All right, good morning, everyone. My name's Matt Stanton. I'm on the Life Science Tools and Diagnostics team here at Jefferies. Happy to have the team from Maravai back at us with the conference here in London this year. Joining us from the company, we have CEO Trey Martin, as well as CFO Kevin Herde. Gentlemen, thanks for being here this morning.
Thank you for having us.
Just, Trey, maybe to start off, you know, you guys called out on the 3Q call that, you know, for BST, we're seeing some softness in bioprocessing. I think there was maybe a bit of surprise there, just giving some of the normalized trends from others on the consumable side. Maybe just talk a little bit about, you know, where and how you play in the bioprocessing workflow in BST and how that might be different from some others. And then, you know, if we think kind of more longer term there, kind of what gets demand back to normal? Is it kind of post-election? Is it biotech funding? Is it, you know, pipeline prioritization, moving further away from IRA? Kind of what gets, you know, demand trends back to normal within where you play in bioprocessing?
Yes. Yeah, I think those are all good, good points. The first question is a very, very good one because Cygnus does play a very specific part in the value stream. So when we look at bioprocessing, biologics in general, most of the, you know, proxies that we have are companies that sell capital equipment, filters, and other consumables that go in that equipment. Cygnus is the business that operates within the BST segment, the only business in that segment, is a maker of host cell protein detection kits, which are ELISAs that are used to quantify the host cell protein eluent when you're isolating the drug substance from the cell systems. So your question is a very good one about where they play. So obviously, the capital equipment cycle is bigger and longer.
Filters and other things that go in that equipment might be probably a better proxy for activity in that space. Where Cygnus has the most activity is when people do program starts. So if someone is starting a process of scaling up an antibody or a cell therapy or what have you in the scale-up, they will actually consume the highest number of the Cygnus kits. Again, 100% consumable business. And as they do their process development, they'll be more and more refined. The kits they use will be specced into the process forever. But the actual high point of use is in program process development starts. So very specific nuance there.
Just on the second part, I mean, what kind of gets us, you know, more towards a more normalized demand? Is it large pharma? Is it funding coming back? Smaller pharma? Is it maybe activity in China? Kind of what are the building blocks to get us back to?
I do think it's all of the above. The, you know, China comes into play with BST because during the pandemic, about 40% of the total growth for Cygnus came from China. And so we've given that a lot of airtime there. In our NAP segment, our China exposure is very low, single digits percentages. So China has meant a lot for the growth of BST for us through the pandemic period, gave us a downside surprise in Q2, popped back a little bit here in Q3. I think our general feeling is we're not counting on China BST for growth. We're looking for stability there. We had five stable quarters before the Q2 surprise. And I think it's very probable that some programs are moving around in different geographies.
And we're confident that when they do that, obviously the Cygnus kits that are specced in will move with the programs. So I think there's probably a little bit of geo-relocation. And I know that there is program rationalization that I think opens up with the funding that you talked about.
Maybe shifting gears a bit over to new products. I think you guys have talked about, you know, over 20 + introductions, you know, this year alone. How should we think about kind of the contribution from those going forward? And then, you know, as you look at your kind of R&D engine, I'm not sure 20 plus a year is what to expect every year, but kind of what are some of the areas you're kind of most excited about coming out of the new product pipeline and R&D pipeline, you know, in 2025 and beyond?
Yeah, I appreciate that. It has been a busy year. I mean, the reality for the NAP segment, most of the headlines, most of what we talk about in here come from TriLink GMP, which is, you know, where the CleanCap, the GMP CleanCap for the COVID vaccines came from. As we come out of that era, what we're really trying to do with the whole segment is broaden the reach and accessibility of mRNA tools to all of life sciences and molecular biology. We have obviously a distinct franchise in capping. We have other things in the mix with R&D that you mentioned. But there's frankly not one silver bullet. We have four caps on the market. We have many more in beta.
One of the things, for example, that I'm most excited about is that we announced on our last conference call. Sorry, I should look at you guys too instead of in addition to man. It is this screening program that allows people to order not one mRNA at a time, but hundreds at a time. Use not one cap, but dozens of caps, different approaches for all the different elements of the constructs of what makes mRNA work to allow people to screen many, many compounds and find basically the highest, the most productive, highest fidelity, lowest impurity approach for whatever it is they're trying to do. One of the other things, you know, we talk about products, but really we are a product and technology company in RUO that spans all the way to GMP. We're also a service company that spans RUO to GMP.
In the service side, the opening of Flanders to be able to do service, which is to do the mRNA drug substance assembly for phase II, three, and commercial is obviously a big. It's a big product launch, so to speak, as well.
Okay. And maybe, I guess to jump over to Flanders too, you know, site just opened up. I think, you know, 3Q marked a big milestone. You guys had your first mRNA build for a cell and gene therapy customer there. Maybe just talk about, since you've opened that site, kind of how the funnel's built, how reception's been. And then, you know, if we think about 2025 and beyond, you know, level of demand there and kind of what that could mean potentially from a revenue perspective as kind of you scale up, you know, Flanders, which is a pretty, you know, meaningful addition to the capacity profile.
Very much so. Yeah. We predominantly, you know, we have a long history of GMP mRNA for the preclinical phase I. The first phase II, which was actually a 2/3 pivotal that we supported there, is a really great milestone. And where all those projects you mentioned before, or those products, excuse me, might be a few hundred thousand to a million in their first year, you know, the phase II plus mRNA programs are usually several million apiece. And we're in the awkward stage of growing. It's one of the reasons why on our conference call, we spent some time talking about how in the CDMO type business, which we call the service, you know, programs can move in and out, and that can affect your quarters significantly, particularly when we're doing $65 million, and these are $2 million-$3 million projects.
But we're coming off of a period, you know, from zero. The Flanders facility technically opened in Q2. We did our first program in Q3. So we're building up from nothing. And I hope that we'll be full enough soon that we won't talk about individual programs ever again, that we'll have enough buffer. But they definitely move the needle at a few million dollars apiece when we're at a $65 million quarter. The funnel's built very, very nicely. And it's all about scheduling. And there are just a lot of other factors that go into when you can execute a project for a customer, some of which are exogenous to us.
Okay. And maybe I think one of the kind of genesis behind opening Flanders 2 was, you know, there was maybe earlier stage work that you were, you know, losing out on as it moved along. And so, you know, it's early and it takes time for the pipeline to play out. But kind of is that thesis of staying with the customer longer, going after that longer revenue, you know, opportunity, like early days, is that thesis kind of being validated, you know, as these kind of scale up, you're talking to the same customers and maybe staying with them a bit longer.
It is, and the element that we want to play here, there are several people doing CDMO services of mRNA. There were not so many people before the pandemic, and we have over a hundred batches of experience doing that, and we're very focused on the products and technologies that go into mRNA, our capping franchise, and all the other things around it, and being really the technical advocate and support for customers, having the service allows us to play that role very, very well and stay with people.
But to be clear, we want to make sure our products and technologies are in every program, whether we have the service or not, which is one of the reasons why we have, you know, we've been public about how we've licensed Fuji and Lonza and others for access just to make sure that we can have our product and tech in as many programs as possible. We definitely think service is going to be a very strong growth vector for us.
Okay.
I'll give Trey a little break here.
Thank you.
One of the interesting things about this whole journey, getting to that question, you know, when we were back in 2017, 2018, you know, TriLink, which was certainly the lead asset in our nucleic acid production segment, was one of the only companies doing highly modified mRNAs and then moving into GMP conditions. And we were supporting some of the initial kind of pioneers there, right? The BioNTechs, the CureVacs, the Intellias, you know, it's a pretty small population of folks and people that go to TriLink. And we had those capabilities and had one GMP suite at the old facility. And that informed making the investment in our first fully automated facility in Water idge, which we got online at the fourth quarter of 2019 and then became the what supported the pandemic demand for CleanCap.
And then through that investment, that further informed that we want to have those later-stage capabilities and use the proceeds from the pandemic as well as some BARDA funding to certainly build the Flanders facility and get that up to speed again to be able to complete the journey through commercial drug substance, which will enable us to have that not only capability, but the stickiness which would come with having commercial revenues, which would be the annuity stream for us. And the nice thing about where we sit as we literally sit here today versus, you know, having been here and seen these investments over the last eight years for the company, we've finished that investment cycle for most of what we've done. And it's been a substantial investment cycle for a company of our size versus who we compete against.
Now we have that behind us. That large CapEx, that large capacity, all those capabilities, we've never had more capacity, more capabilities, more products than we do today. I think that investment has been kind of one of the key strategic visions that we had from the beginning of Maravai. That was buying very unique assets, founder-based, scientific-led companies, and investing in them. You know, all of our acquisitions have been investment-based theses. We never came in and bought a company and said, "This is going to be a cost-cutting ordeal. We're going to squeeze out synergies." It's always been about, "We really like this company. We really like their unique assets, and we're going to invest in them more so than they were investing in themselves to take advantage of the market opportunity." We certainly saw that in the pandemic.
And we certainly are in a bit of an air pocket now, I think, in the industry where mRNA is. So you had some early front runners, and now you have a big pack around the corner. But I think having done that puts us in a really good position as we look forward. And now we have that investment behind us as well. And so I think the company's in a very nice position to capitalize on all the work we've done over the last five years.
That's helpful. And Kevin, maybe staying with you for a second, you know, there's the $50 million of firm GMP commitment that you guys talked about coming into the year. You've stuck with that. I think there's still another slug to ship here in 4Q. I think there's some debate out there of what that looks like next year. You know, it could be higher, lower, the same. Obviously, you're not going to tell us what that's going to be. But I guess in terms of your visibility around that, I mean, just talk about how much visibility you have around that. And should we expect you to kind of quantify or talk about that again next year as we move further away? Is it just getting further into the?
I think we'll continue to do what we've done for the past, frankly, since we've gone public in 2020, the last five years, and that's really trying to detail what we have in hand and what we have clear visibility to. And, you know, when we go back to, I mean, this is obviously varied from $50 million- $600 million over the past five years based upon the demand that our customers give us visibility into. Currently, and with the last couple of years, that visibility generally comes around the end of the year as they're looking at how the season went and what their needs are going to be going forward. You know, we've sort of changed our definition of that a little bit. You know, it was very COVID specific for a while. That was, you know, what was driving most of it.
I think almost all of our high volume vaccine customers now have commercial COVID products, but also have other things they're doing, you know, late stage respiratory and other R&D programs. And our product, and when we're talking about CleanCap, our lead product is fungible in their hands. It's not specific. We have no product that says no COVID-19 indication on it. It is a cap that can be used across an mRNA platform. And thus we know it's going into certain high volume demands, but they're using it across a variety of things. And I think we'll sit down with our customers, as we always do, around the end of the year. And to the extent we have that information in hand, we'll certainly share it as part of our guidance, which we have last couple of years given in February as part of our year-end call.
Okay. All right. That's helpful. Maybe one more kind of sticking with kind of the framing around 2025, and that's more on the margin side, so obviously this year, you know, or if we think about next year, there'll be a lot that's tied to top line, right, and what happens there, but setting that aside, I think 2024 had some more, call it one-time costs. There was the ramp of the Flanders facility. I think you guys made some investments in some key kind of academic type partnerships, so I guess setting aside the top line part, you know, maybe just remind us the more one-time things this year and then anything you can do to kind of quantify what that was this year that maybe kind of doesn't reoccur next year as we think about the break.
Certainly. Yeah. I think coming into the year, you know, we had an expectation of margins being in sort of the low- to mid-20s. We brought down our expectations for revenue. You know, our company is really revenue drives the margin. You know, we have a high fixed cost based on a lot of the facilities that I talked about and the labor force that we have. And we're very efficient with labor, certainly, and have one of the higher revenue per employee metrics in our space. But we do have a high fixed cost because of what we do and what we offer. You know, so the majority of our margin fluctuation, which as we've seen has been in the low teens all the way up in, you know, to above 40% just based upon that revenue volume, is really driven by revenue.
And that'll be 80% of the game. I think there were some costs this year. Again, you mentioned some additional costs with Flanders that we really wanted to make sure we were ready for those first builds and brought in some additional work and did some additional validation testing and other things that incurred some period costs in the first half of the year, that's now behind us. And that was non-recurring, as well as some of these investments in the Johns Hopkins collaboration and some of the things that we just think are right for the business. You know, I think it's as we run our business, we try and make the right business decisions each time. And sometimes that may or may not be in line with how we looked at the beginning of the year. And, but we think it's the right thing to do.
And that's certainly been an opportunity for us. And we continue to do that. So I think those things are behind us. You know, in this last quarter, we printed about a 20% EBITDA margin on $65 million revenues, which is fine. But I think it's, you know, something that we can definitely leverage going forward. And there continues to be, again, that really nice expansion on incremental margins. So watching that top line is going to be important because the key business fundamentals haven't really changed. Pricing has been steady for us. The cost structure and a lot of the cost initiatives we put in a year ago are on track, if not slightly better than what we anticipated. And so that incremental margin profile continues to be very attractive.
As the company scales back to some of the revenue levels we saw previously, that same margin profile is a very strong opportunity to reappear based upon the revenue coming through.
And then the last one would just be the recent deal you guys did. I think you described it as self-funding. So think of that as not dilutive and not a swing factor.
Yeah. Just from a financial perspective, and I'll let Trey put the strategic marks on it. You know, it was a nice small company, you know, $10 million upfront, about a $5 million milestone, hopefully within the first year as we're really buying a front-end kind of e-commerce system to bolt onto what TriLink's offering is to help people configure their mRNA more intelligently. They also have some nice AI capabilities as well. It's a small company. And when we say self-funding, basically the revenues they're generating today more or less offset, you know, the cost of that infrastructure. It's a relatively small bite for us. So it's a nice thing from that perspective. And it fills a nice gap and allows us to buy versus build a key component to what we think is going to be necessary to accelerate the discovery market for mRNA.
Do you want to talk more about that?
Yeah. That's particularly exciting. It's, again, a small company, non-dilutive, but a major enabler, I would say, for that framework I was talking about before, which is to increase the screening capability people have with mRNA 100-fold. So they literally will supply and will integrate the front-end, which is a web-based design environment for people to design experiments like that and make ordering a total breeze through TriLink. There are also some other elements that we're pretty excited about. They're particularly adept at AI-based optimization models for process and will probably continue that line of business with them. They've done work in bioprocessing. Obviously, they've done work in mRNA and DNA structurally. So it's a great enabler for us internally as well as potential growth externally.
Yeah. Maybe to shift gears a bit, you know, the last week there's been some more headlines out of D.C., but, you know, it's been less BIOSECURE. But I think, you know, over the last six months, Flanders opened, right, as kind of BIOSECURE perked up. Just would love kind of like your updated thoughts on, you know, discussions with customers. You're in a pretty unique position. You make a lot of building block services, right, in the U.S., you know, and things like that. So talk about is BIOSECURE still relevant and kind of where customer conversations have been and is where things sourced kind of moving up the pecking order relative to what historically might have been pricing or other items.
Yeah. I appreciate that observation because it is a very unique position. When we meet with people in Flanders, there are two large conference rooms in between the Flanders 1 building and the Flanders 2 building, and most of the time we're talking about Flanders 2, which is where we do mRNA assembly, the drug substance. Flanders 1 is four suites of cGMP API nucleic acid chemistry. So caps, including many-fold higher capacity to support bulk cap than we had during the pandemic, and, you know, I've been in seat here a little over a year, and a few years ago, if you had told me that we would have cGMP bulk chemistry in San Diego and input enzyme production in Jupiter, Florida, and that customers would be really excited about that, I would have doubted that.
But it's an incredible story to tell when you can say, you know, we just toured both buildings and you're talking with a customer about your mRNA drug substance program or theirs. And we say, and the reagents are produced behind us. You know, it's a very unique position. And one of the reasons we try to differentiate that, again, products and technology first service to enable the inclusion of those, but completely vertical from a service perspective, which is unique and 100% U.S., which is also very unique.
I think the net impact here is for us is certainly a positive. Again, I think on the biologics safety testing side, the Cygnus kits have such a gold standard value in the industry. They go with the program. Multinationals may be using China for some of their biologics manufacturing. That program moves, the kits will go with it. We've seen that before. On the nucleic acid production side, you know, we are a U.S.-based manufacturer of products and services for mRNA. Certainly if people are moving away from China, some China-based manufacturers, we are seeing some conversations on that transfer towards us. I think we're very well positioned.
And then on the supply chain side, we source very little, almost nothing, and have plans to actually be completely out of that region from a raw material sourcing perspective as well by the end of the year.
Okay. And then maybe one last one here just around, you know, capital allocation. You know, very clean, strong balance sheet has been a hallmark since the IPO. You know, it's been more smaller tuck-in deals. You talked about a little bit earlier, Kevin. You know, CapEx is coming down. R&D isn't a huge part of revenue. So, you know, how do you guys think about capital allocation going forward? You know, have you seen valuations on the lower, more tuck-in end change at all? And then absent deals, is there any appetite, you know, to maybe look at or consider a buyback?
Yeah. I'll take the last part of that. I think we're always looking at it. I think certainly our low debt structure has been something that we've kept, again, like you said, since the IPO to be able to be very opportunistic with M&A and do it quickly and use cash on hand to be able to bring those across the finish line quickly with the founder-based companies that we're looking at. I think valuations have gotten a little more realistic, certainly. I think the issue with a lot of them is there's, you know, a lot of companies out there that don't meet some of the financial hurdles that we set up for them. We talk about companies being self-funding. Typically, every company we've bought, you know, has been an EBITDA-positive business profile.
There's a lot more science projects probably out there at the moment and probably not a lot of large needle movers for us and other acquirers in our industry, and that's why I think we've seen a lot fewer deals printed over the last couple of years, so there certainly needs to be an appetite to take on some of those, and I would say the valuations on those have come down more recently, and we've also seen some of those companies be in distressed situations, and certainly that's an opportunity for companies like us who do a very good job of, I think, evaluating and integrating companies to be able to potentially take advantage of that part of the market as well. You know, I think we meet with our board very regularly to talk about the capital allocation: is it going to be M&A?
And you said the organic investments coming to an end. So that's nice. We're still going to look for the right deals. And then we're going to assess, you know, the balance sheet, the debt structure, and other potential capital opportunities as they come up because I think we're getting to that point in our cycle where that becomes an opportunity for us as well.
Okay. All right. So with that, we're out of time. So thanks again for being here. Appreciate it.
Yeah. Thank you.