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

All right. We'll go ahead and get started. Good afternoon. Welcome to the Wells Fargo Healthcare Conference. I'm Brandon Couillard. I cover Life Science Tools and Diagnostics. It is my great pleasure to have Bio-Rad with us at the conference this year. Joining us for this conversation, Chairman and CEO, Norman Schwartz as well as new CFO, Roop Lakkaraju. Did I say that right?

That's right.

Norm, Roop, thanks so much for being here. Really appreciate it.

Pleasure.

Maybe to start off, Norm, you recently announced a new COO, Jon DiVincenzo.

DiVincenzo.

DiVincenzo, former Labcorp executive, formerly PKI. This completes kind of the refresh, if you will, of the kind of senior leadership team. He was running actually a much different business with Labcorp, more services, clinical trials, central lab, what about his background and experience that you find attractive for this role at Bio-Rad?

Yes. We're really happy to have Jon join us. He comes from a kind of a long background in life science and diagnostics. If you look back through his history, really good experience through his time at Millipore and then Merck. And then he got an opportunity to be CEO of Enzymatics for a while until that got acquired. And then, as you say, moved on to PerkinElmer. And then more recently, has kind of flipped over to what we think of as the diagnostic side. So kind of running clinical trials, and I think got a really good understanding of the kind of the diagnostics world from that experience. So -- so if I look at the experience through product development, marketing, manufacturing, global experience and his overall general management kind of profile really fits well with what we were looking for.

He was also appointed President, which is a new distinction, a title that you relinquished. What's the significance of that? Is it more internally? Or should we view it externally?

Well, I think that as we looked at candidates and thinking about attracting people with potential for the long term, that was an important consideration. We have looked at succession as a key item in the mix as we attracted kind of new talent. And so that seemed appropriate as part of the process.

Roop, you've been at the company since mid-April. I'd love to get your initial impressions. Any surprises, good or bad, since taking over the CFO role, where are you spending the majority of your time today? And maybe how has that evolved as you've gotten more intimate with the business?

Yes. So I don't think there's any surprises coming in. And from my perspective, I think the time I've spent is really to understand -- it's my first foray into health care. So part of this is understanding both the clinical side and the life science side, we've got quite a diverse set of products and market areas that we serve. And so really understanding that and the drivers associated with it. And then really understanding kind of the business model and where the opportunities are, right? And I think the company has been on a transformation journey and made a tremendous progress over the last 10 years in terms of margin expansion. But I also think that there's still opportunity in terms of incremental margin expansion as well as cash flow improvement on top of revenue growth over time that we would expect to see.

I really do want to dig into that transformation process. [indiscernible] Bio-Rad, have you done a benchmarking analysis on margins, cash flow, working capital and I mean it's not that hard to kind of see. It's black and white, right? But where are the biggest opportunities where you think the lowest hanging fruit is on cash conversion, cost outs that you think are actionable in the next, call it, 12 months?

Yes. Well, I think part of it is continuing the journey we've been on in terms of -- if you look at some of the executives we brought on, who come from what I term high-performance companies, right, companies that are focused on execution, they brought either that Lean Six Sigma point of view or for example, our supply chain head who's been with us a little bit more than a year. And you look at the transformation that we have going on within the factories, just from a productivity standpoint, the improvements we're making from a supply chain standpoint, both from an alignment to our sales and forecasting improvements, but also procurement leverage, right, and then logistics efficiencies. These are all things that have been worked on that are starting to take hold and you're seeing that in our margin in the most recent couple of quarters, in terms of what we've announced. And I think, again, there's more that we have an opportunity to drive there as we move forward.

Maybe switching gears over to the [ SBUs ], I want to start in Life Sciences. I mean the end markets have been weaker than expected for a while now. I mean you took down the guide by 10 points for the full year in the second quarter. Can you unpack just what you're seeing between biopharma R&D, government and academic and then the manufacturing or bioprocess or Chrome piece of the business, which have surprised most negatively if it outside or any of them stable or getting better in market-wise?

Yes, yes. So there's a lot of pieces -- moving pieces there. Obviously, the kind of the fundamental piece is the academic market. And I think that while we -- if I take, first of all, the Americas, especially the U.S. and think about the NIH budgets, there was an increase in the NIH budget this year, fairly modest. And so -- so that is -- that market is moving along okay. I think people are still a little bit conservative in their spending. If I look at Europe, kind of a mixed bag; places like Germany, a little weak; some of the countries in the Nordics, stronger. Again, a kind of a mixed bag throughout Europe and then in Asia, mostly affected by China is kind of anyone's guess right now as to what -- how that's all going to recover. So that's kind of -- kind of the view from a geographic point of view, especially for the academic area. So kind of moving on to the kind of Biotech, BioPharma and they're really, as I see 3 pieces to the puzzle. You've got the BioPharma production piece, which has been a stocking, destocking scenario. And for us, we're still not through all of that destocking. And primarily because of where our products are used in the process, there was more -- there was more stocking that happened, more insurance that these companies wanted to have for those particular critical raw materials, and so they're kind of still working through the destocking process. At the same time, I think during COVID, a number of the pharmaceutical companies stood up some extra programs, had extra money coming in, extra programs. And I think what we've seen in the last 6 months is a lot of kind of -- kind of retuning, readjusting to normal of those -- some of those extra programs. And then on the Biotech side, third piece of the puzzle, this is really all about the biotech funding, which has been weak. And now we're starting to see a rebound in that. I would say that it has not turned into the orders yet, I think there's still a lot of conservatism there. But it will come back. It's just going to take a little longer than we originally thought when the year started out.

On process chrom, how much of that business is clinical trials versus commercial? And...

Most of it's really commercial. I mean you can think about the kind of the process there. You have -- you have in that process, you plant thousands of seeds, and some of those seeds actually turn into what you might call base hits, and then a few of those turn into home runs. And that's kind of the way to look at that market, if I can mix my metaphors.

Roop, can you -- putting any numbers around the magnitude of decline anticipated in that business in '24, are we talking like down 30%, 40%. I mean that's a much bigger number than any other kind of comparable bioprocesses as I can find?

Yes. So on a year-over-year basis, for the full year, it will be in that slightly above 30%. Although from where the first half came out to where the second half is expected to come out, there's sequential improvement in '24. So the destocking that Norman was talking about is taking course or is running its course. But incrementally, we're seeing some slight uptick, not on a step function basis, but just gradual improvement. And I think that also gives us confidence that destocking will continue -- unfortunately, it will continue into 2025 at varying points depending upon the customers, but we are seeing customers that will eventually get back to what will be perceived as a normalized level in process chrom.

Digital PCR has been a huge growth driver in the last several years. I think you talked about it being flat in -- I think it was flat in '23. You talked about it being maybe down low single digits in '24. What is the right growth outlook for this business over the next 3 years? Where are we just in the bigger picture adoption cycle of the ddPCR relative to [indiscernible]?

Yes, go ahead.

Well, I think in terms of where we are, it's taken hold in research environment, especially for oncology applications. There's still more opportunity in there. And I think some of the new entrants over the past few years further validates the ddPCR kind of market as a whole. And for us, centrally, it's a pillar for our growth from a long-term standpoint, just as we had indicated in '22, I think that still is the case. I think the slowness specifically for us in '24 is more to do with Biotech, BioPharma kind of funding. And those dollars translating into actual orders. I think people -- the sentiment has improved. People are wanting to think about buying something, but the actual act of buying something is not at the rate we'd like to see it.

Any updated numbers you can share in terms of the end market. The end markets of ddPCR, how much is clinical versus research today? And maybe how much of the mix is equipment inverse consumables [indiscernible]?

Yes, it's pretty much all the research market still in terms of its application. That's the largest part of it. And it's -- I think it's a pretty good mix between reagents and consumables, about 50-50 today, probably evolve a little more to the more typical profile of maybe 30-70 over time, but right now, it's about 50-50.

The QX Continuum has seen some delays, you've characterized it is opening up a much larger actually part of the routine use market, if you will. How much do you expect the TAM to expand for ddPCR, with that introduction? And do you still expect it to launch in the fourth quarter?

Okay. A number of questions in there. Yes, still we're looking at a year-end launch. I don't have a good number for you on kind of what that TAM is, but when we started, of course, there was kind of the market, which was what we entered the market with, which was the QX100. And then the customer demand and interest was in kind of moving up the capability scale. So -- so they wanted more multiplexing and then at the highest end, they wanted more automation. And what we've seen now, of course, is the kind of the opening up of what we consider to be the low-end market where the QX Continuum is targeted. You know exactly where that will end up, how much it will open up a new market and how much is going to encroach into the qPCR market, I think it's still -- the jury is still out a little bit.

Is the fourth quarter launch firm? Or it's just a chance that might slip into '25 ?

You never know, but it's -- that's what we're targeting.

Okay. Lastly, I want to close the loop on China, to get a sense of what you're seeing there. I think it's about 10% of your total overall revenue mix. Any change of visibility there recently in the breakdown. Just what's embedded in the guide for the year for China, and remind us how much of that is Diagnostics and Life Sciences?

Yes. Just so, I guess, in terms of the market for us, we actually haven't quantified the percentage of China specifically, but APAC for us is 20%. China is the biggest just to put that out there. I think China is still evolving, right? I think there's a number of different considerations that are still at play with China. And from a guide perspective, we haven't assumed that there's going to be some tremendous improvement in the China market or environment. It's kind of continued course and speed of what we've seen so far this year really within the guide, right? And so if China happens to turn around, maybe that's an opportunity, right, for us from an overall guide perspective. But frankly, with everything that's transpiring, whether it's their economy, whether it's the stimulus and how long it's taking to take hold, if you will, or not take hold, I think it's an open question as to where that -- but at the end of the day, China is the second largest market from a health care standpoint. And it's an important market, right? And we continue to invest in that market.

Can you touch on the VVP related headwinds that you're seeing in diagnostics there? And...

You know, we haven't seen very much in the VVP area. That's primarily been targeted at the -- kind of the more general diagnostics, chemistry and large immunoassay, those kinds of things. And our specialty areas have not been -- have not been affected like some of the -- like some of the kind of large general areas. Obviously, we keep -- continue to keep a close eye on that. As time goes on, do they kind of continue to kind of come down into these specialty areas, not clear.

I'm surprised you're not seeing it in diabetes. I guess in other parts of the business, but...

Yes, because it's such a specialty technique -- that we have. Yes, it hasn't come down there.

Okay. Switching gears to Diagnostics. Just help us segment the business with any more granularity between infectious disease, diabetes, blood typing, QC. And where are you best positioned competitively? Are you gaining share in any one of those areas and what's that stemming from?

So if I kind of go across some of the verticals in Diagnostics, if I take the infectious disease area that's kind of fairly mature for us, stable. Diabetes is a little bit of a mixed bag. Some countries growing, some stable. Let's see, think about immunohematology, I think we are managing to take some share in the immunohematology area. Controls are doing well. And then the autoimmune area, where we have a unique platform and technology continues to grow pretty well. So that's kind of the overview.

Maybe switching gears over to margins. First I want to touch on the guide for the year. And the back half, Roop, seems to embed an OpEx build aside from the IP R&D charge. It seems to imply OpEx up mid-single digits in the back half. Can you leave extra cushion there to kind of the expectations? And if that is real, where is that spend going?

Yes. So there's a couple of different pieces to, I think, that question. The first part is the second quarter OpEx was a bit lower, and I think we purposefully managed that OpEx in that second quarter to be a bit more aggressive in tamping spend because we really wanted to get an assessment of where that top line is going and how the end markets are looking and have better intelligence about that. As we look at the back half of the year, we said based on our understanding of how the markets are moving to allow some projects that we otherwise really need to get done here in '24. And specifically, the R&D space and these areas right? To your question of, is there a little bit of room where we're still very cognizant because of kind of the life sciences end markets and a little bit of the choppiness there, being very mindful of our spend. And so could there be a little bit of room there, yes, potentially. I think we're -- I wouldn't say we're conservative about it, but we're reasonable about kind of what's there and opportunity with our cost savings actions to still provide some improvement.

SG&A dollars, Roop, has basically been flat. It's $200 million a quarter since you finished ERP like 4 or 5 years ago. Will that go higher if revenue growth comes back, and is there a scope for more efficiency, more productivity in SG&A than maybe we believe?

So I'll take the latter first. I think there is still opportunities from a productivity and I think especially as automation tools and potentially AI and other things can help in terms of driving efficiencies there. So there's opportunities there. I think to the initial part of the question, I think the rate at which OpEx might grow is more normalized to merit in these sort of things, not necessarily outsized investments in SG&A of any sort. And therefore, we would expect to see the revenue growth be at a faster rate than any kind of OpEx incremental increase, if you will. But I think generally, the OpEx will be in a tighter range from -- to where it is today, and you'll see the cost leverage improve as we return to top line growth.

Norman, the R&D spend $250 million a year. It's really kind of hard to argue that you're getting a great return on that investment. I mean, whether that's measured in Bio-Rad's relative organic growth, just new product introductions, -- is that too naive? What are you most excited about in the pipeline? And are you really spending that amount of money as efficiently perhaps as you could be?

No. So the short answer is that I think we can do a lot better than that. And we are looking kind of more today at kind of where we're spending that money, and what it means for basically sales growth. People measure it from time to time in terms of product freshness and that kind of thing, in my mind, it's just return on investment. In other words, does that give you more sales dollar. And so -- so I think there's work to do there in terms of kind of picking the projects more carefully, getting them across the finish line faster. Yes, there's work to do.

And Brandon, I think I would just add to Norman's answer there is the new leadership we have with fresh perspectives and especially coming out of environments that are execution oriented, I think they're going to help us there.

Is that something that's been underway in '24? Is that more of a '25 story and sort of like reprioritizing those dollars maybe towards the highest growth areas and maybe the total amount of spend doesn't need to be 10% of revenue mark, maybe 8% or 9%?

Well, I would say over the last 3 or 4 years, we've done more to focus that money. It used to be largely based on your sales volume, what you could spend in certain areas, but we've done more to kind of pull that up and then reallocate it to where the opportunities are. So we have changed a little bit the way we do it. But there's still more to do to get the return out of that.

Roop, you mentioned the new Head of Supply Chain, [indiscernible] -- supply chain, I've always thought since you -- the day you finished ERP was an untapped opportunity. It doesn't seem like a lot happened in 5 years. Is that still a significant source of savings what is he doing differently in terms of like applying that DBS know-how? And is that -- is it a sizable bucket for cash flow and cost out?

Yes. So is it a sizable bucket? It still is an opportunity for us, and I think it's a sizable bucket. And the sizable bucket really from a supply chain standpoint should be broken down from a factory execution standpoint, right, and especially with [ Siddharth's ] background in Lean Six Sigma and just applying deeper lean principles from a factory execution standpoint is going to be helpful from a productivity standpoint. The second part of that, from a supply chain standpoint is procurement, right, and just buying power leverage. I think with the ERP we have and improving our data analytics around, supplier spend and consolidation and buying power, I think over time, that is also an incremental opportunity for us. And the final piece is just looking at the DCs that we have and the network that we have, how we support those DCs, the timing, I think there's some cost synergies or efficiency improvements that can be had there. All of that will also help from a cash flow standpoint, right? So it's not just the margin story, but it's a cash flow story. And I think we've got opportunity from an improved to improve cash flows as well. And that's largely from an inventory standpoint, especially, right? The amount of inventory we have is too high. Part of that is necessitated by market constraints still. Those aren't behind us. But as we continue to improve execution and alignment from [indiscernible] that will also improve the inventory management and cash flow.

Okay. To come back to the transformation, which started in 2018, I mean, operating margins which, to me, is the best metric, free cash flow margin, whatever, it's the same thing. I mean have now round tripped back to where they were, give or take, in 2017, '18 before this whole effort started, granted maybe that's the best year to comp that off given the market environment, right? But what else would you point to as tangible evidence of like you've made progress on this 5-, 6-year effort, if not operating margins?

I mean I think it's a fair point, right? And part of I can't speak to '18 and those periods, if you will, I can only see what we -- where we are today and the opportunity in front of us, right? And what I can say about that is I think the company has made forward steps and improvements in certain areas that haven't maybe sustained as much as the company would like and middle market would like. I think as we look forward, though, with the changes that we're making, the intent is to drive sustained improvement, right, that take hold. And I think when you look at '24 and some of the talk track that we've had during our quarterly calls, it speaks to some of the improvements that are sustainable improvements, right? Even while top line revenue is negative, right? And so that's the opportunity in front of us. And I think as we see where '24 finishes up and have a good baseline to really judge the next 3 years, our intent is to provide in an Investor Day in '25 kind of a 3-year outlook and a road map to how we drive further margin expansion.

Okay. That was going to be my next question, ballpark time line on when you might be in a position to refresh that LRP outlook, would it be kind of after the fourth quarter and kind of the year we closed, maybe like a mid-25 type of events?

So I think we want to see how '24 shakes out and report our numbers. I think it'd be a Spring of '25. And in the event that the markets are still choppy, we'll be very clear about what '25 might look like and maybe have the Investor Day in the Fall of '25. But the intent is in '25 to give an updated view of kind of what our point of view on growth and markets as well as then how the business model can continue to evolve.

Okay. Back on that last quarter call, you talked about a small, I think, technology acquisitions planned for the second half, which will recur $30 million IP R&D charge that won't be excluded from the non-GAAP figures -- that's -- everyone knows.

And it's not in our -- in the guidance that we provided -- our updated guidance -- the IP R&D is not in that guidance, so it needs to be additive as a onetime charge.

So take the 12% to 13% operating margin, add the $30 million on top of that, kind of the actual [indiscernible].

That's right.

What is that kind of why bother with some $30 million -- like small pre-revenue acquisition. And can you name the last successful acquisition that Bio-Rad did?

So okay. So I think this particular opportunity, while it is still early stage, I think is it really positions us well with the droplet technology in the kind of biopharma discovery area for antibodies and -- and the technology has been developed over a number of years and platforms are pretty well along, pretty far along. So -- so we do think it's an opportunity to enhance our portfolio kind of not only in the droplet technology area, but for kind of biopharma focused business. And so that's -- that's what that's all about. So okay. So we've done -- if I think of the last, say, 4 or 5 years, what have we done? We've done a couple of early-stage things. I think it's a little too early to claim victory on those, but they're still working along. I think back one that comes to mind is Exact Diagnostics, which kind of folded into the -- our Diagnostics controls business. A couple of others that we've done, they've kind of folded into kind of Life Science in terms of building our cell biology portfolio. What else, a couple of we've done that obviously supported the ddPCR area. So while they don't stand out its individuals, they have added to the baseline.

[indiscernible] I get the question all the time, and there seems to be a view perhaps that maybe your position has pivoted somewhat. And I just want to make sure, well, let me ask it this way. At the Board level, are you considering any range of alternatives that have perhaps not been of discussion in the past?

I don't think that at the Board level, it's changed. I think that if there were a possibility of combining the 2 companies, I think it would be an incredible combination. You'd have Life Science, you'd have Biopharma, you'd have Diagnostics, you'd have kind of like 3 legs under the stool. I think it's pretty obvious today that the kind of relative values of the 2 companies make that not a feasible transaction. And so we've got, obviously, a lot of optionality. We've got with those shares. They could be liquidated. We could do -- we could do a lot of things with them.

Last question, Norman, this is one we posted in our launch. I don't think it's totally clear to investors, to myself, I've covered Bio-Rad forever. I've known you forever, I don't know what you want. If it's to affect the Sartorius transaction, if it's to -- for Bio-Rad to remain independent or to get to 20% operating margin? Like what -- these are like your top priority 3 years from now? And what should investors kind of look at?

Yes. I think the top priority is to continue to make Bio-Rad a sustainable company. And that could be in a lot of ways. It could be through M&A, it could be through operating margins. I think operating margins are extremely important to us. For me, that's kind of the fundamental of how you sustain a company, which is, you've got to have good operating margins. And so yes, that's what we're looking to do, continue to grow, continue to add technologies, continue to be at the end of the day, more valuable to our customers. That's what we're looking for. .

Super. Unfortunately, we're out of time. Norman, Roop, thanks so much for being here. Everybody, have a great day.

Thank you for having us.

Thank you, Brandon, appreciate it .