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

All right. Good afternoon, everybody. Thank you for joining us on day 2 of the Jefferies 2020 Virtual London Healthcare Conference. I'm Brandon Couillard. I cover the tools and diagnostics sector here at the firm. It is my great pleasure to have Avantor with us at the conference this year. Joining us for a fireside conversation, CEO, Mr. Michael Stubblefield. For those of you that are tuning in to the presentation today, please do feel free to e-mail me any questions that you might have, and we'll do our best to work them in to the conversation and the time that we have. Michael, great to see you. Thanks for being here.

Brandon, I appreciate the invite. Looking forward to the discussion.

I guess to just level set the conversation, to kick off, it's now -- we're right at the 3-year anniversary of the Avantor and VWR merger, which I think closed this weekend, 3 years ago. I think that would be maybe a good place to start in terms of if you could offer kind of a quick recap of the strategic rationale of the combination and where the company stands today as far as the integration process. And really, now that you've been 3 years into this combination, what aspects of it have been proven out in terms of it leading to 1 plus 1 equals 3 sort of thing in terms of the strength of your offerings?

Yes, you're exactly right, Brandon. It is 3 years coming up later this week, I guess, is when we closed the VWR deal. And if we go back to the rationale for that acquisition, it was really driven by our interest in continuing to drive our bioprocessing solution forward. In a material-centric portfolio like we have, those specifications for those materials are earned in early phase process development and certainly no later than Phase I or Phase II clinical trials. So being able to access the researchers that are driving these programs at the early phases of their work is really critical. Historically, the majority of the molecules being developed were being mapped by the large pharma. You could probably cover the top 15 or 20 pharma customers out there and be pretty relevant. And I think the proof point to that is the fact that, today, we're specced the more than 80% of the commercialized biologics that are on the market. But that has changed, and it changed probably over the last 5 to 10 years and fragmented to a large degree. Today, more than 80% of the molecules are being developed by pre-revenue companies in disparate labs around the world. And so having access is really a premium. And the acquisition of VWR gives us unparalleled access into the R&D environment and gives us an opportunity to seed our broad portfolio with our customers in early phase discovery, enhances our opportunity to get specced into these platforms before they commercialize. As we sit here now, 3 years post the acquisition, I would say we've exceeded really every milestone that we have set for ourselves. When you look at the strategic rationale, obviously, the positioning was important and the access to the customer is important. And we look at things like pipeline, number of programs that we're working on, the amount of content that we're putting on any individual program. And across the board, we have -- we've been able to fully leverage the access and to position our content preferentially into that channel. From a financial standpoint, I would also say that we've been able to exceed the modeling that we had done early on. Obviously, pre-COVID, we were on pace to achieve kind of a 2-year CAGR of more than 6%. We've been able to expand margins over the last 3 years by more than 400 basis points. Free cash flow has been, obviously, a really terrific part of the story. At the jump-off point we had really negligible free cash flows. And I think on our third quarter call here recently, we said that we were on pace to generate more than $700 million of free cash flow this year. Leverage is down from over 9x. At the culmination of that deal, we'll close the year in and around 4x this year, and obviously generating really favorable earnings. We had, I think consensus for our finish this year is well north of $0.80 a share. And again, at the jumping-off point, that was close to 0. The last point I would mention is as we transition to being a public company as part of this integration, we've been able to advance governance in line with this transition. At the time of the combination, we only had 2 independent Board members, and today, we have 8 and have obviously aligned our governance and compliance processes with being a public company. So we've obviously made significant progress across the board. And I would say, at this stage, we're pretty comfortable with where we're at and looking forward to the next phase of our journey.

You mentioned the bioprocessing business. That's really where I want to kind of start the more focused conversation. I think this has been an underappreciated part of kind of the Avantor portfolio and certainly relative to many of the other well-known peers in this space. You noted your order book on the third quarter in that segment was up over 100% year-to-date, which actually means the third quarter was substantially better than that. How should we interpret that comment? And can you sort of speak to the underlying drivers of that order book growth that you've seen and kind of the components of where that's coming from?

Yes. Biopharma as an end market, as you know, is really important to our business. It represents half of our revenue. And within that, we're going to serve our customers within the R&D environment. That's probably 2/3 of the revenue. And the piece you're asking about here would be the 1/3 of our biopharma revenue, which is oriented to the approved, commercialized platforms that are in the market today, and that represents about 15% of our group revenue. We have a lot of momentum, and we had a lot of momentum in this business even before COVID came about. We've seen that accelerate. Obviously, the majority of revenue today in the bioprocessing space is driven by monoclonal antibody platforms, where we're well positioned with a very robust offering. And that continues to be the case today. That is the lion's share of our order book. Probably more than 75% of this growth in the order book has come in our base business, whether that be in the traditional monoclonal antibodies or I think it's important to point out that the some of the gene therapies that have been approved and are ramping strongly this year are also having an impact on our business. And then certainly, as we have started to transition from early phase vaccine development through to clinical trials and now looking ahead to many of these leading candidates starting to produce vaccines at risk, the contribution of the order book associated with the vaccines is also represented there. Probably 25% or so of that growth would be attributable to the vaccines.

In what areas of kind of the base business do you think you're taking share? From whom? And putting just kind of COVID piece aside, that base business growth is well above even what we've seen from any of the other comps in this space. Just what's kind of the drivers sort of behind that more granularly?

Right. The secret to growing your base business here really starts with your exposure to these platforms in their early phase development. And as we talked about, that was the primary driver with the combination of VWR. And we have significantly enhanced our exposure there, both with -- large pharma continues to be important as well as the biotech start-up community, where we have some really privileged relationships and access points that gives us really broad and deep access into the important customer segment. And with that access, we've been able to, over the last several years, positioned more and more of our offering as we now control the channel. And on an individual platform, we have more content today than we've ever had. And so certainly, that's an element here. I would say the evolution of single-use and the widespread use of single-use is important. Our single-use portfolio is growing more than 20%, has been probably for the last couple of years. And that's a dynamic that's accelerating the growth of our business. And then I mentioned gene therapy. There's been a couple of approvals here over the last year or so that are starting to take hold. And we play a meaningful role in those and certainly starting to see the impact of that. So I'd say it's a variety of factors, including just the efficacy of these therapies and the launch -- the continual launch of new products where we continue to earn specifications. There's a geographic element to this as well. Being positioned like we are to be able to capture growth in both the Americas as well as Europe, but also in Asia is an important part of our model. Despite the fact that only 5% of our group revenues are tied to Asia, that's a little bit misleading in that a significant portion of our bioproduction revenues do come from places like Singapore or in Korea, where we're very well positioned with all of the manufacturers there. And we're obviously seeding what we think is going to be a pretty important growth opportunity in China long term with the investments that we're making there.

If we -- what would be kind of a typical order to revenue cycle for your bioprocessing business? And how do we think about the period over which this bolus of order growth year-to-date might translate into revenue?

Yes. So relative to -- once something becomes an order, and I'm going to give you 2 answers here. Pre-COVID, the lead time for most of our materials would be a few weeks to a few months. I think it's important to note that nearly everything that we do is going to be customized, so very little of off-the-shelf demand. And so our customers would place orders, obviously, well within those lead times. And so we would have order book visibility in this part of the business that would go out 2 to 3 months. That's obviously extended with the increase in the size of the order book here. I would say we're now getting visibility that's probably out into the 6- to 9-month window now. Certainly, part of that is just customers looking to get in the order book and to make sure that they have a place in line here, given the expectation for the wave of vaccine demand that's coming. So that's a little bit of how the order book would work. But in terms of engaging with a customer, sampling products, customizing solutions, how long that process takes, it's a little bit different depending on whether you're talking about the raw material portion of our business or the single-use portion of our business. On the raw material side, you're probably talking a few years, maybe 2, 3, 4 years from the time you first engage to the time that their platform gets approved. Could even be a little bit longer depending on the therapy. On the single-use side, you typically engage a little bit later in the process when they're starting to scale up to commercial manufacturing. And so those can be certainly less-than-a-year type opportunities where you're getting engaged, doing the custom engineering, developing the prototypes and then ultimately commercializing, and that's probably more of a 6- to 12-month process.

To what extent do you think there may be some dynamic to the order book growth, where you've got customers that might be just placing double orders? I feel like I've seen this phenomenon from time to time in the semi market where you might place double orders, and a portion of those get canceled just because folks want to get their hands on as much supply as they can with much certainty to it. Do you think there may be a similar dynamic where a portion of those orders just won't convert to revenues? Or do you feel pretty good that those are like from...

Yes. In our bioprocessing business, given the customized nature of it, once we get an order, it's noncancelable, given that it's all customized. We're -- as soon as we get the order, we're making commitments on our own raw materials. We're making commitments on capacity. And so those become non-cancelable at the point that we receive those and acknowledge those.

You've talked on, I feel like more openly than many others as far as what different types of COVID vaccines could mean for your TAM and your revenue opportunity with mRNA class being the most significant contributor, could theoretically double your TAM. What's your view of the durability of incremental demand from scaling up those mRNA vaccines? Like will they be annual vaccinations, kind of like the flu -- seasonal flu? Or do you kind of see viral vector vaccines that might be just one shot and have fewer cold chain requirements to sort of be the winner? So is it -- sort of thinking about, yes, there will be a bolus in '21 but how durable do you see that being kind of over the 2- to 3-year period beyond next year?

Yes, Brandon, I think that's the answer we're all kind of looking for here. Unfortunately, I don't think it's out there. There are so many unknowns here associated with this vaccine. As you mentioned, there's the 10 or 12 leading candidates. You can probably map to 1 of 4 modalities that are working their way through the pipeline. And obviously, we're encouraged by some of the data that's been released here over the last week or 2 from Pfizer and Moderna that would seem to indicate that maybe we're getting close here to having an emergency approval. But even that still hasn't occurred. As we sit here, we still don't have an approved vaccine. Once it gets into the market or once -- however many of them get approved, get into the markets, we still have a lot of data together in terms of the efficacy, long-term impacts as well as the duration of the immunity and whether or not a revaccination will be required and if so, on what frequency. And ultimately, does an initial round of vaccinations put an end to the virus and it doesn't come back? Or does it become more of an endemic where every fall, we go get our flu shot or COVID shot? We don't know. And ultimately, the answer to that will ultimately dictate the sustainability of any tailwind that we get from this next year. But the mix of technologies is going to be important if they do get approved. They're all very different in their workflow and their raw material and consumables content. And as we've talked about very transparently, as you suggest, they have dramatically different impacts on our business in terms of the potential tailwind that we might see.

Just the thought that Pfizer and Moderna's success had validated the mRNA category altogether and the implications of what that can mean for the pipeline and future commercial approvals, call it, 3 to 5 years out, what's your, I guess, level of excitement just about kind of what it means for that category generally?