Rapid Micro Biosystems, Inc. (RPID) Earnings Call Transcript & Summary

Yes. Awesome. Hi, everyone. This is Rachel Vatnsdal from the Life Science Tools and Diagnostic team here at JPMorgan. I've got the Rapid Micro Biosystems team with me up here today. So this will be a standard 40-minute presentation. We'll start off with some slides presented by Rob followed by Q&A. So for those of you watching online, feel free to submit a question via the Q&A for it all. Otherwise, for those of you in the room, please raise your hand. We do have a mic runner, [ that will ] hand you a microphone, if you have any. With that, Rob, let you take your way.

Thank you, Rachel. Good morning, everyone. My name is Rob Spignesi. I'm the CEO of Rapid Micro Biosystems. And I'm joined by Sean Wirtjes, our CFO. Thank you for your time. We'll jump right in. By way of background, at Rapid Micro Biosystems, we're focused on a critical part of the global pharmaceutical quality control infrastructure called Microbial quality control, which is a regulated process to ensure the safety of finished drug product. The challenges with the current methods used around the world is they haven't innovated or changed in 100-plus years since [ Louis Pasteur ] invented them. We'll go through what that looks like, but there's been no innovation for the most part, and it's causing significant risk and cost to the industry. So we develop a technology that completely replaces and automates this critical process and brings it into the 21st century where it belongs. So there are a number of reasons why we're excited about our opportunity in our future at Rapid Micro Bio. First, we're in a large and growing market under pressure to change by regulators in the industry itself. We have strong barriers to entry. We have first mover advantage, which is really important in our market, a low competitive intensity and a robust patent portfolio to protect our technology. We had the right product for the market in the Growth Direct system, and we're proud to count more than half of the global top 20 pharma companies as our customers. We have an attractive business model where we place capital equipment and pull through a high yield, a high rate of very sticky and recurring revenue. And we have a strong focus on system placement growth. We did experience headwinds due to COVID, given customer site access, although over the past year or so across 2022, site access has improved significantly, and we're back on site with customers. We've also taken action to improve our commercial execution, all of which gives us confidence that we'll return to growth in 2023. So for those of you who've never been inside a micro QC lab in a pharmaceutical site, this is what one could look like. You'll walk in and you'll see people. You'll see [indiscernible] dishes, you'll see paper, pencils, pens and incubators. These are fundamentally the tools of the trade. And again, this process is designed to detect any microbial contamination anywhere in the manufacturing process. So [ stink ], bacteria and mold and other organisms. So the air is constantly tested, the people, the water systems, the surfaces, and the product itself. It's a very, very high volume test. It could be hundreds or even thousands of tests per day per facility depending on what kind of facility is and how large it is. It's mandated by the FDA and the equivalents around the world, so it's not optional. And it's -- as you can probably tell from this photo, it's a very manual process where technicians are taking samples, incubating them, leading them, like looking at them visually and counting the actual growth. So it's subjective. There's human error involved in it paper-based, very slow because you're waiting for the organisms to grow. And critically, it's insecure. It's lacking data integrity, and we'll talk a bit about this in a few slides. And this is what's drawing regulatory scrutiny on this process. So it's, we believe, largely ill-equipped to support modern pharmaceutical manufacturing around the world. So our solution to this is the Growth Direct platform, again, designed to automate that process and bring it into the 21st century. The Growth Direct platform is the only fully automated and high throughput secure MQC system in the world. It's benefited from years of development. It's our second-generation system, years of technical development, feedback from customers and investment. The platform itself is a Growth Direct system, as you can see on the left, fully automated system, proprietary consumables, which we manufacture and they're designed to automate the vast majority of daily routine use test volume in any pharmaceutical plant in the world, a full data and software complement to seamlessly and securely interconnect our system with the customers' information management systems and a full complement of global validation and supports services to move the system from installation through what's called validation and into routine use for our customers. The platform delivers a very strong value proposition and starting with data integrity. Most customers we work with around the world are seeking to solve a data integrity challenge. So customers can go from potentially a weaker environment with data integrity to a highly robust environment from a data integrity standpoint and achieve regulatory compliance in the process. Operational efficiency. So this is all about speed to an answer and automation. The system is fully automated, but it's also rapid. So we provide test results much faster than the legacy methods. So we give customers information much faster to make a decision. I ship to market faster. I can move to the next processing step faster. I can find a problem in my manufacturing operation faster, so I can shut things down, clean remediate and get back to work and save basically what would have been scrap material if the old method was implemented. And then insight in accuracy. It's a computer-driven machine-driven system and eliminates human error, which could lead to challenges like recalls and regulatory interventions. So the value prop is driven global adoption, and I'll go through that in a couple of slides. But from a quick stat standpoint, we've got 125 systems placed around the world. Many of our customers have multiple systems and multiple sites. Think notably, 60% plus of approved CAR-T therapies are using the Growth Direct. Our value proposition resonates across all modalities, but is especially strong in biologics and cell and gene therapies. Over 100 systems validated around the world and over 3 million consumables shipped around the world as well. So this is a, I'll call it, pre and post workflow effectively. When a customer -- before a customer implements a Growth Direct, you can see on the top there, this is the legacy summary workflow of the manual method. It's a 15-step kind of convoluted, slow insecure method that can take anywhere from 5 to 14 days to get an answer with notable data integrity challenges. The Growth Direct goes in and the workflow changes dramatically. It goes from a 15-step to a 2-step fully automated walk away workflow, you get results in about half the time or less, in some cases, again, fully automated and with full data integrity and compliance. So significant and clear value proposition for our customers. So I touched on, we have an attractive business model where we place capital equipment and then pull through a high rate of recurring revenue. So our initial purchase order or upfront sale for a single system is between $500,000 and $600,000. That includes both the system, the growth direct itself, the LIMS interconnect software and validation services to move the system from installation into routine use. Once in routine use, and this is that point in time in which the customer is now using the system as the system of record for the microbial quality control test, we expect a high yield and a higher rate of recurring revenue. And that's between $200,000 and $250,000 per year, made up of consumables and service contracts. The majority of this is consumables. It's a powerful model. We've proven this business model and in 2022, we recorded about $11 million in recurring revenue. So the market is large. It's about 350 million tests per year conducted annually in Microbial Quality Control. The market split roughly 1/3 in North America, 1/3 in Europe and 1/3 in Asia. And that volume corresponds to about $5 billion in annual recurring market opportunity. Moreover, the total market opportunity for our system is about 10,000 systems. If you convert this volume onto our platform, it's about 10,000 and growth direct systems globally, which is another approximately $5 billion, call it, in onetime opportunity. The market also had strong growth. The total market is growing at 8%, but the advanced modalities of biologics and cell and gene therapies, again, where our value prop resonates strongly, is growing much faster at over 13%. There are a number of tailwinds driving the industry and the market towards automation and the [ growth direct ] more specifically. And there's regulatory pressure, there's industry pressure and their supply chain pressure. First, from a regulatory standpoint, the FDA and the EMA and other regulators have issued guidelines around data integrity and have begun to enforce against it. And you can see the number of warning letters is up at 483s and other actions due to data integrity. So a solution like ours to growth direct, very secure full data integrity is a really good countermeasure to this pressure. From an industry standpoint, the new modalities in many cases, just simply outstrip the legacy method's ability to keep up. So especially in the selling -- some of the cell and gene categories, some biologics that have a higher test volume, in many cases, a much faster turnaround requirement. So the combination of a lot of value, a lot of volume, high accuracy required and a fast turnaround makes it custom-made for the Growth Direct. And finally, supply chain, I think we're all probably familiar with having a quality and predictability in our supply chain. Many supply chain issues and pharmaceuticals are due to quality failures, so to have a system that ensures robust quality and continuity of the supply chain is also putting pressure on the industry to adopt technology such as the Growth Direct and automation in general. So our value prop has allowed us to acquire a top-tier customer base. As I mentioned, we have the majority of the global top 20 pharmaceutical companies. The majority of our placements are with the global top 20. That being said, we also address small and midsize customers as well. We're especially strong in biologics and cell and gene therapy. But again, we can address any pharmaceutical manufacturing modality to include small molecules in other formats. Now looking at the right-hand side of the chart, you can see the complexion and composition of our system placement network. So think of us as generally balanced between North America and Europe with regard to our customer placements, smaller in Asia, but growing, and we're seeing very encouraging signs with our business in Asia and the value prop there. Our sales strategy is very much a land and expand. So we seek to acquire customers and then roll these systems out across their networks. It could be across the geographies, across application formats, across even certain product categories. Basically, to paint this map yellow is fundamentally our commercial strategy, and you can see we're chipping away at. One more point on this slide I wanted to reinforce. So while it's a great start, we'll call it, 125 systems placed globally. Again, with a market of 10,000 or so Growth Directs, a lot of runway to go to expand and grow our network. So not only do we have a top-tier customer base, but they're very engaged and supportive as well. And a good example of this is these 8 customers, you can see here in November, published a paper in the PDA journal. And I won't go through it all because there's a lot to it. But basically, the summary, 2 main summaries came out of the paper and describe how these customers validate their Growth Direct systems. But the ease of validation and the compliance with the regs were 2 very important takeaways. And it also demonstrated the suitability of the Growth Direct the rigors of worldwide GMP pharmaceutical manufacturing, which is a very, very high standard. Moreover, all of our applications were addressed by the paper. So our water application, our bioburden application and our environmental monitoring application were also addressed to include those that required applications to the FDA and EMA. So a great endorsement, we believe, with regard to our technology. It's also a great we think, guide for new customers who are looking at the Growth Direct to understand what the regulatory environment looks like as well as the validation approach as well. A major part of our growth strategy is also innovating new technologies and new products to bring differentiation and increase value proposition to the market. Two really good examples of this are our RMBNucleus Mold Alarm product and our Rapid Sterility Kit. So starting with mold, this is -- this product was developed based on our knowledge of our AI organisms and our software system. It's a fundamentally a software product that allows the early detection of mold in the manufacturing environment. So we're actually able to differentiate between mold and bacteria. And customers get especially concerned with mold because it can grow quickly, it's hard to remediate, especially to go several days before you detect it. So our system can give the customer an alarm that there's mold present in the facility and as little as 1 day. Now the legacy method, traditional method takes about 7 days or more. So you can probably see the huge advantage of knowing you've got a contamination problem around mold in your facility. And this is the software change is built into our system. There's no change to the physical system itself or consumables. This is a software basically addition. We launched the product in Q4 of '22, and we plan to implement it with several large customers in 2023. Turning to Rapid Sterility. This is a new consumable for the Growth Direct. Generally, our product strategy is designed around leveraging the platform. So while we leverage the fundamental platform of the software change, this is leveraging the platform now with a new consumable. And the value proposition on Rapid Sterility is a much faster sterility result for the customer. So sterility is typically the end of line, the last major test conducted before a product is shipped to market to ensure the final format, the vial, syringe, et cetera, is actually sterile and ready for patient use. So it's a gating step. And the legacy method takes 14 days or longer. We're targeting 5 to 7 days with our technology. So that's a week plus customers can get product to market, recognize revenue faster, get medications to patients a lot faster. The status of this program is it's in beta right now with one of our top global top 20 customers, and we're considering expanding the beta engagement to other customers as well and more to follow as we move through development. So I touched on in the introduction, we have a very strong focus on increasing system placement growth. In a brief history of time from our start of our launch in 2017, we've had strong system placement growth as you can see here. Now we did encounter headwinds due to COVID and customer site access limitations. Our sales process is most robust and most effective when we're on site, working with customers, working through their workflows engaging in the various stakeholders in the sale and COVID did create a headwind to that. And commercial execution also wasn't exactly where we wanted it. So touched on that being said, over the course of 2022, site access increased dramatically, and we took action as well to improve commercial execution. We've expanded lead generation and marketing capabilities to ensure we had the right volume of leads and opportunities coming into our sales funnel. Comprehensive improvement of our sales process, tools and training to better enable our growing sales team to be effective in the field and an increased focus on key accounts. So these are the teams that address the needs of the very large customers that can grow with us around the world. Additionally, we're partnering with customers as well, reference selling. Customer selling customers is a very powerful tool in our market and publishing white papers and awareness type of pieces, technical webinars, et cetera. You saw a good example of it with the 8 customer a paper. And of course, Rapid Micro does that as well to build awareness and leads for our company. So some total of this gives us a lot of encouragement. We're seeing traction and optimistic that we will return to growth in 2023. So in addition to focusing a strong focus on system placement growth, a very strong focus on increasing gross margins as well. It's important to note that to serve this top-tier customer base. We've had to make investments in manufacturing, supply chain and other infrastructure. And our current business scale has not yet risen to the level to cover these costs. So with business volume, these costs will grow at a much lower rate, creating leverage and significant margin expansion in our business. That being said, independent of volume leverage, we're also going after directly -- direct costs in our business. So product cost, think direct labor, direct materials and cost out. Manufacturing efficiency. This is mostly about our manufacturing automation and our manufacturing technology and making sure it's running and as being as efficient as possible, reducing eliminating scrap in the process and then service productivity and efficiency. This is all about, for example, our project rapid program that we've spoken about publicly that reduces the time from installation to routine use. And some total of this, we expect to impact our business very positively. So we'll have gross margins by 2024 and expansion to 50% to 60% gross margins as we scale, and consumables will be at the top end or above that range. So yesterday morning, we preannounced revenue for Q4 and fiscal year 2022. The revenue came in at $17 million to $17.2 million. System placements at $9 million, systems validated at [ $19 million ] and recurring revenue between $11 million and $11.1 million. So this was at and a bit above our most recent guidance. Some select highlights from the announcement. We did add a new global top 20 customer is based in the U.S., that's an exciting event, as always, to welcome any new customers, especially one of the larger ones. And we're seeing increasing contribution from Asia as well. And it's very exciting, and we're very excited about that market and what we're seeing. We brought on a new large customer in Japan. We talked about our RMBNucleus Mold Alarm software was launched in Q4 and of course, the paper written by our 8 top large customers. And notably, we finished the year with $140 million in cash with expected cash runway into at least 2026. Well to wrap up, again, excited about our opportunity in the business ahead of us, a large market that's growing under pressure to change. We get strong barriers to entry. We had the right product and a phenomenal customer base. And we're only going to grow within its attractive business model and a very strong focus on system placement growth to drive sustainable long-term growth and shareholder value. So that's what I have, Rachel.

With that, we'll start the Q&A session. So as a reminder, if you do have a question in the room, please raise your hand, and then we have [ mic runner ] [ that will ] hand you a microphone. So thank you, Rob. Maybe just to kick it off. You guys went through a strategic review earlier in 2022. So can you just walk through the conclusion of that? It wrapped up in early December. What did the Board really communicate to you in terms of near-term and then longer-term objectives? And then were there any further operational adjustments that came from that review that you need to implement throughout '23?

Yes. The strategy post review remains consistent to drive system sales growth is to improve gross margins is to innovate new products and is to prudently manage our large balance sheet. So no major significant strategy changes coming out of the review.

Helpful. And then can you just give us an update on how site access has been trending? Is it fair to say that customer access is back to pre-pandemic levels yet? And if not, what needs to happen in order to get that cadence and placement of validations as well to get back to how they were trending pre-COVID?

Yes. It's largely -- it's regional dependent. It's largely back to pre-COVID in the U.S., also in Europe, notwithstanding the changes in how people work. People are working more remotely. It seems everywhere, but generally, site access has improved in North America and Europe to getting close to pre-pandemic levels. Most of Asia as well with the potential exception of China, but most of our Asian locations are quite open as well.

Helpful. And then can you just walk us through you made some changes to your commercial force lately. You recently said that almost 70% of your commercial team has been new within the last year. So can you just kind of walk us through the progress that you've made a; on training them? And then, b; what do you think is needed additionally? Is it more training to get them fully ramped do you think you'll need to add additional headcount to that commercial function? Just kind of walk us through the puts and takes there?

Yes. No. So training is a continual event, right, and enabling. It's continual training, continue enablement. That being said, we've got the majority of our team in place gone through a lot of training. We actually had the whole sales team in end of this month for our global sales meeting, which we're very excited about. So the team has made a lot of progress. And it's also important to note some of the best training happens in front of customers. So the site access as well as help so it builds upon itself, whether it's formal training, there's peer training, and then there's training when we're actually in front of the customer, effectively in front of the customer as well. So all of that is trending in the right direction. And I walked through some of the enablement activities that we're doing, all of which are getting traction, and we're very excited about. The only -- there's a few notable heads that we'll recruit for ahead of sales. We announced a while ago that I'm leading commercial currently, and we're going to bring on a top commercial leader. And I would say, select geographic sales regions and some select marketing roles as well that we'll be hiring for in 2023.

Helpful. And then, obviously, a lot of focus here on system placements, but also pull-through is another important metric. So how should we think about consumables pull-through ramping throughout 2023? And then what should we model on pull-through per system placement? And how does that really compare to the run rate from the past several years as well?

Yes, I'll take that one. So I think what we've talked about this year is that we're around $80,000 per system for average validated systems and consumable pull-through. That's not a true reflection of the systems that are in routine use. So that number is a bit higher and actually notably higher for those systems. But given that metric, we look at $80,000 in 2022, we would expect that to increase high single digits into the teens in line with what our longer-term expectation would be for that metric as well. So we do expect to see that tick up during the year as we get shrink that timeframe down that it takes for us to get systems into routine use and get more systems that are validated, but not in routine use yet moved into that phase and using it in their normal day-to-day operations.

Helpful. And then kind of going back to the placements angle. So obviously, multisystem placements are a huge win for you guys when you're able to do that. So walk us through how long it takes typically for a customer to buy their first instrument and then kind of translate that into future purchases and getting those ramped as well.

Yes, yes. So the many customers initial purchase is on to a handful of systems. But go through a validation process, get them into routine use and then expand from there. And as I touched on, there's multiple ways customers can do this. Some customers want to automate all their cell and gene, for example, portfolio. Others want to automate a site network or a geography and then they wind up expanding from there. And that follow-on step can be variable depending on the customer or where they are in their growth. But I can tell you, we're encouraged with the multisystem orders that we do see in our forward-looking funnels.

Helpful. And then you talk about a few different metrics when instruments placed, installed, validated routine use. So for those of us newer to the story in the room, can you just walk us through what are the differences between each of those? And how long does it take to be in each step before you eventually get to routine use? And then lastly, how many are in your validated base for routine use right now?

Okay. I'll go to the first part [indiscernible].

Sure.

Yes. So the system -- customer orders the system, it's shipped and installed installation can take anywhere from 2 weeks to 4 weeks, depending on site access and the facility layout. Then it goes into validation. And this is the process by which the system will be validated under GMP to be the system of record to perform the actual test. It's a very important process. That can be between 6 and 9 months. And we've been working over the past few years now to reduce that. Historically, that used to be a year or more to give you a sense of where we are now is closer to say 9 months at the high end of the range from new customers and 6 months for repeat customers. We've demonstrated that we can be well below that as well. There is an element here that it does require some customer cooperation. So with a lot of resources from customer and availability, we're able to get it done quite quickly at the customer is a little more resource constrained, it can go a bit longer. So just call that 6 to 9 months, and we're working towards the lower end of that range for validation. And then routine use, there can be a gap from the end of validation into routine use that can be 3 months. In some cases, it can be a bit more again depending on the customer-specific requirements. But at that point, Rapid Micro has completed its service. But we do work with customers in that jump from validations to routine use as well.

And I'd just add to that. That's an area where we are also focusing on reducing that time in terms of how customers bring that. And customers do that process to go from validation, completion into routine use can be different, quite a bit different between customers. We're looking for more opportunities to standardize that to be able to help them with workflows and shrink that time down. In terms of validated systems, we have 125 systems placed. We're over 100 systems validated right now. The majority of those systems that are validated are in routine uses, as you'd expect, but we are doing things to try to shrink the number that are kind of in that in between period right now to bring those systems in routine use, and that will help drive that metric in terms of pull through we talked about earlier.

Helpful. Then maybe let's spend a minute here on your exposure to CDMOs. Can you just talk about how meaningful the customer set that is? And then in our role, there's been a lot of focus on the concerns around biotech funding and what is that pressuring on their pipeline? So what are some of the conversations that you're having with those CDMO customers? And do you see them kind of pulling back demand as a result of these funding constraints?

Yes. So we have a good position with CDMOs. And we don't -- most of the CDMO work we do is with current commercial products. So we don't -- and there seems to be significant demand going forward. So we're not seeing a significant pullback, at least at this point in time from our CDMO customers.