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

Good afternoon, everyone, and welcome to the JPMorgan Virtual Health Care Conference. My name is Eleni, and I am on Tycho's Life Science team. It is my pleasure today to introduce our next company, Bio-Rad. We have CEO, Norman Schwartz and the whole team today joining us. And as a reminder, you can submit questions through the ask-a-question feature on the event [ debut ] on the website or e-mail them directly to me, and we will get to them in the Q&A at the end of the presentation. And with that, I'll hand it over to Norman.

We want, Eleni, to have some Q&A. Eleni?

Yes. Is it going to be a 100% Q&A? Okay.

Yes.

Okay. Sorry about that. We'll just jump right in. So just to start off, Norman, with our first question. In the last 2 years, Bio-Rad hired a new CFO, a new COO and a new Head of Clinical Diagnostics, which is your largest segment. And you've also navigated through the pandemic quite well. Can you talk about the change at the top? And how that has made your operations stronger or more competitive?

Well, it's interesting. If I look back at it all these changes, they really all have been retirement-driven. So I think it was an opportunity for us to go out and to find and bring in the folks that are on the team today, Ilan and Andy, and of course, Dara Wright for Diagnostics. I think it's been great for Bio-Rad. I think that each of those individuals has brought kind of new perspectives, new energy. And I think the team has coalesce quite well. So I think we feel pretty energized with the changes that we've made.

Great. And as a follow-up, we know Bio-Rad was affected by the pandemic, but you've navigated through it extremely well. And it also looks like operations actually did better than what your expectations were pre-pandemic. So just wanted to get a bit into sort of the drivers of the growth you've seen and starting with COVID. You saw -- or you're expecting $235 million in COVID-related sales in 2021, which you laid out in December 2020 through your Investor Analyst Day. And you called out that the mix is skewed towards PCR instrumentation. How should we think about the pull-through opportunity from these boxes? And in particular, in a post-pandemic world?

So Andy, do you want to take that?

Sure. Yes. So I think the first thing to think about is, as you mentioned, the bulk of that revenue was instrumentation. But not the classical large Diagnostic boxes that go into the big reference labs. These were going into small, medium-sized labs around the world. And so it's an open platform. So it can be used for LDTs as well as approved COVID testing. So that's been the bulk of the revenue. Bio-Rad was not a molecular diagnostics platform player. So we've been supplying and supporting this instrument base around the world. Thinking about moving forward, we have submitted and are waiting for 2 EUA approvals. They're imminent, imminent can mean today or next week for a -- one syndromic test, one straight COVID-19 PCR test. And we'll then be pursuing the opportunity to sell on to our installed base. Since we are clearly a late mover on the test side, it will be more as a secondary source opportunity, not only for our platforms, but also the other open real-time PCR platforms. And then, of course, as you look forward to an era when testing is not at the pace that it is right now, whether that is Q3, Q4 this year or beyond, we're working on plans on how to capitalize and maximize the installed base that we've established and expanded around the world, as I'm sure other players are, too. But it's an opportunity that we believe exists for us, especially being in smaller and medium-sized labs, where platforms are much more flexible.

That's great. And that really leads into another question we've got in online, which is not only a Bio-Rad, but all of the PCR instrument manufacturers had a great 2020. How are you thinking about the massive uptick in capacity for PCR instrumentation?

I think it's really a continuation of that same story. Our profile is smaller to medium-sized labs, not the large reference labs. And that gives us an opportunity because it's open platform to go back in and kind of redirect where that instrumentation may get used. Some will be permanently sconced in Diagnostic testing that other systems may not. And so I think we're reasonably optimistic about what we can achieve there, where we're not actually locked in to a fully deployed kind of high throughput system, let's say, a LabCorp or Quest or similar kind of lab profile.

Great. Another question we got from our investors. What is your view on the sustainability of increased testing from COVID into the next fiscal year?

So it seems that certainly in many places around the world, we haven't quite gotten a handle on the COVID. And so we feel that the -- that we'll continue to be testing. Our guess is well into this new year. And beyond that, I think it's a real question. I think that, that there's some idea of the durability of the vaccines. So I think there's going to be some ongoing monitoring beyond that. But we will see. We're in a little bit of a new world here.

Definitely. Would love to spend some time now on the Droplet Digital PCR, clearly faster-growing than the rest of the portfolio. How should we think about this business in the context of Bio-Rad? What are some of the key drivers for this technology over the foreseeable future?

Yes. I'll take that one. So we see Droplet Digital PCR as a long time growth opportunity for the company. So it's a long-term driver. The application space for Droplet Digital PCR is broad, both in academia, biopharma and applied markets, where the platform delivers very high levels of sensitivity, ease of use and absolute measurement. So there's a lot of application areas where that is very meaningful. So we've had a double-digit growth rate that has persisted through the COVID-19 pandemic period. And we expect to continue in the same vein. And when we look at the future, we now see overall an expanded TAM and expanded overall opportunity for the platform approaching $1 billion. That's not a number we've used historically in the past. But given the momentum that we have and the increasing fit for the different end markets, we think that's a very realistic opportunity through time.

Great. QIAGEN recently launched their QIAcuity system. Does QIAGEN's entry into Droplet Digital PCR change the outlook for you at all? And can you speak to the differences between the technology?

Yes. Yes, I don't think it changes our outlook. I mean, on one hand, as you might expect, it's a testament to the importance of digital PCR to the broader market. The fundamental difference between the platforms is how you compartmentalize your sample. We do it with droplets, an individual discrete droplet. The QIAGEN platform is a fixed format. So they created basically like a plate of little small wells, nano wells or micro wells that create the compartments. So that does create technical differences and performance differences. Moving forward, I think what we would say is we take the performance high ground. We have a very scalable platform. It's extremely robust and reproducible. And so there's certainly an opportunity for the QIAGEN platform in certain niches, and we fully expect them to be able to have some success there. But overall, we really don't see it changing meaningfully our growth opportunities. It's just really, I think, probably a faster expansion of the overall adoption of digital PCR.

Makes sense. And then it seems like the wastewater opportunity has somewhat accelerated for you during the pandemic. How do you think about sizing this market? And what do you view as maybe the near-term and longer-term opportunity here? And how will it -- how will the opportunity look like in a post-COVID world?

Yes. Yes, I think kind of, in a sense, came out of nowhere, just like many things in the past year. And it certainly gathered momentum in Q3, Q4 for us. So how to think about it in the future? So effectively, it's a surveillance approach to dealing with the pandemic and early warning system by being able to monitor communities for outbreaks. Digital -- Droplet Digital PCR has been shown -- in particular, Droplet Digital PCR has been shown to be the best technology for dealing with -- this is a very mucky kind of samples, it's not your ideal sample. And so the robustness of our platform has shown to deliver very high sensitivity and multiple publications and editorials that are now coming out. How to think about in the future? We think it's a market globally that could be up to $200 million in size. However, that I would say is very dependent upon how it's publicly funded. So it's very dependent upon how the administration is around the world, in particular in the U.S., which is probably where it's most prevalently adopted. How the funding flows? If there's preferential funding, I think it's a very meaningful growth opportunity. And then as to kind of long-term sustainability, I think that depends on the epidemiology of COVID as a disease. Right? If it becomes more flu -- ends up being flu like, where you've got an annual recurrence with the severity and transmissibility of this disease, you want early warning systems. And this is showing itself to be a really good one. So that piece is out of our hands in a sense.

Along that vein, what are -- I'm just curious, what are your views in terms of COVID? Do you -- or do you have a view in terms of will it be sort of an annual occurrence almost like flu? Or do you have a view there?

Yes. Well, I mean it becomes educated opinions at this point. But the story out there is vaccines may be able to provide some -- a reasonable level of immunity for up to 2 years. You won't get 100% coverage of vaccines. You won't get 100% immunity. This is likely to be more like a flu-type situation. But the flip side argument is the new vaccines target, they're different right? And so they're targeting highly -- at least the mRNA ones, they're targeting very highly conserved parts of the viral genome. So I think it really remains to be seen. But it's probably more a 50-50, but I think it's more likely to be flu-like.

That's helpful. Appreciate. And then outside of COVID, you've mentioned the use of the technology within the gene therapy space. What makes this platform so powerful in this application?

So the real benefits of Droplet Digital PCR quite are the exquisite sensitivity, the very robust nature of the assay, it's very, very reproducible. And the fact that it's an absolute measurement. And so you don't need calibration curves. And that's very different from real-time PCR, which has been obviously a gold standard technique for many years. And so you can measure very precisely. So one of taking gene therapy, in particular, that is delivered via viral particles. The actual number of viral particles is the dose. The viral particle contains the gene therapy itself. So you're using that -- using Droplet Digital PCR in that instance to QC, the viral docs, on a routine basis. So as an example. So that's how -- it's, one, I think, a very good example of how the platform is being utilized in these new advanced therapy areas.

We just got a question online asking the 2023 outlook calls out single-cell and bioproduction as 2 of the key growth drivers. What are you seeing there considering there are relatively small portions of your business today? And could you spend a minute on the Celsee launch in single cell this year? Will it compete directly with Tenax? Or different application?

These are multilayer questions. I'm happy to keep talking, but my colleagues should dive in if they wish to. Okay, Celsee. So Celsee was acquired just about the time the pandemic hit. And we've been investing in its development. So it's a platform that's capable of measuring very large numbers of single cells for sample prep. We also see for sequencing. We also see it as a platform that can be used for protein measurement and other multi-omic applications moving forward. The first focus area though is single cell sample prep sequencing. We view it as a very economic platform with a very high cell utilization capability. So that will be our market entry. And at the moment, we're working on automating the solution. And really, it won't be meaningful until 2022. But we do view it as a material contributor to growth going beyond that. And that's why it's called out in our 2023 guidance. So that was one part of the question. What was other -- oh, bioprocessing, bioprocessing. So bioprocessing is becoming just an interesting business for us. I mean we're -- it's positioned in the protein therapeutic space, molecular sorry, the monoclonal antibody therapeutics, in particular. They're growing strong double digit. The majority of the world's top drugs are proteins now means one shape or form. And I would say our growth is tracking similarly to the expansion of that market. We've got a -- you've got a high-value offering. It suits the purposes of those customers well. And we see continued growth as the market moves more and more towards high-value protein therapeutics.

So maybe just one more point to make on that. This single-cell acquisition is part of what I think of as kind of a larger strategy around cell biology. And we've been investing in this whole cell biology area over the last, say, 4, 5 years getting in cell sorting and flow cytometry and antibodies and reporter molecules, and this is just another piece of that. Obviously, a fast-growing and very interesting area for us. But it is -- yes. So it is part of a larger strategy.

That was going to be my next question. How...

Sorry, I guess I [indiscernible] there.

No, it's perfect. How it fits in with your long-term strategy. And so it's perfect. You touched on that. And one of the other questions is specifically in bioproduction. Is your process media business seeing strong uptake in COVID vaccine specifically?

So we are incorporated in some relatively small number of COVID vaccine trials. I would say we're not exposed in the same way as some of the larger players like that. So we don't look at it as a big driver of a pickup in revenue in particular. It's -- we're much more focused on what has been our mainstream principal driver, the prototype, the MATs, the monoclonal therapies.

Perfect. That was very helpful. And then just shifting gears a little bit to capital deployment. You've been signaling that a larger, more transformative deal has been increasingly considered over the past year. Can you speak to your investment criteria? What are your main priorities? And would you consider using equity?

Sure. Norman, you want me to take it? Or you want to start?

Yes, yes, go ahead. Go ahead.

Yes. So historically, Eleni, Bio-Rad was focused mainly on the smaller tuck-in acquisitions with which we continue to pursue about 2 or 3 of those every year. Obviously, in the last year or so, I mean, after we kind of reached the milestone in terms of implementing our new ERP and a more centralized approach and achieving the goals that we laid out back in 2017 in the Investors Day. We have, obviously, an elevated level of appetite to entertain a larger scale transaction. In terms of the size and the type of transaction, large can be on the lower end from a single kind of low-end $1 billion to $2 billion, up to a merger of equals, and it depends what opportunity will arise. Obviously, when it comes to the smaller tuck-in historically that we have been making, you always have a list in front of you that you can choose. It depends what premium you are willing to pay. When it comes to the larger transactions, specifically the public-to-public ones, you need to wait for the right opportunity and then to make sure that you can integrate it successfully. And obviously, you have to react relatively fast. The type of transaction, we are very open minded, whether it's within any of the existing verticals, whether it's adjacent or complementary, we won't probably entertain a transaction with the Unicorn. I mean we are still conservative in terms of the approach of accretion and cash flow generation, the ROIC and helping the top line and the bottom line, et cetera. But we'll have to wait and see what comes along and how does it exactly fit to our model.

Great. And just one follow-up. Going back -- and sorry for going back to the digital -- the Droplet Digital PCR. You've had this technology for quite a while and have made statements about exploring the clinical diagnostic utility. Any updates to provide at this point? Or maybe how does it feed into your capital deployment priorities? And any comments you can make around that?

Yes. So look, clearly, a very sensitive PCR technologies is, you've got to ask a question about Diagnostics, and we have, and we do believe there is potential for that platform in the Diagnostics space moving forward. And we're putting some energy into looking at that. It's not been developed principally as a Diagnostics platform to date. It is deployed in some diagnostic markets, particularly in oncology, where it provides very, very high sensitivity at around mutations, predominantly somatic mutations or fusion genes. We've got an approved application for BCR-ABL, for example. So it's an area we're interested in as we move forward and we're looking at opportunities there.

Even outside of COVID, where we do have a...

Yes. Yes, we have an EUA in COVID for sure. No, thank you, Norman. Yes, well beyond the COVID opportunity. Yes.

And so moving on to something that sort of follows nicely with your capital deployment strategy. In terms of your Sartorius stake, you own around 33% of Sartorius according to your last filing. What's the strategy and plans to monetize the stake? And would you consider selling your Sartorius stake to fund a larger acquisition?

So I think you probably know, this has been a very long-term investment for us. We began investing in Sartorius over 20 years ago when -- actually when Horst Sartorius was still alive. I would say it continues to be a strong strategic interest for us. The business is very complementary to what we do. And so kind of having said that, you asked if we would consider selling it. We -- I guess, I would say if there is a more strategic opportunity, it certainly is possible. But with our kind of first -- our first goal is to -- for it to be a strategic opportunity.

And let me add on that. We most likely also will not be interested to sell any stake for, let's say, distributing dividend or for a share buyback. That's not going to be considered as a priority.

Yes, it would be another strategic, something that's more strategic for us.

That makes sense. And then something you touched upon there at the end in terms of buying back stock. One of the questions investors sometimes ask is why would you or would you not buyback stock? Are you saying that your stock is overvalued? Or is Sartorius overvalued? Or are you thinking -- do you have some other priorities you're waiting to fulfill?

Yes. It's a great question. We have been very opportunistic in terms of our share buyback program when we found that we had a good opportunity. I mean, last year, we definitely participated and jumped in in a large amount. Generally speaking, today, specifically, vis-à-vis the kind of level of appetite to potentially entertain a larger scale transaction as part of the overall capital allocation model. Most likely, we will be more prudent in terms of our cash usage. With that said, we will continue to be opportunistic in terms of the approach to the share buyback program overall.

Great. And then moving on to your financial model and specifically the 2023 guidance you provided on your Investor Day. One of the focuses of the company since your first Analyst Day in 2017, has been on margins. And you've clearly had a great margin expansion story. As we think about the next 3 years, what do you view as different or difficult for -- what is different? What is difficult? And how to think about the next 3 years compared to the last 3 years?

Sure. So when you think about the strategy that was laid out back in 2017, for the past 3 years, it was a juncture where I mentioned earlier, the ERP was implemented, and we started to change the approach to a more centralized kind of approach. I would say that for the most part, it was more to capture the low-hanging fruits and anything that we were able to identify relatively fast. When you think about the new strategy, the next 3 years, it's more around productivity and efficiency, whether it's in our manufacturing footprint or whether it's about our SG&A, the go-to-market approach, coupled with an emphasis on the growth areas. I mean, geographic growth, for example, in Asia, specifically in China. So we will be looking at reallocating some of these resources and have more focus there. Then Andy or Norman, if you wanted to add anything here?

No. I think that's...

You covered it.

That's pretty good.

One of the questions we've got in online is whether you can walk through the key drivers of your margin improvement over the next few years, the sources of SG&A leverage, in particular, given your 2023 guidance for EBITDA was very strong relative to the Street.

Sure. So first, let's start with the top line. Obviously, there will be an incremental leverage in the fall-through from the top line growth. And then we get into the supply chain and the manufacturing footprint that I just mentioned. We will provide more specifics later in the year when we have our next Investors Day. But we did provide that example of looking at the efficiency and productivity throughout our manufacturing footprint. Overall, our gross margin expansion will be based on incremental efficiencies. And when you get to the operating expenses, on the R&D, we feel very comfortable with the level that we have defined in the prior strategy in the last 3 years. We will continue to focus on additional SG&A kind of productivity there. And again, we will provide more insight in the next few months when we'll have the next Investors Day.

And then another question we've got in online is going back to single cell, can you talk a bit about sort of the competition there? And where you would fit in -- where Celsee would fit in in this sort of single-cell ecosystem?

Yes. I mean, look, in the first instance, with single-cell sample prep for sequencing, the lion share of the market is owned by Tenax, and I think there's going to be some obvious competition there. And I think that's one comment. The other is really -- it's still a very -- the market is still very much evolving and still moving very, very quickly. I think the application space is moving fast as well around it. So we really view it not about a market share play against competition as much as taking a good position in an expanding market and helping to drive that expansion on the sample prep side for sequencing. The versatility of our platform, we believe, will also just give us a lot of new application opportunities, as we look at combinations of measurement approach is not just a sequencing-driven strategy.

Makes sense. And going back -- another question, going back to your COVID PCR test. Investors want to know when you could get the FDA EUA? And then are you selling it in Europe yet?

Yes. So when could we get? We quite literally -- it's imminent. It could be tomorrow morning as easily as it could be next Monday morning right now. We have 2 tests in, in waiting for approval. We also have a BioPlex multiplex test that runs on our BioPlex Diagnostics platform for measuring neutralizing antibodies that's submitted, and we are waiting on as well. So we have 3 tests sitting in EUA. And they are -- this week, next week, it's literally any day right now at this point. They've been taking longer. And one of the reasons they've been taking longer is the FDA is kind of upping the requirements, right, the change in the -- moving the goalpost as the game unfolds. For good reasons, we understand it. But of course, we're playing that goalpost moving game ourselves with them right now. And so it's just taking a bit longer.

Another question we've just received this. How do you feel about your revenue targets? Are they ambitious enough? Or are there -- is there any conservatism that is embedded? And does it factor any M&A contribution?

Yes. So Norman...

You're fine. Go for it.

So in terms of the last question, so it does not bake in acquisitions or specifically not the largest scale transaction that we discussed earlier. And we feel that it is a very nice growth when you think about the 2 verticals that we are in. It's actually above what you usually see for each of these verticals, meaning it's above our last 3 years. And overall, 3 years, over 3 years, the CAGR is higher. So we feel very comfortable. We think it's a very ambitious target.

Great. And then another question, and I guess this is a catchall ex-COVID, what are Bio-Rad's biggest opportunities for 2021? And what do you think might not be as well understood by investors or just not as well understood about the story that we can do work on?

Okay. So obviously, I think we've got -- I think the great thing about Bio-Rad is we've got kind of so many different, different directions to go in so many opportunities. Certainly, there's -- at the heart of it, the continued expansion of the Droplet Digital PCR. I think that's -- we continue to invest very heavily in that. And I would say just on a more macro view, also the continued kind of penetration of biopharma across our Life Science portfolio. Just in general, it's been an area where we have not been as strong as in the academic market. But certainly, lots of opportunities in terms of market there with the products that we have. And then certainly, the continued expansion in Asia Pacific. We've said many times that, that over a long period of time, we expect our business to evolve into thirds. And today, the Asia Pacific region, it's about 20% of our total sales should evolve into around 30%. So that continues to be kind of, I think, an above-average opportunity for us. Then we've got things like the immunohematology business in the United States, where we've been underpenetrated, and ongoing growth in kind of across a lot of our businesses, quality controls, diabetes, you name it.

Great. And with that, I think we've hit the top of the hour. Thank you so much again for this great discussion and overview, and have a great rest of the conference. Thank you for joining.

Thank you, for hosting us too.

Okay. Thank you.

Thank you.