Maravai Lifesciences Holdings, Inc. Q1 FY2023 Earnings Call

Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Maravai LifeSciences First Quarter 2023 Earnings Conference Call. Deb Hart, Head of Investor Relations, you may begin your conference.

Thank you, Rob, and good afternoon, everyone. Thanks for joining us on our first quarter 2023 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. As you can see on our agenda for today on Slide 2, Carl will first provide you with a business update, then Kevin will review our financial results and guidance. Trey Martin, President of our Biologics Safety Testing; Drew Burch, Executive Vice President, Nucleic Acid Products; and Becky Buzzeo, our Chief Commercial Officer, will join the call for the question-and-answer session following the prepared remarks. We remind you, management will make forward-looking statements and refer to GAAP and non-GAAP financial measures during today's call. It's possible that actual results could differ from management's expectations. We refer you to Slide 3 for more detail on forward-looking statements and our use of non-GAAP financial measures. Our just issued press release provides reconciliations to the most directly comparable GAAP measures. Please also refer to Maravai's SEC filings for additional information on the risks and uncertainties that may impact our operating results, performance and financial condition. Now I'll turn the call over to Carl.

Well, thank you, Deb, and good afternoon, everyone. We appreciate having you join us for our call today. Let me give a quick recap of the quarter and highlight some innovative new products that we are introducing and provide a few business updates before turning the call over to Kevin. Let's start with our first quarter results on Slide 5. Today, we reported $79 million in revenue for the quarter, $24 million in total adjusted EBITDA and $0.03 in adjusted fully diluted EPS for the quarter. Revenue results were within the range of expectations for the first quarter that we shared with you during our fourth quarter conference call. While our performance in the quarter was consistent with our expectations, like other players in the field, we do note that broader market factors will likely continue to impact the business into the second quarter. Kevin will go into more detail on the results and our revised guidance later in the call. Our Nucleic Acid Production business had revenue of $61 million in the first quarter. This includes an estimated $45 million of base nucleic acid production revenue. The Biologics Safety Testing revenue was $18 million in the first quarter. On Slide 6, you'll see that our adjusted free cash flow in the quarter was $23 million. Cash on hand at the end of the quarter was $628 million, down only $4 million from the year-end despite our having paid $70 million upfront in the quarter for the Alphazyme acquisition. Debt sits at $537 million gross. Thus, we maintain a $91 million net cash position. This puts us in a great position to fund our long-term strategy of growth through organic investments and our own capabilities, while we simultaneously pursue external M&A. We continue to see multiple strategic opportunities in our space where we will endeavor to responsibly deploy some of those cash. As we close out the first quarter of the year, we remain focused on: first, expanding our product portfolio; second, advancing our market leadership in the mRNA space; and finally, accelerating the introduction of scientific innovations in ways that support our customers' rapidly evolving needs while continuing to invest in operations, manufacturing and people to support our base business growth. To the first point on product portfolio expansion and our focus on innovation, let's now turn to Slide 7. As many of you know, CleanCap is not a single product, but rather a portfolio of capping analogs. We have several versions of CleanCap that we have developed for both messenger RNA synthesis and for self-amplifying messenger RNA. Yesterday, at the TIDES USA Scientific Meeting held here in San Diego, our Chief Innovation Officer, Dr. Kate Broderick, introduced the newest addition to the CleanCap product portfolio, CleanCap M6, which we are extremely excited about. CleanCap M6 is our most robust capping analog to date and represents a significant advancement in the field of messenger RNA capping. We believe this innovative capping analog to be the most efficient capping strategy now available in the market, and we believe it will represent the next generation of novel mRNA caps. Of particular note is the fact that it produces the highest in vivo protein expression we have seen for any CleanCap analog so far. In our comparison studies, CleanCap M6 consistently produced over 30% higher protein expression than comparable enzymatic capping methods. Higher expression can result in greater potency or more effective dosing of messenger RNA drugs. Similar to our other CleanCap products, CleanCap M6 generates a naturally occurring Cap 1 structure via co-transcriptional capping. This provides our customers with the benefit of a simplified and higher-yield messenger RNA manufacturing process with a shorter manufacturing time, which leads to better economics and mRNA production. Slide 8 provides a quick recap of the favorable attributes of CleanCap M6. We know the CleanCap already is the most economically favorable capping process on the market. We recently commissioned a strategic consulting firm to study manufacturing costs associated with the three methods of mRNA capping: enzymatic; ARCA, which stands for anti-reverse cap analog; and CleanCap. The study considered the complete economic picture around mRNA capping, including actual customer experiences, costs and future needs. Due to messenger RNA's inherent instability, in vitro synthesis of mRNA can be a challenging biochemical reaction, and the need for high purity necessitates stringent purification and QC testing. As we saw in the recent study, depending on the technology, equipment, downstream purification processes and user expertise, the expected overall yield of cap mRNA can vary greatly, ranging from 50% with enzymatic capping to 95% associated with the use of CleanCap technology. And I'm just back from visiting one of our customers who has been conducting premarket evaluations of M6 and some of our even newer capping analogs. And they're very excited about the performance improvements being seen in their own hands. In fact, we've already begun to take initial orders for this new product. Slide 9 shows the direct reagent costs for the GMP manufacturing of 1 gram of messenger RNA using each of the three outlined mRNA capping methods. This figure demonstrates how enzymatic capping and ARCA require additional reagent costs for the same amount of product due to their reduced yields per reaction. It is estimated that both enzymatic capping and ARCA technologies lead to higher total reagent cost per quantity of produced mRNA: An estimated $248,000 for enzymatic; $221,000 for ARCA; and $215,000 for CleanCap technology. This data demonstrates how influential recovery rate or yield is on the total reaction reagent costs. Beyond this, there are additional advantages to CleanCap, including the reduced purification costs, time savings and producing products with a simpler manufacturing process and labor savings. Slide 10 compares the total manufacturing cost of CleanCap versus ARCA and enzymatic capping. As you can see, CleanCap is 30% less than enzymatic capping and 20% less than ARCA. As a result of this third-party analysis, we have developed robust selling tools for our business development and commercial teams to use to help drive share gain for the CleanCap portfolio, especially versus enzymatic capping methods. The CleanCap M6 analog adds to these economic benefits with the additional enhancement of higher protein expression from the equivalent amount of mRNA. Together, we think that this is a game-changing analog for manufacturing more potent messenger RNA therapeutics and vaccines. Sticking with this new product innovation theme, let's turn to Slide 11. Also at TIDES Scientific Meeting this week, Glen Research, our high-quality provider of fluorophores, quenchers, labels and modifiers for oligonucleotide synthesis, published Glen Report 35.1. The Glen Report has been a consistent publication since 1987 and serves as a well-regarded resource for the many scientists engaged in DNA and RNA research and oligonucleotide synthesis. Four new products were announced in our latest issue, as Glen continues to expand the breadth of its oligonucleotide synthesis products. One, I'd like to highlight today, is the expansion of our proprietary Serinol product line with the launch of three prime Azido-Modifier Serinol CPG, or Controlled Pore Glass, imports. Click Chemistry is a really popular method of conjugation and bio-conjugation, and its discoverers were awarded the 2022 Nobel Prize in Chemistry. Most people will use one molecule labeled with an alkyne group and another labeled with an azide group. When mixed, the linkage formed between the two entities can feel as simple and easy as a click. Glen Research has now expanded our set of products to facilitate the use of oligonucleotide in Click Chemistry. The three prime Azido-Modifier Serinol CPG is convenient to use for this application and produces excellent results. Due to its advantages over other approaches, it is possible that this new support may become the most popular method for preparing azide label oligonucleotides. As you can see, we believe that investing in new product innovation is a key driver for creating value in this part of our business as well. We are in an exceptional position to win customers early for both product and technology adoption. Turning to our commercial strategy. By winning early in the discovery process, especially with our CleanCap technology, we are able to cross-sell NTPs and other raw materials at earlier stages of the clinical pipeline. And that is exactly what our commercial team for NAP is tasked to do. When first with CleanCap, at the earliest stages of the clinical pipeline, cross-sell NTPs and other raw materials and then grow with our customers to support them with their later-stage developments. This can include supporting them with both RUO and GMP materials, depending on their needs and when they choose to move to higher-grade inputs. Let's turn now to Slide 12, and let me share some data with you on our progress with customer adoption. One year ago in the first quarter of '22, we had 185 CleanCap reagent customers on a rolling 18-month basis. As we closed Q1 of this year, that number is now 312 customers, up 69%. These are customers that order CleanCap as a stand-alone reagent product. We shipped it to them or their preferred contract manufacturer, and they then use our capping analogs in their own messenger RNA manufacturing processes. This could be for research and discovery activities, preclinical development and, with our GMP offering, clinical manufacturing of messenger RNA. We also track our CleanCap mRNA discovery customers. These are customers at the very early stages of their programs who look to TriLink to manufacture messenger RNA 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 585 last year to over 600 customers today, up roughly 3%. As these early customers continue through their discovery work, we expect many will mature into mRNA GMP services where they would take several of their top candidates and upgrade them to our GMP manufacturing process, which includes process development to a larger scale, phase-appropriate method validation and collecting documentation that would support an IND filing. Our GMP mRNA customers have grown from 55 to 61 over the last year, up 11%. And lastly, the number of our GMP mRNA customers who have advanced in the clinic is now 26 programs. So let me now share a couple of examples of what this customer journey means over time to Maravai from a revenue standpoint. Slide 13 shows an example of a customer we started working with a few years ago in their early discovery phase. They now have several programs underway for precision genetic medicine. In 2018, they were less than a $1 million revenue contributor. By 2022, they were ready to move to a Phase I trial and ordered nearly $8 million products from us. This particular customer uses CleanCap and our N1-Methyl-Pseudouridine-Triphosphate. This customer is also currently evaluating and using Alphazyme enzymes. Slide 14 is an example of a different customer that we have worked with on nucleic acid services. Their target is a personalized cancer vaccine. This customer represented $102,000 in revenue in 2018, and in 2022 was over $3 million customer. This customer uses our GMP CleanCap mRNA manufacturing and began their product development journey with us during initial R&D construct screening. We worked closely with them to facilitate their construct selection and manufacturing of their various GMP batches. As these customers progressed through our GMP services with their preclinical and early clinical phase work, we also want to support them through later-stage development, which is why we invested in our new Flanders facility. So you can see, we have a unique opportunity to drive CleanCap inclusion across our growing mRNA customer base while providing other critical GMP raw materials to improve in vitro transcription reactions and grow with our customers as they advance their own programs. Now turning to Slide 15 and our biologic safety testing business. Our products and services in this business support the cell and gene therapy, vaccine and biologics drug manufacturing markets by providing process-related and purity analytics, along with offering innovative viral clearance prediction solutions that help our customers ensure the safety of their biopharmaceutical products. We continue to innovate here to bring improved products to market to support our customers. Late last year, we announced the launch of the MockV RVLP Kit. This kit enables bioprocess scientists to quantify the removal of retrovirus-like particles, or RVLPs, produced endogenously by Chinese Hamster Ovary or CHO cells, during biopharmaceutical manufacturing. Today, we are happy to report strong market uptake in this kit and technology by several major biopharma companies and CDMOs. In addition, we are closely monitoring a recently published draft revision of the ICH, which is the International Conference on Harmonization, guideline on viral safety evaluation of biotechnology products derived from cell lines of human or animal origin. This considers the use of CHO-derived endogenous viral particles, or RVLP, for viral clearance experiments. If recommended in the final published guideline, this could be a very positive tailwind for the entire BST business. In March, our BST team launched the PG13 HCP ELISA Kit. Bioanalytic customers can use this kit during purification and process development as well as in quality control and product release testing. The PG13 kit represents the 24th expression platform we provide analytics for and solidifies our commitment to supporting cell and gene therapy. As in NAP, we continue to innovate and scale our offerings in DST to ensure superior technical support, the highest quality services and offerings, and the most comprehensive catalog of products to meet our customers' needs. Now moving on to Slide 16 and some organizational updates. First, we're happy to welcome Drew Burch to our leadership team. Drew joined us in April as Executive Vice President of Nucleic Acid Products. For those of you not familiar with Drew, he has over 30 years of strategic operational, commercial and financial experience in the life sciences industry. I look forward to him playing an incredibly important role on our team as Maravai continues to scale and differentiate itself as a trusted supplier of nucleic acid and chemistry products for the life sciences industry. I'm confident he will build on the momentum of the NAP operating division and help us continue to provide best-in-class products that support the important work of our customers. Second, the integration of the Alphazyme acquisition is going very well. We are actively qualifying their enzymes into our nucleic acid services workflow and building their commercial team. We've also decided to add to the Alphazyme facility footprint with the addition of an adjacent 4,000 square feet to provide an expanded R&D space. Alphazyme extends our capabilities in the manufacturing of critical enzymes that support flexible and scalable production within a universally acceptable infrastructure, and we remain incredibly enthusiastic about our combined opportunities. We also remain active in pursuing other inorganic growth opportunities and look forward to being able to announce additional acquisitions in 2023. We are committed to expanding our reach as a key specialized raw material supplier, and we are actively working to increase our international footprint so that we may improve our ability to directly serve our global customer base. Now before I turn the call over to Kevin, I'd like to let you know that in late March, we published our second Environmental, Social and Governance report. This report covers the 2022 fiscal year and provides an expansive look into our rapidly evolving ESG program, with tangible examples of how we are making a positive impact on stakeholders and positioning our business for sustainable growth. I highlighted some key aspects of our progress during our fourth quarter call, but I encourage you to review the report on the Investor section of our website. The comprehensive 41-page report is the culmination of our enterprise-wide effort to deliver holistic value to our stakeholders while scaling operations and managing rapid growth in a socially and environmentally responsible manner. On Slide 17, you'll find some of the highlights from the report. We are very proud of the team's work to date and are committed to being a strong corporate citizen. We look forward to keeping you apprised of our journey. I'll now ask Kevin to cover more details on our first quarter performance and provide an update on our multiple facilities expansion projects.

Thank you, Carl, and good afternoon, everyone. I'm happy to review our financial results for the first quarter and to provide an update on the multiple facilities expansions we have underway. Starting on Slide 19. As you've seen in our press release this afternoon, our Q1 2023 revenues were $79 million. As we stated in our Q4 2022 earnings call, we anticipated Q1 2023 revenues to be in the range between $75 million to $80 million, and thus, our performance for the quarter was in the high end of our anticipated range and was consistent with our expectations. We present basic EPS, fully diluted EPS and adjusted fully diluted EPS. Basic EPS as 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 noncontrolling interest divided by the weighted average for both Class A and Class B and other dilutive securities to the extent they are dilutive. And 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. Both our basic and fully diluted EPS for the quarter were $0.00 while adjusted diluted EPS was $0.03 per share. This was also in line with our internal expectations for the quarter. Our GAAP-based net loss before the amount attributable to non-controlling interest was $1.3 million for the first quarter of 2023, reflecting the lower revenues and the impact of acquisition-related costs. Our adjusted EBITDA, a non-GAAP measure, was $24 million for Q1, resulting in an EBITDA margin of 30% in Q1 2023. Certainly, our EBITDA margin was lower than we have seen in a while as a result of the lower revenue base. However, even with our revenue base being the lowest we've seen in almost three years, our margin is still very strong when compared to most companies in our space, including much larger and mature companies. In fact, when we look at the selection of six companies that have reported here already in Q1 2023 and had adjusted EBITDA, including, in alphabetical order: Avantor, Bio-Techne, Danaher, Repligen, Sartorius and Thermo Fisher, our EBITDA margin of 30% compares well to the average of that group of six companies of 29%. This is true even in a low revenue quarter and with substantial ongoing investments in our overall infrastructure to support our future growth. We continue to invest and stay laser focused on our long-term strategic objectives, which require continued investment in our overall capabilities. Let's move to Slide 20. As Carl mentioned, we continue to have a strong balance sheet and cash flows. Our cash and cash equivalents as our GAAP metrics totaled $628 million at March 31, 2023, and we generated $85 million in cash flow from operations in the first quarter, mostly based on the accounts receivable collections from a strong Q4 2022. This strong operating cash flow allowed us to fund both the Alphazyme acquisition in the quarter as well as our capital expenditures in the quarter. Our adjusted free cash flow for the quarter was $23 million. Adjusted free cash flow and non-GAAP measure we define as adjusted EBITDA less capital expenditures. We ended Q1 with $537 million in long-term debt and $620 million in cash. This cash and debt structure allows us maximum flexibility as we continue to actively evaluate additional M&A opportunities. As we look at our treasury operations, we've been tightly managing our cash. With the interest cap contract we have in place, our gross interest expense is effectively capped at 6.5%. And with our excess cash sweep activities and nice yields on liquid overnight investments, our overall net interest expense sits below 4%. Now turning to Slide 21, I'll provide some more insights into our business segment financial performance for the quarter. As Carl mentioned earlier, our Nucleic Acid Production business represents $61 million in revenues for the first quarter. Nucleic Acid Production represented 78% of the company's total revenue in the quarter and generated $28 million in adjusted EBITDA in the quarter for a segment margin of 45%. CleanCap revenues from our COVID-19 vaccine customers were approximately $16 million in the first quarter of 2023, in line with our expectations for the quarter. Now we see this going down to about $10 million here in the second quarter of 2023 and maintain our guidance of $100 million in total contributions to our 2023 revenues. We did see additional orders for COVID-related CleanCap demand and have brought the total percentage of our full year total shipped or committed up to about 65% of our full year estimate. Our Biologics Safety Testing business contributed 22% of the company's revenue in the first quarter. Our Biologics Safety Testing business delivered nearly $18 million in revenues in the quarter and $14 million of adjusted EBITDA in the quarter, a margin of 78%. Our Biologics Safety Testing business hit the highest revenue level since Q1 2022 and was up 14% from the last quarter of Q4 2022. We believe we're seeing the leveling out of the impact of China shutdowns, and we believe we will see a return to normal business in the China region in the mid to late second quarter here of 2023. Corporate expenses that are not included in the segment adjusted EBITDA totals above were $18 million in the quarter, increasing from both the prior-year first quarter and slightly from our most recently completed fourth quarter of 2022. These expense increases are associated with the continued build-out of our shared services functions. Now moving to Slide 22 and an update on our facility expansion project. We have completed building construction of Flanders 1 and taken occupancy, and we expect the same for Flanders 2 in the second quarter. We also began working out of our new building for our Biologics Safety Testing business. Our teams remain extremely enthusiastic about the unique capabilities we can offer our customers from our expanding facility footprint. Turning to Slide 23 and our guidance. Our first quarter results came in as anticipated, yet we acknowledge that the broader biotech market is sluggish and will likely impact our original growth projections for the year. Thus, we are updating our 2023 full-year revenue guidance down $20 million at the midpoint to a range of $400 million to $440 million. This puts our base business revenues in the range of $300 million to $340 million. With regards to the gating of overall revenues, we see Q2 had a total of around $70 million or so, which includes the previously mentioned approximately $10 million contribution from COVID CleanCap demand. We then anticipate a more normal growth in the second half of the year, with the remaining COVID CleanCap contribution most likely occurring in Q4. We estimate our adjusted fully diluted EPS in the range of $0.27 to $0.33 and adjusted EBITDA of between $155 million and $175 million. Our guidance is also based on the following expectations, as listed out on Slide 24: Interest expense net of interest income between $18 million and $22 million; depreciation amortization between $38 million and $42 million; stock-based compensation, which we show as a reconciling item from GAAP to non-GAAP EBITDA to be $34 million to $38 million. This also includes a fully converted share count of 252 million shares and an adjusted effective tax rate of 24%. Thank you for your time today and for your support of Maravai. Now I'll turn the call back to Carl for some final remarks.

Thanks, Kevin. So to wrap up on Slide 26, we are playing in the right target markets with strong leadership positions and exceptional opportunities for base business growth as we continue to innovate in messenger RNA and build our product portfolio in other adjacent high-value areas. We are putting our strong cash flow to work with organic investments in our facilities, human capital and product innovation. We will also continue to look for opportunities for inorganic investment to bolster our market position and provide our customers with additional solutions. We are committed to building a strong foundation for long-term sustainable growth of our base business, and we'll continue to focus on people, innovation and operational excellence as our three strategic pillars. I would now like to turn the call back over to Rob to open the line for your questions.

Your first question comes from Conor McNamara from RBC Capital Markets.

Thank you for taking the question. I appreciate the insights on the CleanCap cost and found the slides on CleanCap and total production costs very helpful. I have a financial question and a business question. First, regarding the $20 million revenue hit, Kevin, could you explain its origins? You mentioned inventory normalization in the press release and referred to a slowdown in the biotech sector. Which customers are affected and where exactly does this impact lie? I'll leave it at that.

Yes. Thanks, Conor. I would say we currently are seeing softness sort of in both the businesses, I would say, what we thought was going to be sort of contained more to probably the first quarter has trickled in here to the second quarter. I think now we see in our Biologics Safety Testing business, probably more in the mid-single digits growth for the year, and then the base NAP business probably more in the mid-teens. So I think you're seeing a few hundred basis points up to 500 basis points kind of coming out of both of those full years and really just reflecting kind of what we're seeing here in the current quarter being Q2 as opposed to our original expectations and the ones we shared on our last call.

Got it. Regarding the GMP customers, could you clarify? I recall that the last time you provided this information was in Q3 2022, and the customer number was higher then. Is this decrease due to programs exiting the clinic, or can you provide insight on how that number has changed and how we should view it? You mentioned going from 55 to 61, but I believe the number was higher before.

I honestly don't recall. Kevin, I don't know if you have in front of you, or Deb, anything that would give us some color there.

No, I'm just curious if that's like net customers because I'm assuming you have customers that go into the clinic and customers that come out as programs maybe don't get to the next endpoint. So I was just curious if there's a way to think about kind of the progression of that. And if it's seasonal or anything like that?

Kevin?

Yes. The GMP mRNA CleanCap customers have increased to 61, up from around 58 a year ago. In the clinic, we are tracking 26, which is about the same number we've seen for a few quarters. There hasn't been much movement from the preclinical phase to the clinical phase in our pipeline, and we only have one product currently on the market, so there isn’t much turnover at this time. It’s more of a gradual advancement in those two pipelines.

Okay. And can I sneak one more in, I'm sorry. Just on the M6, does that expand the total addressable market? Does that give you more potential markets to go after that just make you a lot more competitive in the market as you call on customers?

Well, I think right now, we're focused on competitive share gains using M6. And we think that, that will go directly against the enzymatic capping methods. And the bottom line, the reason for that is that with an increase in yield and effectively protein production capability or equivalent amounts of mRNA, that will get everybody's attention, even if they've been long-time users of enzymatic methods and of enzymes. And the original CleanCap were relatively close, but it was easy for them to stay with the enzymatic methods. I think with this and substantially improved performance, it will make them take a much more serious look at CleanCap than they might have before.

And your next question comes from the line of Catherine Schulte from Baird.

I guess, first, you highlighted a couple of customer examples in terms of the ramp up sales over a four-year period, and that's clearly a meaningful driver for U.S. programs progress. But I was wondering for guidance for this year, if we look at your base NAP guidance, is there a way to think about how much of that is being driven by new program starts versus programs you're already involved in that are ramping up?

Well, Catherine, it's a good question. I think Kevin can comment on his view and I'll fill in afterwards.

Yes. Thanks, Catherine. I would say that at this stage, most of what we're seeing is really the progression, I'd say, of the existing customer base, and that really goes to our strategy of really locking in the base technology as early as we can and then growing with these customers, both from a pace perspective as well as a shared-wallet perspective, as well as the migration from RUO to GMP level products, and that's really our focus. So embedded in our guidance is really that existing customer base. It does not incorporate picking up really meaningful additional customers that haven't been part of our customer family thus far.

Yes. And I would just simply add, Catherine, that given the size of orders from customers in their initial year or two as they go through the discovery process, those are relatively less significant to us than the growth of those programs as they grow with us down the road. And that you can see in both of those customer examples.

Yes. Okay, got it. And then on EBITDA margin, if you're expecting to reach about 39% for the full year at the midpoint of the guide, should we anticipate exiting the year more like in the mid-40s if we think about the back half ramp? And is that a fair way to think about the starting point for '24?

Yes, that is what the guidance suggests. We could return to the 40% to 50% range, potentially at the higher end due to the expected additional COVID revenues in the fourth quarter. From our perspective, it's primarily about the revenue contribution from our workforce and facilities. Even in a weaker quarter, we achieved a 30% margin, which is slightly better than our peers. The advantage we have is strong cost control, well-defined processes, and facilities that will allow us to increase that margin as our revenue grows. The key will be the revenue figures as we move into 2024. Long-term, margin expansion plays a significant role in our business modeling.

And your next question comes from the line of Matt Sykes from Goldman Sachs.

Could you provide more insight into the softness you're experiencing in Q2? It seems there are several headwinds, such as emerging biotech spending or inventory issues. I would appreciate clarification on whether one of these factors is more significant than the other, or if both are contributing to the situation. Understanding the dynamics and duration of this softness is crucial for our modeling efforts.

Matt, I don't think we have anything to contribute beyond what the eight to ten companies that have reported this quarter have shared. Our experience aligns with theirs, though there are minor differences across various segments of the business. For instance, there has definitely been some inventory buildup related to the COVID aspect, which is well-known among those involved in vaccine production. In contrast, other areas may show more weakness linked to CDMO growth rates or the recovery in China. All these factors are at play, and I can't single out one that is more significant than the others. Kevin, do you want to weigh in on that?

No, I think that's accurate, Carl. We are experiencing a variety of factors. It's quite challenging to identify the specific contributors individually. At this point, we definitely see some effects from China and inventory depletion as temporary. As we approach the first half based on our guidance, the focus will shift towards the underlying demand from our existing customers. As we examine our customer base and its growth, along with the expanding number of programs and additional products and capabilities we offer, we feel optimistic about our potential to thrive once these challenges ease in the second half of the year and into 2024.

Got it. I appreciate it. And then just my next question is just if you look at the Flanders build out, Phase 1 complete. And then we complete the other one in the second quarter, I know in the past that there's been some customers who have not been able to transition to GMP or you've not been able to transition with them. In terms of closing that gap and being able to solve for GMP production for what you're doing in RUO, do you feel that once we get through sort of the fully complete Flanders facility, that you'll have alleviated a lot of those issues that you might have had in the past with some of those customers?

Well, why don't we ask Becky Buzzeo to comment on that from her dual roles both on the services side of the business as well as the commercial side. Becky?

Thanks, Carl. Yes. So our facility today, we do both the RUO and the Phase 1 manufacturing of the mRNA. And we do believe with the addition of our Flanders 2 facility that we'll be able to meet customer needs who want to go beyond Phase 1. That is the intent of our Flanders 2 building is to go into late-stage manufacturing and have the ability to really transfer those clients over, very easily. And it's only a couple of miles up the road here, and have a strong MSA team to do that tech transfer and then be able to follow the journey of that molecule into late-stage manufacturing.

And your next question comes from the line of Dan Leonard from Credit Suisse.

So my first question, the decremental EBITDA margins on the $20 million reduction in your revenue forecast are pretty steep. It suggests that the change in sales forecast is fully dropping through. Can you clarify whether that's accurate and that you're not taking any countermeasures in response to the change in sales forecast? Or are there other moving parts to consider?

Yes. Thanks, Dan. I think specifically, the midpoint of the revenue decline was about $20 million, I believe, the midpoint of the adjusted EBITDA guidance is about $15 million. So it's about 75% of that dropping through. And really, that just goes to some of the things I mentioned previously. We have a very high variable contribution margin. That's great when things go up. It's a little more painful as things go down, but that's just sort of the nature of what we have here. We don't have a lot of variable costs sort of below the gross margin line. And from our perspective, a lot of what we're investing in is really for the future, and we're going to continue to do so. So if you look at our investments in innovation, a lot of which you saw some of the fruits of which were here with M6. Additionally, the commercial build-out, which is incredibly important to us, as far as driving and seeking and realizing that long-term growth rate by making sure we get all the customers we can, globally adopting CleanCap and using our products and services as a commitment and investment we're committed to. And then lastly, to finish up of the facilities footprint. Again, something we started a couple of years ago, and we think is critical to our strategy as we move forward. So as you see the revenue line move, you're going to see a high proportion of that impact our adjusted EBITDA just because of the lack of below-the-line variable costs.

I appreciate that. And then my follow-up question, Kevin, is on the phasing of the year on both revenue and margins. Did I hear correctly that the COVID CleanCap expectation for Q4 is around $75 million? And if that's the case, what are the implications for margin phasing throughout the year?

That is not what we said, I do not believe. No, what we said was we anticipate about another $10 million or so of COVID-related CleanCap contributions here in the second quarter. We also mentioned that between what is shipped and what is committed, we have about 65% of our $100 million guidance in the book. And then the remainder, which would imply roughly $35 million, would likely be in the fourth quarter?

In the back half. It would be in the back half.

Yes, it would be in the back half. I would say that some of that committed 65% is shipping in the third quarter as well. I was more referring to the delta between the $65 million and roughly in the $100 million, which we would then be anticipating that would spike up in the fourth quarter part of the year.

Your next question comes from the line of Dan Arias from Stifel.

Thanks for the questions. Carl, I appreciate the update on the number of customers that you now have in the mix here. Is there anything you can say about that increase if we just separate out the non-COVID accounts or maybe even the vaccine accounts entirely? Just trying to get a sense for the way in which things are tracking in some of these emerging areas that are obviously a big focus for people.

We are not seeing new COVID accounts, but we are experiencing ongoing activity from our existing clients at various stages. The Pfizer-BioNTech program is the largest among them, but there are several others as well. It can be challenging for us to distinguish between therapeutic and vaccine applications since the same companies are involved in both, as seen in their pipelines. Companies like BioNTech, CureVac, and Pfizer are leveraging their platform technology across multiple projects. While we've dedicated a lot of time to evaluate those focused solely on COVID, we believe we have a solid understanding, though there remains some uncertainty in those figures.

Okay, okay. And then maybe on safety testing, Biologics Safety Testing. Kevin, you mentioned expecting some normalization in China in the back half. Does that mean that we should think about sort of steady acceleration for BST across the quarters? Or is it better to think of some back-end loading in order to get to that, I believe, is a mid-single digit number that you talked to for the year?

Why don't we ask Trey to comment on the commercial side, and then you can follow up with the numbers.

Yes, thank you, Carl. We have noticed a general softness across the regions, similar to many others. We reported on the softness in China that began in the second half of 2022. However, we are seeing some positive indications from customers in the industry that suggest we will begin to recover from that situation. Therefore, we believe it is not a matter of if recovery will happen, but rather when it will occur. We are optimistic about returning to the expected market growth rates in the second half of the year, which generally averages in the mid-single digits that Kevin mentioned.

Kevin, anything to add there?

No, I agree. I think Trey summed it up perfectly.

And your next question comes from the line of John Sourbeer from UBS.

I guess it's on the base nucleic acid segment. I was wondering just if you could break down even a little bit more there on what percentage of those customers are pre-revenue biotech. And is that really where you've seen the slowness? Or has it been more broad-based within that, for the updated guidance?

Yes, John, I would say that as we mentioned earlier, we haven’t observed any pre-revenue biotech customers completely shutting down their programs. In some cases, they have scaled back the number of programs they are pursuing or have shifted their focus to concentrate their resources on fewer programs to better manage their internal processes. However, we’re not seeing pre-revenue biotech companies abandon or withdraw from mRNA if that has been their area of focus.

Got it. And have you quantified what percentage of revenues that would be?

We have a couple of cuts at it. As you might imagine, we have to do not only our own work on our book with some primary research. I would say the numbers I have seen to date are a little bit immature. And I actually wanted to hold off to give you a little bit better and more comfortable insights into the next quarter. So we think we'll have something for you by that.

Great. And then just one last one here. You mentioned a couple of times, I think, in the prepared remarks, looking to do something inorganic. Any just additional color on where you think there's opportunities to fill in, should be something similar kind of to some of the tuck-in deals that you've done over the last year?

Yes. Look, I mean, we're super happy with the Alphazyme team and delighted to have them as part of the organization. I think that fits the historical model of Maravai exceptionally well. I think we will continue to look for those gems when we can find them. And then we're trying to be a little bit more creative when there may not be a number of assets currently on the market or at prices that we would consider to be reasonable to look at deals that might be slightly more complex. It can involve the carve-out of businesses of other companies and/or unique structures that control some businesses in for us. So I think you may see a little bit more creativeness in deals. Hopefully, they'll be a little bit larger in size in terms of immediate revenue contribution, but Alphazyme still remains exemplary of our sweet spot.

And your next question comes from the line of Tejas Savant from Morgan Stanley.

Carl, Kevin, I want to go back to an earlier question right on the top of the call, actually, around those GMP customers within NAP. So I think the question is basically that in 3Q, you had about 68 of them. Today, you've shown 61. So perhaps, can you just bridge us the number of customers you have today versus last fall? It's an important metric for a lot of investors in light of the loss of business you've highlighted earlier not having GMP ahead of Flanders. So just any context, color or bridge you could provide would be helpful.

As I said Tejas, I don't have the numbers in front of me, so I can't.

Got it. Okay. Regarding biologics safety testing, you mentioned the change in the international conference and harmonization guideline. What timeframe do you anticipate for it to have a significant impact on your business if everything goes as planned? Additionally, considering this guideline update, how disruptive might it be for customers who are currently using alternatives? Or is that not really a concern?

Well, look, I think that it can be very disruptive mainly because of the costs and risks associated with late-stage viral clearance testing the way it's currently practiced. So you bet everything on your final test of that. And at the end of the day, it could fail a test, then you have to get back to development of your processes in such a way that it remediates problems that you saw going to go around looking at months, if not years, to a development program. So we think that the availability of the product, coupled with the discussion about the guideline changes comes really at a perfect time. And even if customers are not immediately incented to change their historical gold standard final clearance testing, they should certainly be very interested in utilizing the kit along the way as a surrogate marker for whether they might have a product at the end of the road.

Got it. That's helpful. And then the last question for me, Carl. I know you mentioned that you want to wait until the next quarter regarding your SMID-Cap biotech exposure. However, as you speak with your salespeople, could you share any insights on how many of your existing customers plan to raise funds in the next 12 months? I know you've indicated in the past that many of these customers raised significant capital during the pandemic due to the excitement surrounding mRNA. Any updates on those discussions would be appreciated.

So we have certainly not seen new money come in, Tejas, if you're looking at it from that perspective because of the obvious factors, that thinking, way out over the last 18 months. So I think the demand that we're seeing here is from pre-established companies who raised a significant amount of capital during that period of time we talked about. Are they husbanding that capital a lot more than they were? Probably yes. And are they less certain about their ability to get another round? That would be certainly yes. So I think that it's a mix, but we were fortunate there was a very wide open window. And that's sort of like 2020, 2021 timeframe, and that's still sustaining us. Others may have a little bit of different exposure. And particularly as you're thinking about biologics for small molecules, that trajectory appears to be different than the cell and gene therapy world.

I will now turn the call over to Deb Hart for some final closing remarks.

We just wanted to thank you all for joining us today and taking time out of your day. Feel free to contact me with any additional questions and apologies to anybody that was still in the queue that we didn't have time to get to. Thank you very much. Have a nice evening.

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