Maravai Lifesciences Holdings, Inc. Q2 FY2021 Earnings Call

Ladies and gentlemen thank you for standing by and welcome to the Maravai Lifesciences Second quarter 2021 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I would like to turn the conference over to Deb Hart, Head of Investor Relations. Please go ahead.

Thank you, Alexandra. Good afternoon, everyone. Thanks for joining us on our second quarter 2021 earnings call. Our press release and the slides that accompany today’s call are posted on our website and are available at investors.maravai.com under Financial Information/Quarterly Results. On today’s call, we will cover our financial results and business highlights and we’ll provide updated financial guidance for 2021. As you can see on slide 2, Carl will first provide you with a business update and Kevin will review our financial results and guidance. We’ll open up the call for your questions. On slide 3, we’d like to remind you that the forward-looking statements that we make during this call, including those regarding our business goals and expectations for the financial performance of the company, are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning these risk factors is included in the press release we issued earlier today as well as those that are more fully described in our various filings with the SEC. Today’s comments reflect our current views, which could change as a result of new information, future events or other factors, and the company does not obligate or commit itself to update these forward-looking statements, except as required by law. During this call, we will be using non-GAAP measurements of certain of our results and in providing guidance. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this afternoon, which is posted to Maravai’s website and the www.sec.gov via EDGAR. The metrics we will be discussing in today’s call include net income, adjusted EBITDA, income tax expense and adjusted earnings per share. These adjusted financial measures should not be viewed as an alternative to GAAP measures, but are intended to better enable investors to benchmark our current results against historical performance and the performance of our peers. Now, I’ll turn the call over to Carl.

Thank you, Deb, and good afternoon everyone. We appreciate you joining us for our call today. Let's start with our second quarter results. Maravai had a very strong second quarter, the largest and most profitable in our history. Today we reported $217.8 million in revenue, a growth of 364% compared to last year and up 47% sequentially over the first quarter. Our adjusted EBITDA of $164.7 million grew 841% from the prior year and 62% sequentially. Our top-line performance and outstanding adjusted EBITDA resulted in adjusted EPS of $0.44 per share and record free cash flow generation. The first half has been incredible as our first full calendar year as a public company, with clear momentum building across our global customer base as mRNA research and development moves to the forefront of modern medicine. Growth in our nucleic acid production business remains very robust, with record revenue of $192.5 million, up 533% year-over-year and up 55% sequentially. The demand for CleanCap mRNA continues to accelerate in all areas, including CleanCap reagents, GMP Manufacturing Services, and custom mRNA constructs. Full regulatory approval by the FDA of the first mRNA COVID-19 vaccine currently under emergency use authorization is expected around Labor Day, which should expand demand for the vaccine and CleanCap in late 2021 and beyond. Pfizer and BioNTech announced that they've shipped over one billion doses of COVID-19 vaccines, all containing CleanCap. Pfizer plans to increase COVID-19 vaccine production by one third in 2022, going from 3 billion doses this year to 4 billion next year. Additionally, new generations of COVID-19 vaccines are being developed, targeting emerging variants and enhancing overall immune responses. Several nations are now offering booster doses of mRNA vaccines to older or immunocompromised citizens, and the UK recommends mRNA doses for recipients of single-dose vaccines. Weekly, we learn of new investments in mRNA technology, which represents the future of vaccine development due to its flexibility and effectiveness. Sanofi announced a $477 million annual investment to accelerate clinical development of their mRNA portfolio, aspiring to have at least six mRNA candidates in the clinic by 2025. They also announced plans to acquire Translate Bio for $3.2 billion to further explore mRNA in immunology, oncology, and rare diseases. Pfizer is increasing R&D spending for additional mRNA programs by $600 million. GlaxoSmithKline reported having over 200 scientists working in mRNA and investing in manufacturing. BioNTech announced their project to develop an mRNA-based malaria vaccine and is collaborating on HIV and tuberculosis programs, planning clinical trials for a TB vaccine candidate in 2022. As enthusiasm and investment in mRNA increased, we saw substantial growth in our CleanCap supply agreements. At the start of 2021, we had five signed supply agreements and more in discussions; today we have 13 signed, 12 in active negotiations, and 25 under review. This reflects the high demand for mRNA and CleanCap from a diverse customer base. We are committed to mRNA and CleanCap and will increase our investment in innovation, aiming for an R&D investment level of about 5% of our revenue in the next three years. Moving to our biologics safety testing business, which supports high-growth markets, our second-quarter revenue was $18.2 million, a record high up 47% year-over-year and 3% sequentially. This growth was driven by strong demand from COVID-19 and AAV vaccine programs, robust sales across our product line, and expansion of our biopharma development pipeline. Our protein detection business also experienced revenue growth of 71% year-over-year and 6% sequentially. As previously announced, we are selling Vector Laboratories for $124 million in cash. Vector operates in a different market focused on research immunohistochemistry, which differs significantly from our core focus on cell and gene therapy. While we have seen recovery in the protein detection business, we believe Vector will need significant investments to stay competitive. We want to maintain a focus on nucleic acid production and biologics safety testing, which we see as higher growth and more strategic areas for Maravai. Lastly, we are expanding our facilities to support our growth. We entered into a lease for a new facility in San Diego for nucleic acid production, which will allow us to increase CleanCap production and enhance R&D capabilities. We also have a new lease for our biologics safety testing business in North Carolina, set to double our operational space. We are pleased with our recruitment efforts, ending the second quarter with over 500 employees. Now, I'd like to turn the call over to Kevin to cover our second quarter and first-half performance, the P&L impact of the Vector transaction, and our capital expectations for the facility expansion program along with our updated guidance for 2021.

Thank you, Carl. Good afternoon everyone. I'm happy to review our financial results for the second quarter and the first half of 2021 and to provide our revised financial guidance for the balance of the year. Let's start on slide 13, as you've seen in our press release this afternoon our record Q2 revenues of $217.8 million represented 364% reported growth from Q2 2020. Our GAAP based net income before the amount attributable to non-controlling interests was $134.3 million for the second quarter of 2021. Now turning to slide 14, adjusted EBITDA and non-GAAP measure was $164.7 million for Q2 compared to $17.5 million for Q2 2020 and $101.9 million in Q1 2021. This represents an 841% increase year-over-year and a 62% sequential quarterly increase from Q1. Our EBITDA margin was 76% in the quarter, up from both the 37% in Q2 2020 and the most recent 69% EBITDA margin in Q1 2021. The increase in adjusted EBITDA was primarily driven by our overall sales volume increases and margin improvements from our nucleic acid production business. On slide 15, we present basic EPS, fully diluted EPS, and adjusted fully diluted EPS. Basic EPS is net income attributable to our Class A shares divided by the weighted average Class A shares. Our fully diluted EPS equals net income prior to non-controlling interests divided by the weighted average for both Class A and B shares and other dilutive securities, such as equity awards. Our adjusted fully diluted EPS equals adjusted net income divided by the weighted average of both Class A and Class B shares and other dilutive securities. Coincidentally, both our basic and fully dilutive EPS for the quarter were $0.44, while adjusted diluted EPS was also $0.44 per share. Moving to slide 16. We continue to have an exceptionally strong balance sheet and adjusted free cash flows. Our cash and cash equivalents, which are GAAP metrics, totaled $375 million at March 31, 2021. Our strong EBITDA performance led to robust adjusted free cash flow for the quarter of $160.5 million. Adjusted free cash flow is a non-GAAP measure that we define as adjusted EBITDA less capital expenditures. So, with $547 million in long-term debt, $375 million in cash and a trailing 12-month adjusted EBITDA of $389 million. We have a record low 0.4 times net debt to adjusted EBITDA ratio and only 1.4 times gross debt to adjusted EBITDA ratio. This strong balance sheet and debt capacity allows us the financial flexibility to make both organic and inorganic investments that will drive innovation, capacity, address customer needs and contribute to long-term growth. Now, to provide some more insights into our business segments financial performance for the quarter. Turning to slide 17. As Carl mentioned earlier, our Nucleic Acid Production business fueled the most significant portion of the revenue growth for the first quarter. Nucleic Acid Production represented 88% of the company's total revenue in the quarter and generated $156.7 million in adjusted EBITDA in the quarter. The 81% adjusted EBITDA margin in this business is a record for Nucleic Acid Production and reflects increasing value of our unique products as well as the productivity gains and efficiencies from our state-of-the-art Water Ridge manufacturing facility. In addition, I will tell you we're very pleased with our global supply chain and logistics efforts under the leadership of our Vice President Stephen McCusker, an industry veteran we have substantially professionalized our efforts here. These efforts have resulted in supply chain agreements in place for a major raw material inputs for which we have seen stable or even improved pricing based on volume increases. We have also diversified our supply chain to ensure we have multiple high-quality qualified vendors in geographical diversity. We also continue to improve our global logistics with our partners like FedEx and several best-in-class boutique freight partners to provide excellent logistics services. Our overall pricing, availability, diversification, quality, service levels and on-time delivery metrics are all reviewed regularly and are trending favorably. CleanCap revenues from COVID-19 vaccine customers were approximately $156 million in the second quarter of 2021, a sequential increase of $65 million or 71% from Q1 2021. Our non-COVID-19 related Nucleic Acid Production revenue grew 11% sequentially. Our Biologic Safety Testing business contributed 8% of the company's revenue. In the second quarter, our Cygnus branded products which comprised virtually all of the segments business, grew to a record $18.2 million in the quarter representing 3% growth over Q1 of 2021. This growth was driven by the increasing number of biologics and biosimilars drug development programs as well as the new customers gained in the quarter attributed to high quality and breadth of menu offering. Protein ELISA kits. This included strong growth from our HEK kits used in vaccine and gene and cell therapy programs as well as increasing contributions from our Protein A Melon Gel kits used to purify monoclonal antibodies and our nucleus offerings. Further, we saw a strong quarter for our E. coli products using many biosimilar programs. Our biologic safety testing business delivered $14 million of adjusted EBITDA in the quarter, our protein detection business represented a smaller part of our overall business accounting for only about 3% of revenues for the second quarter and about 2% of our adjusted EBITDA as Carl has commented, we will be divesting this business to Thompson Street later this quarter. Corporate expenses that are not included in the segment adjusted EBITDA totals I just spoke of were $9.7 million in the quarter relatively flat from the Q1 2021 levels of $10 million. Now moving to slide 18 and our updated 2021 guidance, today we are raising our 2021 full-year revenue guidance to $745 million to $770 million, up from our prior guidance of $680 million to $720 million, a $58 million increase at the midpoint even factoring in the removal of roughly $10 million for four months of protein detection revenues that was included in our previous full-year guidance. Included in our overall total revenue range is our estimate for 2021. CleanCap revenues directly attributable to our COVID-19 vaccine customers, which we are estimating at $490 million to $510 million, up $45 million at the midpoint from our prior guidance. This total revenue guidance for the full year of 2021 reflects the expectation of mid-20% growth for the annual growth for our biologic safety testing business coming off record last quarter for this business we continue to see very solid market dynamics across this segment and geographies showing growth in biologics. That combined with new customer wins that build on the already strong base of repeat customers is clearly supporting a more bullish outlook for this business segment in 2021. This guidance also reflects the divestiture of the protein detection business and the loss of that modest revenue contribution. We see protein detection contributing approximately $80 million to Maravai on a reported basis in 2021 for the months of our actual ownership of this business, which we anticipate to be eight months. Given the relatively small contribution of protein detection to Maravai as a whole we are not planning on presenting pro forma results with and without this segment. This updated guidance at the midpoint implies that our nucleic acid production segment revenues will be around $670 million for 2021. Also subtracting the midpoint of our COVID-19 clean cap revenue guidance you'll see that our base nucleic acid business is shaping up to be roughly $170 million for the year. That would represent growth of roughly 60% versus the comparable total in 2020. We continue to see good momentum and traction across our offering share with strong clean cap demand coming from outside of the major COVID-19 players as well including initial orders for non-COVID vaccine development. Furthermore, our blue chip customer base, the gene and cell therapy companies represents an exciting mid to long-term opportunity as the validation of mRNA as a development platform is fueling rapid segment growth. We're extremely busy here and we're very excited about our role as a key contributor to these new mRNA platforms for the foreseeable future. Turning to the quarterly gating of revenues for the rest of 2021, as we expected our second quarter was incredibly strong particularly in nucleic acid production. At this stage, we see the second half of 2021 total revenues roughly evenly split between a third and fourth quarters. Based on our total revenue guidance of $745 million to $770 million that implies second half revenues of around $380 million to $400 million or around $190 million to $200 million per quarter down slightly from the 2Q level of $280 million that's still reflecting second half revenue growth of over 6% at the midpoint of guidance for the first half of 2021 even without the protein detection revenue contribution. As discussed on our last call, our revenue guidance is in large part based on our largest customers rolling forecasts that extend out for several quarters and that are supported in the shorter term by binding POs many of which got several months. On top of that, at the forecasted funnel for our GMP suites, that are used to mainly support build for our customers’ nucleic acid therapeutics programs. Based on these factors our fiscal year 2021 revenue guidance comes with a considerable level of visibility that will also be subject to some quarterly fluctuations. Based on these revenue expectations, we have updated our internal forecast and guidance for other key financial metrics. We expect our non-GAAP adjusted EBITDA aim to be in the range of $515 million to $535 million which at the midpoint of that range represents growth of 207% and implied adjusted EBITDA margin of 69% at the midpoint of our 2021 revenue range. The full year margin is moderated versus the most recently completed quarter that's our record clean cap revenue contributions. Furthermore, as Carl mentioned, we're continuing to look to make organic investments in our R&D and commercial organizations and we continue to expand R&D and commercial organizations and we continue to expand our employee base to meet record customer demand. Adjusted fully diluted EPS, a non-GAAP measure, is expected to be in the range of $1.30 to $1.36 per share. This increase in our guidance here is directly tied to our revenue growth and overall projected full-year margin expansion on the heels of our strong second quarter results. As with our updated total revenue guidance, we anticipate the adjusted EPS for the third and fourth quarter to be relatively even implying EPS for each quarter of around $0.34 per share at the midpoint of this guidance range. Turning to slide 19, adjusted fully diluted EPS is based on the assumption that all Class B shares are converted to Class A shares resulting in a forecasted fully diluted share count of 260 million shares for the full-year. The net income included in the adjusted fully diluted EPS has been adjusted to eliminate any net income or loss attributable to non-controlling interests as a result of the assumed full conversion of Class B shares for Class A shares. Additionally, our adjusted fully diluted EPS including certain adjustments that do not reflect our core operations are based on adjusted effective tax rate range of 23% to 24%. The effective tax rate reflecting some forecasted improvement based on the geographical distribution of our growing revenue base. As it relates to certain other adjustments needed to get to our non-GAAP adjusted EBITDA range, we see the following items in 2021. Interest expense of between $33 million and $35 million, depreciation and amortization also between $29 million and $32 million, adjusted tax rate of between 23% and 24%, equity-based compensation which we show is a reconciling item from GAAP to non-GAAP to be $10 million to $12 million in 2021. For 2021, we also expect to invest approximately $15 million to $25 million for capital expenditures or around 3% of total revenues. We will be further evaluating this total and associated spending timeline over the next quarter given our commitment to the two new facilities that will come online mid-year 2022. At this stage, we estimate the overall capital for these new facilities to be roughly $25 million spread out over the next four quarters. Our reconciliation of net income to GAAP EBITDA and from GAAP EBITDA to adjusted EBITDA is presented in our press release that we issued earlier today. In addition, our segment-related information will be detailed in our Form 10-Q which we plan on filing in the coming days. It was a very strong financial quarter from ROI and just about every metric, our business has never been stronger. I'm very excited about the increasing demand and expanding applications for our unique products which demonstrate the value they hold for our customers. The commitment to fund even more innovation and capacity, new facilities, and growing our human capital is clear evidence of how we're investing in the future. We are strategically applying our strong cash flow while also focusing our business on our highest growth potential markets. Now I’ll turn the call back to Carl for some final remarks.

Well thanks, Kevin. And so to wrap up, we had an incredibly strong first half of 2021 in our first calendar year as a public company. We feel great about the momentum we're seeing across our business and we're pleased to be adjusting our guidance upwards significantly to reflect stronger demand expectations persisting for the remainder of the year and beyond. From COVID-19 vaccines to vaccines for influenza, malaria and TB, to cell and gene therapies battling cancer, the transformative impact mRNA will have on global human health is only accelerating. We at Maravai are proud of the key role our customers, partners and employees are playing in making that happen. We will continue to focus on operational excellence, innovation and people as our three strategic pillars for generating above-market growth. I’d now like to turn the call back over to Alexander to open the line for your questions. Alexander?

Thank you. We have your first question from Matt Sykes with Goldman Sachs. Your line is open.

Hi good afternoon everybody and congrats on the quarter.

Thanks Matt.

Thank you for the detailed update on our progress with the supply agreements. I apologize if I missed it, but did you provide a breakdown of those agreements between COVID-related and non-COVID-related items, or will you offer that breakdown later?

We did not. But the majority would be non-COVID.

Okay, great. And then just on the balance sheet I mean obviously some great progress that you've made and the net debt EBITDA is pretty impressive. Just as you look across the space and you balance organic versus inorganic and you look at the valuations on the inorganic side. Can you accomplish what you want to accomplish part ways organically? Or are there really some areas that you really want to add onto inorganically? You'll just have to deal with the valuations as they are in the market today? Well Kevin, do you want to take a shot at there.

Yes certainly. Look, I think we see some nice opportunities. Again, some of the assets that we're looking at are certainly things that are very close to what we've done historically. So from that perspective, I think we have a little bit of a unique opportunity and try and do so and manage that. make a lot of sense financially but also a very high quality as far as the quality of the products. And there's certain things that we look at that don't exactly pass our test when we do our diligence as well and certainly keep that in mind. I think that we do have the flexibility to know how the leadership, I would say, to do a lot of things organically and you see that with the investment on our capacity expansion and we do have a lot of opportunities from our existing customer base on things that we are not precluded from an intellectual property perspective. So that will be something we can control. Certainly valuations are at the top end of historical ranges but from our perspective again we're looking at things that are unique to our customers might bring added capabilities, probably access if we need them, or accelerate our ability to provide products to our customers in a manner that might be much quicker than trying to do it organically. So it's a balance but I think we can execute both and we're very active and as you could see in both things here and focusing on organic growth and investment as well as several different opportunities and organically that we think will be a big difference to our customers than our overall offering.

Great. And just one last question, when you issued the release on the relationship you mentioned that you are having talks with other folks in the APAC region, is that an area of expansion for you and are you making good progress there COVID and maybe even non-COVID as you kind of expand?

Yeah, it definitely is. And we’re seeing more and more opportunities come up. I think particularly in the COVID area as different countries are making their own investments similar say to Operation Warp Speed here in the United States, so we do expect that trend to continue. And we also continue to see very strong growth in biologic safety testing in Asia-Pac particularly both in China, Korea and to a lesser degree in Japan.

Yeah. Thanks very much.

Thanks, Matt.

We have your next question from Tejas Savant with Morgan Stanley. Your line is open.

Hey Carl and team good afternoon. Just to kick things off Carl. I know I hear your comments on the Delta variant and the building consensus for the need for boosters here. But given the vaccine hesitancy we've run into here in the US and to a certain degree in pockets in Europe. Are you seeing that start to filter through in any way in terms of the orders at all from Pfizer?

No. We've seen no diminution of their ordering pattern or the statements about future demand. As I mentioned they're talking about Pfizer specifically is talking about increasing capacity by 1 million more doses or 33% compared to what they expect to finish this year at.

Got it, helpful. And on a somewhat related note do you have any visibility and whether you'd be specked into their flu vaccine. I mean I think they're starting first in human trials at some point in the third quarter. And sort of similar note here on the other biopharma customers you mentioned is investing aggressively in mRNA development programs. Any sort of early read on you know just showing up and winning that business?

Yeah, look on the first point I can't really or I'm constrained by confidentiality as to what I can say about my customers programs if they haven't said anything about it. So, I'm limited in how I can respond to that. But suffice it to say that the platform that is being used by Pfizer and BioNTech for their major programs has been proven in the COVID-19 vaccines and it would be extremely unusual to make a change in the 11th hour especially on a program that you were trying to rapidly accelerate through regulatory approval. So I think it's fair to say that we're in a good position there. Let's just leave it with that. And then on the expanding demand for mRNA either components themselves or for the molecules themselves, we have seen an incredible level of activity in our commercial organization. And I think it's fair to say that all the companies whose names are being bandied about are wanting to expand on the field have at some point or another given us a call.

Very helpful. And then one final one on the vaccine, the capping, and enzyme announcement from Aldevron this morning. They talked about sort of a tenfold increase in production efficiency for VCE. In your opinion does this make enzymatic, a more competitive alternative to CleanCap although you do have a simpler workflow here and on a related note I mean just given the purchase by Dan here, do you expect any shift in competitive dynamics to the degree that you overlap with them?

Yeah. That's an interesting question. When I finally saw the press release you were referring to this morning, actually I think it was from Ginkgo BioWorks about their relationship with Aldevron. I have to admit that I wondered what all the fuss was about. So it's from Ginkgo which I think is still a private company for a little while yet that's projecting what something like $150 million in total revenue in 2021. What they basically said is that they helped the one customer Aldevron to scale up one manufacturing process for one enzyme by 10X. There was no data in the release that I saw on the quality or the performance of the enzymes in question either before or after the scale up. There was no indication that this was a - the scale difference would actually expand total capacity in the industry given the scarcity of some of the needed raw materials that are out there. And there were certainly no claim made that this would significantly reduce cost for Aldevron. So I'm hard pressed to see how that statement is much more than a press release from a young company accustomed to trying to get attention and I don't really know what to make of it. With respect to the competitive dynamics, post the Danaher acquisition, we have an immense amount of respect for Danaher and the way that the DDS is applied to all of their areas including sales and marketing and we will view them as a competitor and a supplier just like many other people are in the industry.

Fair enough. And congrats on the good quarter here, guys.

Well, thank you so much. We have your next question from Dan Arias with Stifel. Your line is open.

Good afternoon, everyone. I appreciate the questions. Carl, could you provide some insight into the visibility you have regarding orders related to the mRNA vaccine? Have your supply discussions given you any additional perspective on whether they are stocking up for boosters, pediatric use, or expansion into developing countries? Or do the current orders look similar to how they did earlier in the process?

That's interesting, Dan. I would say that we haven't seen any changes. The issues and the increased demand for each of those initiatives you mentioned have been discussed by our customers as they consider their forecasting. This has led to a clearer 12-month forecast of their expectations. To us, this reflects the public statements being made about the need to expand our capacity, for example, by a third in the case of the Pfizer program. Overall, everything seems to be moving in the right direction, and we're not seeing anyone retreat in any way, if that's what you're implying?

I appreciate that insight. I was trying to grasp how you determine the specifics of what Pfizer or another entity may be aiming to achieve. I believe I understand your perspective now. Additionally, I have a somewhat technical question, albeit not too complicated. As we consider broader applications beyond COVID vaccines and the investment you mentioned, should we expect the performance advantages of CleanCap to be comparable to what you’re currently seeing when you compare it to legacy or alternative capping methods? For example, I recall that there was a threefold increase in yield and that the cost was a third of traditional methods during our discussions. Is that generally applicable across similar non-COVID initiatives?

Well, look, I think any one program or another can have significant differences and what they need to consume in the way of components just based on the process and methods that they're using. So I wouldn’t say it’ll always be static. And I think that it’s fair to say that the benefits, the CleanCap has versus enzymatic having are similar across multiple different programs, whether for vaccines or therapeutics. We're in the process of working out a finishing paper that'll be submitted for publication that shows our experience with these various methods and show some of those benefits which probably will be released sometime later this year.

We have your next question from Matt Larew with William Blair. Your line is open.

Hi, good afternoon. You discussed the strong visibility in your current business. I'm interested in the new facility in San Diego; you mentioned an increase in capacity due to the biologic safety testing expansion. Can you provide the total capacity increase related to the investment in San Diego and how confident are you about utilizing this increased capacity?

Yeah, Matt, I don't think I can give you a numerical answer to that, yet. It’s still a little bit early. But think of almost the new facility here in San Diego, as being overflow. So the functions that we move out of our Wateridge facility here will then free up additional space that will be readily converted to additional manufacturing capacity. So that's kind of the right conceptual way to think about it. And then we will have these other support functions, laboratories, innovation centers, as well as some limited pilot plant manufacturing capacity in the new facility. So probably a little bit capacity in the new facility. So yeah probably a little bit too early to tell you until we've scoped it all out and got it down on a piece of paper. But I'd say we may be able to comment more next quarter.

Okay. Fair enough, Carl. And then, Kevin just on the gross margin obviously very strong kind of the quarter and the Protein Detection business you’re divesting here a little bit lower margin. So just want to know kind of an update thinking around the gross margin line long term you alluded to some additional OpEx spending specific on R&D…

Yeah. Yeah. That would be R&D…

...that would be R&D. I mean our gross margins are very strong. As you noted and should continue to be so certainly in the second quarter we had a record production level of output. We sort of to some degree challenged ourselves to see what we could do within the quarter just from a production perspective. And I think that was a very good experience for us. We did a record level of output and it certainly supports some of the previous comments we made with how we could annualize this business to north of a $1 billion of output out of San Diego. And then you layer in I think additional ability to expand that as we are just talking to in the last question, as we kind of move out some of the other research in other areas here to expand what we do here just for pure production. So we feel really good about that. The additional operating costs that'll hit the COGS line for these new facilities isn't much we're talking probably about $5 million on an annualized basis for nucleic acid production and maybe $1.5 million for the new facility for biologic safety testing. So those things will not have a huge impact on the gross margin going forward. And as I spoke to, we feel really good about commodity costs right now. Our supply chain teams do a great job. So to the extent the mixed stays relatively the same we're going to continue to see strong margins certainly benefit a little bit by the high strong margins certainly benefitted a little bit by the high revenues in the second quarter and the unique production that we produced, but overall very stable margins going forward on the gross margin line with some of those added costs which we had pretty small.

We have your next question from Katie with Credit Suisse. Your line is open.

Hi. Thanks for taking my question. On the plasma DNA side, can you provide an update on how that is ramping our tracking relative to expectations? And is it still largely used to support internal operations or have you begun marketing that more so to customers? And then we've seen several investments there on the plasma DNA landscape over the past year. How are you thinking about your competitive positioning there and expectations on investment going forward? Thanks.

Yeah. Thanks for the question, Katie. And yes, the program is tracking to the initial expectations. We'll see how we've finished the year here over the next four months or five months. Our focus is as you suggested entirely on supporting our mRNA and manufacturing customers so that we can provide them plasma as quicker than they can get them in the open market. And so to the degree that people are putting in plasma capacity for general competition say without thereon, we don't really see that correctly affecting us although it certainly will ultimately make it easier for all of our customers, joint customers to get access to plasma quickly and reliably which is what this is all about.

Okay. Great. And then maybe on the M&A side just digging in a little deeper, can you speak to some of the opportunities that you're looking at in the market? What are your target focus areas and what would the sweet spot be in terms of sizing? Thanks.

Yeah. Look obviously we will be focused entirely now on Nucleic Acid Production, biologic safety as areas of investment. And they are both important I would say that we see more specific opportunities in nucleic acid testing because the nature of the industry and the complex supply chains involved, et cetera. So we're actively looking as we have always been at opportunities there. You will see some that are focused on supply chain rationalization and securitization and that's a word for us. And over time, you’ll also see us expanding into other parts or other technologies that are used in the delivery of cell and gene therapies as part of a natural vertical expansion. So those are the areas generally speaking. We don't really have any size or limitations or preconceived notions. Certainly, anything that would be considered a transformative acquisition is handled or evaluated on a one-off basis that you can never anticipate those and they have generally relatively low probability of coming about. But we actively scan anybody who's got positive EBITDA and a sales track record and we're willing to do deals for small companies and technologies that have promise all the way through to somebody who has anywhere from $50 million to $100 million of EBITDA.

We have your next question from Michael Ryskin with Bank of America. Your line is open.

Thank you for taking my question. I have a couple of quick ones. First, regarding the updated guidance for 2021, as well as the outlook for the second half of the year. You've mentioned several times your visibility in terms of purchase orders, especially from major customers. However, looking ahead from the second quarter, particularly concerning the COVID-related aspects, it seems there may be a slowdown going into the latter half of the year. Could you clarify what you are focusing on building versus what you are not, specifically regarding the purchase orders you currently have? How much caution is reflected in that outlook? I have a follow-up after this.

Yeah. I think there are some natural timing differences with our forecast heading into the year. We always didn't see it going completely flat, not just based on what our customers are asking us to do for them and when they need the product. So look I think at this stage you know I think we should continue to see a pretty steady state moving forward. I know it's a little bit down from the peak we saw here in the second quarter. That can always change as well. This is changing pretty regularly and we pretty much have new information every month as we do our S&LP process and roll up our forward looking demand. But you know certainly as Carl mentioned you know this is a pretty steady state. Our customers are making pretty bold statements regarding increasing their production next year. You know we're looking forward in our lens, four to six quarters forward feel real good about what we see. Feel real good about our capacity and some of the investments that we need to continue to deliver on increasing revenues. So you know I think that as we sit here today, you know, I think we have a real solid book of what we see now versus what we saw three months ago when we last talked about our guidance. And that's why we're taking it and picking up meaningfully at the midpoint for both COVID and non-COVID related revenues and as well as you know increasing it in contemplation of losing up $10 million at the protein detection business revenues as well. So a little bit of choppiness certainly, but still very strong outlook for the remainder of the year.

And on that point can you remind me. I'm sure Barry's customer by customer and project by project what sort of a standard time we should think of from when you know when you recognize revenues for CleanCap versus when you know the end customer has got vaccines shipping out the door?

The best way to approach this is to understand that this is very much a real-time operation. There isn’t much inventory in the pipeline. Once we finish a product and ship it, we believe it enters the customer's quality assurance and quality control testing immediately to prepare for use. Our customers have indicated at different times that they typically have a cycle time of around 120 days and are trying to shorten that as much as possible, which suggests that the product is likely in use three to four months later.

Okay. Thanks. And one last if I can squeeze it in on protein detection divestments. Just curious to me give us sort of more insight into sort of how that process came about, was it something you'd been thinking about for some time just gone back the timing of the IPO is still relatively recent. Was it sort of the right opportunity came up and you re-evaluated investment needs elsewhere and decided to sort of pull the trigger?

No idea was we were approached by Thompson Street with their interest in the field. They were credible because they made other investments in immunohistochemistry. We gave them access to some limited amount of information and they stepped forward with what we thought was a fair valuation.

Thank you. We have your next question from Baird. Your line is open.

Yeah. So I just wanted to go to your comment on ramping your R&D over the next several years just in terms of programs getting the most attention I guess how much is improving and expanding upon application for CleanCap and other existing products versus pursuing new product categories. And what might those new product opportunities look like?

We have multiple lines of investment and innovation happening with CleanCap simultaneously. These efforts involve different constructs or modifications of the broader mRNA molecule produced with CleanCap, which can influence its translation into proteins in the body and their effectiveness. There are several ongoing initiatives in this area. Another focus for us is improving the process development related to CleanCap, aiming to produce larger quantities more efficiently and consistently with fewer steps. This is a significant priority for us right now, both upstream and downstream of where we use the CleanCap molecules. Additionally, we are innovating within our regular nucleic acid business, whether it's independent of CleanCap or incorporating it, working with our customers to explore what molecules can be successfully synthesized, how they can be used, and how to modify those that haven’t initially performed as expected. We are also looking at alternative manufacturing technologies and innovative platforms that could enhance our manufacturing capacity and bring it closer to patient care settings, where rapid synthesis of personalized therapies is crucial. These represent three key areas of focus for us.

I'm showing no further questions at this time. Mr. Hart, Please continue.

Well, thanks everyone for joining us today. Just to note to please check out our events website. We'll be presenting at several conferences during the month of September. Feel free to call me if you have any questions and we hope you have a great evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.