The Stephens Conference pleased to wrap up our day with the Alpha Teknova team, President and CEO Stephen Gunstream and CFO Matt Lowell. Before we get started, it will be a fireside chat format. I've got plenty of questions. If people want to chime in, I'll try to pause along the way to see if anybody wants to jump in with any questions. With that out of the way, Stephen, I'll turn it over to you or Matt for any opening comments you want to make, and then we'll go into Q&A.
Thanks, Jacob, and thank you for having us again at the conference. So for those of you that don't know Teknova, we are a leading supplier of reagents for the discovery, development, and commercialization of novel therapies, diagnostics, and vaccines. We manufacture reagents, primarily agar plates, cell culture media, and molecular biology buffers. A true picks and shovels business that supports the entire life sciences. About half our business is biopharma related, 30%-40% in the life science tools, and the remainder is across the board ag, food, academic, you name it.
Over the last, you know, four years, we've really kind of gone through this journey of transforming the company and set it up to scale, in our ability specifically to manufacture custom reagents really quickly, link between research all the way through clinical solutions and supporting clinical customers and commercialization, and then doing that in scales less than 1,000 liter batches, which we believe is critical for areas like cell and gene therapy. As the industry moves more to personalized medicine, the scales get smaller. There's less standardization, and custom manufacturing is key. So, you know, I guess just maybe I'll frame up kind of where I feel we are as a company now. It's been a challenging environment to manage for the last two or three years, but I think the market has stabilized.
I'm particularly proud of Teknova and what we've done to continually increase our number of clinical customers now over 40. That means customers are buying products for use in clinical production. We have, in addition, set the business up to scale. So we have capacity for over 200 million. We do not need to build new facilities or build in any additional infrastructure. As of July, we raised a modest amount of capital that provides us a clear path to profitability. So we're excited about where we are. We're looking forward to 2025, and just, you know, excited to talk to you about, you know, the business as we see it and where we want to go from here.
Got it. So, in your comments, Stephen, you mentioned kind of a stable end market. I think you've also talked about some positive leading indicators. Just where do you think the state of biopharma demand is now, and how do you think it compares to when we were talking here a year ago?
Yeah, pretty different than a year ago, and I wouldn't say it's in a great state, to put it that way, right? I don't think we're back to, you know, pre-pandemic, you know, even double-digit growth at that time, but we are no longer going down. So I think in the, you know, in our last, call, we talked about stabilization in the market. We still see, you know, sort of these small, mid-sized biotech companies. There are what I call the haves and the have-nots, right, right now, which is the haves are kind of now looking at the space, and they have a rationalized pipeline, and they're going to execute, which is really important, right? You know, these companies do not generate revenue. They're focused on getting to the next milestone, so they do the next raise or get to commercialization, and so they're moving and executing.
We still have a handful of companies that, of course, are still trying to go through that process. And I think that's why those two things seem to be balanced. Other, you know, other engagements we have with customers, are pretty positive, right? I kind of tell the story about a year ago going to visit a customer. Lights were out. QC analytical, not even on site. And that's because they were not doing any runs. I went back again a year later, just to, you know, three or four months ago, and they were operating. They said, "Hey, Stephen, we need buffers by, you know, October, and we're going to have three programs planned for next year." So the more of those you start to have, the better.
Now, of course, we also have a couple of the others that we're like, "Hey, we love you guys. We're not ready to order yet. We're still sorting this out.
Got it. That's helpful. And then maybe, well, maybe following up, just kind of what are some of the leading indicators you're keeping an eye on? I mean, are you focusing on kind of biotech funding or, you know, the order trends, just anything you can kind of point to that gives you kind of a glimpse into the future?
Yeah, from a metric perspective, biotech funding is probably the biggest leading indicator for us. You know, we took our core group of customers we were targeting into our strategy. And you can see as the biotech funding went up, we had a shadow effect about four quarters behind of our revenue going up pretty significantly. Same thing when it went down, right? And so when you see the stabilization, which I know it's been a little bit bumpy, but it's not going down drastically. And when you look at 2024, we expect those to roll through 2025. So biotech funding is one of the big pieces there. Obviously, success in the space. We support a lot of gene therapy, so we will look at that and look at, you know, how are they progressing.
And of course, that leads to the funding. That's even probably a little bit earlier. If customers and therapies are becoming successful, it's much easier for those types of similar therapies to raise money. Then more near closer to is actually looking at our pipeline, right? So we have a whole, you know, we do, of course, funnel management. We look at the growth of that funnel, how those are progressing. I would say we're not to the point where there's really big opportunities out there that we're finding. We're building this, you know, piece by piece and expect those to progress. I think there's still a little concern about placing the really large order at this point in time, but the funnel is building and the customers are coming.
And then when they get closer or they're new customers, right, you know, we go through a qualification. So, the amount of qualifications, on-site visits, and then last, right, of course, we always track the number of clinical customers that are purchasing from us. So, you know, when I started almost five years ago, low single-digit number of clinical customers purchasing from us. We disclosed at the end of June, we had 43 customers purchasing from us. And so despite the fact that the market environment has changed, we continue to acquire these customers, even though their average spend has gone down, that we feel like that's a great leading indicator for the business.
Got it. That's helpful. And then the other piece of that you didn't mention, I think your catalog business was up high single digits in the third quarter. Can you just remind us what that customer looks like for that business and then how that high single digits compares to recent quarters?
Yeah, let me talk just so everyone has a frame of reference on the catalog business. The company has been around since 1996, and the catalog business is really the foundation of the company. It's a very diversified set of products that go into stockrooms in biotech companies, large pharmaceutical companies, life science tools companies, diagnostics for everything in the research, right? You think about, you know, washing cells, lysing cells, purifying proteins, isolating RNA, all of those reagents we provide in a form for their stockrooms. We have, you know, thousands of SKUs that support this, and that is what we call the catalog business. It's really on the discovery side. And why we were particularly encouraged with the high single digit growth, right, is because if you go back to Q1, it was actually down in the catalog business.
Q2 was about flat, right? And then Q3 we saw high single digit growth, and so that's just kind of a general bellwether for the entire life science community. And it's pretty broad because we touched, you know, 2,500+ customers, and they're across many sectors, and you can start to pick out a couple little trends in there. But generally speaking, the fact that we're up 9% year on year, we high single digit, we'll say, year on year is a very positive thing for us.
And maybe just like historically, what has that business grown at roughly? How should we think about that?
Yeah, that's a, you know, I don't have the numbers off the top of my head. I think, you know, if we look at the business itself fully, right, we really didn't onboard, like I said, clinical customers until 2018, 2019. So it was very much a Lab Essentials business, which is our RUO business. Within that, there's the catalog part and then the custom piece, right? So there's custom, like OEM products that we make for the space, and other sort of, therapeutic companies that are buying some custom reagents from us in that Lab Essentials piece. That Lab Essentials essentially has grown in the 12%-13% really since 2009, right? So catalog is a piece of that. I'd have to go back and look, but I don't think it's too different from the high single digit.
Got it. And then just a couple more kind of macro stuff. Just large pharma, you know, that's been a hot topic the last, I don't know, four or five months of the CROs. I think maybe you've seen some sluggishness there in recent quarters. Just what are your latest thoughts on that customer base?
Yeah, we look at all these really closely. Large pharma for us on the discovery side buys a lot of agar plates. So this is think about general research, different agar plates to grow bacteria or optimize protein expression and things like that. We have seen in a handful of large pharma accounts, not them going away, just the volumes come down a bit, right? And so that has been a little bit of a drag in there. It's not a substantial part of our business, but it's something that you can start to see that has some impact across the board and kind of tells you a little bit about that sector. That's from a year-on-year perspective. I think you asked about CROs and.
I was just saying the CROs have called out some headwinds there. Yeah.
Yeah. So we're seeing a little bit of that. Again, it's very few. You can, you know, count the accounts on one hand, right? And how many others are like that, but there's also not that many super large pharma companies.
Yeah, yeah. Gotcha. And just the one other kind of end market, you know, we talked, you talked about Lab Essentials, catalog up, high singles, but there's also, I think, some tools customers in that business. Can you just talk about what you're seeing from those guys?
Yeah, we've seen a few accounts. By few, I mean probably, you know, three to four accounts that year on year are down. That's why our Lab Essentials business in Q3 was flat, and so we had the high single digit on one side. Then, of course, on the custom side, there's three or four accounts that were slightly off. Now, a few of those were related, we believe, to timing issues of when they order and deliver, but there are some impacts in there. Some bio companies that are struggling a little bit with funding and some life science tools companies that are, you know, you know the companies. They're still ordering. It's just not the same volume, and, you know, so it's just very specific to these accounts.
Got it. So then kind of thinking about some of the key growth markets, you mentioned some kind of offerings for the cell and gene therapy, but maybe just on that for that industry, maybe just on that customer base. I want to say earlier this year, you talked about some later stage cell and gene therapy customers progressing, and that maybe those could be six-figure opportunities. You know, what are you seeing from that customer base? And how do you see them contributing as we look out the next couple of years, you know, with maybe the caveat that, you know, the FDA could play a role in some of that?
Yeah. So we have two to three customers that are in late stage, and there's some phase two, phase three, some pivotal in there. And we support them. And obviously, this is a pretty binary event, whether or not they get approval. The timing of that is probably a 2026, 2027 in that range for all of these therapies in that stage, right? Of course, you know, we've disclosed we have, you know, 38 other or 35 other, so, biopharma-related clinical customers that are in the phase one, phase two time phases at the moment. So, you know, that's the timing of that. And the impact from a revenue standpoint, if they do go through, we think is pretty substantial, right? And a lot of these trials are for tens of customers or tens of patients, right?
And the population target is in the tens of thousands, right? So we think that that could be, you know, a tenfold type of increase there. And as we've said before, from phase one to commercial, we think it's about a 30-fold increase.
Got it. That's helpful. And then maybe you mentioned some about, you know, the strategy that you embarked on when you guys came in as a team and the efforts to accelerate growth here. Obviously, the macro hasn't cooperated, but I think you guys have done a good job of building out the product portfolio further. So can you just talk about how your offerings or product portfolio now compares to when you IPO'd a couple of years ago? And what are the key focus areas for you the next couple of years on the strategic side?
Sure. So when I started, you know, the company, great base of customers, like I said, 2,500+ . A lot of the business was catalog, some custom, very little clinical. So when you think about product categories, we really beefed up our capability of manufacturing these custom products. And then, of course, with our new facility to do clinical, substantial increase, right? So we've added about $150 million in revenue capacity through the validation and now running of that facility on a daily basis. In addition to that, we recognize where we fit in the space is really in this, with the products we were offered at the time, and the customization was a lot of downstream processing, purification of different therapies like virus and, you know, things like AAV. And we said, look, we're going to build out an R&D organization to go support these customers better.
So we started with the downstream side. We created a number of proprietary products around purification, particularly the polishing step for AAV and separating empty and full capsids. Much of that work was around getting us into the customer to talk to, to sort of acquire these customers, but also plant the seeds for future use of those products. In addition, we also filled out the entire portfolio. So if you go to our website and you look at AAV, you'll see every reagent needed that we can manufacture for the entire process of manufacturing AAV, whether it's done by chromatography or ultracentrifugation. We've also done a plasmid workflow as well, right? So those are sort of the product side. Now, the last two years have been particularly challenging.
We've had to do some cost cutting to sort of ensure and put the business in a stable place until we get through to profitability. So we've slowed down on the R&D side. At the same time, we have retained our core strategy of getting these customers from catalog to custom to clinical, and we launched some new services in manufacturing. So two services we launched this year. One is called Express-Tek. What this is allows customers to expedite their order. We're already really fast, right? So our GMP products ship in, you know, something like 8-10 weeks. Our RUO products, research-use-only products are 4-6 weeks. If a customer needs that product faster, they can pay extra. We can move things around and get them the product. And this has come up a number of times already this year.
It actually has come up over the last couple of years many times where they're doing a clinical production run, they run into an issue, a bad reagent or the wrong concentration that they need to change, and then everything's held up and they can call us and we can now pretty much get that product into production within a week and then there's a two weeks to really hold. And that's a huge, huge saver for them. And of course, you know, there's some service fees and stuff like that that go with that for us. The other service offering is really RUO+ , so research-use-only plus. So this is the distinction between research-use-only, right? That's been the business we've made product for many, many years. It's does everything from $2 plates to complex OEM formulations for customers and the life science tools.
We had a lot of clinical customers that really wanted, did not need GMP, and GMP is expensive, but it's also very stringent and not flexible because once you design and get the customer to buy in on that manufacturing process, you're essentially saying, we will not change that manufacturing process without your approval. And many customers in these preclinical areas want to actually adjust the manufacturing process, but they do not want the reagent made in our RUO manufacturing process because they eventually want to get to GMP. So we created this grade called RUO+ , which is essentially manufacturing in our new facility with the same equipment and processes that we use for GMP, allowing them to get very quickly into GMP when they need to, but have the flexibility to change.
Of course, we don't need to charge them the same price that we do for GMP, so it's kind of the seeding ground for the next wave of GMP coming.
So you just outlined what those offerings are, and I think you launched those last quarter, if I'm not mistaken. So just how's their initial feedback, et cetera, going?
Yeah, I think this is just a natural progression for us. The customers accept it. They're excited about Express-Tek. We've had orders there, and it does solve some big problems for them. So that's an easy one. It's great to go tell customers we have it. It's also good for them to know we have it. And I've talked to a number of them when we say we have it, like, oh, this is great to know in case we get in a bind. On the RUO+ side, we actually grandfathered a lot of customers straight in there because I'm like, you guys want this. They say they come visit. They're like, oh yeah, we want all of our stuff made in the new facility because we're going to be GMP at some point. So we just moved those customers over to RUO+ .
That's used, actually on a daily basis now.
Okay. And then you alluded to this earlier, and maybe I'll kind of tie it with this. You know, I think some of the thesis, when you guys went public is, you've got these catalog customers, and then you try to get them to custom, and then, you know, maybe then you get them to GMP. Can you just talk about where RUO+ fits in that kind of ecosystem? And does, well, one, how's that effort going of kind of moving people up the value chain? And two, then where does RUO+ play in it? And how does that kind of, does that help accelerate some of that movement, et cetera?
So I think the first answer is it is going well, right? And you can see that from the clinical customer count, which is what we provide on an annual basis. So that progression is going well. Obviously, not every customer is going to need a clinical production. There's a lot of OEM we do in custom that is just for life science tools companies, whether it's new sequencing, spatial genomics, you name it, right? We do a lot of OEM in those areas. So that would be the custom. The difference in the RUO+ is these are customers that are clearly going to need to do GMP at some point, right? They're going to want a clinical grade at some point. And for us, it really helps. It helps us identify them, right? And say, hey, here's how we'd manufacture it.
Why would you need it like this? Oh, we're doing preclinical. Okay, great. This is where you go. For them, it's a big deal because then getting to that GMP is actually a very simple transformation, right? In our processing and everything like that. There's not a lot of validation. So, we're seeing, you know, uptake and that. So I think it's working really well as we go through this field.
Okay. That's helpful. And then the other, kind of major product offering, I think the last few years was AAV-Tek . Can you talk about the strategy behind that offering and then how we should think about that contributing to growth going forward?
Yeah. AAV -Tek was what I was alluding to when we talked about having an R&D team start developing some novel products, particularly around AAV, of course, right? And so we did this Buffer Screening Kit, which allowed customers to buy this kit. There still does, right? They can buy the kit from us and run it and then identify which buffer they need to help separate those empty and full capsids much faster than they would be able to do on their own. And they don't have to make all these buffers. We've had a number of customers order those. We've had some great feedback on those products. I think the disconnect may be, you know, is that that reagent is in preclinical or process development.
It will take some time to get all the way through to commercialization when they start to scale, but it allows us to, again, plant those seeds for the future use. We also launched a number of those stock products, and we also put an analytical sample prep kit for digital PCR for measuring titers around AAV. So those are all out there, very AAV specific. That's where we saw a lot of our customers focused. I did pull all that stuff back, in terms of, in some of our cost savings initiatives. Going forward, I think as the market improves, as we get some room in our P&L, right, that's where we're going to start investing back in this and really start to figure out how do we fill out this portfolio because we've onboarded these customers. Now, how do we expand within them?
Their customers are really happy with us. And I think now we have sort of the ability to have a conversation about them, where their biggest pain points are, and then how do we help solve that? So we're talking about, you know, some slight R&D investments maybe over the next couple of years, but also some partnerships and other things that might make more sense.
So proprietary products that you make versus other people's products?
Yeah. So the question is, you want me to do that? Yeah. The percent of proprietary products that we make versus others in the space. I would say the percent we make is very, very low, and to the point that I was just talking about AAV-Tek , which is the proprietary part. Now, what is proprietary about us is the fact that a customer can come to us and say, hey, look, this is my formulation. Read it like an ingredient list. We can look at that formulation and we can automatically, you know, first of all, price it, right? So I have to have a custom calculator to be able to price it and ensure that you're getting the margins you need and that you can deliver in the timeframe you want to deliver, but then route it through manufacturing.
Depending on what is in that formulation, you have to know, hey, actually, I'm going to have to heat this vessel to get it into solution, or I'm going to have to put this in a glass vessel versus a stainless steel or whatever it may be. Then our manufacturing process, the ability to say, hey, you know, we can make this in 200 liters and we'll connect it to our bottle filler, or we can actually put a bag filler in and actually move that around modular.
So what at the heart and the unique difference of Teknova is really our ability to do this custom stuff really quickly, which is it sounds simple, and actually it is kind of simple if you're doing one a day, but when you're doing 50 and you have to manage many supply chains and get everything there on time and to deliver to customers, it's much more challenging. Yes. Okay. So the follow-up question is, what percent is sort of custom versus our catalog business? And then I would say the custom, just a reminder, all the clinical stuff is custom, so that's easy. You can see Clinical Solutions there. And I would say maybe approximately half of the lab essentials business is custom.
Maybe one just follow-up on AAV-Tek because I think it's been a while since I had asked you about AAV9, but any update on that or is that past?
By the way, Jay, I told our sales team, I'm like, he's going to ask me about AAV9. We're still waiting for customer responses. I think it's been—it's been in this process development. There's been some challenges, obviously, with funding and other things, and they're going through it. It's just taken longer than we want. Once we get a good result, then we'll make sure that we can turn that into a product. Then, you know, next year, we'll talk about how great it is.
Okay, and then I'll figure out another one to ask you about after that.
Okay.
Okay. That's helpful. And then you touched on the new facility talking about RUO+ , but just can you talk about, you know, you've got a new facility with the latest and greatest, kind of how what's the reception been from customers? How are audits trending? Has this helped you reach new customers, et cetera?
Yeah. So we built this facility from the ground up, to manufacture products less than 1,000 liters really quickly. And that includes, obviously, the building itself, which is designed to be, you know, completely redundant. We actually have, if you put a mirror right down the middle of the facility, you'd get the same thing on both sides. So we can run two different clean rooms. We actually have three different HVAC systems in the building. So air is not exchanged between hallways, but also between the two very large clean rooms, about over 5,000 sq ft clean rooms in there that is designed to a ballroom so we can move those different types of dispensing technologies around and do it quickly.
Obviously, state of the art, you know, redundancy as well as backup generators, you know, pure steam, all of the things you'd expect, a lot of water capacity so we can scale up without any additional real additional investment there. That's part of it. We always talk about a building, but there's a lot of stuff that goes within that building, right? How do you validate that you can do six work orders, for example, at the same time? So a lot of work in terms of validating different pieces of equipment, validating different processes, validating that you have sterility when you're doing multiple things at the exact same time. So that is done there, and we have a lot of control there, and then also control of what goes in and out of the building. So this is an animal origin-free facility, and endotoxin controlled.
So we don't even bring a raw material in the building unless it's been tested for endotoxin, and then animal origin-free. You go in this building before, you could go in any other one. If you go in some of our other buildings, you're not allowed to come back in. That's how stringent we actually take this. I'm telling you all that because this is what customers really love, right? A standalone building with all of these pieces, the validation in hand so you can manufacture their product and have the trust they need in you to do that all the way through commercialization. And yes, it absolutely is. It's one of our biggest selling tools to get people on site and then walk around and see how we've designed it, but also to talk to the team and understand how we validate things.
And so often, more often than not, if they've been ordering from us, they come out because we say we're going to remove your stuff, your RUO+ . We're going to put you in the new facility, and they want to come see, they come see, and they're like, please only do my stuff now in this new facility, and we're really excited about what we can do with you. So, it's a great asset for us.
Maybe some of this struck me on that. You know, I've heard sort of I assume RUO+ , there's a certain aspect of that tailored for the cell and gene therapy industry because they want GMP inputs and they want to use raw materials earlier that are maybe a little bit cheaper rather than using full-blown GMP in an early piece. But are you seeing traction for RUO+ with other customer types beyond cell and gene therapy, or is it mostly dispensed first?
Yeah. I mean, we also do a decent amount of monoclonal antibody production, right? And so, of course, those types, any therapeutic because really loves the endotoxin control animal origin-free side of things. So certainly those, there are some diagnostic as well that do come by. And then, of course, we have to make sure those products are compliant with what we need to do. But, you know, largely, it's been more therapeutic than diagnostic so far.
Maybe Stephen one more, and then we'll put Matt on the hot seat. But just, you know, given the last week and what's gone on with some of the appointments, just any thoughts around NIH exposure, vaccine exposure that you'd call out?
Yeah, we've had this question a bunch of times today and last night. So, obviously, very topical. I think in many ways, we're pretty fortunate in that, from an exposure perspective and these types of things. You know, from an NIH perspective, I think about the NIH itself, but also the academic institutions where they get the funding. We support, you know, hundreds of academic institutions, but it's a very small part of our portfolio. Lots of high-volume orders, but low dollar amount. And so I wouldn't expect that to be a significant impact there. All the other pieces, you know, China, for example, you know, 96% of our sales are in the United States, and I think very little to none are in China, right? So that is not a concern of ours at the moment.
We have started looking into where we get our raw materials and things like that. Most of that is in the United States or mainland Europe. So I'm not feeling like this is a major concern for us. Obviously, we're going to watch it really closely. But at this point in time, I feel like we're fairly insulated.
Okay. Thanks for that, Stephen. Okay. Matt, Stephen talked about kind of controlling costs given the macro environment, and you guys have made a lot of efforts to right-size the business for the current macro. Do you think you're kind of now at the right size of an organization for where we are right now? And then how do you think about margin expansion from here? Yeah.
Okay. Great. Yeah. I think, well, first of all, I would like to take some credit for our organization for making the tough decisions. And we did have, you know, some pretty serious cost reductions over the last two years, including two RIFs that we had. But the result of that was we were able to put the company in position for long-term success. We actually, on the OPEX side, so I'll kind of maybe break it into two pieces. On the OPEX side, we have achieved over $19 million in annualized savings from the end of 2022 when we kind of peaked out. So they have been substantial and that has also allowed us to reduce our burn rate and preserve our capital. So, and I would say on that side of the business, you know, we're running lean for sure.
We think we can manage with this investment. We may choose to, you know, as we go forward in the business and grow selectively, you know, reinvest in some areas to make sure that we can achieve our longer-term goals. But we feel that right now where we are, it's about the right level. Yep. On the COGS side, you know, we've also actually, despite what the gross margin might indicate because of this kind of new facility that we've brought online and some costs with that, we've actually controlled costs pretty well there too. And also running quite lean on that side. I would say we're always looking for opportunities to further either, you know, actually take costs out or become more efficient, you know, with different processes.
We're moving to electronic batch records, other digitization, other automation, you know, all these, they sound kind of buzzy as I say it now, but you know what I'm saying. There's definitely lots of.
They're buzzy for a reason.
Yeah. Yeah. Those are real things, and believe me, we work hard. They're not that easy to do, but you know, we're always looking for some quick ROIs in that respect. So I think, you know, we're very focused on gross margin. I guess the last piece I'll say about it is, as we've said this now publicly, but as we move forward with incremental revenue, because of this high fixed cost that we're carrying right now, we believe that about 70% of new revenue will drop through to gross margin and also have a similar impact on adjusted EBITDA, so growing revenue is really important to getting to profitability for us, but we're always, you know, very cost-focused and trying to look for wins where we can get them.
That's helpful. Maybe just the you talked about, it seems like the biggest piece of this is leveraging the new facility, but is there any kind of mixed dynamics as we think about Clinical Solutions versus Lab Essentials, that dynamic as well?
Yes. I would say that I think the, you know, the biggest lever is just volume in general. So even growing in the RUO, RUO+ is a huge positive for us. So, you know, growth is good. And some of these new service offerings are nice too because they're pretty high margin, like the Express -Tek and the RUO+ that Stephen was talking about. But in general, I will say that the clinical solutions portion of our business is a higher, you know, contribution margin for us. We don't actually track it that way internally in detail. So it's more approximate, but the unit economics on that type of product because we sell them in larger formats, like some of the bioprocessing bags that Stephen was talking about versus, you know, tubes or smaller bottles.
When you're in a liquids business, that's that kind of works out to be higher margin, that is, of course, where we expect longer term, the higher growth in our business, that'll be a help as well.
Maybe just RUO+ has come up a couple of times. Just as we think about the margin, the pricing and cost and margin of that, can you talk about kind of where those fall within Lab Essentials or that type of work versus if they go fully blown GMP, that thing about the financial contribution?
Yeah. Well, I think I can talk a little bit again, and we don't really report profitability by product category. And it's not something that we track at a precise level internally. But I have talked in the past about the relative contribution margin, I'll use that word, which is not a gross margin. That's a fully loaded. But like if you look at something that accounts for the direct materials and the direct labor and maybe a few other items, what we see generally is that Clinical Solutions contribute to about 60%-80% contribution and the Lab Essentials at 40%-60% on average in those ranges. And of course, RUO+ would fall somewhere in between since we have a little bit of a premium price on those compared to the RUO.
Got it. Maybe, Stephen, one follow-up that somebody sent me. You talked about maybe, you know, being prudent with investments, but maybe as things start to come back, thinking about investing again, you know, some of that could be you spending your own money, but you also mentioned partnerships. Could anything you want to flesh out there or stay tuned?
Not really.
Okay.
No, I can give you a little color, right? You know, like I said, you know, we feel like we have access to a lot of customers right now that are in need of more custom solutions, and we don't have to be the manufacturer of all of those, right? And so it might make sense for us to work with some other parties to see how do we work together and, and you know, support these customers better than what they've been buying from in the past.
Okay. That's helpful. And then, Stephen, I think you uttered the numbers 2025 earlier, if I'm not mistaken, and you guys did mention kind of an outlook for modest growth in 2025 last quarter. You know, still, you know, stabilizing macro, but still some pipeline prioritization here and there. Just how do you think about modest growth next year and what kind of macro would that be predicated on?
Yeah, almost the opposite. And I think I need to be more clear because this question has come up a lot. When I was talking about the market and the bioprocessing market itself, saying stable this year, and I think the bioprocessing market is modest next year is probably in that mid single digit. I think it's probably more like 2026, based on what I see today, that the things kind of go back to sort of maybe that high single, low double digit growth in that space, right? Now, how are we doing there is predicated on how we execute our plan, how much share we take and all of those things. But I think it's a building year is what I'm seeing at this point in time. Of course, you know, it's always challenging to predict the future.
But just maybe one follow-up on that. You're talking about kind of the broader macro, you know, your goal, I think every year would be to outpace industry growth. Is that a fair assumption?
Yeah, absolutely. I think over the long run, I mean, we still have the same goal we had when we took the company public, which is, you know, 25% annual growth for a sustained period. And I think we put the pieces in place to get there. I think it just will take a little time as we ramp through this period.
Yeah. Maybe Matt, just following up on kind of the balance sheet, you know, talk about the cash you have right now. What does the path to cash flow break even look like from here?
Yes. We, of course, completed a capital raise in the third quarter in July, raised $15 million, which, you know, subsequent to that transaction occurring and now ending the quarter with around $32 million in cash. We believe that with that cash on the balance sheet, the access we have to some additional borrowings under our revolver and the kind of the pathway forward, we believe that we have enough capital on hand to get to cash flow positive. And we've outlined that as if you taking four key assumptions to get there. And the first one is that if you assume that we in the near future continue to grow on average at our historical average, which we've said is about 12%-13%. So we do need growth to get there, averaging 12%-13%.
This metric, about 70% drop through on incremental sales, provided that we hold to that, you know, approximately over the next several years, and then also maintaining discipline around our operating expense growth, so limited operating expense growth, and then there will also be some capital expenditures that we'll use cash to, and we've said ± $2 million, and that's as a manufacturing company, we need to continue to invest in our fixed assets, for example, so if you make those assumptions, which we believe are reasonable to make and supported by, you know, history, then that would put us on the path to cash flow positive. We haven't put a date on that, but I think those are reasonable assumptions to make.
Helpful. Any last questions from anybody? Stephen, Matt, any last words from your end?
No, I just thank you for the time. Appreciate it.
Matt and Stephen, thank you guys for joining us here in Nashville. Always good to see you guys.
Thanks very much.