Maravai LifeSciences (MRVI) has received a warm welcome by investors as the company helps well-known biopharmaceutical names in their drug development process. In fact, it actually provides a crucial role in developing current Covid-19 vaccine candidates as well.
The company has been a prime beneficiary of Covid-19 yet has rosy prospects either with or without Covid-19, yet unfortunately, I feel that rosy expectations for the underlying business have been translated into too high expectations for the shares as well. While the business itself is very promising, I have some reservations at these high valuations.
Life Science – Working On The Back
Maravai is a leading life science business which provides critical products used by pharmaceutical companies allowing them to develop drugs, diagnostics, vaccines and perform research on human diseases. The company claims to have more than 5,000 customers including the leading companies in the industry.
The company targets high growth segments in biopharmaceutical development and manufacturing, in fact it claims/believes that its market segments grow at a blended rate of 20% per annum! This is driven by great exposure to cell and gene therapy which is quite encouraging, as both methodologies are forecasted to have very rosy futures. The company has a large vaccine business as well and is actually providing crucial input to BioNTech (NASDAQ:BNTX) and Pfizer (NYSE:PFE) in their clinical programs related to Covid-19.
The company was only founded in 2014 and has shown rapid growth over the past six months, to a very important extent driven by a number of acquisitions pursued in recent years.
Maravai and its underwriters initially aimed to sell 50 million shares in a price range between $24 and $27 per share. Strong demand made that the offering was priced at the high end of the pricing range, as the company raised $1.35 billion in gross proceeds with the offering.
The company reports a nearly 258 million shares count which actually gives Maravai a very large market valuation. At the offer price, Maravai’s equity is valued at $7.0 billion. It seems that the proceeds will not benefit the company as this valuation furthermore excludes a net debt load of $360 million as well, for a more than $7.3 billion enterprise valuation.
This translates into very high valuations as the company generated merely $124 million in sales in 2018, although it reported an operating profit of $16 million that year. Revenues rose a relatively modest 15% in 2019 to $143 million as operating profits rose further to $24 million. So far this year the company generated $185 million in sales (up 73% on the year before), for a run rate close to a quarter of a billion, translating into a 30 times revenue multiple. The rapid acceleration makes it obvious that there is a big Covid-19 component to the current growth.
Excluding a gain on a sale-and-leaseback transaction the company reported an operating profit of $64 million in the first three quarters of the year, for a run rate of $85 million, or about 100 times operating earnings. While the accelerating momentum this year is driven in part by the exposure to vaccine candidates for Covid-19, it is hard to disentangle exactly. Pfizer has rapidly grown to become the largest client, responsible for 14% of revenues so far this year, but adjusting for that there has been rapid organic growth or growth from supplying to other Covid-19 candidates as well.
Shares of Maravai ended their first day of trading about 10% higher to nearly $30 per share. This means that the enterprise valuation has risen to approximately $8 billion, which works down to a 32 times annualised sales multiple based on the numbers in the first 9 months of the year.
The company, based on an operational basis, is able to thrive both in a pandemic and non-pandemic world. While 20% growth in the target markets looks very compelling, I note that revenue growth in 2019 lagged that percentage quite a bit at 15%. This observation in relation with a 30 times sales multiple looks quite steep, as I furthermore note that I am basing this on very strong sales momentum in 2020.
A big peer (and actual client) in this business is Thermo Fisher (TMO). At current levels around $450 per share, the company supports a $180 billion equity valuation, although the enterprise valuation comes in closer to $200 billion if net debt is included. With quarterly revenues of Thermo Fisher up 35% on the year, albeit on a much higher basis at around $8.5 billion for just a quarter, Thermo Fisher trades at just around 6 times sales. Just like Maravai, it is very profitable as well.
This is somewhat of an indication that Maravai trades at a very elevated sales multiple. That being said, Maravai has some exposure to rapidly growing niche segments. Its current valuation around $8 billion, is a fraction for instance compared to the valuation of Thermo Fisher, as it has a large growth runway. In fact, I would not rule out that it might be on the target list of Thermo Fisher which aggressively has been pursuing acquisitions in recent years.
For now, I think this is a very interesting business, yet feel that current valuations are too steep to get involved here as I will keep a close eye on developments in the upcoming quarters.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.