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

All right. Good morning, everybody. My name is Kevin Herde. I'm the Executive Vice President and CFO of Maravai LifeSciences. I'm going to go through a few overview slides for you all here this morning, and then I'm going to sit down with Matthew and go through a little bit of Q&A. So hopefully, we get a lot covered here in the next 27 minutes roughly. Just -- obviously, we might talk about some forward-looking statements here and just our normal disclosures with regards to some of these non-GAAP measures. We talk a lot about adjusted EBITDA as one of our non-GAAP measures of the company. So who is Maravai? So we are a life science tools, products and services provider and we operate in a couple of distinct segments, one which is supporting our customers in providing highly modified complex nucleic acids. We call that segment Nucleic Acid Production. And certainly, one of the largest products we have within that segment is supporting messenger -- mRNA predominantly through both our mRNA services offering as well as our capping solution, which is CleanCap. So one of the things that helped get Maravai on the map most recently is the incorporation of our CleanCap technology into the Pfizer and BioNTech Covid vaccine. So that's one of the biggest applications of our current technology. And then lastly, we have a other part of our business called Biologic Safety Testing, and that provides critical assays and other products to help detect the overexpression of impurities in biologics and biosimilars. So an important part of the regulatory environment, important part of the testing to make sure product quality exists in those products. And I'll talk a little bit about both of those. For the 9 months, just recently ended, we did close to $700 million in revenue, about $500 million in EBITDA. Very high EBITDA margins, obviously, a lot of that driven by the adoption and sales of our CleanCap product. We currently sit here with over 600 employees, a very highly technical group, a lot of PhDs and scientists. And we currently have a little over $100,000 -- 100,000 square feet, excuse me, of manufacturing space, predominantly in San Diego, but across various facilities in the United States. So when we look at Maravai, there's a few attributes that make us unique. We certainly provide a lot of very high science unique products and service offerings into both Nucleic Acid Production as well as Biologic Safety Testing. Our customers are very high end as far as their -- both their size and as far as their funding levels. So our customers include 90% or 18 out of the top 20 biopharmaceutical companies ranked by R&D spend. So we have more exposure to larger companies versus the small or medium-sized companies in our portfolio. We deal with very large end markets. We've really focused on investments in infrastructure. So we have a very new fully automated nucleic acid production plant in San Diego and are making additional investments to further that in 2022 here and in 2023, a very strong financial performance, balance sheet and EBITDA margins, and certainly, a very experienced management team that has been doing this for a while. So when you look at our 2 segments, we cover numerous offerings throughout these 2 segments. We'll start with Nucleic Acid Production. You'll see here that we provide base oligos; we provide messenger RNA as well as our RNA capping, which we call CleanCap; and we also provide plasmid DNA. And this supports our customers in either discovery and research, in early preclinical and in clinical, and obviously, in commercialization with only, right now, the one product in the comorbidity assay that we -- and vaccine that we support being on market. Our CleanCap specifically, for example, is involved in over 180 different programs today. And those are across a wide swath of different offerings, from vaccines to therapeutics, gene and cell therapy, CRISPR applications, et cetera. So definitely a lot of applications of our base technologies into a lot of emerging and trending technologies for both vaccines as well as therapeutics. On the Biologic Safety Testing side, we produce host cell protein detection kits. We also help with viral clearance prediction with our MockV test. We also look at other impurities in manufacturing, so things like endonuclease or protein A. Basically, at the end of the day, we're testing to make sure that our biologic and biosimilar products of our customers have allowable limits with regards to these host cell proteins or other impurities in their end product. We also supplement that by other services that we offer, including things like mass spec testing to help them with the identification and ultimate remedy of some of these impurities in their products. So very strong financial profile, a very strong balance sheet. I mean just looking at our last quarter, you can see the strong margin, the strong earnings, the strong adjusted cash flow. We continue to be in a very strong position from a financial perspective. That's very important, because Maravai basically has been a vehicle in which we've acquired businesses. We've acquired roughly 8 different assets over the -- since 2016, brought them together. All of these assets have been characterized by a few common traits: very high science, very nichey, all founder-based companies that had never traded before. So we're accumulating a lot of small, unique businesses and investing in all of them. So our strategy has been not to go and look for cost synergies maybe in a traditional way, but find assets that we believe have not reached their full potential, invest in them further, allow them to maximize their potential, while investing in assets that are part of markets that we believe in. So that's around Nucleic Acid Production, around our Biologic Safety Testing and some of the surrounding adjacencies to those markets. I'm going to talk about facilities. Again, predominantly in the United States. We have operations in San Diego. Our Nucleic Acid Production, we're going to be expanding that from the roughly 100,000 square feet, I spoke of, to north of 200,000 square feet. And that comes with our Flanders facility that's coming online in early 2023. We're also expanding the Pacific Center for some more lab space and R&D work. And we're also doubling the size of our Biologic Safety Testing facility, which is on the East Coast, to allow that business to continue to grow and expand in a more purposeful facility than it's had in the past. So continuing to make meaningful investments, because we really believe in where this market is going. Certainly, there's been a lot of things in the news about mRNA. We've been a big part of that. That certainly is going to be trending down over the next year. But the base business and the additional applications of these technologies over the next decade is part of something that we plan on being a big part of, and we're very excited about these investments, particularly how it's going to enable more automation, more products and more products under GMP level conditions versus historically researcher's only levels of quality. So that's just sort of an overview of Maravai. Now I'm going to sit down and hopefully take some questions both from Matthew or if anyone from the audience has questions as well.

Cool. Kevin, thank you. I appreciate. I think good introduction for everybody. So I was hoping maybe -- you referenced this a little bit, but we could talk a little bit about the '23 outlook. And what you said about that, how to think about run rate from CleanCap into '23? And frankly, how much visibility do you guys feel like you have as a company on that at this point?

Yes, certainly. I mean, CleanCap has been a big story for us. And since the beginning of the pandemic in early 2020 or -- yes, early 2020, when we first started the collaboration with BioNTech and Pfizer, we've generated north of $1 billion of revenue over those roughly 2.5-year period to support the vaccine. As we look forward, there's a lot more uncertainty certainly with regards to end demand. And that's also one of -- that's one of the main dynamics as we look to '23. And then there's also been a lot of building of inventory across the entire group, not only ourselves, but our -- some of our peers and others in the space. So we see the demand for CleanCap being a little back half weighted next year. And we've guided to roughly around $100 million of estimated demand next year. That's a combination of second half demand from our commercial partners as well as demand a little more evenly spaced throughout the year from additional customers of ours that are still developing who don't have their vaccine on market yet. And those will more be regional or smaller players, we believe. We think that's likely a steady state, and we sort of triangulate that number based upon what we think the end market is going to look like, or customers think it's going to look like over time. And that's slightly bigger than flu. And when you look at that and we do the economics for what that means to us and the CleanCap, that ends up being roughly $100 million product a year. And that's our best estimate at this stage. That's down from roughly a peak of $600 million that we're going to see roughly this year.

And you talked about some of the inventory dynamics and things like that. Are there -- should people be worried about write-downs or anything like that related to inventory or dynamics? Or is that sort of all through and nothing to focus on?

Yes. I mean I think that our customers have -- we've seen some write-downs there as well as across the industry. When you look at BioNTech, Pfizer and Moderna, I think they've all talked about some pretty big sizable inventory reductions or write-offs due to expiration. I think a lot of the finished goods over the last year or so, where we thought after they reach the mature western markets, there would be sort of a secondary or tertiary market they would go to. That hasn't really happened because the infrastructure hasn't been there. So I think the commercialization partners maybe were a little optimistic there and that they didn't pick up those additional tests. I think that will level out and wash itself through here over the next 3 quarters. I think by the time we get to the back half of next year, we'll start to see kind of what that steady state looks like. At least we think so. This virus has been tough to track. So to the extent it doesn't flare up with the severe variant that causes different uptick in adoption or boosters, I think you'll see that likely smooth into a more endemic state at the back half of '23 and beyond.

Okay. Okay. Perfect. And then I guess just last question is, people think about '23. You pointed to very high EBITDA margins. We know CleanCap has margins that are well above your sort of corporate average. How should people think about margins into next year? And what's a steady-state sort of margin profile to think about?

Yes. When you look at the history of our company, go back -- we've always had very high EBITDA margins based on what we do and sort of the uniqueness of our offerings. 2018, 2019, we were at 43% EBITDA margins for both those years. That moved up to 60% when we started selling CleanCap at volume. And then has been in the mid-70s for the past 2 years, which is almost unheard of and probably not a sustainable thing to think about. We are bringing these new facilities on next year, in a year in which that number is going down substantially. So that obviously pressures margins. At the end of our last call, we did talk about an expectation between 40% and 50% adjusted EBITDA margins for '23. I think that's a good baseline. Probably ends up being on the low- to mid-end of that range to start. And then as we continue to grow, which the base business has performed incredibly well over the past few years, we'll see leverage on those fixed costs. So as we start to go out to multiple years, we see it going to the north end of that range, which certainly puts us well above our peer set as well. So I think we're well positioned to have very strong margins as a life science tools company and leverage this infrastructure we're putting in place, which is a pretty unique offering.

Do you have a view on sort of mRNA pipeline? Because obviously, there's -- you've got Pfizer, Moderna, BioNTech looking at other infectious disease vaccines, including flu, RSV, shingles, a whole long list. So what's your outlook on sort of that pipeline? And how much do you think that's a contributor for you guys over the, let's say, midterm?

Yes. Sure. If you look at all the programs we're involved -- CleanCap is a part of -- about 1/3 of those, roughly 180 programs are vaccine related. And only about 1/3 of that subset is related to COVID. The other 2/3 are other indications. And that's very exciting for us. I think seasonal flu will be the next offering for mRNA technologies as those are in the later-stage clinical trials. You look at RSV, you look at some combination of that along with COVID, which is interesting. And then like you said, the existing markets that are there with shingles, with HPV, potentially with other types of viruses. And then you get into some of the more, I think, unique transformative vaccines such as melanoma vaccine or things like that. There are really exciting applications of this technology. The nice thing for us is we -- with CleanCap and with our mRNA and some of our other products, they're foundational components of an mRNA platform. And that's what we're really talking about, is to really be part of the mRNA platform for these large customers. And then they just have additional targets that repeat and build on that base platform. And once you adopt CleanCap as your capping mechanisms, you really lock that in as part of your product. So you're really part of the platform, part of the product and you're not going to be switching that out. So it's key for us to get embedded with our customer set extremely early, and we've done a very good job of doing that.

And then can you talk a little bit about, I guess, durability of CleanCap? And I ask that question on 2 fronts. So one is, how long do you have IP on that? How long can you protect that for yourselves? And then there are obviously other approaches people are looking at, enzymatic approaches, et cetera. So is there a chance that people decide they don't need CleanCap anymore?

Well, we think it's the best capping methodology out there. We have IP on CleanCap through 2036, so for quite a while. And it's probably also not only do we believe it's the most effective from a manufacturing perspective and getting the ultimate protein expression that you want, but it has the most flexibility. So we offer 6 different versions of CleanCap depending on the sequence and whether it has a modification. But there's a lot of room in the chemical space since it's a chemical cap. So we can make constructs that might be very specific to the product that our customers have. So if it happens to be, say, for lung cancer or it happens to be a blood-based oncology target or it happens to be some other type of vaccine, we can tweak into derivatives of CleanCap to ultimately improve the protein expression. And that is what's the unique part versus other methods, where you can't do that. So today, we have about 35% of the market for capping. The enzymatic approach, which has been around for a while, works effectively, but it's a separate manufacturing step, introduces additional biologics, introduces the need to then do filtration and it impacts yield. We don't have to do that because we're embedded within the transcription phase of manufacturing. So it's a very elegant approach that works extremely well. And we think based on our voice to the customers, we'll see good market trends adopting CleanCap more so than other technologies prospectively.

Okay. All right. Obviously, you do other things than CleanCap. You talked about oligos and other things. And we've seen even over the course of this year, but in the next year, right, some gene therapy starting to get approved. Do you start to see some -- perhaps next year, we're going to get some of the first CRISPR products approved. So what's your view on that pipeline and sort of the potential growth of that business?

Yes. I think the nice thing about our offering is we have a lot of capabilities to support a lot of these different sub-segments, which gives us a pretty large addressable market. You see us -- we manufacture a lot of raw materials. So things like NTPs for building blocks, plasmids and other components. Some of the things we make are part of end products, some of the things we make are consumed in making our customers' end products. And so we have good exposure to a lot of growth segments of this industry. And the nice thing about it as well is we've really always had an eye to quality. So we've always been very conscientious of making sure we had the ability to scale from RUO to GMP. And you're starting to see that more and more be part of earlier stage developments. And so having that capability is important enough, it's a differentiator for us, and it allows us to, I think, entertain a lot of different customer conversations about being part of their end products, not just today, but their whole pipeline and their whole portfolio of products over time. And again, as you said, across a wide variety of end-to-end markets, both mRNA specifically, vaccines, therapeutics, gene and cell therapy, all 3 CRISPR categories as far as generations there. So we have a lot of applications of the different types of not only targets, but different type of modalities to reach those targets.

CEO transition, maybe just to talk about what's going on there, what the outlook is, what ultimately you hope to achieve with that?

Yes, certainly. I've had the pleasure of working with our current CEO and Chairman, Carl Hull, for the better part of the last 15 years, spanning our time at Gen-Probe, which is a molecular diagnostic company, time at Hologic, and then certainly here over the last almost 6 years I've been with Maravai as we've grown this company. Carl just turned 65. Yesterday, I think, it was his birthday. And so it's time for him to retire. He's an active -- he'll be an active guy. He doesn't put his feet up and go to the beach. So he's going to be an active Chairman for us. We've announced that we have his successor, Trey Martin. Trey comes to us from Danaher. He was one of the original scientists at IDT, also knows this space extremely well. He'll be focused on the Biologic Safety Testing business for the next 6 months. And then come July of 2023, he'll take over the full-time role as our CEO with Carl being the Executive Chairman and remaining as Chairman of the Board.

And then I guess one other thing and then we'll turn to some questions from the audience. But you talked about cash balance, acquisition potential. Obviously, you've grown the company previously through acquisitions. How should people think about that? The space -- I mean, broadly speaking, right, the space is -- at least the public company valuations are fairly depressed. So is that a big opportunity for you in terms of looking at things? Just how do you think about acquisitions in terms of growth, especially over the course of the next year?

Yes, we're always very active in looking at our pipeline of acquisitions. We've been very successful on the smaller end, and that's where we continue to focus: founder-based companies, things that are kind of outside of the larger processes that tuck in nicely to our existing segments. I think that the only downside, I would say, the private companies are a little slower to react to the valuations than the public companies are. They're still holding on to what their bankers told them a year ago. So we're still working through some of that. But there's still some nice targets out there, and it's about really completing the offering to do as much for our customers as we can. They do not want to go to 80 different suppliers to get their end product. They want to have a few companies that can do a lot of their end product and take them from discovery through the -- at least through Phase III and have those capabilities. So we're really trying to align ourselves to not only have the products and the services, to kind of be that end-to-end mRNA CDMO for our customers, where we're unique. We're not just a CDMO, but we have the products and the intellectual property and the experience to really help them with their products and their overall development. We're going to do that organically certainly with some of the investments we have. And we're going to do that inorganically if we can't do -- can't make the investment or we want to accelerate some of those additional verticals there. So we've always been operating at the smaller end of mRNA. I think most of the opportunities we look at are in that $0.5 billion or less. Not a lot of assets from $0.5 billion to $1 billion out there today. And we probably -- once you get north of $1 billion, it's probably not our space. But I think you will see generally -- I think over the next probably 5 quarters, I think you'll probably see some continued consolidation, and that might mean some of the public companies or some of the merger of equals, I think, will start to occur. And I think what will be interesting to watch outside of the serial acquirers in our space that do a lot of the acquisitions, are sort of what the traditional CDMOs end up doing. Are they going to move down to look at technologies such as ours? Or are they going to look at consolidating their capacity for manufacturing the higher volumes at the later end clinical trials for commercialization. And I think that will be an interesting dynamic over the next year to see how that impacts the M&A landscape.

Questions from the audience. I can keep asking. But I don't know if anybody has anything. I'll take that as a no. So I guess 2 other things. So you talked about industry consolidation or potential for industry consolidation. What do you think are the trends that drive that? And I guess you talked about 2 of them, which is, is there -- maybe I'll let you answer this in this way, right? Is there too much capacity in the industry right now and you need to get some of that capacity out, whether it's because it was built up for COVID or other reasons? Or is there a lack of technology across some of the more mature companies that are generating a lot of cash, but don't really have that next growth driver? And what do you think are the underlying trends that are going to drive that?

Yes. You know what? Yes, I think that there's still some capacity constraints in the industry for certain components. So I don't think we've reached the point where, at least for mRNA where it's going, that we have overcapacity. Now we have a lot of capacity because we scaled up for a unique situation. We can flex that with labor shifts. CleanCap is a small molecule. We can do other things. But ultimately, I think you're going to see people want to have -- again, the voice of the customer pretty broadly across the space is "we want fewer suppliers," right? It's very hard -- mRNA is very fragile. How these -- how the plasmid through the back-end delivery mechanism interact with each other is an important part of a successful product, and the more different companies that you introduce, the harder it is to get that integration. So people really want to be able to go to fewer and fewer companies. And I think you'll see just because of that, a natural market share shift towards the people that can do more. That's what we're focused on strategically for us. That's one of the key growth factors, is getting more share of our customers' wallet, being able to offer more, being able to offer up the quality scale from RUO to GMP and the price premium that comes with that. And ultimately, we think that, that as well as the progression of the market through the phases is going to be the growth drivers over the next 3 to 5 years.

So building breadth of product offering is an important piece of your growth story then?

Absolutely. I mean I think that when you talk to customers today, surprisingly, it's not a price point discussion. It's a quality discussion. It's a capability discussion. It's an on-time delivery discussion. And then ultimately, it will go to pricing and contracting. But those first few components are extremely important, and that's what -- the big customers we're working with really want to make sure that you have those first 3 attributes before even engaging in pricing discussions.

Okay. And then you talked about -- or you highlighted when we were talking about the mRNA pipeline, you briefly talked about cancer a little bit. There's a lot of different -- especially, if you look at BioNTech's pipeline, right, there's a lot of focus on various kinds of cancer drugs. And we're all sort of waiting for the final data from Moderna's personalized cancer vaccine, which should be here in the next couple of weeks. Is that -- if that's successful, right, that could be used across a variety of different tumor types. Is that a really sizable opportunity for you as a company? And how do you think about that, because it could be quite large and there's some large trials that are going to have to be run there?

Yes, I think that is probably the one more exciting components of what we're doing that truly addresses improving the course of care and some unmet needs. I think the people that are very excited about mRNA technology see it as a great tool for things that have been challenging to treat over time. So either viruses that evolve quickly, HIV, things of -- HSV, things of that nature or oncology targets. And certainly, either as a stand-alone approach or in combination with immunotherapy. So it looks to be an extremely interesting component for us. I think the mRNA therapies are a little bit behind the vaccines, I think, certainly, and it's probably 3 or 5 years out there versus the vaccine wave, we'll see over the next few years. But it certainly has us and our customers extremely excited about all the applications. And for us, we're agnostic. We're a tool supplier. We don't have our own end market products. But we benefit from everyone's interest from discovery through all the various phases, and there's certainly a lot of excitement there.

And then I guess maybe here in the last minute, right, you talked about having, I think, 35% share. How do you get that up to 50% -- like what's the realistic goal in terms of where you think you can get that?

Yes. I think what we hear is that people love CleanCap. They're certainly not going to go to market with the ARCA technology. So that's about 15% of the market today. So that's a natural move to -- if those programs are successful, to CleanCap since they're both chemical capping approaches. Enzymatic capping works extremely well. I think there's not as much flexibility there. And it's not, we believe, the best product for capping, nor is it the most efficient. So I think you'll see people using that approach potentially move over to CleanCap. But it will -- enzymatic always have a place in the industry. It's been used for a long time. It is effective. So I think that between that 35% up to potentially 50% is probably a realistic goal for CleanCap here over time as these other programs start to advance.

Great. Well, perfect. Thanks for being here, Kevin.

Really appreciate it. Thank you.