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

All right. Great. Thanks, everyone, for joining us today. I'm Catherine Schulte. I cover Life Sciences & Diagnostics here at Baird. We're very excited to have Maravai presenting here today. And from the company, we have Kevin Herde, CFO; and Deb Hart, Senior Director of Investor Relations. Before we begin, just a reminder to refer to Baird's website and our published research were important disclosures about what we're discussing today. As far as the agenda, Kevin is going to give us a quick full review of the company, and then we'll jump to the Q&A. [Operator Instructions] So with that, Kevin, I will hand it over to you.

Perfect. Thanks, Catherine. Thanks for having us at the conference. We appreciate it. So I'm just going to do a brief overview of Maravai LifeSciences, then we'll get on to some questions. So just a quick disclaimer, we may use some forward-looking statements and use of non-GAAP measures, particularly for us adjusted EBITDA. Let's move forward. So overview about Maravai LifeSciences. So what we are is a life sciences company. We target high-growth markets in both solid gene therapy, vaccines and biologic drug manufacturing. We consider ourselves a leader in highly modified complex nucleic acids, primarily messenger RNA. And our one largest product is our capping technology, CleanCap, which is used in many of the leading vaccine programs in RNA therapeutic programs today. Our most recently reported second quarter, we did $218 million of revenue. That was 364% year-over-year growth. We did $165 million in EBITDA. That was a 76% EBITDA margin. We currently have just over 140,000 square feet of facilities and just over 500 employees. So moving to Slide 4. Some of the key attributes of Maravai, again, a leading supplier of critical solutions for life sciences. We have long-standing relationships with our customers and address very high, large high-growth markets. We've also made significant infrastructure investments that we'll talk about here in a couple of slides, and a very strong financial profile and cash flows and a management team that's been doing this in life science industry for quite a while. So what we do is, again, we supply a lot of products in a couple of main areas. The 2 main segments going forward are our Nucleic Acid Production segment where we supply oligonucleotides, capping reagents, mRNA and other components such as plasma DNA, kind of across the spectrum from early discovering research through preclinical, clinical and then in the case of oligonucleotides in our capping reagents, into commercialization, such as in the vaccines. In our other segment, which is our Biologics Safety Testing segment, we provide host cell protein detection and other contaminant testing kits really into biologics to make sure they have -- they meet the limit required for quality as far as removing some of those contaminants in their end product. So we're making assay kits and helping them with certain investigations to test the overexpression of host cell proteins. Moving to Slide 6. Again, large markets, high-growth markets, nucleic acid production. This market size was at the time of our IPO back in November. As we are analyzing this, it's probably grown substantially since but growing very nicely, a very high addressable market for Maravai. And same with Biologic Safety Testing. Nice, solid growth market and probably accelerating a little bit because of the growth in biologics and some of the additional things that have come out in the last year or so. Good addressable growth and really the gold standard and leader within host cell protein detection. So talking about some of those infrastructure investments. We most recently decided to enter into 2 new leases, 1 of which is here in San Diego. I'm in our Wateridge facility, which is our main location for both the Maravai Corporate Group as well as our Nucleic Acid Production, where most of our production occurs. We just entered into a lease about 2 miles away for another building to help with our overall expansion, bringing on another 64,000 square feet, really to create more capacity for us. So we'll be setting up a redundant small molecule manufacturing line. That's what manufactures our CleanCap product. That will allow us to expand our total capacity as well as move some groups around, totally optimize what we're doing both on operations and in R&D, where we're looking to increase our investment over time. And then we're also getting a new facility for our Biologic Safety Testing business. We'll be moving that business in the middle of next year to a new 45,000 square foot state-of-the-art facility, roughly doubling the size of that business. Again, a business that has been growing very steadily over the years. Certainly needs some more space to continue that expansion. This also moves it closer to the Wilmington area where we'll have more access to capital as far as human capital is concerned and a little easier logistics than the current location, which is in Southport, North Carolina. Again, very strong cash flows, very strong revenue growth, very strong margins as sort of what characterizes the financial profile for Maravai with the growth really coming in Nucleic Acid Production with 533% year-over-year growth driven by the vaccines and the use of CleanCap in those programs. Biologic safety testing, having record quarters over the last quarters as well. Our Protein Detection business, we recently announced we divested and that just closed on September 2. So we received some cash to add to our strong cash balance already with the divestment of that business. So we will only be focused on the 2 preceding segments going forward, Nucleic Acid Production and Biologic Safety Testing. So again, revenue is $366 million through the year-to-date period ending June 30, with EBITDA of $267 million. That converted into $258 million roughly of free cash flow. Overall our CapEx -- maintenance CapEx is very light here. We're primarily a reagent company, so most of our investments in capital are for manufacturing, facility expansion and are typically around 3% of total revenues. Just a quick reconciliation of EBITDA. You'll see our reported GAAP EBITDA reconciles very tightly to our adjusted EBITDA reconciling for some pretty common items, equity-based compensation, M&A cost, debt financing costs, equity costs, things of that nature. We present this just to be very clear with the reconciliation to get to our adjusted EBITDA. So that's sort of just an overview of Maravai. I want to get through that relatively quickly. I think most of you are somewhat familiar with the story, so we'll move on to questions.

All right. Great. Thank you, Kevin. That's a great overview. I wanted to start on the non-COVID side of CleanCap. COVID has been a large accelerant for mRNA and other application areas as well. On your last earnings call, you talked about a notable increase in signed CleanCap supply agreements in 2021, mostly from non-COVID applications. So can you just talk through some of the trends you're seeing on the non-COVID side of CleanCap? And what kind of growth do you expect from that part of the business over the next several years?

Yes, absolutely. I think that's an exciting thing for us. As we entered this year, we had 5 signed supply agreements just for our CleanCap reagents, which we sell as a separate product. We also sell incorporated with highly modified mRNA, but a lot of the demand for vaccine has come as a separate stand-alone product. And then we had about 5 other customers kind of under negotiation. That was started 2021. As we gave the stats on our conference call at the end of the second quarter, that population of signed contracts through under negotiation, term sheets, et cetera, was up to 50. So a fivefold increase in that total population. And that interest is coming from a lot of places. And a lot of it is really non-COVID vaccine related. There's vaccines for other indications. So people are really looking at how they can apply this mRNA technology to historically vaccines that were historically addressed by antibodies and other types of technologies. And then therapeutic purposes, and that's really another exciting area for us. So that list of customers spans everywhere from large pharma down to biotech, down to actually platform applications as well. So we're seeing a lot of interest in it. Certainly, it's something that we're excited about. And some of the reasons why we're increasing our overall capacity to address this wave of interest in mRNA and all the money that's coming into the industry right now.

And is it fair to say that a potential flu vaccine is most likely the nearest term large opportunity? And what do you think that development time line could look like?

Yes. Look, I mean, we as -- we're fairly agnostic as to supplying our mRNA technology to customers in the industry. I think some of our large customers, Pfizer and BioNTech, have talked about that publicly. That is a key target for them going forward. And the other participants in the industry such as Moderna are targeting seasonal flu as well. I think you'll see seasonal flu certainly as a likely candidate or other respiratory types of viruses. I think you'll look at things potentially as RSV and CMV and then you can move into other probably high areas where there's high populations and where an mRNA vaccine could be very productive, such as malaria and potentially very challenging viruses such as HIV as well which has kind of been an area where I think mRNA might have the opportunity to kind of break through with the treatment of that from a vaccine perspective.

And I think Moderna has talked about a flu-COVID combo shot. Are any of your customers pursuing a similar strategy there?

I think they're looking at all the different strategies right now. I think that, that makes a lot of sense. I think getting into a regular cadence of vaccinations where you can address some of the seasonal varieties that are out there for different indications, whether it be respiratory or whether it be COVID, whether it be seasonal flu, whether it be a flu booster with a -- or a COVID booster with a seasonal flu, et cetera. I think those are a lot of possibilities. I think that will kind of see where the science and then the customers take us. Again, from our perspective, it's a lot of demand, and that's what we're really focused on is helping our customers really meet their development goals and ultimately their commercialization goals, either with our modified mRNAs or building blocks or with our CleanCap technology.

Great. And as we see more and more of these announcements from platform pharma companies saying that they're really heavily investing in mRNA, how are you positioning yourselves to embed your products early in these programs? And what's kind of the typical process and time frame from initial interest in conversations to assign supply agreement with CleanCap?

Yes. Well, it's certainly moving a lot faster than it used to. It's moving at a rapid pace. It's interesting, our very first adopter of CleanCap was BioNTech. And that was one of the reasons that we certainly were able to get involved in these programs very early on. And that goes back several years. I think -- nowadays, I think you're seeing this ramp up a lot more quickly as people are dedicating substantial human capital in dollars towards their mRNA programs. And one of the first things they have to do is line up their own supply chain. One of the unique things that you see out there that we always talk about is just how many different vendors are involved. It's very complicated and I think the Pfizer vaccine has over 80 -- I think 86 different vendors or something of that nature that they need to line up just to get their product. And certainly on the development side, there is some part of that as well that ARCA needs to reach out to make sure they can get the various products they need or technologies they need to move forward. So for us, it's about making sure we can provide those things at high quality, on time and as many of them as possible. One of the unique parts of this growth, this fast growth we're seeing is people are reaching out to us, can you do this for me? Can you do this for me? Can you do something else for me? Because they want to consolidate that supply chain. They turn to the vendors, they think are high quality and potentially the vendors that also have some sort of differentiation like we have with the intellectual property protection around our CleanCap capping reagent.

And it seems like on the capping side, right now, your main competition is enzymatic capping. I guess first, why would a customer choose enzymatic over CleanCap right now? And I guess, based on the available technologies, what kind of market share do you think CleanCap could realistically have?

Yes, that's tough. I think it's been evolving. I think everyone when the COVID pandemic started sort of went with the platform they had in place. They really didn't switch platforms. So people that were historically using enzymatic capping stayed there. People that had adopted CleanCap stayed with CleanCap, and it was the fastest way to get through this. And I think that's worked out very well. We've seen a lot of interest in CleanCap since then. And certainly, that's been validated by our existing customers and all the interest we're seeing. It's hard for us to know how many people evaluate the 2 side by side. We typically don't get involved in those conversations. I think from our perspective, we think that the chemical capping approach has numerous advantages, both from overall cost as well as workflow. So we're certainly seeing a high degree of uptake what we believe with people that are pursuing mRNA and looking at the CleanCap solution versus the enzymatic solution.

Right. And if there are future technology breakthroughs, either on the enzymatic side or other capping technologies, what kind of competitive response could you have either in terms of your own development in improving CleanCap or giving away some pricing? How do you think about that potential?

Yes. Look, I think that both technologies will improve. That's just natural I think with the amount of attention and investment. I think enzymatic approaches can improve as well. And CleanCap approaches can -- we can improve upon CleanCap in certain matters. It's all about getting enough generation of protein inside the body to create the response that you need. And I think there's improvements for both methods. I think ultimately, protection for us just comes around the very strong intellectual property suite that we have and the fact that it works well for our customers. It's again simple in the workflow. It produces great results for them. And it's effective from a cost perspective. So there's no incentive to change away at this stage, but there's certainly continued incentive for us as well as everyone in the industry. I think you'll see this as industries mature, as you'll see process improvements, you'll see people getting better yields and overall better effectiveness. And we've seen probably 3 to 5 years of acceleration of all those efforts through what we've gone through in the last 18 months and I think that's only going to help the long-term adoption of mRNA technologies going forward.

And if we focus kind of specifically on your involvement in COVID vaccines, I guess, how -- well, what's been your level of dialogue with your COVID vaccine partners around things like boosters or boosters for emerging variants? And how do you think that plays out over the next 12 to 18 months?

Yes. Look, I think our perspective is that probably the best course of care for individuals would be the dose initial vaccine regimen followed by a booster probably at 8 to 12 months. That seems to be where the immunity starts to wane. I think that we're seeing -- certainly, this is highly politicized at the moment. So I think you see the difference between the right course of care for an individual and how public health policy is being played out. And I think that there's certainly some interest there where you want to make sure that there's enough people getting the first round of vaccines not only in your Western countries but across the world, and we haven't come very close to reaching that yet. So we don't want to put the boosters necessarily ahead of that priority. But I think they can run in parallel. And I think that's a large part of why we are working very closely with our partners to make sure that the overall capacity is there. And if you think -- if you look at our primary customers' output plans for next year, they're planning on substantially increasing the output. So I think you can achieve both those objectives in parallel, and we certainly have the capacity to support that.

Yes. And you talk about having visibility into your customers' plans. Can you just walk us through that level of visibility? What kind of lead time are your customers providing you? And what level of dialogue do you have there?

Yes. When we reach these formal supply agreements for the CleanCap capping agent, we ask our partners or our customers to provide us a 12-month forward-looking forecasts. We need that to be able to production plan, to order the right raw materials and make sure we can continue to stay ahead of their needs. And we've been able to do that. We've never been gated. We've never had any supply issues as Maravai delivering that product. So getting that forward-looking view about 4 quarters ahead helps us to do that, helps us to capacity plan, helps us to make new investments as needed, and helps us to make sure we have the ability to meet the supplies, the supply and the demand curve continues to stay somewhat imbalanced hopefully for this product. We also then, within the next 2 quarters or 6 months, lock those into binding POs. They can't take that up within certain parameters. But really, that's where we're starting to lock in. And then the next 3 months is really locked in completely such that we can deliver against those objectives to keep supplying our customers for what they need to move their programs forward. So a really high degree of visibility. And that's what we stay grounded in when we're giving guidance, and we're talking about the business for the remainder of the year.

And I think you actually recently amended your supply agreement with Pfizer. Are there any details you can give on that? Is that just them changing their production goals, you need to update it that way? Or are there any anticipated pricing pressures either with Pfizer or more broadly going into 2022?

Yes. So a couple of answers there. One is we price on a volume basis. So the more volume, the better the price. And that, we could be very disciplined up and down that scale with all of our customers, specifically then with Pfizer, when we first entered into it, they were actually paying us upfront, about 1/3 of the purchase order value to allow us, as a much smaller company, to order our materials and get things ramped up appropriately. Now that relationship has matured, we're moving to a much more traditional invoice at the time of shipment and just received the money in a slightly shorter time frame on the back end. No change in revenue recognition, just a change in those commercial payment terms.

Okay. Got it. And there's been more talk recently about variation in vaccine efficacy even across the mRNA players. Is Moderna more effective against delta? Is it longer lasting versus Pfizer's? How do you view that data that's come out so far? And do you think it will have an impact on longer-term market share?

Well, look, I think we've been obviously very pleased with what -- how Pfizer has taken the leadership in this marketplace along with BioNTech has really led the charge forward here. I think that the data, depending on how you cut it, what you're looking at, you can argue one point versus the other. I think both the vaccines are highly safe and highly effective. And I think that's the key. I think, for us, we have our partners that are incorporating CleanCap and that we're excited about that success thus far. And we're going to keep supporting them. And then we're excited about where they're going to potentially be going with non-COVID-related applications, and that book of interest just continues to build as well. So I think long term, as with most vaccines, you'll end up with a handful, probably of a customer supporting a specific indication kind of levels out that way over time. We certainly believe that the Pfizer-BioNTech relationship will continue to be probably the market leader here, just to pace on the position they have and the performance of their product.

Okay. Maybe moving to some other parts of your business. Earlier this year, you launched your plasmid DNA offering. What is the initial feedback from customers been there? And how do you really differentiate yourself in that market?

Yes. For us, it was a strategic investment after listening to our customers, and that's what we try to do. We really want to understand what's bothering them, what problems they have with advancing their programs. And a lot of it was getting good high-quality plasmids at the right time with some of the constraints in the supply chain. And as they go through the development process, there's a lot of changes in that. A lot of times they had to sort of go back to the beginning of the line and be gated by some of these inputs. So what we wanted to do was create the capability to provide plasmid DNA for our own internal purposes as well as our mRNA customers, specifically if they're having problems getting them from other sources. So it's a small operation. It's meant mainly to help our customers move their programs forward. We're getting good acceptance. I think it's great to have that in-house capability. Right now, we're keeping it at a fairly small level. We'll evaluate that over time as it potentially grows, but we're happy with how it's kicked off.

And you mentioned in your prepared remarks that you recently divested the protein detection business. Can you just walk through your decision to divest that? And why you decided that right now is the right time to do that?

Yes, sure. It has been a great part of our business for a long time. Certainly, the growth characteristics there are a lot different. This is a mid-single-digit grower. We brought in a great COO in Lisa Sellers to run that business. She had a great strategy that included making some investments and doing some inorganic investments and having to move that business next year. And it was a lot of -- I think it was the right thing for that business. However, when you have to compare that versus the investment returns in nucleic acid production, biologic safety testing business, it wasn't quite where we probably wanted to pay our attention and use our internal resources. So we were evaluating that. And sort of at the same time we were approached, we were shopping the asset that was approached by an outside party. They were interested with the asset. They like that strategy themselves. So we came to what we thought was a fair price and divested the asset. We'll take that cash out to our balance and continue to invest in these higher growth markets.

And can you talk a little bit about your appetite for M&A and your approach there? Are there certain areas of your portfolio you'd be looking to address or gaps in your portfolio you'd be looking to fill? And what kind of deal size would you be comfortable with?

Sure. I think that there's -- we're in a good position with regards -- we're almost at 0 net leverage here today. We certainly have the ability to do M&A as well as invest organically. I think you'll see us looking to do both. Certainly, we're already executing on the organic investment. The inorganic investment for us is typically, we've been very successful in smaller founder-led businesses, high science, things that fit into our portfolio, either vertically or with new technologies in the 2 segments in which we're operating today. And I think you'll see us stay very close to that strategy going forward. I think as we look at the landscape of those sort of things right now, most of them are sort of in the $0.5 billion range or lower. And that's just sort of the nature of where those businesses get to mature and potentially look for exit. We've been -- we've had a large funnel of companies that we've maintained for several years. We stay very close to those companies and in communication with them as some of them are our vendors or our customers. And others are just ones that we had on our radar screen for a long time now, and we're hopeful that we can apply some of our capital to drive some growth and offer some other products in inorganic ways. We're certainly pursuing that very actively. But we're also not necessarily feeling compelled that we have to do an acquisition because of the opportunities to invest organically in the growth we're seeing. So it would be nice to complement our organic growth with the right opportunity if it comes about. We're hopeful we'll get one across the finish line.

Yes. And you talked about those organic investments. Can you just walk us through your internal R&D priorities, whether it's expanding applications or improving CleanCap or going into completely new product categories and what those new product categories may be?

Yes. I think there's a few things. Certainly, defending the CleanCap franchise is extremely important. So developing other methods in and around what we have and how we improve it and looking at the chemical space available to create more proteins, as I mentioned earlier, is an important input for us. We've taken a lot of our resources and kind of put everybody on the operational floor, if you will, over the past year. And now that we're kind of through that and have had that capacity and have that really working well, we can move them back into more kind of traditional R&D roles. So that's one area in CleanCap. The other is a ways to do things just better. Continuous improvement with regards to manufacturing efficiencies, automation is certainly very important to us as well and we're investing there. And then the last thing is, again, looking at other novel ideas in mRNA or in Biologic Safety Testing as we continue to explore that. Our last acquisition as a company was MockV, which is a mock virus particle which we think is going to be a very unique offering down the road for people to even further improve sort of the overall ability for them to assess viral clearance at an earlier stage in the development process. So things like that are going to continue to be the where we're going to put some resources and put some investment to drive long-term growth.

Yes. And maybe we can talk about the Biologic Safety Testing business for a moment. Less talked about just given all the excitement in Nucleic Acid Production, but it's been a really strong growing business for you, may increase your 2021 guidance to assume mid-20s growth in that business. What's driving the strength there? And what's the outlook for that business going forward?

Yes. That business has been outpacing the market for a while, and it has really always been surprising us to the upside. I think it's a combination of things. One is, we have the great breadth of offering there. We have over 23 off-the-shelf kits. That's probably more than the next 4 competitors combined. We're seen as the gold standard, we're written into a lot of regulatory guidance. We're still seeing a lot of investment in biologic programs that are using our kits. We've seen nice growth in the Asia Pacific market, particularly in China in that business as well. All of those things have sort of stacked on top of each other here in 2021 to really drive some good business. And it's just been a real steady business for us, really high growth rates, great margins. And again, the team there has done a wonderful job in meeting this growing demand and certainly deserve this investment in the new state-of-the-art facility, which will enable them to continue those growth rates.

And you talked about some of the capacity expansions that you completed in your prepared remarks. What drove the decision for those investments? How much runway does it give you in terms of capacity? And do you see any need to expand geographically as well outside of human disease?

Yes, certainly. When we made the decision to invest in the facility I'm standing in today back in 2018. Got it online at the end of 2019. Had a record first quarter of 2020. And then certainly came the pandemic, and we were in a great position to be able to address the needs of our customers, particularly on the vaccine side. We since continued to invest in filling out this facility, bringing its potential output to slightly north of $1 billion. With the addition of the Flanders site now, we see the Nucleic Acid Production facilities here in San Diego probably being able to produce around $1.5 billion of out. We're still working on that analysis, but that's basically where we see it and which should give us plenty of room to grow for the next few years. But we're not done. I think we're going to continue to look, and we are looking at other expansion opportunities because we see so much demand particularly as that stack of customers start to build, not just for CleanCap, but for other parts of mRNA. And also, we do see the benefit of being outside the United States. All our facilities are currently here. Certainly a lot of our customers are in Europe. Certainly having an operation that would be closer to them would also be something we're looking at. So it's a combination of the capacity expansion, ability to offer more things to our customers that they're asking us for, and then some geographical expansion. And we'll evaluate, build opportunities versus buy opportunities as we pursue those expansion investments going forward.

We have about a minute left. You've been incredibly successful since your IPO, putting up really strong growth numbers. What do you think is the most underappreciated part of the Maravai story as we sit here today?

Yes. I think -- what we'll see is, I think there was a sense about this is a big uplift because of COVID, and it's going to run for a year and then be gone. And that was the -- people had that sort of thesis, or some people did. And when we did the IPO and they thought that 2021 was going to be a peak year and then they thought, well, maybe it will go into 2022, and that will be a cliff. And then now they're thinking, well, maybe it's 2023, maybe it's 2024. I think that the durability of COVID is certainly here for better or for worse. I think, obviously, we're addressing it as best we can, I think, with all the companies in the industry. I think that's great. I think what's been underappreciated is just really the rest of the business and the applications of mRNA after that. And that's building and that's substantial. And I think it's going to be revolutionary over the next 10 years about how many people adopt mRNA technologies, replace historical antibody technologies. And how many different ways mRNA technologies get embedded into health care to improve it. And I think we're really excited about what we're seeing with our customers and how we can support that. And I think it's going to be a pretty amazing decade when we look back on it just to see how mRNA technologies transform health care.

Well, great. Great note to end it on. Kevin, Deb, thanks so much for joining us. And thanks everyone for tuning in.

Thanks, Catherine. Appreciate it.