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

Good afternoon, and welcome to the RBC Capital Markets 2025 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 the stage with me today are CEO, Norm Schwartz, and CFO, Roop Lakkaraju. Gentlemen, thanks for joining us.

Thanks for having us.

Thanks for having us.

Really appreciate you attending again. So we're going to start kind of high level question, if that's all right before we get into tariffs and NIH and all the fun math stuff with you, Roop. But Norm, you brought in a new CFO, new President, 2 business heads. Maybe starting there and just kind of how is the culture at Bio-Rad changed now versus what it was pre-pandemic in 2019. Do you feel from a leadership position, you have the right people in place? And then how does that trickle down to what you see as your day-to-day roles and kind of what the morale is at the company? Start there.

So I don't think it fundamentally hasn't changed. Still focused ultimately on the customer and on innovation. I would say that it has been great to have this new team in place, very engaged and really working very heavily on kind of operational improvements in this period where -- especially in this period where there's kind of some limitation on top line opportunities, focusing on operational improvements, driving margin. That's really the focus. But again, good team, a lot of things going on and ultimately look forward to the kind of the markets recovering and being able to kind of see the value of some of these improvements that we've made.

And then maybe from just your involvement day to day, I mean, do you have -- do you feel now more confident being able to kind of step away and not fully, but step away and say, look at these 4 guys or these 4 folks that we brought in. They're doing exactly the vision that I brought them in to execute on and you feel pretty comfortable about that? Or do you still feel like you're in the mix with the 4 of them and your day-to-day operations are still more or less unchanged versus what they were 5 years ago?

Yes. There's obviously still a lot to do. And I feel like I'm as engaged as ever. If I look back, I'm not working Saturdays anymore, but aside from that...

Okay. That's good. Well, good. Good. And Roop, kind of -- thanks for that, Norm. Roop, you've been there for just over a year now, I think. So we had you on stage a year ago when you were kind of excited about the things -- the changes that were ahead of you, obviously, some U.S. policy may have changed kind of the trajectory of that. But maybe if you just look at what you saw when you came in as the opportunity set for you as a finance professional, what you knew would be, okay, these are the low-hanging fruits that I could bring -- I bring, this is my core competency. I can do this versus what you said, okay, that's something we need to do on the heavy lifting side. Where do you think you stand as far as how much of the easy stuff has been done? And then how deep into the kind of the heavy lifting have you already started or even already completed of kind of the big changes on -- especially on margin expansion?

Yes. I appreciate the question. So it's been about 13 months now. And I would say that the good news is Norman and the company have initiated a number of improvements, whether that's the rationalization of the footprint and some of these sort of things that were underway. I think with myself and the new leadership really over the course of last 12, 13 months, really aligning on where the markets are, where we need to go from a strategy standpoint, both from a diagnostics and a life science standpoint, by which then you can look at, well, what are the operational improvements that can be driven. And so at the end of the day, we're early in the baseball game from an ending standpoint in terms of that margin expansion opportunity. As Norman said, having the market be a little bit more constructive would be helpful towards get to that top line growth. But we're focused to drive execution from a top line growth perspective, we think we've got some growth areas that I'm sure you'll touch on over time. And from a margin expansion standpoint, it starts with some of that leverage on the top line. And then driving, whether it's lean deployment, which we've been doing over the course of the last 15, 18 months, which is relatively new, not just in the operational area, but taking that upstream as well as to the OpEx areas, there's a multitude of things that we're focused on from an overall margin expansion that over a multiyear basis, we think will drive margin expansion into that teens and ultimately targeting that 20% on a long-term basis.

Right. Thanks for all that color. And now we'll dive I guess, into the more of the here and now, given -- especially given all the uncertainties in U.S. policy. So in Q1, and make sure I get these numbers right, you incorporated about $40 million of revenue headwinds into guidance from a slowdown in research-related spend. And most of that is around U.S. policy, particularly around some of your customers that are NIH funded. Just confirm that number. And then how much of that is what you've actually seen versus, okay, you're taking a view that based on these conversations, there was a step down and we think that it's not going to rebound. So how conservative is that $40 million versus you've already seen $40 million come out for the year?

So I'll start with Q1 was a pretty good quarter for us relative to kind of what we guided, right? We had a beat on the top end and the operating margin line. So you can argue that Q1 played out even though there was a lot of moving pieces, played out kind of how we kind of expected it to do from an end numbers perspective. That softness that you speak about is really for the rest of the year in terms of that Q2 through Q4 across academia is a big quick portion of that, whether it's in the U.S. But that's really a conversation -- a global conversation, not just a U.S. conversation. So that's kind of the expectation. The other piece is biotech softness, which we saw. And a lot of the softness is focused on instruments, right? The good news is consumables. We've continued to see that pull through on a fairly steady clip, which was nice to see. That means the activity is continuing. And I think that need for the activity is continuing as well. And the other part of this is the China market, which has continued to be challenged, right? That's factored into that softness that we spoke about.

Okay. Okay. And has anything changed? I know on NIH that was call it, I think, February 15, when there was a social media post, and that was when there was -- I don't know if freakout is the right word, but we'll say freak out that these customers said, we don't know what we're going to do. We don't know if we're going to be able to stay open for business. Obviously, that -- from what I understand, a lot of these folks did not shut down their labs. So from February 15 to where we are today, has the tone improved a little bit? Has it gotten worse than that initial shock? Or is it kind of still waiting and seeing?

I would say that it's continuing to do work, but being cautious.

Got it. Okay.

And that's reflected mostly in the slowdown in instrument purchases. As Roop said, the flow of reagents continues. So people are still in the labs, still working, but they're just being very conservative about their budgets to make sure they can stretch them as far as they can in the unknown circumstances.

Okay. And then the other unknown is unknown and it changes on a weekly basis. But as far as the tariffs, I think you incorporated 130 basis points, which equates to about $30 million to $40 million-ish net impact on the business from tariffs. And remind us what are the components of that and we'll go from there.

So the 130 bps, you're right, Conor, it's a net number. And the primary areas that drive that tariff impact are really 3 -- I'll break it down into 3 categories. Number one, is U.S. products that are manufactured here and shipped over to China. There are European products that are made there shipped to the U.S. And then there is broadly global supplier tariffs that we're working day-to-day hand-to-hand combat, if you will, right? So those are the 3 components of it. And as you said, it's changing day by day from that standpoint. Again, 130 bps though, is in that number.

Okay. And you incorporated what you assumed would be the impact based on the implemented tariffs at the time you gave guide?

That's right.

Obviously, the tariff policy has changed. But on top of that, are you actually -- like does that 130 basis points like -- has that equated to like checks you've already have to write for tariffs? Or is that just kind of -- it's still evolving. So even though things have been implemented, you're not actually paying that because it's still evolving. So that's what I'm a little confused because it feels like it's -- you've baked in some conservatism, but I don't want to put words in your mouth.

So if it can be all of the above, I would take all of the above, right? Because there are tariff rates that have flown through our books, right? So those are being incurred. There are others that are being paused. And the question is, is it in perpetuity? Or is it only for that 90-day period. And so from what we incorporated from a guide standpoint, could there be some positive uptick from that 130 bps? Yes, that's a possibility as well. So it's kind of these moving pieces, but both are correct in that some has already come through and others are paused and therefore, won't come through or haven't come through.

Okay. All right. So definitely being conservative. I'm not putting words in your mouth. Sorry. Okay. What about just from a demand perspective, is there any -- we talked about the NIH-related academic customers. But just overall, is there kind of a fear of what's next from U.S. policy that's driving maybe a temporary slowdown from end market that was already slow where your customer is like, look, we can't really pull the trigger on anything because we don't know what tariffs going on. We don't know what other policy is going to come next. We don't know what's coming out of Washington. We're just going to wait for a while until we absolutely need stuff. Or have you -- has that already played out? Because you've had basically a weak purchasing environment from your -- most of your customer classes over the last couple of years. And so has there been any more another step down just of the added uncertainty?

In the last month or 2?

Yes, the last couple of months just over the last -- basically since April.

Yes. I wouldn't say so. I think it's pretty much the same. Obviously, there's the kind of latest talk about the kind of most favored nations in pharma and some of that discussion, questions around what's that going to mean? It's kind of a new uncertainty. But in terms of the basic research markets, yes, I don't -- I think my sense, we're kind of at the bottom of that. I think China is a little bit of the exception. Question in my mind about where China is going with the research budgets, given the economy and the other constraints they have, but generally, the feeling is we're at the bottom.

Okay. Great. And then does your guidance assume any China stimulus uplift in the back half there?

No. No, I think we saw before when the China stimulus happened last time around, really not much effect for us. And I don't think we feel that there's a big upside this time around either, especially now with a lot more pressure on the in China for China. I think that's a kind of counterbalanced stimulus for us.

And then one of the most widely asked questions I'm getting from investors, is the ramp implied by guide? And if you go from Q1 to Q4, kind of the -- both the revenue ramp and the margin ramp, it looks -- some would say it looks aggressive. And maybe walk me through that. And I would say what I tell investors is, look, the last couple of years have been unique in that it's not a normal Q1 to Q4 progression, given all of the timing of kind of these headwinds that hit. But walk through your confidence level in being able to hit that ramp that you are -- that you have implied in guidance?

Yes. So I guess I'll start with the -- historically, if you look at first half, second half, I'll start there. It's been 49%, 51%. When you look at this year, it's roughly 48%, 52%, not dissimilar. When you look at the profile of how you've modeled it, right, Q1 being lowest, which is typical for us, there's a Q2 step-up, which is typical. Q2 and Q3 are relatively consistent, then you get a Q4 pickup from a seasonality standpoint. That's the profile for the year. To your question of are we -- there is not a broad presumption of macro improvement and these sort of things. When you look at some of the change from Q3 to Q4, it's specific to parts of our business where the sales funnel drives that growth in particular areas like quality systems and the lot release periods there. How process chromatography flows through the year. So there are some very specific things that drive some of the inflection points for us. They are unique to what our profile is, if you will, right? But there's no broad market uptick that we're contemplating there. Maybe with the exception of it's -- there's a little bit of improvement broadly just because I think as we get towards the end of the year, the economy needs to get on more stable ground. And therefore, the expectation that there's at least some clarity around NIH budgets and tariffs and these sort of things, but not necessarily a broad economic recovery.

What about budget flush at the end of the year? This is something that hasn't really happened in the last couple of years. And have you baked in any assumption on budget flush this year?

We have not, as of now, and I think it's a little bit early to kind of -- at least for us to predict kind of a budget flush at this point in time.

Okay. And I think all of us are focused on jeez, we've had a shoe drop in every possible end market and geography at this point. So maybe focus on the positive. If you look at your guide, what is one area where you like this could -- what's the area that could surprise to the upside that maybe investors are not asking you about? And the one that I always look at is like biopharma has a ton of cash, obviously, ex the early-stage biotech that are still funding, but the rest of pharma has got a lot of cash that they really haven't deployed. So that I always point to that is, "Hey, look, at some point, they're going to turn the faucet back on and start spending." But maybe I'm giving that too much credit, but what are some things that like you would love to see and be like, oh, there we go. Okay, now things are -- now we could start looking at the high end of guidance and how we outperformed because of this one thing that gets going.

Yes, it's an interesting point. I think that in terms of pharma having cash and deploying it, they could do kind of 1 or 2 things, it's internal development or they could kind of buy up some of these kind of biopharma assets that are hat are on the market, the small biotech assets. And I think that might be a kind of a further stimulus for the biotech recovery, in fact, more activity in that group, probably spawn more investment in the biotech area. So that's a potential upside.

So Biotech M&A, just overall spend on pharma?

Yes. And okay, biotech has come alive again. So it's a great place to invest and let's go for it.

Okay. Great. Maybe we'll use that as a good segue into capital deployments. And you guys have been active in your buybacks, which is nice to see, especially because your stock where it is. But how do you think about M&A? And actually -- maybe we'll start with the most recent deal and Stilla and give us an update on the timing and how we should think about that opportunity? And then I want to dig more into where some of the opportunities are in M&A going forward?

So from a timing standpoint, Stilla, we still expect it to close by the end of the third quarter. It's moving along well. And so we look forward to getting that closed and then we're getting the integration process here.

Yes. I think that's a really good model for us. It's a product that's basically on market and it fits extremely well within our portfolio. In fact, it fits a place in our portfolio that has developed in the last 24 months or 36 months, which is the low end of the Droplet Digital PCR market, a market where we have a leadership position. And that's kind of a perfect kind of a fit for us on the kind of the smaller side of the equation. I think as we think about M&A going forward, we are focusing a little more on assets that with on-market products. And candidly, would like to find something a little bit on the larger side, where we can leverage our -- the improvements will be made, the operational improvements, leverage our global distribution system, maybe even leverage some of our manufacturing capabilities. So that's the kinds of things we're looking at, whether it's in life science or diagnostics, we're probably a little bit agnostic as to which one it is. It's just got to be the right fit for us and add value for the company and obviously then for our customers.

So just to summarize, I think, if you look at your history of M&A, you've got, I'd say, I'll call it mixed track record where you've bought -- you typically buy companies that aren't revenue generating, either they do have a product in market, but they don't have the sales force or they're close to market, but not quite to Bio-Rad standards. And so if I look at some of the other deals you've done in ddPCR, which I think was QuantStudio, if I'm not mistaken, you didn't pay much for that. It took a few years to get -- to put some R&D dollars into that to make it Bio-Rad worthy and you launched it and that was an incredibly successful product. So I would say the ROI on that was very, very high. Then you also had some deals where you bought what I would call more science projects that weren't big investments, but you thought the market might go this way. You bought them, you found out, look, this isn't working, and so they ended up being a 0 ROI or negative ROI. And so -- but I would say the wins are probably better than the losses unless you disagree with that. So going forward, knowing that as your background, are you more focused now on -- and I think you said this, but are you going to buy something that is on the market today where you can use your network to significantly expand their reach? Or should we expect to see some more of the science projects?

It's the companies of scale. And I think Stilla makes that point, if you will, right? What -- where Stilla is and where it's competitive is in that entry point of the market for Digital -- Droplet Digital PCR, right, as well as the high-end qPCR. And so for us, that's SAM that we don't address today. That's where the greatest growth is in the digital PCR market. And so that's the focus. Now where they are from a life cycle standpoint is they lack the commercial infrastructure today to really take it broadly. And so because we are the market leaders in digital PCR, we can take our network and our capabilities and take them to the market broadly. And so that's the expectation we have.

And then on capital deployment in Sartorius specifically and your cash balance, let's say, and you mentioned deal sizes with the B in the most recent call. So we'll start there. Let's say you had a $1 billion deal today that you wanted to buy, you've got several avenues on how you could finance that. And how would you prioritize, one, using the cash on hand; two, raising debt to do that; and three, selling a portion of your Sartorius holdings to do that deal. Are all 3 of those an option to buy that -- a deal of that size? And what would be your order of preference of those three?

So the order of preference, you said it, cash, debt, Sartorius, if necessary, right? You can argue, I mean I know Sartorius gets a lot of airplay, and it's been an incredibly successful investment by the company. So really kudos to Norman and the Bio-Rad team from that standpoint. And therefore, it gives us further optionality. But one can argue also that it's undervalued where it is today. And so because we have optionality from a cash and a leverage standpoint or a debt standpoint, we're going to look at those. But it's -- if we're going to pay something, it's got to have the value creation for us, right? It has to have top line, it has to give us margin expansion. Because ultimately, that's what we're focused on is operating margin expansion and improved free cash flow generation.

Right. And as far as the M&A environment goes today, do you feel that, a, the sellers are being more realistic in valuations; and b, you are at a stronger point relative to your competitors in the M&A process because of all of the avenues you have to finance a deal versus others may be facing leverage issues with higher interest rates that maybe their deal economics will be as good. So do you feel like you're at a stronger point when you get to the negotiating table and are looking at M&A deals?

I think we have a very strong position. Are we stronger? I mean, that's a case-by-case assessment. But because of the strength of our balance sheet and our cash position, and the fact that we've got 2 areas of the business, whether it's diagnostics or life sciences, we really are agnostic in terms of which asset -- it's about the quality of the asset, and that's the bottom line.

And the fit.

Great. Well, that just about wraps up our time. Really appreciate you guys joining us. And thanks for everyone in the room and online for listening in.

Thank you for having us.

Thanks for having us, Conor.