Maravai LifeSciences Holdings, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

Maravai LifeSciences Holdings, Inc. is a life sciences company that develops and manufactures critical products and services, primarily focused on mRNA technologies.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Maravai operates primarily in the pharmaceutical, biotechnology, and academic research sectors, specializing in providing critical inputs for therapies, vaccines, and diagnostics.

  • Revenue Streams:
    • Nucleic Acid Production: This is a dominant revenue source, involving the synthesis and modification of nucleic acids, particularly mRNA. Their CleanCap mRNA capping technology is a key differentiator.
    • Biologics Safety Testing: The company offers services to detect contamination, impurities, and other defects in biological products and processes.
    • Custom Services: Maravai also engages in custom manufacturing and other supporting services.
  • Industry Trends: The broader life sciences sector is experiencing rapid innovation, especially in areas like gene and cell therapies, with substantial growth in mRNA technology for vaccines and therapeutics.
  • The mRNA space is a very fast-moving, growing industry. This offers opportunities for companies that can stay ahead of the technological curve. * Increased regulatory scrutiny is pushing a need for more rigorous quality control in biologics testing which plays directly into Maravai’s offerings. * The rise of personalized medicine is driving demand for custom development of biopharmaceutical ingredients.
  • Margins: While profitability has been inconsistent, margins in the high-growth periods tend to be good, especially in core segments. As noted in the 2023 annual report, Gross profit margin is 45.6% compared to 70.7% for the prior year.
  • Competitive Landscape:
    • The market for nucleic acid production includes large players with established technologies and emerging companies with innovative approaches. The competitive landscape is evolving, with new techniques and suppliers coming into play.
    • The competitive landscape in testing is fragmented and includes companies that offer specific testing services and others who offer a wider range of testing options.

  • Competition is a clear risk due to the rapid technological changes and price competition in the industry, especially if commoditization starts creeping into product areas.

    • The industry is fast moving and dynamic.
  • What Makes Maravai Different?
    • Proprietary mRNA Technology: The CleanCap technology is a major differentiator, enhancing mRNA expression and stability. The Intellectual Property that is attached to this technology acts as a huge moat.
    • End-to-end Service: Maravai can provide solutions from basic raw materials up to finished product.
    • Focused Expertise: The company’s focus on the relatively niche but fast-growing areas of mRNA and biologics testing positions it advantageously within specific segments of the market.
  • Recent Concerns and Controversies:
    • The company has faced falling stock prices after experiencing rapid growth in the last couple of years.
    • There is some uncertainty in the long term as the competition increases in the mRNA production market.

  • Financial Overview:

  • Revenues: MRAAY saw a decline in 2023 to $422 million in revenue compared to $666 million in revenue the prior year. The decline was primarily in its Nucleic Acid Production segment.
  • While sales of core CleanCap products grew, COVID-related sales diminished, leading to the overall decline.
    • Gross Margin: The consolidated gross margin was 45.6 percent, compared with 70.7 percent in the prior year which reflected an increase in the amount of inventory write-downs.
    • Net Income: A substantial increase in net loss, from $142 million in profit in 2022 to $305 million in losses. This decline was a combination of decreasing revenue and increasing expenses
    • Cash Flow: For the year ended December 31, 2023, cash flow from operating activities totalled 400.6m, which was reduced from the $322.3 in the prior year. Also, free cash flow declined to $46 million compared to $177.9 million in 2022.
    • Balance Sheet: The company had a cash balance of $318 million and $690 million debt on their books, in Dec 2023. Current assets exceed current liabilities, but the debt on the balance sheet could be a potential risk.
  • Although the company’s results are significantly worse this year as compared to last year, it has stated that it expects 2024 revenue to grow by 10 to 15 percent.

Moat: 3 / 5

Maravai has a Narrow Moat, primarily due to its proprietary CleanCap technology and the specialized nature of its biologics safety testing.

  • Intangible Assets: The CleanCap technology and patents do give the business a clear advantage over other competitors, but those patents need constant innovation to extend the moat. The brand also commands a certain reputation for quality in niche markets that can act as a moat.
  • Switching Costs: Switching costs are high, but they may not be prohibitively so. While switching from one mRNA provider to another might seem difficult for researchers due to established workflows, it’s still not a significant barrier if other providers become better and cheaper options.
  • Cost Advantage: The company does have specialized knowledge and skill in the space, but it doesn’t translate into a structural cost advantage as companies can easily outsource similar services.
  • Network Effect: There isn’t a strong network effect associated with its current products.
  • Size Advantage: With about $500 million market cap, it doesn’t have a significant size advantage compared to other bigger players.

Justification: The narrow moat rating reflects the company’s competitive advantages in some of its specialized offerings but also acknowledges the potential for competition from new entrants and the dynamic nature of the industry. The presence of patents and a known brand do give the company an advantage, which gives it a narrow moat.

Legitimate Risks to the Moat and Business Resilience

  • Technological Disruption: The company’s biggest risk is that other companies develop better processes or new technologies that surpass MRAAY’s competitive advantage and cause the stock to fall.
  • Competition: Increasing competition, especially with larger companies, could compress margins and make value creation more challenging.
  • Economic Slowdown: The business is dependent on funding for clinical research which is susceptible to government or other private funding cuts and economic downturns.
  • Customer Concentration: It is also risky that a few large pharma and biotech companies might form a large part of their customer base, and so the business performance is at the mercy of these key customers.
  • Acquisition Risk: M&A can be tricky, and acquisitions are often used to boost revenues in short term, which can be detrimental to the quality of overall earnings.
  • Reliance on key suppliers: Since it relies on select vendors for specific product components, losing a supplier can disrupt business.

Business Resilience: The company does have some resilience due to it being specialized and having key partnerships, but it’s susceptible to competition from larger competitors, which makes its overall resilience lower than ideal.

Understandability: 3 / 5

The business model is complex but reasonably understandable.

  • Technical Aspects: Understanding the nuances of mRNA technologies and biologics testing requires some understanding of science.
  • Business Model: The fundamental business idea of supplying critical components to the biotech industry is easy to grasp.
  • Value Creation: How MRAAY creates value can be assessed by comparing it with competitors in the biotech, mRNA, and testing industries. Justification: Although the technical complexity in drug development is a bit high, it can be simplified to an extent for normal investors to be able to somewhat understand it, but it’s definitely not a business that is too easy to understand, hence a “3” rating.

Balance Sheet Health: 3 / 5

MRAAY’s balance sheet health is at a moderate level.

  • Debt: As mentioned previously, the company has a significant amount of debt on the books, which can become a problem in the future.
  • Current Assets vs. Liabilities: The current assets are able to cover current liabilities.
  • Cash Flow: Though positive, the decline in free cash flow is a concerning trend which has to be rectified in the coming years.

Justification: The balance sheet isn’t unhealthy, but could be made better if MRAAY is able to pay down the debt and increase its cash flow in the coming years, but for now the overall health is at a 3.

Conclusion:

Maravai is a business that operates in a rapidly growing sector with proprietary technology, but is facing increasing competition from new entrants and changing business dynamics. With a clear understanding of key metrics like ROIC and debt management as well as an understanding of the dynamics of the competitive forces, the intelligent investor can approach this company after carefully considering the financial metrics. This business is more complex than other generic value plays, requiring specialized knowledge of the industry, but can be a lucrative proposition when bought right.