Bio-Rad Laboratories, Inc. (BIO) Earnings Call Transcript & Summary

We'll kick it off. I'm Tycho Peterson with Life Science team. It's my pleasure to introduce our next company Bio-Rad. We'll do a breakout right after in Sussex room. With that, let me turn it over to Norman.

Okay. Thanks, Tycho. Okay. The music stop. That must be me. Okay. Well, thank you all for joining us. We're going to take this opportunity to tell you a little bit about Bio-Rad, about our rich history, how we've contributed to science and health care, and where we've been investing, and of course, what we see for the future. So before we get started, caution you that we will be making forward-looking statements, which do carry with them inherent risks. So for those of you who are new to Bio-Rad, we do have a rich history and a strong culture, but more important, I think we're well positioned for the future. Today, we serve these 2 markets: life science research and medical diagnostics. And today, we see ourselves as a global leader in each of these 2 markets with about 8,000 people. We develop, manufacture and market products, products that enable discovery. We tend to be vertically integrated in our approach. We do have a reputation as an innovator, investing around 9% of every sales dollar in discovery, in new products, new technologies. In terms of sales, a little over $2 billion in sales. A long history of performance, 65-plus years. And certainly, over that time, we've developed a number of key competencies. The 2 parts of the businesses are complementary. And as we see it, the ability to leverage to kind of across from life science and diagnostics is important for us. So an overall picture. Today, we serve more than 15,000 customers. No single customer accounting for more than 2% of our sales. These customers are spread across several subsegments: Life Science research, BioPharma, hospitals, clinical labs, transfusion labs. And then geographically, we're truly worldwide with over 60% of our sales outside the Americas. Our goal, actually, if you look at this chart is to see this geographic mix to be in thirds. We are making progress over the last few years. Asia Pacific has grown from about 15% to, as you see, a little over 20% of sales today. Underlying this, of course, is a broad, diversified base of products, more than 8,000 products, across a variety of technologies areas where we've carved out these niche markets and can sustain -- build and sustain these product areas. But I think it's important to understand the nature of the customers, our direct sales model, the products themselves all really combined to give us a very recurring revenue model. So today, we think about 70% of our sales being recurring in one form or another. So Bio-Rad has a long history as an innovator. Pictured here are a few of the many examples that over the years, contributions to the advancement of science and health care. So when you look at our leadership positions, one of our key operating strategies is to be a leading player in these areas that we serve. Here are some of our key market areas. On the left-hand side is the Life Science area. On the right-hand side, the Diagnostics area. I would say, over 80% of our sales today are from products in which Bio-Rad has a leading position in some of these markets. And I think -- if I think about it, that trend has increased over the last several years driven by innovation and market focus. That percent has been on an increasing trend. It's clear that our customers and markets are evolving. We are now seeing a closer connection between the disciplines. There used to be actually more distinct, defined segments, more of a continuum of what we think of a translational research through to its application in health care. Bio-Rad is well positioned with key technologies and market expertise across the spectrum from discovery to delivery. So then when we think about the businesses, the 2 businesses: First, the Life Science business. This is a snapshot, think of the total market as being $45 billion plus. Our target is about -- really an 8% to 9% -- $8 billion to $9 billion subsegment, what we describe as biomolecular research and to a certain extent, biopharmaceutical production. This business is fairly well balanced geographically with Asia being our fastest-growing area driven in large part by China. In terms of products, mix of instruments and consumables, and we do have a strong emphasis on content development to increase this kind of percent of recurring revenue business. Our customers here stand a broad section of the Life Science market. We serve academic researchers with our core technology segments focused around the study of genes, proteins and cells. And our customers are actually moving to a little more integrated approach where information from all 3 of these segments is important, kind of a system's biology concept. We also support BioPharma with these same discovery tools, some of which are used in a manufacturing environment. Additionally, we have an applied segment where the primary focus is products for food safety and quality testing. Key part of our strategy is about advancing discovery, investing in our core markets, new markets and certainly in new disruptive technology. This is actually a fairly new market for us. This idea of cell biology, one we've been investing in for a few years. These investments have been both from internal development and through acquisition. Building a portfolio of products in this increasingly important area of cell analysis. It's a rapidly growing part of the Life Science market. Another key area of significant focus for us has been in this area of digital biology, particularly around Droplet Digital PCR. This is actually turning out to be a fundamental technology, allowing researchers to find that kind of needle in a haystack, seeing things that couldn't be seen before. It's kind of like -- kind of thinking of it as the power of partitioning. So in the relatively short time this droplet technology has been available, it's found broad application in biological discovery, in translational research, in BioPharma and now even into Clinical Diagnostics. The technology is finding value both in DNA amplification and in sequencing. Value seen in translational research has really given this area kind of a foundation and credibility for use in diagnostics. Not only have we seen a wealth of publications and research, but it's a good proxy to the value to science. It's also important, we've seen an increasing application of this droplet technology into translational research with over -- today over 1,100 liquid biopsy sightings. And overall, it looks like the number of new publications keeps increasing each year. And lastly, Bio-Rad recently received FDA clearance for our platform in 2019, starting to enable diagnostic applications. This is a platform-based technology. So it's obviously been an important to keep evolving. Our road map is, as you might expect, customer-driven within putting the workflow, performance, reporting. And here, I think, we do benefit from our market position and our ability to gather valuable information to design the next instrument system. It's also important when we talk about instruments. It's also important to know that we have developed a very large portfolio of research assays for these platforms in the tens of thousands and are building a diagnostic menu in oncology. Here is the latest from Bio-Rad in digital biology, the QX ONE. This is a fully automated approach to Droplet Digital PCR. It offers a number of benefits to customers, especially in the BioPharma area. This is a system we just started delivering in December and certainly look forward to its adoption in 2020 and beyond. And finally, here, we're certainly excited about the opportunities for this technology in gene and cell therapy where ddPCR is proving to be a valuable tool in a market that's growing very rapidly. The technology is being used throughout the therapy process. At the front end, quantifying the therapy, then assuring that the gene editing and dosing accuracy is correct as part of the treatment. And certainly then posttreatment to monitor patients and look for recurrence. So to complement the work in digital biology and to extend our Life Science business into this space, we acquired a novel DNA -- RNA-Seq library preparation technology in 2019. This proprietary enzyme technology acquired with this company, 2D Genomics, offers us a differentiated entry into the RNA-sequencing prep market, estimated around $400 million today. Our first product to market, leveraging this technology is something we call SEQuoia. I guess being a California company, that's appropriate. It's really designed for bulk RNA-sequencing experience -- experiments, and it's set to launch early this year. It has unique ability to study the entire set of DNA biotypes, as you see pictured here. We will continue to build a portfolio of library prep solutions around this technology and certainly see potential for it to augment our qPCR business. So Diagnostics is the second key segment of our business, representing today about 2/3 of our revenue. Again, a large market, in which we focus on key subsegments. Customers are largely hospital labs with reference labs and transfusion labs, also important served areas. Geographically, this business is a little more heavily weighted towards the Americas, but Europe, and over time, Asia, we expect to grow as a percent of the total. Obviously, a highly recurring business model where instruments are placed in the labs and then the customers consume reagents on those platforms. Products in this segment used to provide results in 3 distinct areas. First, test to diagnose and monitor a variety of conditions. Second, test to ensure safety of the blood supply. And third, materials and informatics to assure integrity of laboratory results. We talked a little bit about this before, about our blood typing business where we have a leadership position, except actually in the U.S. That leadership position around the world has been largely driven by our high- and mid-volume platforms. And of course, a broad array of assays is important for this critical area. So we do see the U.S. market as a large opportunity for us. Over the past 2 years, we worked to gain U.S. FDA approval for actually a range of platforms, starting with the IH-1000, our high-volume system, followed then by a mid-volume IH-500, and more recently the IH-24 low-volume systems. So today, we have this broad range of platforms and assays available for this very important market. So it'll certainly take some time to get traction in this area, but we feel we should be able to reach over time a similar leader position to that, that we have in the rest of the world. So another important area for us is quality controls. And these are used by labs to assure that the results that are reported out are correct. And one of the increasing areas of interest is in controls for molecular tests, for virology, transplant, respiratory. And we expanded our offerings recently here with the acquisition of eXact Diagnostics. This was several months ago. And the idea here is really to accelerate our market penetration in this very important product area. So over the last several years, we've pursued a number of transformational changes for the company, investment in a global ERP system, investments in new early-stage technologies and also in recasting our organization. All of these have been directed at improving our ability to scale the business efficiently and effectively. Today, we've completed the largest part of the organization and systems transformation and are looking to -- actually looking forward to mining the benefits from these investments. Likewise, we're looking for continued growth from the new products and technology areas that we've targeted. So I would say, all of this notwithstanding the recent ransomware attack we experienced in early December, I would tell you that we're well on our way to recovery, thanks to investments in backup systems and the speed at which we responded to the attack. However, we do feel it did have some effect on sales for the quarter. We also estimate, of course, that a portion of this shortfall will be recoverable as we go forward. So we go back to 2017. We set out a goal of improving our operating margins, expressed here in adjusted EBITDA, taking our margins to 20% by the end of 2020. Several elements of the plan. Of course, for us, it all starts with the top line, that continuous flow of new products, geographic expansion and entry into new markets. These are all key for us. Then it's about driving the return on those internal investments we've made in the systems and the organization. And as you can see here, we've already been able to leverage some of this, consolidating distribution centers in Europe, enabling global procurement, establishing shared service centers, and we are making progress. And we continue to feel that this goal is -- and target is achievable. And of course, as we reach this 2020 milestone, we do expect to lay out a path to further progress. So in summary, been around for about 65 years. Over that time, we've grown and evolved in many ways; the markets and geographies we serve, the products and technologies in our portfolio and the tools we deploy in the business. The wave of investments we've made over the past few years, I think, set the stage very well for the future for growth and for improved profits. And in addition, we have good opportunities for inorganic growth acquisition to complement our organic growth. And finally, it's great to have Ilan Daskal on board as well as CFO; and Andy Last as COO, both of whom joined us in the past year. So I hope you all share our excitement for the future. Thank you for your interest in Bio-Rad.