Bio-Rad Laboratories, Inc. ($BIO)

I'm Dan Leonard, the life science tools and diagnostics analyst at RBC. And we're thrilled to have with us from Bio-Rad, Roop Lakkaraju, CFO; and Ruben Argueta from Investor Relations. Thank you both for joining.

Thanks for having us, Dan. Appreciate it.

So we've got some ground to cover and only 25 minutes to do it. I thought, Roop, to set the table, if you could just reflect back on your recently reported quarter, what worked, what were the challenges.

Yes. We reported first quarter results at the end of April. Obviously, it's a dynamic environment, end markets continue to evolve. I think for us, maybe I'll highlight a few different things. Number one, when I look at where our digital PCR instruments are, we had 24% year-over-year growth. We were very pleased with that. That's especially attributable to our QX700 series products, which are a result of the Stilla acquisition that we completed last year. The Stilla acquisition, upon acquiring them, we looked at getting to accretiveness within 18 to 24 months. We're actually ahead of that schedule. We kind of reiterated that within 12 months, we'll be accretive. So we're pleased with that. And then when you look at some of the R&D improvements execution we've made, that's also reflected with our digital PCR platform. We were able to port 99% of our assays. We've got over 400,000 assays on digital PCR. Those were ported over ahead of time. So that just reinforces the value proposition of our QX700 platform. So that was very nice to see. Quality controls on the Diagnostics side continue to be strong for us. So we like that, and we think there's greater opportunity there in terms of growth over a longer-term period. We reiterated kind of see mid-single-digit growth there on quality controls. So that's something that's nice. From an end market standpoint, obviously, there's the Middle East conflict, and that presented some challenges for us. Specifically, in the Middle East, we've got blood typing products that we're in, we're really strong. Blood typing outside of the Middle East was actually strong for us in other parts of the world. APAC was especially strong. Free cash flow, $78 million, which we were pleased with again. That's a focus for us. And then about $48 million of share repurchases that we did. So all things considered, it's challenging end markets, but team navigated with positive areas, both on the tools side as well as the Diagnostics side.

Okay. That's a great start, and I want to dive into some of these details. But before we do, there was an article in the Wall Street Journal on Sunday that you have a new shareholder. I was wondering if you would care to comment?

Yes, we value our engagement and feedback from our shareholders. It's very important to us. We take that very seriously. With that said, we don't talk about any specific conversations with our shareholders, and kind of leave it at that.

Okay. Great. Well, with that out of the way, let's dive into some of the business trends. You mentioned the Middle East is a challenge. And I think investors were caught a bit offside by your Diagnostics exposure in the Middle East. So could you elaborate a bit on that and maybe use this as an opportunity to talk about your Diagnostics exposure more broadly?

Yes. It's a fair point. It's not -- obviously, Middle East is encompassed within our EMEA region overall, which we report as a group. Middle East, over the past few years, has been a very strong area for us, especially in the diagnostics specific area. It's about 9% of our Diagnostics revenue. And our team has really done a great job of positioning us with the tenders that happen in region. And so if you think about it with 9% of Diagnostics, the Middle East for us is somewhat similar to our China exposure, which is around mid-single digits kind of as an enterprise. And so it's an important growth area for us. It's unfortunate with what's happening in the Middle East and the conflict. However, I think longer term, we believe post the conflict, and hopefully it resolves itself soon, there's an opportunity for us to get back to growth in the Middle East.

Okay. And just in terms of business mix and how your Diagnostics business might be different than every other diagnostics business that Wall Street looks at, I think it would be interesting to talk about China. So we hear a lot of different things on diagnostic trends in China, everybody has a bit of a different business there. With Bio-Rad's business, what are you seeing in China? What do the opportunities look like?

Yes. For China, it's been relatively stable, I'll say, for us. And a couple of years ago, we had that reimbursement rate change associated with our A1c products there. We obviously took that. That rate reduction lapped in 2025, Q4 of 2025. Outside of that, we haven't been affected by VBP. So that's not an area that's affected us. And where we see strength, China diagnostics is -- it's split about 50-50 between Tools and Diagnostics for us. And really, we've got a strong position in quality controls in China, and that continues to show strength for us in China. We expect we'll continue to do that.

Okay. Before we pivot away from Diagnostics, it sounds like your quality controls portfolio is one of the standout portfolios in your business overall from your prepared comments at the start talking about the quarter mid-single-digit growth rate. Can you elaborate a bit further on what gets you excited about that franchise? What are the growth opportunities?

Yes. I mean quality controls is an important area. It's required. We've got market leadership in that area. We're actually putting more investment into that area. We see additional opportunities for growth. And that's kind of how we look at it. And really on a global scale in terms of the quality controls. It's not any specific region, but we see the opportunity on a global basis.

Okay. And that's a 100% consumables business, correct?

That's correct.

Got it. Presumably, the margin profile then is attractive?

It is attractive. I especially like the margin profile of quality controls.

Okay. All right. Well, let's pivot to the Life Sciences market. Can you walk us through the trends you're seeing by end market in Life Sciences?

Yes, it's a great question because I think it's continuing to evolve. I think from a -- if I look at U.S. academic and gov, it's been soft. And obviously, I think there's been a lot of headlines around the NIH, plus 1% from a budget standpoint. I think that's good. However, the ability to get that money into institutions' hands has been a bit challenging. And I think that's been -- created a little bit of that softness in terms of what we're seeing. Obviously, 24% digital PCR instrument growth on a year-over-year basis, that was very strong. We like that. What we've seen though is consumable pull-through, and this isn't just a U.S. phenomena, it's -- we've seen this in Europe as well, slowing for us. And I think it really is lab activity slowing down as people prioritize payroll and these sort of things. Obviously, there's work still being done, but not at the rate that we thought we would expect to see coming into the year. And so that's been a little bit of a surprise. Europe softening was an evolving item for us, something we'll continue to monitor as well. Separate from that, our applied markets for digital PCR, think of that as food science, has been strong, stable. So we like to see that. And when you look at -- we've got certain franchises like western blotting, a critical area for new lab startups, and that's an instrument that goes into every such new lab. And when you don't have new labs starting up, that creates a little bit of a headwind there as well. So we're seeing some of that dynamic, especially within the U.S.

Okay. What about biopharma?

Biopharma. Large pharma for us is stable and it played out the way we expected, and that's obviously within our process chromatography area. As we think about the broader biopharma aside from large pharma, it's a little bit of a mixed bag. When you look at earlier-stage companies, there's still slowness there, there's softness there. As you go to later-stage companies, they have seen funding getting into their hands and they're seeing some of that. Unfortunately, our portfolio skews a little bit more towards that earlier-stage set of companies that are more in that development phase. So we're seeing a little bit of softness there on a continued basis. We do think as the year progresses, we expect that to improve slightly. But we're not expecting strong end market shifts or anything like that.

Okay. You mentioned the digital PCR business a couple of times. Can you talk a bit about the broader portfolio there and how your market segmentation strategy is working?

Yes. The team has done a really nice job in terms of, really with the Stilla acquisition, in broadening our portfolio and availability. So we've got our historical platforms, the QX200, 600 and QX ONE. One of the things with the Stilla acquisition, we were able to position them appropriately within the end marketplace. And one of the things we were doing previously is needing to discount the 200 and 600. No longer need to do that because of the breadth of our portfolio. And so that's been nice to see. And then with the Stilla platform and especially the entry-level product of the Stilla series, if you have 700 series, the S, what we've seen is qPCR conversion, which we kind of -- was part of our investment thesis for the acquisition, it's played out as expected. And so that was nice to see in terms of qPCR conversion as well as market share pickup in terms of new digital PCR. And so we think on a longer-term basis, that's going to continue to be a growth driver for us. And when we think about the consumables pull-through, obviously, I mentioned right now we're seeing a little bit of softness on that consumable pull-through. We think over time, because of the instrument sales that we have, that ultimately the consumable pull-through will happen there, which will help kind of reinforce the value proposition.

Is qPCR conversion a good thing for Bio-Rad or a headwind for Bio-Rad?

Well, I mean, we've got historical qPCR platform, right? And so where we weren't playing in qPCR is kind of the higher-end qPCR. And so you start to see with these price points, high-end qPCR and entry-level digital PCR, that those price points are comparable, if you will. They're not exactly the same, but they're comparable. So the value proposition starts to get reinforced in terms of, instead of that high-end qPCR, maybe a digital PCR instrument can be applicable. So we see an opportunity to continue to sell, and we do sell from a qPCR standpoint our instruments. But then we obviously see digital PCR opportunities as well.

Okay. And I think we have time to touch on process chromatography. So 2 quarters ago, you mentioned some specific idiosyncratic headwinds. That's well-understood at this point. Is it possible to talk about how your process chromatography business is doing excluding those couple of idiosyncratic headwinds?

It's actually -- it's played out as how we expected it coming into the year, right, considering those specific dynamics that you mentioned. Outside of that, it's played out the way we think. And long term, it's still an important area and an opportunity for growth for us.

Okay. And then final question on Life Sciences. You have a new strategy in China. Can you update us on the Bio-Rad China strategy?

Yes. I think the specific item is we stood up, in a very relatively short time frame, within about 120 days, China manufacturing capability for certain of our tools' SKUs. This is something that had been thought about for quite some time within Bio-Rad. For those of you that speak to Bio-Rad on a regular basis, I'm sure that's come up in conversation. And we felt that it was important and an opportunity for us that we're missing out in terms of some of those tenders. And therefore, standing this manufacturing capability up in China for China, we think is a growth opportunity to help support our China business on a longer-term basis.

Bio-Rad has lots of SKUs.

Yes.

So which did you stand up locally in China? How do you even make that decision?

Yes. I mean without getting into specific SKUs, I guess we went through a specific kind of evaluation of where the opportunities are in the end market, where we have good positioning and right tools, if you will, from a marketing perspective. And then that's where we focused in terms of the SKU capabilities.

Got it. All right. Well, Roop, as I mentioned, we resumed coverage of Bio-Rad very recently, and we've been getting questions on the back-end loading nature of both Street forecast for 2026 as well as guidance for the full year. Can you speak to that? What are some of the idiosyncratic factors within Bio-Rad which gives you that second-half weighting in 2026?

It's a great question, and obviously, Dan, appreciate picking up coverage on Bio-Rad. Always appreciate your support. From a phasing standpoint, our historical phasing is about 48% of our revenue in the first half, 52% in the second half. When we look at the phasing right now, it's roughly 47% first half, 53% second half. So not dissimilar. Now with that said, and when you look at kind of our profile through the year, it's as expected, right? Q1 is traditionally the low point from a revenue standpoint. We see it stepped up reasonably kind of in that 5% or 6%, which is what it's doing this year for Q2. Q2, Q3 can be either relatively flat or a slight uptick in Q3, depending upon end market dynamics. And then Q4 steps up. That's exactly the profile we're seeing. And when we look at the specific elements that are supporting that growth, obviously, part of that is continued digital PCR growth that we expect to see. Then when we look at specific movements from Q1 to Q2 or into Q3 and Q4, it's very specific to, for example, lot releases and quality controls. They happen at certain times of the year. We talked about it extensively last year. The same dynamic was there. We have that same dynamic. So when you look at how things are moving and growing in Q3 and then into Q4, that's specific to quality controls, as an example. We have certain blood typing opportunities that we see, instrument opportunities later in the year. So the movements within the year are specific to either certain opportunities that we see or lot releases, quality controls or the digital PCR.

Is there anything -- I mean, to that digital PCR dynamic, is there any assumption around a budget flush in Q4 that your guidance is predicated on? That budget flush topic is always of interest to investors.

No, it doesn't -- it's not predicated on a budget flush.

Okay. All right. Well, Norman doesn't have prepared remarks on every quarterly earnings call. He did on your Q1 earnings call. He talked about an ambition to get to mid-teens EBIT margins in the near term. Can you elaborate on that? And how do you get there from your current 10-ish percent level?

Yes. I think -- and I appreciate your comment that not every quarter Norman has prepared comments. I think we -- when we feel like that there's things that ought to be reiterated or reinforced, it is important for him to provide those comments. As it relates to that mid-teens op margin, we've got opportunity for margin expansion. That is a focus for us as part of the relatively new leadership, let's call it, right? At the end of the day, we want to drive to market growth rates. We can debate, I'm sure, what market growth rates are today. As part of that margin expansion, we have margin expansion opportunities. And we've got free cash flow improvement opportunities as well, and we've talked extensively about that. We have actions underway in each of those areas. And so I think what Norman wanted to reinforce is, from his perspective, op margin expansion is of importance to him and to all of us, right? And I think there's a perspective of just the dual-class share, governance framework and everything, is that truly an important aspect? I think it was to reinforce really, hey, it is. And the actions we're doing are to drive towards that in the near term, and then longer term, see how we can grow beyond that. In terms of drivers, I think there's numerous drivers. Obviously, it'd be nice for the end markets to improve. But even without that, we have margin expansion opportunities from our perspective. When you look at pricing discipline, we've improved that over the course of the last couple of years since the time I've been here, and Jonathan was here and other folks within the new leadership team. We're going to continue to reinforce that, and especially where we've got market leadership opportunities. As we think about within the COGS area, there's opportunities within when you look at our capacity and absorption levels, there are some opportunities there to try and rightsize some things, and really rationalize our footprint appropriately. We've done that to some extent historically. We'll continue to look at that as an opportunity. We look at procurement, buying power as an opportunity. We've made improvements in logistics, and both rate and lane improvements, and we'll continue to look at those. And then, of course, there's OpEx rationalization and productivity improvements that we're looking at and have implemented and we will continue to implement as we move forward. As an example, last year, in February of 2025, we did a fairly large restructuring to rightsize some of our operating costs. So we'll continue to look at these things in terms of driving that operating margin expansion near term and long term.

Is it possible to quantify how much of the bridge from a 10% today to a 15% near term, how much of that would be top line independent compared to top line dependent?

I think the -- there is a level of independence there in terms of actions that we can take to drive that expansion. Part of that top line is also the mix of the top line. Life Science tools tends to be good margin for us as it relates to Diagnostics, and so that mix of revenue helps. Obviously, I mentioned earlier, our QX700 Series products are a good -- it's a good set of instruments from a margin standpoint. And so that mix of revenue also contributes to that support.

Because like you mentioned, we could debate the market growth rate.

Yes, we could.

Okay. Well, what about levers on the balance sheet that might not show up necessarily in operating margin? We talk sometimes about inventory turns. Can you walk through your thinking on that?

Yes. Inventory is obviously important to support the types of products we have. Some of them are quick turn, they need to get in customers' hands within a very short time period, they're temperature controlled, these sort of things. When we look at inventory as a whole, quality controls is one area which, because of its business model requires additional inventory and these sort of things, so we want to be mindful of that and protect that franchise, that type. When you look at the rest of our inventory opportunities, we see that in terms of working capital efficiencies that we can drive there. And so our supply chain teams are actively working on that. Another area that we're looking at is days payable outstanding with vendor terms, right? When you look at where that is, there's opportunity for improvement, and especially as it relates to where our DSO is. And so we've made improvements in the AR collections and these sort of things over the last couple of years, and the quality of our AR, the aging has improved. So all of this contributes towards that working capital efficiency standpoint and cash conversion efficacy. The other part of it is we're continuing to rationalize our CapEx, and really that's come down when you look at it from a prior few years versus where we were in 2025, while doing specific investments that we felt we needed to do. So we'll continue to look at CapEx rationalization as well and really invest where it's needed and ensure we're getting the return for those investments.

A big chunk of your CapEx is reagent rental in the Diagnostics business though, correct?

it is. It's not a majority or anything like that, but it's a reasonable percentage. But it's nowhere near 50%.

Okay. And how do you measure return on R&D? The R&D as a percentage of revenue is an area on the P&L that sticks out.

Yes. We've talked openly about the R&D investments we've made over the years. And that R&D kind of product vitality index hasn't been where we want to see it. We've made improvements in terms of our R&D execution and efficacy, I think. And in general, our operational efficacy, execution efficacy, if you will, right? From an R&D standpoint, we have -- we go through and we're rationalizing and really evaluating what's the return, what's -- when do we expect to see revenue from the investments we're making on this to really drive the vitality improvement? And then we're investing in areas that we think offer us an opportunity from a growth perspective. Hence, when you look at some of the R&D movements to porting the assays onto the Stilla platform, right? That's ahead of schedule. Well, that's purposeful, right? We put the resources behind that, versus saying that something by the end of the year we might be able to do, right? So we're looking at these opportunities. We're investing further in quality controls because, again, market leadership, there's an opportunity for more. So we're really looking at this in a structured way to drive R&D returns at a far higher level of returns than what we've had historically.

Got it. Well, Roop, I was told to keep on schedule. We've got 30 seconds left, so we'll leave it there. Thank you so much for your time.

Thanks, Dan. I appreciate it.