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

Okay, everybody. Welcome back to the Life Sciences and Diagnostics track of the 2021 Stifel Healthcare Conference. Up next with us is Maravai. And we're happy to have CFO, Kevin Herde, with us from the company. Kevin, thanks for agreeing to spend some time with us this afternoon.

You bet, Dan. Thanks for having us at the conference. Appreciate it.

Yes. Our pleasure. Okay. So I think you're going to go through a couple of slides. I'll duck out. And then when it looks like you're wrapping up, I'll swing back around and we could do a little bit of Q&A.

That will be perfect. Thank you very much. I'll take it from here.

Okay.

So thank you, everybody. Again, Maravai LifeSciences. I'm Kevin Herde, the CFO. I'm going to go through a few prepared slides kind of recapping who we are and our most recent results, and then we'll dive into some chat with Dan and any questions that folks might have. So we may use some forward-looking statements and some non-GAAP financial measures. The one we refer to most often is adjusted EBITDA, and we do have reconciliations from our GAAP numbers to those adjusted numbers in all of our investor information, including the end of this presentation. So who is Maravai? So we are a leader in providing highly modified complex nucleic acids. We do that through our Nucleic Acid Production segment. We operate predominantly in 2 segments today, Nucleic Acid Production as well as Biologic Safety Testing. Within the Nucleic Acid Production, not only do we provide highly modified complex nucleic acids, predominantly messenger RNA as well as other building blocks for oligonucleotide inputs, but we also have a proprietary capping technology called CleanCap, which is the predominant chemical capping technology used in the industry and is used and incorporated into many of the COVID vaccines that you're -- out in the market today. In the Biologic Safety Testing segment, we provide critical assays for detecting impurities, either host cell protein impurities or other contaminants which you will get in biologic manufacturing processes. Our most recent quarter was just completed and reported on last week as well as our 10-Q filed, and all that information is available on our website. We had $205 million of revenue in the quarter, which represented 133% growth year-over-year. Very high EBITDA margins, we had 100 -- 76% EBITDA margins for $156 million in adjusted EBITDA in the quarter, which was 170% year-over-year growth. We currently operate in about 140,000 square feet of lab and production space, predominantly here in the San Diego area, where I'm standing today. We have about 500 employees, many of those with advanced degrees. We're a very high science company. So a little bit more about our mission statement and investment attributes. Our goal as a life science tools company is really to provide enabling technologies to our customers, their scientists, to help bring the miracles of science to life. The term "Maravai" is actually an old Italian dialect for the word "miracle." Investment attributes for us, again, a leader of critical solutions for life sciences, really spanning early-stage discovery through commercialization; long-standing relationships with our customers that even predate Maravai, going back to the acquisitions we've made to help form and grow Maravai, very sticky customer base, very, very -- our products are very embedded and integrated into their end products. We address very large high-end growth markets. We've really focused on investing in all of our assets over the years, accelerating the growth and capitalizing on the large high-growth markets in which we participate. And those infrastructure investments are predominantly with facilities, as the one I stand here today that we brought online at the end of 2019, is really a highly automated sort of best-in-class Nucleic Acid Production facility. We're also making incremental investments to expand that capacity in 2022. I'll talk a little bit about that. Very strong EBITDA margins, very strong free cash flow as a result of that as well. And the team here, myself, our CEO, Carl Hull; our COOs, Brian Neel; and Christine Dolan; and the rest of the executive team, have a tremendous amount of experience in the life science and health care industry. So as I talked about, we really span discovering research through commercialization really across our 2 different segments. So within Nucleic Acid Production, we provide oligonucleotides. We provide capping reagents, messenger RNA and plasmid DNA to support our ever-growing base of customers; certainly a very high growth for us, not only in our financial results, but as far as the number of customers in which we have, given the amount of attention and flow and investment into mRNA and Nucleic Acid Production. And within Biologic Safety Testing, again, our tests are there to help detect impurities in the end product, and that is really utilized throughout both the development process and the manufacturing process. So that could be overexpression of host cell protein contaminants, viral contaminants. We also offer service offerings, including things like mass spec for people that want to take a deeper dive into their products to figure out what contaminants might be there, what impurities might be there and how they can tweak their processes to lower them to acceptable levels in their end product. So talking about our overall infrastructure. Again, I'm here in San Diego, which is the headquarters for Maravai and our Nucleic Acid Production. We're also investing in expansion in 2022. That will be our Flanders facility. We're going to drive additional capacity for oligonucleotides, chemistry and more investment in R&D and innovation around this space. The Wateridge facility is the one I'm in today. Our Cygnus Technologies, which is the brand we operate for Biologic Safety Testing, is located on the East Coast. We'll be moving to a larger facility in the middle of next year, which is to be the Leland facility. And Glen Research is outside of the Dulles area in Sterling, Virginia, and that's a part of our Nucleic Acid Production family. So a little bit more about the third quarter, again, strong total revenue growth. When you break it apart across our segments, you see the growth in Nucleic Acid Production of 170% on -- for the third quarter versus the third quarter of last year. Biologic Safety Testing grew nicely at 18%. Our Protein Detection business, we divested, sold that business in the first part of September of this year. So I'll be focused really on the first 2 segments as we go forward in this conversation. So when you look at the annual growth on a year-to-date basis, you can again continue to see the strong growth in the business, reaching $571 million for the 9 months, with very strong EBITDA margins, yielding $422 million for the 9 months. CapEx, which -- and then free cash flow, which we define as adjusted EBITDA less CapEx, extremely strong. And that's really been the hallmark of our business model, being able to turn our revenue around in a low capital-intensive business and generating very high free cash flows. Our non-GAAP reconciliations are here for you to take a look at. Certainly, we have a few things that we go ahead and reconcile back from adjusted net income and adjusted net income per share, but relatively small on a total net basis, with certain things that just don't reflect the ongoing operations that are tied to historical M&A that we have incurred from an expense perspective. So just a quick overview there. I think it's always best to dive into the chat in the Q&A. So at this time, Dan, let's go ahead and get going.

Sure. Okay. Thanks for those opening comments there, Kevin. I mean, I guess, the obvious place to start would just be the COVID CleanCap performance during the quarter and the outlook that you have. If I look -- and to go to 2022, I mean, we have a quarter left. I think people feel pretty comfortable with the outlook that you have this year. So if I look at the 2022 outlook, it's calling for $550 million to $575 million in COVID CleanCap revenues. And some high-level math would say that if Pfizer is making 3 billion doses this year and 4 billion doses next year, and I guess, a question embedded in this would be do you think Pfizer is going to make 4 billion doses next year. That math, just looking at the 3 quarters of this year, could lead you to like something in the range of $600 million or $700 million for CleanCap related to COVID. So I know we need to walk before we can run, and we're not in '22 yet. But can you just sort of walk through the way in which you're thinking about the initial outlook on '22 and then how that may or may not change over the course of the year?

Yes, certainly. So the way we give guidance and the way we've been running our business is really rooted in our conversations with our customers' supply chains. So as our customers progress to supply agreements with us, they give us rolling sort of 4-quarter forward-looking forecasts. So we have visibility, at this stage now, to basically through the end of next year. When you look just at the COVID-related CleanCap revenues from the stable of customers that we're providing that capping reagent for, we have really good visibility into how that revenue is shaping up for next year. We talked about in our earnings call of that guidance that goes through the end of next year for revenues. That COVID component that you referred to, over 75% of that is in-house with firm purchase orders, and those are take or pay-type purchase orders. So as we give guidance, we're grounded in that very tangible supply chain information that we get. Certainly, the overall performance by Pfizer BioNTech as far as their ability to expand capacity has led us to, throughout the course of 2022, kind of increase that total, and we've done that steadily as those numbers have come to us. And that's really been expanding the demographic, looking at boosters, looking at other levels of demand. And we continue to see that growing, not only here with the updated '21 guidance, but our visibility into 2022, and we see CleanCap growing from there. Ultimately, we'll continue to communicate that as our customers communicated to us, but we're certainly pleased with the fact that the business is growing at a nice clip, looking forward to the next 5 quarters.

Yes. Okay. And has the nature of the communications from your customers changed at all over the course of the pandemic in terms of frequency or size of the orders? I mean, I guess, what level of visibility do you feel like you have ahead of the order coming in?

Yes. I think it's matured as the whole supply chain has matured. I would say, the early discussions were pretty brief, what's your capacity and how quickly can you get it to us. The nice thing about the facility is -- that we're in today is we do have tremendous capacity and have had since this outbreak started to meet those demands and continue to have capacity to meet additional asks for incremental product over and above those base forecasts. I think -- and we're going to continue to have that. The infrastructure that we have in place today supports all of the revenues that we see for 2022. We're building additional capacity next year through our new facilities, really as a long-term investment for that continued stage of stepped-up growth that we're seeing, not just from the COVID application of CleanCap, but the increasing demand for non-COVID applications of our technology. That comes through in both additional vaccine targets. The most obvious and most talked about is the next generation of flu vaccines using mRNA and then for the therapeutic use of CleanCap, both as a stand-alone reagent for our customers, but also embedded in highly modified mRNAs that we make on their behalf.

And when does that capacity fully come online?

So with the capacity to meet the demand we need throughout next year is already online today, we could probably do about $1.5 billion of revenue out of our Nucleic Acid Production facilities as they stand here today. And we are expanding that, again adding about 60,000 square feet to our Nucleic Acid Production footprint in the middle of next year. We're already working on it. We'll have that go live probably first part of the third quarter. That will give us additional redundancy and additional capacity to make other inputs for our customers, based on the long-term demand that we're seeing. For the Biologic Safety Testing business, it is moving the existing facility to a much larger facility, closer to the Wilmington area, again to support the growth we've seen over time in that business, and that will also go online in the third quarter of next year.

Okay. Okay. And then maybe just sticking with COVID, but maybe not Pfizer-related COVID CleanCap, I was looking at your Q and I was noticing that CureVac is actually almost $50 million of CleanCap revenue in the quarter, which is pretty substantial, it was 23% of the quarterly revenue. And I think about the time line that they're on, they announced that the vaccine data was not all that great in June. And I know that they had said that they were going to continue kind of full speed ahead for a little bit, but they could not have been really scaling up with that. So how sustainable are revenue streams outside of the Pfizer BioNTech, the obvious ordering patterns that you have there? How much of that, to the extent that you can tell, is related to this sort of next-generation vaccine that they may be working on?

Yes. Well, I think that, certainly specific to CureVac, again, our customers give us forward-looking demand that gets locked in. So they certainly are taking that product and will be using it for various campaigns. We think that they're continuing, based on their public statements, to advance their next-generation vaccine. So we're, I think, we're continuing to feed into that. Certainly, the majority of our COVID vaccine comes from the Pfizer BioNTech collaboration and their performance and their execution, which has been excellent. We continue to support their growth. And as they continue to do well with the overall market share that they're taking as well as looking forward to expanding into their additional potential boosters and age demographics, et cetera, there's really strong demand there. It is a bucket of customers. They're not the only ones. So there's different dynamics with every single individual customer there. But certainly, we think that the -- as we collect all of those inputs, we're certainly comfortable with the COVID demand for CleanCap next year increasing over this year, and it's driven by predominantly the growth that we're seeing with the overall output that Pfizer and BioNTech are publicly talking about in 2022 over 2021.

Yes. Okay. And then on the call, you made mention of some of the non-COVID applications that are starting to draw some real demand for CleanCap, infectious diseases, oncology, mAb-based therapies. Is there color you can add to that? And how far behind the COVID vaccine revenue stream do you feel like some of that is in terms of ramping up and really, kind of I don't want to see it taking the place of COVID vaccine revenue, but at least meeting it somewhere on the curve?

Yes, absolutely. We had a great quarter for our Nucleic Acid Production business on a year-to-date basis. That base demand outside of the demand for COVID vaccines was up 50% on a year-to-date basis, and that's coming from several areas. The largest contributor in the most recent quarter was CleanCap demand as a stand-alone reagent for other vaccine programs, not -- non-COVID-related. And yet if you think about what our customers are working on, that's predominantly the next generation of flu vaccines. The timing of that would certainly be up to the regulatory bodies. I think what we saw with the Warp Speed actions was certainly unique. The traditional time lines are longer than that. We think that this is probably going to fall in between. I think an optimistic scenario as these things move is through the third -- Phase III roughly by the end of this year and could potentially be ready for the 2022 flu season. I think a more base case would be rolling into probably the Southern Hemisphere and then -- in 2023 and then to the United States and other Western countries in the Northern Hemisphere in the flu season of 2023. That's probably one of the next building blocks of growth for us. When you take that, you stack it with the demand from the therapeutic side, we see good ongoing demand and really moving forward, combined with the overall market growth rates that we've been fueling our growth on for the last several years. So these things, as you said, all sort of stack up for us. And I think that portends really nicely, going forward, regardless of what your algorithm optimally is for projecting for just COVID stand-alone demand.

Yes. Carl mentioned on the call that 80 -- hopefully I get this right, 85% of your CleanCap customers are working on some non-COVID application in some way. Are there -- is there a material portion of those that is not working in -- on COVID? And the reason I ask is that kind of to me says that you're drawing in new customers to the mRNA approach without having been led there through the obvious vaccine doorway, if you will?

Yes, I think that you'll see, and you see this across biotech and big pharma, a lot of money going into studying mRNA as the technology of the future. And I think that's -- we're first seeing that with the wave of COVID vaccines. We're going to see that with flu and other large target-population vaccines that you mentioned. And then you see that on the therapeutic side. Certainly, we've given some statistics over the last couple of quarters with total customers, number of contracts, just a lot of interest in the technology. And certainly, that is -- as a tool supplier, and one that's agnostic to the customer base or indication, we're there to support them as we move this forward. We've put this infrastructure in place to really support what we thought was going to be nice growth in the segment over the next decade. We've probably cut that acceleration in half. And certainly, using the platforms that have proven successful for COVID is a template for other types of vaccines. And then certainly attracting interest and the supply chain, the research, the advancement has all matured at a much more rapid rate, and we're certainly seeing that. I think you see the next-wave vaccines coming next, and then you see the therapeutic applications of mRNA technologies. That class of customers is probably in early Phase I today. So if you look forward over them using that technology and that demand for 2022 and then getting into '23, '24, '25, you're going to start to see that -- those several tools of building up that demand progress. From our perspective, we continue to be very focused on that group of customers as well, and that's why we continue to build out our capacity, our capabilities as well as our quality systems and our ability to supply various inputs under different conditions. So historically, it was more RUO, research based-grade material. We see the marketplace demanding more and more high-quality GMP, ISO-grade or even FDA-inspected facility outputs, and we need to continue to make investments into those areas to grow with the maturing development programs' phases, obviously commercialization of products that use our technologies.

Yes. Okay. What about on the pricing side? I mean is it -- does the average ASP improve on CleanCap as you move away from Pfizer, who is obviously buying in pretty significant bulk, and towards maybe some of these smaller orders? Or at the end of the day, is the pricing range pretty tight on CleanCap?

Yes. I would say there's 2 ways to look at it. One, certainly, we volume-price, so our -- the highest users of stand-alone CleanCap are getting the best price, and we're pretty disciplined up and down that volume-price matrix. As we move into the therapeutic side, as we make highly modified mRNAs with CleanCap, we're doing really custom builds. So we'll quote those out, sort of build at a time, and again, staying very disciplined to our margin calculators and what we think is the right pricing. Certainly, we have very strong margins and that we've been able to have very strong, consistent pricing, that's also helped. And we leverage our fixed cost base. We've done a lot of automation. We've gained a lot of scale. That's also helped us with our own supply chain. We've been able to bring down our core input pricing because of volume. And certainly, the automation also helps, and it allows us, because of the stacking demand for CleanCap and some of our other inputs, we can do very large runs. And those runs helped to produce the highest margins for us as these prices remain very consistent.

Yes. Okay. Okay. Maybe just big picture on CleanCap COVID before I sort of depart from that thought line. I mean philosophically, how are you squaring away this debate that's being had on the antivirals and what that might mean for the future of vaccines? And then along those lines, I mean, I would be remiss if I didn't ask if you could venture a guess at how you might see 2023 playing out from a CleanCap COVID perspective.

Yes. Well, certainly, on the second question, it's -- we get good visibility to provide 5 quarters of forward-looking guidance. And of course, the next question is always about what about quarter 6...

Right.

Look, I think that you'll see continued demand for this. Unfortunately, COVID is not going away. The best way to control a pandemic is through vaccination. That's certainly true. The best example, and the one we talked about on the earnings call, was with regard the flu. The introduction of Tamiflu or other types of therapies post-infection did not input -- really impact the positive trajectory of that vaccine. I think it's great that we have multiple ways to deal with this. But certainly, from a cost perspective, from a public health perspective, focusing on proactive vaccinations and then ultimately, boosters to stay ahead of variants, I think will continue to be the method in which governments and agencies that do recommendations that people follow and personal choice, I think, ultimately will continue to be strong demand for vaccines. And to the extent there are additional therapies post-infection, I think that's great, but we do not see a correlation of those things rolling out and decreasing demand for the vaccines. And certainly, that's what's embedded in our 2022 guidance.

Yes. Okay. That's fair. Can I just ask about the other Nucleic Acid segment and what the primary drivers are there? I mean you get off the earnings call and you realize where the -- most of the attention was focused, and that there are some areas that maybe got a little bit less. So can you just kind of fill us in on what's going on there and what the outlook for that piece is under NAP?

Yes. There's a bunch of different things in there. Certainly, the core building blocks, whether it be NTPs, whether it be plasmas, whether it be other inputs into oligonucleotide synthesis, continue to see strong demand, and that comes from a lot of different places. It comes from everywhere, from diagnostics, to therapeutics, to research. And that continues to be a nice growth business. And that's the core business that we invested in and that had always been running prior to early 2020 and the incremental demand for our CleanCap. Our capabilities to work with our customers, our GMP capabilities, certainly in doing those runs, are an incredible part of the value we give to our customers and working with them, and that's increasingly getting more and more attention as more and more people turn to this technology. So a lot of active dialogue there, not only with our historical customers, but a lot of new customers coming into the fold. And that's really exciting for us. We would look back at the total number of customers that we have for either CleanCap or mRNA. And that base of customers, we look at sort of a rolling 18-month active customer list, is up about 70% from where it was 9 months ago. So a lot of activity across everywhere, from core bench work, all the way through early-stage Phase I and advancing those things. So the overall demand for our products is getting -- continuing to be very strong, and that's the base business that we're certainly excited about. We continue to be a life science tools provider. We're very agnostic as far as our customers go and who wants to apply our technologies. We have the capacity to do a lot of things. And I think we do so in a high-quality manner, and that's kind of what we focus on.

Yes. Okay. And then outside of Nucleic Acid entirely, on the Biologic Safety Testing business, we're looking at some of these biologic -- these companies that are levered to bio manufacturing. And the growth rates are just demonstrably different than they had been in the past, just by virtue of what's going on in the industry. So do you see the potential for that segment of the business going forward to sort of re-rate from a growth perspective?

Yes. That certainly has performed -- outperformed the market and our expectations over the last couple of years. I think we see that as growing roughly 25% here in 2021, and that's due to a few reasons. Really, the breadth of offering we have, and we offer more off-the-shelf kits than anyone else, we have more capabilities from a service perspective, we have more capabilities from looking at other contaminants outside of host cell proteins, such as protein A or endonuclease. And we're also seeing, as you talk about the broader market, a couple of things happening. More people are probably getting away from dedicating limited skilled labor to doing in-house home brew testing. They've been focusing more on their core mission and using off-the-shelf products like ours, which is a good trend for us. And then you do see a move towards more usage of CDMOs. And the CDMOs are frankly driving a lot of our growth as well. And that's nice to see as they also like to use kind of the gold standard products that are out there in the industry. That's been one of the bigger drivers for us also. So it's been a confluence of various tailwinds that have pushed us over what we had historically seen as roughly a mid-teens market grower. We've outperformed that. And potentially, you're right. I think maybe that market growth could be leaning towards a higher growth than that over time just because of some of those factors that I just mentioned.

Yes. Okay. Okay. Let me ask a typical CFO-type question. Margins, gross margins, you're right, they are quite high. What are the key levers there outside of the obvious volume that you're benefiting from now? And then on the op margin side, how should we think -- I mean, you're expanding. You've got a lot more stuff going on than you used to, pre-COVID anyways. How should we think about the investments that you need to make filtering into the op margin outlook going forward?

Yes, certainly. I mean it was steady pricing, increasing volumes and a good footprint in automation and good leverage with our suppliers. Our margins on the gross margin side continue to be very steady. And we are looking to reinvest some of this high profitability back into our organic growth profile, that's primarily going to come to increased investments in R&D, certainly some of our commercialization channels and marketing. Our revenue growth comes a little faster than we've been able to reinvest some of those things, just given how fast they come. But we've always been focused on making sure that we have not only the capacity, but the capabilities to continue to broaden, for instance, our suite of technologies in and around CleanCap by offering various derivatives to that program over time, and we're looking forward to really talking more about that on our R&D Day coming up here in January, and then continuing to provide more of the overall solution to our customers. I think as you enter into a new technology that's coming into the forefront, such as mRNA, you'll naturally start to see a consolidation of the supply chain. I mean some of our vaccine customers have to go to over 80 different vendors to get to their end solution. That's not ideal. They would rather go to a fewer customers that they believe can provide high-quality products on time and they have a good relationship with. And luckily, we score very high with our customers from that perspective. So we're going to look to increase our share of their wallet by providing more products and capabilities to their end solution. That's certainly a big part of our strategy and why we continue to invest in more capacity and more capabilities through additional people and additional infrastructure.

Yes. Makes quite a bit of sense. Okay. Last one for you, just on capital deployment. Healthy balance sheets, you've been doing some pruning in the portfolio. Where is the appetite for a deal right now? And what assets might make sense? And then I did get a question from the audience on what is the optimal capital structure steady-state, and would you consider share repurchases or dividend in the absence of attractive M&A.

Yes. I mean we've always been active, at least as far as looking at targets. We have only got founder-based companies that are high science, that are within a certain level. We crossed the net debt ratio, under 0 now as we sit here today. So that's a favorable position to be in, and we have a lot of capacity to do deals. I think that where we tend to focus, again, is on the high science, founder-based things in our ecosystem that makes sense to bring in either capacity products or capabilities or technologies that our customers want. We're very selective. We've kicked a lot of tires over the last year. We continue to be very active. I think you'll continue to see us very focused on those sort of things going forward, and we hope to bring a few across the line. That's our primary focus, not only the organic investment I talked about, but also the inorganic investment to bring against some of that supply chain and capabilities together. And we're incredibly focused on that. At this stage, we are aware that there's other ways to deploy capital back to our shareholder base. I think we're going to focus on the first 2 for a while here. And then if none of those come to fruition or if our cash balance continues to increase in the method that it has, based on our free cash flow, we'll look at other methods.

Okay. Fair enough. Okay. Let's leave it there, Kevin. I do appreciate you spending some time with us here today. So have a great Thanksgiving holiday, and we will talk to you soon.

Appreciate the time. Thanks, Dan.

Take care.