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

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Great. Hello, everyone. Thank you for joining. Welcome to another meeting for the life science tools and diagnostics track at the Wells Fargo Virtual Conference. I'm Tim Daley. I work with Dan Leonard on the life sciences team. And here, we are happy to be hosting Bio-Rad today for a fireside chat. So we have a full house, a lot of the team here, Norman, Ilan, we've got Andy, and we've got myself. So yes, so I think we're just going to kick it off. Again, this is going to be kind of an open forum, fireside chat, and we welcome everybody to submit questions. So you can e-mail me directly at [email protected] or submit the questions via the portal.

So with that, I guess, we will kick it off. So thank you, everybody. Appreciate your attendance. And I guess kind of initially, just wanted to get your own thoughts on it's been a pretty hectic last 1.5 months. The environment has changed since your earnings call. So I just wanted to get a general update on the business. I think then, we are talking about 10% organic growth guidance, some strong end market activity. And yes, just kind of go from there. If you could provide any updates from an end market perspective, anything you're seeing on the ground or anything that's materially changed in the last 1.5 months, that would be great.

So I should have known who was going to answer, but this is Andy. So I'd say, broadly speaking, our guidance took into consideration the COVID profile that we've got in our instrumentation deployment, strength in our digital droplet PCR business and strength in the biopharma segment more broadly and also with our process chrom business as well. That all seems very much on track in our minds. And then as a backdrop, the diagnostics and broader life science markets coming back, the kind of soft area in our diagnostics is really related to elective surgeries, which have taken a little bit of a step back on the recovery due to the Delta variant kind of explosion. But generally speaking, a good trajectory across all of the remaining parts of our portfolio are working back to a more normal demand profile. So -- now overall, we're still very encouraged by our guidance for the year, and as you know, sticking with that.

I think it's also safe to say that materially, nothing has changed in the last 1.5 months. I think that -- over the last year, I think that our customers have adapted to this kind of new environment and seem to be able to kind of roll with the Delta punches, so to speak. So while as Andy says, things are not 100% back to normal, it seems to be a pretty decent cadence for the business.

Perfect. Great. No, thank you for that backdrop. So could you talk a bit of -- there might be some softness in diagnostics since the elective surgery pullback. I know that on the last earnings call, the discussion was around current levels of activity on the diagnostic lab customer side and the academic lab customer side were kind of about 90%-ish back from COVID. So I just wanted to kind of check on that status. So has there been a material pullback tightening of one of those 2 buckets? Or just maybe not any continuous improvement there?

I don't think we've seen anything that would be a callout in terms of change from our point of view. Just on the elective surgery side, where you get these Delta surges overwhelming hospitals.

All right. Understood. Okay. So it sounds like the kind of $13 million to $14.5 million-ish base business growth that was expected for the second half of the year is still on track there. So that's definitely good to hear. Okay. And then on the other side of the coin, you guys did highlight some supply chain concerns, maybe potential margin pressure there. It doesn't seem like those headwinds have abated and maybe even gotten a little worse. We've been hearing a bit more today even about supply chain shortages or supply change disruption. So any additional color you can provide there would be helpful.

I think they still persist. That -- the electronic componentry, things that have chips in them, definitely challenging. Resins, definitely challenging. Sometimes, it's a little bit like street fighting to get supply. But generally, we're coping with it and are working our way through and doing our best to keep customers supplied and supported. But it's definitely not business as usual there. It's a real fight to get the supplies you're looking for.

I think the other piece of that is shipping capacity is still not what it used to be. And so that's always a little bit challenging.

All right. Okay. And then as well, anything you're hearing or seeing on the labor front, talent retention front? A couple of companies today have highlighted that specifically has maybe gotten a little worse in the last few months, whether it be from requiring a bit more payouts to keep people happy or some signing bonuses. Or just kind of any color if you are seeing something similar.

Do you wish to answer that? Or shall I?

I think that everybody is challenged on the -- trying to bring new people on board. And it's a competitive market. I think still there are people who -- working remotely and or want to continue to work remotely. I think it's -- overall, it's -- it is a little bit of a challenging environment for attracting people.

Yes. I concur.

Okay. But nothing that would materially hold back growth or kind of disrupt the plan that you guys all have internally, it's not to that point?

No. No. I mean -- but it's always been a challenge to find good people. So I don't think it's materially different than it has been.

Okay. I appreciate that.

I think the challenge going forward will be kind of around the remote work environment and how that is going to evolve for people, how companies are going to deal with that. Our company is going to all have vaccine mandates. We're not -- it's just -- there are some kind of questions about the dynamics over the next 12 months.

All right. Yes. I understand. Well, there's a lot of questions in the air at the moment, which kind of, I guess, brings us to the next topic. So thinking about kind of the COVID versus base business side of things. So guidance last quarter, you all increased it, had about $40 million to $50 million of COVID revenues in the second half of the year. The numbers that we've been tracking -- and even today, Quest Diagnostics upgraded their full year guidance due to increased COVID testing. So just curious as -- or is that $40 million to $50 million still the number that we should be expecting in the second half of the year? Or anything -- any kind of pickup that you're seeing there materially?

So Andy, do you want to start? Do you want me to take it? Or...

It's fine. Go for it, Ilan.

Yes. Tim, generally speaking, our kind of thinking, which has been from the beginning of the year, that the second half, incremental revenue from COVID-related kind of instruments will tail off, obviously, relative to the first half. We did guide for the $40 million to $50 million. We do believe that generally speaking, that is the trend. Obviously, if there is some pockets that suddenly will arise from either a specific location or if there is going to be a completely new variant that will trigger a new wave of demand, that may change our thinking. But the way we continue to think about it and the way we plan for it is that it's going to tail off.

So you referenced -- I think it was LabCorp or Quest kind of upping their guidance. Just keep in mind that our participation in COVID has been largely around instrumentation and not around the test themselves. So we don't track necessarily with LabCorp or Quest.

No. I appreciate that, that wrinkle there. And then that is actually kind of what I wanted to touch on next is, how are efforts to leverage the increased installed base due to COVID coming to fruition? What are you -- any success stories you can point to? And then as well in that same vein, thinking about the partnership with Seegene. Just wanted to get your view on the value of syndromic testing, particularly in multiplex molecular diagnostics solutions when it comes to COVID. There are cases of flu and RSV and things rising across the country. So just kind of, I guess, status update on the -- any success stories in leveraging the newly increased installed base? And then as well the kind of the recent partnership, anything you want to touch on there?

As it relates to the partnership, which is part of the strategy to leverage installed base, the 2 go hand in hand. So it's a long-term relationship that we've struck with Seegene. We've had a long-term relationship with Seegene, a very positive one. So it's subject to FDA approvals. And there's a series of molecular tests in both COVID and in other infectious disease that we're working on with them. It will take some time to get those approved through the FDA. So that is part of our approach to leverage the installed base. And the other is obviously, other assays that are in development that we're looking at in the background in our R&D organization. But we've got an installed base that -- some of which will be transitory, I think. As COVID does recede and it becomes much more of a routine kind of panel testing, so syndromic panel testing world, maybe in 12, 24 months' time. But a lot of our demand has been driven by the kind of opening of small diagnostic labs and -- that we're still seeing recovery in the academic sector for our instrumentation as those labs come back on the stream.

No. That was that was a helpful update. So I guess kind of moving on -- moving away from kind of the near-term COVID impact and everything like that. So Andy, just wanted to get your view on kind of the midterm growth outlook. So a lot of your tool peers have been discussing exiting COVID, stronger growth company, increases to their long-term growth framework after COVID, maybe some companies are talking to mid-single digits, now they're high single digits. Is -- how should we be thinking about the kind of 5% organic growth framework that's out there? So is this still relevant? Right now, I think, year-to-date, tracking above that, around 7%, if we look at compared to 2019. So just kind of higher-level views, how do you -- how are you viewing the business pre and post COVID and that 5% kind of, I guess, stick-in-the-mud that we have to kind of peg you guys on?

Yes. I think that as we come through the end of the year, we're reevaluating and looking at the trajectory of the business post COVID, and we don't anticipate that there's going to be a lot of COVID in our numbers going forward because of instrumentation capacity being kind of filled. The core business, we -- yes, we see up at least 5% '23 guidance, but that would be kind of in line with our '23 guidance for the core business. And so we're -- our long-term strategies, we're evaluating where we can push our product portfolio to high growth rates, we're looking at that. And if we feel that, that's appropriate to guide to, we'll certainly communicate that in the investor meeting at the end of the year. But as it sits right now, I think it's still a good yardstick for the core business on a broad basis.

Yes. Tim, if you back out the COVID-related sales, and you have a 2-year stack on -- from 2021 back to 2019 and then you annualize it, actually instead of the 7%, you get our kind of high end of the range of a 5% kind of year-over-year growth, and that kind of fits our 2023 target model. Obviously, as Andy kind of mentioned, we'll continue to see, specifically in the next few months, the different kind of aspects of COVID and what does it mean and how should we be thinking for next year. And I think there are quite a few important inputs in the next few months that will shape up our thinking for next year. If you think about return to normalcy, return to the office and booster vaccine, adverse variance potential. So hopefully, in a few months, we'll get a better kind of insight into kind of how to think about next year.

Okay. Got it. All right. And then kind of, again, for Andy or Ilan, whoever wants to take this one, thinking about the margin side of things. So we view the Bio-Rad story as one of the most compelling margin accretion stories over the long term. You guys are ranked in one of our top picks. And so just curious about any puts, takes for the midterm annual improvement in operating margins. Obviously, we talked about a couple of things earlier with kind of the supply chain, maybe some pressure there. Maybe with the labor front, but that doesn't seem that bad. So just kind of taking all the puts on that side and maybe discussing how price -- how you're able to push price, how price acceptance is going in the market and anything, kind of thinking about cost versus price here, and if anything has changed versus kind of how you've been communicating for long-term margin accretion.

Sure. Andy, do you want to start operationally? Or...

I mean operationally, I would say this year, of course, we're benefiting from -- still from lighter T&E, generally a lower cadence of SG&A cost across the board. From a portfolio perspective, we still got some positive mix impact to COVID, yes. But we've got some offsets against that, which is supply costs, freight, some of the raw material costs are going up. And I'd say, generally, hiring is behind where we initially anticipated it would be. So there's puts and takes in our margins for the year. And we see certainly the supply chain side of some of those rolling out to next year. We don't see it disappearing quickly. So we're working through the implications of that to margin. But of course, we've got the COVID effect to overcome from a mix perspective next year, too. So that's another consideration as we look at margins for '22 and beyond. So Ilan, I don't know if you wish to put any more flesh on that.

Yes. Probably in addition to -- Andy mentioned obviously the discretionary expenses, and that will continue to have some tailwind, and some of the supply chain challenges, some headwind kind of challenges there. Some are more kind of sporadics, others like the components, and others are more kind of systematic and for -- like freight, that you need to kind of come up with your new process, how do you kind of deal with it globally. But in addition, we should think about our 2023 target as well as the restructuring that we announced earlier this year. And we are on track with all those internal initiatives, ex COVID. And so far, it's all kind of on track and on time. And these are all kind of offsetting. So, so far, we are able to successfully mitigate some of those COVID-related challenges. And in terms of our 2023 model, we are on track to achieve those targets.

Just -- maybe just one other point here. Kind of just looking back at the last couple of years, I would say we've built a kind of a strong foundation of -- in terms of the organization that we put together and the systems that we kind of put together and the standardization that we've instituted across the company. And I think that does give us a nice solid foundation for continuing to enhance the operations of the company.

All right. Great. No, that's definitely -- that's so good to hear, full speed ahead. And actually, I just got one in from the audience. So kind of taking a little -- get more granular here on the diagnostic business. So someone was asking, what kind of implications do you think the potential implementation of IVDR in Europe will have on your diagnostic business?

So...

Go ahead, Ilan.

I mean, obviously, the diagnostics is -- we've always operated in a regulated environment. There's some -- certainly, there's work to do to comply with the new IVDR standards. And like most of the companies, we're working on that. I don't think it will have a material kind of a change in our business. I would have thought that maybe some companies would have kind of thrown in the towel and dropped out. I haven't really seen that happen. So it's just kind of another part of the business.

All right. Understood there. So okay. So probably this would be a good opportunity to move a little bit more onto the product side of things. So thinking about Digital PCR. So are there any kind of new success stories, new adoption wins or any kind of areas more recently that you've seen the value proposition gaining a bit more traction? And then as well, while we're talking about the digital side of things, can you give us an update of the current status of the license funnel strategy, on that side as well -- of the business as well?

Yes. Let me start with the platform itself. We are experiencing strong demand and maintaining strong double-digit growth rates on Digital PCR. We don't see that changing. We did announce earlier in the year that there's a new platform coming, which is QX600, a higher multiplexing platform with the ability to create even more droplets and an enhanced performance even more so than it currently delivers. The drivers remain the same, I think, and we're getting continuing interest in the biopharma segment, particularly around cell and gene therapy initiatives, basic research and translational medicine, all the major applications. I wouldn't say there's anything particularly notable that is different. It's just a very robust, broad-based demand for the platform. The benefits are increasingly obvious, and we're enhancing the technical performance profile with new product introductions. So we're very strong on Digital PCR in terms of its prospects.

All right. That's a good update to have. So -- and then if we were to think about -- sorry.

Well, you had a licensing question. I wasn't sure whether Norman or someone was going to answer that. But we've settled our disputes with Tenax and very -- and a very good outcome. And if others -- we don't reveal who we're talking to and for what purposes as it relates to licensing, but we remain in a very strong position with good freedom to operate. I think that's really the story for us right now.

Okay. So shifting gears a bit to thinking about cell analysis side and the recent acquisition and kind of building out the portfolio there. Any updates on that front for us here?

As it relates to Celsee? Are you referring [ to that ] particularly, Tim?

Yes.

I'd say the -- really, the -- we've integrated the company. It's very well integrated into Bio-Rad now. We've got multiple programs running. They took -- they slowed down when COVID hit. We acquired them just about when COVID manifest itself on the world, which was wonderful timing. So we kind of lost -- we lost a bit of time there, which has really kind of pushed our delivery dates out at least a couple of quarters. But other than that, everything is looking positive with our original intent. It's just on a longer time line than when we first acquired the company.

All right. So maybe just a temporary step back, but everything else is kind of running at plan.

Yes.

Okay. All right. I appreciate that. And then anything to add on the immunohematology end? Specifically thinking about the U.S. here. And then after that, maybe just some general capital allocation questions and capital deployment. So we only got like 3 minutes left. So whatever you think would be the best use of the time here.

So I think as we've said in the past, we entered the U.S. market with our immunohematology products. I guess it's been a few years ago now. And as we've said before, it's kind of a slow, steady build that we expected. And I think we're seeing it play out that way, and we continue to kind of make progress kind of in building our market position in the U.S. I mean, obviously, during COVID and the constraints around hospitals and elective surgeries, and this is more on a global basis, that has -- that business has been a little bit more challenged. We've seen kind of signs of recovery. But then if you have these outbreaks and the kind of hospital swingback to focusing on COVID patients and setbacks here and there. But overall, we continue to work to kind of build that position in the U.S. market and, of course, in continuing to drive business in the rest of the world.

Norman, do you want to comment briefly on the inorganic question?

Yes. So again, we continue to kind of look at opportunities. We have a kind of a portfolio of things that we're looking at and evaluating. Love to do something larger, more transformational. Those things are obviously a little harder to come by. In the meantime, we've got kind of a number of kind of tuck-in things that are on our radar screen at the moment. So we feel pretty good about the kind of the outlook there.

All right. Great. Well, I think that brings us right to the end of it here. So again, I want to thank everybody. Thank you all for joining and attending the conference. And again, if you have anything for us, please let us know. But thank you again, Bio-Rad. I appreciate it.

Thank you.

Thank you. Thank you, Tim. Thanks for having us.

All right. Appreciate it. Have a good one. Bye.

Thank you. Bye now.