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

Good afternoon, everyone. My name is Matt Sykes, the life science tools and diagnostics analyst at Goldman Sachs. And I have the pleasure of hosting Trey Martin, CEO; and Kevin Herde, CFO of Maravai Life Sciences. Guys, thanks very much for joining me today.

Yes. Thank you for having us.

Maybe Trey, I'll start off with you. Just would love to kind of go over how your transition CEO has been over the last, call it, year and how you're thinking about the strategy of the company attrition away from COVID-related revenues into a more steady state for the rest of the business? And what your experience has been and what some of your goals have been and what you've kind of achieved over the past year?

Sure. Well, certainly, 2023 was an interesting time to take the helm, particularly the second half of '23. I would say I have been really pleased to come in and see that we have an exceptional team. There were highs and lows that were very public from Maravai with inclusion in the global pandemic response, we find ourselves post pandemic with a series of well, 4 new buildings, really good cash position, 2 acquisitions executed during the pandemic and a fantastic team and organizational structure, I think that's ready for our future participation in a more broadly diversified market.

Got it. And maybe just thinking about your strategy to stay with the customer from discovery phase to clinical. Can you talk through how we should think about GMP revenue over the next several quarters? And I understand it's likely to be lumpy, but sort of how long it will take for that revenue to show a more stable stream as it becomes more diversified and just sort of that strategy play out over time?

Yes, the participation from a product perspective, the CleanCap and other products that are included in mRNA programs really were what made all the headlines in the pandemic when trialing specifically, 1 of our 4 businesses transitioned from really grams of RUO to kilos of GMP product. TriLink has actually been in the GMP service area for mRNA, but only really in the preclinical Phase I. Our New Flanders 2 facility gives us the opportunity to participate all the way through clinical, commercial scale. We have been actually bearing the cost of those facilities since the second half of last year. And so as we certify them, as we open them all of the programs that will be going in there, all the GMP service will be incremental and should have nice leverage to it.

Got it. I mean kind of building on that, can you talk to the utilization of Flanders 1 and Flanders 2 so far? And how we should expect that to trend throughout the year? Obviously, a lot of it is related to the revenues coming in, demand coming in. But just kind of how we should think about that utilization levels of the new facilities?

Yes. Well, literally, we are in the certification phase for both buildings here so utilization has been essentially internal process development, IQ/OQ/PQ audits and so forth. So we're ramping up from, call it, a low level of utilization this year where we have a tremendous capacity capability. I mean, I think it's important to note that it's been a long cycle during the pandemic of capital investment for the company. But as we wind that down here really in the first half, we have all the facilities and capacity we need for 5 to 10 years of growth expansion. Flanders 1, remember, is our cGMP chemistry supply building with 4 suites. Flanders 2 is our mRNA service building with 3 suites. Let's just say we have a lot of upside, a lot of capacity to fill the plan and we were public later phase commitments already, which is really a key competitive win because people going to be first in a brand-new building, but we've got some partners who have already committed but we'll be stepping into a brand-new certified building here in the second half and starting to fill it in plenty of upside, plenty of capacity and room for growth with a lot of leverage.

Maybe just building on that, a question there about those new customers that did join given this new facility. What was some of the feedback that you got from them in terms of like the reasons why and sort of the choices that they made in order to go with you guys?

Really, it's thanks to the long history of TriLink Cas in supporting this industry. TriLink was a nucleic acid chemistry and oligo business for the last 2 decades. And really enabled early-stage discovery work in mRNA through that nucleic acid chemistry. So there's a long history there of a very established workflow, over 100 GMP runs through our company. And it's really, I guess, the experience in interactive personal touch we can offer. We bring the technical experience right to the customer we're not a gigantic company. So we have the ability to connect people and to help them shepherd these programs through since it's a relatively new modality, people really like that touch.

Got it. And how should we think about win rates trending since opening planners is obviously incredibly early, but you talked about these new customers are you benefiting from being able to say that if and when a program goes clinical, commercial, you'd be able to stay with the same provider. I mean what kind of benefit has that had comfort level that you've gotten with customers relative to what it would have been a few years ago?

Yes, and that's a really good point. Again, TriLink has been in the -- really on the front side, the preclinical and Phase 1 GMP, what we call the service, which is the actual mRNA production process itself through the pandemic, of course, went all the way through clinical, commercial scale reagents through product. But the difference before the pandemic and after is that there are many other players in this, let's call it, the CDMO side of mRNA production. And it became more because there were more choices that had this capability, it became more important for customers to hear that you could be a partner all the way through every clinical phase. So admittedly, we modified the original plans of Flanders 2 to enable that essentially the appropriate level of controls the appropriate environmental situation to enable our participation all the way through. It's interesting. I reflect back to the time where we're working -- we did a lot of diligence calls with customers at the time, and they would say that we love CleanCap product, but it's a shame, sometimes we have to leave for some of the senior services at the end and now you're able to go back to them and say, look, we can actually do that now. And so that obviously gives you a stickier customer. But at the same time, I'm sure that feedback loop will likely continue as these new customers come on. And so how have you kind of modified the sort of go-to market, but educate the commercial teams in order to make sure that that's out there.

Well, I like that point because we are I would say, a product and technology company first. And CleanCap is obviously the headline product, but there are others, and plenty more in the works where we want to enable the entire ecosystem from discovery all the way through clinical. Our services exist to help people shepherd their programs through with our chemistry. And I guess the pitch is who better to help you with the workflow and the process and the people who created the chemistry in the first place. So that's really part of our value prop that I think is unique, which is what we call the GMP services but we're also providing almost all of the inputs for that. And again, primarily a product and technology-focused company where service enables the inclusion of the products and technologies in people's programs.

Got it. And Kevin, maybe one for you just about operating margins. I think everyone's aware of sort of the fixed costs you have and the potential operating leverage that exists in the business model. So it's obviously dependent on volumes and there's been obviously some volatility in the top line on a quarterly basis. But if you had to kind of set sort of like a level of revenue you're able to obtain the current facilities and think about like what then starts getting above that fixed cost burden and generating that operating leverage. How should investors be thinking about it? Maybe if I put it a different way, like at full utilization, like what's the margin potential.

Yes. I think while we certainly saw where margins could go when we were near $1 billion in revenue, certainly, but that was one product at scale for a limited amount of customers, and we certainly have great synergies in those large production runs. I think as we move forward, we have both the expanded footprint with Flanders. And again, something like Flanders from an incremental cash cost perspective is in the $5 million to $10 million range. So it's not a huge burden as far as the operating costs are concerned, that's just the facility costs. And then right now, we're sharing a labor pool between the demand of Wateridge at Flanders. So we're able to keep that sort of fungible and move it around based upon demand. I think as we start to build up the specific funnel for Flanders, then we'll consider whether we have 2 separate pools for labor. So that will be one toggle for us moving forward. But I think as you correctly pointed out, it's really the absolute revenue levels that we're generating through some of these plants when we're down at a lower level, like we were closer to the first quarter, you could see the margins are going to be in the teens as we saw in the fourth quarter when we're up in the mid-70s, they are substantially higher. I think over time, where we see this now is we have all the facilities we need, as Trey said, to support at least the next 5 years and not have to tilt up any more buildings. And because of that, our cost structure is sort of labor and facilities at this point. And I think we have the capacity to move substantially forward because we are not near the capacity that we can potentially get to so I think as we ramp up, the high incremental margins are going to continue to be very strong, but it's going to be driving revenues through Flanders 2 as well as maintaining and hopefully continuing to increase the discovery revenue supported at Wateridge to give rise to margins that we feel can move back up to in those 30% to 40% over time as we ramp up -- as we build this business and continue to grow it. And the reason we feel pretty comfortable about that is we know what our raw material inputs are, they're very well defined. We have sticky price points. And because of that, I think the incremental margin profile incremental profile [indiscernible] incremental dollar is going to come with a very high incremental margin because of the consistency in pricing and the attributes of our products. And that's what true on biologic safety testing. And we move that into a new facility. That's going to support their 5-year plan, and we continue to see, of course, very strong EBITDA margins from that business as well. So I think what we're happy about as we sit here today, both with the absolute capacity that's available to us, which we think we can triple the business without adding more walls quite easily as well as the additional capabilities that you mentioned that we didn't used to have. So we're opening up a new revenue channel in the back half of the year to do Phase II, Phase III commercial builds and still having the solid price points and being able to leverage this cost structure across the across all the different lines on the P&L, but specifically, we're going to be leveraging G&A. We're going to be leveraging our fixed costs, and then we can toggle our labor as volume comes pretty quickly that will able us to keep good margin control.

What would you point investors to in terms of KPIs to kind of measure this progress. Obviously, be a little volatile in the near term, but is there anything you should be pointing that investors should be looking for to see this progress?

Yes, I think there's -- I mean, I'll tell you what we certainly look at. I think it's both the core of the leading indicators that are more qualitative, meaning they're just not in the financials, and that's sort of the participation in the number of programs. We've talked about that a little bit over time how much CleanCap is involved in programs where we think our market share is. That was very CleanCap specific, and we're broadening that out. We're bringing that capability actually in-house now our business insights group to really look at all the different phases, all the different programs over the broader market and understanding our penetration into that and how fast that market is moving. And I think what we're encouraged by when we look at this, and we'll share some of this as we refine it, is there's still a lot of people moving into that preclinical phase in areas where we participate in either directly mRNA therapeutics or the broader cell and gene therapy space. And so I think that, that is a nice part of the funnel to see progress. We haven't seen as many people progress in the later stages yet. But I think that's what's coming over the next 5 years is that progression into therapeutic applications of our technologies and services outside of just our participation in some of the vaccine programs that's really going to be the sweet spot for someone like Maravai. So how well are we participating in the phase moving forward? And how is that overall [indiscernible] how are we able to then stack these additional customers in and then hopefully, as they move through the pipeline, then have an annuity by being participating in their commercially approved products, which as we know, there are very few right now using mRNA, but we only feel very good about the future. So financial certainly, revenue, gross margin, EBITDA margin, the leading indicator how is our market share progressing and how is the market looking from a trajectory and then an advancement perspective particularly when you start to flex away from some of the vaccines and getting into some of the more therapeutics, where we're likely to have multiple products involved in some of those programs.

Got it. Super helpful. And thinking about sort of the biopharma end market, what do you think the potential impacts from IRA? Have you seen customers pushing out, pausing or canceling programs as they reevaluate through the economics of it?

Yes. I mean I think we've seen some of that I think when we dive into the numbers, there's a few dynamics. I think when you look at Discovery, I think you're still seeing a very nice level of customer base. You're seeing some of that over the last 6 quarters or so that the ordering volumes of that base just be down. So I think that's market reflective, budget reflective and probably project prioritization a little bit in the R side, on the GMP side, we are seeing more of a stacking of programs, so we're just trying to move them all forward at the same pace. And I think that's just an economic reality that's hitting most of the businesses in our space. And I think it's temporal. I mean, people take their leader most advanced programs first and then they will kind of make priority decisions thereafter. But I think what we're encouraged by, even in light of that market constricting a little bit over the last 6 quarters is that people aren't necessarily abandoning programs. We're not seeing a lot of customers other than some that are having some financial issues, but not hitting us to that much material impact walk away from this modality, right? I mean people are still very encouraged by it. I think that there's still a substantial amount more money than we thought there was going to be at this stage. When we look back to our models from 4, 5 years ago. And that's kind of the basis for some of our initial investments. So I think we're kind of getting through this period in 2023 and maybe the first half of this year where that's been a factor, we think it's leveling and we're hopeful to start to see this start to pick up again.

Got it. And then emerging biotech. Biotech funding had a pretty good first quarter. It seems like it's continuing. Trey, I think you mentioned on the call that it was like 30-ish percent or so of revenues. Could you maybe talk about what benefit you could see from the funding environment? What kind of lag period there is seeing that funding versus actual spending taking place? And what is kind of baked into your expectations for this year?

Yes, Kevin mentioned that we've started basically, we now have our own internal business intelligence team focused on this question of market of pipeline. And we can say the biggest number of ads has not surprisingly been in the pre-clinical that is, of course, harder to put a pin on because it's not specifically filed and registered. But there are a lot of preclinical starts in mRNA. And remember, mRNA is not just for infectious disease vaccines. It's protein replacement therapy, it's oncology. It's also, in many cases, part of a CRISPR program where the endonuclease is expressed with an mRNA, but it's also a tool for making cell and gene therapies. So broadly, we look at the mRNA specific market, but also the cell and gene therapy market in the CRISPR market as really our 3-legged stool and we see starts a great number of program starts in the preclinical, not only, frankly, the small and mid-caps that you're quoting but also several big pharmas are just starting their mRNA programs, knowing that the endpoint is successful, knowing the safety and efficacy, thanks to the quick proof and the pandemic I think the platform is widely being embraced at all strata. But specifically, because mRNA is quick and economical, there's an opportunity for a lot of small and mid-cap companies to do program starts. And we're definitely seeing that in the preclinical side.

Got it. And within your customers' programs, where do you expect to see the largest opportunity in the next several years in terms of cell gene therapy, mRNA vaccine M&A therapies, CRISPR, like as you kind of think about those opportunities, how do you think about sort of ranking those in terms of potential?

Since the infectious disease vaccine path is proven already. It's not surprising that when we did our last third-party study that was about 40% of the programs that were in case. And certainly, a way of making vaccines in a matter of months rather than a matter of quarters. Using in vitro transcription rather than chicken eggs with traditional vaccine approach is completely logical to follow that through because we know the clinical safety and efficacy works. We know the delivery works and everything else. I expect that oncology continues to grow. I believe, in our last third-party study, it was in the mid-20s percent of total programs. And there, you have something completely unique and enabling the ability to personalize the message to essentially encode very custom one-off neoantigens for people. So I think that's probably the most enabling area. But any given market report you look at has been selling gene therapy, mRNA and CRISPR, all in the mid-20% to high 20% market growth ranges. So I would say it's anyone's game, but we like all 3 of those markets and the growth rates there in, for sure. And the great thing, I think, fundamentally about mRNA is that it's a platform. So I've already said this, but the way you make it for an infectious disease vaccine, the way you make it for a personalized oncology treatment, the way you make it for protein replacement, the way you make it to express the endonuclease and a CRISPR assay is the same. Is fundamentally, it's a configurable medicine. It's the order of the AGC and you and the message. It might have a different cap, might have different UTRs and tails but at the end of the day, you're just configuring that order of basis to do all those different things. So I expect it to be in an immensely powerful platform for the next generation of medicine. And I hope they all take off. But certainly, there's a lot of different shots on goal available there.

It's like asking you to pick your favorite child.

Yes, right. It's not going to happen.

Exactly. I get it. I just want to kind of understand a little bit better in terms of the customer behavior in sort of the earlier stages. And so what are the barriers for customers the search providers halfway through the program. For example, the customer was with you in discovery, but wanted to switch to a competitor as you move to clinical, commercial, what are the barriers of doing that regulatory otherwise? I understand Phase 2 and beyond, you kind of get inspected in and it's very challenging. To do that just prior to that. Is there some level of switching that does take place?

Well, in service, yes. So if -- and certainly, there's the competitive -- I mean, this is a double-sided coin, right? If someone customer, they're sticky. And from their previous approach. And you can do that, of course, in preclinical and in many cases, Phase 1, but the later you go in a program, the less likely that switching behavior is to have -- because of our position as a product provider, if we, for example, bid on, but don't win a CDMO type contract to do this, what we call the G&P service. We still ship reagents to those. So that's an advantage of having both layers and being, again, primarily a product and technology company. The service is enabling and the service is incremental to our growth and certainly our margins but we can still participate in programs even if we don't win that service contract. And I would say as through the pandemic as many of the major CDMO providers added mRNA capability that became that CDMO service side of mRNA became more competitive. And we in that world, you can see people choosing different partners for Phase I and Phase II, then Phase III and so on. But the product and technology inclusion in the program itself is very sticky. And we just hope to add to that market share, whether we have the service or not.

Got it. And so the follow-up question to that is, as you speak to your commercial teams and a lot of the focus, I'm sure, is winning that discovery business and then keeping them into GMP services, but another part would be going after programs that are in someone else's discovery, where you can then convert them to GMC services. And. Given some of the switching costs, it's a little bit tougher. And so how do you think about balancing the resources and time of your commercial team to focus on one or the other or some combination of the 2?

That's -- yes, that's a great insightful point that -- the vast majority of our GMP programs are people that started with us in discovery, the barrier of switching, the activation energy to do that is lowest, of course, preclinical so that's why we -- as you've quoted, we like to focus on winning in discovery, staying with our customers and enabling all the way through the process. So our focus is primarily there, but it's been a not insignificant build for us, both in facility, but also in team and capability to do the program management to up-level it so that we go from Phase I to Phase II to Phase III to clinical capability as well. There's -- there's a significant QARA component of that, and there's program management of that at a different level than preclinical and Phase I GMP. So we have invested in commercial, I would say, both outside and inside with the inside focused on the G&P services going all the way through clinical, commercial and the outside primarily focused on trying to win in discovery.

Got it. And could you kind of walk us through what a typical volume uplift could look like as the customer moves from discovery to clinical and clinical commercial? I remember a slide from not your most recent R&D Day, but few R&D days ago where there was a 10x uplift, which is sort of the kind of the benchmark that we at least used to think about it. But maybe just digging a little bit deeper in terms of what that volume uplift look like as the customer travels through those different stages for Maravai.

Yes. Lawyer answer is it depends so in GMP services, you have the fundamental service. In our case, we're bringing products in that we make. And we have, of course, all of the other ancillary and associated parts of a project that are included in the quotes like analytical services. We've been public about our recent investments in what we call our analytical sciences, Center of Excellence, the ASC. But typically, you're going to see single-digit millions go to high single-digit millions, go to double-digit millions, and that was sort of 1, 3 million. If I do -- if you look at a normal distribution, that's where the mean would be in those 3 stages.

Got it and it would kind of be helpful to better understand what your kind of hit rate is for customers moving from preclinical to commercial at this stage? I know it's early, but is there sort of a hit rate or win rate you guys have kind of discussed?

It is -- if what you're looking for is what the graduation rate is by phase, it is early for that, I would say. And we track coal customer and all the other traditional metrics that most people do. And when we do follow-up with coal customer, it's not a dead program in many cases in the last 3 or 4 quarters, it's been delayed funding or strategic delay, as Kevin said, pipeline rationalization, all sorts of other reasons that so you could -- we could say it's gone cold after some number of quarters and everybody is different on that. But in many cases, when we do these, these follow-up calls we're not counting a graduation rate where we can say, okay, 60% go from Phase I to Phase II, 30% go. I just don't think it's mature enough for that, and we've had so many disruptions to a normal environment that I don't think we can necessarily count on the data set we've got over the last 4 quarters.

Yes, I'd probably add to that, too, there's 2 different dynamics. I'd say. One is, let's say, we're selling a specific product, let's say, it's one of the clean cap family of caps. It's a fungible product in the hands of our customers, right? I mean, it's not tied to an indicator specifically. So a lot of times, we're dealing with large customers, they'll buy a volume of it predominantly for a certain program, but then they'll be able to use it across their portfolio. And we don't always have visibility to that. I mean we're very agnostic with regards to what it's used for frankly. Secondarily, you have the services side where we know very specifically what they're looking to build and what it is, but those will come and go and they're not our programs, right? So again, knowing that we are at very first and foremost, a product and technology company for the entire space and not necessarily economically vested in a specific program, meaning we're not structuring things where we have royalties and things of that nature, right? We're providing goods and services and these are the products and programs of our customers. That leads us to a little bit of a disadvantage in understanding the timing and cadence of their ordering patterns and then you have the natural volatility and uncertainty related to phase graduations. So we'll see so in place an order, go away for 9 months and then come back and place a much larger order or not come back for that specific program. So we deal with all of that, and that's, again, at these revenue levels that we're at today, why we see that quarter-to-quarter variation where it's just not a sequential build. Parts of our business certainly do that and have over time. but some of the bigger chunkier orders have those other dynamics that make it a little bit frustrating to forecast in the short term, certainly.

Got it. Just shifting to biologic safety testing. So you're used by all the CAR-T and gene therapies approved by the FDA, how should we think about growth in this segment? Is it driven by a number of approvals in this space? Or is there kind of solid growth within earlier phase of development?

Yes, I'll take that to start. It's really in the development. What's the biologic development programming because the number of kits that are used are tied more to the product development process development cycle because you're always temper expression of host cell contaminants anytime you tweak the process. So you're using the Cygnus branded kits and our services quite frequently during the development process and as you're getting ready to lock formulation and finalize. Once you get approved, like in the case of the therapies that we're currently improved in all 21 used to Cygnus-related kit. And as it is seen as the gold standard, then you really move to just lot release. That could be once a month, once a quarter, depending on how many builds they make to support demand. So we actually see an inverse relationship from development to approval. So for us, it's about keeping that development funnel and the number of programs growing. And I think we see that market in the 10% range as far as growth. We've always outperformed the market a little bit just based on the breadth of our products and then the custom side of that as well as the related services to look for potentially other contaminants in those host cells and in those products. And then we're starting to see some nice momentum in progress with our MockV test as well. So that's a market that obviously doesn't exist today in a predictive viral clearance. And then so those things are additive. And so we see the market growing 10%-ish and probably over time, be able to outperform that by a couple of hundred basis points because of those last 2 factors.

Got it. Could you walk through some of the partnerships that you recently signed with Lonza, do you expect to accelerate these types of deals going forward? And then maybe talk through how it came about and that mostly them coming to you or going out to them and how those work?

Yes. Well, I'm glad to say there's been a lot of inbound interest. And in no small part, that's because CleanCap remains the best solution for efficient, high yield and high purity production in mRNA. And we know, of course, in this competitive industry that obviously, we are not present on every continent. We don't have all ranges of capacity, and it would be probably not the best strategic move for us to try to build that. So there are tremendous partners in all these different geographies, Fuji in Japan, Lonza in Europe, where we have exceptional top-tier CDMOs who are interested in having our technology available to their clients. And it basically reinforces what I've been saying about product and technology first. And we want to be an enabling differentiated solution for all mRNA products. So anywhere we can drive the inclusion and our participation, we'll do that. But specifically, we're choosing the top-tier CDMOs in these different geographies who are interested in partnering and can enable widespread inclusion of our solutions.

Yes, one last question just because I think it's an interesting point you made where you've got a differentiation with CleanCap that's leading you to those types of discussions that are much broader and helpful to the business. You had a slide, I think, in your last R&D day that showed sort of CleanCap versus ARCA versus Enzymatic. And ARCA, I think CleanCaps got the yield and workflow advantage. Enzymatic it's a little workflow but can you just talk about the competitive landscape where we are today? And we have gotten a lot of questions from clients on enzymatic seemingly improving without a lot of kind of data behind that. But I would love to get your view on where you see clean cap from a competitive differentiation standpoint even over the next few years in terms of the defensibility of that business, given how it so it's important in sort of the future of Maravai.

Yes. So the CleanCap is not only a product, of course, or, in this case, 4 different products with obviously a few more in the works. But it's also a process. And the process is the co-transcriptional capping or the inclusion of the cap reagent in the same step as the IVT or the in vitro transcription. That leads to, of course, fewer days of production, better yield and so forth. What I'm actually excited about is a biochemist is our ability to modify these reagents to add different capabilities that existed. So m6 is the first version of this, let's call it, the new generation of caps they are still have all the workflow advantages of co transcriptional capping, but we can start to tune them to have different in vivo or biological effects. In the case of m6, it's higher efficiency translation into protein. So what's exciting about co-transcriptional capping is not only that it's a workflow or production improvement, but there's also an opportunity to differentiate performance of the medicine at the end of the day. And that's the first of what we hope will be many improvements to all aspects. But it shouldn't surprise you that enzyme providers are big proponents of the enzymatic solution. CleanCap providers are big proponents of the CleanCap solution. It's not an accident that our last 2 acquisitions were a very differentiated nucleic acid chemistry company called MyChem and an enzyme production company called Alphazyme. We would like to participate and enable all aspects of the ecosystem whether your approach uses more enzyme, we have the capability to enhance scale Alphazyme's world experts in enhancing scale and lowering unit cost of high-purity enzyme or driving through the nucleic acid chemistry. It's all part of the same ecosystem, and we want to have differentiated solutions everywhere we can in that ecosystem.

Got it. With that, we're out of time.

That's right. Good endpoint.

Yes. Thank you very much. Appreciate it.