Ladies and gentlemen, thank you for standing by. My name is Tammy and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2023 Maravai LifeSciences Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Ms. Deb Hart. Please go ahead.

Good afternoon, everyone. Thanks for joining us on our third quarter 2023 earnings call. Our press release and the slides that accompany today’s call are posted on our website and are available at investors.maravai.com. As you can see on the agenda on Slide 2, joining me today are Trey Martin, Chief Executive Officer; and Kevin Herde, Chief Financial Officer; Drew Burch, President of Nucleic Acid Production; and Becky Buzzeo, our Executive Vice President and Chief Commercial Officer will join the call for the question-and-answer session following our prepared remarks. We remind you management will make forward-looking statements, and we refer you to GAAP and non-GAAP financial measures during today’s call. It is possible that actual results could differ from management’s expectations. We refer you to Slide 3 for more details on forward-looking statements and our use of non-GAAP financial measures. Our just issued press release provides reconciliations to the most directly comparable GAAP measures. Please also refer to Maravai’s SEC filings for additional information on the risks and uncertainties that may impact our operating results performance and financial condition. Now I’ll turn the call over to Trey.

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 third quarter, provide some color on the cost-cutting initiatives we announced today, and highlight a few business updates before turning the call over to Kevin. Let’s start with our third quarter results on Slide 5. Today, we reported $67 million in revenue for the quarter, $12 million in total adjusted EBITDA, and a loss of $0.01 in adjusted fully diluted EPS for the quarter. Q3 results were below our expectations. With persistent macroeconomic and industry-specific conditions impacting the top line. As we mentioned during our last quarterly update and as referenced by many of our peers, we’ve seen continued softness as customers adjust their spending priorities in the wake of broader economic uncertainty and lower levels of venture in private equity-backed investment. As a result, key customers continue to focus on capital conservation efforts, which is constrained research and development budgets. This continues to result in a longer decision-making process, causing customers to strategically prioritize and stage their programs. We are not seeing signs when we provided prior guidance, and expect those trends to persist at least through the end of 2023. Unfortunately, this has been a consistent theme throughout our industry. Our Nucleic Acid Production segment had revenue of $51 million in Q3. This includes an estimated $36 million of base Nucleic Acid Production revenue. The Biologic Safety Testing revenue was $16 million in the third quarter. Turning to Slide 6, as you are all aware, Maravai grew at an exceptional rate during the pandemic as we scale the manufacturing of CleanCap to unprecedented quantities for mRNA-based COVID-19 vaccines in the global pandemic response. We rose to serve a critical global need, and are…

Thank you, Trey, and good afternoon, everyone. Starting on Slide 15. As per our press release this afternoon, our Q3 2023 revenue were $67 million, below our expectations for the quarter as the ongoing macro and industry-specific softness continues to pressure the base business across both segments. As for earnings per share, both our GAAP basic and diluted EPS were at $0.05 per share loss, while adjusted fully diluted EPS was $0.01 per share loss for the quarter. Our GAAP-based net loss for the amount attributable to non-controlling interests was $15.1 million for the third quarter of 2023. Adjusted EBITDA, a non-GAAP measure, was $11.9 million for Q3 up from $9.1 million in the most recently completed second quarter of 2023. Our adjusted EBITDA margin was 18% in the third quarter. For the first 9 months of 2023, our adjusted EBITDA, a non-GAAP measure, was $44.8 million, resulting in an adjusted EBITDA margin of 21%. As discussed in the last quarter, we remain focused on balancing our investment in our facilities and our labor to best position us for the future while also actively managing our expense structure to address our current revenue outlook. As we continue to see the soft market conditions, we decided it was necessary to realign our cost structure more aggressively to the current demand environment. As Trey previously covered, today, we announced a structured initiative that is targeting at least a $30 million reduction in our annualized spend based on recent expense levels. These decisions are never easy. But we feel reflecting necessary adjustment to address the broader business pressure we’ve all been faced with in 2023 and heading into 2024. We will be actively reducing our labor force by approximately 15% on or about 100 employees, primarily in the Nucleic Acid Production operations areas…

Thanks, Kevin. So to wrap up our prepared remarks on Slide 21, we believe the cost-cutting initiatives we announced, while difficult, position us well for the future. Our overall base of customers is expanding and diversifying. This, along with our new corporate structure that is better equipped to serve those customers needs will support a future of sustainable growth. Though market conditions remain challenging in the near-term, we are confident in the expected long-term growth rates for biologics for mRNA medicines for gene editing and gene and cell therapy. We believe our serviceable addressable market will double over the next 5 years. And we expect to be able to outpace market growth with differentiated technology, products and services. We will continue to put our cash flow and balance sheet to work with select organic investments in our facilities and analytics and product innovations. We will also continue to look for opportunities for organic and 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, profitable and sustainable growth for our base business. Kevin, Becky, Drew and I are all happy to answer your questions. So now I’ll turn the call back over to the operator for instructions.

[Operator Instructions] Your first question comes from the line of Tejas Savant with Morgan Stanley. Your line is open.

Hi, guys. Good evening and thanks for the time here. Maybe I’ll start with one big picture one on Trey and just the visibility, particularly into the pharma customer base, right? So emerging biotech, I believe, is about 30% of your total revenue exposure. Can you share just some color on the customer conversations there that you’re hearing especially through November here? And you also mentioned some key customers focusing on capital conservation to sounds like it’s a very similar dynamic at your larger biopharma customers as well. Is that a fair interpretation?

Hi, Tejas. Yes, thank you that your number is about right for a small mid public company exposure around 20% of our revenue year-to-date. And also correct that the activity through large Cap pharma has continued consistently. There have been actually quite a few recent licensure announcements that I’m sure everyone has noticed, but we see, again, that rationalization of program progression and, of course, a completely different time frame expectations than we experienced through the pandemic for that progression and a return to normalcy that, I think we all the industry hope is somewhere in between the rapid – the rapid progression of the pandemic and the time before. But I would say probably the best person for me to add color, color there might be Becky, who has just recently had some pretty high-level large pharma customer visits.

Yes, we’ve been talking to many clients, big pharma, small biotech, even academic clients. For sure, budgets are tight. We also are getting a lot of information around program rationalization. So slowing new entrants into their pipeline and really progressing programs that have the best view of a positive outcome. There are continual conversations around derisking programs. So many times what this means is getting additional development data packages so that the filing is successful. So with that, we’re seeing some delay in filing those initial INDs and instead kind of going back and doing further optimization on sequences and analytics.

Next question comes from the line of Catherine Schulte with Baird. Your line is open.

Hi, thanks. This is Tom Peterson on for Catherine. Appreciate you taking the time for a question today. I was wondering to start, if you could first speak to what you saw throughout the business as the quarter progressed, yes particularly in September, I guess what was the exit rate in the quarter and what have you seen in the October?

Yes, sure. We have a bit of a third month effect. I think we’ve described that previously where we have rescheduled shipments to go out at the end of each quarter. Largely speaking, though, part of the reason for our guide is, I would say, a particularly soft July and August, more in line with that July, so September, again, with the third month effect was relatively strong, actually, but we are now guiding to essentially a constant rate for the rest of the year of what we saw in Q3.

Our next question comes from the line of Matt Larew with William Blair. Your line is open.

Hi, good afternoon. One thing you reiterated today was the long-term guidance through 2028 and assuming that the COVID contribution you gave at the R&D Day holds that would require a base business CAGR of 25% over that time frame. And the base business grew around 23% from 2018 to 2022. So this would be a faster CAGR on a larger base through 2028. So given how much uncertainty there is in the end markets, could you just maybe speak to the confidence level in the long-term trajectory? And understanding you’re not giving 2024 guidance, they hit those levels, we have to start growing again at some point. So when do you really start tracking back or working your way back to that level of growth that’s required to hit those long-term targets?

Yes, sure. Thanks, Matt. This has obviously been a bit of a correction year, and we are, I think from a correction standpoint, the TAM and SAM markets that estimates that people use, including us, will probably be adjusted down for a bit of a step down. And as you say, and it’s about what the growth rates are coming back out. And as you identified, we have our base business and we have the COVID program material. I would say the, the example we had where we took single-digit millions out of the COVID is a good example of how we see activity already starting to shift across a broader base, non-COVID programs. And again, our material inputs are fungible in that way. We do definitely have 2023’s looked COVID CleanCap to work around. But we also have a lot of confidence in the long-term growth rates and, in particular, look forward to, as we announced two partnerships that are in the CRISPR gene editing area today. We look forward to what we’ve seen will be a very exciting growth and market uptake for CRISPR gene editing, which is both the therapy in itself in a tool to make cell and gene therapies. And I think a lot of the activity there has been well publicized. So we’re looking forward to a much broader and less concentrated customer base with many more programs progressing and are very optimistic about the growth in the mRNA, gene cell therapy and CRISPR gene editing markets over that 5-year period.

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

Great. Thanks, I’m actually going to ask a two part. First, I want to follow up on exactly the last point, but maybe I’ll just drill in on the near term, a little bit more on the non-COVID piece. I mean you’ve had just on dollar terms, declines there for three or four quarters in a row now and you’re guiding to another decline in 4Q, I believe, can that segment grow next year or have you sort of zeroed out all the adjustments and all the rebasing that needs to happen? Just because there was a period of such an elevated growth in the prior years and especially as you say, some of that stuff can move between COVID and non-COVID pretty easily. I’m just trying to figure out what the right floor for that is when that can start growing again. And this year, in the 150s, is that a 4? Or is there still some more excess non-COVID come out of that? And then if I can squeeze in a second part. I want to ask about the cost cuts, the $30 million. First, I want to make sure is any of that having a benefit in 4Q? Or is it only really kicking in next year, and if you could just provide a little bit more specifics, is it on the, it sounds like it was pretty heavily on the manufacturing side, but also on SG&A. If you could just sort of break that through across the different buckets, how we should think about it? That would be helpful. Thanks.

Yes. Mike, I’ll start with the second part of your question on the cost realignment initiative. Yes, I would say geographically on the P&L, it’s roughly going to be 50% hitting the COGS line. The operational reductions primarily in our Nucleic Acid Production segment sort of right size those operations to the post-pandemic volumes that we’re seeing and the other 50% predominantly going to hit our SG&A line. The focus a little bit more on the G&A component of that we continue to see the appropriate investments in our commercial channel paying dividends for us over time. So basically 50-50 split between COGS and SG&A. We have been cognizant certainly of the revenue declines throughout the course of this year and investors’ cut back certain discretionary spend items. And actually, yesterday was the primary day in which we took action on the elimination of roughly the 100 positions. So those certainly will incur a one-time severance charge here in our fourth quarter and roughly be out of our ongoing P&L for a portion of this quarter. That’s why I think when you see the decline in our revenue guidance, you see that coming in with a little less dynamic impact to the EBITDA grain previously given in previous quarters. It’s partially mitigated by some of the contentious cost controls as well as the impact of the lay-offs that we did yesterday. I don’t know, Trey, I don’t know if you want to comment on the revenue progression.

Yes. I mean a big part admittedly, in the first 90 days here for me has been looking at our monthly revenue progression and performance and focusing really on the reorg and restructure activities with facing the reality that we see today, we are certainly optimistic that this the, let’s say, the leg down in July and August will be, we will set the stage for the next level of growth, but are certainly not ready to call that pivot point. So the, again, the reorg, realignment has been based on the first 3 months where I’ve been in seat here, which unfortunately have been three lower months of revenue compared to the past, but we’re on a, we’re on a, I think, a relatively stable keel now going forward and have taken basically the same approach for Q4 for the rest of the year, which is the reason for the guide down.

Our next questions come from the line of Conor McNamara with RBC Capital Markets. Your line is open.

Hey, guys. Thanks for taking the questions. I think I’ve got one for each of you around the $30 million cost cuts. First, Trey, if you think about those cost cuts, I mean, it sounds like they are in manufacturing and probably some in sales, does that how does that, if any, impact your ability to hit the growth rates that you’ve talked about historically? And at your R&D Day, you’re still going to hit that target? Will these cuts allow that? And then as a follow-up, Kevin, just assuming you still can’t hit your revenue, should we just think about that $30 million helps that? Whatever your EBITDA margin target was that you had outlined for those plans?

Yes, I’ll take the first part. I’ll ask the second part of that and just touch on it. Yes. Again, those reductions are about half in the operating lines and about half in the SG&A line, but predominantly more in G&A and not on the merchant side as, again, we continue to invest. There is also important, I think, as we went through this exercise, it was, we looked at the business in a couple different manners. We looked at the overall reduction in kind of cash costs, which are predominantly labor and variable costs, and it’s around a 20% reduction of those of the company. But we are very specific in targeting areas that we thought we could reduce without impacting our ability to grow at the rates in the modeling in which we’re projecting going forward. And I think we’ve done that in all the teams across the company and the new leadership that we have came together to agree on a plan that both had financial targets but also made sense operationally and made sense to Trey’s reorganizing the company in the manner that we want to move going forward. So yes, I think we feel we’ve made the right reductions that are real estate improved based on what revenue currently has, but it does not hamstring us to hit our long-term growth objectives. So I’ll just, I’ll leave that component of the question there.

Yes. And I’ll add. It’s an insightful question. I’d say that really our, and again, 50-50 between operations and G&A. So there are two elements to it. From an operations footprint perspective, this is all essentially fixed labor where you set up shifts and have capacity available, whether it’s chemistry production or contracting RNA and so on. And I would say the level that we made changes there is really a function of two overlapping principles, one being that we were holding some capacity for residual COVID business. And the decline of the residual legacy in pandemic COVID business is faster than expected over the last two quarters. So that’s a faster decline and then the diversifying next-generation Maravai business, we’re essentially doubling in a slower potential growth rate of that in conjunction with the faster decline in COVID. So it isn’t a typo question because we certainly have the capacity and capability needed for the broader and more diversified customer group to do many more things within mRNA. Unfortunately, it will not be 70% of sales for one compound for one customer like it was in ‘21 to ‘22. It will be a much more diversified group of smaller projects, which I hope bring stability and predictability of the business. On the G&A side, it’s a similar, I would say, realization of the company and its current size that you’re all very well aware of, can afford or sustain necessarily the level of corporate shared services that we had imagined it a size 3 to 4x our current size. So we will, we do obviously intend to be a high-growth, high adjusted EBITDA company. And as we grow at a slower rate back for this place, we will have the ability to incrementally add our fundamental structural capabilities and operations are still there where they need to be strategically.

Yes. And specific to the question on margin, Conor, I mean, certainly, one way to look at this is certainly look at this as if it sort of had occurred at the beginning of this year, which would take sort of an adjusted basis are roughly low 20% margin that we’re talking about today in our guidance and increasing that to roughly 30% or so. And I think that from our perspective, it’s the right thing to do in the current environment. I will tell you that we are not a big cost structure company. So this was a big reduction for us. and a lot of our ability to drive margin expansion from the levels we’re at now will certainly come from top line growth, and that will continue to be the case. But we did feel obviously that it is prudent to adjust our cost structure and be able to reset, streamline our operations in light of the tough macro environment and just frankly, because certainly, a good visibility to this return to growth is still hasty for most people in our industry and not overly clear. I don’t think anyone is assuming that there is a spring back January 1, 2024, I think it’s going to continue to be working with our customers, understanding their needs and positioning ourselves to support that. That’s what we’re currently doing, and that’s certainly, one of the main reasons we’re deferring our 2024 guidance until we complete those discussions and get as good of an understanding as we can have heading into ‘24 and completing that year.

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

Thanks for the questions here. Trey or Kevin, can you just maybe talk to Biologic Safety Performance in China and then outside of China, if you kind of compare what’s going on there and then how you might expect those to buckets to trend into year-end? I imagine China is softer then two, but curious about what the difference might actually look like there?

Yes. Yes. Thank you. We, looking specifically at China BST, which again was a big growth driver for them in ‘21 and ‘22, really, the difference between what we’ve been talking about so far, that is that the leg down for China and PST really started in the second half of last year. And having just looked at a lot of the numbers, obviously, we are, I would say, relatively stable at this new level. So there are year-over-year comparisons from growth that are now steady that were harder for us certainly in the second half last year and first half of this year. So we see China not so far not taking any further steps down but at a relatively stable rate for the past three quarters in BST specific.

Yes. And just to put some numerical context to, in the second quarter of 2022 when we first saw this decline that Ray alluded to China was about 19.5% growth for our BST business. In the most recently predated quarter, China was 19.5% of the revenues in the BST business. And its range from 18.4%, 22.9% in those periods that I just spoke to. So it’s leveled out. We don’t have, we believe, ongoing exposure to see that go much lower than that. I think that’s the level that’s going to support the current environment that we’re seeing for biologic manufacturing in China.

Our next question comes from the line of Matthew Sykes with Goldman Sachs. Your line is open.

Hi, this is Ivy on for Matt. Any updates on the progress of Founders 2? And how are you thinking about bringing on additional capacity in a year where demand is being impacted by destocking, COVID rolling off and weaker farmer spend?

Yes, I’ll start. Yes, certainly, not ideal to bring online additional capacity in this year, but these are decisions you make at least 2 years in advance just given the length to take some of these facilities. And frankly, it’s still necessary, and we still think it was the right decision to have redundancy for our manufacturing of CleanCap. Flanders 1 accomplish that and obviously, it was funded through our [indiscernible] brand, Flanders 2, again, a big part of our commercial strategy, and I’ll let the others in the room comment on that, but that’s certainly something that we’re not rushing to finish, obviously, given the demand, but it is certainly something that in the context of commercial discussions is an incredibly important asset that we need to have is, frankly, table stakes to be a competitor in the Nucleic Acid Solutions part of our business.

Yes. So Flanders 2 specifically is where the mRNA services happen at Phase 2 and beyond we have our existing G&P services for chemistry and [indiscernible] RNA, all in the Wateridge Facility that there is a nice picture of on our [indiscernible]. So as we talk through customer program progression, we have the ability to turn that on at the right time for the right customers. And obviously, with all the work we’ve done this quarter rightsizing and realigning our operations footprint, we have not proactively leaned into Flanders 2, until we have solid bookings schedule. And Becky can probably just add a few comments because that’s been our primary focus here this last quarter.

Yes, sure. I mean, look, we’re incredibly excited about the Flanders 2 building. And I think that you’re always going to be building ahead when you’re offering more of that GMP manufacturing facility footprint. We have a number of customers that have come through our research use only manufacturing services, they then progress to file an IND, and we’ve made that GMP material for them, and now they have interest and they are going in to Phase 2 and then sometimes it’s the Phase 2/3 combo. And so in those cases, where it lines up that we’re going to be GMP-ready mid-next year, those are the customers that we’re engaging with that are on that same pathway to need that clinical material for Phase 2 or a Phase 2/3 combo. And so we continue to progress that. And I think that’s a definitely a great development in our ability to continue to service customers and be best in making CleanCap mRNA, which is what is really what we do well.

Next question comes from the line of Justin Bowers with Deutsche Bank. Your line is open.

Hi, good afternoon, everyone. As you look at the composition of the NAP revenue to date and the funnel that you have now, is there a way to help us think about what proportion is sort of recurring revenue or a way to think about visibility going forward that’s sort of like part one, then part two would be just any thoughts on the competitive landscape. I know that your lead times have come down a lot, and there is also been a lot of capacity that has come online across the industry as well, just be helpful to have a sense of your perspective on the landscape there as well?

Yes, I’ll take a quick stab at the competitive landscape and hand it to Drew or your first question. So the, as we focus on the front end of the development funnel, there is more diffuse competition there where the competition and services specifically has come up significantly is really at the large CDMO level where there are fewer programs. So we the competitive landscape is sort of meeting in the middle with large CDMOs who have recently brought mRNA capacity to the market, reaching back into earlier phases and discovery folks such as us progressing through from discovery through Phase 1 through Phase 2 and so on since about two-thirds of our TriLink revenue is Discovery. We are really, I think, being more affected there by new project starts, slowdowns or delays than specific competition. So then I’ll hand to Drew for the first part of your question.

Sure. Thanks, Trey. Look, I think it’s difficult to put a precise percentage on it in recurring revenue terms. I think we have there are customers in discovery order from a on regular basis and tends to recur. We have some platforms that were built into the two quarter on a quarterly basis and that was supplied regularly as you get further into clinical trials, whether we’re supporting with reagents like CleanCap or whether we’re supporting with clinical trial services, it may be a recurring piece of business so long as that program continues to advance through the clinic, but the advancement of that program through the clinic may not occur on a regularly quarter regular quarterly basis. So there may be stocking events in certain phases of the clinical trial, and there may be manufacturing events at certain phases of the clinical trial. So hopefully, that helps get to your question, but it’s really a mix of both and not always in a consistent quarterly pattern on the clinical trial activities.

We are now out of time. I’d like to turn the call back over to Deb Hart, Senior Director, Investor Relations.

Thank you, Tammy, and thanks, everyone, for your time today and for joining the call. We will be at a couple of conferences next week and hope to catch up with many of you there. Have a good evening.

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