John Jacob: Yeah. The bottom line is we don’t expect any of this to drift beyond Q1, right. Jim, anything to add to that?
James Kelly: No, that’s it.
Brendan Smith: All right. Great. Thanks so much. And then just on the cost cuts, can you maybe expand a bit on maybe where some of the new R&D cuts will be coming from, how they’re distributed across 2024, and maybe whether these are being accounted for elsewhere in your filings, just kind of trying to get a little bit of a sense beyond the plan really what they’ll look like and potentially if there’s been any tangible changes and like accounting methods or the past few or upcoming quarters? Thanks very much.
James Kelly: Yeah. So, we share with you that we’re going to be reducing our R&D and SG&A by over $200 million, and also reducing our supply chain related expenses by over $100 million for a total of over $300 million in savings. Where did these come from? I should first say, this is not a function, I would say of forward-looking accounting. It is not. This is about real savings, real cash, real improvement to our cost structure. Where these come from? It’s a focused evaluation that begins with the markets we serve and the return on net investment as we pursue the COVID opportunity and prepare for the combination opportunities. So start with focused investment. Then you assess your people, your sites, facilities, capabilities, capital investments to support that.
You then evaluate third-party vendors and what it takes to have them along assisting us on that journey. And you resize and reshape all of it. So I’ll give you specific examples of thinking along supply chain. One, we got to better manage the alignment of supply with demand. We got to avoid these write-offs, since ENO (ph). This has to do with how much we do at risk. As we further sharpen our focus on the demand signal, we’ve got to knock that out. Then you look at your internal operations and based on that you got to be leaner. I’m talking about facilities, reduced idle capacity, and any overhead support. And then we’ve got to continue to negotiate aggressively, third-party agreements relating to our supply network. So that’s how you come after your supply side.
On the R&D side, you heard from Filip a lean focused approach with CIC. That’s how you do it. You get to market faster with CIC in a more efficient investment profile and then everything I said about commercial market and infrastructure in overhead we’re going to drive for higher efficiencies to support this leaner focused company.
John Jacob: And Jim just to build upon that and thank you for that clarity. The company was originally scaled and built for a much larger opportunity in a global pandemic and we demonstrated early this year with decisive action as a leadership team, management team and board that we can make the right decisions to scale down that business. And in fact, we’re proud of the fact that this year, we’re over $100 million ahead on the 2023 cost reduction targets that we announced earlier in the year and we did so without damaging our capabilities to operate. That’s really key. And now as a new team here, management team, since I joined in the beginning of the year, we’ve had line of sight on strain selection to shots and arms cycled this year and an assessment of how the COVID market is unveiling itself post-pandemic.
And with that line of sight and the knowledge of the capabilities we need to continue to operate efficiently and bring forward our program, we’re confident we can make the real cuts, as Jim said, not by accounting function, but by reducing scope and scale and taking expense out of the system to make this company leaner and more focused and more competitive and able to independently bring forward that CIC program to a filing status. Do you have anything to add to that?
John Trizzino: It’s that focused, the way we’re operating day in and day out, we’re laser focused on driving towards everything you just said, John.
Brendan Smith: All right. Great. Thanks very much, guys. Appreciate it.
Operator: [Operator Instructions] And our next question comes from Mayank Mamtani of B. Rally Securities. Your line is open.
Mayank Mamtani: Good morning, team. Thanks for taking our questions. So maybe just a follow up to prior comment on cost of goods expectations for Q1? Any early insight on sort of the returns expected retail and non-retail segments? Now, you’re trying to manage this as real time as possible. And I also noticed your grant revenue was particularly high today, and there were some write-offs, I guess. Could you just clarify what’s sort of going on in that line item?
John Jacob: Hey, sure. There’s three particular pieces you hit there. One is, hey, what are we learning about returns? A second one has to do with grant revenue and what are we seeing there? And forgive me, Mayank, what’s the third one?
Mayank Mamtani: Yeah. The cost of sales line item today that was reported for COGS line (ph)?
John Jacob: Yeah. You got it. Okay. So, beginning with returns. Hey, our return window really opened the 1st of November, so too early to tell what were pleased with this hey, we have really good, I’ll call it specially distribution uptick and also sell through to ensure we’ve got our vaccine across the country available, but too early to give feedback on returns. We’re going to be monitoring that one very closely, of course. On grant revenue, you are seeing across both grants and royalties that we’re up ticking our guidance by $100 million. Why? Filip has done an exceptional job working with our partners in the U.S. government to, enable us to take full advantage of that 1.8% [indiscernible] revenue. And in addition to that, there were multiple milestones tied to our success in being prepared for the U.S. market.
We met them. And that’s why you’re seeing improvements there in addition about $12 million this quarter Matrix R21 revenue related to the malaria R21 vaccine as our partner Serum is preparing to launch as early as next year. So really important advancement there. Okay. Let’s talk a little bit about the COGS line. What you’re noting is that we had COGS in a quarter where we had no revenue. We had COGS of $99 million. All right. Let’s talk about what’s happening there. Does it benefit from the SK Bio settlement of $22 million? I think you know that, so that would take it up to about $121 million. What is in that? You’ve got $85 million or $82 million in excess capacity. We noted that. Add to that some scrap and overhead. What I mentioned to you is, hey, we got to be better.
We can’t have that happen. We got to be more focused on that front. And then finally, some unabsorbed overhead, about $20 million. Again, this is a part of being lean and focused. These are the types of things we’re seeking to drive down. Hopefully that helps you.
