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

Good afternoon. Thanks for being here at the last session of our London conference. We're very excited to have Maravai LifeSciences with us today, here to tell us more about the story before we jump into some Q&A, CEO, Trey Martin; as well as CFO, Kevin Herde. Turn it over to Trey.

All right. Thank you. Thanks for being here in person. I know it sounds like we're at the tail end of this conference and also thanks to those who are joining us online. As with every other presentation you'll probably see today, we'll be making forward-looking statements using some non-GAAP terms such as adjusted EBITDA. And we have, of course, all of our risk factors listed in our SEC filings on the website. All right. I thought I would start for this group with a little bit of the history of Maravai, where it came from and where it's going. So Maravai is almost a 10-year-old company. As of next March, that will be the 10-year anniversary. It was a venture between Carl Hull and Eric Tardif, who were executives at Gen-Probe with GTCR. And it was meant to be -- it was a private roll-up strategy, acquiring differentiated, scientific founder-driven, product-leading companies, specifically Vector Labs, as you see, TriLink and Cygnus, all in 2016. And then in 2017, Glen Research, which is an oligo supply company that's been in business over 30 years. So we kind of call that Maravai 1.0, I would say. Maravai 2.0, which led to a lot of headlines into an IPO, as you can see there in November of '20, was our participation specifically in the global pandemic. TriLink, you see one of the first acquisitions, has a product category called CleanCap that is an improvement to the way that one makes mRNA from a template. And the chemical improvement called CleanCap was incorporated into the Pfizer BioNTech vaccine, and that took Maravai in a completely different direction. Accelerated the adoption from RUO to GMP and led to a lot of investments and a lot of interesting things for the company that I'll get into here in a bit. So then, during the pandemic, we made some significant infrastructure investments and acquired 2 more companies. You see there at the end, MyChem and an enzyme company called Alphazyme. I'll explain a little bit more of that as we go through. So general attributes here. As I implied, the infrastructure adds that came from the pandemic era investments give us this incredible operational leverage going forward. We believe we're in the right markets, specifically mRNA and how it interacts with CRISPR gene editing as well as cell and gene therapy and we have had an intend to continue to have top-tier growth and adjusted EBITDA metrics in the market. The way we're going to do that strategically is, as you see here, something that you don't often hear in biologics, in particular, where the focus tends to be at the very end of the value chain, those drugs and compounds that are commercialized. We say, as you can see here, that we want to win the front end of the funnel, which is the discovery category. If you think about the way mRNA medicines came on to the scene, this was a technology that was in its infancy, and a big bet was made and it turned out to be the right bet that this was the best possible modality to quickly innovate infectious disease vaccines for the COVID pandemic. That bet worked out but it took really an industry with a few key players and early-stage candidates all the way to a global pandemic scale with literally billions of patients. So what we don't have really yet is a fundamentally mature discovery funnel and heavily weighted funnel of Phase I, Phase II and Phase III opportunities. It's still led by a few companies, but with a lot of investment interest coming in recently. There's a rich technical history with the, again, scientific founder-driven companies that were acquired and rolled up in Maravai. And that leads to a technical intimacy with customers that we think is of enormous leverage going forward, how we say we want to be the customer's first choice. But it continues to be on us to drive the industry forward with more enabling technologies. CleanCap's version 1 was incredibly useful in the pandemic response. We continue to innovate in that area as well as all the areas in and around the mRNA production ecosystem. All right. So the reason that we think that we're in the right markets is well illustrated there by just the mRNA cell and gene therapy pipeline progressions for the next several years, but I'll get more specific. So in playing in the infectious disease vaccines because the vast majority of revenue last year was for one customer for the inclusion in that COVID vaccine, that's really dominated the narrative in and around Maravai's participation in these markets. We view that incredible period of time as the opportunity to show the proof that mRNA is a platform that can be leveraged not just for infectious disease vaccines, but in protein replacement therapy and therapeutics in CRISPR gene editing and so on. We participate in the biologics market in a larger sense with the BST, the Biologics Safety Testing segment, which is our Cygnus business. And you see over there, on the right, strategic vectors for that business are -- it's predominantly a product business. In fact, all of the Maravai portfolio is completely consumable products, we have no instrument participation. It's -- so there is an ability to add services in and around those products for the customers that have trusted Cygnus for many, many years, as well as a new category that was part of a small technology acquisition called MockV Systems, the new category is being launched within Cygnus, and it's called the MockV product line, which seeks to essentially in the same way that Cygnus years and years ago changed the way people did host cell protein detection, this product line intends to change the way people look at viral clearance in their biologics production. So I've mentioned the pandemic a few times. That period of time led to some incredible changes at Maravai, again, scaling CleanCap from a predominantly RUO to a GMP product from grams to kilograms. It brought us into, I think, the right circumstances to support this next generation of medicines. In no small part, the capital was reinvested in 4 new facilities that you can see there on the right, they're noted by reporting segment. Obviously, the clinical proof of CleanCap as a primary input to mRNA came out of that as well as significant increases in investment in commercial sophistication and in R&D program specifically. And then finally, as I mentioned earlier, also through the pandemic and that incredible period of time, 2 more acquisitions to solidify the ecosystem in and around nucleic acid chemistry and enzymes which is what MyChem and Alphazyme are, respectively. So these facilities, we mentioned in our public comments are specific, the Wateridge facility that we talk about really supported the entire pandemic supply for chemistry and for mRNA. As a part of pandemic readiness, Maravai won a significant grant from the government from BARDA, specifically to support the expansion of supply for the chemical inputs, which is the facility we call Flanders 1, and the service in support of mRNA production, which is the facility we call Flanders 2. Each of these facilities are occupied now and being fitted. So we are bearing the cost of them as it is now and have tremendous expansion opportunity going forward using those -- that infrastructure. So the 2 segments, Nucleic Acid Production is, as you can see there, more than 3 quarters of revenue, and it comprises the TriLink business, including the GMP services, the Glen Research business and the Alphazyme enzyme business. Here, this is where all of our conversation about mRNA and all the inputs lie. And again, we think of mRNA as a platform. More than infectious disease vaccine, it's the opportunity really to usher in the new era of programmable medicine where just the change in the sequence can be the change between a COVID spike protein neoantigen or a personalized neoantigen for oncology, for protein replacement therapy or for the endonuclease used in CRISPR gene editing. All of them -- all the mRNA molecules that I just described are fundamentally built the same way and the variance is just in the sequence. I know I have to move quickly. What we have here is an example that we put in one of our quarterly reports of a customer moving from that discovery pipeline just through Phase I. So again, we're not -- we, as a company, are not relying on X number of compounds in commercial and our full-scale participation in them. In fact, this is as good a place as I need to reinforce that this is a product and technology company that has services to help people adopt the products and technologies in their pipelines as early as possible, and then, of course, with the intent to stay with them all the way through. This is just an example of early discovery, going to late phase discovery, going to Phase 1 and the way those results and that participation can stack as we move through with the customer. So again, Biologics Safety Testing is the other segment, and this is comprised of the Cygnus Technologies Company and the small technology acquisition, MockV, about 1/4 of revenue, tremendously high-margin business and the gold standard in whole-cell protein detection. As you can see there at the bottom, one of our favorite stats is that all 17 FDA-approved CAR-T cell and gene therapies are QC-ed with Cygnus kits. And we certainly hope that, that percentage continues. But here in the BST segment, we're playing across a broader -- the breadth really of the biologics market. And so any work done in any primary expressing cell line, your HEK, your CHO, your E-coli and so on, one has to check for residual host cell proteins during biologics production. So that's why you can see at the top, there are 24 different cellular expression systems that are covered with these tests, actually, almost 30 kits that do this work. And the output of all of these cell systems across the biologics market can be any of the things you see listed below. So Maravai's model then is to take these scientific founder-driven companies and invest in them, to invest in further innovation where there are technology opportunities to build and leverage scale, which we've done significantly during the pandemic and to add particularly a commercial overlay where you have a category-leading, product-driven company very often and you don't have a sophisticated commercial funnel. We have been adding significantly in that area, focused on key accounts and cross-selling across the different businesses, opportunities there as well as adding predictability, our full intent as we go through and have more intimate relationships with the customers. And then, of course, Maravai's model has been acquisition of this type of company, and we expect and intend that to continue so that we have both organic and inorganic growth vectors working for us. To that end, we keep a grossed-up structure. $580 million cash is another nice outcome of the pandemic participation, long-term gross debt, good interest rate. You can ask Kevin specific questions about that. But you can see that we have a net cash position, and have recently announced in the post-pandemic move here in Maravai 3.0 that we've taken some cost actions to set ourselves up while the industry regains its footing. And again, with the intent that we maintain our top-tier EBITDA percentage. So we believe then that we're in the right markets with an opportunity to grow significantly there and hope that the pandemic simply hastens the adoption of the next generation of programmable medicines that leverage nucleic acid chemistry. And we are at the center, of course, of nucleic acid chemistry enzymes and inputs and mRNA. We, again, intend to maintain a top-tier margin profile. And -- yes. I think that's probably good. Thank you, and we'll take your questions.

Thanks, Trey, for that introduction. Maybe I'd love to start off with the non-COVID opportunity for CleanCap. Just kind of give us an update on the status of the programs that you're involved with, maybe how many that you're involved with today? Any color on where they stand in terms of phases? And importantly, are any of them canceled? Are they just on pause right now? What's kind of the nature of, I guess, those to the degree that you have visibility?

Yes. Well, so we get that visibility and we reported that number publicly in Q4 last year. We intend to do the same thing here for our Q4 this year. It is a deep dive in all of the clinical trials with available data and then going through the material sheet. So it's something we do with a third party. We have initiated that study again and we'll report the progress through Q4. But we have specifically many, particularly in the service area, anecdotal versions of a story you've all probably heard many times today, which is that there are natural and expected delays in programs that might be technical, they might be regulatory and so on, and then there are maybe the abnormal or unnatural delays that are a function of people wanting to concentrate on if funding is limited and there's concern about future funding concentrating on later-stage programs where they might be. The thing is there's not a lot of later-stage program assets in the mRNA space specifically. So in that case, it tends to be rationalization of discovery activity, unfortunately. It tends to be the first thing that dials down and it tends to be the first thing that comes back when one sees the market turning corner.

On the CleanCap COVID business, what happens in '24? I think the Street is modeling like $20 million, you talked about for this year, having firm orders. When you guide for '24, will you have visibility on firm orders, and how should we just think about that revenue line next year?

Kevin, do you want to take that?

Yes, I'm happy to take that. Look, I think that one of the reasons we didn't guide here at the end of the third quarter was some of the lack of visibility. We've had very strong visibility in the business for the past 3 or 4 years, particularly with regards to demand under our license and supply agreements for CleanCap for high-volume customers. That demand is certainly down, and we're certainly working with the customers to understand what they need, and that's what's going on currently. And that's why we are differing our guidance on '24 until we have those conversations, we get a better handle on what our customers need and I think they're still struggling with what they need. And I don't think we've reached equilibrium or steady state on this. But it will be a smaller part of our business certainly going forward. And that's one of the reasons we -- as Trey mentioned, we made some cost adjustments as well. I think we're really focused on a cost structure that's tied to the base business, and we see that demand, whether it be for the pandemic or for respiratory vaccines in general because I think you're going to see a less specific application of that technology going forward, it will probably be into multi-variant type of vaccines or other type of combination. So having that discrete visibility I think is continuing to get less and less as we go year by year. So less COVID specific and probably tied to respiratory panels of the vaccines. So I think we're working with our customers, and we hope to get their view. And once we have that, I think it will inform our total view and then whether we think it's specific to COVID will determine whether we continue breaking it out in '24.

Trey, you talked about a number of the new facilities that have come online. Will Flanders 2 opening be incremental to revenue in '24? Do you still target, I think, 2Q next year for that opening and given the environment, why not just pause it?

But we are actually slow rolling that to a certain extent. So rather than do a traditional open for a service business where it's fully staffed, the good news is, again, we're supporting all of the GMP business out of Wateridge at the moment. So the intent is to open Flanders 1, which is the chemistry production group and move some of that existing staff into the new building. And then Flanders 2 is a function of the stage progression for people who need mRNA specifically Phase 2 and beyond. And we get to plan that proactively with the customers in the pipeline. So there's not a -- the facility is built, and again, the operating -- the carrying cost of the facilities are already baked in. The fitment and finishing formal launch with customer product will be in targeting Q2 for Flanders 1 and will be specific to customer need for Flanders 2.

One of the things you mentioned on the last quarter call, which I appreciate a lot of the detail about new partnerships with new pharma companies. One of them was with Thermo to utilize CleanCap, one of their Invitrogen systems for in vitro transcription kits. Will that be material next year? Is that one of the larger opportunities or more incremental, maybe the less of a revenue driver in '24?

We hope so. But it's a part of the larger strategy, which is again to win early and be with the customers when they're doing discovery so that we can be a part of their entire journey, not just try to get in there at the end, but really enable discovery. We think the technology is differentiated and gives differentiated performance and that, that will hopefully lead to more development and more successful customers who are developing. So that's just part of that broader strategy to be included in as many programs as possible.

At the R&D Day, you gave some midterm targets for like $700-plus million of revenue, I think, in 5 years and getting back to 40% plus EBITDA margins. Can you give a revenue target specifically, especially given the lower base that you're coming off of? And what are the leading indicators external investors should be looking at to kind of assess how the market is developing for the customers that you're supporting?

The one thing we're optimistic about is, as many in the industry are aware of is, what we hope is the impending announcement of a CRISPR medicine that's actually a cure for a disease. And that -- I'm optimistic that, that will bring new-found interest and vigor to the space. But generally speaking, our long-term model assumes a return to prior pandemic growth for the base business and the participation in the markets I've described several times with roughly, as you've seen, the 1/4 biologics exposure and 3/4 mRNA cell and gene therapy and CRISPR gene editing exposure going forward. If you want to talk about how it was built, Kevin can add color.

Yes. I mean, I think that for us, again, it is a target, and I think we've spoken about the markets that we're in. I think that '23 being a down year is certainly a challenge. But if you look back before that, I mean, our Nucleic Acid Business had a CAGR of over 35% from '18 to '22, our Biologics Safety Testing business had a CAGR of around 15% and that those both outstripped the markets. And I think we continue to think that our technologies where we play price points, consistency and steady pricing that we've had, continue to support to those positive long-term trends. And as Trey alluded to, that growth that we saw through '22 in the base business, excluding COVID, was with a lot of things in very early stages, right? Like, there really wasn't this progression of supporting companies from Phase I, II and beyond. It was really in the discovery, the preclinical and really the early-stage Phase I work that we've been doing. So you take the progression, you take the transition from RUO to GMP, you take what we believe will be market growth over the next 5 years, and you perform at or slightly better, which is the embedded assumptions in those CAGRs to get to that number. It's something we feel comfortable with, and we're still very excited about.

I think it's also important to point out the infrastructure we keep talking about is enough to support that level of business today. So we have that capability to do that without tilting up new buildings in other future investments.

In the minute we've got left, how are you thinking about capital allocation right now with the stock price where it is? Does it make sense to look at a buyback authorization? And what would be your priorities right now?

I think we maintain the structure that we talked about there, the grossed-up structure to be opportunistic for M&A and continue that primary mission. I have definitely had that question a few times. But when we get together with the Board as we just did, we have quite a bit of conversation about the inorganic funnel, and we're still very interested in continuing that part of the mission.

Pretty good. Well, we're out of time. So we'll leave it there. Trey, Kevin, thanks so much for being here. Everybody, thanks for being at the conference, and have a great day.

Thanks.