Maravai LifeSciences Holdings, Inc.

Good day, and thank you for standing by. Welcome to the Q3 2021 Merify Life Sciences Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentations, there will be a question and answer session. To ask a question during that session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any assistance during the call, please press star 0. I would now like to hand the conference over to your speaker today, Ms. Deborah Hart. Ms. Hart, you may begin.

Thanks, Chris. Good afternoon, everyone. Thanks for joining us on our third quarter 2021 earnings call. Our press release and the slides that accompany today's call are posted on our website and are available at www.investors.maravai.com under financial information, quarterly results. On today's call, we will cover our financial results and business highlights, and we'll provide updated financial guidance. As you can see on slide two, Carl will first provide you with a business update, and Kevin will review our financial results and guidance. We will then open the call for questions following the prepared remarks. On slide three, we will remind you the forward-looking statements that we make during this call. including those regarding our business goals and expectations for the financial performance of the company, are subject to risk and uncertainties that may cause actual events or results to differ. Additional information concerning these risk factors is included in the press release we issued earlier today, as well as those that are more fully described in our various filings with the FCC. 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 this call, we will 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, which is posted to the MARAVI website and as filed in our 8K with the FCC and available through EDGAR. The metrics we will be discussing 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 that are intended to better enable investors to benchmark our current results against historical performance and the performance of peers. Now I'll turn the call over to Carl.

Well, thank you, Deb, and good afternoon, everyone. We appreciate having you join us for our call today. Before we get started with our third quarter results, I'd like to let you know that today we published our inaugural Environmental, Social, and Governance Report, highlighting what we've accomplished to date and our long-term commitment to creating a sustainable future. The report touches on many of the themes we value and the impact our culture has on our business performance. You can find the report on the investor section of our website. We look forward to engaging with you on how we continue to integrate ESG principles into our operating decisions. On slide five, you'll see some of the highlights from the report. Throughout our organization, we think and act sustainably by using ethical business practices that ensure safety, efficiency, and social responsibility in a manner that protects our employees, communities, shareholders, and the environment. I'm particularly proud of our team for actively embracing and enhancing inclusion and diversity initiatives, and of the fact that we were recently added to the State Street Global Advisors Diversity Index. We recognize we are in the early portion of a continuous journey, and we look forward to periodically sharing updates on our progress. Now, let's turn to our third quarter on slide six. I'd like to remind you that our third quarter results include two months of contribution from our protein detection business, which was divested effective September 2nd. Maravai had another super solid quarter, growing 133% compared to the prior year, reaching $204.8 million in revenue. Our trailing 12-month revenue reached a record high of $669.1 million. Our adjusted EBITDA of $156 million grew 169% over the prior year. Our top-line performance and consistent profitability resulted in adjusted diluted earnings per share of 44 cents per share. Cash at the end of September was $547.9 million, and total gross debt was $545.5 million. bringing us to a positive net cash position for the first time in Maravai's history. We have had an incredible year in our first calendar year as a public company, as our numbers will attest. It is clear that momentum continues to build across our global customer base as mRNA research and development progresses to the forefront of modern medicine. Turning to slide seven, Growth in nucleic acid production, in particular, remains very robust. Our nucleic acid production business had revenue of $182.9 million, up 170% year over year. Demand for clean cap mRNA continues to be strong in all areas. Clean cap reagents themselves and custom mRNA constructs using both our development and GMP services. We, of course, see significant clean cap demand related to the development and production of mRNA COVID-19 vaccines. Our customers are working diligently to both increase the global supply of the initial vaccines and to prepare for potentially emerging variants. Let's get into this in a little more detail. Let me begin by saying that we strongly believe we'll continue to see durable demand for CleanCap for the foreseeable future for a number of the reasons cited on slide eight. First, just under 40% of the global population has been fully vaccinated as of this week, meaning that more than half the people in the world are still in need of the primary vaccine. Second, vaccine labels are expanding to younger populations. including ages 5 to 11, as is now occurring in the United States. Third, there are increasing recommendations worldwide for the use of a third dose of vaccine as a so-called booster. Just yesterday, Pfizer asked the FDA to extend the booster authorization to all adults. And now there are growing calls to use mRNA vaccines to complement an initial adenovirus or viral vector vaccine, such as from J&J or AstraZeneca. Finally, we can also foresee the need for an annual booster or periodic maintenance vaccine recommendation as the pandemic moves into an endemic phase over time. In fact, here in the U.S., the federal health guidelines already recommend a fourth dose for those who are immunocompromised, which should be administered six months after they receive their third dose. As most of you know by now, we have solid forward-looking visibility into the revenues for CleanCap that are provided to COVID vaccine manufacturers under formal supply agreements. As we look at that book of CleanCap orders already in hand and that are included in our preliminary 2022 guidance, we now have POs for over three quarters of the expected 2022 COVID clean cap revenue. Therefore, our current expectation is that our COVID-19 related clean cap revenue will increase in 2022 by somewhere between five and 10%. Using the midpoint of our revised 2021 guidance for COVID-related clean cap, that would imply further revenue growth of roughly $25 million to $50 million attributable to COVID clean cap in 2022. Now, it seems apparent from all of the market activity that we saw last Friday that some investors hold a view about vaccine revenue durability that is somewhat at odds with the one I just outlined for you. All I can tell you is that our guidance is based on quite tangible things, those forward POs that I referred to, for example. We clearly see a bit of a disconnect here that I'd like to dive further into. An effective public health response to a pandemic as disruptive as this one requires a multi-pronged approach that includes effective diagnostics, therapeutics and vaccines. Paxlovid, which has been in the news recently, is a treatment to be administered once someone has already contracted the virus. We don't necessarily see any connection between the development of a potentially beneficial antiviral therapy and the number of vaccine doses that will be administered over time protect against acquiring and spreading that same virus. These are really two different things and quite likely will exist at two dramatically different price points. Let me give you a historical example on slide nine. We have a pretty good precedent to refer to here with the seasonal flu and Tamiflu. Tamiflu was introduced to a great deal of fanfare back in 1999. Its effectiveness at reducing flu complications, hospitalizations, and deaths in at-risk patients was well established. It shortened the duration of the disease in many patients and also lessened its severity in others. Sound familiar? Its first major test came during the H1N1 or swine flu pandemic of 2009-2010, as you'll see on this slide. During that flu season, 114 million doses of flu vaccine were distributed in the U.S. That was also the peak year of Tamiflu sales worldwide, at over $3 billion, as I recall. The very next year, when there was a somewhat star-crossed universal H1N1 specific vaccination campaign in the U.S., the number of flu vaccines administered hit a then record 155 million doses, which we can think of as a pandemic-style vaccination high. Since the slight retreat in the number of vaccines the following year, as flu returned to a more normal endemic phase, demand for vaccines has increased consistently. In 2020 to 2021, the U.S. distributed almost 194 million flu vaccines, a 70% increase in the decade following that original H1N1 pandemic. And throughout that entire decade, there was an affordable, approved treatment for the flu widely available. One did not substitute for the other. As an aside, I should also note that the number of flu tests taken annually in the U.S. increased 2.5-fold during the period from just 2010 to 2015, according to the CDC. So it's quite reasonable for us to recognize that diagnostic tests, effective antivirals, and vaccines will all continue to be elements of our public health response to COVID. And while each of us on this call probably can't wait to grab a blister pack of Paxlovid to keep in our backpacks as we travel, that will in no way substitute for being fully vaccinated as the most effective way for society to combat this disease. Now turning to slide 10 and our non-COVID-19 related pipeline. Although the current large scale COVID-19 vaccine demand overshadows much of the progress we are seeing with non-COVID-related mRNA programs. The pipeline for these non-COVID-related vaccines and therapeutics is impressive. All told, over 85% of our mRNA development customers using CleanCap are working on non-COVID-19 programs that range from vaccines for oncology, influenza, and other infectious diseases, to mRNA therapeutics for, again, oncology, monoclonal antibody-based therapies, and protein and enzyme replacement therapies. As mRNA technology has now been proven out, we're also seeing more active GMP mRNA programs entering the clinic, which provides us with the opportunity to provide additional GMP services. The majority of these programs are still in phase one, So the capacity investments that we are currently making and that we outlined for you on our last call will allow us to support this demand and to transition to Phase II clinical material and beyond over the next few years. We expect continued growth in the broader vaccine and therapeutic pipeline as mRNA-focused R&D accelerates in real time. To wrap up the nucleic acid production highlights, we are seeing very strong growth in the base nucleic acid business beyond just our COVID vaccine clean cap sales. This base business, which consists of custom oligos, NTPs, plasmids, standalone messenger RNA, messenger RNA with clean cap, and clean cap demand for non-COVID vaccine applications grew approximately 50% for the nine-month period. Now turning to slide 11 in our biologics safety testing business, which supports high-growth markets in cell and gene therapy, vaccines, and biologics drug manufacturing. Here we set the global gold standard in host cell protein and process-related impurity analytics, along with offering innovative viral clearance solutions that ensure the safety of biopharmaceutical products. Our third quarter revenue of $16.6 million in BST is up 18% from last year, with year-to-date growth of 29%. All regions, North America, Europe, and APAC, delivered strong growth, including 49% year-to-date growth in the Asia-Pacific region, which has become a focal point for biosimilar development. In BST, we see strength from both our biopharma and CDMO activities with an increase in the number of drugs in preclinical development and in clinical trials. We saw a strong demand for all categories of kits during the quarter from generic host cell protein assays to other ELISA and purity detection kits to custom HCP assay development and to orthogonal mass spectrometry-based services that promote the use of our HCP kits. This business is extremely sticky, as most biopharma companies will keep using the same qualified assay kits as their drugs move through the development process and into commercial manufacturing. Biologic safety testing continues to be a very attractive space for Maravai. We plan to continuously innovate, scale our offerings, ensure superior technical support, and offer the highest quality services and products, and the most comprehensive catalog of products to meet our customers' needs. Moving on to slide 12. We'll be hosting our first Investor R&D Day on January 28th, and hope you can all join us for this virtual event. Deb will be providing more details and registration information as we get a little closer. We look forward to an engaging event and to introducing you to other members of the MARAVI team. Turning now to slide 13, I'll ask Kevin to cover our third quarter performance, along with our updated guidance for 2021, and to provide our initial revenue expectations for 2022. Kevin?

Thank you, Carl. Good afternoon, everyone. I'm happy to review our financial results for the third quarter in nine months of 2021, and to provide our revised financial guidance for the balance of the year. I will also discuss in more detail our initial revenue guidance for 2022. Let's start on slide 14. As you have seen in our press release this afternoon, our Q3 revenues of $204.8 million represented 133% reported growth from Q3 of 2020. Beginning with gap numbers, our net income before the amount attributable to non-controlling interests was $132.8 million for the third quarter of 2021. Income from operations was $156.9 million in the quarter. Operating margin was 77%. After backing out the gain on the sale of our protein detection segment, our GAAP operating margin was 71%. Turning to slide 15. Adjusted EBITDA and non-GAAP measure was $156 million for Q3 compared to $57.8 million for Q3 2020. This represents a 170% increase year over year. Our adjusted EBITDA margin was 76%, up from the 66% in Q3 2020, and consistent with our most recent 76% margin in Q2 2021. Increase in adjusted EBITDA year-over-year was primarily driven by our overall sales volume increases and margin improvements from our nucleic acid production business. On to slide 16. So we present basic EPS, fully diluted EPS, and adjusted fully diluted EPS. Our basic EPS is 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 non-controlling interest divided by the weighted average for both Class A and B shares and other dilutive securities such as equity awards. Our adjusted fully diluted EPS equals adjusted net income divided by the weighted average of both Class A and B shares and other dilutive securities. Our basic and fully diluted EPS for the quarter were $0.46 and $0.45, while adjusted diluted EPS was $0.44 per share. As you can see now on slide 17, we have continued to have an exceptionally strong balance sheet in cash flows. Our cash and cash equivalents, which are gap metrics, totaled $548 million at September 30, 2021. Our strong EBITDA performance led to robust adjusted free cash flow for the quarter of $153.8 million. We defined adjusted free cash flow and on-gap measure as adjusted EBITDA less capital expenditures. At the end of the quarter, we had $545.5 million in gross long-term debt prior to unamortized debt issuance costs. With $547.9 million in cash and trailing 12-month adjusted EBITDA of $487 million, we have a record low 1.1 times gross debt to adjusted EBITDA ratio and are below zero times on a net basis. Our robust balance sheet, continued strong cash flows, and overall debt capacity give us the financial flexibility to make both organic and inorganic investments that will drive innovation, build capacity, address customer needs, and contribute to long-term growth. Now, to provide some more insights into our business's segment financial performance for the quarter, I'll turn to slide 18. As Carl mentioned earlier, our nucleic acid production business fueled the most significant portion of the revenue growth for the third quarter. Nucleic acid production represented 89% of the company's total revenue in the quarter and generated $150.6 million in adjusted EBITDA in the quarter. The 82% adjusted EBITDA margin in this business continues to reflect the value of our unique products as well as the efficiencies from the scale of operations at our state-of-the-art water-rich manufacturing facility. Clean cap revenues from COVID-19 vaccine customers were approximately $131 million in the third quarter of 2021. Our biologic safety testing business contributed 8% of the company's revenue in the third quarter. Revenues from our Cygnus branded products, which comprise virtually all of this segment's business, or $16.6 million in the quarter. This demand was driven by the increasing number of biologics and biosimilar drug development programs and the overall strength and depth of our product portfolio and services. Our biologic safety testing business delivered $13.6 million of adjusted EBITDA in the quarter. In looking at this business on a year-to-date basis, our biologic safety testing business has grown 28.7% from the prior year nine-month period. This strong revenue growth not only reflects demands for our core HCP and ELISA kits, but greater than 40% growth in our service offerings, which demonstrates our expanding capabilities within this segment. Lastly, the customer segments we serve continue to reflect evolutions in the broader market with the CDMO channel growing significantly, both through direct sales and through our channel partners. This growth is especially exciting as we are seeing demand for our broader offerings, including HEK 293, HCP ELISA, SF9, and CAP HCP ELISAs for scaled-up AAV manufacturing, along with Endonuclease, GTP, and BSA ELISA for measuring other process-related impurities. Our protein detection business, which we divested to Thompson Street in early September, represented less than 3% of revenues for the quarter and at $2 million, less than 2% of our adjusted EBITDA. Corporate expenses that were not included in the segment-related adjusted EBITDA totals were $10.2 million in the quarter, relatively flat from the Q2 2021 levels of $9.6 million. Now moving to slide 19 in our updated 2021 guidance. Today, we are raising our 2021 full-year revenue guidance to $770 million to $780 million, up from our prior guidance of $745 to $770 million. a $17.5 million increase at the midpoint. Included in our overall total revenue range is our estimate for 2021 clean cap revenues directly attributable to our COVID-19 vaccine customers, which we are now estimating at $520 to $525 million for the year, up $22.5 million at the midpoint from our prior guidance. As total revenue guidance for the full year of 2021, reflects the expectation of around 25% annual growth for our biologic safety testing business. This guidance also reflects the divestiture of the protein detection business and the loss of that modest revenue contribution, which will remain at the reported $19 million for 2021. Given the relatively small contribution of protein detection to Mara Valley as a whole, we are not planning on presenting pro forma results with and without this segment. This updated guidance at the midpoint implies that the total nucleic acid production segment revenues will be around $690 million for 2021. We continue to see good momentum and traction across our offerings here, with strong clean cap demand coming from outside of the major COVID-19 programs, as well as including initial orders for non-COVID vaccine development. Further, our blue chip customer base of gene and cell therapy companies represent an exciting mid- to long-term opportunity as the validation of mRNA as a development platform is feeling rapid segment growth. We're extremely busy here and very excited about our role as a key contributor to these new MRNA platforms for the foreseeable future. As discussed on our last call, our revenue guidance is based in large part on our largest customers' rolling forecasts that extend out for several quarters and are further supported in the near term by binding purchase orders, which may go out for several months. On top of that, we have a forecast funnel for our GMP suites that are used mainly to support builds for our customers' nucleic acid therapeutic programs. Based on these factors, our revenue guidance here comes with a considerable degree of forward visibility, but still may be certain to subject to some quarterly fluctuations. Based on those revenue expectations, we have updated our internal forecasts and our guidance for other key financial metrics. We expect our non-GAAP adjusted EBITDA a non-GAAP measure to be in the range of $570 million to $575 million, which at the midpoint of the range represents growth 239% over the prior year and an applied adjusted EBITDA margin percentage of 74% at the midpoint of our 2021 revenue range. As we've highlighted in our last call, we are continuing to look to make organic investments in our R&D and commercial organizations, and we continue to expand our base of employees to meet record customer demand. Adjusted fully diluted EPS, a non-GAAP measure, is expected to be in the range of $1.48 to $1.52 per share for 2021. The increase in our guidance here is directly tied to our revenue growth and overall margin expansion. This implies EPS for the fourth quarter of around $0.34 to $0.38 per share. Let's move to slide 20. 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 of around 258 to 259 million for the full year of 2021. The net income included in our adjusted fully diluted EPS has been adjusted to eliminate any net income or loss attributable to non-controlling interests as a result of the full conversion of Class B shares to Class A shares. Additionally, our adjusted fully diluted EPS, including certain adjustments that do not reflect our core operations, are based on an adjusted effective tax rate range of 23% to 24%. The effective tax rate reflecting some forecast improvement based on the geographical distribution of our growing revenue base. As it relates to the certain other adjustments needed to get to our non-GAAP adjusted EBITDA range, we see the following items in 2021. Interest expense between $34 million and $35 million, Depreciation and amortization between $28 million and $29 million. An adjusted tax rate of 23% to 24%. Equity-based compensation, which we show as a reconciling item from GAAP to non-GAAP EBITDA, to be between $11 million and $12 million. And for 2021, we expect to invest an estimated $15 million to $20 million for capital expenditures, less than 3% of total revenues. Our reconciliation of net income to GAAP EBITDA and then from GAAP EBITDA to adjusted EBITDA is presented in our press release today. In addition, our segment related information will be detailed in our form 10Q, which we plan to file in the coming days. Now turning to slide 21, you'll see our initial revenue expectations for calendar 2022. While we don't intend to provide detailed guidance for 2022 on this call, nor do we want to set a precedent to always provide future year guidance on our third quarter call, we did want to provide our current view on the top line based on initial orders from our major customers. Revenue of $840 million to $880 million in 2022 implies growth of 14% at the midpoint of our guidance when adjusted for the divestiture of the protein detection business. As Carl mentioned, we see clean cap demand for COVID vaccines in 2022 increasing between 5% and 10% over the 2021 level. As it relates to other components of annual guidance, We will plan to provide more detailed guidance for 2022 in the first part of next year. Our third quarter was another solid quarter of operational, strategic, and financial execution. We continue to support the strong COVID vaccine demand, grow our core business, focus on organic expansion, and support our customers with quality products on time to support their businesses. Now, before I turn the call back to Carl, I also want to state that our supply chain remains solid in support of our products. Our investment in our supply chain activities and our quality systems have positioned us well for business continuity with no present issues. We are fortunate that our company has been built from a series of U.S.-based acquisitions that have long and strong relationships with their legacy vendor and customer bases. These relationships have only deepened over the period of Maravai ownership. Seventy-five percent of our year-to-date inventory purchases have been sourced from companies in the U.S., which also mitigates global supply and logistic risks. As we look forward to wrapping up 2021 over the next seven weeks and turn our eyes to 2022, we see a year of continued growth across our core segments, a focus on key capacity expansion activities, an increase in R&D investment and innovation to drive long-term growth. Combine those items with industry-leading EBITDA and free cash flow margins, a strong and flexible balance sheet, and a stable of customers that are looking to reshape vaccine and cell and gene therapy markets, it's clearly evident that Marvi is in a great position. To conclude my remarks, the team here is focused, primed, and ready to continue to support every increasing base of customers with our strong suite of products and services. Now I'll turn it back to Carl for some final remarks on slide 23.

Well, thanks, Kevin. So to wrap up, we feel great about the entire business, and we're pleased to be adjusting our 2021 guidance upwards for revenues, adjusted EBITDA and EPS significantly, and to be introducing 2022 revenue guidance for growth of approximately 14% at the midpoint after adjusting for the divestiture of our protein detection business. This overall growth in 2022 includes strong continued underlying core growth in our nucleic acid production and biologic safety testing businesses, as well as increasing clean cap demand for vaccine programs. From COVID-19 vaccines to vaccines for influenza, malaria, and TB, to cell and gene therapies battling cancer, the transformative impact mRNA will have on global human health is only accelerating. We at Maravai are proud of the key role that our customers, partners, and employees are playing in making that happen. As our customers' programs advance into later stage clinical volumes or commercialization, we see our growth as not only being sustainable, but also potentially accelerating as messenger RNA-based therapies and vaccines work their way more broadly into adopted healthcare practices. I would now like to turn the call back over to Chris to open the line for your questions. Chris?

Thank you, sir. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound key. Our first question comes from Matt Sykes of Goldman Sachs. Your line is open.

Hey, good afternoon, Carl and Kevin. Thanks for taking my questions. Congrats on the quarter. Hey, Matt. You know, one question we feel that quite a bit was has been on one of the slides you have that 60 percent of the world's population is yet to be fully immunized. And then Pfizer, BioNTech's role in sort of rest of world immunization as you continue to build capacity and they continue to manufacture vaccines. What do you think Pfizer's role will be in sort of non-U.S., non-Europe, rest of world type immunization programs as we move forward into 22 and 23?

Yeah, good question, Matt. You're asking me to prognosticate a little bit, so I'll qualify my answer with that. I think that Pfizer is uniquely well positioned given their global reach and infrastructure to play an expanding role throughout the world in the pandemic response. If you look at the scale and scope of their operations, the number of countries that they've shipped the vaccine to already, it really is quite impressive. And so I think that as the landscape continues to unfold and as the science progresses, what we're finding is that the mRNA modality, and so that means Pfizer-BioNTech and Moderna, is holding up quite well in terms of its performance. Some of the early issues with the supply chain or the cold chain distribution are being mitigated or addressed. And I think that right now people would say the best-in-class vaccines are, in fact, the messenger RNA vaccines. So with that backdrop, I would say that we feel very fortunate that our longstanding customer, BioNTech, partnered with Pfizer in this situation because they're obviously extremely well-positioned. And I think if you look at the numbers, that were disclosed by both companies about their expected volumes next year looks to me like Pfizer expects to take about 75% of the mRNA vaccine market for COVID. And you're going to have Moderna in at around 25%. Great.

Thanks for that color, Carl. That's very helpful. And then just appreciate you guys breaking out the, um, the non-COVID-related CleanCap customers being over 85%. Any additional color you can provide on sort of the growth you're seeing in that customer base, the diversity across that customer base, and how you feel the progress you're making in sort of non-COVID-related CleanCap?

Yeah, I mean, it's nothing short of amazing. Had COVID not happened and we had seen this kind of growth that we're now seeing in the non-COVID applications, I think we would have all been extremely pleasantly surprised and pleased with that work. So right now, I think you're seeing, A, a bunch of established players fully resume the programs that they had in play or that they had planned for prior to COVID. And now you're also seeing a lot of new entrants into the market with different technologies and different approaches that are trying to penetrate some of the specific opportunities that I outlined And so it's quite broad, widespread, and probably unimaginable two years ago. Great.

Thank you for taking my questions. Appreciate it.

You bet. Thank you. Our next question comes from Taya Savant of Morgan Stanley. Your line is open.

Hey guys, good evening and thanks for the time here. Carl, to your point on oral antivirals being compliments rather than substitutes for vaccines, I think that's a good point, but every once in a while we get the question, is there a chance here that these pills could cap uptake of the vaccine for boosters or perhaps among the anti-vaxxer population and to some extent even emerging markets? So just curious as to get your take on that sort of aspect of the dynamic.

Yes, let me think about that for a second. I am sure that there is some segment of the population that will be much more reassured taking a proven existing antiviral like we're talking about here rather than taking a vaccine. But how big is that share of the global population? Number one, I don't know. Number two, we seem to have hit a threshold in many developed countries of around anywhere from 20 to 25% of people not being really enthusiastic about taking a vaccine in the first place. So I don't know that it's going to cause any more resistance than might have been there before that period of time. I'm just not sure. But then if you look at the cost, and to my point about different price points, you're talking about vaccines now that can cost in the range of $20 to $30 each dose. And I believe the Merck antivirals were priced at around $700 for a course of therapy. I just don't see from a public health point of view how a 35 to 1 cost improvement ratio that doesn't address the actual underlying spread of the virus is a viable substitute.

Got it. That's helpful. And then, you know, Moderna recently had a bit of a manufacturing hiccup. They've lowered their sales range, and to your point, you expect Pfizer to sort of take a, you know, over 75% share of the mRNA vaccine market opportunity next year. Could this represent an upside for clean cap near term, or is that already sort of captured into your 5% to 10% growth forecast for 2022 for the COVID clean cap piece?

Well, I think that given the news about Moderna is relatively late breaking, it seems unlikely to me that that was ever fully digested or folded into the forecast that we have received from our customers yet. So there might be some potential upside there. I think time will tell. But again, we go back to the fact that we're working off of orders, not projections.

Got it. Very helpful. And then one final one for Kevin here. Kevin, can you give us a sense of underlying EBITDA margins for the nucleic acid production business if you were to X out the COVID contribution? And what do segment margins in your mind look like in steady state for that business over the medium term? Okay.

Yeah, I mean, we have been guided to sort of EBITDA margins excluding the COVID contribution. You know, I think that CleanCap, whether it's for COVID vaccines or for other products, is very high. So there's a bit of a put and take there with regards to those two items. You know, I think you'll see, you know, we've been, I think the midpoint of our guidance here is around 74%. We've been very consistent around that level. over the last few quarters and moving forward here. We are continuing to look at a couple of things that will put some pressure on that. That would be the increase in R&D spend, the increase in commercial, and then the additional facilities that we'll be bringing out incrementally over the course of next year with our Flanders facility and the new home for our biologic safety testing business, which will collectively probably add around $6 million to $7 million of annual expense. That having been said, the leverage we get over our fixed cost base with the fact that we're growing these businesses next year should help to buffer some of those investments. So, you know, margin stability, as we look forward, I think is a fairly reasonable assumption with some of the key investments that we're consciously making in our cost structure for longer-term growth. Very helpful. Thank you.

Thank you. And next we have Dan Arias of Defo. Your line is open.

Good afternoon, guys. Thanks for the questions. Carl, to your point on Pfizer's recent comments, they had a couple of ideas that they threw around just in terms of expectations for vaccines. I think they had talked about the plan being to ship 1.7 million doses next year, but it also sounds like they're thinking that that $4 billion, sorry, that $4 billion dose number is a production goal, and it's something that you referenced on the last call. So the guide for clean cap, for COVID clean cap, how should we think about that and what that's based on or what that looks like and how that aligns with the Pfizer outlook? I mean, I know you just said that you base your view on orders and not a projection, but it would just be helpful to square away, you know, how what you're thinking jives with what they're thinking.

So hearing silence, I guess I will take some of the part of that question.

I'm sorry, Kevin. I was on mute. My apologies.

Oh, no problem.

My apologies, Deb. So, look, we can never square this circle for you, so I apologize for that in advance. The way I would think about it is Pfizer is moving on to sort of the next phase of the vaccination program. You're going to see a mixed shift next year. I'm sure that they will be selling much more product to the developing world, so those lower economic output countries that will be receiving product at cost, or the countries that are kind of in between that and the Western markets that were predominant this year. As a result, anything that tries to tie the dollar projections back to that would have to account for that mix in price, which I understand is a fairly significant difference. So that would be the first thing I would say. And then the second is the orders, even as they're communicated by our customers and their competitors, their expected order volumes sometimes take weeks or months to work through their supply chain and get into the actual orders that we see. So the history here has been one of fairly consistent increases in volume, not going the other way. I don't know if that's responsive to you.

Yep, that's helpful. Okay. But maybe just following on that point, I'm curious if the visibility or the timing or the size of the clean cap orders has sort of changed over time. Is that something that plays into the order book for you? You know, do you just find that there's a little bit more up in the air or more that's up in the air in terms of timing or what you might have coming to you in 90 days' time?

No, actually, I think it's the other way around. We have seen only larger demands coming in over time as the production processes are stabilized, and we see greater certainty going out for a longer period of time today in terms of number of months of orders on hand.

Okay, super. Thank you very much.

You bet.

Thank you. And next we have Catherine Schutte of Beard. Your line is open.

Hey, guys. Thanks for the questions. I guess first, last quarter I think you broke out the number of clean cap supply agreements that you had signed that were in active negotiations or with term sheets. Can you just give us an update on where you stand there today?

Calvin, do you want to take that one? Yeah, certainly.

Yeah, I mean, it's not a metric that we're necessarily going to be updating every quarter. I can tell you that, you know, that overall population has grown and the advancement of kind of those different funnels have grown as well, meaning we've gone from term sheets to more active negotiations and certainly signed more deals than we had when we poured those numbers previously. You know, our commercial team remains extremely busy across this customer base, and not only are we squeezed with the way that funnel is maturing and continuing to grow, but it's also the excitement in and around, you know, the number of programs which each of those contracts potentially serve for each of our customers, and that's the thing that will also give us, you know, greater opportunities for long-term success in some of these programs sticking with mRNA and CleanCap over time.

Okay. And then if I back out the COVID-related clean cap revenue, it looks like the nucleic acid production business increased about 40% sequentially. So what were the key drivers there, maybe split between non-COVID clean cap and the other components of that segment?

Yeah, there's a variety of things. I mean, I think the non-COVID clean cap is the next kind of larger bucket of products there. And where you get into this being a little bit hard to dice up perfectly is we do cell clean cap both as a standalone reagent and incorporate it with modified mRNA. So you have combination products as well as standalone clean cap and then standalone. All of those chemistries demand for intermediaries and other raw materials. So, you know, it continues to be really nice growth across the portfolio, I would say. And this is still very broad-based as far as customers are concerned, meaning we're not necessarily seeing one customer's program get ahead of the whole population. It still continues to be pretty broad-based. A lot of people still in discovery and early stage one. But we are starting to see, I would say, the most... a significant part of this growth starting to come from clean cap demand for non-COVID applications across some of those vaccine targets that Carl previously articulated starting to ramp up. And that's something we've been working with our customers on and to get more visibility on. As you know, our clean cap products are not target specific. So if we ship a certain amount of kilograms to a customer, which we believe was intended for product program X. It could go to program Y. They don't necessarily need to order it to differentiate their orders that way. But we're certainly trying to work with them in understanding the non-COVID versus COVID piece, and then the piece that's related to specific programs that they have versus other exploratory options. So the nice thing about, again, the growth, it's pretty broad, pretty well spread across our customer base. so we're not really necessarily concentrating any of the nucleic acid production growth outside of COVID into any particular customer.

Yeah, and Catherine, I'd also highlight the growing demand from these exact same customers who've been buying CleanCap from us for other applications for the building blocks or the inputs that are used in their own synthesis programs. So, If they're doing it in-house, then those raw materials that we currently use ourselves are in high demand. The ability to produce those reliably and at high-quality standards has been noticeably increasing demand here over the last couple of quarters.

Great. Thank you.

You bet. Thank you. Next, we have John Sauerbeer of UBS. Your line is open.

Hi, thanks for taking my question. Sure, John. Yeah, just maybe talk a little bit on capital deployment. You know, the company has around $550 million in cash, you know, pretty unlevered. You know, what are the, can you talk a little bit on the priorities there across share repurchase, M&A, and capacity expansion?

Yeah, certainly. I mean, it is a great position that we are in the strength of our balance sheet and the flexibility. I think You know, we see our ability to execute on all fronts at the same time. That doesn't always happen in any given period. But, you know, organic investment, you know, as we articulated the last quarter with the facility expansions, that continues to be something we're focused on. Certainly, we have P&L capacity to do that as well. From there, you know, the next priority and, frankly, a parallel priority has always been looking at inorganic opportunities. We continue to be extremely active there. We continue to want to bring something meaningful across the line, and we're focused in the nucleic acid production segment predominantly first, and then certainly biologic safety testing as well. There's just fewer assets in which we're tracking in that space. So that is certainly a big focus of ours as well. As far as other applications of capital deployment with regards to either debt capacity, leverage, share repurchasing, other financing activities, I think we're going to continue to focus on the first two and see where we shake out. I think the other items will be something we'll revisit in 2022 based on the outcome of the first two investments.

Thanks. And I just appreciate the color earlier on the supply chain. Are there any areas that you're seeing that maybe inflationary pressure or pricing pressure? And can you talk about maybe the company's ability on being able to pass along these price increases to customers?

Yeah, certainly. I think at this stage, we have benefited by such an increase in volume from where we were two years ago and such an increase in formalizing our operations, really professionalizing some of our negotiation tactics and kind of bringing up multiple vendors to compete against each other. We've seen pretty good pricing decreases on a per unit basis with some of our main inputs. And that's, again, volume-driven as much as the life science businesses can be. And so that's been very helpful to us right there. We do not see specific price increases right now affecting our COGS profile. As it relates to passing things along, there are certain items that we see in more of a catalog-type business. that we can pass along some small percentages of increases, but those have been in the low single digits historically as far as what we've passed on as far as pricing increases to offset any cost increases that we have, again, primarily to some of our smaller product lines. Got it. Thanks for taking my questions, and congrats on the quarter.

Thank you, John.

Thank you. Next, we have Paul Knight of KeyBank. Your line is open.

Hey, guys. Carl, could you talk about you're obviously successful with these non-COVID early stage customers. What are they saying about clean cap versus alternatives? Is it a preferred technology or what are they saying they like about clean cap?

Yeah, I think, John, I'm sorry, Paul, when people come to us in early stages, they've already made a decision about kind of the design of the construct that they want and they're trying to see can it in fact be synthesized and then after that can it in fact work. So I think people have already made a decision at that point that they probably are in favor of clean cap. That's why they're coming to us to get those constructs made initially. And so I think it's just it is really a question of preference. A lot of this has to do with, you know, what are the examples that you have out there of systems that have performed well and they just are imitating that basically.

And what should we assume, Kevin, for the quality control business for growth next year? What's your assumption there?

Yeah, we didn't parse that out. I mean, look, I would say that we obviously said we'll be about 25% this year. You know, the market historically there has been in the low to mid teens, you know, so, you know, that's kind of the two different areas, two different goalposts for you, but we didn't break out 22 guidance for the two segments at this stage. Okay, thanks. Thank you.

Thank you. Next, we have Matt LaRue of William Blair. Your line is open.

Hi, good afternoon. I just wanted to follow up to Paul's first question. And so, Carl, you alluded to the significant investments across the space in mRNA. And I assume that, you know, most customers who are working with you using CleanCap before are still using CleanCap. But of new programs that have gotten funded, Have you had opportunities to win new customers or new non-COVID programs? How have you fared? And has anything changed in the landscape, either competitively or in terms of preference for co-transcriptional versus post-transcriptional capping technologies?

Well, on the latter point, the answer is no. I don't think much has changed. When you look at it right now, Co-transcriptional capping gives you the ability to reduce the number of steps in your production process and not lose yield unnecessarily. And so those benefits have endured, and I think that's one of the things that drives people towards us in the first place. But as you think about what's our percent market share of all the programs, we don't have that. It's obviously a rapidly evolving space, and any data sources that are out there probably are always dated by the time you see them. We are in the process of updating our market growth estimates from the time of the IPO to the current market. And I can tell you that obviously those growth rates have shifted and the origins, or I'm sorry, the sources of the growth are different than they, in some cases, dramatically different than they were two years ago. We plan on sharing some of that data at our upcoming R&D day as we talk about opportunities.

Okay. Thanks, Carl. And then, Kevin, you mentioned that you don't have any supply chain issues in terms of your products, but you're obviously building out a large, the Flanders facility and then the new biological safety testing facility. I guess just any issues that you've seen or anticipate in terms of the build-out of those facilities, and do you feel like you have some push in on capacity if there were to be any delay there?

Yeah, we certainly do have the opportunity to meet demand that we see for 2022 in our existing facilities. This is really building for the future, and with our new investments next year, I'd say that those programs and those construction projects continue to be on pace. We look at the cost regularly. There's some small increases around the edges, but nothing material from our perspective. So we're still on pace for that, and we don't need those facilities to hit what we just guided for 2022. It's more the longer-term opportunity as well as capabilities, and we've always tried to stay well in front of that so we can be ready to meet those demands as they come to fruition.

Okay.

Thanks a lot.

Thank you. And, operator, we have time for, I believe, one more question.

Yes, sir. Our last question comes from Michael Ryskin of Bank of America. Your line is open.

Great. Thanks. Thanks for squeezing me in. Hey, Carl. I've got two for you, a little long-winded but hopefully pretty direct. First, I was going to ask on the non-COVID clean cap work. You gave that stat that 85% of your customers are non-COVID related. When we think of clean cap and how it gets used through the development process, The amount of reagent that gets used, we kind of think of it as it should ramp as you move through development, as you move through the clinic and eventually want to get approved. And that ramp should be pretty aggressive, you know, inflection towards the back end just in terms of volume of reagent, you know, correlated to volume of patients or volume of doses. So these 85% of CleanCap customers, Anything you can broadly give us in terms of when you see that inflection, that ramp happening? Is that, you know, two, three years out, four, five years when some of these projects are going to, you know, get to that later clinic or approved stage and when those dollar terms should get pretty meaningful?

Yeah, I think that that's a great question that nobody knows the answer to right now, right? I think that with COVID and warp speed, that's the pace at which it happened. Now everybody is wondering how much of that will actually translate to routine approvals in the future and the future regulatory posture. So I think it's too early to tell. It's a good question. I would assume it's going to be shorter than it would have been two or three years back. But is it going to be a year shorter? I just don't know the answer to it. I don't think we're going to see any of these therapeutics or vaccines get approved as rapidly as we did see with COVID-19. That's a given. But it's going to be someplace between the two extremes there. I think the other thing that's important to note is that we do, in fact, see the ramp as these programs go through. You've got to remember that we may have dozens and dozens of customers with active programs at any point in time. They're subject to the risk of clinical failure that are existent for a all pharmaceutical products, right? So you're going to have to take a haircut out of that universe of early customers to get to what the ultimate end state might look like. And then the ramp will depend really on the size of the patient population. So is it a rare indication or orphan disease? or is it a more widespread one? And as you said, the dosage required. And as we've talked about before, some of the conditions and some of the therapeutics can dose an individual patient with a gram or more of messenger RNA in a year, and those could add up very quickly.

Okay, great. And if I could really appreciate that call, or if I could throw in the follow-up is, as far as Queen Cap COVID-19, I think, you know, if you go off of your number this year and you take that 5%, 10% growth, you're pointing to $560 million at the midpoint for next year. So the way you kind of interpret that is that that's sort of your most realistic scenario now in terms of visibility. With 75% of that committed, is it fair to say that, you know, $420 million or 75% of that number, that's the absolute worst-case scenario. You know, if everything drives up, that's the floor. And if so, what's the blue sky? You know, what's the upside there? Or put another way, you know, those purchase orders that are committed, are they still coming in? Are you still getting more and more order book growth where that committed number could get higher and higher as we go forward?

Yes, to the latter part of the question. We are seeing increasing orders. And it's going to be asymmetric, right? If you establish a floor and you think of that's the – the baseline from which we're operating, I think the skew on the upside is much higher potentially because you could have one or more programs that either progress faster or that have, you know, clinical success quicker. So that's how I would answer that.

Great. Really appreciate that, Kohar. Thanks so much.

All right.

Thank you. And that was the last question. I will now hand it over to Ms. Deborah Hart for closing remarks.

We just wanted to thank you all for joining us today and remind you that we'll be at two different financial conferences this month, so please check out the events page of our website for information there. And we look forward to hosting you for our virtual R&D day in January. I hope you have a great evening. Bye-bye.

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day. Enjoy your evening.