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

Right. Good morning, everybody. I'm Tycho Peterson. Welcome to the 2022 Healthcare Conference. I'm pleased to introduce our next company this morning Avantor. [Operator Instructions] And with that, let me turn it over to Michael.

Good morning and thank you, Tycho, and hello, everyone. I really appreciate your interest in Avantor, and I'm super excited to kick off the new year here at the JPMorgan Healthcare Conference. And to tell you about Avantor, our mission and the role that we play in enabling scientific breakthroughs. Joining me today is Tom Szlosek, our CFO. And following my prepared remarks, Tom and I will be glad to take your questions. As we get started, I need to remind you that we will be sharing -- or what we shared today will reflect our beliefs based on information that's currently available to us, and we'll be providing forward-looking statements, which did reflect our current views, but aren't guarantees of future performance. Factors that could alter these views and assumptions include, but aren't limited to, the factors described, the Risk Factors section of our 2020 annual report on Form 10-K and the subsequently -- subsequent quarterly reports on Form 10-Q. I also need to remind you that this presentation may contain certain financial measures, which are not prepared in accordance with U.S. generally accepted accounting principles and a reconciliation of non-GAAP measures to GAAP can be found at the back of the deck. I'll let you read test of our standard disclaimer. I'm now moving on to Slide 3. As we approach unbelievably, at the end of the second full year of this pandemic, we have all experienced how the power of science changes lives for the better. In addition to enabling testing, vaccines and therapies for COVID-19, advancements in science are empowering us to treat some of the challenging diseases that we face. And the potential to achieve scientific breakthroughs has never been greater. And everything that we do at Avantor is tied to our unique mission of setting science in motion to create a better world. Our business model is grounded in supporting our customers from discovery to delivery, and Avantor is embedded in virtually every stage of the most important research, scale-up and manufacturing activities in the industries that we serve. We leverage our comprehensive offering and access to early-stage research, to seek content and solutions that ultimately become specified into our customers' approved production platforms. Our broad portfolio of products and services, customer-centric innovation model and world-class supply chain enables us to support our customers' journey every step of the way. That's how we keep life-changing science moving forward. As shown on Slide 4, Avantor serves attractive high-growth end markets, with a total addressable market of more than $80 billion, with approximately 70% of our revenue earned in life science applications, we have one of the highest exposures in our peer group. Our end markets feature similar characteristics, including high regulatory oversight and complex development processes, and we realize significant operational synergies by leveraging a common product portfolio and supply chain in serving them. In biopharma, we serve as a one-stop shop to support our customers' R&D efforts, and provide customized materials for life-critical treatments given to patients around the world. Our health care offering enhances patient well-being through the support that we provide to critical diagnostic workflows, as well as enabling content we supply for implantable medical devices. We help move science forward with precise reliable research products for education and government applications, and we provide ultra-high purity solutions essential for the world's most demanding environments within our advanced technologies end market. Our relevance in these attractive end markets positions us for mid-single-digit organic growth over the long term. And as I will show you later in this presentation, we have outperformed this over the last few years. While there's nothing simple or straightforward about supplying more than 6 million SKUs on demand in a highly regulated environment, you can condense our offering into 2 core areas. First, we provide comprehensive products and services that enable our customers to achieve precise analytical results in their research, diagnostic and quality assurance and quality control activities. And second, we provide customized materials produced to exacting specification for our customers' commercialized production platforms. One important aspect of our model is the resiliency of our business. Given the consumable specification-driven nature of our portfolio, more than 85% of our revenue is recurring, enabling strong performance across economic cycles. More than 55% of our revenue comes from proprietary branded products and services that are supplemented by innovative third-party offerings from our critical supplier partners. Our proprietary content is an important driver of growth and margin and is on track to exceed 60% of our total revenue in the next few years, as I outlined in our recent Investor Day. Turning to Slide 6. Our global footprint offers extraordinary access, enabling us to serve more than 225,000 customer locations in more than 180 countries around the world. Our global distribution network of distribution centers gives our customers security of supply and real-time flexibility as we can reach the majority of them within 24 hours. Additionally, our 12 innovation centers and more than 30 manufacturing sites enable extensive collaboration and customization, critical elements for serving highly regulated specification-driven applications. We hold leading positions in the Americas and Europe and are selectively investing in core biopharma hubs like Singapore, Korea and China, to capture exciting growth opportunities in the EMEA region. Slide 7 summarizes the key elements of our financial algorithm, mid-single-digit plus organic growth, 50 to 100 basis points of annual margin expansion and mid-teens plus adjusted EPS growth. Long-term value will be further enhanced as we prioritize capital allocation for M&A. All these elements are underpinned by the Avantor Business System, which drives operational rigor and execution throughout our business. For the balance of my presentation, I will focus on 4 attributes that enhance our long-term value creation potential. First, we have a proven track record of execution with outstanding financial and operational success. Over the last few years, we have successfully transformed our business and have exceeded all our strategic and financial targets. Second, compelling industry fundamentals, and a differentiated value proposition position us well for continued growth as a leader in biopharma, where we derive more than half of our revenue. Third, given our extraordinary customer access, strong free cash flow generation, and track record of integration, we serve as a natural aggregator of life sciences content. The 3 acquisitions we closed in 2021, provide an early glimpse of how we can leverage M&A to enhance our growth and margin profile. And fourth, we are committed to creating value for all of our stakeholders through our Science for Goodness sustainability platform. I will now expand on each of these in more detail. To give you an appreciation of our ability to execute, Slide 9 compares our long-term financial algorithm to our performance over the last 3 years. As you can see, we have outperformed on all measures, highlighted by an approximate 7% organic growth CAGR, about 115 basis points of annual margin expansion and approximately 57% annual EPS growth. Importantly, our free cash flow has grown from $163 million in 2018 to more than $850 million in 2021, enabling us to maintain a responsible balance sheet while pursuing attractive M&A opportunities. Beyond the financial performance, our milestones and achievements over the last few years also tell a strong story. We completed the integration of VWR ahead of plan and exceeded our goal of more than $300 million in synergies. In 2019, Avantor became the largest health care IPO in U.S. history and is now a Fortune 500 company. We've expanded or opened innovation centers in the U.S., Korea and China and have completed several raw material single-use biorepository and distribution center expansions around the world. And again, the foundation of our ability to execute is the Avantor Business System. Slide 10 offers an example of how we've leveraged ABS to drive a rigorous innovation process, enhancing the impact on growth and profitability from our investments in proprietary offerings for our bioproduction platform. We have leveraged our ABS toolkit to establish long-term breakthrough objectives, drive execution through structured problem-solving, deliver process improvements to yield efficiency and speed and provide real-time visibility to drive daily action and accountability. This has enabled us to approximately triple the revenue from the product introductions, dramatically reduce the time to launch and drive a more than fivefold increase in the value of our pipeline. We have similar examples across all aspects of our business that reinforce our strong track record of execution. I'm now moving to Slide 11. As I highlighted earlier, biopharma is an important driver of our overall growth. Avantor is benefiting from strong industry fundamentals that provide a constructive backdrop for our current and future growth opportunities. The robust funding environment is fueling research and development activities at unprecedented levels, and Avantor is uniquely positioned to benefit from this activity given our access to research labs around the world, including startup labs that we access through our exclusive relationship with Bio, the world's largest biotechnology trade association. The enhanced funding and increased research activity have yielded robust pipelines and an exciting revenue outlook. In addition to traditional monoclonal antibodies that are poised to continue double-digit growth, the emergence of cell and gene therapy, viral vector and mRNA will further enhance our growth. Avantor is well positioned to support all these technologies, and our clinical business benefits from the rich pipeline as product scale-up through trials and testing. And the accelerating FDA approval rate leads to the commercialization of new molecules and ongoing opportunities for us to realize long-term recurring revenue for our proprietary materials that are specified into our customers' production process. And we're confident that this will be an attractive industry for the foreseeable future. And as Page 12 shows, Avantor is uniquely positioned to capitalize on these strong market tailwinds. Our ability to serve biopharma from early phase discovery to delivery enables us to capture benefits throughout the integrated development and commercialization process. In research and product development, our deep customer access 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. And our broad portfolio enables a one-stop shopping experience for all their scientific needs. Importantly, through this access and early-stage collaboration, we earn specifications on our proprietary materials that seed future bioproduction revenue. Additionally, our more than 1,750 on-site service associates extend our reach and enable another high-touch customer access points. 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. In bioproduction, which now comprises more than 40% of our biopharma revenue, our 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 to downstream and through final fill and finish with a broad range of GMP materials, including high-purity process ingredients, single-use fluid management solutions, highly characterized chromatography resins and custom excipients. This is the fastest-growing part of Avantor, and we have a robust pipeline of opportunities across all modalities, including bioengineered vaccines, monoclonal antibodies and cell and gene therapy. Innovation plays an integral role for us as we work closely with customers to identify workflow gaps and leverage our unique capabilities to scale up for commercialization. On Slide 13, this mRNA production workflow is an example of how we are supporting our customers' development of mRNA-based therapies. Our enzymes are critical catalysts during the transcription process. Our extensive line of J.T.Baker chromatography resins, [indiscernible] purification, and our lipids are an integral part of the mRNA delivery mechanism. All these products and many more are specified into our customers' production process, giving us the opportunity to serve these platforms throughout their life cycle, making the revenue very sticky. Moving to Slide 14. Our positioning and relevance across all modalities has resulted in a fivefold increase in the open order book for our bioproduction business, essentially a year's worth of revenue. While our M&A investments tend to gain more attention, we're also making significant capital investments to support our growth in biopharma. You can see examples of investments completed in 2021, to expand capacity for our process ingredients and excipients as well as a pipeline of ongoing work that will be completed in this year to sustain our growth for these products in the coming years. We've also made significant investments in our manufacturing and supply chain organization, including additional work shifts to increase overall output. In addition to investments in capacity for process ingredients and excipients Slide 15 provides a view of our single-use supply chain footprint, where we have also been making significant investments. As a reference point, our single-use platform now comprises more than 40% of our bioproduction revenue and the platform is expected to grow more than 20% annually. As you can see, we have grown the footprint significantly to support this growth with expansions at existing sites and opening of new sites. With our recent acquisitions of RIM Bio and Masterflex, we now offer a differentiated end-to-end single-use fluid management solution. I'm now on Slide 16. I 2021 was a busy year for M&A at Avantor, and we expect to be active in the future. Our strong free cash flow and rapid deleveraging give us the flexibility to prioritize significant capital for M&A. Our platform has enabled more than 40 transactions over the last decade, and we successfully deployed more than $4 billion in 2021 to acquire RIM Bio, Ritter and Masterflex. Collectively, these recent deals have growth and margin profiles that are approximately 2x higher than the existing Avantor portfolio, illustrating the value of our disciplined approach to capital deployment. As outlined during our recent Investor Day, we expect to have more than $8 billion of M&A capacity through 2025, and we'll continue to manage our balance sheet prudently and are committed to a target leverage range of 2x to 4x adjusted EBITDA. We begin 2022 with similar leverage as we started with -- in 2021, and we remain active in building our deal pipeline and pursuing opportunities. We're focused on enhancing our portfolio of proprietary offerings and have a strong bias for assets in biopharma production, services and innovative research workflows. We also continue to prioritize deals that are accretive to organic revenue and margin, yield high single-digit returns on invested capital and support rapid deleveraging. Slide 17 illustrates one of the key reasons, M&A is so accretive to our model. By leveraging our channel and the customer access it provides, we generate significant commercial synergies from our acquired businesses. For example, as soon as the Ritter transaction closed last June, we were able to activate our approximately 3,500 global sales associates to map and prioritize customer opportunities in both biopharma research and diagnostics. We moved quickly to introduce J.T.Baker brand precision consumables through our direct and e-commerce platforms and began actively sampling products with target customers on a global basis. Our team of application specialists then engaged to actively support our customers' qualification of these products and ultimately the specification and approval of our materials into their workflows. Although this qualification and specification process can take several months and in some cases, even longer, it ultimately results in long-term highly recurring revenue. In the 6 months since we've closed the Ritter transaction, we're already seeing the impact of our approach to integration and synergy capture. Increasingly, our customers, employees, regulators and shareholders expect us to embed sound environmental, social and governance practices into our business. The interest of these stakeholders are key drivers for our long-term business success, and we have doubled down on our commitment to sustainable business practices. Our Science for Goodness and Sustainability platform is grounded in 4 pillars: people and culture, innovation and environment, community engagement and governance and integrity. As shown on Slide 18, we've made meaningful progress on sustainability in 2021, including the release of our inaugural sustainability report, a meaningful increase in the diversity of our Board of Directors and executive leadership team, as well as additional steps to reach our goal of increasing the gender and racial diversity across our full management team, announcing our initial goal to reduce operational greenhouse gas emissions by 15% by the end of 2025 through a comprehensive energy efficiency and conservation road map, linking executive compensation incentives to our ESG goals, integrating sustainability practices throughout our onshore supply chain, as we launched our updated supplier code of conduct on which we are building our responsible supplier program and supporting STEM education and expanding health care access through philanthropic giving from Avantor and the Avantor Foundation. In Avantor spirit of continuous improvement, we plan to build and expand on this progress. Expect to hear more from us on this important topic throughout the year and beyond. We shared Slide 19 at our recent Investor Day event, but we've now updated our financial goals for 2025, to reflect the addition of Masterflex to our portfolio. By executing on our organic growth strategy, we expect to generate $9.5 billion to $10 billion in revenue, expand adjusted EBITDA margin to approximately 24% and generate approximately $2.50 of adjusted earnings per share. Of course, we will look to enhance this outlook through the disciplined deployment of capital for M&A. I'm now on Slide 20. We're in the early stages of our year-end close and look forward to sharing our fourth quarter and full year results with you in a few weeks. We remain highly confident in the guidance we provided during our third quarter earnings call. As for 2022, we expect mid-single-digit organic sales growth, inclusive of an approximate 2% headwind from COVID-related sales. Reported growth is estimated to be 7% to 9%. We expect to achieve more than 125 basis points of margin expansion, resulted in a nearly 21% adjusted EBITDA margin. This reflects a favorable pricing environment, ongoing productivity and integration benefits from M&A, offsetting the inflationary pressures hitting virtually all of our cost categories. For adjusted earnings per share, we are forecasting a range of $1.45 to $1.53, representing approximately 15% growth, using a normalized share count of 685 million shares in 2021 and 2022. Finally, free cash flow is expected to be more than $1 billion, representing greater than 90% conversion of adjusted net income. As you can see, we're poised for another great year here at Avantor. You heard me say at the beginning of my presentation that science has the power to change lives for the better. At Avantor, we have a passion for science, for working hand in hand with the world's leading researchers and scientists and for solving complex problems. The role of our products and services and enabling scientific breakthroughs has never been more important, and we're helping scientists every step of the way. Our business model is proven. The value we bring is clear, and it's in our DNA to be focused on continuous improvement. We've demonstrated we can execute, are well positioned for long-term growth and have a clear vision for 2025. All this stems from more than 13,500 associates with a relentless focus on keeping life changing science moving forward, and it's driven by our mission of setting science in motion to create a better world. We're about driving progress for you, for our business, our customers and our associates. I hope you're as excited about Avantor's future as I am. Thank you for your time today and for your interest in Avantor. And thank you, Tycho, for the invitation and opportunity to present. We look forward to taking your questions.

Great. Thanks, Michael. Maybe I'll kick it off with the 2022 outlook. And obviously, you've got an FX headwind and a COVID headwind as you talked about. Can you talk about what's assumed for pricing and volume next year? Obviously, you're navigating an inflationary environment and supply chain constraints. So how are you thinking about pricing in this environment in particular?

Tycho, when you think about our traditional model, roughly 1/3 of our revenue growth would come from pricing and approximately 2/3 would come from volume in this hyperinflationary environment that we're operating here in, you're going to -- you're definitely going to see a step-up in pricing contribution in this year. We're well into that process. In fact, we started putting in place pricing in the fourth quarter so that would be ready heading into the new year. And I suspect that it's going to be something we're going to need to continue to address throughout the year as we continue to monitor the inflationary environment and increases from our suppliers and some of the constraints that we face in the supply chain. But certainly going to see a higher contribution in the year ahead.

And the 200 basis point headwind from COVID, that was often expected $400 million in revenues in '21, obviously, with cases coming up. I mean is there a chance that, that may be too aggressive?

It's hard to say. I think, as I mentioned, we're in the midst of closing the books. I think we feel good about the $400 million that we signaled at the end of the third quarter for 2021. We've tried to be conservative throughout the pandemic in terms of forecasting the impact of some of these tailwinds from COVID. Our guide for 2022 certainly contemplates continued deceleration of revenue in our portfolio of both testing and PPE, which overall COVID tailwinds for us have only been 5% or less. So it's not the most important driver of our business. But we certainly have contemplated those categories coming off, and we expect that the vaccine portion of our tailwinds will continue to hold up at similar levels to what we saw in 2021.

And then on the longer-term outlook, you lifted it by $500 million, obviously, adding Masterflex. Masterflex was projected to do, I think, $300 million this year, and you talked about it growing 15%, which roll that forward, gets you to $450 million in 2025. So is the additional $50 million just the base business doing better? Or is there something else there?

Yes. I mean I think the outlook for our single-use platform, as I indicated, is quite robust. We've had a lot of momentum in that platform over the last couple of years as we continue to build out the solution and we're excited by what we have today. We're confident, we'll continue to be able to grow that business north of 15% and even in some cases, probably north of 20%. So I think you're in that range, Tycho, of 15% to 20%. And really all we try to reflect here is just the closing of the Masterflex transaction.

And obviously, you had a busy year on M&A with Masterflex and Ritter and RIM, good deals across the board. I mean, I guess as we think about, you've got $8 billion potential capacity going forward. Is there a path to kind of high single-digit growth, in your view, similar to what you see from some of your peers, understanding, obviously, the long-term guidance is 4% to 6% based on the M&A you're doing, it seems like high single-digit growth could be doable longer term?

I'd say a couple of things. I think, Tycho, Firstly, the long-term algorithm calls for mid-single-digit plus our track record would support something stronger than that. CAGR over the last 3 years is more than 7%. And the algorithm for M&A as we deploy capital is to buy assets that would have accretive growth rates to the group average. So I think certainly, we're working in that direction of being able to lift the long-term algorithm for the business. And at this stage, I think it's probably more a question of when we do that then if we'll be able to do that, we got a lot of momentum in our end markets and certainly in our business. I'd like to get some of the COVID noise behind us before we adjust that long-term algorithm. But I think certainly, the strategy is pointing us in that direction as is the execution, Tycho.

Biopharma, obviously, coming off a very strong 2021. The order book was up 65% through September, and 80% of that was not code related. Can you just talk on the strength of that book, how quickly you think you can kind of work through it? And any risks around cancellations?

Yes. Obviously, the order book has been accelerating over the last couple of years. And I think it reflects a couple of things. One, it reflects, I think, some of the constraints that are in the value chain that are leading to longer lead times, causing our customers to place orders a little bit earlier than what they ordinarily would have in a more normalized environment, but it also reflects the strength of our end markets. The order book does kind of reflect the mix of our business, which means that roughly 80% of that order book is going to be from our traditional monoclonal antibodies, cell and gene therapy, molecules that we're specked into and the balance being COVID driven. And so we're excited about the strength of the core business, the momentum that we do see there. And heading into the year with essentially a full year's worth of revenue on the books already certainly gives us a lot of confidence heading into the year. These orders typically are not cancelable. We're making commitments on raw materials and capacity to be able to produce these when we make the acknowledgments of those orders. So I think we -- that's not something that we would typically see. So out of the gates here, certainly much stronger visibility than what we would normally have. And I think this is a dynamic that's going to be with us for a bit of time here, we'll continue to take orders from our customers and ship. We're obviously taking orders a bit faster than we're shipping at the moment. That will catch up at some point, but I wouldn't expect this to normalize until we see a bit more stability in the supply chain at a macro level, logistics and raw material availability and labor availability, these kind of things that would lead to reductions in lead times.

And then maybe if you could just spend a minute on the integration progress of Masterflex, Ritter and RIM. How are those kind of fitting in with the portfolio? Are you starting to see cross-selling. What's the feedback from customers has been?

Yes, I can take that one, Tycho. The -- as you would imagine, we set up program management offices for each of the 3 integrations. More or less, mirroring what we did with the VWR, Avantor combination, which as Michael had mentioned, really was successful and the approach is pretty rigorous. I'd say we're largely complete with the tactical aspects of RIM and Ritter. Masterflex being more recent and a little bit more complex and that it's a carve-out. We're in the early innings. But I think even post the program management offices will have significant opportunities in each of the 3 acquisitions in terms of integrating systems like ERP and will drive further cost synergies there. But also other things like driving the commercial synergy plans will be prominent exercises throughout the course of the year, and driving pricing as well will be important. So on track, and we're excited about the path forward for all 3 of the deals.

Evaluations and M&A remained high and competitive. Obviously, there's been a lot of volatility on the tape. And can you characterize the pipeline for deals at the moment?

Yes. As you know, it's something that's very prominent for our entire leadership team and our Board. In 2021, we closed the 3 deals, deployed $4 billion of capital. And notwithstanding that, we still maintain a pretty active pipeline across the 3 -- across our entire businesses, but with a focus on biopharma production as well as service opportunities that could be synergistic with what we're doing as well as on innovative research type platforms and offerings. And so we continue our efforts. We have, as Michael said, plenty of capacity, he gave you the number through 2025, but I can assure you there's plenty of opportunity this year. And so we'll continue to take a measured approach. We're not in a hurry. We don't have money burning a hole in our pocket. And so we're optimistic that we'll continue the success.

Maybe just hitting on a couple of the other businesses. Healthcare had a good 2021. Obviously, you saw the elective procedure recovery and return of routine diagnostics. What's your kind of near-term view there of that business given the growing number of Omicron cases and how are you thinking about health care overall for '22?

Health care, for us, Tycho, is about 10% of our portfolio. We have had a very strong year in 2021. And classically, that platform would grow kind of mid-single digits for us. And I think it's probably what we're expecting for the year ahead. We'll obviously, baked into our outlook here would be a bit of a pullback here in testing on one part of the portfolio. And then on the other hand, we have a very robust order book for our implantable medical devices platform -- similar strength there is what we see in our biopharma production business and a lot of momentum there. So I think we continue to be optimistic about the platform and our positioning and have a bit better visibility going into the year than what we would normally have in that part of the business as well.

Maybe a similar question around education and government. That was more mix in '21. You saw the decline in COVID testing and PPE sales throughout the year. But what are you seeing now within that channel, particularly on the University side?

Yes. So this is probably the one end market for us, which we would still say has a bit of room to run to get back to kind of pre-COVID levels. We were in the market pretty actively a little bit before Omicron started to spread. And I think our sense was that was the one space that still wasn't running on all cylinders. And despite that, we drove some reasonably good growth there in the year, and we're anticipating some additional recovery in growth in 2022. The schools are just now starting to get back to campus, returning from the break here in the U.S. So we'll see what the impact of Omicron has on that. I would say, at least through the year-end finish, our business held up very well and kind of in line with expectations. So we haven't really seen an impact at any meaningful level of the recent spread. But probably a little bit too early to tell on what impact that could have on Q1, just given schools and campuses just reopening here coming out of the out of the break.

Maybe 1 for Tom on EBITDA margins. You exceeded expectations in '21. That was some mix and your long-term guidance of 50 to 100 bps pre Masterflex. But obviously, Masterflex is 40% EBITDA margins versus 20% for legacy. So how do you think about kind of the longer-term outlook on EBITDA margins? And as you continue to do M&A, how much headroom do you think there is to push higher?

Yes. I think you're hitting on the exact premise of our M&A approach in terms of being accretive to our growth rate in terms of being accretive to margins. I mean, we're $7.5 billion revenue. So it does take a bit of acquisition to move the needle, but you're making a good -- made a good point on Masterflex. If I look at 2022 as an example, given the what Michael had articulated for 130-plus or 125, 130-plus basis points of EBITDA margin expansion. Obviously, if you take the midpoint of our long-term guidance on an organic basis of 50 to 100, take the midpoint of that 75 basis points versus the 130,you can see the impact that those acquisitions are having on our margin rates in the near term here. And that's exciting for us. There's a legitimate significant differential in the gross margins of those proprietary products. And so we're -- we will continue on that basis. I think Michael reiterated the long-term guidance on margins. But we get into the mid-20s pretty quickly here over the next couple of years, even with our existing portfolio and then augmenting that, hopefully with additional capital deployment.

And if we kind of think about proprietary content, prior -- during the Analyst Day, I guess you hit -- unveiled the target to get to 60% proprietary content by 2025. Can you just remind us on what the margin differential is on private label versus branded products?

Yes. And I think a good point to mention may have picked up in Michael's commentary. We're now at roughly 55% when you pro forma for the acquisitions this year. We had -- we didn't have the Masterflex in the in the Investor Day because the transaction hadn't closed. But we're in the mid-50s now in terms of our total proprietary content. And you're right, the gross margin differentials on the proprietary versus third party, roughly 2x from a gross margin perspective. So when you think of the proprietary consumables that we have, the single-use offerings, biomaterials offerings very significantly accretive to the overall portfolio.

And then free cash flow generation, we expect to grow pretty healthy to kind of $1.2 billion to $1.4 billion by 2025. Can you just talk about how sustainable that free cash flow generation is and how we should think about it in the near term?

Yes. I mean I think about it in the context of EBITDA, I mean, it should grow in line with EBITDA, notwithstanding some of the working capital investments that we've had to make like in 2021, as an example. I mean, given some of the supply chain constraints, we certainly were a little bit more conservative with our inventory levels. But I think going forward, this continues -- remains to be a big area of focus for us. I mean we went from, as Michael said, $160-ish million in 2018, will be close to $900 million in 2021 and 2022, our guide is for $1 billion plus. The model is relatively the same in terms of low CapEx model. So I think tagging it to our EBITDA growth and marrying the EBITDA growth should be an expectation that we should be able to maintain.

Great. Maybe in the closing minute or 2 here, we'll go back to the biopharma discussion and back to Michael for a minute. Just as you think about your portfolio, obviously, you've done some interesting M&A. You still have some gaps, bioreactors, so culture media. How are you thinking about kind of filling out the rest of the bioprocess portfolio going forward?

Yes. And I think we're excited about the momentum that we've got certainly in the business and the growth, nearly 30% growth in 2021, certainly validates the relevance of what we do. But we continue to work away at enhancing the portfolio. So it's a dynamic space, new modalities becoming more prominent and our customers expect us to continue to bring more and more content to help solve their solutions to their problems. So very active from an innovation standpoint. We continue to invest in the infrastructure to help us develop new materials to not only support existing modalities, but we're very active in cell and gene therapy and things like mRNA, for example. And then as you suggest, M&A can be an important element of the strategy to help us continue to bolster our portfolio. We take a very workflow-driven approach to all that we do, including bioproduction. We understand our customers' workflows very well. I think there's some natural places, certainly material-centric solutions are a natural place for us to play. And -- but we understand it more broadly than that. And as Tom indicated, we have a very robust pipeline of M&A that would help to address the gaps in our portfolio. Fortunately, it's a very fragmented environment. It's a complex environment, which creates significant opportunities for us to invest and continue to build on what we have today, but we're very well positioned. The access that we have around the world certainly makes us a natural aggregator of content and we'll look to continue to be active.

Great. Well, I think we'll leave it at that. Good to see you guys. Thanks for taking the time.

Thanks, Tycho. Have a great day. Thank you all.