MRVI (2021 - Q2)

Ladies and gentlemen thank you for standing by and welcome to the Maravai Lifesciences Second quarter 2021 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I would like to turn the conference over to Deb Hart, Head of Investor Relations. Please go ahead. Deb Hart

Thank you, Alexandra. Good afternoon, everyone. Thanks for joining us on our second quarter 2021 earnings call. Our press release and the slides that accompany today’s call are posted on our website and are available at investors.maravai.com under Financial Information/Quarterly Results. On today’s call, we will cover our financial results and business highlights and we’ll provide updated financial guidance for 2021. As you can see on slide 2, Carl will first provide you with a business update and Kevin will review our financial results and guidance. We’ll open up the call for your questions. On slide 3, we’d like to remind you that the forward-looking statements that we make during this call, including those regarding our business goals and expectations for the financial performance of the company, are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning these risk factors is included in the press release we issued earlier today as well as those that are more fully described in our various filings with the SEC. Today’s comments reflect our current views, which could change as a result of new information, future events or other factors, and the company does not obligate or commit itself to update these forward-looking statements, except as required by law. During this call, we will be using non-GAAP measurements of certain of our results and in providing guidance. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this afternoon, which is posted to Maravai’s website and the www.sec.gov via EDGAR. The metrics we will be discussing in today’s call include net income, adjusted EBITDA, income tax expense and adjusted earnings per share. These adjusted financial measures should not be viewed as an alternative to GAAP measures, but are intended to better enable investors to benchmark our current results against historical performance and the performance of our peers. Now, I’ll turn the call over to Carl.

Well, thank you, Deb and good afternoon everyone. We appreciate having you join us for our call today. Let's start with our -- our second quarter results on slide 5. Maravai had a very strong second quarter. In fact the largest and most profitable quarter in our history by far. Today we reported $217.8 million in revenue growing 364% compared to the prior year and up 47% sequentially over quarter one. Our adjusted EBITDA of $164.7 million grew 841% over the prior year and 62% sequentially. Our top-line performance and outstanding adjusted EBITDA resulted in adjusted EPS of $0.44 per share and record free cash flow generation. We've seen an incredible first half in our first full calendar year as a public company. It is clear that momentum continues to build across our global customer base as mRNA research and development moves to the forefront of modern medicine. Turning now to slide 6, growth in our nucleic acid production business in particular remains very robust. Nucleic acid production had record revenue of $192.5 million, up 533% year-over-year and up 55% sequentially. Demand for CleanCap mRNA continues to accelerate in all areas. CleanCap reagents themselves, GMP Manufacturing Services and custom mRNA constructs. Full regulatory approval by the FDA of the first mRNA COVID-19 vaccine currently being used under emergency use authorization is now expected to occur around Labor Day. And should further expand demand for the vaccine and CleanCap in late 2021 and beyond. Pfizer and BioNTech just announced that they've already shipped over one billion doses of COVID-19 vaccines. All of those contain CleanCap. Pfizer has further said that they plan to increase COVID-19 vaccine production by one third in 2022 going from 3 billion doses this year to 4 billion doses next year. In addition, the development of new generations of COVID-19 vaccines continues apace. These next-gen vaccines either offer specific protection against emerging virus variants such as the Delta variant or they enhance overall immune responses by offering booster doses of the first generation vaccine formulations. On the public health front we are beginning to see nations such as Israel, France and Germany offered third doses of mRNA vaccines as a booster to older or immunocompromised citizens. Others such as the UK are additionally recommending that recipients of single dose vaccines from J&J and AstraZeneca receive an mRNA dose at their next immunization. It also seems that each week we learn of new investments being made in mRNA technology as it represents the future of vaccine development efforts due to its flexibility, scalability and effectiveness. Slide 7 shows some of these headlines. Sanofi announced a $477 million annual investment through 2025 to accelerate the clinical development of their entire mRNA aid portfolio. Sanofi has stated that they hope to have a minimum of six mRNA candidates in the clinic by 2025. And last week they announced their intention to acquire Translate Bio for $3.2 billion to accelerate vaccine programs and to further explore other therapeutic areas for mRNA, and specifically cited a goal to unlock the potential of mRNA in other strategic areas, such as immunology, oncology and rare diseases in addition to vaccines. This comes on top of the previously announced commitment made by Pfizer to increase R&D spending in 2021 by $600 million for additional mRNA based development programs. GlaxoSmithKline said that they now have over 200 scientists working on mRNA, and are making large for additional mRNA based development programs. GlaxoSmithKline said that they now have over 200 scientists working on mRNA and are making a large scale investments in mRNA manufacturing. BioNTech recently announced their new project to develop an mRNA-based malaria vaccine. Their goal is to start a clinical trial by the end of 2022. BioNTech is already collaborating with the Bill & Melinda Gates Foundation on HIV and tuberculosis programs. For TB BioNTech plans to begin clinical trials for testing a vaccine candidate also in 2022. Currently they and their partners are developing vaccines against nine different infectious diseases and the company continues to pursue 15 oncology programs in the clinical and preclinical phases based on four different drug classes including mRNA. Novartis has also indicated that they are considering entering the mRNA market. Chairman Joerg Reinhardt commented in a recent interview that quote “the mRNA technology has proven to be an attractive option in this situation. And of course every research company is questioning whether they should invest more in this area” close quote. And Celltrion a leading pharmaceutical company in Korea announced their plans to develop a next generation mRNA vaccine platform. We are currently seeing the impact of all of this increased enthusiasm and investment on our own business to illustrate this point. Let me share with you some CleanCap supply agreements statistics at the start of 2021 we had executed five supplier agreements for CleanCap in place and another handful of agreements under discussion. Today we have 13 supply agreements signed 12 more in active late stage negotiations and 25 more with term sheets under review. This underscores the incredible enthusiasm that exists for mRNA generally and CleanCap specifically. Even more encouraging is the fact that this customer population spans the entire spectrum from large pharma to innovative biotechs to new and potentially transformative manufacturing platforms. From our perspective mRNA and CleanCap are clearly here to stay in a durable and meaningful way and Maravai is right in the middle of it. We are also increasing our investment in mRNA innovation as we scale our R&D operations facilities and quality systems. We believe that an appropriate level of investment in R&D long term will approximate 5% of our revenue and we would expect to reach that level of investment within the next three years. That investment will be comprised of people, laboratory facilities and equipment, program management resources and external collaborations. We will also begin pursuing specific technologies and new opportunities identified by our new scientific advisory board which we are currently in the process of forming. We'll have more information on the SAB available for you during our next earnings call. Now turning to Slide 8 on our biologics safety testing business which supports high growth markets in cell and gene therapy vaccines and biologics drug manufacturing, here we set the gold standard in host-cell protein and process-related and purity analytics along with offering innovative viral clearance solutions that ensure the safety of biopharmaceutical products. Our second quarter revenue of $18.2 million in DST marks a record high up 47% from last year and up 3% sequentially. This growth was driven by three main factors. First continued high end user demand for our products through both direct and distributor channels -- as a result of expanding COVID-19 and adeno-associated virus or AAV vaccine and therapeutic programs and their unique analytical needs. Second a strong sales across the full breadth of our product line that are routinely used in a number of commercialized cell and gene therapies oncolytic effects vaccines innovative biologics and biosimilars. And finally we’re continuously expanding biopharma product development pipeline. We saw a strong demand for all categories of kits during the quarter from generic host-cell protein assays to other ELISA impurity detection kits and to orthogonal mass spectrometry based services that promote the use of our HCP kits. Additionally a number of clients entered into agreements with us to develop custom host-cell protein assays to support their proprietary biologics. We plan to continuously innovate and scale our offerings and our biologic safety testing business to ensure a superior technical support to offer the highest quality services and products and to offer the most comprehensive catalog of products to meet our customer needs. Turning now to Slide 9. Our protein detection business saw 71% revenue growth versus the prior year which were the pandemic-impacted revenues. Sequentially, revenue was up 6% driven both by our custom and catalog business. Vector now represents only 3% of our revenue and 2% of our EBITDA. Our current assessment is that there are multiple significant market opportunities in our nucleic acid production and biologics safety testing businesses that will require incremental investments and management attention in order to support our hyper growth in these strategically important markets for Maravai. So as you will see on Slide 10, we announced earlier today that we have entered into an agreement with Thompson Street Capital Partners to sell Vector Laboratories for a purchase price of $124 million in cash. Vector operates in a different market with a different growth profile that being research immunohistochemistry versus cell and gene therapy then the rest of Maravai and focuses on different customers, primarily traditional academia versus biopharma. While we have seen a good recovery in the protein detection business from the pandemic lows, our view is that Vector will require material investments and commercial capabilities and a commitment to bolt-on M&A in order to ensure its long-term competitiveness in this pure research segment. The combined effect of such investments would be to increase our financial exposure to an on course segment. We prefer to maintain a laser like focus on nucleic acid production and biologics safety testing as we see those markets being significantly higher growth and far more strategic for Maravai. We wish Lisa Sellers and the entire Vector team nothing but tremendous success going forward. We're confident that Thompson Street is a great partner for Vector and this divestiture will allow Maravai to focus on our core technologies in cell and gene therapy while supporting our biopharma customer base. As you might imagine, we are actively evaluating additional acquisition opportunities across the entire cell and gene therapy space. Proceeds from this transaction will further improve our cash position and enhance our ability to execute quickly on meaningful acquisition targets. I’d now like to turn to slide 11 and give you a quick update on our facilities and our plans for additional capacity expansion to support our exceptional revenue and profit growth. As you will have seen, we just entered into a lease agreement to develop our new expanded San Diego facility for the nucleic acid production business. We refer to this as the Flanders side. Our current Water Ridge facility in San Diego is already close to reaching capacity in certain areas although we have yet to maximize the total output of water ridge as measured in sales dollars, we will soon be in need of additional space for offices, warehouse receiving and storage, and for certain laboratory operations. Our objective then is to create a center of excellence where our existing Water Ridge facility will continue to be the manufacturing center of excellence for all continue to be the manufacturing center of excellence for all mRNA technologies. By moving some of our operations to the new Flanders site, we will further increase capacity for commercial clean cap production, expand the rest of our small molecule platform, enhance our research and development capabilities and add G&P API manufacturing capacity. The Flanders site will house two centers of excellence for us; one for innovation and one for oligonucleotides in chemistry that will enable the R&D expansion for chemistry and small molecules and mRNA technology that I spoke about earlier. Similarly, we've entered into a new lease for our biologic safety testing business in North Carolina. Groundbreaking for the new site is scheduled for late 2021 and we anticipate occupancy in Q3 of 2020. The state-of-the-art facility will more than double our operational square footage supporting current and future growth. The fully customized design will provide room for a mass spectrometry center of excellence and specialized cell culture facilities. It will significantly increase our cold storage capacity while providing other R&D, laboratory and automation upgrades. Extensive process flow analysis has been incorporated in the design of the facility to optimize and enhance both our manufacturing and kit packaging operations. Not only are we extremely excited about the additional capacity of these new facilities we’ll provide from ROI. We are pleased with the continued success of our employee recruitment efforts. We ended the second quarter of 2021 with over 500 employees, 507 to be exact from the first time in our history. To put that in perspective we’ve increased our work force organically by nearly 40% in the last 12 months. I'm extremely proud of our human resources team and all of our supervisors and leaders for their commitment to achieving amazing financial results, while remaining dedicated to advancing the human capital capabilities of Maravai during these unique times. Now moving to slide 12, I'd like to ask Kevin to cover our second quarter and first half performance, the P&L impact of the vector transaction and the capital expectations for our facility expansion program along with our updated guidance for 2021. Kevin?

Thank you, Carl. Good afternoon everyone. I'm happy to review our financial results for the second quarter and the first half of 2021 and to provide our revised financial guidance for the balance of the year. Let's start on slide 13, as you've seen in our press release this afternoon our record Q2 revenues of $217.8 million represented 364% reported growth from Q2 2020. Our GAAP based net income before the amount attributable to non-controlling interests was $134.3 million for the second quarter of 2021. Now turning to slide 14, adjusted EBITDA and non-GAAP measure was $164.7 million for Q2 compared to $17.5 million for Q2 2020 and $101.9 million in Q1 2021. This represents an 841% increase year-over-year and a 62% sequential quarterly increase from Q1. Our EBITDA margin was 76% in the quarter up from both the 37% in Q2 2020 and the most recent 69% EBITDA margin in Q1 2021. The increase in adjusted EBITDA was primarily driven by our overall sales volume increases and margin improvements from our nucleic acid production business. On slide 15, we present basic EPS, fully diluted EPS and adjusted fully diluted EPS. Basic EPS is net income attributable to our Class A shares divided by the weighted average Class A shares. Our fully diluted EPS equals net income prior to non-controlling interests divided by the weighted average for both Class A and B shares and other dilutive securities, such as equity awards. Our adjusted fully diluted EPS equals adjusted net income divided by the weighted average of both Class A and Class B shares and other dilutive securities. Coincidentally, both our basic and fully dilutive EPS for the quarter were $0.44, while adjusted diluted EPS was also $0.44 per share. Moving to slide 16. We continue to have an exceptionally strong balance sheet and adjusted free cash flows. Our cash and cash equivalents, which are GAAP metrics, totaled $375 million at March 31, 2021. Our strong EBITDA performance led to robust adjusted free cash flow for the quarter of $160.5 million. Adjusted free cash flow is a non-GAAP measure that we define as adjusted EBITDA less capital expenditures. So, with $547 million in long-term debt, $375 million in cash and a trailing 12-month adjusted EBITDA of $389 million. We have a record low 0.4 times net debt to adjusted EBITDA ratio and only 1.4 times gross debt to adjusted EBITDA ratio. This strong balance sheet and debt capacity allows us the financial flexibility to make both organic and inorganic investments that will drive innovation, capacity, address customer needs and contribute to long-term growth. Now, to provide some more insights into our business segments financial performance for the quarter. Turning to slide 17. As Carl mentioned earlier our Nucleic Acid Production business fueled the most significant portion of the revenue growth for the first quarter. Nucleic Acid Production represented 88% of the company's total revenue in the quarter and generated $156.7 million in adjusted EBITDA in the quarter . The 81% adjusted EBITDA margin in this business is a record for Nucleic Acid Production and reflects increasing value of our unique products as well as the productivity gains and efficiencies from our state-of-the-art water rich manufacturing facility. In addition I will tell you we're very pleased with our global supply chain and logistics efforts under the leadership of our Vice President Stephen McCusker an industry veteran we have substantially professionalized our efforts here. These efforts have resulted in supply chain agreements in place for a major raw material inputs for which we have seen stable or even improved pricing based on volume increases. We have also diversified our supply chain to ensure we have multiple high quality qualified vendors in geographical diversity. We also continue to improve our global logistics with our partners like FedEx and several best-in-class boutique freight partners to provide excellent logistics services. Our overall pricing, availability, diversification, quality, service levels and on-time delivery metrics are all reviewed regularly and are trending favorably. CleanCap revenues from COVID-19 vaccine customers were approximately $156 million in the second quarter of 2021, a sequential increase of $65 million or 71% from Q1 2021. Our non-COVID-19 related Nucleic Acid Production revenue grew 11% sequentially. Our Biologic Safety Testing business contributed 8% of the company's revenue. In the second quarter our Cygnus branded products which comprised virtually all of the segments business, grew to a record $18.2 million in the quarter representing 3% growth over Q1 of 2021, this growth was driven by the increasing number of biologics and biosimilars drug development programs as well as the new customers gained in the quarter attributed to high quality and breadth of menu herself. Protein ELISA kits. This included strong growth from our HEK kits used in vaccine and gene and cell therapy programs as well as increasing contributions from our Protein A Melon Gel kits used to purify monoclonal antibodies and our nucleus offerings. Further we saw strong quarter for our E. coli products using many biosimilar programs, our biologic safety testing business delivered $14 million of adjusted EBITDA in the quarter, our protein detection business represented a smaller part of our overall business accounting for over only about 3% of revenues for the second quarter and about 2% of our adjusted EBITDA as Carl has commented, we will be divesting this business to Thompson Street later this quarter. Corporate expenses that are not included in the segment adjusted EBITDA totals I just spoke of where $9.7 million in the quarter relatively flat from the Q1 2021 levels of $10 million. Now moving to slide 18 and our updated 2021 guidance, today we are raising our 2021 full year revenue guidance to $745 million to $770 million up from our prior guidance of $680 million to $720 million, a $58 million increase at the midpoint even factoring in the removal of roughly $10 million for four months a protein detection revenues that was included in our previous full year guidance included in our overall total revenue range is our estimate for 2021. CleanCap revenues directly attributable to our COVID-19 vaccine customers, which we are estimating at $490 million to $510 million up $45 million at the midpoint from our prior guidance, this total revenue guidance for the full year of 2021 reflects the expectation of mid 20% growth for the annual growth for our biologic safety testing business coming off record last quarter for this business we continue to see very solid market dynamics across this segment and geographies showing growth in biologics. That combined with new customer wins that build on the already strong base of repeat customers is clearly supporting a more bullish outlook for this business segment in 2021. This guidance also reflects the divestiture of the protein detection business and the loss of that modest revenue contribution. We see protein detection contributing approximately $80 million to Maravai on a reported basis in 2021 for the months of our actual ownership of this business which we anticipate to be eight months. Given the relatively small contribution of protein detection to Maravai as a whole we are not planning on presenting pro forma results with and without this segment. This updated guidance at the midpoint implies that our nucleic acid production segment revenues will be around $670 million for 2021. Also subtracting the midpoint of our COVID 19 clean cap revenue guidance you'll see that our base nucleic acid business is shaping up to be roughly $170 million for the year. That would represent growth of roughly 60% versus the comparable total in 2020. We continue to see good momentum and traction across our offering share with strong clean cap demand coming from outside of the major COVID 19 players as well including initial orders for non COVID vaccine development. Furthermore our blue chip customer base the gene and cell therapy companies represents an exciting mid to long term opportunity as the validation of mRNA as a development platform is fueling rapid segment growth. We're extremely busy here and we're very excited about our role as a key contributor to these new mRNA platforms for the foreseeable future. Turning to the quarterly gating of revenues for the rest of 2021, as we expected our second quarter was incredibly strong particularly in nucleic acid production. At this stage, we see the second half of 2021 total revenues roughly evenly split between a third and fourth quarters. Based on our total revenue guidance of $745 million to $770 million that implies second half revenues of around $380 million to $400 million or around $190 million to $200 million per quarter down slightly from the 2Q level of $280 million that's still reflecting second half revenue growth of over 6% at the midpoint of guidance for the first half of 2021 even without the protein detection revenue contribution. As discussed on our last call, our revenue guidance is in large part based on our largest customers rolling forecasts that extend out for several quarters and that are supported in the shorter term by binding POs many of which got several months. On top of that at the forecasted funnel for our GMP suites, that are used to mainly support build for our customers’ nucleic acid therapeutics programs. Based on these factors our fiscal year 2021 revenue guidance comes with a considerable to be a for visibility that will also be subject to some quarterly fluctuations. Based on these revenue expectations we have updated our internal forecast and guidance for other key financial metrics. We expect our non-GAAP adjusted EBITDA aim to be in the range of $515 million to $535 million which at the midpoint of that range represents growth of 207% and implied adjusted EBITDA margin of 69% at the midpoint of our 2021 revenue range. The full year margin is moderated versus the most recently completed quarter that's our record clean cap revenue contributions. Furthermore as Carl mentioned we're continuing to look to make organic investments in our R&D and commercial organizations and we continue to expand R&D and commercial organizations and we continue to expand our employee base to meet record customer demand. Adjusted fully diluted EPS, a non-GAAP measure, is expected to be in the range of $1.30 to $1.36 per share. This increase in our guidance here is directly tied to our revenue growth and overall projected full-year margin expansion on the heels of our strong second quarter results. As with our updated total revenue guidance, we anticipate the adjusted EPS for the third and fourth quarter to be relatively even implying EPS for each quarter of around $0.34 per share at the midpoint of this guidance range. Turning to slide 19, adjusted fully diluted EPS is based on the assumption that all Class B shares are converted to Class A shares resulting in a forecasted fully diluted share count of 260 million shares for the full-year. The net income included in the adjusted fully diluted EPS has been adjusted to eliminate any net income or loss attributable to non-controlling interests as a result of the assumed full conversion of Class B shares for Class A shares. Additionally, our adjusted fully diluted EPS including certain adjustments that do not reflect our core operations are based on adjusted effective tax rate range of 23% to 24%. The effective tax rate reflecting some forecasted improvement based on the geographical distribution of our growing revenue base. As it relates to certain other adjustments needed to get to our non-GAAP adjusted EBITDA range, we see the following items in 2021. Interest expense of between $33 million and $35 million, depreciation and amortization also between $29 million and $32 million, adjusted tax rate of between 235 and 24%, equity based compensation which we show is a reconciling item from GAAP to non-GAAP to be $10 million to $12 million in 2021. For 2021, we also expect to invest approximately $15 million to $25 million for capital expenditures or around 3% of total revenues. We will be further evaluating this total and associated spending timeline over the next quarter given our commitment to the two new facilities that will come online mid-year 2022. At this stage, we estimate the overall capital for these new facilities to be roughly $25 million spread out over the next four quarters. Our reconciliation of net income to GAAP EBITDA and from GAAP EBITDA to adjusted EBITDA is presented in our press release that we issued earlier today. In addition, our segment-related information will be detailed in our Form 10-Q which we plan on filing in the coming days. It was a very strong financial quarter from ROI and just about every metric, our business has never been stronger. I'm very excited about the increasing demand and expanding applications for our unique products which demonstrate the value they hold for our customers. The commitment to fund even more innovation and capacity new facilities and growing our human capital is clear evidence of how we're investing in the future. We are strategically applying our strong cash flow while also focusing our business on our highest growth potential markets. Now I’ll turn the call back to Carl for some final remarks.

Well thanks, Kevin. And so to wrap up, we had an incredibly strong first half of 2021 in our first calendar year as a public company. We feel great about the momentum we're seeing across our business and we're pleased to be adjusting our guidance upwards significantly to reflect stronger demand expectations persisting for the remainder of the year and beyond. From COVID-19 vaccines to vaccines for influenza, malaria and TB, to cell and gene therapies battling cancer, the transformative impact mRNA will have on global human health is only accelerating. We at Maravai are proud of the key role at our customers, partners and employees are playing in making that happen. We will continue to focus on operational excellence, innovation and people as our three strategic pillars for generating above market growth. I’d now like to turn the call back over to Alexander to open the line for your questions. Alexander?

Thank you. We have your first question from Matt Sykes with Goldman Sachs. Your line is open.

Hi good afternoon everybody and congrats on the quarter.

Thanks Matt.

No problem. Just to kind of a cleanup question when you -- thank you very much for providing that detail on the progress we've made on the supply agreements. I'm sorry if I missed it, but did you break that out between COVID and non-COVID in terms of what those supply agreements what the mix of it is or are you going to break that out?

We did not. But the majority would be non-COVID.

Okay, great. And then just on the balance sheet I mean obviously some great progress that you've made and the net debt EBITDA is pretty impressive. Just as you look across the space and you balance organic versus inorganic and you look at the valuations on the inorganic side. Can you accomplish what you want to accomplish part ways organically? Or are there really some areas that you really want to add onto inorganically. You'll just have to deal with the valuations as they are in the market today? Well Kevin, do you want to take a shot at there.

Yes certainly. Look I think there is -- I think we see some nice opportunities. Again these some of the assets that we're looking at are certainly things that are very close to what we've done historically. So from that perspective I think we have a little bit of a unique opportunity and try and do so and manage that. make a lot of sense financially but also a very high quality as far as the quality of the products. And there's certain things that we look at that don't exactly pass our test when we do our diligence as well and certainly keep that in mind. I think that we do have the flexibility to know how the leadership, I would say, to do a lot of things organically and you see that with the investment on our capacity expansion and we do have a lot of opportunities from our existing customer base on things that we are not precluded from an intellectual property perspective. So that will be something we can control. Certainly valuations are at the top end of historical ranges but from our perspective again we're looking at things that are unique to our customers might bring added capabilities probably access if we need them or accelerate our ability to provide mirthless products to our customers in a manner that might be much quicker than trying to do it organically. So it's a balance but I think we can execute both and we're very active and as you could see in both things here and focusing on organic growth and investment as well as several different opportunities and organically that we think big difference to our customers than our overall offering.

Great. And just one last question, when you issued the release on the relationship you mentioned that you are having talks with other folks in the APAC region, is that an area of expansion for you and are you making good progress there COVID and maybe even non-COVID as you kind of expand?

Yeah, it definitely is. And we’re seeing more and more opportunities come up. I think particularly in the COVID area as different countries are making their own investments similar say to Operation Warp Speed here in the United States, so we do expect that trend to continue. And we also continue to see very strong growth in biologic safety testing in Asia-Pac particularly both in the China, Korea and to a lesser degree in Japan.

Yeah. Thanks very much.

Just for your information sales in Asia-PAC were about 14% of revenues for this most recent quarter. And China was about 3.5% of revenue for the most recent quarter.

We have your next question from Tejas Savant with Morgan Stanley. Your line is open.

Hey Carl and team good afternoon. Just to kick things off Carl. I know I hear your comments on the Delta variant and the building consensus for the need for boosters here. But given the vaccine hesitancy we've run into here in the US and to a certain degree in pockets in Europe. Are you seeing that start to filter through in any way in terms of the orders at all from Pfizer?

No. We've seen no diminution of their ordering pattern or the statements about future demand. As I mentioned they're talking about Pfizer specifically is talking about increasing capacity by 1 million more doses or 33% compared to what they expect to finish this year at.

Got it, helpful. And on a somewhat related note do you have any visibility and whether you'd be specked into their flu vaccine. I mean I think they're starting first in human trials at some point in the third quarter. And sort of similar note here on the other biopharma customers you mentioned is investing aggressively in mRNA development programs. Any sort of early read on you know just showing up and winning that business?

Yeah look on the first point I can't really or I'm constrained by confidentiality as to what I can say about my customers programs if they haven't said anything about it. So I'm a limited in how I can respond to that. But suffice it to say that the platform that is being used by Pfizer and BioNTech for their major programs has been proven in the COVID-19 vaccines and it would be extremely unusual to make a change in the 11th hour especially on a program that you were trying to rapidly accelerate through regulatory approval. So I think it's fair to say that we're in a good position there. Let's just leave it with that. And then on the expanding demand for mRNA either components themselves or for the molecules themselves, we have seen an incredible level of activity in our commercial organization. And I think it's fair to say that all the companies whose names are being bandied about is wanting to expand on the field have at some point or another given us a call.

Very helpful. And then one final one on the vaccine, the capping, and enzyme announcement from Aldevron this morning. They talked about sort of a tenfold increase in production efficiency for VCE. In your opinion does this make enzymatic, a more competitive alternative to CleanCap although you do have a simpler workflow here and on a related note I mean just given the purchase by Dan here, do you expect any shift in competitive dynamics to the degree that you overlap with them?

Yeah. That's an interesting question. When I finally saw the press release you were referring to this morning, actually I think was from Ginkgo bio works about their relationship with Aldevron. I have to admit that I wondered what all the fuss was about. So it's from Ginkgo which I think is still a private company for a little while yet that's projecting what something like $150 million in total revenue in 2021. What they basically said is that they helped the one customer Aldevron to scale up one manufacturing process for one enzyme by 10X. There was no data in the release that I saw on the quality or the performance of the enzymes in question either before or after the scale up. There was no indication that this was a -- the scale difference would actually expand total capacity in the industry given the scarcity of some of the needed raw materials that are out there. And there were certain certainly no claim made that this would significantly reduce cost for Aldevron. So I'm -- I'm hard pressed to see how that statement is -- is much more than a press release from a young company accustomed trying to get attention and I -- I don't really know what to make of it. With respect to the competitive dynamics, post the Danaher acquisition, we have an immense amount of respect for Danaher and the way that the DDS is applied to all of their areas including sales and marketing and we will view them as a competitor and a supplier just like many other people are in the industry.

Fair enough. And congrats on the good quarter here, guys.

Well, thank you so much. We have your next question from Dan Arias with Stifel. Your line is open.

Good afternoon, guys. Thanks for the questions. Carl, maybe just a general one on a level of visibility that you have on orders coming in from the mRNA vaccine, guys. I mean do you -- have you been able to gain insight -- additional insight from your supply conversations with them when it comes to just whether or not they're stocking going on for a booster or a pediatric usage or expansion into the third world. Or do orders generally look the same as other orders generally look the same as other orders the way that they did earlier on in -- in the process?

Yeah. That's interesting, Dan. I guess what I would say is that we haven't seen any -- stop -- stop and say differently. Both issues and the increased demand possible for each of those initiatives you mentioned had them discussed by our customers with us as they're thinking about their forecasting. They -- they have I think resulted in clearer 12-month out forecast of what their expectations are. And to us, they reflect the -- the kind of public statements that are being made that we have to expand our capacity, say, by a third in the case of the Pfizer program. So I think all of that is going in the right direction and we're not seeing anybody back off in any way, if that's what you're getting at?

Yeah. That's helpful. I guess I was just trying to just understand whether you have sort of a line of deciding what the specifics of what Pfizer or another party might be trying to do. But I think I get your point there. Okay. And then maybe just secondly, I guess a bit of a technical question, but nothing crazy. I mean as we start to think about expanded usage beyond COVID vaccines and the investment that you referenced, should we consider the performance benefits of clean cap kind of being similar to what you're experiencing today when you -- when you compare legacy or alternative capping approaches to your end? I mean in other words, I think there was like a 3x benefit on yield and the cost was a third of legacy methods when we were going through the process. Is that generally translatable across the board when you think about some of these non-COVID projects?

Well, look, I think any one program or another can have significant differences and what they need to consume in the way have components just based on the process and methods that they're using. So I wouldn’t say it’ll always be static. And I think that it’s fair to say that the benefits, the CleanCap has versus enzymatic having are similar across multiple different programs, whether for vaccines or therapeutics. We're in the process of working out a finishing paper that'll be submitted for publication that shows our experience with these various methods and show some of those benefits which probably will be released sometime later this year.

We have your next question from Matt Larew with William Blair. Your line is open.

Hi, good afternoon. You obviously discussed the great visibility you have in your existing business. Just curious in terms of the new facility in San Diego, you mentioned how capacity has been increased in the biologic safety testing expansion. But how much of capacity in total increase in -- with the investment San Diego. And how much visibility do you have in terms of soaking up that capacity you’re building out?

Yeah, Matt, I don't think I can give you a numerical answer to that, yet. It’s still a little bit early. But think of almost the new facility here in San Diego, as being overflow. So the functions that we move out of our Wateridge facility here will then free up additional space that will be readily converted to additional manufacturing capacity. So that's kind of the right conceptual way to think about it. And then we will have these other support functions, laboratories, innovation centers, as well as some limited pilot plant manufacturing capacity in the new facility. So probably a little bit capacity in the new facility. So yeah probably a little bit too early to tell you until we've scoped it all out and got it down on a piece of paper. But I'd say we may be able to comment more next quarter.

Okay. Fair enough, Carl. And then, Kevin just on the gross margin obviously very strong kind of the quarter and the Protein Detection business you’re divesting here a little bit lower margin. So just want to know kind of an update thinking around the gross margin line long term you alluded today some additional OpEx spending specific on R&D…

Yeah. Yeah. That would be R&D…

…that would be R&D. I mean our gross margins are very strong. As you noted and should continue to be so certainly in the second quarter we had a record production level of output. We sort of to some degree challenged ourselves to see what we could do within the quarter just from a production perspective. And I think that was a very good experience for us. We did a record level of output and it certainly supports some of the previous comments we made with how we could annualize this business to north of a $1 billion of output out of San Diego. And then you layer in I think additional ability to expand that as we are just talking to in the last question, as we kind of move out some of the other research in other areas here to expand what we do here just for pure production. So we feel really good about that. The additional operating costs that'll hit the COGS line for these new facilities isn't much we're talking probably about $5 million on an annualized basis for nucleic acid production and maybe $1.5 million for the new facility for biologic safety testing. So those things will not have a huge impact on the gross margin going forward. And as I spoke to we feel really good about commodity costs right now. Our supply chain teams do a great job. So to the extent the mixed stays relatively the same we're going to continue to see strong margins certainly benefit a little bit by the high strong margins, certainly benefitted a little bit by the high revenues in the second quarter and the unique production that we produced, but overall very stable margins going forward on the gross margin line with some of those added costs which we had pretty small.

We have your next question from Katie with Credit Suisse. Your line is open.

Hi. Thanks for taking my question. On the plasma DNA side, can you provide an update on how that is ramping our tracking relative to expectations? And it is still largely used to support internal operations or have you begun marketing that more so to customers? And then we've seen several investments there on the plasma DNA landscape over the past year. How are you thinking about your competitive positioning there and expectations on investment going forward? Thanks.

Yeah. Thanks for the question, Katie. And yes, the program is tracking to the initial expectations. We'll see how we've finished the year here over the next four months or five months. Our focus is as you suggested entirely on supporting our mRNA and manufacturing customers so that we can provide them plasma as quicker than they can get them in the open market. And so to the degree that people are putting in plasma capacity for general competition say without thereon, we don't really see that correctly affecting us although it certainly will ultimately make it easier for all of our customers, joint customers to get access to plasma quickly and reliably which is what this is all about.

Okay. Great. And then maybe on the M&A side just digging in a little deeper, can you speak to some of the opportunities that you're looking at in the market? What are your target focus areas and what would the sweet spot be in terms of sizing? Thanks.

Yeah. Look obviously we will be focused entirely now on Nucleic Acid Production, biologic safety as areas of investment. And they are both important I would say that we see more specific opportunities in nucleic acid testing because the nature of the industry and the complex supply chains involved, et cetera. So we're actively looking as we have always been at opportunities there. You will see some that are focused on supply chain rationalization and securitization and that's a word for us. And over time, you’ll also see us expanding in to other parts or other technologies that are used in the delivery of cell and gene therapies as part of a natural vertical expansion. So those are the areas generally speaking. We don't really have any size or limitations or preconceived notions. Certainly anything that would be considered a transformative acquisition is handled or evaluated on a one-off basis that you can never anticipate those and they have generally relatively low probability of coming about. But we actively scan anybody who's got positive EBITDA and a sales track record and we're willing to do deals for small companies and technologies that have promise all the way through to somebody who has anywhere from $50 million to $100 million of EBITDA.

We have your next question from Michael Ryskin with Bank of America. Your line is open.

Thanks for taking the question, guys. Couple of quick ones hopefully. One on the guide for -- the updated guide for 2021, as well as the outlook for the second half. We talked about a number of time in the past of your visibility in terms of purchase orders and some of the you know the bigger customers. But if we look forward from 2Q, especially on the COVID queen cap side of things, it does imply or a bit of a slowdown as you go into the second half of the year. Just wondering sort of could you remind us what's -- what are you building and what are you not building in and sort of just the immediate purchase orders that you have on hand sort of how much conservatism is in that outlook? And I’ve got a follow up.

Yeah. I think there are some natural timing differences with our forecast heading into the year. We always didn't see it going completely flat, not just based on what our customers are asking us to do for them and when they need the product. So look I think at this stage you know I think we should continue to see a pretty steady state moving forward. I know it's a little bit down from the peak we saw here in the second quarter. That can always change as well. This is changing pretty regularly and we pretty much have new information every month as we do our S&LP process and roll up our forward looking demand. But you know certainly as Carl mentioned you know this is a pretty steady state. Our customers are making pretty bold statements with regards to increasing their production next year. You know we're looking forward in our lens, four to six quarters forward feel real good about what we see. Feel real good about our capacity and some of the investments that we need to continue to deliver on increasing revenues. So you know I think that as we sit here today, you know, I think we have a real solid book of what we see now versus what we saw three months ago when we last talked about our guidance. And that's why we're taking it and picking up meaningfully at the midpoint for both COVID and non-COVID related revenues and as well as you know increasing it in contemplation of losing up $10 million at the protein detection business revenues as well. So a little bit of choppiness certainly, but still really strong outlook for the remainder of the year.

And on that point can you remind me. I'm sure Barry's customer by customer and project by project what sort of a standard we time we should think of from when you know when you recognize revenues for CleanCap versus when you know the end customer has got vaccines shipping out the door?

Well I think the best way to think about that is this is very much a real-time operation. So there's really not much between -- not much in inventory in the pipeline. So when we finished product and ship it we believe that it goes into the customer's QA and QC testing right away to prepare for use. And then our customers have disclosed at various points in time that they're running sort of 120 days cycle time and endeavoring to reduce that as much as they can, so that should give you a feel that it's you're probably in somebody arm three or four months later.

Okay. Thanks. And one last if I can squeeze it in on protein detection divestments. Just curious to me give us sort of more insight into sort of how that process came about, was it something you'd been thinking about for some time just gone back the timing of the IPO is still relatively recent. Was it sort of the right opportunity came up and you re-evaluated investment needs elsewhere and decided to sort of pull the trigger?

No idea was we were approached by Thompson Street of their interest in the field. They were credible because they made other investments and immunohistochemistry. We gave max us to some limited amount of information and they step forward with what we thought was a fair valuation.

Thank you. We have your next question from with Baird. Your line is open.

Yeah. So I just wanted to go to your comment on ramping your R&D over the next several years just in terms of programs getting the most attention I guess how much is improving and expanding upon application for CleanCap and other existing products versus pursuing new product categories. And what might those new product opportunities look like

Well, great question. We have several lines of investment and innovation going on and CleanCap simultaneously. They relate to other constructs or they relate to modifications of the broader mRNA molecule produced with CleanCap that can affect its actual translation into proteins in the body. And the success of those proteins and doing what they're intended to do. So multiple threads exist there. Another area of innovation for us is really in process development as it pertains to CleanCap So how can we produce larger and larger quantities of this more efficiently and more consistently with fewer steps. And that's a big focus for us right now both upstream and downstream from where we actually utilize the CleanCap molecules. But then beyond that there's a lot of innovation that happens in our normal nucleic acid business. Independent CleanCap -- with CleanCap Incorporated in it where we're innovating with our customers on what molecules can actually be synthesize successfully, how can they be utilize and how do you modify something that hasn’t worked quite as initially intended. So there is really a number of those things that are underway. We’re also evaluating technologies that can be used for manufacturing alternative technologies and in some cases some really innovative platforms that may extend the reach of our manufacturing capacity and move it closer towards patient care settings where it's important to rapidly be able to synthesize individualized therapies, I’d those say those are probably three major areas.

I'm showing no further questions at this time. Mr. Hart Please continue.

Well, thanks everyone for joining us today. Just to note to please check out our events website. We'll be presenting at several conferences during the month of September. Feel free to call me if you have any questions and we hope you have a great evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.