Avantor, Inc. (AVTR) Earnings Call Transcript & Summary

All right. Great. That's my queue. Sorry about the technical difficulties. Hello, everybody. Thanks for joining us for the fireside chat today with Avantor. Joining us from the company are Michael Stubblefield, CEO; Tom Szlosek, CFO; and Tommy Thomas from Investor Relations. I'm Dan Leonard, the life science tools, services and diagnostics analyst with Wells Fargo. The format is fireside chat. If you have a question for management, please raise your hand in the Zoom feature or you can shoot me an e-mail, and we'll try to get to you. I'll kick off the Q&A, and welcome team Avantor. Thanks for coming.

Yes. Thanks for having us here today. Certainly excited to be part of your conference today. We're all getting used to a new format here.

Sure, sure. It takes some time.

So Michael, I guess, what's high on everyone's minds right now is COVID, of course. And you guys touch COVID response across a number of different areas of your portfolio. So can you elaborate on that, elaborate on the various COVID-related opportunities across the Avantor portfolio?

Yes, Dan. Maybe the best place to start here is to take you back to where we were at in the second quarter. We talked about 500 to 600 basis points of tailwinds in our second quarter results really comprising 3 main areas. Roughly half of that tailwind came in the testing and the diagnostics space. We have a pretty comprehensive solution that would support the sample prep workflows for the PCR tests. And we also have a fair bit of content on the antigen-based serological tests, both raw material content as well as our channel actually distribute some of those kits. We had maybe another quarter of that tailwind in the area of PPE, and we provide a pretty comprehensive solution there for -- primarily for the production workers in a biologic plant, making various therapies. And then certainly, our bioproduction offering is benefiting from increased demand associated with the vaccines that are being pushed through clinical trials and working their way towards approvals. And so collectively, those are the 3 areas that are probably benefiting the most for us from the current pandemic. Now as we've moved from the second quarter into the third quarter, we certainly still are benefiting from those same tailwinds. But I would say, the mix of that is probably altering a bit as we move into the quarter. Testing seems to have hit a bit of a steady stake here, at least in the U.S. where we're seeing maybe somewhere in the order of 550,000 to 600,000 tests a day. And so the steep ramp that we experienced in the second quarter has probably moderated a bit. PPE continues to run well above historical levels, but continues to be constrained. I think the bottleneck has moved from masks to now more gloves and garments, which is constraining some of the upside opportunity there. And then the -- I think probably the most exciting piece for us would be the bioproduction exposure that we have to the various modalities that are working their way through the clinical trial process. We're seeing certainly some modest impact to the business in the -- as we work our way through the third quarter. But given the number of doses for the various platforms that are being produced for the clinical trials, which any one of these trials is roughly 30,000 volunteers and requiring maybe a couple of doses. So you're talking maybe 60,000 doses per candidate, which we're helping to support. But the real lever here would be for any of these candidates that get approval and move into full production, which I know we're all anxiously awaiting that point. And when that happens, just given the broad nature of our portfolio and its relevance across the 4 key modalities that you see in the front and maybe even the second running candidates here, we should benefit from any of these that ultimately get approved then hopefully later in the year here with any lock here, we'll be supporting the ramp of those.

And Michael, how would you encourage investors to think about framing the size of the opportunity for Avantor across depending on the modality and any other way you'd frame it?

Yes. I don't know that we have a whole lot more information than what we talked about on our call at the end of July. Unfortunately, it's a pretty good -- wide range of outcomes here, depending on which candidates make it through, which is linked to the modality and then the number of doses that are ultimately required by the global population. And I think the way we framed it is kind of independent of which producer or customer you're talking about. If you're just looking at it from a modality standpoint, on the low end, if everything were recombinant protein vaccines, that's probably the technology that would have, what I would call, maybe the lightest bill of material, the lowest raw material requirements. And that would increase our addressable market incrementally, I would say. On the other end, if everything were mRNA based, which is probably unrealistic to think that any one of these technologies is going to be the only one that prevails. But if you make that assumption that it were all mRNA, that's probably the other bookend. That's the heaviest bill of material and would have the most content on it. And if you run a scenario that maybe you're producing 8 billion doses or something in that magnitude, you come close to doubling the addressable market for our business. And so it's a pretty wide range of outcomes, which makes planning a little bit difficult. But the way we are addressing that, we have stood up a war room that has all the relevant functions represented in there that meets daily and are running some pretty sophisticated simulations, trying to model the mix of outcomes that could occur here and what technologies would be required and what materials would be required so that we can then be planful about what the raw material requirements will be, where our bottlenecks could be from a manufacturing standpoint, so we can start to move and get ahead of the curve here and support as much of the demand as we possibly can. But ultimately, we're not really going to know until you start to get approvals and you start to see the number of doses they're going to need to be produced.

And what specifically do you offer that you had flagged to investors to be mindful of when it comes to the mRNA manufacturing process? Are we talking about buffers? Are we talking about some of the chemicals that would be sloshing around during the lipid nanoparticle process? Like what specifically would you flag?

Yes. So we're going to have quite a number of materials that are going to find their way into those technology platforms, ranging from our chemicals and ingredients all the way through to our single-use offering. But maybe to just give you one example, there's going to be some cholesterols that are going to be pretty important in the delivery of that technology, which would be one of the core products that we would be providing, which would be responsible for delivering the virus to the patients.

That's helpful color. So moving along from that, can you mark us to market on what you're seeing across the various regions and customer end markets that Avantor serves?

Yes. I think we're obviously kind of working our way through this real-time here and adjusting to a pretty dynamic situation. I think we're encouraged that we've continued to see incremental improvement in kind of the base of the core business, which is kind of returning the business into a growth stage here. I think at the end of the second quarter there, we gave a little bit of color on what we saw in July and kind of flagged flat to low single-digit performance in the month of July. We've now got the benefit of having closed July and work our way through August and into September. And certainly, we not have a little bit better visibility on the quarter, July came in at the upper end of what we signaled and we've seen that carry forward into the early days of September here. And although I don't have an exact quantification for you on the tailwinds, they're probably somewhat more moderate, at least how I see it today than what we reported in the second quarter as PPE and testing has kind of plateaued a bit, and we're waiting for the vaccine piece to really kick in as something gets approved. But our base business has improved pretty meaningfully. And by end market, I would call out, we've seen a nice recovery in the university academic setting as researchers will return to the bench in a significant way. You recall back in April, we were probably off in that part of our business, which is roughly 15% of our business, nearly 50%. And while we're not back fully to what I would call a normal demand environment, we're a lot closer, both in Europe as well as in the U.S. And one interesting observation here is, although the number of researchers in the lab are still well below full run rate or full capacity, the productivity coming out of the lab is higher than what you would have anticipated, given the number of researchers in the lab. So our revenue is probably running ahead of what we would expect, given the capacity in the lab itself, which is a nice trend. The K-12 market here in the U.S., which we have some exposure to, given the number of schools that are working virtually, we haven't really seen much recovery in that part of the business. Similar trend in biopharma R&D is in the university setting. We've seen a steady return of scientists to the bench and a steady recovery of that business. It was never anywhere near what the academic piece was, but was more flattish. In the second quarter, we've seen that return incrementally. And then I would say just in the broad category of elective procedures, which would impact our health care business, which is roughly 10% of the revenue, we've seen steady recovery of the number of elective procedures impacting our biomaterials medical implant business. And I would say, the other half of that platform, which is our kind of core health care offering to hospitals and clinics and other point-of-care facilities, I think by and large, that business seems to have fully recovered to the normal diagnostic work that you would normally have expected outside of COVID seems to have come back. And we've had some nice wins in that area, building on the strength of our supply chain. And I think picking up share from a few others who -- supply chains have struggled a bit to keep up in this environment. So we've actually seen some nice growth in our health care platform. And then lastly, if you look at our applied business, the half of that platform that's somewhat defensive, growth-oriented and somewhat insulated from the macro fundamentals has continued to perform well. And I would say, we've seen somewhat modest improvement in more of the GDP elements of that platform. And I think it's going to take a much broader economic recovery for those to get back to where they were at pre-COVID, but they're certainly stabilized. We're seeing some modest recoveries in pockets. And it's roughly 10% of our business, so not a meaningful contributor to the top line at the moment. From a regional perspective, I would say the dynamics between Europe and the U.S. are similar. Europe's recovery is a bit ahead of where we're at in the U.S., but we've seen really nice recovery there in the university sector. Still not back to normal, but very close, very strong biopharma growth. And so the trends between Europe and the U.S. probably looking pretty similar with maybe Europe being a little bit ahead. And then Asia, we ended the quarter well in the second quarter, and we've seen the business continue to perform well in the third quarter.

Okay. One clarification. You mentioned on the flat to low single-digit messaging around July, which continued into August. That was for total co., right? That's not the base business with co., that's a separate total company.