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

Good afternoon, everyone. Thanks for joining us today on day 3 of our Healthcare Conference. I'm Tejas Savant, and I cover the life science tools and diagnostics sector at Morgan Stanley. Delighted to have Maravai join us today. And representing the company, we have Carl Hull, CEO; and Kevin Herde, CFO. Welcome to you both, gents. Before we get into the Q&A, just some important disclosures. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your sales rep.

So with that, Carl, I mean, just to kick things off, maybe for people on the call who are not as familiar with the Maravai story, can you give us a high-level overview of the company? And what do you view as Maravai's greatest accomplishments since the IPO last year?

Sure, Tejas, and thank you for having us. We're delighted to be with you today. Look, Maravai, simply put, is a life sciences company that provides inputs and components to other life sciences companies for their use in their own products. In general, our focus is in 2 areas: nucleic acid production and biologics safety testing. In nucleic acids, we're really focused on RNA -- all things RNA and especially, messenger RNA. And at the heart of that franchise is our CleanCap product line, which has been incorporated into vaccines and therapeutics, all of which utilize mRNA. We also manufacture components for molecular diagnostic testing purposes, things like oligos and related components. And then in biologics safety testing, we're producing kits that are used by all the major biologic and biosimilar manufacturers to assess the quality and safety of the product that they're producing and specifically to look for residual host cell proteins that are left over after you produce a drug in a cellular expression system.

Got it. Carl, I mean, you've had a pretty stellar performance in '21. I mean continued momentum, and the CleanCap business has been at the heart of it, primarily driven by the uptake of the Pfizer-BioNTech vaccine. How do we get comfortable with the durability of CleanCap revenue? And how are you thinking about a potential sort of air pocket in the business model, if you will, in that sort of '23-plus time frame? I feel like people feel pretty comfortable about this year and next year, but it's more around sort of '23-plus where the debate centers.

Yes. Well, it's interesting, Tejas. We look back at the track record at the time of the IPO in November of last year, people were asking us a lot of pointed questions about the 2021 cliff for revenues. About 4 months later, that became the 2022 cliff. And now as you just pointed out, it's 2023 and 2024. So if history is any guide, I don't think there's a lot to worry about. But I think the reason for that, and there are some very tangible reasons, it's pretty straightforward. The first is that we're seeing much more of the market for COVID-related vaccines go to mRNA than anyone, I think, expected 9 months ago. The tremendous clinical efficacy of the mRNA vaccines and the excellent execution of both Pfizer BioNTech and Moderna, I think, have outperformed all of the other vaccines and all of the other suppliers. And so that is one tailwind that wasn't fully expected or anticipated. The second is we see a growing interest in the infectious disease space really focused on infectious disease vaccines other than COVID. And so obviously, people are looking closely at the other respiratory diseases. This could include RSV in infants, CMV in people of all ages and other related diseases and some really interesting discussions about maybe you combine those and you put together COVID with a flu vaccine, for example. So that's one area of interest. There's some exciting work being done on diseases that have been very resistant to vaccine strategies in the past, things like malaria and even HIV, where if RNA -- mRNA can make a difference, we're going to revolutionize yet another part of health care, and that's super exciting. And then finally, I think there's the therapeutic applications of mRNA, and those include immuno-oncology, which is really a therapeutic vaccine strategy, and then the original focus of the mRNA vaccines themselves, which were rare or orphan diseases. These would be often diseases that affect infants for which there's no decent cure or treatment and diseases that will be lifelong diseases, including things like glycogen storage disorders or other inborn errors of metabolism. So we think each of those represents yet another leg of growth in the business, and they're following one another serially pretty quickly.

Got it. And talking of just forward visibility in terms of CleanCap orders, is it sort of 6 months at this stage? Is it -- goes out to 12 months? How are you thinking about that?

Kev, do you want to take a shot at that?

Yes, happy to, Carl. And thanks, Tejas. Happy to be presenting today. Yes. So we have really nice visibility into our pipeline that really comes from a few different things. One, with our large-scale CleanCap customers, we do have formal supply agreements. They provide us actually a rolling 12-month forward-looking forecast for the business, of which the next 6 months are locked in supported by purchase orders. So very strong visibility into the pipeline from that regard. And that's a growing group of customers. As you know, we've talked about how many CleanCap contracts we had at the beginning of the year. We had about 5 contracts and another 5 that were under negotiation. That whole population now is about 50 between those that are signed and those that are under negotiation in term sheet status. So really strong growth there. So that's giving us an increasingly larger percentage of our revenues under that view and under that model. And then from there, we have the visibility forward looking into the demand for clean rooms and for the GMP activities for gene and cell therapy applications. And because of the need to schedule that out to support our customers, we have good visibility there as well. So real strong visibility into the forward-looking pipeline, and that helps to inform our investments in capacity and our investments in planning and other things of that nature.

Got it. You've got several capacity expansion efforts underway, including the new Flanders site. In light of Pfizer's comments to increase COVID vaccine production capacity to about 4 billion doses next year, is what you have coming online enough to support that level of demand?

Absolutely. I mean we can support that level of demand. Roughly today, I mean, we currently can do just north of $1 billion worth of output for nucleic acid production here in San Diego. The Flanders site, as you alluded to, is about 2 miles away. We're going to put a redundant CleanCap -- basically a small molecule manufacturing line there that can do CleanCap and also flexed to do other things as well as kind of reorganize our operational groups for the maximum efficiency. We think the combination of those efforts is going to get us to about $1.5 billion of potential output from these San Diego-based facilities by the time we get to the third quarter of next year.

Got it. And then, Kevin, in terms of just the modified terms on the Pfizer-BioNTech supply agreement that you recently disclosed, including I think it was a shift to an invoicing-based sort of billing, if you will, I mean, how are you thinking about any impact from that? I mean could we see any sort of catch-up payments as a result of that switch or not really?

No, I think it's going to flush through pretty quickly. Basically, what we had in the initial ramp-up of this relationship, we were receiving 1/3 of the purchase order value upfront to help us make the investments in inventory, supply chain, et cetera. Now this has gotten to a mature state. We're basically going to a traditional, they will -- we will invoice them at the time of shipment. And then we brought those payment terms in to compensate for that switch. No change to revenue recognition at all is recognized at the time of shipment.

Got it. Carl, back to you. I mean you outlined a number of sort of therapeutic areas where you might see some mRNA traction. Where do you think the pipelines are most advanced today? I mean is it going to be sort of universal flu followed by everything else? And what could sort of come next?

I think that's right, Tejas. It seems to us that the other non-COVID vaccines are really the place where people are concentrating a great deal of effort. That includes the existing players. Both Moderna, Pfizer and BioNTech have all announced multiple different infectious disease vaccine programs. And I think the one thing to keep in mind is in addition to the established players, the major vaccine companies and some other pharma companies are really accelerating their investment in mRNA technology. And if they didn't have programs that have been successful in mRNA COVID, they're trying to develop that capacity in-house. So you see announcements about investments of $400 million, $500 million, $600 million a year in incremental R&D from several of these companies. And I think they'll all target the infectious disease vaccines as the logical entry point.

Makes sense. How should we think about doses as you transition from COVID CleanCap and non-COVID CleanCap revenue? Obviously, in a sense, the COVID side of things is like a dream indication. But on the other hand, you might have greater volume per dose in some of the other therapeutic areas. How should investors be thinking about that upside?

Yes, that's an often overlooked point. First of all, the starting dose for a Pfizer-BioNTech COVID vaccine is 30 micrograms of mRNA. And if you look at the other infectious disease vaccine applications, they'll probably be similar. To the degree that there are combo vaccines, say, COVID-flu or flu with RSV, you'll probably simply multiply that dosage by the number of targets. So that's really straightforward. But when you get into the therapeutic applications, you have to remember a couple of things. First of all, you're dosing a patient often based on weight. Secondly, the dosages to be therapeutic are very different than what's needed to be immunological. And so it's not uncommon to see for a child a dosage that could be 1,000x higher for therapeutic application than for a single vaccine. On top of it, that dosage may be repeated monthly or quarterly. It depends on the disease state. And finally, interestingly enough, they are weight-dependent. So as the targeting of diseases expands to conditions that affect more adult patients, then the amount of mRNA needed for each therapeutic dosage will increase as well. So there's a couple of different things that just render at a very different beast. It may not be 5 billion doses over the course of a couple of years, but it may be close to that in terms of dose equivalents or higher.

Got it. There's a number of competitors kind of building capabilities in the capping sort of space, if you will. Recently be it news out of Aldevron and Ginkgo around the more efficient VCE enzyme. What are you doing proactively to gain and keep your market share? And on a related note, should we essentially view any sort of Pfizer and BioNTech sort of mRNA pipeline products as relatively unlikely to switch away from CleanCap?

Well, look, I don't want to speak for our partners. You can ask them the question themselves. But I think it is unlikely that -- for a de novo program that is similar to the existing programs that are out there, whether vaccine or therapeutic, it's very unlikely that anybody switches capping methodology. Once you've established that platform, once you've made it work successfully and most importantly, once you've got the regulatory buyoff on the use of that platform globally, it makes a little sense to switch individual things out, especially if you don't know what their impact on your clinical efficacy could be. But as we look at the future, we always look for room for improvement. Clearly, there are opportunities to enhance enzyme performance that people are talking about. And they may apply to go-forward programs once validated and accepted by the community. But I think more importantly, for us, we see some really interesting opportunities to use CleanCap and adjacent technologies to help us -- help our customers do what they're trying to do, and that is to get the body to produce more of a particular protein. So if we can enhance protein production by changes in CleanCap structure or alternatively by perhaps changing the part of the molecule or the sequence of the molecule that CleanCap attaches to, we may be able to help our customers accomplish what's important to them. So that's a big area of investment for us right now.

Got it. Outside of CleanCap, Carl, in terms of the other offerings in nucleic acid production, where do you see the most traction? And then I had a follow-up question on the plasmid side of things as well.

Sure. Well, our underlying business and the predated CleanCap was making mRNA constructs for customers according to their custom needs. That still remains a mainstay of the business. What we're seeing is a growing trend towards the utilization of GMP manufacturing techniques for those constructs. Previously, they were more of a research grade or intermediate-grade approach, but we're seeing greater demand for higher quality levels, and that's true across our business. So mRNA constructs are quite strong. Secondly, we have a very robust business in other small molecules, and these include NTPs, or nucleoside triphosphates, that are essential building blocks or tools used in things such as next-gen sequencing or in diagnostic application. And those are a big part that is contributing to the underlying growth of the business. And finally, I'd be remiss if I didn't mention our Glen Research capabilities out of the Washington, D.C. area. And here, we have a full catalog of nucleic acid synthesis building blocks that we sell to other manufacturers or developers. And in turn, there's been a lot of demand there from the molecular diagnostics space.

Got it. And then on plasmids, Carl, I mean, can you just update us on the traction you're seeing here? Is the supply-demand imbalance as acute as it was in the start of the year? I mean there's been a bunch of people making capacity investments here, including some pretty large tools companies. Just what's the state of play in that market today?

Yes. We still think there is an imbalance, and it manifests itself most often in delays in customer programs because they can't get the plasmid at the quality level they need when they need it. This is especially true when you make a change. If you're lucky enough to call your plasmid correctly from day 1 and get it made, you may not be subject to a lot of delays. But if you have to make a change, go back and get in line at the back of the queue, that could be a significant time delay. So we think the imbalance is there. Our focus is on making sure our customers don't experience that imbalance and that they're able to get sort of an end-to-end manufacturing solution from plasmid to fully capped messenger RNA from us, and that will continue to be our focus. We're happy with the progress to date.

Got it. Just got one question over email here. Can you comment on the strength of the IP for CleanCap?

Yes. It's strong. I mean, obviously, we would offer editorial comments along those lines. But I think the fact of the matter is that we invented this. We pioneered its usage. Our first customer commercially for CleanCap was, in fact, BioNTech. So we've been at this a while, and we feel very strongly that this is a unique innovation. And thus far, I think the market agrees with us.

Got it. Kevin, one for you on sort of nucleic acid EBITDA margins as we see a little bit of a transition from COVID-related to non-COVID-related CleanCap revenue. Is that something that could sort of affect the margin line at all?

I don't think so, Tejas. I mean really, it's about CleanCap demand in its totality, and we see that building, as Carl mentioned, from numerous sources. So not only the COVID demand, again, which we continue to see being strong looking forward, but also all the other applications of CleanCap, both for vaccines and then for therapeutic and other purposes. So we build that at scale. We sell it in bulk. We're pretty agnostic as to what customer it goes to. So certainly, continuing that demand from all those different sources will support those margins going forward.

Got it. Carl, switching to the Biologic Safety Testing business. You've spoken about strong demand for all categories of kits in the second quarter. Can you talk about sort of what's underlying that demand? I mean how much of that strength -- is it sort of in terms of the breadth of the menu that Cygnus offers versus some of the peers out there? And then I have a follow-up on the traction for the MockV kit as well.

Sure. Yes. Look, we think that the market for biosimilars and biologics continues to be very robust. Having said that, we're outgrowing what we think the market growth rates are in that space. And we think that's attributable to the breadth of the menu that you cite. We have 23 different cellular expression systems that we can test for, and we have 23 different process impurities that we can detect. So that's unequaled in the industry and is a real source of differentiation for us. But I think also, we have to acknowledge that there is yet another COVID tailwind at work here because as you now look at the cell and gene therapy applications and the vaccine production related to COVID, you're seeing a sudden explosion of demand. So on the cell therapy side, it's obvious that's monoclonal antibodies that are being applied to anti-COVID -- or COVID treatment. Those are all dependent on cellular expression systems, and some of them require very specific ones that other companies don't offer. And on top of that, when we think about the production of vaccines themselves, depending on what type of vaccine you're manufacturing, it's not uncommon to use 2 or 3 different cell expression systems to complete a transfection. And as a result, you need to test for all of those cell impurities as well. So there's some real great secular tailwinds, I think, that are helping us.

Got it. And in terms of just the investments you're making in this business, can you speak a little bit to the pipeline efforts underway?

For Biologics Safety Testing?

Yes.

Yes. Clearly, we're focused on our MockV opportunity, which is -- stands for mock viral particles. And really, this is an attempt to restate the way the traditional viral clearance studies have been done for drugs that are produced in a system that involves a virus one way or the other. And this gives our customers, the exact same customers who use the Cygnus kit, the opportunity to assess their process development changes along the way and get an early warning that they may have a problem with viral clearance before they get to the end of their entire process development effort and then send out samples for true BSL-2, BSL-3 viral clearance studies. We're trying to shortcut and replace that and enhance it. It -- I'm sorry, it won't replace it, but it will allow our customers to predict it. And that, in and of itself, can be a major contributor of value to them.

Got it. 80% EBITDA margins, I mean, pretty spectacular. The question we get is, how sustainable can these be? And how are you thinking about sort of the long-term trajectory there?

Kev?

Yes, certainly, happy to take that. Look, I mean, we're throwing off great EBITDA margins. There's no doubt about it. Those continue to increase as we've leveraged our cost structure here over time. Supply chain has done a great job for us. We continue to qualify more suppliers for our relatively well-defined inputs and actually improve the pricing there slightly as we get economies of scale and have multiple vendors involved. So that's been very helpful. We are going to invest a little bit back into the business, certainly. We talk about our R&D investment. We talk about the need to have some more commercial resources, and we will do that. But we're going to continue to have very strong EBITDA margins. And another nice attribute of our business model is the high free cash flow margins as well with only about 3 percentage points on revenue applied to maintenance CapEx. You're looking at a lot of that really turning into cash that gives us a lot of optionality to use that cash, whether these organic investments, inorganic opportunities or potentially down the road, other financial measures that give back return. So it's a great position to be in.

Got it. Carl, another question that just came in over email here, quoting a New York Times article today talking of a view among some scientists that boosters may not be needed for the general population. Is this a point of controversy in the scientific community today? And just sort of where are you shaking out on that?

Yes. Look, I think you're referring to a review article or actually more appropriately, an op-ed that was published in the Lancet by a group of very well-established public health officials from around the world. And I think what you're seeing is a collision of medicine and public health policy. And we often think of those as being identical. But in fact, the best medical care treatment for an individual may be somewhat at odds with what's best for society or public health. And I think that's what's driving this little bit of a disconnect that is appearing. And the disconnect, in my mind, is simply what's best for a patient who's received 2 doses of a vaccine and is showing signs of waning immunity. Is nothing best for that patient? Or is a booster, at an appropriate interval, the right treatment? We would probably argue that that's the answer ultimately. But on the other side of the equation is we have to remember that there are now estimated to be 5.5 billion people who have not received a single dose of vaccine in the world. And even if you adjust for the widest estimates of about 1.1 billion people already being infected and assume that they have still effective natural immunity, we still got 4.4 billion people to go. And that -- therein lies the dilemma. I think public health authorities are rightly concerned about how can we get everybody in the world vaccinated as fast as humanly possible. And any one dose that goes to someone who is already vaccinated is not available for someone who isn't. So in that zero-sum game, their position is a valid position from a public health point of view, but it might not be the best thing for the individual and their own health status.

Got it. And Carl, I mean, to your point, I mean, the -- I mean, even if a country has excess doses, it's not necessary that they're going to be willing to ship it all out to somewhere else in the world where you have a more acute need or a smaller fraction of the population is vaccinated. On the other hand, are you hearing anything from your partners on the mRNA side in terms of coming up with more convenient forms of the vaccine, if you will, so that they can be more suited for use in emerging markets or real-world conditions?

Sure. I think there's a lot of effort and a lot of innovation being devoted to how can we make things thermostable for as long as possible so that we don't have to impose difficult cold chain requirements and shipping to developing parts of the world. Another area of focus is can we find an alternate delivery system so that it is not an injectable vaccine but perhaps a nasal-administered vaccine. And I think those efforts will continue apace. It's just hard to bet on which ones of those might be successful apriori. You just don't know.

Got it. And as long as it's a Pfizer-BioNTech vaccine, let's say, Maravai will still sort of play a role in all those sort of new modalities? Or is that something which will need to be sort of revisited at that stage?

I think we feel that we've been a very good partner to the Pfizer-BioNTech partnership itself. We have made sure that we have adequate capacity and adequate quality material available for them at all times just as we've done for every other CleanCap customer. So we've never been a rate-limiting factor. And I think that, that contributes well to our established position with both partners on their joint programs and on their separate programs as well. Are there going to be cases where a particular therapy for a particular disease may want to use or may need to use a different approach? That's always a possibility. But we think that being a reliable partner who contributes a key component is a good position to be in.

Got it. I want to talk a little bit on the divestiture of the Protein Detection business, Carl. I mean at the time of IPO, you talked about that business essentially being small, but an early touch point to a lot of your customers, particularly academic customers who are doing a lot of mRNA work, and that gives you a line of sight to introducing them to the rest of the portfolio, perhaps partnering with that project as it moves towards commercialization. How do you kind of like sort of fill that gap, if you will? I mean from a revenue and EBITDA standpoint, obviously, it's not particularly material for you and it's a margin business.

Yes. Look, I think, Tejas, we came to the realization this year that the business is still in good shape. Obviously, it was impacted negatively as all lab-based businesses were last year due to COVID closures, but it's rebounded very nicely. And we were fortunate to bring in a great leader who looked at the business, both operationally and strategically, and she's developed a strategy, which I'm fully supportive of, which requires incremental investment in the business through a series of bolt-on acquisitions. All of them make logical sense. The challenge is as each month would buy the contributions from Protein Detection to the overall Maravai kept decreasing, not because they weren't increasing, but because the rest of the business is growing so explosively. So we recognized that we were setting ourselves up to be suboptimal in the Protein Detection space because they would have to compete for resources and especially for acquisition dollars and management time with the Protein Detection -- I'm sorry, with nucleic acid production and with biologic safety testing. That would be a huge challenge and we would probably be doing the business a disservice. So we were approached unsolicited by a third party who was interested in doing just that, focusing on it and using it as the core of a business in which they would make incremental investments. We found a fair price. And so that was the rationale. Will we ever replace the connections we have with the academic customers? Probably not directly in kind. I don't see us going back into that space. But our reputation in RNA and mRNA or all things RNA, I think, is pretty well established right now, along with the same thing in biologic safety. So we feel pretty good about the decision.

Got it. And then in terms of your appetite to do M&A near term, I mean, obviously, the business is throwing off a ton of free cash flow, thanks to COVID. What's -- how are you thinking about sort of pulling the trigger here on bolt-on opportunities?

Kevin, do you want to take a shot?

Yes. Look, I think we continue to hang around the hoop with a lot of founder-based companies that we've fostered relationships over the years. Some of those are already part of -- whether our vertical supply chain and others that we know really well in the space. Ideally, with the strong balance sheet that we have, being able to be opportunistic as those founders are ready to exit, I think, is something that is what we've proven we can do well. And I think we can add a lot of value to those businesses by how we invest in them, bring them into the fold and amplify their growth. And I think that there's very -- there's a few stuff that's out there that we're interested in, we're active, and we're hopeful we can bring some across the line. And if we don't, it's going to be a combination of that plus organic growth and then looking at some other opportunities. So we don't feel compelled to have to do a deal. But I think with the cash flow we have and with the successes we've had, we'd like to do a deal, and we're certainly focused on that.

Got it. And Carl, what do you view as the most interesting set of opportunities for you?

I think we are on the cusp of a revolution in medicine, and it is based on mRNA in a variety of fashions and a variety of applications. We're beginning to appreciate the extent of that opportunity in that transformation, but I think it's only the very, very early innings. So in front of us, we think those applications for the next decade are going to be super exciting.

Got it. Kevin, one quick one for you. Any sort of supply chain disruptions or rising sort of inflationary pressures in the business that you're grappling with at the moment?

No, none whatsoever. We have a great supply chain leadership team. We've done a great job validating other vendors, actually gaining some economies of scale with our vendor base as far as our growth in our production to get better pricing and no shortage of materials or logistics. We're in real good shape.

Got it. Carl, to wrap up, I mean, obviously, it's been a rough few days for the stock. I mean for no fundamental reasons but because of the insider selling overhang and whatnot. In your mind, as you sort of look at the Maravai story over the next sort of 2 to 3 years, what excites you the most? And why do you think investors should engage with the story given sort of some of those sort of very recent dynamics?

Well, look, Tejas, I think that the -- you're absolutely correct that there are no fundamental changes in the business. And so I like to think that markets are efficient and ultimately reflect the reality of what's going on. This may be a short-term dislocation in that sense. But I think the excitement that we feel for both of our major businesses and for the contributions they're making to human health care are really quite amazing. And as I think about the future, I think it's important that people appreciate just how central a role Maravai is playing in a number of very, very important programs and realizing that we're doing our level best to continue the level of innovation that has gotten us here as well as to support all of these programs. And we're making smart investments that allow us to expand as our customer demand continues to expand, and you could expect more of that from us. So overall, I think that Maravai is well positioned for the next several years.

Got it. That's a great place to leave it at, gents. So thank you both for joining us this afternoon, and I hope you enjoy the rest of the conference.

Thanks so much, Tejas. We appreciate the hospitality.

Thank you. Talk soon.