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

Hi, everyone. This is Rachel Vatnsdal from the Life Science Tools and Diagnostics team with JPMorgan. Today, I have Norman Schwartz from the Bio-Rad team. This session will be 40 minutes. We'll start off with the standard 20 minutes of management's presentation, followed by 20 minutes of Q&A. If you're listening to this via the webcast, feel free to submit a question online through the portal. Otherwise, if you're in person, raise your hand, and we have mic runners throughout the room that can get you a microphone. Norman? Thank you.

Okay. Great. Thank you. Okay. Well, thank you all for joining us here today. It does feel great to be back here in person after several years in 3 dimensions. Since it has been a few years, I thought I'd take kind of the first part of this to refresh everybody on Bio-Rad and what we've accomplished over the last few years and then show you a little bit about what we're focused on for the next few years. Of course, we'll be making forward-looking statements, refer to other financial measures not defined under GAAP. And as you know, these 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 I think more important, we're very well positioned for the future and we're building on a strong foundation. We have 70 years of continuous progress and we're today approaching the $3 billion sales milestone. We do continue our reputation as an innovator, investing around 9% of every sales dollar in new products and technology. And finally, we are vertically integrated with competencies from product development all the way through to marketing, manufacturing, sales and distribution. So today, we serve 2 important markets: life science research and clinical diagnostics. Each of these are large, robust markets with ample opportunities for growth, and we see ourselves as global leaders in each of these 2 markets. I think one of the hallmarks of our success over the years is really this idea of staying close to our customers, understanding their needs, and I think our direct sales model is really an important contributor in this regard. So today, we serve more than 150,000 customers with no customer accounting for more than 2% of sales. So pretty diverse. And these customers span several subsegments: life science research, biopharma, hospitals, clinical labs, transfusion labs, all the way to some applied markets. And when we look at our worldwide presence, I think geographically we're pretty diverse, more than 50% of our sales outside of the Americas. And if we look at this long term, we see this geographic mix being evolving into thirds. And I think the nature of our customers, our direct sales model, our products, all combine to give us a very recurring revenue model with about 70% of our sales recurring in one form or another. So between the 2 core segments, Life Science and Diagnostics, we have a broad, diversified product base, more than 8,000 products across a variety of technologies and we've built and sustained a strong presence in a number of markets on which we continue to build. And today, if we think about it, we think about 80% of our sales are derived from products in which we have a leading market position. So as I mentioned, we operate in these 2 distinct segments, the first being Life Science. Here, we serve a mix of academic and biopharmaceutical and a little bit of applied markets with a broad array of products for -- basically for biological research. These customers span the globe. As you can see, a healthy balance across the 3 geographies around the world. And still we see outsized opportunity in Asia. In terms of the products, it's important to understand that this is a mix, a mix of instruments and reagents. So there's a strong emphasis on content development to increase the percentage of recurring business here. And the diversity of cross products, markets, geographies does provide for some real stability and resilience as we focus on some key opportunities. So here are the few areas of the portfolio that excite us and that we see as key to growth over the next several years. Top of this list, on the left, is Digital -- Droplet Digital PCR, where we are today aggressively extending our portfolio to make ddPCR more accessible to a broader range of customers and applications. Second is Biopharma Production. We've experienced really excellent growth over the last several years and feel we should continue to see this kind of move forward. And then in Cell Biology, here -- this is something more recent, where we've assembled what we believe to be a strong portfolio of technology assets which we are looking to build upon. So if we drop one level deeper, talk a little bit more about Droplet Digital PCR. Ultimately, I think we're excited about this because our customers are excited, whether they are kind of realizing the power of absolute quantification, achieving a new level of sensitivity when screening for early disease, kind of all of these areas. I think really our installed base of platforms have helped us to establish ddPCR, and we're really working to expand our reach and segmentation of this market with a series of targeted platforms for both research and biopharma, including what you see on the left, QX ONE, which we launched in 2020, targeted primarily at Biopharma Production in industrial scale settings with kind of high throughput and automation capabilities. And then more recently the QX600 really setting a new standard for multiplexed rare event detection. And then there's QX Continuum. This is a lower-end system which we are working on, should be introduced at the end of the year and could even overlap with higher-end qPCR. And of course, continue to work on the reagent side of the equation. Second area is this area of Biopharma Production, process chromatography as we like to call it. These are materials used for separating and purifying biologics at a production scale. We've become well known in the industry for our ceramic hydroxyapatite among others, used extensively in the -- kind of really in the later polishing steps of production. As part of our growth strategy, we continue to invest in innovation. We have our new Nuvia mixed-mode resins, which help -- really help customers to consolidate purification steps. And we're also working with our customers here on application development. Third pillar is centered around Cell Biology. And again, we've kind of built a strong portfolio, a broad portfolio of technology assets around flow cytometry, antibody, single cell, all what we see as attractive market areas. For us, I think there's a particular focus on single cell analysis, where we see quite a bit of potential over the next several years in -- really in 2 areas. First is rare cell detection, enabling customers to isolate and analyze, circulating tumor cells with a simple workflow and high sensitivity. And the second is single cell multiomics, where we have some developments in the works. So that's a little bit about Life Science. And this is Diagnostics. It's really the other half of our business, accounting for about $1.5 billion of the total Bio-Rad revenue today. Here, we serve 3 primary customer segments: transfusion labs, reference labs, hospital labs. We operate here in most markets globally. Current mix weighted a little more towards the Americas and Europe, with solid growth opportunities in Asia much like Life Science. I think here, it's a good mix of reagents and instruments. But I think the important thing to understand is that these are mainly what we call closed systems. So the instruments and reagents are run together. So we do generate strong consumable attachment to these instruments with, as you see here, the reagents accounting for about 70% of the revenue. So when we think about Diagnostics and building on our solid base, we see these 3 growth pillars for Diagnostics. The first is in our core diagnostics, a focus on extending that area with high-value applications. The second is expanding our quality control, franchise, including reagents and supporting informatics solutions. And the third is something a little bit new for us in Diagnostics, which is entering this molecular area, leveraging current positions of technology, innovation and commercial strength that we have. So in Diagnostics, kind of diving a little deeper on the core area and the -- what I call our BioPlex 2200 platform, the theory of clinical immunology. This is a highly automated multiplex immunoassay system. It's differentiated, and it really supports what we think of as complex disease diagnosis, serving growing clinical areas, particularly places like autoimmune and infectious disease. And the idea here is you can detect multiple disease-specific proteins simultaneously. It adds significant clinical value, particularly in the area of autoimmune, where diagnosis is very complex. And we offer more than 60 assays today and have a rich pipeline in the works. Second pillar here is quality controls, where we have a leading position. Today, if you think about it, diagnostic tests inform 70% of all medical decisions. So ensuring test accuracy is really critically important for our health care system. And I think the opportunity to expand this business is driven both by reagents but also by software. And our software here is entirely unique, enables engagement with a large portion of clinical testing labs in the world. And I think it's fair to say that customers who use our what's called Unity, QC data management, they also see -- we also see a strong preference for our QC reagents, our controls. And we're also actively extending our quality controls menu here to include molecular diagnostics. The last growth pillar here is to enter the large and fast growing market of molecular diagnostics. And here, we have kind of a 2-pronged approach. First, it's -- we're working lots of comprehensive menu of tests for use with Bio-Rad's PCR instrumentation. We plan to do this with leveraging an exclusive partnership that we formed with Seegene Technologies for the U.S. market. I think it's fair to say that Seegene's expertise in developing highly multiplex PCR assays makes them an ideal partner for us. And here, we also recently acquired a platform in development called PCR|ONE. It will really allow us to enter another segment, this kind of syndromic testing market with an innovative, rapid sample-to-answer proposition. So then the second piece of this is kind of leveraging our industry-leading Droplet Digital PCR franchise to develop high-value clinical assays in large growing markets such as reproductive health, infectious disease and transplant monitoring. We have a number of exciting opportunities to introduce here, novel assays to replace costly, cumbersome sequencing and another maybe low sensitivity methods. I think there -- it's fair to say I think we see a lot of opportunities here. So if I look back over the last few years in what we've done, I think that --- I think we really have achieved the goals of what we call the first phase of our transformation and are now focused on the next phase of improving our operating performance and accelerating growth. It's a 3-phased approach, beginning with -- began with globalization of operations and moved through to operational improvement and then on to accelerated growth. And much of what you see here today was put in motion several years ago. I guess back in 2017, we communicated our operational plans, kind of setting out these financial goals across these 4 metrics: growth, margins, cash flow and value. And I think it's fair to say through 2021, we not only met but exceeded those goals, best represented by a 7% plus currency-neutral growth rate and adjusted EBITDA margins which have expanded by over 800 basis points. So earlier this last year -- early this last year, we conducted another Investor Day, in which we mapped out, again, a path to our next phase of growth and profitability for the years ahead. Like our success here will be driven by kind of the focused investments in new products and technologies to drive and enhance growth, coupled with our continuous efforts to increase operational efficiency. Our plan here is to move our revenue growth up again a little bit to about 9% in the next few years and really to generate improved operating performance with targeting about 28% EBITDA margins by 2025, another improvement of about 400 basis points over the next several years. So 2022 what to say? I think in spite of the macro challenges of this last year, I think we all feel good about where we're headed actually and what we've accomplished in this last year. I think we're making meritable progress in reducing what turned out to be supply chain issues in 2022, beginning to reduce our high backlog of open orders. I will say that our customers, to a large extent, have been very patient while we work to get their orders filled in this process. I think it's also to say that we've learned a lot over the past few years about the fragility of our supply chain and how we classically managed supply and demand and that dynamics. And there are a number of changes and improvements coming out of this that should help us going forward. As we think about the recent inflationary pressures, we're working to increase prices to help offset increased costs in our business. It's a question we get a lot. And I think -- most important, I think our core businesses in health care, biopharma and the research markets, I think, they really continue to be robust and steady for us. So I think we're -- well, I got one more here. So this is a slide that outlines a little bit our environmental and social responsibility goals, ES&G, which has become more and more important for investors. And we've had several initiatives in this over the last several years. In terms of carbon emission and renewable, we've done a lot, especially in the solar area: a big solar installation in our Hercules campus here in California, also recently completed a big solar installation in Switzerland. And we've long been a -- kind of had a very diverse workforce. So this kind of comes naturally to us. Continue to work on those efforts. And I think it's fair to say when you look here, we have a lot more we can do in the reduction of recycled packaging. But these are some of the things that we're working on for the next several years. So okay. I think we are poised for continued progress in the years ahead. We see an accelerating revenue profile, reflects kind of the transformations that we've done and the transformation of our product portfolio. We continue to invest in these faster growing, high margin businesses and expect our revenue growth rate to increase to nearly 9% by 2025. At the same time, we continue to optimize our cost structure. And we're also looking to improve our -- what I call our channel profitability, to align our market strategies and help to support this greater top line leverage. Overall, again, targeting to reach 28% adjusted EBITDA margins in 2025. And certainly, I think we with this enhanced profitability generate significant cash flow, should support our capital allocation strategy. And certainly, we also have opportunities to enhance our profile with targeted complementary inorganic opportunities along the way. So thank you, and appreciate all your interest in Bio-Rad. I think we're going to open it up to Q&A.

Yes, we're going to shift over to Q&A. So I'm going to invite the rest of the management team to come join us up here. As a reminder, if you do have any questions, please feel free to raise your hand and then a mic runner will hand you a microphone.

Nice and cosy. Yes.

Yes, I know. Very cosy, isn't it? Awesome. Thank you guys for joining us. So first off, you've had a really nice benefit from COVID-related sales during the pandemic. So with new variants emerging and COVID kind of taking resurgence again, how should we think about the durability of your COVID revenue in the coming year? And then what do you see for 2023, '24 and beyond?

Would you take that one?

So yes, we were largely engaged through the supply of instrumentation. I think it's probably broadly accepted that the market is largely saturated from an instrumentation point of view. And certainly, we've had a diminishing revenue stream from participation in COVID. And I think we'd like to say we've come in for a nice soft landing towards the end of 2022. We don't see it as a material contributor to our revenue moving forward.

Helpful. Maybe shifting over then to bioprocessing. So destocking has been a major theme this week with a lot of your peers also flagging some of those same stocking impact. So can you walk us through your process for the chromatography business within that broader bioprocessing market? And are you seeing anything that would suggest that demand is either waning or anything for your chromatography business there?

Yes. We really don't see the same thing that other people have been talking about. The business is very steady. We don't see any kind of destocking trends. We tend to be kind of late in the process. So we're in the kind of the polishing steps of these processes. And yes, don't see the same things that some of the people are talking about.

Okay. That's helpful. Then maybe let's shift over to one of your key growth areas, Digital Droplet PCR for a few minutes here. The applications for the technology continue to really grow, and you've talked about that being a $1 billion opportunity. So how big can ddPCR get over time? And then has that outlook for this franchise been dampened by the emergence of the new competition in the segment from QIAGEN, Roche, Thermo in the past few years?

Sure. I'll take that one. As it relates to market size, I think we've progressed our thinking as to the overall, let's call it, TAM for Digital PCR. In the early years, I think it was deemed to be $300 million to $500 million opportunity. And a couple of years ago, we said maybe that's more like $1 billion. I think we now see that as a robust high single-digit to $10 billion overall opportunity and a split between the Diagnostics segment and Life Science segment. If you think about the Life Science segment, the applicability of that technology is very broad, whether it's translational medicine, biopharma, production of the new therapeutic modalities, even into the industrial segments in waste water and other kind of broad-based applications. So we've really upped our sizing of that opportunity on the Life Science side. And then when you consider Clinical Diagnostics, a significant portion of the diagnostics world is molecular PCR based. And so here you have a next generation of PCR technology. And the strategy here is to take a differentiated high-value opportunity as a market entry and then build on that and -- where the performance, precision and sensitivity is meaningful and can add value, whether it's either displacement of another technology or advancing the capabilities of real-time PCR. So when you look at that in collection, we think that's a very sizable market opportunity now. And we've got product development initiatives and strategies to pursue and access that over the coming years. This is going to take a few years to get the product introductions positioned and adopted, but we see it as a very robust long-term opportunity.

Great. Helpful. Maybe looking ahead then, are there any new product introductions that you're excited for heading into 2023?

Well, absolutely. By the end of this year, we will be introducing Continuum, we call it QX Continuum, Digital PCR platform, Droplet Digital PCR. This is another one -- it's another segmentation of the market, in this case, towards the lower end of the market, which we think is right for exploitation. And so then we'll have an entire suite of product offerings from very high throughput, fully automated which is largely biopharma all the way through to the low-end segment qPCR based predominantly. We're working on our PCR|ONE platform. That's not an introduction this year, but that will progress. We'll see single cell introduction towards the end of the year. And then just general life cycle replacements across the bulk of our portfolio.

Okay. Maybe we can shift over to more of a macro discussion now. So on the supply chain front, you cited that some of the supply chain disruptions have contributed to a significant increase in order backlog in the past year. So were you finally able to work down some of that order backlog during 4Q?

We were. Yes, it's been quite a challenge the past year, not just for ourselves. And so through the year, we perhaps underestimated the magnitude of supply of chips and related components. So that was particularly challenging in Q3. We saw improvement towards the end of Q3, and we saw that improvement progress in Q4. So we do -- we guided in Q3 that we would improve that situation by the end of the year, but that we would still continue with elevated backlog into 2023.

Got it. Okay. So maybe how could you characterize the visibility on that supply chain? And when will you actually be able to fully work through that backlog? You said it's extending into 2023.

Yes. Our current perspective on that is -- to a large degree, component supply on Life Science has improved a lot. I wouldn't say it's the biggest challenge for us anymore. It's much more a work through the volume, the capacity, the backlog. It's a little harder on the Clinical Diagnostics side. The alternative sources have to be fully validated in a clear platform. And they are large and more complex systems that take longer to build. So we anticipate that at least in the first half of the year that the clinical backlog will still be burning that down. But by the end of the year, we feel we should be past all of these issues.

What about cancellations? How should we think about our cancellations playing into that as well?

Yes. Cancellations have not really been a major factor. I think Norman mentioned in his talk that our customers have been pretty patient and very loyal. And so I think that's a real testament to the products and the platforms. So there have been cancellations, but they've really not been a material factor in our numbers, yes.

So shifting over to pricing then. That's been a common topic this week as well. Can you talk about what level of pricing power and contribution did you exit 2022 with? And then how are you thinking about pricing being a factor for '23?

Do you want to answer that one or -- I've been doing all the talking.

Sure.