Rapid Micro Biosystems, Inc.

Good day, and welcome to Rapid Microbiosystems' third quarter 2021 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your touchtone telephone. If anyone should require assistance during the call, please press star then 0 to reach an operator. As a reminder, this call is being recorded. I'd now like to turn the call over to David Deichler from the Gilmartin Group.

You may begin.

Good morning, everyone, and thank you for joining Rapid Micro Biosystems' third quarter 2021 earnings call. I'm David Deichler from the Gilmartin Group. On the call from Rapid Micro, we have Rob Stignese, Chief Executive Officer, and Sean Worches, Chief Financial Officer. Yesterday evening, Rapid Micro released financial results for the third quarter ended September 30th, 2021. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements, including but not limited to statements related to Rapid Micro's financial condition, expectations for business development and growth, customer interest, and adoption of the growth direct system, and the potential impact of COVID-19 on Rapid Micro's business. Actual results may differ materially from those expressed or implied in forward-looking statements due to a variety of factors. For a list and description of those risks and uncertainties associated with Rapid Micro's business, please refer to the risk factors section of our Form S-1 filed with the Securities and Exchange Commission on July 12th, 2021. We urge you to consider those factors. You should be aware of the statements should be considered estimates only and are not a guarantee of future performance. This conference call contains time sensitive information and is accurate only as of the live broadcast today, November 12th, 2021. Rapid Micro disclaims any intention or obligation except as required by law to update or revise any financial objections or forward looking statements, whether because of new information, future events or otherwise. And with that, I will turn the call over to Rob.

Thank you, David. Good morning, everyone, and thank you for joining us to review our third quarter 2021 results. I will begin today's call with an overview of our operating results and key growth objectives. I'll then pass it over to Sean for a detailed financial review before we open the call up for questions. I'd like to start by saying how pleased I am with our third quarter performance. We delivered total company revenue of $6.9 million, with commercial revenue coming in at $6.3 million. We made good progress executing across our strategic initiatives to accelerate the global adoption of the Growth Direct system with 10 system placements during the quarter, bringing our total systems place to 113. We continue to establish ourselves as the market leader in automated microbial quality control, or MQC, within biopharmaceutical manufacturing globally. I'll now provide an update on some of the progress we've made recently on our strategic growth objectives. Since becoming a public company in July, we've accelerated investment to drive customer adoption, global expansion, and product development. To support our growth plans, we hired Life Sciences veteran Andy Keyes as Chief Commercial Officer during the quarter. Andy was most recently the SVP of Global Commercial Operations at Quantarix, where he led sales and service operations globally. And he is now leading our sales, service, and validation teams worldwide. We're thrilled to have him on board at Rapid Micro. and excited to have him lead the expansion of our commercial teams. Biopharmaceutical customers recognize that our purpose-built technology is designed to overcome challenges associated with the outdated manual NQC method. The Growth Direct has the speed, accuracy, scalability, and security required for advanced pharmaceutical manufacturing. Customers value the Growth Direct's efficiency and time to result, which we highlighted in a poster presentation at the 2021 Parental Drug Association Pharmaceutical Microbiology Conference in October. The time to result data presented demonstrated that the Growth Direct delivered environmental monitoring results in approximately 72 hours versus five to seven days using the traditional manual testing method. This strong value proposition, along with other strong value drivers, allows us to attract a top tier customer base, including the majority of the global top 20 pharmaceutical manufacturers. During the quarter, we also continue to invest in product innovation to expand application of the Growth Direct. This includes our rapid sterility application, which is in development and was recently profiled at PDA in October. Rapid sterility testing is critical, not only in the manufacturing of biologics and sterile injectables, but also vaccines and cell and gene therapies. With our Growth Direct system, customers will be able to significantly reduce time to result for final sterility testing, at this very important stage of production, which will accelerate the release of final product to patients. When using the Growth Direct, customers can ship quality product more rapidly with fewer bottlenecks, improved data integrity, and less potential waste. We are encouraged by the positive interest we've already received in anticipation of the Serility application's upcoming beta in 2022. Additionally, We also advanced new product development programs focused on expanding our solution within customers' quality control workflows. For example, our program focused on differentiating among categories of organisms by advanced software developments to our core vision system is proceeding well, and the Growth Direct would be the first automated rapid MQC product able to differentiate organism types. We expect to begin beta in 2022 with this exciting new offering. Operationally, we continue to build robustness and continuity across our manufacturing and supply chain network. For example, our new consumables manufacturing site in Lexington, Massachusetts is currently under construction and will be operational in 2022. In summary, I am extremely proud of our achievements in the quarter despite some COVID-related headwinds. We continue to invest in building a solid business foundation and laying the groundwork for long-term growth. As we look ahead, we remain very excited about the growth opportunities for our business. Furthermore, with the proceeds from our IPO in July, along with the repayment of our outstanding term debt during the quarter, we have the capital and financial flexibility to accelerate our growth initiatives to drive long-term value for our stakeholders. I'll now turn the call over to Sean to discuss our financial results. Sean?

Thanks, Rob. Good morning, everyone. Last night, we reported total revenue for the third quarter of $6.9 million, an increase of 31% compared to $5.2 million for the same period last year. Commercial revenue was $6.3 million, representing growth of 27% over the third quarter last year. Within commercial revenue, product revenue of $4.8 million increased 19% over Q3 last year. Consumables revenue grew more than 200% versus Q3 last year as a result of newly validated customer systems coming online and increased utilization by some existing customer systems over the past year. From a system standpoint, as Rob mentioned, we placed 10 systems in the quarter. This compares to 11 system placements in Q3 last year. As a reminder, system placements in Q1 and Q2 last year were negatively impacted due to widespread COVID-related border closures and customer site access limitations following the outbreak of the pandemic in March 2020. As we moved into the second half of last year, some of these limitations started to ease and we were able to place several systems that had been delayed from the first half with customers in Q3 and Q4. While system placements have historically been and continue to be subject to quarterly variability due to a number of factors, the unique dynamics last year resulted in an unusually low number of system placements in the first half and a correspondingly unusual rebound in second half placements. Specifically, we placed five systems in the first half of 2020 compared to 21 systems in the second half, including the 11 placements in Q3 that I mentioned earlier. This unusual COVID-related trend significantly impacts quarterly growth rates when comparing 2021 to 2020. Service revenue was $1.5 million in the third quarter, up 65% compared to the same period last year. This increase was due to higher revenue from validation services and, to a lesser extent, recurring service contracts. During the quarter, we completed the validation process on five new systems, bringing the cumulative number of validated systems in the field at the end of Q3 to 68. This result reflects several system validations that shifted from Q3 into Q4 due to COVID-related access challenges at some customer sites, as well as a more pronounced impact from the summer holiday season. Since the beginning of Q4, we've completed those shifted validations and are also on track with our Q4 plan for new validations. Recurring revenue, which includes consumables and service contracts, was $2.2 million in the quarter, representing an increase of 154% compared to Q3 last year. This performance was driven by the very strong growth in consumables I mentioned earlier, as well as solid growth in revenue from service contracts as we continue to grow our base of validated systems. To finish up on revenue, non-commercial revenue related to our contract with BARDA was $0.6 million in Q3 this year compared to $0.3 million in the third quarter of 2020. In late September, we were notified by BARDA that they had approved a $0.4 million final adjustment to close out our previous contract, which we recorded as incremental non-commercial revenue in the quarter. As a reminder, we do not anticipate non-commercial revenue from our current contract with BARDA continuing beyond 2021. Moving on to gross margins, product margins were negative $1.5 million or negative 31% in Q3 compared to negative $1.4 million or negative 34% in the same period last year. On a percentage basis, gross margins improved as a result of volume leverage from higher revenues in the quarter. Service margins were essentially break-even in the third quarter compared to $0.1 million or 14% in Q3 last year. with the difference due mainly to recent investments in new field service and validation headcount to support higher service activity. Moving down the P&L, total operating expenses were $10.8 million in the third quarter, consisting of $3.1 million in sales and marketing, $2.4 million in R&D, and $5.3 million in G&A. This compares to total OPEX of $6.2 million in the third quarter of 2020. The year-over-year increase was due to higher sales and marketing spending driven by increased investment in headcount and higher G&A expenses relating to our transition to a public company. Net loss in the third quarter of 2021 was $25.0 million. This includes the impact of an $8.2 million charge to adjust the fair value of our outstanding preferred stock warrants prior to their conversion into Series A common stock warrants in connection with the IPO, a $3.1 million charge related to the repayment of our term debt and a $0.8 million charge to other expense related to an exit fee payment to a former lender that was triggered by our IPO. This compares to a net loss of $8.5 million in the third quarter of 2020. Net loss per share attributable to common shareholders was $0.71 in Q3 2021 as compared to $30.08 in the prior year. As a reminder, the number of weighted average common shares outstanding in Q3 this year was materially higher than Q3 last year because of the conversion of our outstanding preferred stock to common stock in connection with our IPO in July. This accounts for a substantial portion of the decrease in net loss per share between the periods. With respect to non-cash expenses and CapEx, depreciation and amortization expense was $0.4 million, stock cup expense was $0.6 million, and CapEx was $0.5 million in the third quarter of 2021. We ended the third quarter with approximately $220 million in cash and cash equivalents. As Rob mentioned earlier, we fully repaid our outstanding term debt during Q3, which will eliminate approximately $0.8 million in interest expense each quarter starting in Q4. Now shifting to guidance, we continue to expect our full year 2021 commercial revenues to be at least $24 million, representing growth of at least 70% compared to 2020. On a sequential basis, we currently expect our commercial revenues to increase, gross margins to improve, and OPEX spending to increase in Q4. Engaging onsite with our customers is the most effective way to sell growth direct systems and efficiently move them through the validation process and into routine use. It's important to note that the current environment continues to present transitory challenges and uncertainty related to the timing of business activity due to COVID-related customer access limitations. We are actively managing the business to navigate through these challenges and mitigate their impact. That concludes our prepared remarks, so at this point, we'll now open the call up for questions. Operator?

As a reminder, to ask a question, please press star then 1. If your question hasn't answered and you'd like to remove yourself from the queue, press the pound key. Our first question comes from Tycho Peterson with JPMorgan. Your line is open.

Yeah, hi. Can you hear me okay?

Yeah. Hey, Tycho.

Hey, so on the validations, you know, you did take a step down here. I know you talked about, you know, typically second half stronger than the first half, but can you maybe just talk a little bit more about what you're seeing in the market? You know, how much of this is, you know, the COVID impact? Is there any supply chain impact here? And, you know, have things picked up a bit since the end of the quarter?

Yeah, it's Sean here, Tycho. In terms of validations, I think I covered some of it in the prepared remarks. We have had some customer situations, particularly coming out of Q3, kind of latter part of Q3, and into Q4 where the access has tightened a bit. And we've had the impact of the validations from Q3 to Q4 was really a couple of different customers where things changed a bit due to COVID and our ability to get those systems validated and get over the finish line in Q3 pushed into Q4. Now, as we said earlier, Every one of those validations that we didn't get done in Q3 that we had anticipated has already been done in Q4, and we're making good progress and on track with our Q4 validation. Again, this is all timing that we're seeing at this point, we believe. Having said that, looking at Q4, the environment, I think, is continuing with what we've seen over the past couple of months now. At this point, that's what we're assuming we're going to see for the near term, not really seeing anything that's showing that we're going to move materially positively or negatively from a COVID standpoint right now. So we're watching that very closely as we have been. But the environment did change a little bit late in Q3, and that's carried forward into Q4 so far.

And is it fair to say then that because this is timing, you don't really see an impact on 2022 consumable numbers as we look ahead?

Yeah, I mean, we're still working on the plan for next year. I think, you know, Once a system's validated, that starts our activity working with the customer, move them into routine use, which is really the ultimate driver of consumables. So as things slip a little bit, it could have some impacts in terms of when new customers get up into routine use. But we'll talk more about our expectations for consumables next year when we get to giving guidance for next year.

And then on sterility, you highlighted the beta launch coming next year. Can you just talk a little bit about how you think about the initial rollout of sterility?

Yes, that goes, Rob. So with regard to rollout, I'm not sure you're referring to full commercial rollout, but that will come later in the development sequence. But the next major step is a beta launch, if you will, which will be with we're working now with several large global biopharma customers who would beta test our sterility application, provide feedback, And then subsequent to that, in later periods, we would execute a full commercial launch of the product. But the beta is scheduled for 2022.

Okay. Last one on SG&A. You know, you said you've actually increased tech count as you're scaling up here. Can you just give us a sense of, you know, where you are from a rep standpoint and how you're thinking about, you know, SG&A for 2022? Sure.

Yeah, so we have a, as you heard in the prepared remarks, we've hired a new chief commercial officer, Andy Keyes. We have a focused investment effort across broadly commercial, and not only in sales and marketing, but global service as well. So we're ramping headcount. I think we mentioned in previous discussions that we're roughly planning to double headcount across our commercial operations throughout the year, and we'll continue that growth going into into 2022. We see that as a key element in driving growth going forward. Okay, thank you. Sure, thank you.

Our next question comes from Tejas Savant with Morgan Stanley. Your line is open.

Hey, guys. Good morning, and thanks for taking the questions here. Rob, of the 10 systems you placed in the third quarter, can you just elaborate on how many were with the same customer in terms of multi-unit orders, and how many customers were new into your installed base mix?

Yeah, Tejas, in the other placements, these were all sales to existing customers.

Got it. And then on the backlog, I mean, anything you can share and mix in terms of large multi-unit orders that we should be thinking about heading into 22?

Yeah, broadly, the backlog, I think we'll refer to it as a funnel, is consistent with previous discussions. So it's a good mix of new and existing customers, the placements in this quarter notwithstanding. And And there are, as we continue to roll our business plan out and we continue to sell not only to existing customers but large and even medium-sized new customers, there are increasing conversations about large multi-unit orders going forward. So we do expect that to be a feature. That being said, as we expand, I think it's important to note, As we expand our commercial operation, as we just touched on, we do see opportunity for midsize customers and small customers as well in all our geographies, especially as we ramp our number of heads in the field.

Got it. And then, Rob, on the global focus on supply chains here across your customer base and just ensuring uninterrupted supply of reagents and consumables, et cetera, are you seeing customers, particularly the ones who are new to the Growth Direct system, being a little bit more gun-shy, if you will, of placing an order with you in light of the lack of redundancy in your consumable supply capabilities just yet?

Yeah, I don't know if I would use the word redundancy. per se. To be fair, it is a discussion. But I think as we mentioned in previous periods as well, we work with customers on a stocking plan and we walk them through our inventory approach as well. So we hold upstream raw goods material and inventory to absorb any upstream supply chain shocks. And we also maintain downstream finished goods inventory as well. in our various stocking locations. So this tends to get customers comfortable. Moreover, as I mentioned in my prepared remarks, we're also building out our secondary consumables manufacturing site in the Lexington, Massachusetts area, which provides continual continuity and business continuity within our system once it's online. And we're also, I think I mentioned as well in previous discussions, we're also looking at giving our strong partners base of customers in Europe in future periods, a consumables manufacturing capability in that region as well.

Got it. That's helpful. And then on the COVID resurgence that you're seeing here, any impact on lengthening sales cycles? And on a somewhat related note, you know, with these supply chain cost pressures, are you seeing any signs of inflation? And is the expectation still that on the gross margin line, you can hit sort of break even around the middle of next year? Or could we see that pushed out a little bit because of some cost pressures?

Yeah, I'll start with the commercial side and then Sean can dive into the on the call side. Yeah, so COVID is impeding our ability to get on site in certain situations to engage with our customers. And Sean mentioned that is the best way to interact with customers, not only on validations, but sales as well. So we do see some speed and timing impact on our sales and validations processes. So I think it's more of, I would say, thematically I don't see massive changes to our sales, our broad sales cycle, but, you know, customer situations specifically can be impacted by our ability and are being impacted. Just a bit more of a difficult and uncertain operating environment given site access issues, and we're seeing some unevenness from whether it's country to country or more specifically customer to customer about how sites are able to get access. Now, we're executing through that, and more broadly, our end market demand is very strong. The value proposition is resonating strongly, but we do have this, we'll call it COVID friction that we're executing through currently.

I think I'd add to that just that as we see it, at this point at least, the market is still the market we believe it to be. Our opportunity is as good or better than we have always thought it is. We're talking about timing. We're managing it extremely actively, doing everything we can. There are a bit of ebbs and flows to it. Last year was obviously a very big flow, and it ebbed from that, and, you know, we're seeing different waves in different places, to Rob's point about customers and geographies kind of being impacted in different ways at different times. So, again, it's something we're hyper-focused on at this point and managing as best as we can, and I think we're doing a pretty good job at it. And then...

Yes, go on, on the gross margin point.

Yeah, I was going to hit that. So you asked about inflation and gross margin. I'd say we are seeing some inflationary impacts. I think we talked about it in the past around mainly freight, some materials, a bit on labor, and we're working to manage those internally. I think as we look out, we don't expect that to change much in the near term. I think everybody saw the inflation report yesterday, so everybody's got their eye on this topic. Having said that, you know, we are doing a lot of things internally to offset that or do better than that in terms of what we expect for product costs next year, and obviously we have other larger programs that we're pursuing to get significant amounts of cost out. So I think as we look at 2022, you know, we're putting a specific plan together around execution on that given the current environment for next year, but At this point, we still believe 2022 will be the year that, on our commercial base, that we will flip to positive gross margins during the year.

Got it. Super helpful. Thanks, guys.

Thank you. Thank you.

All right. Next question comes from Max Masucci. Max Masucci with Cohen & Company. Your line is open.

Hi. Thanks for taking the questions. So it's nice to see the sales leadership ads, you know, over the past few quarters, you know, hires coming from companies with a strong track record of execution like Thermo and Quanterix. I'd imagine that adding more manpower should be helpful on the sales front, but I'm curious to hear how the new hires can help to move the needle for existing customer growth under the land and expand strategy, you know, given the relationships that these companies recent hires may have or any expertise they bring to Rapid in terms of expanding from within?

Yeah, thanks for the question, Max. Yeah, sure, that's part of the plan, as you may imagine. So to your point, we've hired from companies that have a strong history and record of commercial execution. Also, from our market generally, so our leadership does have connections and relationships within our industry globally, not only expertise in building teams and executing commercial plans, but also has, which is important, customer relationships around the world, especially in, and not only in our large customers, but some of our other segments as well. And as we look at potential channel partnerships, relationships, and capability and expertise there as well. So I view it as a broad skill set and relationship set that will benefit Rapid Micro.

Great. And then if we just separate, say, biologics and cell and gene therapy customers, it would be great to hear If, you know, there's any – what the portion is of customers in each category that are ordering, you know, one type of test consumable versus those that have expanded. They're ordering and adopted, you know, two or three of the launch test consumables. Just looking to get a bit more detail around the adoption trends for the broader product portfolio.

Yeah, so, again, broadly the – we're – We're focused and have a heavier proportion of sales generally into biopharma broadly to include biologics and cell and gene therapy. With regard to the applications, you see environmental monitoring being adopted broadly, generally, and you probably see a bit more of an adoption with some of our water and bioburden applications in biologics initially. but we expect to expand that to the cell and gene portfolio over time as well, as the case may be. I'm not sure that's fully answered. In our CDMO category as well, I view that as a – because they're largely manufacturing biologics and cell and gene therapies on behalf of their customers, so I view that as a similar segment. And our sales into that segment from an application portfolio generally reflects what I just mentioned. Great.

Nice to hear about the new capability to differentiate between categories of organisms. Is this more of an enhanced software capability that analyzes data generated by your launched test consumables, or is there a new consumable for this application? And I would imagine that capability is being developed based on customer feedback, so I would just be curious to hear how it could compare to some of the existing solutions on the market.

Yeah, so... Yeah, I need to be a little careful regarding where we are in development, Max, and IP considerations. But, yeah, it will work with our current consumables, and it's the best way I can put it for now, and we'll provide additional detail in subsequent conversations. It's advancements to our core vision system through broadly I'll call it software. And as you know, our strategy is to leverage our platform technology upstream and downstream and provide more solutions and data to our customers. So currently we detect contamination, we enumerate it. This capability within software will give us the ability to provide additional enhanced information to customers. For example, we can give customers a steer on a test-by-test basis whether or not, for example, mold is present. Differentiate between mold and bacteria, for example. I won't go into great detail, but some customers, that's a very valuable accelerated insight if there's a mold present in an operation. And the way that works today is that that's usually an offline downstream process that can take several days in the manual method to get a result. Not only the manual method, but all the subsequent analysis. So our vision would be to be able to capture more of that workflow and give it all to the customer much more quickly, again, under the aegis of our value prop, which is speed and data integrity and accuracy. So it's a very exciting capability we're working on.

Great. Appreciate you taking the questions.

Thank you. Sure.

Again, to ask a question, please press star, then 1. Our next question comes from Dan Arias with Stiefel. Your line is open.

Good morning, guys. Thanks. Rob, just looking at the different account types that you serve, can you touch on the workflow intensity difference that you see for cell and gene therapy applications versus small molecule and just whether you're starting to see some of those cell and gene guys pull ahead and contribute more based on the greater number of tests that they might do? I think that's one of the ways that consumables utilization is expected to go up there, so sort of checking in on what you're seeing.

Well, that's absolutely the case, Dan. Yeah, so cell and gene therapy, especially autologous cell therapy, for example, quick turnarounds, a lot of interventions, very fast processing, high test volume. It's a much different environment than some small molecule chemical synthesis processes. So it's a faster, higher... test density type of environment. Some of the biologics, I would say, fall into that category as well, but cell and gene therapy is really the, I would say, the pinnacle for us with regard to that fast turnaround requirement, incredibly high focus on test volume and a premium on speed and accuracy.

Okay, and then just maybe to go back to the validations topic, when you look at the sales funnel that you have right now, maybe X the COVID impact, what are the expectations for validation timelines, just knowing that, you know, you have this funnel of new customers and those folks tend to take longer, but also you have these things that you're looking to do to shorten that process. So where do you see those two things netting out over the next 12 months?

I think over time, Dan, with both of the things you mentioned, mix between new and existing customers and the advancements that we expect to make, progress we expect to make in shortening the process overall, that over time we'd expect those timelines to come in. So not at a point where we can be specific about that right now, but we are definitely investing time and resources into that. different ways that we can streamline that process, speed that process, and for whether it be a new customer or an existing customer, we think there's opportunities with both to, over time, bring those timelines in and get those systems up and running and through validation faster.

Yeah, okay. That was actually going to be my follow-on, Sean. Is the team dedicated to installations and getting accounts up and running, is that expected to grow? I mean, where does that sit in terms of the investment and sort of the strategic priorities that you guys have? Yeah.

Yeah, I think we talked in the prepared remarks about investment in field service and validation folks. I mean, they're really the kind of on-the-ground hands and feet that are doing the work. We are investing a bit in incremental resources who will be focused more on process management and looking at these opportunities to streamline. So we've made some investments out already. We'd expect to make a bit more investment in that next year, I'd expect. So it is an area where we're devoting dedicated resources

Okay, super. Thank you.

Thanks.

There are no further questions. I'd like to turn the call back over to Rob Spignessi for closing remarks.

Well, great. Well, thank you for joining us today on our third quarter earnings call. We appreciate your interest in our company. Next week we are attending the Stiefel Healthcare Investor Conference and look forward to speaking with many of you there.

This concludes the conference. You may now disconnect.

Everyone, have a great day.