Earnings Call Transcript - MRVI Q4 2023

Operator, Operator

Good afternoon and thank you for joining us. We would like to welcome everyone to the Q4 2023 Maravai LifeSciences Earnings Conference Call. I will now hand it over to Deb Hart, Head of Investor Relations. Please proceed.

Deb Hart, Head of Investor Relations

Good afternoon, everyone. Thanks for joining us for our fourth quarter and year-end 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, Trey will first provide you with a business update and Kevin will review our financial results and guidance. Drew Burch, President of Nucleic Acid Production, will join the call for the question-and-answer session following our prepared remarks. We remind you that management will make forward-looking statements and refer to GAAP and non-GAAP financial measures during today's call. It is 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 Trey.

Trey Martin, CEO

Thank you, Deb, and good afternoon, everyone. We appreciate having you join us for our call today. Let's start with our financial results on Slide 5. Today, we reported $289 million in revenue for the full year and adjusted EBITDA of $65 million. Our fourth quarter results of $74 million in revenue were stronger than anticipated due to outperformance in our base Nucleic Acid Production segment, specifically for CleanCap and custom chemistry. Turning to Slide 6. Our Nucleic Acid Production segment had revenue of $59 million in Q4. This includes an estimated $18 million of COVID CleanCap revenue. For the full year, total Nucleic Acid Production revenue was $225 million, with the base NAP revenue at $164 million. COVID CleanCap revenue was $61 million for the year. Our Biologics Safety Testing segment contributed $15 million in Q4 and $64 million for the full year. Our Q4 base non-COVID revenue company-wide was $56 million, up from our Q3 total of $52 million. As we exit the 2023 calendar year and begin 2024, we're entering a new era for Maravai which we are referring to as Maravai 3.0. Let me put some context for that on Slide 7. As many of you know, Maravai was originally founded nearly 10 years ago by Carl Hull and Eric Tardif, along with the support and backing of GTCR. This was Maravai 1.0, a private equity-backed company with a strategy to consolidate differentiated founder-based life science tools companies with industry-leading technologies and very strong brands. From 2016 through 2020, Maravai acquired 5 companies, including TriLink BioTechnologies and Cygnus Technologies in 2016, Glen Research in 2017. Each of these acquisitions serve unique niches in the industry and this rollout strategy was extremely successful. As the pandemic hit in 2020, we entered a new phase. Many of our customers pivoted their focus to develop a COVID vaccine, including BioNTech which was already using TriLink's CleanCap technology for its mRNA vaccine and therapeutic development. Maravai 2.0 was primarily focused on the scale of Nucleic Acid products, specifically on the CleanCap product needed to meet global pandemic vaccine demand. We scaled our production of CleanCap from grams to kilos, transition from RUO grade to GMP quality and move to running 24-hour shifts 7 days a week. This was an important period for Maravai as it allowed us to prove our ability to scale and demonstrate CleanCap's clinical potential in the form of billions of safe and effective vaccine doses. During this period, we decided to take the company public in November of 2020. Throughout the pandemic period, we were able to leverage our profitability and strong cash flows to reinvest into scaling our operations and expanding our footprint. We finished the build-out of our Waterridge facility well ahead of plan, started building our Flanders 1 and 2 GMP facilities and moved our biologic safety testing team into a brand new state-of-the-art facility in Leland, North Carolina. We also made additional complementary acquisitions, including MyChem, a nucleic acid chemistry leader and Alphazyme for specialized enzymes. Each of which is also part of our Nucleic Acid Production segment. So an incredible amount of capability, capacity, and infrastructure came from the pandemic era that will serve us today and throughout the next decade. Let's turn to Slide 8 and Maravai 3.0. Maravai 3.0 is the post-pandemic phase for our company, our new normal. The capability and infrastructure additions that came from pandemic era investments give us a foundation for exceptional operating leverage going forward. We're not trying to replace COVID vaccine revenue with a single program or a single customer. We are focused on bringing innovation to the entire mRNA production workflow. Building on capabilities in emerging adjacent product and service areas where we can differentiate ourselves and diversify the business for long-term sustainable growth. In fact, we believe that 2024 will be the most diversified customer base we've had in the last 5 years. More on that in a moment. We are organized with 2 main reporting segments: Nucleic Acid Production and Biologics Safety Testing. Within NAP, we have TriLink Biotechnologies, Glen Research and Alphazyme and BST is our Cygnus brand, including the MockV technology acquisition. Each of our brands has very strong histories and customer relationships. They act not only as product suppliers but technical experts who consult and help customers through their development and scale-up challenges. Acquisitions remain a key component of our strategy moving forward. We believe we're in the right markets, specifically all mRNA platforms as well as CRISPR gene editing in cell and gene therapy. It starts in the discovery market for each of our businesses and we have a unique ability to translate discovery products and services all the way through to GMP. Our value proposition of winning customers in discovery and supporting them through commercialization is stronger than ever. Maravai 3.0 is about being a leading innovator playing a key role in the future of genomic and personalized medicine. We believe we will continue to differentiate ourselves as a technology leader and the first-choice partner for our customers. I think we are privileged to have the opportunity to be part of this next generation of medicines with the goal of helping to improve human health. Turning to Slide 9, let me share an update from a third-party analysis we commissioned specific to our CleanCap programs. You may recall that we first did this exercise in February 2022 and identified over 180 preclinical and clinical trials using CleanCap. We updated that research in December 2022 and saw overall growth of over 70 programs. Our annual refresh of that work was recently completed and we have now identified over 350 programs that use CleanCap or more than 100 new programs in the last 12-month period. This includes preclinical through commercialized programs for a variety of different conditions. Note that 3 different CleanCap analogs are used in the production of 3 different mRNA products that have received full regulatory approval which is really exciting. CleanCap AG 3'-OMe methyl, is in the Pfizer BioNTech vaccine. CleanCap AU is used in a self-amplifying vaccine approved for use in Japan and CleanCap AG is also in the vaccine approved for use and marketed in Japan. Looking at the pipeline by clinical phase, you'll note that 3 out of 4 of the identified programs are in the preclinical or early discovery phase. This supports our strategy to win in discovery and grow with our customers as they advance through the clinic into approval. This is true for CleanCap and for many of our other products and services. Let's turn to Slide 10. Specific to the CleanCap analysis, growth in the mRNA pipeline was seen across multiple modalities, as shown in the left ring chart and for multiple applications, including cancer vaccines, infectious disease vaccines, and cell therapies that use mRNA. This reflects the widespread interest of big pharma in the mRNA platform technologies and foreshadows what we believe is sustained future investments in the field. And as the heat map on the right shows you, the top disease targets of these programs are cancer and infectious disease. Within the infectious disease programs, 16% are COVID-related. So what we're really pleased with in this latest data is twofold. First, we see a notable increase in the programs headed to the clinic and the discovery pipeline is accelerating. Second, Phase III programs that moved into the clinic 3 to 5 years ago use CleanCap less often than the Phase I programs that moved into the clinic last year, suggesting that our strategy to win in discovery is playing out. We intend to support these customers through the lifespan of their developmental programs. One important note, this data does not yet reflect CleanCap M6 which we introduced just last May in 2023. Our long-term history with mRNA manufacturing processes provides a smooth path for our early-phase customers looking for ways to move quickly into scale-up in clinical manufacturing without having to do a tech transfer. We provide these customers with a faster route by plugging into our platform workflow technology called CleanScript. Our CleanScript platform gets at the heart of what these customers need, like reducing double-stranded RNA in the manufacturing process instead of trying to remove it downstream. Working with an established partner like TriLink reduces the time and risk for clinical stage production. Specific to TriLink, in Q4, we provided a limited set of customers with early access to a small-scale mRNA offering for screening and sequence optimization. We have received multiple orders from industry-leading organizations, early evidence that we're on the right track with how we evolve our mRNA portfolio to enable early-stage discovery programs. Through this offering, we expect to expand into key screening markets upstream from the current marketplace, providing cross-selling opportunities and adding to our customer base. And after launching CleanCap M6 last year, we have over 170 discovery customers working with it. Several of whom have shared their intent to incorporate M6 into their preclinical and clinical studies over the next several quarters, reinforcing our strategy of winning in discovery. We are also pleased to share that Alphazyme now sells enzymes to use in the IVT process for mRNA production. We believe we can gain both market share and share of wallet here through continuous innovation, new product development, and exceptional service. We are in a truly unique commercial position in this market because a very large number of biopharma innovators of all sizes come to us first at the earliest stages of their programs for our products and services. Our customer pipeline reflects the future contours of the industry. Let's move to Slide 11. 2023 was another record year of FDA approvals and the development pipeline is meaningfully higher than at any point in history. In fact, the FDA approved nearly 50% more novel drugs in 2023 than in 2022, putting it back on pace with historically high levels. The FDA approved 55 new innovative therapies, containing active ingredients or molecules not previously approved in 2023. Up from 37 in 2022 and 51 in 2021. The agency also approved 7 new cell and gene therapies in addition to the 55 novel drugs. You've no doubt seen in the news and hear commentary from some of our peers that the FDA is increasing staff and aiming to improve the drug approval process and expedite drug approvals for orphan diseases. In particular, establishing an accelerated approval for gene therapies. This bodes well for our products and service offerings now and in the future as we work to support our customers' programs from discovery to late-phase development. Let's move to Slide 12 and the facilities update. We are poised to achieve late-phase manufacturing capabilities for cGMP mRNA in 2024 and continue the acceleration of our innovation across all businesses. Specific to our Flanders 1 site, we've had several requests for GMP CleanCap M6 and plan to start producing it in Flanders 1 by midyear. For Flanders 2, we received our first booking from a customer to produce late-stage mRNA drug substance in 2024 and other customers are showing strong interest. The pipeline for IND-enabling clinical materials is strong. And the moves we made in early '23 to upgrade our commercial teams and our facilities are getting us in front of customers and their RFP processes. Our customers have confidence in our operational readiness plans and our technical and manufacturing teams to meet their clinical timelines. With both of our Flanders facilities coming online and our new Analytical Sciences Center of Excellence in San Diego, we will be well-positioned to be our customers' partner of choice as the number of mRNA drugs moving into clinical phases continues to accelerate. Our commercial strategy under Becky Buzzeo's leadership is to win in discovery with the right products and services and to continue to support the unique needs of our mRNA and cell and gene therapy customers during their clinical development programs through to full commercialization. This strategy also includes fostering key academic and industry partnerships to enhance innovation and accelerate market adoption of the latest technology. Our 2024 return to growth requires that we protect and grow the unique core capabilities we currently have in each business. There are also markets for us to disrupt and differentiate ourselves, such as the evolution of our enzyme capabilities at Alphazyme, MockV viral clearance testing at Cygnus, and custom mRNA at TriLink Discovery. As we look to 2024 and beyond, the need for Maravai's products and services for these early-stage programs is greater than ever. Let's move to Slide 13 and an update on our intellectual property. Our recent patents issued in China and Canada reinforce the global strength and protection of TriLink's intellectual property, adding new jurisdictions of enforcement to the CleanCap patent estate which already includes the United States, European Union, Australia, Japan, Korea, and Hong Kong. We now hold the IP for CleanCap materials and methods in major markets across the globe. Importantly, drug developers in China will now have expanded access to license authentic CleanCap technology. Now please turn to Slide 14 and some further exciting developments for Maravai. We signed key licenses in Q4 that will strengthen our position and advance the number of CleanCap mRNA programs in clinical trials. We have enabled FUJIFILM Toyama Chemical, as a CDMO with the ability to manufacture CleanCap or mRNA to further enable our global customers with access to an in-country CDMO of choice in Japan. The agreement includes all forms of CleanCap, including our latest CleanCap M6. As we continue to focus on new product innovation, Glen Research, our high-quality provider of fluorophores, quenchers, labels, and modifiers for oligonucleotide synthesis, published Glen Report 35.2. The Glen Report has been in publication since 1987 and serves as a well-regarded resource for the many scientists engaged in DNA and RNA research and oligonucleotide synthesis. Three new phosphoramidite products were announced in our latest issue, including m6Am. The m6Am phosphoramidite is the same monomer that is found in CleanCap M6, affording access to the modification in RNA oligos for future biologic study. Our Cygnus team recently signed a strategic partnership with Dyadic to provide a new C-1 host cell protein ELISA Assay, extending our product leadership in HCP detection. The kit has been qualified with many drug substances and in-process samples, providing the specificity and sensitivity to detect C-1 host cell protein impurities with reproducibility that supports downstream purification monitoring, product lot release, and regulatory compliance. And Cygnus continues to shine in the cell and gene therapy market, supporting all 19 of the CAR-T gene and cell therapy approvals for lot release. Cygnus is with the drug developers all the way from process development through commercialization. Now, turning to Slide 15. You saw in our press release that we're introducing our 2024 revenue guidance of $265 million to $285 million. As I mentioned earlier in the call, we believe our 2024 revenue will be the most diversified since 2019. Prior to the pandemic, our top 10 customers represented about one-third of the overall business. During the pandemic, our top 10 customers jumped to represent over 80% of total revenue. Last year, our top 10 customers accounted for less than 50% of overall revenue. We believe our top 10 revenue concentration will continue to decline over time as we expand our customer base, increase our product offerings and take advantage of cross-selling opportunities. We believe we will continue to build stronger customer intimacy and drive sustainable, durable growth as Maravai 3.0. We are in a unique position to provide a concierge-level experience for customers that makes it easy to do business with us, whether through enabling faster turnaround time, incorporating novel chemistries, or creating flexible partnerships. We are viewed as a high-quality experienced partner that can manage a very challenging technology which many others in the industry are not equipped to do. I couldn't be more excited for Maravai 3.0 and I know that we can continue to make significant contributions to improving human health. We are energized for a new year and our renewed focus on supporting our customers to accelerate their discoveries to provide life-changing medicines for patients worldwide. I'll now ask Kevin to cover our fourth quarter and full year performance, along with more details on our guidance and our model assumptions.

Kevin Herde, CFO

Thanks, Trey, and good afternoon, everyone. As Trey mentioned, we are pleased to have finished 2023 ahead of expectations and we are excited to move forward into 2024. I will briefly cover our financial results for the fourth quarter and full year of 2023 and then discuss financial guidance for 2024. Before I get started on our results of core operations, I want to address the two large GAAP-based non-operating line items on Slide 17 that likely drew some attention in our press release issued earlier today. As a result of shifting to a GAAP-based pre-tax loss in 2023 and assessing our forward-looking GAAP book income projections, we have recognized a valuation allowance against our deferred tax assets as of year-end. The recent history of our pre-tax loss is considered a significant piece of objective evidence that is difficult to overcome and limit the ability to consider other subjective evidence such as future growth projections. Thus, in consultation with our technical accounting and tax advisers, we believe it is appropriate to establish a full valuation allowance against our deferred tax assets. Given our Up-C structure and the nature of the deferred tax assets, predominantly recognized as a result of our IPO in 2020 and subsequent exchanges in 2021, generally no partial valuation allowance is available. Additionally, as our long-term tax receivable agreement, or TRA, and the related liability is tied to the usage of our deferred tax assets created via the Up-C structure. We have also removed that liability from our GAAP-based financial statement. The net impact of these two items is a noncash, non-EBITDA, non-operating GAAP tax expense of $764 million to establish a full valuation allowance against our deferred tax assets and a corresponding $669 million noncash, non-EBITDA non-operating GAAP other income gain tied to the relief of the TRA liability. As many that understand the nature of this, the liability was approximately 85% of the underlying deferred tax asset as is typical in an Up-C structure. To conclude on this matter, the underlying deferred tax assets are still available to the company to utilize to reduce taxable income in the future and we may be able to release the valuation allowance once GAAP pre-tax income is substantiated. To the extent that deferred tax assets are utilized, the corresponding payment of approximately 85% of those benefits to the owners of the tax receivable agreement will be made and we will include the TRA liability again at the time we release the valuation allowance. The last item to note here is that our GAAP-based results are in a book loss primarily due to the extent of noncash charges, such as depreciation and amortization tied to the accounting for acquisitions and our facility build-outs as well as stock-based compensation charges. If there are any questions on this technical accounting matter, I'll be happy to take them at a later time so we can focus this call on the operating results of Maravai. So now diving into the financial results for the quarter on Slide 18. Our GAAP net loss before non-controlling interests was $110 million for the fourth quarter of 2023. This compares to net income of $87 million for the fourth quarter of 2022. Our GAAP net loss for the year was $138 million compared to income of $491 million for 2022. As noted in the consolidated statement of operations, we incurred a GAAP-based charge in the quarter of $6 million associated with our previously announced cost restructuring actions. Moving to Slide 19. Adjusted EBITDA, a non-GAAP measure, was $21 million for Q4 2023 compared to $130 million for Q4 2022. Our adjusted EBITDA margin was 28% in Q4 2023, above our expectations for the quarter as a result of the higher-than-anticipated revenues in the quarter and the efficiency of initiating our cost restructuring actions that also benefited Q4 2023. Adjusted EBITDA for the year was $65 million with an adjusted EBITDA margin of 23%. This was above the high end of our last updated full-year guidance for 2023 for adjusted EBITDA of $55 million to $60 million. I will discuss EBITDA by segment in a few slides. Moving to Slide 20 on EPS. Basic and diluted loss per share for the fourth quarter was $0.80, driven primarily by the net impact of the GAAP noncash, non-operating charges associated with the net impact of the deferred tax asset valuation allowance expense and the change in the TRA liability. Adjusted fully diluted EPS, a non-GAAP measure, was $0.01 a share. For the year, our EPS metrics were basic and diluted loss per share of $0.90 and adjusted fully diluted EPS, a non-GAAP measure, of $0.03 per share. Moving forward to the year-end balance sheet, cash flow, and other financial metrics on Slide 21. We ended the year with $575 million in cash and $533 million in long-term debt, resulting in a $42 million net cash position. Adjusted free cash flow was $8 million for the quarter and $13 million for the full year of 2023. That calculation of adjusted free cash flow, a non-GAAP measure, is based on our adjusted EBITDA less capital expenditures which were $21 million and $13 million in the quarter, respectively and $65 million and $53 million for the fiscal year, respectively. For fiscal year 2023, we generated $126 million in cash flow from operations. With that strong operational cash flow, we invested $122 million in expanding our offerings and capabilities to support future growth vectors with the acquisition of Alphazyme and investment in our Flanders GMP facility. This includes the capital expenditures for 2023 of a net total of $53 million. Depreciation and amortization ended the year at $40 million, in line with our expectations and previous guidance. Interest expense, net of interest income, ended the year at $18 million, in line with our expectations and previous guidance. This represents an effective interest rate of about 3.4% for the year, reflecting strong execution on our treasury operations. Stock-based compensation and noncash charges were $35 million for the year, also in line with our previous guidance range. We ended 2023 with 132 million Class A shares outstanding and 119 million Class B shares outstanding for a total of 251 million shares outstanding at the year-end on a fully converted basis. Fully diluted weighted average share count for 2023 was also 251 million shares. I note that our total Class A plus Class B shares outstanding at the end of 2020 following our IPO was 258 million shares and was 255 million shares at the end of 2022. Thus, our total shares have declined over the past 3 years. As a result of our bifurcated ownership structure, cash that accumulates at Pubco as a result of our equalization of tax distributions have been utilized to effectively retire B units outstanding, increasing the level of Class A ownership. These transactions appeared during 2021 and in conjunction with the acquisition of Alphazyme in Q1 2023 have effectively used around $180 million of cash to reduce overall Class B shares. This has more than offset the dilution associated with stock options and restricted stock issuances to employees and directors of Maravai since the IPO, leading to the reduction of overall shares outstanding over the past 3-plus years. Next to Slide 22 and the discussion of segment performance in the quarter. Our Nucleic Acid Production segment, which includes both our Discovery and GMP products and services market under our TriLink, Glen Research, and Alphazyme brands, had revenues in the fourth quarter of $59 million and adjusted EBITDA of $24 million, a margin of 41%. For the year, revenues for our NAP segment were $225 million with adjusted EBITDA of $83 million for a margin of 37%. Included in the revenues in the fourth quarter was our estimate of $18 million in revenues associated with CleanCap for COVID-19 related vaccine demand. This brings the total estimate of CleanCap for COVID-19 related vaccine demand to $61 million, in line with our expectations and previous guidance statements. Now to Slide 23. Our Biologics Safety Testing segment, which includes products from our Cygnus brand, had revenues of $15 million in the fourth quarter and adjusted EBITDA of $12 million, a margin of 76%. For the year, revenue for this segment was $64 million, and adjusted EBITDA was $47 million for a margin of 73%. As detailed in these segment results, the combined adjusted EBITDA, just our operating segment prior to the corporate shared services expenses, was $130 million for 2023, a combined margin of 45%, clearly highlighting the financial strength and health of our core operational segments. The corporate shared service expenses impacting total adjusted EBITDA include centralized functions such as human resources, finance and accounting, legal, IT, and the incremental expenses associated with being a public company and totaled $15 million in the quarter and $64 million for the year. Now getting to our financial expectations for 2024 on Slide 24. We are guiding 2024 total revenues to be in the range of $265 million to $285 million. Breaking down the anticipated revenue by segment, we see our Nucleic Acid Production segment to be down about 8% at the midpoint, mostly due to anticipated declines in high-volume GMP CleanCap demand, and we see the Biologic Safety Testing business achieving low to mid-single-digit growth over 2023. Now as we enter the Maravai 3.0 era, we will no longer be carving out our estimates of COVID-related CleanCap in our guidance or attempting to estimate it on a quarterly or annual basis prospectively. We understand that our customers use our GMP CleanCap for a variety of end uses, including supporting commercially approved vaccines and in research and development programs, as our CleanCap is a platform technology that is not indication-specific and thus fungible in the hands of our customers. Now our 2024 guidance does consider around $50 million in fiscal year 2024 contractual non-cancellable GMP CleanCap commitments made by our customers. As for the cadence of estimated revenues, we have seen in each of our quarters over the past few years plus the impact of COVID-related CleanCap carrying between 23% to 29% of the annual total, so a little bit of variability with each year. As we look at 2024 revenues, we see the first quarter carrying about 22% of our 2024 revenues, with the first half of the year carrying about 47% of the total for the year. So we see the second half weighting slightly higher than the first half but consistent with our historical variability and consistent with many of our peers' outlook for 2024. Moving to the rest of the P&L. We are on track to realize the previously targeted cost reductions of $30 million, of which about 2/3 were tied to the reduction in our labor force at our San Diego-based Nucleic Acid Production and corporate headquarters that was substantially completed in the first quarter of 2024. These targeted reductions will be partially offset by annual cost increases associated with the remaining ongoing labor force and focused investments in our commercial and R&D teams to drive organic growth. Overall, we expect gross margins to be flat to slightly lower than 2020 levels based on an unfavorable product mix compared to 2023. R&D and sales and marketing expenses are estimated to be up slightly on an absolute dollar basis, reflecting our ongoing investment in these areas. G&A expenses are expected to be down about 5% on an absolute basis versus 2023. Overall, we estimate 2024 adjusted EBITDA margins up between 23% to 25%. We see adjusted EPS in the range of $0.00 per share to a $0.06 per share loss. Our guidance also contemplates the following expectations for 2024: interest expense net of interest income between $25 million and $30 million; depreciation and amortization between $40 million and $50 million; equity-based compensation which we show as a reconciling item from GAAP to non-GAAP EBITDA to be between $45 million and $50 million; as-if fully converted share count of 254 million shares; and an adjusted effective tax rate of 24%. Lastly, as we have discussed, we are outfitting the final stages of our Flanders facility in the first half of 2024, which will result in us being substantially complete with all facility investments that we expect will be needed to support our business for the foreseeable future. As such, we anticipate total net capital expenditures to shift down to $30 million to $35 million in total for 2024. Subsequent to this completion, mainly over the first half of 2024, we anticipate capital expenditures moving down further to annual maintenance and growth investments closer to 5% of total revenues over time.

Trey Martin, CEO

So to wrap up on Slide 26, we believe we have transitioned during a challenging 2023 to Maravai 3.0, and we are at a new normal, poised for a solid and more diversified 2024. From new combo vaccines to cell and gene therapies battling cancer, we believe that the transformative impact that mRNA has on global human health will only accelerate. We believe we are playing in the right target markets with strong leadership positions. We are building our product and services portfolio and expanding our strong brands in strategically important high-value areas to support genomic medicine. We are committed to building a strong foundation for long-term, sustainable and profitable growth, with a focus on innovation, scaling our commercial organization, leveraging our new manufacturing scale and inorganic growth opportunities. We have this incredible opportunity still ahead of us to participate in the next generation of medicines that are going to better treat and in some cases literally cure disease. This is what fuels our team every single day. We, at Maravai, are proud of the key role that our customers, partners, and employees are playing in making that happen. Then finally, thank you for your attention. To our investors, thank you for your trust and support, and we look forward to continued collaboration around fulfilling our mission over the coming years. I would now like to turn the call back over to the operator and open the line for your questions.

Operator, Operator

Your first question comes from the line of Matt Larew with William Blair.

Matt Larew, Analyst

I wanted to ask just about the guidance. The first would be sort of on the top line. You referenced, I think, $50 million of noncancelable orders. For the whole space, obviously, visibility has been an issue over the past year to 1.5 years. I'm just curious as you thought about constructing the guidance for the year, if there's any difference in the way you thought about approaching your communicated guidance relative to internal expectations or if you're just seeing more end market improvement or just some general thoughts on sort of the guidepost around the guide.

Kevin Herde, CFO

Yes. Sure, Matt. Thanks. This is Kevin. I'll take that. Look, I think we feel good about the guidance range. I think as we sit here today versus where we were, say, a year ago, the overall percentage of our revenue that we see either having been recognized throughout the course of the year, sitting in PO or sitting in some of these contractual commitments like you mentioned, is higher than it was and that puts us in a good spot. It's near 40% of our full-year guidance and it was closer to one-third probably a year ago. So that gives us some conviction that we do have a good grasp for the full year and that's incorporated in our guidance.

Matt Larew, Analyst

Okay. Regarding the EBITDA guidance, the midpoint of that margin and revenue mix is approximately $66 million. You reported around $20 million in the fourth quarter, and considering factors such as incentive compensation reset in the first quarter, I’m interested in understanding the overall picture when comparing the annualized Q4 results to the midpoint of the guidance. Could you help clarify the other factors at play beyond the top line for 2024?

Kevin Herde, CFO

Yes, well, I think if you take the 2.75x the midrange of the EBITDA, you get $66 million. And again, that's relatively consistent with where we ended the full year of 2023. We do see certainly a step down in revenue versus where we ended up '23 in the midpoint of our guidance. So that's a big component of it. I'll also tell you that we did put in, obviously, some cost actions. We did benefit, probably about the tune of around $4 million in the fourth quarter of '23 of that $30 million overall target. So the year-over-year benefit there is about $26 million. So about half of that is coming down due to lower revenue at the midpoint and the remainder are some of the things, one, you mentioned the normalization of compensation practices and then certainly, the continued investment in commercial and R&D. As we sit here today, we have about 40% more sales heads than we did at the end of 2022. That's been a concerted focus of us, particularly as we morph into Maravai 3.0 to have that strong sales force. So that's a reinvestment as we move forward. As it relates to the margin cadence, we're going to see some continued variability quarter-by-quarter as we did in 2023. I think if you see the second and third quarter of 2023, our EBITDA margins were in the mid-teens, were down in the low 60s of revenue. And certainly, given our implied guidance for the first quarter, based on the first quarter carrying roughly 22% of the full year, that's about a $60 million number for Q1. You expect the EBITDA margin for the first quarter to be relatively consistent with that mid-teens sort of level and then increasing from there. As it has done historically, our key toggle for margin expansion is really the top line, and we'll continue to see margin expansion as top line growth moves into that full year estimate of 23% to 25%.

Operator, Operator

Our next question comes from the line of Justin Bowers with Deutsche Bank.

Justin Bowers, Analyst

I was on mute, sorry about that. So I just wanted to take a step back. At a high level, can you just talk about the demand environment and how that's evolved, let's say, over the last 3 to 6 months? It looks like you're sort of calling for an inflection and a bit of a return to growth when we strip out some of the COVID CleanCap. So just wanted to get a sense of sort of the drivers behind that as a starting point.

Trey Martin, CEO

Yes. Thanks. This is Trey. We are seeing, I'd say, first and foremost, a willingness to make binding commitments again, which is something that is obviously a welcome change. As you identified and we discussed in the material, we're coming off of a period, well, the pandemic period really was intensely weighted toward heavy customers with large orders, and we're coming into a very nice diversification, growing the number of customers significantly and so on, seeing demand. But of course, these are smaller POs and smaller checks. Ultimately, it will lead to a much more diversified and, I would say, stable and predictable business. But in this transition, we are, I would say, for demand, seeing more customers come in. They are unfortunately not massive customers of the pandemic era but we've also seen, again, this recommitment to binding forecasts. And maybe I'll hand it to Drew for a little more color.

Drew Burch, President of Nucleic Acid Production

Yes. Thanks, Trey. I think Trey described it well. We've annualized some of the pandemic-era commitments, so we'll move past that. We have seen a greater diversity of customers, and I think the chart that Trey showed on the number of clinical trials using CleanCap speaks to some of those dynamics as you see those numbers continuing to go up at a pretty significant rate. So we'll replace some of those larger commitments with the broader diversity of customers. And I think that augurs well for the future.

Justin Bowers, Analyst

And then just maybe just a quick follow-up. What sort of the shelf life where the process to validate the efficacy on CleanCap? There's been a question that we get a lot and there's been, I guess, a wide range of estimates out there. So we'd just like to get your perspective on that.

Drew Burch, President of Nucleic Acid Production

Yes, sure. It's Drew. I'll take that. It's a customer-driven decision how they will choose to use their inventory. And we support customers with retest dates and also with retesting services. We're pleased that CleanCap has held up well from a stability standpoint and our customers work to make decisions about how they want to manage their own inventories.

Operator, Operator

Our next question comes from the line of Catherine Schulte from Baird.

Catherine Schulte, Analyst

In your prepared remarks, you mentioned that a larger portion of programs entering Phase I last year used CleanCap versus that set a few years ago. I guess, what was that number in terms of the portion of programs entering Phase I last year that utilize CleanCap just to try to get a sense for our market share?

Deb Hart, Head of Investor Relations

Catherine, we're looking at that stat...

Trey Martin, CEO

We've got a table with all of them. So you're asking the number of Phase I programs at the end of last year versus this year?

Catherine Schulte, Analyst

Yes.

Trey Martin, CEO

Total in Phase I at the end of '22 was 69, in total of Phase 1 at the end of '23 was 86.

Catherine Schulte, Analyst

Okay. I was more referencing you mentioned that a larger CleanCap was used more frequently in programs entering Phase I, if you have like what percent of the Phase I utilized CleanCap? But if you don't have that, that's okay.

Trey Martin, CEO

Yes. Yes. It's about 40%.

Catherine Schulte, Analyst

Okay, great. That's very helpful. And then maybe for the first quarter guide implies a decent sequential step down in revenue. How should we think about the outlook for Biologic Safety Testing versus Nucleic Acid Production in that first quarter number?

Kevin Herde, CFO

Yes. So most of that anticipated decline versus the fourth quarter sequentially, Catherine, is going to be in the NAP segment. Again, a lot of that is tied to the high-volume GMP CleanCap. We actually see Biologic Safety Testing stepping up in the first quarter as it has done a lot historically having strong first quarter performance. So I think you see a step-up in BST over Q4 and then offset by NAP coming down, again, predominantly due to the high-volume GMP CleanCap pattern that we're seeing for 2024.

Operator, Operator

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

Michael Ryskin, Analyst

I have a couple of quick questions. Thanks for the Q&A. One question is about the $50 million in contracts for 2024. I know you mentioned you didn't want to discuss it too much, but I want to ensure we're considering it correctly. In 2023, you had around $60 million to $65 million in contractual revenue. Now you have $50 million for 2024. Can you share any information about when that ends? It’s important for us to model this accurately, especially since it could create a significant headwind in 2025 if it concludes. I have a follow-up as well.

Kevin Herde, CFO

Yes, well, I think as you know, under most of our license and supply agreements, we work with our customers for kind of rolling annual forward-looking forecasts, right? So certainly, as we sit here today, we're very comfortable with our guidance and what we're speaking of related to those commitments. And as we go through the year, we'll be working with our customers as that rolls forward into 2025 and certainly better after, I mean, that's sort of the mechanisms on how that works. But right now, we're sticking sort of that clear view that we have right now today.

Michael Ryskin, Analyst

Beautiful. And then...

Trey Martin, CEO

Sorry, I had to mention that the number we've been publicly sharing for the previous year regarding COVID-specific large committed programs was 61, as we had forecasted earlier.

Michael Ryskin, Analyst

Okay. Yes. And then my follow-up question, I was going to ask on this FUJIFILM partnership. We've gotten a bunch of questions over that in the last couple of weeks. Any additional comments you can make beyond what you had in the prepared remarks? And any way to possibly size that because that seems like it could be pretty meaningful sort of how much of that is assumed in 2024?

Trey Martin, CEO

Yes, the key will depend on FUJI's customer signings as a CDMO, which creates a degree of separation for us. Forecasting this is challenging, but it is an important partnership in Japan, especially since it includes the full CleanCap portfolio. We have several enabled CDMOs that hopefully have the chance to collaborate with us, particularly in later phases as Flanders 2 opens later this year. If they require increased scale or geographic options, that's the reason for involvement in various jurisdictions. This could be very significant, but it is contingent on the programs they can secure in Japan.

Operator, Operator

Our next question comes from the line of Conor McNamara with RBC Capital Markets.

Conor McNamara, Analyst

Congrats on a solid quarter. Just if you do look at Q4 results, you came in about $5 million ahead of what you were expecting, if my math is correct. And just was there anything in there as far as bulk purchases or anything pulled forward from 2024 that's worth calling out? Or is that just execution?

Kevin Herde, CFO

Thank you, Conor. I can confirm that there was nothing pulled forward. This quarter was quite typical for us in that aspect. We did experience what we refer to as drop-in orders, which are unexpected requests from customers that contributed positively to our quarterly expectations. This can happen occasionally, especially with CleanCap, as they may enter a new phase or start a new program, leading to bulk orders that were not anticipated. Such occurrences result in some volatility from quarter to quarter. Overall, it was a strong quarter compared to our internal projections, and we are pleased with the results.

Drew Burch, President of Nucleic Acid Production

And it's true. I would add on, I think the efforts that have been undertaken in the past few quarters on our commercial execution for fruit. So we saw some good traction with the commercial team and really just getting that CleanCap opportunity and other offerings in front of the customer base in a more forward-leaning way.

Trey Martin, CEO

I think we talked last year about how there was some reticence for these committed orders, the take-or-pay type arrangements, which may also largely dissipate with the pandemic. But this is sort of an upside positive consequence of people not necessarily committing to take or pay but still needing the material. And that's the reason, as Kevin said, that it was not in funnel but we are able to take it and execute within the quarter.

Conor McNamara, Analyst

Got it. Great. And then as it relates to guidance, looking at what you said about the first half versus second half on revenue, that implies the second half, we'll do roughly $70 million to $75 million a quarter in the second half. Should we expect that EBITDA margins would be roughly in line in the second half of 2024 to what you guys did this year? Or is there any headwinds or tailwinds that would make that much different? And then just as a follow-on, I mean, is that a good place to start for as we think of beyond 2024?

Kevin Herde, CFO

Yes, I think you got exactly right, Conor. Obviously, as we move up into the type of revenue performance that we saw in the fourth quarter of '23. We had a strong EBITDA margin exiting the year, 28%. And I think as we're in and around that revenue level, that's certainly what you can expect and that will pull up the slightly lower margin than we see here in the first half and average out to our guidance for the year.

Operator, Operator

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

Koslosky, Analyst

This is Koslosky on for Matt. The first one, how are customer conversations trending in terms of bioprocessing recovery within the different modalities that you called out on the slide? So basically, is there one modality where you're seeing more positive commentary relative to the others?

Kevin Herde, CFO

That’s a great question. The distribution relates to the cell platforms that people are using for production. I would say we are returning to normal for BST, where we previously encountered some distortions, specifically comparing CHO to E. coli and so on, where we experienced slowdowns that have now recovered to a normal sales proportion. Additionally, there are various modalities that can be expressed in different cell lines. This is a bit more complex, especially since many of our Cygnus customers are also CDMOs or distributors. Unfortunately, we don’t have detailed visibility into the specific programs they are engaged in or the number of kits they are using for particular cell lines or map expressions, if that’s what you’re asking.

Koslosky, Analyst

Yes. I think more in terms of like cell therapy versus mRNA vaccines in those types of modalities and how customer comments are trending within each of those modalities.

Drew Burch, President of Nucleic Acid Production

Yes, it's Drew. I think I can't say we've seen a significant difference between cell therapy and mRNA. We have active customer discussions on both sides, and the growth data for clinical trials is evident. There are nearly 1,000 clinical and preclinical trials currently underway for mRNA, with a smaller number for gene editing, but both figures have increased significantly over the past year and are projected to grow by 30% or more in the coming years. Our discussions align with this trend. We're enthusiastic about the customer engagement and are pleased to have a customer ready to start production with us in Flanders 2. Overall, I would describe the sentiment as balanced optimism across the portfolio.

Kevin Herde, CFO

Yes, and just to sort of underscore that point, Drew, I mean, we have a highly engaged and strengthened commercial team that just continues to drive that, and we are seeing that reflect in our discussions.

Conor McNamara, Analyst

Great, that's super helpful. And then with your 2028 revenue target of $700 million and taking into consideration the new 2024 guide, how confident are you in the step-up of growth necessary in the 2025 through 2028 in order to reach this target?

Kevin Herde, CFO

Yes, I believe if you examine the numbers, you're looking at a compound annual growth rate that reflects our focus on developing this business and making strategic investments. This is why we are concentrating on initiatives like the Flanders 2 expansion, research and development, and innovation. This growth target is something we are accustomed to, as evidenced by our core business growth of 23% from 2018 to 2022. As we move forward with Maravai 3.0, compared to those prior years, we have many more programs, increased funding in this area, heightened enthusiasm, and expanded capabilities, products, and customer engagement. This remains a priority for us as we strategically grow our presence. That said, our immediate goal is to achieve the targets we set for 2024 and to see the business return to growth.

Operator, Operator

And for our last question, this comes from the line of Paul Knight with KeyBanc.

Paul Knight, Analyst

Yes, thanks for the time. As we look at various biotechnology firms, are they dedicated to one capping technology? Or are they agnostic? And do they really look at alternatives?

Trey Martin, CEO

Yes, that's a great question. When starting a new program or in the discovery phase, companies should seek the best technology available at that moment. As a customer, they may be neutral regarding their preferences, which can be influenced by whether they handle production internally or partner with someone else. If we are the partner, we have an efficient workflow that integrates co-transcriptional caps seamlessly. We also have dedicated CleanCap customers, which excites us about continuing to innovate and offer new options because we believe that at any stage of their clinical development, they should incorporate the best technologies, with M6 being the latest example.

Paul Knight, Analyst

What is the final stage they can reach? Are they limited? They really need to commit to what, Phase I? I'm assuming they committed to Phase II, right?

Drew Burch, President of Nucleic Acid Production

I believe it's typical for people to commit as they enter clinical trials, possibly making some adjustments later. We notice the most switching occurs as products and programs start their clinical phase. However, as Trey pointed out, we are continually striving to provide new options that will assist customers in optimizing their programs. We are pleased to share that CleanCap AG, CleanCap 3' OMe methyl, and CleanCap AU have all received approval. M6 is progressing well, and we see a significant interest in advancing it to GMP production. There isn't a universal solution, and we persist in introducing innovations to help our customers maximize their program outcomes.

Deb Hart, Head of Investor Relations

Great. Well, with that, we would just like to thank everyone for joining us today. We'll be at several conferences over the coming months. So I hope to catch up with some of you in person there. And feel free to contact us with any follow-up questions. Hope you have a great night.

Operator, Operator

This concludes today's conference call. You may now disconnect.