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

Hey, everyone. My name is Tejas Savant, I'm the Life Sciences Tools & Diagnostics Analyst here at Morgan Stanley. It's my pleasure to host Maravai this morning, and we have Carl Hull and Kevin Herde from the company. So thank you both for joining us.

Maybe, Carl, just to kick things off, we'll get right into the weeds. Everyone knows who you are. So look, I mean, on the COVID side of things, clearly, you derisked the guide recently said it at $200 million to $300 million. But even at that midpoint, if you assume $0.30 per dose, that's about 830 million sort of annual doses. Why do you think that's a reasonable sort of like endemic run rate here? How are you thinking about upside or downside relative to that midpoint?

Sure. Well, look, first, I put aside the cost per dose or price per dose because that can vary. And certainly, as customers have got experience with the manufacturing grants and kilogram quantities in mRNA and they've gotten more efficient. So put that aside as a basis. But our view from outside work that we did was that roughly this year, there would have been about 5 billion mRNA doses produced by the industry. And as we look forward, we think that the kind of steady state, if you want to call it, endemic rate is more likely to be about 2 billion doses by the industry, and we feel reasonably comfortable that the Pfizer-BioNTech market share will hover around where it has reflecting their global executional capability and roughly 65%.

One of the questions we got actually over the last week was Moderna, their R&D Day showed some numbers around $82 million as the U.S. high-risk opportunity and about $340 million is the global high-risk opportunity. And of course, people are assuming it will be one dose per year analogous to the flu vaccine. So I guess what underpins your confidence to your point around the $2 billion dose opportunity, half of which you're saying will accrue to Pfizer.

Well, remember that I think Moderna backed into those numbers from a $100 ASP for the retail value. So that changes pretty dramatically. That's a fivefold difference compared to the governmental pricing, right? So if you normalize for that, I think we're saying roughly the same thing.

And the transition from the U.S. government purchasing vaccine doses and now transiting that roll out to the private sector. How sensitive do you think Covid vaccine volume would be -- should it require sort of co-pays or on-market deductibles, et cetera?

Well, certainly, there's any barriers to getting vaccines are not a good thing in terms of adoption or utilization. But I would say that likely the way people are behaving these days, if you're willing to get a vaccine, if you're going to get a vaccine or if you're motivated for that, you are probably unlikely to be discouraged by a reasonable co-pay. But if you're looking for just another reason not to get one, that reinforces it.

In the near term, Kevin, perhaps you can address this. Is there a risk of inventory destocking for clean cap given the push out that Pfizer had here into 4Q? And if not, why not? And are you seeing some of those push out orders now starting to come back?

Yes. So I think as we look at 2022, as you know, we have really strong visibility for that and have had since basically the beginning of the year. They have taken their demand down to the lowest levels in the prior contract. We talked about that a little bit on the call. And then I think going into 2023, we're still working with them. I don't think they know exactly where the forecast is going to go, and so we're trying to be very cooperative with them and determining what that forecast is. Certainly, there could be supply chain fluctuations. There always is, as you ramp up or as you ramp down, and this is on -- certainly from a zero-revenue contribution to $600 million to somewhere lower. So you'll see some of that flowing through. But at this stage, we're just having a lot of conversations with our customers, particularly the largest ones, trying to get a sense of what they need. There's a lot of factors going into this, certainly how the fall booster campaign is going to go, certainly how product exploration rolls into things, et cetera. And we have a lot of other customers that have different dynamics they haven't even introduced their commercial product yet within the COVID bucket as well. So you have a couple of different factors going into kind of how we're projecting the same things.

On China, I mean, obviously, you've had rising case counts there. Can you just give us an update on your work with Fosun over there? And how are you thinking about the possibility of perhaps a large clean cap order? And on the flip side, I think, Carl, you had mentioned you were sort of transiting product from Russia into China. That had a little bit of an impact on the second quarter. Has that now been essentially completely rerouted and no longer expected to be a drag on your EMEA sales?

Yes. On the latter point, it has. It was a onetime thing that we just had to get around the dislocation of the supply chain since you couldn't go back through Russia. So that's taken care of. I think you're asking me to put on my secretary state hat on the former part of the question.

You are actually a state for the life sciences essentially. You know where all the bodies are varying.

True. I'm really not sure how that's all going to play out. We don't have any direct relationship with Fosun. Our relationship is with BioNTech, who then has the primary relationship with Fosun. It is clear that the organization and the capabilities are now there for the Chinese government to approve the BioNTech, Fosun candidate if they choose to do so. I believe there were some initial difficulties with the CMO chosen by Fosun that probably affected the first year and would have made. That a sort of valid discussion about, are you guys really ready or not? I would believe that that's been taken care of now. So you're dealing with other issues outside of the strict public health realm. And it is clear that the efficacy of the various candidates have been administered in China is much less than had they chosen mRNA route.

How are you thinking about softness in biotech funding impacting your customers? You've talked about sort of not seeing any of that impact. Why is that? And what is your revenue exposure on an executed basis to some of these early-stage biotech’s?

Well, look, I think it's a luck of the draw is how I would characterize why we haven't seen much impact here. If you'll think back temporarily to the start of 2020, first, there was a 3-month period of time when none of us knew what was going to happen. Then there was a period of time where there was a frank optimism about the opportunities for mRNA, but they needed to show some progress. And then after that initial 6-month period, there was just a rush into the mRNA space. Everybody had to have a partner, everybody had to have technology access, and they were trying to assemble the pieces together from as many different sources as they could. I think during that land grab, you saw a lot of funding come into the industry. It was specifically targeted against some RNA opportunities, and that has been enduring. And when I say a lot of funding, I mean, I recall a couple of $150 million, $200 million B rounds, right? So these are well-funded customers that we have. And quite frankly, it was a shot in the arm for the industry just generally because we were dealing with a number of smaller customers who might not have been that well capitalized. That is very much our sweet spot. So I would say to the degree that we've seen an observable and detectable effect -- it really has to do with more prioritization of programs to somebody who might have been working on 5 things simultaneously is thinking about their future and saying, let's really concentrate on these 3 highest probability or highest return type opportunities, but it's not a wholesale, we're stopping mRNA.

And then can you just comment on the traction you're seeing on the non-COVID mRNA pipeline? Obviously, the near-term opportunity here is potentially a flu vaccine. How large could that be? And what are the other sort of medium-term opportunities in the pipeline that you view as particularly promising?

I think there are hundreds of opportunities, first of all. So we've disclosed a number of customers that we've been working with in a number of different programs that we're involved with kind of in order of timing, I think you'll see other infectious disease vaccine programs beyond COVID. So the obvious ones are flu, other respiratory diseases like RSP and those sorts of things. So that's one wave. There is a next wave of those infectious disease vaccines that are for the more difficult tropical diseases, so I'll say, things like Zika, Chikungunya, other things like that, where people are really trying to address very severe disease burdens that happen elsewhere in the world. So that's number one in terms of timing. Number two, with a lot of enthusiasm right now are the various immuno-oncology, you can call them vaccines, but the immuno-oncology treatments that can either be individualized to a patient or there are some allogeneic versions of those under development. And I think that to the degree that this auto immunization and the high jacking of the body's immune system to fight cancer can be proven out. There's a great deal of excitement and a number of different approaches for a number of different cancers that are underway. And then finally, I think you have a lot of interest in the historical roots of mRNA therapies, which were rare diseases, and these are the things that are basically inborn errors and metabolism for a child and typically show up early in life and they can be the muscular dystrophies. They can be the phenylketonuria, a ton of different things where the bodies and metabolism is not working right and mRNA can cure it. So that's the third broad area. And then I think finally, there's a great deal of enthusiasm right now for broader indications of what can mRNA actually do to deal with very widespread diseases. And a classic example, I think Moderna has talked about this as have others, something like heart failure. So can you use mRNA therapeutics to change the VEGF expression of cardiac myocytes, that's really cool.

If the mRNA pipeline products, Carl take longer to get approved or scale to commercial volume, what would be the implications for your sort of business model? I mean do you view your high-teens growth in the non-cover base business as essentially a sustainable growth rate with commercial grade sort of mRNA products all being upside?

Yes. I think that's the right way to look at it, Tejas. Our sweet spot, as TriLink and Maravai has always been to work with the early stages of discovery and development and preclinical tax work, et cetera. That's where our sweet spot is. So to the degree that, that number of programs continues to expand, it's almost irrelevant whether any of them reach commercialization for our business model to be successful.

And then at the Analyst Day, you talked about CleanCap extensions. Can you just recap for us what improvement these extensions provide over the current version? When do you expect to roll these out? And would these extensions extend the IP runway for CleanCap? And would they pose sort of a regulatory hurdle potentially for customers who want to switch?

Yes. Well, several parts to that question. First, the function of a CAP is multiple when it's on an mRNA molecule. A lot of it has to do with stability and avoiding degradation by various enzymes that are naturally occurring in the body. But another big part of what a CAP does is it initiates the translation into proteins that happens in the body. So you have a CAP at one end and you have a poly a tail of the other. Both have a role in getting things started and getting things going, in generating the cellular mechanism necessary to produce the proteins you're looking for. So we find ways to optimize both the structure, which is the sequence, the starting sequence that you use for that CAP, and that can have an effect on your ability to produce more and more protein, which after all, is what you want to do here. And then there are also areas immediately adjacent to the CAPs and the tails that called untranslated regions. And the structure of these untranslated regions is now being better understood so that you realize a particular sequence in a particular place may help you even further. So this is an area of emerging knowledge. It's one we're participating in. And yes, we do think it leads to potential opportunities for further protection. Our intellectual properties stayed around CleanCap, we feel very comfortable with, and it's acknowledged having been super innovative at the time that we did it, and we're looking for ways to further that.

Can you just give us an update on the plasma business? Do you see this business is more about sort of expanding your customer reach? Or is it more about sort of just growing your share of wallet?

Yes. Look, I think it's both. The most important thing for us is just to facilitate our customers getting their job done, right? And their job is to make messenger RNA. So because you have to have the plasma and in fact, even in front of the plasma, you have to have the gene necessary to produce that plasmid, customers are finding difficulty and cobbling together all of those elements because of supply chain constraints and timing constraints. And the situation is so bad that if a customer misses a window of production, say, with a plasma manufacturer for a GMP construct and this is by 2 weeks, that may cause them a 6-month setback in the program because they missed their manufacturing slot and they have to go back to the back of the line. So for us the strategic imperative, giving our customers access to optimized plasmids was to make their workflow easier and to allow their schedules to have a higher degree of probability. So we see that continuing. We don't see ourselves going into the business of trying to compete one-on-one with Aldevron, for example, with every plasma order. That's not what we're about.

And then you obviously expanded CleanCap capacity pretty significantly on the planner side. A couple of questions there. So near term, Kevin, I mean, is there a risk of further contract losses? Do you do customers wanting to make that switch from our euro to GMP-grade work, why you wait for Flanders to ramp and become operational? And then secondly, how easily could you adapt some of this CleanCap capacity to serve other areas of your business as a Covid demand sort of normalizes?

Yes. So on the first part, as of now, that was isolated incident of our customer kind of changing the quality level from RUO to GMP, which is what we kind of anticipated the market going to particularly as the larger pharma companies get more involved in mRNA and have those higher quality expectations. So Flanders, which is coming online here at the end of the year, first part of next year, we'll be able to enable us to meet that demand, but we haven't seen any other situations like we saw as we discussed in our second quarter earnings call. So I think we're in good shape moving out there. As it relates to the flexibility of our manufacturing. Yes, I mean, CleanCap is basically a small molecule manufacturing setup. We can flex it to do other things. So to the extent there's varying demand for clean cap, we can certainly flex into some of the other building blocks that our customers like. And again, leading some of the things Carl talked about, it's that combination of new customers' growth and then that share of wallet really be able to hit all of the verticals and within mRNA manufacturing that we're seeing a continued interest and probably a consolidation of companies ultimately as well.

I just wanted to touch briefly on the DoD agreement that you had announced earlier this year. Can you just provide a brief overview of what it entails? And do you have to essentially reserve capacity for the government? Should there be another pandemic?

Yes, I don't know if I call it reserve, but they would have optionality on it. It certainly -- and it would likely be in collaboration with somebody else since we're not doing the entire products so they would have some prioritization there. They get some MFN pricing in that nature. But we're really happy with that relationship. It's offsetting about half of the cost for our Flanders one expansion about half of that will come this year and the remainder of that will come next year. So roughly $40 million, $39 million of support to help us expand out our offering and our capabilities. And yes, that will help them and give them the rights to get to some of that capacity should they need it or should we need to collaborate at a government-led program down the road. We're hopeful that doesn't happen again, certainly. But it's good to be recognized, and it's certainly nice cash flow perspective.

Switching gears to the biologic safety testing side of things, Carl. What about Cygnus sort of most resonates with your customers versus kits made by others or kits they could make potentially in-house?

Really, it's 2 or 3 different things, Tejas. The first would be reliability. So our kits are time tested improved and have been in use for 20, 25 years, oftentimes type the same people in the quality control or process development areas of these large companies. So we have a demonstrated track record. Secondly, as we have the breadth of menu offering. But one of the things that the COVID pandemic has taught us is that a lot of the cellular expression systems are not necessarily optimized for doing all things and there are certain types of things you're doing, especially as you get into gene therapy, where you have the 2 transfections and multiple times and multiple cell lines, you need access to other reliable kits from an established vendor that you know will have regulatory acceptance or at least not raise regulatory questions. And then I think the third thing is our ability to provide super deep technical support. That's always something that we've done with the Maravai Companies. But in particular, with Cigna, you're dealing with people who are task-driven working on a biologics manufacturing program, and they've got to get something done. They need to talk to people to know what they're talking about. And we can offer that. We can also offer services to further characterize their impurity profiles, things like a mass spec analysis or other orthogonal analyses that we do. So it's really those 3 broad buckets of things that bring people back to us time and time again.

And is 10% essentially sort of steady-state growth for the segment in your view? Or could we actually see sort of meaningful upside over time either via new kits or perhaps share gains?

Well, look, I think historically, that business has grown log closer to 20%. It will be close to 10% this year, citing some of the headwinds that we're seeing in China, where obviously there's a lot of biologics to turn lot of our kits there. And certainly, taking out our Russian distributor and things of that nature. I think the growth rate just with biologics, safety testing is in that 13% to 15% range in the long term. So that's what we'd be pegging there. And then contributions to that would come via the service offerings, as Carl mentioned. We're also seeing some channel shift a lot more of the business going through your traditional CMOs and things of that nature. So that's taken us up nicely as we -- they like to use the gold standard test there. So that's been good. And then lastly, the contributions from Mace. We did have our first commercial sale in the last quarter to do viral clearance predictive type of testing. And that will be a new emerging market for us that will potentially contribute to that growing in excess of that mid-teens.

And on that point, I mean, at the Analyst Day, you talked about the next-gen version of the [indiscernible] kit, and I believe that was the RVP kit as well. I mean have those now launched? And if so, any early customer feedback you could share?

They're in the process of launching, and I think it's too early to tell.

Fair enough. On Biologics margins, I mean, clearly, they're sort of over your corporate average. And we do get questions around how sustainable those are. But you've talked about how selecting the best kit for safety testing essentially pays for itself, and it's a small portion of the overall customer cost. So it's well worth their investment. How recession-proof are those assumptions? And could we see some pressure here of the economy sort of enters a prolonged slump.

No. Now I get to be the Council economic adviser something like that. I don't think so. I mean you'd have to look at the broader biologics market and look at the underlying demand for the therapeutic programs. If there was a massive shift away from traditional monoclonal antibody manufacturing for some reason, new technology, let's say, mRNA or place. Yes, there would be an effect on that underlying business. But I don't think we're forecasting that or as anybody in the industry. So I think from a recessionary point of view, the demand for these advanced therapies continues to be strong. The reimbursement in most countries continues to be reasonable. And those are the factors that I think will support that underlying demand. So I wouldn't say that it's recession proof, but I wouldn't say it's recession-prone either.

A couple on the numbers here for you, Kevin. I mean can you just talk to us about your FX exposure, especially as the non-COVID pieces of the business grow and as you diversify your geographic sort of presence as well. How are you thinking about that?

Well, at the current moment, everything is the dollar-denominated from our supply chain customers and the contracts the customers, and we don't have any operations overseas. So right now, we don't have any FX exposures, a good place to be. And I think that just the nature of our companies, founder-based companies U.S.-centric, has been sort of a benefit over the last few years. I mean our supply chains remain extremely consistent. We've sourced about 80% of our products through the North America sources. So that's given us good stability and pricing has been, frankly, improved a little bit over the last couple of years just based on volumes. So no FX commitments that we're concerned about and a real stable supply chain and good solid contracts, if you look across the business, again, all denominated in the dollar. So some no currency impact that we see unless we start moving more internationally with our infrastructure, which is one of our strategic initiatives.

Carl, one more came over e-mail. Just as you think about your equipment exposure here in '23 and then '24, should we be expecting sort of essentially 2 years of normalization where 23 might be a little bit sort of higher than what you assume will be your steady-state run rate?

Well, we certainly haven't given guidance on 24 so, I probably won't start that today. Look, I think there's going to be noise in the system. People still are using the phrase that we're moving into an endemic phase. In some cases, it's more a political definition than it is an actual definition. And so I think time will tell how things play out. It will be interesting to see this fall here in the northern hemisphere, how the interplay between flu and COVID goes, if some of you will recall, 2 years back, there was absolutely no flu in the United States, none. It just disappeared, and it was supplanted by coin on the respiratory side. So you'll have to see how those 2 interplay. I think the Southern Hemisphere had a tougher flu season already this year, and it started earlier. So you could bounce from one to the other. And if you do that, then maybe there are changes in mutations that you want to deal with. So I'm not quite convinced personally that we're at the stage where somebody can say, okay, every year in October, we're all going to get a Covid shot. You may need some interim tweaks between now and then. But that certainly is the policy objective. And when the boosters got released last week for BA4,5, I got one shot in each arm following the government's advice.

On the point around Covid normalization, I mean, how should we think about translating that into EBITDA margins for next year, Kevin?

Yes. I mean we're not going to guide on the bottom line yet at this stage. There's a lot of factors still going into refining that. But look, I would say that before this all started, we were running mid-50s to almost 60% EBITDA margins for the company. We're at a much bigger scale even with the forecast to decline in COVID that will benefit us from a leverage perspective there. The pressure and the offsets that we've been communicating, certainly, our infrastructure that we continue to build out for the long term with our expansion in San Diego and for a biologic safety testing business in the North Carolina. We also have the additional investment we're making in R&D organically. We brought in a great new leader there in Cape Broderick, and so we're looking for some exciting fans our organic growth over time. And then certainly, the labor costs, inflationary pressures there over the last couple of years, the labor remains about 2/3 of our cost structure. So as those rates go up, that lab leads to a little pressure as well. But all in all, we've always had very highly profitable businesses, and we will have highly profitable businesses but it goes down as well.

And then as you think about sort of your cash on the balance sheet and appetite to do a larger deal, would you be willing to perhaps take on a little bit of leverage? What would be the level you'd be comfortable with for the right asset?

Yes. I mean, the great thing about our business, all is the free cash flow that we get, right? We generate, I think $175 million of free cash flow just last quarter alone. We set or more cash than debt today and we have a lot of flexibility there if we saw the right asset to move up. But if you look at our track record and what we're targeting in the conversations we're having today, there's not a lot in that $1 billion to $3 billion range out there that's actionable for us. We're certainly on the lower end of billion sub when we look at deals. That's what we've been successful in integrating. It's what we've been successful with most of the founder conversations that we continue to have. So I'd say if we see an asset that goes up to $1 billion and need to add a couple of turns based on current year EBITDA, we'd be comfortable with that for sure. But we don't see a lot of assets on the higher end of that range right now.

Carl, just your thoughts on just consolidation in the space more broadly. Have valuations reset in the private markets or assets you would look to purchase? And on the flip side of that, as you sort of think about consolidation, what would a company like a Maravai sort of gain by being part of a larger tools company, for example?

Well, have valuations normalized. I'm not sure that they have fully. I think your banker colleagues have been projecting a very nice second half of the year. I haven't yet seen that materialize. But I think that, that's a function of -- especially in the space that we traffic in founders and their grasp of the immediacy of the markets. They don't have the advantage, if you will, of being for sale every day when the stock market opens. And so they don't realize how big the corrections have been. And I think somebody who heard a year ago that their business is worth $1 billion. They remember the $1 billion, and that's about it. So I think that it's going to take a little bit more time for that to fully normalize. Having said that, there's a bunch of activity right now. I think initially, the activity that continued, say, 3 to 6 months ago was probably a little bit lower quality assets and now we're beginning to see more companies that we have our eye on expressing interest in seeing what they might be able to do strategically. So we do take that as a positive early sign. I just haven't seen a number of deals in our immediate space closing. And in terms of consolidation, look, we bring a lot to any large-scale life sciences company that's interested in the space, primarily because of our customer relationships. And if you think particularly about the continuum from early-stage research and development all the way through to commercialization. Many of the larger life sciences companies have spent their time, effort and capital on the commercialization piece and trying to do things at massive scale. What we bring are high-touch relationships with all the people who are early in the process. And while nobody knows what the category success or failure rate for mRNA as a therapeutic modality ultimately is going to turn out to be. If history is a guide, you're going to see a handful of those progressed to full commercialization. But if you are thinking about being well positioned for that, you really want to be touching those customers as soon as they pick up a pipe.

That's a great place to leave it at. So thank you so much for the time, Carl. I appreciate it.

Appreciate it. Thank you.