Description

Maravai [MRVI] is a moat-protected picks-and-shovels bet on next generation medical therapeutics with solid financials to navigate the growth timing. mRNA, CAR-T, and to a lesser extent CAS9/CRISPR will all benefit MRVI. MRVI had a burst of revenue from COVID-19 mRNA therapeutics that they turned into a mini-rollup of patent-protected, well placed, products that are high impact but low cost and hard to replace throughout the development and manufacture of those next generation therapeutics with high growth rates. Meanwhile their finances are plenty strong enough to carry them through until the growth in those fields pushes revenue high enough to establish Maravai as a much larger player. The stock price has cratered on the recent anti-COVID basket depression combined with a very real implosion of COVID mRNA revenue, but unlike some companies MRVI did not fritter away their COVID revenue and currently has a large cash pile (roughly matched by debt) as well as a very nice selection of operating business assets in high organic growth areas.

Sometimes I publish ideas with well defined catalysts inside 6 months, this isn’t one of those. In contrast, MRVI is a many year compounder. I expect high probabilities of very good things from MRVI in 5-7 years, but my reasonable probability scenarios include some in which continued decreases in COVID service revenues and/or a biotech venture downturn may result in 12 months of bad news in the near term. 

Business

Maravi [MRVI] Is a combination of several businesses that all share several very nice qualities, both competitive and commercial.

Competitively, the businesses generally focus on providing patent protected elements that are small costs in large and expensive advanced medical product processes and absolutely critical to the success and continued licensing of very expensive products. This makes them hard to replace and gives strong long term pricing power. Commercially, the product portfolio shares commonality in marketing audience and relationship, providing easier sales’ branching out into additional products than in many companies with multiple product lines.Additionally, the products are in areas with strong organic growth trends.

Nucleic Acid Production

This is the big headline business that has made most of the money. When Making mRNA strands for medical applications, the end needs a cap - actually a cap 0, cap 1, and cap 2. Early researchers figured out how to duplicate natural capping using a sequence of enzyme steps to put on the subcaps one at a time. The next tech jump was figuring out an “anti-reversal” version of those enzyme steps that reduced errors when putting on those subcaps one at a time for lower errors. Maravai subsidiary Trilink developed “CleanCap” which is a way to put the entire triple-cap end structure on all at once resulting in higher yields, faster processing, and the ability to introduce subtle customization to the end caps that has led to enhancements in yield and immunological performance. During COVID there were three major mRNA vaccines and two used Maravai Cleancap. The one that didn’t was Moderna because they started earlier - using the previous tech level - and one does not change capping technology mid commercialization. The majority of mRNA therapies in current development now use CleanCap (though admittedly still not all - there are still some in development from back in 2018 time period for example). If one of the newer mRNA flu vaccines moves to full production in the next few years, MRVI revenue stands to jump significantly. Beyond that, this is a category that should grow with a blended growth rate of mRNA therapy and CRISPR/CAS9 categories. Additionally, the growth rates in the projections below are for the addressable markets but MRVI has a hidden advantage here: they are currently only supplying about 30% of the market but new projects are adopting CleanCap at much higher than 30% rates - there is almost no real reason NOT to use CleanCap on new projects other than lab inertia - so MRVI could gain huge revenue in this area even if the overall market size stagnates. 

Figure: Base (non-COVID) revenue since 2018, with the orange being Nucleic Acid Production. (Protein Detection business was sold).

Biologics Safety Testing

This business builds on a couple “gold standard” safety tests that apply to advanced medical production for things like CAR-T or monoclonal antibodies (think enzymes and cellular machinery involved medicines). They are expanding from these niches and in several places are becoming so embedded in the accepted way of doing things that their methods are being written into various regulations. Usually those regulations don’t specify the Mayavai products, but there are generally few if any practical options so you wind up with situations like the CAR-T cell therapy market where 100% of approved products use the Maravai safety tests. Things like the Maravai Mock-V testing units turn process validation projects from month-long efforts at limited-access sites into something that can be practiced and sometimes even certified and finished in 24 hours at the customer’s existing site. The costs of such kits are so incredibly cheap ($1-2K each) compared to how much time and money they save that no customer has motivation to risk changing brands.

Figure: Biosafety group revenue (Cygnus corp before acquisition) and growth rate going back to 2013.

Support and expansion

Management has been vertically and horizontally expanding in recent years. They acquired an enzyme company to be able to satisfy the production needs of many customers and increase their services, and have increased their oligo production beyond that needed for internal use so that they can sell more to customers.

Competition

Most of the main products produced by Maravai have both patent protection and a lot of trade secrets involved in making them well. This dramatically reduces the incentives to cheat the IP and use knockoff versions even where it might be possible. Thus while it might be possible for a Chinese knockoff version of CleanCap to be made, the savings would be a microscopic fraction of the manufacture cost of any resulting product and the risk from not having the massive experience of MRVI doing the synthesis would be huge. This is a better moat than any patent and should persist for a long time. MRVI is also continuing to come up with newer and better forms of CleanCap so there is no end in sight for their competitive advantage. 

Recent Narrative & Market cap

A review of recent revenue and trading history makes it pretty easy to understand how this stock arrived at the valuation it currently has and the bear thesis is easily expressed and a valid concern.

MRVI makes inputs for mRNA, genetic, and cellular medical therapies. They already had good technology on a nice growth slope when the exogenous shock of Covid happened. During the massive resulting revenue boom, several things happened for the company. They went public, their technology was proven and exercised at massive scale, and they received a huge inflow of cash from operations. As we can see from the chart above, the public market valuation skyrocketed but quickly waned when it became clear that the Covid revenue was temporary. However, the Covid cash flow was spent buying good businesses and their non-Covid business has continued to grow at a measured pace in the background. An analytical eye towards the future of their markets and likely revenues may suggest that their current share price has been overly depressed with the current broad anti-Covid basket trade in the market.

With that being said, the bear case is easy to state: if the rate of new medical therapeutic development slows well below projections, and these new technologies roll out slower, then MRVI will be a long slow grind. This is the frightening part: is the revenue just in a long decline or is it at a point of inflection towards a long upwards path. That is the critical question, and it’s a question about the future of mRNA, gene editing, monoclonal antibody, and other advanced treatments.

Valuation

MRVI clearly isn’t a cigar butt, and the decreased revenue after COVID mRNA product dropoff has reduced margins so how do we value this company? Let’s look at a few approaches…

For the “happy models” I’m using organic base revenue growth (excluding all COVID revenue) of 18% for nucleic acids (incl mRNA/CleanCap business) and 20% for Biologic Safety Testing. Those numbers are below most published estimates for the relevant markets even with some pessimistic weighting. They are also below MRVI historic non Covid CAGR for those segments and I arrive at lower 5 year estimates than management is guiding. They also give no credit whatsoever for an increase in the 30% of currently served market share.

If one or more mRNA flu vaccines gets traction in the next few years growth will blow away all the models. COVID related revenue is assumed to not grow at all:

Macro business model

At the macro level it’s fairly easy to map a linear fit of net income (or your favorite metric) to revenue level over all available quarters. Since MRVI is a nicely profitable business the results are pretty good. A naive model predicts immediate strong profitability into 2024, but that neglects some changes in the business model as they have added more businesses that include some that are earlier in their growth curves and added SG&A compared to, say, 2019/early 2020 which was pre-COVID but broadly similar revenue to now. Adjusting a bit for higher expenses I wouldn’t actually expect accounting profitability until end of 2024/early 2025 at best and it looks like smooth sailing forward from there. But then MRVI is also finishing up 5 years of high CAPEX and should be dropping to low single digit CAPEX rate by mid 2024 so that helps out.

Applying some industry multiples to revenue based on predicted earnings scales 3-4 years out we can get current market cap valuations in the 2.5B to 3.8B range. I’m deliberately being a little vague here because such a macro model is by nature hugely subjective and I’m not married to any of the assumptions, mostly I’m just interested to see that some reasonable estimates get numbers appreciably above where we’re at in the market today. If you want to play with models and discuss the numbers you get I can share equation fits and such in the comments.

If growth doesn’t materialize, the existing cost cuts won’t get the company to profitability but can reach breakeven cash flow when CAPEX drops. The no-growth paths seem extremely low probability, and in that bad scenario cuts can still turn the company profitable at a lower level.

Business unit economics

Sitting down and modeling the business unit economics of MRVI has been interesting. I did AR(x) models both for the smaller scale time period 2018-2020 before COVID caused mRNA CleanCap product production to skyrocket and for the business overall 2018-2022, as well as bottom up. No matter how one slices it, the cost to service existing revenue when facilities and people are being used anywhere close to full scale are quite small, less than 25 cents per dollar of revenue. Cost of revenue acquisition hs also historically been small, at less than a dollar per dollar of new revenue acquired (between $0.50 and $0.83 depending on regime and scale). Overall the NPV of a dollar of current revenue tends to be in the low to high $7 range and the NPV of a dollar spent on growth right around $7. Plugging this just into revenue (no growth value whatsoever) puts current NPV above $2B. Using those models to estimate how much is being invested in growth this year roughly doubles that. Again, these are imprecise techniques, but it is very useful to see that the post COVID backlash fire sale seems to have pushed the market price of these excellent businesses far below even a cautious NPV sort of summation.

Valuation Conclusion

The nice thing about MRVI is that the stock valuation is so low that there is a bit of a heads-I-win-tails-nothing-happens property to the bet. If the bear scenario happens and the revenue stays depressed for a while the recent cost reductions combined with the end of elevated CAPEX spending puts the company in reasonable long term financial health to grow its technologies with the market. When the market DOES grow, whether it’s next year or 3 years from now, MRVI is in a fantastic position and starting from such a low valuation that it stands to be a long term multi-bagger and compounder. Ultimately that is the situation that led to me putting this one in the coffee can for the long term.

Inorganic Growth 

Management has been clear that they see further inorganic growth as a good use of cash flow. While this would normally make me kind of nervous, I have to admit that analysis of their previous acquisitions leaves me mildly impressed. They have done a pretty good job of acquiring companies that can conduct operations within already existing facilities and leverage existing sales teams, while also selling to existing customers. The acquired companies also all seem to have technological moats and the properties of being tiny but critical elements in very large processes. This is definitely something I will be watching carefully, and one really stupid acquisition would probably be enough to send me running.

Catalyst

This is a multi-year compounder. Revenue should climb very significantly, generating cash flows and forcing the company to be recognized as a pharma industry mainstay rather than the COVID-basket discard it seems to be valued as today.