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

Hi. This is Paul Knight at KeyBanc Capital Markets. I'm the life science analyst. When -- similar format today, there will be a room for questions on the chat that you could submit on your screen or e-mail myself at paul.r.knight. I think Tom wants to make some opening comments, and also today, Gerard Brophy, who's Head of the bioproduction unit at Avantor. As many of you know, we've been doing a lot of work in this area over the past several years. It's certainly a high-growth area and been a focus of M&A for Avantor. So an exciting year, many years ahead, we believe, in terms of biologic production in the industry. But Tom, I'll let you start with some opening remarks, and I know Ger wants to -- will do the same.

Okay. Appreciate it. Thanks, Paul. So I just want to remind the attendees a little bit about Avantor and also reiterate our '22 financial guidance. So we're an $8 billion manufacturer and distributor of materials and solutions for use in life sciences, including biopharma; and advanced technologies and applied materials. As a materials and solutions provider, our offerings are recurring in nature. And they enable research, quality assurance and control and production processes and, for the most part, are required to meet high purity and performance specifications. This 2022 is our third full calendar year following our IPO in 2019. Our organic growth, our operating results and our cash generation have positioned us in the upper quartile of our peer group relative to share price performance over the time frame. We've also completed 3 acquisitions since the IPO, aggregating $4 billion in revenue -- or sorry, $4 billion in purchase price. And for 2022, those acquisitions will bring us about $500 million of revenue at significantly accretive margin rates, as we've talked about. And we're excited to continue our progress in 2022 and expect to grow our core organic sales between 6% and 8%. And you can consider that to be 4% to 6%, inclusive of the 200 basis points of COVID-related headwinds. We're a relatively minor COVID player. We -- it's probably $400 million in 2021, probably half of that in 2022, and that's where the headwinds come in. Our growth has been -- our growth -- the growth, the 6% to 8% growth will enable 125 basis points of adjusted EBITDA margin expansion, again, continuing our trend of being near triple-digits every year on expanding EBITDA margins, our adjusted EPS of $1.45 to $1.53 for the year and over $1 billion of free cash flow. Unless there's any other questions on these points, let me introduce Ger. Dr. Ger Brophy is our Executive VP. He's in charge of our business with the bioproduction -- biopharma production industry. It's roughly $1.5 billion revenue for Avantor. It's the most profitable and fastest-growing piece of our company. Our offerings span all modalities and include high-purity ingredients and chemicals, full range of single-use fluid handling systems and customized excipients. Ger is in his fourth year at Avantor. And prior to joining us, he held a variety of research and development strategy, advanced systems and business development positions with GE Healthcare Life Sciences, GE Healthcare Medical Diagnostics and Amersham for nearly 30 years. Ger has a Bachelor of Science in Biotechnology and a Doctorate in Molecular Biology from Dublin City University in Ireland. Paul, I think Ger will have a couple of introductory points, and then we'll turn it over to you for your questions. Thank you.

Thanks, Tom, and thanks, everybody, for being here. I appreciate the opportunity to showcase Avantor and the biopharma production business in general. At Avantor, everything we do is tied to our mission of setting science in motion to create a better world. And we're in a situation now where advances in science are empowering us to treat some of the most challenging diseases we face. The potential to achieve scientific breakthroughs has never been greater. And the potential to change up how things are done is also a significant opportunity at the moment. For example, with COVID, improvements have occurred across the board in R&D and manufacturing operationalization. They've been necessitated. But once done, the industry is not going to go back on some of these significant improvements. So there's never been a better time. It's a great time to be in this industry. Our business model is grounded in supporting our customers from discovery right through to delivery. We're embedded in virtually every stage of some 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 see content and solutions that ultimately become specified into our customers' approved production methods. And with approximately 70% of our revenue in life science applications, we have one of the highest exposures in our peer group. In biopharma production, we operationalize life-changing therapies. Our product offering, services and global network allow us to support our customers and their efforts to bring life-changing therapies to market more quickly, more safely and effectively. And our deep expertise and customizable solutions make us a trusted supplier to the industry. So with that, Paul, those are the introductory remarks, I'm glad to engage in the discussion.

Yes, Ger, you mentioned that it's a great time to be in the industry. Could you -- what's happened in the last 4 years or so in bioproduction to make it an even better market? Is it -- could you outline your thoughts on what's happened to make biologic production what it is today?

It all happened relatively quickly. It's not that many years ago, the monoclonal antibodies, which we now take as a standard therapies, were really getting traction. Let's pick a number, 25, 30 years ago. And monoclonal antibodies are still the anchors of this space. Traditionally, we might have associated monoclonal therapies with oncology and maybe with inflammation. And now groundbreaking clinical research is making new disease areas, like neurodegeneration, a range of molecular diseases, a range of infectious disease is now more amenable to monoclonal treatment. And we're also seeing innovations in things like antibody-drug conjugates, bispecific antibodies, biosimilars, antibody fragments. So the industry is really getting into its stride in dictating how biologicals can really operationalize the specificity in the power that they have. And of course, for us, that means that they need the support, the materials, the advances in manufacturing and operational technology that underpins that. But we're also seeing other platforms coming through as well. For us, addressing the monoclonal segment is always going to be the biggest. It's probably about 60% of our revenue, and it's growing fast and strong, and we're well positioned to support that. Cell and gene therapy continues to grow very well. We estimate maybe 10% each of our revenue profile. But we're all quite familiar with the amazing advances in autologous CAR T that allowed pediatric patients suffering dreadful cancers to be treated in gene therapy, neuromuscular diseases are now being treated, disease of the eye. And they require a collaborative approach with our production customers, new materials, new formats, new form factors, and we're leaning into that. But of course, we can't ignore COVID in the last 2 years. The biopharmaceutical industry stepped up really quickly and address that specific opportunity, but as I implied in my opening comments, galvanized the industry to bring new materials, new processes, new regulatory pathways through to bear even more quickly than ever before. So we see this as an industry, as a market, that's found its stride now. Our associates are proud to play their part in addressing global and dreadful diseases. And from a segment point of view, it's surely an attractive segment for us to be part of.

And Ger, obviously, a handful of firms have dominant holds on the industry, whether it's some of your former roles, former companies. It's -- the market share seems solid. What would you outline is some of the strong businesses at Avantor that you would highlight us to?

Yes. Yes. So in this space, we believe we're one of the leading cGMP manufacturers, good manufacturing practice manufacturers, into the bioproduction space. We have content across the board. So let me just briefly outline, many people will know this. The process for making a biopharmaceutical is simplistically divided into 3: Upstream, downstream and fill/finish. Upstream, the biological is made generally in a fermenter, perhaps in different ways using biochemistry. Downstream, the molecule is separated from the means of production. fill/finish, it's made into a drug product that can be infused into a patient. Our products are central to all 3 of those areas. We have fermentation ingredients and technologies in the upstream space. We have process chemicals and separation technologies such as protein A chromatography, in the downstream space. And we have a range of highly purified, highly characterized excipients in the fill/finish space. And the nature of our business model is that we can pivot very quickly as new platforms come through. So again, as I said, very strong in monoclonals, but that upstream, downstream, fill/finish, many of the considerations apply across the platforms of viral vectors, of recombinant proteins, of mRNA. And in addition, in parallel, we focus on single-use aseptic fluid transfer. So just literally, we all understand that the materials have to flow through the unit operations, like filtration, like chromatography and flow between them. And again, that has to be done in a very carefully controlled way. The materials that carry those fluids have to be extensively characterized. Single-use is probably the fastest-growing part of our fast-growing biopharma production business, and it's where we've doubled down with some M&A. So we believe we're very, very well positioned. It's still a fragmented marketplace, production space. You're right to acknowledge there are several good and strong competitors out there. So anything from 15% to 30% share is a good share of any piece of this segment, but that also gives us a lot of headroom to initiate organic and inorganic growth, and that's a significant part of our strategic plan. Where we really worked very strongly is how we work with our customers to customize materials and processes. As customers would lean into a new manufacturing process, perhaps needing a new analytical grade, a new form factor, a new way of presenting the material, we leverage our innovation center, the mothership of which is in Bridgewater in New Jersey, to really work hard with customers to make sure that they have exactly what they need in the right format to the right analytical grade with the right documentation and stability. And that business model plays out across all the manufacturing platforms and of course positions us well with specified materials into their operation process, that, that gives us that sticky, high-quality revenue that's a hallmark of this segment.

And Ger, obviously, monoclonal antibodies have been a very strong market for a while and getting better every year. Well, at least mid-20s is our estimate of growth in terms of prescription growth. Could you talk to the next area the market's looking at, meaning mRNA, certainly success with vaccines. But what are your thoughts on how that market is developing and how it will develop?

Yes. Yes. It is worthwhile just to be thinking of the approvals we've seen over the last 3 years. So 14 approvals of biologicals in 2021. And of course, a lot of high-profile emergency use authorizations that we're all familiar with, with the vaccine space. But contrast that with 13 in 2020 and 10 in 2019, so we know that the acceleration is occurring. And like I said, even in monoclonals, I think last year, the 100th monoclonal was approved by the FDA. So we're seeing that relentlessly come through. That was focus on a PD-1 inhibitor from GSK, and there are many in that class. But the speed with which these are coming through now is significant. COVID, like it or like it not, has increased all our understanding and exposure to novel platforms. And the one that kind of is maybe a little bit more under the radar is viral vector technologies. But as you know, outside the U.S., the AstraZeneca vaccine is based on viral vectors. The J&J vaccine, many of the Chinese and Russia vaccines are based on viral vectors. Now that's a technology platform that had been gaining traction from gene therapy and autologous CAR T, but now it's, in terms of operational volume, there's a significant increase that's been required by the need to get all those vaccines in a timely fashion. So we see significant process improvements happening in the viral vector space. We see significant requirements for new materials, new single-use technologies that allow the flexibility and speed of some of the operations to come through very, very strongly. New requirements in fill/finish. New requirements even in excipients because viral particles can aggregate, and to present them as optimally to the patient as possible, requires some new thinking. And we're deeply involved in that with our research center. But the one that's maybe captured the imagination mostly are the nucleic acid vaccines, the mRNA vaccines. And that's the Moderna and the Pfizer BioNTech vaccine. What that has done is it's really, I think, legitimized an emerging platform. Now as I'm sure you know, this is an area that's been studied extensively for 10, 12, 15 years. And a lot of the basic blocking and tackling on nucleotide and utilization on lipids and lipid nanoparticles was already well underway. But the COVID pandemic necessitated a step-change in how these would be operationalized. And the FDA and other regulatory bodies, to their credit, quickly engaged with how to initially allow emergency use authorizations, but then move these vaccines through to full approval in terms of both safety and efficacy consideration. And of course, now they've literally been tested on billions of people. So this is another area where the industry is not going back. So whether it be extensions in the COVID vaccine space with boosters or pediatric doses or vaccines for other diseases like RSV or influenza or therapies, and we do see a significant expectation that there will be nucleic acid drugs for therapies which will develop over the next number of years, I think this is going to be a very usefully disruptive phase from the industry in terms of how it brings new platforms to bear very, very quickly, and maximizing the impact that COVID has generated in the space.

When you look at, obviously, lots of changes in the last 20, 30 years, what's your crystal ball say on the next 5 to 10 years in the industry? Is it -- is there a risk of over-excitement on some of these new modalities? Is there the risk of overcapacity? Or is this always a capacity-constrained business?

I don't see any warning signs. And again, it's difficult to predict anything except the -- or even the future, but I don't see any warning signs. I see that again, sorry to keep mentioning the pandemic, but of course, it has focused our attention. We know that various clinical trials have been delayed. We may even know from our personal lives that various medical procedures for individuals have been delayed or postponed. We know that the opportunity now for innovation and funding to flow into new therapeutic areas and new manufacturing platforms is well positioned. We might expect that, to address the supply chain sensitivities, that biopharma and biotech may take a more conservative view on raw material inventory. So as with anything, difficult to predict, but the direction of travel should mean that this industry continues to be strong for the foreseeable future in my opinion.

Yes, I think what you said previously regarding mRNA, it seemed like an overnight success story, but it was a 12-year overnight story, right?

You're exactly right. I mean, there's some amazing researchers who have been kind of working away almost despite some of the funding groups that were looking after them and had done all the hard yards so that the FDA and the other regulatory bodies could with confidence say that this material is well characterized, we understand this process pretty well, and then move not to expose patients to any risk with regard to efficacy or safety. And that work had been done in the past 10 to 12 years, without a doubt.

Yes. And then I think investors fairly aware of the production players, like those in single-use and stainless, the Cytivas, the Thermos, the Sartorius of the world. You seem to acquire more, you are in more unique markets that people are not quite as close to. Does this present you the opportunity of having more logical future M&A and maybe less competitive than what some of the other peers may have adjacent to them?

M&A is definitely a part of our road map. We're spending a lot of time internally on this. And we start our considerations on customer workflows. We're spending a lot of time now with our customers, and they range from startup through biotechs through CDMOs through CMOs through pharma companies through biosimilar manufacturers, to really understand where the pain points are and where we can lean in. And M&A is part of our opportunity space, but integration and how we support that with NPI and process support is equally as key. But with that view on M&A, we've started in the single-use aseptic fluid handling space. So with the acquisition of RIM Bio in China last year and now with the Masterflex acquisition which we closed in November. And I'm pleased actually with how they've gone. I'm pleased that the expected strategic fit that we anticipated has played out well. And that as we now go to customers, they are leaning in and understanding how those technologies fit in, but also that we can build from that. That having an anchor product with, for example, the Masterflex pumps, allow us to also specify single-use assemblies, upstream and downstream, of those instrument platforms. But also to consider how solutions and concentrates, acids, bases, production chemicals, flow through those tubing assemblies. So we -- M&A can be sometimes opportunistic and that may well happen, too. But I would say we're pulling a lot of intellectual horsepower at the moment, and customer engagement to really anticipate where best to spend our M&A dollar.

Would you say -- would it be fair to say that your product offering gives you maybe an earlier look into customer pipelines than maybe some peers?

I think on 2 fronts. So as you know, we have a very broad lab presence. They're probably -- in the lab in the world that our associates are in generally. I don't want to misspeak, but I think we've got over 6,000 associates addressing the lab biotech startup community. So we should see what's coming out. If there's a new investigator or a new platform out of Shanghai or Cambridge, England or Cambridge, Massachusetts or San Francisco, Palo Alto, we should get an early bead on what that is. And increasingly, I think the community and the venture community are more sensitized to thinking about eventual enterprise value and manufacturing considerations. So we're definitely hanging our shingle out there and saying, "Even as you're starting in a new manufacturing platform, you may already want to be thinking about security of supply, stability of materials, GMP, single use, et cetera." And I think that breadth and that presence in startup labs will play out well for us. The other area, again, just going back to the Masterflex acquisition, is that project management houses and engineering groups often specify hardware solutions quite early. So that is a kind of a beachhead for us in that regard, that having now the Master flex peristaltic pumps, the industrial pumps that we have and the tubing sets, mean that we're often in a conversation with big manufacturing biopharma production instances perhaps a couple of beats before where we might otherwise have expected to be. And that allows us to go in there and say, "Well, we understand you in the atomic cell therapy space or the gene therapy space or whatever space. Let us talk to you about what we already have and also about our business model, which is we are gladly here to work with you to assist and scale up process development. Are there any new materials, et cetera?" So those 2 elements, I think, allow us an early look into some of the manufacturing opportunities.

And if we go back in time when this was a pharmaceutical-oriented -- when therapies were small molecule and now we're entering this large molecule area, do you think there's ever a risk -- do you think there's a risk that we would go back to what were -- the lower-margin business that pharmaceuticals kind of implied, and we saw with that era? Or will biologics be more proprietary, better margins, stickier businesses?

I think 2 things. I think even in the -- even the small molecule space, those molecules that can really tell a strong utility story are reimbursed at a very high rate as well, and we all know some examples of that. But your question implies, you're right, that the generic cliff that can occur with a small molecule. It's just more difficult with a biological. And we're now seeing biosimilars beginning to make a slight impact, especially in Europe, still little enough in the states and starting to come through in Asia. But even so, the margin of those biosimilars are significant. And that's largely because the process is significant. The ability to scale up is not something that everybody can do. The molecular biology, the CMC, the QC requirements are considerable. And so far, the empirical evidence would suggest that even as biologics reached the end of their patent life, and even as biosimilars start to come through, that the majority of margin is still preserved.

Right. It's still a highly technical product, even at the generic level.

It really is. And I think that, that means that the ability to preserve that price, even globally, tends to be preserved. Now what it does to, I guess, even if you do get some slight segmentation on price, it does perhaps allow more patient access to occur. We all know that biologicals are not necessarily cheap drugs. But as we see biologicals now aimed at more chronic conditions, for example, Alzheimer's or inflammation, the price point may have to be adjusted. But our assessment is that the provision of production chemicals or ingredients materials is not a significant part of the price of biological drugs. So even still, there may be some opportunity to segment in that space and for all parties still to come out of it pretty well.

And Ger, obviously, the legacy VWR is one of the top 2 largest distributors of lab products in the world. Does that make your acquisition and synergy possible from current products better than from some of your prior roles?

I think so, we can see sometimes that some products are just -- they just got a huge pull. And you just [ start from one ], why is that? Well, what's happening over here in this particular space? We've seen it recently in a particular segment around oligo RNA. And understanding the ebbs and flows in the lab space can sometimes be very instructive as to what may eventually happen in the production space. So that's definitely true. And VWR, in addition to its presence in the lab space, of course, has an enormous distribution network. So even in my business, I can leverage the distribution horsepower, the CDP warehouses, the transport network, the IT infrastructure, that the VWR network implies. And it improves the positioning and delivery of my products as well.

And Tom, I'll throw a couple over your way. We don't want you to be too quiet during the meeting. But obviously, a lot of opportunity in the biological production market, but I'm sure VWR wants to do more self-manufacturing. What are your thoughts there? I know you've done some M&A to increase that exposure. You're on mute, Tom.

Sorry about that, Paul. Yes, I mean, it's a great point. The Ger referenced the expansion that we've done through acquisitions. I mean, we've also amped up the amount of capital we're applying to CapEx to also support growth in his business and in other businesses. Like a couple of years ago, we were less than $100 million in CapEx. We'll be 3x that this year. And you can see it across the entire line of offerings that Ger has, whether it's single use, some of the ingredients and chemicals. So we're -- we would prefer to do that. And certainly, our open orders and the trends ahead would support that. But you're right, to the extent that we can find opportunities where they're adjacent to the footprint that Ger described, that presence that we have across the 3 areas of biopharma production, that's what we're interested in. And that would perfectly describe Masterflex as well as RIM Bio.

And a couple of questions that -- today, and we've heard before is here, are you seeing any impact from biotechnology funding or lack thereof?

Yes. Good question. It's something that we have not at all seen so far, I would say. The -- it's when you cut through the math and apply percentages to percentages to percentages, I mean, it's a relatively small piece of our customer base. Now there could be a timing lag. Who knows? Because a lot of these companies get funded and have the capital capacity to move forward for a period of time. I'm not aware of any that are imminently exhausting their funding. And I'd say the other thing is that we're -- we don't have any single customer that's over, say, 3% or 4% of our revenue. So it's pretty well diversified when it comes to that base as well as other basis.

Yes. And then the academia has also been cited by about everybody over the last year as a pretty low-growth market. Do you think it's linked to that 3% NIH budget growth? And is there hope with this 17% budget increase for FY '22?

Yes. I mean it certainly is promising. I don't know that we have a direct correlation to NIH. But I as much want to see like full -- the labs running at full capacity and people being there to do purchasing. And that's gone through fits and starts over the course of the last 2 years. So that's also got to be some tailwind at some point. But we've planned it pretty conservatively for 2022. It's -- we've got in the whole education at roughly low-single digits.

And Ger, we've heard a lot of commentary from Pfizer, Sanofi, major biopharma, about their initiatives in mRNA and biologics. Have you ever seen anything quite like this?

I have not. I think we all know we'll be telling our grandkids about this period of our lives and I think it will go down in history. I think the confluence of a number of different things has meant that the biopharma industry has really come through this very strongly. And credit to the industry. So we definitely live in interesting times. I've never seen anything as intense as the past 2 years in this space.

And I think what's been masked, right, is the underlying growth of biologics ex COVID, correct?

I think so, and they have continued to grow. There's a lot of focus now on Tom mentioned COVID tailwinds and headwinds for providers. But I think even on the way up, we kind of strongly into it -- this is not a zero-sum game, but elements of some of the aspects of zero-sum game play out in this. If we're immediately pivoting to provide materials to COVID providers, then we're having to scramble to make sure that our other customers are also not under any situation of having to close down. And that was a challenge and a scramble for everybody in the industry. So similarly, if we are now in a position where we start to see some COVID headwinds, the requirements of our customers in oncology, neurology, inflammation and infectious diseases, everything else, still remains. And those customers are tapping us on the shoulders saying, "Okay. I know you had to do what you had to do during the COVID times, but now we expect the TLC that we've come to expect for the longest time. So it's playing out in that way for us.

And then with the last couple of minutes left, I guess the 2 questions I would have is regarding vaccines. Do you think vaccines will be kind of a permanently higher-growth, more attractive market than what it's been over past decades?

We tracked it pretty carefully over the last number of years. And of course, there were 1 or 2 spots of light in the vaccine space. But realistically, it was a kind of a low-cost, high-number business that was often difficult to address. And things like some of the new molecular vaccines now for shingles and some of the bacteria diseases, we're already beginning to change that a little bit maybe 3 years ago. But now I think there's a much greater acceptance of vaccines. And companies like Moderna and Pfizer have already planted a flag for very interesting vaccines in, not alone infectious diseases, but people have talked about cancer vaccines as well. So I think all our perceptions of the vaccine space is going to change significantly. And I think it will be a really important segment for us going forward.

Good. And with that, Tom, you and Ger can stay on the line. But I know our investors have to move on to the next sessions.

Okay. Perfect.

Thank you.