conservative view on what demand is, given all the challenges that's going on in the industry right now. Thanks for the question, Jess.

Yeah, thanks, Connor.

I think we all believe very firmly that we are in the right segments with the right technologies. This is definitely a turbulent time in the marketplace generally. We have a great deal of faith, though, in the long-term mid to high double-digit growth rates of our target markets. It's not a matter of if they return to growth, but when.

And we are just trying to navigate the turbulence at this time before taking off again. But so far, we haven't seen anything or heard anything from customers that leads us to believe that this would be a long-term impact to those markets.

Yeah, then on your second question, Connor, you know, the slightly more than $100 million of decline in the revenue guide, about 35% of that, around $40 million, was attributable to our services business, and that's where you really see, you know, some of this timing get pushed out. It's a little hard to parse that $40 million decline from what we previously were forecasting to what we're forecasting now between, you know, budget prioritizations, push-outs, and potentially other factors within that segment, but that is sort of the magnitude of the services decline that we're seeing, and certainly some of that is resulted to prioritization and companies taking programs that are a little more in line, which certainly leads to slower decision-making and natural push-up timing into further periods.

Great. Thanks for that, guys. Appreciate it.

Your next question comes from the line of Dan Leonard of Credit Suisse. Dan, your line is open.

Great. Thank you. And congrats as well, Carl, to be able to retire.

Thanks, Jacob. Appreciate it.

So a couple of questions. First off, on the updated clean cap forecast, I appreciate that the COVID clean cap forecast I appreciate the new forecast is merely reflecting your firm orders in hand, but it's still a big ramp into the second half of the year compared to the first half. And it sounds like these are all take or pay obligations. Do you worry at all that by enforcing these obligations, the inventory overhang for COVID clean cap is going to continue into 2024? Or are there reasons why that wouldn't be a problem?

Yeah, Dan, specifically, I don't think we're forcing these obligations here this year. This is really, these are actually not related to Pfizer and BioNTech. These are other customers in other regions. And this is specifically, you know, our scheduled program with them to support the finalization of their products and the launch of their program. So, you know, I think these are very tied to what our customers expected usage is this year. And, you know, I think that You never know exactly what the uptake is going to be at the end of the quarter or at the end of the year related. This goes a little more seasonal, but as it relates to the $65 million we have this year, really tied to specific programs and our specific customer needs, and I would consider them stocking per percent.

Understood. That's helpful clarification. And then my follow-up, are you able to speak to how the opportunity funnel is building for Flanders to be more fully integrated drug substance for mRNA?

Yeah, I think we are, and as we released here, the Flanders II building has gained occupancy this period. We continue to work on fitting that out, but the commitments are being worked in the funnel, and I think I'll pass it to Becky to get a little bit more specific about that.

Yeah, I think we've gotten a lot of good reception on our Flanders II. Activities, as Trace said, we took occupancy of the building at the end of June and continue to meet our milestones on our construction. We'll be GMP ready about midway through 2024, which puts us in line to continue some of the programs that we make phase one material now for, and then be able to continue servicing those programs and clients as they advance their clinical trials.

That's really our objective.

Your next question comes from the line of Catherine Schultz of Baird. Catherine, your line is open.

Hey, guys. Thanks for the questions. I guess first, can you just give some initial customer feedback on CleanCap M6? You know, what's been the mix of interest between existing and new customers, and have you seen any interest from enzymatic customers?

Yeah, thank you. We are really thrilled with the early response to Clean Captain 6.

Again, having launched it just last quarter. I'll hand that one to Drew for a few more specifics.

Yeah, Catherine, it's been an exciting uptake for us. Customers have been quite interested, and that really runs the gamut from large vaccine companies to large pharmaceutical companies that are pursuing non-vaccine applications. to smaller mRNA-focused companies. So it's been pretty much across the piece, and we've had a lot of customers come back for reorders after initial purchase, so we're pretty excited about what we've seen so far.

All right, great. And Kevin, you talked about your cost structure a little bit. You've made a lot of investments expanding capacity for nucleic acid production that you know, might not be filled in the timeframe you expected at the time of those investments. So are there any facility rationalizations that need to happen to bring down fixed costs given the lighter top line and any other cost actions that you're taking?

Yes, certainly. I mean, I think our commitment to the facility footprint we have remains steadfast because we think it's the right thing, right solutions and capabilities for our customers long term. And these are obviously multi-year investments that are incredibly important. actively manage. I would say that we're going to continue to resource Flanders building as we see the demand, and I think as Becky spoke to, that will be how we finalize our late-stage development, how we ramp up the labor, how we move people from existing facilities to new facilities based upon the mix of that revenue. Anyone has raised the overall cost structure. Yes, certainly we are already taking actions to minimize discretionary spend, be very selective with our labor and how we backfill and look at supporting our base of business. But at the same time, balancing that with, you know, the opportunity we still see and are very excited about. And that continues to mean we need the right commercial footprint. We also need the right innovation group that's doing amazing work. And, you know, I would say that when you step back and you look at our cost structure, as you know, a lot of it is people and facilities. But even with that, I would say our labor efficiency metrics when you define them as revenue per employee, are still amongst the very highest in lifestyle tools and diagnostics at nearly half a million dollars per head of contributions. So it's something we are sensitive to and look to balance, but it's also something that's a favorable attribute of our business model.

Your next question comes from the line of Justin Bowers from Douche Bank. Justin, your line is open.

Hey, good afternoon, everyone. So where are you now with your RUO turnaround time? And then can you provide us with just an updated number for total clean cap for the year?

Yeah, thank you. So RUO mRNA turnaround time is now in the weeks, usually four to six weeks.

And we have active programs to try to continue to cut that down as quickly as possible to really enable the entire discovery funnel in that space.

And the part, I'm sorry, what was the second part of the question?

Yeah, just if, what total clean cap outlook is for the year?

Total clean cap outlook?

Yeah, I mean, we've talked about this a little bit in the past.

in the quarter of roughly 21% on a year-to-date basis, non-COVID clean caps grown 16%. So really, really strong growth on our clean cap franchise related to the indications that don't support COVID.

Got it. And then just to follow up in terms of, can you talk a little bit about the competitive landscape and, you know, if you're benefiting at all from the improved throughput times and any difference from what you're seeing from, you know, competition here domestically and then in APAC?

Did you say in APAC as well? Yes.

Okay. Yeah, domestic, so there are a couple parts to that. Domestic RUO mRNA is competitive. I would say there is likely more competition in the GMP space

you know, have built significant facilities, and at the same time, the market is rationalizing programs, as we've discussed many times. So I would say that competition is more in the later phase, GMP space.

APAC specifically, I don't think we've seen anything different.

There is a weakening market environment, particularly in China, as we've discussed, but

competitively, I don't think that has changed from previous updates.

Your next question comes from the line of Tejas Savant from Morgan Stanley. Tejas, your line is open.

Hey, guys. Good evening, and Kyle, congrats on the retirement here. Maybe to kick things off, I just want to ask you about The assumptions baked into the guide, Kevin, in terms of things like the current weakness in China continuing and the budget flush dynamic that you're resuming for the fourth quarter, given just the magnitude of the repeated cuts we've had through 23, what drives your confidence that the outlook is now truly de-risked? I mean, is it supported by sort of bottom-up work, frequency of check-ins with your customers have gone up, anything else that you can point to to sort of address this air pocket here in demand and enhance the near-term visibility that you guys have?

Yes, sir. I'm happy to take that. Yeah, I think as we look at the back half of the year, the numbers, frankly, are such that our range incorporates anywhere from the back half of the year on the base business being down roughly 5% to being up roughly 15%. At the midpoint, I think it's the second half of the year that's maybe about $7 million higher than the first half, so about a 6% growth. I think we're seeing... You know, leveling out, certainly our biologic safety testing business has been around this level for a while. You know, we are seeing some customers that didn't order for the first half of the year starting to reorder, so that's a positive sign. We are seeing an order book coming in. As it relates to China, you know, kind of across the business, that's about a $15 million impact to the overall takedown. Most of that we see in our biologic safety testing business as we've been seeing since the second quarter of last year. And we're not assuming that that's a growth region for us anymore. I mean, that was probably in the magnitude of a, you know, $25-ish million a year business for Mara by overall and growing a little bit. It's going to obviously be substantially less than that here in 2023.

Got it. That's helpful. And then one quick follow-up. The first part is really on biotech. Can you just talk about your current sort of exposure to SmithCamp biotech customers on a revenue basis? And then, Kevin, a similar question for you on EBITDA margin, really. I mean, I think you clocked in at around the 13% range here. The guide is assuming a bump up to about 25%. Just walk us through the puts and takes there. I know you mentioned somewhat of that, you know, the manufacturing variances and the swing associated with that, et cetera. But just help us build that bridge from 13 to 25 in the back half. Thank you.

Yeah, I'll handle certainly the second part of that question. You know, as I spoke to, you know, really I think the right proxy is sort of our first six months, which is around 22%. You know, we're guiding to, you know, a little bit higher than that for the full year now, which assumes a little bit of margin increase. in the second half of the year, very high variable margin on the incremental COVID revenues that we're going to see in the second half of the year. And as we flushed out a good deal of some of the overhead variances here in the second quarter, I think the risk of that being negative in the second half of the year is to minimize as well. So you can take that along with controlling costs and discretionary spend that we're certainly managing to match these revenue levels. I think to the extent we hit these ranges, it'll be a comfortable margin for us for the full year

Sure. Yeah, we obviously we're continuing to monitor that. It's approximately 30%, just to answer the question outright, of revenue that can be said to come from emerging biotech, depending on how you draw those lines. That said, we are not seeing programs of significant size that are being pulled for funding necessarily. The prioritization is more the issue there.

30% the way we classify small and mid-count.

Your next question comes from the line of Matt Larry of William Blair. Matt, your line is open.

Hi, this is actually Madeline on for Matt. I was just wondering, I think that a large portion, I think you said $40 million of the guidance cut was coming from a decline in services revenue. Can you talk at all about the difference in margin profile for the services revenue versus the products revenue?

Yeah, we don't really get into specific margins on a product by product basis. You know, it's always a little bit of a So we don't specifically guide to that. We kind of look at it on an overall segment basis more than anything else. But I would say when we look at our overall revenues, the two things that are distinct, one, we've seen, you know, continuously strong variable margins and consistent pricing across the product portfolio, which is a positive. On the services portfolio, we do take our current cost structure into account. We bid those products out and run gross margin calculators to ensure, you know, we have the sort of margins that we're looking to maintain. And we still believe that we're at a competitive price point on our services and solutions and our products versus competition out there today.

Great. Thank you. And then one thing I think we've heard from peers this quarter is that some of the headwinds that originally were confined to that emerging biotech have now, in terms of like pipeline relationalization, conservative spend, things like that, are now expanding more to large pharma. Is that something that you've experienced as well?

You know, I'll take that one. I think that we've got a little bit of a different customer profile than either the large life sciences competitors or the biotech suppliers. And what I think happened is we saw the pinch on the funding and the resulting desire to conserve capital on the part of our customers. We saw that a little bit later than it was apparent to some of the other players in the industry. Why? It would be pure speculation on my part, but I think a lot of the mRNA therapeutic players were very well funded. But once it became apparent in the broader market that there was kind of this winter coming from a funding point of view, I think then the trend among our emerging biotech customers accelerated. We saw the names of a few of our customers in the paper in this past quarter that we hadn't seen before. And so I do think that we're not immune from that. And then the broader questions on places like China and the headwinds there, relatively speaking, it was a smaller part of our business. When we're running 800, 900 million in revenues, now it becomes more obvious.

Your next question comes from the line of John Farber. John, your line is open.

Thanks. Carl, best of luck in retirement, and Trey, congrats on assuming the CEO role. When you look at some of the demand headwinds you talked about there, you kind of bucked it across prioritizations, delays, cancellations. Any way just to kind of further bucket that down, and would you be willing to quantify what percentage or a dollar amount around the cancellations you've seen? in the quarter or year to date?

Well, I don't think that we've seen any specific cancellations in the quarter that we would refer to or that we'd call out. I'm looking around the table to see if anybody's shaking their head positively. They've got a great answer for you. I don't quite see it. So, look, I think the biggest impact we have seen in the last two quarters forecast was clearly the emerging biotechs and the change in their spending patterns or willingness to spend. That happened significantly for us, and I think it probably had an outsized impact, if you will, on the services business. And so if you were looking for what's the major driver there, that would be the one I would call

Yeah, mainly what we've seen is folks that have had multiple candidates in a pipeline, and they have paused advancing their phase one, which is where our GMP services is today as an offering, and instead take candidates that are later phased forward and put that investment there, both in their people and their resources, And those are things that I, that pipeline, I think, will come back. It's just that they're playing, you know, a more spread out game instead of taking five molecules through phase one, maybe pausing their phase one, taking their phase through their two to three, and keeping that funding because that has a less of a risk profile to it.

Okay. I think that actually takes us perfectly to time. Thanks, everybody. for your questions, and I will pass it back to Jenny.

This concludes today's conference call. You may now disconnect.