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

Good afternoon. Welcome to the Wells Fargo Healthcare Conference. Thanks for being here. I'm Brandon Couillard. I cover the life science tools and diagnostics sector here at the firm. It's a real treat to have Bio-Rad with us back at the conference this year. Joining me for this conversation to my left, CFO, Roop Lakkaraju; and CEO, Norman Schwartz. Thank you both for being here.

Thank you for having us.

Maybe this would be a good place to start off. You put up a pretty good 2Q, probably one of the biggest revenue beats I've kind of seen in Bio-Rad in a little while. Can you just talk about some of the things that may be played out more favorably for you, some of the highlights in the portfolio, then we can dig in from there?

Okay. Maybe I'll start with Q2. Obviously, we were happy with it overall. I think a couple of things contributed to that -- the results. I think on the top line standpoint, I wouldn't say things got better, but I think things stabilized a bit from an end market standpoint. So that was quite helpful. Specifically, process chrom was strong for us, and that was very specific to a customer's desire to pull in from later in the year to Q2. And again, that's solely for their production needs and not tariff related, these sort of things. So that was a nice strong contributor. And then we had consistent consumable pull-through, and we saw a strong year-over-year growth rate on consumables. So activity continues even with all of the churn that's happening from an A&G standpoint, these sort of things. So that was nice to see. Aside from the top line, I think operating margin, we saw good news there overall. I think the tariff situation is stabilizing at the end of -- or during our Q1 call, we specifically had kind of in the midst of all the tariff dynamic -- dynamism going on. So that stabilized a bit. And so that allowed us to improve the op margin. But we also continue to see the flow-through of consumables and the mix of revenue and then just tight expense management. Closed the Stilla acquisition by the end of Q2, which we really were focused on doing. And that -- along with that closure, the announcement and launch of Continuum, which I think has been long awaited. And most recently, we did a webinar of our Droplet Digital PCR portfolio. And hopefully, you all got a chance to watch that, listen to that. And so that really gives you a sense of the breadth of our portfolio there. And then cash flow was also very strong in the quarter, which is a continued focus for us in terms of free cash flow. So overall, I think a good quarter and continued progress from our standpoint.

A number of things I wanted to dig in further into there. Just start with process chrom. I think it was -- grew maybe over 50% in the second quarter. You raised the guide for the full year to, I think, low double digits now. It's starting to trend, I think, more consistently with other players in that ecosystem. How is visibility today maybe relative to where it was perhaps 6 or 12 months ago? And is there, I guess, anything besides the one customer you'd like to sort of call out?

Yes. I think given that fundamentally, that business is kind of lumpy quarter-to-quarter. I think we do have much better visibility today than we had several years ago where the -- I think we've managed to partner better with the companies that are using the product. It's to their benefit and our benefit. And so I think that's worked very well. To your point, I think it has -- the business has kind of stabilized out. And of course, again, it's a lumpy business, but kind of if you draw a line through the ups and downs that we've had, it's still a pretty healthy growing business, high single, low double digits. And I think that's -- we continue to see that going forward.

Maybe just if we look at biopharma, excluding process chrom, it's so unique, right? What are you seeing from an R&D demand point of view? Is that any different between instruments and consumables, your kind of state of the world biopharma?

Well, it's interesting. We just sat in on the lunch presentation from Merck, and they got this big program to reduce costs. But one of the places they're investing is R&D. That was a very strong point that they made. So that sounded pretty good to me.

I think to build on Norman's comments there, I think from a biopharma ex large pharma, I think, it's still challenged, especially on the instrument side of the house, consumables. People are, again, I think, are getting activity done because they want to move research forward. But instrument softness continues across both biotech and smaller biopharma, if you will. Large pharma, I think, which is evidenced by our process, chromatography area of the business has stabilized for us as we just spoke to.

To what extent, if at all, are pharma tariffs, MFN kind of affecting your conversations with pharma clients or spending appetite, if at all?

Yes. We really aren't seeing much in that regard. And in fact, it was again interesting to listen to the Merck people just now. They don't feel it's going to have a big effect on them either. So -- but we aren't seeing anything that says that that's going to be a headwind for us.

Our Life Science business actually over-indexes to academic and government. I think earlier in the year, maybe after the first quarter, you kind of built in, I think, an assumption, correct me if I'm wrong, that the U.S. A&G market would maybe be down 20% this year. Kind of what's embedded? And obviously, the second quarter was a lot more stable than maybe you thought 3 months earlier. What's embedded in your outlook for kind of the back half for kind of A&G globally within Life Sciences?

Yes. I think from a U.S. perspective on A&G, we continue to see it similar to the second quarter, where activity continues, and that's especially on the consumables side. Instruments are challenged. I think everyone is pointing to the NIH budget finalization, where that lands. I think there is a point of view that it's no longer a minus 40%. The question is, is it 0 to minus 10%. I think one thing that people are just looking for is kind of a decision on that so that at least they have got comfort around, okay, at least know what '26 budget could be and then how I can plan for instrument and obviously, continued activities from a consumable standpoint. So that's the U.S. I think the -- when we look at globally A&G, Europe is getting pressured, especially areas like France and Germany, where people are moving money from healthcare to defense and these sort of things, the geopolitical situation. China continues to be challenged from an end market and macro standpoint. And so that's resulting in some softness there. Japan and Korea has improved when you look at Asia broadly, which is nice to see, but obviously smaller markets overall.

So just one more point on -- to add to what Roop says. I think as the NIH budget gets resolved, I think it's going to take time for researchers to kind of rebuild a trust in -- basically in the government and the future. So I don't look to it to be a kind of a spring-loaded situation, but I think it will take time to kind of gradually rebuild that trust and therefore, the instrument sales to come back.

Just to clarify one comment you made, Roop. So are you assuming that the U.S. A&G market is kind of flat sequentially in terms of dollars in the second half relative to 2Q? Or is that -- were you kind of referencing more of a year-over-year growth rate or decline?

I think sequentially, it's going to be similar to the second quarter, right? Not necessarily anything -- there's no budget flush. To maybe read into Norman's comments a little bit, we're not expecting like a budget flush or anything like that in terms of what we see right now. It's more just continued activity with cautiousness around instruments.

Okay. Okay. I'd like to pivot over to ddPCR. You did hold that webinar a week or 2 ago to kind of showcase the new combined portfolio. You finally got Continuum out the door. Can you just talk about how much the portfolio expansion kind of opens new opportunities and where those are? And I guess, what you view as a normalized growth rate for ddPCR going forward?

So I think it opens up a lot of opportunity for us. Certainly, one of the areas that we've talked about in the past is the entry level, and now we've got a good solid entry-level platform or platforms, if you also think about the Continuum, which is kind of a little higher on the scale, but still in that kind of entry level. So we've got a couple of offerings now in that entry level in addition to the kind of the mid- and high-range platforms. I think the -- if you look at the combination of all the platforms we have there, we've got really -- really something for everyone today. And not only that, but we can use those platforms to build on the -- I don't know how many hundreds of thousands of assays we have, but I think the last number was like 490,000 or something, being able to port those assays onto the new 700 series and enable researchers to do a lot more.

To build on Norman's comments, that assay portfolio plus the amount of research publications that we articulated are kind of market-leading elements, right? And why that's important gets to your question around the growth rate. Obviously, over the last few years, we've seen negative growth rate or kind of flattish growth rate. I think our opportunity, and this is evidenced by our ddPCR growth rate for the rest of this year going from low singles to mid-singles is evidence of that. And it's driven by that expanded portfolio in the second half. And so I think near term, we kind of look at that market-leading position to help enable, let's call it, mid-single digits. But long term, our focus is driving that to high single-digit kind of growth rate and seeing if we can't start to touch that double-digit growth rate, but it's a little early to talk about it from that standpoint. But we think with the market migration and obviously, the macro improving over time, I think will help enable spend around instruments again.

Do you think the market will primarily continue to be concentrated in research? And what needs to happen for adoption to really take off in diagnostics in terms of use application or would it accelerate its uptake in the clinical setting?

Yes, I think we're starting to see some adoption. And it always takes time for these technologies to develop and to gestate in this kind of research environment. But we're working on some opportunities in diagnostics. We're also seeing some through the external partnerships we have with Geneoscopy and Insight. And so I think it's starting to develop, but it will take more time.

It's early innings for the Dx side of digital PCR, right? And I mean, for that matter, ddPCR or digital PCR adoption is still relatively early, and there's more growth from that standpoint. Growth in terms of applications, right, especially in oncology and where it's rare event detection is really needed. And so you still got opportunity there. And as you get more traction on the life sciences standpoint, I think you'll see more of that adoption and translation over to the Dx side, which is especially early. And so that's a future growth opportunity for us as we think about it on a longer-term basis.

You closed the Stilla deal at the end of 2Q. I think you guided to something like maybe $15 million of revenue contribution in the second half, correct me if I'm wrong. Is somewhere in the mid-20s, $30 million range a good full year run rate to think about? And remind us what you've kind of disclosed as far as getting that acquisition to breakeven, eventually accretion and maybe what the gross margin profile looks like?

You got a lot in that question. Let me try and walk through those. And if I miss anything, remind me. I think the first part is the revenue number you're quoting is probably high. Take half of that is kind of how we plan for it in the second half. And part of that is just getting the teams trained up, the Stilla teams trained on the Bio-Rad instruments, but also our teams trained on the Stilla platform as well as Continuum and getting that out to market. So that takes a little time, and so we're working our way through there. I will say that customer feedback to date has been incredibly strong. Obviously, the Stilla products were already on market. And through our diligence, we did -- we spoke to every one of our customers, and there was tremendous feedback on their instruments and the workflow and architecture and everything else, and we're seeing that play out. So pipeline is building. I think the end markets starting to buy instruments will be more helpful, but we're seeing that traction. But to the number in the back half of the year, it looks more like that. I think as we think about and tying back to my comment earlier, around longer-term growth rate in ddPCR in that kind of mid-single-digit type of number in the near term, that's kind of how we want to think about it into '26 and beyond. So we think that, that's kind of the runway there. What didn't I hit on your question?

Just the acquisition you're getting to -- yes, accretion and breakeven, with that...

In the second half or the Q2 call, we actually increased our operating margin outlook for the year, expanded that, right, by 200 basis points. Incorporated within there is there is some dilution from the Stilla acquisition. What we've talked about initially is that we want to drive accretion 18 to 24 months out. I think that's very reasonable in terms of what we see here. We'll kind of provide that update based on market uptake in the second half of this year at the year-end call, so that will give you a sense of what's baked into the '26 growth rate overall as well as that time to accretion. But feel very good about kind of that within 18 months, getting to that accretion point. And our focus, quite honestly, as we build out the '26 plan is can we accelerate that even further.

Shifting gears over to diagnostics. Can you just talk about what you're seeing from a pricing or reimbursement perspective in China? What part of the portfolio is it concentrated in? And if you look out in '26, is it still a headwind next year? Or do we lap it as we move into the first quarter?

So -- do you want to go?

Yes. So obviously, there's been a lot of talk around VBP, which really hasn't affected us. They've obviously gone off after the kind of the larger players, the larger assays that are being done, and we tend to be more on the specialty side. So we're kind of under the radar in most cases. Now we did get -- they have kind of pivoted from the use of this VBP to -- back to basically just changing reimbursement. And that's what we had happened in the fourth quarter of last year. And so we'll obviously get through that at the end of this year, but it's a lower reimbursement rate for our A1c test there.

Yes. And we're not seeing it across other areas, we don't anticipate seeing any further reimbursement rate changes here in '25. I think we're continuously monitoring how the China market evolves. I mean, some of our peers talked about DRG more specifically in the recent quarter. That's something we'd already factored in earlier in the year when we did our Q1 call because we've seen some evidence of DRG and what that really is doing is reducing the amount of panel test that from a diagnostic standpoint, just to curb the cost for the end consumers in China. And so that has been carrying through, but we're mindful of how the China market is continuing to evolve.

How much of a drag is that on the Dx business this year? And what are you seeing kind of outside of China? Any growth drivers or themes to call out?

Yes. From a reimbursement rate change effect, it's kind of in that mid-teens to $20-ish million on an annual basis overall. Obviously, in the fourth quarter is when it cut in last year. So we'll lap that come the fourth quarter of this year. And so that full effect. So a bit of a headwind. And I'll just remind folks, we also had a reasonable headwind on the donor screening business that we had through a partner that also no longer exists in the '25. So a bit of headwind for the Diagnostics business coming into '25. With that said, I mean, if I look at the Q2 results in Diagnostics ex China, 3.7% growth, which we were very happy with. Quality Systems was a strong contributor to that kind of growth rate. We hope to see that continue as we get through '25 and roll into '26. But right now, on a broader global standpoint, we're mindful of just how the macro evolves, I think, from a potential growth opportunity.

Got you. Okay. On the tariff topic, remind us what's embedded for the year in terms of gross and net impact from tariffs? And will you be able to fully mitigate that in '26? And subsequent to the call, we did have the Swiss 50% rate go into effect. Care to update us on what that means as far as near-term cost impact?

Yes. I think the Swiss piece is still -- like so many of these, it's not solidified, right? And I think it's to be determined in terms of potential impact. I mean we produce some product in Switzerland. We produce product elsewhere in Europe. So we'll need to see what products and how we might mitigate that in region, for region type of situation. From a tariff standpoint and what we had contemplated, coming out of the Q1 call when the tariff discussion was at its height, we had assumed a 130 basis point kind of headwind to the margins. At the Q2 call, we indicated that, that's been mitigated partly through where tariffs actually fell versus what was initially contemplated and announced. And so we reduced tariff headwind down by 100 basis points to about 30 to 40 basis points. So that's what's factored in for the rest of the year. Obviously, since the Q2 call, there's been -- such as Switzerland, such as India, there are some things that have continued to evolve. And so needless to say, there's variability still out there for which we're assessing kind of the impact both near term as well as into '26.

Yes. Not to mention the kind of the updates last week where those fall out.

Right, right, the court.