Rapid Micro Biosystems, Inc. Q4 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rapid Micro Biosystems' Fourth Quarter and Full-Year 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the conference over to Michael Beaulieu, Investor Relations. Please go ahead.

Good morning, and thank you for joining the Rapid Micro Biosystems' fourth quarter and full-year 2023 earnings call. Joining me on the call are Rob Spignesi, President and Chief Executive Officer; and Sean Wirtjes, Chief Financial Officer. Earlier today, we issued a press release announcing our fourth quarter and full-year 2023 financial results. A copy of the release is available on the company's website at rapidmicrobio.com under Investors in the News & Events section. Before we begin, I'd like to remind you that many statements made during this call may be considered forward-looking statements within the meaning of Federal Securities Laws, made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements, including statements relating to Rapid Micro Biosystems' financial condition; anticipated future cash usage and cash runway; guidance for 2024 including revenues, expenses, gross margin, system placements and validation activities; expectations for and planned activities related to the company's business development and growth; customer interest and adoption of the Growth Direct system; statements regarding the planned launch and commercialization of Rapid Sterility; and the potential impact of macroeconomic uncertainty on Rapid Micro's business. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. For a list and description of the risks and uncertainties associated with Rapid Micro's business, please refer to the risk factors section of our most recent annual report on Form 10-K filed with the Securities and Exchange Commission, as updated from time-to-time in our subsequent filings with the SEC. We urge you to consider these factors and you should be aware that these statements should be considered estimates only and are not a guarantee of future performance. This conference call contains time sensitive information and is accurate only as of the live broadcast today, March 1, 2024. Rapid Micro disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I'll turn the call over to Rob.

Thank you, Mike. Good morning, everyone, and thank you for joining us. I will begin this morning's call with an overview of our fourth quarter 2023 performance and highlights, followed by a review of our growth strategy for 2024. I'll then turn the call over to Sean for a more detailed review of our financial results and outlook. Total revenue was $6.3 million in the fourth quarter, representing growth of 45%; and $22.5 million for the full-year 2023, representing growth of 31% compared to the prior quarter and year, respectively. We placed six Growth Direct systems in Q4 for a total of 16 for the year. These results exceeded our guidance for both the quarter and the year and reflect strong, consistent commercial execution and the robustness of our growth strategy. Also, in our fourth-quarter results, we were pleased to report that we made significant progress and achieved near breakeven gross margins, which we believe represents a positive inflection in our financial profile. This performance is a result of the efforts of our manufacturing, operations, and service teams who have been aggressively focused on reducing costs, enhancing efficiency, and productivity. On a cumulative basis, through the end of 2023, we have placed 141 Growth Direct systems globally, including 121 fully validated systems, and have shipped nearly 5 million consumables. Our customer base now includes 70% of the global top 20 pharmaceutical manufacturers and many of the largest global Contract Development and Manufacturing Organizations (CDMO), including Samsung Biologics, who recently selected the Growth Direct system to automate their critical microbial quality control testing. We have also placed Growth Direct systems with 100% of the manufacturers of commercially approved CAR-T therapies. Manufacturing of these life-saving therapies requires accuracy, full automation, and fast turnaround, which are hallmarks of the Growth Direct. We are very proud to be the trusted partner with these leading companies for their mission-critical microbial quality control processes. As we turn to 2024, our priorities remain consistent with 2023. First, accelerating Growth Direct system placements remains our highest priority. Our second priority is improving gross margins and driving towards profitability. Our third priority is developing and commercializing innovative new products, which in the context of 2024, means achieving the successful launch and commercialization of Rapid Sterility. And finally, we remain focused on prudently managing our cash. The success in achieving our 2024 top priority of accelerating system placements is a function of the size and quality of our sales funnel, which remains many multiples of our forecast. During 2023, our system placements were a balanced mix of new versus existing customers and single versus multi-system orders. We also achieved a balanced mix of sales into biologics, cell, and gene therapies and small molecules, which reflects a global market opportunity. Accelerating system placements is also a function of the coverage and capability of our commercial organization, where we have been investing in our global sales and marketing teams as well as critical enablement activities, such as sales tools and training. We exited 2023 with solid momentum, including two-thirds of 2023 systems being placed in the second half of the year and productivity from all three of our sales regions. And finally, we continue to leverage our strong relationships and a strong track record with our customers to reference selling as we strive to make Growth Direct the industry standard for microbial quality control testing. All of this gives us confidence in our ability to execute against this priority and meet or exceed our 2024 targets. Turning to gross margin improvement. We were pleased with the progress we made during 2023 to take costs out of our product manufacturing processes and operate more efficiently. In the fourth quarter, we began to see some of the early benefits of these actions reflected in our financials. In fact, our cost of revenue in Q4 decreased by 7%, while revenue increased by 45% compared to the same period last year, driving gross margin to near breakeven. We think this is the start of a positive inflection point and demonstrates significant leverage in our business model. Looking ahead to 2024, we expect to achieve positive gross margins for the full-year as we further scale our business and continue to execute against our cost reduction, efficiency, and productivity programs. Our third priority is developing and commercializing new products to drive growth and provide additional value to our customers. In early January, we announced the upcoming availability of our Rapid Sterility application for the Growth Direct system. As we highlighted in our January press release, our Rapid Sterility application can deliver time-to-organism detection as little as 12 hours and final time-to-result in as little as one to three days. These data represent a significant improvement over widely used traditional test methods, which generally require a 14-day endpoint incubation and provide compelling differentiation when compared to current products on the market. Rapid Sterility, as with our environmental monitoring, water, and bioburden applications, offers a compelling value proposition for our customers that includes faster product release, more accurate results, improved data integrity, full automation, and consistency across their manufacturing networks. This is a breakthrough technology, and we are excited about expanding the Growth Direct platform with this new application. Later this month, we plan to participate in the PDA annual meeting, where we will give a technical presentation on our Rapid Sterility application and engage with both existing and prospective customers. We remain on track for a mid-year launch and look forward to providing you with updates in the coming quarters. Wrapping up my prepared remarks, I wanted to share my latest thoughts on Rapid Micro and the Growth Direct technology. I spent several weeks in January and February connecting with customers, and I was reminded of the many strong partnerships we have established. I remain confident in the market opportunity and customer demand for the Growth Direct and our strong service and support offerings. These are truly valued partnerships within a critical part of our customers' quality and manufacturing processes. As we strive to make the Growth Direct an industry standard, we will continue to expand our offerings with innovative products, such as Rapid Sterility. As our platform expands, we will continue to further embed our products and services within our customers' critical quality and manufacturing processes. Our customers recognize a compelling value proposition of automating their quality control labs with a product that supports global regulatory requirements. Turning back to our strategic outlook. We are excited to build upon our many achievements in 2023. We have a clear set of priorities and are building a track record of strong and consistent execution and innovation. We are confident we have the right strategy and will leverage our successes in 2023 on our path of increasing shareholder value. And with that, I'll now turn the call over to Sean to discuss our fourth-quarter performance and details for our 2024 guidance.

Thanks, Rob. Good morning, everyone. I'll start my comments today with a review of our fourth quarter 2023 results, and then discuss our 2024 outlook. Q4 revenue increased 45% to $6.3 million compared to $4.4 million in Q4 2022. During the fourth quarter, we placed six Growth Direct systems compared to two in the fourth quarter last year. The six systems this quarter represent the most we placed since Q3 2021. We also completed nine validations in the quarter. Product revenue, which is comprised of systems and consumables, increased 45% to $4.1 million in the quarter compared to $2.8 million in Q4 last year. The growth in product revenue was primarily driven by the higher number of systems placed in the quarter. Consumable revenue in Q4 increased on a year-over-year basis, but was down slightly on a sequential basis due mainly to the timing of customer shipments. Service revenue also increased 45% to $2.2 million in the fourth quarter compared to $1.5 million in Q4 last year. The increase was driven by a higher level of validation activity and higher recurring service contract revenue. Fourth quarter recurring revenue, which consists of consumables and annual service contracts, increased 13% to $3.3 million compared to $2.9 million in Q4 last year, driven by growth in both consumables and service contract revenue. Non-recurring revenue was $3.0 million in Q4 compared to $1.5 million in the prior year quarter. Turning to gross margins. Product margins were negative $0.6 million in Q4 compared to negative $2.4 million in the fourth quarter last year. The improvement was attributable to higher product revenue, higher production volumes in both systems and consumables, and benefits from actions taken by the company to lower product costs and increase manufacturing efficiency, including enhancements made to our automated consumables manufacturing line earlier in the year. Service margins were positive at approximately $0.4 million in Q4 compared to negative $0.2 million last year. Higher revenues and increasing productivity drove the improvement in service margins in the quarter. On a combined basis, our fourth quarter gross margin was near breakeven at negative $0.2 million or negative 3% of revenues, representing a 24 percentage point improvement on a sequential basis and a 56 percentage point improvement compared to the fourth quarter last year. Looking at this margin improvement in another way, our total revenue increased 45% in the fourth quarter, while our total cost of revenue decreased 7% over the same period, driving a significant improvement. Looking forward, we expect continued margin improvement in 2024 and beyond as we continue to grow revenues, reduce product costs, drive higher manufacturing efficiency, control manufacturing overhead costs, and increase service productivity. Continuing down the P&L, total operating expenses were $12.0 million in the fourth quarter, consisting of $3.2 million in sales and marketing, $3.3 million in R&D, and $5.5 million in G&A. This compares to total operating expenses of $14.7 million in the fourth quarter of 2022. The decrease was largely due to non-recurring costs incurred in the fourth quarter last year associated with the strategic review process initiated by our Board of Directors in that period, as well as cost savings in Q4 this year resulting from the restructuring plan implemented in August 2022. Net loss was $11.2 million in Q4. This compares to a net loss of $16.4 million in Q4 last year. This improvement was largely due to higher revenue, better gross margins, and lower operating expenses, showing the broad financial benefits of the progress we made against several of our strategic focus areas in 2023. Net loss per share was $0.26 in Q4 compared to a net loss per share of $0.39 in the prior year quarter. With respect to non-cash expenses and capital expenditures, depreciation and amortization was $0.8 million, stock compensation expense was $1.0 million, and capital expenditures were $0.4 million in the fourth quarter. I'll now turn to our 2024 outlook, where my comments will primarily be focused on the full-year. Given current market conditions, our outlook reflects some uncertainty related to customer budgets and the timing and scale of customer purchase decisions. With that context, we expect total revenue to be at least $27 million for the full-year 2024, which assumes we will place at least 20 systems. This implies year-over-year revenue growth of at least 20%. Assuming typical seasonality, with revenue and placement stepping down from Q4 to Q1 on a sequential basis, we expect total revenue of at least $5.5 million in Q1, which assumes at least three system placements. We then expect revenue and placements in Q2 and Q3 to be higher than Q1, and then peak in Q4. While we anticipate launching Growth Direct, Rapid Sterility by midyear, our guidance assumes any contribution from this new offering will be modest in 2024, given our typical systems sales cycle. Looking at consumables, we expect revenues to increase sequentially in Q1 compared to Q4, and then continue to increase sequentially each quarter over the balance of the year as more systems complete validation and ramp toward routine use. With respect to service, we expect revenues to be between $2.0 million and $2.5 million each quarter, with variability primarily driven by the timing of validation activities. We expect to complete at least 16 validations in 2024, with at least three in the first quarter. Turning to gross margins. We expect Q1 margins to be lower than Q4 due to the seasonality impact I mentioned earlier. Thereafter, based on our revenue outlook, the benefits from ongoing cost reduction and manufacturing efficiency initiatives, and increasing productivity and service, we expect our gross margin percentage to improve, but still be negative in Q2, and then be single-digit positive in Q3 and Q4 as well as for the full-year. We expect service margins to be positive in all four quarters and for product margins to improve each quarter as the year progresses. We expect operating expenses to be in the range of $48 million to $52 million in 2024, with depreciation and amortization of approximately $3 million, stock compensation of approximately $4.5 million, CapEx of approximately $3 million, and other income, which is comprised primarily of interest income of approximately $3 million in 2024. Finally, we expect cash burn of roughly $40 million in 2024, providing cash runway at least into the second half of 2026. This assumes a meaningful benefit from working capital, including inventory reductions. That concludes my comments. So at this point, we'll open the call up for questions.

The floor is now open for your questions. Your first question comes from the line of Dan Arias with Stifel. Your line is open.

Hi, good morning guys. Thanks for the questions. Sean, maybe just to start on the gross margin improvement. How much of what would get you crossed over into positivity this year is, so to speak, in the bank, à la the efficiency improvements that you made last year, the cost work that did, versus things that have yet to be done or that depend on volumes for the year? And just as a follow-up to that, I think you said down first half of the year and then single-digit up in the back half of the year. Does that get you up for the first year? And if you made that comment, I apologize, but just my rough glance that the model doesn't necessarily suggest that, that could be the case.

Yes. I'll start with your second question, Dan. So yes, the guidance is that we think margins will be a little bit lower in Q1 compared to Q4 but get better, still negative in Q2, but then flip positive in Q3 and Q4. And for the full-year, we expect it to be positive. So hopefully, that cadence makes sense. Volume is a player in that, but there's a lot of other things that play within that cadence as well. So I think that kind of segues to your first question. There are some things like the automation improvements we made that are baked in. Volume is important. And then there's ongoing work around cost reduction in products, other things we're doing around efficiency, and increased throughput in manufacturing. It's a mix, but there definitely are some components that we have baked in that are going to help support better performance on margins and move us positive in 2024.

Okay. Helpful. And then maybe just on the revenue side, annualized pull-through per system, two questions there. Obviously, the new systems that are getting installed alter the calculation a bit. But if you looked at sort of same-store sales, what you had installed at the end of last year, are you confident that the average pull-through level will be up this year? And then on the consumables growth rate that we should be thinking here, 23% recurring revenue growth in 2023, how doable is a number like that this year? Obviously, you're growing the installed base, so that should help.

Yes, I think the implied growth rate on recurring will be a little bit lower. In Q4 performance first, we've guided that we would be down sequentially mainly due to timing of shipments, and that's what we saw. In consumables, you're right. We have new systems coming online. The number we track, as we've talked about in the past, is validated systems. We still have work to do typically once we get there to get people in routine use. Another important factor is that we had a significant customer that let us know in mid-'23 that they were selling a site that had multiple high-volume systems in it. As we made our way through the second half of '23, we started to feel the impact of that as those systems came offline. That is still the case today. The good news is that the new owner of that site plans to bring some of those systems, not all, but some of them back online later in 2024, which we view as an opportunity.

Okay. Maybe just last quick one since it feels like we may be up the time here. Just on the validation timelines, do you think as an average 2024 validation timelines will be shorter than they were in 2023?

Yes. I think we've talked about Project Rapid in the past and the work we're doing to shorten that process up. I think we saw good progress on that in '23, and I would expect we'll see incremental progress in '24. So, yes.

Next question comes from the line of Tejas Savant with Morgan Stanley. Your line is open.

Hi, this is Jason on for Tejas. Congratulations on the quarter. And thank you for taking my questions. So just some questions related to Sterility. Could you elaborate on the competitive landscape of Sterility versus other competitors in the space? With the launch, do you anticipate the new offering opening up opportunities with new customers or expanding placements with existing customers? And I guess on a related note, do you anticipate that you'll be building out a sales force to support Sterility sales, or would you leverage your existing sales force? Thank you.

Okay, thanks for the question. It's Rob. I think there's three in there. The first one is the competitive landscape. The top competitor is the legacy method in Sterility. That being said, there is increased competitive activity from other suppliers of Rapid Sterility applications in the market versus our other applications. It is a market where there are some incumbents offering technology-enabled rapid solutions. We specifically developed and designed this system to offer compelling differentiation, clearly against the legacy and traditional method, but also against the current technology-enabled methods. We like how we compare against the other offerings in the market, as I mentioned in my prepared remarks. Regarding new and existing customers, I think the answer is both. The exciting aspect of Sterility is that customers are excited about it, particularly within our existing customer base. The majority of our current customers are large molecules, including biologics and cell and gene therapies. However, Sterility will also get us more deeply into small molecule injectable manufacturing. Therefore, it expands our opportunity. Regarding the sales team specifically, we primarily plan on leveraging our current sales team; however, we will have a dedicated Sterility group focused on assisting and enabling our sales team with some of the technical elements and application elements of the Sterility-specific activities.

Got it. Thank you. That was helpful. If I could squeeze another question in. With Sterility development in its final stages, what are the next areas of product or workflow development that could enhance the customer experience on Growth Direct? Thank you.

Yes. From a high level, we view the Growth Direct as a platform technology. Our product strategy is to continue to influence the workflow in and around our platform technology. We automate the microbial quality control process. We detect the contamination, enumerate contamination, and we do that across the primary microbial quality control tests for environmental monitoring, water, bioburden, and soon sterility. We also envision, over time, providing more information to customers regarding the organisms they are detecting in their workflows. The mold technology we released last year is a great example of this. There could be extensions around that. We're generating enormous amounts of digital data for customers. This is the first time these labs have had access to this data. So, the question is, how can we help customers use, manage, and analyze their data on both a site-specific and global basis? Our goal is to become the new quality control infrastructure. As we grow our site network globally, we're essentially creating a new microbial quality control infrastructure for our customers. What kind of services and insights can we provide given the data we generate? This gives you insight into how we're thinking about expanding our influence within our customers' quality and manufacturing operations.

Thank you. I appreciate the answers, guys.

Sure.

Thanks and congrats on the quarter. Thanks for taking the questions. One on Samsung Biologics: did they select the Growth Direct platform for their microbial QC? Can you remind us if it was a multisystem placement and was that multiple Samsung sites? If you could give us color on the sense of the magnitude of Samsung going forward as you expand across their global sites? When can you expect more Samsung placements? Obviously, it's a pretty huge entity.

Yes. Thanks, Steve. We're clearly excited about the Samsung partnership and the company selecting us. Samsung does their diligence, and we think it speaks volumes that they selected the Growth Direct. We did place a multisystem order at a single site last year. I won't go into the forward-looking expectations, but I can tell you that we're very much looking forward to growing with Samsung in the coming quarters and years.

Okay. Great. No, I appreciate that. And then maybe a follow-up question on the CRO landscape. Given the current geopolitical sentiment and that proposed bipartisan BIOSECURE Act, could you give us a sense of your exposure to CROs that were named in that BIOSECURE Act?

Yes. It's very low. I think it's specifically around China. Our connectivity and exposure are quite low. We have a strong CDMO footprint, as you know. Our value proposition resonates strongly there, and our current products and expected customer base would be independent of that BIOSECURE Act and the named parties within.

Okay. I appreciate that color. And last one is a follow-up question on Rapid Sterility. Can you just walk through some of the positive early beta testing feedback and the stress testing you did during that beta launch that's driving confidence in the expected midyear launch? And has Rapid Sterility been helping drive the conversation with new customers?

Yes. It is helping drive conversations with new and existing customers. We've been, I wouldn't say surprised because we expected a positive response, and we're getting it. Importantly, we have not assumed meaningful contributions for Sterility in our 2024 guidance due to the midyear launch and the sales cycle timing. However, we are preserving the opportunity for upside with regard to Sterility, and there is considerable excitement surrounding it. Our confidence comes from a combination of customer feedback and a rigorous internal development process. We have gone through system readiness, which is essentially a new consumable that works with the system, and extensive testing with data we've published regarding time-to-detection and time-to-result. We will work with customers to validate this data in their environments over time. We're quite confident in what we're seeing, and that confidence has driven us to release a press release. We're excited about the product, and so far, the market seems enthusiastic as well.

Okay, great. Thanks for that, and congrats again.

Okay. Well, thanks, Steve, for the question. And thanks everyone for joining us today. Again, we enter the year with strong momentum and are in a great position to deliver an excellent year in 2024. I look forward to speaking with many of you over the next few weeks at the TD Cowen and KeyBanc Life Sciences Conferences. Thank you all.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.