Maravai LifeSciences - Q1 2023

Transcript

Operator (participant)

Good afternoon. My name is Rob. I will be your conference operator today. At this time, I would like to welcome everyone to the Maravai LifeSciences Q1 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. If you would like to ask a question during this time, simply press star followed by one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Deb Hart, Head of Investor Relations, you may begin your conference.

Deb Hart (Head of Investor Relations)

Thank you, Rob. Good afternoon, everyone. Thanks for joining us on our Q1 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 two, Carl will first provide you with a business update, and Kevin will review our financial results and guidance. Trey Martin, President of our Biologics Safety Testing, Drew Burch, Executive Vice President, Nucleic Acid Products, and Becky Buzzeo, our Chief Commercial Officer, will join the call for the Q&A session following the prepared remarks. We remind you management will make forward-looking statements and refer to GAAP and non-GAAP financial measures during today's call. It's possible that actual results could differ from management's expectations.

We refer you to slide three for more detail on forward-looking statements and our use of non-GAAP financial measures. Our just-issued press release provides reconciliations to the most directly comparable GAAP measures. Please also refer to Maravai's SEC filings for additional information on the risks and uncertainties that may impact our operating results, performance, and financial condition. Now I'll turn the call over to Carl.

Carl Hull (Executive Chairman)

Well, thank you, Deb, and good afternoon, everyone. We appreciate having you join us for our call today. Let me give a quick recap of the quarter, highlights some innovative new products that we are introducing, and provide a few business updates before turning the call over to Kevin. Let's start with our Q1 results on slide five. Today, we reported $79 million in revenue for the quarter, $24 million in total adjusted EBITDA, and $0.03 in adjusted fully diluted EPS for the quarter. Revenue results were within the range of expectations for the Q1 that we shared with you during our Q4 conference call.

While our performance in the quarter was consistent with our expectations, like other players in the field, we do note that broader market factors will likely continue to impact the business into the Q2.

Kevin will go into more detail on the results and our revised guidance later in the call. Our nucleic acid production business had revenue of $61 million in the Q1. This includes an estimated $45 million of base nucleic acid production revenue. The biologic safety testing revenue was $18 million in the Q1. On slide six, you'll see that our adjusted free cash flow in the quarter was $23 million. Cash on hand at the end of the quarter was $628 million, down only $4 million from the year-end, despite our having paid $70 million up front in the quarter for the Alphazyme acquisition. Debt sits at $537 million gross, thus we maintain a $91 million net cash position.

This puts us in a great position to fund our long-term strategy of growth through organic investments in our own capabilities while we simultaneously pursue external M&A. We continue to see multiple strategic opportunities in our space where we will endeavor to responsibly deploy some of this cash. As we close out the Q1 of the year, we remain focused on, first, expanding our product portfolio, second, advancing our market leadership in the mRNA space, and finally, accelerating the introduction of scientific innovations in ways that support our customers' rapidly evolving needs while continuing to invest in operations, manufacturing, and people to support our base business growth.

To the first point on product portfolio expansion and our focus on innovation, let's now turn to slide seven. As many of you know, CleanCap is not a single product, but rather a portfolio of capping analogs.

We have several versions of CleanCap that we have developed for both messenger RNA synthesis and for self-amplifying messenger RNA. Yesterday, at the TIDES USA scientific meeting held here in San Diego, our Chief Innovation Officer, Dr. Kate Broderick, introduced the newest addition to the CleanCap product portfolio, CleanCap M6, which we are extremely excited about. CleanCap M6 is our most robust capping analog to date and represents a significant advancement in the field of messenger RNA capping. We believe this innovative capping analog to be the most efficient capping strategy now available on the market, and we believe that it will represent the next generation of novel mRNA caps. Of particular note is the fact that it produces the highest in vivo protein expression we have seen for any CleanCap analog so far.

In our comparison studies, CleanCap M6 consistently produced 30%+ higher protein expression than comparable enzymatic capping methods. Higher expression can result in greater potency or more effective dosing of messenger RNA drugs. Similar to our other CleanCap products, CleanCap M6 generates a naturally occurring Cap 1 structure via co-transcriptional capping. This provides our customers with the benefit of a simplified and higher yield messenger RNA manufacturing process with a shorter manufacturing time, which leads to better economics in mRNA production. Slide eight provides a quick recap of the favorable attributes of CleanCap M6. We know that CleanCap already is the most economically favorable capping process on the market. We recently commissioned a strategic consulting firm to study the manufacturing costs associated with the three methods of mRNA capping, enzymatic, ARCA, which stands for anti-reverse cap analog, and CleanCap.

The study considered the complete economic picture around mRNA capping, including actual customer experiences, costs, and future needs. Due to mRNA's inherent instability, in vitro transcription of mRNA can be a challenging biochemical reaction, and the need for high purity necessitates stringent purification and QC testing. As we saw in the recent study, depending on the technology, equipment, downstream purification processes, and user expertise, the expected overall yield of capped mRNA can vary greatly, ranging from 50% with enzymatic capping to 95% associated with the use of CleanCap technology. I'm just back from visiting one of our customers who has been conducting pre-market evaluations of M6 and some of our even newer capping analogs, and they're very excited about the performance improvements being seen in their own hands.

In fact, we've already begun to take initial orders for this new product.

Slide nine shows the direct reagent costs for the GMP manufacturing of 1 gm of messenger RNA using each of the three outlined mRNA capping methods. This figure demonstrates how enzymatic capping and ARCA require additional reagent costs for the same amount of product due to their reduced yields per reaction. It is estimated that both enzymatic capping and ARCA technologies lead to higher total reagent cost per quantity of produced mRNA, an estimate of $248,000 for enzymatic, $221,000 for ARCA, and $215,000 for CleanCap technology. This data demonstrates how influential the recovery rate or yield is on the total reaction reagent cost. Beyond this, there are additional advantages to CleanCap, including the reduced purification cost, time savings in producing products with a simpler manufacturing process, and labor savings.

Slide 10 compares the total manufacturing costs of CleanCap versus ARCA and enzymatic capping. As you can see, CleanCap is 30% less than enzymatic capping and 20% less than ARCA. As a result of this third-party analysis, we have developed robust selling tools for our business development and commercial teams to use to help drive share gain for the CleanCap portfolio, especially versus enzymatic capping methods. The CleanCap M6 analog adds to these economic benefits with the additional advancement of higher protein expression from the equivalent amount of mRNA. Together, we think that this is a game-changing analog for manufacturing more potent messenger RNA therapeutics and vaccines. Sticking with this new product innovation theme, let's turn to slide 11.

Also at the TIDES Scientific Meeting this week, Glen Research, our high-quality provider of fluorophores, quenchers, labels, and modifiers for oligonucleotide synthesis, published Glen Report 35.1.

The Glen Report has been in consistent or constant publication since 1987 and serves as a well-regarded resource for the many scientists engaged in DNA and RNA research and oligonucleotide synthesis. Four new products were announced in our latest issue as Glen continues to expand the breadth of its oligonucleotide synthesis products. One I'd like to highlight today is the expansion of our proprietary Serinol product line with the launch of 3'-Azido-Modifier Serinol CPG, or controlled pore glass, supports. Click chemistry is a really popular method of conjugation and bioconjugation, and its discoverers were awarded the 2022 Nobel Prize in Chemistry. Most people will use one molecule labeled with an alkene group and another labeled with an azide group. When mixed, the linkage formed between the two entities can feel as simple and easy as a click.

Glen Research has now expanded our set of products to facilitate use of oligonucleotides in click chemistry. The 3'-Azido-Modifier Serinol CPG is convenient to use for this application and produces excellent results. Due to its advantages over other approaches, it is possible that this new support may become the most popular method for preparing azide label oligonucleotides. As you can see, we believe that investing in new product innovation is a key driver for creating value in this part of our business as well. We are in an exceptional position to win customers early for both product and technology adoption. Turning to our commercial strategy. By winning early in the discovery process, especially with our CleanCap technology, we are able to cross-sell NTPs and other raw materials at earlier stages of the clinical pipeline.

That is exactly what our commercial team for NAP is tasked to do.

Win first with CleanCap at the earliest stages of the clinical pipeline, cross-sell NTPs and other raw materials, and then grow with our customers to support them with their later stage developments. This can include supporting them with both RUO and GMP materials, depending on their needs and when they choose to move to higher grade inputs. Let's turn now to slide 12 and let me share some data with you on our progress with customer adoption. One year ago, in the Q1 of 2022, we had 185 CleanCap reagent customers on a rolling 18-month basis. As we close Q1 of this year, that number is now 312 customers, up 69%. These are customers that order CleanCap as a standalone reagent product.

We ship it to them or their preferred contract manufacturer, and they then use our capping analogs in their own messenger RNA manufacturing processes. This could be for research and discovery activities, preclinical development, and with our GMP offering, clinical manufacturing of messenger RNA. We also track our CleanCap mRNA discovery customers. These are customers at the very early stages of their programs who look to TriLink to manufacture messenger RNA on their behalf using CleanCap as their capping method. Their activities are mostly for early research and discovery, including assay development, target identification, and in vitro cell models. This group of customers has grown from 585 last year to over 600 customers today, up roughly 3%.

As these early customers continue through their discovery work, we expect many will mature into mRNA GMP services, where they would take several of their top candidates and upgrade them to our GMP manufacturing process, which includes process development to a larger scale, phase-appropriate methods validation, and collecting documentation that would support an IND filing. Our GMP mRNA customers have grown from 55 to 61 over the last year, up 11%. Lastly, the number of our GMP mRNA customers who have advanced to the clinic is now 26 programs. Let me now share a couple of examples of what this customer journey means over time to Maravai from a revenue standpoint. Slide 13 shows an example of a customer we started working with a few years ago in their early discovery phase.

They now have several programs underway for precision genetic medicine.

In 2018, they were less than a million-dollar revenue contributor. By 2022, they were ready to move to a phase I trial and ordered nearly $8 million of products from us. This particular customer uses CleanCap and our N1-Methylpseudouridine Triphosphate. This customer is also currently evaluating using Alphazyme enzymes. Slide 14 is an example of a different customer that we have worked with on nucleic acid services. Their target is a personalized cancer vaccine. This customer represented $102,000 in revenue in 2018, and in 2022 was over a $3 million customer. This customer uses our GMP CleanCap mRNA manufacturing and began their product development journey with us during initial R&D construct screening. We worked closely with them to facilitate their construct selection and manufacturing of their various GMP batches.

As these customers progress through our GMP services with their preclinical and early clinical phase work, we also want to support them through later stage development, which is why we invested in our new Flanders facility. You can see we have a unique opportunity to drive CleanCap inclusion across our growing mRNA customer base while providing other critical GMP raw materials to improve in vitro transcription reactions and grow with our customers as they advance their own programs. Turning to slide 15 and our Biologics Safety Testing business. Our products and services in this business support the cell and gene therapy, vaccine, and biologics drug manufacturing markets by providing process-related impurity analytics, along with offering innovative viral clearance prediction solutions that help our customers ensure the safety of their biopharmaceutical products.

We continue to innovate here to bring improved products to market to support our customers.

Late last year, we announced the launch of the MockV RVLP Kit. This kit enables bioprocess scientists to quantify the removal of retrovirus-like particles, or RVLPs, produced endogenously by Chinese hamster ovary, or CHO cells, during biopharmaceutical manufacturing. Today, we are happy to report strong market uptake of this kit and technology by several major biopharma companies and CDMOs. In addition, we are closely monitoring a recently published draft revision of the ICH, which is the International Conference on Harmonisation guideline on viral safety evaluation of biotechnology products derived from cell lines of human or animal origin. This considers the use of CHO-derived endogenous viral particles, or RVLP, for viral clearance experiments.

If recommended in the final published guideline, this could be a very positive tailwind for the entire BST business. In March, our BST team launched the PG13 HCP ELISA Kit.

Bioanalytic customers can use this kit during purification and process development, as well as in quality control and product release testing. The PG13 kit represents the 24th expression platform we provide analytics for and solidifies our commitment to supporting cell and gene therapy. As in NAP, we continue to innovate and scale our offerings in BST to ensure superior technical support, the highest quality services and offerings, and the most comprehensive catalog of products to meet our customers' needs. Moving on to slide 16 and some organizational updates. We're happy to welcome Drew Burch to our leadership team. Drew joined us in April as Executive Vice President of Nucleic Acid Products. For those of you not familiar with Drew, he has over 30 years of strategic, operational, commercial, and financial experiences in the life sciences industry.

I look forward to him playing an incredibly important role on our team as Maravai continues to scale and differentiate itself as a trusted supplier of nucleic acid and chemistry products for the life sciences industry. I'm confident he will build on the momentum of the NAP operating division and help us continue to provide best-in-class products that support the important work of our customers. Second, the integration of the Alphazyme acquisition is going very well. We are actively qualifying their enzymes into our nucleic acid services workflow and building their commercial team. We've also decided to add to the Alphazyme facility footprint with the addition of an adjacent 4,000 sq ft to provide an expanded R&D space.

Alphazyme extends our capabilities in the manufacturing of critical enzymes that support flexible, scalable production within a universally acceptable infrastructure, and we remain incredibly enthusiastic about our combined opportunities.

We also remain active in pursuing other inorganic growth opportunities and look forward to being able to announce additional acquisitions in 2023. We are committed to expanding our reach as a key specialized raw material supplier, and we are actively working to increase our international footprint so that we may improve our ability to directly serve our global customer base. Before I turn the call over to Kevin, I'd like to let you know that in late March, we published our second environmental, social, and governance report. This report covers the 2022 fiscal year and provides an expansive look into our rapidly evolving ESG program with tangible examples of how we are making a positive impact on stakeholders and positioning our business for sustainable growth.

I highlighted some key aspects of our progress during our fourth quarter call, but I encourage you to review the report on the investor section of our website. The comprehensive 41-page report is the culmination of our enterprise-wide effort to deliver holistic value to our stakeholders while scaling operations and managing rapid growth in a socially and environmentally responsible manner. On slide 17, you'll find some of the highlights from the report. We are very proud of the team's work to date and are committed to being a strong corporate citizen. We look forward to keeping you apprised on our journey. I'll now ask Kevin to cover more details on our Q1 performance and provide an update on our multiple facilities expansion projects. Kevin?

Kevin Lynch (VP and General Manager, CDMO Services)

Thank you, Carl. Good afternoon, everyone. I'm happy to review our financial results for the Q1 and to provide an update on the multiple facilities expansions we have underway. Starting on slide 19. As you've seen in our press release this afternoon, our Q1 2023 revenues were $79 million. As we stated in our Q4 2022 earnings call, we anticipated Q1 2023 revenues to be in the range of between $75 million-$80 million, thus our performance for the quarter was in the high end of our anticipated range and was consistent with our expectations. We present basic EPS, fully diluted EPS, and adjusted fully diluted EPS. Basic EPS is net income attributable to our Class A shares divided by the weighted average Class A shares.

Our fully diluted EPS equals net income prior to non-controlling interest divided by the weighted average for both Class A and Class B and other dilutive securities to the extent they are dilutive. Adjusted fully diluted EPS equals adjusted net income divided by the weighted average of both Class A and Class B shares and other dilutive securities. Both our basic and fully diluted EPS for the quarter were $0.00, while adjusted diluted EPS was $0.03 per share. This was also in line with our internal expectations for the quarter. Our GAAP-based net loss before the amount attributable to non-controlling interest was $1.3 million for the Q1 of 2023, reflecting the lower revenues and the impact of acquisition-related costs.

Our adjusted EBITDA, a non-GAAP measure, was $24 million for Q1, resulting in an EBITDA margin of 30% in Q1 2023.

Our EBITDA margin was lower than we have seen in a while as a result of the lower revenue base. Even with our revenue base being the lowest we've seen in almost three years, our margin is still very strong when compared to most companies in our space, including much larger, more mature companies. When we look at a selection of six companies that have reported here already in Q1 2023 and had adjusted EBITDA, including, in alphabetical order, Avantor, Bio-Techne, Danaher, Repligen, Sartorius, and Thermo Fisher. Our EBITDA margin of 30% compares well to the average of that group of six companies of 29%. This is true even in a low revenue quarter and with substantial ongoing investments in our overall infrastructure to support our future growth.

We continue to invest and stay laser-focused on our long-term strategic objectives, which require the continued investment in our overall capabilities. Let's move to slide 20. As Carl mentioned, we continue to have a strong balance sheet and cash flows. Our cash and cash equivalents, so GAAP metrics, totaled $628 million at March 31st, 2023, and we generated $85 million in cash flow from operations in the Q1, mostly based on the AR collections from a strong Q4 2022. This strong operating cash flow allowed us to fund both the Alphazyme acquisition in the quarter as well as our capital expenditures in the quarter. Our adjusted free cash flow for the quarter was $23 million. Adjusted free cash flow, a non-GAAP measure, we define as adjusted EBITDA less capital expenditures.

We ended Q1 with $537 million in long-term debt and $620 million in cash. This cash and debt structure allows us maximum flexibility as we continue to actively evaluate additional M&A opportunities. As we look at our treasury operations, we've been tightly managing our cash. With the interest cap contract we have in place, our gross interest expense is effectively capped at 6.5%. With our excess cash sweep activities and nice yields on liquid overnight investments, our overall net interest expense sits below 4%. Turning to slide 21. I'll provide some more insights into our business segment financial performance for the quarter. As Carl mentioned earlier, our nucleic acid production business represents $61 million in revenues for the Q1.

Nucleic acid production represented 78% of the company's total revenue in the quarter and generated $28 million in adjusted EBITDA in the quarter for a segment margin of 45%. CleanCap revenues from our COVID-19 vaccine customers were approximately $16 million in the Q1 of 2023, in line with our expectations for the quarter. We see this going down to about $10 million here in the Q2 of 2023 and maintain our guidance of $100 million in total contributions to our 2023 revenues. We did see additional orders for COVID-related CleanCap demand and have brought the total percentage of our full year total shipped or committed up to about 65% of our full year estimate. Our biologic safety testing business contributed 22% of the company's revenue in the Q1.

Our Biologics Safety Testing business delivered nearly $18 million in revenues in the quarter and $14 million of adjusted EBITDA in the quarter, a margin of 78%. Our Biologics Safety Testing business hit the highest revenue level since Q1 2022 and was up 14% from the last quarter of Q4 2022. We believe we're seeing the leveling out of the impact of China shutdowns, and we believe we will see a return to normal business in the China region in the mid to late Q2 here of 2023. Corporate expenses that are not included in the segment adjusted EBITDA totals above were $18 million in the quarter, increasing from both the prior year Q1 and slightly from our most recently completed Q4 of 2022.

These expense increases are associated with the continued build-out of our shared services functions.

Moving to slide 22 and an update on our facility expansion project. We have completed building construction of Flanders I and taken occupancy, and we expect the same for Flanders II in the Q2. we also began working out of our new building for our biologics safety testing business. Our teams remain extremely enthusiastic about the unique capabilities we can offer our customers from our expanding facility footprint. Turning to slide 23 and our guidance. Our Q1 results came in as anticipated, yet we acknowledge that the broader biotech market is sluggish and will likely impact our original growth projections for the year. We're updating our 2023 full year revenue guidance down $20 million at the midpoint to a range of $400 million-$440 million.

This puts our base business revenues in the range of $300 million-$340 million. With regards to the gating of overall revenues, we see Q2 had a total of around $70 million or so, which includes the previously mentioned approximately $10 million contribution from COVID CleanCap demand. We anticipate more normal growth in the second half of the year, with the remaining COVID CleanCap contribution most likely occurring in Q4. We estimate our adjusted fully diluted EPS in the range of $0.27-$0.33 and adjusted EBITDA of between $155 million and $175 million. Our guidance is also based on the following expectations as listed out on slide 24. Interest expense, net of interest income between $18 million and $22 million. Depreciation and amortization between $38 million and $42 million.

Stock-based compensation, which we show as a reconciling item from GAAP to non-GAAP EBITDA to be $34 million-$38 million. This also includes an as if fully converted share count of 252 million shares and an adjusted effective tax rate of 24%. Thank you for your time today and for your support of Maravai. I'll turn the call back to Carl for some final remarks.

Carl Hull (Executive Chairman)

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

Operator (participant)

At this time, I would like to remind everyone in order to ask a question, press star then one on your telephone keypad. We ask that you please limit yourself to one question and one follow-up. Your first question comes from the line of Conor McNamara from RBC Capital Markets. Your line is open.

Conor McNamara (Equity Research Analyst)

Hey, guys. Thanks for taking the question, I appreciate it. Thanks for all the color on-

Carl Hull (Executive Chairman)

Hey, Conor.

Conor McNamara (Equity Research Analyst)

... on the CleanCap cost.

Carl Hull (Executive Chairman)

Thanks.

Conor McNamara (Equity Research Analyst)

Some of the slides were very helpful on the CleanCap cost and the total production cost. Thank you for that. I've got one financial question and one kind of business question. First on the $20 million revenue hit, Kevin, can you maybe parse out where that's coming from? 'Cause you did call out some inventory normalization in the press release, and you talked about some biotech slowdown. Just which customers and kind of where that impact falls? I'll start there.

Kevin Lynch (VP and General Manager, CDMO Services)

Thanks. Conor. I would say, you know, we currently are seeing, you know, softness sort of in both the businesses. I would say, you know, what we thought was gonna be sort of contained more to probably the Q1 has trickled in here to the Q2. I think now we see in our Biologics Safety Testing business, probably more in the mid-single digits growth for the year, and then the base NAP business probably more in the mid-teens. I think you're seeing, you know, a few hundred basis points to up to 500 basis points kinda coming out of both of those full years and really just reflecting kind of what we're seeing here in the current quarter, being Q2, as opposed to our original expectations and the ones we shared on our last call.

Conor McNamara (Equity Research Analyst)

Got it. Thanks for that. Just on the GMP customers, can you just help clarify? I think in the last time you shared that was Q3 2022, and if I remember, the customer number was higher. I don't know if that's just programs falling out of the clinic or can you just comment on how that number progresses and how we should think about that? You went from 55 to 61. I think the number was higher than that.

Carl Hull (Executive Chairman)

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

Conor McNamara (Equity Research Analyst)

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

Carl Hull (Executive Chairman)

Kevin?

Kevin Lynch (VP and General Manager, CDMO Services)

No.

Conor McNamara (Equity Research Analyst)

It's not no big deal. I was just...

Kevin Lynch (VP and General Manager, CDMO Services)

Yeah, look, I think the GMP mRNA CleanCap customers are 61. That is up from where we were a year ago. I think it was closer to 58 at that point in time. In the clinic, we have 26 that we're currently tracking. That's roughly the same number it's been for a few quarters now. Just because you really haven't seen too many people move out of the preclinical phase into the clinical phase, at least in our pipeline, and then obviously not too many people exit as we still just have really the one product on market. You know, there's not really a lot of churn in there right now. I'd say it's just sort of a slow progression of those two pipelines.

Conor McNamara (Equity Research Analyst)

Okay. Can I sneak one more in? I'm sorry.

Kevin Lynch (VP and General Manager, CDMO Services)

Sure.

Conor McNamara (Equity Research Analyst)

Just on the, on the M6. Thanks, guys. On the M6, does that expand the TAM? Does that give you more potential markets to go after? Does that just make you a lot more competitive in the market, as you call on customers?

Carl Hull (Executive Chairman)

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

Conor McNamara (Equity Research Analyst)

Got it. Thanks, you guys. Really appreciate the time.

Carl Hull (Executive Chairman)

You bet.

Operator (participant)

Your next question comes from a line of Catherine Schulte from Baird. Your line is open.

Catherine W. Schulte (Senior Research Analyst)

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

Carl Hull (Executive Chairman)

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

Kevin Lynch (VP and General Manager, CDMO Services)

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

Carl Hull (Executive Chairman)

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

Catherine W. Schulte (Senior Research Analyst)

Yeah. Okay. Got it. On EBITDA margins, you know, if you're expecting to reach about 39% for the full year at the midpoint of the guide, you know, should we anticipate exiting the year more like in the mid-40s if we think about the back half ramp, is that a fair way to think about the starting point for 2024?

Kevin Lynch (VP and General Manager, CDMO Services)

Yeah. Certainly, that is what the guidance would imply. We would be back up in that, you know, 40%-50% level here potentially at the higher end, just given the assumption of the additional COVID revenues in the Q4. You know, frankly, you know, from where we're sitting, you know, it's really a revenue contribution kind of over our assembled workforce and facility infrastructure. You'll see here, even in a low quarter, I think we had, you know, a 30% margin, which is slightly above our peer average, as I went into some detail. But the nice thing about what we have here is certainly we have a great control of our costs, really well-defined inputs and, you know, facilities that enable us to rapidly expand that margin as the revenue base increases.

You know, that's really gonna be a function of what that revenue number is when we go into 2024. you know, as we model our business long term, certainly that margin expansion is a big part of that modeling exercise.

Catherine W. Schulte (Senior Research Analyst)

All right. Great. Thank you.

Carl Hull (Executive Chairman)

Thank you, Catherine.

Operator (participant)

Your next question comes from a line of Matt Sykes from Goldman Sachs. Your line is open.

Matthew Sykes (Research Analyst - Managing Director)

Hey, good afternoon. Thanks for taking my questions. Maybe if I could just kind of dig into one of the previous questions just about the softness that you're seeing into Q2. There's obviously a number of headwinds, you know, whether it's emerging biotech spend or inventory overhangs. Would just love to get a little bit of additional color if it's one or the other or both, just so we can help kind of frame our modeling. Given that both of these probably have a finite end, we just wanna make sure that we're understanding the dynamics of that softness and the sort of duration of it.

Carl Hull (Executive Chairman)

Yeah. Matt, I really don't think we've got anything to add to the eight or 10 guys who've already reported this quarter. I think our experience is the same. There are slight differences in different parts of the business, so you might have had some or we definitely had some inventory build on the COVID side of the business, which everybody has reflected who's been involved in the COVID vaccine production. Other places you might see more softness related to CDMO growth rates or, you know, the China recovery. All of those things are part of it. I can't call out one more than the other that's significant. Kevin, I don't know if you want to take a shot at that.

Kevin Lynch (VP and General Manager, CDMO Services)

No, I think that's spot on, Carl. I think, you know, we're seeing a multitude of factors. Very hard to parse out the individual contributors each. You know, at this stage, I think we certainly see at least some of the China impact and the inventory burn-off as being temporal and obviously rolling off here in the first half based on our guidance. From then, you know, it's going to come down to the certainly the underlying demand from the existing customers.

As we, you know, continue to look at the customer base and how that's growing, you know, the number of programs and how that's growing, as well as, you know, the additional products that we have and capabilities, I think we feel good about our ability, you know, to build once those headwinds kind of subside going into the second half and into 2024.

Matthew Sykes (Research Analyst - Managing Director)

Got it. Thank you. I appreciate it. Then just my next question is just if you look at the Flanders build-out, you know, phase one complete, and then we're completing the other one in the Q2. I know in the past that there's been some customers who have not been able to transition to GMP or you've not been able to transition with them. In terms of closing that gap and being able to solve for GMP production for what you're doing in RUO, do you feel that once we get through sort of the fully complete Flanders facility, that you'll have alleviated a lot of those issues that you might have had in the past with some of those customers?

Carl Hull (Executive Chairman)

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

Becky Buzzeo (SVP and Chief Commercial Officer)

Hi. Thanks, Carl. Yeah. In our facility today, you know, we do both the RUO and the phase I manufacturing of the mRNA. We do believe with the addition of our Flanders 2 facility, that we'll be able to meet customer needs who want to go beyond phase I. That is the intent of our Flanders 2 building, is to go into late-stage manufacturing, and have the ability to really, tech transfer those clients over very easily. It's only a couple of miles up the road here. It, you know, have a nice, strong MSAT team to do that tech transfer and be able to follow the journey of that molecule into late-stage manufacturing.

Matthew Sykes (Research Analyst - Managing Director)

Got it. Thank you very much. Appreciate it.

Carl Hull (Executive Chairman)

Thank you, Matt.

Operator (participant)

Your next question comes from the line of Dan Leonard from Credit Suisse. Your line is open.

Dan Leonard (Analyst)

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

Kevin Lynch (VP and General Manager, CDMO Services)

Yeah. Thanks, Dan. I think specifically, the midpoint of the revenue decline was about $20 million. I believe the midpoint of the adjusted EBITDA guidance was about $15 million, so it's about 75% of that dropping through. Really that just goes to some of the things I mentioned previously. We have a very high variable contribution margin. That's great when things go up. It's a little more painful as things go down, but that's just sort of the nature of what we have here. We don't have a lot of variable costs sort of below the gross margin line. You know, from our perspective, a lot of what we're investing in is really for the future, and we're going to continue to do so.

If you look at our investments in innovation, a lot of which, you know, you saw some of the fruits of which that were here with M6. Additionally, the commercial build-out, which is incredibly important to us as far as, you know, driving and seeking and realizing that long-term growth rate by making sure we get, you know, all the customers we can globally adopting CleanCap and using our products and services is a commitment and investment, you know, we're committed to. Lastly, the finish up of the facilities footprint. Again, something we started a couple of years ago and we think is critical to our strategy as we move forward.

You know, as you see the revenue line move, you're going to see a high proportion of that impact our adjusted EBITDA just because of the lack of below-the-line variable costs.

Dan Leonard (Analyst)

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

Kevin Lynch (VP and General Manager, CDMO Services)

That is not what we said, I do not believe. No. What we said was, we anticipate about another $10 million or so of COVID-related CleanCap contributions here in the Q2. We also mentioned that between what is shipped and what is committed, we have about 65% of our $100 million guidance in the book. The remainder, which would imply roughly $35 million, would likely be in the Q4.

Dan Leonard (Analyst)

I was taking the $100 million and minusing $15 million in Q1 and the expectation of $10 million in Q2. $75 million remainder, plugging that into Q4. That's not what you were saying?

Carl Hull (Executive Chairman)

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

Kevin Lynch (VP and General Manager, CDMO Services)

Yeah. It would be in the back half. I would say that some of that committed 65% is shipping in the Q3 as well.

Dan Leonard (Analyst)

Okay.

Kevin Lynch (VP and General Manager, CDMO Services)

I was more referring to the delta between the $65 million roughly and the $100 million, which we would then be anticipating that would spike up in the Q4 part of the year.

Dan Leonard (Analyst)

Got it. Thanks for clarifying.

Kevin Lynch (VP and General Manager, CDMO Services)

Sure.

Carl Hull (Executive Chairman)

You bet. Thank you.

Operator (participant)

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

Dan Arias (Managing Director, Life Sciences and Diagnostics Analyst)

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

Carl Hull (Executive Chairman)

The only thing I would say is that we're obviously not seeing new COVID accounts. That's for sure. We are seeing continued activity from the existing players that we've been servicing at various stages along the way. Obviously the biggest is the Pfizer-BioNTech program, but there are a number of others beneath that. It's hard in many cases, though, for us to truly separate what is a therapeutic application versus a vaccine application. The reason for that is it's the same companies doing both, right? All you have to do is look at the pipelines of guys like BioNTech, CureVac, Pfizer, others. You'll see that they're trying to leverage that platform technology across multiple different shots on goal. It is hard for us to know with certainty there.

We've spent a lot of time assessing those that are doing just COVID, and we think we've got a good feeling for that, but there's still some imprecision in those numbers.

Dan Arias (Managing Director, Life Sciences and Diagnostics Analyst)

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

Carl Hull (Executive Chairman)

Yeah. Why don't we ask, Trey?

Dan Arias (Managing Director, Life Sciences and Diagnostics Analyst)

Sure.

Carl Hull (Executive Chairman)

Kevin, why don't we ask Trey to comment on the commercial side, and then you can back it up with the numbers?

Trey Martin (President, Biologics Safety Testing)

Yeah, sure. Thanks, Carl. We, we are, as so many others have been, seeing softness generally across the geos. We've reported the China softness that really started in the second half of 2022. We are getting some encouraging signs from customers, industry here that we'll see a climb out of that. In our mind, it's definitely not a matter of if, but when. We're, we're optimistic for recovery back to what we would consider to be the expected market growth rates in the second half, which averages out to the mid-single digits that Kevin called out.

Dan Arias (Managing Director, Life Sciences and Diagnostics Analyst)

Okay. Will do that. Thanks.

Carl Hull (Executive Chairman)

Kevin, anything to add there?

Kevin Lynch (VP and General Manager, CDMO Services)

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

Carl Hull (Executive Chairman)

Yep.

Operator (participant)

Your next question comes from the line of John Sourbeer from UBS. Your line is open.

John Sourbeer (Executive Director, Health Care Equity Research)

Good evening, and thanks for the question. I guess it's on the base nucleic acid segment. I was wondering if just you could break down even a little bit more there on what percentage of those customers are pre-revenue biotech, and you know, is that really where you're seeing this slowness, or is it more, you know, broad-based within that for the updated guidance?

Carl Hull (Executive Chairman)

Yeah, John, I would say that as we've commented, I think a couple of times in the past, we don't see any of the pre-revenue biotech customers just completely shutting down programs and running away. They have in some cases, reduced the number of programs that they're going after or reprioritized those to focus their resources on fewer numbers of programs to manage their burn rates. It's not like we're seeing pre-revenue biotech companies just shut down and run away from mRNA, if that's been their focus.

John Sourbeer (Executive Director, Health Care Equity Research)

Got it. Have you quantified, you know, what percentage of revenues that would be?

Carl Hull (Executive Chairman)

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

John Sourbeer (Executive Director, Health Care Equity Research)

Great. Then, you know, just one last one here.

Carl Hull (Executive Chairman)

Sure.

John Sourbeer (Executive Director, Health Care Equity Research)

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

Carl Hull (Executive Chairman)

Yeah. Look, I mean, we're super happy with the Alphazyme team and delighted to have them as part of the organization. I think that fits the historical model of Maravai exceptionally well. I think we will continue to look for those gems when we can find them. we're trying to be a little bit more creative, when there may not be a number of assets currently on the market or at prices that we would consider to be reasonable to look at deals that might be slightly more complex, that can involve the carve-out of businesses of other companies and/or, you know, unique structures that can fold some businesses into us. I think you may see a little bit more creativeness in deals.

Hopefully they'll be a little bit larger in size in terms of immediate revenue contribution, but Alphazyme still remains an example of our sweet spot.

Conor McNamara (Equity Research Analyst)

Thanks for taking the questions.

Carl Hull (Executive Chairman)

You bet.

Operator (participant)

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

Tejas Savant (Executive Director and Senior Healthcare Equity Analyst)

Hey, guys. Good evening, thanks for the time here. Carl, Kevin, I want to go back to an earlier question right at the top of the call, actually, you know, around those GMP customers within NAP. I think the question is basically that, you know, in Q3 you had about 68 of them, today you've shown 61. Perhaps can you just bridge us the number of customers you have today versus last fall? It's an important metric for a lot of investors in light of the loss of business you've highlighted here due to not having GMP ahead of standards. Just any context, color or bridge you could provide would be helpful.

Carl Hull (Executive Chairman)

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

Tejas Savant (Executive Director and Senior Healthcare Equity Analyst)

Got it. Okay. Perhaps on Biologics Safety Testing, you highlighted this, you know, the International Conference on Harmonisation guideline change. Over what timeframe do you expect that to be meaningful for your business, if all goes to plan? On the other side of that, I mean, as they think about sort of, you know, this guideline update, how disruptive could it be for customers who are, you know, already using sort of alternatives or is that sort of not really a consideration?

Carl Hull (Executive Chairman)

Well, look, I think that it can be very disruptive mainly because of the costs and risks associated with late stage viral clearance testing the way it's currently practiced. You bet everything on your final test of that. At the end of the day, if you fail that test, then you have to go back to development of your processes in such a way that it remediates the problems that you saw in a go-around, and that could add months if not years to a development program. We think that the availability of the product coupled with the discussion about the guideline changes comes really at a perfect time.

Even if customers are not immediately incented to change their historical gold standard final clearance testing, they should certainly be very interested in utilizing the kit along the way as a surrogate marker for whether they might have a product at the end of the road.

Tejas Savant (Executive Director and Senior Healthcare Equity Analyst)

Got it. That's helpful. Then last one for me, Carl. I know you mentioned you wanna hold off until the next quarter on your small cap biotech exposure. Just, you know, anecdotally, as you talk to your salespeople, any color you can share on for how many of these your existing customer base is raising money here in the next 12 months or so, you know, something that's, you know, front and center on their radars? I know you've talked in the past that a lot of these customers raised a lot of money during the pandemic, given the excitement around mRNA. Just any updates around those conversations would be helpful.

Carl Hull (Executive Chairman)

Yeah, no, we have certainly not seen new money come in, Tejas Savant, if you're looking at it from that perspective, because of the obvious factors that have been going on over the last 18 months. I think the demand that we're seeing here is from pre-established companies who raised a significant amount of capital during that period of time we talked about. Are they husbanding that capital a lot more than they were? Probably, yes. Are they less certain about their ability to get another round done? That would be certainly yes. I think that it's a mix, but we were fortunate that there was a very wide open window in that sorta, you know, 2020, 2021 timeframe, and that's still sustaining us.

Others may have a little bit of a different exposure, and particularly if you're thinking about biologics or small molecules, that trajectory appears to be different than the cell and gene therapy world.

Tejas Savant (Executive Director and Senior Healthcare Equity Analyst)

Got it. Super helpful. Appreciate the time and all the color, Carl. Thank you.

Carl Hull (Executive Chairman)

You bet, Tejas. Okay, Rob, I think that's about it in terms of our timing today. Perhaps, if you'd like to turn the call over to Deb.

Operator (participant)

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

Deb Hart (Head of Investor Relations)

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

Operator (participant)

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