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

Our next presentation, we have Maravai. We're lucky to have with us today, Kevin Herde, Chief Financial Officer; and Brian Neel, Chief Operating Officer. I'm Dan Leonard, I cover the life sciences industry for Credit Suisse. Kevin and Brian, thank you for coming.

Thanks, Dan.

I was hoping to start off the fireside with a brief overview of Maravai for folks who might not be familiar?

Yes, certainly happy to do that. So Maravai LifeSciences, obviously, a life sciences company, really focused in on 2 segments, our Nucleic Acid production segment and our Biologics Safety Testing segment. We started the company, Carl Hull, our interim CEO at the moment and Chairman of our Board; Eric Tardif and along with GTCR started the company back in 2014, and we started buying basically founder-based companies. We've only bought founder-based companies over the last 8 years, very high science, very niche in their markets. Very good customer retention, very similar attributes across all the companies in the portfolio. And what's been unique about the Maravai LifeSciences kind of journey over that 8 years from the private equity starting to where we are today is the common characteristics of the companies and the fact that we've really just invested in all of them. And this was not a cost synergy roll-up or anything of that nature. We saw very attractive companies and very good markets with some really nice future. So we wanted to invest in each of those to accelerate their growth and address the market dynamics. And that's played out extremely well for us, certainly taking the company public in the fall of 2020, and that was right after we invested in one of our acquisitions in San Diego to really bring about a modern automated nucleic acid production facility, which is where Brian and I reside and spend most of our time. And since then we've been able to continue to do acquisitions to fill out the complement of the assets we have in nucleic acid production. And this theme just continues throughout not only this year but going into next year with additional facilities coming on board, and we'll talk a little bit about that, I'm sure, in the time we have, both for nucleic acid production as well as our biologic safety testing business and expanding that footprint. So a really nice story of rolling up these companies, some of which have been around for decades in their given space, so a lot of them pioneers, in both host cell protein expression and contaminant testing as well as highly modified and mRNA and certainly, our proprietary capping product in CleanCap, and were all inventions of our founders. And having this founder-based roll-up of companies just gives us a very solid platform to build from, but also still we kind of keep that entrepreneurial spirit and trying to continually develop and try and stay ahead of where we see the markets going, and that's formed a lot of our decisions. Luckily for us, we were able to make those investments scale up and have the capabilities to help address the pandemic and with our participation in the Pfizer and BioNTech community vaccine, and that's brought over $1 billion of highly profitable revenue to us over the last 2.5 years and has enabled us to further accelerate our strategy, strengthen our balance sheet and put us in good position for '23 and beyond.

That's a great introduction. And I want to talk about the new capacity you have coming online. But before we look to the future, can we reflect on the third quarter results that you just reported, what do you think were the key highlights from that earnings report?

Yes, revenue of $191 million in the quarter, consistent with our guidance for $190 million to $200 million. Strong EBITDA margin has been a hallmark of the company here, specifically during the time in which you've had these high CleanCap revenues, which is a very high-margin product for us and good base business performance continuing. We've seen our base business perform over the last few years. So this is what we call our business without the contribution from the COVID vaccines, is our base business. That business has been growing near 40%. We anticipate it being in the high 30% for the nucleic acid production component of that, a little lower this year in biologic safety testing, just because of some headwinds we're seeing in China and eliminating the sales through our Russian distributor during the course of this year. But I think it was another just successful quarter for us, not only financially, but some of our leading indicators that we look to that are important, and that is the number of new customers we're generating that are trying to CleanCap in the research environment or using our mRNA advancing programs in the clinic. We look at all those leading indicators as far as really good indications of how our customer set is growing and how the interest in our products are growing and how we see the investments we're making for the next couple of years being very important to support that broadening customer base, which is one of our key vectors for growth. You talk about the overall amount of into our space being attracted to mRNA and what we're doing. You talk about the upsell from RUO to GMP level quality as a growth vector and then you have the advancement of the underlying programs from early discovery through -- certainly through the later phases, is also accelerating given the additional amount of product that needs to be consumed as they advance through those phases. So real exciting time for us and again, continuing to build out in anticipation of this class starting to advance more meaningfully over the next few years.

And you may have just answered this next question, but what would you call your key priorities for the next 12 to 18 months?

Yes. Brian, do you want to maybe touch on nucleic acid production there?

Yes, absolutely. For me, it's all about really what's next. And I see kind of 2 areas of focus right now. The first segment is on the services business. So Kevin mentioned the discovery pipeline. So we try and really focus on catching customers early in the services business, progress them into the clinic. And then also with that, then we drive CleanCap adoption and overall product adoption through that. So that's our second segment is the -- we'll call it, the product segment. So those 2 segments have a lot of interplay. And you think about our thesis for what's next, our customers want more from us. They want the technology and the products at higher quality, higher scale ultimately and they want to see us progress them into the clinic and later into the clinic. So our 2 new facilities that we're working on now investing in will give us really diversification into both of those areas. We'll have the segment of services, which will take us to Phase II clinical capacity and beyond. And then our products will start to transition into GMP products into our second facility, we'll call that the Flanders facilities. That will then allow us to scale and launch additional products into that work stream and then help create that vertical as our customer base looks to move into the clinic and then eventually into commercial.

And Brian is Phase II where you typically begin to engage customers on the services side? Or do you engage even earlier?

Much earlier. So our current facility will really be focused on let's call it the discovery process. So a customer will have maybe a few targets they want to look at. They'll be getting data for those targets. They'll eventually come to us and say, okay, maybe we've picked a few targets we'd like to move forward. We start having discussions with them about their GMP funnel process and then really focusing then on engineering, scale-up, thinking about tox studies and ultimately then thinking about their Phase I clinical study. That will all happen in our current building. Our new building will then take those programs as they progress to Phase II and beyond and transfer to that facility where there is going to be a little bit more quality controls in the facility design to allow us to ultimately give them higher quality and higher scale material.

What's the average size dollar-wise of a product or a project in the discovery phase?

Yes. I mean in the discovery phase, it really can be program-based. It could be in the tens of thousands of dollars. As I think as you get to kind of that entry into that GMP phase, you start to talk about hundreds of thousands of dollars to $1 million plus for kind of that early clinical development phase. And then from there, I think we'll scale into -- really think about linear scaling at that point kind of a 10x scaling through those phases and price increases along with that as you see progression. It can also depend on how many targets are being progressed as well as the scale and requirements for those targets.

Understood. In the operational readiness of these new facilities that you're building out, what have you messaged from a timing perspective, what risk parameters would you put around the timing?

Yes. Our facility for products, we'll call that our Flanders 1 facility. We expect to have construction done in the first quarter next year. Then with that, about a 6-month time line to do some of the validation and verification early builds for that facility. The Flanders 2 facility, which is API based, will be kind of in the -- maybe the back half of the first half of the year, so Q2. And then a similar type of trajectory to get that facility up and online, looking at having end-of-year capability for maybe some of the early Phase II program scaling that can occur at the end of 2023.

Yes. And with regards to our Biologic Safety Testing business, we're moving that in kind of during this -- the winter break that's coming at the end of December. So that's an actual doubling of the capacity square footage-wise, purpose-built facility out of a kind of a generic building that's housed that business for a long time. So that will give us a lot of opportunity for growth, additional services, both supporting the traditional Cygnus branded products as well as some of the new products that are being launched via our MockV acquisition we made a few years ago. Going back to some of Brian's previous comments, what's -- one of the unique things we're doing here that we're excited about is on the mRNA business, nucleic acid production business, we have basically an mRNA CDMO that we're more or less forming and are supporting our customers through. What's unique about our version of the CDMO maybe versus some other companies that are traditional CDMOs or CMOs, is the -- certainly, we are the ones actually manufacturing the products as well, right? So this is -- these are purpose-built facilities with a high amount of automation, leveraging our strength in products, as Brian talked to. So we could do things like plasmids, things like the NTPs, do the mRNA, do the capping and provide that all through a kind of end-to-end service offering for our customers to give them a one-stop shop to get where they want to go on their journey. So unlike some other companies, they may have to source the products or have their customers, help them bring in the various products and then do some of the development and manufacturing. We're kind of wrapping that all together, which is a nice kind of handoff between a traditional products company and the traditional CDMO, we're kind of covering both bases here. And a lot of times, you're doing it in a manner that allows us to optimize the outcome for the customer because they are our products, our scientists working closely with them, hopefully getting a better product at the end of the day.

So a more vertically integrated drug product CDMO.

Yes. Absolutely.

Kevin, are there any framing thoughts you would provide investors for 2023? We've talked about the facility build-outs qualitatively, but quantitatively, as we think about scoping the opportunity, how would you -- what are some early things that investors ought to keep in mind for the forward year?

Yes. 2023 is certainly going to be a bit of a transitional year for us. I mean I say that with the fact that we still have incredibly strong base business growth and very strong EBITDA margins per our comments following up on our earnings call, and that was for base business growth of at least 20% and an EBITDA range between 40% and 50% overall with our COVID contribution going from what it was to be about $600 million this year down to an estimate of $100 million for next year. So obviously, a big decline in that component of the business, but most people certainly understand that. But after that, it's really about bringing these key additional facilities and capabilities online, introducing them into the market, getting traction with them with the raw material side of the business and then continuing the base business growth and continuing what we believe to be smart capital allocation, and that is continuing to not only fund organic investments via these expansions and capability builds that we're doing, but also continue to look for the type of M&A we've done historically. And that is to continue to add assets into our key segments that are likely smaller tuck-in deals, but give us additional capabilities to be, again, that end-to-end type of company that for our customers. So looking in the raw material space, looking further into what we do in mRNA and even looking strategically at options for delivery mechanisms and other things over time, I think it's going to be important to give your customers the way to take you from early discovery, as Brian said, through at least through Phase II, Phase III as we look at the market now, and then we'll address further commercialization efforts probably at a later date as this class starts to mature.

What's the operational handoff required to go from manufacturing of 1 billion units of one product for one customer to manufacturing thousands of products and thousands of units? How do you...

Yes, It's been a big shift. I mean, certainly, we were on a certain path exiting 2019, and we're setting up to grow into our one facility over the next 5 years or so, and that accelerated rather rapidly through demand for CleanCap and small molecule manufacturing and really scaling that process up with Brian and his team did exceptionally well. Now it's going to be a different transformation. As you said, it's going to be going from focusing on a couple of large customers making one product to that more holistic view of products and services to help people on this mRNA journey, which we've seen just tremendous interest in. And so that is it's things as simple as restructuring how many ships to run, how many days we run; two, moving people out of one work center and managing into supporting other lines in different ways. Luckily, we have a great workforce in San Diego to choose from, and we can make those adjustments kind of on the fly here. And luckily, that will not only enable us to continue to have the capacity should we need to ramp back up again for something like CleanCap but also have just the varying degrees of expertise for all of these different verticals we're setting up with the mRNA services. So it's a combination of people. It's a combination of processes and certainly, infrastructure is a big piece of it. What we've been working on and we're bringing online in 2023. Gosh, we started those decisions 2.5 years ago, probably something of that nature.

Yes, that's right.

It's not something you turn on very quickly. So we're trying to stay ahead of the market demand, and we think we're going to be in a good spot certainly for '23 and beyond, particularly as the market migrates towards higher quality at earlier phases, and that's an important part of the market dynamic that we see shaping up.

Just to add to that really quick, on the product side. I think the way to think about it is the products that we're talking about are really our catalog-type products. So we're -- we can build bulk material and then basically disseminate out into multiple customers very easily. So think of it as really more of a filling capacity needed to kind of fill the customer demand off of that catalog-type product. I think the services business has been very typical for us where it's really more about scaling a number of targets that becomes the challenge. And so we're trying to address that on the upfront side, scaling out capacity. And then as targets get selected, that's really more about how you turn product in the number of suites and so we've been investing in that as well. So that we can kind of make sure that we understand what the market needs and how to ultimately meet those commitments. But on the product side, specifically, it's pretty straightforward for us to accommodate multiple customers.

Okay. And then Kevin, on the COVID side, your -- I think you called it a planning assumption, the $100 million for 2023 as a planning assumption. How confident are you that that's the right planning assumption as you're thinking about investment needs in the business going forward?

Yes. I think we're confident in that number. I think that it's -- there's a couple of components to it. There continues to be the commercial demand from Pfizer and BioNTech on the community product. We see that being predominantly in the second half of next year, just because of what they've built up in sort of our conversations with them thus far. The other part of that $100 million assumption is the rest of the customers that we classify into that number that are still in the pre-commercial phase. So there's about a half a dozen or so of customers that are buying CleanCap specifically for COVID vaccines. Again, for 2023, some of that is commercial demand, which will be mostly in the back half of next year and the remainder is that pre-commercial development demand that's still there, and that will be spread a little more evenly throughout the course of the year. So that's '23. Then kind of thinking about long term. I think that roughly $100 million contribution for -- to us from COVID and perpetuity seems our best estimate. And that's really kind of going off of that flu-like or slightly better than flu-like volume, so that roughly 600 million, 700 million total doses there's generally a manufacturing rate associated with that that's around 1.2x factor. So you'll see them make 1.2x more than is actually ultimately shipped. That's just sort of pretty common in the industry as far as manufacturing is concerned to shippable doses. Then you kind of look at how much we ultimately get paid. We don't do it on a per-dose basis, but there's some math out there that most people have triangulated around $0.20 a dose, if you look at the total doses that have been produced in our revenues overtime over the last 2.5 years. And you take that in the market share of the customers we support, which should basically be the non-Moderna part of the market or the non-Moderna part of the market share which is around 2/3 or so currently. I mean that kind of gets you to that number roughly in perpetuity, and that's sort of how we solve for that equation. And look, I think it will evolve. I think we'll see where it goes. Certainly, there's a lot of really threatening new variants that are still out there. There's a lot of interest in developing vaccines that could particularly be in combination with things like seasonal flu or RSV. So I think that we haven't seen the end of the development cycle either. So I think it's everyone's best guess where this goes and then we'll follow the science, and we certainly have, I think, a good relationship with our customers and certainly the capacity and capabilities to support them wherever COVID go specifically in addition to their multitude of other programs they're working on.

That 1.2 multiplier is helpful from -- and market demand for vaccine doses to what's actually manufactured. So you would say that your 1 billion-odd manufacturer doses manufactured assumption is consistent with a 600 million, 700 million endemic end market demand...

It's probably around there. I think those were rough numbers, yes. But I think it's certainly bigger than the actual doses administered because there is some manufacturing factors that are applied. And we've seen that pretty consistently.

And your core business, excluding COVID, has grown 15% through the first 9 months of the year, year-on-year. I think you're baselining that to grow at least 20% in 2023. What are the 1, 2 key drivers that accelerate that growth rate?

Yes, really, when we look at that, there's the 2 segments, so Biologic Safety Testing business, that market is roughly in the low to mid-teens. We pegged around 12% to 14% as far as market growth. We've historically done better than that, closer to 20% because of the breadth of our offering, our services and some new products we introduced. Certainly here in this year, it's lower than that market growth because of the headwinds we've seen in China and the biosimilar and biologic manufacturing slowing down, as I said, cutting off our Russian distributor as well. We see returning to market growth rates. So we're looking at the base business. That segment should be growing in the -- in that low to mid-teens next year. And really thereafter, we see that as a pretty consistent market growth. We can perform maybe 200 to 300 basis points better than that with expanded services as well as our [ market fee ] offering, which we're excited about. Nucleic acid production, certainly, growth rate is higher than that. Brian's have been doing a great job driving this business and looking forward with the capabilities that we have. We have a lot of different components within that nucleic acid production. We have everything from base all that goes to supporting diagnostic sequencing through our Glen Research facility to the higher growth drivers in that marketplace in that overall nucleic acid market, and that includes the mRNA services business, which has been growing north of 35% and it includes those raw materials, the NTPs and the other key components, which has also been growing on the high end of our various growth ranges. And we do see a nice price uptick as people convert from RUO to GMP as well. So you layer all those different factors in, and we're -- that's why we're kind of guiding to at least 20% growth. And we think there's some opportunity to do better than that over time. If these market characteristics stay the same because we should see some maturation of the underlying programs. And as that happens, the volumes go up pretty exponentially from early discovery to something that would be done in Phase II or Phase III. And that's obviously exciting for us, not just to see our customer success, but the additional volumes that come with that success.

And then can you address the margin profile for 2023? That's a question I've gotten a bunch, you're framing the margin as 40% to 50% EBITDA margin on a higher revenue base. versus 2019, you had 43% EBITDA margin. What are the puts and takes in that forecast that would weigh on the number a bit more than folks might have expected?

Yes. Look, I mean, we've been lucky to not only have very high EBITDA margins historically, but very high cash flow conversions off of those EBITDA margins since we don't use a lot of CapEx. So you're right, in 2018, 2019, we were doing 43% EBITDA margins. That ramped up to 60% in 2020. And obviously, we've been in the mid-70s the last couple of years with the contributions from CleanCap for the COVID indication. We're guiding down to 40% to 50% next year as that $0.5 billion of highly profitable COVID revenue trends downward to more endemic levels. And then it just happens to be in the same year where these 3 new facilities are coming on. And these are not facilities we've purchased. We rent them. So there's operating expenses associated with them. Each of them are substantial and each of them are really to give us additional capabilities in the case of Biologics Safety Testing, some additional capacity that we will need for the foreseeable future. So there'll be pressure on margins, 40 to 50 is nothing to be ashamed about certainly, very strong margins versus the industry and the peer set. But it's also, I think, a cost base that we then are going to be able to leverage off of this transformational year that we're seeing in 2023 and be able to look to lever over time as we grow the business since we won't need additional facilities for what we're planning to do in those facilities today. Other investments for us would more be along the lines of something more geographical getting outside the United States or down the road if we decide to make the decision to do commercial builds or things post Phase III for our customers.

And then can you talk about what you're thinking on capital deployment? And I think you mentioned M&A earlier, how are you framing M&A opportunity and what might look like a good fit in the business?

Yes. We have a strong balance sheet. We're sitting in a net cash position. We're in really good shape there. What we're seeing in our near-term funnel are still smaller deals for us, small and tuck-in deals, really things that will be easily funded off our balance sheet and really helped to -- again, help to complete the offering. So again, we're looking everywhere from raw materials and plasmids, our own supply chain to capabilities we don't have today, which would be more in the lines of delivery mechanisms and things of that nature. But as we look today, I think most of the opportunities now and probably over the next operating cycle or through '23 are probably going to be in that $0.5 billion or less range. We don't see a lot of $0.5 billion and above today based upon what we're looking at. So I think we can easily digest the smaller ones, and we're really focused again on filling out that offering, completing it and being able to have our customers go to less vendors to get their end solution. That's really the strategy here with an eye towards quality and with an eye to doing things that other people maybe can't do because of IP that we have or because of our know-how and our expertise and our reputation in the industry.

Does this include fill-finish capabilities? Or what would be some examples of capabilities...

We probably not going to go there right now. I think we'd like to stick to the sort of the noncommoditized side of this right now, I think, over time, that's something that we're going to want to address, either via partnership, a tech transfer or strategic alliance. We could potentially look at it. But we're not really seeing that our customers have that need today. Outside of the one commercial product, the other over 180 programs that are CleanCap specifically is involved in -- most of those are pretty early stages and aren't going to be ready for commercialization in the next year or 2.

Understood. And then maybe final question in the last couple of minutes we have here. How would you characterize the competitive environment?

Brian, how does it look for you?

Yes. I mean I think we're in a pretty unique position right now. I mean we've got really several steps ahead on what we'll call the GMP reagents and supplies that feed into this market into our services market. And our goal has always been to stay several steps ahead of where we think the customer needs are. So generally, I think we're positioned where if you think about our competitors, are probably in one or the other, not necessarily the services and product side, we can then kind of integrate those 2 together. So others were out there building similar type of capacity right now, definitely in the product side of the business. I think what we learned through the pandemic was building clean rooms around this capacity was key, and so we continue to do that to stay ahead. Launching new products to stay ahead ultimately. And then I think of the services as like a [indiscernible], right? So we want to go upstream with plasmid and go downstream at some point with LNP as a part of our strategy. I think that helps us diversify there as well. So I like that combination that we have on the product and services side, and continuing that, I think, will be key for us to kind of compete out in the market. And I think over time, there'll be some more consolidation. But again, I think we've got several years of work in advance of a lot of our competitors right now.

And there was one order you flagged in Q2 that traded to a competitor because they had GMP capability that you didn't have yet. Has that now been fully addressed and the capabilities built out so that would be -- wouldn't recur?

I'm not sure which program you referring to there.

Yes, it was the NTP purchase, I think there was, previously. Yes, anyway, we do have that capability. We launched a different -- a slightly different version of it. But are highly -- our N1-Methylpseudouridine program is now available under GMP conditions. We're actually doing it in Water Ridge in a clean room that was kind of repurposed to help address that and then we'll port that over to Flanders and have that be the supplier of that product going forward. So we have over 100 -- I think, over 170 customers ordering that product under RUO today, and I think we've already started converting -- got orders from a handful of GMP...

Yes, we've got a health -- that's there. That was a product launch timing issue, I think, ultimately, the source was ex U.S. on that. And so I think the advantage here is this is a U.S. source for GMP material, N1-Methylpseudouridine, I think, specific is what we're talking about.

Understood. Well, with that, we're out of time. Kevin and Brian, thank you for joining today.

Thank you.

Thank you. I appreciate it.