Maravai LifeSciences Holdings, Inc. (MRVI) Earnings Call Transcript & Summary

All right. Thank you for joining us. We'll kick off our next session. My name is Mike Ryskin. I'm on the life science tools and diagnostics team here at BofA. I'm joined by the session by Juan Avendano and the team. And joining us as well, we have Kevin Herde and Deb Hart from Maravai. So I think to begin, we're going to go through some slides, just sort of set the background a little bit, and then we'll hop into a fireside chat after that. So Kevin, off to you.

Great. Thanks, Michael. It's a pleasure to present Maravai to you. For those who don't know the story, we went to public in November of 2020 and just recently reported our first quarter results this Monday. On Slide 2, just to start, we will talk about certain forward-looking statements and non-GAAP measures, primarily adjusted EBITDA and some disclosures related to that. Then I'll move to Slide 3 and kind of just talk about the overview of Maravai. So again, we target high-growth life science reagents markets predominantly in our 3 segments. Those segments represent Nucleic Acid Production, Biologics Safety Testing and Protein Detection. Within our Nucleic Acid Production segment, we have our proprietary novel mRNA chemical capping CleanCap reagent, and that is the reagent that has fueled the most growth that's incorporated in many of the leading mRNA vaccines, including the vaccines produced by Pfizer and BioNTech. Within Biologics Safety Testing business, we can test for impurities during biologic and therapeutic processes in host-cell expression protein and other contaminants, and that's also a very solid business for us, growing at nearly 20%. And our smallest segment is Protein Detection, which is your traditional immunohistochemistry antibodies, a sustaining type of business in detecting proteins in cell and tissue samples. That's roughly 4% of our business at this stage. Turning to kind of the financial profile, at the high level. We did $148 million in revenue in the first quarter, just reported. That's 191% year-over-year growth, 102% -- $102 million in EBITDA and 244% year-over-year growth. We have outstanding EBITDA margins that really reflect the technology, the intellectual property and the leading positions of all of our products across our segments. We operate about 140,000 square feet of facilities, the predominant one being here in San Diego. We have over 100,000 square foot, really state-of-the-art related to producing nucleic acids, mRNA and CleanCap. We've been in this facility since the end 2019, and we have today over 460 employees, several of which obtained advanced degrees as we have a highly scientific workforce. Moving to Slide 4. Again, some of the attributes of Maravai from an investment portfolio perspective. And we're a reagents company, so we focus on providing key ingredients to our customers, which is very important. And we have great retention and long key relationships with our customer base. A great example of that is both CureVac and BioNTech were 2 of the original adopters of the CleanCap technology dating back several years. I mean we've had great relationships with them as they advance that technology and that platform. We've made significant investments in infrastructure. And talking about our San Diego facility, really state-of-the-art as far as automation is concerned and the ability to scale. This facility I'm in today can support over $1 billion in outlet related to nucleic acid production. And we're well on our way towards that goal over the next couple of years. And we have a great EBITDA financial profile, spin off a lot of cash. We'll be about 1x net levered here really soon, and that gives us a lot of flexibility as it relates to both organic and inorganic investment opportunities. And we've all done this before. A lot of us come from Gen-Probe, myself, Carl Hull, Eric Tardif, and we have a lot of other people running the business, some at other levels that's in the organization that have a tremendous life science experience. And we've been working together now for several years prior to going public. And we have a great culture here and great engagement with our employee base, and everything has gone very well that way. As it relates to Slide 5, moving to just our recently reported Q1 performance, just breaking it down by segment. Certainly, Nucleic Acid Production revenue growing 306.5% in the quarter and fueled by the contributions of CleanCap and the demand for that in COVID-19 vaccines. Biologics Safety Testing revenue continues to outpace the market, 23.5% growth just due to the breadth of products offered there as well as continued strength in biosimilars. And I think we're seeing that across the marketplace as that segment continues to grow above historical growth rates. And again, Protein Detection growing 7%. That business was directly impacted by the pandemic in 2020, having shut down as it mostly focuses a little bit on the academic and the research markets, which people ran at their bench but it's returned to normalized levels and grew 7% in the quarter versus the prior year. Moving to Slide 6. Just to focus on some metrics we haven't talked about yet. CapEx was $27.5 million roughly in 2020. That reflected a lot of infrastructure for finishing the build-out of our San Diego facility. Roughly, we see free cash -- or CapEx around 3% -- 2% to 3.5% based on our current guidance for 2021, and very strong free cash flow. We define free cash flow as our adjusted EBITDA plus our capital expenditures, and we saw that in about $142 million in the recent quarter just completed. Moving to Slide 7. We upped our outlook for the year based upon the growing trends and success that Pfizer is having and others as well as increases in our Biologics Safety Testing business and some of our non-CleanCap-related businesses in and around oligonucleotides and other M&A, which continue to do very well for us. Our current outlook is for revenues of $700 million, at the midpoint of the $680 million to $720 million guidance range; EBITDA between $440 million and $470 million, which results in adjusted EPS of $1.04 to $1.12 per share. All of those meaningfully from our previous guidance, reflecting the continued strength of CleanCap and the continued strength of mRNA as a vaccine and the continued performance by Pfizer and BioNTech in winning commercial contracts and creating additional capacity, which we really see is expanding not only through 2021, but also through 2022 and beyond based upon the activities and the statements they're making and that we support. So we're really bullish about what we're going with this business. Moving to Slide 8. This is just simply a reconciliation of our net income to GAAP EBITDA and then from GAAP EBITDA to adjusted EBITDA. Again, pretty straightforward reconciliation to give people the ability to view how we look at the different metrics from GAAP to non-GAAP. So those are some of the prepared remarks I have for you today. Thanks for going through that. And now I'm certainly ready to address some questions you all might have.

Great. Thanks, Kevin. Appreciate that. A reminder to investors on the line, you can submit a question through the Veracast portal or you can send them directly via Bloomberg chat or e-mail, and we'll get you in the queue. I think just to get started, Kevin, on some of the last points you made. Obviously, a lot of focus has been on sort of the near-term COVID tailwinds. And as you said, trends in recent weeks and months from some of your major partners, most notably Pfizer, BioNTech, but others as well, are all positive. Could you comment a little bit on how much visibility you have going forward in terms of your purchase orders? How are some of those contracts structured? How much confidence that gives you about not just 2Q, but second half 2021 and then 2022 in terms of what the real demand is going to be?

Right. So with our large major COVID-19 vaccine customers, we have standing MSAs or supply agreements in place with them, and that basically requires them to work with us to provide forward-looking forecast for about 12 months. And so we have good visibility certainly through 2021 and now into the first 1/3 of 2022. In addition, those are then backed up in the short term of the 3-month, 6-month window with varying degrees of locked-in purchase orders that we have in hand. So we have a very strong visibility into our forward-looking revenue guidance as it relates to CleanCap, in particular, and we certainly see that being very strong this year and expanding into next year certainly based upon the additional capacity increases, commercial wins and the statements from Pfizer and others. And we're very excited about that and certainly are continuing to invest in our infrastructure and our capabilities to deliver to that and more as we move forward. As it relates to the rest of the business, again, continue to do very well. Also we have good visibility into our gene and cell therapy company customers. They use our clean rooms to advance their campaigns and schedule those a couple of quarters out to make sure that we're ready to deliver the custom mRNA, CleanCap and other services they need to advance their programs. And we have just great core businesses that have good repeat revenue. We have a very sticky customer base, and that expands across the remainder of Nucleic Acid Production, certainly in Biologics Safety Testing and Protein Detection.

And just going back to the COVID viewpoint. I think something Carl has talked about on the last couple of earnings calls is sort of the longer-term opportunity there, the thought process that this could really become endemic [ and be necessary ] over time. Could you comment a little bit on sort of what your expectations on that are in terms of how you're planning the financial model for the long run and also sort of what's the status in terms of how locked in is CleanCap into these -- into some of these vaccines? And not only just being the first wave, but also potentially the second wave, the second-gen vaccines out there.

Yes. So I'll take the last question first. CleanCap is locked into these formulations. We lock it in very early on. We do so -- have done so with certainly BioNTech, CureVac, others certainly within the Pfizer vaccine. It is really a reagent that is -- really benefits our customers for multiple reasons. Certainly, it's part of a solution that's proven to be highly effective and highly safe. It also is that -- it's a chemical capping that occurs during the transcription phase of the manufacturing process. So unlike other enzymatic methods, it doesn't require separate manufacturing step where you get the yield differences and introduce additional biologic components into the vaccine. So it helps with the production efficiencies, which is incredibly important as we're talking about the scaling of the mRNA vaccines to address the pandemic and other applications, frankly. So we're very excited about that. As it relates to this year, again, moving into next year and then beyond. We've always thought and seen this as a multiyear rollout. We still have 6 billion people to be vaccinated the first time, and so there's still a lot of work to be done here. And we're really happy with how Pfizer and BioNTech are continuing to advance the capacity and then roll that out to meet that need from there. I think multi-variant -- other variants as well as booster shots are going to be the norm. And so we see this demand extending through 2021 likely based on the comments our customers expanding in 2022 and continuing to be present in 2023 and beyond. So we're planning for that. We will have the -- continue to make investments we need to, again, supply that demand, meet that demand and have the infrastructure in place to support our customers.

A point you made there, Kevin, was sort of on the benefits of CleanCap versus traditional older enzymatic approaches. It's still a relatively new technology. As mRNA vaccines and as, in particular, your work with Pfizer and CureVac and Imperial College London has gained some attention in the media, are you noticing that it's opening more doors for you with other companies in development, companies that were using CleanCap in the past but that are now potentially exploring this? I guess I'm trying to ask sort of long-term impact of this in terms of uplifting CleanCap.

Yes. I think there's 2 ways to look at that. I think, certainly, the validation of the mRNA as a platform technology has certainly accelerated several years because of what we've been doing with the COVID-19 pandemic, and that bodes well for companies like us that participate in the space. I think we're also seeing several people come to us with interesting CleanCap that didn't previously have mRNA programs, and that's for other potential indications. And I think that, that is really exciting for us as well. So I think mRNA is here to stay, certainly, as a platform technology. And then we just feel it's better science as it relates to applications, such as the large-scale vaccines because of its ability to cover multiple variants naturally, and that's certainly an exciting part as far as global health care is concerned. So we continue to get an increasing interest both on the vaccine side as well as on the therapeutic side and people who find CleanCap to our highly modified mRNAs for specific purposes in gene cell therapy. So those 2 trends are only improving for us and even makes us more excited about the future.

And on the -- just wrapping up sort of on the CleanCap side. What's your manufacturing capacity today? How much more sort of do you need to scale up to sort of stay ahead of it?

Yes. And again, here in San Diego, where the predominant nucleic acid production occurs, we're probably 50% to 60% utilized. We can crank out just sort of north of $1 billion out of this facility. When you add in the other contributions of the other companies, that puts us in that low $1 billion range, between $1.4 billion, $1.5 billion, I think, before the expansion when we hit capacity. But from our perspective, we're going to continue to invest organically and make sure that we have no limits to our growth. We've done that historically. We've always invested in all of our assets that we've acquired or brought on naturally to accelerate their growth, and that served us well. And we're going to continue to do this because we have great tailwinds in the markets in which we participate.

Great. And on that point, just because you touched on it right now, sort of on the investment side of things. Can we talk through the margin profile a little bit? I mean, as you said, you've acquired a lot of these businesses over time. And if we look at sort of the R&D profile and the SG&A, I think it's incredible now, but sort of how much investment do you think you need to do to -- going forward to maintain the edge there?

Yes. So our recently completed quarter, we had a 69% EBITDA margin. We guided to about a 65% EBITDA margin at the midpoint. Some of that is we're going to be looking to make additional investments in our commercial infrastructure, in our R&D efforts as well. We do have a fair amount of R&D kind of embedded in our cost of revenues just because we are working very closely with our customers on custom products. You see a lot of that effort sort of in that line as opposed to the traditional R&D line. But we still have some ways to go to continue to build out our infrastructure commercially for the size of the company we are, and that's just we've grown so fast down from founder-based companies that have amazing science, amazing products, but didn't necessarily have the infrastructure in place to maximize the growth, and that was what attracted us to them and what we've been able to bring to the table, and we're going to continue to invest in that. We are, at this stage, a 100% U.S.-based company. We do not have infrastructure outside the U.S. Certainly international and geographical expansion is also on the list of things we're looking to invest in over time to make sure we maximize our opportunity with the assets we have and the assets we may acquire or continue to put on the marketplace for our customers organically. A great example of that is our plasma DNA investment, our organic investment to address our customers' needs and market needs for high-quality plasmids for our customers that are making mRNA products, and that's an example of organic investment. And as you said, we've also been very active in inorganic ways in M&A over the years.

Okay. Speaking of some of those investments and some of that R&D spend. I mean, I think the question we fielded from the beginning is given your -- again, given the importance of CleanCap to the business now, are there any potential competitor for that, that you know about there? I mean, the big approach we know of is antibiotic, obviously, but are you aware of anyone else developing something here? Are you concerned about a potential disruptor coming in given the importance of the business?

At this stage, we're not. At this stage, we feel really good about CleanCap kind of being the best-in-class capping strategy for mRNA, and it's had years of development behind it. So I think we're very strong, but very comfortable with our IP position and very comfortable with all the different variants that would require workarounds, et cetera, and we're very protected there. But we're constantly looking at that. And that's again another area of investment for us is continuing to make sure that we have all the strategies in place to ensure that CleanCap -- derivatives of CleanCap, et cetera, are proprietary to us and can be enabled with the customers that work with us. And we feel we're very good about that. We do not see any disruptive technologies. And again, most of these capping techniques need to really be locked in at initial formulation, and they're not going to change. They're successful. They work for the customers. They're a small cost for the end product, and they're effective. And I think that there's no incentive for our customers to change.

Do you have any thoughts on sort of what market share CleanCap has now versus enzymatic approaches, maybe not necessarily on a dollar basis, but on a volume basis? Just sort of what's the opportunity set within mRNA where you're not playing yet?

Well, look, I think the market and the market size is obviously changing pretty rapidly here, as we speak. We are certainly embedded in our other top customers we've talked about publicly. So that's Pfizer, BioNTech, CureVac. You talked about the Imperial College London and Daiichi-Sankyo and others of that nature. They're using mRNA, and they're doing a great job in their commercial efforts. The other methodologies out there certainly with mRNA has been [ doing their ] proprietary enzymatic method. ARCA or other historical methods just can't scale to that end. So you really kind of dealt with enzymatic methods or chemical methods, such as CleanCap is really the predominant market share leader as far as capping mRNA for vaccines certainly at this scale.

Great. Maybe moving on to some of the other parts of the business. I mean, I think you talked about -- you touched on Biologics Safety Testing earlier in your prepared remarks. Always been a very strong growth business but has stayed resilient throughout COVID in 2020, off to a good start in 2021. Can you just talk us through some of the product mix there? What's so differentiated about that portfolio for you? And even relative to the broader biologics market, it seems like you're outgrowing that pretty meaningfully. So how sustainable is that?

Yes, yes. Let me just talk a little bit about that business. What we do there is we create basically kits to help test for contaminants in biologic processes. So that might be the overexpression of wholesale protein. So someone's using HEK as an expression system to grow their biologic. We need to make sure that, that host-cell protein is out of the end product or at least below acceptable levels, and they use a Cygnus-branded kit to test for that. It's been the gold standard for a long time now, obviously, of various different expression kits. We have a high breadth of expression kits. So you're starting to see some things such as BSA or such as E. coli but working with biosimilars. And those are picking up steam just because we've always had them in the catalog on the portfolio, and that's very consistent with some of the market growth we're seeing in biosimilars. The performance of these kits is sort of unparalleled. Again, it's an FDA reference gold standard in many cases, and we have a large breadth of kits for a lot of different -- both expressions of host-cell proteins and other contaminants, protein A or endonuclease or other things that are created during biologic manufacturing processes. We can test for to make sure they're not overexpressed in the final product, and that's a requirement from a quality perspective. So very embedded into the process, very much benefiting from the market growth. These are consumed more rapidly during development stages because of the change in formulations and the overall process change controls that need to be in place. And so that feeds into our revenue growth as you're seeing an investment in these areas during development. So the combination of those things, the market growth, the breadth of quality, the breadth of products and the quality as well as the services we offer to help our customers, have enabled us to continue to expand the growth rates above the market rate.

And who are the other vendors that you're competing with there?

There's other offerings out there. Probably the largest, frankly, competitor are people that bring it in-house, right? So large shops that are going to be making their own kit, their own sort of home brew, if you will, in testing, using their own and not outsourcing it or buying a -- either a custom kit from us or a generic kit from us for certain expression systems. I would say our offering is so broad that it probably covers the next 2 or 3 off-the-shelf competitors combined. So I think we feel very good about our market position. And as labor becomes more scarce, people want to apply their internal labor more so to development programs and less to in process quality control kits. So I don't think we see a threat of more in-housing. Frankly, this is a very reasonable product that provides a great result, certainly, as you compare it to the overall cost of some of these programs.

And on the other segment, Protein Detection, as you said, easy comps last year because it's a little bit more academic and government exposed. That's of the end market where we saw the biggest challenges. Obviously, you have a very easy comp in 2Q coming up. But just in general, if you kind of adjust the comp, is that business mostly back to normal now? Is sort of the mid-single-digit growth rate the right way to think about it going forward on a normalized basis?

Yes. Michael, that's absolutely right. It's -- that's the market growth. That's what we've been seeing historically. It is back to those historical levels, and we see that market performance continuing. A nice base business for us. It served us well over time. But just given the growth rates of the other segments, it's an increasingly smaller part of our overall contribution.

Is that -- I mean, given it's dilutive to your overall growth profile, are there sort of synergies on the cost side, on the revenue side that sort of make it core to the business? Or sort of what are your long-term strategic views on that?

Yes. I mean, look, it's a solid business as far as performance reliability, good, solid margins. The other businesses are exceptional margins. And it was, again, it was sort of our first acquisition as we formed Maravai, so it has that component to it. We have back officed a lot of things that create natural synergies on the cost side and then share that across our segments. So everything from the finance accounting, IT, SG&A functions to distributor management and other things of that nature, and you see common customers relationships, both on the customer side as well as the vendor side across all of our businesses. And certainly, we get some leverage points from that. But you're right. Strategically, if we're looking ahead, given the growth, given our proprietary products, the customers we're working with and where we think the greatest opportunity is, the Nucleic Acid Production segment and Biologics Safety Testing segments continue to be the primary focus for us with regards to incremental investment.

Okay. And you touched on this point briefly a second ago. I want to come back to it quickly. On inflation and sort of supply costs. Something we've been seeing a lot of talk in the markets about. Could you talk through sort of how critical -- how big of an impact is that having on the business, whether it's reagent cost or anything else in the material supply chain side of things? How much are you able to pass on to customers? Sort of what's the flexibility in the model there?

Yes. Sure. Actually, as we've formalized and grown our global supply chain group from where we were to where we are today, and based upon the growth of the company and the forward-looking forecast and capacity and where we see the business going, we are entering into larger supply agreements from our vendors at better pricing than we ever have. So we're actually seeing just based on volume improvements there, and you've seen that reflected predominantly in the nucleic acid production margins that are coming out of that business from where they used to be. That's just scale, and scale is great for our business. So we have not seen that pressure in our supply chain. Also, we've been pretty good with the pricing on our product side, certainly on the larger CleanCap products. Those are fixed prices for multi-years that are not variable based on end unit pricing or anything of that nature. So we feel comfortable with those pricing dynamics for us. And we're building this product. Where we used to build it at a microgram level, we're building it at a kilogram level, which still isn't very big when you look at the end product but is substantially high than we've ever done so. So those -- that scale has also led itself to margin improvement. And frankly, when you look at this business, the pricing of those products just simply follows a pretty traditional lower price at the higher volume. We stayed very disciplined with regard to pricing models up and down that curve.

Okay, okay. One other question, as we're getting to the end of the hour, is, historically, you've been sort of very acquisitive to bolt on new platforms, new capabilities, new technologies. I think that's something you and Carl have indicated you're going to continue to do going forward. Could you just talk about the opportunity set out there and how you're thinking about valuation trends? How are you thinking about particular areas? Obviously, you mentioned nucleic acid and biologics safety testing as priorities. Would you consider a different vertical? Sort of talk us through the approach here.

Yes. I think our first priority is to continue do to what we've done, and that is, I think, in the nucleic acid production, first; biologics safety testing, second. I don't see a fourth leg of the stool at this stage for us. I think there are still some nice assets to be accumulated, either up and down our supply chain or looking across other things our customers need, and that's really the feedback that we get. Right now if you just look at Pfizer's quotes, 86 different suppliers across 19 countries to make over 100 -- 250 different components for that 1 vaccine. Our gene and cell therapy companies have the same issue. They have to go to 6, 8, 10 different vendors to get their end solutions. So this is mRNA, it's capping, it's plasmid DNA, it's transfection reagents, viral vectors, lipid nanoparticles that are delivery systems. When you have to line up that many different vendors and any one of them is gated for any reason, it impacts your time lines. And for some of these companies, that -- the time lines are everything for what they're trying to advance. So continuing to provide additional capabilities to our customers through us, we have such a good reputation for quality, for on-time delivery, for working with our customers, they want to see us do more, frankly. And our business model generates the sort of cash flow that gives us the flexibility to be opportunistic and drive assets at the right value. Valuations are certainly a challenge in the marketplace today. There's certainly a lot of people that have a lot of optionality because of the different avenues to either public listings or otherwise, so we don't feel unnecessarily urgency to acquire on a specific cadence. It has to fit our strategy and then ultimately has to pencil out for us as well, and we're pretty disciplined about that. But even with all that having been said, we have a nice pipeline of things that we're looking at. And we've been very active here in the first quarter, and we're going to continue to be active throughout the course of the year, hoping to bring some things across the finish line. But we also balance that with a build versus buy scenario. Again, we have the opportunity with our expertise, what we've proven we can do as far as building our own capacity, building our own expansion, building our own new products or derivatives to our products that matter to our customers. And that's always an option for us also to more control our own destiny while supporting long-term growth. So it's an exciting time to have sort of the flexibility we have with the cash flow we have, with the opportunities. And I think we're going to be able to bring some meaningful additions to our growth curve through 1 of those 2 avenues, inorganic or organic investment.

Got you. Yes, that's a good problem to have. We're down to about a minute left. I'm just going to sort of go to our -- they're my closing question, which is, obviously, you've had a lot of meetings with investors here the last couple of days and including after you reported earnings on Monday. What's sort of the bigger themes that are coming out in your conversations? What are the questions people keep coming to back to the topics of discussion? Sort of what's topical for the investors you're discussing with?

Yes. I think the biggest thing continues to be the durability of COVID-19 contributions from our business. I think people were really happy about our prepared remarks, very happy about what our key customers are saying about next year, increasing capacity even larger than 2021. We see that as well. We've always seen that. We have more confidence in being able to say that now as we work with them, seeing their successes on how they've been able to expand geographically, expand with age demographics and continue to look at more applications of CleanCap outside of the COVID-19 vaccines only bodes well for the long-term profile. And that's really been the predominant question for us, is really where is this business going and what are the contributors to long-term growth, and we see several and we're really excited about that.

Got you. Well, thanks so much, Kevin. Really appreciate that. That was a very thorough overview and covered a lot of ground. Thank you for joining us, Deb. Thank you for everyone on the line for listening in, and good luck with the rest of your meetings.

Thank you very much.

Thanks.