and diagnostics team, introducing our next company, Rapid Micro Biosystems. It's my pleasure to introduce Rob Spignesi, President and CEO, and Sean Wirtjes, CFO. Let's keep it interactive. If there's any audience questions, just, you know, just raise your hand, somebody will bring over a microphone. Or if you want, you can just email me at steven.mah@cowen.com, and I'll ask the question for you. But you know, before we get started, Rob, just for the benefit of the people that may not know the company as well-
You know, maybe give a brief introduction to the company.
Yeah, sure, happy to. Again, Rob Spignesi, CEO, Rapid Micro. Thank you all for your time and attention. So at Rapid Micro Biosystems, we're focused on a critical part of the global pharmaceutical manufacturing quality control infrastructure. It's called microbial quality control. This is a regulated, globally regulated, high volume testing process, effectively, that all pharmaceutical companies go through to ensure the safety of the manufactured product, to assure there's no microbial contamination, so think bacteria, mold, et cetera. The problem is, unlike the rest of the pharmaceutical value chains, for example, how we discover drugs in the first place and how we manufacture drugs, those parts of the value chain have benefited from technology and scientific advancements.
Microbial quality control hasn't innovated, hasn't changed, hasn't really moved much at all since Louis Pasteur invented it about 100 years ago. So think high school biology, a lot of Petri dishes, manual, slow incubators, pencils, pens. It's a, it's a slow, error-prone, costly, you know, risky process, and it's causing risk and cost to the industry that are becoming untenable, especially in light of advanced modalities like biologics and cell and gene therapy. So we've developed a technology, a platform, consisting of a system called the Growth Direct and consumables and services , that fully automates that process in a pharmaceutical quality control and manufacturing environment. Accelerates the process as well, and really brings, fundamentally brings this process into the 21st century. So just a couple quick stats about the market and why we're excited about the business.
About $10 billion, you know, growing at mid- to high-single digits. Globally, we've got a fantastic strategic position in the market to include first mover advantage. We have the right technology for the market. We're proud to count roughly 70% of the global top 20 pharmaceutical companies, as our, as our customers. We've recently announced that 100% of commercial, CAR T companies, and therapies are using, the Growth Direct. And a very powerful, high-growth, recurring business model, where we place a Growth Direct system, and we pull through a high rate, high yield of proprietary consumables, and services that's, that's quite sticky in these, in these validated, pharmaceutical environments.
Right. And can you estimate the total addressable market? I know it's difficult because, you know, you're kind of displacing the-
Yep
... tried and true, but, you know, it's, you know... Can you, can you put a dollar amount on that?
Yeah, we can. We size the market at about $10 billion, but just, you know, gonna break that down. So $5 billion of that we consider recurring consumables and services. The other five billion, think of this as a one-time-ish capital market. So if you converted all the test volumes, about 350 million tests conducted annually, globally, in microbial quality control. If you converted all that onto our system, that would equate to roughly 10,000 systems, and the system ASP is roughly $500,000. So you get about a $5 billion total, if you will, capital market, and then $5 billion in recurring services, and consumable. So a lot to go after.
Against that, call it 9,000-10,000 system opportunity, we have 141 systems placed. So while we're in many of the large customers, we have a very long runway to go with regard to just sheer organic opportunity for growth.
Got it. And, you know, maybe touch on, you know, kind of the value proposition to your customers-
... in terms of, like, return on their investment.
Yep.
You know, you mentioned that, you know, a lot of it's automated, but can you discuss maybe the process by which you help, like, automate, like, the documentation that, you know, kind of FDA and regulatory agencies require?
Yeah. So the value prop, I can answer that in context of how-
Yeah
... customers look at our platform and the ROI and value prop that they ultimately gain from it. So the first one to the regulators is data integrity. So as you may imagine, the process, you know, just quickly, it could be a room with as many folks as are in this room, maybe times five or six for a large site. Everyone gowns up.
They go into a manufacturing environment and take a bunch of samples, come back out, put them into a gigantic walk-in incubator, all the while writing down what they're doing, how they're doing it, coming back five, seven, 14 days later, looking at each sample they took, and counting any organisms and writing it down on a piece of paper, and ultimately, it's finding its way into a computer system. And that could happen hundreds of times per day or even thousands of times per day at a larger site. So lots of chances for error, lots of chances for, unfortunately, falsification.
This is data integrity. Can you trust that sample, and every sample matters, every single one of them matters. Can you trust that that has the right data integrity to release a drug that could be contaminated if it was improperly manufactured? The regulators are aware of this and concerned about this. Part of what our value prop is is to basically lock down the process with regard to data integrity. All of our samples are barcode labeled. The system is a machine-driven, computer-driven system. Customers can go from, as I described, what could be a data integrity challenge environment to a fully compliant, lockdown data integrity compliant, which comports with the global regulations.
The second main area of value proposition is, think of this operational benefit, just running a better business. So our technology is rapid, so it's half the time or less to give a result. At the end of the day, customers are looking for a test result that says they can ship this drug to market, or the next processing step, or they can't because it got somehow contaminated. The air system's contaminated, the water system. Human beings, we tend to be the one of the top source of contamination in the pharmaceutical environment. So they want data that they can trust quickly. So our vision technology and our automation technology provides those answers much, much quicker, about half the time or less, saving days, and in the case of sterility, we'll probably talk about, you know-
Yeah
... potentially weeks, so that they can ship much faster or solve problems faster. And the last kind of area of value customers typically seek is accuracy. So you can imagine looking at samples all day, every day, there's an error rate associated with it, and if a drug gets out with a bad sample, you can have a recall situation. So having a machine-driven, AI-driven, computer-driven, and robotic-driven system ensures that you have high accuracy, and the totality of that value proposition gets infused into a business case and ROI, which drives ultimately the cust-
Yeah
... customer's purchase decision.
Okay, all right, great. And, let's maybe talk about some of the end, you know, end markets. You know, maybe there's, you know, how you see it evolving. I know you, you know, you have a, you know, business model where you kind of enter into an institution and then kind of expand out from there. Maybe, you know, give us an idea, Sean, you know, what the mix is of, you know, your instrument placements, how many are with, like, brand-new customers, where you can then expand versus, you know, expansion from, you know, current existing customers.
Yeah, I think as we look at our customer base, pretty good mix, new and existing. You know, we're, we focus a lot on our funnel looking forward. I think it looks a fair amount like our customer base looks today, where we've got that balance, I think, and we look at that across a couple different angles. You know, that's one, I think, across segments. Rob talked a little about the segments that we focus on. I think we've got some good balance in our funnel as we look forward from that perspective as well, and I think more over the past few years, we're seeing benefits that are growing from our investments over in Asia.
Okay.
So, you know, we have historically been very, very focused on North America and Europe. That's where the vast majority of our customers are today, but we have a small but growing base of customers in Asia that are contributing more as time goes on here over the last year or two. So I think we, we like the diversity, we like the balance that we have in the funnel. We're continuing to cultivate that.
Okay. And what's driving the strength in the funnel? Is it just to the point you made, Rob, all the, you know, return on investment, streamlining, accuracy, reducing documentation-
Yeah
... all of the above?
Yeah, it's a few things. So I think, to your point, our current customer base, as we land and expand, as customers expand with us, those become funnel opportunities, which we've got good visibility into. So customer XYZ says, "Hey, I'm going to roll out to site B, C, and D, after site A," so that creates a funnel. I think an important part of our journey, too, has been the development of a global sales team.
You know, as Sean touched on, we're serving a global market, and customers want us in Asia, they want us in Europe, they want us in North America because that's where they operate, that's where they manufacture. So having a fully loaded, if you will, staff, sales, and marketing team who are generating opportunities and leads around the world also kind of create that, you know, create the kind of funnel that we like. And the last piece I think is relevant, we're becoming more and more of the spend of some of these larger companies, so we're getting access to more senior levels in the organizations.
As we get access to more senior and executive levels, we're able to get better insight into the strategic deployment of our technology, which can tend to also bring some quality and visibility into the funnel as well.
Okay. Yeah, you, you talk about, like, the global nature, you know, global expansion, you know.
Can you give us a sense of the current geographic mix in terms of, like, system placements, and then, you know, what you think, you know, could be over time?
Yeah, right now, we're generally balanced between North America and Europe, so generally equally from a site base. A bit smaller in Asia, as Sean touched on, but we like what we see out there, and we're growing quite strongly. We recently announced, Samsung has-
Right
... become a customer. We don't announce all our new customers for a couple different reasons, but you know, Samsung was announced, and we were quite excited about the impact, you know, they'll have on our business over time, and the region as well.
Okay. So obviously, that's a big opportunity. I mean, Samsung Biologics is massive, so there's a pretty good expansion opportunity there.
... I'm guessing. You know, how is signing that, how has that impacted maybe your, you know, inbound BD discussions? You know, people obviously, you know, see Samsung, I mean, it's obviously a very respected, very well-respected, well-known entity, you know. So has that helped the BD discussions?
I think it's been additive, but I will say, customers in our, well, it might not be publicly announced every time we win a large customer, we do have the majority of large customers out there. The market knows that.
Okay.
So we already have a pretty good brand halo, if you will, with regard to serving critical top-tier, premier-tier customer base. I think Samsung is fantastic, but it's consistent with many of our other customers as well.
Yeah. Okay. No, that's fair enough. Speaking of that, getting into, you know, pharma versus biologics-
And cell and gene therapy, do you guys disclose the mix, or can you give us any color on instrument placements? How much are in pharma? How much are in biologics? How much are in cell and gene therapy?
Yeah, we tend to group them together as far as, as far as, the biologics and cell and gene as an advanced kind of class-
Yeah
... of manufacturing modality. You know, that's the majority of our placements, call it 70%-80% plus of our installations around the world are in that, I'll call it advanced modality. The majority are in biologics, of that majority, and then we're also quite well represented in cell and gene therapy. Although, we get asked the questions a lot 'cause we're quite strong there, but it is a much smaller part of the market and our business as well in biologics. I can tell you that we are, and we can touch on this, you know, maybe in a follow-on question, but as sterility comes online, that will also help position us more strongly in the small molecule, injectable, and vaccine spaces as well.
Okay. Right. Yeah. Well, why don't we go there since, you know-
Sure
... since you brought it up. You know, it looks like you're scheduled for, you know, mid-2024 launch. You know, can you walk through some of the feedback you've got from your, you know, your early access partner that you kind of helped, like, stress test and, you know, get feedback as you were developing the final iteration of the product?
Yep. So, we had a beta partner, but we also have, since our announcement a couple of months ago, we're also speaking with other, I will call it, close-in customers, and generally, the feedback is very positive. So, for those that don't know, sterility is typically the final microbial test conducted in a pharmaceutical environment before the final packaged product, the vial or the syringe, is shipped to a patient. So it's critical in that it's sort of the last, it's the last check to make sure it's safe to go to a patient. It's also takes, in the old method, if you will, 14 days or more to get an answer. So there's a lot of time that has to expire, if you will, before it can ship and holding up...
Clearly, I think we all learned the criticality of vaccines, for example, during the pandemic, but just generally, getting medications out to patients and both the commercial supply chain benefits of fast release. So our technology can release, is our expectation, to within about 1-3 days, or as early as 1-3 days, versus what could be 2 weeks or more. So an enormous delta. Moreover, the technology, in as little as 12 hours, can tell you if you have a contamination, which would allow you to say: Hey, stop the manufacturing process or remediate it quickly. So it's breakthrough with regard to the those data. So customers know that and see the benefit of that, so they're quite interested.
Super early days, it's not launched yet, but as far as the, I'll call it, the inbound interest, it's quite excited around it, just given the data and the potential implications on their business.
Right. Right. I guess it's even more pointed if it's like you're doing an autologous therapy, right? I mean, these typically are, you know, fairly ill people.
Yep.
It's kind of like a last line of, life or last, you know, therapy. You know, the need to get it out quickly is important, I would guess.
Yeah, it's, I mean, sterility testing and so in a CAR T environment like that, we have 2- or 3-week vein-to-vein time. All tests are actually important. It's why, it's why we're quite strong there-
Yeah
... because you don't want delay in the process, because it's a very, very short turnaround time. So across all the test modalities, environmental monitoring, it too includes sterility. You wanna make sure it's accurate and, and as fast as possible.
That's right. I got it. Yeah, and I guess that's, yeah, to your point, yeah, you're in 100% of the CAR T manufacturers right now. I'm assuming the stickiness there is, like, 100%?
Yeah, the stickiness-
Because-
Yeah, no, the stickiness. The way we view it across all our customers is, it's quite sticky. So, and to give you some context of that, in order to be what's called validated, our system goes through a validation process. It basically means it's as good as, if you will, or better than the previous process it replaced, the compendial process. That's called validated under GMP. It's all about change control. You don't wanna do harm effectively to the manufacturing process. It's kind of how it works. So once the customers go through that process, which can be... We have a team that deploy around the world to help our customers.
We've done it, I think, it's 120-plus times around the world, so we're quite good at it, and can help customers through it. Once it gets validated and they go through that process, and they lock in, if you will, the change control into their quality management system, it becomes quite sticky at that point, almost independent of the modality.
Right.
Cell and gene in particular, because I think it's, it's such a critical once you kind of lock it in and you've redeployed kind of the, the legacy approach, but it's very similar in biologics as well.
Okay.
That's one of the benefits of our model, is once we get it validated, once we're in, it tends to be durable, I'll call it, revenue-
Right
... recurring revenue.
'Cause someone would have to redo the whole validation-
Yes
... if they brought in a new process.
Yes.
Okay. No, that makes sense. Thank you.
Folks don't typically wanna do that. Typically.
Right. Yes.
After you just went through one.
Right. Right. You know, how is, like, the imminent launch of, you know, Rapid Sterility? Has that impacted your kind of inbound discussions and new customer discussions or, you know, existing customers? Where's kind of the, you know, most excitement coming from?
It's starting to be with both with existing and with new.
Okay.
but both, so it's, you know, again, it's early days, so I don't wanna get too far ahead of it. We'll be sure to update you on future calls. But yeah, I think early days here, we're excited about the conversations that are coming inbound, both again, from our existing customer base, as well as we don't have 100% of the top 20, right? As well as some customers who we have not yet signed up.
Okay, got it. Got it. All right. Yeah, so maybe let's pivot over to the financial side.
You know, I know you guys just, you know, just reported, you know, what demand trends or what learnings can you take out from, you know, the 2023, you know, how does that impact your 2024 outlook, especially in terms of kind of the macro? You know, there was, you know, a lot of people were kind of pulling back some R&D spend, you know, how come some of these macro trends impacted your guide in 2024?
Yeah, I think, you know, as we look... If I go back to 2023, you know, we built momentum during the year. So, you know-
... about two-thirds of our placements were in the second half of the year. That does tend to follow a kind of a seasonality that we've seen in the past, so not a big surprise there. But we feel good that, as we mentioned on our call, we had 6 placements of new systems in Q4. That was the most systems we've had in a quarter since Q3 of 2021. So I think we feel good that we're building momentum as we exit 2023 and move into 2024. Now, having said that, we have been seeing and are continuing to see, you know, some budget kind of tightness within certain customers. Their processes are sometimes taking longer, they need more approvals. So, you know, it's not a free-flowing process for all of our customers right now.
So, we're continuing to watch that really closely. I think we're optimistic that we may see that start to get better as the year progresses, but that's not a call that we're at a point where we're ready to make yet.
Okay, got it. So it's a potential source of upside if the macro conditions loosen up a bit?
Yeah.
Okay, all right. No, that's really helpful. And then, you know, maybe let's talk about, like, gross margin.
You know, you became positive in the quarter, driven by the-
Close.
Okay.
Very, very close.
Yeah, close.
you know, how should we start thinking about when it's, you know, starts becoming positive and, you know, at scale and over time, you know, what's kind of like the long-term-
Yep
... gross margin rate?
Yeah, sure. I, I mean, I think it's important to give a little context here. I think, you know, we, as a relatively small but rapidly growing business-
Yeah
... are serving a customer base that is very demanding, very global. So, you know, early in our time, we built infrastructure to support those customers and the demands that they put on us. So if you imagine our operations to support that, our manufacturing, our supply chain, all that is built to support, you know, the top 20 largest global biopharma companies in the world. That costs money. So scale is really important to us. So, you know, if you look back a few years when we were at a lower revenue level, lower volumes, you know, that we weren't covering that cost-
Yeah
... that we maintained to drive that. And that's really one of the largest reasons why margins have been negative up to now. Now, if you look back at 2023, our gross margins for the year were a little, a little below negative 20%. As Steve mentioned, we were about breakeven in Q4. Our guidance for 2024 is that we will be positive gross margins in the full year. I think as you think about cadence for that, we typically drop down in overall volume and placements from Q4 to Q1. We expect that to happen.
Okay.
That'll move our... We expect that's gonna move our margins slightly more negative in Q1.
Right.
We'll improve, but it'll still be a little bit negative in Q2, and then move positive in Q3 and Q4, and in the totality of the year, we'll be positive for the year, so.
Okay.
You know, if you think about negative 20-ish last year-
Yeah
... single-digit positive for 2024, I think that kind of an improvement trajectory going forward beyond 2024 probably makes sense-
... in how to think about us. So it's a pretty steep trajectory in terms of the improvement that we expect, and that's driven by a couple things. Volume is really important for us, and volume is gonna drive a lot of leverage for us, particularly given that cost pool I talked about that we've built up is not gonna grow much over the next several years. We've got the capability we need, and we have capacity to grow into it. But equally as important is, especially in our consumables business, where we have the biggest opportunity, that we have a number of programs that are in flight and planned for the future to take cost out of our product. So, we can do that in systems.
I think we can do that even more in consumables over the next few years, and us being able to ride the benefit of volume leverage, but also remove cost and be more efficient in our manufacturing processes, particularly related to the automated line we use to manufacture consumables, are all things that, when added together, will be able to drive us to that type of a steep incremental improvement-
... in margins over the next few years.
Okay, got it. And so thinking about gross margin, given kind of the seasonality, is it better to think of your gross margins more on an annual basis because of the lumpiness or?
Yeah, I think, I think it's probably annual, and I think it's understanding what that trajectory typically looks like for us, that seasonality.
Right.
you know, I think, you know, where you're gonna see the biggest benefits in a given year is typically gonna be in the second half, where volumes-
Right
... tend to pick up and where we tend to improve over time.
Yeah, okay. All right, that makes sense. And then, yeah, maybe talking about capacity and ability to scale, you know, is the company right-sized at this point?
Yeah, I think if you think about manufacturing, I'd say the answer is yes. I think we have the ability to increase our production volumes, both systems and consumables, pretty significantly without a lot of additional investment. Our service organization, we will need to invest over time, but I believe there's a fair amount of leverage in that part of our business as well, in addition to productivity improvements, which are a big focus for us there. So-
Okay
... I think both of those things will also be contributors to the margin improvement we talked about. If you drop down below margins, you know, Our operating expense guidance for this year, the midpoint of that's $50 million. Our actual spend in 2023 was about $50 million. So, we are, we're holding that very tight. We're managing it very, very closely. And, you know, in the case of 2024, our expectation is we're gonna be able to absorb merit increases and other investments by offsetting it with other cost reductions. So-
Okay.
We don't see a need to expand our operating expenses materially over the next couple of years.
I would extend that, Steve, to also to sales and broadly commercial. We have it in place globally.
We have, we have latent capacity within our sales team, within our service team, and as-
Right.
Our customer base grows, we get better density.
Okay.
You need fewer. You don't need to keep adding heads necessarily at the same rate to kind of cover those, those areas. The same with validation.
Yeah.
So we've got this, I would call it table stakes, sort of infrastructure built. Now we want to make sure we get an appropriate return on that infrastructure.
Okay, got it. Okay, so you're saying existing sales footprint, you know, you know, as you get on new customers, they can then start going from new customers, and then versus just maintaining accounts?
Right, exactly.
Okay.
So yeah, there's capacity in the sales team, there's capacity in our-
Got it.
- in parts of our service team. You know, ultimately, with more and more volume, we'll have to invest, but the rate of investment is different versus when we were initially building the infrastructure out.
But to your original question, I think the organization we have today is what we need to support us through the next several years.
Right. Okay.
Yeah.
Yep, yeah, got it. All right. And then, you know, I wanted to ask, you know, something about, you know, the current geopolitical sentiment, you know, regarding, you know, this kind of proposed BIOSECURE Act. And again, it's proposed, it's not passed into law yet. But, you know, there's some talk of, you know, potentially export controls and kind of, you know, emerging technologies, critical choke points. You know, could you give us a sense of your, you know, possible exposure in China? I know there's a couple companies named, I mean, BGI's more genomics, but not relevant to you guys, but-
Right
... you know, certainly WuXi as a you know, contract manufacturer, CDMO, you know, could potentially use some of your systems. Could you give us a sense of your exposure to-
Yeah. Yeah, so-
In that area?
So currently, our exposure to China is little to zero.
Okay.
So, you know, as we've reported over the past several quarters, just given what's going on in China, we've had very little exposure to the macro associated with that region of the world, and we'll continue to watch it. We've reviewed the BIOSECURE Act, and we've... You know, we're not in... Little to no exposure-
Okay
- as the headline.
Okay. All right. And then maybe in the last few minutes, you know, maybe you know what are kind of some of the catalysts we should look for in 2024?
Yeah. So some of the catalysts, as Sean just got done talking about in chapter and verse, you know, gross margin improvement. We're excited about sterility. Our guide does not imply much contribution from sterility, just given the logic is it's a mid-year launch, and customers tend to budget-
Yeah
on an annual cycle, so likely not fully budgeted, but we're going to reserve the opportunity to have upside driven around the excitement around sterility. As always, we're out there. Our sales team is operating globally to land large multi-system deals, which can certainly be catalysts for the business as well. So you think about, you know, revenue associated with that sterility impact, improving, you know, improving gross margins. Those all constitute interesting catalysts for our business in 2024.
Okay, great. Well, I'm gonna open up to the floor if there's any questions in the last minute or so.