Earnings Call Transcript - MXCT Q1 2022

Operator, Operator

Good day and thank you for standing by. Welcome to the MaxCyte First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. I will now like to hand the conference over to speaker today, Sean Menarguez, Director of Investor Relations.

Sean Menarguez, Director of Investor Relations

Good afternoon, everyone. My name is Sean Menarguez and I'm the Director of Investor Relations here at MaxCyte. Thank you all for participating in today's conference call. On the call from MaxCyte, we have Doug Doerfler, President and Chief Executive Officer, and Ron Holtz, Interim Chief Financial Officer. Earlier today, MaxCyte released financial results for the first quarter ended March 31st, 2022. A copy of the press release is available on the company's website. Before we begin, I need to read the following statement. Statements or comments made during this call may be forward-looking statements within the meaning of federal securities laws. Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements. Actual results may differ materially from those expressed or implied in any forward-looking statements due to a variety of factors which are discussed in detail in our SEC filings. The company undertakes no obligation to publicly update any forward-looking statements, whether because of new information, future events, or otherwise. And with that, I will turn the call over to Doug.

Doug Doerfler, President and CEO

Thank you, Sean. And good afternoon, everyone. And thank you for joining MaxCyte First Quarter earnings call. I'll begin with the discussion of our business and operational headlines during the quarter, followed by a detailed financial review from Ron. We are very pleased with the start to 2022, as our team continues to deliver on all financial and strategic objectives in our plan. MaxCyte's ExPERT platform continues to be the premier cell-engineering technology enabling the development of our growing set of advanced cell-based therapeutics. With our additional resources at hand, we continue to invest in our people and capabilities at a measured but healthy rate as we seek to ensure the success of our partners. Ron will provide more details later in the call, but I know that we generated very strong first-quarter 2022 results, as pre-announced last month and outlined in the press release published today. These results are anchored in robust performance in our core cell-engineering business, which was up 48% year-over-year. We generated significant SPL program-related revenue in the quarter with revenue timing running a little sooner than our internal forecast, yielding strong year-over-year growth in the quarter. As you know, we have very limited visibility into the timing of our partners’ clinical progress, and as such, it's a challenge for us to provide precise information regarding program-related revenue beyond general expectations for the year. First-quarter revenue was a record $11.6 million, up 78% over the first quarter of 2021 with very strong growth in the core business. Growth in revenue to cell therapy customers was 57% year-over-year and to drug discovery customers was 23% year-over-year. Cell therapy growth was primarily driven by both instrument and PA sales. We are seeing expansion of our global customer base across all stages of development and are encouraged by our traction with cell therapy customers at the early development stage, which continues to strengthen our robust SPL pipeline. During the quarter, we recognized $2 million in clinical milestone revenues. As we have previously indicated, our partnership agreements are strictly confidential, and so we will not be answering any specific questions relating to our SPL partners, their clinical progress, or their respective development programs. However, we remain excited about the progress our partners have been making in the clinic. We continue to sign new SPL partners and see additional SPL programs enter trials. Further, we have seen our existing clinical SPL portfolio progress into later stages, including pivotal clinical studies suggesting we may see a partner's first commercial product as early as 2023. Overall, our core business revenue growth and recognition of the SPL program-related revenues are signs of the strong execution by our growing commercial team and robust customer demand; this strength is seen in new sales and leases of instruments, as well as strong PA sales. The timing of customer PA purchases and leased instruments as they prepare for pivotal trials and commercialization can be hard to predict. We would expect them to remain lumpy until our SPL portfolio and clinical progress of those partners is broad enough to smooth out that lumpiness from individual programs. Given our strong performance, we wanted to highlight that we have not seen any weakness in the demand for our products and associated support from our customers. We have strong relationships with our partners and customers and believe MaxCyte’s ExPERT platform is a core aspect of their therapeutic development strategy. We continue to meet and exceed our customers’ expectations for supply and scientific support, and we continue to have a growing new business development pipeline. Our SPL pipeline remains strong and we continue to expect additional SPL partnership announcements this year at comparable economics to prior partnerships. In the first quarter, we signed an agreement with Intima Bioscience, which we highlighted on our last call. We now have 16 SPL partners that are going to bring more than 95 development programs in the aggregate, of which more than 15% have entered the clinic. In the near term, we are optimistic about the potential for our SPL partners to generate meaningful and growing revenue from both their pre-clinical research and clinical progress, as well as, hopefully, commercialization of partner therapeutics over the next 12 to 24 months and beyond. We are making important investments to support our future revenue growth, including investing in our commercial teams, developing and expanding in-house manufacturing, and in our in-house bioprocessing in cell therapy applications and process development labs. These investments will advance our ability to take advantage of expanding markets, the emergence of new therapeutic development programs and companies, and support our partners as they move toward and into the commercial launch of therapeutic products. This investment will come with continued growth in headcount across most areas of the organization, particularly in R&D and sales and marketing, including alliance management. These kinds of investments have delivered strong growth today as we support our partners' potential success, and we continue to be upbeat about the value of these investments we're making in 2022 and beyond. In closing, we have had an excellent first quarter for 2022 as we continue to execute on our financial and strategic goals. We're excited about our opportunity going forward, particularly in the cell therapy market, and are making the right investments to drive growth across the business. I will now turn the call over to Ron to discuss our financial results.

Ron Holtz, Interim CFO

Thanks, Doug. Hello, everyone. As Doug mentioned, we realized record revenue of $11.6 million in the first quarter compared to $6.5 million in the prior year's quarter, based on strong performance in both our core business and through the clinical progress milestones delivered by our SPL partners. Core business revenue was $9.6 million in the first quarter of 2022, compared to $6.5 million in the first quarter of '21. This includes revenue from cell therapy customers of $7.4 million, growing 57% year-over-year, while revenue from drug discovery customers was $2.2 million, growing 23% year-over-year. We saw broad growth across the business with particular strength in instrument sales in cell therapy and in processing assembly sales in both cell therapy and drug discovery during the quarter. We recognized $2 million of SPL program-related revenue in the first quarter of 2022 compared to immaterial program-related revenue in Q1 of 2021. Moving down the P&L, gross margin was 91% in the quarter versus 89% in the first quarter of the prior year. The increase in gross margin was driven by the higher SPL program-related revenues. Excluding that SPL revenue, gross margin was relatively unchanged. Total operating expenses for the first quarter of 2022 were $14.7 million compared to $12.2 million in the first quarter of 2021. And recall that Q1 2021 included $3.9 million of expense from winding down investments in our CARMA platform. As Doug mentioned, our current strategy is to continue to make meaningful investments across the business to take advantage of the opportunities we see to accelerate organic growth over the coming years. The overall increase in operating expenses was primarily driven by increased headcount to support growth in field sales and field science, manufacturing, and lab teams. Growth in company-related and stock-based compensation expense also contributed to the higher level of expenses compared to the same period a year ago as our NASDAQ listing did not occur until the third quarter of 2021. We have a very healthy balance sheet with total cash and cash equivalents and short-term investments at $246 million as of the end of the first quarter, and no debt. Note that in Q1 we began to see the first portion of cash investments in the construction of our new facility. Total investments this year in our new headquarters are expected to be approximately $12 million in 2022. We are increasing our outlook for 2022. We now expect revenue from our core business, which includes sales and leases of instruments and sales of disposables to cell therapy and drug discovery customers, to grow at least 25% compared to 2021 core business revenue. We saw strong business momentum in the first quarter and remain cautiously optimistic about the balance of 2022. Turning to our SPL program economics, as we've discussed in previous calls, the timing of SPL revenues is predicated on our customers’ clinical and regulatory progress, where we have limited visibility. Taking into account the earlier than expected Q1 program-related revenue, we continue to expect 2022 SPL milestone revenue of approximately $4 million.

Doug Doerfler, President and CEO

Well, thank you, Ron. In summary, we remain excited about the opportunity to lead the industry forward as the premier cell-engineering platform technology supporting the development of advanced cell-based therapeutics for patients that may not otherwise have treatment options. As always, we want to take this opportunity to thank our team, Board, suppliers, investors, and the amazing industry that we have the honor of serving. We are very pleased to report strong first-quarter results, and MaxCyte remains well positioned for growth, and we are excited about the opportunities ahead. We are now opening up the line for questions.

Operator, Operator

Thank you. Please stand by while we compile the Q&A roster. And our first question comes from Max Masucci from Cowen. Your line is now open.

Stephanie Yan, Analyst

Hi. This is Stephanie Yan for Max Masucci. Thanks for taking the questions, and congrats on a great quarter. If you look broadly at some of the more recent therapies your SPL partners have launched in the clinic and compare them to the therapies you supported during the 2017 to 2020 time frame, what's the diversity of cell types and molecules are you seeing? Are there any emerging trends to call out?

Doug Doerfler, President and CEO

Good question, Stephanie, and thank you for it. Since 2017, we have observed significant movement in the field. Our first deal was with CRISPR, and we see that momentum continuing with multiple edits being made to cells. Companies are shifting focus from T cells and their subtypes to gamma delta T cells and B cells. The variety of cell populations and their subsets is increasing. We're also witnessing more complex edits, as I mentioned earlier. Various tools are being utilized, some of which have been around for a while, like zinc finger nucleases and transposase. Additionally, there are new areas of indication, mainly for inherited diseases with CRISPR, especially in their sickle-cell program, as well as in autologous stem cell and allogeneic T-cell treatments. There's also movement into autoimmune diseases, and some of our earlier-stage customers are delving into neurodegenerative and infectious diseases. We truly believe this entire field is just beginning to take off as people grow more comfortable with these engineering tools and manufacturing methods.

Stephanie Yan, Analyst

Got it. That's super helpful. And also with the recent pullback in publicly traded bio-manufacturing peers and likely some degree of a pullback in private asset value, has your approach towards M&A changed at all? Are you leaning more towards complementary M&A or are you entertaining some later, more transformational deals?

Doug Doerfler, President and CEO

Yes, I think we're seeing some movement in private financing now. It's reflective of a few months behind the decrease in financings in the public market. It's important to note that we are not seeing any reduction in demand for our products with our partners, which is encouraging. We've always considered expanding our corporate development group. While our targets are confidential, it's fair to say we have focused on staying close to the cell-engineering space, without moving too far upstream or downstream. We're looking for opportunities to address significant pain points customers face in the cell therapy field. We are open to various opportunities, but any deals we pursue will likely revolve around solving these engineering challenges for our customers.

Stephanie Yan, Analyst

Got it. That's great. Super helpful. And if I could squeeze in one more. During the last call, you highlighted that you were working with several beta customers on the ExPERT VLx to build application data. Can you provide some more detail on the progression of the beta launch or share any additional milestones on the VLx product roadmap?

Doug Doerfler, President and CEO

We released that product in the fourth quarter of this year, focusing on investing in the business and refining our strategic plan. The release took place in 2022, and we believe it addresses an intriguing marketplace with a highly disruptive technology in large-scale bioprocessing. We are collaborating with customers using the ExPERT VLx to develop application data to support this progress. We see significant opportunities, though we recognize it will take time. An area we are particularly excited about is the rapid production of monoclonal antibodies, which we believe has an immediate market demand. This represents a significant expansion opportunity for the company. Currently, we are doing quite a bit of this at a small scale with the STx, so it’s a natural progression for us and our partners to scale up from mid-scale, which is the STx, to larger volumes. However, work is required in this area, particularly in applications. There is a considerable amount of engineering and process development that occurs before and after electroporation. We are focusing our investments in this area to ensure we can support our customers throughout their processes.

Stephanie Yan, Analyst

Got it. Thanks so much for that color. Really appreciate it.

Doug Doerfler, President and CEO

You bet. Thank you.

Operator, Operator

Thank you. And our next question comes from Matthew Larew from William Blair. Your line is now open.

Matthew Larew, Analyst

Good afternoon. It's clear that there hasn't been any change in customer demand, but since this has been a significant topic this earning season, I'm curious if you've noticed any shifts in the prioritization of pipelines from customers, particularly regarding secondary assets, even though typically customers have six to seven programs.

Doug Doerfler, President and CEO

Matt, we aren't observing any changes at this time. Our focus is generally on the lead asset or the second in priority for the company, as you mentioned. From what we can tell, these companies are maintaining their commitments. If there are any reductions, they might be influencing some preclinical programs, but that information is typically confidential with our partners, so we don't have much insight into it. Additionally, our business has experienced significant growth. We saw strong core business growth in the first quarter, which supports the idea that things are continuing to progress well.

Matthew Larew, Analyst

Okay. And then just in terms of hiring, just curious what you're seeing out there and if you've been able to hire at pace with what you're expecting. I think it might have come in a little bit light of what we were thinking. I'm just curious if that's any sort of efficiencies that you've felt in or if you've began to schedule at all on the hiring front.

Doug Doerfler, President and CEO

I’ll let Ron discuss the expenses, but our hiring group is very active. We have increased our human resources for team building and are being quite innovative in how our employees work. As many of you are aware, the last couple of years have mostly been virtual, which remains a key method for attracting talented individuals. This approach does come with its own leadership and management challenges. However, if we find the right candidates and equip them with the necessary tools to work remotely, I believe we will perform well. Ron, would you like to share some insights about the expense changes for the first quarter?

Ron Holtz, Interim CFO

We are successfully hiring the people we want, although the current job market is more competitive than in previous years. This may cause us to lag slightly behind our initial headcount plans, but I don't see it having a significant impact. The competitive landscape does require more time to identify the right candidates. When we do find candidates, they often have other offers, but we are successfully attracting the individuals we desire. Overall, I feel this aspect of hiring is progressing well.

Matthew Larew, Analyst

Okay. Thanks, Ron. Last one just about two months ago where there was a competitive launch in the space, we just be curious of the last couple of months if you've been out and perhaps heard feedback on that device or had it compared to your technology? Is there anything you would highlight about what you're hearing or what you see as key differentiators, which have been maintained even relative to this newer launch?

Doug Doerfler, President and CEO

I’ll mention a few points, Matt, but I’m not going to provide any insights that could benefit our competitor. They have been discussing their product for quite some time, and it’s appearing in significant meetings. However, we’re not observing it influencing the commercial evaluations with customers, so we don’t see its impact. What sets us apart is our performance, flexibility, scalability, cGMP standards, and our commitment to supporting customers in the cell-engineering sector. We welcome the competition, as it reinforces the notion that this is an intriguing area with substantial future benefits for our company.

Matthew Larew, Analyst

That makes sense. Thanks.

Doug Doerfler, President and CEO

Thanks, Matt.

Operator, Operator

Thank you. And our next question comes from Dan Arias from Stifel. Your line is now open.

Daniel Arias, Analyst

Opening guys, thanks for the questions. Doug, you mentioned some lumpiness that can arise with respect to the individual programs that you have in your prepared marks. I'm just curious whether as some of your partners have pushed into the later stages, you've gotten comfortable with the purchasing around key milestone events. In other words, how consistent are you finding their spending to be into scale up to a new trial stage and then maybe out as well. Should we think about there being step-ups ahead of a milestone and stepped down afterwards, or is that something to be mindful of or is it more or less consistent?

Doug Doerfler, President and CEO

I believe the variability we see is primarily related to the milestones themselves, as we have several of those in play, particularly with 15 programs currently in the clinic. I anticipate that as we bring a larger number of ANDAs to the forefront, it will help stabilize that variability. Although I’m not an expert in mathematics, I recognize that it’s a new experience for us, and we're witnessing increases as we transition from preclinical to clinical phases. Additionally, there is quite a bit of non-clinical work being performed with some of these products. It's worth noting that these companies refer to this as non-clinical, as it involves experimentation alongside their products already in clinical development. Due to the relatively small number of programs, we're still trying to gauge demand accurately. This uncertainty is one reason why we decided to increase our in-house manufacturing capabilities. We aim to maintain flexibility to meet our customers' needs, and we plan to expand that capability as we move toward the commercial launch of some products in the coming years. I hope this addresses your questions on a few points.

Daniel Arias, Analyst

Yes, you make a valid point, and it seems that what happens next is still to be determined. Shifting to another subject, let's discuss new business development and account acquisitions. Reflecting on our conversation from a year ago, during our listing discussions, you indicated that our share in the clinical non-viral delivery markets was around 40%, with an additional 15% that was under discussion and had strong conversion potential. Can you provide an update on that segment and how successful you've been in converting the business that appeared promising about 6 to 12 months ago?

Doug Doerfler, President and CEO

I can’t provide a quantitative update, but I can say qualitatively that we are on track to meet our goals and successfully gaining business while converting companies to our technology, even at an early stage. We have also made investments in collaborating with translational medical centers that have a cGMP manufacturing suite within an academic setting. Additionally, we have initiated a more targeted marketing and sales approach because many of these companies originate from academic labs. Once they move into clinical or IND-enabling studies, companies are formed around them. If we can integrate our technology early enough into this process, we believe it will significantly enhance our SPL pipeline for the future.

Daniel Arias, Analyst

Okay. Maybe if I could just sneak one more in here since it feels like we have the time here. On the strategic plan that you were touching on, you had alluded to it, I think, in your comments with the VLx, but I think part of what you were trying to do this year or into this year was move upstream and downstream of where you are today in cell therapy or at least evaluating how you can do that. Is that something we should keep an eye out for? And if so, would that be an organic effort or more on the inorganic side?

Doug Doerfler, President and CEO

We are establishing another corporate development group and have been dedicating significant time to our strategy and future direction. We see opportunities where we can excel, particularly in solid generic steps. Some of these opportunities will arise organically as we have identified areas for growth. There is a real demand in the market for product consistency, characterization, and methods to manage product potency, which has become increasingly important. We are exploring basic analytical techniques that could enhance our offerings. Most of these opportunities will likely be in manufacturing rather than in the early stages. Our company is positioned in a high-value proprietary manufacturing sector, and we intend to concentrate our efforts there. We believe there are substantial opportunities, especially as technologies developed for other industries, like bioprocessing, can be adapted for our use. Additionally, smaller companies are developing technologies and products that face challenging decisions regarding investments in sales and marketing, particularly in a market where capital is not as freely available as it was previously. Board members at these companies will be carefully considering whether to take such risks, as execution in this market can be complex. We have managed to attain a certain level of success in this environment.

Daniel Arias, Analyst

Okay. Helpful, Doug. Thank you.

Doug Doerfler, President and CEO

Thanks. Thanks, Dan.

Operator, Operator

Thank you. And our next question comes from Jacob Johnson from Stephens. Your line is now open.

Mark Belford, Analyst

Hi. This is Mac on for Jacob. Just a couple of quick ones from me. On the drug development side, can you talk about how much of the investments in R&D and sales and marketing are focused on this side of the business? And how much do you think this could accelerate growth in the segments?

Doug Doerfler, President and CEO

Yes, I believe we are starting to see the benefits from the consumer investments we made over the past couple of years on new processing assemblies. We continue to receive robust feedback from our customers, particularly focused on drug discovery. This market has been relatively flat, with slight growth, and we aim to accelerate that trend. We saw some success in the first quarter in this regard and plan to continue our efforts. The more we can target use cases in drug discovery, which includes bioprocessing, the better positioned we will be to develop that business. The initial launch of the VLx is likely to focus on bioprocessing rather than cell therapy, as we view drug discovery to encompass the mid and large-scale production of monoclonal antibodies. Consequently, we expect to see significant growth in that sector as we keep investing in drug discovery.

Mark Belford, Analyst

Thanks. Also, last quarter you commented on that you're seeing interest outside the U.S. How large of an opportunity are the European and Asia Pacific markets for you?

Doug Doerfler, President and CEO

We've been operating in Europe for a long time, and there is consistent strong growth across the EU and the UK. Our sales and marketing efforts are fundamental there. We are making careful investments that will pay off. We are observing growth in cell therapy, especially in China, where it is a challenging market to achieve sustainability. While entering the market isn't exceptionally hard, maintaining lasting success is our main focus. We have seen good results in Japan and somewhat in Korea, and we will continue to direct our attention toward Asia and Europe, as Europe is now a crucial part of our cell therapy business.

Mark Belford, Analyst

All right, thanks, Doug.

Doug Doerfler, President and CEO

Sure. Thank you.

Operator, Operator

Thank you. And our next question comes from Mark Massaro from BTIG. Your line is now open.

Vidyun Bais, Analyst

Hey, guys. This is Vivian Wohl for Mark. Thanks for taking the question. So for your very existing SPL portfolio, can you share any detail on the rough split of your customers that are in the clinic at present or in later stage development?

Doug Doerfler, President and CEO

We mentioned that at the end of last year, we had 16 partners, and these partners are associated with 95 programs, with 15% currently in the clinic. While there has been some speculation from analysts about the products we support, we have publicly disclosed that we are deploying CTX001 for sickle cell disease. However, we have been less transparent about some of the other programs, as all of these deals are confidential, and we prefer not to discuss them further.

Vidyun Bais, Analyst

Okay, got you. And can you just touch on the SPL panel? I think you've previously discussed a need to sign three to four SPLs per year and just any update there. And how are the conversations about this progressing?

Doug Doerfler, President and CEO

Yes. The pipeline continues to be very robust, and there has been merger. We just signed into the first quarter of this year. We continue to guide to, I think, three or four, I can remember that specifically. And we're building out our business development group, Alliance Management group. So we think that there's a tremendous amount of opportunity in that. One of them has to do more with the progression of our partners, and it does actually impact our negotiations, besides being moved from preclinical in the IND-enabling studies. That's the turning point where they would want to have access to our patents, our technology, our master founders, things like that.

Vidyun Bais, Analyst

Thank you. Great. Thanks for answering the question.

Doug Doerfler, President and CEO

Sure.

Operator, Operator

Thank you. And I’m showing no further questions at this time. I'd like to turn the conference back over to Doug Doerfler for closing remarks.

Doug Doerfler, President and CEO

Thank you all for your questions, interest, and support of MaxCyte. It's been an incredible 2021 and a strong start to 2022, despite the current investor sentiment in the industry. We are optimistic and confident that we will see impressive clinical data from our partners in the coming quarters, which should positively impact the cell therapy industry as a whole and MaxCyte specifically. Thank you again for your support, and I look forward to our future discussions. We will be meeting with investors over the next several days, so if you have any specific questions, feel free to reach out to us at [email protected]. Thank you, Sean, Ron, and Gigi, for facilitating this call. Stay safe. Thank you.

Sean Menarguez, Director of Investor Relations

Take care, everyone.

Operator, Operator

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