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

Good morning, everyone. Thanks for joining us today and at William Blair's Virtual Growth Stock Conference. My name is Matt Larew. I cover life sciences tools here at William Blair. And I'm here today with Kevin Herde, the CFO of Maravai LifeSciences, the company I co-cover with my colleague, Brian Weinstein. A quick compliance note before we jump into things, is that for a complete list of disclosures, you can visit our website at williamblair.com.

So Kevin, while you're not going to walk -- formally walk through a deck today, given that this is a generalist growth stock conference, I do think it would be helpful if you could maybe just provide a brief overview of Maravai, maybe a history of your work in the company, the markets you participate in and how those markets and your participation in them has evolved over time.

Yes, certainly happy to do that. Thanks, Matt. And it's nice to be with you guys here at the conference here today. So Maravai LifeSciences, we are a life science company, primarily life science reagents. We help provide products to customers that they incorporate them into their own end products or use them in their manufacturing process or use them to quality-test their manufacturing process. So we don't necessarily have our own products to go out to the end market other than supporting our customers. We like to target high-growth markets in cell and gene therapy and vaccines and biologic drug manufacturing. We do so across 3 separate segments. Our smallest segment is Protein Detection, which is the historical immunohistochemistry assets that we have. We sell primarily to academic and research. Our next largest segment is in Biologic Safety Testing. So that is host-cell protein detection gets to test for impurities in biologic, primarily consumed in the development and manufacturing processes. They test for those impurities as not in a quality-control perspective. Our last and largest segment is Nucleic Acid Production. And that's where we're making all of the nucleotides and highly modified mRNAs, which are used by our various life science partners in diagnostics and nucleic acid-based vaccines and therapeutics. Our largest product in that segment is our proprietary messenger RNA technology called CleanCap. And our CleanCap, it's literally a capping reagent to help cap messenger RNA. It's used in vaccine programs and RNA therapeutics. And one of the largest drivers for the company at this point in time is the incorporation of the CleanCap product into several of the COVID-19 vaccines. So that includes the Pfizer-BioNTech collaboration as well as CureVac as well as others. So that sort of puts into perspective the 3 segments in which we operate. Our primary facility is here in San Diego, California, where I am today. We have about 140,000 square feet across our various facilities. We have over 460 people. In our last quarter, we recently completed first quarter of 2021, we did $148 million in revenue. That was 191% growth from the prior first quarter of [ 2021 ]. We also have very high EBITDA margins. Our EBITDA margin in the first quarter on an adjusted EBITDA basis was 69%, which yielded adjusted EBITDA of $102 million. We have very strong free cash flow, very low CapEx model, which gives us great flexibility, a really strong balance sheet. We've done a lot of M&A over the years. That's how we built Maravai [ LifeSciences initiation ] about 7 years ago. But all the assets we have acquired over the time have been in the given markets for a very long period of time. And so we've been public for just over 6 months now, having done our IPO in the middle of November of 2020. So just a short recap there. We have provided our full year guidance, just to give you a sense of the size of the company. Our midpoint of our guidance is roughly $700 million of total revenue for 2021, EBITDA between $440 million and $470 million and adjusted EPS between $1.04 and $1.12 per share. So a high-growing, good-sized company with nice profitability margins and certainly in an exciting space with our largest segment participating in all the excitement and interest in messenger RNA.

Well, that's a great setup here. And maybe just as a follow-up to that, a high-level question we often get from investors is just trying to understand how everything fits together in what is really a rapidly evolving life sciences space. So maybe just help us understand your product portfolio, how you get inserted into various drug development or various lab workflows. And maybe as part of that, you could discuss the RUO to GMP capability and how important that is to your customers.

Yes. So a lot of our customers will get certainly Nucleic Acid Production, which is our largest segment. We will be working with -- very early on in their development processes. So most of what we do in that space is going to be related to highly modified messenger RNA. So we really do a lot of custom work. You'll see we have a really low R&D spend as a percentage of revenue. That's because a lot of those people are embedded up in our cost of revenue line since they're providing custom products. So we would like to get with them in very early stages, initial research, helping with their constructs, look at what they're trying to do. Some of those products will include our CleanCap proprietary IP-protected capping reagent, and some of them will not. And some of them will be just other products or use other capping technologies. And so we work with them very [ early on ]. So there's a class of customers there, that we have [ work with ] about 40 customers or so across gene cell therapy and other applications. They work within our clean rooms, and we have GMP capabilities there to help with the manufacturing process. So that sort of moves them upstream through the initial development, all the way through potentially working under GMP conditions for what they need to get accomplished. And that's really been a growing part of our business. Certainly, that we kind of consider that the core, if you will, and then certainly, the applications of CleanCap and the CleanCap scale we have really being the next biggest and largest item for us. We were very fortunate. So we built a purposeful facility that when it came online at the end of 2019 here in San Diego to really support what we thought was going to be an explosion of growth in mRNA over the next decade, that's come a lot faster than we anticipated. And we brought that up again at the end of 2019, had a record first quarter of 2020, pre-COVID, and then COVID hit. BioNTech and CureVac were 2 of the very first adopters of the CleanCap technology. And this goes back several years when they were first evaluating different methodologies. So we knew them. We had a great relationship with them. We're really expecting great things from them [ this year, in 2020 prior to COVID ]. And then as COVID came on, they both came to us and said, "Hey, we're going to go forward." And then BioNTech and Pfizer obviously came forward and applied the technology. And we've been really happy certainly with that relationship and their commercial success, and that's been a lot of why we've been so successful and had the growth rates that we've had in the current year. But all that comes back to our ability to have capacity. And really, that just came ahead of what has happened. The facility we have in San Diego can support north of $1 billion in Nucleic Acid Production output. We're probably about 60% capacity there. So we have the ability to make CleanCap at high volumes under really strong conditions as well as support that whole growth of gene and cell therapy customers in clean rooms for advancing their individual products, which are more on the therapeutic applications of the technology.

That's really helpful. I want to ask a few questions around COVID, and maybe we'll spend a little more time here [ and with the other companies ] I'm hosting this week. But starting with CleanCap, you alluded to the new guidance range, which is about $100 million higher than the initial guidance range, with about $70 million of that coming from that CleanCap. So maybe just help folks understand what kind of visibility you have into the orders from your CleanCap customers and really what the drivers were for that guidance increase.

Yes. So we work with our customers and their supply chain teams. The manufacturing of a vaccine is a very complicated [ process as Pfizer says publicly ]. They work with 86 different suppliers over 19 countries for something over 250 different components that go into it. We're one of those suppliers, certainly and we believe a key one since the key technology is very important. So with our customers on the vaccine side, we have a rolling 12-month forecast. So we work with them to make sure that we have the ability to source what we need to make product and the capacity to deliver. And that has not been an issue for us whatsoever. So we have good visibility, forward-looking, for about 12 months, so basically through the second quarter of next year. And then from there, we lock in purchase orders, basically looking 6 -- about 2 quarters, about 6 months out, and then they're certainly scheduled to ship over the next 3 months. So very strong visibility in the 3- to 6-month time frame, absolutely, and good visibility [ with Pfizer as ] we're working with them on what they anticipate after that, going up to about 12 months. So because of that, we feel very strongly about -- and very confident in certainly our guidance range for this year. Now when we go all the way back to October, that process has been in place. So we continue to have these meetings. They come often [ as weekly in ] working with our customers. And since that period of time, basically every month and certainly every time we've had earnings or given updated guidance, those ranges have been increasing. And they've been increasing pretty consistently with the commercial wins they've been having as far as signing up new customer commitments for their vaccines and for the various programs as well as their capacity. And that certainly, Pfizer and others have made very large projections about potential capacity here and expanding into 2022, which also has us very excited as well. So as they line up all of that supply chain, of which we're one of those many, many customers, they can then build up into and support those increases in production and increases in doses. So we have seen a steady increase in their demand, not only for this year but for next year as well. So we're very excited about that and continue to build out our capabilities to make sure we can supply that, that what we see as increasing demand next year over this year as well as supporting non-COVID applications for a long time going forward.

And that's a good segue to my next question here, which is, again, you've talked about Clean CapEx generating more revenue from COVID in '22 than '21 and continuing to be present in '23 and beyond. And again, that's consistent with commentary from other vaccine developers. And we've also heard commentary from Pfizer around their plan to put 2 mRNA approaches to a flu vaccine into clinic each year for the next 2 years. A number of your other customers are making progress with their vaccine candidates and frankly had non-COVID platforms and programs existing before the pandemic. So maybe just with all those factors in mind, how should we think about the long-term run rate or growth opportunity for CleanCap?

Yes. That's what we're really excited about, certainly. It's been great to be part of the solution here, with what we've been dealing with the pandemic and working with our customers. But we've seen probably the adoption and commercialization acceptance, standardization of mRNA practices, accelerated probably 3 to 5 years. And then you look at the amount of investment that people like Pfizer plan on making into mRNA technologies for other applications and the doors that we believe this technology opens for other conditions is very exciting for us. So we've always been excited about that. I think it's now just getting more into the spotlight and certainly has been amplified because of what's happened with the pandemic. It's just showing the strong capabilities, how effective mRNA technologies can be, how safe they can be, in a wide range of things that they can offer and how they can be scalable. So we're really excited about that. Certainly, we're already starting to see that demand. There was a pause certainly in the early part of 2020, and a lot of people pivoted to other programs or pivoted to COVID programs that they didn't have, obviously, before. Now they're getting back to their core missions. Several of our customers are doing that. So we see that as a nice complement to where we're going and certainly excited about these other applications and the investments that are being made in the space, which, again, has really accelerated our trajectory from where we thought it was going to be.

Yes. And so I think you mentioned sort of a pull-forward, maybe 3 to 5 years of interest and investment in this space, maybe a piece of that from the performance of the vaccines. We saw Sanofi's recent purchase of Tidal. Maybe that was another indicator. Just curious if there's anything internally you're seeing, maybe it's even anecdotal evidence, whether that might be customers indicating to you that they're going to spend a greater portion of their R&D on mRNA, maybe it's CleanCap inquiries for non-COVID projects. Just curious if there's anything that you are seeing internally?

Yes, I think it's a little bit of all of that, Matt. I think we're certainly seeing interest in traditional large pharma companies that maybe didn't have an mRNA-based program thinking they now need to have one and certainly need to look at that technology. Certainly, existing customers, Pfizer being a great example, very excited about moving things forward. You look at what they're doing with their seasonal flu. I think that will be in Stage 3, I think, this year, if not this next quarter, moving that forward. And then again, the nice thing about mRNA technologies, again, versus traditional methodologies is just because of the natural science, you cover more variants naturally and which leads [ to solve ] great things like seasonal flu vaccines or other indications for large-spread vaccines or therapeutic uses, which we're also very excited about. So it's been a little bit of everything. Existing customers, really the dollar inflow into the space has increased. They're very excited. They want to move forward. It's the customers that are adopting this platform for the first time saying this is the platform of the future. So we're going to start porting all of our things onto it. And that's people that maybe didn't have this technology before saying, "We need to start a program. We need to find the right partners." And we've certainly seen a lot of that as well. So it's a good inbound flow and certainly good trajectory for Maravai as a whole.

Is there any potential competition? And I say potential because maybe there isn't really any current competition, but any potential competition to CleanCap that's worth calling out? Or is it mainly just competing against enzymatic approaches, would be part one. Part two is we've heard from some companies working on ways to improve capping efficiency so that potentially, in the future, maybe less capping reagent would be needed. So I would just be curious to get your thoughts both on competition for CleanCap and potentials for improving the efficiency.

Yes. So certainly, at high scale, there's really chemical capping like CleanCap or enzymatic capping. Again, we're fortunate that we have the capacity to scale and the intellectual property locked in around our approach, which we think is pretty solid and gives us the ability to meet all the demand that's out there. So I think we haven't seen much as far as other methods that can have all of those attributes, which is important, certainly available due to its scale and then the performance and the cost profile and the efficiencies you see in the manufacturing process since Our CleanCap is applied during the co-transcriptional phase in manufacturing. It's not a separate step, but separate reagents introduced into it like enzymatic capping, which -- because it's preferable. So that's very helpful for us, certainly long term, having that in place. And the second part of your question, Matt?

Well, just we've heard of some companies working on approaches to improve the capping efficiency...

Oh, efficiencies, sure...

Efficiency, yes, [ just if you had to take on ]...

Yes. I mean -- and we work on that as well. I mean we're certainly looking at all the different ways to have CleanCap even be better than it is today. As you adopt new technologies, one of the exciting things for us is we hope there are efficiencies. And we're seeing efficiencies in our own manufacturing process. We're seeing efficiencies from our suppliers, and we hope our customers see efficiencies in the manufacturing process. I think that's a good part of adopting new technologies on a broad basis as you want everyone to feel good about what they're doing, realizing process improvement, standardize the development, standardize the operations, get better at it such that it can be really the accepted investment method out there. So there are -- we're hopeful, again, across the whole supply chain, including ourselves, that everyone is getting more effective and getting more efficient in what they're doing. Certainly, we believe CleanCap has tremendous technological advances [ that -- for ] previous methods that give us a better yield [ and at the end ], with a more effective ingredient. But we're going to continue to improve that and work with our customers to make sure they're getting what they need. And we're excited to -- we're going to plan on having an R&D Day [ in the summer or by ] late third quarter just to really lay a lot of this out. We've been doing some white paper internal studies, so we get that question a lot. We just want to have all the data and science [ in this ] so people can understand the different methods and how CleanCap is unique versus some of the other methods out there and some of the potential improvements to address some of the things you noted.

That's great. Given the success of CleanCap in the COVID vaccines, just curious, is there an opportunity for you to get something like a master file with the FDA that potentially could increase your competitive moat?

Well, so CleanCap is incorporated in our customers' filings with the FDA. So you cannot flip out your capping [ region ] without doing another study. So that locks us in there. And we think, again, the templates that some of our customers have created for what they're doing today are things that are working, and they're working very well. I mean they're going to be able to take that template and port them over to other indications. And therefore, because of that being locked in at the early stage, having a technology that works great, having the capacity and the quality that really is what our customers want, I think that sets us up well for existing and future programs.