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

We're really excited to have Maravai LifeSciences presenting today and representing the company, we have CEO, Carl Hull; and CFO, Kevin Herde. Kevin, Carl. Welcome.

Thank you, Tom. Good to be here.

Great. So I think Carl, you're going to walk us through some summary slides to start, so we can start with that, and then we'll get into some Q&A.

Well, I may be able to do that or I may not because I can't see what the slides are so this could be an interesting presentation. Bottom line, what you see here is that Maravai LifeSciences reagents company providing tools to the industry for a variety of applications. Our businesses is characterized by incredible growth over the last 2 years driven by COVID. You'll see the numbers here for our first half performance in 2022. The growth rate has continued, but I think what characterizes the business is really an incredible profitability of our business, those are EBITDA margins, not standard margins that you can see. In addition, we do this in a very employee light environment with something like 550 employees supporting the revenue numbers that you see there on the screen. So we feel pretty good about the business. Recent performance has been outstanding, and we're super excited about the prospects for the future. The next slide that I can't see, but Deb is helping me out here just shows you how we're positioned in the industry as a provider of tools to other players in the industry. So most of our effort is not devoted to selling to researchers, which is the more traditional life sciences company, but really selling to other companies who are then incorporating our products into their own products. Our customers, and really, it's a blue-chip roster of customers. We have over 90% of the top 20 R&D spenders in big pharma as customers of Maravai and they are growing rapidly individually. And we've been making significant investments that Kevin will tell you about here in just a second, that have supported our ability to generate this kind of growth and this kind of margin. And the management team at Maravai we're well experienced in the industry, and we've recently strengthened the team by bringing in some additional resources on both the commercial and R&D side. We sell across the continuum from discovery and research that's being done in a biopharma company all the way through commercialization. So a particular example would be our CleanCap product for capping messenger RNA that's used by Pfizer and BioNTech and all of the code the vaccines. We sell that CleanCap product all the way through to commercialization. We also offer manufacturing services for messenger RNA and plasma DNA, which are important constituents of both vaccines as well as RNA therapeutics. Two lines of business that the first I just described is nucleic acid production. And then the second is biologic safety testing. And here, we provide analytical tools that assess from a quality control perspective, the purity of biologics. So basically monoclonal antibodies during production, we're able to assay whether there are any contaminants from the actual production process itself, which is a critically important part of the safety profile of the drug. Kevin, maybe you'll talk a little bit about our investment in facilities and what we're up to.

Yes. Thanks, Carl. So as Carl mentioned, one of the nice parts about our business is the free cash flow that we generate, which enables us to continue to invest organically in our infrastructure, which is incredibly important to be able to have the quality, the capabilities and really the automation to meet the demands of our customers at a very high level, and we've been able to do that very successfully. In San Diego, we moved into our, what we call a Wateridge facility, which is our primary mRNA manufacturing facility at the end of 2019. That was certainly very opportunistic with the COVID opportunity following shortly thereafter. We then further expanded that facility over the course of 2020 and the first part of 2021. We are now adding a second facility in San Diego to do additional manufacturing for innovation, all of the nucleotides and chemistry that will be complete the first phase around the end of this year going live in the first quarter, and then we have a second phase of that following shortly thereafter. We're also adding a third facility in San Diego to house some additional warehouse and G&A headcount needs. And then for our biologic safety testing business, we're basically doubling the square footage of that opportunity, moving it a little closer to the Wilmington area. And this is going to enable us to continue the growth we've been seeing historically in that business as well as increase our service offering, which is a fast-growing part of that segment. So Carl touched on this briefly. I just call out a couple of other things here. Certainly, EBITDA growth and revenue growth continued to be strong. I touched a little bit on free cash flow, which was close to $360 million for the 6-month period. One of the key focuses for us and for investors is our non-COVID growth, and you'll see in the blue bar on the lower part of the slide that, that business for nucleic acid production, which is the acronym NAP grew 41% in the first half of the year. That follows 2 consecutive years of greater than 40% growth in that nucleic acid business X-COVID. Let's move to the next slide. Very strong balance sheet in a ne1t cash position, adjusted free cash flows of $175 million in the last quarter, again, gives us great optionality with regards to continued organic investment as well as our history of successful M&A. Our last acquisition was earlier this year with the acquisition of MyChem, which had a really strong high-quality operation for all the nucleotides into our umbrella, and we continue to hunt and then look to bring more deals across the finish line using this strong balance sheet to ideally bring in this type of companies that we brought in historically, high science, generally founder-based unique assets and generally on the lower end of the M&A scale, typically $500 million or less. So that is kind of our target range at this point in time.

With that Tom, back to you.

Great. Well, that was a very helpful overview, Carl and Kevin. Thanks for that. So I wanted to start a little bit on the COVID outlook. Obviously, coming out of the quarter, you had talked about -- we're moving into a new phase of COVID demand. We're kind of moving off peak demand. We're not quite in that endemic run rate and that can make forecasting 12 months, 6 months a little challenging. So can you walk us through sort of what's embedded in the COVID CleanCap outlook for the back half and then we get to 23 kind of after that?

Yes. Look, we spent some time with outside consultants trying to address the drivers of demand for the vaccine itself because we couldn't just look at our products and try and figure them out in isolation. We had to understand the end application of the actual vaccine dosages and there still are a lot of different opinions that are out there. But the view that we have formulated says that 2022, as you said, is your peak demand and peak production, we anticipate that about 5 billion doses of messenger RNA COVID vaccines have been made this year. With that as a basis, we expect that next year will look something more like 2 billion doses. And if you look at others in the industry who are reacting to the same trends that we're seeing and that our customers are experiencing, they range anywhere from sort of 55% to 60% decline to 75% in the most extreme. Just going to depend on what products and what services you're providing since our CleanCap is in every dose, every molecule of mRNA that's made, we go into every vaccine dose, but we also -- there's a significant amount of wastage in the manufacturing and distribution process. And for us, we're part of that, too, which is actually paradoxically a good thing.

Got it. That's helpful. And after the call, we had news of Pfizer and BioNTech receiving approval here in the States for an updated bivalent vaccine. I think there was a positive CHMP opinion issued yesterday and EU up to wait and see what the ultimate decision is there. But any kind of change in the outlook that's embedded with a bivalent vaccine? Is there any kind of differences we should think about from a Maravai revenue perspective and just kind of overview there.

That’s a great question. We really don't see that. The way I think about it now is our customers in Pfizer and BioNTech and other vaccine programs have established their capacity and their manufacturing for X, whatever X may be across the line. And when they substitute in, let's say, the bivalent formulation, it simply takes away from X. So X would be the original vaccine that will taper and then the bivalent will come in, but the overall level of demand remains roughly the same, give or take.

That's helpful. And then any thoughts on sort of what vaccine demand looks like, what your customer demand looks like in terms of moving from government purchasing orders into private markets? Obviously, there's a little bit more of a U.S. dynamic, but broadly, your thoughts there.

Yes. Look, I think that the source of reimbursement or coverage for the vaccines will probably not do a lot to meet end demand. If you're inclined to get a vaccine, whether you have a co-pay or not is sort of incidental. You're going to go ahead and get a demand. And if you don't want to get vaccinated and somebody tells you, cost $20, that gives you a reason not to get vaccinated. So I don't really think it has much of an overall impact on us.

Got it. That's helpful. And then any latest on mRNA in China? Just sort of the vaccine outlook there and how you think the government might approach COVID going forward?

Yes. Look, that's been a confusing situation, I think, to a lot of people. At the end of the day, the Chinese government has gotten themselves into a situation where they've administered a very thorough vaccine program across the country, but they've done so with vaccines that turned out to be less effective than the alternatives, particularly mRNA vaccines. And I think having done that, there were some initial hiccups in the relationship with BioNTech and Fosun, their local partner. I do think Fosun had a couple of missteps with a contract manufacturer that they were using and that contributed to some initial delays. And it seems like the government has just gotten a little bit more entrenched that we know we need a Chinese solution here. And they're not willing to take a foreign alternative. So they are aggressively developing their own mRNA vaccines, a couple of programs are underway. One of them may be in Phase 3 now. So it seems reading the tea leaves more likely than not that the Chinese mRNA vaccine may be the one that gets approved, it will certainly get approved first before BioNTech.

Sure. That's helpful. Okay. Let's move kind of to the base business. You touched on the growth. I think it's 27% base NAP growth last quarter, 41% year-to-date. Can you just speak to kind of the dynamics in the base business? And what's the right way to think about medium-term growth for that NAP business?

Yes, I'll start with that. Yes. It's been a really nice consistent performance by the nucleic acid business, X-Covid. And I think it's a few different things there. One is you're continuing to see strong interest just in mRNA as a platform generally, the amount of funding that you're seeing going into the space over the last couple of years hasn't slowed down. And when you look at our customer list, we have 18 of the top 20 biopharma R&D spend budgets as customers of ours. We've seen sequential increases in the users of CleanCap, users of our mRNA services and the number of programs advancing in the clinic every quarter since we started tracking those metrics over the last few years. So very strong continued momentum. And again, it just goes to the strength of our capabilities, the strength of our quality, the tight customer relationships we have there. When we look at the broader market, we continue to see solid tailwinds there, too. We see the mRNA CDMO type business growing 30% to 35%. The underlying demand for key raw materials maybe slightly below that and incorporate all of those in chemistry and some other things, but very strong market growth, and we're certainly well positioned with our capabilities from an infrastructure and a human capital perspective to take advantage of those market trends and/or as we've seen, over the past 2.5 years exceed them.

Great. And any change in behavior from cell and gene therapy customers, obviously, funding concerns, I think, becoming more top of mind? And maybe just speak to that customer mix within that base business.

Yes. Look, I think that a number of companies have been exposed to recent downturns and the recent concerns of people about their ability to raise cash in the meantime. In our case, we really have not seen that as a primary factor. We believe that a lot of that is due to the fact that mRNA investments began to be made very aggressively in 2020. At the time the pandemic broke out. And so there were a lot of money was taken down by the individual companies at that point. To the degree that there is any effect at all on our business, let's say, we had a customer as a mid-range biopharma customer, and they had 5 different mRNA programs. They were trying to progress at the early stage. They may be prioritizing 3 or 4 of those now as opposed to going after all 5. That may be part of the cash conservation mentality. But we are not seeing people wholesale cancel programs nor are we seeing customers who start working on mRNA stop working on mRNA.

Got it. That's helpful. And then at the R&D Day, you hosted earlier this year, you talked about mRNA vaccine programs and therapeutics kind of moving beyond COVID. You spoke to that. But I think the first place people go is flu, but what other areas should we be thinking about here? What are you seeing from customers? And what gets you excited?

Yes. I think just the previous presentation with Novavax showed somebody who's going after both combo COVID as well as flu. Other people are pursuing stand-alone flu. Part of that's just going to be strategic. Are you going to get clearance on flu first before flu and COVID. But both of those things will happen a little bit broader than that is the notion of a pan respiratory virus vaccine that could have 3 or 4 targets. The most likely additional target to that is RSV, respiratory syncytial virus. And then some of the human pneumoviruses are likely candidates. So you'll see multiplex respiratory viruses. Other infectious diseases include some of the ones that are burdens in other parts of the world, more than they are here. These include tropical diseases like Zika, Chikungunya, others. There has been some work done on malaria. That's been famously very difficult for vaccine development programs, but it's a potential application. And the other 2 things that are the broad field, and this is where I think some of the real excitement and pizazz comes in, are the use of mRNA in immuno-oncology therapeutics, specifically vaccines that are either patient-specific or allogeneic for a particular type of cancer. And so the use of mRNA to produce those epitopes that then the body is trained to raise an immune defense against super exciting application, a number of companies doing that. And then we see other work being done broadly in CAR-T therapy and other gene therapies that utilize not only mRNA or other RNA like a guide strand RNA and gene editing. They also utilize products in our biologic safety testing business because just as you're making these individualized therapies or cell and gene therapies broadly, you have to do the same kind of safety testing that's being done for biologics. So we get both ends of that deal.

Great. I want to get into capacity expansion a little bit. You touched on it on the presentation. But before we get there, last quarter, you had a GMP order, a customer that was looking for a GMP-grade order that ended up being canceled. So first, have you seen any other cancellations as customers kind of potentially pull GMP kind of earlier into the process? And just an update on the Flanders facility in terms of what you think that could bring to the customer set, timing expectations, et cetera?

Sure. I'll take the commercial piece and then Kevin will talk about the facilities. No, that was a onetime order consideration, and it was a unique set of circumstances. What we were doing is selling an intermediate product that's used in the manufacture of mRNA, and it was a rather large order. And that customer had wanted to do with us under ROI basis, which we were set up to do. They then partnered with a large pharma company on this program and brought them into the picture. The large pharma company had a different idea about what they wanted to do and they wanted to use GMP material from the get-go. So as a result, our Flanders facility not yet up in operational or we couldn't offer that particular product under those particular GMP conditions. But that's a one-off thing. And this business can be spiky like that. And so we have to custom ourselves to move between quarters or sometimes frank cancellations.

Yes. And I think the expansion into Flanders is going to enable us to do a little bit of segregation, certainly have some site redundancy, but also, as Carl alluded to, really established the processes and infrastructure for GMP conditions to manufacture APIs to take our customers further along the journey towards commercialization, which is a key point of our commercial strategy. As we look at the business, it's sort of evolving into sort of 3 sub-segments in nucleic acid production, we really have the kind of small molecule manufacturing CleanCap and other potential small molecules of applications. We have the mRNA services business sort as a CDMO as we work with our customers, develop their highly modified constructs. And then we sort of have the all organ products kind of side of it, which is kind of an ongoing nice component of that business as well, including our Glen Research business that we have. So you kind of see those 3 sub-segments, they're all kind of evolving differently and we're setting up our facility footprint to kind of support them all individually with strong strategies.

Can you talk a little bit about the DOD agreement at Flanders and what kind of validation you think that provides for the platform more broadly?

Yes. It's been a great experience for the team working with the DOD getting the BARDA grant that's going to offset roughly half of our costs for the first rollout of Flanders, which is basically an $80 million investment, of which about $39 million will be subsidized by that grant half of it this year, half of it in the early part of next year. And then we have a good relationship with them. I think working with them, understanding their lens, how they look at things and being on their radar for future potential investments as we continue to expand our capabilities to address both mRNA technologies as well as pandemic response as well as a lot of the investment that we're seeing that we believe will continue to come very consistent with some of the current administration's comments about investing in what we need for health care for this country. And we think mRNA is going to be a great tool for a lot of those things, particularly in the oncology space.

Yes. We certainly see the government being well focused and very clear about what their priorities are. And onshoring, while that is one big part of it, it's also one part of securing the supply chain and making sure that we are prepared for the future. So I think that's a good position for the government to take here.

Yes, that's really helpful. So we started the conversations that were talking about COVID and how that might impact forecasting and visibility. How does that impact how you think about the next capacity expansion? What are your thoughts around sort of where you're going to sit going into 2023 on capacity? How do you evaluate kind of further capacity needs? And do you have any updated thoughts on sort of capacity outside of the U.S. and any international sort of facilities you might be looking at?

Yes. It's interesting. As we sit here today, we are in a much, much stronger place than we were 2 years ago, certainly 3 years ago. When you look at the number of customers, when you look at the number of programs we're involved in, you look at the capabilities, the balance sheet, the financial profile, et cetera. I think that the contribution from COVID and the validation of the technology and certainly, the financial impact has been great. I think it's pulled forward a lot of interest in the space and has certainly proven to be very safe and effective as a platform. And that's been very helpful. I think it's a little been maybe a little overstated as far as the negative impact of it rolling off because we've always been laser-focused on the core business, the long game here and putting together the assets we need to really be a fully integrated supporter of mRNA and all of our customers' interest in the space. And that continues to inform our decisions for investment and whether or not that wherever this COVID contribution goes is one separate thing, but it hasn't distracted us for making sure we're putting together the infrastructure, making the investments for the long-term game here, which we believe is incredibly important, not only from a capacity perspective, which with Flanders and our existing building will enable close to $2 billion of overall capacity for the salicylic acid production, which is highly automated, but also gives us adaptability and gives us the opportunity to continue to stay ahead of where we think the market is going from a quality perspective as well, which is really important.

Yes. And to build on Kevin's point about the long game here, we just this morning announced the availability and the launch of a new product, which is a component product used in messenger RNA called N1-Methylpseudo-U, which is a key building block of all of the modified mRNA products that are out there today. The first time we made that product goes back 20-22 years ago to the time that Drew Weissman and Katalin Karikó at the University of Pennsylvania then. We're inventing the mRNA technology that's being used today across the market. And they came to us to actually manufacture those compounds and the first mRNA constructs using those compounds. So you do have to take that very long view that you don't know today that this will turn into something, but you're prepared to support the science behind it.

Carl, you stole the question from me. I think it's my next one. It is helpful. Yes. No, that's great. With the timing I have left, maybe let's get something on biologic safety testing. And let's think maybe near term first. You saw some softness in China. I don't think that's specific to Maravai necessarily. But can you just kind of give us an update on where we're at in the middle of the quarter and where we are on activity levels in China?

Yes. For us, biologic safety testing has been sort of a 3-legged stool, if you think about it, the 3 major sites that are doing that manufacturing in the U.S., the EU and China, specifically. And in the U.S. and EU, we are direct in those markets through -- in China, we've had an excellent distribution partner for a number of years now. But at the end of the day, the shutdowns that have occurred on an episodic basis, sometimes affect biologics manufacturing centers in China and sometimes miss them. And so when they happen to hit them, then there's a real problem with access for the employees to the manufacturing sites and their ability to consume products. So that's led to a very choppy performance that was otherwise a little bit more steady pre-COVID from the Chinese market. But we see those things again as being episodic quarter-to-quarter type things that you get through. And certainly, our distribution partner there has indicated that they've seen a broader recovery within the last 6 months compared to say, a year ago.

Great. And with some of that lumpiness in mind, maybe, again, how do we think about medium-term growth in biologics, safety testing? What kind of drivers should we think about here from an overall market standpoint?

Yes. We've been able to outpace the market there. I think with our breadth of our offering, introducing new services, being able to introducing things that are not just HCP test kits that are addressing other contaminants such as endonuclease protein and things of that nature. We've been able to grow that business last few years close to 20% and the market is about 13% to 15%. As we look at it going forward, I think we'll likely see us closer to that mid-teen growth upsides to that going to continue to be our service offering. We do see more and more people using our services and the channel growth we're getting from the traditional CMOs has been much stronger than the market growth as well, and that's been a nice trend for us because they tend to use sort of the gold standard type of kits and services, which is great. And then in addition to the base business, we just had our first commercial sale of our McAfee kit. That will be generating a new market for predictive viral clearance testing. So that will probably be a little bit of slow growth initially, but we're seeding that market right now and are excited about the potential for that to start to contribute meaningfully in the next few years.

I think 2 new product launches expected on the BioAg safety testing side, roughly around 2Q, 3Q if I remember correctly, right? Okay. So with the final couple of minutes, maybe let's turn to M&A in the portfolio. So if you think about -- since the IPO, you've added MyChem, you have divested the protein detection business. So maybe you sit here today, how optimized do you think the portfolio is? And where might you be looking to add?

Yes. I think for us, I think the focus is really nucleic acid production. We love the biologic safety testing business. Just not a lot of sort of free floating assets out there that are available and mostly are hyped up into larger companies. So I think we continue to look right on that space. But really the nucleic acid areas our focus. And for us, we're looking within our kind of ecosphere. So whether it be partners, whether it be supply chain or whether it be within the founder type companies that we've stayed really close to over the years. And that continues to be a really good place for us to hunt for M&A. And I think we're seeing reasonable -- a little more reasonable expectations from a valuation perspective. People are still kind of clinched on and sliding down the curtain on probably what they heard a year ago from their investment bankers, but we're in the final stages of some negotiations. You never know how those are going to go. But I think we're hopeful that we'll be able to bring additional asset across the finish line here this year.

Great. And maybe just to wrap broadly speaking, can you just speak to the resiliency of the portfolio, how you think Maravai can hold up in a potentially lower global growth environment?

Well, certainly, we find it to be very resilient based on the mix of businesses that we're in, based on the investments that are being made by our customers in the development of technology in their space. So it's an example of the right place, right time. And I think in some cases, this is where you get into how do you anticipate growth and how do you manage for growth. And the one issue that we always are sensitive to, is it once you make a decision that I want to enter into an area or I want to add capacity in our industry, it can be a 2- or 3-year lead time item. So you do have to be anticipating what the future trends are going to be, and you also have to be willing to take measured and calculated risks in doing that. So we think with the combination of those 2 things, right place, right time and the appropriate risk tolerance that the prospects are very good and it sort of avoid the choppiness or the real downdrafts that you can see in an economic recession.

Great. Well, I think we're right at time. So Carl and Kevin, thanks so much for joining us and enjoy the rest of the conference.

Thank you, Tom.