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

Everyone, welcome to RBC Capital Markets 2024 Global Healthcare Conference. I'm Conor McNamara, the Life Science Tools and Diagnostics analyst at RBC. It's my pleasure to introduce our next company, Bio-Rad. On stage with me is our COO, Andy Last, and CFO, incoming CFO; Roop Lakkaraju. Gentlemen, welcome. Thank you for joining us.

Thanks for having us.

Great. Andy, let's start with you. You announced your intent to retire in September. Can you just quickly describe some of the major changes you've seen at Bio-Rad since you joined?

Yes. I shall attempt to encapsulate 5 years of hard endeavor in 2 minutes. I think the -- I think we've worked hard on kind of the fundamentals of transformation of the company. And that's really a top to bottom exercise. We've revamped the portfolio strategy focus areas, markets we want to focus on platforms, work on cost structure, which I think we've showed some improvement there. We've worked a lot on the supply chain, trying to improve the supply chain and our logistics platform in particular. And so I would say establishing a new strategy framework for the company for growth in key markets that have played out for us, and I think we'll continue to do so once we get a recovery in biotech bio. So I think a lot of change, and I think it's been well received within the company.

Great. Roop, on to you, you recently joined. What -- you came from outside of the health care industry. What was it about Bio-Rad that attracted you to the company?

Yes, there's a few different things that attracted me. First, I mean, when I look at the markets that Bio-Rad plays in Life Sciences, clinical diagnostics, and just how those markets are continuing to grow and evolve and the need for technology. It's -- there's a large opportunity there. And then when I look at Bio-Rad, and where it fits within those markets and specifically having key market leadership in areas like digital PCR and other areas, it has the ability to win in the marketplace. And then when I looked at the transformation that had already occurred that Andy just articulated, and the opportunity to do more and continue to evolve the business model both from a P&L perspective, but also working capital, right, and balance sheet efficiency standpoint, I thought there was more opportunity there. And when I look at my background, broadly in tech and specifically in manufacturing and supply chain areas. There's an opportunity for me to add my experiences to what is already occurring in the company. And I thought there was a nice marriage. And then the final piece, I would say, is meeting the management team and the people at Bio-Rad, I mean, it's passionate employees and a passionate executive team that's driving this transformation.

Great. So two follow-ups there. First, since joining, do you see low-hanging fruits as far as some of the operations that can be improved upon? Because Bio-Rad has -- their margins are significantly lower than other Life Science tools companies, and I think the company was on track to close the gap there until the pandemic. And so do you see anything that's just, I see this, well, best practices would imply we should do this? Or is it just going to be kind of more of a continuous improvement?

Yes, it's a great question. I wouldn't say that there is low-hanging fruit because I think all of it requires still work to be done. However, there are opportunities, right? And pricing is one where we can be more programmatic about our pricing and pricing strategy and approach. I think when we look at the markets coming back and how that feeds into our factories, that alignment between sales forecasting and operational execution and marrying that more tightly. I think there's an opportunity there to drive further efficiencies. That also will help in terms of inventory management and working capital management. So I think there is opportunities to synergize some of the business process improvements that are occurring already to be that much more robust and drive future improvements from a margin expansion standpoint.

Okay. And just another point you made is the enthusiasm by the employees. And I guess this is for both of you. From an outsider perspective, you've had 4 key employees that I think were very key in the whole transformation since 2019 and even before that. So how would you describe the overall morale at the company and again, maybe they're just all one-offs. But how do you answer that question? You had 4 major departures in the last 6 months? Is there something there that investors should be concerned about?

I think it's right to ask the question. I think they are all individual facts and circumstances. Each case has got their rationale for doing so. It's an unfortunate timing. And yet, we've got a new CFO. We're close to announcing a new President of the Clinical business. We had an incumbent internal candidate for the Life Science business. And so in many respects, we really didn't miss a beat internally. I really can't point to anything that kind of went off the rails as a consequence. So morale, look, aside from the fact that the Life Science segment has taken a bit of a beating is very good. It's very good. The enthusiasm that Roop sees has been there for a while, and it's not disappeared.

And Conor, I would just add, as a new person coming into the organization over the last 4 weeks, it's an appropriate question, right? When you look at each of the discrete changes, there were -- they were for personal reasons. I mean, Andy's retirement, et cetera, right? There isn't anything that is organizationally problem or challenging, right? It's just business. It just happens to all occur in a very short time frame. With that said, to the point of the products and the passion and what we're looking to drive and how we're still trying to drive shareholder value, that doesn't change.

I want to touch on Q1 results and guidance early in the call. So if you just look at your Q1 results, you maintained guidance for the year of plus 1% to plus 2.5% on a constant currency basis. If you look at the rest of the peers in Life Science tools, more a calling for what will say a flattish year with down in the first half, up in the second half. And you're calling for a little bit better than that. What kind of assumptions are you making as far as end market recovery? And what gives you confidence that, hey, you're going to perform better than a lot of these other Life Science tools companies this year?

Yes. I'll start, and then Roop can add in. First is, I think, for the Clinical Diagnostics business on the table because not all Life Science tools, companies have a meaningful diagnostic side to the business. And it's more than half our revenue, and we feel that's a pretty solid year for us. So you've got a good foundation. So the variance is really driven by the Life Science side of the business. In is a very challenging year last year with slippery slope from basically the beginning of Q2 onward. So you've got a lot of soft compares. The focus of the recovery is in biotech, BioPharma funding. The way you have to have the capital inflows, which we've seen for requisite #1 and then an increasing engagement from customers, which we're also seeing in terms of dialogue and the funnel start to get populated. That's got to turn into orders, which is yet to come. So with the comps and let's call it a building funnel, that's how we look at our Life Science business for this year. And we see Clinical Diagnostics kind of still being in the guidance range, but a little stronger than perhaps we anticipate it coming into the year.

I think the other thing I would add is those signals and the specific conversations we had with our commercial organization region by region to really understand the voice of the customer and to reinforce. Yes, the funding is out there. Are people actually willing to have conversations about spending, and we saw those positive comments, right, that reinforced. Okay, yes, it may be a steep second half climb, but there's positive signals. We obviously need to see that flow through in the manner that we've indicated to get to those numbers. But at this point in time, when -- as we did the Q1 call, those positive points where they reinforce our position.

And if you look at 2 key product lines within Life Science, ddPCR, process chrom, what's the typical lag between the conversation to an order to revenue conversion?

Yes. On digital PCR, so I'd like to point out one important thing. The variance is mostly on the instrumentation, the consumable and reagent stream has been pretty stable, which is a positive. And it's 3 to 6 months. It's the typical sales cycle for one of those systems. Process chrom is a completely different beast because it all starts off with a very small volumes when you go into at the early stages of a therapeutic program and in there, and it ramps as they go through clinical development to full commercial therapeutic and lead times on those orders in terms of visibility can be 3 months to 9 months.

Yes. And Roop maybe this is more a question for you. But 1 of the pushbacks or questions that we've got from investors is just we'll say, lack of transparency, meaning that the way that the segments are broken up in the amount of financial information you gave both on the calls and in the Qs and Ks. Have you looked at that and thought, maybe we should update that and give additional color? Or is it -- or do you feel pretty good about the way things are scripted now?

It's a great question. I think it's -- I will say it's probably early days for me, Conor, to really say, how we might, if we ought to change how we -- the level of transparency, as you said, obviously, there's segment disclosures already in the financials from that perspective. I think one thing to be cognizant enough and again, I'm learning this industry, right? And so one of the concerns is always when you break down product family areas, competitive aspects. And so there are things that I don't know that I still need to learn as to what that means from a competitive standpoint, what other these sort of things. So with all that said, I think there is an opportunity for us to maybe articulate kind of our initiatives and the opportunity in front of us more legibly and give a tighter message around that. But as it relates to transparency of product families and these other things, I think that's an open question that has broader considerations that I still need to understand.

Okay. Great. And if you look back from 2019 through sometime in 2022, you did see some revenue acceleration, and you guys were actually growing faster than the market. And how much of that was this outsized growth in ddPCR, and process chrom, which we're doing extremely well versus some maybe some market share gains that you were taking because of those products versus just you guys were executing because you were growing above the market. I'm curious what drove that? And are you confident that once the macro environment comes back, that phenomenon will return?

Yes. Now I'm assuming you're, ex-COVID, right?

Yes. All ex-COVID.

I would say Droplet Digital PCR was a principal driver. And process chrom now, we know that process chrom was kind of a little bit on adrenaline, right, simply because of the kind of inventory stocking that was going on. Not the same story we Droplet Digital PCR. I mean that was driven by cell therapy, gene therapy, monoclonal antibody development and the manufacturing processes that we're finding the platform useful for too. So they got a little outsized in that period, in my view. I think when they come back overall, it will still be double-digit growth rates, perhaps not quite as enthusiastic double digit, particularly for the process chrom side. As you penetrate, we were not underpenetrated in biotech and BioPharma, where we started to build channel in that portion of the market in that segment. So it definitely gave us a halo effect, wrap around sales. and I expect that to continue.

Got it. Okay. And just you mentioned a biotech funding environment that returned in Q1. As the spending reopens as these customers start to order products, like is there a hierarchy of what they order first? Is it more on the high-end innovative products like ddPCR, or do you see there's a gap that needs to be filled where they have an ordered replacement equipment or use consumables on the commodity -- more on the commoditized side? Or is it...

I think it's pretty balanced. I think it'd be a pretty balanced order book, frankly. I mean, we do expect digital PCR. It's kind of like near the top of their shopping list, especially for some of the more innovative therapeutic plans, right? The platform is really a phenomenal fit for their needs. But if they need western blotting reagents, they still need western blotting reagents. So I think it's going to be more of a balanced order book.

And what's your -- what's the backlog on ddPCR? How will you be able to meet demand pretty quickly when that comes back?

Yes. I mean our supply chain, our instrument supply chain issues are all behind us now. They were very painful in 2022 and 2023, but they're all behind us now.