Back to the 2023 Stifel Healthcare Conference. We are on the Life Sciences and Diagnostics track, and I'm here with the Rapid Micro Biosystems team. Happy to have CEO Rob Spignesi, CFO Sean Wirtjes. Guys, thanks very much for spending some time here today.
Thanks for having us.
Yeah, thank you for having us.
My pleasure. Rob, maybe just, as a starting point, can you talk a little bit about Growth Direct and just what the business is, and why the customers end up being in a better place for having used it?
Yeah, sure. So, just by way of context, we're focused on modernizing a segment of the global pharmaceutical quality control infrastructure called microbial quality control. This is a regulated and mandatory process that all pharmaceutical companies go through to ensure that their manufactured product, their drugs, are free from microbial contamination and safe for safe for patient use. The problem is, the fundamental methods and infrastructure designed to do this hasn't changed in the 100+ years or so since Louis Pasteur invented it. You know, some of you may remember high school biology, Petri dishes, incubators, clipboards, a lot of time, a lot of labor. That's literally how it's done in the vast majority of cases in global pharmaceutical manufacturing all over the world. It's leading to costs and risks to the industry.
There's pressure to change from the regulators. There's pressure to change from the industry itself, as new modalities have come into the market and putting pressure on these legacy methods. So we've developed a technology called the Growth Direct Platform that consists of a system, an instrument, that's designed to automate the vast majority of daily routine use test volume in any pharmaceutical manufacturing facility anywhere in the world across modalities, proprietary consumables, and services. Our business model is to place the capital and pull through a high yield, a high rate of recurring revenue, which I'm sure we'll discuss.
So the customers go from the legacy slow, error-prone, expensive model to our system that's rapid, fully automated, walk away with very, very high data integrity and a much higher degree of compliance with the regs. Just a better way to run their business. So they can ship to market faster, they can find problems faster, they can reduce their scrap, and just generally run a much, much better operation. We count two-thirds currently of the global top 20 pharmaceutical manufacturers in the world as our customers. Many of the large CDMOs are also customers. We're very strong in biologics and cell and gene. I assume we'll chat about that as well.
I think we have, as of today, five of the six commercial cell therapy companies as our customers, and we expect to have six out of six this quarter. So we're very strong in the cell and gene segment in particular, along with biologics. But it's important to note that we address all modalities, independent of the manufacturing type, to include small molecule injectables as well.
Yeah. But maybe to that point, because you're right, there are lots of new types of drugs being developed right now, new modalities. And presumably some of those have different needs attached to them-
Mm-hmm
... from a microbial control standpoint. So can you just talk about what kind of business you're open to or is open to you, and then how that might influence the growth rate, depending on what type of project happens to be worked on?
Yeah, right, great. Yeah, so, again, it's important to note that we can address all of the modalities out there. Historically, we focused a bit more on biologics and cell and gene therapy for a couple of reasons. The testing intensity tends to be a little bit heavier there in any given site or area, just the way a biologic is, the way it's manufactured. It's also a biologic, so it's a bit more prone to contamination than a chemical process, for example. And then, of course, cell and gene therapy, cell therapy in particular, has a lot of human interactions in another process and is a very fast turnaround, you know, critical manufacturing process that does not sustain contamination well. So these need automation, and they're also high volume.
Part of our business model, as you may imagine, is to go to where a lot of the volume is. We can automate more of it and generate higher degrees of recurring revenue.
Mm-hmm.
You know, that being said, especially with our R&D pipeline, which we may touch on, we plan on expanding more significantly into small molecule injectable and other modalities as well. But historically and currently, the majority of our business is in the advanced modalities of biologics and Cell and Gene Therapy.
Okay. And just to be clear, that is a model benefit when that happens, right? I mean, obviously, no one thing changes the picture overnight, but the shift towards that business is good for growth-
Yeah.
- and good for instrument growth and, and even more importantly, good for consumable growth.
Yeah, I think on average, the pull-through on those types of systems is higher than-
Okay
... our overall average and is beneficial from that standpoint.
Yep. Okay.
Yep.
Can you maybe just talk about the instrument purchase decision, just in the sense that you're obviously targeting these new customers? Rapid Micro has been around for a while, but it hasn't been a household name in the industry like maybe it is now, or at least more of it now. So can you talk about who the existing customer base is and how placements differ between those that don't know you're there but want a box, and those that know you're there, have a system, and might be interested in deploying them more broadly?
Mm-hmm.
Yeah, so we're becoming more of a household name.
Yeah.
Right. So,
Which I think I was, I was trying to make that point. I don't know whether I did or not.
I think you did. I think you did. I just want to put an exclamation point on it. I appreciate that. Yeah, so, so, the purchase decision is, it's interesting over the evolution of the business, is, you know, current days, to include early in our evolution, and we've been commercial... We, we view 2017 as our first real year of commercial sort of launch, and then 2018 and beyond as our, you know, kind of growth trajectory. Is to solve, trying to solve a problem. Customers are trying to solve a problem. I think it's becoming more universally accepted that it's not, you know, if automation is going to solve this problem, it's a when.
So we definitely had, you know, certain customers who were early adopters, largely many of the Top 20, and they were trying to solve a problem. They were trying to solving a labor leverage problem, or a data problem, or an automation problem, or a throughput problem, or a speed problem, all problems that we solve. And there's business cases against them. That usually triggered an initial purchase, and many of these companies also have a corporate-level initiative to automate. So it's not like we're bringing a brand-new concept to bear. The technology is, in many cases, but the theme of automation and speed and our value proposition is recognized, even several years ago by many. And virtually everyone we speak to today, they have some type of initiative around automating their their technology.
So typically, the way it would work is, trying to solve a problem, or someone left company A, who had Growth Direct, went to a new company and said, "We've got to get Growth Direct." So we're seeing some of that now as well, as we grow. And they'll typically acquire one to three or four systems, get those installed, get those validated, and then that typically will trigger the next set of purchases for either that site or an additional site or different geographies. And more and more of our sales funnel is becoming large companies with multi-system orders that we expect to, you know, move through our funnel and into placements in the coming quarters and years.
Okay. So one of the things that goes into the forecast for your company is the installation timeline, the validation timeline, and when it is that you can actually start modeling being up and running with the consumables-
Yep
... path. Is it fair to say that you think that one of the things that can compress those timelines and get the system up and running faster is just the repeat purchases? Because presumably, you take maybe a little bit less time to install and get your second one or third one up and running as the first, although I'd love to know whether that's not really been the experience.
It's definitely the experience for a couple different reasons. You know, the first of which is you're fundamentally changing a legacy practice, so there's a cultural change-
Mm-hmm
... that these companies go through. So that's why the first one tends to... change management, in effect, and that's what we do—I think among the best in the industry—is our validation teams and our teams that work hand in glove within a very high-touch method to go from a legacy method to a technology-enabled method. As that gets traction, as that company learns and goes through that learning curve, subsequent installations, validations tend to go quite a bit quicker. Moreover, we're able to bring data packages from the first installation to other sites around their network.
Mm-hmm.
So they actually wind up skipping some of the predicate steps to kind of get to the validation, final validation, end state much, much quicker-
Okay
... in many cases. So you do see that acceleration for a couple different reasons.
Yeah. Okay, so if I think about the top-line trajectory, since the IPO, things obviously slowed last year. Some for some obvious reasons, like, you know, just industry backdrop and, and where spending went to. But when I talk to you guys, I get the sense that some of it was less obvious, just in the sense that there was, it was about the team, and it was about the funnel and the way in which you forecasted business. Can you talk about how the process for you guys has improved? Because tell me if I'm barking up the wrong tree, but it does feel like internally, you guys are in the process of getting better and dialing in a forecast, quite honestly, in a way that you weren't able to prior. Is that right?
It is. It is right. So yeah, I think this is consistent with, for those of you who've been tuning in to our earnings calls, it's a consistent theme for the past several quarters about, you know, post-pandemic commercial strategy that we activated last year. That consisted of, you know, getting back in front of customers, investing in our sales and marketing initiatives, and then focusing on more senior-level connections and contacts within our customers-
Mm
... to get insight and visibility into purchase decisions. And, you know, that's an ongoing story, and you're never done. But yes, progress, you know, we're happy with our progress, and, you know, we believe our results are showing it.
Yeah.
We're quite excited about it.
Yep. Yeah, 2023, you said, you've gotten your feet under you, just at least in the last couple of quarters, for sure. So the outlook for this year, I guess it feels pretty firm to me. I don't know, Sean, whether you would endorse, you know, whether or not there's a level of conservatism or aggressiveness built into your finish to the year. Maybe we start there-
Yeah
... and then I'll ask-
Yeah,
... you an actual 2024 question.
Yeah, yeah. I think, I think we feel comfortable with it. I think it's, it's within a backdrop of the macro environment being what it is, which is, you know, tough to read-
Mm-hmm
... at some points. We talked about the fact that we have some customers who have had purchasing decisions move around on us. That's not the norm, but we have seen it.
Mm.
So, we're being cautious in how we think about the future. But I think in terms of the commercial initiatives that we've put together, that Rob just talked about, and the work, what we see in our funnel and with interactions with customers, we feel confident in that-
Okay
... in that forecast.
Yep, so the natural next question is: Does that sales funnel say something about next year in some way that you're able to comment about? I mean, every one of these has been; there's been a caveat in there that, which is, we'll see what the guide looks like in a couple of months. But as far as just an early read on business trajectory, the things that Rob's speaking about, just in terms of where the team is and the type of conversations that are being had now versus the ones that were had two years ago, is there something that you can say about acceleration next year, short of just giving sort of a revenue outlook?
Yeah, no, I think we expect to continue to see momentum in system placements in 2024. Yeah, I think we, you know, on the flip side of that, I'd say that, you know, we are gonna see probably a little bit lower growth rates in our recurring revenue, just because we've come now through a period of, you know, six quarters or so where placements have been down.
Mm-hmm.
That's really the front end of the funnel that drives that recurring revenue. Now, I think that's a short-term thing that we're gonna manage in 2024, and in 2025, we should see that start to come back to more historical levels for growth.
Okay.
Overall, I think, you know, you're gonna see some puts and takes. I, I think, you know, growth rate, you know, where we are in growth rate this year is probably not a bad way to think about where we, we would look to be next year.
Okay. Why on a per instrument basis, though, would the number go down? I mean, to our point here, there's new molecules being developed. The spending landscape in 2023 kind of stinks. I think it's pretty obvious-
Mm-hmm.
that that's the case. So maybe I'm wrong on a per instrument basis, should we think about that number staying stable or going up? It's really about the aggregate number because of the installs.
Yeah.
That-
Per instrument, I'd expect it to go up.
Okay.
Yeah, I'm talking in the aggregate-
I see-
Really, year-over-year growth is where I think we'll have a little bit of a headwind relative to where we've been the last couple of years.
Okay. The drivers of that acceleration in consumables utilization, or just pull-through, would be what we're talking about here, the types of molecules that are being worked on, presumably the types of customers that you're now placing it in, to our point on repeat. Actually, I don't wanna suppose what they are. Maybe you can tell.
Yeah. I mean, that's certainly part of it.
Yeah, I think it's price. I mean, price, mix. Price obviously is, you know, is self-explanatory. A mix... You know, our funnel does, it's a healthy weighting now towards, tilted towards existing customers, with their advanced modalities, and these tend to be... It's also a mix of our product portfolio. So our product portfolio, our environmental monitoring tends to be a very high volume, high capacity used product, and a lot of our funnel has that type of product in it. Same time, our water and bioburden product is also used in biologics, you know, a bit more than or quite a bit more than cell and gene therapy. Those can also be high-yielding, as well.
So we've got a good mix of what we believe will be high-yielding assays also in our pipeline going into molecules, to your point, or sites, frankly, that are high-volume sites that will drive that, you know, system-to-system volume up.
System usage.
Yeah.
Okay. Yeah, and you kinda touched on the portfolio and the way that it's evolving. Maybe just a comment on sterility.
Mm-hmm
... and mold. Those are two assays that I think you're looking to launch-
Yep
... sometime soon, maybe? Is that something that can be additive for 2024, or just given the nature of those adoption curves, should we be thinking about that as more of a 2025 factor?
Well, mold we launched, and.
Yeah
... Sean can touch on the, on our revenue outlook for that. That, just by way of background, for those of you who are newer to it, Mold, we launched about a year ago. It's a software-only change that leverages our knowledge of our vision technology to basically differentiate Mold from bacteria. And customers are particularly interested in Mold because it can spread quickly, and it's hard to remediate. Sterility is a product that we have in our R&D pipeline. We haven't released a launch date of that. We have mentioned that we are increasing focus on commercialization, so you guys can read into that what you will, then.
Right.
But we're excited about sterility. Sterility is a major assay that's the... It's a critical end-of-line test. It's the final test that a customer will conduct before that vial or that syringe goes to an actual patient, so it's gating to release in many applications. So we and many of our customers are quite excited about that. So what we did say on our earnings call, that we'll have more to update you on, in that next quarter.
Good.
Now on mold, maybe touch on the-
Yeah
... revenue outlook?
Yeah, so mold is a software product that will help our customers differentiate between mold and bacteria when they're using our system, and many of our customers find that very important because mold carries a kind of some special risk with it, and the time and the cost to remediate a mold outbreak is very high. So, we've talked in the past, as we've rolled this out, we launched it in Q4 last year. As we've been working our way through this year, I'd say the majority of our new systems that have been sold this year have mold on them or will have mold on them. At the same time, we're working with our existing customer base to drive adoption of this product into that, and I think we're making some good progress there.
You know, one thing that's important to know is, for them to use mold, it typically means a software update. So we can't just flip a switch and have them on mold. We've actually typically gotta go out on site as part of a preventative maintenance visit or another interaction with the customer and get it up and running, so we're doing that with customers now.
What would be the reason that a customer chooses not to adopt that? And I don't mean to just toss up a softball and say, "Well, thanks, Dan, it's obvious," but, like, it seems like a capability that doesn't involve, to your point, a new hardware purchase. It's a problem that needs a solution, I would assume. So I guess I'm wondering why adoption for existing Growth Direct users wouldn't be super high. I mean, maybe that is a softball in some ways, I don't know. But the idea is just, like-
Yep
... you know, from a purchasing decision, what would keep someone from wanting to adopt that?
You know, I mean, it would be, like you said, the majority of them have it.
Yeah.
It would. That's kind of the answer. So, I mean, there could be just a variance at the site, or mold hasn't.
Mm-hmm
...been a historic problem for that particular... It's more of a, probably a site issue than, than-
Okay
... a company issue. The QC lead might think, "Hey, you know, mold's not a big issue. Let's just keep going, and I'll deal with it later." But, it tends to be the minority-
Okay.
Yeah
... 'cause it's a built-in technology that just reinforces and expands the value proposition of the system.
I think our expectation is penetration. You know, we're seeing with new systems, it's high. We expect to see that-
Yeah
... with the existing customers, too.
Yeah, that was my next question, is it fair to assume that the new boxes that go out the door in 2024, 2025, 2026, what have you-
Yeah
... a good portion of them are? And is there a margin benefit at all? And I mean, maybe-
Yeah, there should be. I mean, as with software, typically, we'd expect to see margin benefit.
Right.
I think, you know, as you think about the impact of this, you know, we have said before, you know, our objective this year has been, and I think for a bit of time more, it'll continue to be, get this in the hands of customers.
Mm-hmm.
We're doing that. We're getting it up and running with customers now, but to be fair, a lot of those customers are gonna have some time with it for free, kinda set the hook, as we've talked about before as well.
Yeah.
So, you know, I expect in the latter part of 2024, we'll start to see more of a contribution, but I think about this more of a 2025 contribution and then growing from there, and that it should be something that's a tailwind to margins for us.
Okay. Let's touch on margins if we can.
Mm-hmm.
Because gross margins have kind of been up and down, downtime is one of the reasons that, that that's been the case. That happens pretty much everywhere. I don't know of too many life sciences-
Yeah
-or any business, really, for that matter, that has, doesn't have downtime. But it does seem to be more of a factor here than when I have to talk about it in other companies. Can you just talk about the path forward on a more consistent gross margin trajectory, and ultimately, where that trajectory leads you? And I guess there's a product and a, and a, and an overall gross margin-
Yeah
-conversation there.
Maybe just as a little background, I mean, our margins are negative right now. A lot of that—I'd say the bulk of that is because we are a company of our size dealing with big global biopharma companies, and to serve them in the way that we need to serve them, we've made a significant investment in infrastructure and capability in our business. With scale, there's gonna be significant volume benefits. A big part of that margin expansion story—we're starting to see some of that even with the growth that we've seen recently.
Mm-hmm
... is we're gonna have very highly leveraged volume benefit. So that, that's one. Now, beyond that, there's a lot of other things we're doing to drive margin improvement. You talked about downtime. We had some downtime in Q2 and Q3. That was downtime, that was for a very good reason, we believe. That was to actually make improvements and enhancements to our automated line that are gonna allow us to be more efficient with that, which is gonna drive better margins on our EM consumable in particular.
Okay.
So we're starting to see that now, and we expect to see that continue on and even increase in 2024.
Where-
That's gonna be one contributor.
Yeah. Sorry, I didn't mean to cut you off there.
Yeah.
Where is the confidence in gross crossing over to gross margin positivity?
Yeah
... in 2024?
Yeah, so I think we expect it for the full year. You know, I think the base case would be that it's gonna be in the latter part of the year. You know, we typically... You know, if we assume what we've generally seen, we typically step down in revenue from Q4 to Q1, just seasonality more than anything. So, you know, if we follow that same pattern, that's gonna have a little bit of an impact in Q1, in terms of margins. But then we'd expect to generally step up over time, assuming we follow that typical pattern. And if we do that, I think the latter part of the year is where we'd expect to see a meaningful flip over into positive margins.
Okay. Maybe just staying with investment, which kinda dovetails with what we were talking about with the commercial franchise and just the way in which sales efforts are evolving. Are there geographic elements to your plan going forward that are different than what they have been? Is Asia going to be a focus? You know, they're not spending a ton of money in China right now, but can you just talk about what your presence should be in the out years there, just given what presumably will be a good level of activity again at some point? And then, Sean, the second half of that would be, given the investment that you need to make for a small company trying to still prove out Growth Direct, operating expense-
Hmm
... trajectory from here, where does that go?
Yeah.
I can take part A. Yeah, so Dan, we. If you look at the test volume across global biopharma, it's about a third North America, a third Europe, and a third Asia. So we now have we're more recently been you know kinda stood up our operation in Asia. So we have commercial franchises across all three regions, and we see opportunity in all three.
Yeah.
Asia's a little newer there, but we're seeing, you know, reasonably good success there. We, in a recent earnings call, we touched on a large CDMO that has joined us there, as well as other large, a lot of large companies. So yeah, we see opportunity in all regions, and if you think about our customer base, it's global. So as we, and we have customers that have our systems in all three regions.
Mm-hmm
... any given customer. So they tend to operate across all three regions, and we have to serve them in all three regions. It's another reason why we're resident across those regions. But clearly, outside large customers, there's also small and mid-size that happen to be regionally focused that are also customer targets as well.
Okay.
Yep, and I... One word I'd use here that we've been talking about a little bit internally for 2024 is looking at it as a harvest year from a spend standpoint. So we've been investing in the business, whether it be operations, our service organization, or our infrastructure, our sales organization, across the business. There have been investments we've made over the past few years. 2024 is a year where I would expect us to be very have very tight control around spending. So anything that's not variable, in terms of where we spend, I would expect to see that in the single digits-
Mm-hmm
... you know, as kind of a starting point for how to think about that, while we're growing the top line at something much higher than that. So we're trying to drive leverage, not just through gross margins, but we're trying to drive leverage down through OpEx as well.
Okay.
Yeah.
So the sales infrastructure, is, in your mind, scaled in a way right now that allows you to do what you need to do in order to drive the top line next year? This is not a, "Hey, we need to add 50 heads-
No
-in commercial.
No.
That's right.
It's the commercial force is scaled.
Okay.
Yeah, and so the spend controls is one way to look at it. Another way to look at it is return on investment.
Yep.
Just think of it as that. We've invested in the business, you know, along the way here. Now, it's the return. Increased productivity in sales, increased productivity in our service operations, getting a higher yield off of our folks out there.
Okay. Okay, you know, I don't often talk about patent-related matters in some of my businesses, but I'm finding that in 2023, IP is a much more front-of-mind topic, let's just say, in a lot of ways. You do have some patents that are rolling off in 2025, I believe. If the answer is, we're, you know, we don't see it as material to the business, fine. But I would like to just ask the question to see whether that's something that becomes a discussion point.
Yeah, it's a good point. So think of our IP estate is not only patents, but you know, trade secrets-
Technically.
software algorithms. And we have a, we think of it as a kind of a picket, effectively, around our integrated system. So it's got multiple elements to it, elements of IP, some of which are patents. You mentioned, we've got a patent expiring coming up here-
Mm-hmm
... in a couple years. But there's other patents protecting the system, the system itself, the consumables. We've got, you know, trade secrets and know-how, which is formidable-
Mm-hmm
... in this kind of space. And of course, we have trade secrets in the form of, you know, software and algorithms, smart vision systems. So we're comfortable with our protected IP position.
Okay. Maybe just going back to, if I could, a thought just kind of jumped into my mind, just on our conversation as it relates to repeat purchases and just customers that have multiple systems. Offhand, do you know how many, what percentage of your customers have more than one platform?
Six... It's the majority-
Okay
... have more than one system.
Yeah.
Uh, sixty-
It's over 60%.
60%+.
Over sixty.
Yeah.
So the other 40% is a natural focus for you guys. I mean, it's... If an analyst can sit here on a stage and say, "Hey, it might be a good idea to sell to the other 40%," then presumably, you guys are pushing just as hard on that 40%.
Yeah, because it's where they are in their evolution. So, you know, as you may imagine, the customers that have more than one system might be a little bit more of a legacy customer.
Mm-hmm.
And then we've got brand-new customers that we're, you know, selling every quarter that are just starting their journey with us. Some may have purchased one system initially, so some multiple. So those that are just signing up with us and getting their first system, we do expect to sell other systems downstream, too. It's rare we have a customer that says, "Hey, I just want one, and that's it forever.
Yeah.
Some may start with one, some may start with two, as I mentioned before, two or three. But the end, the, the outlook typically is, Let's start someplace and then, and then move, from there. Although we are seeing, as we get more well-known in, in the market, to our, to our earlier conversation, customers starting with bigger tranches initially, which is, which is exciting, or, and/or moving faster to the next tranche-
Okay
... faster.
All right, maybe one more for you, Sean, and then I'll-
Yep
... I'll let you guys go. Just on the system placement outlook for next year, not in any numerical way, because I know we'll get a number for the top line, and we can do our math around what that might imply. But just to our point on sales funnel forecasting capabilities, C-suite level conversations, at some point, the hope would be that you get to a point where you're not moving up and down on system placements. Whatever the backdrop allows you to do, we'll see.
Mm-hmm.
But going from 4 systems to 1 system, to 7 systems to 1 system-
Mm.
that might be exaggerated, but you get my point.
Yep.
Do you feel like your forecasting and the timelines along that your boxes are running on installation validation can inject a consistency for placements that allows investors to feel, you know, like there is a pace on this business that is forecastable, that is predictable?
That's the goal. I think our funnel supports—I mean, I'd say sitting here today versus a couple quarters ago, we're better than we were. So I think that is something that, you know, we will always have some level of variability in the business. But I think that we're positioned with the funnel that we have today and kind of the work that we've put in around the commercial side to have a higher level of predictability than we've shown maybe over the past couple of years.
Yeah. Okay, I'm gonna leave it there, guys.
All right.
Appreciate your time.
All right.
Thank you.
Thanks, Dan.