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

Good afternoon, everybody. We're wrapping up here. I'm Luke Sergott. I cover life science tools and diagnostics here at Barclays. With me, I have Kevin Herde, CFO; and Deborah Barbara, VP, Strategy and Business Development of Maravai. So I think they're going to kick off here. Are you guys going to kick off with the presentation? Or we can dig into some questions.

Yes, we will. And thank you for having us during happy hour. Obviously, it led to a large attendance. We'll go [ have drinks ] afterwards, I promise. Anyway, so again, Kevin Herde, CFO. Happy to walk you all through a few slides just to kind of [ tee off ] Maravai and kind of refresh people on where we are, who we are, and then we'll get into your questions. Some forward-looking statements. We do use some non-GAAP measures. So we have some caveats here with regards to that. Overall, obviously exiting a really -- another really strong year for Maravai, $883 million in revenue in 2022, which is 10% overall growth. We did $1.80 in adjusted EPS. Exited with 619 employees at the end of the year and have about 150,000 square feet of manufacturing and lab space, which is a critical part of our infrastructure, we believe, that's enabled us to be as successful as we have been and then sets the stage for really what we're looking to accomplish over the near term. And we'll talk a little bit more about that as we move forward. So what do we do? Really focusing on 2 reportable segments and 2 end markets. The first one, and our largest one, is our nucleic acid production segment. And what the key takeaways here are is we really support discovery and research, preclinical, clinical and then have an eye towards commercialization, and we do obviously provide certain products to commercial ends at the moment, particularly with regards to the vaccine products and our capping CleanCap proprietary chemical cap that we provide from RNA. But a lot of the work that's being done, a lot of the work has been the historical drivers of the business has really been in that early discovery research and preclinical. And still a lot of those programs, certainly for mRNA, are still in that phase and the opportunity that we have to advance the pipeline with our customers and grow with those inflection points is one of the key growth vectors that we're focused on moving forward. We've talked about plasma DNA and now we've added enzyme capabilities as well. So as we look at our business, one of the key components to us is increasing the breadth of our offering to enable ourselves to have more solutions and products for our customer base, our growing customer base. And that's an important -- again, another growth vector for us as we look forward. Our second segment, which historically has been a little smaller, it will be a little bigger part of our business moving forward, is Biologic Safety Testing, and that is the testing for the overexpression of host cell proteins, so the contaminants and biologics and then cell and gene therapies and things of that nature. And we have a tremendous market share there and really considered the gold standard with our Cygnus-branded product in that marketplace. So one of the things that we're excited about is serving high-growth end markets. This is a busy slide. There's a lot on here, I won't go through everything. But really, what we're doing here is we've acquired companies, assets, technologies across a broad spectrum of technologies in nucleic acid out, certainly capping, our raw material capabilities, making highly modified mRNAs, having the capability to do plasma DNAs, doing custom oligonucleotides and other oligonucleotide synthesis inputs. We support diagnostics, we support sequencing. We support a whole bunch of technologies, all the generations of CRISPR, et cetera. Some of that with mRNA. Some of that with some of the building blocks that go into those products. And we -- so we have a great exposure to a lot of high-growth end markets. And now with the acquisition of Alphazyme, we also have exposure to enzymes, and enzymes are certainly prevalent across this market. And certainly anything that involves nucleic acid starts with an enzyme reaction as well. Biologics Safety Testing, same sort of profile. Host cell protein detection kits. Other viral contaminations. So whether we're looking for endonuclease or protein A or other contaminants that need to be below allowable limits, our Cygnus tests set the gold standard for really testing and doing lot release and helping with changes in development to make sure that the end product is something that's going to be allowable at the end of the day. And we're still really excited about MockV and our viral home clearance testing and looking at how we can help customers have earlier predictors for how they're going to stand up for that viral clearance testing at the end of their development cycle. Here's a great example of a customer. We get this question quite a bit. You have all these customers, so what? What does it mean? How is this going to advance your business? How are you going to grow with this customer base? And what does that magnitude look like? And this is a good example of a customer that historically, over the course of 2018, 2019, 2020, was doing discovery. They're trying to pick their target. They're trying to figure out what they were going to advance. And through that, they were around $1 million. We have a lot of customers like this, $0.5 million to $1 million worth of sales, buying the MRA or buying CleanCap and going through that discovery process, and we work very closely with them on that, but they're kind of ordering products and going through their internal R&D process, then they pick their candidate and they start to move into the clinical trial. What does that mean for the value of an account? And you can see here, it's in this instance, and this is just moving to Phase I because I know the specific customer, this is about a tenfold increase. And if you go to Phase II and beyond, you can see another step function there. So when people say, "Well, how are you going to backfill the COVID cliff, if you will, the $0.5 billion that is not coming to your business next year, if you assume this kind of endemic $100 million run rate for that vaccine?" This is an example of how. Growing with the customers, growing with those advanced spaces. Just CleanCap alone is in 250 individual mRNA programs. So you have a certain success rate of those programs, a lot of them at least advanced to Phase I and so on. And you can see that step function and you add all of those up and you start to see how we get that growth and that recoverability and grow the business over time with the customers. You add to that the conversion from RUO to GMP quality. You add to that the breadth of offering and getting a bigger share of the wallet as we allow our customers to buy more of our products and technologies that we either have today or continue to acquire through using our balance sheet to make smart M&A, gives us different growth drivers that compound and get to higher-than-market growth rates, and that's what we're really excited about. All right. I'm just going to go through the last few real quickly. Again, nucleic acid production is about 92% of our business. Last year, again, focusing on building out the catalog, going into other adjacencies, introducing things like GMP-level N1-Methyl-Pseudouridine, again, is really market-leading as far as being able to offer these products under these conditions, and we can -- we're going to continue to introduce additional raw materials under GMP-quality levels with our new facility here in 2023. Biologics Safety Testing, a smaller part of our business, but just a great business for us, really high margins, really diverse offering. We have more expression kits than the next 3 competitors combined and really seen as the gold standard and referred to. In fact, and when we made this slide, we were -- we had 15 out of 15 commercialized CAR T cell and gene therapies using Cygnus kits and lot release. And I think there's been a few more approved since then, and we're doing a lot release for them as well. So people definitely want to use Cygnus kits to move their lot release testing forward. And lastly, I just want to touch on this real quickly. We're making substantial investments continually. I mean we have our foot down on the pedal as it relates to expanding our capabilities and our capacity because you have to have these things in place as you start to move forward, and especially nucleic acid products and services, we're focused on that. We have 2 key facilities going live this year with Flanders in San Diego that's going to enable redundancy for CleanCap. It's going enable us to do high-volume GMP-level raw materials. And the second part of that will enable us to do Phase II APIs for our customers. And then in Leland, we're moving our Biologics Safety Testing to a purpose-built facility, sort of for the first time they've been in the founder-based facility for a long time, again, gives them the absolute capabilities to grow that business, offer more services and really be efficient and effective to take that business forward. So I will pause there. And I think that's a nice little recap of Maravai, and we'll head on to a little Q&A.

Awesome. So let's start on the COVID piece as you mentioned the COVID cliff. Talk about the mature -- I mean there's a couple of here, obviously, but let's start off with the maturity of your pipeline and you're talking -- you showed that slide as you're going from Phase I to Phase II. I know the big step-up in revs that you guys get from that. How much of your pipeline right now is expected to mature and take that Phase I to Phase II in the year?

Yes. Look, I think if you look at the -- all the products that we're involved and all the programs we're involved in that we can -- we have information on. I mean they're not our program. So obviously, we're working with either marketing consultants or our customers to understand that. The vast majority of them are probably talking -- 80% of them are still in that Phase I preclinical time frame. And when they exit is a little bit unknown to us exactly. So it is part of our revenue trajectory for '23. It's going to be a bigger contributor, I think, '24, '25, '26. I still see this as a little bit in the infancy, and we're still getting out of this pandemic situation. So people are just kind of getting back to their core missions that were pre-COVID, getting their workforce back, moving these programs forward. We're seeing some progression not as much as I think we'll see as it starts to accelerate in the back half of this year and in '24 and '25. So we don't tag it exactly to say we know when this program is going to advance, but we do see the ordering patterns, and that's why we still have a little bit of inherent volatility and lumpiness because these things come in waves, if you will. Someone will order a lot of product for a Phase I build to have the product for that clinical study, then they'll go away and they'll come back in 6 months or 9 months, if they don't have another program. So we'll still see that as we move throughout the course of the year. But we're getting continued momentum there. And again, we're very optimistic about our customers getting back on to their focus. And that's both on the vaccine side as well as on the therapeutic side. I think we'll see the infectious disease additional vaccines be the first next sort of larger programs that come through and get commercialized. Then you'll see the therapeutic pull-through after that. And then you see the stacking of that demand coming. And again, that's the reason why we're really focused on getting all of our infrastructure in place heading into '24.

Yes, that makes sense. And as the biotech funding environment, it's always going to come up, but one of the negative knock-on effects is just everybody is tightening their belt right now. And so are you -- talk about what you're seeing from the demand among these customers and frame [ us ] your exposure to those customers that are emerging biotech versus large pharma. And then if any exposure of these guys to SVB that you tell us.

Sure. I'll start and I'll let Deb finish. A couple of things. I think it was a really unique period from the second quarter of 2020 through the second quarter of 2022. We were getting flooded with demand, flooded with people who wanted to place POs for the next 12, 18 months, secure up their supply chain onshore, either deal with COVID or deal with and making sure they had access if their other vendors weren't manufacturing and other things. So that was a crazy period of time. We're past that certainly. And so the ordering patterns are changing. People are a little more pragmatic, a little more, as you said, calculated in making their commitments. And I think that's ultimately good, and it's good for a company like ourselves because we want people to look at everyone that's available to help them and come and do the site visits and look at our facility and look at our capabilities. And we feel very strongly that gives us a leg up on a lot of our competition as well as our availability, our capacity, our availability to meet their demand in the near term, not have long lead times. And then obviously, our intellectual protected assets that we have that they can't get anywhere else. So it's a very compelling business that we have. So getting into a more thoughtful ordering process that ends up being a larger sale or a more strategic platform investment with our technologies and our customers serves us well. And I think that's going to set us up certainly for longer-term success. We're not seeing much on the way of customers falling out from any funding concerns. I think you're going to see program rationalization. I think that happens anytime there's uncertainty in the marketplace. And we all know there's a lot of uncertainty in the marketplace globally on a lot of different aspects of that. So that's natural. I think that will flush itself out, and confidence will bring those programs back to where they normally should be. On the SVB exposure, we don't bank with them. We don't have assets for them. We looked across our customer base because we know where the money is coming from to pay AR and things like that. I think we have about $0.5 million of AR tied to those accounts. It's not a material amount, and I'm not concerned about those programs with those customers. So we're in good shape as it relates to that. I think that will have knock-on effects with regards to using leverage and other things. Ultimately, we're an acquirer of assets and have a great balance sheet. I was somewhat joking today. We probably have a better balance sheet than some regional banks do, which probably might put us in good shape to do M&A and be opportunistic. So again, strong companies can get through these periods and we see a really strong company in that manner. Deb, if you want to touch on anything, just...

Sure. Thanks, Kevin. Touching on the program or pipeline rationalization topic, right? When you look across the chasm of cell transcriptional and gene therapies, when you think about what our customers are doing, the rationalization is actually happening more frequently around cell therapy programs for a number of reasons, including difficult to manufacture, pipeline success or lack of success, difficulties around getting things through the regulators. So when we think about what's going on in the pipeline rationalization around mRNA really is rational. It's not about putting -- letting programs go, but more about how do we right size the number of programs leads and candidates that we have in the pipeline at any one time.

That makes sense. Yes. I mean that's kind of consistent with what we've been hearing as well. On the -- you mentioned a little bit with the inventory buildup during colo, which I completely understand. How was the time frame for things to get back to normal?

Yes, great question. Look, I think it's pretty obvious that there was built-up demand inventory that was building up in the system heading into the back half of 2022, that's building over in the first half of '23. For us, we think that's pretty contained within the demand for CleanCap, particularly for COVID programs just because, again, we made a lot of that product in the early part of '22. They had scheduled shipments, they had obligations to take it, so on and so forth, and that certainly is impacting our guidance and how we see '23 shaping up, and we're taking that into consideration we believe appropriately. Outside of that, we don't see it impacting us directly. But that having been said, again, a combination of that, combination of the uncertainty in the market, combination of having a really strong end of the year and getting out of that kind of frantic ordering pattern, I think, creates a slower first half of the year for a lot of people in our space, including ourselves. And I think that tempers our overall growth for the year, but it doesn't change our overall outlook for where we see the business going. So we think it's temporal. We think it flushes out here in the first half of the year, and we get back to comps and acceleration of growth patterns in the second half of the year as it relates to the base business moving forward.

Yes, that's consistent. Again, I mean, everybody has been saying pretty much the same thing. Can we talk a little bit about the Alphazyme with the enzymes? This is -- it looks like a really interesting business. Talk about the -- how it fits within the portfolio. Like you said, you guys have been pretty acquisitive in nature, rolling it all together. So how much more to go after this one?

Yes. No, it's a great question. We really like Alphazyme. We really like enzymes, they're nimble. They're very similar to our nucleic acid chemistry and the fact that it serves many different markets and very many different needs in those markets. We like the idea that Alphazyme not just serves our core markets of in vitro transcription, but that they also serve adjacent markets in NGS as well as molecular diagnostics, which I like to think about as our legacy markets that TriLink have been serving for decades. So very excited about that.

And then from a revenue and growth, can you give us some type of idea what the metrics are from fundamentals?

Yes. I think we said on our last earnings call that we saw Alphazyme adding 2 to 3, and I think 100 basis points or so growth on the base business. So that puts it at $6 million to $8 million of contribution. Relatively small, but a nice business, great growth rates, faster than the corporate growth rates. Looking for them to be adding to EBITDA this year for us, which is great for a company of that size. They're in a facility that will allow them to grow for several years. And as Deb pointed on, great people and great leadership, and they really know this space. And the space is having enzyme knowledge and capabilities is prevalent across all of nucleic acid production, and it really allows us to fit that technology and that understanding with our M&A, with our capital, the things we provide to get to that ultimate product as effectively possible. So having that all in-house just gives us a great advantage to meet our customers' expectations to give them the best product possible.

Are there any underserved markets that Alphazyme had that you guys are overexposed to like the cell and gene therapy, where you see a big synergy opportunity to have them get on to your platform and get scale?

I'm not sure.

I'm not sure, either.

I think we're going to let them. We are going to work with them very closely with helping, again, those synergies that I talked about, but we're also not going to distract them from the path that they're on because they're on a great path. So I think anytime you acquire companies, and we've been doing this for a while now, you have to balance out those "synergies". And we don't model cost synergies, we never have. We've always been about finding great companies, giving them access to capital, giving them access to our back office so we can take that off their fleet, allow them to focus on the customer, the technology, the product and amplify their growth. And we've done that time and time and time again. I don't think Alphazyme is any different. We're going to let them focus on that. But we're also going to take their expertise where we need it and see if there's those opportunities. Could this help a different segment? Could this help if we want to scale this up in a GMP manner or otherwise? And I think that those are the nice things to have, the capabilities in-house to be able to pursue. And then pursuant to the earlier part of your question, are there other things to go after? Absolutely. We still see some really neat technologies, some really interesting companies. Our M&A pipeline is always active. We walk away or say no to a lot of things because we have a high bar for quality. But we see -- we still see some meaningful acquisitions coming out that I think are actionable for us. So we're going to continue to keep Deb and her team extremely busy over the course of '23.

Got it. And the capital?

Yes. Look, I mean we're still in a net cash position at over $600 million of cash and have a very cost-effective debt structure that we keep in place to have the dry powder on the cash balance to be able to do these deals. So anything probably $0.5 billion or less is actually off our balance sheet, and we can do so quickly. We don't see much north of that at the moment. But anyways, most of these smaller founder-based tuck-ins that bring new technology to products that we're really good at integrating and doing exactly what I said is integrating, but also allowing them to stay with their customers, stay with their brand and stay with the successes gotten there and balancing those 2 things, I think, has been a big part of our success. We're going to keep going down that path. And we love to bring in a few more companies and a few more technologies because we have a customer appetite that is building, and we believe giving them more access to unique differentiated technologies under one umbrella is a winning formula.

And I think we're very focused on our core things we do well. But we're also open to the near adjacencies in terms of our opportunities. So we're keeping our mind open and our funnel open to looking at those opportunities as they arise.

Yes. Okay. That's great. Lastly here, let's talk a little bit about China. The dynamics that you're seeing there, I mean, this has been pretty wild to watch. The country either shut down or everybody had COVID, and so the recovery there. Talk about what you're seeing, how that's progressed versus your original expectations.

Yes. Look, I think that it was a great growth driver, certainly for our Biologics Safety Testing business over the course of 2020 and 2021. I certainly 2022, and the second half of the year, we started to see the headwinds. And it's interesting because if you look at our geographical growth factors within that business, North America was right on target where we thought it was going to be, EMEA right on target where we thought it was going to be, China started to climb. I mean it's all related to that geography. So we're -- we feel that it's going to bounce back. I think that springs a little rusty right now. And so it doesn't -- I don't think we're seeing it yet. And I think that, that's probably a little longer than we had hoped. And I think that's not an uncommon piece of commentary. But look, I think the underlying outputs from biologics and biosimilars and then cell and gene therapy, they're not slowing down. And that demand on that infrastructure that's there is still there. So we think it's temporal. And again, as best we can tell, this is going to flush itself out in the first 6 months this year and get back to normalized rates because of the underlying production value is still there.

Yes. And the stimulus, are you guys hearing anything regarding that and how you're positioned?

No, I'm not close enough to answer that question.

Okay. Awesome. And this is all for me. Thank you.

Okay. Thanks, everybody. Thank you. Enjoy happy hour.

[ Drinks are ] on Kevin.