Q1 2021 Maravai LifeSciences Holdings Inc Earnings Call
Good day and thank you for standing by welcome to the Q1 2021 Mario VI Life Sciences earnings Conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
A question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over the our speaker today that part. Please go ahead.
Thank you Mary good afternoon, everyone. Thanks for joining us on our first quarter 2021 earnings call. Our press release and the slides that accompany today's call are posted on our website and are available at investors <unk> Dot com under financial information quarterly results.
On today's call, we will cover our financial results and business highlights and will provide updated financial guidance for 2020 what.
As you can see on slide two carnival first provide you with a business update and Kevin will review, our financial results and guidance.
And up the call for your questions.
On slide three we'd like to remind you that 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 risks and uncertainties that may cause actual events or results to differ additional information concerning these risk factors is included in the press release.
Earlier 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 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, we issued this afternoon, which is posted tomorrow website and available.
Edgar filings on the SEC website, the metrics, we will be discussing in todays call increased 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.
<unk> historical performance and the performance of our peers now I'll turn the call over to Carl.
Well, thank you Doug and good afternoon, everyone I'd like to take a moment to welcome our newest group of investors who participated in the company's recent follow on offering which closed in April we are very pleased to have you with us today.
In addition, I'd like to take this opportunity to extend my personal thanks to each and every member of the more of our team who continue to execute at an incredibly high level as we will shortly see.
If we could start with slide number five as we shared in our pre announcement. Moreover, we had a very strong start to 2021 with the largest and most profitable quarter in our history to date, we formally reported $148 $2 million in revenue growing 191% compared to the prior.
Per year and up 50% sequentially over last quarter are.
Our record topline performance also contributed to outstanding EBITDA earnings per share and free cash flow generation.
I'll walk through some of the trends, we're seeing across our end markets and geographies and then Kevin will provide you with some additional color on our first quarter results and our thoughts for the remainder of the year.
Turning now to slide six and our nucleic acid production business demand for clean cap Messenger RNA continues to accelerate in all areas clean cap reagents themselves.
<unk> manufacturing services and custom mrna construct.
Mrna is an established platform for vaccines continues to be incredibly successful clinically and commercially due to its flexibility scalability and effectiveness.
One question, where you're constantly ask us how we assess the durability of our COVID-19, clean cap revenues and what the future holds for Morro volumes, let me try to address this upfront and share with you some of our very latest thinking.
As I said last quarter. It is our belief that COVID-19, vaccinations will continue to be needed for years to come in order to address new streams of the virus that have emerged as preventative measures have been eased in many countries and selective evolutionary pressure on the virus is intensified by numerous partially.
<unk> immunization programs.
We expect COVID-19 to become an endemic disease not dissimilar to influenza that will require ongoing public health interventions for years to come.
And we fully expect that reoccurring messenger RNA vaccinations will be in a central part of these continuing interventions.
The clinical efficacy of both of the mrna COVID-19 vaccines and widespread use today has not been equal by any of the other types of vaccines currently authorized.
In fact, the European Commission President.
The underlying our sulfur physician recently said and I quote we need to focus on technologies that have proven their worth.
Mrna vaccines are a clear case in point close quote.
This followed the announcement that the EU was in negotiations with Pfizer for $1 8 billion additional doses of vaccine for delivery beginning in 2022 and 2023.
Those negotiations were concluded successfully over this past weekend, resulting in the largest single contract to deliver COVID-19 vaccines to a governmental authority over a multiyear period.
It also seems clear that the ultimate share of the vaccine market held by messenger RNA vaccines.
Global programs, such as <unk> will further increase beyond the initial expectations as alternative vaccine modalities contend with concerns however, unfounded about their own safety profiles.
The development of new generations of vaccines that either offer protection against emerging vaccine variants.
Or that enhance immunity.
Offering booster doses of the first generation vaccines are well underway.
Regulatory authorization of mrna vaccine usage across all groups of the population adolescence pediatric patients and pregnant women as examples.
Imminent.
We will also further expand demand in late 2021 and throughout 2022.
We also anticipate increasing demand for clean cap in 2022, as our other customers own mrna COVID-19 vaccines received their own immediate emergency use authorizations and as those customers ramp up for full scale manufacturing just as Pfizer and beyond to have.
Already done.
These multiple concurrent tailwind now cause us to believe that 2022 is likely to see more in a COVID-19 vaccine capacity among our customers expand well beyond what was originally expected in 2021.
<unk>, specifically, we expect continued strong demand from our existing COVID-19, clean cap customers in 2021, and 2022 as they dramatically increase their manufacturing capacity for existing vaccines.
Pfizer concerned confirmed this expansion of capacity in their recent earnings call, indicating then that they expect it to be able to manufacture 3 billion doses in 2022 up 20% from their 2021 projections.
And in an open letter released just last Friday, Albert Boral has stated that Pfizer's internal objective is now to reach 3 billion dose capacity in 2021 and to expand even further to 4 billion doses during 2022.
Yesterday, Shanghai, Fosun pharma announced the formation of a $200 million joint venture with beyond tech to produce a to build a manufacturing facility in China capable of producing 1 billion doses of COVID-19 vaccine each year.
And this morning beyond took announced that it will also build a 1 billion those plant in Singapore scheduled to begin operations in 2023.
As you can see we have a great deal of confidence in the growing demand for clean cap, we will see this year next year and beyond from our largest customers.
In addition, global investment in Messenger RNA as a platform technology for several other COVID-19 vaccines is rapidly accelerating.
Pfizer raised its guidance for R&D spending in 2021 by some $600 million last week to reflect increased investment in additional mrna based development programs and COVID-19 anti virals.
More and more industry experts are projecting that mrna represents the future of vaccine development efforts.
The infrastructure and expertise now exist to further expand beyond COVID-19 variance into new infectious disease targets, such as seasonal influenza malaria core HIV and the race for an mrna vaccine for flu has clearly already begun.
Immuno oncology applications that make direct use of mrna or gene editing capabilities now include therapeutic cancer vaccines and advanced Immunotherapies, such as car T cell therapies.
Some of the earliest applications of mrna therapeutics addressed other high value unmet clinical needs for enzyme replacement therapies in glycogen storage disorders.
Many of these early stage clinical programs were put on hold due to the pandemic at a number of our customers are now resuming activity in these areas.
Now turning to slide seven.
In addition to our nucleic acid products more of those other businesses complement and round out our product portfolio.
And our biologic safety testing business customers choose our Cygnus brand due to the breadth of our test kit menu and our reputation as the gold standard when it comes to detecting impurities in the biologics manufacturing process.
We saw strong demand for all categories of kits during the quarter from generic and custom host cell proteins certainties to other Elisa impurity detection kits.
First quarter revenues for our biologics safety testing products, whereas an all time high and increased 23, 5% from the prior year.
Our protein detection business saw 7% revenue growth versus the prior year driven by both our custom and catalog business we.
We are back to historical pre COVID-19 sales levels as research labs have reopened and resumed new discovery and development work.
Finally, I'd like to comment briefly on the M&A landscape as you know, we built our business by acquiring established and emerging companies with strong scientific foundations in our target markets.
By investing in their systems processes and people in order to accelerate our growth and expand the applications for their technologies going forward. We will continue to seek a balance between driving our substantial organic growth with opportunistic acquisitions that meet our stringent.
Financial and operational requirements.
And now moving on to slide eight I'll now ask Kevin to cover our Q1 performance in some detail and provide our updated guidance for 2021 Kevin.
Thank you Carl and good afternoon, everyone I'm happy to review our financial results for the first quarter and to provide our revised financial guidance for the full year of 2021.
Turning to slide nine of our presentation.
As you have seen in our press release. This afternoon, a record Q1 revenues of $148 2 million represented a 191% reported growth from Q1 2020, our GAAP base net income for the amount attributable to Noncontrolling interests was $75 9 million for the first quarter of 2021.
Moving to slide 10.
Adjusted EBITDA, a non-GAAP measure was $101 9 million for Q1 compared to $29 6 million for Q1, 2020, and $64 3 million in the most recent fourth quarter of 2020.
This represents a 244% increase year over year, and a 58% sequential quarterly increase from Q4.
Our EBITDA margin was 69% up from both the 58% in Q1 2020 and the most recent 65% result in Q4 of 2020.
The increase in adjusted EBITDA was primarily driven by overall sales volume increases and margin improvements from our nucleic acid production business.
On slide 11.
We percent basic EPS fully diluted EPS and adjusted fully diluted EPS basic EPS is GAAP net income attributable to our class a shares divided by the weighted average class a shares our fully diluted EPS equals GAAP net income prior to Noncontrolling interest divided.
The weighted average for both class, a and B shares and other dilutive securities such as equity Awards.
Adjusted fully diluted EPS equals adjusted net income divided by the weighted average at both class a and class B shares and other dilutive securities both our basic and fully diluted EPS for the first quarter were 24.
While adjusted diluted EPS was <unk> 26 per share.
Moving to slide 12.
We continue to have a strong balance sheet and cash flows our cash and cash equivalents, which are GAAP metrics totaled 248 million at March 31, 2021, our strong EBITDA performance led to robust adjusted free cash flow for the quarter of $97 million.
<unk> free cash flow is a non-GAAP measure that we define as adjusted EBITDA less capital expenditures.
So with $548 5 million in long term debt about 2200 $48 million in cash and trailing 12 month adjusted EBITDA of $241 million, we sit at a $2 three times gross debt to adjusted EBITDA ratio at one three times net debt to adjusted EBITDA ratio.
Now to provide some more insights into our business segment financial performance for the quarter.
Turning to slide 13.
As Carl mentioned earlier, our nucleic acid production business fueled the most significant portion of the revenue growth for the first quarter.
Nucleic acid production represented 84% of the company's total revenue in the quarter and generated $95 6 million in adjusted EBITDA in the quarter to 77% adjusted EBITDA margin in this business as a record margin for nucleic acid production and reflects the increasing value of our unique products as well as the productivity gains in efficiency.
<unk> from our state of the art San Diego manufacturing facility.
Clean cap revenues from our major COVID-19 vaccine customers were approximately 91 million in the first quarter of 2021, a sequential increase of 76% from Q4 2020.
Our biologic safety testing business contributed 12% of the company's revenue in the first quarter, our Cigna branded products comprised virtually all of the segments business grew to a record $17 6 million in the quarter representing growth of 23% from Q1 2020.
This growth was driven by the increasing number of biologic and Biosimilar drug development programs as well as new customers gained in the quarter attributable to a high quality and breadth of our host cell protein Elisa kits.
This included strong growth from our HEK kits used in vaccine and gene and cell therapy programs as well as increasing contributions from BSA bovine serum albumin and endonuclease offerings.
Other we saw a strong quarter for our E coli products used in Biosimilar programs.
Our biologic safety testing business delivered $14 3 million of adjusted EBITDA in the quarter.
Our protein detection business based on the different growth rates for each of our businesses represented a smaller part of our overall business accounting for just 4% of revenues in the first quarter and only 2% of our adjusted EBITDA.
Corporate expenses that are not included in this segment adjusted EBITDA totals I just discussed were $10 3 million in the quarter, increasing from Q1 2020 levels up $4 3 million, mainly due to public company costs and continued investments in our maracay level marketing and other back office support efforts that we centralize to support our businesses in the most cost effective manner.
Now moving to slide 14, and our updated 2021 guidance.
We are raising our 2021 full year revenue guidance to $680 million to $720 million up from our prior guidance of $580 million to $630 million a $95 million increase at the mid point included in that range. Our estimate for 2021 clean cap revenues directly attributed to our major COVID-19 vaccine <unk>.
<unk>, which we are estimating at $440 million to $470 million up $70 million at the midpoint from our prior guidance.
This total revenue guidance for the full year of 2021 reflects the expectation of 20% annual growth for our biologics safety testing business.
Coming off the record last quarter for this business, we continue to see solid market dynamics across our segments and geographies fueling global growth in biologics that combined with new customer wins that build on an already strong base of repeat customers is clearly supporting more bullish outlook for this business segment in 2021.
We also see protein detection growing by 20% this year off the lower 2020 base of this business has returned to pre pandemic quarterly revenue totals.
Now since all of you listening this call are really good at math I'll jump straight to what this implies for our nucleic acid production business. This guidance at the midpoint implies this nucleic acid production segment revenues will be around $600 million for 2021.
So subtracting the mid point of the COVID-19, clean cap revenue guidance, you'll see that our base nucleic acid business is shaping up to be roughly $150 million for the year, which would represent growth of over 35% versus the comparable total in 2020.
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 players as well, including initial orders for non COVID-19 vaccine development. Furthermore, our blue chip customer base of gene and cell therapy companies represent exciting mid to long term opportunity is the validation of mrna is it development.
Platform is fueling rapid segment growth.
We are extremely busy here and we're very excited about our role as a key contributor to these new mrna platforms for the foreseeable future.
As Carl mentioned, we continue to see growing interest in a number of our other nucleic acid products, particularly for some of these mrna based platforms, we see that as being really exciting for the long term growth prospects for Marlin.
Now turning to the quarterly gating of revenues because of the continually evolving demand for clean cap as well as the inherent choppiness in supporting our gene and cell therapy customers through their development spaces, we will not be providing quarterly estimates for revenues at this stage. However, we do see the second quarter being up meaningfully from Q1 based primarily on our book of clean capital orders.
That continued to grow as a result of our major customers commercial successes and expanding global rollout of vaccines, given the size and fluidity of these forecast for clean cap to address global vaccine demands. We are working closely with all our customers develop the most accurate forecast possible. We currently project second quarter total revenues for all of <unk> to be up.
At least over 30% from our current record Q1 levels.
As discussed on our last call. Our revenue guidance is in large part based on our largest customers rolling forecasts that extend out for several quarters and there are further supported in the shorter term by binding Pls, which may go out for several months on top of that we have a forecasted funnel for our GMP suites, which are used to mainly support bills for our customers nucleic acid therapeutics programs.
Based on these factors our fiscal year 2021 revenue guidance comes with a considerable degree of forward visibility that will be subject to some quarterly fluctuations.
Based on those revenue fluctuations, we have our expectations, we have updated our internal forecasting guidance for other key financial metrics, we expect our non-GAAP adjusted EBITDA, a non-GAAP measure to be in the range of $440 to $470 million, which at the midpoint of that range represents growth of nearly 170%.
And implied adjusted EBITDA margin percentage of 65% at the midpoint of our revenue range. This margin is slightly lower than our mostly recently reported EBITDA margins. Since it reflects some level of focused organic investment in our business to continually reinforced our ability to support long term growth.
Adjusted fully diluted EPS, a non-GAAP measure is expected to be in the range of $1 four to $1 12 per share.
Moving to slide 15.
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 260 million shares for the full year of 2021.
Net income included in the adjusted fully diluted EPS has been adjusted to eliminate any net income or loss attributable to noncontrolling interest as a result of an assumed full conversion of class b 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 of 23% to 25%.
The effective tax rate, reflecting some forecast improvement based on the geographical distribution of our growing revenue base.
As it relates to certain other adjustments needed to get to our non-GAAP adjust EBITDA range. We see the following items in 2021 interest expense of between 30% and $35 million.
Depreciation and amortization also between $30 million and $35 million.
And adjusted tax rate of 23%, 25% equity based compensation, which we show as a reconciling item from GAAP to non-GAAP EBITDA to be 10 million to $12 million in 2021 and for 2021, we expect to invest an estimated 20 million to $25 million for capital expenditures, which is approximately three 5% of total revenues.
A reconciliation of net income to GAAP EBITDA and from GAAP EBITDA to adjusted EBITDA is presented in our press release. In addition, our segment related information will be detailed in our form 10-Q, which we plan to file in the coming days.
Lastly, I would like to continue to express my personal gratitude to all employees vendors and service providers or <unk>. They continue to be incredibly committed and are such a great part of our overarching mission for our customers with quality products that are enabling them to make such great contributions to numerous advances in life Sciences. So thank you for your time today. Thank you for your support of <unk>.
And now I will turn it back to Carl for some final remarks.
Thank you Kevin.
So to wrap up with slide 17, we're off to an incredibly strong start in 2021, and our first full year as a public company.
We feel very good about the momentum we're seeing across all of our lives.
It is clear that this momentum is building across our entire global customer base.
Is it more in a research and development moves to the forefront of modern medicine.
We have a direct line of sight into the book a clean cap demand for 2021, which continues to grow and our 2022 outlook is building nicely with additional mrna vaccines coming to market.
And with the expansion of our strong existing partnerships with industry leaders in mrna therapeutics.
We still aren't in a position to provide guidance for 2022, we are seeing customers already booking production capacity throughout the first half of that year.
And in the category of even more late breaking news we have been on the receiving end of the number of inbound calls about the reports last week that the U S. Government is supportive of some as yet unspecified waiver of intellectual property rights concerning COVID-19 vaccines.
The stated intent of this effort is to promote the availability of more vaccine doses globally more rapidly.
Moreover, as fully committed to working with all of our current and potential partners to ensure the broad global production of and widespread access to vaccines as quickly as we can.
In fact, we are supplying vaccine programs based in the U S.
Europe, Japan, Thailand, and China already.
We would note that the availability of our mrna capping reagents has never been a rate limiting factor for vaccine production by any of our partners.
While we don't yet know any details about what the button administration is prepared to support at the World Trade organization.
Our understanding is it any direct negotiations on this issue will take time.
And we will ultimately require unanimous consensus among the 164 members of the WTO.
Ambassador tie the U S. Trade representative was quoted in a statement last week, saying quote those negotiations will take time close quote.
Well IP waivers might have the potential to enable a more diverse global vaccine suppliers over a long period of time access to IP is only one element of a complex set of requirements needed to produce mrna based vaccines of quality and at scale.
Bill.
But Pfizer spokesperson recently noted that the company's vaccine requires 280 components from 86 suppliers in 19 different countries.
Making hundreds of millions of doses of mrna based vaccines also demands highly specialized equipment and personnel.
Of which are in short supply.
And complex and time intensive technology transfers between partners and their global supply and manufacturing networks.
It is absolutely critical that whoever may be producing the vaccines and those supplying the raw ingredients for them have the expertise and demonstrated capabilities to do so consistently.
Safely.
We believe that the waivers being discussed will not meaningfully expand the supply of COVID-19 vaccines in the next two years.
With the pandemic still raging today, particularly in the unvaccinated corners of the developing world. We believe that increased investment and the production capacity and distribution channels of the proven manufacturers of these complex biologics is the most productive step that Paula.
<unk> makers can take.
From COVID-19 vaccines to vaccines for influenza.
So in gene therapy is battling cancer, the transformative impact mrna will have on global human health.
It is only accelerating and we had Moreover are proud of the key role that our customers partners and employees are playing in making that happen.
I would now like to turn the call back over to Mary to open the line for your questions Mary.
Thank you as a reminder to ask a question you will need to press star.
Slowed by one on your saxophone telephones.
Your question has been answered or you wish to withdraw your question Bob.
Your first question comes from the line of.
Zhang.
From Morgan Stanley. Your line is now open.
Hey, guys good evening.
Carl just just one opening question for you in terms of.
What's included versus what would represent upside to your revised guidance here.
So the FDA, apparently just issued an EUA on on.
Proving the vaccine for 12 to 15 year olds.
Was that contemplated in your guide I know you mentioned in the prepared remarks that.
These new vaccine categories, including pregnant women.
And pediatric vaccinations are now imminent. So that's the first part and the second part is to.
To the extent that your customer <unk> their vaccine is expected to be stable at I believe it's around five degrees for three months.
And <unk> is also working on a vaccine that's potentially stable in the to do eight degree range for up to six months would suggest that there is room here for adoption in emerging markets down. The road is that something that's contemplated in sort of your comments around 22 and beyond.
Well, thanks for the questions and let me start by saying that it's hard to.
Look at any specific indication or group of new Baxter knees and say, yes, that's in the guidance or no. That's not in the guidance. We're operating obviously at an aggregated level demand from our big customers.
It's fair to say that those big customers are highly focused on their own capacity and what their needs are to support the regulatory plans of approvals that they know they have in process. So my answer to your first part of your question is yes, I think it's reasonable to assume that those expansions.
Of demand.
Coverage would have been anticipated by our partners and that's been reflected in the orders that we get in the way we build our guidance as Kevin explained.
And then on the second question I, absolutely believe that you will see much more use of mrna vaccines in the developing world than we ever thought even three or four months ago before the first cold chain.
Changes were approved by the FDA that seem like a momentous.
Hurdle among monumental hurdle to get over but right now it looks like to us becoming much more manageable. So I would expect that youre going to see mrna vaccines will be used in a large number of places that were not previously anticipated.
Whether that's incorporated or not I think it's less likely that those changes have been fully anticipated or baked in.
Perfect and then call on the EU contract expansion commentary that you made.
Obviously, we're still in that bundle and some comments are pretty supportive of us.
Mrna approach and $1 8 billion doses as a lot of doses.
Is that all upside starting in 'twenty, two or whether it's some of that help later this year as well and then second there was also a comment you made around a push to source all ingredients locally.
So with that in mind I mean is it your European clean cap expansion something that you would need to consider or do you feel pretty comfortable that pfizer in biotech and continuing sort of sourcing the ingredient side from your current facility or in the states.
Yeah look on the latter question I simply don't know I think there is probably.
Sure.
An admirable motivation by stating that but if you look at pfizer's commentary that they source components from 19 different countries. It seems quite unlikely to me that theres duplicate supply of every one of those 280 components.
All in the EU, so as a practical matter that may be a little bit more difficult to handle and with respect to the timing. What we heard is obviously this was 900 900. So it's a purchase obligation for 900 million doses and then the option for the EU on the additional 900 million.
I've heard that the very first shipments under this expanded order might occur in December which would suggest you would have some ramp in the fourth quarter of this year, but the vast majority of the demand is in 2022 and 2023.
Got it very clear and helpful. And then one final one.
The comments you made around the IP veeva.
That helps clarify a couple of inbounds, we had gotten as well, but can you just sort of put a finer point on it in terms of how you expect that to play out in terms of the price per dose for clean cap is it fair to assume that given that the.
Price per dose is so small relative to the overall.
Sort of like.
Cogs of the vaccine and then the final price point is about perhaps at least the one.
The developed world.
Should not see much of an impact or is that something that you might be to revisit for emerging market production.
Well are you asking if we would not see impact because of the IP waiver proposal was.
Exactly exactly.
Yeah look.
I don't see how those two things can possibly be linked together.
Body suspended the IP on all of the components that are being used in vaccine today, you'd still have to have suppliers geared up and capable of producing that exact compound.
And then you'd have to go through the regulatory submissions related to changing compounds I, just don't see that as being a terribly likely occurrence.
I don't think we would see price pressure.
Perfect. Thank you.
Alright, Thank you I appreciate the questions.
Next question comes from the line of Matt <unk> of Goldman Sachs. Your line is now open.
Great. Thanks for taking my questions.
Just my first one just pivoting away from COVID-19 for a minute.
Actually give some additional color on some of the other non COVID-19 mrna vaccines and therapies, you're working on flu.
Malaria and some other indications can you just give us a little bit more color. It sounds like some of these projects are coming back online.
How sort of the.
More strict COVID-19 Lockdowns could you just give us some more color in terms of maybe does this disease areas or any other new programs that you're involved with on our non covered basis.
Well, yeah, Matt obviously, it's our customers who are doing all this work.
Proposed to take credit for that but at the end of the day I think that the vaccine work has been accelerated with the most noise in the most discussion around.
Seasonal influenza vaccine alternatives and those can be combos multi valent. However, you want to look at it. So I think that that one is the most obvious and that has had the most commentary around it the other programs, including malaria and HIV have been vaccine targets that have been resistant to alternate ways.
Doing vaccines for a long long time, so the validation of the mrna platform has caused a lot of experts in the field to field that these represent valid next targets for the MLR and a platform and we do know that there are people working on those in addition, there are a large number of I'll call them.
Lesser prevalent diseases again, similarly resistant or would perhaps hyper variability. There's mrna was being used for these include things like Ebola rabies etcetera, and I think it's both.
So the other infectious disease vaccine targets are now in full.
Full swing and those other programs that might have been put on hold as people concentrated oil and COVID-19 are also re emerging.
Great. Thanks for that and then just on the Capex I know you guys had put a lot of money into the trailing facility to get up to I think a capacity of about 1 billion in sales are you shifting and.
One are you are you continuing to focus on that and to prepare for the types of volumes you might see.
Even on a longer basis or are you shifting capex are there areas. If so where are you shifting your capex towards.
Kevin would you look at that.
Sure Matt Yeah, I mean, right now really the focus has been predominantly on the completion of a San Diego based facility for nucleic acid production again.
We had built out all of the square footage available to US now I think except for about 5000 square feet and are making sure those lines are up and doing the size runs that we need and we have all the equipment. So that's really as far as the recent focus on in last quarter as well as this recent first quarter.
And from that from this point forward I think we're going to continue to look at a lot of different things.
Certainly the biologics business continues to expand a little bit above our expectations.
We're evaluating that also as we've talked about with our with our free cash flow.
Outside of the kind of M&A that Carl mentioned organic investment and ourselves is going to continue to be something we evaluate so whether that's additional facilities or additional infrastructure and additional geographies.
As we continue to expand as we look forward as we always have.
For several years to make sure we have the capacity to meet this growing demand.
Something we're turning our attention to we've previously talked about the capacity of nearly $1 billion here in San Diego output, but if you take where we are today and you look at how we're growing at least from a percentage perspective, even with the non COVID-19 related vaccines, that's potentially a couple of years away. So we have to stay in front of that as well and those are all things that we're currently looking.
But what you've seen in the last couple of quarters is predominantly focused on the <unk> segment.
Great. Thanks for the time guys I appreciate it.
You bet.
Next question comes from the line of Brandon Couillard of Jefferies. Your line is now open.
Hey, Thanks, good afternoon.
Well maybe.
Maybe shifting gears back over to clean cap is it reasonable to think about a clean kept pricing coming down somewhat in 'twenty, two or would that be premature based on your conversations with your biggest customers today.
I think it would be premature.
Very clear.
In terms of.
Maybe shifting gears over to the plasma DNA.
Build out could you just give us an update now that you have several months into that launch anything tangible you can share with us in terms of.
A number of customers.
Today.
Yes, I mean its in its early stages, we didnt have high expectations right out of the box in terms of contribution given the rapid growth clean tap on our side, but it's tracking along well and particularly for customers, who want and services to go from.
Sort of custom mrna construct all the way through to finished product.
The story is resonating in the capacity, we think will be well utilized.
Okay. Thank you.
Thank you.
Our next question comes from Matt Larew of William Blair. Your line is open.
Hi, good afternoon.
You alluded to sort of the complexity of fragility of the global supply chain with respect to the Pfizer vaccine obviously.
Brendan that's about the plasmid offering I'm just curious if the club experience as a supplier has highlighted any other bottlenecks in particular, where he can scale and manufacturing of key expertise can be particularly helpful.
Well I mean, certainly when you think about the mrna vaccines right now the biggest challenge is just the supply of enough lipids that go into the manufacture of the lipid nanoparticle and equipment needed to formulate this high volume of demand. So that's certainly.
The consideration that I'm sure is consuming a lot of our customers time and efforts at this point beyond that.
We concentrated on our own supply chain, making sure that we could source all of the materials and increasing quantities as the demand grew and making sure that we have viable backup suppliers in case something happened with our primary suppliers and I'm pleased to say that effort has gone well, we haven't had any massive delay.
Phase and getting components, obviously being a U S based manufacturer and all of this stuff being under the rubric of the defense production Act at some level then our ability to get the materials that we need hasn't been in question. So we feel pretty good about how it's set up today.
That doesn't mean that there aren't other problems that other folks are having.
Okay, and then Kevin maybe touched on this a bit but just wanted to follow up in terms of thinking about infrastructure.
And is scaling to $1 billion, perhaps faster than you may have thought six months ago, Carl you alluded to the <unk> partnership and.
And beyond expanding Singapore, just curious within that context, and then thinking about COVID-19, perhaps is an endemic.
Start to redundancy that you're thinking about I know, they're kind of global manufacturing type of considerations.
Yes, yes.
Yes, certainly there are I mean, certainly redundancy something that our customers certainly want to see and.
And we think is also very important so we're evaluating that and that can take several forms right. It could be organic investment in additional buildings that could be partnering or enabling someone to help us with overflow capacity as needed long term either domestically or internationally. So we're constantly.
Constantly evaluating that we have several different conversations ongoing and I think that you know whether it would be strictly organic or via partnership or.
Getting additional capacity through M&A those are all opportunities and again, we're looking at each one of them are very very sensitive to the fact that we want to continue to ensure that we are supplying all of the demand. That's out there that's been something we've been focused on for years now and it served us well. So we're going to continue to invest in ourselves that capacity long term.
Okay. Thanks for the time.
Thank you.
Again to ask a question.
Yes.
Barb followed by one on your telephone.
Next question comes from Derek Debruin of Bank of America. Your line is open.
Hi, good afternoon.
Hey, Joe.
Okay.
Brendan sort of.
Asked it but I'm going to ask it a different way.
Looking at you are talking about 65% EBITDA margin in 'twenty, one does that hold into 'twenty. Two is that a good way to sort of the thing of that initial model.
Yes.
Uh huh.
Yeah go ahead go ahead.
Okay.
He was going to say something.
To the extent that the mix stays the same I think it will continue to be around that level I mean, again, we're not going to necessarily.
Barely squeezed the P&L to force a certain margin at the extent at the sacrifice of long term growth I think what youre seeing now is sort of the natural margin that the business has been generating.
As I said in my remarks, we're continuing to invest in the right areas state Correctional marketing be it quality be it R&D.
R&D I think youll see some of that as we get into the second half of the year.
That's going to continue to be important for us long term, but the business is throwing off really high margins because of the growth that we have a nucleic acid production in the infrastructure and the cost controls that we have in place.
As Carl mentioned, you'll see a little bit about pricing and what are those contracts stanfield, we're looking about supply chain with the inbound stand so given most of that's being driven by the gross margin I think that those margins right now are pretty sustainable.
Got it and is that still assuming a 30 to 35 million depreciation amortization for the year.
Yeah $30 million to $35 million DNA for the aircraft.
Got it.
And.
Given the demand in and.
Obviously, there's a huge interest here.
Are you actually going to be able to take pricing up.
As people sort of like rush to go down this pathway of mrna projects.
Yeah look I don't think we would in the current situation.
Spec too to take pricing up in a systematic way of affecting a large number of people involved in these critical programs, we will look for opportunities to enhance the products to make them fit.
Individual customers' workflows or applications better and to the degree that those improvements contributed added value to the customer you could expect that they'll pay for some portion of that systematically no I don't see this as being a business, where we take three or 4% price per year across the board.
Lord and keep in mind that we have multi year.
Material service agreements for material supply agreements with some of our big customers.
That would preclude activities outside of the contract.
Great and then just one final one any.
Incremental color on M&A basically adjacent new verticals, just what are your general thoughts as you look at it what's the right strategy for the company towards your current strength for the company.
You know look it's still the same we're focused on adding more capabilities to meet the needs of our existing customers that would be in each of the three verticals that we participate in right now I can tell you we've been super active over the last few months and looking at some potential add ons.
Or significant acquisitions within those spaces don't think we have anything happening short term there, but it is a continued focus for us and we will always try to balance.
Super High organic growth that we're seeing with M&A that reflects what we've done in the past which is.
To look for those target companies.
Science in our target markets, and then to be able to conclude deals.
I think that remains unchanged.
Great. Thank you very much.
You bet.
Next question comes from Dan Brennan of UBS. Your line is open.
Great. Thank you thanks for taking the questions.
Maybe just thinking about 'twenty, two you kind of talked about the new contract and you know Pfizer coming out and talking about 4 billion doses.
Can you just remind us again like how far in advance you.
Do you typically see orders come in and then number two can you just remind us your capacity I know you talked about the <unk>.
Hi chain and you've kind of stepped it up in your prepared to ramp like do you currently have capacity to meet <unk> 4 billion doses in 22 of them unfold.
Kevin would you look to China.
Yes, certainly.
Straight question take the second part of your question there, Yes, we do.
The ability to meet that capacity.
Right now as we look at where we're at we're probably 50% to 60% capacity. So we certainly have the ability to ramp up substantially from where we're at and that just comes with vaccine and labor and block field sizes, and those sort of things and that comes into long term production planning and that's why we work with our customers to look at their demand a year forward I mean thats what they are.
Have forecast or sort of kind of in a collaboration with us in the msas as Karl mentioned that give us one year worth of its visibility and again that is for us to plan and make sure. We can meet their demand and when we use that and they did it they typically will place orders based on the contracts.
In binding <unk> out for a few months if not a couple of quarters. Some of our customers provide those rolling forecast and place a po going out all the way into 2022 already and some of them on.
They just really want to make sure they have their slots. So it's a little bit different but the requirements are a little bit in the shorter term, but again nice visibility looking forwarding and that's it's just been a great relationship with many of these high high volume customers and working with them to make sure. We meet the demand and that's certainly that's something we've been able to do and we will continue to be able to do as we look forward.
Great and then is there any risk around the volume scale I'm, just wondering whether or not an enzymatic approach could potentially become more economical I don't know what higher volumes maybe some.
Some cost savings I'm, just wondering whether or not clean capex more locked in or is there any risk of kind of some of the vendors that can switch.
You know I think we we believe that the cost of switching here.
Especially regulatory or re registration costs are frankly, much more significant than any differences in cost of methodologies and.
Our customers are getting more experienced with their processes that are getting greater yields and they are able to.
To be more efficient overall.
I would think that this is not a point in time at which you will see somebody switched from clean Jeff Jones of myopic or vice versa.
And kind of to date I guess.
How have you faced any challenging yourself.
Terms of being able to scale can you just walk through how things have gone. According to plan. It's been unprecedented volume brand that seems to be just capturing more and more share given the issues. We've seen in some other modality. So I'm just wondering how would you characterize your own kind of commercial scale today.
Well look I don't want to minimize the efforts of Bryan Neil and his team are trialing, but we have not had problems in our ability.
To meet this growing demand keep in mind that in addition to purpose design brand new facilities with lots and lots of space to grow which we started with Brian and team are focused very heavily on.
On process improvements and specifically that means doing things and larger scales. So if you wind the clock back a year and a half five gram or 10 Gram order for clean cap would have been a significant quantity.
Today, we're operating skills that have us pulling orders for multiple kilograms of that material. So.
<unk> into it and they all contribute but we've been.
Doing several things simultaneously.
All of us to keep pace with the demand and we still see further room for improvement opportunities.
And you mentioned fluent that came up a few times.
And we've kind of look into that as well and obviously, it's been a lot of discussion from some of the sponsors about using mrna float with the pricing of Queen-cup vary at all when you think about that.
Content.
Clean cap in flu, how would we think about the opportunity set versus COVID-19.
I think it maybe a little bit too early to tell if there are opportunities for us to make modifications to clean cap that make it work better and our flu vaccine than you might have a different basis for pricing I don't think it's going to be step functions are orders of magnitude different but there may be some added value we can deliver.
And of course, it also depends on the quantity of material that you need to do so how much mrna do you need to use this.
Salt amplifying construct or.
Street construct those things are all a little bit too early to give you anything definitive.
And maybe final one just on IP is there any risk around narrow by happen to open up its own IP for.
COVID-19 clean cap.
The sponsors are being potentially for us to do that.
Is that something that potentially is the risk to yourselves that knock offs could just replicate what you've done using your patents and the supply at a much lower price.
Honestly, we don't know theres not enough specificity and the little bit of information. That's been provided about some of these initiatives and so we stand by what I said earlier about kind of the wrong solution to the wrong problem.
Great well, thank you and congrats.
Well. Thanks, so much we appreciate it and with that I think Deb will turn it back over to you.
Great well, thanks, everyone for joining us today I just wanted to tell you will be at the bank of America.
Wednesday night trial could.
Could be participating at the UBS healthcare conference later in the month.
Presentations will be available live and replay on our website.
Free to contact me, if you have any questions and we look forward to staying in touch with you. During the course of 2021. Thanks for your time.
Bye bye.
That concludes today's conference call. Thank you all for your participation you may now disconnect.
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