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

Hello, everyone, and good morning. My name is Tejas Savant, and I'm the Life Sciences Analyst here at Morgan Stanley. It's my pleasure today to host a fireside chat with Kevin Herde, CFO of Maravai. Kevin, thanks for doing this. Before we begin, just have a quick disclosure statement to rattle off here, for important disclosures, please see the Morgan Stanley research website at morganstanley.com/researchdisclosures. And if you have any questions, do reach out to your sales rep.

So Kevin, perhaps just to set the stage, for folks on the call, who are not as familiar with the Maravai story. Could you just provide an overview of the portfolio? And what do you think is your competitive differentiation across each of the segments?

Yes, absolutely. So first of all, thanks to Nasdaq and Morgan Stanley for hosting us here this morning. Happy to be joining you all. So Maravai LifeSciences and just a little background was about formed 7 years ago with some executives that I just drove with together at Gen-Probe and then was backed by GTCR and through that, we bought a series of companies, many of which would have products on the market for decades. And the key segments that we're currently participating in today include Nucleic Acid Production and biologic safety testing. And the key advantages to our products in those segments is performance, quality, and certainly, the customer acceptance and retention really seen as some of the gold standard products, Nucleic Acid Production, this includes things such as highly modified mRNAs and of course, our capping solution, CleanCap, which is a chemical capping solution that's embedded into the Pfizer BioNTech and other COVID vaccines. On the biologic safety side, we produce health host-cell protein detection kits and kits for other impurities and biologic testing. This is marketed under our Cygnus brand, and we have the breadth of products, services, solutions. It's really unmatched by other competitors where we need off-the-shelf, really been custom solutions for impurities and biologic testing. And because of these 2 different attributes, we see really strong growth, really strong customer retention and really nice operating margins.

Got it. Great. So diving deeper into the story, the topic du jour, obviously, has been the Omicron variant. With the emergence of this new variant, Kevin, have you had any early conversations with Pfizer around how this could shape their demand curve? And if the current version of the vaccine doesn't work very well against the new variant, and if this variant is found to cost severe disease, how would that impact your CleanCap revenue in the near term?

Yes, certainly. So as of today, we have not had specific conversations with Pfizer about this new variant. Our mRNA CleanCap capping solution is a somewhat generic solution, meaning it's applied to -- we have 5 different varieties that supply to a lot of different indications. So it doesn't need to be indication-specific. So platform technology can work across a variety of RNA applications. I think from our perspective, that lends itself very nicely to being very adaptive. And I think we'll see and I think some early conversations have been if to the extent the current vaccine doesn't provide as much protection, it will provide some naturally to some of these new variants. A more specific variant booster is probably going to be necessary. To the extent that overlaps with the current initial rotation of getting 1, 2 or even up to 4 shots for some people that are immunocompromised currently, you would likely see that is potentially additive. I think the unique thing we're seeing about this variant is the spike protein mutation, which is a different construct than how some of the original vaccines were manufactured to address how the construct of the original virus was. So it may create some differences. We've always thought here that this would be something that would be with us for a while and that naturally boosters would be useful for either waiting immunity or to address things such as the Omicron variant that we're seeing today.

Got it. And Kevin, in terms of just how your contract is structured with Pfizer, is there an ability for them to sort of perhaps dial down older version of the vaccine and then dial up the new formulation. Should that be the case where the newer one is the one that's working against Omicron a lot better?

Yes. So I mean we have -- again, we sell CleanCap a few varieties. I doubt that the CleanCap we would sell them would be different. It would be more of the modifications on their end and working with BioNTech and Pfizer in this 3-way agreement as far as how they construct some of the other components outside of CleanCap. They're probably using the same version of CleanCap. That having been said, for all of our large license and supply agreements, we're working off a rolling 12-month forecast. We have locked in take-or-pay commitments in the short term. And certainly, there's some -- months you go after, months 6 and beyond. But -- and we have very strong indications for our customers for the next 5 quarters. We provided that on our most recent call. And we see a strong fourth quarter as well as growth for our CleanCap product and overall for the company in 2022.

Got it. And under the scenario where the current version of the vaccine actually does work well has -- in your mind, does Omicron essentially serve as a reminder to both governments as well as the general population here that it's really important to get that booster shot. And frankly, I mean, for the majority of the world that is even yet to be vaccinated fully to make sure that they get at least that first 2 doses. And could that lead to an uptick in demand? I mean you've called for 5% to 10% year-over-year growth in '22 for your COVID CleanCap sales. Could that number come in above that range, perhaps just given the variants running around?

I think that's a possible scenario. Certainly, the 5% to 10% is what we know today and feel very strong about and have 75% PO coverage against. I think as we've seen over the last 18 months, our customers' demand has only increased each year, and that's likely because of some of the things that we're seeing and that you're alluding to. I think that naturally, we want to see everyone get the first 2 doses, certainly. And that will help to contain the virus. It's where people that either aren't vaccinated or have not been fully vaccinated where these variants can be developed within. And I think it's certainly controlling this pandemic, it's going to be important to get that first round. Then I think, ultimately, having specific boosters potentially, we'll see where the science takes this, it's early days in this case. But we see this as more likely than not. And I think our customers do as well moving towards something that's going to be at least annually to make sure that we're controlling these evolutions in the virus that will naturally occur and occur with all viruses.

Got it. I'm going to go out on a linear to sort of run a potential bear case scenario by you. If it were to emerge, let's say, in 2 weeks that this variant is more virulent but less deadly. How do you think that impacts the demand curve for you? Perhaps not so much in '22, but in '23 and beyond?

Look, I think that we want -- I think -- and I think you're seeing this when you're looking at the news every day. I think the governments and the people in charge of public health they're having an effective vaccine and having a high compliance rate with that, those vaccine recommendations is the best way to control pandemic. And I think, right now, we're dealing with these variants of COVID and SARS-related viruses that I think that most countries and public health entities were going to have to be prepared for this for a long time. Unfortunately, I think we're going to continue to see these sort of things pose threats to us. We want to all get back to normal life. I think that we're going to continue to see demand for this virus specifically. And then as I said, we are not a COVID-specific company. We are an mRNA platform company with a great capping technology that is also being applied to seasonal flu and a lot of other development programs for our customers. And that's also what we're excited about is not just how we're addressing the current pandemic, but how we're going to be part of the wave of mRNA applications for therapeutics, vaccines, gene cell therapy, et cetera, for a long time.

Got it. A lot of variables that could shape the demand curve as we just went over. So given that all those moving pieces, where do things stand on the capacity front, Kevin, today? And how are you sort of planning to meet some of these changing demand conditions on a week-to-week basis?

Yes. And we were very fortunate, as you know, to move into the facility that I met today in San Diego, California, which is really a state-of-the-art Nucleic Acid Production facility. We moved into this at the end of 2019 right before the pandemic, and we're able to certainly scale up and meet the demands of all of our customers and have always been able to do so. The facility, I mean today has a potential output of close to $1.5 billion of revenue. We're not there today. So we have all we need to meet the demand this year and next year. But we are expanding, and we're expanding in both the new building and close to this one. And in 2022, again, to provide some redundancy as well to further our capabilities in other areas. Some of these are building blocks for mRNAs like NTPs and other types of things that are in demand to get to the end solution, sticking to Nucleic Acid Production specifically, as you see a new industry. We're really starting to come into the commercialization, coming to the volume, you're going to see a more likely a consolidation of the supply chain, for example, or the Pfizer BioNTech product uses over 80 vendors today, not a very sustainable model. Our customers want to see us do more for them, and we like to have more share of their wallet and their end solution. So we're working towards that end of these new capabilities in this new facility will help us. We don't need it to meet the demand today or project the demand, but it's going to be something that we're going to be able to scale up other product lines as well as have some redundancy. We're also doing that in our Biologics Safety Testing program. As you know, we've been basically doubling market growth for several years now, have a great offering are sort of bursting at the scenes in our current facility, and are moving into a new facility that will be up and running in the third quarter of next year, and we're excited about the opportunity not only give our team some more space, but to continue our solutions and service offerings, which are becoming an increasingly strong driver of growth for us in that business.

Got it. Now Moderna, I mean, recently sort of lowered their near-term sales range. How are you thinking about sort of the market share there between Pfizer and BioNTech? Who you work with Moderna, who you don't? Could this lead to a potential opportunity for you to see some incremental upside which you haven't sort of baked into your forecast? Or is it sort of one of those near-term sort of dynamics where given that you have 6 to 12 months of POs in place shouldn't really move the needle that much for you?

I think we'll see. I think we're very happy, obviously, with being part of the Pfizer BioNTech product. I mean their global reach is almost unparalleled and that's given them the ability to have a high market share that they've garnered. We also have a lot of other customers using our technology, some of the regional players. Certainly, some of their vaccines, which meant to be applied in some of the APAC or other regions. We see daily more developments there that are favorable as well. So again, we have 1 really strong lead collaboration that we have with Pfizer and BioNTech. But we have a growing number of customers using CleanCap for both COVID and other applications. And that's also got us very excited about the future growth.

Got it. I want to finish my cheetah's thought here on COVID and I'll come back to the comment you just made around on Pfizer. But what's the latest thinking on antiviral treatments? I mean that obviously impacted your stock a little while ago when the news came out from Pfizer -- from first, Moderna than Pfizer. But on the other hand, you and Carl have been pretty vocal about saying that these are complements not really substitutes. Have you had any early discussions with Pfizer around how they're going to make sure that both the vaccine and the oral antiviral are prioritized by their sales force, and they're pushing hard to kind of like put both out there?

Yes. Look, I think we have to just refer to their public comments, which I think we agree with. I mean they are all complementary. I think you have to first control infection rates. You have to control a pandemic with vaccines. That's the most cost-effective way of doing it as well and while it will always be at the forefront of public health and government decisions as far as the best tool, the tool just to use. If someone does get infected, it's nice to have reflux too, certainly an oral pill that can control or hopefully help with severe outcomes, hospitalizations and deaths. But that only follows an effective vaccine program. The 2 are definitely complementary, and I don't see any cannibalization from the vaccine efforts related to the therapeutic efforts. So I think you've seen that with Tamiflu. If anything, it's been complementary to both of the trajectories of those things. So I think we'll see the same thing in this case.

Got it. Makes sense. To your point on Pfizer, Kevin, obviously, so your largest sort of driver of sales today. Does that, in a sense, kind of become a bit of an albatross around your neck from the point of view of signing new customers? I mean, are they worried that you're going to have 80%, 85% of your attention focused on this massive partnership, which has worked out so well for you over the last couple of years?

No, I don't think so at all. I think people know us well. We're agnostic. We're a life science tools company. We've been able to provide and meet the demand from all of our customers, again, because we are in such a state-of-the-art facility that was really made to project forward for the next 10 years worth of growth that's coming a lot faster than 10 years as we've seen. But we certainly have the capacity. We certainly have the talent, and we certainly have a very secure supply chain ourselves, which has enabled us to meet all of demand, still have capacity and be able to provide the high quality that our customers want, so they could provide things at the research level all the way up to the GMP standards that some customers require and we have the capacity to do that. And certainly, I think, more than anything, I'm having -- the Pfizer BioNTech has been a validation of the technology and our capabilities. And I think at the end of the day, has certainly helped us. And then CleanCap has extremely strong intellectual property around it. You can only get it from us. And I think that's something, obviously, that leads itself to securing a lot of additional customers as we go forward.

Got it. You've highlighted significant interest from drug developers in entering the mRNA space following the success of the COVID vaccine. What therapeutic areas do you see the greatest focus for mRNA developers? I mean, is it infectious diseases initially or are they starting to look at oncology and rare diseases as well? And where do you think the pipelines are the most advanced today?

Yes. Well, certainly, in other infectious areas, certainly, you see the advancement of the flu vaccines. And I think that's going to be part of the regular regimen. The timing on that, I think, is still -- we'll see where it comes out. We certainly had a rapid regulatory approval with regards to COVID. Flus may follow something that's a little more traditional, but probably not as kind of slow, if you will, as some of the previous ones given the validation of the technology. Does that mean you'll have seen an mRNA based flu-vaccine for the 2022 season, maybe that's an outside opportunistic case there. I think it's more likely in 2023 as we look at today. And then I think you see it following when you look at what our customers are talking about, you're looking at things like TB and malaria and other things, it could be more controlled by the efficacy of an RNA virus -- vaccine, excuse me. And from there, you do see it moving into oncology, certainly. That's certainly a big area that holds a lot of promise for this technology, very deep pipelines across a lot of our top customers when you look at -- but Pfizer is talking about BioNTech, CureVac and others, and a lot of money, billions of dollars going into research and mRNA. And that certainly is very exciting for us being a part of that supply chain and being able to work with these customers, given what they want. And hopefully, in the end of the day, really provide effective solutions for things that have been tough to treat.

Got it. Every once in a while, we get the question around COVID being sort of a dream indication, if you will, for both Pfizer for that vaccine as well as for you guys, obviously, for CleanCap with every other subsequent indication coming with a smaller sort of patient TAM, if you will. But on the other hand, you've spoken about sort of the volume per dose argument and that providing an offset, walk us through that sort of dynamic in terms of how you see this transition from a normalization, if you will, in COVID sales to the non-COVID CleanCap business starting to ramp in some of these new areas?

Yes. That's been an exciting part of what we've seen over the last few quarters, as you know, is the application of our technologies in non-COVID vaccine. So whether it be seasonal flu or other indications, the amount of customers that are using CleanCap either as a stand-alone reagent or in the combination with our highly modified mRNAs to help them with their programs, that overall customer count is up over 70% from the beginning of the year. And that is a lot of -- that's certainly a lot of people doing a lot of different things in a lot of different stages. Now in total, a lot of those efforts are certainly in the early stage. They're in core research or they're in early Phase I, and they're covering a lot of indications. So not only is that a customer count increase, but they're doing multiple programs in several cases. And this is across everyone from large pharma, down to sort of nascent biotechs to platform technologies that can really revolutionize how the h*** antibodies are delivered or manufactured and sort of are pretty exciting to look forward to. We're growing with that customer base. We're growing with the industry. We're growing with the amount of investment that's coming into mRNA technologies, and it's our goal to support as many of our customers as we can with what they're trying to get accomplished. And right now, it's -- they're not our programs per se. So it's tough for us to go into too much detail, and there's a lot of CDAs around a lot of them. But just the overall excitement, the overall momentum we have on the non-COVID business, ultimately, as we see it in the application of CleanCap or other vaccines as well as where COVID settles out will lead to what we see as a nice long-term growth for the business. So that's what we're continuing to invest in, focus on and create capacity for as we go forward.

Got it. There's a number of other competitors building capabilities in the space, specifically Aldevron be -- the more efficient VCE enzyme. What's your strategy to continue to gain and keep your market share? And on a related note, do you essentially view BioNTech and Pfizer's mRNA pipeline products is extremely unlikely to switch away from CleanCap because of the regulatory lift? Or do you think there is a world in which perhaps those customers might evaluate sort of VCE or some other approach?

Well, look, I think that, first and foremost, our material, our CleanCap, the mRNA is part of the registration, is part of the product. You can't switch out your capping methodology without doing another clinical trial or bridging study or something that, frankly, wouldn't make a lot of sense to do, given the effectiveness and safety profiles that we have today. Our CleanCap is a chemical capping approach, which is unique. It's a single manufacturing set, a single step. It has a less complicated supply chain since you don't need the other materials to manufacturing footprint, the QC of the different reactions you need with enzymatic comes with that overall cost because of that to get the same amount of active mRNA and certainly, the regulatory and quality of antigens having the fewer manufacturing steps, the one-pot synthesis, the cotranscriptional application of it during that process, the less exposure and treatment of mRNA. And then ultimately also target development. I mean CleanCap has a lot more flexibility for modified cap structures that you can't do using enzymatic cappings. So a combination of all those advantages, I think, has been pretty obvious to the industry that it's the preferred approach. It's highly scalable and cost effective. And I think because of all those reasons, you're going to continue to see that be probably the leader in the market as far as preferred methods of capping. And I think once people lock in that platform, and this is really part of their platform technology, you're not going to see them change because it's effective. They have the supply chain. They have customers like they have the capacity. It's not a gating item. And so I think they lock-in those vendors, such as ourselves with products that work well and then they move forward and they use that and they repeat that for different targets. What's exciting for us as well, and we'll talk about this at our R&D Day coming up in January is where we go with CleanCap from here. And we have a lot of exciting ideas that our team is brewing up with regards to additional modifications of CleanCap and other things that could be done using chemical capping to even help our customers more get the active ingredient they need to trigger what they're trying to do in the body to fight disease. So very exciting times for us and we're really looking forward to putting some of our scientists out in the forefront and talk about some of those advancements in our roadmap going forward.

Got it. Outside of CleanCap, Kevin, can you provide a quick overview of the other offerings within the Nucleic Acid Production segment? And what are the specifics with mRNA offerings you provide, for example, to your customers?

Yes. So a lot of things. And again, this was where we were really seeing good momentum heading in 2020 before the pandemic set in. We had a record first quarter of 2020 here in the new facility, actually manufacturing NTPs for under our customers. This was one of the oligo synthesis inputs that you need. So that's certainly a growing and substantial product line for us. We also sell a lot of products into diagnostics and sequences in our Glen Research branded products, which is -- we've really grown nicely and a great asset for us. We do custom oligos, so we do mRNA, both stand-alone and that can be combined with other methods like ARCA, things for research and mRNA embedded with CleanCap which I both previously spoke to, which is a really popular product line for us. We also do certainly supply plasmids for our customers as well. We started launched at this last -- this year, and that's seen a nice initial uptake as far as interest and our customers wanting to work with us to have generate again, these initial building blocks that sometimes we get from other companies because they can control, again, more of it with a single vendor and that's sort of the strategy for us from here. I think where we're going now is continuing to support those needs, but also continue to support the different quality requirements. I think as we look forward, we see the quality being an important part of the regulatory process as these things advance through different stages in the clinic. And certainly, with our investment we've made in quality systems here, the knowledge of the people that we have and the processes we have we can meet those high-quality levels and we'll continue to invest in our GMP capabilities for all the inputs that we use going forward.

Got it. A couple of things to follow up on over there. And one of the questions we get occasionally is, how does your custom oligo offering compare to, say, a twist or an IDT or perhaps a Gen even or some of those other vendors out there?

Sure. Yes. I think our specialty is really in a highly modified sophisticated mRNAs that are really the core of some probably more unique development efforts. So whereby there's base all those that IDT and others have done a great job, you could basically go into their oligo configurator, dial something up, get it either later that day or the next day or very quickly and at a very good cost points, it's highest commodity-type business, high volume, and they've done a wonderful job there. We're a little bit different than that. We're really on a custom scale. We're working with our customers for much longer sequences that are much more highly modified, much more custom and then much more of a higher price point because of that much more tailored to what their end indication is looking to do, much more collaborative. So just a very different approach as far as addressing all of the market, I think there's great benefits to high volume, quick turnaround and things that can be used very simply and then there's a lot of value to highly modified mRNAs that are custom made for our customers and again, we compete more on the latter side of those differentiations.

Got it. How should we think about segment EBITDA margins for Nucleic Acid Production, Kevin, I mean, particularly as you transition from COVID related to non-COVID-related CleanCap revenue?

Yes, they continue to be very strong. I mean we've consistently been able to do segment margins in the high 70s and certainly, those close to 80% and then we overlay our corporate overhead and other back-office costs that we centralize across Maravai and gives us the margins that we've seen, which have been in the low to mid-70s throughout the course of this year, really strong EBITDA margins and a hallmark of Maravai sort of from the early days and good consistency of pricing actually getting supply chain reductions because of our volumes, leveraging our fixed cost structure in our automation and certainly the intellectual property knowhow. And then ultimately, with all that actually providing a best cost solution to our customers, which is -- it's a nice position to be in where we have enjoyed higher margins and we help our customers lower their COGS profile by providing them the most effective solutions that they can have. So great EBITDA margins and great cash flow margins. Our maintenance CapEx is only a few percent of revenue at the most. And even with these incremental investments in facilities, we still generate a ton of free cash flow for our organic investment in these opportunities. And continuing to look at inorganic opportunities with that flexibility, really strong balance sheet, and we're very active and looking to provide more solutions and more products for our customers that if we can't get them or make them organically, we're going to try and acquire them inorganically. And we certainly have a lot of people in our ecosystem that we follow very closely, built by founder-based companies that are very high science, and we continue to look to bring those companies into the Maravai family.

Got it. Switching to Biologics Safety Testing, can you just talk about 2 things. One, the competitive differentiation for Cygnus versus other folks doing Biologic Safety Testing and the recent traction for the MockV kits that you launched earlier this year?

Yes. So on the first question. Again, we're providing and really seen as sort of the gold standard as far as host-cell protein expression kits are concerned, have a broad reach to all the different potential host cells as well as other contaminants that might come out through the process, so whether it's protein A or endonuclease or other things, using off-the-shelf kit has certainly become very cost-effective and very well accepted. I think that people don't want to spend valuable internal labor resources developing in-house kits that was historically sort of our biggest competition. I think we've seen a trend away from that and what we've also seen with us, is sort of the shift to the CDMO space. Is those customers, which are now doing a lot of this work in the area are also more likely to not apply their resources to using their own kits. They like to go to someone who's seen as gold standard provide best service to their customers. And so they're really growing strongly. We've seen certain CDMOs in our portfolio this year grow by over 50%. Which is obviously, very strong growth when the market is probably growing in the mid-teens. So that's a trend that's also helping people with the strong off-the-shelf offering.

Got it.

We're very excited about that. And what was the second part of your question?

Just MockV traction since the launch...

Yes. So MockV is a really unique product. Again, we're -- we went through kind of a phase where we're doing sort of process transfer from the bench to what would be a commercialized kit. And again, this is a slight -- mock viral particle that can help with viral clearance testing earlier in the development process. So as opposed to having to wait to the end to do it, people can kind of do it like throughout the development process, like they're doing with host-cell protein expression kits. So early stages didn't have an expectation for meaningful revenue this year, but we do see that being introduced and hopefully driving revenue over the next couple of years and another part of that overall solution to provide our customers with ultimately the best testing kits to give them the highest quality product at the end of the day.

Got it. Just a couple of minutes here to go. So I'm going to throw a couple of rapid fire questions at you. The Biologics segment comes with extremely high EBITDA margins, a 80%-ish or so, if I remember right. How sustainable do you think that is on a go-forward basis?

Yes. We think -- well, we're going to continue to invest a little bit of those contribution into R&D and into the commercial channel, which has been a little under indexed. But price points are stable, very sticky customer base, a great breadth of products, and we're accelerating our service offering there, which also has good strong margins there. So I think even though we're moving into a bigger facility and we're going to invest a few points in R&D and commercial, I think you'll continue to see margins very strong in that business.

Got it. Capital allocation, I mean, especially after the protein divestiture comes up ever so often in my conversations with investors, what's your appetite? And then more sort of near term with valuations having come in for a lot of these growth assets, are you seems sort of new pockets of opportunity on the M&A landscape?

I'd say we're lucky. We do have a strong balance sheet. We're sitting at net cash position currently, and great capital cash flows. We're looking at organic expansions like I spoke of. We're looking at inorganic acquisition activities. We're very active there. we think the valuations are reasonable for us if they're strategic and makes sense. And I think those are the things we've done in the past are a good example of what we're looking to do currently. And then after that, there's also other opportunities to provide financial returns back to our shareholders. So we're looking at all 3 of those, and they're not all mutually exclusive, given our strong balance sheet and our cash position. So we're hopeful to be making progress on each of those here over the next few quarters.

Got it. You spoke a little bit about your Investor Day in late Jan around CleanCap extensions. Is there anything else that you plan to kind of like preview with that event?

Yes, certainly, I mean we're talking about whole market cell and gene therapy certainly, we'll talk a little bit about what's going on with Biologic Safety Testing, where we're at with MockVs, certainly. We'll talk about our workflow and why we differentiate ourselves to a little video probably on our manufacturing space here than unfortunately, not too many people got to see because of the pandemic. And then really go into some of the big questions that people often have. What is the true difference between CleanCap enzymatic approaches and ARCA. And why is CleanCap superior? And then what's the roadmap going forward to take that technology and expand it even more for our customers. Those are the sort of topics we plan on addressing.

Got it. Fantastic. So that brings us to the mark then, 30, I believe. So thank you so much for spending your morning with us, Kevin. We appreciate the time.

You bet. Thank you, Tejas.

Talk to you soon.