Maravai LifeSciences Holdings Inc (MRVI) 2022 Q2 法說會逐字稿

Greetings, and welcome to Maravai LifeSciences Q2 2022 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Deb Hart, Head of Investor Relations. Thank you, and over to you, ma'am.

Thank you, Vikram, and good afternoon, everyone. Thanks for joining us on our second quarter 2022 earnings call. I'm joined by Carl Hull, our Chairman and Chief Executive Officer; and Kevin Herde, our Executive Vice President and Chief Financial Officer.

Our corrected press release and the slides that accompany today's call are posted on our website. If you're looking at a version of the press release that has our EBITDA margins at XX percent, please refresh your browser or go to our Investor website at investors.maravai.com under financial information, quarterly results for the updated version.

As you can see on Slide 2, Carl will first provide you with a business update and Kevin will review the financial results and guidance. We'll open the call up for your questions following the prepared remarks.

On Slide 3, we remind you that the forward-looking statements that we make during the call, including those regarding our business goals and expectations for the financial performance of the company, are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning the risk factor is included in the press release we issued today as well as those that are more fully described in our various filings with the SEC. Today's comments reflect our current views which could change as a result of new information, future events or other factors, and the company does not obligate or commit itself to update these forward-looking statements, except as required by law.

During the call, we're going to be using non-GAAP measurements of certain of our results and in providing guidance. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this afternoon. The metrics we'll be discussed in today's call include net income, adjusted EBITDA, income tax expense and adjusted earnings per share. These adjusted financial measures should not be viewed as an alternative to GAAP measures but are intended to better enable investors to benchmark our current results against historical performance and the performance of our peers.

So I'll now turn the call over to Carl.

Well, thank you, Deb, and good afternoon, everyone. We appreciate having you join us for our call today. Let me start with the fact that we had a great quarter. Our strong second quarter results completed a record first half of the year. Broad-based strength across Nucleic Acid Production portfolio drove better-than-expected revenue, earnings and cash flows.

Let's turn to our second quarter results in more detail on Slide 5. Today, we reported $243 million in total revenue for the quarter, growing 11% compared to the prior year. Our adjusted EBITDA of $188 million was up 15% over the prior year, and we reported a record 78% adjusted EBITDA margin for the quarter. That adjusted EBITDA performance led to adjusted EPS of $0.54 per share for the quarter and adjusted free cash flows in the quarter of $175 million.

On Slide 6, you'll see our results on a 6-month basis. Revenue for the first half of the year was $487 million, up 33% compared to the prior year. Our base business, excluding COVID CleanCap revenue was 15%. This top line growth resulted in adjusted EBITDA of $375 million for the 6-month period which represents a 77% EBITDA margin. As you can see, 2022 is off to a very solid start.

Turning to Slide 7. Growth across the Nucleic Acid Production segment remains robust. Maravai's offerings today address multiple modalities within mRNA therapies, genomic medicines, cell therapies and other oligonucleotide therapies where we see a strong pipeline and demand for our products. Our Nucleic Acid Production business had revenue of $225 million in the second quarter, up 17% year-over-year. Excluding COVID-19-related CleanCap revenue, our base Nucleic Acid business grew a healthy 27% year-over-year, demonstrating momentum we are experiencing enabling the non-COVID pipeline.

We also have some good news to share on the intellectual property front. One of our U.S. patents claiming our CleanCap technology has been in ex parte reexamination proceedings at the U.S. Patent and Trademark Office and we recently received notice that all reexamined claims are patentable. We expect to receive the reexamination certificate by the end of the month. We believe that this, together with our other U.S. and global patents claiming our CleanCap technology demonstrates our foundational intellectual property position in the field of five-prime capping of messenger RNA. We are focusing on our base Nucleic Acid Production business as the key driver of long-term value creation as we continue to see innovative messenger RNA customer growth in both products and our CDMO services.

Turning to Slide 8. Thanks in large part to the success of COVID-19 vaccines and the preliminary validation of messenger RNA as a breakthrough therapeutic modality, both small and large biopharma companies have made sizable investments into R&D for new messenger RNA therapeutic assets. In fact, work we have done with a top-tier market consultant showed that the number of messenger RNA vaccines and therapeutic assets in development is expected to grow fourfold from 2022 to 2027. This bodes quite well for us as we are uniquely positioned with the right toolkit to support an increasing number of these customers with our products and services.

We've seen nice traction as CleanCap and our other small molecules, especially our modified nucleotides and nucleoside triphosphates are incorporated into new programs by both preexisting and new customers. We have a tremendous opportunity to drive CleanCap inclusion across our growing messenger RNA customer base while providing other critical GMP raw materials and our newest technology to improve in vitro transcription reactions. These programs should continue to bring value to our customers and help improve the quality of manufactured messenger RNA for years to come.

As interest in cell and gene therapy continues to rise and as the number of development programs advancing to later clinical stages accelerates, we expect the new commercial approvals will validate the high clinical efficacy and transformational impact of these modalities. According to the Alliance for Regenerative Medicine, the FDA expects more than 200 gene and cell therapy INDs per year in the near term and between 10 and 20 cell and gene therapy approvals per year starting in 2025.

Separately, Maravai's third-party consultant advises that the messenger RNA vaccine and therapeutics market may see up to 30 approvals of which approximately 70% may be infectious disease vaccines by 2027. While COVID-related revenue has represented a huge catalyst to the company's growth and operations since 2020, it is these non-COVID programs that have us most excited about the long-term growth opportunity ahead for Maravai.

Turning to Slide 9 and our COVID outlook. As you all know, our part in supporting COVID-19 vaccines has been amazingly rewarding, and we are very proud of the role we have continued to play in helping to address the pandemic. We believe that the vaccine market has moved beyond its initial peak demand phase driven by mass vaccination programs and that we are now in a more dynamic and more difficult to forecast part of the COVID vaccine life cycle.

When we updated you last, after the first quarter, we thought the 2022 CleanCap revenues directly attributable to our major COVID-19 vaccine customers would be about $630 million for the year, at the midpoint of our guidance of 12% to 14% growth over 2021 levels. Since that time, our customers have advised that some governments have delayed or postponed previously contracted vaccine orders so that they may accept new variant vaccines being prepared for the fall.

In particular, Pfizer, one of our major customers recently indicated that their second half 2022 revenues from shipments of [Kumernafi] will be split unevenly with a shift of demand towards the fourth quarter of the year. These types of changes and plans could, of course, create unexpected variability in our future shipments of CleanCap. We shipped $350 million in COVID-19 related CleanCap products in the first half of 2022.

Given the difficult to predict market dynamics in regards to demand for vaccines and boosters and the delayed time lines for previously expected booster campaigns, we are revising our 2022 guidance to effectively derisk our outlook, which will lower the full year COVID-19 related CleanCap revenue range by about $20 million from the prior guidance. We're now assuming that this full year COVID CleanCap total will range between $600 million and $620 million for 2022, leaving $260 million to go in the second half at the midpoint. This may be somewhat backloaded into the fourth quarter. Kevin will discuss the puts and takes to this revised COVID-related guidance and other inputs for our 2022 guidance later in the call.

A central issue in many of our divisions with investors has obviously concerned the durability of COVID-related CleanCap revenues into 2023 and beyond. There remain many certainties here and the vaccine space is definitely in a flux. In addition to working with our largest customers to secure the updated rolling 12-month forecast that we have used in developing our previous guidance, we have engaged outside consultants to independently develop demand forecasts for next year. Based on that work and using the latest forecast data we have available, we now believe that the COVID vaccine-related CleanCap demand will be between $200 million and $300 million in 2023. This is an estimated base volume for the next year, and there are numerous factors that could lead to changes up or down in this estimate once we actually enter 2023.

Let's move to Slide 10. Another issue of intense interest to investors' concerns the appropriateness of our current market valuation. As I have said before, we believe that we are significantly undervalued because of the market's unwillingness to look beyond our massive success with COVID-19 and to appropriately assess the value of our underlying business, which by itself is among more exciting companies in life science tools today.

One fact stands out. Just after our IPO in November of 2020, we reported that Maravai generated $284 million in revenues and $169 million in adjusted EBITDA for the full year of 2020. Today, less than 2 years later, our TTM revenues are $920 million, and our adjusted EBITDA is $693 million, more than 4x our IPO levels. I probably don't need to note for you that the stock has been trading recently at the same levels as our IPO price.

Now turning to Slide 11 and our Biologics Safety Testing business. Our products and services in this business support high-growth markets in cell and gene therapy, vaccines and biologics, by providing process-related and purity analytics, along with offering innovative viral clearance prediction solutions that help our customers ensure the safety of their biopharmaceutical products. Our second quarter revenue was $17 million in Biologics Safety Testing, down 4% from last year. The 2 main factors impacting the quarter were resumed weakness in China due to the sporadic pandemic lockdowns that occurred in April and May and our decision to suspend sales to Russia during the Ukraine invasion.

As we move through the rest of the year, we're keeping an eye out for further COVID outbreaks and regional lockdowns, but we're currently seeing a return to more normalized business operations in China. We continue to innovate and scale our offerings in Biologics Safety Testing to ensure superior technical support to offer the highest quality services and product and the most comprehensive catalog of products to meet our customer needs. We have several new product launches planned this calendar year, including a PG13 cell line assay, a Protein L Ligand assay and several automated platform kits, further building on the breadth of our product offerings.

Now moving to Slide 12 and some recent leadership updates. First, we are happy to welcome Dr. Pete Leddy to our leadership team. Pete joined us in July as Executive Vice President and Chief Administrative Officer reporting to me. In this newly created role, Pete has responsibility for leading our global shared services functions, including human resources; environmental, social and governance initiatives; our diversity, equity and inclusion initiatives; our global facilities function; and security. Pete has over 30 years of experience leading growth and change across a wide variety of businesses and specifically in scaling global life sciences companies. I look forward to him playing an incredibly important role on our team as Maravai continues to differentiate itself as a trusted supplier of components, nucleic acids and biologics assays for the life sciences industry and as we strive to be a good corporate citizen through our ESG and DEI initiatives.

Second, we've expanded the leadership team within Nucleic Acid Production as well. We are committed to increasing our investment in messenger RNA innovation as we scale our R&D operations, facilities and quality systems, and as we partner ever more closely with our customers. To this end, we brought on Dr. Kate Broderick as Senior Vice President, Research and Development; and Jay Lochhead, as Vice President, Quality and Regulatory. Both are seasoned life sciences executives and we are excited to see their contributions to innovation and to making us best-in-class in our quality initiatives.

Third, the integration of the MyChem acquisition is on track to be completed by the end of the year. We have merged their product development and commercial outreach activities with TriLink's R&D and commercial teams. The addition of MyChem extends our capabilities in the manufacturing of critical raw materials that are used in cell and gene therapy, molecular diagnostics and messenger RNA vaccine manufacturing. Going forward, the team will be supporting innovation with the expected launch of new chemistry products including the developed CleanCap variants and scaling up chemistry processes for current products to GMP grade. Dr. Chanfeng Zhao, the CEO and Co-Founder of MyChem is now the Vice President of Research and Development, leading our chemistry initiatives.

Moving to Slide 13. I'd like to update you on our facilities expansion plans. During the second quarter, we signed a collaborative agreement with the Department of Defense where they will fund up to $39 million of our planned expansion of the Flanders nucleic acid production facility here in San Diego. This is part of the government's goal of nationwide pandemic readiness for COVID-19 and beyond. We view this award as recognition of the significant role messenger RNA is playing and of our unique set of capabilities and their importance to future vaccine and therapeutic development.

The Flanders site construction is on schedule, and we expect to have occupancy for Phase 1 of the project later this year, with Phase 2 occupancy in the first half of 2023. As a reminder, the first phase will provide us with an additional GMP manufacturing suite with 2 clean rooms. By moving some of our operations to the new Flanders site, we will further increase capacity for commercial CleanCap production here at the Wateridge site, expand the rest of our small molecule platform and add GMP API manufacturing capacity, allowing us to support our customers through Phase 2 and beyond.

Likewise, the Biologics Safety Testing relocation from Southport to a new state-of-the-art facility in Leland, North Carolina, is progressing nicely towards a move-in date over the holiday break at the end of this year. This new facility more than doubles our operational square footage to support current and future growth. The fully customized design will provide room for a mass spectrometry Center of Excellence and specialized cell culture facilities.

It will significantly increase our cold storage capacity while providing other R&D, laboratory and automation upgrades. Extensive process flow analysis has been incorporated in the design to optimize and enhance both our manufacturing and kit packaging operations. We also recently secured 54,000 square feet of office, warehouse and light lab space in San Diego and plan to relocate some of our corporate and G&A teams to this new site, which we are calling The Pacific Center. The Pacific Center site is conveniently located midway between the Wateridge and Flanders locations here in San Diego and all reside within a 5-mile radius of each other.

We had some light renovations planned for the site and will occupy the space later this year. These new facilities are an example of how we continue to make investments to further accelerate growth in our base business. We also remain active in pursuing inorganic growth opportunities and look forward to being able to announce additional acquisitions in the future. We are committed to expanding our reach as a key specialized raw material supplier and we are actively working to expand our international footprint so that we may improve our ability to directly serve our global customer base.

Lastly, on Slide 14, I wanted to give you a brief update on some Maravai corporate initiatives we have launched to support our various stakeholders. We believe that giving our time, money and talent can make a positive impact on our communities. We have implemented both a company-wide volunteer day and an employee match program for charitable contributions to a wide range of nonprofit organizations. These programs are in addition to the Maravai Charitable Foundation, which we established late last year. Our giving supports charitable scientific and educational endeavors with a particular emphasis on advancing scientific education and innovation, supporting local communities in which we operate, promoting public health and access to health care and advocating for inclusion and diversity.

This slide shows some of the university programs and charitable organizations we have supported, including the University of San Diego, San Diego State University and the University of California, San Diego.

I'll now ask Kevin to cover more details on our second quarter performance and to update our guidance for the balance of the year. Kevin?

Thank you, Carl, and good afternoon, everyone. I'm happy to review our financial results for the second quarter and to discuss the components of our current guidance for the full year of 2022. Given that Carl has presented some of the financial highlights already, I will briefly cover some more details regarding the second quarter results and then dive into our updated financial guidance for 2022.

Starting on Slide 16. Beginning with the GAAP numbers, our GAAP net income before the amount attributable to noncontrolling interests was a $157 million for the second quarter of 2022. This compares to $135 million for the second quarter of 2021. Income from operations was $181 million in the quarter from operating margin of 74%. R&D spend in the quarter was $4 million, which compares to $2 million from Q2 2021, as we continue to increase our R&D spend as a percentage of revenue to spur the growth of the base business.

Moving to Slide 17. Adjusted EBITDA, a non-GAAP measure, was $188 million for Q2 2022 compared to $164 million for Q2 2021. This represents a 15% increase year-over-year. The net adjustments from GAAP EBITDA to adjusted EBITDA continue to be small with our adjusted EBITDA only $1 million or less than 1% of our reported GAAP EBITDA for the quarter. Our adjusted EBITDA margin was a record 78% in Q2 2022, up from the 75% reported in Q2 2021 and slightly better than we had forecasted, as a result of favorable gross margins in the quarter.

Turning to Slide 18. We present here basic EPS, diluted EPS and adjusted fully diluted EPS. Basic EPS, our GAAP measures in the net income attributable to our Class A shares divided by the weighted average [outstanding] Class A share. Diluted EPS, also a GAAP measure starts with basic EPS and to the extent the assumed conversion of Class B shares and other equity awards are dilutive, then net income and weighted average shares outstanding used in the calculation are adjusted to reflect the diluted effect of this conversion. Class B shares and other equity awards were dilutive in Q2 2022, and thus included in the calculation.

Lastly, the simplest most comparable metric of focus for us is adjusted fully diluted EPS, a non-GAAP measure which equals adjusted net income divided by the weighted average of both Class A and B shares and other dilutive securities. Our basic EPS for the quarter was $0.54 per share, diluted EPS was $0.53 per share and adjusted fully diluted EPS was $0.54 per share.

Moving to slide 19. Here we present a few balance sheet and other financial metric highlights. We ended the quarter in a net cash position with $551 million in cash and $541 million in long-term debt. Our strong EBITDA performance led to robust adjusted free cash flow for the quarter of $175 million. That calculation of adjusted free cash flow, a non-GAAP measure, is based on our adjusted EBITDA of $188 million less capital expenditures in the quarter of [$30 million], which represents purchases of property and equipment and construction costs incurred for our facilities, a portion of which are considered lease-hold improvements and will be reflected as prepaid expenses and other assets in accordance with GAAP, further offset by government funding recognized.

Capital expenditures in the quarter were consistent with our expectations reflecting our focused investment in the facility capacity expansion we have talked about in prior calls and that Carl just highlighted earlier. We expect our net capital expenditures, as I just defined it, to be about $65 million to $75 million for fiscal year '22, which includes roughly $20 million of anticipated offsets from the Department of Defense pursuant to the collaboration agreement we have with them.

Of this net total, about 2/3 of these will actually be classified as long-term other assets and the remainder as traditional fixed assets under some of the GAAP accounting that I mentioned. The remainder of the $39 million of current grant will likely offset CapEx in early 2023 as we complete the Finders facility. With $541 million in long-term debt, $550 million in cash and trailing 12-month adjusted EBITDA of $693 million, we have 8x gross debt to adjusted EBITDA ratio and no leverage on a net basis.

As we look at capital allocation from our free cash flows and strong balance sheet and debt capacity, we remain focused on strategic investments for growth and increasing our capabilities in support of the markets and customers we serve, plus that involves organic investments in the people, processes, systems, innovation and facilities to further our offering and solidify the foundation for long-term growth for our base business.

In addition, we continue to evaluate and potentially acquire businesses or technologies that can further expand our offerings. This combination of organic investment along with inorganic M&A strategy, continues to be our near-term focus for capital allocation, as we believe strongly in growth investments that include breadth of offerings, commitment to quality and the dependability that comes with available and increasing capacity.

As it relates to financial market risks, we are in a good position. The timely repricing of our debt earlier this year, combined with interest rate hedging strategy has allowed us to maintain our forecasted interest expense range for the year. Furthermore, we have structured Maravai and the vast majority of our contracts and treasury operations predominantly in the U.S. dollar and thus are not facing any material FX impact for 2022. As we have repeatedly discussed, our strong financial performance, balance sheet and cash flows provide us tremendous financial flexibility to make both organic and inorganic investments that will drive innovation and build capacity.

Now to provide -- turning to Slide 20. Production business fueled most significant portion of the revenue growth for the second quarter. Nucleic Acid Production represented 93% of the company's total revenue in the quarter and generated $186 million in adjusted EBITDA. The 83% adjusted EBITDA margin in this business is a record for Nucleic Acid Production and reflects the value of our unique products as well as the productivity gains and efficiencies from our state-of-the-art San Diego manufacturing facility and the margin contribution from our MyChem acquisition.

Our base Nucleic Acid Production business excluding CleanCap revenue for our major COVID-19 vaccine customers grew 27% year-over-year as CleanCap and the rest of our product portfolio are used in increasing number of programs and our customer list continues to grow. CleanCap revenues from our major COVID-19 vaccine customers were approximately $178 million in the second quarter of 2022 compared to $155 million in the second quarter of 2021.

Our Biologics Safety Testing business contributed 7% of the company's revenue in the second quarter, slightly below our internal estimate, mostly attributable to the ongoing pandemic lockdowns in China and our on ongoing decision not to ship into Russia, as Cygnus branded products, which compares virtually all of this segment's business were down less than $1 million in the quarter or 4% in Q2 2021. While the Asia Pacific region was impacted by lockdowns, North America and Europe were up 11% and 17%, respectively, versus the prior second year quarter. Our Biologics Safety Testing business delivered $14 million of adjusted EBITDA in the quarter, that's an 81% EBITDA margin.

Corporate expenses that were not included in the segment adjusted EBITDA totals were $12 million in the quarter, up from the Q2 2021 levels of $10 million, mainly due to investments in key personnel and systems to drive and support growth. We continue to increase our ability to track key talent at all levels for Maravai. At the end of June, we had a record 555 full-time regular employees, up from 521 at the end of Q1 and continue to add key talent to support our business under a very competitive labor market.

Now let's move to Slide 21 and our updated financial guidance. We now expect revenue of $880 million to $910 million for the current year. This is down $45 million or just less than 5% at the midpoint from our previous guidance. Included in that range is our estimate for 2022 CleanCap revenues directly attributable to our major COVID-19 vaccine customers to be about $610 million for the year at the midpoint or down about $20 million from our previous expectation as we saw customers reduce Q4 demand down to their contracted minimums. Thus, the COVID demand is roughly half of the lower 2022 revenue guidance. The remaining reduction is attributable to weakness in the APAC region, specifically in China, which we are forecasting to impact both the NAP and BST segments.

In addition, we have removed from our forecast a large order for certain raw materials from a customer that updated the requirements to GMP grade and capability that we expect to have in the near future with our new Flanders facility, but for which we could not provide in line with our updated requirements. Taking into consideration these adjustments to 2022 guidance, we expect overall revenue growth of 12% over 2021 levels at the midpoint, including just over 30% in our NAP business, including revenue from COVID-19-related CleanCap and about 10% annual growth in our BST segment.

Based on our strong first half margin profile, our adjusted EBITDA guidance, a non-GAAP measure, is narrowed to a range of $640 million to $660 million, a change of approximately $20 million or about 3% at the midpoint compared to our previous guidance range of $650 million to $690 million. Based on this updated adjusted EBITDA guidance, adjusted fully diluted EPS, a non-GAAP measure, is expected to be in the range of $1.70 to $1.80 per share compared to our prior guidance of $1.74 to $1.90 per share.

As it relates to timing, we continue to see some choppiness in our business when looking at the short 3-month quarterly periods. As implied by your full-year guidance and our first half actual results, the second half of 2022 is forecasted to be between $393 million and $423 million with the third quarter expected to be between $190 million and $200 million in revenues and the fourth quarter slightly higher than that. This will also likely result in the third quarter EPS likely being in the low $0.30 per share and the fourth quarter slightly higher than that. Based on the lower second half revenues as compared to the first half and in consideration of product mix and continued growth initiative investments, we expect our EBITDA margin in the second of the year to be about 70%, resulting in an approximate full-year range representing our updated guidance of about 73%.

The Slide 22, you will see our other guidance assumptions for 2022. Adjusted fully diluted EPS is based on the assumption that all Class B shares are converted to Class A shares, which results in a forecasted fully diluted share count estimated at $256 million for the full year of 2022. Additionally, our adjusted fully diluted EPS, including certain adjustments that do not reflect the core operations are based on an adjusted effective tax rate of approximately 24%.

As it relates to the other adjustments needed to get to our non-GAAP adjusted EBITDA range, our expectations for 2022 include: interest expense between $22 million and $25 million; depreciation and amortization of $30 million to $35 million; equity-based compensation, which we show as a reconciling item from GAAP to non-GAAP EBITDA to be between $18 million and $20 million; and as stated earlier for 2022, we expect to invest a net of $65 million to $75 million for capital expenditures, the vast majority tied to our facility expansion.

Our reconciliation of net income to GAAP EBITDA and from GAAP EBITDA to adjusted EBITDA is presented in our press release and at the end of the slide presentation. In addition, our segment-related information will be detailed in our Form 10-Q, which we plan to file in next day.

So thank you for your time today. I'll now turn it back to Carl for some final remarks.

Thanks, Kevin. So the wrap up on Slide 24, we are playing in the right target markets with strong leadership positions and exceptional growth in our base business as we build our product portfolio in other high value areas. As Kevin said, our disciplined business model and our strong cash position allow us to continue to invest in operations, facilities and people to support the many exciting growth opportunities in our base Nucleic Acid and Biologic Safety Testing businesses, and to innovate in ways that support our messenger RNA and cell and gene therapy customers' rapidly evolving needs.

I would now like to turn the call back over to Vikram to open the line for your questions.

(Operator Instructions) We have our first question from the line of Matt Larew with William Blair.

This is Max on for Matt. I appreciate the color on the 2023 COVID business. But I was hoping you could go into a little bit more detail around how much exactly of that is already booked? How we should expect the cadence to trend throughout the year? And then any detail you can provide around the nature of those contracts, whether or not they're still take or pay?

Well, Max, our model and our contractual relations haven't changed with our customers. The issue for all of us right now is just there's very little visibility into 2023 volumes when it comes to the vaccines themselves and that cascades backward through the supply chain. So I can't really comment on how much of that is booked right now, but it's suffice to say that it's the focus of all of our discussions with our customers.

Got it. And I hate to go out even further in the future here, but previously you had mentioned that you expected COVID demand to get settled out in 2024. I'll be curious to hear your take on whether or not you still think that's the case. And then I recognize that it's going to be difficult to say, but is there anything you can provide around how you're thinking about what the demand looks like longer term past 2023 and what that run rate kind of looks like as we move past next year?

Yes. Well, look, if you look at this guidance, you'll see that we're saying roughly, we think next year will be 1/3 to 1/2 of what the volume was at its peak here in 2022. My personal view is I believe that the longer-term prospects are going to look similar to that. I really don't see this kind of monotonically declining.

And I think most people who look at the vaccine market have reached that same conclusion that there is a certain baseline and it's probably going to be somewhere around where '23 ends up. But you just don't know based on the number of variants and the number of vaccines that actually have to be made. And always remember that we focus on how many vaccines need to be manufactured, not necessarily how many immunizations are actually delivered, right, in the people's arms, there is a delta between those two.

We have a next question from the line of Matt Sykes with Goldman Sachs.

Maybe just to kind of shift gears a little bit. Just the commentary you made about the customer in China that had canceled the contract and they're switching to GMP from RUO. I mean we've heard similar things in the channel that people are using GMP earlier and earlier in the process. And obviously, with your Flanders facility, you're going to be able to serve that capacity. But where do you feel you are today in terms of serving the potential GMP capacity that you're forecasting? And do you assume that people are going to start using GMP earlier in the process and therefore, maybe will there be additional CapEx requirements as you sort of transition, not away from RUO, but just focus more on GMP going forward?

Super good question. I would say that, first of all, just to clarify, we didn't say that the customer was in China. I think Kevin was also talking about the China lockdowns and the same couple of sentences there. But this large customer had committed to an order for RUO material. And as they evaluated it with some changed partnerships on their side, they made the decision they immediately needed GMP, which they thought would be later in the program. So it's exactly the example that you cited.

And we think that's occurring more often. I'd say the main driver of that is you're getting more big pharma involved in earlier stage programs. And you've seen, of course, some of the announcements about partnerships and relationships around a candidate therapeutic. So as that happens, I think the big pharma mindset is very much one of eliminating any potential compliance risk early on, and that will drive them to GMP earlier.

I think we're well positioned. The Flanders site is designed exactly to allow us to do this. And I think the capital investment that we have anticipated there and the support that we've got from the government will allow us to meet those demands, just unfortunately not as quick as this past quarter.

Okay. Got it. And then just on M&A. Kevin discussed it a little bit in terms of balancing inorganic with organic. But just given your balance sheet currently, given some of the valuations that have likely come down in certain areas, I guess outside of MyChem, I would have thought there would have been more activity on the M&A side. Is there something in terms of valuation or ability to find the right companies or a timing aspect that might have held you back from M&A? And should we that as accelerated? Or is this just simply a case-by-case basis waiting for the right opportunity, which is probably what you're going to say. So I should...

Thank you for answering your own question. I mean a little color here is just that we are picky about what we look for, and we have certain expectations and aren't always (inaudible). And while you're right, valuations have clearly come down in the market, management acceptance of those valuations may not be as quickly adjusting. How is that?

No, that's fair. And then one last question just on -- you previously disclosed, and apologies if I missed it earlier in the call as I joined late, you previously disclosed the number of non-COVID programs that you're involved with. Is there any update to that? And apologies again if you had disclosed this earlier in the call.

No. I don't think there's any update to it. What have we said before, Kevin? 183 total programs and I'm looking for the split here. I'll tell you what, we'll come back to you on that. I have it here, but I just can't seem to locate it right now.

Carl, we had previously talked about 183 program. That was based on an in-depth market analysis that we did earlier in the year. It really hasn't changed. We haven't revisited that market analysis. So it's not something we're necessarily keeping an absolute rolling tally on, but we visit it periodically as we see changes. But yes, it was 183 mRNA programs. But we're not -- again, that's an internally derived metric that we're tracking. We work with our third parties on accumulating that at a point in time and are using that information to inform some other decisions.

We have next question from the line of Tejas Savant with Morgan Stanley.

Carl, I appreciate the visibility on 2023 year, but when we think about that $200 million to $300 million COVID assumption, which by the way, at the midpoint sort of lands right on top of where we were. Is it fair to assume that we should be thinking sort of 1 booster dose per individual. Can you outline some of the other assumptions embedded in the low versus high end of that range in terms of perhaps vaccine uptake, applicable geographies and market share?

Yes. I mean we were pretty thoughtful about the way that we looked at it. So we didn't just consider the number of vaccines potentially being made, we also looked at the rate of change from what we understood 2022 to be in the first half and what that trajectory and projections by the various participants has been. Of course, we've got an offset because while we're in the largest market share program that's out there already and exposed to that trajectory downward, we're also in a number of smaller programs that are still in clinical trials and coming up.

So there's a little bit of an offset in there as well. So we feel that this is kind of a triangulated number that we will be able to refine, and we want to communicate it as soon as we have completed the external work to generate it.

Got it. That's helpful. And then just continuing along those lines. I mean with COVID revenue expected to normalize and you've also got plans to move to these new facilities at Leland and Flanders. Kevin, how should we think about sort of margin headwinds in '23, perhaps as occupancy of those or utilization of those facilities takes time to ramp?

Yes. Look, we're not going to necessarily get into any more guidance on '23 other than the COVID number at this stage. But from our perspective, the overall facilities burden that we have here is not a huge cost. I mean it is very reasonable. We got these at good times. They are long-term leases, long-term investments. So they're spread out for a very long period of time. And we think certainly having the capability and the flexibility with our investments in these facilities is extremely important.

So -- and these are small molecule manufacturing lines, if you're talking specifically about COVID, they can do and likely will do some other things as the market changes and our mix of revenue moves away from some of the COVID-related CleanCap demand in just some other items. So we're putting in place the things we think we need to support this business over the mid and long term. And that's certainly going to be something that is very important to us. And we're not overly concerned necessarily today about the fixed cost of this infrastructure. We think it's necessary to have the capability and to be able to respond to the demand that we see shaping up over the next several years.

Got it. And then one final follow-up for me. With the cost of capital rising, concerns around a recession, et cetera, are you thinking of any sort of OpEx reduction efforts, perhaps cash conservation efforts here? And how do you think about your cell and gene therapy customer base at this point? Any elongation and purchase decisions, project delays or cancellations that you guys are beginning to see out there?

Well, I'll deal with the latter part, and I'll let Kevin talk about the first part, Tejas. I think that we are not seeing any pullback or diminution of the number of customers that we have who are working on this. As we've said before, we they were well funded in the 2020, 2021 time frame and quite well funded in some cases, as you all know.

But I think that what we may be seeing is examples where a company that was trying to move 5 programs forward at one time maybe concentrates on 4 or 3 programs and tries to move them forward to show some progress in their own conservatism and cash conservation, but they're not abandoning the field by any stretch of the imagination and there's still more and more entrants coming in through it. So that's how I characterize what's going on there. And Kevin, about cash conservation?

Yes, nothing specific, Tejas. I mean we're always trying to make the best business decision for everything we look at. Certainly, as our revenue profile might change a little bit, we can manage that. We run into various shifts. We can manage the mix of our products through our attrition and hiring, how we backfill and other things. So we're pretty tight on how we manage labor, how we manage our expenses, obviously, given our historical margins and sort of the profitability of the company. But there's no conservative effort right now to make any changes. We like the investments we're making. And again, we're playing the long game here, and we feel real comfortable with our cost structure and the investments we're making to address that long-term goal.

Yes. And with free cash flow of $175 million in the quarter, we've got a little bit of cushion. So...

We have next question from the line of Paul Knight with KeyBanc.

Carl, you had mentioned in the past of a growth rate, ex COVID, Pfizer of kind of in the 40s. How do you feel about that growth rate today?

I think you're referring to -- if you look at our core NAP business, I think we were up closer to that number prior to the revisions to our guidance this year, which I think brings that number of around 30%. And again, that's specific to this year. I think what we're seeing both this year with this updated guidance and seeing that base business grow roughly 30% at the midpoint right here, we see sensitivities on each side of that number is sort of the opportunity.

And I think that, that is what we're seeing now. And I think with the capacity and capabilities we're increasing, albeit for a slightly different mix of business going into the future, those -- that's why we're continuing to support and invest in that business because the market work that we're doing and the long-term growth and some of the statistics that Carl cited earlier in the prepared remarks, underscore the need to support that type of growth rate.

Yes. But I would say, Paul, this is more choppy now as we're getting bigger because we're getting some very large jobs and slight slippages from quarter-to-quarter can and do occur. So I think we'll be a little bit tempered as we look at that and would just say, it's probably going to make more sense to look at 6- and 9-month trends and it's necessarily can be to compare 3 months to 3 months.

Right. And then lastly, the $47 million approximately of ex COVID, that would include some of the MyChem transaction, right?

Yes. It would include some of that. We're not separately breaking it out that, but that would roll into the non-COVID totals.

We have next question from the line of Michael Ryskin with Bank of America.

I'm going to follow up a little bit on Paul's last question, I think we're going to be getting at the same point. Could you talk a little bit more about the non-COVID Nucleic Acid Production component? You're guiding to 30% now and I think the guide was more than 50% year-over-year in the first quarter. So a little bit more detail on 2Q and the fiscal year. You mentioned a little bit on China. I think you hinted a little bit at Russia. If you could go into more detail on what's going on in that and then non-COVID component of nucleic acid?

Yes. Well, the major component in those changes and estimates has to do with, for example, not having a GMP capability online right now at a time when we expected to have rather a large contribution from already raw materials. So that's one. The second is the China effect and other Asia Pacific effects have really been primarily in our Biologics Safety Testing business. That's where they hit. So it is kind of confusing when we talk about base business because we talk about base business for Maravai as a whole, and we also talk about base business from Nucleic Acid Production. So we do have to kind of distinguish those two things. Kevin, do you want to see if you can clarify that any better?

Yes. No, I think that's right. As we talked about, the lowering at the midpoint was -- half of it was COVID related, which I think we all understand. I think the remainder of roughly $20 million or so. The biggest part of it, as Carl alluded to, was the raw material purchase a little bit there in the Biologics Safety Testing business bringing that growth expectation down a little bit here for the year for the reasons we cited.

And then just again, there's a little bit of uncertainty from the APAC region. There's a lot of little smaller things out there that we just didn't have the certainty to keep in our guidance for this year. Certainly, a potential upside if those things come through. But I would say there's probably just a little uncertainty out in that region. And given the relatively small number and the fact that some of our orders can be pretty big and pretty choppy, as Carl alluded to, we wanted to make sure that we were adjusting guidance based on what we see today and can be confident in delivering and that's where we're probably at.

Okay. All right. And then a follow-up on that, and this is for the second half, I guess, and a little bit for '23. You already discussed a little bit your COVID outlook for the second half of the year, your COVID outlook for next year. And then also that nucleic acid production non-COVID. It looks like for the second half, you're guiding to about 20% year-over-year. So I guess my question is, given what's changed from when you last spoke in May to stay -- some of these orders going away, some of the more uncertain. How derisked is your outlook for the second half of the year? Is there further downside? Is this sort of a little bit of conservatism built in?

Because -- I'll use COVID as an example, but you can apply this across the board. There's a scenario, right, where COVID slows down even more and where maybe some of those variant specific vaccines don't come back in the fourth quarter. So is this something where both for COVID and non-COVID, do you feel like this is sort of the base and there's only upside from here? Or is there a situation where 3 months from now, we're having a little bit of a repeat conversation of this?

Yes. I think from my perspective, certainly, on the COVID number, I think that's relatively derisked just because of how our contracts work there and these things are -- then be delivered and already a lot of them manufactured are on POs and those sort of things. So I don't see that ticking down within the calendar of fiscal year 2022.

Certainly, Nucleic Acid Production doesn't have that larger percentage as the COVID number as far as being kind of more guaranteed or locked in. So there's certainly still some variability in there. But I think that -- we go through our forecasting process every month in detail with our commercial team. We have sensitivities on both sides of our base forecast. This basically reflects our base forecast as we evaluate it today as we always have in giving guidance, and we run kind of one set of numbers, and that's what we're looking at.

So there's inherent business risk, of course, there's some inherent opportunity as well. But I think certainly on the COVID number, that's pretty solid. On rest of them, there's probably a little bit more to get just around the nature of our business, but it's certainly brought down to a level that we feel comfortable in delivering at this stage.

And put it this way, Michael, you've known us for a couple of years now, you know we're pretty conservative in how we guide.

We have next question from the line of Brandon Couillard with Jefferies.

Kevin, not sure you're willing to comment, but I'll take a flyer on this. What would the run rate EBITDA margins look like under a scenario where the COVID-CleanCap revenues do drop down to a baseline of that say, $200 million run rate?

Yes. I would say you are right about the first part of your question, we're not going to go there for 2023. Look, I think if you look back at what Carl presented when he was talking about valuation and you look at that point in time, that 2020 year that we had there, we had $280 million in revenues, $100 million in COVID-CleanCap and a 60% EBITDA margin, we're going to be bigger than that. So I think you look at that as just an example of where we were with a lower level of CleanCap, both on COVID and non-COVID and where we're going to be going into 2023. So I think that just gives you a little bit of sense of, this was a very profitable business prior to the spike in COVID and will continue to be a very profitable and high-margin business prospectively.

Got you. And second question, any chance you could put a dollar number around the customer order that was canceled? Just can you quantify that?

High signal-digit lines.

We have the next question from the line of John Sourbeer with UBS.

And I reckon this will be our last question. John, go ahead.

I guess just maybe two here. One, just following up on what Tejas asked about cell and gene therapy and the emerging biotech slowdown. But I guess when you look at some of the non-COVID mRNA programs and just the funding environment, have you noticed any slowdown there? And are you willing to comment on the base Nucleic Acid business, how much is exposed to emerging biotech?

Well, look, I think that we are not seeing a reduction in the number of customers or the outright cancellation of programs. As I think I mentioned there may be some prioritization that's going on within the smaller companies. But it's also fair to say that our business ex COVID consists of everybody from the largest pharma companies, all the way to virtual mRNA start-ups. So we've got a little bit of everything in there.

But the bulk of the business and the revenues really come from programs that are advancing and for which they need greater and greater quantities of either mRNA or CleanCap or other components. So I would guess from a revenue point of view, the waiting probably tilts towards the larger biopharm -- mid to large. And the number of programs will tilt the other way with more customers that look like they're smaller. That would be my intuitive answer.

And then I guess another one on the base business. When you think about the customer order patterns made outside are shifting to the GMP. But have you noticed any changes there? And maybe if there is any stocking at all when you look through the second half?

I am sorry, the first part of the question, you said what?

I guess when you think about specific to the base business Nucleic Acids, could you talk about customer order patterns there? And have you noticed any stocking within customers?

No, not on the base side of the business at all. That stuff is consumed pretty rapidly, it's programs specific and it's time sensitive. So that's not the kind of stuff that you would stock up.

Well, thank you, everyone.

Yes. Thank you. Ladies and gentlemen, we have reached to the end of the question and answer session. And I'd like to hand the call back over to Deb Hart for closing remarks. Over to you.

Thank you, Vikram, and thanks, everyone, for joining us today. We'll be at a couple of conferences this quarter. So please check out our Events page. Apologies to anyone in the queue that we didn't get to. Feel free to call me with any questions, and we hope you have a great night. Thank you.

Good bye.

Thank you very much. Ladies and gentlemen, that concludes this conference today. You may disconnect your lines at this time. Thank you for your participation.