MRVI (2021 - Q1)

Good day and thank you for standing by. Welcome to the Q1 2021 Maravai LifeSciences Earnings Conference Call. I would now like to hand the conference over to your speaker today, Deb Hart. Please go ahead. Deb Hart

Thank you, Mary. Good afternoon, everyone. Thanks for joining us on our first quarter 2021 earnings call. Our press release and the slides that accompany today’s call are posted on our website and are available at investors.maravai.com under Financial Information, Quarterly Results. On today’s call, we will cover our financial results and business highlights and we will provide updated financial guidance for 2021.

Well, thank you, Deb and good afternoon everyone. I would like to take a moment to welcome our newest group of investors who participated in the company’s recent follow-on offering which closed in April. We are very pleased to have you with us today. In addition, I would like to take this opportunity to extend my personal thanks to each and every member of the Maravai team who continue to execute at an incredibly high level, as you will shortly see. If we could start with Slide #5, as we shared in our pre-announcement, Maravai had a very strong start to 2021 with the largest and most profitable quarter in our history. Today, we formally reported $148.2 million in revenue, growing 191% compared to the prior year and up 50% sequentially over last quarter. Our record top line performance also contributed to outstanding EBITDA, earnings per share and free cash flow generation. I will walk through some of the trends we are seeing across our end markets and geographies, and then Kevin will provide you with some additional color on our first quarter results and our thoughts for the remainder of the year.

Thank you, Carl and good afternoon everyone. I am happy to review our financial results for the first quarter and to provide our revised financial guidance for the full year of 2021. Turning to Slide 9 of our presentation, as you have seen in our press release this afternoon, our record Q1 revenues of $148.2 million represented 191% reported growth from Q1 2020. Our GAAP-based net income before the amount attributable to non-controlling interests was $75.9 million for the first quarter of 2021. Moving to Slide 10, adjusted EBITDA, a non-GAAP measure, was $101.9 million for Q1 compared to $29.6 million for Q1 2020 and $64.3 million in the most recent fourth quarter of 2020. This represents a 244% increase year-over-year and a 58% sequential quarterly increase from Q4. Our EBITDA margin was 69%, up from both the 58% in Q1 2020 and the most recent 65% result in Q4 2020. The increase in adjusted EBITDA was primarily driven by overall sales volume increases and margin improvements from our Nucleic Acid Production business.

Thank you, Kevin. So to wrap up with Slide 17, we are off to an incredibly strong start in 2021 in our first full year as a public company. We feel very good about the momentum we’re seeing across all of Maravai. It is clear that this momentum is building across our entire global customer base as mRNA research and development moves to the forefront of modern medicine. We have a direct line of sight into the book of CleanCap demand for 2021, which continues to grow. And our 2022 outlook is building nicely, with additional mRNA vaccines coming to market and with the expansion of our strong existing partnerships with industry leaders in mRNA therapeutics. While we still aren’t in a position to provide guidance for 2022, we are seeing customers already booking production capacity throughout the first half of that year. And in the category of even more late breaking news, we have been on the receiving end of a number of inbound calls about the reports last week that the U.S. government is supportive of some, as yet unspecified, waiver of intellectual property rights concerning COVID-19 vaccines. The state and intent of this effort is to promote the availability of more vaccine doses globally more rapidly. Maravai is fully committed to working with all of our current and potential partners to ensure the broad global production of and widespread access to vaccines as quickly as we can. In fact, we are supplying vaccine programs based in the U.S., Europe, Japan, Thailand and China already. We would note that the availability of our mRNA capping reagents has never been a rate-limiting factor for vaccine production by any of our partners. While we don’t yet know any details about what the Biden administration is prepared to support at the World Trade Organization, our understanding is that any direct negotiations on this issue will take time and will ultimately require unanimous consensus among the 164 members of the WTO. Ambassador Tai, the U.S. Trade Representative was quoted in a statement last week as saying, those negotiations will take time. While IP waivers might have the potential to enable a more diverse set of global vaccine suppliers over a long period of time, access to IP is only one element of a complex set of requirements needed to produce mRNA-based vaccines of quality and at scale. A Pfizer spokesperson recently noted that the company’s vaccine requires 280 components from 86 suppliers in 19 different countries. Making hundreds of millions of doses of mRNA-based vaccines also demands highly specialized equipment and personnel, both of which are in short supply and complex and time-intensive technology transfers between partners and their global supply and manufacturing networks. It is absolutely critical that whoever may be producing the vaccines and those supplying the raw ingredients for them have the expertise and demonstrated capabilities to do so consistently and safely. We believe that the waivers being discussed will not meaningfully expand the supply of COVID-19 vaccines in the next 2 years. With the pandemic still raging today, particularly in the unvaccinated corners of the developing world, we believe that increased investment in the production capacity and distribution channels of the proven manufacturers of these complex biologics is the most productive step that policymakers can take. From COVID-19 vaccines to vaccines for influenza, to cell and gene therapies battling cancer, the transformative impact mRNA will have on global human health is only accelerating. And we, at Maravai, are proud of the key role that our customers, partners and employees are playing in making that happen. I would now like to turn the call back over to Mary to open the line for your questions. Mary?

Your first question comes from the line of Tejas Savant from Morgan Stanley. Your line is now open.

Hey, guys. Good morning. Carl, just one opening question for you in terms of what’s included versus what would represent upside to your revised guidance here. So, the FDA apparently just issued an EUA on proving the vaccine for 12 to 15-year-olds. Was that contemplated in your guide? I know you mentioned in the prepared remarks that these new vaccine categories, including pregnant women and pediatric vaccinations, are now imminent. So, that’s the first part. And the second part is to the extent that your customer, CureVac, their vaccine is expected to be stable at I believe it’s around 5 degrees for 3 months and BioNTech is also working on a vaccine that’s potentially stable in the 2 to 8 degree range for up to 6 months, would suggest that there is room here for adoption in emerging markets down the road. Is that something that’s contemplated in sort of your comments around ‘22 and beyond?

Well, thanks for the questions, Tejas. And let me start by saying that it’s hard to look at any specific indication or group of new vaccinees and say yes, that’s in the guidance, or no, that’s not in the guidance. We’re operating obviously at an aggregated level of demand from our big customers. But I think it’s fair to say that those big customers are highly focused on their own capacity and what their needs are to support the regulatory plans and approvals that they know they have in process. So my answer to your first part of your question is, yes, I think it’s reasonable to assume that those expansions of demand – of coverage would have been anticipated by our partners, and that’s then reflected in the orders that we get and in the way we build our guidance, as Kevin explained. And then on the second question, I absolutely believe that you will see much more use of mRNA vaccines in the developing world than we ever thought even 3 or 4 months ago. Before the first cold chain changes were approved by the FDA that seemed like a momentous hurdle among – monumental hurdle to get over. But right now, it looks like that’s becoming much more manageable. So, I would expect that you are going to see mRNA vaccines will be used in a large number of places that were not previously anticipated. As to whether that’s incorporated or not, I think it’s less likely that those changes have been fully anticipated or baked in.

Perfect. And then Carl, on the EU contract expansion commentary that you made, obviously, Ursula von der Leyen’s comments are pretty supportive of the mRNA approach and 1.8 billion doses is a lot of doses. Is that all upside starting in ‘22, or will some of that help later this year as well? And then second, there was also a comment you made around a push to source all ingredients locally. So with that in mind, I mean, is a European CleanCap expansion something that you would need to consider or do you feel pretty comfortable that Pfizer and BioNTech can continue sort of sourcing the ingredients from your current facility here in the States?

Yes. Look, on the latter question, I simply don’t know, Tejas. I think there is probably an admirable motivation by stating that, but if you look at Pfizer’s commentary that they source components from 19 different countries. It seems quite unlikely to me that there is duplicate supply of every one of those 280 components all in the EU. So as a practical matter, that maybe a little bit more difficult to handle. Now with respect to the timing, what we heard is, obviously, this is 900 and 900. So it’s a purchase obligation for 900 million doses and then an option for the EU on the additional 900 million doses. I have heard that the very first shipments under this expanded order might occur in December, which would suggest you would have some ramp in the fourth quarter of this year, but the vast majority of the demand is in 2022 and 2023.

Got it. Very clear. Helpful. And then Carl, one final one, the comments you made around the IP waiver that helps clarify a couple of inbounds we had gotten as well, but can you just sort of put a finer point on it in terms of how you expect that to play out in terms of the price per dose for CleanCap? Is it fair to assume that given that the price per dose is so small relative to the overall sort of like COGS of the vaccine and the final price point as well perhaps at least the one in the developed world, you should not see much of an impact or is that something that you might need to revisit for emerging market production?

Well, are you asking if we would not see impact because of the IP waiver proposal? Was that...

Yes, exactly, exactly.

Yes. Look, Tejas, I don’t see how those two things can possibly be linked together. If somebody suspended the IP on all the components that are being used in vaccine today, you would still have to have suppliers geared up and capable of producing that exact compound, and then you would have to go through the regulatory submissions related to changing compounds. I just don’t see that as being a terribly likely occurrence. And thus, I don’t think we would see price pressure.

Perfect. Thank you.

Alright. Thank you. Appreciate the questions.

Next question comes from the line of Matt Sykes of Goldman Sachs. Your line is now open.

Hi, thanks for taking my questions. Just my first one, just pivoting away from COVID for a minute, you actually gave some additional color on some of the other non-COVID mRNA vaccines and therapies you’re working on, flu, potentially malaria and some other indications. Can you just give a little bit more color – it sounds like some of these projects are coming back online post sort of the more strict COVID lockdowns. Could you just give us a little more color in terms of maybe disease areas or any other new programs that you’re involved with on a non-COVID basis?

Well, yes, Matt, obviously, it’s our customers who are doing all this work. We wouldn’t want to propose to take credit for that. But at the end of the day, I think that the vaccine work has been accelerated, with the most noise and the most discussion around seasonal influenza vaccine alternatives and those can be combos, multivalent, however you want to look at it. So I think that, that one is the most obvious and has had the most commentary around it. The other programs, including malaria and HIV, have been vaccine targets that have been resistant to alternate ways of doing vaccines for a long, long time. So the validation of the mRNA platform has caused a lot of experts in the field to feel that these represent valid next targets for the mRNA platform, and we do know that there are people working on those. In addition, there are a large number of, I’ll call them, lesser prevalent diseases, again similarly resistant or with perhaps hyper-variability that mRNA was being used for. These include things like Ebola, rabies, etcetera. And I think it’s – the other infectious disease vaccine targets are now in full swing, and those other programs that might have been put on hold as people concentrated on COVID are also reemerging.

Great. Thanks for that. And then just on the CapEx, I know you guys had put a lot of money into the trialing facility to get it up to, I think, a capacity of about $1 billion in sales. Are you shifting in – one, are you continuing to focus on that to prepare for the types of volumes you might see even on a longer basis or are you shifting CapEx to other areas? If so, where are you shifting your CapEx towards?

Kevin, would you like to take a shot at that?

Yes, yes. Sure, Matt. Yes. I mean right now, really, the focus has been predominantly on the completion of the San Diego-based facility for Nucleic Acid Production. Again, we had built out all of the square footage available to us. Now I think, except for about 5,000 square feet, and are making sure those lines are up and doing the size runs that we need and we have all the equipment. So that’s really as far as the recent focus in the last quarter as well as this recent first quarter. And from this point forward, I think we are going to continue to look at a lot of different things. Certainly, the biologics business continues to expand a little bit above our expectations. So we’re evaluating that. Also, as we’ve talked about, with our free cash flow, outside of the kind of M&A that Carl mentioned, the organic investment in ourselves is going to continue to be something we evaluate. So whether that’s additional facilities or additional infrastructure and additional geographies as we continue to expand, as we look forward, as we always have for several years to make sure we have the capacity to meet this growing demand, that’s something we’re turning our attention to. We have previously talked about the capacity of nearly $1 billion here in San Diego output. But if you take where we are today and you look at how we’re growing at least from a percentage perspective, even with the non-COVID-related vaccines, that’s potentially a couple of years away. So we have to stay in front of that as well, and those are all things that we’re currently looking at. But what you’ve seen in the last couple of quarters is predominantly focused on the NAP segment.

Great. Thanks for the time guys. Appreciate it.

Thank you, Matt.

Next question comes from the line of Brandon Couillard of Jefferies. Your line is now open.

Hi, thanks. Good afternoon. Carl, maybe shifting gears back over to CleanCap. Is it reasonable to think about CleanCap pricing coming down somewhat in ‘22 or would that be premature based on your conversations with your biggest customers today?

I think it would be premature.

Very clear. In terms – maybe shifting gears over to the plasmid DNA buildout, can you just give us an update? Now that you’re several months into that launch, anything tangible you can share with us in terms of number of customers to date?

Yes. I mean it’s in its early stages. We didn’t have high expectations right out of the box in terms of contribution given the rapid growth of CleanCap on its side. But it’s tracking along well, and particularly for customers who want end-to-end services to go from sort of a custom mRNA construct, all the way through to finished product, the story is resonating in the capacity that we think will be well utilized.

Very good. Thank you.

Thank you.

Next question comes from Matt Larew of William Blair. Your line is open.

Hi, good afternoon. Carl, you alluded to sort of the complexity or fragility of the global supply chain with respect to the Pfizer vaccine. Obviously, Brandon has asked about the plasmid offering. But just curious if the COVID experience as a supplier has highlighted any other bottlenecks, in particular, where you think scale and manufacturing expertise could be particularly helpful?

Well, I mean, certainly, when you think about the mRNA vaccines, right now, the biggest challenge is just the supply of enough lipids that go into the manufacturer of the lipid nanoparticle and the equipment needed to formulate this high volume of demand. So that’s certainly a consideration that I’m sure is consuming a lot of our customers’ time and efforts at this point. Beyond that, we concentrated on our own supply chain, making sure that we could source all the materials in increasing quantities as the demand grew and making sure that we have viable backup suppliers in case something happens with our primary suppliers. And I’m pleased to say that, that effort has gone well. We haven’t had any massive delays in getting components. Obviously, being a U.S.-based manufacturer and all of this stuff being under the rubric of the Defense Production Act at some level, then our ability to get the materials that we need hasn’t been in question. So we feel pretty good about how it’s set up today. That doesn’t mean that there aren’t other problems that other folks are having.

Okay. And then, I guess, Kevin, maybe you’ve touched on this a bit, but I just wanted to follow up in terms of thinking about infrastructure. You mentioned your scale into $1 billion perhaps faster than you may have thought 6 months ago. Carl, you alluded to the Fosun partnership and BioNTech expanding in Singapore. Just curious, within that context and then thinking about COVID perhaps as an endemic, if there is thought to redundancy that you’re thinking about, and other kind of global manufacturing footprint considerations?

Yes. Yes, certainly, there are. I mean certainly, redundancy is something that our customers certainly want to see and we think is also very important. So we’re evaluating that. And that can take several forms, right? It could be organic investment in additional buildings. It could be partnering or enabling someone to help us with overflow capacity as needed; long-term, either domestically or internationally. So we are constantly evaluating that. We have several different conversations ongoing. And I think that whether it be strictly organic or via partnership or getting additional capacity through M&A, those are all opportunities. And again, we’re looking at each one of them. We’re very, very sensitive to the fact that we want to continue to ensure that we are supplying all of the demand that’s out there. That’s been something we have been focused on for years now and it’s served us well. So we are going to continue to invest in ourselves and that capacity long-term.

Okay. Thanks for the time.

Thank you.

The next question comes from Derik De Bruin of Bank of America. Your line is open.

Hi, good afternoon.

Hi, Derik.

Hey, so Brandon sort of asked it, but I’m going to ask it a different way. If you look at – you’re talking about a 65% EBITDA margin in ‘21. Does that hold into ‘22? Is that a good way to sort of – to think of that initial model?

Yes. Go ahead, Carl.

Go ahead, Kevin.

Okay. I was going to say, yes. I mean certainly, to the extent the mix stays the same, I think it will continue to be around that level. I mean again, we’re not going to necessarily squeeze the P&L to force a certain margin at the extent – to sacrifice the long-term growth. I think what you’re seeing now is sort of the natural margin that the business has been generating. As I said in my remarks, we’re continuing to invest in the right areas, be it commercial marketing, be it quality, be it R&D. I think you’ll see some of that as we get into the second half of the year. And that’s going to continue to be important for us in the long-term. But the business is throwing off really high margins because of the growth that we have in Nucleic Acid Production and the infrastructure and the cost controls that we have in place. As Carl mentioned, we feel real good about pricing, where those contracts stand, feel really good about our supply chain and where the inbound stands. So given most of that is being driven by the gross margin, I think those margins right now are pretty sustainable.

Got it. And is that still assuming a $30 million or $35 million depreciation, amortization for the year?

Yes, $30 million to $35 million D&A for the year. Correct.

Got it. And given the demand, and obviously, there is the huge interest here, I mean, are you actually going to be able to take pricing up as people sort of like rush to go down this pathway of mRNA projects?

Yes. Look, I don’t think we would, in the current situation, expect to take pricing up in a systematic way, affecting a large number of people involved in these critical programs. We will look for opportunities to enhance the products to make them fit individual customers’ workflows or applications better and to the degree of those improvements, contribute added value to the customer. You could expect that they will pay for some portion of that. But systematically, no, I don’t see this as being a business where we take 3% or 4% price per year across the board. And keep in mind that we have multiyear material service agreements – or material supply agreements with some of our big customers that would preclude activities outside of the contract.

Great. And then just one final one, any incremental color on M&A, basically adjacents, new verticals, just sort of your general thoughts as you look at it, what’s the right strategy for the company or what is your current strategy for the company?

Look, it’s still the same. We’re focused on adding more capabilities to meet the needs of our existing customers that would be in each of the three verticals that we participate in right now. I can tell you we’ve been super active over the last few months in looking at some potential add-ons or significant acquisitions within those spaces. I don’t think we have anything happening short-term there, but it is a continued focus for us, and we will always try to balance the super high organic growth that we’re seeing with M&A that reflects what we’ve done in the past, which is to look for those target companies with great science in our target markets and then to be able to conclude deals. And so I think that remains unchanged.

Great. Thank you very much.

The next question comes from Dan Brennan of UBS. Your line is open.

Great. Thank you. Thanks for taking the questions. Maybe just thinking about ‘22, you kind of talked about the EU contract and Pfizer coming out and talking about 4 billion doses. Can you just remind us again like how far in advance do you typically see orders come in? And then number two, can you just you mind us your capacity? I know you talked about the supply chain, and you’ve kind of set that up and you’re prepared to ramp. But like do you currently have capacity to meet potentially 4 billion doses in ‘22 if that unfolds?

Kevin, would you like to try that?

Yes, certainly. I mean the straight question – to your second part of your question there, yes, we do have the ability to meet that capacity. Probably right now, as we look at where we’re at, we’re probably 50% to 60% capacity. So we certainly have the ability to ramp up substantially from where we’re at. And that just comes with flexing in labor and lot build sizes and those sort of things. And that comes into long-term production planning, and that’s why we work with our customers to look at their demand a year forward. I mean that’s – they have a forecast. They are sort of kind of in a collaboration with us in the MSAs. As Carl mentioned, they give us one year worth of visibility. And again, that’s for us to plan and make sure we can meet their demand. And then we use that, and they typically will place orders based on the contracts and binding POs out for a few months, if not a couple of quarters. Some of our customers provide those rolling forecasts and place a PO, going out all the way into 2022 already. Some of them want to – I guess they just really want to make sure they have their slots. So it’s a little bit different, but the requirements are a little bit in the shorter term, but again, nice visibility looking forward. Again, that’s – it’s just been a great relationship with many of these high-volume customers and working with them to make sure we meet the demand. And that’s certainly been something we’ve been able to do, and we will continue to be able to do as we look forward.

Great. And then is there any risk around a volume scale? I’m just wondering whether or not an enzymatic approach could potentially become more economical. I don’t know with volumes, maybe there are some cost savings. I am just wondering whether or not CleanCap gets more locked in or is there any risk of kind of some of the vendors looking to switch?

I think we believe that the cost of switching here, especially regulatory reregistration costs, are frankly much more significant than any differences in cost of methodologies. And as our customers are getting more experienced with their processes, they are getting greater yields and they are able to be more efficient overall. So I would think that this is not a point in time in which you’ll see somebody switch from CleanCap to enzymatic or vice versa.

And kind of to date, I guess, have you faced any challenges yourself in terms of being able to scale? Can you just walk through how things have gone according to plan? It’s been an unprecedented volume run that an mRNA seems to be just capturing more and more share given the issues we’ve seen in some other modalities. I am just wondering how you characterize your own kind of commercial scale to-date?

Yes. Well, look, I don’t want to minimize the efforts of Brian Neel and his team at TriLink, but we have not had problems in our ability to meet this growing demand. Keep in mind that in addition to purpose design, brand-new facilities, with lots and lots of space to grow, which we started with, Brian and team are focused very heavily on process improvements. And specifically, that means doing things in larger scales. So if you wind the clock back 1.5 years, a 5 gram or a 10 gram order for a CleanCap would have been a significant quantity. Today, we’re operating at scales that have us filling orders for multiple kilograms of that material. So a lot goes into it, and they all contribute, but we have been doing several things simultaneously that have allowed us to keep pace with the demand, and we still see further room for improvement opportunities.

And kind of you mentioned flu and that came up a few times, and we’ve kind of looked into that as well. And obviously, there is been a lot of discussion from some of the sponsors about using mRNA for flu. Would the pricing of CleanCap vary at all? When you think about the content of CleanCap in flu, how would we think about the opportunity set versus COVID?

I think it maybe a little bit too early to tell. If there are opportunities for us to make modifications to CleanCap that make it work better in a flu vaccine, then you might have a different basis for pricing. I don’t think it’s going to be step functions or orders of magnitude different. But there may be some added value we can deliver. And of course, it also depends on the quantity of material that you need to do. So how much mRNA do you need to use? Is this a self-amplifying construct or a straight construct? Those things are all a little bit too early to give you anything to center or to look.

And maybe final one, just on IP, is there any risk around Maravai happening to open up its own IP for COVID CleanCap? If the sponsors are being potentially forced to do that, is that something that potentially is a risk to yourselves that knockoffs could just replicate what you’ve done using your patents and just supply it at a much lower price?

Honestly, Dan, we don’t know. There is not enough specificity in the little bit of information that’s been provided about some of these initiatives. And so we stand by what I said earlier about just kind of the wrong solution to the wrong problem.

Great. Well, thank you and congrats.

Well, thanks so much. We appreciate it. And with that, I think, Deb, we will turn it back over to you.

Great. Well, thanks, everyone, for joining us today. I just wanted to tell you we will be at the Bank of America Conference this Wednesday, May 12. We will also be participating at the UBS Healthcare Conference later in the month. Both presentations will be available both live and replay on our website. Feel free to contact me if you have any questions and we look forward to staying in touch with you during the course of 2021. Thanks for your time.

Bye-bye.

That concludes today’s conference call. Thank you all for your participation. You may now disconnect.