This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good day, and welcome to the Rapid Microbiosystems Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a 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 conference, please press star then 0 to reach an operator. As a reminder, this call may be recorded. I would like to turn the call over to Mike Boyer, Investor Relations. You may begin.
spk03: Good morning, and thank you for joining the Rapid Microbio Systems fourth quarter and full year 2021 earnings call. Joining me on the call today are Rob Spignessi, President and Chief Executive Officer, and Sean Wurchis, Chief Financial Officer. Earlier today, we issued a press release announcing our fourth quarter and full year 2021 financial results. A copy of the release is available on the company's website at rapidmicrobio.com. under Investors in the News and Events section. Before we begin, I'd like to remind you that many statements made during this call may be considered 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 relating 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 the risks and uncertainties associated with Rapid Micro's business, please refer to the Risk Factors section of Form S-1 filed with the Securities and Exchange Commission on July 12, 2021. We urge you to consider these factors, and you should be aware that these 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, March 4, 2022. Rapid Micro disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. And with that, I'll now turn the call over to Rob.
spk08: Thank you, Mike. Good morning, everyone, and thank you for joining us to review our fourth quarter and full year 2021 results. Before getting into the details of our performance, I would like to remind everyone of our mission at Rapid Micro Biosystems. We're focused on revolutionizing microbial quality control, or MQC, which is a critical regulated aspect of the global pharmaceutical manufacturing process. This process includes a constant testing of raw materials, production environments, personnel, in-process materials, and final sterility of drug products from microbial contamination, such as bacteria, mold, and other harmful organisms. Our GrowthDirect platform fully automates and replaces the traditional manual MQC process, setting the foundation for end-to-end quality control automation to enable the future of advanced pharmaceutical manufacturing. We remain very excited about our commercial opportunity. The MQC testing market is large at approximately $10 billion and growing. It is ripe for disruption and under pressure to modernize with little competitive intensity. We count over half of the global top 20 pharmaceutical manufacturers as our customers, and our value proposition is resonating strongly. And while we address all pharmaceutical manufacturer modalities, we are especially strong in the fast-growing biologics and cell and gene therapy segments. Turning to full-year 2021 results, total revenue was $23.2 million, which increased 45% compared to the prior year. This includes commercial revenue of $21.6 million, which increased 54% compared to 2020. For the full year 2021, we placed 29 systems and completed the validation of 33 systems. On a cumulative basis, we have placed 116 systems as of the end of 2021, a 33% increase compared to the end of 2020. Additionally, we have validated 84 systems, a 65% increase compared to last year end. Recurring revenue increased by 100% in 2021, driven by higher consumable utilization and annual service contracts. While still early in our commercial growth, recurring revenue represented 36% of commercial revenue in 2021 compared to 28% in the prior year. In 2021, approximately two-thirds of new systems were placed with existing customers and one-third with new customers. Moving forward, quarterly variability notwithstanding, we expect a good balance of systems to be placed between new and existing customers. This demonstrates that as we continue to expand our footprint with new customers, existing customers are recognizing the value proposition of our growth direct solution and are purchasing additional systems. Geographically, about 60% of the systems were placed with customers in North America and about 40% were placed with customers in Europe and Asia Pacific. And finally, Approximately 70% of the systems placed are being used to support manufacturing of biologics and cell and gene therapies. Together, these points demonstrate the progress of our land and expand strategy, where we seek to place an initial set of systems with a customer and then expand to other sites in regions within a customer's manufacturing network. We fully expect the investments we are making across the commercial organization to drive future growth and success. Entering 2022, we have a robust funnel of growth direct system opportunities that is balanced between new and existing customers and include the diverse mix of manufacturers, including top global pharma companies and CDMOs. While the funnel includes opportunities across several modalities, it is most heavily weighted towards the fast-growing biologics and cell and gene therapy segments. We believe the size and quality of our growth direct system funnel coupled with our continued investments in our commercial teams and capabilities will enable us to drive significant continued growth and achieve our goals in 2022. In summary, 2021 was a transformative year at Rapid Micro. Despite some headwinds, we executed against our land and expand strategy. We significantly expanded our commercial, operational, and product development teams, including key leadership positions. And importantly, we strengthened our financial position following the initial public offering that provided the capital to execute a multi-year, strategic plan, including critical investments to drive commercial growth, product development, and operational expansion. Looking forward to 2022, we will continue to target investments in our commercial capabilities, including nearly doubling the size of our global direct sales and marketing team, as well as expanding sales operations and support, investing in training, and developing digital marketing and tools aimed at increasing Salesforce productivity and effectiveness. We are also excited about our expanded team and capability in the Asia Pacific region where we have not had previously a meaningful presence. We are also investing in new innovative products that will further demonstrate our leadership position in automated microbial quality control. Our product and service strategy is focused on leveraging the GrowthDirect platform to provide additional upstream and downstream in our customers' workflow. We are pleased with the progress of our product development teams have been making and would like to provide a few updates to our product pipeline. We are on track to begin customer beta testing of our mold detection advanced software later this year. This product will enable customers to differentiate mold from other categories of microorganisms. This is an important capability that supports our goal of giving customers early information to make decisions and respond to contamination events more quickly. We have integrated this feature into our core vision system, further enhancing and expanding Growth Direct's capabilities within customer workflows. We are also excited to announce that in Q2, we plan to start beta testing with a global top 20 pharmaceutical customer for a rapid sterility application. This customer has adopted several of our other applications, and we're excited to get the beta underway. As we have discussed, integrating rapid sterility testing into our automated Growth Direct platform will accelerate final product release and enable customers to ship their products more quickly. This application is especially important for sterile and time-sensitive products such as vaccines, biologics, sterile injectables, and cell and gene therapies. Moreover, delivering a rapid sterility test to customers on the Growth Direct platform will extend our automation and data integrity benefits and offer compelling differentiation versus existing sterility products on the market. We are also investing in global manufacturing to expand capacity, augment our supply chain infrastructure, and drive operational efficiencies to deliver product cost reductions. Around mid-year, we are looking forward to the completion of our new consumables manufacturing site in Lexington, Massachusetts. The second manufacturing site will enable even more robust continuity of supply to serve our customers and is critical to our long-term growth. To summarize, we are very excited about the opportunity in front of us. We are building a strong recurring revenue business as we increase our cumulative system placements and drive higher consumable utilization. Additionally, we have a strong balance sheet and the financial flexibility to continue to make strategic investments to expand and enhance our commercial and operational capabilities, including new product development, to drive growth and create shareholder value in 2022 and beyond. With that, I will turn the call over to Sean to discuss our financial results. Sean?
spk04: Thanks, Rob, and good morning, everyone. This morning, we reported total revenue for the fourth quarter of $5.2 million, which was essentially flat compared to Q4 last year. Commercial revenue was $4.9 million, down slightly from $5.1 million in the fourth quarter last year. Both total and commercial revenue were at the high end of the ranges we preannounced in early January. Within commercial revenue, product revenue was $2.9 million, compared to $4.1 million in the fourth quarter of 2020. This decline was due to lower placements of growth direct systems, but was partially offset by strong growth in consumables, which increased over 100% compared to Q4 2020. As we discussed in January, the decline in system placements was due to customer site access limitations caused by the rapid onset of Omicron and other specific customer timing issues that resulted in the placement of three growth direct systems in the fourth quarter compared to 10 placements in Q4 2020. Systems revenue declined at a rate slightly less than system placements. In contrast, the significant increase in consumables revenue was driven by newly validated systems coming online and increased utilization by some existing customers. Commercial revenue also includes service revenue, which was $2.0 million in the fourth quarter, an increase of 91% compared to Q4 2020. The increase was largely due to higher revenue from validation services and, to a lesser extent, recurring service contract revenue. During the quarter, we completed the validation process on 16 systems, including several that shifted from Q3 into early Q4. On a combined basis, the 21 validations we completed in the second half of 2021 met our expectation and sets us up well for continued consumables growth in 2022. Non-recurring revenue was $2.6 million in the fourth quarter, with the impact of lower system placements partially offset by good growth in validation revenue. Fourth quarter recurring revenue, which includes consumables and service contracts, increased 91% to $2.3 million. Growth in our recurring revenue is primarily driven by increases in our cumulative validated systems and higher customer utilization of our consumables. During 2021, the cumulative number of validated systems in the field grew from 51 to 84, an increase of 65%, and consumable revenue per average validated system was around $80,000. It's important to keep in mind that this metric includes a number of recently validated systems that have not yet fully transitioned into full commercial routine use. Looking only at those systems we consider to be in routine use, consumable revenue per average system was well over $100,000 in 2021, with several individual customer systems at run rates well over $200,000 for the year. These metrics are important factors in our forecasting and give us confidence in the contribution we expect recurring revenues to make to our long-term growth. While we expect these metrics to continue to trend up over time, they can and do vary from quarter to quarter due to several factors, including the pace and timing of validation and the transition to routine use for new systems. To finish up on revenue, non-commercial revenue related to our contract with BARDA was $0.4 million in Q4. As a reminder, we completed our existing contract with BARDA in Q4 and do not anticipate recognizing any non-commercial revenue in 2022. Turning to gross margins, product margins were negative $2.7 million or negative 92% in Q4 compared to negative $3.0 million or negative 74% in the same period last year. The decrease in product margins was due mainly to the lower system volume in the quarter. To help illustrate this, had system placements been flat with Q4 last year, product margins would have improved substantially compared to that period, reflecting both the progress we've made in reducing product costs over the past year and the impact that variability in system placements can have on our margins. We continue to execute against a number of product cost reduction and efficiency initiatives across both systems and consumables and expect these efforts as well as increasing sales volumes to drive sequential improvement in product margins as we work our way through 2022. Service margins were 3% in the fourth quarter compared to 12% in Q4 last year. The slight decrease was mainly due to investments we made in incremental field service and validation personnel during 2021. We expect these investments to drive significant service margin improvement over the course of 2022, as both our activity volume and employee productivity continue to increase. On a combined basis, commercial gross margins improved slightly from negative 57% to negative 54% in Q4, with the impact of lower system placements more than offset by a higher mix of service revenue and improved consumable margins. We continue to actively manage inflationary pressures in some materials, freight, and labor costs, and did not experience any material business impact from them in the fourth quarter. Moving down the P&L, total operating expenses were $12.0 million in the fourth quarter, consisting of $3.4 million in sales and marketing, $2.9 million in R&D, and $5.8 million in G&A. This compares to total operating expenses of $6.6 million in the fourth quarter of 2020. The increase was largely due to higher employee-related costs due to increased investment in commercial and product development, as well as higher G&A expenses incurred to operate as a publicly traded company. Net loss in the fourth quarter of 2021 was $14.6 million. This compares to a net loss of $11.3 million in the fourth quarter of 2020. The increase in net loss was primarily due to the higher operating expenses that I just discussed. Net loss per share attributable to common shareholders was $0.35 in Q4 2021, as compared to $36.66 in the prior year quarter. As a reminder, the number of weighted average common shares outstanding in Q4 this year was materially higher than Q4 last year because of the conversion of our outstanding preferred stock to common stock in connection with our IPO in July 2021. This accounts for a substantial portion of the decrease in net loss per share between periods. With respect to non-cash expenses and CapEx, Depreciation and amortization expense was $0.5 million, stock comp expense was $0.7 million, and capital expenditures were $2.0 million in the fourth quarter of 2021. We ended 2021 with $203.5 million in cash, cash equivalents, and investments. We believe the strength of our balance sheet gives us the flexibility to invest in our growth initiatives as we scale and continue on the path toward profitability. Now turning to guidance in our 2022 outlook. We are reaffirming the guidance we provided on January 9th for full-year commercial revenue of between $27 million and $32 million, representing growth of approximately 25% to 50%. System placements are the largest source of potential variability between the high end and low end of this guidance range. As we expected back in January, Omicron headwinds have continued to impact our ability to access customer sites and interact with customers in person thus far in Q1. While we have recently seen early signs of these limitations starting to lessen in some geographies, we continue to expect Q1 system placements and commercial revenue to look similar to Q4 and represent the lowest quarter of the year. From there, our guidance assumes that commercial revenues increase sequentially as the year progresses, peaking in Q4, driven by two primary factors. One, increasing system placements due to ramping benefits from our ongoing commercial investments and expected lower impact from COVID-related headwinds. as well as normal seasonal trends, and two, increasing recurring revenues from consumables and service contracts as we continue to grow our base of validated systems and move them into routine commercial use. Looking at the year in halves, our 2022 outlook assumes that roughly 40% of our revenue will be delivered in the first half of the year with the remainder in the second half. We expect the number of new systems validated in 2022 to be in line with or slightly higher than 2021. Although we currently expect the quarterly cadence of system placements and validations to increase gradually as the year progresses, it is important to note that we have historically seen some variability between quarters. That concludes my comments on our 2022 outlook, so at this point, we'll open the call up for questions. Operator?
spk01: 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 in the queue, press the pound key. Our first question comes from Max Masucci with Cohen. Your line is open.
spk06: Hi, thanks for taking the questions. So, first one is just around, you know, the timing of growth direct implementation. Like, for biopharma companies, you know, that are conducting their drug development manufacturing in-house, I'm sure it varies, you know, for small molecule versus biologic and cell and gene therapy customers, but Are you seeing these customers implement growth direct systems, you know, automated MPC testing capabilities before or after IND filing? Just curious when the ideal time is to introduce a growth direct system.
spk08: Yeah, Max, it's Rob. Good question. So most of our placements and installations are, are after commercialization of the product within, again, our broader segment is biologic and cell and gene therapy, although we do have examples of where we've been purchased and installed in phase three trials, especially in cell and gene therapy. So that's the composite, I would say, of our current portfolio. That being said, we see opportunity to work upstream in the process, in the phase, certainly phase three, possibly even phase two, to become part of the manufacturing quality process earlier. And it is one of the key elements of our commercial strategy.
spk06: Great. And then... Maybe just thinking about demand by customer type, can you just give us a sense for the demand trends you're seeing for biopharma customers versus CDMOs? And then maybe even if we could split it between biologics companies, cell and gene therapy companies, and small molecule companies. Just be curious to hear, you know, how demand trended for each of those customer types during 2021 and expectations in 2022.
spk08: Right. So I would say with the way we look at it and what we've seen is, you know, demand was strong. I think you've heard in the prepared remarks with regard to biologics and cell and gene therapies, both from a principal manufacturer standpoint as well as CDMOs. The majority of our CDMOs is a strong segment for us, and the majority of those sales are into the biologics and cell and gene therapy categories, but also those companies that are performing principal manufacturing of biologics and cell and gene therapy, as I discussed in the prepared remarks, our value prop is resonating quite strongly. Our value prop resonates strongly in small molecule and sterile injectables. It's just less of a... It's less of a current feature of our current portfolio based on the composite that I walked you through in the prepared remarks and previously. And that's as much to do with our current focus as any end market demand. And as we expand our commercial team, expansion of our capture of those other segments is certainly in scope. But the demand and value proposition around biologics generally and cell and gene therapies remains strong across the I would call it the manufacturer type, principal manufacturer or CDMO.
spk06: Great. Maybe just a final quick one. Just as the variant impact has cooled off a bit, you're serving a global customer base, but if there's anything you can offer around a rebound, the rebound you've seen in the U.S. versus maybe China, the EU and rest of the world, Omicron has cooled off, that would be helpful.
spk08: Yeah, so the first part of the quarter looked a lot like Q4, per Sean's comments, although we are seeing green shoots and things getting better in the U.S. in particular. Just for example, we had one of our major customers on site last week. It's the first time that's happened in a very long time. Asia, I would say, is probably the most, based on our experience at least, the most still in a – I wouldn't call it a lockdown mode, but in more of a COVID protocol mode. And then Europe is somewhere in between North America and Asia. That being said, we are planning a significant customer visit trip in the early part of Q2, which we expect to – go through with, so we are kind of cautiously optimistic about the restrictions alleviating. It's still company to company and case by case, but we're incrementally optimistic.
spk06: Great. Thanks for taking the questions.
spk08: Thank you.
spk01: Our next question comes from Tycho Peterson with J.P. Morgan. Your line is open.
spk07: Hi, guys. This is Casey on for Tycho. Thanks for taking my questions. I'd like to get a sense of, hey, so what's the implied pull through per system in the 2022 guide, both in terms of, you know, total instruments in the validated base, and then for the routine use instruments? And then can you give us a sense of, you know, how many of the validated base right now is routine? And where do you think that would go by the end of 2022?
spk04: Yeah. Hi, Casey. It's Sean. So, on the first question, you know, focusing on the validated system base, I think what we've got modeled in is a, you know, relatively modest increase in that number, that $80,000 number that I mentioned in my remarks. You know, we will expect to see that accelerate over time as we continue to grow that base and more and more of that overall base is already into routine use. So, you know, think about routine use. You know, we've talked – in the past about the lag and the process to get from validation to routine use. It's different for different customers. It typically goes faster for existing customers than new customers. Our target's three months. We don't have every customer there yet. Some take longer than that. We're continuing to work with them to accelerate that process. We do see significant opportunity and are going at that in a number of different ways. We've talked about some things we're doing to project manage more directly and shrink those timelines down. So both that and there are opportunities with customers we're going after to increase utilization of their systems, whether it be adding applications. They naturally do it sometimes as they ramp up production. So both of those factors are things that we see as drivers of that metric increasing and accelerating over time.
spk07: Got it. That's helpful. And then on the margin profile of the consumables, usually in our space the consumables have a higher gross margin than the instrument. So, just want to get a better understanding of what goes into the consumables manufacturing process here and if there's any way to optimize costs there. And then, you know, ultimately, where do you see the long-term consumable margins shaking out once you guys are at scale?
spk04: Yeah, sure. You know, there are lots of opportunities to optimize costs, and we're going after many of them right now. When you think about us, I mean, we talked about this before as well, and, you know, one of the bigger challenges with consumable margins for us today is just scale. The volume is relatively low. We've made significant and multimillion-dollar investments in an automated line and infrastructure to support the growth of ourselves and our customers. Adding facilities, we just talked about the Lexington facility that we're adding and we expect to bring online mid-year. So what's going to drive the consumer margins for us moving from negative to positive and trending up into the 70-ish percent range, which is where we ultimately expect them to get long-term, is going to be us taking cost out of the product. At low volumes, you don't have a lot of leverage with suppliers. There are different things we can do as we grow that will help get cost out of product that we've talked about in the past. But volume is a very big provider of leverage in the margins for consumables going forward as well. This cost base we built, we do not expect to grow at anything close to our consumables growth rate. And therefore, the amount of overhead that gets allocated to an individual consumable over time is going to shrink relatively rapidly. And that will drive a lot of improvement and expansion in consumable margins going forward. So, we look out, you know, a couple of years from now, we would expect to be in a space where we're moving positive and we'd expect that trajectory to be pretty steep in terms of getting ourselves up to where we ultimately think we can get on a consumable margin overall. Got it.
spk07: Thank you for all the color there. And then maybe just curious, um, you know, how you guys are thinking about client staffing shortages, uh, if there are any, both, uh, in terms of near term impacts to placing and validating instruments, but also on the customer demand side, um, as this dynamic, you know, would likely drop some incremental demand towards, you know, an automated, um, high throughput kind of solution. So yeah, any color there? Thank you.
spk08: Yeah, Casey, it's certainly part of our value proposition. You know, customers view our system as a way to manage the risk of human labor. So it's definitely a core part of our value prop and resonating, as you may imagine, strongly in the current market. As I touched on in previous conversations, it's also not, it hasn't been a great idea historically to have Certainly through COVID to have a number of people in a lab side by side, you know, looking at petri dishes. So that automation, remote data and data enablement capability we bring as part of the strong value prop, it resonates well with our customers, you know, per my comments in the intro remarks.
spk01: Our next question comes from Dan Arias with Stifel. Your line is open.
spk05: Good morning, guys. Thanks for the questions. Sean, when you look at the bucket of routine use systems that drive those consumables pull-through levels that are pretty high, 100K, and I think you said there were some that were over 200K, what is the average timeline that it took to get to those levels? And then I guess what are the characteristics that those customers have in common and that we can kind of use to conceptualize who should be getting to what level and when. I mean, I'm sure overall customer size plays into it, but I'd be curious just to hear, you know, when you try to understand who gets to where and when and what the expectations should be there, you know, how we could go about thinking about that.
spk04: Yep. I'll start, and I think Rob may have some comments here, too. Yeah, so in the timeline to get Customers from validation to routine use, it varies quite a bit historically. We're, as I said earlier, trying to narrow that down, both shrink it and make it more consistent. And we're making some progress on that, but we've got some work to do. We think there's a lot of opportunity there, which is going to benefit us and get consumables going sooner. The three months I said was a target. We have some that are three months. We have some that are, to be frank, more than a year. Most are in between that. So I don't have an average number for you, but I would think about somewhere in the middle of that range of being where a typical customer would be taking, the time it would be taking a typical customer today to get from validation and routine use. In terms of who's at the 200 plus, who's at something less than that, it really has to do with use cases for a specific customer. I think we've said before that You know, cell and gene therapy, the level of testing intensity for EM within that sector is very high. So we would typically expect those kinds of customers, and generally biologics as well, maybe slightly lesser extent, in EM particularly, to be pulling through high volumes of consumables and generating high volumes of revenue. But it does ultimately come down to use case, and Rob, I'll let you comment a little bit on that as well.
spk08: Yeah, sure. I think just to jump off of Sean's comments, I think that's spot on. Think of it as right now mostly application-driven, Dan. So environmental monitoring is our – in any given manufacturing facility, it's 70-plus percent of the volume, and our footprint tracks pretty closely to that. So our higher volume and higher yielding systems tend to be the environmental monitoring systems in both cell NG and biologics. We have some very high examples in both N segments. So our water and bioburden tests tend to be a bit lower volume, but I can also tell you that we've got a focused energy against continuing to maximize system performance capacity. There is latent capacity in some of our systems around the world, and we've got a dedicated team out there that is growing focused on improving application utilization, bringing on, for example, if a site has a water system that's being used not at full capacity, partnering with the customer on different parts of the site or campus to bring more water testing on to maximize the utilization and ultimately consumable revenue. But the highest level, think of it as, you know, we're focusing on biologics and cell and gene therapy. It tends to be a very, very high test volume environment for EM and other. And the majority of our sales and forward-looking funnel, it's important to note, is environmental monitoring.
spk04: Yeah. The only other thing I'd add to that, Dan, is just remember that, you know, between water bioburden and EM, the pricing is quite a bit different, roughly 3X or more. for water and bioburden. So volume is not the only driver. Price is important as you think about how that's working out in the market.
spk08: Right. So some of that latent capacity and some of the systems around the world, that becomes an interesting lever over time as well.
spk05: Yeah. Okay. Okay. Helpful. And then just to go back to some of the dynamics in the quarter and some of the things that you mentioned, can you just talk to the placement factors that you saw that aren't related to COVID and the extent to which Some of them are sort of idiosyncratic or one-time situations. And then, you know, looking into the first half of the year, are you getting the sense that there might be any of those that would crop up and that we should kind of factor in when we're thinking about 1Q or 2Q placements, aside from what you mentioned?
spk08: Yes, Rob, I'll start. And Tommy had a couple comments as well. So, you know, the non-COVID and maybe customer-related timing issues, like one good example is we had a, you know, a decent-sized multi-system order pushed to the right due to construction delays. Now, the details of that could be related to COVID underlying impact in construction. It's hard to flesh that out at times, but fundamentally, if the site's not prepared, the customer's not ready, it's extremely difficult to place a system. So that is an example of an idiosyncratic case that was a meaningfully sized multi-unit order in the quarter. You're looking into the first half. Do risks of that nature exist? You know, at some level, yes, but the quality and scale of our funnel that we're managing around to hedge any risk associated with that, that type of risk will exist, but as we build our sales team out and build our funnel around it, that's really one of the major countermeasures we have against these types of challenges. And having better site access can also help us get ahead of some of these risks as well.
spk04: Yeah, just one bit of color on that deal that Rob talked about, too. The reason that the construction pushed out, or we needed construction at all, I guess, or they needed it, it was because they decided to increase the size of their order. So they needed to put it in a different facility, which ultimately needed construction to fit the systems. So it's a good answer for us. It just impacted timing.
spk05: Yeah. Yeah. But it should fall into 2022. So if I was thinking initially two in Q4, I could be thinking three in 2022 at some point. I mean, the point is, like, you will capture that order and the size is larger. That's a good assumption. Okay. And then just lastly on that funnel that you mentioned, just to kind of, like, calibrate where we are now versus where we were, I think when we were going through the IPO process, the way that the funnel looked by customer type was kind of, just over two-thirds biopharma, and then the rest was CDMO and other. Is that generally the way that it looks now, or are you growing the biopharma piece? Because to your point, Dell and Gene and things like that are picking up and contributing more to the overall demand profile.
spk08: Yeah, so I would say the biopharma principal manufacturer is still probably in that two-thirds, and a big chunk of the rest is CDMO. We tend to look at it as a bit more on end product manufacturing modality. So the combination of biopharma and CDMO is better than 85 plus percent. And the funnel of those in our funnel, they're manufacturing specifically biologics and cell and gene therapies. So think of it as the vast majority of our funnel is in the biologics and cell and gene therapy category. The biggest single segment is biopharma followed by CDMO.
spk05: Got it. Okay. Very good. Thank you, guys.
spk01: Sure. Our next question comes from Tejas Savant with Morgan Stanley. Your line is open.
spk02: Hey, guys. Good morning. So one on the 3Q versus 4Q dynamic here, Rob and John. Can you just walk us through why you think, you know, the site access issues impacted validated systems in 3Q, but the impact shifted sort of predominantly to system placements in 4Q?
spk08: Yeah, so if you recall, we picked up the validations pretty quickly in Q4, and what And that is related to how customers view critical access and essential activities. So once a system is purchased and is going through the installation process and validation process, you know, that can tend to get, it's viewed more of an essential type of function and allows our folks to get on site. There's always some noise in that which cause a little bit of A little bit of delay between Q3 and Q4 in the validations, and as you know, we picked them back up. New sales opportunities are a little bit different with regard to our ability to get on-site and get site access, especially with some of our newer opportunities out there. That's just a practical issue associated with how customers ran their business and allowed us site access based on the kind of activity that we were performing. Okay.
spk04: Just to add to that, I think just more broadly, it's important to remember that at any given point in time, we have a number of validations in process. We measure the metric at the end of a quarter. In that case, because of the factors that we were seeing, a handful of them slipped a few weeks. If you look back at our historical quarterly validation numbers, they have tended to bounce around because those kinds of things have happened historically. They just have been exacerbated with COVID and some of the access issues that they've created. Although, as Rob said, it's a bigger issue with the new system placements than it is with validation. So I want to set an expectation that these things can bounce around between quarters. And we look at it on an annual basis and say, did we meet our goal? Yeah, in 2021, we met our goal. And we'll continue to do that. The critical question is, is what's happening with timing going to impact future consumable sales. I think when we look at the Q3, Q4 example, not in any meaningful way. We don't think so. To the extent that things split materially in the future, we'll need to talk about that. But we do see variability, and I just want to make sure that we're clear that that's part of the normal business cycle for us.
spk02: Got it. That's helpful. And then just a couple of quick ones on the margins here. I think you pointed to sort of some of the dynamics in the fourth quarter here on the gross margin line, but are you still targeting gross margin breakeven in 22 on a consolidated basis?
spk04: Yes, we are. At the midpoint of our guidance range, we will be positive on gross margins in the fourth quarter.
spk02: Got it. Great. And then, Sean, on OPEX, I mean, should we be thinking of, you know, sort of mid to high 40s is fair with another sort of, you know, $8 million or so allocated for the Lexington facility buildup?
spk04: OPEX or CAPEX, Tejas?
spk02: Well, both, actually, yeah.
spk04: Okay. Yeah, so on OPEX, I would think about that as being a little bit below what our commercial revenue growth rate will be. So we won't have it at quite the same level, be a little bit lower. That's really driven by a couple of things. Investments we made in 2021 annualizing. The other big thing in there is that we're a public company now. This will be the first year that we have those costs that we carry with us for an entire year. So the annualization of those drives a little bit higher growth rate in those costs. And as we look forward, we expect there to be a bigger gap between revenue growth and OPEX growth after this year as we drive toward profitability over time. On CapEx, yeah, the Lexington site is a consideration. There's a couple other relatively significant things in CapEx this year. So the number that you threw out there is probably a relatively fair number to think about CapEx for us this year.
spk02: Got it. Helpful. And then, you know, it's come up a couple of times before, but I just wanted to talk about, like, some of the more recent proactive measures you've taken to ensure your customers regarding business continuity. You know, it's a big point of focus, especially given not just the supply chain pressures, but now also all the geopolitical tensions, you know, brewing over here. And in that context, Rob – Can you possibly think about sort of, you know, plans to accelerate that European facility build-out?
spk08: Well, to that point, Tejas, I mentioned a visit to see customers early in Q2. The second part of that visit is to look at various sites in Europe as well. So it is top of mind. For us, just more generally, we continue to hold both upstream and downstream finished goods inventory in both North America and Europe for our customers. We haven't seen any major supply chain disruptions through COVID up until including kind of current times. We have our principal manufacturing in Lowell and a manual backup there, and then, of course, as you know, we're investing here in Lexington for backup manufacturing as well, and as we discussed, ultimately, Europe as well. But anyway, good timing on the question because we are focused now on the, as Lexington is coming to conclusion, looking into the European site selection and go forward. Still TBD on the actual project plan around that, but it's very much on the plate for 2022.
spk04: And that'll be probably our number one CapEx investment over the next couple of years after this year.
spk02: Got it. That's helpful. And then one final one for me on sterility. Just, Rob, any color on feedback from customers following the announcement? I think you mentioned the first customer beta starting here in the second quarter. And any color on whether a customer could adopt GrowDirect solely for sterility, or is it more of an optionality for existing customers to add a new application to the platform?
spk08: Oh, yeah, well, the general feedback that we're getting from customers, especially those of which we're working with on beta, is quite excited. So I think there's a need for a rapid sterility application in the market that is married with a system like the Growth Direct where you have the full walk-away automation and all the data integrity benefits. And to the second question, we absolutely see a value prop of, of selling sterility to not only our existing customer base, but new customers as well. The value prop resonates strongly in our core market of biologics and cell engine therapies, but we also touched a bit about, at the top of the call here, the Q&A about other segments like sterile injectables and other types of small molecule markets. It also has a very high value proposition fit there as well. So we view it as... certainly related with regards to the full assay profile that we currently have, but also it can be adopted, you know, as a standalone assay and system basis. Our goal, obviously, is to acquire the entirety of the workflow in any given customer, but there's, we do envision, you know, Sterile maybe being the lead dog, if you will, or the lead, you know, kind of instrument and assay in new customers.
spk02: Very helpful. Thank you, Rob.
spk01: There are no further questions. I'd like to turn the call back over to Rob for any closing remarks.
spk08: Okay. Well, thank you for joining us today. We appreciate your interest in our company. Next week, we're attending the Cowan Healthcare Investor Conference and look forward to speaking with many of you there.
spk01: This concludes the program. You may now disconnect. Everyone, have a great day.
Disclaimer