Good afternoon, ladies and gentlemen, and welcome, everyone, to the Maravai LifeSciences Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator instructions] Thank you. I would now like to turn the call over to Deb Hart. Please go ahead.

Thank you. Good afternoon, everyone. Thanks for joining us on our third quarter 2024 earnings call. Our press release and the slides accompanying today's call are posted on our website and available at investors.maravai.com. As you can see from our agenda on Slide 2, Trey Martin, Chief Executive Officer; and Kevin Herde, Chief Financial Officer, are joining me today. 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 the prepared remarks. We remind you that management will make forward-looking statements and refer to GAAP and non-GAAP financial measures during today's call. It is possible that actual results could differ from management's expectations. We refer you to Slide 3 for more information about those 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 you joining our call today. I'll give a quick recap of the third quarter and provide some commentary on the market dynamics we are experiencing. I'll then provide a few business updates and discuss our plans to acquire the DNA and RNA business of Officinae Bio. Let's start with our third quarter results on Slide 5. Today, we reported $65 million in revenue, $13 million in total adjusted EBITDA and a loss of $0.02 in adjusted fully diluted earnings per share. Our Nucleic Acid Production or NAP segment had revenue of $50 million. Biologics Safety Testing or BST, had revenue of $15 million. Q3 results were slightly below our expectations, primarily due to a few customer requested program timing shifts, muted demand in research and discovery products within our NAP businesses and persistent softness in the global biologics market, which impacted our BST segment. In our NAP businesses, we recently achieved a key milestone, celebrating our largest service build to date at our Wateridge site, consisting of 26 grams of mRNA material for a preclinical cell and gene therapy customer. This program was initially slated for completion during Q3, but was delayed by 1 week into Q4 at the customer's request. Therefore, only a portion of the service revenue was recognized in Q3 versus the full amount we had assumed in our forecast. We will recognize the remainder of the revenue related to this program in Q4. This is an example of the way customers' clinical program timing can affect our service revenue realization. We also commenced our first customer build at Flanders 2, meeting another major milestone in our NAP segment. You'll see some photos on Slide 6. This program is for a cell and gene therapy customer using mRNA…

Thank you, Trey, and good afternoon, everyone. Starting on Slide 14. As you saw in our press release this afternoon, our Q3 2024 revenues were $65 million, slightly below our expectations for the quarter. Both business segments lagged our expectations with the NAP segment impacted by softer CleanCap demand in both RUO and GMP businesses as well as the customer requested delay of a preclinical program build. Our BST performance continues to be pressured by a soft bioprocessing market backdrop. In the third quarter, we took a GAAP noncash goodwill impairment charge of $154 million as we revisited our long-term model assumptions for all of our business units. The write-down is related to our TriLink business unit within our NAP segment, specifically the write-down of goodwill associated with the acquisitions of TriLink and MyChem. Our GAAP-based net loss for the amount attributable to noncontrolling interests was $176 million for the third quarter of 2024, with $154 million of that associated with the noncash goodwill impairment charge. As for earnings per share, both our GAAP basic and diluted EPS were a $0.70 per share loss, while adjusted fully diluted EPS was a $0.02 per share loss for the quarter. Adjusted EBITDA, a non-GAAP measure, was $13 million for Q3 2024, up from $12 million in Q3 2023. Our adjusted EBITDA margin was 20% in Q3 2024. That brings our year-to-date adjusted EBITDA, a non-GAAP measure, to $37.5 million and adjusted EBITDA margin of 18%. Turning to Slide 15. We ended Q3 with $578 million in cash, up $5 million from the end of the second quarter based on $13 million in cash flow provided by operations in the quarter and our CapEx was $8 million in the quarter. Gross debt, which has a term until late 2027 is at $529 million,…

Thanks, Kevin. So to wrap up our prepared remarks on Slide 19, though market conditions remain challenging in the near term, we are confident in the long-term growth rates of our target markets and believe we offer differentiated technology, products and services. We expect to close Officinae acquisition early next year, and we'll continue looking for inorganic investments and additional partnerships to bolster our market position and provide our customers with additional solutions to accelerate our growth. We are encouraged by the pipeline progression we see for mRNA, gene editing and cell and gene therapies, and we believe the new clinical trial starts bode well for long-term growth in our markets. Our strong balance sheet, strong cash position and manageable debt position gives us strategic flexibility, and we will remain diligent in our cost control and operational efficiency. We are committed to building a strong foundation for long-term profitable and sustainable growth of our base businesses. Kevin, Becky, Drew and I are happy to answer your questions. So now I'll turn the call back to the operator for instructions.

[Operator Instructions] Your first question comes from the line of Dan Leonard with UBS.

You've talked about a firm commitment number throughout the year. How much of that firm commitment is now left by Q4?

Yes. So Dan, it's coming in as anticipated here in the third quarter and then the fourth quarter. We have roughly another $14 million to ship in the fourth quarter tied to committing to fulfilling that original expectation, Dan.

Okay. And then just my follow-up, Kevin, the sequential decline in NAP from about -- I think it was $49 million in Q3, $50 million rounding to $43 million at the midpoint for Q4. How much of that is the project push you mentioned into 2025 versus a weaker market?

Yes. It's probably -- the project push probably a couple of million dollars we get -- we go-to-market being the remainder.

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

Justin, are you there?

Pardon, I was on mute. What are -- can you talk about some of the swing factors for 4Q as it relates to the NAPs business? Realistically, there's probably 6 weeks or 7 weeks in the quarter left in the Western world. And then just a quick follow-up would be, is there any revenue associated with the acquisition for 2025 or is that just a technology acquisition?

Yes, sure. I'll start. I'll take the second question first. Yes, Officinae is predominantly a software acquisition for us and putting their front end onto our TriLink Discovery platform. And that's really what we want to do there, the sort of buy versus build decision, both from the exceptional platform they have as well as the timing to get that plugged in into market. They do have a business. They do have revenues. It will be -- we're talking low single-digit millions and a business, again, that is self-funding, meaning it's not going to be dilutive to our overall business. So a small group, but I think they formed something that's really unique, and it fits perfectly into our acquisition model of finding good, unique founder-based companies with great technology to participate in this space, and we believe it will provide a lot of value. So -- and we'll get a little bit more information, obviously, as we close that deal and get closer to integrating them into Maravai in the first quarter of 2025. As it relates to the range of potential sensitivities, I think the one thing that throughout the course of the year, frankly, we continue to monitor our sort of the rates of our discovery business. I think there's probably $1 million on each side of that business as far as flexibility there on how those orders come in. Again, that's a long tail of lower volume orders. What we haven't seen this year, both on the RUO and GMP side are these larger drop-ins that we periodically get as companies move from one phase to another or just need, frankly, CleanCap to cover a variety of programs that might be in there and they're stable. Typically, those have been $0.5 million up to $5 million…

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

This is Yuko on the call for Tejas. While you know that you'll be providing a formal guidance at a later date, in light of your business being largely skewed towards nondiscretionary cost items, how should we think about guardrails for margin expansion next year?

Well, I'll speak generally. Look, again, we continue to be a company that is predominantly going to go up and down from a margin expansion perspective based on our revenue base. As you look at us today, we have -- as you look at our midpoint and roughly our adjusted EBITDA, we have -- at the midpoint, $260 million revenue company with roughly a $235 million, $240 million cost basis there. And of that cost basis, a big chunk of it, roughly half is labor related. So that's sort of semi-fixed, if you will, [Technical Difficulty] short term, more variable in the long-term. Then the facility costs on top of that are another big component. We operate across about 6, 7 different facilities, and if you count Flanders is 1 or 2 buildings. And that's a big fixed cost for us. The nice thing about that fixed cost is it supports our business model prospectively. We don't need to add any more buildings. We have all the capabilities we need to grow into what we have and expand our margins. And then the last is just the variable piece of our COGS, which is very small. As you know, we have a very high variable margin and sort of everything else, sort of the largest being some of the G&A costs that we need to be a stand-alone public company and some of the legal costs we have as we pursue protecting CleanCap and our IP. So I think from our perspective, it's a matter of filling the factory and leveraging that cost base that I said. I think that I want to say there was a report out earlier in the year that put us in a very nice light as far as revenues per employee. We do not have a big cost base, and we're very efficient at what we do. And to the extent we're able to profitably grow on the top line, that flow-through is going to be very evident as it has been historically. And none of those dynamics have changed.

Yes, I think I'll -- I'll just add that to Kevin's point, the process of stepping into the new capabilities of Flanders 1 and 2 obviously added to our cost base, but we've been bearing those costs largely for the last 4 quarters. And so some of the dynamics we see here on the low and high bounds of each quarter are the reason that we put lumpiness in the comments because, again, the cost base for all of these capabilities is largely fixed and the incremental flow-through on margin is significant as we go above them. The dynamic range, of course, looks extreme as we have a quarter that gets close to that cost basis versus even, say, the prior quarter.

Okay. And then just do you expect any changes to government contracts, including the one with BARDA based on the recent election outcome?

I don't think so. In fact, BARDA was recently here celebrating the opening of Flanders 1 and the pandemic preparedness capacity that comes from that and reiterated that, that's a 10-year arrangement. So I think that should not be subject to any political changes.

Your next question comes from the line of Matt Hewitt with Craig-Hallum Capital Group.

Maybe first one, I was hoping to dig in a little bit on your commentary regarding the soft bioprocessing backdrop. Obviously, there's been some mixed reports so far this earnings season. Some, I guess, more on the consumable side outside of China have commented that, that the market is showing signs of improvement. Others where it's more equipment heavy or more Asia Pacific, China related are still seeing headwinds. What are you seeing? And when you were saying the soft bioprocessing backdrop, I guess, kind of what exactly are you referring to?

Yes, that's an insightful question because I like how you've divided that up. We, of course, look at all of our peers in bioprocessing, both the peers who sell the equipment and peers in CDMO. A significant proportion of the Cygnus customer base is CDMO related. And what we are sensitive to is program starts, specifically and actually heavier weighted on the early side of the funnel. So phase -- preclinical and Phase I, Phase II and so on use proportionately more of the Cygnus host cell protein detection kits than the late Phase II. So as people focus on their downstream or their late-phase projects and deprioritize their early phase projects, it actually has an outsized impact on the number of kits that Cygnus sells. That said, overall, the peer set we look at is -- has centered around flat year-over-year to minus mid- to high single digits. And Cygnus is performing basically in the middle of that range this year with the new guidance. So we think they're essentially at the bioprocessing industry norm. And that's across the whole peer set, whether it be primarily capital equipment-based, consumable-based or the CDMOs.

That's really helpful. And then maybe separately regarding the Officinae Bio acquisition, obviously, software. But I'm just curious, when you look at that, is there some customer overlap? Is what drove you to start those conversations? Was it a customer asking for it? Was this you looking at your portfolio saying, boy, we could really use some help in this area? Just any more color on the why there?

The -- you're exactly right with your former comment or your prior -- your latter, excuse me, comment, which was we needed help. We have the capability from the perspective of input chemistry, the variety of chemistry and now with our new 96-well plate-based mRNA screening product, we have the capability to let people do combinatorial optimization that they've never been able to do before. What we lacked for TriLink was a front-end design environment, one that was informed by bioinformatics and in particular, one that could accelerate and improve the efficacy of designs using AI and machine learning. And Officinae Bio was a start-up that really started there, Software-as-a-Service and a design environment that we're going to bolt right on to the front end that leads to e-commerce that links directly to our LIMS to create not only a seamless design experience for the customer, but a really rapid high throughput experience for mRNA construct experiments and optimization. So it was really primarily driven there. I would say there was no customer overlap. They have a different go-to-market for their DNA and RNA construct services that will be expansionary for us and reach a slightly different target market than we do with our pure-play service business.

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

Trey, in rough terms, what percentage of the gRNA trial starts that you have on that bar chart there are being sponsored by companies that are our customers or do you think have a good chance of being customers? And do you see that activity as needle moving for NAP next year?

I think we do see it as needle moving for NAP. We have reported, as you know, many times, the overall active mRNA program percentage of CleanCap, which, by the way, remains 30%. We haven't disclosed and frankly, it's rather new data for the guide RNA portion of that. So keep in mind, those trials include 2 shots on goal for us. The existing mRNA that would express the Cas endonuclease in vivo and the newer area, which is for GMP guide RNA. I'll pass that to Drew for a few more comments.

Yes, sure. Look, I would say the -- we don't see any sign that the percentage participation of CleanCap is any different. Not all of those programs use mRNA, but I think the participation -- best we can tell is likely the same. We certainly -- anecdotally, we see a lot of activity there, Dan. The participation of mRNA in that universe appears to us to be growing versus other modalities, but we only see what we see. I think percentage-wise, we don't see any difference.

Yes. Okay. And then just a follow-up, Kevin, on the EBITDA guidance, how derisked do you think the 4Q outlook there is? And then performance has been pretty tied to the hip with revenues, which you've talked about. Do you think as you come off of some of these things that are going on in 2024, that can maybe decouple a bit? Do you see yourself having some additional flexibility that just sort of gives you some wiggle room if the top line doesn't materialize the way that you forecast? Or is the P&L relationship pretty much what it is to Trey's point, there is a lot of fixed cost there?

Yes. I think following our restructuring in the fourth quarter of last year, I think we've got the cost structure to a place that we find is appropriate. It's lean. It allows us to best care for our customers and do what we want to do while not only staying lean, but also continuing to make some incremental investments in commercial. I think that continues to be the one area that we never really came out of the box very strong in most of our acquisitions. And as we formed this company, it's been very science-based, very operational, and I think in a much more competitive landscape today. And I think having those feet on the street and getting customer intimacy will continue to be important. So we're going to continue to invest there as we have been over the last couple of years. I don't see the business model changing such that we'll have more discretionary spend to offset changes in revenue. I think the model is a good one, frankly. It's about filling up the factory and driving the top line. And I think that's going to be our continued focus here for the fourth quarter and as we move into 2025.

Okay. Well, everyone, it appears we're having some technical difficulties. I apologize to anyone still in the queue. We will try to follow up with you individually. Thank you for your time. Again, apologies for this technical issue, and we hope we can connect with you. We'll be at a couple of conferences during the month of November and hope to see you there.

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