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

Okay. Welcome back to the 2023 Stifel Healthcare Conference. I am Dan Arias, and we are on the life sciences track here. Happy to have Maravai with us. CEO, Trey Martin; and CFO, Kevin Herde. Guys, thanks a bunch for being here. Trey, I think maybe a good place to start would just be the CEO transition. You've been on the job for a few months. Previously, you were at Danaher, and you were running a different type of business there but adjacent, nonetheless.

Maybe you can just talk a little bit about the strategy that you see for the company, the things that Maravai did well before and then the things you'd like to see Maravai do better, going forward?

Sure. The -- my history actually in serving a large group of customers in a largely custom-configured business has -- I think, will serve quite well here. Maravai has really gone through 2 phases. The Maravai, for those who are not familiar, was a roll-up of several category-leading, scientific founder-driven companies that became public in late 2020 and then participated very meaningfully in the pandemic response with one of the chemistries from one of the companies. The company was called TriLink, and the chemistry is called CleanCap. And that really took what was largely a research business, a discovery business, as we say, into the clinical realm big time, with the scaling not only from RUO to GMP, but the scaling from grams to kilos, the building of clean rooms, the onboarding of skilled clinical labor and the involvement of customers with audits and quality systems at just a next level. So the company rose to the challenge of the pandemic response exceptionally well and showed really the clinical utility of this technology. Now as we come down from the pandemic, it's actually about getting back to the base, which is a more broad and diverse group of customers, at various clinical stages and even preclinical stages. Thanks for the acknowledgment that -- I basically just finished my first 90 days. And as many people know who read the public comments, we had some significant work and some cost work that we did right away, which is not uncommon, obviously, for a leadership transition, particularly on the org side. But in this case, coming down off of that pandemic performance that took a $200 million company to an $880 million company and back now to the midpoint of our guidance at about $280 million, there were obviously decisions that needed to be made about what level of corporate overhead we needed at the current volume and where we could be responsible. We haven't lost sight of the mission at all, but where we could be responsible in our cost structure with the market where it is and going forward.

Okay. So maybe just thinking about the buckets of revenue that you have, we'll talk about the COVID piece in a second, but one of the comments that you made at the Analyst Day was that the non-COVID body of work is actually accelerating at a pace that's higher than it was pre-pandemic. Can you talk about where that is? Where you're seeing the most signals in terms of increased activity? And then for those of us that are looking at the non-COVID business and trying to say, "Okay, what can we see that shows us signs that this is accelerating at a pace that will allow us to feel good about the growth rate," what should we be focused on? Is it other vaccines that are non-COVID? Is it something on the cancer therapeutic side? What would you point us towards?

Yes. The obvious evolution, I would say, for infectious disease vaccine is to go from single-indication COVID to multivalent vaccines, that's one of the powers of mRNA vaccines, is that one can put multiple indexes, multiple targets in the same vaccine dose. So there are plenty of clinical programs that are not COVID alone but COVID and influenza, COVID and [ RSV ] and so on. And the mRNA modality is just really well situated for infectious disease vaccines, where you want to do basically whatever the primary strain is. Seasonally, it's not -- it's a much faster build because fundamentally, the only difference between mRNA vaccines is the order of the bases in the sequence. So that is, I would say this, the obvious move toward a, as we all know, population that is -- has some vaccine fatigue at this point to put multiple different potential diseases in one dose. But what had excited me early on about mRNA is, again, that configurability and really its potential in oncology. So -- but I mean, let me back up, mRNA can be configured by a sequence to be the neoantigen for the spike protein on whatever the predominant COVID is. It can be an influenza neoantigen or it can be a neoantigen for someone's oncology profile that is completely personalized to their tumor or it can be a protein replacement or it can be the protein or, in this case, enzyme used in CRISPR gene editing. It is the most configurable platform, I think, that we've dealt with in pharmaceuticals, and that's tremendously exciting.

And is the starting point for the non-COVID bucket the same as it is on the vaccine side, which is to say that the split between [ code ] transcriptional and none is of a similar magnitude, when it comes to the therapeutics that are being developed? I mean, which -- another way of saying that would be just, do you have the ability to be in the number of -- or the percentage of therapeutic products that you do in the vaccine markets just by virtue of the way that those evolved?

Yes. I think even perhaps more so. Really during COVID -- during pandemic response, people were scaling what they were already working with. And now that there's time, so to speak, there's an opportunity to focus on optimizing the entire workflow, looking at all the [ info ] technologies, of which CleanCap is one, but there are many other possibilities. One thing that was indicative of our strategy going forward is the 2 acquisitions that were made by Maravai during the pandemic were of a custom nucleic acid chemistry company called MyChem and an enzyme production company called Alphazyme. And so the entire workflow from the very beginning to the realization of a clinical mRNA molecule is nucleic acid chemistry, enzymes, plasmids and so on. So we intend to participate, I would say, more fully in the entire workflow and the entire work stream for the realization of those molecules from preclinical all the way through.

Okay. Presumably, some of those companies are also vaccine companies, which brings into play this conversation about COVID to non-COVID. And it seems like visibility on what is being used for COVID or non-COVID work is incomplete, I guess, would be one word to say, one word to use. Could you just talk about the process of learning, what at the customer level -- they are doing with their product? How much more they might use for a non-COVID product than you thought they might be 2 quarters ago? Because I think, if I'm understanding the dynamics of the quarter correctly, that was certainly part of it, right, which is that you are learning, you're still learning and forecasting, based on what these companies are able to do from a fungibility standpoint.

Yes. The -- so I mentioned earlier, Maravai is an accumulation of multiple category-leading, scientific founder-driven companies, and a couple of things are true of that category: One is they tend to fortunately have a gravity. Typically, they are innovators in the space, for example, our company, Cygnus. The company Cygnus, that comprises our Biologic Safety Testing Segment, for example, was one of the earliest founders, basically creators of the industry that is now wholesale protein detection. So their leadership in that industry is a function of this brand and this service level and this technical acumen built up over multiple decades. Consequently, these types of companies typically are not built with what you would say would be a traditional funnel-based active hunting sales system. And during the pandemic, what that meant was that -- again, during pandemic's response, people scaled what they were already working with. So the job was actually to scale again, from RUO to GMP, from grams to kilos, but that was a pretty straightforward operational job. The job now is different. The job now is to create a very broad funnel with these many customers, it is possible and gain a level of intimacy that didn't exist before. And what you mentioned is actually something we referred to on the conference call, where we have been carving out the CleanCap specifically used in COVID pandemic vaccine response. And -- well, in our August call, which was my workday 6, we mentioned that we had been holding guidance for $100 million of that specific category that had been carved out through the pandemic, and we decided we would just take that to the $65 million of orders we had in hand. And then in this conference call just last week, we mentioned that we had a customer who said, "I'm going to split this order. And part of it will go to this COVID protein, but part of it will go to" -- this program, excuse me, "but part of it will go to a non-COVID program." And that type of interaction and intimacy is something we hadn't had much of before. So that's a really good concrete and public example of how we're starting to build that intimacy with the investment in the sales funnel and the new sales and accounts infrastructure.

Okay. So it would be fair to say that at some point in, say, mid next year, you're forecasting capabilities at the customer level are maybe not complete but are better than where they are today, just in the sense that you've had more of those conversations, there's an understanding of where 50% might be moved to something else ahead of, say, the quarter or a guidance call or something like that?

Well, and there's also the progress where we have customers who either are making a financial decision to push back or they have a technical issue or there's a regulatory question or something -- every week, we are building more and more of that customer intimacy to bring visibility. And believe me, that's something we all want.

Kevin, to what degree do you think a $60 million [ COVID ] number still has risk associated with it to what we're talking about here in terms of go forward for COVID-related work?

Well, I think it's solid for this year. I think that's certainly -- and we feel good about that getting in the late quarter. Look, I think that where we go from here, I think, continues to be a question. I think that, that is, I would say, what we thought might have been the end steady state for the respiratory vaccine market a year ago is probably different now. And I think it will continue to evolve. I don't think we've hit that steady state. I think we'll see continued pressure as -- depending on how serious the variance are. And then I think we'll see upside bias if we try to see these multivalent vaccines that combined flu, RSV and COVID indications together. I think you'll see a step-up if that becomes the standard of care prospectively. But I think it's going to take another cycle, probably, to settle out into what we consider to be the base sort of case steady-state demand there. And I think that we will stay close to that with our customers and see where that goes.

I would agree that we're not at equilibrium. I mean it was one of the -- it was the biggest vaccine rollout in history, right, global rollout. I was incredibly -- an incredible movement over those years. And yes, I mean, predicting what the steady-state equilibrium will be and when has been really the fundamental challenge.

If you don't push harder on those conversations that we're referring to here, where you dig into fungibility and what might you do with this bucket of CleanCap versus what you thought, are customers able to deliver to you a better forecast than they were when it comes to that? I mean, is there just an insight on their part that they have, that they didn't have or that they might have, going forward, that's better than now?

I think that's a fair statement. I think there's a little more time right now. And one of the challenges, the dynamic challenges in the marketplace for all of us in this industry has been that people were preordering and over ordering from supply chain, strategic supply chain concerns. And now we're actually having the opposite, where we have these agreements we call LSAs, service agreements and licensing agreements. And even in those cases, we have some customers reticent to commit to late next year because of the current economic conditions. So not only is the anxiety about supply chain gone, and now it's been replaced by concern for cash preservation and other things that we've mentioned in our calls.

Okay -- we talked a little bit at the Analyst Day about the M6 analog and just how that's filtering into the market. Can you talk about that as an adoption driver? And then one of the things that occurred to me at the time was that it is a more efficient product, and with efficiency comes less of a need for the overall amount of product that potentially you need. If an analyst sitting at an Analyst Day can figure that out upon looking at slides, then presumably you guys can, too. But I'd love to just hear whether you think that, that's a fact that we need to sort of think about in the interim before scaling of a new product? If you get half of your customer base using the new product and it's 30% more efficient, does that leave you open to some risk?

I mean, ultimately, we want to provide the customers the best possible solution for them that drives their technology in medicine forward. The value characteristics are slightly different between -- and let me just explain to people just briefly. Co-transcriptional capping is the fundamental invention that is branded CleanCap, and it's a reagent that provides a process efficiency. The M6 is the next generation of co-transcriptional caps that has that process efficiency benefit as well as a functional benefit. The 30% that [ Dan ] is mentioning is that it is 30% more effective in tissue -- in cells at doing its job, which is helping protein expression. So ultimately, it can give a -- well, it does give a more effective protein expression per dose. But one thing to keep in mind in the diverse universe of the next generation of medicines we're entering here is that doses are very different. Not all doses are going to be analogous. In fact, many will be much higher than the doses that were used for prophylactic vaccines for COVID. The treatments will all be different. And another thing that makes this a complex thing to model, which I understand everybody wants to do, is that mRNA and gene editing are not only therapeutic modalities in themselves, but there are also tools to make cell and gene therapies, cell therapies in particular. So there are multiple inputs, multiple amounts. But I think fundamentally, it should be said that we want to support -- we want to evolve the technology to be as effective as it possibly can be and participate in the broader array, the broader universe of inputs for the entire workflow.

Yes. One of the things that you talked about at your prior R&D Day, so not this, most recent one, was the fact that in certain situations, you are using a lot more CleanCap than you do for a vaccine. And the answer was, yes, it is a driver. But I guess the more pointed question would be, as these pipelines evolve, can it be a driver of growth for next year or something that contributes next year? Or is this -- given the state of the pipeline and just how long these things tend to take, is this 25, 26, 27 that we should be thinking about that's helpful?

Well, I think our -- I'll let Kevin comment, too, not only because he's getting loan me over there but because I was not around for that R&D Day. But the -- but I think one important component, since so much of this industry looks at commercialized product as the goal, we used the phrase very often that you'll see in our public material, win in discovery in the front end of the funnel. We are a profitable company and can support scaling out just as much as scaling up and are happy to participate in discovery and preclinical, in Phase 1 and so on in an accretive way as we grow customers and activity. Now in the current climate where people are concerned about funding, that's one of the first places people will tighten as they focus on late-stage material to get it through. But as in our experience, particularly in the BST business, it's also one of the first places to pick up.

Thank you, Trey. Well, look, I think that circling back to that, when you look at a customer in discovery and how they can grow and benefit Maravai, there's really a few things to consider. One, certainly, as you move from target discovery and then you move into a therapeutic application, whereby they're going to either advance in the total need of product they need from a volume perspective or the absolute volume for that indication. So like you said, it could be tenfold what you need or 20-fold need for a prophylactic vaccine or more than as they move from an early-stage phase to the next phase, you see those step up in growth. So you see those two things -- 2 combinations. And then you see the progression from RUO-grade material to GMP material, the price premium that comes with that. So you could hypothetically have a customer that hits all 3 of those products and have extrapolated growth over that customer portfolio as they move a single target or maybe multiple targets forward. So we've seen examples of that. There are a few now. I would say that with regards to cadence, we're still seeing the vaccines move next, the therapeutics still much earlier. I'd say, the therapeutic application of mRNA as a therapeutic is probably a few years away. But in that interim, you have the demand for vaccines and then you have the demand for mRNA, enzymes and other components we sell as the enabling technologies between cell and gene therapy CRISPR and other things. And I think that's the bridge to mRNA as a standalone therapeutic or is a therapeutic in combination with, say, CAR-T or other things of that nature, what you're probably going to be, again, in that later phase kind of a midrange dynamic for Maravai as we look at it through that.

Okay. Do you think that you see a product, be it COVID and some other pathogen or non-vaccine entirely, is there something in 2024 that you think we see as far as a milestone or an approval that the company that come from one of your customers that kind of gives us this moment of "Okay, it's happening on the non-COVID side" because I think that's the essence of a lot of what people are struggling with right now? So in the absence of knowing exactly how much of that that's going to contribute, we take these press releases to mean things are moving in the right direction. I'm curious whether you think there's something to stand up and sort of point to next year?

Well, actually, I think we and the industry are all hoping that this year, we get the first CRISPR cure approval. And one thing, again, as I said, it's tough to model because you have it as a therapeutic endpoint. But in many of these CRISPR clinical trials, mRNA is used to express the endonuclease, the Cas protein. So there's crossover benefit there. And I think, first of all, what an incredible moment to have a genetic medicine of sorts, be an actual cure...

Is that a customer of yours?

I'm not going to comment specifically, but we...

We put it on tea...

I will say that we did announce 2 partnerships publicly in our queue with CRISPR companies...

Fair enough. That works.

So you guys can go back to that slide and take a look. But the -- but that's an incredible moment for the field. And again, these are CRISPR and mRNA are really, again, configurable nucleic acid medicine. CRISPR guides, all of their specificity comes from the order of bases in the RNA oligo. And again, many of the CRISPR companies are using mRNA to -- as the other -- basically, there are 2 elements in that treatment, and mRNA is the other treatment. So again, we all hope in the industry that, that is this year. And then one of the other things that we promised publicly that we'll continue with is we do this annual study that is a deep dive in the entire clinical trial universe, and we give a gross number of how many programs we know we're in, either for one or more reagents and/or service. And we're doing that again now, which is just an annual thing because it's an expense, and we took a few of expenses this year.

Yes. No, that certainly makes sense. Okay. Maybe just on the Biologic Safety Testing side, that growth there has come in for some obvious but maybe some less obvious reasons. Can you talk about how much of that is due to China? And then Kevin is, a resumption of growth rates that we saw before it stepped down, something that's a reasonable near-term target.

Yes, I could put that in context, certainly financially. So China, for the Biologic Safety Testing business, is around 20% of that business. And it's actually been between 19.5% and 22.2% for the last 6 quarters. So once we saw that dip down in the second quarter of 2022, it's still stayed kind of down range -- in that range bound there for the last 6 quarters. So we think it's basically normalized there. We're not counting on that segment of a region to grow for that business. And our exposure overall to China is 5% or less across the company, and we also don't source much there either, so I think it's not an area that we're looking for, for either cost synergies on the supply chain side or really growth on the revenue side. I think we've always seen the -- that business as performing a little bit better than the growth of biologics, I think, depending on who you want to reference. I think it's somewhere between that 10% and 13% over time as far as the market growth. We've always done a little better. A couple of factors drive that: I think when you put the China factor aside, I think you see the shift to more traditional CDMOs in that space and their need to use the gold standard or want to use the gold standard for their customers. And certainly, the Cygnus-branded kits make -- check off that box and then just the pure breadth of our offering expanding into other contaminants like endonuclease, [ Protein A ] and other things. And then the services business. We've in-housed a lot of that services to really be able to provide a broader offering for our customers that want to do a deeper dive into what's going on, and that's enabled us to stay ahead of the market growth rate. And then we're still excited about [ mock V ] creating a market there for viral clearance testing. And so I think you summarize all of those things, and I know Trey was the President of that group for about 6 months, so I'm hopefully doing a fair job of summarizing it as we have, but those are the reasons why we see the ability to grow that business. And as we look forward, as we talked about our 5-year view, I think we see that in that 13% to 15%, 300 to 500 basis points higher than growth because of some of those factors that I mentioned over the next 5 years.

Is there a pricing element to these new products, M6, [ bock V ], et cetera? And can that be part of the growth algorithm?

There is, for sure. We -- like I mentioned, there's a value proposition to be had, for sure. But we also, again, want to diversify our participation in the whole workflow to not be so dependent on one thing, one specific reagent in that case. Price definitely comes into play, though, particularly when you have the advantage of these category-leading products..

Kevin, maybe just on the gross margins and the EBITDA margins. You have, to our prior point, put in some operating expense streamlines at various points. And the production capabilities seem like based on some of your comments that there's room for efficiency gains. Can you just maybe talk a little bit about what the gross margin trajectory is? And then the EBITDA goals that you have, are they sort of straight-line type goals? Or just given the visibility issues that we're talking about, could there be some fluctuation there?

Yes, I think there could be some fluctuation and it's going to be top line dependent. Look, I think we have proven we have very high-variable margins, and that continues to be the case and has been, historically. I mean, we have a very controllable set of inbound costs for our manufacturing. We don't rely on other people's technology. There's no licenses, royalties or anything else and very well-characterized commodity-type products go into it. So we have very good control over the variable margin. I think where you see the volatility that we'll -- we've seen with our margin historically, EBITDA margin and particularly gross margin as it really flows through from that line item, is based on volume over our fixed costs, certainly facilities cost being one. I think we're very happy with the facility decisions we've made over the last 5 years. And as we sit here today, once we finish out fitting Flanders 2, those will be the facilities we need to take this forward over the next 5 years. And we won't be tilting up more buildings. So you'll see that investment CapEx drop, and then it will really be up to us to fill those factories, increase the utilization factor using our labor and those facilities and certainly drive margin expansion. And that will come 90% from top line growth. And that's what we're really focused on as we move forward from here.

So is the utilization of the new capacity well captured, so to speak, underneath your targets? Or do you think that to our continued point here on just visibility within your customer base, there is some risk associated with utilization at a lower level than maybe you thought as you were trending?

Yes. I mean I think that's a good point. We've been very cautious certainly about scaling up our new Flanders facility ahead of volume. And we certainly can meet all of our current demand with our Wateridge facility in San Diego. The Flanders facility is for that redundancy for CleanCap. It's going to really industrialize the small molecule manufacturing on one side and then to be able to do Phase II to commercial drug substance on the second side. Not a lot of people need that second side today, but they certainly want to make sure you have that capability to begin the journey with you wherever they are. And that's why it's a necessity now to have that infrastructure. And then as we've proven in the past, we can flex labor and scale up pretty quickly.

Okay. Yes, it's a right-to-play question in many cases there, now that the market -- and this again is different than the pandemic era when there wasn't available capacity for mRNA services. Now, there is.

Okay. That makes sense. Kevin, I got to hit you with one last one. Thoughts on growth in 2024 on the top line.

Right now, we're not guiding to 2024. I appreciate the question. I think for all of us in the industry, I think, it's tough to look forward just because our customers are not giving us the visibility they historically had. And I think we all want to be prudent in the current environment, work with them, as Trey mentioned, with our commercial teams and get to a level of confidence, where we can guide confidently about 2024. Right now, it's not yet the time.

Yes. Fair enough. Okay. We'll leave it there. Thank you, guys.

Thank you so much.