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

Welcome to the RBC Capital Markets 2023 Global Healthcare Conference. My name is Conor McNamara. I'm the Life Science Tools and Diagnostics analyst at RBC. It's my pleasure to welcome Bio-Rad. With us are Andy Last, EVP and Chief Commercial Officer; and Ilan Daskal. Did I get that right? Okay -- Chief Operating Officer, I'm sorry. And Ilan Daskal, EVP and Chief Financial Officer. Gentlemen, thanks for joining us. Really appreciate it.

Thanks for having us.

Yes. Just let's quickly -- I don't want to dive too much on this, but give us your highlights from the quarter you just released. What are some of the things that you talked about and what are the takeaways as you've thought about it since you released the quarter, just review that really quick.

Do you want me to start? Well, obviously, it was one of the more challenging quarters for Bio-Rad in that we had a softer top line than we expected. We still had good underlying growth for the business, over 6% currency-neutral core growth, excluding COVID. But we had a few headwinds during the quarter on the top line. And we had some, I would say, some mixed challenges in the quarter, which had an impact on our gross margin as well. So we reported a softer than we anticipated quarter. But the fundamentals of the business, we came out feeling are solid. We re-guided the year. Ilan will talk to that maybe a little bit. And we've been talking about that mostly today. We still think we have a very good outlook and so our base is solid.

Yes. And obviously, I will add Andy mentioned our guidance for this year as well as our 2025 target. For this year, we baked in some additional factors that emerged specifically as of late. One is associated with incremental sanctions in Russia. That's one we called out. And the second one that we called out was the softness in funding for smaller biotechnology companies which is a bit of a headwind for us. And we also see the inflationary kind of cost aspect continues to stay along with us for quite some time. And in some instances associated with some material, even additional incremental cost and increase in price increase there. So that led us to soften our guidance for this year. When we think about our 2025 model, we layered 2 of those aspects. We believe that the softness and headwind in smaller biotechnology funding is going to stay for another year or 2, or so to be another headwind for the next year or 2. And the other aspect, again, the inflationary cost is also -- we don't see it as short-lived or transitory. I mean, it's probably longer term. And that led us to kind of adjust a little bit in our 2025 model. But again, as Andy mentioned, fundamentally, our growth drivers are still there in terms of the Droplet Digital PCR, the process chromatography, diagnostics that we actually upped our guidance for later this year. So we have a lot of upcoming kind of strategy that we believe is going to continue to play well for us, and it's all kind of baked in the kind of nice growth trajectory, still it's 8 years -- 8% for the 2021 to 2025 CAGR, which is still pretty nice profile, which is definitely higher than the historical kind of growth profile for Bio-Rad.

Yes. And do you think that's -- that 8% is faster than the market is growing.

Yes.

And just to be clear, several companies in the space also talked about these pressures. So you think most of these or all of them were industry-related or anything company specific that you guys called out?

In terms of market?

No, sorry, not -- this year and for the actual numbers. So the guidance you cut, it sounds like everything you just laid out across the industries.

Macro industry.

For the 2025, most of it is macro in industry. For 2023, I think there were some aspects associated with our internal supply chain constraints, and they are more Bio-Rad specific, but these are more transitory normal.

Okay. All right. We'll come back to the quarter if we have time. But Andy, I wanted to talk -- we've gotten a lot of questions about the success you're having with your ddPCR product line. And you guys are -- have a majority share in that market against some large players. What kind of -- what do you think has driven that market share gains? And are you starting to see any of these big players take share from you guys?

Yes. Well, thanks for the question. It's obviously an area of focus. I mean we are the market leader, and I would say, largely have established the market for Digital PCR with our Droplet implementation. The platform essentially, you should think about it as a next generation of PCR. And in that regard, it's no different to the next-generation sequencing was to see sequencing. It changes throughput, precision, sensitivity and it opens up a whole myriad of applications, which as we launch platforms with new capabilities and new price segment offerings, there's a multibillion-dollar market opportunity. There are some new market entrants. We've established a trend line that is attractive for others. I think you can view that 2 ways. One is it stimulates further market expansion, and we believe that to be true. But the market is defined by performance and ease of use and breadth of menu. We have thousands of assays to run on our platform. We have thousands of publications. We have a pretty mature product offering with still quite a runway for new innovation and new applications. And so we expect to maintain our leadership in the coming years and expand the overall size of the market.

I would add maybe also Droplet Digital PCR, in general, it's an emerging technology. The TAM keeps growing. I mean just a few years back, it was estimated only by maybe $200 million, $300 million. Now we are thinking in the billions in terms of the overall TAM. As Andy mentioned, we will continue to introduce new instruments. There are different strategy how to go about that market. I think that today, we do kind of target more the higher complexity kind of and more sophisticated instruments. We plan to introduce by the end of this year, as we mentioned a few times in recently the continuum product, which is based of the Dropworks acquisition. And we believe that it will be another kind of successful instrument that will start to show up on our results sometime next year.

Okay. And can you -- you guys obviously don't break out product sales, but just can you just tell us where you are in the launch? And I know there's consumables that go with it. I think you were -- last time I heard you are like 50-50 equipment versus consumables. So there's still some growth from consumables, but I'm assuming you're still having success placing boxes. So just where do we stand as far as...

Yes, I think it's early innings in adoption of the platform still. Yes, it's been roughly 50-50. But through time, I expect that mix to shift more to the consumable reagent pull through, especially as we launch more assays. We're launching a new assay this quarter for MSI, which is a well-established cancer testing paradigm right now. Our new assay works in plasma. Whereas the existing, which is a few hundred million dollars, is an FFPE tissue based. I see that as quite a fundamental shift, but this kind of technology can enable. So moving it from solid tumor tissue based to plasma blood. I think that should be quite exciting. It's just another example.

And of these placements, are you just upgrading current customers that are on your PCR platform? Or are you getting competitive wins or customers that are adding something -- a new technology to their lab?

Yes, yes and yes. Yes. I mean, yes, we're getting upgrades, add-ons. And then we're getting new interest because now someone can do 12, 15, 20 samples -- markers in a single well. Now you can encroach into -- much deeper into oncology. And more complex assays and answer more deeper questions. And so we're seeing a lot of interest in the oncology field as a result.

Great. And sorry, remind us about the launch. You've -- are you launching your third platform this year? Or you've already launched that?

So QX600 went out in Q4. The Q4 of this year, we expect to introduce our QX continuum, which Ilan mentioned, but that's a system developed specifically for high end of the real-time PCR market. So that's in that range, it's like someone buys a fully kitted-out real-time PCR or qPCR system. We're looking to introduce them to Droplet Digital PCR in a configured system that meets the price point.

All right. I'm just switching gears and talking about capital deployment. You've highlighted, obviously, M&A and buybacks as kind of 2 near-term opportunities. Norm said that you have a couple of deals in the hopper. But obviously, in the space, there hasn't been many deals announced for a variety of reasons. So first off, if you -- what's your willingness to do buybacks? And can you do buybacks and still do M&A? And what's your appetite for deal size. It's a 3-part question. So maybe start with...

Yes, it's a great question. Obviously, we need to find the right balance with an increasing cost of capital today and the continued multiyear improvement in transformation that we are working on. We believe that generally speaking, our readiness in terms of entertaining a large-scale transaction is there, meaning if the right opportunity comes along, then we should seriously consider to entertain more. With that said, we're trying to balance it with the overall kind of share buyback kind of opportunistic approach that we have adopted. That's the approach that we have been taking in the last few years. We continue to follow that approach. And when it comes to the kind of M&A, so we have been saying that, generally speaking, we are focused on the lower end of those larger-scale transactions. So anything maybe $1 billion to $5 billion at most with financing these transactions as much as we can by debt. We do believe that our share price is underappreciated. So we try to kind of maximize that. We will try in case we come across one to finance it with debt as much as we can. And there is one more layer that we are really sensitive to is all around the complexity of the integration. We -- everything that we are trying to achieve organically, we want to make sure that we can have a very successful integration, which is key to an integration and any acquisition. But that is something that we pay attention a lot to make sure that even if the financial exercise work, does it make sense in terms of our ability to kind of perform well and integrate it well. If it's really complicated and complex and it requires most of our daily attention and the entire [ companization ], we think twice, should we pause and kind of wait for the next phase of our organic growth and execution of the transformation and then revisit it. So again, we are really sensitive to that complexity.

Okay. And we'll come back to that in a second, but you mentioned buybacks at the beginning. And can you remind us how much you have left on your current program. And obviously, with your stock price where it is, I would assume you'd like to re-up that. So how quickly can that be re-upped and it's what -- logistically, how does that happen?

Sure. So first, the Board authorized program still has at the end of the quarter about just over $200 million left in that plan. And obviously, when we will exhaust the current plan, we can reach out to the Board and ask to extend or to expand the amount there. And that's the process in terms of deciding kind of in terms of the pace of utilizing the current pool. Again, it's based on the opportunistic approach. There were quarters in the past that we were not in the market. There were quarters that we were pretty aggressively in the market.

Great. So now back to your M&A strategy, you mentioned you want something that's, I guess, not complicated. But if you were to prioritize the deal, what's most important to Bio-Rad, accelerating top line growth or margin expansion?

Great question. So it depends also what flavor and what type of transaction we would prefer. And what we have been saying all along, and it goes similarly, do we prefer a transaction or a target in the diagnostic space versus the life science space? I think we are kind of indifferent. I mean it has to be the right opportunity for us. I think there is merit to any type of these transactions in each of these 2 business groups. Obviously, it will come with a different profile. Generally speaking, diagnostics has a little bit lower growth rate, but it has to be a tangible business with a nice free cash flow, which will contribute to the growth in life science and vice versa. We won't be looking for anything with extremely high multiple, low revenue. That is something that will be less exciting for us at least.