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

I think we're ready to go. Good morning, everybody. I'm Luke Sergott from Barclays. I cover life science tools and diagnostics. It's my pleasure to have Kevin Herde from Maravai. And we're going to pretty much start on the macro here, but then we can get into some of the core business and some of the other drivers.

So with that, just give us an update on -- as we go from Ukraine, Russia, limited exposure, obviously, but I've been asking everybody if they're seeing anything from weakness in demand trends or anything else overall spilling over.

Yes. Great. Well, first of all, thanks, Luke, for having us here. It's nice to be out of the office and see all of you in person. Specifically with regards to that region, yes, very limited exposure, no operations there, very limited revenue. The only thing we've been working around is just the logistics of our -- some of our routes go through that region to get over to the Asia area, been working very successfully with our freight forwarders and logistics providers to make sure things get to our customers on time, and thus far, it's gone well. So no impact thus far.

All right. So on the supply chain there, just give us an idea of -- I mean the incremental cost or is it some of the offsets that you guys have.

Yes. We're in a great spot when related to our own supply chain and are sourcing, our inputs into our products are well-defined commodities. We have multiple sources there. We've actually been seeing effective price declines over the last couple of years just based on our volume and our growth and the increasing sophistication of our own supply chain team. So there's a little bit of noise around, again, some of the logistics and some of the freights. But overall, our margin profile is very steady, if not slightly improving on the gross margin line because of, again, the leverage we have and the scale we're gaining.

Okay. And so from an inflation standpoint, you talked about on the 4Q call, inflationary pressures, where they're isolated, the labor and bringing manufacturers -- facilities online. So just remind us what you have baked in the guidance here, offsets available to how you're able to pass those prices on, a couple of follow-ups on there.

Sure. Sure. Well, we're really fortunate. Our business model generates an extremely high EBITDA margin. As you know, we've been roughly around 70% EBITDA margin or guiding to about 69% here in the current year. And that incorporates our view on increasing labor costs outside of our material and COGS, about 2/3 of our operating expenses are tied to labor. So it's an important part of our cost structure. Typically, we've seen merit and promotional increases in the 2% to 4% range historically. We just went through this with our employee base here over the last month, and we're at that 6% to 8% here in 2022 moving forward, kind of reflect the market dynamics, make sure we're retaining our key talent and continuing to track key talent in the marketplace. So that's one component of how inflationary pressures are impacting us, but that's incorporated in our guide for the year. Secondarily, we continue to invest organically in our capacity and growth, bringing 2 new facilities online here by the end of the year, expanding our nucleic acid production capabilities in our San Diego footprint as well as transitioning to a new facility for a Biologic Safety Testing business. We have contingencies built into those budgets and time lines. We've pretty much drew most of those by now. And that's just, again, reflective of what's going on in the marketplace. But -- and we still see ourselves bringing those online here in the back half of the year and still being consistent with our CapEx guidance for the year.

Okay. And so it's relatively tracking in line with your expectations, it's fair to say?

Yes.

All right. And are there any customers that you're getting pushback from, any of the customer segments that you guys supply?

No, we really haven't been. We've been lucky we have, a, very sticky customer base. They -- I wouldn't say they're price insensitive, but that's typically not the top conversation. It's about capabilities. It's about capacity. It's about quality. It's about on-time delivery. And those are really the key things that drive our customers to us and why we keep them and they get attracted to both sides of our business, frankly. So right now, we're in pretty good shape. And pricing has been consistent, if not -- we'll take a couple of percentage points of price based on some of our catalog programs or products each year. So if you look at our overall growth that we're looking forward to next year, say, 2 to 3 probably percentage points of that growth is price related. Again, more related to some of our catalog programs versus our custom offerings.

That's very helpful. All right. And so as we dig into the base business here, all of the investors really are trying to do right now is just figure out what a base business of how -- of COVID manufacturing of the bioprocessing side, right? So like how sharp is that going to decline? And then is there enough non-COVID work in the pipeline, either for mAbs or cell and gene therapy, however you see that order book adding up to basically offset any of those declines? Like that's really the only debate we have.

Yes. Sure. Well, I think going back 2 years ago, we always saw the incorporation of CleanCap into the vaccines, and that's our capping product for mRNA. And all mRNA needs to be capped, being incorporated and being part of a multiyear rollout of the vaccines. And I think we're well on that journey still. I mean we see our overall demand for CleanCap and the application of CleanCap for what we believe are the COVID vaccines up 12% to 14% this year over last year. And again, our CleanCap product is a generic product. It's not customed to our customers. It's not a COVID-specific product. It's a generic product [ dynamic ] starting sequence that caps messenger RNA. And we've seen strong demand, obviously, for that throughout the course of the last 2 years, and we see strong demand for that throughout the course of the current year. We have good forward-looking visibility from our primary customers being incorporated into the Pfizer and BioNTech offering predominantly. And right now, we've -- they've given us forward-looking forecast for 2022. We passed that along in our guidance, as we've done every year. And we're just now engaging in those conversations for the first part of 2023, and we see no signs of this slowing down. I think if you look at the news as recent as this morning, certainly in Hong Kong, which is probably a pretty good proxy for most of the Asian region, and some of the data that you like to believe would be coming out of China, consistent with that, you see another spike occurring. And I think that's going to roll through a lot of the Pacific area. You also see in Europe the BA.2 variant of Omicron, catching another wave and increasing cases in Europe. So we are far from seeing the top of this, unfortunately, on a global basis, and there's still a lot of unvaccinated populations that need to be addressed because those become the, frankly, the populations in which these variants can develop and threaten the rest of the United States. So with our customers right now, we see growth again this year, and we have not seen any indications of this slowing down in the near future. And thus far, as we go back over the last couple of years, I think we've been kind of proven right as how we thought about this. We saw it as a multiyear rollout, we saw variants as emerging and being important and we saw additional dosing potentially as often as annually. And now we're looking at recommendations of up to 4 doses to get the maximum coverage for avoiding severe disease as part of the rollout. So we still have a long way to go. And that's something we -- that's why we're continuing to invest in this business and continue to work with our customers. And as we get visibility from them directly, as we've always have been, into the next year, we'll be in a position to pass that along.

And so on the second point, though, as that rolls off from your customers, you guys have an interesting viewpoint with TriLink, where you touch basically all your plasma and RNA production in some form of action. So give us an idea of what you're seeing on the emerging technology and really how that order book has trended and ramping.

Yes. A lot of different things that have us excited there, I think -- and let's start again with CleanCap. That is, again, we think best-in-class capping reagent on the market and certainly have been validated in the COVID vaccine. We also see a lot of demand for that for other indications and starting with vaccines for other large populations. So you see our customer base. And again, we're providing tools and services and products to our customers, and these are their end products, but we see investment in the flu vaccine. We see investment in the shingles vaccine, in HPV, in malaria, in TB, HIV, just to name a few, of the populations where you're going to see mRNA applied towards vaccines. And it's our strategy to certainly get CleanCap as the capping mechanism locked into there. So that's the CleanCap as a reagent side, and that business has been growing extremely nicely for us, not only from a revenue perspective, and we can touch upon sort of the contracts as well that we've seen that's a leading indicator for us. Secondarily, as you mentioned, what we do is we partner with our customers for basically being an mRNA CDMO or services company, providing highly modified messenger RNA development for them either with or without CleanCap, prominently with CleanCap if they're moving forward for commercialization. And that does give us a very good sense of where this is all going. As we sit here today, we're in the middle of some market intelligence work. We have roughly around, I think it is about 180 different programs that are in various phases -- clinical phases, from preclinical through commercialization, only one being commercialized, of course. About 180 of those programs that we're looking at right now, and one of them being commercialized. Now of that subset, about 2/3 of those are sitting in the preclinical space. So there's still a lot of when is this going to move and when is it going to -- when are we going to see it meaningfully in our revenue uptick, but that's what has us excited is working with our customers, and that's across a range of end applications from vaccines to therapeutics to cell and gene therapy. And those are the sort of things that we've built the company around originally in supplying the building blocks, the highly modified mRNAs and the CleanCap reagent to help them advance their therapeutics programs. And you usually see our customer base getting that kind of on core mission. They've been all a little distracted or not available because of the pandemic or move slightly into COVID-related investments, and we see them really starting to get back on some of their core views. And then you couple that with the strong tailwinds of funding going into the messenger RNA from all the big pharma, and it's just been a real busy time for us over the last year, particularly as we've been fielding these relationships and helping our customers with how they plan on moving these programs forward meaningfully over the next couple of years.

And then -- so we'll get into -- I mean there's a lot of CleanCap there that I'd like to talk on. But as you think about the Pfizer guide, does that include the China approval of the mRNA vaccine?

That's interesting. I would say probably not. I think they've typically been using the older technology in most of Mainland China. We do have some customers that are working on mRNA for the region. But basically, what we're seeing from them and when you're looking at the Pfizer roughly 30% increase in production goals, I'd say, predominantly, that would not include some of those major markets that haven't adopted mRNA vaccines.

All right. That's helpful. And so as you're thinking about the CleanCap here and you're talking about the supply agreement and the funnel, you guys have a good chart that shows the number of projects. And it looks like you just keep landing these new -- the funnel is clearly full, but is there an elongation to landing the funnel and then ramping those up and executing on those contracts?

Yes. Our commercial team has done a great job. Some of the statistics we've put out there recently is around our LSAs, which are license and supply agreements. So that really represents the subset of our customers that are going to need a license because they're going to take a product with CleanCap in it to a commercial state and then want a formal supply agreement just based on the magnitude of the potential relationship. And that comes with certain parameters with regards to forecasting, to ordering, to quality, all those sort of things. The number of license and supply agreements that we've executed is up threefold from where it was about a year ago. And that for us is, again, another leading indicator of the interest that our customers have. And we had, I would say, a rush to get a lot of those done. Our customers did. They want to get them in place before the beginning of the year. So I think that moved a lot into the executed category, but the currently under negotiation categories as well as that overall pipeline continues to mature, and our teams continue to be very excited about it. And that's just for a stand-alone reagent CleanCap demand. And then there's the other subset of the modified mRNAs in the services business. So both of those are moving forward. I think the big question for everybody and for us as well is how are those underlying programs going to advance and what pace and what size. And as I said, about 2/3 of those are still in the preclinical stage, so there's a lot of intelligence still there to get. But I think from our perspective, it's about supporting our customers when they need our product and helping them move that forward. And I think that is the long-term big goal that we're playing for is really moving meaningfully multiple programs into the clinic and, ultimately, through commercialization, both on the vaccine side and the therapeutic side over the next 3 to 5 years.

Okay. And is that -- when you're talking about the funnel here and a lot of the preclinical stuff, are we talking -- are you seeing most of this come from large pharma? Or is this a lot of this mid stuff?

It's all over the map, frankly. It's everything from the large pharma to small, medium-sized companies to companies that are looking at novel platforms that might put some of this manufacturing very close to the end user. So I think that's another thing we're excited about is we have good coverage as far as increasing number of customers. We have good coverage as far as indications and classes. And good coverage as far as just the breadth of people we're serving. I think that, that just really dovetails nicely into the substantial cash flow we're seeing into this market right now. And I think that positions us very well and has us excited and why we continue to invest in the business with our capacity and capabilities.

All right. And we've talked a little bit about funding, but with the public market weakness, give us a sense of what you're seeing just overall in aggregate from private, public, if you're seeing any of that starting to flow through from lower RFPs or the backlog?

Yes. We have not seen that yet, and we have not seen any -- some of the news about funding maybe slowing down other areas. I think our space is maybe a little bit different than the broader space just because of what's occurred in the acceptance and excitement over mRNA. And I think a lot of our customers did their fundraising in '19, '20, '21. And so their balance sheets are very strong, particularly those that are in the Phase I and beyond. And I think that serves us well from a customer -- in fact, we have not seen any pullback from any of our customers citing funding as the reason why.

Any rationalization whereas you have some funding and they might have 3 or 4 candidates but they really just kind of take 1 through?

We haven't seen that. I mean we see that for different reasons. Sometimes we're involved in discovery with them. Sometimes they come to us with the candidates they've already selected out of their screening process. So it's tough for us to bifurcate if they're minimizing the number of targets due to financial reasons or just effectiveness of -- [ assuming ] they've already done. Right now, I haven't got wind of anyone pulling back because of financing reasons. And again, our role in this is typically not going to be the largest spend of their program. I mean they need this product, obviously, to move forward in the clinic to do their tox and other studies. So they're not going to typically pull back with their critical raw material manufacturers. They're going to probably gate themselves more on clinical trial and on the timing of other things.

Okay. All right. And then we obviously haven't seen the downstream effect on the commercialization, and that's more of the discovery side. All right. So shifting gears, can you talk a little bit about MyChem, how the acquisition has been trending forward. [indiscernible] feedback?

Yes. Yes, happy to. So in January, we acquired MyChem, a manufacturer of highly pure oligonucleotides and one of our suppliers for several years. So someone that was already in our environment. Someone we had kept our eye on a founder-based business, very high science. Right in the middle of integration right now. Really pleased with bringing them into the fold. And that's sort of been -- as we look back on how we built Maravai over these years, it's been acquiring founder-based companies that were very high science, had great markets, great technology, and were very unique, but become gated simply because of the fact that most of these folks are science-based people and don't have the resources or commercial capabilities that they would need to maximize the value of their business. So as has been the case with all of our acquisitions and all the assets we brought into the fold, we invested in them, we've never modeled the cost synergy in any of our deals because we like the companies, like the science, like the underlying customers and the markets and feel if we can give them the capital infrastructure support they need to maximize their value, they're going to do so. And that's proved out to be very true over the years for Maravai. And MyChem is not different. Early days. The nice thing is they're a San Diego-based company. We know them well. We're folding them directly right into our operations there. And they do have an over -- partially overlapping customer base, but also bring some incremental customers as well to us. So it's nice to bring that into fold. And again, we're very happy with that -- the science around that because we see the need for high quality oligos and other components as a really different -- a really big differentiator in the market going forward as people move to needing things under GMP conditions or things that would be subject to FDA licensure and inspection, having that quality component. As this market mRNA matures, it's going to be an important part of the puzzle to be successful.

Okay. And I guess as you're thinking of that roll-up strategy and looking out 3 to 5 years, is this a portfolio approach that you guys are taking? Or is it more of just trying to find those businesses that will benefit from your scale?

Yes. I think for us, we have -- we're lucky. I mean we certainly have very high cash flow. We generated free cash flow of over $150 million last quarter alone. So that gives us a lot of flexibility here. We continue to focus on organic investments. With the expansion of San Diego, we would've invested over $100 million in those capabilities for mRNA, which is a really unique infrastructure on a global basis to support that. I think we're going to continue to look inorganically. We certainly are in a great spot with regards to our balance sheet. We have onetime leverage there and, again, have tremendous cash flows. So we're going to continue to look at the same sorts of things we've done in the past. I would say that's sort of our sweet spot. We diligence and stay close to a lot of companies that are very similar to the ones we've acquired, have those ongoing conversations. We do not feel compelled to have to do deals on any time line, they need to make strategic sense, and ultimately, fold into what we're doing in nucleic acid production or in biologic safety testing. I think where we see things today is that ultimately, you'll see a consolidation of the underlying supply chain. We've seen that over the last few decades as we've been involved in various emerging technologies, certainly molecular diagnostic and NGS and things of that nature. You see that underlying supply chain consolidate because the customers and the people that are leading the charge don't want to deal with, as in the case with Pfizer, over 80 different suppliers to make that product. That's not sustainable. And so I think you're going to see that consolidation of the underlying supply chains, and we want to be part of that -- one of the lead companies that is doing that consolidation on behalf of our customers because they're coming to us today saying, hey, you guys do a great job with quality, with delivery. You have the hook with your IP and your strong IP around your CleanCap franchise. What more can you do for us? And can we get -- and that's great for us because we want to get a share of their wallet going forward as well. So that's sort of the strategy there. So I think you'll continue to see us eye acquisitions in our 2 existing segments that make sense and follow that strategy and bring technology capabilities, capacity and consolidation of that supply chain for our customers. Size wise, we've done relatively small deals. We could lever up and go larger. But I think for our perspective, we like to stay outside of the larger auction processes and let the larger serial acquirers do that. And I think a lot of the things we look at and the relationships we've fostered over the years with these founder-based companies are just naturally smaller, and that's a sweet spot for us.

And I guess as a follow-up on the serial acquirers and talk about where you would fit particularly well, where you guys compete against those guys just as a workflow of the bioprocessing situation -- or not situation, sorry, bioprocessing workflow. How do you guys fit in versus some of the larger players and...

Yes. I think on the nucleic acid production side, what we are focused in certainly is capping as well as highly modified mRNA. So we differentiate quite a bit from the assets that someone like a Danaher has collected or Thermo Fisher or some of the other companies that are doing a lot of volume, but not as high of a complexity of the modifications. And we're doing a much more of a service business, much more of a collaborative business with our customers and looking at very highly modified mRNA. So the price points there are substantially different. As of the delivery times, I mean, we're working 2 to 3 months in a clean room with the customer to get something very specific to what they're trying to do versus certain companies in the marketplace, an IDT, for example, you can place an order for an oligo and get it same day, next day, very simplistic. So very different as far as the complexity, the cost and the margin. And we like to operate and always have been in kind of that niche high-margin sort of market, and I think we'll stay there. We're not going to necessarily chase revenues for the sake of revenues. We like protecting our margins and like having kind of that value-add component of where we sit in the overall marketplace and addressing that part of the market.

Okay. That's helpful. And let's go through -- let's circle back here when you talk about capacity expansion. How much is that bringing online in terms of a revenue, a step-up? And then as you look at the margin impact here going forward throughout the year, give us an idea of the pacing.

Yes. So a couple of points there. I'd say right now, we can support just north of $1 billion of output in San Diego. And we haven't gotten there yet certainly with our nucleic acid production business. As we add this additional facility, it will give us redundancy, the opportunity to kind of separate some of the R&D efforts and other business components from what we're doing in the high-volume side and the GMP side. When we get those 2 together online, and that'll be kicking off here 2023, that'll increase our capacity at least another 50%. So you're talking about a $1.5 billion capacity for mRNA, which, certainly, it fits our long-term -- or our midterm view of where we need to continue to grow. And we're probably not done. We're also looking at other facilities over the next probably 3 to 5 years to put in capabilities focused again as that quality increases, that would be FDA expected facilities doing APIs and other things. And then we're all based in the United States right now, all our facilities. So we'll continue to look to develop some regional capabilities as our customers express desire to have some of that in-country or in-region capabilities. And we're hearing that from our customers or from the health agencies in certain countries or regions that they want to have some of those capabilities in-region because of pandemic preparedness long term. And I think that will inform some of our investments going forward. On the biologic safety testing side, we'll be moving the business completely from its current facility to its new facilities, about double the size, and that should provide for roughly double the revenue capacity and what we do there as well as the ability to expand our service offering there, which has been one of our highest growth components of that business.

Thank you. That's all the time we have today. Thanks again, Kevin, for making time.

You bet. Thanks, Luke. Appreciate it.