Maravai LifeSciences Holdings, Inc.

telephone keypad. If you would like to withdraw your question, again, press the star 1. Thank you. I'd now like to turn the call over to Debra Hart, Head of Investor Relations. You may begin.

Good afternoon, everyone.

Thanks for joining us on our second quarter 2024 earnings call. Our press release and the slides accompanying today's call are posted on our website and available at investors.maravai.com. As you can see on our agenda for today on slide two, Trey will provide a business update, and Kevin will review our financial results and guidance. Drew Burch, President of Nucleic Acid Production, and Becky Buzio, our Chief Commercial Officer, will join the call for the question and answer session following the prepared remarks. During today's call, management will make forward-looking statements. It is possible that actual results could differ from management's expectations. we refer you to slide three for more detail on forward-looking statements. Also, during this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release and also posted to the investor section of our website. Please also refer to MARVI'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 Trey.

Thank you, Deb, and good afternoon, everyone.

We appreciate you joining us for our call today. Let me briefly recap the quarter, share an update on our new Flanders facilities, highlight some innovative new products we introduced, and provide a few additional business updates before turning the call over to Kevin. Let's start with our second quarter results on slide five. Today we reported $73 million in revenue for Q2, $17 million in total adjusted EBITDA, and $0 in adjusted fully diluted EPS for the quarter. Our nucleic acid production segment had revenue of $58 million in Q2, The biologic safety testing revenue was $15 million in the second quarter. Kevin will go into more detail on the financial results later in the call. Slide six shows our cash on hand at the end of the quarter was $573 million, up about $11 million from Q1. Debt is $530 million gross, thus we maintain a $43 million net cash position. We remain in a great position to fund our long-term growth strategy through organic investments while simultaneously pursuing external partnerships and or M&A. Regarding organic investments, let me provide an update on our two Flanders facilities. I'm excited to share that our Flanders facilities are truly coming alive. Flanders One started initial engineering runs in April, And our team has continued to hit all key milestones to ensure we complete our commitments to BARDA and the U.S. government. On slide seven, you'll see a photo of one of the four clean rooms at Flanders One. This was taken during the recently completed engineering run to produce GMP CleanCap M6. Other milestones we've achieved for our Flanders One facility include our Environmental Monitoring Process Qualification, or EMPQ, and our ISO 9001 certification. Flanders One adds significant scale and mitigates operational risk, as we now have multi-site capacity to manufacture CGMP small molecules in the United States. This includes the CleanCap analogs, as well as other nucleic acid chemistries, like RNTPs and N1-methyl pseudouridine, which are also needed as clinical grade inputs for mRNA production. Turning to slide eight, Our Flanders II teams produced the first batch of mRNA in the facility through the successful TriLink internal engineering run, demonstrating our ability to bring TriLink's best-in-class mRNA manufacturing processes to our Phase II and Phase III mRNA service customers. In addition, the CGMP manufacturing environments at the Flanders II facilities have also completed their EMPQs. and initial data review of our primary manufacturing suites for use in late phase and commercial manufacturing campaigns. This is a very important step to ensure the facility meets the stringent regulatory requirements our customers have for their clinical material. TriLink is committed to combining our innovation in mRNA manufacturing with the compliance needed for late phase and commercial manufacturing. This marks the beginning of how we can enable the advancement of life-changing medicines for patients worldwide. I'm also really pleased by our commercial team's success in winning RFPs for Flanders II CDMO services for builds that start in the second half of 2024. One customer whose RFP we won for a pivotal trial has already stated an intent to work with TriLink on additional products in their pipeline to service their early phase clinical manufacturing needs. Being the first customer in a brand new facility is not an easy decision, but the combination of our investments in plant design, consultations on regulatory requirements, and our experienced teams have eased any of the customer concerns. Trilink has manufactured over 100 GMP batches with over 70 different constructs, and we've made over 16,000 RUO constructs for thousands of clients. We are in a unique position to be of strategic value to our customers at any stage of their journey. Our customers continue to trust in our expertise, in our manufacturing and analytics, along with our new state-of-the-art mRNA plant are the key elements in winning these deals. TriLink is committed to providing innovative solutions to mRNA drug development from early discovery through pre-clinicals and now through late phase and commercial service to complement our products. CryLink has also established its Analytical Sciences Center of Excellence, or ASCE, reinforcing our commitment to mRNA innovation. The ASCE will serve as the hub for analytical development, where assays and tests will be available to our customers. ASCE is closely linked with every manufacturing site, including the New Flanders facilities, with redundancies in equipment, so that test methods can easily be transferred and product release occurs at the site of manufacturing. The ASCE also expands the capacity of TriLink's analytical services group, opening the possibility for a new business associated with nucleic acid product testing. Let's move to slide nine in our nucleic acid production segment. I'll highlight our new product portfolio expansion and our focus on bringing these products to market. NPIs, or new product introductions, are a key strategic priority for us, and I'm pleased with the progress we've seen to date. The TriLink team enhanced our catalog mRNA offerings, repositioned custom chemistry services, developed offerings for our GMP RNTP platform, and launched catalog IVT enzymes into the TriLink commercial ecosystem. Let's take each of those in order. As we touched on last quarter's call, we recently launched new catalog MRNA products with our TriLink Discovery Group using the CleanCap M6 and N1 methyl pseudouridine. We've now completed that catalog refresh and upgraded our existing catalog with our most up-to-date CleanScript IVT process. Since the launch, sales have exceeded our expectations for these new products, so we're very pleased by the market response. Our custom chemistry offering has been repositioned to improve how quickly our customers can interact with us and get the custom nucleic acids they need. The team tackled a few key areas, the most notable being our turnaround time, cutting that quote to cash process in half. Overall, we believe the improvements enable both existing and new customers to easily choose us and have a great experience to help them advance their discoveries. In Q2, we launched both RUO and GMP nucleotide triphosphates, or NTPs. When our customers come to us for their mRNA raw materials as they start discovery, it's important for them to know that we can continue to support them with GMP-grade materials produced here in the US as they scale and move into the clinic. This effort showcases our capabilities to do just that with a GMP platform for standard and custom molecules. As our customers advance their development, we can move with them, scaling from production in Water Ridge to production in Flanders, and with the confidence of high quality, productivity, and our expertise. Expanding our portfolio across these materials better enables us to support our customers and unlock the potential of genomic medicine. During the last week of June, we launched our IVP enzymes under the TriLink brand. an important effort across both TriLink and AlphaZyme. We've already incorporated AlphaZyme enzymes into our CleanScript mRNA production workflow and now have extended the enzyme product offering to our TriLink customers. By offering these enzymes at a single point of sale with our CleanCap technology, along with modified and unmodified NTPs, we have made it easier for our customers to access the breadth of differentiated mRNA production inputs and for us to gain a greater share of wallet. As you can see on slide 10, PryLink is able to supply all the key inputs for the IVT mRNA production process, all produced in our US-based facilities. We have four CleanCap options, and starting this quarter, we will offer M6 as a GNP input. Our CleanCap franchise is patent protected for CleanCap materials and methods, in all major markets in the world. And we're continuing to innovate with R&D on new mRNA capping analogs while continuing to protect the franchise with new and continuing patent applications. We have N1 methyl pseudouridine. And as I just mentioned, we now have the wild type RNTPs and a process for scaling up other modified NTPs into GMP production. And finally, we offer the enzymes that are used in the process. So, by having all the key inputs for IVT, we enhance the simplicity of doing business with TriLink. We can support the full workflow with innovation across the in vitro transcription inputs and continuous improvement to the IVT production process itself. Turning to slide 11, Glenn Research also launched five new products in our 59th Glenn Report, expanding our tools for genomic research and diagnostics. This includes four new seranol nucleic acids that expand our options for DNA and RNA backbone modifications. SNA oligos will hybridize with SNA, RNA, as well as DNA. These oligos are nuclease-resistant and have been used in guide strands for CRISPR, molecular beacons, and other applications. I continue to be impressed by customer feedback regarding Glenn Research's industry-leading promptness, responsiveness, quality, and commitment to excellence. Turning to slide 12, we continue to bolster our market leadership in the MRNA space through collaborations and strategic partnerships. In Q2, we announced a collaboration with Johns Hopkins University to establish a new MRNA Innovation Center. TriLink's investment in the partnership includes funding for the center, and enables Hopkins researchers to use CleanCap and our in vitro transcription technology, CleanScript. Additionally, TriLink will provide technical expertise and access to other critical discovery and manufacturing supplies, further lowering the barriers to discovery and application of mRNA. The center will bring together Johns Hopkins experts in RNA biology, genetic medicine, drug delivery, and biotechnology under one roof. We expect it will serve as a training center for the next generation of RNA investigators and as a hub for RNA researchers across the Hopkins network. Our continued key academic partnerships are helping to enhance innovation and are designed to accelerate market adoption of our latest technology and products. In addition to the JSU agreement, we have seven active research collaborations with top tier academic institutions including a new collaboration with the Houston Methodist Research Institute. We shared with you during our last call that AlphaZyme was collaborating with Applied DNA for scale-up manufacturing, enabling the Linea RNA polymerase. They have recently completed the process development project, which resulted in over 70% reduction in Linea RNA polymerase manufacturing costs and the manufacturer of a quantity of enzymes sufficient to support applied DNA's anticipated demand for critical starting material for production. We developed the full enzyme production process and made breakthroughs in the manufacturing workflow that allowed applied DNA to enter the market with a fully compliant quality product and a cost structure that enables the Linnea platform to be highly competitive. We believe that investing in new product innovation and partnering with leading academic and industry partners is a key driver for creating long-term value. We are exceptionally positioned to win customers early for product and technology adoption. Now let's turn to slide 13 in our biologic safety testing business, updates under the Cygnus Technology brand. As with the nucleic acid segment, We continue to innovate to bring improved products to market to support our customers. Cygnus Technologies recently launched three new products, including our second E. coli host cell protein kit for the BL21 variant used for recombinant protein expression, our first fungal cell line host cell protein kit, and our protein L mix-and-go kit, the first residual protein L ELISA on the market. The E. coli kit was developed for a specific strain of E. coli used for recombinant protein expression and is the only kit on the market for this specific strain. The fungal line HCP kit was developed in partnership with Dyadic International. The assay is expected to play an important role in facilitating the broad adoption of Dyadic's C1 protein production platform, which enables rapid and efficient low-cost production of antigens, monoclonal antibodies, and other therapeutic proteins. We believe this partnership will help accelerate the adoption of the C1 platform, ultimately aiming to enhance access and affordability of healthcare for patients in developed and developing countries. The Protein L Kit, which is highlighted on slide 14, will be used for affinity purification on next-generation antibodies, including bispecific antibodies, trispecific antibodies, and fragment antigen binding antibodies, or FABs. There are over 100 bispecific antibodies in clinical development, most in the early stages. Since 2014, the FDA has approved nine bispecific marketing applications to treat cancer, as well as hematologic and ocular diseases. In the future, the FDA anticipates there will be a spectrum of bispecific antibodies developed to prevent, treat, or diagnose diseases. For comparison, since 1986, the FDA approved over 100 full-length monoclonal antibodies. Full-length MABs are purified with protein A resins. Bispecific antibodies are purified with protein L resins. Given the number of bispecific antibodies in development, we believe there's high growth potential for protein L resin, and thus, we're pleased to introduce our residual protein L quantification assay the Protein-L Mix and Go ELISA kit. As we celebrate our one-year anniversary of occupancy in our new Leland facility, we're proud to announce the completion of our new DNA laboratory. This 800-square-foot full-service space is BSL-2 compliant with segregated areas for development, manufacturing, and cold storage. This new lab provides the dedicated space and capabilities for the development of our new line of DNA detection kits, demonstrating our commitment to continuously improve and broaden our best-in-class portfolio of host cell detection products. Finally, we're pleased that Cygnus was recently featured in BioPharm International for our cutting-edge antibody affinity extraction method. As in the NAP segment, we plan to continuously improve our offerings in BST to ensure differentiated solutions, superior technical support, the highest quality services and offerings, and the most comprehensive catalog of products to meet our customers' needs. Now moving to slide 15 and our commitment to deliver unquestionable quality. Trilink, Cygnus, Glenn, and AlphaZyme all recently hosted successful ISO audits. These always require tremendous effort from the quality team members as well as many others on site. I was really pleased to hear how positive and complimentary the feedback was from our auditors about every process, system, site, instrument, and person involved. Quality is a central MARAVI objective, and the zero major observations and successful certification to ISO standards in each of the audits is a testament to our adherence to high quality standards. Before I turn the call over to Kevin, I'd like to let you know that in early July, we published our third environmental, social, and governance report. Without question, our commitment to ESG goes hand in hand with achieving our company's long-term strategic objectives. On slide 16, you'll find some highlights from the report. This new report covers the 2023 fiscal year and provides an expansive look into our evolving ESG program. tangible examples of how we're making a positive impact on our stakeholders and positioning our business for sustainable growth. A key ESG advancement was expanding our environmental disclosures to include select Scope 3 greenhouse gas emissions. These advancements will enable Marabai to better evaluate how to make meaningful emissions reductions in the future. I encourage you to review the report in the investor section of our website. The comprehensive 50-page report is the accumulation of our enterprise-wide effort to deliver holistic value to our stakeholders while scaling operations and executing our return to growth strategy in a socially and environmentally responsible manner. Along with the safety and quality of our products, we are proud of our ESG advancements and are working meticulously to increase transparency and build the infrastructure necessary to support long-term sustainable growth. This team has done important work today, and we are committed to being a strong corporate citizen. We look forward to keeping you apprised of our journey. Moving to slide 17, I'll now ask Kevin to provide more details on our second quarter performance and our expectations for the balance of the year. Kevin?

Appreciate it, Trey. Certainly it was a very busy quarter for Maravai as we continue to broaden and deepen our overall capabilities and offerings. I want to recognize the efforts of our entire team for not only delivering over 73 million in revenues in the quarter, but also the numerous operational and R&D accomplishments in the quarter, which demonstrate the commitment and strength of our employees. Now let's dig into the Q2 financial results starting on slide 18. Revenue for the quarter was 73 million. Our gap net loss before non-controlling interests was 14 million for the second quarter of 2024. This compares to a net loss of $12 million for the second quarter of 2023. Adjusted EBITDA, a non-GAAP measure, was $17 million for Q2 2024 compared to $9 million for Q2 2023. Our adjusted EBITDA margin was 23% in Q2 2024, up from the 13% in Q2 2023, and up from the first quarter of 2024 is adjusted EBITDA margin of 12%. Overall, while the EBITDA margin in our second quarter was solid, it trailed our expectations. As we have seen over the past six quarters, both our revenues, which have ranged from $64 million to $79 million, and our adjusted EBITDA margins, which have ranged from 12% to 30%, have shown a fair amount of variability. For the trailing 12 months, our adjusted EBITDA margin stands at 21% on revenues of $279 million. I reckon many of your questions will be focused on margins. Let me spend some time discussing this topic on slide 19. As we look back when we last achieved revenues near this level, we only have to look back to Q4 2023 in which revenues were 74.1 million and our adjusted EBITDA was 28%, 27.7% to be exact, which was 470 basis points higher than this current Q2 2024 performance. I will spend a few moments broadly reconciling to that data point and discussing some of our profitability dynamics. First, our overall product mix and related contribution was the primary item in this bridge, and frankly, the largest contributor to the variance to our internal expectations. Our BST business, which we expected to decline about a million from its strong Q1 2024 performance, declined more than anticipated, ending the quarter at 15 million or 3 million below Q1. That variance, combined with lower absorption at our BSP manufacturing facility, led to about $2 million in lower adjusted EBITDA as compared to Q4 2023. This is roughly a 270 basis point impact. The second item to detail represents our higher startup costs and preparedness expenses tied to our new Flanders facility. These costs total $2.5 million in the quarter, up from $1 million in Q4 2023. This $1.5 million incremental expense was primarily tied to third-party consultants that have completed most of their work. This impacted the EBITDA margin by approximately 200 basis points in Q2 2024 versus Q4 2023. Lastly, Q2 2024 contained incremental expenses in our R&D efforts and costs associated with our Johns Hopkins collaboration. These items were roughly a million in total or about 150 basis points of impact. So to sum up, Those items, they total around 620 basis points of margin impact versus Q4 2023 levels. Now offsetting some of that dilutive impact of the aforementioned items was the benefit of our cost saving actions. The net impact of all other items, which in total provide 150 basis points of benefit, completing the 470 basis point lockdown from the Q4 2024 EBITDA margins. I will speak more to our margin in our updated 2024 guidance section in a bit. Moving to slide 20 and EPS. Basic and diluted EPS for the second quarter was a loss of five cents per share, the same as Q2 2023.

Adjusted EPS was zero for the quarter, also consistent with the prior year's second quarter. Moving forward to the year-end balance sheet cash flow and other financial metrics on slide 21.

As Trey mentioned, we ended the quarter of $573 million in cash, up $11 million from the end of Q1 2024, and $530 million in long-term debt, resulting in a $43 million net cash position. For Q2 2024, cash provided by operations was $17 million. Capital expenditures net of BARDA reimbursements were $6 million in the quarter, a bit lighter than anticipated based on the timing with the final outfitting stage at some of our Flanders buildings. Depreciation and amortization was $12 million in the quarter, which is in line with our expectations and annualized guidance. Interest expense net of interest income was $5 million in the quarter, consistent with our expectations. Stock-based compensation and non-cash charge was $14 million for the quarter, also in line with our expectations. Now, we ended Q2 with $141 million Class A shares outstanding and $111 million Class B shares outstanding, for a total of 252 million shares outstanding. The fully diluted share cap impacting our adjusted EPS metrics was 254 million total shares in the quarter and 253 million total shares on a year-to-date basis. Next to slide 22 and the discussion of segment performance in the quarter. Our nucleic acid production segment, which includes both our Discovery and GMP products and services marketed under our TriLink, Blend Research, and AlphaZyme brands, had revenues in the second quarter of 58 million and adjusted EBITDA of $21 million, a margin of 36%. Our biologic safety testing segment, which includes products from our Cygnus brand, had revenues of $15 million in the second quarter and adjusted EBITDA of $9 million, an adjusted EBITDA margin of 63%, lower than recent trends, as previously mentioned. Corporate shared service expenses impacting adjusted EBITDA totaled $14 million in the second quarter, down over $1.6 million from the comparable second quarter of 2023. Overall, Q2 was solid with revenue in line with our expectations, margins slightly below as a result of a few specific items as discussed, and a continued solid balance sheet and cash flow performance. So with half of 2024 in the books, Let me now detail how we are now thinking about the full year of 2024 on slide 23. Based on Q2 revenues being aligned with our expectations and our current assessment of the likely range of revenue outcomes for the year, we remain comfortable with the existing 2024 total revenue range of $265 to $285 million.

Looking at the segments, our biologic safety testing business printed a strong $18 million first quarter, but was followed by a weaker than expected Q2 based upon some lingering uncertainty in China. Based on the first half, and the outlook for the second half, we now see the BST segment up in the low single digits for 2024.

After taking this estimated performance for the BST business, the NAF segment will be roughly around $210 million at the midpoint of our revenue guidance for 2024, with the sensitivities to this midpoint mostly around the performance of our tri-link branded discovery business and the extent and timing of GMP-related service revenues in the second half of 2024. For the gating of revenue, with $138 million in first half revenues and a $275 million midpoint of our range, this sets the second half at $137 million at the midpoint, or about $68 million to $69 million per quarter. And we see Q3 likely in that $65 to $70 million range. Now, we see the profitability metrics likely lower than our initial guidance for 2024 that we left unchanged after Q1. We now see the adjusted EBITDA margin expectations of 20% to 22% and our full year adjusted EPS in the range of a 2 cent loss to an 8 cent loss per share. This 300 basis point reduction in our estimated adjusted EBITDA margin stems mostly from our product mix, the higher than initially anticipated slander startup costs, and the expenses associated with the more recent initiatives that we believe are the right moves for the business. including the job Hopkins funding and licensed deals in our end-time business unit. As this implies, given the first half performance, this results in a second half adjusted EBITDA margin around 24%, resulting from consistent MAP performance, a step up in BST revenues from Q2 levels, the completion of the Flanders startup costs and overall cost control efforts and operating expenses. Our guidance also holds the following expectations in 2024. Interest expense, net of interest income to be between $20 million and $25 million, a slight improvement from our previous guidance given our tight treasury operations and the continued benefit from our interest rate cap contract given the lack of rate cuts. Depreciation and amortization between $45 million and $50 million. Equity-based compensation, which we show as a reconciling item from GAAP to non-GAAP EBITDA to be between $45 million and $50 million. an ad debt fully converted share count of 254 million shares for the year, and an adjusted effective tax rate of 24%. Finally, we see total net capital expenditures of around 30 million for 2024.

So thanks for your time today. I'll now turn the call back over to Trey. Thanks, Kevin.

So to wrap up on slide 25, we had a solid first half of the year and are tracking against the revenue guidance range we originally communicated to you in March. We are executing on our return to growth strategy, and year-to-date have introduced significant new innovations to the market that further extend our leadership across the entire mRNA production workflow, as well as increasing our manufacturing capacity at our TriLink Flanders 1 and Flanders 2 facilities in these high-value areas. Our Cygnus team continues to innovate, with new product introductions and market-expanding technologies. We have incredible and passionate teams across Maravai, and the opportunity to do amazing things for human health. Our balance sheet remains strong, and we are well-positioned to execute on opportunities for both organic and inorganic investments to bolster our market position and provide our customers with innovative solutions.

We remain confident in the fundamental strength of our end markets and the value we provide our customers for the life-changing development of drug therapy. diagnostics, and novel vaccines. We remain committed to building a strong foundation for long-term, diversified and sustainable growth for our businesses. I would now like to turn the call back over to the operator to turn the call back over to the operator to turn the call back to turn the call back over to the operator to open Turn the call back over to the operator to open up the line for your questions. Thank you.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. We ask that you please limit yourself to one question and one follow-up. Your first question comes from the line of Catherine Schulte from Baird. Your line is open.

Hey, guys. Thanks for the questions. First, you know, great to see NAP get back to double-digit growth here in the quarter. Were there any one-timers or lumpy orders that you saw in the second quarter? And then why should we expect to see a sequential decline in revenue in the third quarter? Is that primarily on the NAP side or BST?

Yeah, I'm happy to take that, Catherine. Yeah, I would say that as it relates to the sequential slight decline in NAP, it would be in that segment, in the NAP segment, and we do see, you know, some of the orders that we had scheduled at the beginning of the year gating that way. So, you know, the second quarter contains some of those kind of high-volume clean cap orders, and that is going to step down a little bit sequentially in the third quarter and result in NAP being a little bit We're hopeful that BST can recover certainly from that low water point that we saw there in the second quarter.

We've discussed that dynamic a little bit. One of the interesting things about having GMP services and GMP products is that while GMP services unfortunately will tend to move out if there's movement, sometimes GMP products can come in and go out within the quarter or in some cases within the month. We did, as you identified, Catherine, have a little bit of that here in Q2, the GMP products that slid in that were helpful.

Okay, I got it. And then maybe for BSP, can you just remind us how much of your business is in China and how is that business performing outside of China?

Yeah, you can explain... over 80% of the BST results with a China drop specifically. That's really the only place where we have any China exposure. As you know, the growth in BST China came during the 21-22 COVID period. And then of course, we took that leg down in the second half of 22. Since then, honestly, we've had five very steady quarters. So the drop that happened here in Q2 in BST China specifically was a surprise to us and our distribution partners, actually. I don't think that we've specifically carved out exposure, but it's now, let's say, in the teens for BST.

Great.

Your next question comes from a line of Matthew Sykes from Goldman Sachs. Your line is open.

Hi, this is Evian from Ad.

Thanks for taking my question.

The first one, can you talk through what you're seeing from pharma customers within their discovery R&D spend versus some later stage projects? Have you seen a reprioritization of spend as companies look to cut costs but maintain investment in their later stage projects?

Sure, I think I'll hand that one to Drew.

Sure, thanks, Trey. Yeah, I think that's a fair statement. We have seen, you know, in all the companies publicly, there's been some reprioritization across the sector. It's a little tough to tie to, you know, one company or another company, but there's a fair amount of... portfolio moves. Overall, we've seen positive dynamics in terms of mRNA program starts, and so we think the fundamental backdrop is positive, but each given company may be reprioritizing as they move forward.

Okay, that's helpful. And then this is more of a broad question on your strategy.

So understand the focus is on winning and discovery and then shifting customers to GMP as they move along their pipelines. But will you try to poach programs as they move from discovery to clinical from players doing it internally?

Yeah, I think that's probably the biggest market opportunity because it's still early days in mRNA. I think everyone knows that. We're all excited because of how quickly we saw it, you know, go from a concept or the last mile to, you know, the billions of doses of vaccines. But really, the ecosystem and the programs that are at play, many of them started in-house, and many people still perform the MR&E production process in-house. One of the things we've seen, to your point, is you hear us talk about what we call our clean script workflow, which is the workflow that we've done hundreds and hundreds of times here. And very often, we have people who make the choice having run programs internally, do we go through the trouble of tech transferring our program or do we just bolt into the well-traveled clean script process, which has already gone for so many programs at different phases. So we actually see that conversion as probably one of the biggest opportunities we have as programs modernize. and as we have the opportunity for uptake to bring efficiency to those programs.

Great. Thank you.

Your next question comes from a line of Tasia Savant from Morgan Stanley. Your line is open.

Hey, guys. Good evening and thanks for the time here. A couple of quick ones for you, Trey, to kick things off. sort of following up on that earlier question on just SmithCap Biotech, right? I mean, we had a large preclinical CRO this morning, take down numbers pretty dramatically in the back half, citing weakness on the global biopharma side as well as on the biotech side. And so what are you assuming in your back half guide in terms of the early stage sort of biotech contributions? And then Can you comment a little bit on the pricing environment that you're seeing broadly across the space? It's just tougher negotiations. Are you needing to do more discounting here? Just any color on that would be helpful.

Sure. Thank you. We did have, as we discussed, a few large orders come in for GMP products that were for big top pharma. And so within the quarter, that lowered our typical SMID, as you like to say, TAS, from the high teens to the low teens. And I think, well, we expect that to moderate out a little bit. It was a rather extreme move in this quarter, but we are not expecting it to grow substantially in the rest of this year's guidance, if that's what you're

Got it. And then, Trey, on the pricing?

Pricing is a function of each individual program. So it's not quite as simple as where a catalog-type company would throw 2% to 3% price in every year. But we see the opportunities to take – we take price opportunities when we can. I'll put it that way. but there's not a target number specifically that we're needing to achieve that would be in jeopardy for the rest of the model this year.

Got it. And Kevin, I want to dig in a little bit on EBITDA margin cadence in the back half. A couple of moving pieces here. You've got the step-down and high-volume theme cap that you called out and then potentially a little bit of a step-up in BST as well. Do those two dynamics essentially sort of offset each other as we think about the 3Q versus 4Q? And then is that 4Q number a good jumping-off point off of which we can see sort of steady sequential increases next year? Thank you.

Yeah, thanks. That's the latter part of your question, and certainly that's going to be ultimately revenue-dependent more than anything else. So we'll see that margin tie very directly to where our revenue hits versus the cost structure that'll be pretty stable going into next year, given all of the work we've done to complete our facility's footprint. As it relates to the quarterly sequential migration of our EBITDA margin from here, yeah, I would say, as I mentioned in the prepared remarks, really it's sort of a normalization of NAP, kind of seeing NAP relatively you know, the same as it was in the first half of the year, BST hopefully improving, picking up some margin there, and then a lot of the costs that were dragged on the margin the first time started to tail off, so the... ...associates to the other items that I mentioned, as well as some of the things that are related, and then... ...modeling to get us that slightly higher margin in the second half.

Got it. Thanks, guys. Appreciate the color.

Our next question comes from a line of Matt Hewitt from Craig Hallam. Your line is open.

Good afternoon, and thank you for taking the questions. And just a heads up, you guys are cutting out pretty bad. I don't know if it's just on our end, but there's quite a bit of pauses in between words. I guess first up, you noted during your prepared remarks that NTP is manufactured obviously here in the U.S., How important is that to your customers? Are you seeing some of this repatriotization kind of really starting to bear fruit? And, you know, what are you hearing from customers regarding that?

Yeah, I think, first of all, I think the sound was a couple of F-35s flying over us here in San Diego. So hopefully you can hear us clearly now. And thank you for the question. I'm smiling because, you know, I would not necessarily have thought it would become such an advantage to have RUO and GMP chemistry manufacturing in San Diego, California, and similarly enzyme manufacturing in Jupiter, Florida, but we're seeing a tremendous amount of interest come from those facts. It just happens to be the result of where our business has started and grew up, but it looks like it could become a significant strategic advantage. And we have people not only asking one level deep in the supply chain, but being interested, I think, for the first time that I've noted in how deep in the supply chain they can find out the origin story. So, yeah, I think it's going to actually become a pretty appreciable advantage for us moving forward here.

That's great, and that's good for me. Thank you.

Your next question comes from the line of Justin Bowers from Deutsche Bank. Your line is open.

Hi. Good afternoon, everyone. Can you give us a sense of, well, number one, with Flanders II, do you have that capacity built out now where you want it, or are you still building out additional cleanroom capacity there? And then can you give us a sense of what the timeline is like for that from when you just initially start adding equipment versus engineering runs versus when you're actually in revenue generation phase?

Yeah, I think as Kevin mentioned, we are really at the tail end here of the capital cycle. And as we mentioned in the comments about the EBITDA bridge, really have had some one-time startup costs, professional fees, and other things to get the facility truly rolling. We are at the same time, however, so the whole rooftop has to open, obviously. But we are, let's say, scaling in from a labor perspective and a total overhead perspective as we fill that factory. But there's no more substantial capex to do. to turn on the multiple suites. I think we've shared this previously, but we have three parallel manufacturing suites, and our job right now is to fill them up.

Understood. And then, quick follow-up. Any change in the committed orders that you have for some of the larger commercial programs?

For the bulk orders, no, no changes.

Thank you. Yep.

Your next question comes from the line of Connor McNamara from RBC Capital Markets. Your line is open.

Hey, guys. Congrats on the nice quarter, and thanks for the questions. Just as a follow-up on the Flanders, too, have you incorporated any Phase 2 or Phase 3 programs starts into your guidance this year? We'll start there.

Yes. One of our first commitments was a phase two, three pivotal. So, yes.

Okay. Great. And then, can you tell us, I know you guys have showed this in the past, but, you know, something, a trial that goes, you know, when a trial advances from preclinical to the clinic, you see a pretty big step up. Is there any way you can kind of quantify how big of an opportunity each of these programs are or how we should think about, you know, as you add in new programs, what's the potential opportunity? benefit for new programs?

I understand where you're going with that, Connor. And it would be good if we could. But what we're seeing that we're actually excited about is the broadening significantly of the use of mRNA from infectious disease vaccine to part of, well, tools for cell and gene therapy, for protein replacement programs, as the message to be expressed for CRISPR gene editing and so on and so forth. All of those have different delivery sizes and use cases.

Historically, the results we've shared have been what happens to a bulk GMP clean cap, well, an RUO clean cap customer that's preclinical that goes bulk GMP clean cap in phase one and two. And so on. When you blend in the service and now again, we're happy to see these different uses for mRNA and these different therapeutic targets. It unfortunately makes it more difficult to predict what the step up will be. We just know that it's a good progress at each stage. Progress at each stage. Right. Great. And let me just sneak one in for Kevin, if that's okay. Kevin, did you – quantify the OPEX change from Q2 to the second half of the year? It sounds like there's a couple million of costs in there that won't repeat. Should we assume that OPEX on an absolute basis goes down from Yeah, I think on an adjusted EBITDA impacting basis, that's correct. Great. Thanks, guys. Appreciate it.

Your next question comes from the line of Michael Riskin from Bank of America. Your line is open.

Great. Thanks for taking the question, guys. And, yeah, earlier the audio was a little bit in and out, so if you answered this, I apologize. I must have missed it. But just on the margin guide revision for the year, you know, that bridge you provided was helpful. And, you know, you called out the product mix in BST, which makes a lot of sense, you know, the Flanders Startup Cost, some of the initiatives. What I want to dig into is just sort of, how transient are some of those factors, right? So, you know, the product mix, that should be relatively transient. The Flanders cost, again, if you could write a little more color on, if that's just, you know, startup cost or actual operating cost that's coming in a little higher. And then same thing on the initiatives, you know, the Johns Hopkins and some of those other collaborations. I imagine that's relatively one time in nature in terms of starting up that facility, starting up the collaboration. Or is that something that's going to, you know, have a run rate in the model going forward? Yeah, sure.

Happy to. Yeah, certainly on the Flanders cost, we've incurred a year to date close to, gosh, almost $3 million now of, I would say, really incremental costs to bring up our quality systems, have the documentation, have the validation, stock the facility with things that are not inventoryable items that are therefore used over the manufacturing periods going forward. So, you know, we've gone ahead and just included those in our expense burdens. I know some companies choose to... those as pre-revenue startup costs, but we've just flushed those through our P&L. So most of that will be period and isolated the first half of the year, and then we'll be starting to generate revenue and not see those as an incremental drag on margins prospectively.

As it relates to a couple of the other things that we mentioned specifically a certain way, our Startup expenses for the collaboration with John Hopkins as well as some of our Smaller license deals that we haven't talked about publicly in our enzyme division All were basically drags on The first half will kind of come in and out of some of the quarters as we look at it prospectively. But overall, when you think about all those different costs, they will predominantly be behind us as we go forward for the rest of the year. Okay. Okay. That's helpful. And then as far as some of the new product instructions, you know, you're highlighting. I mean, my belief is they're a relatively small contributor to revenues. now and won't gradually ramp over time so correct me if that's wrong but then I also want to ask about the incremental EBITDA contributions from those.

We know your historical clean cap and BSD margins. How should we think about these new products relative to that? Are they incremental to margins essentially or should we just think about them as more in line with existing? Thanks.

Yeah, I think predominantly our incremental products, again, this is for us continues to be more of a revenue game than a lot of varying margins within NAP. We do see a little bit based on the customer channel and some of the different business units that we have, but overall, especially as it relates to the discovery products, this for us is an infrastructure that we have in place. The incremental variable costs aren't much different We're trying to put together really, you know, solutions that are best for our customers that drive revenues and those overall revenues, you know, drive margin expansion for us. So, you know, for us, again, it's strategic and, you know, overall financially beneficial, you know, just to drive the total revenue numbers. All these products have high variable margins and, again, mostly generated by our already established facilities and workforce.

Got you. Thanks. Your next question comes from a line of Matt LaRue from William Blair. Your line is open.

Maybe to stick on the new product side, Trey, you highlighted what now is quite a number of new products filling out sort of the mRNA production suite. Your reference part of that obviously is the workflow and the ability to access more wallet. Perhaps relative to CleanCap,

Could you characterize the size of some of the markets you're able to access with the new products?

And if there are any of these new products in particular where you view your approach, your technology, the service offering, the product offering to be particularly differentiated and one that you might see drive more growth early on?

Yeah, absolutely. Within the framework of the mRNA IVT workflow, there are certainly bulk commodity chemicals. There are obviously enzymes, and there are differentiated chemicals, or excuse me, differentiated technologies, which are workflow technologies that manifest themselves in our service business or products, you know, materials and methods that manifest themselves like CleanCap.

We are definitely looking for both internally organic innovation organic innovation innovation around differentiated solutions to bring the next generation of workflows to market.

But a big part of this lift I think that you've identified is just to make sure we cover all the fundamental elements of the IBT workflow. Thanks to the acquisition of AlphaZyme, we now have access to very high-quality, high-purity enzymes for our customers to blend with the already stellar position that Trilink and Molybdenum had within the nucleic acid chemistry space. So what you're hearing and commenting on here is the aggregation of all of the inputs to the IVT workflow and what our our innovation is focused on is finding more differentiated ways to bring about the next generation of mRNA through solutions like CleanCap. I can't flash those that, of course, we haven't released yet, but I'm pretty excited that there are so many different places within the workflow and within the inputs to improve performance overall. Overall, I think we're going to bring mRNA purity up Yield up and cost down for our customers And we can bring that we can make that possible As you've said from a wallet share perspective with a one-stop shop But but our intent is to continue driving the industry forward with innovation within that framework Okay, thank you

And then just on Flanders, too, you mentioned winning RFPs for builds starting in the second half. Could you maybe speak to how the funnel behind some of those initial wins is building and what you're seeing from a phase or customer mix perspective, how many of those potential RFPs relate to customers who are existing in CAP? and then maybe just sort of what the size or activity level is, you know, kind of on a quarterly basis.

Thank you for that question. It's well-timed because I think Becky was getting a little lonely. Becky, do you want to talk about customer progression, bookings, GMP, phasing, all that?

Sure. We've had a strong interest in our GMP services to manufacture products clean cap mRNA drug substance and that has It's continued to be quite strong for us this year and building our funnel We've made additions to our commercial team both on the technical side and then on the seller side And we have seen you know a really nice doubling of our funnel from q1 to q2 and it's across different indications So, you know, cell and gene therapy, protein replacement, those are the places that we've seen the most activity.

Okay, thank you.

Rob, I think we have time for one last question here.

Thank you. Your final question comes from the line of Kyle Cruz from UBS. Your line is open.

Thank you for taking the question. Could you please describe if your recently announced supply agreements with large CDMOs or agreements you have with third-party distributors are influencing how you think about adjusted EBITDA margins going forward? And on a similar note, with Planters 2 opening up, how do you view some of the CDMOs you're supplying with CleanCap as competitors and partners for work going forward? Thank you.

Yeah, I'll take the latter part first and then hand the first part to Kevin. Look, we want to make sure that our technology is in every molecule. So we realize that that's unlikely if we try to hold too tight to the idea that you have to do everything with us. And we have not specced Flanders 2 to satisfy the need of every customer obviously and every That's why we have these key partnerships with the leading CDMOs, like Fuji, like Lonza, that we've announced. It's a key part of our program. And, of course, we would love the service business, but we want to make sure that we have differentiated products. We help bring about the next generation of mRNA, and that we help with that, whether it's just with product or whether it's product and service. And Kevin, I'll hand the front side.

Yeah, I mean, these relationships are really strategic and about a symbiotic relationship here to help these large CDMOs help their customers with getting access to the best technologies to give them the best end product. Certainly throwing CleanCap into that portfolio is incredibly important. As far as economic considerations, you know, it really still boils down to volume. This is really, there's not stand-alone technology You know, distributor type pricing or anything of that nature embedded here, this is really about the underlying program, what the volume of that program is, and we stay pretty disciplined to volume-based pricing. So, you know, economically, as we drive volumes through these incremental channels, I would not see the underlying margins differ much from historical margins.

And that concludes our question and answer session. I will now turn the call over to Deborah Hart for closing remarks.

Well, we just want to thank you for joining us today. We'll be attending several financial conferences in the coming weeks, so we can try to connect with you at one of those events. Feel free to reach out with any further questions, and we hope you have a great evening.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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