Guys, I appreciate you spending some time with me today.
Thanks for having us, Dan.
Yeah, sure.
Appreciate it.
Thank you. I think maybe a good idea would just be to orient people on Growth Direct and the Rapid Business. Maybe, Rob, if you want, you could spend a few minutes just talking about what it is that you guys have been up to and what you do for your customer base.
Yeah, sure. So, by way of background and context, we are focused on modernizing a critical part of pharmaceutical manufacturing and quality control called microbial quality control. This is a, again, mission-critical process that's regulated, and it's fundamentally designed to ensure that finished pharmaceutical product going to patients is safe and free of microbial contamination. So, think bacteria, mold, elements such as that. The challenge is the fundamental methods used around the world in just about every pharmaceutical manufacturing plant haven't evolved in about 100 years since they were invented by Louis Pasteur. So, and with the advent of advanced modalities such as biologics manufacturing and cell and gene therapy, and certainly even some of the small molecule manufacturing, the legacy methods are resulting in cost and risk for the industry.
What we've done is we've developed a fully automated system called the Growth Direct platform that fully automates this legacy process and brings it into the 21st century where it belongs. We can get into the value prop as the day goes on here, but the system is fundamentally designed to reduce costs, accelerate the time for detection of any organisms, dramatically improve the data integrity, and again, bring this legacy method into the 21st century. Our business model is placing the Growth Direct system, capital equipment, and then pulling through a high yield of recurring services and consumables. We're proud to count about 70% of the global top 20 pharmaceutical companies as our customers, and we operate globally across North America, Europe, and Asia with over 150 systems placed around the world.
Okay, that's good. So, let's talk a bit about the value proposition because as a guy who used to streak out plates for microbial QC, an automated approach seems pretty helpful in that circumstance. What is it that the customers that you have have seen or realized about your offering, and what is it about those that aren't yet customers or might not be customers, what kind of hang-ups do they have about switching over from manual to automated?
Right, yeah. So, the core benefits of our, first of all, by way of background, the legacy method is, imagine, if you will, it could be a dozen, it could be multiple dozens of quality control technicians with stacks of Petri dishes going into large environments and taking samples, think high school biology effectively, bringing all those samples back, putting them into very large rooms that are basically incubators, and then looking at, coming back in a week or two later and actually looking at each sample and physically counting and then writing on a piece of paper what they see. That's how microbial QC is generally done today. So, it's slow, it's error-prone, it's expensive, it's open to error, which could lead to recalls, things of that nature.
And it lacks what the regulators call data integrity because the actual integrity and trustworthiness of that sample could be suspect in that kind of environment. So, what customers get when they adopt the Growth Direct is they can go from a data integrity challenged environment to a fully robust automated environment. So, our system barcodes, checks everything, it's all machine-driven, computer-driven, so very strong data integrity. A second piece that customers get from a value prop is operational efficiency. So, there's certainly a labor component where we're automating, and there's significant labor leverage, there's speed to a result. We can provide results in about half the time or less in many cases. So, customers can make a decision faster, they can ship to market faster in some cases, they can move to the next processing step faster in other cases. So, they can turn inventory faster as well.
And the last piece is accuracy and the precision of the system where we can virtually eliminate the human error associated with the current process, which could prevent recalls or other costs or risks for the operation. So, that typically entails the kind of the core of the value proposition and what customers and why they continue to adopt our system around the world. Those that are not yet customers are, we rarely receive a hard no. We do deal with big pharma, and most of the time customers are, we do compete with other priorities inside large pharma. It's also important to note that many decisions are at the site level versus, I would say, the corporate level. So, we work with our customers at the site level to work through site-based priorities.
It could be CapEx, it could be other priorities where we need to slot in the Growth Direct over time.
Okay. Yeah, so that gives a good segue into just what the end market backdrop has been and what biopharma has had going on for it in the last 18 months, I guess you could say. How does Growth Direct fit into the current instrument purchasing decision, and how are you seeing changes in that thought process for customers today versus maybe a year ago when the CapEx landscape was, it's not great now, but it's seemingly better than it has been in prior periods?
Yeah, so what we've seen is, and continue to see, is high ROI critical projects are being prioritized and funded, and we believe we've been a beneficiary of that, and we anticipate that that will continue even against a backdrop that's been. We've certainly seen budgets tightening and more scrutiny, but again, a few elements that we see that we've benefited from is, again, high ROI compelling projects are being prioritized and funded. And secondarily, in some cases, the Growth Direct has been established as a strategic multi-site priority, and there's nothing bulletproof in this market, but that can tend to give some insulation from the quarter-to-quarter, even year-to-year challenges with regard to budgeting.
So, we have seen that and benefited from that, and we're starting to see, and we spoke about this in our last earnings call, repeat purchases, multi-system orders from existing customers as they continue to propagate and expand their Growth Direct fleet across their global platform.
Yeah. It seems like if you have a customer who has installed the system at one site and there are other sites where there aren't systems, then that represents a fairly ripe opportunity. Can you talk a little bit about the business that's going to existing customers versus new business development, and then what the differences are between customers that decide, yes, site two should get another system versus some other customer that says, we have one, but this maybe is not appropriate at the time for moving across all the sites?
Yeah, so it's important to note, certainly our large customers rarely buy a single Growth Direct, and that's their only contemplation. There's typically a contemplation for deployment, and the majority of our large customers have multiple systems across multiple sites, so that's important to note as well. So, those that are deploying, again, we had a really good case study in our last earnings call on this, is customers have a business case for automating a certain area, a certain therapeutic, a certain test type, and seek to standardize across their representative footprint of that therapy or that type of test, and we see that in our business. Customers that haven't fully deployed that, we think it's a function, again, of time.
Rarely is it a complete and utter one system or two systems and it's a shutdown, but it is, as I mentioned earlier, it can be a function of when a site is ready. It's also important to note that this does require the site to have some capacity, some bandwidth, some budget. The timing has to work out, so we do wind up working with customers on the right timing, which can just drive timing slower for some customers versus faster for other customers.
What do you see as the outlook for the business into 2025, just given the industry backdrop that we have today? We just had a cell therapy-focused company up here before you. The hope is that the direction of the activity right now is supportive of better business next year than this year. Would you say that what's going on in new modalities, cell therapy, biologics in general, gives you a more or less optimistic view on 2025?
I think it's consistent with what we've seen in 2024. Again, it's important to note that we come in and help a company, whether it's a new line starting up, a new drug line starting up, or an existing one that's been in place for a decade or more, become more efficient, become more compliant with the regulations, manage their data integrity. So, as long as the market is generally constructive, we feel confident in our outlook. I think what's more important than that, maybe more relevant to the question, is our forward funnel and our conversations with customers right now suggest that we will continue to have an optimistic outlook, relatively speaking, on our 2025 and beyond.
Okay. I want to come back to your comment on conversations with customers in a second, but just to sort of finish the thought on new modalities and the types of drugs being developed, Sean, do you see a difference in the revenue being generated from new modalities, biologics versus small molecules? In other words, if investors are looking at activity in a certain part of the market, do they feel better about your revenue prospects watching cell therapies, biologics potentially come back into the mixture? Or is it really at the end of the day, the customer generation, the revenue generation by molecule type is not all that different?
Yeah, I think biologics, cell and gene therapies tend to have more intense testing that needs to happen in their quality control processes. So, I think if you look at our portfolio of systems out in the field that are pulling through consumables, those therapies tend to be at the higher end of the spectrum. So, yeah, I think we look at those as something that's contributing and can continue to contribute in the future to better pull through, better overall performance over time in terms of the revenue that comes out of those types of products versus things like maybe small molecules.
Yeah. Okay. And that would translate to a pull-through-per-system type way, where life sciences, we life sciences analysts are pretty meat and potatoes with our models sometimes. If we wanted to make it about systems installed and then consumable stream behind them, the annualized consumable stream behind a system focused on biologics would presumably be higher than something for a small molecule.
In general, I think that we would expect that to be true.
Okay.
Yep.
Okay. Maybe just thinking about, Rob, your comment on just customers with conversations, it felt like if I were to compare 2021, 2022 to the current moment, there is a change that's been made just in terms of the types of conversations that you're having with customers and the level at which you're having them. Can you talk a little bit about the evolution of the commercial franchise and why presumably you're in a better place than you were before?
Yep. So, we believe that the Growth Direct is now the standard, effectively the standard in automated microbial quality control. So, we are larger with the largest and top-tier customers out there. We become a larger part of these companies' method of operation, more important to their global critical pharmaceutical franchises. So, that would naturally lead to more senior-level conversations and an expansion of those A, the discussions and B, the fleet across our global network. So, that has allowed us to benefit a few different ways. Number one, better visibility into the funnel and to customers' intentions. And secondarily, more constructive conversations at, I would say, more senior levels in these organizations, which also provides a bit more visibility and level of concreteness to the outlook.
Yeah. Sean, does that translate to true forecasting improvement or visibility for you? I mean, if you look at 2025, this is a hard question, but if you look at 2025 forecasting and you Xed out all the market dynamics, do you feel like internally your ability to forecast based on what your reps are telling you and the way in which they're saying things is better? Basically, as what Rob talked about, allowed you to have more confidence in a forecast.
Yeah, I think so. I mean, I think it's a combination of things. Rob talked about some of them. I think just that rigor that's there, if you try to kind of, as you say, take the environment out of it, I think that what we've done over the past couple of years has really contributed to a meaningful improvement in our visibility into what the future holds, and obviously, we're always kind of looking at different criteria to kind of evaluate the things that are in the funnel, but I think overall that process is better than it was a year or two ago.
Yeah, and our commercial operation and rigor and team is that much more improved as well, so the sum total of these activities is what gives us the confidence and outlook.
What is left to be done on the commercial side? I mean, I'm sure you haven't cracked the nut entirely in the last 12 months, but so what when you think about what is necessary in order to be successful in 2025, see this ramp in the business, have the confidence be higher, what left is on the short list, so to speak?
I think it's more of what you've seen. So, it's just continued expansion within, I would say, all customer segments, not only the large ones we talk about, but also have a non-trivial amount in small and mid, continuing to fill the funnel and ultimately close in place on multi-system orders as well is a critical part of that, and that is underpinned by our ability to have what we call a global account sort of focus with our commercial team to make sure we're interacting with the senior-most decision-makers in these companies so we continue to generate that commercial velocity.
Have you talked about the percentage of systems that go out the door as a multi-system order and how that has compared or would compare to some number of years ago?
I don't think we have done that per se. I think it's safe to say, though, the majority of our system placements are with the large top 20, and as a customer class, the multi-system orders tend to come out of the top 20. That's maybe an indirect way of answering your question.
But it's not going down, in other words. The number of multi-system orders, because I mean, part of it is new business generation where a company may not be jumping into a two-system order. So, the competing forces of we're trying to sell more to large companies that have the ability to do that, but we're also trying to broaden our audience with the smaller set. Sometimes the number doesn't move up as much as maybe you would think, but it doesn't sound like that's the case here. It feels like multi-system orders are trending up.
Yeah, it's very trending.
Okay. Sterility, maybe as an offering, that's something that I think was important to you guys as a product launch, broadens the application base. Can you just spend a minute on why that's a meaningful offering for you guys?
Yep. So, I think big picture first, strategically, it helps to round out our core strategy of automating the vast majority of daily routine use microbial QC tests. So, our Growth Direct system, for those who aren't as familiar with it, has been designed to be a high-capacity, high-throughput, rapid method that automates the vast majority of routine test volume. And some customers have several systems doing one application in single sites. So, it's really a, think of it as in some ways, it's industrial automation that's addressing a meaningful life sciences challenge. So, to that end, we want to have an offer the full suite of microbial QC tests, not just be a kind of a corner single test application. Sterility was the remaining, I would say, in our core kind of set in addition to environmental monitoring, which is the highest volume water and bioburden testing.
Sterility testing is an end-of-line and highly critical test. It's usually the last test a pharma company will conduct before it actually ships to a patient. The actual vial or syringe is actually tested. It's an incredibly important critical test. What customers will get from our application is not only the benefits of the Growth Direct I mentioned before, the full automation, the data integrity, but they'll get speed, which is incredibly important, because typically, not in every case, but in many cases, when that test is passed, the drug can go to market. The standard today is the legacy method's about two weeks. If everything goes well, it could be quite a bit longer that you're waiting to ship or waiting to do something with the product. Our data suggests that we can ship with a final result in as quickly as three days.
The time to detection, which is really important for sterility because it's presence-absence, a single, what's called a CFU, just is a failure in as quickly as one day. You compare that against two weeks or more. It's a huge difference in time to get a validated, highly data integrity, sort of secure kind of result, and customers can make decisions against that much, much faster than they could versus the compendial method.
Okay. Fairly compelling. What will be the difference between those that adopt in the next 12 to 18 months versus those that maybe don't?
I think the difference is going to be similar to what we talked about before. It'll be just kind of where they are in their competition for projects, what problem they're trying to solve in bandwidth to a certain extent. But we believe we've got a very compelling system that over time will be demonstrated in the market.
Yep. And just, Sean, to bring it all home to the model, which everybody eventually tries to do, do you think that is something that as an offering can be meaningful to revenue growth in 2025? I mean, some of these new products, it takes time to get them out. You're excited about them, but maybe not the needle mover that investors and analysts would hope for. Do you think by the time 2025 is through, there will be a meaningful P&L effect from the sterility launch?
Yeah. I mean, it's certainly going to contribute. I think we're working the funnel on that. Our sales cycle tends to be a little longer than some companies. I'd say with a new product like this, it probably tends to be even a little bit longer than that. So, I think it's certainly something we expect to contribute in 2025 in terms of the level of contribution. I think when you hear from us about 2025, we'll probably be fairly conservative about it, but we are doing a lot behind the scenes to make sure that it contributes to the year.
Right. Anything else in the R&D hopper? I mean, I'm sure you're not going to give all the state secrets away, but do you see any new, so to speak, diversification and additional applications as important in the next 12 months as well?
Yeah. So we won't refer to applications necessarily or the timeframe, but I would think of, so we do have R&D programs underway. Think of our R&D strategy as we have a platform technology with the Growth Direct that we're placing in the middle of this legacy workflow we spoke about. Our R&D is focused on moving upstream and downstream in that workflow for two main reasons, maybe three. One is continued differentiation and customer value with that revenue generation, but also cost reduction and margin improvement. So, over time, as we move things from the state secret mode to the public mode, we'll be clear in how we're categorizing on the fundamental strategy around that particular product. But think of it as either revenue generation or, in some cases, cost reduction and margin improvement.
Yep. Perfect segue. Sean, gross margins. If there's one thing that my conversations with investors on Rapid have focused on in terms of just the hurdle, it's the profitability at the gross margin line. You guys have made progress. You're now at the end of 2024, crossing over in a way that I think is meaningful. How do you see your ability to be over the Rubicon, so to speak, and be regularly? I mean, I know there are fluctuations by quarter. There's seasonality in a lot of these life sciences businesses, but a lot of investors just simply don't care as much about that as you do or as a reason. How do you feel about the ability to be regularly gross margin positive?
Yeah. So, I think we feel confident about that. I think maybe zoom out for a second, kind of say where are we in space and time? First of all, I think it's really important to say that gross margin expansion from where we are today is one of our top strategic priorities in the company. There's a lot of energy going into it. I think, as you said, Q3 was a milestone quarter for us. We were positive 8%, positive gross margins. May not mean a lot to people. I think where are we going from here? Our goal is that by the end of 2027, we're up in the 50% range. So, what gives us confidence that we can get there? Go back a couple of years. 2022, we were negative 50%. Last year, we were negative 24%.
We're not making improvements of a few hundred basis points a year. We're making 20-plus percentage point improvements year over year. Now, that trajectory is probably not going to continue at that level, but we know the things that have allowed us to make that happen. There are cost reduction activities significantly that are going on within the business, driving manufacturing efficiency with our automated consumable manufacturing line, service utilization, and there's more opportunity in that side of things. So, the playbook's already out there. We have a portfolio of projects that are kind of within that playbook now that we look out over the next 12, 24, 36 months that are going to help drive that for us. But that experience gives us visibility and confidence that we can continue to drive margins up to where we need to get them to.
Do you feel like it is more the drivers going forward will be more on the product side, to your point on COGS, things you can do from an efficiency perspective, or more on the service side?
Yeah, it's more on product. I'd say within product, it's even more on consumables, kind of where we are today to where we need to get to. And I'd say the energy inside the business is commensurate with that in terms of where we're focusing on the improvement activities. There's improvement activity everywhere. I would say the bulk of it is focused on consumables right now.
Plus where we have operating leverage in the business.
Yeah. Yeah. Maybe just as a final point, there are a lot of labs that know about Growth Direct, but then there are a lot of labs that don't yet. So, the idea is to expand the understanding of what you guys offer. How does that translate to investment in new geographies, broadening into areas where maybe you just haven't had the manpower in order to do everything you want? What does the investment necessary in order to bring Growth Direct to a larger audience look like over the next year or two?
Yeah. So, we continue to expand, I would say, our awareness. I think we've got. We've kind of grown up in North America and Europe. Those businesses are equivalent to each other. We're a bit newer in Asia right now. So, we have a number of methods to expand our awareness. We attend about 30-plus events per year that are more formal trade show type events. Word of mouth is a non-trivial method and maybe among the most productive methods that we have as, again, we penetrated the majority of the large companies out there, and it's word of mouth within their organizations as well. We host something. I'm leaving here, as you know, after this meeting, going to our Growth Direct Day, which is a two-day, basically all things R&D and Growth Direct.
And we do scientific webinars and lunch and learns and things of that nature to constantly kind of keep our name out there. So, we believe our awareness is growing, and we believe our revenue growth and our sales reflect that.
Okay. I'm going to leave it there. Thank you, guys. Early Thanksgiving wishes to you both. I'll talk to you soon.
Likewise.
Same to you.
Thanks, Dan.