Maravai Lifesciences Holdings, Inc. Q3 FY2022 Earnings Call

Greetings, and welcome to Maravai LifeSciences Third Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Hart, Head of Investor Relations. Thank you. You may begin.

Thanks, Doug. Good afternoon, everyone, and thanks for joining us for our third quarter 2022 earnings call. I'm joined by Carl Hull, our Executive Chairman and Interim CEO; and Kevin Herde, our Executive Vice President and Chief Financial Officer. 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. As you can see on Slide 2, Carl will first provide you with a business update, and then Kevin will review our financial results and guidance. We will open the call for questions following the prepared remarks. On Slide 3, we remind you that the forward-looking statements 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 issued 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 also 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 our press release. 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 that 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.

Well, thank you, Deb, and good afternoon, everyone. We appreciate having you join us for our call today. Let me now give you a quick recap of the quarter and provide a few business updates before turning the call over to Kevin. Starting on Slide 5. Today, we reported $191 million in total revenue, $133 million in total adjusted EBITDA, and $0.37 in adjusted fully diluted EPS for the quarter. These results were within the ranges of our expectations. Furthermore, we are confirming our overall expectations for the full year of 2022 and tightening up our previously communicated ranges as we move to close out the year. Kevin will go into more detail on the results and guidance later in this call. In the Nucleic Acid Production or NAP business, we saw a revenue decline in COVID-related CleanCap revenue in the quarter of 4% versus Q3 of 2021. In the base NAP business, revenue was down 6% year-over-year against a strong third quarter 2021 comparison in which we had a large non-COVID order from a customer entering a clinical trial. Our Biologics Safety Testing business continues to see intermittent headwinds from the business in China and was down 1% from quarter 3 last year. Our adjusted free cash flow in the quarter was $119 million. The strong cash flow generation leaves us with an all-time record cash balance of $617 million as of the end of quarter 3, up $67 million from quarter 2. This puts us in a great position to fund our long-term strategy via organic investments in our capabilities while we continue to actively pursue external M&A. We see multiple potential strategic opportunities in our space where we are working to deploy some of this cash. On Slide 6, you'll see our results on a 9-month basis. Revenue for the first 3 quarters of the year was $678 million, up 19% compared to the prior year similar period. Excluding COVID CleanCap revenue, our base Nucleic Acid Production business was up 21%, and our Biologics Safety Testing business was up 4%. Our top-line growth resulted in adjusted EBITDA of $508 million for the 9-month period, which represents a 75% adjusted EBITDA margin. As we enter the final quarter of the year, we feel extremely well positioned to build on our strong commercial foundation, expand our existing customer relationships, and amplify our product and services offerings to support our customers. During the quarter, we announced the first commercially available GMP-grade N1-Methyl-Pseudouridine-5’-Triphosphate, a critical raw material for mRNA manufacturing. This new product extension leverages our existing quality systems and GMP capabilities, including clean room manufacturing, expanded analytical testing, and process verification. The demand for messenger RNA modified with N1-Methyl-Pseudo U, as we call it, has risen significantly in the past several years due to its incorporation in both currently approved mRNA vaccines against COVID-19. N1-Methyl-Pseudo U is a key raw material for the majority of mRNA therapeutics in development today. In fact, it is our most requested modified NTP in mRNA manufacturing. Our GMP-grade N1-Methyl-Pseudo U allows us to address our customers' needs to domestically source critical materials, and we are pleased to add this GMP-grade molecule to our existing offering of chemical capping reagents and other mRNA components. We see this as the first of many GMP-grade reagents to come from our new product development pipeline. This product now available is both a GMP raw material and can also be incorporated into GMP mRNA manufacturing campaigns. These types of new products should continue to bring value to our customers and help improve the quality of manufactured mRNA for years to come. We remain focused on our base nucleic acid production business as the key driver of long-term value creation as we continue to expect innovative mRNA customer growth in both products and services. To illustrate the traction we see from both a product and services standpoint, let me share some evidence of ongoing customer adoption on Slide 8. Demand for CleanCap mRNA continues to accelerate in all areas: CleanCap reagents themselves; GMP manufacturing services; and custom mRNA constructs. One year ago, in the third quarter of 2021, we had 170 CleanCap reagent customers on a rolling 18-month basis. As we close the third quarter of this year, that number is now 273 customers, up 61%. These are customers that are a CleanCap as a stand-alone reagent. We ship it to them, or their preferred contract manufacturer, and they use our capping analogs in their own mRNA manufacturing process. This could be for research and discovery activities, preclinical development, and with our GMP offering, clinical manufacturing of mRNA. We also track our CleanCap mRNA discovery customers. These are customers at the very earliest stages of their programs who look to trial manufacturing mRNA on their behalf using CleanCap as their capping method. Their activities are mostly for early research and discovery, including assay development, target identification, and in vitro cell models. This group of customers has grown from 464 last year to over 600 customers today. That's up 29%. And among these early customers as they continue through their discovery work, we expect many will mature into the mRNA GMP services business where they would take several of their top candidates and upgrade them to our GMP manufacturing processes, which includes process development to large-scale manufacturing, phase-appropriate methods development and validation, and collecting documentation that would support an IND filing. These GMP messenger RNA customers have grown from 53 to 68 over the last year, up 28%. As these customers progress through our GMP services with their preclinical and early clinical phase work, we also want to support them through Phase II and beyond, which is why we are building the new Flanders facility. Now let's turn to Slide 9 for an update on those facility expansion plans. As we announced in the second quarter, we signed a collaborative agreement with the Department of Defense where they will fund up to $39 million of our planned expansion of the Flanders Nucleic Acid production facility here in San Diego. This is part of the government's goal of nationwide pandemic readiness for COVID-19 and beyond. We successfully passed the BARDA audit and have commenced billing for reimbursement under our grant for the Flanders construction. We expect to receive our first reimbursement check later this month. The Flanders site construction is progressing, and we expect to have partial occupancy for Phase 1 of the project in early first quarter 2023, and Phase 2 occupancy later in the first half of 2023. As a reminder, the first phase will provide us with an additional GMP manufacturing suite with 2 cleanrooms. By moving some of our operations to the new Flanders site from Water Ridge, we will be able to expand the rest of our small molecule platform and add GMP API manufacturing capacity. This will allow us to support our customers through Phase 2 and beyond. Likewise, the Biologics Safety Testing relocation to a new facility in Leland, North Carolina, is progressing nicely towards a move-in date over the holiday break at the end of this year. This new facility more than doubles our operational square footage to support current and future growth. The fully customized design will provide room for a mass spectrometry center of excellence and specialized cell culture facilities. It will significantly increase our cold storage capacity while providing other R&D, laboratory, and automation upgrades. Extensive process flow analysis has been incorporated in the design to optimize and enhance both our manufacturing and kit packaging operations. Our Pacific Center expansion, which will provide additional warehouse space, light lab, and SG&A space is also progressing nicely, with the number of employees and teams already making the move. And that expansion is on track to be fully completed in the early second quarter of 2023. These new facilities are an example of how we continue to make investments to support the long-term growth that we anticipate in our base business. Now turning to Slide 10 and our COVID outlook. As you all know, our part in supporting COVID-19 vaccines has been incredibly rewarding, and we are very proud of the role we've continued to play in helping to address the pandemic. With about 2/3 of our revenue coming from the use of CleanCap in COVID-19 vaccines in 2022, a central issue in many of our discussions with investors has been the durability of our COVID-related CleanCap revenues into 2023 and beyond. The vaccine space clearly remains in substantial flux, and there are still a number of uncertainties around end-user demand for these vaccines. The uptake for the new bivalent booster vaccines has frankly not been great, with only 19 million people in the U.S. receiving the new booster dose as of October 19. As we discussed last quarter, we were estimating then that COVID-related vaccine production would likely drop by 1/2 to 2/3 from 2022 levels. That led us to anticipate that the 2023 COVID revenues would drop proportionately for us to a range of $200 million to $300 million in 2023. Today, as we head into 2023, we are not in the same position. Since we do not have those commitments or long-range forecasts from our major customers in hand. Additionally, based on the slow uptake of the new boosters, we believe it is likely that our customers have raw materials on hand as they start the year, which will negatively impact our revenue in 2023, particularly early in the year, as those customers work down any existing raw materials. As a result, we now believe that CleanCap COVID revenue for Maravai in 2023 could be half of what we most recently anticipated. Our current estimate for COVID-related CleanCap revenues is about $100 million in 2023 with limited shipments in the first half of 2023. Internally, we are also planning around that $100 million annual run rate as a reasonable assumption for COVID-related CleanCap revenue in 2024 and beyond. In my closing remarks, I'll try to touch more on future guidance. Now turning to Slide 11, our Biologics Safety Testing business. Our products and services in this business support high-growth markets in cell and gene therapy vaccines and biologics by providing process-related and impurity analytics, along with offering innovative viral clearance prediction solutions that help our customers ensure the safety of their biopharmaceutical products. We continue to innovate and scale our offerings in BST to ensure superior technical support to offer the highest quality services and products and the most comprehensive catalog of products to meet our customers' needs. We anticipate launching our pivotal retrovirus MockV kit later this year, further building on the breadth of our product offerings. The MockV technology addresses unmet opportunity for growth in viral and purity detection. Now let me finish with a topic that may be on some of your minds, and that concerns our disagreement with Danaher regarding Trey Martin joining Maravai as our CEO. Following our hiring of Trey, Danaher filed a lawsuit against Trey and Maravai, claiming a violation of a non-competition agreement and sought a temporary restraining order, which was granted, including Trey from working for Maravai pending a preliminary injunction hearing expected to occur within the next month or so. We are mounting a complete and vigorous defense against the suit. Public policy in California, where Trey is a resident and Maravai has its headquarters, has recognized the unjust impact of similar contractual restrictions that are intended to limit the mobility of former employees. We are disappointed that Danaher has taken this action to try to limit Trey in advancing his career. We remain confident Trey is the right choice to lead Maravai through our next phase of growth. While we can't speculate on the full range of possible outcomes here, one possibility is that Trey will be reinstated as our CEO following the preliminary injunction hearing later this year. Another possibility is that he may somehow be limited in roles that he could play with Maravai for up to a year as he completes any remaining post-employment obligations that the court may find he has to his former employer. In the meantime, I'm quite happy to step back into the CEO role, as you can see. I feel that we've been as transparent as we can with you on this matter right now. And I would ask for your understanding as we won't be taking any further questions on this legal matter unless we have something material to announce in the future. Now moving on to Slide 12. I'll now ask Kevin to cover more details on our third quarter performance and update our guidance for the balance of the year. Kevin?

Thank you, Carl. Good afternoon, everyone. I'm happy to review our financial results for the third quarter and discuss some updates to our current guidance for the full year of 2022. So starting on Slide 13. Our GAAP net income before non-controlling interests was $100 million for the third quarter of 2022. This compares to $132 million for the third quarter of 2021. Note that certain prior year amounts were adjusted for the lease accounting standard change required under SEC 842. Income from operations was $117 million in the quarter for an operating margin of 61%. R&D spend in the quarter was over $5 million, which compares to about $2 million from Q3 2021, as we continue to increase our R&D spend and focus on work around our CleanCap franchise as well as other novel innovations. Moving to Slide 14. Adjusted EBITDA, a non-GAAP measure, was $133 million for Q3 2022 compared to $155 million for Q3 2021. Our net adjustments from GAAP EBITDA to adjusted EBITDA continued to be small, only less than 6% from our GAAP EBITDA for the quarter, the vast majority tied to the non-cash stock-based compensation add-back. Our adjusted EBITDA margin was 69% in Q3 2022, a little better than our expectations for the quarter based on slightly better gross margins and favorable SG&A expenses. Now to Slide 15. To represent basic EPS, diluted EPS, and adjusted fully diluted EPS, basic EPS is a GAAP measure and is net income attributed to our Class A shares divided by the weighted average Class A shares. Diluted EPS, also a GAAP measure, starts with basic EPS, and to the extent that the assumed conversion of Class B shares and other equity awards are dilutive, then net income and weighted average shares outstanding used in the calculation will be adjusted to reflect the dilutive effect of the conversion. The dilutive effects of Class B shares and other equity awards were negligible in Q3 2022. Lastly, the simplest and most comparable metric of focus for us is adjusted fully diluted EPS. A non-GAAP measure, which equals adjusted net income divided by the weighted average of both Class A and B shares and other dilutive securities. Our basic EPS for the third quarter was $0.34, diluted EPS was $0.34, and adjusted fully diluted EPS was $0.37 per share. Our bottom line for the quarter was a bit ahead of our expectations from the higher margins in the quarter as well as lower interest and tax expense, which both benefited from some advanced interest rate and tax planning tactics. Moving to Slide 16, and a few balance sheet items and other financial metric highlights. As Carl noted, we ended the quarter in a record gross cash position with $617 million in cash and $540 million in long-term debt. Our strong EBITDA performance led to a robust adjusted free cash flow for the quarter of $119 million. That calculation of adjusted free cash flow, a non-GAAP measure, is based on our adjusted EBITDA of $133 million less capital expenditures in the quarter of $14 million. We define capital expenditures as purchases of property and equipment, which are included in cash flows from investment activities, accounts payable, and accrued expenses offset by government funding recognized. And to the extent construction costs determined to be lesser improvements recorded as prepaid payments, including portions including accounts receivable and accrued expenses, also offset by government funding recognized. Capital expenditures in the quarter were consistent with our expectations, reflecting our focused investment in our facilities capacity expansion that Carl had touched on earlier. We continue to expect our net CapEx, as I just defined it, to be between $50 million and $55 million for the full year of 2022, which reflects about $28 million of anticipated offsets from the Department of Defense pursuant to the collaboration agreement we have with them. Now of this total, about 2/3 will be classified as long-term other assets and the remainder as traditional fixed assets. The remainder of our $39 million current grant will likely offset CapEx in early 2023 as we complete the Flanders facility. Now sitting on over $600 million in cash is a great position for Maravai to be in. Furthermore, as I briefly touched on, our advanced planning results having an interest rate cap contract, which effectively caps our cash-based interest rate at 6.5%. Overall, we're in a very strong position to lean into the M&A space over the remainder of 2022 and into 2023. We are currently actively evaluating multiple potential deals. Lastly, as I mentioned last quarter, we have structured Maravai and the vast majority of our contracts and treasury operations predominantly in U.S. dollars and thus are not facing any material foreign exchange impact in 2022. Now to provide some more insights into the business segment financial performance for the quarter, let's turn to Slide 17. Our Nucleic Acid Production business represented 91% of our total revenue in the quarter and generated $134 million in adjusted EBITDA, a 77% adjusted EBITDA margin. CleanCap revenues from our major COVID-19 vaccine customers were approximately $127 million in the third quarter of 2022. This compares to $131 million in Q3 of 2021. Our Base Nucleic Acid Production business, excluding CleanCap revenue from our major COVID-19 vaccine customers, was down from Q3 2021 as our prior year had a large non-COVID-related order to one of our customers to support numerous of their non-COVID-related programs. Our Biologics Safety Testing business contributed 9% of the company's revenue in the third quarter and continues to be impacted by the ongoing pandemic lockdowns in China and our ongoing decision not to ship into Russia. Our Cygnus branded products, which comprised virtually all of this segment's business, were down $1 million in the quarter. Our Biologics Safety Testing business delivered $13 million of adjusted EBITDA in the quarter, a 79% EBITDA margin. Corporate expenses that are not included in the segment adjusted EBITDA totals were $14 million in the quarter, up from the Q3 2021 levels of $10 million, mainly due to investments in key personnel and systems that drive and support growth as well as the additional investments in key leadership positions for both R&D and our commercial areas. We continue to be pleased with our ability to track key talent at all levels of Maravai. At the end of September, we had a record 604 full-time employees, up 50 employees from June. We continue to add key talent to support our customers and our long-term plans. Now moving to Slide 18. Our slight updates and tightening of our 2022 financial guidance ranges. We now expect revenues of $880 million to $890 million for the current year, including our updated estimate around $600 million to $605 million of revenues associated with CleanCap related COVID vaccine demand. The small movement in the midpoint of the revenue range of $10 million or about 1% is tied to the combination of lower COVID-related revenues in 2022 and the lower expectations for our Biologics Safety Testing business for the year. This update in guidance implies a midpoint for our base non-COVID CleanCap business of about $282 million or growth of approximately 17% from comparable 2021 levels. This base growth includes about 3% to 5% growth for our Biologics Safety Testing segment and about 35% to 40% growth in the Base Nucleic Acid Production segment. We are tightening our full year 2022 EBITDA guidance, a non-GAAP measure, to the range of $650 million to $660 million compared to our previous guidance range of $640 million to $660 million, increasing the midpoint by $5 million. Based on this updated adjusted EBITDA guidance, our adjusted fully diluted EPS is now updated to a range of $1.76 to $1.80 per share compared to our prior guidance of $1.70 to $1.80 per share, increasing the midpoint by $0.03 per share. Now obviously, with 9 months complete, our updated full year 2022 guidance less our reported 9 months results provides basically our expectations for the current fourth quarter. To save analysts on the call the stress of making rapid calculations prior to our Q&A, let me lay that math out for you all at the approximate midpoints. For the fourth quarter, we expect total revenues of approximately $207 million; COVID-related CleanCap revenue of about $127 million; base business revenue of about $80 million, which would represent growth of 65% over Q4 of 2021; adjusted EBITDA of around $147 million, which would be a margin of 71%; and adjusted EPS of about $0.33. Now on Slide 19, you'll see our other guidance assumptions for the full year of 2022. Adjusted fully diluted EPS is based on the assumption that all Class Bs are converted to Class A shares, which results in a fully forecasted diluted share count estimate of 255 million to 256 million for the full year of 2022. Additionally, our adjusted fully diluted EPS includes certain adjustments that do not reflect our core operations, and are based on an adjusted effective tax rate of around 24%. As it relates to the other adjustments needed to get to our non-GAAP adjusted EBITDA range, our expectations for 2022 include interest expense between $21 million and $23 million; depreciation and amortization of $30 million to $32 million; equity-based compensation, which we show as a reconciling item to be about $17 million to $19 million; and as stated earlier, we expect our net capital expenditures to be about $50 million to $55 million, the vast majority tied to our new facility expansion. Our reconciliation of net income to GAAP EBITDA and from GAAP EBITDA to adjusted EBITDA is presented in our press release and at the end of this slide presentation. In addition, our segment-related information will be detailed in our Form 10-Q, which we plan to file in the next couple of days. So to conclude, we continue to execute financially in line with our expectations and against the 2022 guidance that we initially set for 2022 revenues of $840 million to $880 million back in November of 2021. There has certainly been a lot made of the pre-COVID, COVID pandemic phase and post-COVID pandemic phase for companies like Maravai. Although the future impact of COVID-related demand is still unclear to all, we remain in a great position for the long term. I recently looked back to some of our financial models from 2018, and we sit here with the Biologic Safety Testing business that is right about where we projected it to be and the Nucleic Acid Based business well ahead of where we projected it to be. Additionally, we are $700 million ahead of our cash projections and have substantially more capabilities and infrastructure today for our long-term growth and success. Not only is Maravai a much larger, more profitable, and stronger business than we anticipated years ago, but the success of mRNA has attracted a level of market-wide interest and investment much larger and broader than we believed it could be at the end of global conflicts and uncertainties and rising inflation and interest rates are all macro factors that impact us all in life sciences. We recognize these factors and make decisions understanding the broader markets. However, we also keep a steadfast conviction in our vision, our strategy, and we remain focused on the long game. We are in a great position to move meaningfully forward, and we'll continue to lean in and invest in those people, processes, facilities, systems, as well as assets that best position us for our long-term success.

All right. Well, thanks, Kevin. In summary, we have delivered a solid 2022 thus far and look forward to ending the year in line with our stated expectations and quite possibly detailing more about our M&A activities for you. Before we wrap up our prepared remarks, I want to further discuss our current outlook. With the lowered expectations for COVID revenues in 2023 and our discussions around the level of COVID-related revenues that we now estimate for our own business planning purposes, we felt it important to provide some additional details around how we see things moving forward. Our Base Nucleic Acid business continues to perform well, as you would expect in this environment. We see continued strong growth in that business based on our capabilities, customer interest, and market momentum. We also see our Biologics Safety Testing business resuming broader market growth levels in 2023. Based on this and the work we are doing for our annual budget and long-term planning process, we believe our Base business will deliver revenue growth of at least 20% for the company in 2023. We see that, and in combination with our estimated $100 million in COVID-related CleanCap revenues, resulting in an adjusted EBITDA margin range of 40% to 50% next year. We will be completing our planning ideas in the coming months and will look forward to providing our detailed 2023 guidance as well as our long-term growth and profitability targets as part of our year-end 2022 earnings call in February. Until that time, we are as focused as ever on execution in our business for our customers, providing our employees with a great work environment and career development opportunities and making decisions that we wholeheartedly believe will create long-term shareholder value. I'd now like to turn the call back over to Doug to open the line for your questions.

Our first question comes from the line of Tejas Savant with Morgan Stanley.

So maybe just to kick things off, Carl, can you just elaborate on how much of the $125 million to $130 million in COVID in the third and fourth quarter was related to take-or-pay revenue? Is that a dynamic that we should be keeping in mind as we think about the margin headwinds, particularly in '23? I know you laid out that 40% to 50% EBITDA margin estimate out there. But just trying to make sense of the moving pieces here, the regular decline in COVID versus any take-or-pay dynamics that we should be keeping in mind?

Yes, Tejas, good to hear from you. I think the right way to answer that question is to tell you that in general, unlike some of the other participants in the CDMO marketplace, we don't settle contracts without shipping products. So I would say, in general, what you see in our margin numbers or our forecast is largely product being shipped.

Got it. Okay. That's helpful. Earlier this week, we heard from a few CDMOs about increased cancellations, not necessarily cancellations, but a slowdown in progress within the drug pipeline. I'm curious if you're noticing any of these trends in your customer base.

No, we really haven't seen it in the mRNA services side of the business, Tejas.

Got it. Clear enough. And then on the new product launch here with the GMP-grade N1-Methyl-Pseudo U, I believe you called it, Carl. A bit of a tongue-twister.

Pseudo U, I wouldn't, but okay.

So it sounds like a pretty interesting product here and pretty differentiated in terms of the context of mRNA manufacturing. Would you sort of like be in a position to put any dollar amounts in terms of the SAM, if you will? And how do you see that opportunity ramping in the near term? Or is it just really sort of another arrow in your quiver?

Well, look, I don't think we could give you SAM data right now. We're certainly not in a position to give you specific guidance on 2023, just yet. But I would tell you that we think this is representative of the trend in the industry, which has more and more big pharma become involved. As we discussed on previous calls, as they become involved in the mRNA field, their expectations and demands in terms of the quality of the inputs that they utilize are increasing and, in some cases, increasing rapidly. So we think this is a good example of what might happen in the future, and being the first to offer those in various products is going to be important to us.

Our next question comes from the line of John Sourbeer with UBS.

You mentioned in your prepared remarks that there are increased raw materials on hand with COVID customers, possibly some destocking. Do you see this trend also affecting your base NAT? Is that contributing to the lower growth trajectory expected for next year?

No, John, I don't really think it is. This would be specific to the COVID vaccine area where there was a high premium put by our customers on being prepared for the worst case. It certainly doesn't apply generally to the other RNA therapeutics. And remember, those are much earlier in their development. So it's not like any of these products are yet being commercialized and people are approaching it from a cost savings point of view. They're trying to just go as fast as they can.

Got it. And I guess on that growth trajectory next year. I guess, can you just maybe elaborate on some of the drivers there year-over-year? And then the company does have meaningful capacity coming online. Maybe just any color on how some of these projects are maturing and how you can fill some of that capacity?

Kevin, do you want to take a shot at that?

Yes, certainly. We are very pleased with the feedback we are receiving from our customers. Regarding the GMP N1-Methyl-Pseudo U, we have had over 150 customers ordering that product on a research use only basis over the past three years. This transition is related to the conversion and the accompanying price increase. We are already seeing purchase orders and supply bookings for the GMP version. This illustrates, as Carl mentioned earlier, how our new capabilities and enhanced focus on quality are contributing to our growth. When we examine the various aspects of nucleic acid production, we have different elements such as synthesis inputs like NTPs, the plasma market, CleanCap as an individual product, mRNA services with CleanCap as a contract development and manufacturing organization, and other foundational products like those from Glen Research. Each of these has its own growth rate, and we are enthusiastic about all of them. However, it is the synthesis inputs and the mRNA CDMO business where we are currently seeing the most interest, and these areas represent the higher growth segments within our portfolio.

I guess last one for me, and I apologize if I missed this. Did you say how much of the $100 million in 2023 COVID CleanCap has already been booked for next year?

We did not, no.

Like, would you comment on that?

We're not going to get into that right at this stage. I mean, right now, we have a lot of conversations with our customers just because of a lot of different demand. And we have a lot of different customers within that group, and they all have different dynamics. So it's a little bit hard to generalize at this point.

Well, John, I would say that our experience is probably not very much different from a number of other peers in the space where the prior visibility that we all had going into '22, related to COVID demand, is much reduced this year going into '23.

Our next question comes from the line of Paul Knight with KeyBanc.

Carl, the Q4 guidance for non-COVID indicates a significant year-over-year increase in Q4. Can you elaborate on the factors contributing to that? Additionally, regarding 2023, you mentioned growth in the low 20s, while previously you indicated it was around 30%. Could you clarify that as well?

Let me ask Kevin to comment on those, and I'll fill in.

Yes, Paul. We've discussed before that there are a few factors influencing Q4. One of these is the performance of CleanCap related to non-COVID programs, which has fluctuated. Last year, it peaked in Q3 and we expect it to be higher in Q4, driven by customer demand for non-COVID CleanCap. We have a solid pipeline of CDMO mRNA services for the fourth quarter, which will significantly contribute to that figure. Looking ahead, while we won't provide specific guidance for 2023, we feel very optimistic about our long-term growth and our baseline projections for next year. We believe the business is in a good place. When examining our base business growth rates, we see potential across various sectors. Certain segments are experiencing slower growth, but the main drivers we identify—specifically in oligonucleotide synthesis and our CleanCap services for modified mRNAs—are aligned with higher growth rates reflecting market trends. Additionally, there are improvements in quality and other areas contributing to growth rates of 30% to 35%. Although some parts of the business may grow at lower rates, the overall blended average is approaching a 20% baseline that we expect for next year.

Our next question comes from the line of Matt Sykes with Goldman Sachs.

This is Zibi on for Matt. First, on your capital allocation strategy, are there any specific areas of interest or potential gaps you're looking to fill? And also, could you give us an update on what the landscape looks like at this point?

Well, generally, I think our view here is that there are other pieces to the puzzle that our customers are looking for, and we try as much as we can to focus in on those areas, whether they be other components that are used to manufacture mRNA or perhaps other nucleic acid-based products and other ways of delivering those products. So reasonably, I think you could expect us to be hanging around the verticals. We've always been interested in acquisitions around the Biologic Safety Testing business. But unfortunately, though, there are not many of those that are logical strategic fits because of the specialized nature of those products. And then I think in terms of the current environment, it's getting better than it has been for the last 6 months. I think people are coming to grips with current valuations, maybe not fully, but more so than they were at least initially as the market correction occurred. And I think we do see a large number of opportunities that are relevant to us based on what I just said that we're pursuing. So improving, but not there yet.

Great. That's helpful. And then recognizing Biologic Safety Testing was negatively impacted by China lockdowns and then also Russia. Are there any updates you can provide for the balance of the year as we see these dynamics persist?

No, because I think they are kind of spotty as a concern in China, and it's just the luck of the draw. So you have large commerce through our distribution channel there who happen to be in cities that get affected multiple times. They suffer the difficulties of it. So I would say that there's not much else there. We continue to maintain our decision on exiting the Russian market was appropriate, and feel comfortable with that.

Our next question comes from the line of Matt Larew with William Blair.

This is Madelin Mollman on for Matt Larew. Quick on the raw materials. I know you mentioned that you thought it would impact the first half of the year. Have you heard anything from your COVID customers about how much inventory they have, like how much higher it might be above normal levels, anything like that?

No. And I guess the reason is nobody knows what normal is, right? This has just been going on for 2 years. So that's a hard one to pin down. But no, we don't have real good visibility onto the customer's individual inventory situation and how they view it. We're just reflecting the fact that absent specific sales forecasts, we don't want to kind of stick our finger up in the wind and make a guess.

Got it. That makes sense. And then looking at the non-COVID mRNA therapeutic pipeline. Are there any candidates that you see becoming catalysts in the next couple of years? And can you talk a little bit about how the dynamics for you change as a therapeutic move through the clinic?

Well, that's an interesting thing. I mean, I think people always focus on who the winners are going to be, which is sort of a natural thing, super hard to tell with therapies like this, particularly for those that are directed at rare diseases, because it's just so difficult to anticipate or run pilot clinical trials until you get to your pivotal trial. So I don't think we consider our business to be picking the winners. We believe widely serving the largest number of participants in the early stages is the best way to maximize the probability that we're working with those folks who ultimately do have a game-changing application. We're doing that. The dynamic about what changes over time is there's a greater focus, obviously, on quality standards and compliance and moving more into a consultative role as you're developing the procedures and effectively the manufacturing processes that would be used for later stages. So I think the customer expectations of closer collaboration versus a little more hands off, here's my sequence make this for me, which is how I would characterize the early stage, later stage becomes more consultative.

Our next question comes from the line of Michael Ryskin with Bank of America.

I'm going to try to squeeze in a couple of really quick ones. First of all, your commentary on COVID 2023 and beyond, you're still pointing to about $100 million per year in 2024 and 2025 and so forth. Your last guide was more of $200 million to $300 million. So given how quickly that's changing and given what you're seeing from other CDMO and bioprocess players, where they're essentially assuming 0 COVID bioprocessing pretty quickly, sort of what's the rationale for keeping that in the model? Is it that just further risk of downside? So why not strip it out now?

Well, Michael, because we don't think COVID demand is going to go away. That's the bottom line. So we're partnered with the team that has roughly 2/3 market share, depending on where you look at it, of the COVID market; neither they nor we think that market is going to go to 0, but if you think about it on a steady-state basis, what we're doing is reducing it down to about roughly 15% to 18% of what it was at its peak this year. So I think that that's a reasonable assumption if you back into some of Pfizer statements about what their expected volumes might be and analyst projections there. I think it triangulates pretty nicely on that. I'm not aware that anybody has that going to 0.

Okay. And then on the EBITDA margins for next year, 40% to 50%, again, I appreciate your comment on investing in the business and sort of setting the company up right for the longer term. But that's still on the lower end sort of our assumptions, even if you adjust for the lower COVID contribution, especially if you look at the business we're doing in 2019 and 4 years later, you've got a lot more volume there. So can you walk us through the bridge there from your EBITDA margin this year coming in the 70% range but 40% to 50% next year. It's a pretty big step down.

Kevin, would you like to take that?

Yes. I mean, look, I think, certainly, the COVID-related CleanCap is a big driver of that, certainly. I mean, that is a high-margin product for us. So you complement that with a handful of things. And again, our investment is that we're making are really looking out multiple years here. We're just happy to be seeing '23 as a transitional year where you have that decline of high-margin CleanCap revenue contribution in the same period as you're bringing online 3 new facilities, and continuing to expand your internal organic R&D engine as well as your commercial engine for the long term. I mean, those things just come together all in the same year and lead you at the lower end of that EBITDA range. But again, we're not managing the business for next quarter's EBITDA or even next year's EBITDA specifically. We're putting in the things that we feel need to be in place and need to be in place as soon as possible to take advantage of the opportunity we see over the next 3, 5, and 10 years with where we're playing. So I'm very happy with the investments we're making and how it's setting us up for the long-term success, certainly because those confluence of factors that I just spoke of. The margins are going to be lower next year, and we hope to bring that up as we grow and as we grow up, the transitional year that 2023 is going to represent.

Yes. And Michael, I would add on that one, too, if you step back and look at it, when you think about a pure life sciences company in sort of the cutting-edge part of the field that's growing the base business at 20% or greater, as we indicated, and delivering margins above 40% on the EBITDA line is a pretty compelling both investment opportunity and a pretty compelling business for us to run. So admittedly, this year is really superior. Next year, it looks pretty darn good.

Okay. And if I could squeeze in one last quick one. On the non-COVID Nucleic Acid piece. You touched on 3Q '21 having that tough compare, which you called out at the time. But if you just look at this year on a dollar basis, 1Q 2Q, 3Q, the revenues for non-COVID are flat and they actually be down sequentially, if it wasn't for that canceled order in 2Q. So is this sort of what we should be expecting from just progression over the course of the year? Because I think we kind of anticipated some sequential ramp as the year went forward. So anything to touch on there in terms of timing through the course of the year, how that should trend?

Yes. No, it's really one of those things that doesn't just step nicely every quarter for various reasons. Like I said, sometimes you get bulk orders just for CleanCap. Sometimes we have multiple jobs getting wrapped up and getting built out as they relate to our CDMO business. So we just don't have a quarterly rhythm just because we haven't got enough customers progressing into those later phases that it smoothed it out. So we had a very strong Q3 last year, it stepped down in Q4 this year. It's going to step up in Q4. It's just the nature of the business. I think to grow those should smooth out a little bit, but that's just the nature of what we're seeing right now.

Yes, it's a little bit noisy, and that's a lot of the smaller numbers probably as much as anything else.

Our next one comes from the line of Dan Arias with Stifel.

Carl, just wanted to ask a couple of quick ones here. Just thinking about some of the out-year drivers that you have working for you to your point prior. One of the things that came out of that Analyst Day that you did at the R&D Day was that there are things in the pipeline that use a lot more CleanCap, actually substantially more in some cases. Do you think the '23 is the year where that might start to matter, or do we need to just get further down the development pipeline process in order to really kind of move the needle there?

Yes, that's a thoughtful question. I would say I agree with Kevin on the characterization of '23 as a transitional year. I don't think you're going to see many, if any, of those therapeutic compounds, which is what you're alluding to there, get clearance and commercial traction right away. So I think those are more longer-term drivers of demand. But certainly, there's a lot of people doing. And as you can see from our customer account numbers in each of the various segments, they're all increasing robustly.

Okay. Helpful. And then just maybe a last quick one. When it comes to Pfizer and the vaccine forecast, do you get that forecast ahead of the guidance for the year? Or do you find out about it basically when we do when they get on the call for investors? I'm just generally curious.

Interesting question. Let's just say that we do pay very close attention when Pfizer says something 2 days before our earnings call. Was that clear enough?

Our next question comes from the line of Dan Leonard with Credit Suisse.

Carl, I have 2. So previously, Carl, you gave a $2 billion dose number as the backbone for your 2023 COVID forecast, COVID CleanCap forecast. What's the new dose number you're assuming behind the $100 million view for endemic COVID?

I basically divide it by 2, since we're talking about moving it from $200 million on a low end down to $100 million. So I think it's that degree there may be some inefficiencies that would cause it to be a little bit higher. But I think that's overall generally a good estimate.

Okay. And then my follow-up, just can you comment at all on margins in 1H versus 2H in 2023?

No, we haven't gotten to that point with our guidance yet. So I think that's a stay tuned for the end of the year, Paul.

We have one last one from Brandon Couillard with Jefferies.

Just a housekeeping one for Kevin. The large customer orders that didn't recur in the NAP segment from 3Q last year. Could you just size that? And is there another similar headwind on a year-over-year basis in the fourth quarter?

We experienced a decline in Q4 of 2021 compared to previous run rates in the NAP business, primarily due to a specific order exceeding $10 million from a customer, which was associated with non-COVID demand. We noted a similar situation in the third quarter of 2021. Although it's a different customer in the fourth quarter, we expect some demand for CleanCap products, which is already secured for Q4 of 2022, alongside continued positive momentum in our mRNA services, contributing to a strong finish for Q4 of 2022 in the non-COVID sector.

And last one, Carl, is it safe to say, based on your comments that the CEO transition being in flux won't diminish your appetite or willingness to act when it comes to target assets you'd like to pursue?

Absolutely not. We're fully engaged in the same things that we were looking at a month ago, and our appetite for those deals remains as robust as it was the first time around. Another way of saying, we're not going to let ourselves get distracted.

Yes. I'd like to hand it back to Deborah Hart for closing remarks.

Well, thanks, Doug, and we want to thank you all for joining today. We'll be participating in a couple of financial conferences this quarter. So you can find out more details about that from our website. Feel free to call me with any additional questions. And we hope you all have a great evening. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.