Maravai LifeSciences Holdings, Inc. (NASDAQ:MRVI) Q1 2024 Earnings Call Transcript

Maravai LifeSciences Holdings, Inc. (NASDAQ:MRVI) Q1 2024 Earnings Call Transcript May 8, 2024

Maravai LifeSciences Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen. And welcome to the First Quarter 2024 Maravai LifeSciences Earnings Conference Call. As a reminder, this call is being recorded. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session where participants are requested to limit themselves to one question and one follow-up. [Operator Instructions] Thank you. I would like to now turn the call over to Debbie Hart, Head of Investor Relations. You may begin.

Debbie Hart: Good afternoon, everyone. Thanks for joining us on our first quarter 2024 earnings call. Our press release and the slides that accompany today’s call are posted on our website and available at investors.maravai.com. As you can see on our agenda for today on Slide 2, Trey will first provide you with a business update; and Kevin will review our financial results and guidance. Drew Burch, President of Nucleic Acid Production; and Becky Buzzeo, our Chief Commercial Officer, will join the call for the question-and-answer session following the prepared remarks. During today’s call, management will make forward-looking statements and refer to GAAP and non-GAAP financial measures. It is possible that actual results could differ from management’s expectations.

We refer you to Slide 3 for more detail on forward-looking statements and our use of non-GAAP financial measures. Our just-issued press release provides reconciliations to the most directly comparable GAAP measures. Please also refer to Maravai’s SEC filing for additional information on the risks and uncertainties that may impact our operating results, performance and financial condition. Now I’ll turn the call over to Trey.

Trey Martin: Thank you, Deb, and good afternoon, everyone. We appreciate having you join us for our call today. Let me briefly recap the quarter, highlight some innovative new products we are introducing and provide a few business updates before turning the call over to Kevin. Let’s start with our first quarter results on Slide 5. Today, we reported $64 million in revenue for Q1, $8 million in total adjusted EBITDA and a loss of $0.02 in adjusted fully diluted EPS for the quarter. Q1 revenue results exceeded the range of expectations that we shared with you during our fourth quarter conference call. Our Nucleic Acid Production segment had revenue of $46 million in Q1. The Biologic Safety Testing revenue was $18 million in the first quarter and this was our first quarter of growth for BST since Q1 of 2023.

Kevin will go into more detail on these results later in the call. Slide 6 shows that our adjusted free cash flow in the quarter was $4 million. Cash on hand at the end of the quarter was $562 million, down $13 million from year-end as we continue to progress with the build-out and equipment installation for our two new Flanders GMP facilities. Debt is $532 million gross. Thus, we maintain a $30 million net cash position. This puts us in a great position to fund our long-term growth strategy through organic investments while simultaneously pursuing external partnerships and/or M&A. We continue to see multiple potential strategic opportunities in our space where we will endeavor to responsibly deploy our capital. As we sit here today, we remain focused on our return to growth strategy.

To enable long-term, sustainable growth for our business, we expect to continue to expand our product portfolio, advance our market leadership in the mRNA space, and accelerate the introduction of scientific innovations in ways that support our customers’ rapidly evolving needs. To the first point on product portfolio expansion and our focus on innovation, let’s turn to Slide 7 and some updates in our Nucleic Acid Production segment. In our enzyme product portfolio, I’m happy to announce that our toolkit now consists of the majority of enzymes used in the mRNA IVT process. Incorporating Alphazyme enzymes into the TriLink mRNA workflow, which we trademark as CleanScript, provides our customers with industry-leading high-purity mRNAs with increased activity and reduced toxicity.

We recently launched over 20 new catalog mRNA products from our TriLink Discovery Group. This project leverages our decades of RNA experience through the incorporation of our industry-leading capabilities in capping, base modifications and mRNA manufacturing workflows, in addition to the enzymes manufactured at Alphazyme. As many of our Discovery customers look to advance their programs from mRNA design to LNP or other delivery system optimization, they need to catalog mRNAs to rapidly advance their projects. With that in mind, we’ve launched these new catalog mRNA offerings with CleanCap M6 and N1-methyl-pseudouridine. This enables customers to use the best chemistry from the outset of their programs. In addition, we’ve refreshed the entire catalog using the latest version of our CleanScript IVT production process.

CleanScript allows us to deliver the highest purity products that have reduced double-stranded RNA levels and can enhance in vivo protein expression. The innovation doesn’t stop with these newly announced catalog Discovery products. We intend to launch many additional mRNA products as we move forward and we are engaging more deeply with customers as we support their research programs with custom constructs. Turning to Slide 8, we continue to bolster our market leadership in the mRNA space through strategic partnerships. TriLink entered into a non-exclusive license and supply agreement with Lonza for CleanCap analogs for use in Lonza’s global mRNA development and manufacturing services from preclinical through Phase 3 programs. Lonza is one of the world leaders for producing biologic drugs.

They’ve elected to bring CleanCap into their portfolio to enable many more customers to benefit from the advantages of CleanCap and we see this as an important partnership for us to seed the market with our technologies. We believe Lonza’s decision to incorporate our solutions in their highly regarded development and manufacturing services is a strong endorsement that CleanCap is the optimal way to produce mRNA, and we are excited for this partnership to unfold. Alphazyme announced a collaboration with Applied DNA for scale-up manufacturing, enabling the linear RNA polymerase. Under the terms of the agreement, Alphazyme will perform manufacturing process development, enabling the scaling of their RNA polymerase manufacturing from its current research scale to the commercial scale necessary to empower the growing demand for the company’s linear IVT platform.

We developed a full enzyme production process and have made breakthroughs in the manufacturing workflow for Applied DNA. We’re fully able to support their forecasted demand and help enable their growth. We also continue to foster key academic partnerships to enhance innovation and accelerate market adoption of the latest technology. We currently have active research collaborations with five top-tier academic institutions to address a wide range of disease indications and custom nucleic acid applications, demonstrating our desire to be a technology partner to scientists developing the next-generation of medicines. We believe that investing in new product innovation and partnering with leading academic and industry partners is a key driver for creating long-term value.

We are in an exceptional position to win customers early for product and technology adoption. Turning to Slide 9 and tying innovation to our commercial strategy, which is a critical part of our return to growth. Again, we’re in a unique position producing the process inputs used in the IVT reaction, as well as the full clinical scale production of mRNA. As we work to improve mRNA production, we see several opportunities to drive new product and process innovations to improve the overall manufacturing workflow. This is a luxury and that it helps us move the mRNA field forward in a unique and differentiated way. By winning early in the Discovery process with our CleanCap and our CleanScript technologies, our commercial team can cross-sell NTPs, enzymes and other raw materials at earlier stages of the clinical pipeline, putting us in a position to grow with our customers to support them with their later stage development.

This can include providing either RUO or GMP materials depending on their needs. This year has started with exciting positive momentum, thanks to the efforts from our commercial operations and business teams. We have made great progress in evolving and building our commercial team and building the flywheel between our products and services activities. As we continue to expand our customer funnel for RUO and GMP offerings, it is important that we offer an unmatched customer experience from day one and for as long as the customer is with us. Our enhanced commercial team has the talent, tools and processes to help build Maravai 3.0 in support of our return to growth strategy. Let’s turn to Slide 10 and our Biologic Safety Testing segment updates under the Cygnus Technologies brand.

As with the nucleic acid segment, we continue to innovate to bring improved products to market to support our customers. Cell and gene therapy development has experienced tremendous growth as the FDA and other regulatory agencies worldwide continue their efforts to enable innovators in this new class of medicines. The FDA and other global regulatory agencies have approved several cell and gene therapy products, and we are very proud that Cygnus Kits now support all 21 of the 21 FDA-approved CAR-T cell and gene therapies. We are also pleased that Maravai was recognized as among Fast Company’s most innovative companies in biotech in 2024 for our Cygnus MockV RVLP Kit, which detects retrovirus-like particles that can be produced during the manufacturing of biologic drug products.

The kit, which uses a surrogate non-infectious virus-like particle, can be run without extra safety and containment measures. This enables faster, easier and more cost-effective optimization of viral clearance to assure biopharmaceutical safety prior to human clinical trials, regulatory approval and commercialization. This award adds to the many recognitions the MockV RVLP Kit has received since its introduction in 2022. We remain very optimistic about the MockV product line and our ability to disrupt the viral clearance market. As in the NAP segment, we plan to continuously improve our offerings in BST to ensure superior technical support, the highest quality services and offerings, and the most comprehensive catalog of products to meet our customers’ needs.

Cygnus consistently supports and advances the technology to improve biotherapeutic safety and accelerate the movement of new therapeutic monoclonal antibodies, biosimilars, and cell and gene therapies through the development and regulatory approval process. Now, moving to Slide 11 and our facilities update. As many of you are aware, Flanders 1 is our new GMP manufacturing site for small molecules. I am pleased to report that we have produced our first engineering batch of GMP small molecule products in the new facility and are quickly migrating our CleanCap M6 to GMP quality. As we approach the one-year anniversary of the M6 launch, customers have lined up for M6 GMP batches and are eager to move CleanCap M6 into the clinic. Flanders 1 adds scale and mitigates operational risks, as we now have redundant capacity to manufacture small molecules.

This includes the CleanCap analogs, as well as other NTPs, such as N1-methyl-pseudouridine, which are needed as GMP-grade inputs for mRNA production. This will not only bolster our supply chain resilience. Flanders 1 is a designated facility to aid the U.S. Government in future pandemic preparedness. We hosted our Flanders 2 grand opening in April and are now officially in the market for late-phase cGMP mRNA production. Flanders 2 was designed to meet the manufacturing requirements of mRNA-based medicines through all drug development phases. We have enabled mRNA clinical programs for over 10 years, from Discovery through investigational new drug or IND filings. Our new cGMP facility will serve our partners with late-phase clinical and commercial mRNA drug substance manufacturing.

The 32,000-foot facility includes three Grade C manufacturing clean rooms, a dedicated fill suite and an independent buffer prep and staging area. We have on-site quality control, EM monitoring and release testing supporting 1-gram to 100-gram batch sizes. We couldn’t be more excited to open our doors and help enable the lifesaving medicines our customers are developing. Many of our customers have been asking to stay with our talented team as their clinical programs advance into Phase 2, Phase 3 and beyond, and I’m so pleased that we can now support them. In fact, we have already signed statements at work to support a Phase 2 clinical trial and our first Phase 3 batches. We believe this is a capability extension that will make it easier for drug developers to select us for Phase 1 or even preclinical batches at the beginning stages of their development, as they know they will have a partner who can support them through commercialization.

We have a long history of innovation in mRNA. Our significant investment in these two facilities underlines our commitment to innovate the process for producing the next-generation of genomic medicines and the raw materials that enable their production. This expands our capabilities to help our customers unlock the potential of mRNA and develop life-changing vaccines and therapies. The Wateridge facility will continue to support the important work underway in TriLink Discovery and act as a key partner in providing development expertise to our customers. Moving to Slide 12, I’ll now ask Kevin to provide more details on our first quarter performance and our expectation for the balance of the year. Kevin?

Kevin Herde: Thanks for the handoff, Trey. Echoing Trey’s remarks, we are pleased with the topline performance in the quarter and excited about the business accomplishments that are laying a solid foundation for our future. Today, I will summarize our financial results for Q1 and then discuss our reaffirmed financial expectations for the full year. Let’s start with the Q1 financial results on Slide 13. As Trey mentioned, our revenue for the quarter was $64 million. Our GAAP net loss before non-controlling interest was $23 million for the first quarter of 2024. This compares to a net loss of $1 million the comparable first quarter of 2023. Adjusted EBITDA, a non-GAAP measure was $8 million for Q1 2024, compared to $24 million for Q1 2023.

Our adjusted EBITDA margin was 12% in Q1 2024. This adjusted EBITDA margin was slightly lower internal forecast for the quarter by about a $1 million, partially tied to the timing of some operational readiness period costs for our new Flanders facility, which we are incredibly excited about. For the trailing 12 months or last four quarters combined, our adjusted EBITDA margin was 18% on revenues of $274 million. Overall, our adjusted EBITDA margin in any given quarter will vary primarily based on revenues given the high proportion of labor and facility related costs and the relatively low revenue-based variable costs. As it relates to labor and our previously discussed cost reduction actions, you’ll see on Slide 14, we ended the quarter with 575 full-time employees, compared to 673 employees we had at the end of September 2023 prior to our restructuring initiatives and we completed all of the related actions over the course of Q4 2023 and Q1 2024.

As we look forward, we continue to evolve our organization with an eye to the future. This includes continued investment in innovation, commercial infrastructure and GMP operations that are at least partially funded by the targeted reductions in our G&A structure and balancing our NAP operations team to the current demand profile. We continue to be focused on funding future growth opportunities while maintaining a cost effective structure. With 575 employees, our revenue per employee metric for 2024 is just under $0.5 million in revenue per employee, which is amongst the best in life science tools. This, coupled with the broad and expanding capabilities of Maravai positions us well for operating efficiency moving forward. I will discuss EBITDA by segment in a few slides.

Moving to Slide 15 and EPS. Basic and diluted EPS for the first quarter was a loss of $0.09 per share compared to breakeven EPS in the first quarter of 2023. Adjusted EPS was a loss of $0.02 per share for Q1. Moving forward to the year-end balance sheet, cash flow and other financial metrics on Slide 16. We ended the quarter with $562 million in cash and $532 million in long-term debt, resulting in a $30 million net cash position. Adjusted free cash flow was $4 million for the quarter. That calculation of adjusted free cash flow, a non-GAAP measure, is based on our adjusted EBITDA, less capital expenditures, which were $8 million and $4 million in the quarter, respectively. For Q1 2024, cash used in operations was $8 million, primarily associated with the $20 million in planned retention payments associated with the two-year anniversary of the MyChem acquisition.

Capital expenditures net of BARDA reimbursements were $4 million in the quarter. We anticipate our quarterly 2024 capital expenditures to peak in Q2 of this year, corresponding with the final outfitting stage of our Flanders buildings. Depreciation and amortization was $12 million in the quarter, which is in line with our expectations and previous guidance. Interest expense net of interest income was $4 million in the quarter, slightly better than our expectations as our interest rate cap contract maintained higher values and excess cash yields stayed high based on the evolving expectation that rates will not shift downward in 2024 as quickly as previously expected. Stock-based compensation, a non-cash charge, was $12 million for the quarter, also in line with our expectations.

We ended Q1 with 133 million Class A shares outstanding and 119 million Class B shares outstanding, for a total of 252 million shares outstanding at the end of March on an as-yet-fully-converted basis, in line with our expectations for Q1 and flat versus the same time a year ago. Next to Slide 17 and the discussion of segment performance in the quarter. Our Nucleic Acid Production segment, which includes both our Discovery and GMP Products and Services, marked under our TriLink, Glen Research and Alphazyme brands, had revenues in the first quarter of $46 million and adjusted EBITDA of $10 million, a margin of 22%, a lower margin than previous quarters as anticipated based on the lower revenue level over our cost base. Our Biologic Safety Testing segment, which includes products from our Cygnus brand, had revenues of $18 million in the first quarter and adjusted EBITDA of $14 million, a strong and consistent adjusted EBITDA margin of 77%.

As detailed in these segment results, the combined adjusted EBITDA of our operating segments prior to the corporate shared service expenses was $24 million for 20 — Q1 2024, a combined margin of 37%. Corporate shared service expenses, including the impact adjusted EBITDA, which includes centralized functions such as human resources, finance and accounting, legal, IT and the incremental expenses associated with being a public company, totaled $16 million in the first quarter, down almost $2 million from the comparable first quarter of 2023. Let’s move on to our current thinking around the full year of 2024 on Slide 18. Based on a solid start to the year and our current assessment of the likely range of revenue outcomes, we are comfortable with the existing 2024 total revenue guidance range of $265 million to $285 million in revenues.

Looking at the segments, our Biologic Safety Testing business printed a strong $18 million first quarter, which we see as the high quarterly mark this year, consistent with previous years and achieving an overall low-to-mid single-digit growth over 2023 for this segment. After taking this estimated range for the BST business of around $65 million to $70 million for the year, we expect the NAP segment will be roughly $200 million to $250 million for the year 2024. As for the cadence of estimated revenues, we estimate the first half of the year now carrying close to 50% of the year, up from our previous expectation of 47%, which, based on the midpoint of our full year range and the Q1 result, would result in a second quarter revenue estimate at about $73 million or so.

So we see the topline firming up after a solid start and balancing the first half and second half of the year. We anticipate that margin will expand from Q1 with the sequential increase in revenues as we’ve seen in the past. We see the range of our profitability metrics within the same range as our initial guidance, adjust EBITDA margin expectations of 23% to 25% and our full year adjust EPS in the range of zero cents per share to a $0.06 per share loss. Guidance also holds the following expectations in 2024; interest expense net of interest income to be between $25 million and $30 million; depreciation and amortization between $40 million and $50 million; equity-based compensation, which we show is the reconciling item from GAAP to non-GAAP EBITDA to be between $45 million and $50 million; as-if fully converted share count of 254 million shares; and an adjusted effective tax rate of 24%.

Finally, net capital expenditures of $30 million to $35 million in 2024. Overall, a solid start to the year. I’ll now turn the call back over to Trey.

Trey Martin: Thanks, Kevin. So to wrap up on Slide 20, we had a solid start to the year and are tracking against the revenue guidance range that we communicated to you in March. We are executing on our return to growth strategy and year-to-date have introduced significant new innovations to the market that further extend our leadership across the entire mRNA production workflow, as well as increasing our manufacturing capacity at our TriLink Flanders 1 and Flanders 2 facilities in these high-value areas. We have also strengthened our commercial team and continue to bolster our market leadership in the mRNA space through key industry and academic partnerships. Our TriLink, Glen Research, Alphazyme, and Cygnus brands all continue to lead their fields while pushing the boundaries of innovation to offer unique and even better solutions to solve customer problems and advance discoveries.

Our balance sheet remains strong and we are well positioned to execute on opportunities for inorganic investments to bolster our market position and provide our customers with additional solutions. We remain confident in the fundamental strength of our end markets and the value we provide our customers for the life-changing development of drug therapies, diagnostics and novel vaccines. We remain committed to building strong foundation for the long-term sustainable growth of our businesses. I would now like to turn the call back over to the Operator to open the line for your questions. Thank you.

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Q&A Session

Operator: [Operator Instructions] And your first question comes from the line of Matt Hewitt with Craig-Hallum. Please go ahead.

Matt Hewitt: Good afternoon and congratulations on the strong start to the year. Maybe first up, congratulations on the Lonza contract. How should we be thinking about the ramp of that relationship? Is it something that will kind of build over time or is there an initial kind of order flow that you would expect and then kind of stabling from there? Just help us walk through that relationship a little bit.

Trey Martin: Sure. Thanks for the question. The arrangement with Lonza is similar to others we’ve announced where we just want to make sure that we open all avenues for customers’ development programs to CleanCap and our other technologies. As you might guess, it’s not a moment — an instant moment where things start up. It’s an enablement that will take time to build, particularly you see in GMP services and particularly at the high level. Lonza operates that these are contracts that are negotiated several quarters ahead of time typically. So we would expect a ramp in the consumption. But again, the idea is to make sure that there are many avenues toward incorporating our technologies, whether we are producing or others are.

Matt Hewitt: That’s great. And then maybe a separate follow-up question. I’ve been getting a lot of questions from investors asking about the BIOSECURE Act and impact that that may or may not have on respective businesses. I’m just curious, it sounds like there’s a markup meeting next week with the House. How would that impact your business if in fact that becomes law?

Trey Martin: Well, there’s definitely a lot of conversation about this. And like you say, it’s not law yet. As we’ve looked at things, we have a significant proportion of our business in the U.S. and Europe. and from the perspective of CDMO services, if something like that were to go into effect, we think it would essentially lead to a new equilibrium across geographies and as we are a majority U.S. and Europe, we would be able to participate in that.

Matt Hewitt: Understood. Thank you very much.

Debbie Hart: Thanks, Matt.

Operator: Next question comes from the line of Tejas Savant with Morgan Stanley.

Tejas Savant: Hey, guys. Good evening and thanks for the time here. I just want to follow up on that Lonza question from earlier, Trey. Can you just give us some color on how the deal came about? Was this unsolicited inbound? Did Lonza consider alternatives as they chose Maravai? And has this contract win sparked further discussions with either pharma customers or other CDMOs? And does it come with any minimum volume commitments at all?

Trey Martin: Great questions, Tejas. Let me hand that over to Becky, who was actually directly involved in those discussions. Becky, are you with us?

Becky Buzzeo: Yeah. Hey, Tejas. How are you doing? Yeah. So, look, I think this is really a broader strategy that we have. We see CDMOs as a very good channel for our GMP biomanufacturing materials and to enable the adoption of CleanCap. We realize that there are customers that have many choices and there are many choices to — and certainly capacity, expertise and desire, and different partnership structures that with different CDMOs are all part of the driver of selection. So, what we’re looking to do is build enablement structures to partner with Tier 1 CDMOs that have a desire to partner with us. And, yes, we have a contract with them and so there’s typically a mutual agreement around wanting to bring CleanCap in as a platform technology and then have a glide path for customers to have the ease-of-use with that CDMO and really streamline activities between the two companies and make it easier.

Tejas Savant: Got it. That’s super helpful color. And then…

Becky Buzzeo: Yeah. Yeah.

Tejas Savant: …Trey, one for you on the opening of the San Diego facility here, is there a backlog of work that’s already in place there or building up the book of business is still ahead of you? Just help us think through sort of the capacity utilization ramp at the site and what’s the max sort of potential revenue that we can expect to see there over time?

Trey Martin: Sure. There is definitely a buildup to be had, because in no small part, because we did not have the late phase clinical capabilities from an infrastructure point of view until the opening of the facility. But I will hand it to Drew, who has been living this life and give you some more color there.

Drew Burch: Sure. Good afternoon. We do have — we have taken our first committed orders for that facility. It is, as you would expect, it’s a funnel we expect to continue to grow over time. But we have already contracted late phase mRNA builds for the facility.

Tejas Savant: Got it. Thanks, guys. I appreciate the time.

Drew Burch: Sure.

Operator: Your next question comes from the line of Dan Leonard with UBS.

Dan Leonard: Thank you all. So, I know it’s gotten harder to unscramble the egg between what’s COVID and what’s non-COVID nowadays. But as best you can tell, did the base business, the non-COVID business with the Nucleic Acid Production, did that grow sequentially versus the fourth quarter?

Trey Martin: Versus the fourth quarter.

Drew Burch: Yeah. Well, and you’re saying base, non-COVID, Q1, Q4, Q1 sequential?

Dan Leonard: Yeah. Best efforts, because I know it’s hard to unscramble that.

Trey Martin: It is.

Kevin Herde: I mean, Dan, I mean, obviously, we’re not breaking that out now, so I can’t directly answer the question. What I would say to that, generally speaking, is certainly, the Nucleic Acid Production business obviously was down versus the fourth quarter sequentially, as expected. And one component of that were these GMP orders for a CleanCap, which we had scheduled coming into this year and that took a step down from the run rate we had been seeing throughout the course of 2023. And that was the largest contributor to that sequential decline. I think that’s the best way for me to answer that question.

Dan Leonard: Got it. No. I appreciate that. Thanks, Kevin. And my follow-up, I could use a bit of help on the gross margin line. I know you said that margins came in near your plan, but I think perhaps, our model wasn’t dialed in appropriately. And cost of goods were higher than we expected and they were up year-over-year, despite lesser revenue. So how can we think about, better think about the gross margin progression from here? Thank you.

Kevin Herde: Yeah. Certainly, Dan. Certainly gross margin, as well as our EBITDA margin, will fluctuate predominantly based upon revenues. And when you really take that down a layer, it’s within the Nucleic Acid Production segment, and even a layer lower, tied to our manufacturing facilities here in San Diego, where we have the most substantial amount of fixed costs and overall labor. I think another component of that that we saw here in the first quarter, which was relatively as anticipated, was just the mix. I mean, we did have a lower overall CleanCap quarter versus some of the previous quarters we had seen and that’s certainly a higher margin product, particularly when we’re doing it at higher volumes and in sort of bulk to some of our larger pharma customers for their needs.

So you’ll see that margin ebb and flow a little bit with the overall volume of CleanCap. When you look back at, say, the fourth quarter of 2023 or the first quarter of 2023, we had those larger CleanCap quarters. You see those gross margins higher. And then, I think as we go into the second quarter, we do see a substantial stability in CleanCap based upon those contracted shipments that we have visibility to today. So lower revenue margin predominantly. And then I mentioned a little bit startup costs related to planters. We do have some period costs that go through that for validating new equipment and putting in disposable things, tips and gloves and chemicals and other things you need. So that was another part of it. So you’ll see the margin bounce around a little bit and that really flows down overall to the EBITDA margin as well.

But as we look forward, particularly here in the second quarter, we see that bouncing back and likely to be very consistent with some of what we saw in the fourth quarter of 2023.

Operator: Question comes from the line of Catherine Schulte with Baird.

Tom Peterson: Hey, everyone. This is Tom Peterson on for Catherine. Thanks for taking the question. Just to start, I guess, we’ve heard from peers that there’s perhaps a slower than normal budget release from pharma this year. I guess, did you see any of these dynamics in the quarter, particularly just any atypical phasing that you saw in the first quarter?

Trey Martin: Sure. The — with our two different segments, they are different dynamics. Typically, in BST, we see our high point in Q1. And that has to do, I think, mostly with calendar, budget, pharma program planning and really consequentially CDMO program planning. In NAP, we did see a little bit of that. I’ll hand that over to Drew specifically.

Drew Burch: Yeah. I would say we saw a couple of different dynamics. It’s a little tough to disentangle. I think we’ve seen some rationalization, both among big pharma and small pharma. That said, we also saw some situations where people are continuing to push pipelines ahead and we saw a stronger funding environment in the public and the venture capital markets. So, a little bit cross-current. I don’t think in our business we see any discernible trends from that. We assume it’s probably going to take a bit of time before that those funding dynamics, the strengthening and funding shows up in orders. But I guess that’s how I would characterize the environment.

Tom Peterson: Okay. That’s helpful. And then maybe just one for Kevin on some of the cost actions and restructuring. How right-sized do you feel that the corporate and cost structure is today, given some of the comments around some of the commercial focus on today’s call? Should we be thinking about any kind of incremental actions in 2024 in either direction and should we still be thinking about kind of $26 million of net benefit from the cost action here in 2024?

Kevin Herde: Yeah. I think absolutely. I think that, the cost actions about, which we’re talking about $30 million with about two-thirds of those tied to labor, those have all happened, so with that flex in the headcount and some of the metrics that I spoke of. And we will continue to, as we spoke of, make targeted investments in commercials. We’ll continue to see, I think, that line and our R&D line particularly continue to see incremental investments throughout the course of the year. And, again, I think the right way to sort of look at this as we tried to frame in last call is if you have 200 units of cost, we weren’t necessarily going from 200 units to down to 170 units. It was more like, as opposed to going from 200 units to where it would naturally have been something like 240 or closer to 210.

We sort of took some of that out of our run rate, but we also wanted to make sure we were still investing in R&D for innovation’s sake and we talked a lot about that progress in commercial. We talked a lot about that progress, as well as in Alphazyme and in Cygnus, which continue to show, you know, good momentum and good growth. So, our focus was really in taking those costs specifically out of G&A and specifically about right-sizing the operations at TriLink here in the San Diego facility and then kind of also converting some of that labor and making them fungible to move over and take care of some of the increasing demand we’ll be seeing that will be driven by planters too. So, again, it’s a very focused effort, we’re very happy with how we’ve executed that and we’re on track to realize all those savings that we articulate.

Operator: Your next question comes from the line of Matthew Sykes with Goldman Sachs.

Unidentified Analyst: Hi. This is Evi [ph] on for Matt. Thanks for taking my questions. Could you walk through the current GMP to RUO split and how you see that trending throughout this year with the new facilities coming online?

Kevin Herde: Yeah. I could take that. I’m — it’s not something that’s necessarily broken out, but I would say that, when we look down and through our business, particularly Nucleic Acid Production, we see — we look at it in different ways. We obviously have our business units that we look at. Those represent both our Alphazyme business, which continues to grow and perform well, our Glen Research business unit, which is part of the structure, but tied more predominantly to diagnostic sequencing and some of those applications, which continues to perform extremely well. And then we have within what we brand as our TriLink products, really the bifurcation between Discovery and that kind of RUO business, if you will, on the research side.