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

Hi. My name is Yuko Oku, and I'm on the life science tools and diagnostics team at Morgan Stanley. Before I begin, I'd like to remind our listeners important disclosure information can be found at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, it's my pleasure to host Rapid Micro Biosystems. Speaking on behalf of the company is CEO, Robert Spignesi and Sean Wirtjes. Thank you for joining us today.

Thank You.

Thank you, Yuko and Good morning, everyone.

To start for the audience who are new to the story, could you provide a brief overview of the company and your Growth Direct platform? Describe the key advantages of owning Growth Direct system over the existing microbial testing methods today. And how does the upfront operational cost of Growth Direct for the customer compared to the traditional MQC method?

Okay. Sure. I think there's 3 questions in there. So we'll take them in order. First, a bit about Rapid Micro Biosystem. So we're focused on modernizing a critical part of the global pharmaceutical quality control infrastructure. It's called Microbial Quality Control. This is a regulated high-volume testing process that every pharmaceutical company in the world conducts to effectively ensure their products are safe and sterile for human consumption. The problem is this method that's used almost universally globally hasn't innovated in about 100 years since Louis Pasteur invented it. It's literally a slow Petri dish laborious error-prone method, and it's causing risks and additional costs on the industry, and it's under pressure to change with regulatory pressure on data integrity and the advent of advanced manufacturing modalities such as biologics and cell and gene therapies is putting pressure on the fundamental pace of how this test is conducted. So in response, we've developed the Growth Direct system. It's a fully automated system that automates and replaces this legacy process and brings it into the 21st century on par with the balance of the pharmaceutical value chain. That consists of a system itself, the Growth Direct system, a fully automated system, proprietary consumables and services and provides compelling value prop and the ROI advantages to our customers. We've got a high-growth, attractive business model where we place capital equipment and pull through a high yield, a higher rate of consumables and services and to a proven business model. We're proud to count the vast majority of the global top 20 pharmaceutical companies and CDMOs as our customers and continue to expand inside their global manufacturing networks. Off to a great start this year. In our Q2 earnings call, we announced 30% growth, record consumable sales through the first half 25% growth as well and reaffirmed our full year guidance of at least $22 million in revenue, at least 30% growth and at least 15 system placements. That's a bit about the company. I think you also asked about the advantages of the Growth Direct. Yes. So the current method is think of a 15-step five-day to 2-week process with lots of people, incubators, manual accounting, clipboards, paper, that's how this is fundamentally conducted today. So it's long, it's costly, it's error-prone, it's unfortunately subject to falsification of data. The regulators are really focused on the data integrity, the quality of the data that's being generated. Basically, can you trust the fact that those samples were conducted and properly read. And as a consequence, is the fundamental drug product, safe for human use. So that's the current state. When customers implement the Growth Direct, they go from potentially a challenged data integrity environment to a very robust. It's a fully automated system computer-driven system with 2-way paperless secure links into their information management system. So data is handled in a completely different way. It's fully automated. So it's basically a walkaway system. The sample is taken. It goes on our system. It's fully -- still growth based. So it's fully processed and handled without human intervention, and it's rapid. So we provide results in half the time or less. So customers have quality information that they can trust much faster. So what can you do with that? You can ship product to market a lot faster. You can potentially shut down a manufacturing line faster if you find a problem, right? You can redeploy labor. There's -- as you may imagine, significant labor savings. And also, it's computer-driven, as I mentioned, in a deep learning base system that counts extremely accurate. Fundamentally, you're counting the organisms in any given testing environment. So it's incredibly accurate as opposed to the human method, which is less accurate, which reduces potential for errors to happen, costs associated with that and potential recalls as well. So it's a comprehensive and broad-based value prop and ROI against it. And there's a third question as well, I think in there. I may have touched on it.

I think you captured it.

Great. Okay.

Well, that was a great overview. Thank you for that. The pandemic hindered your access to customer sites impacting placements in '22. You launched a comprehensive action plan earlier this year, and I want to dig into each of these topics. The conference -- action plan was really launched to accelerate Growth Direct placements, develop and commercialize new products and expand gross margins and manage cash. So what do you believe are the key factors holding customer back from adopting Growth Direct? And how are you addressing these barriers on accelerating placements?

Sure. So just as a point, just -- we implemented the action plan actually last year, in the August time frame. Yes, so we don't believe there's necessarily clear elements holding the customers back. What we do face in this environment is where we're fundamentally addressing pharmaceutical manufacturing quality control, which is a standardized environment. So you're asking customers to change a standard process. So it was time involved with that. The good news is many/most of our customers seek to automate large swaths of their operations. So that typically involves multiple stakeholders will call it, kind of weighing in and going through the process and that can take time. And I think we all prior recognized big pharma has created a lot of things and -- but they can tend to move a bit more slowly. So I think of it as a process to implement change management and in some cases, a fairly significant change to their operating processes. So that's really the kind of our job is to manage that with customers. So how do we go about that? Is that multiple different elements that we've implemented that has proven to be quite effective. The first is a fully deployed and enabled sales team, which we've spoken about. So this helps customers to secure budget to position the value proposition properly to work on business cases, most of our initial sales go through a business case analysis, then once we're installed and a customer kind of propagates from there. But that initial sale, that initial process is typically done through a business case. Then critically, our validation and service teams, which we believe are among the best in the industry. Again, this is all about changing a legacy process to a new more modern process. There's under GMP, which is how our customers manufacture, there's a change process that needs to be validated. So we go on site with our customers, work hand in glove with them to go from the legacy method to the current method in a regulatory compliant manner. And so we've continued to build out that team, and we've got a lot of learning over 100 validations globally. So we do that very well. And another element and the last element relative to this is our supply chain. So we've built and operate a highly reliable, redundant supply chain. We have a proprietary consumable and services and we're serving a mission-critical need in our customers. And in many cases, we're installed and some of the customers, I would say, crown jewel franchise products. So our supply chain has to be incredibly robust and rigorous and redundant. So those are some of the, I would say, the larger programmatic elements that we continue to do well to work with our larger customers to help them implement and overcome any potential objections and roll out our system globally in their networks.

Great. And when customers order Growth Direct, do they typically place multisystem orders or a single unit? And if you could describe the mix, that would be great.

Yes, both. So the quick answer is both. So we serve -- I think it's important to note that we talk a fair bit about our large customers, which is majority of our sales. But we can address large customers, small customers, large molecule manufacturing, small molecule manufacturing, and we have examples of all of the above. But a typical customer journey for, I would say is a larger customer, what would typically be going through that business case analysis that I spoke about, they'll typically buy 1 to a handful of systems to start this is really to prove out the model, prove they can get it validated and kind of just get the process started. That will typically be at one site. Sometimes we've seen more than one site, but 1 to a handful of systems at one site. They'll go through the validation process, prove out the model, if you will, and then propagate and grow from there. And there's no real 1 size fits all to the land and expand, as the landing and then they expand across their networks. And we, of course, help them do that. That's part of what our sales team and validation team does. And I can say it's incredibly encouraging. We're getting more time than any other time in our company's history, we're getting insight into customers' forward-looking documented plans of how they're going to roll out the growth rates across our network. So that visibility is very exciting for us. So customers will move on from there. And then there's various ways that they can implement across a site network or region. We have some customers who've implemented us across a single product category globally. So it really depends on what problem they're trying to solve. And of course, what we do is work with customers on the additional. So if they automated a single application, we worked with them in other applications. If they automated a certain product, we work on other products that they automated a given region. We've worked with our sites. We look at them in other regions and other sites. So the whole idea is to continue to prove the business case with the Growth Direct and continue to expand across their entire network. It's important to note, we've developed this system to capture the vast majority of daily routine use test volumes in any manufacturing environment. So we're not a niche. We want as much as we can possibly get of the consumable volume, environmental monitoring, water bioburden, and we can talk about sterility later. So we're able to -- we're a high volume, high capacity, high throughput system. This is all purpose-built for pharma. This is why we -- our expand process is so important and why our value prop resonates so strongly with customers.

There's also a lag between system placements and system validation. Understanding there's a lot of variability, like you talked about between customers and customer sites. What is the rough estimate for that lag? And what are some of the efforts underway to shorten that time line between validation and placements and -- how does that differ for a new customer versus an existing one?

Right. I'll answer the last 1 first. That's probably the biggest variable is new versus existing. As I mentioned, a new customer is starting the journey starting the automation and transformation journey, and we're going into an environment that hasn't really innovated as I mentioned, in 100 years. I just keep that sort of front and center. So again, we go in and listen, word-of-mouth helps as more and more customers around the world adopt and more and more of our sites are inspected from the regulators. This is certainly helping customers move things along a bit quicker. But in general, a new customer will want to go through our full validation process. Sometimes the length is driven by customer availability. We need to make sure we do most -- much of the work. We still need customers to be involved and they can get pulled away for -- it could be an audit, it could be a variety of things. But generally, it tends to go quite smoothly. And some customers will also expand the validation for good reasons. So some customers may say, hey, we want to roll this out globally. So let's test the organisms from multiple sites, which can tend to also and use this first one is kind of like the proving platform and the platform dig as much data as we possibly can. So the subsequent validations go that much faster. So there are a variety of things that can tend to impact the initial validation. So we plan for, on average, about 6 months, and it can be as high as 9 months depending on how the customers availability or more specifically, how large scale they want to contemplate the kind of full validation. But we've done validations as quickly as 3 months -- 2 to 3 months and -- or less. Now follow-on validation tend to go much faster. As I mentioned, customers can do a lot of the work upfront and then we can -- don't need to do quite as much work on the subsequent installations, and those can be in 3 to -- 2 to 4-month range quite easily. Now we've also have approached this as a process improvement under an umbrella program we call Project Rapid. And that's really geared towards looking at independent of whether it's a first-time customer or a repeat customer, how do we lean out that process? How do we look for any kind of areas of opportunity to accelerate the process? And we've done that quite successfully. So we've implemented dedicated project managers. And this is basically a project doing an implementation and the validation is basically a project in involving Rapid Micro Biosystems and either a customer site or multiple customer sites and certainly multiple global stakeholders typically. So managing all that is what we've gotten very good at. Also the data. So we've got so much data on how customers validate the scientific elements of a lot of the validation is proving the Growth Direct is as robust, if not more robust in counting and detecting organisms as a legacy method. So bringing data to bear on a variety of organisms helps us to do work offline and bring it on-site to customers to accelerate their processes. In general, again, project coordination and capability has allowed us to accelerate that process, and we're continuing to do so.

Great. So once the system is online, I would assume you have strong visibility into the consumable pull-through, given that it's a highly regulated and controlled process. So tell me, at what capacity do customers typically run the system? Are most operating at like a 40% level or more like 70%? How much excess capacity is recommended to have on hand, just in case there is some event -- unforeseen events?

Like as also of my answers, Yuko, there's no 1 size fits all. I can't say generally, the majority of our customers are using our Environmental monitoring application. Environmental monitoring is the high-volume application that tests the air, the surfaces, the personnel. And the majority of those systems operate at or near 100% capacity. We have some customers with several Growth Directs lined up at 100% doing nothing but EM, nothing but. So think of it as environment -- and again, the system was built as a high capacity, high throughput system in part because environmental monitoring testing is so high volume, especially in the biologics and cell and gene therapy markets where we have a very strong footprint. It's 1 of our key and core competitive advantages. The water and bioburden, think of these as more -- there is capacity in those systems. So those operate that's probably closer to the 40% to 50% on average. I'm estimating now on the exact data just because of the sheer volume, it's the same system, the sheer volume doesn't necessitate a similar capacity and throughput as environmental monitoring. And we'll talk about sterility later perhaps, but sterility, we anticipate will be even lower volume but higher value. So that's -- think of it as high volume, medium volume and low volume, but our system can do all 3 core kind of elements.

I think importantly, the pricing on the consumables kind of is inverse to those volumes. So when we think about pull-through per system, it doesn't vary a lot between the applications. So high volume, a little bit of a lower ASP on EM as you work your way up through water bioburden and then up into sterility, you see that start to change. So volumes go down, but prices go up.

Right.

Okay. And I wanted to dig into something you touched on. You've also seen strong adoption of Growth Direct in cell and gene therapy customers. So why is that?

Yes. So in cell therapy, in particular, we believe we still have the majority of the commercial CAR-T therapies are using our system. And this goes back to the intro where the fundamental microbial quality control process to up 100 years ago was developed when CAR-T manufacturing wasn't even a thing yet. So you had this incongruent situation where the legacy model just doesn't fit the needs of modern manufacturing. And CAR-T manufacturing in particular, call and gene more broadly is characterized by incredibly high test volumes given how the manufacturing modality is conducted, extremely fast requirements of vein-to-vein time can be measured in weeks and are trying to get it down today's and the criticality of accuracy, right? So you have this high volume, very fast turnaround, and you have to be right because each batch effectively is a prescription for a patient who is typically one of the last lines of defense for that particular patient. So it's a perfect business case for automation. And that's why we believe we've seen such good adoption because it's on average, it's hard for -- harder for a human-based organization to keep up with the demands and our system can -- it's been designed for that kind of operation and a similar operations that we see in biologics and other segments. But it especially resonates and some of these -- some of our call and gene environments -- for many of the call and gene environments.

I wanted to touch on sterility. You announced last quarter, sterility, it is currently in beta testing phasing with top 20 global customer and remain on track with our internal plans. How much of a driver will sterility be in driving more placements? And help us think about the demand?

Yes. So we think -- so the sterility will be a -- it's basically the Growth Direct System. There are some, I would say, some relatively minor changes to handle the new sterility cassette. So -- and also sterility is typically, the testing is a mission-critical end-of-line, last line defense kind of test. So it's typically done in different part of the campus or manufacturing area than environmental monitoring, water and bioburden. So we do envision a new -- a dedicated if you will, or a new system and a new implementation for our customers around sterility. So to that -- to your initial question, we do envision it driving incremental system placements and demand over time. We believe in our research indicates that there's a strong demand for a rapid sterility test on the market, especially 1 that benefits from the value proposition of the Growth Direct with the way we handle data integrity, the full walk away. It's still growth based. So we're not just drawing the organism to discover it, which other technologies do. So our voice of customer research and our beta feedback certainly gives us encouragement that the demand is strong for a system like ours.

And once it's more broadly available, how should we be thinking about lag between placements and validation? You said that it's last line of defense. So -- and it's also a new applications. So should we anticipate that it could actually take longer for that system to be validated?

You should. Yes. It will be a similar trajectory, we'll launch it and it will -- and you brought up a good point. It's last line of defense. It's critical. So we do envision it to take longer and we'll help clarify that as we get closer to launch. But over time, though, critically, we expect that time to contract as more customers adopt it, and we -- and it benefits from Project Rapid, as I mentioned before.

Okay. Mold Alarm is also now available. You indicated encouraging attachment rate and use system sales and upgrades to existing Growth Direct. Tell us more about this offering and the feedback you've heard from customers so far?

Yes. So just -- by way of background, Mold Alarm is an outgrowth of our knowledge of vision technology, AI or deep learning technology and our knowledge -- considerable knowledge of microbiology and how organisms grow and more effectively. So this is a software upgrade, if you will. And we're able to give customers an accelerated, consistent with our value proposition of rapid results, an accelerated alarm notification that they have Mold present in their facility, and customers clearly are concerned about contamination and some of them can get especially concerned about Mold contamination because it can spread very, very quickly, and it can be difficult to remediate depending on where it is and the legacy method it could take days and our system can flag it as early as a day and sometimes even sooner. So it gives a really quick steer to -- is your operation in control from microbial QC standpoint or are you at risk of it getting out of control much, much faster, again, consistent with our value proposition. This fits generally under the ages of our development -- our product development strategy of capturing more customer workflow and provide more information and benefiting our ROI to our customers. So that's what it is and customers are -- yes, it's been encouraging the attachment rates. And as we said in previous earnings calls, we -- our focus this year has been generally to get it into the hands of customers, get them using it, getting some feedback on it and then looking to drive revenue in 2024 and beyond.

I wanted to throw some questions over to you, Sean. Your '23 guide calls for at least 15 systems for the full year and you placed 5 in first half. So could you speak to your confidence in second half system placement given the job in macro?

Sure. And I think as a reminder, we also mentioned on the Q2 call that we had 2 systems from a multi-system deal we closed in late Q2 that were already placed with the customer in July. So we were effectively about halfway there through July. I think Rob touched on it a little bit earlier. I think as we look at our funnel and the interactions with customers, I think the velocity at which things are happening is speeding up. So I think that -- that's exciting for us. The visibility, as Rob mentioned, is increasing. So I think those things give us more confidence in kind of where things are heading. And traditionally, you go back a few years before COVID, we had a very good track record of driving system placement growth, and we think we're on the path to get back to that type of a trajectory. Yes. I think the other thing that we typically have seen historically and don't see any reason why it wouldn't be similar this year as Q4 tends to be our -- seasonally our biggest quarter. People are looking to spend budget, planning things to make sure execution happens before the end of the year and they move into the next year. So all of those things come together to give us confidence in the guidance we have out there.

Great. And gross margin improvement continues to be one of the top priorities for you.

It is.

Help us think about the key drivers to gross margin improvement and the progress you made along that front.

Sure. I think to start off, it's important to understand the context. So we are a company that is serving a very demanding global customer base. And at our current scale, we have built a lot of capability, which carries a lot of cost with it. So we have a pretty significant cost base in our gross margins for things like supply chain for things like quality different parts of our organization that we need to support those customers and deliver what they expect but that's also a cost base that's going to grow far slower than our revenue growth. So there's a very significant margin opportunity there from volume leverage. Having said that, there are a lot of other opportunities within the company that we're very focused on right now. One is cost reduction, so reducing the cost of our products. I'd say manufacturing efficiency. We have an automated line that we produce our consumables on, moving all of our products onto that line being more efficient in that line is going to help us drive margin improvement as well. Productivity and Service, We've added to our service teams over time, where we've got better spread over the world. We're improving our processes, reducing the time that it takes to do different things that our service teams do our validation teams do. All of those things are actively being pursued right now, significant focus within the business and will all be drivers of margin improvement going forward.

Got it. And could you remind us of your cash position, cash burn and cash runway? Help us think about balancing capital allocation priorities with managing cash?

Sure. So we finished Q2 with $113 million in cash and investments. We reiterated that we expect to finish the year at or a little bit below $100 million in cash, which should give us runway at least in 2026. And I'd emphasize the at least. I think there are decisions that we've made and can make that can extend that out longer than that. So that's kind of a minimum threshold we've set for ourselves. I think you touched on them earlier, kind of what we've articulated in terms of investment priorities. And I think a lot of the investment there, we've made already and we'll continue to support it and cultivate it. So I think would we make other investments over time? Sure, we are constantly talking about investments, but to make an investment, we're also going to want to see a return on it. So I think we're committed to being very disciplined in managing our cash carefully and only making investments where we see a clear return and then driving to realize that return.

Great. And then just to wrap up, with '23 focused squarely on executing on your action plan? Where do you see Rapid exiting the year? And could you tell us your focus areas for '24?

Yes. So as we discussed, we see an exit of the year consistent with our guidance, our reaffirmation of our guidance and then we're confident in that reaffirmation and 2024, you should expect more of the same, strong commercial and operational execution with a focus on system placements, gross margin improvement, new product innovation and prudent cash management and investment.

Great. Well, thank you very much.

Thank you.

Thank you.