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

It's Paul Knight, analyst at KeyBanc on the life science industry. With us today is Brian Neel, Chief Operating Officer of Maravai. We appreciate your time today, Brian. And I thought if we could just start with going over your background and what you're doing at Maravai.

Yes. Absolutely. Maravai LifeSciences is actually a business that has several brands within it. One of those brands I think we're going to focus on today is TriLink BioTechnologies. And at TriLink, we specialize really in 2 key areas. We have a technology that we've invested quite heavily in the last few years, a CleanCap technology, which is a capping reagent we use for mRNA production. We also have other products that we sell along with the CleanCap as a stand-alone product. The second part of our business is a CDMO business that's very focused on mRNA API development production, specifically right now for preclinical development up to Phase I clinical studies, and we're investing in some additional buildings here in San Diego to migrate into Phase II to early commercial API development production as well. And so those are the 2 key focus areas for the TriLink business and areas where we continue to make investments for the future.

And where were you prior to Maravai, Brian?

Prior to Maravai, I was actually with Synthetic Genomics for a few years. I actually did a Codex DNA presentation earlier today with Todd Nelson, their CEO, that formerly was Synthetic Genomics as well. And then prior to that, I was with GenMark Diagnostics for several years. And then prior to that, Thermo Fisher, Invitrogen, Life Technologies for about 14 years in various roles in operations, M&A and site expansion projects. I was working with that company all focused on life science and diagnostics space.

Okay. And Kevin Herde has just joined us as well, Chief Financial Officer of Maravai. How are you, Kevin?

Good, Paul. Good to see you.

Brian, obviously, capacity expansion is occurring at Maravai. How difficult does it get -- is it to get equipment and build out capacity right now?

Yes. I mean I think the key for us has always been getting ahead of the curve in the processes that we develop. And we've done a lot of that work in our Wateridge facility. So what that means for us is that we have a basis of design for the different platforms that we've been integrating into production, particularly through expansion of the CleanCap product through the pandemic. And then we will use that as a basis to capitalize in our newer buildings, where we'll add additional infrastructure for expanding out similar type capacity and scale as well as scaling additionally to larger capacity. And because we have a very known platform we use right now, the scaling piece of the equation is one that is very manageable for us. I think if you think through the process of construction and design build-out, actually, that's the longer lead item versus acquiring most of the equipment that we utilize today. And so really no major constraints there. The constraints typically for us has been actually building out the facility infrastructure to land that equipment. But we have a very special relationship with the City of San Diego and have been able to expedite construction projects, not only through the pandemic, but we're continuing to get very good access to the city departments here to really expedite capacity build-out in the San Diego area. And so where other companies maybe have longer leads than typical, we've been able to get surely construction projects through in the city.

And I know at the Analyst Day, you cited that therapeutics would require more drug substance per dose, sometimes a multiple of what's in the vaccine. Does that mean that it would eat up capacity quickly if therapeutics are successful?

Yes. I mean, I think generally speaking, commercial capacity is obviously limited across the world. And that's one of the reasons we're building additional capacity for our customers here in San Diego. I think right now, we feel very comfortable with where we sit and where most of our customers are at today, which is in early clinical, preclinical, maybe into Phase I, Phase II clinical trial scales. And so our next building will allow us to progress with those customers. And one of the keys for us was being able to bring that capacity online prior to our customers moving to later clinical phases. And so I don't foresee that being a major issue at this point. Your point on program requirements and the need for higher capacity in general, I think a lot of that is being addressed through scale-up programs that we're currently working on in our CDMO business. And we look to easily tenfold increase that at our next facility versus where we are today at our Wateridge facility here in San Diego.

Kevin, I hate to see you sit there and not have say much, so I don't know if you want to make a few comments. Please go ahead.

Yes. Look, I think that, first of all, it's great to have Brian bring some of the commercial leadership of our Nucleic Acid Production segment and his views to the group here. It's been a pretty consistent story from Maravai over the years, and that is really investing in our opportunities, and that goes all the way back to the first acquisition we made before Maravai in 2016 and all the subsequent ones, and that is really finding great technologies, great companies that participate in markets with good tailwinds and good growth and then investing in them to really amplify that growth over time. And we've done that with people, processes and systems and infrastructure. And Brian talked a lot about what we've done here in San Diego, and it's probably nearing $100 million now in what we've put into really state-of-the-art automation and capabilities for mRNA. And we did that starting in 2018, constructed 2019, brought it online at the end of 2019. And this is obviously all pre-pandemic. So it was building out that capability, what we were seeing for the next decade of mRNA growth. Certainly, we have reached that -- filled out the capacity -- not the capacity, but building out faster than we anticipated, we had left a real lot of it open, formed the shell for further expansion and quickly put that in to work it and to use it and then are complementing that with another facility a couple of miles away here, again, to stay ahead of what we continue to see, and that's just great opportunities in mRNA really in and around the mRNA services business with our CleanCap intellectual property as the key capping reagent there. And we just see a tremendous growth in the number of companies and customers that want to not only have CleanCap as a stand-alone reagent but then want to work with us on the service side to bring more of their end solution up through TriLink and Maravai. And that's certainly what has us excited and why we keep investing in these things for the foreseeable future because we think this overall wave of conversion to mRNA as a technology for a variety of potential things outside of vaccines and therapies in the gene cell therapy, et cetera, is where we are heading, and we're going to be well positioned to capitalize that over the next 5 years.

And Kevin, if COVID revenue goes down in the industry, including Maravai, what do you think that does to operating margins? You operate at obviously a great level of profitability now. Is there reverse earnings leverage if COVID dissipates?

Yes. Look, I would say that's a tough one to tell exactly because nobody knows where that trend line is going to go. Going back to that first quarter of 2020 pre-pandemic, we were already operating, I think, at a roughly almost a 60% operating margin in Q1 2020 pre-pandemic and pre bringing in that additional CleanCap revenue. That's obviously now then allowed us to flex up to in the low 70s, which is some of the highest EBITDA margins I've seen in the space. Would there be a natural fall back if the total CleanCap production comes down over time? Yes, there would be a little bit. I think that is one of our higher-margin products because of its uniqueness and intellectual property and the scale in which we are making it. That having been said, we see the CleanCap demand, again, stacking from a variety of indications. We do not have a single product in our portfolio that's COVID specific, right? We are supplying and capping analogs. We're providing a platform for our customers in which to do mRNA development and product introduction and commercialization. And we think that there are numerous items, both as a stand-alone reagent for CleanCap, COVID being one indication, seasonal flu, malaria, shingles, TB, HIV, several of the things that our customers are working on. And that's just for high-volume CleanCap demand. So you have to look at the overall demand that we're seeing and how that's going to support growth and margins going forward. And then there's the whole side that Brian talked about on the CDMO and the mRNA services. So we look at it in its totality since we don't have COVID-specific products. We see that's how they're being applied, certainly, and that's given us a big windfall from a revenue growth and cash flow perspective. But there's a lot of other building blocks that kind of stack up below that, that's going to help support our long-term growth.

When you see customers buy material in a clinical trial, a larger clinical trial, that's not percentage of completion. It's going to be a little bit lumpy. Is that fair to say?

Certainly, for CleanCap as a stand-alone reagent. It's a very simple -- they order it, we make it. We ship it, it's point of shipment revenue recognition. When it comes to some of the custom services that both our biologics safety testing business does to help people look at contaminants in their biologics as well as some of the work that Brian's teams do with regards to helping our customers make highly modified mRNA constructs in a CDMO-type setting, there is some point-in-time recognition on those custom services. But predominantly today, we're a take an order, manufacture and ship type of revenue model for the vast majority of our revenue.

And Brian, I know we had talked about this a little bit at the panel. But can you talk to the customer, I guess, they're still anticipating faster time to market with mRNA and CleanCap.

Yes. I think that's really been, really the story of our existence, honestly, where there's always been a challenge to timeline. And I think what's happened over the last 18 months is that's just been exacerbated as these platforms are getting developed out for mRNA modality. And I think that, that will be a continuing pressure point to not only service more broadly, so it become more of a one-stop shop for early clinical screening to development to clinical builds, but looking at that timeline compression factor being first to market and being able to innovate and automate there very specifically to allow success in programs to be determined at a faster clip. And I think that's really what we saw during the pandemic, the ability of mRNA to really go through the development process quite rapidly. And then with that, then you can have follow-on platform programs as well. And so I think that that's seen as a very, very attractive aspect of mRNA technology in general. And that pressure point will remain, and we're seeing more and more of it over time as more entrants come into the space.

Do you think vaccines is forever a growth industry now instead of no previously?

Yes. I mean we always saw activity in vaccine. I think I mentioned this earlier today that cell and gene therapy, there was a lot of programs in that space prior to COVID. But COVID obviously has shown new utility for vaccines. There's a lot of unmet need in the world. And so I think that we are seeing quite a surge there, and it's everything from infectious disease to oncology programs. And maybe some of the vaccine focus prior to COVID was more oncology focused. I'm thinking back through funnel development, but we're definitely seeing a lot more infectious disease-type programs come forward in our services business and just a general discussion with customers.

And I know, again, you had mentioned a 60-year term sheet or contracted customers. Any concentration? Is it starting with early stage? Is it therapeutics? Any profile you could paint on that customer base?

Yes, it's actually really across the board, cell and gene therapy, therapeutics and vaccines. And I think that's everything from start-up mid-level biotechs to big pharma. We're seeing activity pretty equally across the board, particularly because there's a -- I think there's a know-how constraint generally in the market. And so we see that in the services, the CDMO side of our business, I'm approached by really all different types of customers and different types of programs. And then what you're referring to on the term sheets is our stand-alone license and supplier for CleanCap. The same thing applies there. We're seeing the same type of outlay of customer types and modalities there as we're seeing in the services CDMO side of the business.

What's the customer citing as the -- what they like about CleanCap?

Well, I think clearly, being in a commercial product helps, right? So I think it starts there from a level of interest that maybe a new entrant would have. But we've been working with a lot of this customer base early on. So if you take BioNTech as an example, they were one of our first adopting customers back in 2016. And what they liked was the ease of use, the co-transcriptional capping, mRNA is somewhat fragile molecule, and you don't want to overprocess it. And so there's less manufacturing steps required when you use that type of a platform decision, a co-transcriptional platform, which is what CleanCap gives you. And so I think a lot of these different factors were critical early on with development customers. I think now you have that as part of the basis of argument, but now you also have a commercial product on the market. And I think there's a good precedent there now for newer entrants to look at that as a type of program or platform to emulate in their own work.

And why are customers going with alternatives like ARCA?

ARCA actually, at this point, I think it's more of a remnant out there. I don't see a whole lot of interest. We don't see a whole lot of interest to utilize ARCA at this point, say, versus CleanCap. So I think at this point that from a co-transcriptional perspective, that's not really been a very relevant concern for us as of late. I think when you talk about capping, really we're thinking about co-transcriptional capping with CleanCap versus enzymatic capping, which I just described earlier as being a more complex overall manufacturing process.

Yes. A question from the investment side is biotechnology demand. Obviously, finance being softer there. Any thoughts on that, Kevin?

Yes. So far, we haven't seen any impact to our business. I would say a lot of people that are in the areas in which we're supporting, whether it be mRNA or in biologics, are either very well funded or have done a lot of raising over the last couple of years. So we have not had any commercial slowdown. I mean we've only seen acceleration as demonstrated by some of the statistics we put out there and nor have we heard about it impacting any time lines. We're hopeful, actually. If we harken back to 2 years ago, we thought we'd probably be a little more advanced from where we are now because of the distraction of the pandemic and what it's meant to our customers, meaning they were going off of core mission. They were having to either pivot and doing COVID vaccines or therapeutics and/or they were not at the benches often or having -- or able to enroll clinical trials and move their programs forward. So I think that a lot of that funding in which sometimes it's subsidized due to the COVID work that they pivoted towards is now coming back into focus and a little bit more back on their initial missions. And so far, it's been nothing but strong demand for us and no impact from any funding levels that we've seen directly.

And Brian, a question would be, again, back to the various capping technologies. Any strong competitor, I think, is the gist of the question.

Yes. I mean, I think when you're thinking about the capping technology itself, you're really -- we're competing against more of a commoditized enzyme offering that several companies out in the market have. And so I think that's really where the focus would be there. But again, I think that the decision that our customers are trying to make is what's the overall best platform that they can launch their product with. And so once that decision is made, and we talked about this earlier, once you get into the early clinical phase, you're pretty much locked into it if you're going with CleanCap or co-transcriptional CleanCap platform, and to change that would be very difficult. So I think we're basically competing with enzyme producers out there in the market.

Got it. Okay. And then another question is your new capacity, how much of that is spoken for?

I think that's a good question because we do have some good level of flexibility. Look, I think as we sit here today, we're probably at 50% of our hypothetical capacity very soon in Wateridge, meaning, when you look at the size of our Nucleic Acid Production business, it's around $1.5 billion of overall capacity. So we certainly have some -- can still feel very comfortable where we are for a while. I think Flanders gives us a substantial increase in that. So it's going to take us likely $2 billion or north of potential Nucleic Acid Production output. And it also gives us the -- as Brian spoke to, the opportunity to kind of be a little more flexible in the different types of things we do and where they're located. So I think product mix, obviously, is a big part of that over time. But we feel real comfortable with the capacity today that we have to support demand and the different type of capacity we'll have over time, primarily as we look at different levels of quality that Brian alluded to. And that's really a big part of the maturation of the market is going from the RUO type of the world up to the very later phases and the higher grades of quality. And that's informing a lot of our investments in people, process and systems today.

Okay. I will -- the -- any impact from Aldevron's VCE product that, I guess, you're not involved with or your thoughts on that?

Yes. So that's, again, really a reference back to enzymatic capping. And so I think that what we're talking about there is that platform choice in the enzymatic versus co-transcriptional CleanCap decision. So they would be considered one of those competitors that's offering that enzyme as part of their portfolio.

Got it. Okay. And then on the -- I know Carl has mentioned in the past that COVID vaccine could be a likely booster every year. What are your thoughts on that? And what are your thoughts on some of these other large markets that pharma is going after like malaria, like flu? Any thoughts on these potentially new markets, Brian?

Yes. Again, I think as a follow-on to some of our previous discussions today, I think efficacy is one of the topics we talked about to improve our efficacy for diseases out in the world today that maybe have challenges there or there's been ineffective vaccination programs that are out in the world. And so I think that we see that as upside for infectious disease and so do our customers. There's a lot of different programs that we're working through now that are focused on infectious disease. You mentioned malaria. I think influenza is one that we talked about earlier as well. And I see those as being key follow-on type driving programs for commercialization and clinical success for a lot of the partners we're working with today.

Then Kevin, another question would be regarding the M&A environment. Obviously, with your very attractive margins, how many true adjacencies are out there for you?

Well, yes. I mean it's not our first criteria to look at things that are margin accretive. Certainly, that would be a small population. But for us, it's about strategic fit. The MyChem acquisition we did here in the first quarter, a great example of that, someone we've known for a while, respect high science, sticky customer base, part of our supply chain already, founder-based company, very true to the characteristics of our previous acquisitions and right for investing in what they do to provide even higher-quality products and differentiated products to our customer base. And that's what we continue to look at, strategic fit. Do they bring a capability we can't create organically, meaning do they have a special manufacturing know-how or IP that we're going to have to buy and not build and does it strategically fit into the portfolio for serving our customers with a broader offering. I think that's ultimately not only the migration of the quality curve that we're going to see, but it's going to be the consolidation of the underlying supply chain that you naturally see with new technologies coming out. You saw that in molecular diagnostics. You saw that with NGS. You're going to see that in mRNAs that underlying supply chain needs will come together via M&A or via large buying choices made by the customers that dominate the space, and you're going to have fewer customers supporting the end product today. Pfizer who has one of the best supply chains in the world has to deal with over 50 different vendors to get to their end product. That's not a great sustainable model. You're going to see that consolidate. We want to be one of those consolidators because I think that makes a successful business proposition going forward.

And I found it intriguing your comments about what the world was like pre-COVID, Brian. I guess it was about -- growing about as rapidly as it is now, ex-COVID. Would that be your thought?

In terms of market growth?

Yes.

I mean, I think -- here's the complexity, I think, with what we've seen over the last 2 years, is the number of new entrants. And so I think there's going to be a potential for acceleration. I think part of it will be dependent on success of these entrants and their programs and how they progress to the clinic. We did talk a little earlier today about will clinical studies be able to move quicker than they have in the past, that I don't know. I think that remains to be seen. But I do think that there will be an acceleration of entrants wanting to try and get there. And I think that's what we're seeing right now. I mentioned going from almost doubling our customer base in mRNA -- CleanCap mRNA customers in about a 1-year period. And that acceleration still is, I'd say, in its early phase of these programs making it through to the clinical phase. And so I think the next 2 years, we'll see a lot of potential wins, some fall out. And so I think we'll have to see what happens there. But clearly, the number of entrants has been very intriguing for us to understand more and support these companies as best we can, which is why I've been so forward thinking on capacity build-out and wanting to be there and available as programs progress because a lot of the know-how just isn't out there right now to do that.

Do you think about per dose pricing? Or do you think about quantity of active -- of drug substance?

Yes. For us, it's really, actually a little bit different equation. On the mRNA services side, it really is about scale and what we're doing with scale that really drives the pricing there. And then on the product side, again, it's really scale and what requirements are needed for each particular customer. And so I think that it's tough for us to flow through the dosing because each program could have a different dosing profile and end market pricing and need. But we've, I think, been pretty successful focusing on the scaling side of it and trying to match up with our customer base that way.

And then I think as we kind of wrap this up in terms of time, on the academic side, how big of a customer concentration do you have there, Kevin? And that funding environment has been tight. Any thoughts on academics?

Yes, really small there, Paul. I mean, we had a little bigger piece of that when we still had our Protein Detection business. But as it relates to our Biologics business and our Nucleic Acid Production segment, it's a very small part of our overall customer base. I mean we're really looking at people with an eye towards commercialization, a lot less towards academic-based research.

And then the last question I have, Brian, as you look at the data around the Pfizer COVID vaccine and maybe you've seen -- I have not, in terms of data around other mRNA modalities. But is the safety profile pretty compelling? Obviously, the efficacy is. But what's the -- do you have a read on safety profile?

Yes. I think it's more anecdotal. I mean I'm not an expert in products -- end product safety. But I think one of the things that was very compelling and actually quite encouraging for us thinking about mRNA platform development was the fact that for all of us who either took the vaccines themselves or those around us, I think it was somewhat of a nonevent. There was some allergic reaction issues that were out in the marketplace that we've heard about. But generally speaking, the number of people dosed, and I think some of the safety concerns that came out of that seemed fairly minor to me. That's just my own view.

And any wrap-up comments, Kevin?

Look, it's -- again, it's -- thanks for having us. Paul, it's nice to kind of get back on the cadence of hopefully some regular investor outreaches and meetings. And we're happy to and lucky to be here in sunny San Diego at least today and have a really engaged workforce and a great employee base that simply make all this happen. So for any of you out there that are in the San Diego area, feel free to contact Deb or reach out through somebody to see if you want to come by and see what we're doing here at TriLink and Maravai.

Yes. And I think if you'll come to New York, you'll find the restaurants are kind of packed at pre-COVID levels.

It's been great to be part of this conference.

Good to be here.

Thanks very much.

Thanks, everybody.

Take care.