We're really excited to have Maravai LifeSciences presenting today, and representing the company, we have CEO Carl Hull and CFO Kevin Herde. Kevin, Carl, welcome.
Thank you, Tom. Good to be here.
Great. I think, Carl, you're gonna walk us through some summary slides to start so we can start with that, and then we'll get into some Q&A.
Well, I may be able to do that, or I may not, because I can't see what the slides are. This could be an interesting presentation. Bottom line, what you see here is that, Maravai is a life sciences reagents company providing tools to the industry for a variety of applications. Our business is characterized by incredible growth over the last two years, driven by COVID. You'll see the numbers here for our first half performance in 2022. The growth rate has continued, but I think what characterizes the business is really the incredible profitability of our business. Those are EBITDA margins, not standard margins that you can see. In addition, we do this in a very employee-light environment with something like 550 employees supporting the revenue numbers that you see there on the screen.
We feel pretty good about the business. Recent performance has been outstanding, and we're super excited about the prospects for the future. The next slide that I can't see, but Deb is helping me out here, just shows you how we're positioned in the industry as a provider of tools to other players in the industry. Most of our effort is not devoted to selling to researchers, which is the more traditional life sciences company, but really selling to other companies who are then incorporating our products into their own products. Our customers, and really it's a blue-chip roster of customers, we have over 90% of the top 20 R&D spenders in big pharma as customers of Maravai, and they are growing rapidly, individually.
We've been making significant investments that Kevin will tell you about here in just a second, that have supported our ability to generate this kind of growth and this kind of margin. The management team at Maravai, we're well experienced in the industry, and we've recently strengthened the team by bringing in some additional resources on both the commercial and R&D side. We sell across the continuum from discovery and research that's being done in a biopharma company all the way through commercialization. A particular example would be our CleanCap product for capping messenger RNA that's used by Pfizer and BioNTech in all of the COVID vaccines. We sell that CleanCap product all the way through to commercialization.
We also offer manufacturing services for messenger RNA and plasmid DNA, which are important constituents of both vaccines as well as RNA therapeutics. Two lines of business. The first I just described is nucleic acid production, and then the second is biologics safety testing. Here we provide analytical tools that assess, from a quality control perspective, the purity of biologics. Basically, monoclonal antibodies during production, we're able to assay whether there are any contaminants from the actual production process itself, which is a critically important part of the safety profile of a drug. Kevin, maybe you'll talk a little bit about our investment in facilities and what we're up to.
Yeah. Thanks, Carl. So as Carl mentioned, one of the nice parts about our business is the free cash flow that we generate, which enables us to continue to invest organically in our infrastructure, which is incredibly important to be able to have the quality, the capabilities, and really the automation to meet the demands of our customers at a very high level. We've been able to do that very successfully. In San Diego, we moved into our what we call our Water Ridge facility, which is our primary mRNA manufacturing facility at the end of 2019. That was certainly very opportunistic with the COVID opportunity following shortly thereafter. We then further expanded that facility over the course of 2020 and the first part of 2021.
We are now adding a second facility in San Diego to do additional manufacturing for innovative oligonucleotides and chemistry. That'll be complete with the phase I around the end of this year, going live in the first quarter, and then we have a phase II of that following shortly thereafter. We're also adding a third facility in San Diego to house some additional warehouse and G&A headcount needs. For our biologics safety testing business, we're basically doubling the square footage of that opportunity, moving it a little closer to the Wilmington area. This is gonna enable us to continue the growth we've been seeing historically in that business, as well as increase our service offering, which is a fast-growing part of that segment. Carl touched on this briefly.
I'd just call out a couple of other things here. Certainly, EBITDA growth and revenue growth continue to be strong. I touched a little bit on free cash flow, which was close to $360 million for the six-month period. One of the key focuses for us and for investors is our non-COVID growth, and you'll see in the blue bar on the lower part of this slide that business for nucleic acid production, which is the acronym NAP, grew 41% in the first half of the year. That follows two consecutive years of greater than 40% growth in that nucleic acid business ex-COVID. Let's move to the next slide. Very strong balance sheet in a net cash position.
Adjusted free cash flows of $175 million in the last quarter, again, gives us great optionality with regards to continued organic investment, as well as our history of successful M&A. Our last acquisition was earlier this year with the acquisition of MyChem, which put a really strong high-quality operation for oligonucleotides into our umbrella. We continue to hunt and then look to bring more deals across the finish line using this strong balance sheet, to ideally bring in this type of companies that we've brought in historically. High science, generally founder-based, unique assets, generally on the lower end of the M&A scale, typically $500 million or less is kind of our target range at this point in time.
That's all.
All right.
Back to you.
Great. Well, that was a very helpful overview, Carl and Kevin. Thanks for that. I wanted to start a little bit on the COVID outlook. You know, obviously coming out of the quarter, you had talked about, you know, we're moving into a new phase of COVID demand. We're kind of moving off peak demand. We're not quite in that endemic run rate, and that can make forecasting, you know, 12 months, six months, a little challenging. Can you walk us through, sort of what's embedded in the COVID CleanCap outlook for the back half, and then we can get to 2023, kinda after that?
Yeah. Look, we spent some time with outside consultants trying to address the drivers of demand for the vaccine itself, because we couldn't just look at our products and try and figure them out in isolation. We had to understand the end application of the actual vaccine dosages. There still are a lot of different opinions that are out there. The view that we have formulated says that 2022, as you said, is a year of peak demand and peak production. We anticipate that about 5 billion doses of messenger RNA COVID vaccines have been made this year. With that as a basis, we expect that the next year will look something more like 2 billion doses.
If you look at others in the industry who are reacting to the same trends that we're seeing and that our customers are experiencing, they range anywhere from sort of, you know, 55%-60% decline to 75% on the most extreme. Just gonna depend on what products and what services you're providing. Since our CleanCap is in every dose, every molecule of mRNA that's made, we go into every vaccine dose, but we also, there's a significant amount of wastage in the manufacturing and distribution process. For us, we're part of that too, which is actually paradoxically a good thing.
Got it. That's helpful. You know, after the call, we had news of Pfizer and BioNTech receiving approval here in the States for an updated bivalent vaccine. I think there was a positive CHMP opinion issued yesterday, and the E.U. will have to wait and see what the ultimate decision is there. Any kind of change in the outlook that's embedded with a bivalent vaccine? Is there any kind of differences we should think about from a Maravai revenue perspective and just kind of an overview there?
It's a great question. We really don't see that. The way I think about it now is our customers in Pfizer and BioNTech and other vaccine programs have established their capacity and their manufacturing for X, whatever X may be, across the line. When they substitute in, let's say, the bivalent formulation, it simply takes away from X. X would be the original vaccine that will taper, and then the bivalent will come in, but the overall level of demand remains roughly the same, give or take.
That's helpful. Any thoughts on sort of what vaccine demand looks like, what your customer demand looks like in terms of moving from government purchasing orders into private markets?
Yeah.
A little bit more of a U.S. dynamic, but broadly, your thoughts there.
Yeah. Look, I think that the source of reimbursement or coverage for the vaccines will probably not do a lot to the end demand. If you're inclined to get a vaccine, whether you have a copay or not is sort of incidental. You're gonna go ahead and get it. If you don't want, if you don't wanna get vaccinated and somebody tells you it would cost you $20, that gives you a reason not to get vaccinated.
Right.
I don't really think it has much of an overall impact on us.
Got it. That's helpful. Any latest on mRNA in China? Just sort of the vaccine outlook there and how you think the government might approach COVID going forward?
Look, that's been a confusing situation, I think, to a lot of people. At the end of the day, the Chinese government has gotten themselves into a situation where they've administered a very thorough vaccine program across the country, but they've done so with vaccines that turned out to be less effective than the alternatives, particularly mRNA vaccines. I think having done that, there were some initial hiccups in the relationship with BioNTech and Fosun, their local partner. I do think Fosun had a couple of missteps with a contract manufacturer that they were using, and that contributed to some initial delays. It seems like the government has just gotten a little bit more entrenched that, no, we need a Chinese solution here, and they're not willing to take a foreign alternative.
They are aggressively developing their own mRNA vaccines. A couple of programs are underway. One of them may be in phase III now. It seems, reading the tea leaves, more likely than not, that the Chinese mRNA vaccine may be the one that gets approved. It'll certainly get approved first before BioNTech.
Sure. That's helpful. Okay, let's move kinda to the base business. You touched on the growth. I think it was 27% base NAP growth last quarter, 41% year to date. Can you just speak to kinda the dynamics in the base business and what's the right way to think about medium-term growth for that base NAP business?
Yeah, I'll start with that. Yeah, it's been a really nice, consistent performance by the nucleic acid business at ex COVID, and I think it's a few different things there. One is you're continuing to see strong interest just in mRNA as a platform. Generally, the amount of funding that you're seeing going into the space over the last couple of years hasn't slowed down. And, you know, when you look at our customer list, we have 18 of the top 20 biopharma R&D spend budgets as customers of ours. We've seen sequential increases in the users of CleanCap, the users of our mRNA services, and the number of programs advancing in the clinic for every quarter since we started tracking those metrics over the last few years. Very strong continued momentum.
It just goes to the strength of our capabilities, the strength of our quality, the tight customer relationships we have there. When we look at the broader market, you know, we continue to see solid tailwinds there too. Like, we see the mRNA CDMO type business growing 30%-35%. You know, the underlying demand for key raw materials may be slightly below that when you incorporate all of those in chemistry and some other things. You know, very strong market growth, and we're certainly well-positioned with our capabilities from an infrastructure and a human capital perspective to take advantage of those market trends and/or, as we've seen over the past 2.5 years, exceed them.
Great. Any change in behavior from cell and gene therapy customers, obviously funding concerns, I think, becoming more top of mind, and maybe just speak to that customer mix within that base business.
Yeah. Look, I think that a number of companies have been exposed to recent downturns and the recent concerns of people about their ability to raise cash and thus conserve it in the meantime. In our case, we really have not seen that as a primary factor. We believe that a lot of that is due to the fact that mRNA investments began to be made very aggressively in 2020 at the time the pandemic broke out. There were a lot of money was taken down by the individual companies at that point. To the degree that there is any effect at all on our business, let's say we had a customer as a mid-range biopharma customer, and they had five different mRNA programs they were trying to progress at the early stage.
They may be prioritizing three or four of those now as opposed to going after all five. That may be part of the cash conservation mentality, but we are not seeing people wholesale cancel programs, nor are we seeing customers who start working on mRNA stop working on mRNA.
Got it. That's helpful. At the R&D day you hosted earlier this year, you talked about, you know, mRNA vaccine programs and therapeutics kind of moving beyond COVID.
Mm-hmm.
We spoke to that, but I think the first place people go is flu.
Sure.
you know, what other areas should we be thinking about here? What are you seeing from customers, and what gets you excited?
Yeah, I think just the previous presentation with Novavax showed somebody who's going after both combo COVID as well as flu. Other people are pursuing standalone flu. Part of that's just gonna be strategic. Are you gonna get clearance on flu first before flu and COVID? Both of those things will happen. A little bit broader than that is the notion of a pan-respiratory virus vaccine that could have three or four targets. The most likely additional target to that is RSV, respiratory syncytial virus, and then some of the human pneumoviruses are likely candidates. So you'll see multiplex respiratory viruses. Other infectious diseases include some of the ones that are burdens in other parts of the world, more than they are here. These include tropical diseases like Zika, Chikungunya, others.
There has been some work done on malaria that's been famously very difficult for vaccine development programs, but it's a potential application. The other two things that are the broad field, and this is where I think some of the real excitement and pizzazz comes in, are the use of mRNA in immuno-oncology therapeutics, specifically vaccines that are either patient specific or allogeneic for a particular type of cancer. The use of mRNA to produce those epitopes that then the body is trained to raise an immune defense against. Super exciting application, a number of companies doing that. We see other work being done broadly in CAR T therapy and other gene therapies that utilize not only mRNA or other RNA like a guide strand RNA in gene editing.
They also utilize products in our biologics safety testing business because just as you're making these individualized therapies or cell and gene therapies broadly, you have to do the same kind of safety testing that's being done for biologics. We get both ends of that deal.
Great. I wanna get into capacity expansion a little bit. You touched on it in the presentation, but before we get there, last quarter you had a GMP order, a customer that was looking for a GMP grade order that ended up being canceled. So first, have you seen any other cancellations as customers kind of potentially pull GMP kind of earlier into their process? Just an update on the Flanders facility in terms of what you think that could bring to the customer set, timing, expectations, et cetera?
Sure. I'll take the commercial piece, and then Kevin will talk about the facilities. No, that was a one-time order consideration, and it was a unique set of circumstances. What we were doing is selling an intermediate product that's used in the manufacture of mRNA, and it was a rather large order. That customer had wanted to do it with us under an RUO basis, which we were set up to do. They then partnered with a large pharma company on this program and brought them into the picture. The large pharma company had a different idea about what they wanted to do, and they wanted to use GMP material from the get-go. As a result, our Flanders facility not yet up and operational, and we couldn't offer that particular product under those particular GMP conditions. That's a one-off thing.
You know, this business can be spiky like that, and so we have to accustom ourselves to, you know, moves between quarters or sometimes frank cancellations.
Yeah, I think the expansion into Flanders is going to enable us to do a little bit of segregation, certainly have some site redundancy, but also, as Carl alluded to, really establish the process infrastructure for GMP conditions to manufacture APIs to take our customers, you know, farther along the journey towards commercialization, which is a key point of our commercial strategy. You know, as we look at the business, it's sort of evolving into sort of three sub-segments in nucleic acid production. We really have the kind of small molecule manufacturing, CleanCap, and other potential small molecules or applications. We have the mRNA services business or as a CDMO, as we work with our customers develop their highly modified constructs.
We sort of have the oligo and products kind of side of it, which is kind of an ongoing nice component of that business as well, including our Glen Research business that we have. We kinda see those three sub-segments. They're all kind of evolving differently, and we're setting up our facility footprint to kind of support them all individually with strong strategies.
Can you talk a little bit about the DoD agreement at TriLink and what kind of validation you think that provides for the platform more broadly?
Yeah. It's been a great experience for the team working with the DoD, getting the BARDA grant that's gonna offset roughly half of our costs for the first rollout of Flanders, which is basically an $80 million investment, of which about $39 million will be, you know, subsidized by that grant, half of it this year, half in the early part of next year. We have a good relationship with them.
I think working with them, understanding their lens, how they look at things, and being on their radar for future potential investments, as we continue to expand, you know, our capabilities to address both mRNA technologies, you know, as well as pandemic response, as well as, you know, a lot of the investment that we're seeing that we believe will continue to come, very consistent with some of the current administration's comments about investing in what we need for healthcare for this country. We think mRNA is gonna be a great tool for a lot of those things, particularly in the oncology space.
Yeah, we certainly see the government being well-focused and very clear about what their priorities are. Onshoring, while that is one big part of it, it's also one part of securing the supply chain and making sure that we are prepared for the future. I think that's a good position for the government to take here.
Yeah, that's really helpful. We started the conversation sort of talking about COVID and how that might impact forecasting and visibility. You know, how does that impact how you think about, you know, the next capacity expansion? What are your thoughts around sort of where you're gonna sit going into 2023 on capacity? How do you evaluate kind of further capacity needs? And do you have any updated thoughts on sort of capacity outside of the U.S. and, you know, any international sort of facilities you might be looking at?
Yeah, it's interesting, you know. As we sit here today, we are in a much stronger place than we were two years ago, certainly three years ago. When you look at the number of customers, when you look at the number of programs we're involved in, you look at the capabilities, the balance sheet, you know, the financial profile, et cetera. You know, I think that the contribution from COVID and the validation of the technology and certainly the financial impact has been great. I think it's pulled forward a lot of interest in the space and has certainly proven to be very safe and effective as a platform. That, you know, that's been very helpful.
I think it's a little bit maybe a little over overstated as far as the negative impact of it rolling off, 'cause we've always been laser focused on the core business, the long game here, and putting together the assets we need to really be a fully integrated supporter of mRNA and all of our customers' interests in this space. That continues to inform our decisions for investment.
You know, whether or not that wherever this COVID contribution goes, is one separate thing, but it hasn't distracted us from making sure we're putting together the infrastructure, making the investments, you know, for the long-term game here, which we believe is incredibly important, not only from a capacity perspective, which with Flanders and our existing building will enable close to $2 billion of overall capacity for nucleic acid production, and which is highly automated, but also gives us adaptability and gives us the opportunity to continue to stay ahead of where we think the market's going from a quality perspective as well, which is really important.
Yeah. To build on Kevin's point about the long game here, we just this morning announced the availability and launch of a new product, which is a component product used in messenger RNA called N1-methylpseudouridine, which is a key building block of all of the modified mRNA products that are out there today. The first time we made that product goes back 22 years ago to the time that Drew Weissman and Katalin Karikó, who were at the University of Pennsylvania then, were inventing the mRNA technology that's being used today across the market. They came to us to actually manufacture those compounds and the first mRNA constructs using those compounds.
You do have to take that very long view that you don't know today that this will turn into something, but you're prepared to support the science behind it.
Well, Carl, you stole the question from me.
Sorry.
I think it was my next one. You know, it's
I can read up to that point.
It is helpful, yeah. No, that's great. With the time we have left, maybe let's get some in on biologics safety testing.
Sure.
Let's think maybe near term first. You know, saw some softness in China. I don't think that's, you know, specific to Maravai necessarily, but can you just kinda give us an update on where we're at? You know, in the middle of the quarter and where we are on activity levels in China.
Yeah. For us, biologics safety testing has been sort of a three-legged stool, if you think about it. The three major sites that are doing that manufacturing are the U.S., the E.U., and China specifically. In the U.S. and E.U., we are direct in those markets through. In China, we've had an excellent distribution partner for a number of years now. At the end of the day, the shutdowns that have occurred on an episodic basis sometimes affect biologics manufacturing centers in China and sometimes miss them. When they happen to hit them, then there's a real problem with access for the employees to the manufacturing sites and their ability to consume products. That's led to a very choppy performance that was otherwise a little bit more steady pre-COVID from the Chinese market.
We see those things again as being episodic quarter, type things that you get through. Certainly, our distribution partner there has indicated that they've seen a broader recovery, within the last six months compared to, say, a year ago.
Great. With some of that lumpiness in mind, maybe again, how do we think about medium-term growth in biologics safety testing? What kind of drivers should we think about here from an overall market standpoint?
Yeah. We've been able to outpace the market there. I think, you know, with our breadth of our offering, introducing new services, being able and introducing things that are not just HCP test kits, but are addressing other contaminants such as endonuclease, Protein A, things of that nature. We've been able to grow that business last few years close to 20%. The market's about 13%-15%. You know, as we look at it going forward, I think we'll likely see us closer to that mid-teen growth, upsides to that gonna continue to be our service offering.
We do see more and more people using our services and the channel growth we're getting from the traditional CMOs has been much stronger than the market growth as well, and that's been a nice trend for us 'cause they tend to use sort of the gold standard type of kits and services, which is great. In addition to the base business, you know, we just had our first commercial sale of our MockV kit. You know, that'll be generating a new market for predictive viral clearance testing. That'll probably be a little bit of slow growth initially, but we're seeding that market right now and are excited about the potential for that to start to contribute meaningfully in the next few years.
I think two new product launches expected on the biologics safety testing side, roughly around 2Q, 3Q, if I remember correctly, right?
That's right.
Right. Okay, with the final couple of minutes, maybe let's turn to M&A in the portfolio. Think about, you know, since the IPO, you've added MyChem, you have divested the protein detection business. If you sit here today, how optimized do you think the portfolio is, and, you know, where might you be looking to add?
Yeah. I think for us, I think the focus is really nucleic acid production. We love the biologics safety testing business, just not a lot of sort of free floating assets out there that are available, mostly are hyped up into larger companies. You know, I think we continue to look around that space, but really the nucleic acid area is our focus. For us, we're looking within our kind of ecosphere. Whether it be partners, whether it be supply chain, or whether it be within the founder type companies that we've stayed really close to over the years, that continues to be a really good place for us to hunt for M&A. You know, I think we're seeing reasonable a little more reasonable expectations from a valuation perspective.
People are still kind of clinging on and sliding down the curtain on probably what they heard a year ago from their investment bankers. You know, we're in the final stages of some negotiations. You never know how those are gonna go, but you know, I think we're hopeful that we'll be able to bring an additional asset across the finish line here this year.
Great. Maybe just to wrap, you know, broadly speaking, can you just speak to, you know, the resiliency of the portfolio? You know, how you think, Maravai can hold up in a potentially lower global growth environment?
Well, certainly, we find it to be very resilient, based on the mix of businesses that we're in, based on the investments that are being made by our customers, in the development of technology in their space. It's an example of right place, right time. I think in some cases, this is where you get into how do you anticipate growth and how do you manage for growth. The one issue that we always are sensitive to is that once you make a decision that I wanna enter into an area or I wanna add capacity, in our industry, it can be a two- or three-year lead time item. You do have to be anticipating what the future trends are gonna be, and you also have to be willing to take measured and calculated risks in doing that.
We think with the combination of those two things, right place, right time, and the appropriate risk tolerance, that the prospects are very good and sort of avoid the choppiness or the real downdrafts that you can see in an economic recession.
Great. Well, I think we're right at time. Carl and Kevin, thanks so much for joining us, and enjoy the rest of the conference.
Thank you, Tom.