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

I'm Matt Sykes, the Life Science Tools and Diagnostics analyst at Goldman Sachs, and the pleasure of welcoming Maravai Life Sciences here this afternoon. Kevin Herde, the Executive Vice President and CFO. Kevin, thank you very much for joining us today.

Great. Thanks, Matt.

Maybe you could just set the stage and talk a little bit about the most recent quarter. Your guidance for the year and kind of how you see trends in the bioprocessing market evolving longer term? And we can get more into that last part, but sort of some of the highlights from the quarter and then what do you expect for the year?

Yes, certainly happy to. I mean our last quarter was another record quarter for the company. Again, good growth across each of our segments. For those of you who know the story well, we are participating in nucleic acid production. That's predominantly mRNA and our lead product, which is our CleanCap capping product for capping mRNA. And we have a second segment, which is biologic safety testing for testing for the overexpression of host cell proteins or other contaminants of biologics. So for the first quarter, got good solid growth, not only because of the continued contribution we see from COVID on the CleanCap side. But really, the base business had really solid performance, and that's something that we built this company for. I think we saw over 50% growth in the base business in nucleic acid production in the first quarter, and that is really around our core mRNA services business, kind of an mRNA CDMO business, if you will, as well as some other key inputs for oligonucleotide synthesis, and then our biologic safety testing business continues to perform very well, probably could grow around 15% or mid-teens this year, a little down from the last couple of years growth that we saw, which was over 20% to close to 25%, just a great set of products there, good market trends for biologics in general, which is in gene and cell therapy and applications of mRNA technologies, which is really driving both of these segments and the core business growth. And that's why we continue to invest in those capabilities going forward.

Got it. Maybe if we start with big picture. I mean one of the more attractive parts of bioprocessing is this, what we would consider a pretty significant supply-demand imbalance that exists in the upstream. We've also seen increased investment in the area because of the supply demand imbalance. Maybe give us a sense for where you're currently seeing supply/demand if there still are capacity constraints? And where are you seeing this most acutely in your business as you look across the different parts?

Yes. I think from our perspective, we were fortunate to have moved into our high-volume automated facility at the end of 2019, which certainly gave us a tremendous amount of capacity. As we sit here today, our San Diego facility for nucleic acid production can do well north of $1 billion of output, probably close to $1.3 billion of potential output. We're bringing on another facility about a couple of miles away to really focus on raw materials, redundancy for CleanCap and some other core capabilities, which will take our overall capacity to about $2 billion in output for nucleic acid production. So as far as we're concerned, we do not have any capacity constraints nor do we have to really switch off our resources between, say, CleanCap and mRNA services or raw material inputs. And certainly, on the biologic safety testing side, that's the case as well. We're actually moving that facility into a newer facility at the end of this year, which is doubling its size. So from a Maravai perspective, we have tremendous capabilities and capacity for the demand we're seeing. Now our customers that's not always the case. They're still getting gated on some of the early building blocks. We still see long lead times in certain areas, plasma DNA being a good example of where that's existed for high-volume customers, which still get 9- to 12-month lead times and things of that nature. But we're not as -- our offering is not prevalent on the PD and DNA side, it's more on the -- we're more on the high volume as far as mRNA, highly modified based payers. We're talking 500 to 1,000 plus in that service business and using our GMP clean rooms and the capacity for capping and other oligo synthesis inputs where we have tremendous capacity. So as our customers get us the raw materials they need, we continue to move them forward with their programs. And we do have a small plasmid offering that does address some of our customers' needs, but not all of them at this stage.

Got it. We've heard from some other companies recently involved in sort of the COVID vaccine development that they've started to see a transition from customers moving towards non-COVID-related work away from COVID. What's been your experience so far? And when and if, do you expect to see some of this transition? I know you have guidance out there for COVID for this year. So just as a reiteration of that we haven't seen a change? Because some of this, I feel is very vaccine specific. We're obviously with Pfizer BioNTech. So maybe help us understand that because we got a lot of questions on it, and there's the news flow has been picking up, so just would love to get your thoughts on this COVID to non-COVID transition?

Yes, certainly. So really a couple of things in there. I think one is we have very good visibility into our COVID number for the rest of 2022. That's just the nature of how we contract, how our POs are structured, which gives us a high degree of certainty with regards to the range we've offered, which is approximately $630 million of COVID-related revenues for 2022. And between the POs in hand, the contracts, what we ship them over 80% of that is really locked in for this year. So that's a really solid number. But we also see, which is nice to see, we see our customer base kind of getting back to their core mission, particularly the ones that we've been working with for a while where they might have been a little bit distracted or pivoted to doing COVID therapeutics or other COVID vaccines. They're not getting back to their kind of core mission that they once intended to do, and they're getting back to the bench, and we're seeing a nice acceleration of that pipeline, and that's within our mRNA services business. As we look at our overall portfolio of what we help support, again, we don't have our necessary our own end product, but we're providing components for our customers. And when we just look at CleanCap as an example, which is our mRNA capping product, it's in 184 different programs today. Only 1 of those is commercialized. I think we don't know which one. And so we're really looking at how that pipeline of additional applications of our technology is going to move forward. And we've been spending a lot of time with our marketing consultants over the course of this year. And of that 183 programs that are in the development phase, about 60 of them, about 1/3 of them are vaccine-related, but only 20 of those are COVID-related. So we're seeing this next generation of mRNA technologies for vaccines, of which, we are a part of starting to come through and progress. It's still early-stages, again, getting back to this 183 programs, about 130 of them are still in the preclinical stage. So there's a lot in there that still needs to move forward. There's still a lot of early stage work, but we're starting to see that investment pick up, and we're starting to see that class slowly start to move. And I think you'll see that with the next generation of mRNA vaccines that will come after the COVID sort of tail or flattens often, we'll see that investment get into those next applications of large populations that are going to be using mRNA technology, seasonal flu, certainly being the most advanced of that stage.

One of the things that we've written about in the past is that 1 thing that we've been impressed by that there are other longer-term benefits of the COVID work that you've done that extend to the relationships that you've built and the validation that you've received from a Pfizer and a BioNTech. And you've worked with companies like CureVac where the vaccine might not have, but you have that relationship proving some capabilities to them. And there's also been Glaxo and Bayer and other folks that you've been introduced to. How has that and those sort of warm calls into some of those large companies that are investing a lot into mRNA and cell and gene therapy, for that matter, how has that helped your overall business? And are some of these programs that you're talking about in the non-COVID side, obviously not identifying the customers, but like has that provided a tailwind for you, if you know what I mean?

Yes. I mean it's -- there's numerous ways to answer that question. I would say, if we look back a couple of years ago, we probably had relationships with maybe a handful of the top R&D spending programs globally. Today, we have as on our customer list 18 of the top 20 R&D spend. So certainly picked up from there. Just the number of customers that are either using our mRNA services or using CleanCap are several folds higher than they were a couple years ago. So you're really seeing not only interest in our technology, but actual customer signing contracts, customers coming into the queue, customers doing target discovery and working with our teams to see where this technology can take them. So certainly, the ability to meet the demand that we saw over the last 2 years with our facility was a great opportunity for us to, like you said, validate the technology, ramp up the scale, prove our capabilities, prove our ability to do it at a quality level repeatedly over and over, deliver on time and some of the things that are really important. And with that comes trust and confidence and then the ability to expand to other areas of our capabilities. And that's what's informing a lot of our investment decisions because ultimately, as with any new technology, I think we've seen this in diagnostics, which is -- I was a part of it a long time, see this in sequencing. You're going to see a consolidation within the industry, and you're going to see the key people that are bringing these products forward, not want to deal with 8 different vendors each component of this solution, they're going to want to see a Maravai through our trialing subsidiary. Can you do the plasma, can you do the mRNA construct? Can you do the capping? Can you do potentially some of the liquid nanoparticle delivery mechanisms? Not all of that we have at scale today, but it's informing some of our investment decisions, both organically and then our mRNA strategy, which because of the COVID windfall we've experienced has put our balance sheet in a very strong position to be able to fill on some of those holes that we may not be able to address organically.

Got it. And we'll definitely get to that in a little bit. But maybe before we get to that, probably not the first time you got the question, but it's certainly a question that's on top of mind in terms of a lot of your work is preclinical and if so there's an emerging biotech, there's obviously a funding issue. And it's maybe not immediate. Some of those preclinical programs are funded. But as they sort of move on and become successful, then there might be some funding gaps there. How do you feel that Maravai is positioned with that customer segment? You talked about 18 of the top 20 R&D budget. So it sounds like you have a good balance, but would just love to kind of decompose some of that where that demand is coming from and within the biopharma segment there?

Yes. We look -- and we kind of have a little bit of everything within that mix. I would say that our customers are well funded, and a lot of that fundraising happened prior to the last 9 months or so. And so those customers are in really good positions. We're also at a unique spot, I would say, when you look at spend across programs, and this is true for nucleic acid production as well as biologic safety testing in that we are a relatively small part of an overall cost portfolio. We're not in the clinical trial side. We're not in the commercial manufacturing side. We're kind of at this stage, at least providing raw materials or other components in the discovery and the building of the test or the product in either case. And I think you see that as probably not being the first line of cuts if they do come in. We haven't seen any of that impact thus far, but you really need the material to move your programs forward. So I think you'll see -- generally, you'll see people tighten the belt on SG&A type of items, maybe on indications and maybe revisit clinical trial strategies. But without the building blocks of their material, you're really not going to move anything forward. So that's -- we're probably last in line to feel that impact if we do feel it at all.

Got it. The term bioprocessing is -- can be very generalized even when you're talking about upstream, and there's been a lot of focus rightly so on CleanCap, but you guys do other things besides CleanCap. And so other areas within nucleic acids or maybe even on the other side, biologic safety that you're excited about, you don't think gets enough attention that's driving some of this base business growth that you guys have talked about?

Yes. I think it's about capabilities for our customers. So for us, again, I think you look at the ability to work with the R&D groups that our customer base to do the highly modified mRNA, where we really have a unique history of being able -- of doing this. I mean our TriLink brand has been around for over 20 years, and we're some of the pioneers in mRNA technologies. So we have a long legacy of capabilities there that now seems to be much more in the forefront than it was during those years leading up to it. So that's unique in our ability not only to do things for our customers but do them at the varying levels of quality they may want. So whether it be RUO or whether it be GMP in our clean rooms, for example, is something that's very unique to what we have to offer. And then I think you're going to see that expanding to some of the other oligo synthesis inputs, so whether it be NTPs, whether it be things like N1-Methyl-Pseudo-U to help with certain modifications they want to make. Again, being able to do that not only on the RUO basis, but the high-quality basis. What we're trying to anticipate that the regulators are going to be looking for, for these products to move successfully through phases and get commercialized, we are very sensitive to that. And then wrapping around our consultative services on how you get from those points and take it all the way through to a high-quality level as something our customers turn to us to do. We have a lot of experience in that area and success in that area and the ability certainly as proven with CleanCap to be able to successfully scale up. And we've been able to do that as well to support people throughout the journey. I mean you really have a substantial increase from preclinical levels of mRNA capping other services to when you go to Phase I and when you go to Phase II, the ability of this pipeline to mature and to generate that natural demand and then move through the quality levels you need both things that we're investing in. So it's not just capacity, but it's capacity at different quality levels to support where we see this market going over the next 3 to 5 to 10 years.

Yes. I mean that's an interesting point that we've tried to highlight is that sort of step change in the quantity, volume, materials needed when you get beyond a certain phase and certainly into commercial. The other thing that happens is, oftentimes you have to switch from RUO to GMP. But what we've been picking up is that GMP is now being used earlier in the process. Is that something that you're seeing? And do you think that is a beneficial driver for you? I know you do both RUO on GMP, but you clearly have some significant CapEx investments put into GMP grade facilities?

We do. And we're continuing to invest in those areas. I think it is a differentiator. I think you want to be able to demonstrate to your customers: a, you can do it and do it well, but you want to make it as smooth as a transition as possible for them and we're always keeping an eye to that next step. And there's various terms there. There was going to be GMP light or something like that. At the end of the day, you want to keep your eye on what do you think the end product is going to be and you have a natural smooth transition to that and not have a gating of time or a gating of uncertainty for your customer. You want to be able to lay out. And this is what we do today. We can make this for you at this level of quality or this level of quality and here's the added cost components. Here's what it's going to look like, and that allows them to plan with us with confidence, which is a big part of the relationship.

Got it. In terms of competitive landscape, particularly in upstream, it's a fragmented area, right? And you spoke a little bit earlier about potential consolidation. The desire of customers that want to consolidate the vendors and the partners they're using. How do you kind of see the competitive landscape evolving? Do you see consolidation continuing? Evaluations, I would say, like a year or 2 ago were may be prohibitive, but not so much anymore. And so there's a lot of private companies as well.

Well, I think, look, in life science tools, I think the large companies in this space sort of demand consolidation over time. From our perspective, that -- again, we're not looking to compete with them. Several of them are customers or partners with us. We see consolidation for us is really some of the smaller assets in the space that they're not attracted to or just not going to move the needles that are meaningful to us or give us certain capabilities or technologies. Maravai has been a consolidation of nothing but founder-based assets. And that's very unique, very high science, very unique positions in the market, very high customer retention, stickiness, good price points, good margins, et cetera. And we still see a lot of assets that can complement that and kind of roll up some of these smaller pieces to really give a nice complete offering, again, at a lower scale than some of the big acquirers, but also staying kind of away from maybe some of the commoditized parts of the market that are -- some people do very well at very high volume. That's not our sweet spot. We don't need to be like them. We want to stay in the areas that we do well for our customers, and that's maybe a smaller revenue contribution but a higher margin profile, and that's really where we focus our attention.

Got it. Moving back to COVID for a minute. How are you seeing sort of COVID boost your demand so far and your long-term expectations for the annual or regularity of boosters or maybe even variant-specific vaccines? I know that you receive a purchase order and it goes and whether it's used for per shot or for shot. But just in terms of where you sit, you have a unique perspective, so I would just love to get your thoughts on that?

Yes. I mean I think we feel and our scientific team feels the best science is going to be an annual booster that addresses emerging variance of concern. I think the scientific community and even that that's lobbying, I think the governments or the health agencies want to see a vaccine booster that has a little longer durability as far as that frontline immunity and isn't waning quite as quickly, right? So I think when you look at the existing vaccine, it has that 5 to 6 months sort of waning component to it and then it's addressing the initial variant of concern, gives some protection but not maybe as broad protection as we want versus the emerging and the BA variance that we're seeing with Omicron and other things. So I think ideally, you want to see the regulators get ahead of this, say, okay, we're going to use the same platform, but we're going to address the variance of concern and we do so with different types of vaccines that hopefully have a little longer period of creating that immunity protection such that it can be annual. And that's going to make a sense as far as keeping the compliance rate high and keeping the population certainly more healthy. I think what I'm surprised at, and I don't know if everyone is aware that the 3-dose regimen compliance in the United States is 33%. So it's not high. I mean people are getting COVID fatigue, I think. And fortunately, that's not helping when we see these upswings. It's because of that compliance rate and that waning and the fact that it still catered towards the original variant is creating some of these issues that we're seeing today. And the virus doesn't get tired or complacent, right, but people do. And so you're seeing this component, and that's why we're seeing some of the upswings we're seeing today.

Got it. And I think there's been a large focus on U.S. and Europe and then the rest of the world opportunity hasn't been talked about as much. There's still a significant portion of the global population. But there's also distribution, there's different views in terms of those countries towards vaccines. Where do you see that rest of world opportunity for a COVID vaccine? Is there still a pretty large opportunity set for you, just especially given the dominance of the Pfizer, BioNTech vaccine relative to others?

Well, I think that there's -- there are opportunities. I think what was underappreciated was the lack of infrastructure in some of these countries and the ability to get the needle in the arms of people in a manner that is efficient and covers the masses of populations that need it. So I think you're going to see innovation there as well. I think you see innovation in temperature storage and how it's -- how the different vaccines are delivered. And even in some of these modular manufacturing containers that our customers are talking about. The nice thing is our technology is particularly CleanCap, very transportable, very flexible to be done in other manners, even [indiscernible] or other type of things that could fit this, and it's not really the gating issue that we're seeing in some of these things. So I think there's going to be more innovation there, and that's going to need to happen to be able to create the infrastructure successfully deliver to some of these other populations because they don't have what we see or here's a clinic on almost every corner where you could go that just doesn't exist, right? So they're going to have to get some more investment. And you're starting to see that, and I think that's going to be a big part of controlling this on a global basis. Then you certainly continue to have certain governments. And China, obviously, is an interesting example of not yet adopting mRNA technologies to protect their population. I think that we'll keep a close eye on that. Certainly, with our relationship with BioNTech, their relationship with folks in the area, there is some ongoing effort there. But we just don't get a lot of feedback as to whether that's going to get traction or not.

Got it. And that relationship is still in place?

Yes.

Okay. In terms of the focus for internal innovation at Maravai, just over the medium term, do you plan on continuing to focus on the upstream or maybe looking to add more product portfolio the downstream as well? Like where -- if you were to kind of think big picture, which direction you might be going for internal or and we can talk about M&A a little bit or inorganic investments?

Yes. A couple of areas we're really focused on. One is the CleanCap franchise. Certainly, we have a great moat around that from an intellectual property perspective, extends out 14 more years. We think it's very real pressure tested and very solid. But we think we can continue to create more analogs. Right now, we just kind of have 5 broad classes of CleanCap that we offer. But we think there's the ability because it's a chemical cap and there's chemical space available to modify CleanCap specific for the intended use of the end product. So where we have 5 today, you might have 50 downstream, which is very specific to each indication you're going after. And that innovation is also part of informing the breadth of offering because ultimately, you want to take all of your inputs. So whether it's your plasmids, it's your mRNA, you're capping, your delivering and you want those to all work as optimally with each other. And the best ability to do that is to offer them all within one company that has the ability to do that. And right now, we're -- when you get different plasmids from different people they have different levels of quality and so on and so forth. So looking at those investments to offer that full breadth and be able to optimize with our experience, how those interplay with each other to get the best result, to create the best protein responser or response you're trying to listen in the body is part of that overall program and strategy. So that will be done organically, and that will be done through M&A because some of those things have IP or other things that we can't replicate without going out and buying it.

And just turning to biologic safety for a minute. We've always been really impressed by this business. It gets dwarfed by the other aspects of the business. So it doesn't get as much attention, but you're looking at a business growing 15% to 20% with 80% EBITDA margins. And there's a competitive advantage that you have relative to peers in terms of the generic kits that you sell. And I've been amazed that just given the margin profile, the growth profile there hasn't been a little bit more innovation from some of your peers in that space. Is it still the case with your -- the Cygnus, the biologic safety business that you still maintain that competitive advantage? And maybe explain for people a little bit about what that is and how it allows you to capture more of those downstream opportunities?

Yes. I mean a lot of credit goes to Ken Hoffman, the founder of Cygnus Technologies who had the vision to create these antibody lines and ultimately, these host cell protein detection kits with basically as you're doing biologics or biosimilars, you're growing a bug in a bug, and you have to kind of filter for and have the initial host cell protein be below a certain limit and our test gets test for that and test for that in a variety of different expressions systems so whether it be CHO cells or E. coli or other things. We basically developed a whole broad spectrum of those off-the-shelf kits where we have, I think, 28 of them available today. The next 4 competitors in the market have 12 combined. So we just have such a breadth of offering. The regulatory agencies refer to Cygnus's kits as a gold standard. And luckily for us, we've seen actually because they're so good and there's such a small part of the program and they're so effective in what they do, we don't see a lot of people wanting to create limited resources either internally or other companies to try and replicate the same product that's already at a very high level, so we can maintain an excellent market share, continue to grow slightly above the market through our service offerings and also introducing other tests. So outside of the host cell proteins, we also look for things like endonuclease, things like Protein A, other such contaminants that are part of the biologic safety profile that you want to test to make sure the below levels. And if they're not, we offer a lot of services either via mass spec or other orthogonal services to be able to help our customers triangulate on the various impurities that are there. And that's been a nice business for us as far as the service offering is concerned. The other dynamic in the business which has helped us a lot as you see a lot of the biosimilars or biologics moving to CDMOs, the traditional CDMOs, those CDMOs typically want to not be questioned in what they use for some of the things they defer to the best kit on the market, which is Cygnus. So we've been growing that business roughly 20% over the last couple of years, and that CDMO channel for us has grown by 40%. And so you'll see that dynamic as that market shifts to CDMOs, and we have that strong relationship, but they want to use the best products in the market, they're turning to us to provide those, and that's also helping us grow and outpace the market there. So it's just been a great business, very unique, very -- highly defensive, extremely sticky, good pricing and continue to be able to take a little price each year, some great distributors globally that also help us in other regions where we don't have a direct presence. So it's a really strong business for us.

And then just on the M&A front. I mean you did a deal in January, MyChem that I felt it was largely one, security of supply which is in this environment, a very wise thing to do, but probably some ability to generate some additional revenues from additional opportunities. How are you thinking about M&A now? As you mentioned before, the free cash flow that you generated, you've gotten balance sheet cash basically. So like how -- what areas do you think are still interesting to you? And is it -- will it be some more of these security supply deals? Or is it going to be a little more on the revenue growth side? Because I feel like from a margin accretion standpoint, it's going to be really hard.

That's not the measure we use.

No, no. Okay. So maybe help us with some of the criteria in some of the areas that you might be thinking about?

Sure. Yes. I think certainly, securing our supply chain, particularly people that do high quality is a big piece and MyChem in their process, which was kind of a proprietary process that we turn to them to actually as 1 of our vendors as many in the industry, really highly pure, oligonucleotides and oligonucleotides and has a really unique process that we're actually porting over to our own processes at TriLink. So a very unique acquisition there and some great people and some incremental revenue contribution on top of that. So it kind of checked a lot of boxes. Most of our supply chain continues to be actually domestic. We have 75% of our supply chain in North America. So it's pretty unique that way. We know a lot of them very well. We would love to be able to acquire them. It's not always actionable. So we continue to stay very close to a number of those companies and the founders we've had relationships with for a number of years. But outside of supplying our supply chain, there's other people, again, to add to that breadth. So again, you're looking at things that we may not offer today. We're very strong in highly modified mRNAs, very strong in capping, have a nice and growing infrastructure for the other oligo synthesis inputs. There's still some opportunities on the plasma DNA in upfront side and in -- certainly in the delivery mechanisms, and we don't have any assets there or relationships there. So those are areas that are of interest to us to get that whole breadth of offering. And after that, then you have to look geographically, you don't have any infrastructure outside the U.S. So as our customers are predominantly in Europe or other places, having that commercial presence, having that manufacturing presence if and when it becomes a nationalistic approach to some of these things like you're seeing will ultimately be something of interest, and that's another box that we consider when we really look at these things. Typically, we're not looking at large science projects that hasn't been our ammo. We're looking at things that contribute or EBITDA positive. We probably have a little more flexibility now based upon where we are if we see something that's really unique. But for us, it's a strategic fit. It's the novelty of the science that is unique that gives us something other people can't offer. We're just not going to buy capacity. That's not really our focus. I think we can build into that, and we have it in good supply with which we have and what we're building in San Diego and its capabilities. And sometimes that's people or technology. Sometimes it's IP, sometimes it's just know-how, but those are some of the unique things that we're looking for, again, to stay differentiated and not just kind of fall into the commoditized revenue grab. So we're highly disciplined when it comes to our diligence process. We're not going to do a deal just to do one, it's going to have to make sense and certainly checks a lot of those boxes, again, quality also being very important to us given where we think this market is going to go.

Got it. I just remind the audience if anybody has a question. We do have microphones. So feel free to raise your hand if you have a question. I remember when we were doing the IPO, sustainability of margins was 1 of the questions we got. And it hasn't been an issue.

It's actually 1 up a little bit.

No, it's actually gone up. And so part of the question we get now is how much of this is generated from the COVID-related business. And if that fades over time, could we see some margin compression from that. So maybe just give us a little more clarity on sort of the base business margin profile and what you think the sustainability of margins reasonably could be?

Yes. I mean, look at the last quarter, we had a 77% adjusted EBITDA margin, which is almost unheard of. I think we're not going to try and hold ourselves to something like that over time, and that would be a little bit tough. When we look back pre-COVID or even the first year of kind of the COVID ramp-up where we only had about $100 million of contribution, we had a 60% EBITDA margin in our new facility. So that's sort of a baseline for where that business was. And depending on where a CleanCap goes, it might be a little choppy over the next 6 quarters. So we'll see how our customers are talking about demand going forward. But I think that and the stacking of demand for CleanCap through other indications and through all the customers is going to continue to have that be a meaningful contributor, and that's certainly a high-margin product. But we price a lot of what we do based upon our current inputs for an example, our mRNA services, someone will come to us, say, I need the following construct with CleanCap under GMP, and I need 5 grams in August for my Phase I clinical. We'll take our current labor rates, our current infrastructure, our overhead, our raw material input, and we'll quote that out based on the margin we want to see that business at and say that will be an $8 million job or what have you. So we control our margins with the current cost structure we have. So we have good control over that. And a lot of time, it's more about quality, delivery time, capabilities than it is absolutely about cost. That's typically not the leading discussion point. And that might change over time -- but as we sit here today, it's more about some of those other attributes that I talked about. So that also allows us to continue to have good margins. And the other part of this is our inputs, our raw material inputs are very well defined. We have a great relationships there. We have great pricing with those, and we don't have any other component of our COGS is going out via licensing royalties or anything else. So it's a very pure play as far as what we're developing, the uniqueness of it and the ability to have good profitability on almost all of the products across our scale. And we look at that very hard, and we've made some conscious decisions over the years to deemphasize certain product lines, let certain contracts expire if we don't like them kind of hitting our standards and staying in that sort of that high-margin value-added part of the marketplace in which we compete today, and we plan on keeping that strategy in place.

Maybe just discuss pricing. You talked about the input cost, and there's a lot of contract-based work that you would do that might result in -- I'm sure it's diversified across the business so you can have different levers. But just talk about the pricing environment and how your customers have responded to that? I mean given the supply-demand dynamics, it's probably something that you can do. And so I just would love to hear kind of your pricing strategy.

Yes, historically, we've probably benefited maybe 300 basis points every year of growth from price adjustments. Right now, I think we feel comfortable with the volume price, at least on CleanCap and other materials that we've established, we've been very consistent up and down that level. So if someone's here there's a certain price if they're a top customer, they're getting maybe half of that price as they go up on that volume. And it's been more or less a sliding scale that we've been very disciplined on. So I don't think there's any surprises as people order our products up and down that volume. It's very consistent with that level. We feel that it's a good value proposition, what we offer on the services side, what we offer on CleanCap, what we plan on offering on the raw materials if we don't already today. And then again, on the biologic safety side, these kits are very price effective for our customers based upon how the performance that they give. So.

Got it. And then maybe the last question to finish up. You announced a contract with the U.S. government. How does that help offset in terms of your CapEx plans?

Yes, another great validation for us, and that is the DoD BARDA grant, but it's going to basically offset roughly half of our $80 million investment in our facility expansion in San Diego in exchange for them having a right to tap us on the shoulder if they need to get into our capacity for any future pandemics or any issues that we have going forward. They will have to still pay for it, but they'll have the most favored [indiscernible] strong tap. But yes, it's great. It's a great -- another validation much like CleanCap being incorporated into leading global vaccine is the fact that we went through this process. They're very enthusiastic about us scaling up and the investments we're making in mRNA and nucleic acid production and are willing to fund half of that commitment over the next roughly 6 quarters that we're going to be building and finalizing that building.

Great. Kevin, we're out of time, but thank you very much for joining us. Really appreciate it.

Thanks, Matt. Thanks everyone.