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

All right. Good morning, everybody. Welcome to the JPMorgan Healthcare Conference. I'm Tycho Peterson. It's my pleasure to introduce our next company this morning of Avantor. For those that want to ask questions, there's a submit question function on the website. And with that, let me turn it over to Michael.

Thank you, Tycho, and good morning, everyone. I appreciate your interest in Avantor and certainly excited to kick off the new Year here at JPMorgan Healthcare Conference to tell you about the company and our mission and how we set science in motion to create a better world. Joining me today will be Tom Szlosek, our CFO. And following my presentation, Tom and I will be glad to take your questions as Tycho suggested. If you follow along with me here on the slides that we posted, we'll get started on Slide 2. Cover the legal disclaimer here. I need to remind you, obviously, that we will be providing forward-looking statements, which reflect our current views but aren't necessarily guarantees of future performance, and I also need to remind you that the presentation contains certain financial measures, which are not prepared in accordance with U.S. GAAP, and we've got a reconciliation of any of these non-GAAP measures in the appendix to the presentation. So I'll let you read the rest of the disclaimer. I'm now on Slide 3. As it's been an incredible year and has demonstrated the potential to achieve breakthroughs in life sciences has never been greater. New therapies are emerging and enabling us to treat some of the most challenging diseases that we all face, including COVID-19 and Avantor is very well positioned as a critical player in this endeavor. And everything we do is tied to our unique mission of setting science and motion to create a better world. As Slide 4 shows, we've undergone a significant transformation since acquiring VWR in 2017, organic growth has doubled, driven by our integrated offering to biopharma, which represents approximately half of our revenue. Margins and overall profitability have also increased substantially, fueled by a considerable step-up in the proportion of revenue coming from our higher-margin proprietary offerings. Through the combination of proceeds from our May 2019 IPO as well as organic growth and free cash flow generation, we've also been successful in rapidly deleveraging our balance sheet, and we remain on track to achieve our target leverage range of 2 to 4x. Our governance and ownership have also evolved. We currently have more than 90% free float in our shares, and we've adopted a best-in-class public company governance structure. And the transformation we've driven over the last 3 years has positioned Avantor as a global life sciences leader. And as you can see on Slide 5, our positioning is supported by the scale and the relevance that we've achieved. We're now a Fortune 500 company with over $23 billion in enterprise value. And with nearly 70% of our revenue earned in life science applications, we have more exposure to life sciences than any of our peers. And our successful penetration of market leaders is a proof point of our relevance. It's never been a more exciting time to serve this space, that COVID-19 pandemic has underscored the importance of science to our society. And Avantor has the scale and the resources to capitalize on the opportunities in this thriving industry. Turning to Slide 6. Avantor is deeply embedded in virtually every stage of the most important research, scale-up and production activities in the industries we serve. Our model is grounded in supporting our customers' early phase discovery activities. And we serve as a one-stop shop in providing scientists all that they need to conduct their research. Our customer-centric innovation model enables us to provide solutions for some of the most demanding applications. And we leverage our access to the early-stage work to seek content and solutions that ultimately become specified into our customers' approved production platforms. Our broad portfolio of products and services and our fully integrated business model enables us to support our customers' journey every step of the way. Avantor's distinctive capabilities are outlined on Slide 7. I'll start by highlighting customer access. Our global footprint and infrastructure enables us to serve more than 225,000 customer locations in more than 180 countries around the world. We have 11 innovation centers that enable extensive collaboration and customization, both critical elements for serving highly regulated specification-driven applications. And our portfolio includes more than 6 million products and services, including high-value specialty products developed to exacting purity and performance specifications as well as a broad assortment of consumables, equipment and instruments. And our proprietary brands such as J.T.Baker and NuSil are the gold standard in the industries that we serve and have been specified and trusted for decades. Our e-commerce platform makes it easy for customers to do business with us. And enables digital marketing efforts that position us to capture new demand. And all of these capabilities are underpinned by our Avantor Business System, which drives execution and continuous improvement. Slide 8 provides a revenue profile of our business across several dimensions. Approximately half of our revenue comes from proprietary branded products and is supplemented by innovative third-party offerings, from our critical supplier partners that enable us to provide comprehensive workflow-driven solutions to our customers. We serve 4 end markets that feature similar characteristics, including high regulatory oversight, and complex development processes. And as I mentioned earlier, approximately 70% of our revenue is in life science applications in end markets such as biopharma and health care, and no single customer represents more than 3% of our revenue. We have a leading position in the Americas and in Europe and have a growing presence in AMEA, driven by our ongoing investments in core biopharma hubs like Singapore, Korea and China. And the end result is a proven, highly recurring revenue profile. You may have seen our press release this morning announcing our estimated sales and cash flows for the fourth quarter. These results are preliminary and will be refined when our year-end audit is completed. As shown on Slide 9, we are estimating approximately 15% organic growth for the fourth quarter, reflecting a combination of sequential improvement in the core business, and continued momentum from our COVID-related offerings in diagnostic testing, PPE and vaccine development and production. Free cash flow in the quarter is expected to be greater than $270 million, which will bring our full year free cash flow to more than $850 million compared with $302 million in 2019. Our focus on working capital and the success we've had in reducing our interest and tax payments -- tax expense is paying off. We'll provide a more complete view of the fourth quarter and full year during our earnings call in early February. But our preliminary results underscore the relevance and value of our business model and reflect how well our team has executed in a pretty challenging environment. Our framework for creating long-term value is outlined on Page 10. I'd like to take a moment to cover that. Our relevance in the attractive end markets we serve positions us for mid-single-digit organic growth, and our track record over the last 3 years supports this. We have a number of levers, including volume leverage, commercial execution, product mix and ongoing productivity that will drive annual EBITDA margin expansion of 50 to 100 basis points. The growth in our operating profits, along with ongoing reduction interest and tax expense, will support net earnings growth in the mid-teens. We've also -- we're also excited about the optionality we've created in our capital allocation as our cash flows have strengthened, and we have deleveraged our balance sheet considerably. And this entire value creation framework is underpinned by the Avantor Business System. Turning to Slide 11. I want to provide some additional context for our organic growth algorithm. We serve large growth-oriented end markets. Collectively, we have a total addressable market size of over $75 billion that in aggregate is growing mid-single digits. Biopharma is the largest end market we serve, representing 50% of our revenue with high single-digit growth. We derive approximately 10% of our revenue from health care, with roughly half of this coming from our NuSil branded silicones platform, which is widely used in the medical device industry. The other half of the revenue comes from hospital and point-of-care facilities as well as clinical and reference labs and includes our diagnostic related offerings. Education and government represents 15% of our revenue, with our exposure to university research labs comprising approximately 2/3 of this. Advanced Technologies represents about 1/4 of our revenue. With approximately half of this in growth-oriented production platforms in defense, semiconductors and electronics, with the other half coming from GDP-driven end markets such as chemicals, oil and gas, ag and food and beverage. While each of our end markets is unique, the way we serve them is similar and is reflected in our business model, as shown on Slide 12. As I mentioned earlier, our model is grounded in supporting our customers' early phase discovery activities. This is the foundation for each end market we serve and a core driver of our organic growth. By starting where science begins, we establish ourselves as a critical innovation partner and embed ourselves into our customers' discovery processes through our collaborative approach and customizable solutions. Our unparalleled customer access is an important differentiator, given the importance to our model of engaging with researchers in early-phase discovery. Our extensive quality systems, deep regulatory expertise and GMP manufacturing capabilities enable Avantor to scale up with customers as they secure regulatory approval and move towards commercialization. And getting specified into our customers' production process gives us the opportunity to serve these commercial platforms throughout their life cycle, making the revenue quite sticky. Given the high growth of these platforms, this is a critical element of our growth algorithm. On Slide 13, I want to highlight how this integrated model works in our largest end market, biopharma. We are positioned across the entire biopharma value chain from research and product development to clinical trial support and ultimately, in the commercial production of approved vaccines and therapies. As complexity increases, drugs are increasingly defined by the process, not the product. Avantor's value proposition is uniquely suited to meet the needs of drug developers, and were an integral part of our customers' development pipelines. In research and product development, our access to more than 225,000 customer locations positions us to work with market leaders as well as early-stage start-ups that are driving the majority of development activities, for new therapies and treatments. Our broad portfolio of chemicals, consumables, services and equipment enables a one-stop shopping experience for all of their scientific needs. And through this access, an early-stage collaboration, we see future bioproduction revenue as this is where material specifications are earned. And additionally, our more than 1,400 on-site service associates extend our reach and enable another high-touch access point. In clinical and biorepository, Avantor offers a range of scale-up and clinical trial services to support our customers' commercialization efforts. Custom kitting and packaging is available through our Therapak brand, and we offer equipment and ancillary supply management services through our MESM brand. We also offer highly regulated biorepository and archiving services under our EPL brand and recently announced the opening of our newest facility in Germany. At the end of the value chain in bioproduction, this is the fastest-growing part of our biopharma business, and customers rely on our support to move from lab-scale formulation to optimize commercial manufacturing. Our comprehensive offerings position us to serve complete workflows within our customers' manufacturing process from upstream, downstream and through final fill and finish with a broad range of GMP materials, including single-use offerings, and highly characterized chromatography resins. We have a robust pipeline of opportunities across all modalities, including bioengineered vaccines that are relevant to COVID-19, monoclonal antibodies and cell and gene therapy. Turning to Slide 14. Our track record of expanding EBITDA margins is strong. We have driven over 400 basis points of expansion in the last 3 years, and we are confident in our ability to exceed 20% EBITDA margins within the next 3 years. Our Avantor Business System, or ABS, underpins everything we do, and we use it to rigorously execute our strategy and operating plans. ABS provides our more than 13,000 associates, a common framework for growth, productivity and leadership and emphasizes database decision-making, process rigor and standardization. There are several important levers that we rely on to drive margin expansion. Firstly, we realize efficiency benefits as our organic growth drives higher utilization of our fixed infrastructure. In addition, robust pricing discipline, including tight controls to manage inflation and value-based pricing mechanisms, further enhances margins. Product mix benefits, driven by stronger growth in our proprietary offerings for our production platforms and especially biopharma production, are also expected to continue. Additionally, our continuous improvement culture yields ongoing productivity initiatives across our commercial, supply chain and back-office functions to offset fixed cost inflation. We also anticipate using M&A to further enhance margins as we will specifically target higher-margin proprietary content to enrich our current product mix and will leverage existing infrastructure and our channel to deliver revenue and cost synergies. The third element of our value creation framework is continued strong EPS growth. As shown on Slide 15, we've been able to grow adjusted EPS from $0.10 on a proforma basis in 2017 to consensus estimate of $0.84 in 2020, 100% earnings CAGR over the period, fueled by strong EBITDA growth, more than $300 million in VWR integration synergies, significant reduction in interest expense as well as improvements in our tax rate. Continued conversion of organic revenue growth to EBITDA in the range of 1.5x to 2x, along with an ongoing reduction in our interest and tax expense, will drive mid-teens EPS growth over the long term. Of note, this EPS growth outlook doesn't consider the impact of future M&A activity. On Slide 16, it is clear that we're really hitting our stride with free cash flow. In 2 years, we've grown free cash flow by 5x. This performance is particularly noteworthy given the pandemic and will enable a shift in our capital allocation. And this performance is no accident. Our capital-light model and disciplined approach to working capital management yields free cash flow conversion well above 90%. Our teams are incentivized with a working capital metric in our annual bonus plan, and we leverage the Avantor business system to drive execution. Despite the gains we have made in recent years, we believe we still have room to improve, and working capital will remain an important area of focus for us. Free cash flow has also benefited from the work we have done to reduce our cost of debt and income tax rate. In 2020, we completed several debt repricing and refinancing actions that have permanently reduced our interest payments by more than 50%. And our interest expense will be further reduced by our ongoing deleveraging. With this reduced interest burden and virtually no principal repayments required for the next 5 years, we're planning for a significant shift in our capital allocation from debt service to M&A moving forward. And as you can see on Slide 17, we have a tested and proven history of M&A success with transactions that range in size from small tuck-ins to large transformational deals. Since 2011, we have successfully completed 40 deals, deployed more than $8 billion in capital and generated well over $350 million in EBITDA synergies. We have the capacity to continue this successful track record and an excellent team in place that is focused on collaborating with our business leaders on our opportunity pipeline. We're most interested in acquisitions that will enhance our portfolio of proprietary offerings with a strong bias for assets in biopharma production, services and research. We will also prioritize deals that are accretive to organic revenue growth and EBITDA margin, yield high single-digit returns and that support rapid leverage recovery. As I move beyond our long-term value creation framework, I'd like to address a few other important topics. On Slide 18, we highlight our role in helping to end the COVID-19 pandemic. Although all of our manufacturing, distribution and R&D facilities have remained open, the pandemic has created some headwinds for our business, most notably in the second quarter, that continue at some level even today in our education, health care and within some segments of our applied materials markets. While demand in our K-12 and university segments continues to improve, we haven't yet to return to growth. Similarly, reduced demand for routine medical procedures, including elective procedures, persists. Despite these headwinds, we have embraced our critical role in providing solutions and services to support COVID-19 testing workflows, head-to-toe personal protective equipment, and customized materials needed to develop and produce vaccines and therapies. Our diagnostic offerings cover all 3 main workflows, including PCR, antigen and serological-based testing, and our broad portfolio of safety equipment is being supplied to R&D labs and production suites in all of our core end markets. We're deeply involved in the development and production of therapies and vaccines. We're relevant in all vaccine modalities, including mRNA and viral vectors that have already received emergency use authorization in several countries around the world and are supporting various government-sponsored initiatives, including Operation Warp Speed, here in the United States. While the many uncertainties associated with the current pandemic make it impossible to predict the impact on our 3 COVID-related product areas, I want to provide some context for potential revenue scenarios. In 2020, we realized approximately $250 million to $300 million in COVID-19 related revenue, largely driven by our diagnostic testing offerings. In 2020, we expect modestly higher overall COVID-19 related revenues, but with a mix more weighted to our vaccine-related offerings. Accordingly, we would anticipate more modest revenue from diagnostic testing as vaccines become more widely deployed throughout the year. Moving to Slide 19. I would like to emphasize Avantor's commitment to sustainability. In 2020, we aligned with United Nations Sustainable Development goals and formalized the initial framework for our sustainability program that is naturally connected to our strategy and aimed at having a positive impact for all of our stakeholders. Earlier in 2020, we published our first benchmark report and improved disclosures in a number of areas. Going forward, you can expect to hear a lot more from us on this topic. Consistent with our ABS principle of continuous improvement, we will accelerate our efforts through a series of new goals, and reporting improvements, many of which are highlighted here on Slide 19. Of note, we're committed to increasing the diversity of our management team and have set a goal to improve gender and ethnic diversity and leadership roles across our business. We're also committed to reducing our environmental footprint and expanding our product and services portfolio to support our customers' efforts to improve the environment. We'll share more information about this important sustainability work throughout 2021. Turning to Slide 20. You may recall that we withdrew our 2020 earnings guidance due to the extraordinary uncertainties and volatility created by the global pandemic. Although a path to resolving the pandemic is starting to take shape, significant uncertainty remains with lab utilization, diagnostic testing volumes and vaccine production, distribution and ultimately adoption. Nevertheless, we would like to share some perspective on potential revenue ranges for 2021. In 2020, our core business grew approximately 1% to 2%. We consider a mid-single-digit run rate a reasonable baseline for core revenue growth as we start the new year, and it should be even higher as we move into the second quarter, where the year-over-year comparison becomes significantly easier. As we head into the back half of the year and especially the fourth quarter, the growth comparisons become even more challenging. Based on this outlook for our core business, together with potential range of COVID-19 tailwinds I described earlier, we are currently projecting a 4% to 7% organic growth range for 2021. We will share any further perspective that develops as part of our fourth quarter earnings release on February 3, and we'll, of course, update you as we move through the year. Now as I conclude my presentation on Slide 21, I'd like to reiterate that Avantor is a global life sciences leader that is well positioned for growth. Our scale and extraordinary customer access embeds us in the workflows of a sophisticated exacting customer base. Our collaboration-based innovation model and ability to serve customers from discovery through scale-up and commercial production differentiate us from our peers. We have a strong financial track record of growth, cash generation and deleveraging, enabled by the Avantor Business System. We have a sound framework for creating long-term value and have demonstrated our ability to delever -- deleverage organically and successfully integrate acquisitions to enhance our capabilities and deliver synergies and operational efficiencies. Importantly, we're excited about our future. Our business is well positioned for growth, and our capacity for M&A offers incremental opportunity to further enable innovation and scientific breakthroughs. Thanks again for your interest in Avantor, and thank you, Tycho, for the opportunity and invitation to present. Look forward to taking your questions.

Great. Maybe I'll start, Michael, with the pre-announcement. I'm just wondering if you could provide any more color on latest trends in light of COVID flare-ups. I know you talked about, I think, core growth of 1%. So a notable sequential improvement there plus COVID tailwinds. But can you maybe give a little more color on how 4Q played out?

Yes, happy to share a little bit of context. So I just kind of provide maybe an umbrella comment that we're still working through the close and the audit and we'll obviously be prepared to get into a lot more detail in our February 3 earnings call. But we're far enough through the close, obviously, to give you some guidance around top line growth of approximately 15%. And as I mentioned, we're still working through all the detailed analytics on that. But it feels like core growth probably has moved sequentially from kind of the 1% to 2% that we saw in the third quarter to probably exiting the year closer to mid-single digits, which would imply kind of a high single-digit contribution from the COVID tailwinds. So we've seen a nice improvement in all of our end markets. We still have some headwinds in areas like education and certain parts of our health care exposure, namely some of the elective procedures. And not all of our industrial markets are back at pre-COVID levels. But certainly, nice momentum building in the core business as I think most of our customers are starting to figure out how to operate in this new normalized that we're -- from a COVID perspective, as we think back to the second and third quarter, most of our tailwinds were driven by our solutions for diagnostic testing with more modest contributions from PPE and the work we're doing to support vaccine development, not through all of the analytics yet for the fourth quarter, but certainly, we'll have seen a much more significant impact and shift towards the vaccine production. As we talked about on our third quarter call, we were already starting to get orders at risk for production quantities that we were expecting to deliver in the third -- in the fourth quarter, which we certainly did. And as anticipated on the back end of some of these emergency use authorizations, we've continued to see a build in our order book as some of our customers now have line of sight to their production plans going forward. Testing volumes certainly accelerated in the fourth quarter and the impact on our business would certainly be on par with what we saw in the second quarter, if not higher.

And on -- you noted the at-risk production, what percentage of the vaccine doses do you think at this point have been produced at risk? Is it still in the kind of millions?

Yes. It's hard to tell when we're supplying in bulk, so we don't exactly have line of sight to that particular order, corresponding to a certain number of doses that are being produced. But the early orders that we were getting were obviously from the customers who had candidates that were in advanced clinical trial stages where the probability of getting approval was pretty high. So you can link that to some of the customers that are out with authorizations today. And now as we start to see some of these, both in the U.S. as well as in other parts of the world, move forward with authorizations, I'm sure we've transitioned from at risk to full-scale production at this point.

And then as we think about the longer-term outlook, the 4% to 6%, as you noted, I think, on Slide 4, you've been at a 6% CAGR the last couple of years. Your guidance for this year is 4% to 7&, could 5% to 6% be the new norm? And 4% to 7% seems a little bit conservative based on what we know. Obviously, you've got the tough comp problem as you highlighted. So what are kind of the gives and takes to the outlook for this year? And then how do we think about the longer-term outlook, is 4% to 6% still the right bogey?

Yes. I think as we've said all along, as our exposure currently sits with our core businesses, we're pretty confident that we can do 5-plus percent growth in the core. So that is in line with kind of a mid-single-digit growth algorithm. COVID presents kind of an unusual opportunity. We experienced, as I mentioned, $250 million to $300 million of tailwinds from our solutions in 2020 and we would anticipate modestly higher contributions in 2021 from that. But we're in a pretty uncertain environment still. Infection rates are at an all-time high. It's unclear how many doses will ultimately produce and maybe even more unclear how many will be taken. And it's uncertain what the correlation to vaccine deployment and diagnostic testing will play out. I think there's at least one school of thought that says, as you start to get closer to herd immunity, the diagnostic testing and its contribution could pull back. And so we're obviously looking to get some clarity on that as we as we move through the year. Some of our end markets still do have some uncertainty. So I think as we think about a 4% to 7% signal moving into 2021, I think it reflects kind of the current run rate of our core business that we see. And then we think it also takes into account some of the uncertainties and variables that are in play here relative to the pandemic that we're working through.

One that came in from an investor, which is an interesting one is, how do you differentiate when you're out in the market relative to your peers, Thermo, Merck KGaA? Is it strategy? Is it product mix? Is it culture? How do you differentiate?

Yes. I think there's probably 2 or 3 key things that characterize our model. Firstly, it's access. I can't underscore that enough. The access that we have to early-phase discovery activities is so critical to our integrated model where we're ultimately looking to secure specifications in that early phase discovery and development that will scale and enable us to realize some really sticky revenues on the production. And so being able to provide our customers an integrated end-to-end experience and support them with the same quality systems and same productions and GMP manufacturing, when they're doing the early phase discovery as well as when they're doing their full-scale production is a critical enabler for us. Our ability and willingness to customize is probably another important differentiator that I would highlight. When you look at our portfolio of -- that is predominantly material centric, the ability to customize at the scale that we do so gives our customers tremendous flexibility in how they can tune their systems to drive efficiency and yield and performance. And I think the last element that I would probably highlight here is just convenience. We try to make ourselves pretty easy to do business with. And that's everything from broad product choice and a broad portfolio to choose from that kind of enables this one-stop shopping mentality, a transactional platform and e-commerce platform that makes it really easy to facilitate the buying process. And ultimately, a supply chain that allows us to get products anywhere in the world in a 24 to 48-hour basis. I think are probably the 2 or 3 things that I would highlight, Tycho, is what differentiates us and what creates the most value for our customers.

Great. Another one that came in was just on kind of the industrial exposure, thinking about the year ahead. How are you thinking about the outlook there and any risks to that part of the business?

Yes. So as I highlighted in my presentation, roughly 25% of our business is in the applied markets. And about half of that would exhibit more GDP-type growth dynamics. And that's end markets like oil and gas and petchem, for example. PMIs have been above 50 for the last couple of quarters and continue to be strong. And that has fueled nice sequential recovery. We were pleased at how resilient our exposure to that space was even in the depths of the downturn in the second quarter, those applications were probably not off more than mid- to high single digits and worked their way back through the course of the year to -- in and around flat. So we've got a little bit more room to go yet before we would have those growing in line with our historical levels. But it feels like there's momentum, and you just follow the PMIs around the world that would sort of indicate that we could continue to see some sequential improvement moving through the early part of this year.

Another area we get a lot of questions is just on the biopharma, bioprocessing part of the business. I think you talked about last quarter, the bioprocessing order book doubling through September and 75% of that was not tied to COVID. Can you maybe just talk about how you think about the backlog and the order book going forward?

Yes. Unfortunately, the momentum has continued and not necessarily unanticipated either. We had fully expected that the initial orders we were getting for vaccines, were being placed at risk just to cover the lead time associated with our customized materials, which is probably on average a couple of months. And one, when our customers started to get authorizations, they can then more formally plan their outward production and start to place more meaningful orders to cover the ramp that they were driving and expecting to realize. And so on the back end of the authorizations, our order book has continued to build, and it probably stands exiting the year relative to where -- it started 2020, probably on the order of 3x, if not greater, and continuing to build daily.

Do you think -- where do you think bioprocess can go in terms of exposure to 15% of the business today? I mean, could that get to 25%, 30% over time? How do you think about that?

Well, a couple of key things to think about here. One is the fastest-growing part of our portfolio. The bioproduction part of our portfolio, which is about 1/3 of our overall biopharma exposure. And as you suggest, about 15% of the group revenue, is growing double digits. And it's probably moved from kind of the low double-digit to mid-teens level to even higher than that as we exited the year. And so having organic growth at those levels is certainly going to move that positioning within our portfolio. The other thing that will certainly drive this as well is M&A. As I highlighted in the presentation, our capacity for M&A has increased dramatically as we've moved through the last 3 years. And that would be squarely on our radar for the coming year here. And we'll clearly have a bias for adding proprietary content to our bioproduction platform that would even further enhance the proportion of revenue coming from this important platform.

Maybe do you want to elaborate on the M&A framework, how we think about the size of the deal, you could potentially do or if it's a string of pearls bolt-ons? How do you think about the ability...

Yes. Let me bring Tom on the discussion here. Tom leads our M&A activities, and happy to have him share a perspective with you on that.

Yes. I think, first of all, and thanks, Tycho. Happy New Year. The -- I look at it from both the capacity and capability perspective. The capacity, as Michael showed, is immense. We had $1 billion-plus in the slides, it's probably closer to double that without doing anything from an equity perspective. So certainly, we -- with where the balance sheet is now much better positioned than we were a year ago. Secondly, from a capability perspective, we've got a team. We've built a team. They're very linked with all the businesses and business leaders in their strategy, and that has helped us to develop a pipeline of opportunities in each of the businesses. We -- as Michael said, we'd probably be most interested in biopharma production, as you mentioned. But there certainly are other areas. Services is interesting. And the research workflows that we don't necessarily participate in fully today would be good opportunities like genomics as an example. From a return perspective, we're very disciplined. We've agreed with the Board in terms of the quantitative expectations, and Michael went through those. And last thing, I'd say that you could see a range, but I -- a range in terms of size of deals. But I would fully expect that the first -- initial full array will be tuck-in type of deals that are 1% to 2% of revenue.

Great. And Tom, as long as we have you, a question on kind of EBITDA margin expansion and levers. I mean, should we think about kind of 50 to 100 basis points this year and are things that could kind of get you above that for the current year?

Yes. I think we have to have a balanced perspective on that. Certainly, we were on the higher end in 2020. I think when we publish our final results, you'll see that. And so there are some puts and takes going into the next year. I'd say the things that just keep in mind from things that are headwinds would be the way we've operated. We've largely been working from home. There's been very limited travel, T&E and those kinds of expenses. So you've got a little bit of a holiday on that in 2020. When that returns, I don't know, we've kind of planned it as of sort of July 1, you'd see some of those normal operating costs come in. But I think balancing that, more than balancing the scales are the initiatives Michael talked about. Certainly, that the organic growth is a huge help for us in terms of leveraging our fixed cost base. We've got a fair amount of fixed costs in both distribution, manufacturing and SG&A. So it works to scale for sure. We've done a great job on managing price inflation dynamics. And while there could be a little bit more inflation this year, and we've got our eye on it and watching that closely from a pricing perspective. We've got overall production -- or sorry, productivity initiatives that we expect to help to offset the inflation that we'd see. The last thing I would mention is the work that we're doing on mix. I mean, as the proprietary offerings grow in prominence. Those have a superior gross margin rate for us. So all of those do contribute, and I do think 50 to 100 basis points is a reasonable expectation from where we sit right now.

Got it. And any reason that can't continue for years to come? I mean, is there a natural kind of ceiling on margins in your view?

I think the opportunity to deploy capital is going to be the real accelerant here. I do think 50 to 100 basis points is doable on an organic basis. But certainly, we want to be on the higher end of that on a regular basis. And for us, that means increasing the proprietary content in the portfolio, which we've got some organic investments going on. Michael referred to some of them in the vaccine production area. But certainly, in biopharma production, we've got other organic type investments that we're making that can help with growth. But I think deploying capital towards M&A is also going to be a catalyst here.

Maybe one last one, and I don't know if Michael wants to weigh in on this. But as we think about the outlook for '21, this is an investor question. It's about $150 million or so in COVID tailwinds from vaccine and therapies. How is that relative to the raw material per dose opportunity you've laid out previously? And what sort of revenue capture are you baking in within mRNA modality in particular? And how does that compare to what you saw in the fourth quarter?

Yes, I'm happy to take that, Tycho. So if you look at the data that we shared in the presentation, we've modeled COVID impact in 2021 of, call it $250 million to $350 million plus and the plus really to reflect some of the uncertainty associated with how the pandemic will ultimately play out. And we've tried to give some sense for the shift in mix. And as you've noted, 2021 will be a richer mix of vaccines, maybe a little bit less testing than what we saw in 2020 is how we've modeled that. And so when you look at then what -- how much would be associated with the vaccine, I think it's -- as we look at it, it's kind of in line with what we've been expecting. But you still have to make some assumptions around modalities and approvals and ultimately, production and adoption of the vaccines to see how that will play out. But I think the data that we gave you there is directionally how we see things and we think it's consistent with what we've been expecting all along.

Great. Well, we've hit the end of our slot here. So I appreciate you taking the time and enjoy the rest of the conference.

Excellent. Thank you, Tycho. Appreciate it.

Thanks, Tycho. Talk to you soon.