andresr
The numbers for Maravai LifeSciences Holdings, Inc. (NASDAQ:MRVI) in its last earnings report were fairly close to expectations, but the impact of slowing demand in its high-margin COVID business is most likely going to result in a significant decline in revenue going forward, as well as EBITDA margins.
While MRVI isn’t the only company facing significant declines in revenue from declining COVID-related business, the depth of the cuts from prior revenue guidance from that segment has raised questions on what the real COVID profile for the business is, considering guidance was cut in half from the low end of its prior guidance, and the time frame for lower expectations was pushed out to 2025, and probably longer.
Add to that the fact the company is bringing several new facilities online, and management expectations for any of its therapeutic compounds getting clearance and commercial traction in the near term are close to zero, there is little in the way of visible positive catalysts that would drive company growth over the next couple of years.
In this article we’ll look at some of its latest numbers and dig a little deeper into the plunging revenue stream associated with COVID, and how it’ll impact EBITDA margin, free cash flow, and other metrics going forward.
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Some of the numbers
Revenue in the third quarter of 2022 was $191 million, compared to $205 million in the third quarter of 2021. Revenue in the first nine months of 2022 was $678 million, compared to $571 million in the first nine months of 2021.
With the downward guidance from COVID revenue, it’s going to be some time before we see those types of revenue numbers again, with the exception of it coming via an acquisition.
Net income in the reporting period was $99.7 million or $0.34 per diluted share, compared to net income of $132 million or $0.44 per diluted share in the third quarter of 2021.
Adjusted EBITDA in the third quarter of 2022 was $133 million, compared to $155 million in the third quarter of 2021. Adjusted EBITDA in the quarter was 69 percent. The company cut adjusted EBITDA guidance to a range of 40 percent to 50 percent, which was from the expected decline in high-margin revenue from COVID and an increase in operational expenditures.
Some of the CapEx will be offset in early 2023 by the remainder of its $39 million grant as the company brings its Flanders facility online.
MRVI continues to throw off a lot of free cash flow, with the third quarter generating adjusted free cash flow of $119 million. With revenue and EBITDA earnings coming under pressure, free cash flow is likely to contract in the quarters ahead.
At the end of the third quarter of 2022 MRVI had cash of $617 million and long-term debt of $523 million.
I think the company probably has one more quarter left in it before the decline in COVID-related revenue significantly hits its top and bottom lines. If that’s how it plays out the stock could get a temporary boost, but there’s nothing I can see that would justify its share price finding support at higher levels.
Nucleic Acid Production business
Its Nucleic Acid Production business, which includes revenue from COVID-19, accounted for 91 percent of total revenue in the third quarter. That included adjusted EBITDA of $134 million and an adjusted EBITDA margin of 77 percent.
The bad news there isn’t just the downwardly revised revenue guidance associated with COVID, but also the fact its non-COVID business in the segment was also down because of tough comps associated with a large order in the third quarter of 2021 that was unrelated to COVID.
To me that means 2023’s revenue and earnings aren’t going to match 2022’s, and there are no visible catalysts that will cause the company to maintain momentum.
CleanCap COVID revenue and demand
Based upon data as of October 19, 2022, management said the number of people in the U.S. receiving a new booster dose stood at only 19 million, far less than anticipated. In the second quarter the company guided for vaccine production related to COVID-19 to “drop by 1/2 to 2/3 from 2022 levels.” Based upon those assumptions, the company projected 2023 COVID revenues to drop to a range of $200 million to $300 million, with binding commitments in place from its major customers, along with favorable long-term forecasts.
Those conditions rapidly changed, and the commitments and forecasts from its major customers are no longer “in hand.”
Management believes its customers have more raw materials on hand because of the weaker COVID-19 booster numbers, which will have an impact on sales in 2023, especially earlier in the year. The thought is as they work down inventory demand should grow in the second half of 2023.
If excess inventory was the only issue I would agree with that assessment, but I also think many people consider this to be a post-COVID period and aren’t as interested in getting more treatments in that environment, especially with growing concerns about the risks involved.
But whatever the reason, the company has downwardly revised COVID revenue to be at approximately $100 million for full calendar 2023, with limited shipments in the first half of the year.
The company also sees $100 million as being the annual run rate for COVID revenue in 2024 and beyond. Because of the low demand for boosters from people, I think it’s highly probable that even those numbers may be far too high.
As for EBITDA margin, that is guided to drop from about 70 percent in 2022 to only 40 percent to 50 percent in 2023.
That is from the high margins COVID revenue brought in, bringing three new facilities online, increased spending in R&D and SG&A.
Conclusion
Taking into consideration the downward revisions in revenue and EBITDA margin in 2023 and further out, along with increased expenditures associated with bringing on new facilities and the increase in R&D and SG&A spend, management is now positioning the company as being in a transitional period.
However, if one wants to take that idea, the fact is the company is going to struggle in 2023 and possibly beyond if it performs in alignment with management guidance and commentary.
Not only are these headwinds pretty much locked in place for 2023 and further out, but there is also a lack of tailwinds in relationship to its pipeline, which management said they didn’t see getting clearance or commercial traction in the near term.
So, with declining revenue and EBITDA margins, which will have an impact on net income, EPS and free cash flow, and lack of a catalyst from its pipeline in the near term, I think the only way the company can grow at this time is through an acquisition.
With its large cash war chest and the need to effectively deploy some of that capital, I think it’s most likely that the next move from the company in regard to growth will be via acquisition.
Outside of that, organic growth looks tough for the company in 2023 and beyond, and the impact of lower guidance is going to result in less favorable results over the next year.
As the company stands today, I see it coming under more pressure in 2023, even if its fourth quarter numbers from 2022 are decent.
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