Maravai LifeSciences Holdings, Inc.
Q1 2023 Earnings Call Transcript

Published: 8 May 2023

[Operator:]

Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Maravai LifeSciences First Quarter 2023 Earnings Conference Call. [Operator Instructions] Deb Hart, Head of Investor Relations, you may begin your conference.

[Deb Hart:]

Thank you, Rob, and good afternoon, everyone. Thanks for joining us on our first quarter 2023 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. As you can see on our agenda for today on Slide 2, Carl will first provide you with a business update, then Kevin will review our financial results and guidance. Trey Martin, President of our Biologics Safety Testing; Drew Burch, Executive Vice President, Nucleic Acid Products; and Becky Buzzeo, our Chief Commercial Officer, will join the call for the question-and-answer session following the prepared remarks. We remind you, management will make forward-looking statements and refer to GAAP and non-GAAP financial measures during today's call. It's possible that actual results could differ from management's expectations. We refer you to Slide 3 for more detail on forward-looking statements and our use of non-GAAP financial measures. Our just issued press release provides reconciliations to the most directly comparable GAAP measures. Please also refer to Maravai's SEC filings for additional information on the risks and uncertainties that may impact our operating results, performance and financial condition. Now I'll turn the call over to Carl.

[Carl Hull:]

Well, thank you, Deb, and good afternoon, everyone. We appreciate having you join us for our call today. Let me give a quick recap of the quarter and highlight some innovative new products that we are introducing and provide a few business updates before turning the call over to Kevin. Let's start with our first quarter results on Slide 5. Today, we reported $79 million in revenue for the quarter, $24 million in total adjusted EBITDA and $0.03 in adjusted fully diluted EPS for the quarter. Revenue results were within the range of expectations for the first quarter that we shared with you during our fourth quarter conference call. While our performance in the quarter was consistent with our expectations, like other players in the field, we do note that broader market factors will likely continue to impact the business into the second quarter. Kevin will go into more detail on the results and our revised guidance later in the call. Our Nucleic Acid Production business had revenue of $61 million in the first quarter. This includes an estimated $45 million of base nucleic acid production revenue. The Biologics Safety Testing revenue was $18 million in the first quarter. On Slide 6, you'll see that our adjusted free cash flow in the quarter was $23 million. Cash on hand at the end of the quarter was $628 million, down only $4 million from the year-end despite our having paid $70 million upfront in the quarter for the Alphazyme acquisition. Debt sits at $537 million gross. Thus, we maintain a $91 million net cash position. This puts us in a great position to fund our long-term strategy of growth through organic investments and our own capabilities, while we simultaneously pursue external M&A. We continue to see multiple strategic opportunities in our space where we will endeavor to responsibly deploy some of those cash. As we close out the first quarter of the year, we remain focused on

[Kevin Herde:]

Thank you, Carl, and good afternoon, everyone. I'm happy to review our financial results for the first quarter and to provide an update on the multiple facilities expansions we have in our way. Starting on Slide 19. As you've seen in our press release this afternoon, our Q1 2023 revenues were $79 million. As we stated in our Q4 2022 earnings call, we anticipated Q1 2023 revenues to be in the range of between $75 million to $80 million, and thus, our performance for the quarter was in the high end of our anticipated range and was consistent with our expectations. We present basic EPS, fully diluted EPS and adjusted fully diluted EPS. Basic EPS as net income attributable to our Class A shares divided by the weighted average Class A shares. Our fully diluted EPS equals net income prior to noncontrolling interest divided by the weighted average for both Class A and Class B and other dilutive securities to the extent they are dilutive. And adjusted fully diluted EPS equals adjusted non net income divided by the weighted average of both Class A and Class B shares and other dilutive securities. Both our basic and fully diluted EPS for the quarter were $0.00 while adjusted diluted EPS was $0.03 per share. This was also in line with our internal expectations for the quarter. Our GAAP-based net loss before the amount attributable to non-controlling interest was $1.3 million for the first quarter of 2023, reflecting the lower revenues and the impact of acquisition-related costs. Our adjusted EBITDA, a non-GAAP measure, was $24 million for Q1, resulting in an EBITDA margin of 30% in Q1 2023. Certainly, our EBITDA margin was lower than we have seen in a while as a result of the lower revenue base. However, even with our revenue base being the lowest we've seen in almost three years, our margin is still very strong when compared to most companies in our space, including much larger and mature companies. In fact, when we look at the selection of six companies that have reported here already in Q1 2023 and had adjusted EBITDA, including, in alphabetical order

[Carl Hull:]

Thanks, Kevin. So to wrap up on Slide 26, we are playing in the right target markets with strong leadership positions and exceptional opportunities for base business growth as we continue to innovate in messenger RNA and build our product portfolio in other adjacent high-value areas. We are putting our strong cash flow to work with organic investments in our facilities, human capital and product innovation. We will also continue to look for opportunities for inorganic investment to bolster our market position and provide our customers with additional solutions. We are committed to building a strong foundation for long-term sustainable growth of our base business, and we'll continue to focus on people, innovation and operational excellence as our three strategic pillars. I would now like to turn the call back over to Rob to open the line for your questions. Rob?

[Operator:]

[Operator Instructions] Your first question comes from the line of Conor McNamara from RBC Capital Markets.

[Conor McNamara:]

Thanks for taking the question. I appreciate it. And thanks for all the color on the CleanCap cost. Some of those slides are very helpful on the CleanCap cost and total production cost. Thank you for that. I've got one financial question and one kind of business question. So first on the $20 million revenue hit, Kevin, can you maybe parse out what -- where is that coming from? Because you did call out some inventory normalization in the press release and you talked about some biotech slowdown. But just which customers and kind of where that impact falls? I will stop there.

[Kevin Herde:]

Yes. Thanks, Conor. I would say we currently are seeing softness sort of in both the businesses, I would say, what we thought was going to be sort of contained more to probably the first quarter has trickled in here to the second quarter. I think now we see in our Biologics Safety Testing business, probably more in the mid-single digits growth for the year, and then the base NAP business probably more in the mid-teens. So I think you're seeing a few hundred basis points up to 500 basis points kind of coming out of both of those full years and really just reflecting kind of what we're seeing here in the current quarter being Q2 as opposed to our original expectations and the ones we shared on our last call.

[Conor McNamara:]

Got it. And then just on the GMP customers. Can you just help clarify -- I think the last time you shared that was Q3 2022, I remember the customer number was higher. So I don't know if that's just programs falling out of the clinic? Or can you just comment on how that number progresses and how we should think about that? You went from 55 to 61. I think the number was higher than that.

[Carl Hull:]

I honestly don't recall. Kevin, I don't know if you have in front of you, or Deb, anything that would give us some color there.

[Conor McNamara:]

No, I'm just curious if that's like net customers because I'm assuming you have customers that go into the clinic and customers that come out as programs maybe don't get to the next endpoint. So I was just curious if there's a way to think about kind of the progression of that. And if it's seasonal or anything like that?

[Carl Hull:]

Kevin?

[Kevin Herde:]

Yes. Look, I think the GMP mRNA CleanCap customers are 61. That is up from where we were a year ago. I think it was closer to 58 at that point in time. And then in the clinic, we have 26 that we're currently tracking. That's roughly the same number it's been for a few quarters now. And again, I don't -- just because you really haven't seen too many people move out of the preclinical phase into the clinical phase, at least in our pipeline and then obviously, not too many people exit as we still just have really one product on market. So there's not really a lot of churn in there right now. I'd say it's just sort of a slow progression of those 2 pipelines.

[Conor McNamara:]

Okay. And can I sneak one more in, I'm sorry. Just on the M6, does that expand the TAM? Does that give you more potential markets to go after that just make you a lot more competitive in the market as you call on customers?

[Carl Hull:]

Well, I think right now, we're focused on competitive share gains using M6. And we think that, that will go directly against the enzymatic capping methods. And the bottom line, the reason for that is that with an increase in yield and effectively protein production capability or equivalent amounts of mRNA, that will get everybody's attention, even if they've been long time users of enzymatic methods and of enzymes. And the original CleanCap were relatively close, but it was easy for them to stay with the enzymatic methods. I think with this and substantially improved performance, it will make them take a much more serious look at CleanCap than they might have before.

[Operator:]

And your next question comes from the line of Catherine Schulte from Baird.

[Catherine Schulte:]

I guess, first, you highlighted a couple of customer examples in terms of the ramp up sales over a four-year period, and that's clearly a meaningful driver for U.S. programs progress. But I was wondering for guidance for this year, if we look at your base NAP guidance, is there a way to think about how much of that is being driven by new program starts versus programs you're already involved in that are ramping up?

[Carl Hull:]

Well, Catherine, it's a good question. I think Kevin can comment on his view and I'll fill in afterwards.

[Kevin Herde:]

Yes. Thanks, Catherine. I would say that at this stage, most of what we're seeing is really the progression, I'd say, of the existing customer base, and that really goes to our strategy of really locking in the base technology as early as we can and then growing with these customers, both from a pace perspective as well as a shared-wallet perspective, as well as the migration from RUO to GMP level products, and that's really our focus. So embedded in our guidance is really that existing customer base. It does not incorporate picking up really meaningful additional customers that haven't been part of our customer family thus far.

[Carl Hull:]

Yes. And I would just simply add, Catherine, that given the size of orders from customers in their initial year or two as they go through the discovery process, those are relatively less significant to us than the growth of those programs as they grow with us down the road. And that you can see in both of those customer examples.

[Catherine Schulte:]

Yes. Okay, got it. And then on EBITDA margin, if you're expecting to reach about 39% for the full year at the midpoint of the guide, should we anticipate exiting the year more like in the mid-40s, if we think about the back half ramp? And is that a way to -- a fair way to think about the starting point for '24?

[Kevin Herde:]

Yes. Certainly, that is what the guidance would imply. We would be back up in that 40% to 50% level here in particular -- potentially at the higher end just given the assumption of the additional COVID revenues in the fourth quarter. Frankly, from where we are sitting, it's really a revenue contribution kind of over our assembled workforce and facility infrastructure. You'll see here even in a low quarter. I think we had 30% margin, which is slightly above our peer average as I went into some detail. But the nice thing about what we have here is certainly we have a great control of our cost, really well-defined inputs and facilities that will enable us to rapidly expand that margin as the revenue base increases. So that's really going to be a function of what that revenue number is when we go into 2024. And as we model our business long term, certainly, that margin expansion is a big part of that modeling exercise.

[Operator:]

And your next question comes from the line of Matt Sykes from Goldman Sachs.

[Matt Sykes:]

Maybe if I could just kind of dig into one of the previous questions just about the softness that you're seeing into Q2. Just -- there's obviously a couple -- a number of headwinds, whether it's emerging biotech spend or inventory overhang. Would just love to get a little bit of additional color if it's one or the other or both, just so we can help kind of frame our modeling given that both of these probably have a finite and we just want to make sure that we're understanding the dynamics of that softness and the sort of duration of it?

[Carl Hull:]

Matt, I really don't think we've got anything to add to the eight or 10 guys that have already reported this quarter. I think our experience is the same. There are slight differences in different parts of the business. So you might have had some -- you definitely have some inventory build on the COVID side of the business, which everybody knows, has reflected, who's been involved in the vaccine production. And then other places, you might see more softness related to CDMO growth rates or the China recovery. So all of those things are part of it. I can't call out one more than the other that's significant. Kevin, I don't know if you want to take a shot at that?

[Kevin Herde:]

No, I think that's spot on Carl. I think we're seeing a multitude of factors. It's very hard to parse out the individual contributors each. But at this stage, I think we certainly see at least some of the China impact and the inventory burn off as being temporal. And obviously, I'm rolling off here in the first half based on our guidance. From then, it's going to come down to the -- certainly, the underlying demand from the existing customers. And as we continue to look at the customer base and how that's growing, the number of programs and how that's growing, as well as additional products that we have and capabilities, I think we feel good about our ability to build once those headwinds kind of subside going into the second half and into '24.

[Matt Sykes:]

Got it. I appreciate it. And then just my next question is just if you look at the Flanders build out, Phase 1 complete. And then we complete the other one in the second quarter, I know in the past that there's been some customers who have not been able to transition to GMP or you've not been able to transition with them. . In terms of closing that gap and being able to solve for GMP production for what you're doing in RUO, do you feel that once we get through sort of the fully complete Flanders facility, that you'll have alleviated a lot of those issues that you might have had in the past with some of those customers?

[Carl Hull:]

Well, why don't we ask Becky Buzzeo to comment on that from her dual roles both on the services side of the business as well as the commercial side. Becky?

[Becky Buzzeo:]

Thanks, Carl. Yes. So our facility today, we do both the RUO and the Phase 1 manufacturing of the mRNA. And we do believe with the addition of our Flanders 2 facility that we'll be able to meet customer needs who want to go beyond Phase 1. That is the intent of our Flanders 2 building is to go into late-stage manufacturing and have the ability to really transfer those clients over, very easily. And it's only a couple of miles up the road here, and have a strong MSA team to do that tech transfer and then be able to follow the journey of that molecule into late-stage manufacturing.

[Operator:]

And your next question comes from the line of Dan Leonard from Credit Suisse.

[Dan Leonard:]

So my first question, the decremental EBITDA margins on the $20 million reduction in your revenue forecast are pretty steep. It suggests that the change in sales forecast is fully dropping through. Can you clarify whether that's accurate and that you're not taking any countermeasures in response to the change in sales forecast? Or are there other moving parts to consider?

[Kevin Herde:]

Yes. Thanks, Dan. I think specifically, the midpoint of the revenue decline was about $20 million, I believe, the midpoint of the adjusted EBITDA guidance is about $15 million. So it's about 75% of that dropping through. And really, that just goes to some of the things I mentioned previously. We have a very high variable contribution margin. That's great when things go up. It's a little more painful as things go down, but that's just sort of the nature of what we have here. We don't have a lot of variable costs sort of below the gross margin line. And from our perspective, a lot of what we're investing in is really for the future, and we're going to continue to do so. So if you look at our investments in innovation, a lot of which you saw some of the fruits of which were here with M6. Additionally, the commercial build-out, which is incredibly important to us, as far as driving and seeking and realizing that long-term growth rate by making sure we get all the customers we can, globally adopting CleanCap and using our products and services as a commitment and investment we're committed to. And then lastly, to finish up of the facilities footprint. Again, something we started a couple of years ago, and we think is critical to our strategy as we move forward. So as you see the revenue line move, you're going to see a high proportion of that impact our adjusted EBITDA just because of the lack of below-the-line variable costs.

[Dan Leonard:]

I appreciate that. And then my follow-up question, Kevin, is on the phasing of the year on both revenue and margins. Did I hear correctly that the COVID CleanCap expectation for Q4 is around $75 million? And if that's the case, what are the implications for margin phasing throughout the year?

[Kevin Herde:]

That is not what we said, I do not believe. No, what we said was we anticipate about another $10 million or so of COVID-related CleanCap contributions here in the second quarter. We also mentioned that between what is shipped and what is committed, we have about 65% of our $100 million guidance in the book. And then the remainder, which would imply roughly $35 million, would likely be in the fourth quarter?

[Dan Leonard:]

So I was taking the $100 million and minusing $15 million in Q1, and the expectation of $10 million in Q2. So $75 million remainder, plugging that into Q4, is that not what you were seeing?

[Carl Hull:]

In the back half. It would be in the back half.

[Kevin Herde:]

Yes, it would be in the back half. I would say that some of that committed 65% is shipping in the third quarter as well. I was more referring to the delta between the $65 million and roughly in the $100 million, which we would then be anticipating that would spike up in the fourth quarter part of the year.

[Operator:]

Your next question comes from the line of Dan Arias from Stifel.

[Dan Arias:]

Thanks for the questions. Carl, I appreciate the update on the number of customers that you now have in the mix here. Is there anything you can say about that increase if we just separate out the non-COVID accounts or maybe even the vaccine accounts entirely? Just trying to get a sense for the way in which things are tracking in some of these emerging areas that are obviously a big focus for people.

[Carl Hull:]

Well, the only thing I would say is that we're obviously not seeing new COVID accounts, that's for sure. But we are seeing continued activity from the existing players that we've been servicing at various stages along the way. So obviously, the biggest is the Pfizer-BioNTech program, but there are a number of others beneath that. It's hard in many cases, though, for us to truly separate what is the therapeutic application versus a vaccine application. So we've spent most -- and the reason for that is the same company is doing both, right? All you have to do is look at the pipeline. So guys like the BioNTech, CureVac, Pfizer, others, you'll see that they are trying to leverage platform technology across multiple different shots and goal. So it is hard for us to know with certainty there. We've spent a lot of time assessing those that are doing just COVID, and we think we've got a good feeling for that, but there's still some imprecision in those numbers.

[Dan Arias:]

Okay, okay. And then maybe on safety testing, Biologics Safety Testing. Kevin, you mentioned expecting some normalization in China in the back half. Does that mean that we should think about sort of steady acceleration for BST across the quarters? Or is it better to think of some back-end loading in order to get to that, I believe, is a mid-single digit number that you talked to for the year?

[Carl Hull:]

Why don't you ask Trey -- Kevin, why don't we ask Trey to comment on the commercial side, then you can back it up with the numbers.

[Trey Martin:]

Yes, sure. Thanks, Carl. We are -- as so many others have been seeing softness generally across the geos. We've reported the China softness that really started in the second half of '22. But we are getting some encouraging signs from customers industry here that we'll see a climb out of that. So in our mind, it's definitely not a matter of if but when, and we're optimistic for recovery back to what we would consider to be the expected market growth rates in the second half, which averages out to the mid-single digits that Kevin called out.

[Carl Hull:]

Kevin, anything to add there?

[Kevin Herde:]

No, I agree. I think Trey summed it up perfectly.

[Operator:]

And your next question comes from the line of John Sourbeer from UBS.

[John Sourbeer:]

I guess it's on the base nucleic acid segment. I was wondering just if you could break down even a little bit more there on what percentage of those customers are pre-revenue biotech. And is that really where you've seen the slowness? Or has it been more broad-based within that, for the updated guidance?

[Carl Hull:]

Yes, John, I would say that as we commented, I think there's a couple of times in the past, we don't see any of the pre-revenue biotech customers just completely shutting down programs and running away. They have, in some cases, reduced the number of programs that they're going after or reprioritized those focus on -- focus their resources on fewer numbers of programs to manage the internal phase. But it's not like we're seeing pre-revenue biotech companies just shut down a runaway from mRNA, if that's been their focus.

[John Sourbeer:]

Got it. And have you quantified what percentage of revenues that would be?

[Carl Hull:]

We have a couple of cuts at it. As you might imagine, we have to do not only our own work on our book with some primary research. I would say the numbers I have seen to date are a little bit immature. And I actually wanted to hold off to give you a little bit better and more comfortable insights into the next quarter. So we think we'll have something for you by that.

[John Sourbeer:]

Great. And then just one last one here. You mentioned a couple of times, I think, in the prepared remarks, looking to do something inorganic. Any -- just additional color on where you think there's opportunities to fill in, should be something similar kind of to some of the tuck-in deals that you've done over the last year?

[Carl Hull:]

Yes. Look, I mean, we're super happy with the Alphazyme team and delighted to have them as part of the organization. I think that fits the historical model of Maravai exceptionally well. I think we will continue to look for those gems when we can find them. And then we're trying to be a little bit more creative when there may not be a number of assets currently on the market or at prices that we would consider to be reasonable to look at deals that might be slightly more complex. It can involve the carve-out of businesses of other companies and/or unique structures that control some businesses in for us. So I think you may see a little bit more creativeness in deals. Hopefully, they'll be a little bit larger in size in terms of immediate revenue contribution, but Alphazyme still remains in sample of our sweet spot.

[Operator:]

And your next question comes from the line of Tejas Savant from Morgan Stanley. .

[Tejas Savant:]

Carl, Kevin, I want to go back to an earlier question right on the top of the call, actually, around those GMP customers within NAP. So I think the question is basically that in 3Q, you had about 68 of them. Today, you've shown 61. So perhaps, can you just bridge us the number of customers you have today versus last fall? It's an important metric for a lot of investors in light of the loss of business you've highlighted earlier not having GMP ahead of Flanders. So just any context, color or bridge you could provide would be helpful. .

[Carl Hull:]

As I said Tejas, I don't have the numbers in front of me, so I can't.

[Tejas Savant:]

Got it. Okay. Then perhaps on biologics safety testing, you highlighted this -- the international conference and harmonization guideline change. Over what timeframe do you that to be meaningful for your business if all goes to plan? And on the other side of that, I mean, as we think about sort of this guideline update, how disruptive could it be for customers who are already using sort of alternatives? Or is that sort of not really a consideration?

[Carl Hull:]

Well, look, I think that it can be very disruptive mainly because of the costs and risks associated with late-stage viral clearance testing the way it's currently practiced. So you bet everything on your final test of that. And at the end of the day, it could fail a test, then you have to get back to development of your processes in such a way that it remediates problems that you saw going to go around looking at months, if not years, to a development program. So we think that the availability of the product, coupled with the discussion about the guideline changes comes really at a perfect time. And even if customers are not immediately incented to change their historical gold standard final clearance testing, they should certainly be very interested in utilizing the kit along the way as a surrogate marker for whether they might have a product at the end of the road.

[Tejas Savant:]

Got it. That's helpful. And then last one for me, Carl. I know you mentioned you want to hold off until the next quarter on your SMID-Cap biotech exposure. But just anecdotally, as you talk to your salespeople, any color you can share on -- for how many of these, your existing customer base, is raising money here in the next 12 months or so, something that's front and center on their radars? I know you've talked in the past that a lot of these customers raised a lot of money during the pandemic given the excitement around mRNA. But just any updates around those conversations would be helpful.

[Carl Hull:]

So we have certainly not seen new money come in, Tejas, if you're looking at it from that perspective because of the obvious factors, that thinking, way out over the last 18 months. So I think the demand that we're seeing here is from pre-established companies who raised a significant amount of capital during that period of time we talked about. Are they husbanding that capital a lot more than they were? Probably yes. And are they less certain about their ability to get another round? That would be certainly yes. So I think that it's a mix, but we were fortunate there was a very wide open window. And that's sort of like 2020, 2021 timeframe, and that's still sustaining us. Others may have a little bit of different exposure. And particularly as you're thinking about biologics for small molecules, that trajectory appears to be different than the cell and gene therapy world. Okay. Rob, I think that's about it in terms of our timing today. So perhaps if you'd like to turn the call over to Deb?

[Operator:]

Certainly, I will now turn the call over to Deb Hart for some final closing remarks.

[Deb Hart:]

We just wanted to thank you all for joining us today and taking time out of your day. Feel free to contact me with any additional questions and apologies to anybody that was still in the queue that we didn't have time to get to. Thank you very much. Have a nice evening.

[Operator:]

This concludes today's conference call. Thank you for your participation. You may now disconnect.