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

Welcome, everybody, to the Goldman Sachs 42nd Annual Healthcare Conference. I'm pleased to have Avantor joining us today at our conference. We have President and CEO, Michael Stubblefield; Executive Vice President and CFO, Thomas Szlosek; and Tommy Thomas, Vice President of Investor Relations. Welcome, everybody. Thank you very much for joining us.

Thanks, Matt. Happy to be here. Appreciate you hosting us.

Great. Maybe if we'll start out, I'll let you guys set the stage a little bit. It's been a few years since the IPO. I think at the time, you're telling the story of resetting the organic growth rate higher, strengthen the balance sheet, which I believe you've largely achieved at this point, and it's been impressive. So maybe kind of give us a mark-to-market on Avantor today and kind of what you have accomplished over the last few years.

Yes, I think that's a great place to start, Matt. As you know, the integration of our business with VWR and subsequent IPO has certainly created a really strong business. When you look at what we have built here, we view ourselves as a leader in the life science industry with our portfolio and certainly scale to capitalize on some pretty exciting opportunities in this space. And you see that in some of the announcements this week from some of the recently approved therapies. Today, when we look at Avantor, we're deeply embedded in virtually every stage of the most important research and scale-up and production activities in the industries that we serve. Our model is grounded in supporting customers' early phase discovery activities, and we serve as a one-stop shop in providing scientists all that they need to conduct their research. We have a super customer-centric innovation model that enables us to provide solutions for some of the most demanding applications. And we leverage what we view as unparalleled access to our customers and to early-stage discovery work to seed content and solutions that ultimately becomes specified into our customers' approved production platforms. We're proud of the scale and the relevance that we've achieved. And certainly, as you indicated, have made considerable progress since the IPO. Our growth rate has more than doubled driven by our integrated offering to biopharma, which represents about half of our revenue. Margins and overall business profitability have increased substantially, and we realized significant operational synergies and are executing a program to rapidly deleverage the business. At the end of Q1, leverage was roughly 3.5x and certainly within our target range of 2x to 4x. So when we kind of take a high-level view of where we're at, Matt, we're very well positioned. We have a very relevant offering serving growing end markets. We have a very resilient business model and a tremendous track record of execution. And in fact, we are executing on our strategy with certainly a focus on high-growth production applications. With the strength of the balance sheet, as we sit here today, we've been able to deploy more than $1 billion in capital and have significant capacity remaining. Regarding the capital deployment, hopefully, you've seen some of the recent milestones. We successfully closed our first acquisition, RIM Bio, which gives us broad single-use production capabilities in an important and fast-growing region of the world in China. And we've announced the acquisition for Ritter. Maybe just a quick update there. We've cleared all regulatory hurdles. We have the financing in place and would anticipate closing that transaction here in the near term. Certainly, on pace to do that earlier than what we had originally expected.

Great. It's really helpful. And we'll definitely be touching on Ritter and RIM Bio in the Q&A. But maybe just start where I feel like we've started a lot of these discussions over the past year, and hopefully we won't in the future, but just regarding COVID and the related tailwinds. You've guided to about $350 million to $450 million for this year. I'd expect a large portion of that is actually fairly durable though in the vaccine development. So maybe could you talk about the durability of the COVID tailwinds you've experienced. And clearly not necessarily facing the difficult comps that some other peers in the industry are, but just maybe address sort of the durability and how you think about that.

I mean, I think that last one you made is important around our exposure to COVID. It's less than 5% of our total revenue today and certainly a relatively smaller portion compared to many of our peers. We do view the vaccine contribution as durable. It appears to be more of an endemic -- moving towards an endemic scenario with boosters and variants that are going to need to be addressed. Certainly, we have still billions of people on the planet that are going to need to be vaccinated. And we are investing in capacity for raw materials as well as single use, and you've seen that in many of our announcements, to enable us to capture and to position ourselves to meet what we view as a durable COVID demand as well as a surge in growth and demand for our base business. And the vaccine today is probably half of our overall COVID tailwind that we're benefiting from. The diagnostic piece of our COVID tailwind is probably another 40% or so. And as we have said from early in the year, we would anticipate tailwinds from that exposure to decline throughout the year and more precipitously in the second half of the year. And in fact, have had that baked into our outlook from the beginning, and certainly in the updated guidance of 6% to 9% that we provided at the end of Q1 certainly contemplates that. So there are things that are different about our diagnostic exposure, but I think are worth pointing out though. While we're going to have exposure to all relevant testing types, we're more focused and leveraged on PCR with more modest antigen-based sales. We benefit from broad geographical exposure, especially in Europe where demand still is running a bit higher than what we see in other parts of the world, including the U.S. So overall, I would say, we've certainly capitalized on the opportunities that have been before us, quite a critical role in addressing the pandemic and it's enabled us to make investments and position our business to emerge from COVID even stronger than we entered.

Great. And maybe that's a good segue because one of the things that we've been thinking a lot about is when it comes to bioprocessing, bioproduction is what are the longer-term impacts of COVID to this business? Meaning, can you talk about how your COVID-related work, given the critical nature of it, given the urgency of it, may have translated into new or deeper relationships with your biopharma customers? I guess what I'm saying is there more subtle durability to your bioprocessing revenues that's actually been strengthened beyond COVID?

Yes. When you look at our biopharma exposure, I mentioned in the introduction there, it's about half of our revenues. And so it's obviously an important driver of our business. And through the pandemic, the agility that the business has been able to recognize has certainly driven deeper relationships with customers in both vaccine production as well as in the diagnostics space. Another exciting dynamic that we've realized from the pandemic is we're now, as a value chain and as an industry and certainly is one of the leaders in this space, well positioned to capitalize on accelerated growth. And I would say, broadly speaking, the bioengineered vaccine is a new kind of category and addressable market for us that didn't exist before. As well as mRNA therapies. The core business has been driven and will continue to be driven, at least over the short to medium term, by the strength of our positioning in monoclonal antibodies. Cell and gene therapy provides the next frontier for opportunity for this business. But as we've seen here through the COVID experience, bioengineered vaccines as a modality presents tremendous opportunities for us in the biologics space. Historically, the vaccine market was relatively off limits for the biologics players. And given the efficacy and the experience that we've had with COVID, there's a lot of work underway here to translate that experience into other more traditional vaccine areas that have been served by other technologies. And we see that as a durable long-term opportunity for our business. Similarly, prior to COVID, there was a pipeline of opportunities in the mRNA space that was probably 190 to 200 candidates making their way through, mostly early stage. And certainly, the collective experience that we've had as an industry in doubling down on mRNA to bring that as one of the leading solutions from a vaccine perspective has certainly accelerated the broader mRNA pipeline. And the industry will benefit from that, certain patients will benefit from that and, importantly, will play an important role in that as well. So when I take a step back, we've always said or recently said that the addressable market for our bioproduction business was, call it, $11 billion, something like that. But we believe that has increased with the emergence of bioengineered vaccines and mRNA advances. And certainly, that will be an important topic of discussion for us at our upcoming Investor Day here in September. We're very bullish, hopefully as you can tell from my comments here, on bioproduction. There's certainly strength in the market beyond COVID. When you look at just the number of new drug approvals, the trends and the uptick in clinical trials and certainly the funding backdrop that we're operating within. Our sales in bioproduction are growing double digits, certainly more than 30% over the last few quarters. And our order book is as strong as it has ever been. We nearly have a full year's worth of demand sitting in our order book here as we're moving towards the latter parts of the second quarter. And that is an acceleration of more than 60% since early in the year. And when you look at the investments that we're making, we think we're positioning ourselves well to be able to capitalize on the opportunities here.

Great. That's very helpful. And maybe sort of like the other side of that is that just given the level of scale-up that you had to do for the COVID vaccine manufacturing, were there parts of your process or manufacturing that could have been improved? And were you able to kind of optimize what you do for the future in terms of how you serve these customers? Meaning just thinking about the level of volume that you had to do and the time constraints that you had, were there improvements that you're able to take a look at your process and actually make, and you think will come out on the other side more efficient, better optimized?

Yes. Thanks for giving me the opportunity to talk about our Avantor Business System. We've referenced it over the last couple of years as the core operating mechanism and how we run our business. And it's built on the kaizen philosophy of continuous improvement. And with the capabilities that, that system has brought to our business and how empowered that makes our associates across our network, we were fortunate to have that as part of the DNA here as we work through, obviously, a pretty strenuous time here in meeting unprecedented surge in demand and supply chain constraints, as well as just the uncertainty and volatility particularly in the early days of the pandemic. And so having a structured way to go about meeting the demand, solving and addressing challenges and opportunities, problems as they arise certainly has allowed us to maximize the potential. But continuous improvement is the way of life are long. And when we were doing that well before the pandemic, it's allowed us to probably more aggressively apply it here throughout the pandemic, but it will be part of the DNA going forward. There have been a number of constraints in the supply chain in a lot of areas that are still constrained today given the demand. But by having a robust methodology and framework and footing to be able to work from, to work and to solve those challenges is certainly one of the elements of our model that allows us to execute at a very high level.

Great. And you mentioned the mRNA pipeline. And when I take a look at the upstream portion of bioprocessing, I see it as a fairly fragmented industry and many companies are offering their RUO capabilities, which are for preclinical front. But as sort of the mRNA and, just broader, the cell and gene therapy pipeline starts to mature and we move closer to commercial scale for some of these therapies, do you see having GMP-grade facilities as a key competitive advantage for you? And do you see this upstream market starting to consolidate in the hands of larger companies? And how are you positioned for that if that's the way you're seeing it?

The mRNA opportunity certainly came with that challenge. Many of the raw materials that were needed were only being made available at research grades. And so in the early days of the development, that was one of the challenges that we had to overcome relatively quickly. And fortunately, that is a hallmark of our business model. The number of GMP-grade facilities that we do have is a key differentiator. We have 13 such facilities around the world, and we'll be the only raw material supplier with these capabilities in all 3 major regions of the world with a world-class or best-in-class quality management system that's been harmonized across the globe. So this certainly positions us well to solve these types of challenges. And as we look at the trends in the marketplace, particularly from a regulatory standpoint as well as just how these new therapies are evolving, the personalized nature of them, the scale that they're being produced at, the technologies that are being deployed, there is only one direction of travel here and that is towards higher standards. That's been a trend that's been afoot here over the last several years, and we see it accelerating where the tolerance for impurities, the requirements for more stringent specifications are becoming more prominent. And that really does speak well to our business model and the strengths that we've built our business off of. And we do see and would expect to see ongoing consolidation of some of the large players. And as this happens, certainly, the need for high-quality GMP assets will be required. They have no appetite for risk. And it's been our experience over a long period of time, it would be our expectation going forward, that any such consolidations come with opportunities. These dislocations or these kind of catalyst events create opportunity for innovation and for us to bring to power -- bring to bear the full power of our model and the breadth of our offering. When these consolidations occur, they're typically looking to drive synergies and tend to be more open to working with us and partnering with us to identify value and sources the value that they can bring to the bottom line in a pretty critical synergy period of their other combinations. So these consolidations typically work to our advantage.

Got it. And then something we're going to get to, but just while we finish up on the bioprocessing side, a question from the audience. Just obviously the news yesterday on aducanumab and how do you think that will influence your bioprocessing growth going forward to the extent you can comment about it?

Yes. It was exciting news, not just for patients but certainly for the industry in an area that's had a lot of focus. There's a lot of patients. I think in the U.S., there's more than 6 million patients alone that could potentially benefit from this therapy. So an exciting day for sure. And it does underscore the importance of the work we're doing and certainly highlights that there's never been a more exciting time to be serving this space for sure. Probably -- context is probably important here. I've mentioned before a couple of times already that biopharma is half of our revenue. And within that, 1/3 of that would be in the bioproduction space. And that is underpinned by a very strong and high exposure to the monoclonal antibody space. We've said historically that we would be [ expecting ] to more than 80% of the commercialized therapies in that space and well represented in the pipeline of opportunities that were making their way through the development process. Unfortunately, we don't or can't comment on specific customers or therapies. But I think I would certainly highlight that we're well positioned to benefit from newer therapeutic areas, including Alzheimer's. I think it's important to recognize that our technologies are agnostic to therapeutic area to modality and -- which is to say that we're going to be lined up both from a pipeline perspective as well as from a commercialized perspective behind the majority of opportunities that are out there including Alzheimer's as those various platforms in Canada make their way through the regulatory process. But certainly, a very exciting day for the industry as a whole.

Great. Just moving towards advanced technologies, about 25% of your revenues. You've mentioned in the past a $16 billion TAM growing mid-single digits. It's maybe more cyclical business and was impacted by the slowdown last year. Could you talk about your expectations for this segment as we move into -- move through this year?

Yes. I'd like to make a few points probably about this part of our business. Firstly, important to recognize that our advanced technologies & applied materials business is highly synergistic with our biopharma and health care and education businesses. The workflows that we're serving with our customers in this part of the business are almost identical or similar to what we do in our life sciences business. And that enables us to leverage the same manufacturing footprint, certainly the very similar product portfolio, the same commercial organization. Certainly, our transactional backbone is the same, and the broad distribution network that we have is leveraged to serve customers across all of our end markets, including this one. Secondly, we have significant differentiated proprietary content that's used in this part of our business, particularly in end markets like the semiconductor space as well as the aerospace and defense area. That was customized in the same way that we would work with a life science customer in early phase discovery activities earning a specification and ultimately becoming a part of the process of record for these important and sensitive end markets. It's a diversified part of our business, really diversified customer base that we serve. No end market that we would have in this part of the business would be more than $100 million in revenue. And when you look at the mix of exposure that we have in this business, we would broadly classify -- probably about 50% of the revenues in this segment is somewhat industrial in nature and about 50% of the revenues as part of the business is relatively durable and less cyclical. Within industrial, we're going to be serving workflows and customers in the petrochemicals area, mining, oil and gas. And the nonindustrial parts of this business would be things like food and beverage and the ag space, water and environmental. And when you look at the trends, the macro environment for this part of our business, certainly, there are strong macro signals that would support continued recovery of particularly the industrial part of this business. And while there are parts of this business that do, in fact, follow some of the GDP trends around the world and some of the cyclicality that comes with that, this business did show how resilient it was during the pandemic and have held up very well. I think at the trough, it was off mid- to high single digits. It's work its way back. I think in the fourth quarter, it returned to growth. It was relatively flat in the first quarter, but we would anticipate that as we move through the year, just given the macro backdrop and the recovery that we see in the economies around the world that this business will continue to work towards a more normalized growth trend in the low to mid-single-digit level.