BioDot, Inc. (ATS) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the ATS Automation Conference Call and Webcast. This call is being recorded on April 14, 2021, at 10:30 a.m. Eastern Time. [Operator Instructions] I'd now like to turn the call over to Shereen Zahawi, Director of Investor Relations at ATS. Please go ahead.

Thank you, operator, and good morning, everyone. Your main hosts today are Andrew Hider, Chief Executive Officer of ATS; Ryan McLeod, Chief Financial Officer; and Chris Hart, President of ATS Life Sciences Group. For those who joined us by phone, our remarks are accompanied by a slide deck, which is available at atsautomation.com. Before we begin, I am required to provide the following statement respecting forward-looking information, which is made on behalf of ATS and all its representatives on this call. You are cautioned that the oral statements made on this call will contain forward-looking information that involves risks and uncertainties, including those introduced by the COVID-19 pandemic. The actual results could differ materially from the conclusion, forecast or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in ATS' filings with the Canadian provincial securities regulators. Now it is my pleasure to turn the call over to Andrew.

Thank you, Shereen. Good morning, and thank you for joining us. Today, we are pleased to announce the acquisition of BioDot, a specialized global supplier of fluid dispensing equipment and systems. BioDot expands our life sciences offerings in point-of-care and clinical diagnostics end markets. It adds capabilities in precised, premium, low-volume fluid dispensing and lab automation. BioDot's complementary portfolio will allow us to create unique market offerings for existing and new customers. The transaction is aligned with our strategy to target acquisitions in attractive and growing markets, with differentiated technologies and strong positions. From a financial perspective, the transaction offers robust synergies, earnings accretion and a compelling return on invested capital. The total purchase price is USD 84 million or approximately CAD 106 million. This implies a transaction multiple of 9.7x BioDot's projected fiscal 2022 EBITDA. After factoring an estimated year 3 synergies under ATS' ownership, this multiple declines to 8.4x EBITDA, making the transaction highly accretive to ATS. Note that the transaction multiple equates to 5.6x based on BioDot's fiscal 2020 stand-alone EBITDA. We are financing the acquisition by drawing on our revolving credit facility, which will result in a pro forma leverage of 2.1x net debt to LTM EBITDA. The acquisition is expected to close in calendar Q2 2021, pending the completion of customary regulatory filings. In terms of the strategic rationale for the acquisition, BioDot fits our M&A playbook. It broadens our life sciences capabilities by adding a portfolio of differentiated technologies and innovative products. Its clinical research offering and aftermarket service business offers compelling recurring revenue opportunities. It has demonstrated strong profitability and cash flow generation. During our due diligence process, we identified synergies that would allow us to realize additional financial upside from the acquisition. Over the next 3 years, we anticipate cost synergies of approximately $1.5 million, resulting from supply chain optimization and operating efficiencies. We expect to generate another $1 million of EBITDA through revenue synergies resulting from cross-selling and joint innovation. The transaction will be accretive to ATS' earnings and cash flow per share metrics in our first year of ownership, and we expect ROIC to exceed our cost of capital in year 3 and reach double-digit return on invested capital by our fourth year of ownership. BioDot is a differentiated leader in its chosen area of focus. Based in Irvine, California, it designs and manufactures mission-critical, ultra-low volume, premium fluid dispensing and lab automation systems. It serves a diverse blue chip customer base in point-of-care and clinical diagnostics, genomics and other segments of life sciences. It has a highly skilled workforce of 94 employees, 2 U.S.-based manufacturing facilities as well as locations in China and the U.K. BioDot's systems enable customers to manufacture billions of test devices every year. Over the past 12 months, it has helped customers join in the fight against COVID-19 by successfully expanding capacity and meeting demand for COVID-19 point-of-care diagnostics. Other recent innovations from BioDot include CellWriter. This product allows clinical labs to automate workflows related to cytogenetic tests. Cytogenetics is a study of chromosomes in cells and tissues, offering compelling ROI and saving millions of dollars in labor and reagent costs. The company generated $36 million in revenue last year. Point-of-care systems comprised 75% of its sales today, while clinical and life sciences systems make up 9%. Services and consumables represent 16% of revenue. And over the next few years, we expect to see meaningful growth in BioDot's recurring revenue streams. We expect the strong demand for COVID-19 test devices to present a tailwind for BioDot sales in fiscal 2021. We view fiscal 2022 forecast revenue of approximately $36 million as the normalized run rate for the business. The acquisition of BioDot adds new capabilities to our life sciences portfolio, allowing us to access different parts of the point-of-care and clinical diagnostics markets. Similar to other life sciences acquisitions we have done, BioDot's markets are highly regulated, which plays to our strength in delivering high precision automation solutions. BioDot's addressable market is expected to grow in the mid- to high single-digit CAGR, with core markets, including lateral flow growing at mid-single digits, clinical growing at high single digits and biochips growing at double-digit CAGR. Growth in the industry is driven by strong trends, which we see continuing. These include a paradigm shift in diagnostics with greater acceptance of decentralized and near patient testing, which we see expanding beyond COVID-19 to such areas as infectious diseases and veterinary care, a shift towards molecular diagnostics in cancer diagnosis and treatment and growth in precision medicine, including single cell genomics and research applications. Turning to strategic rationale. BioDot establishes our low-volume fluid dispensing offering and helps increase our penetration with life sciences customers given the meaningful overlap in our customer base. BioDot has a long track record of innovation and product technology with a team of design and dispensing experts and 20 active patents, including strong protection for CellWriter, its new clinical product. We also see a compelling opportunity in BioDot's recurring revenue, which we expect to reach 40% of sales by fiscal 2023 from approximately 16% today. This is driven by the growth in CellWriter installed base and associated growth in the sales of consumables, both slides and syringe tips as well as continued growth in aftermarket services as BioDot emphasizes service sales with customers. There are multiple avenues to create meaningful synergies beyond leveraging technologies and the ATS business model across the portfolio of ATS and BioDot. Some examples include leveraging early entry points with customers to offer turnkey automation solutions that incorporates BioDot's dispensing technology; deploying our digital solutions like Illuminate, ATS' industrial IoT platform, on BioDot's CellWriter to enable continuous in-lab monitoring to anticipate consumable demand and servicing needs; and cost reductions due to supply chain optimization and transfer of BioDot's high-volume production to ATS' REM facilities. This would also provide incremental capacity to support BioDot's growth. This transaction meets our 4 key acquisition criteria: market, value, fit and financial returns. BioDot operates in a large and growing market, underpinned by strict industry and government regulations. It possesses several differentiated technologies and a brand that is globally recognized in an industry that gives high value to these attributes, while having invested heavily in developing technologies for attractive markets. It is a strong operational fit, with an experienced and motivated management team and the potential to apply the ABM playbook to further improve operations and realize synergies. And it is a financially attractive acquisition, with strong profitability, high recurring revenue potential, EPS and cash flow accretion in year 1 and attractive return on invested capital by year 4. The acquisition of BioDot is another step in the ongoing evolution of ATS towards high value and growth end markets. These are highly regulated sectors, where ATS can add substantial value to its customers to the application of automation technology. Since 2013, ATS has completed several acquisitions in the chosen markets and have more than doubled its LS business. On a pro forma basis, our exposure to regulated markets, which include life sciences, but also food and nuclear, is now approximately 73% of our revenue. Going forward, we will continue to explore opportunities to acquire assets in key targeted areas, with our focus remaining on transactions that are strategic for ATS and provide a solid return on investment. In summary, we're excited about the addition of BioDot to the ATS family. BioDot operates in an industry with attractive fundamentals and holds a leading position in its key end markets. The transaction broadens ATS' life sciences offering and grows our equipment portfolio. BioDot enjoys strong profitability and offers a compelling opportunity to grow our recurring revenue stream. This is an attractive transaction from a financial perspective that is accretive to our earnings and cash flow and generates a compelling return on our capital. With that, I will turn it over for questions. Operator?

[Operator Instructions] You have a question from the line of Mark Neville with Scotiabank.

This looks like a pretty interesting deal. I've got a bunch of questions. But maybe an easy one upfront. Who are the customers? I mean is this private clinics and labs, hospitals, drugs company? Just trying to get a sense of who this -- who you're selling to.

Sure. I'll start, and then I'll have Chris add some additional comments. So Mark, when you look at their customer base, first and foremost, there's a significant level of overlap on our customers. And these are blue chip customers that often are in the lab space and/or providing these diagnostics to the market. And so you see, first, an overlap of ATS in this business, but then also a potential on where we can continue to have dialogue for expanding our solutions with customers that ATS doesn't have today. Number two. When you look at their significant increase in the COVID-19 support, they've seen expanded customer base through that. And their lateral flow business has certainly been a leader in this space and one that we've, due diligence, learned is a key area for supporting and enabling customers to expand in this market. Chris, would you like to add on here?

Yes. I think a couple of points here, the topic of overlap. So in the POC space, the lateral flow space, there's a lot of, call it, traditional ATS customers where our engagement would be on the device manufacturing side. But within that same organization would be an element that would deal with the dispensing of reagents, the preparation of strips, et cetera, that would go into those devices, so strong overlap there. On the diagnostics side, as Andrew said, that's more lab-based. Again, there's some overlap with ATS there in the sense that we also manufacture through our REM business, specimen testing, diagnostic machines for our customers. I think the overlap with key customers, but there's also overlap in some areas where we're just starting to explore engagement with customers that are BioDot customers that we want to be ATS customers. And then there's a whole host of BioDot customers that we were interested in exploring what opportunities we may have.

Okay. That's helpful. Maybe when you're talking sort of market growth mid, high single digits, I guess, just in simple terms, what's sort of the main driver or drivers behind it? Is it sort of what you said, Andrew, sort of the shift to the point-of-care diagnostics, is that the primary driver or more to it?

Yes. So Mark, there's a couple of things here. So they're seeing certainly a tailwind in the lateral flow business. And so when we've done and spoken to customers, that they've got a very high brand within their market and areas they serve. And so they have seen a shift there, a fairly significant shift. And what we're also seeing is several customers in this space have put other projects that, similar to ATS, has put other projects on hold to really enable that solution and support in the market for the fight against COVID. And so you're seeing the shift around, call it, the testing devices for this become a key driver for the lateral flow. In the CellWriter technology, and just to give you a little frame-up on this, and I often like to -- so to know what they do, you got to think about, if you look at a liter, these guys dispense a picoliter in motion on a test rep, and so on an actual slide. And so they'll do it in motion on a slide in a picometer. And to give you a sense of what a picometer looks like, it's 1 trillionth of a liter. So very challenging. And these are often customers that are focused on, whether it's cancer treatment or diagnostics or around those areas, and it's often a manual process. And reagents are very expensive as well as the labor is expensive. So when you think about their opportunity, you're looking at about a 50% reduction on labor to run these tests as well as a 70% to 80% reduction in reagent costs. And so not only are the test expanding because you're looking at different things within, whether it's diseases, or whether it's veterinary care, to all the way to cancer understanding diagnostics and really building out the ability to do this in an automated process, which is their sweet spot to enable the solution for customers. And Chris, anything that you would like to add on for their specific area?

I think that covered the question, Andrew.

[Operator Instructions] You have a question from the line of Cherilyn Radbourne with TD Securities.

I wanted to dig in a little bit on the opportunity to grow the aftermarket and consumables component of the business. I wonder if you could expand a little bit on the CellWriter product and sort of give us an idea of what the capital cost of a system like that is going into the customer. And then what does the product support annuity look like in relation to that capital cost over the life of the system?

Yes. So Cherilyn, I'll start, and then certainly, I'll ask Chris to add on here. Just to give you kind of a sense of the framework, there's 2 models for the CellWriter, and the models are: one, it's either a sale, and then the recurring, which is the consumable and service support or; call it, a lease model where they're going to have more on the recurring revenue, which is more on the support for the consumables that's going to drive the system. And as you think about labs, we look at this from a standpoint of the total lab space. And to give you a sense of the addressable market, this area is, call it, a $260 million cumulative U.S. and through looking up to 2024 in U.S. and Europe. And labs within the U.S. is really around large labs, midsized labs and small labs. And in the U.S. alone, you've got 5 large labs, 40 midsized and 70 small. And it's really the ability for BioDot to go in, whether it's a CapEx initial spend upfront and then the recurring revenue, which is the consumable, or to differentiate and provide the solution but have a higher consumable amount, regardless it's still reduction in the cost of tests. And Chris, certainly, feel free to add here as you've done and spoken to many of these customers.

Yes. I think you mentioned it, Andrew. The normal approach here in a lab would be technicians with pipettes, and that's a highly manual process. BioDot understood that there was an automation void between the harvesters and the microscopes, and CellWriter fills that void. So I think a lot of labs are prime candidates for this automation from the return on investment standpoint, but also from an efficiency standpoint. And being able to process multiple assays on a single slide, that drives efficiency gains in ultimately acquiring determining that genome in full.

And in terms of the lab space, which Andrew just outlined, the 5 large, 40 midsized and 70 small labs, what percentage of those labs would be automated today?

So primarily, the focus is on the large labs -- large and medium, those cases. And it's very dependent, too, on what do those labs process from a testing standpoint. That really feeds into the determination of whether a CellWriter is required for those labs. So I think as micro assays become more and more prevalent, it's going to -- and labs start to consolidate, small labs start to consolidate, then the potential for CellWriter increases.

Okay. That makes sense. Just wondering if you could describe, at a high level, how you thought about building a normalized earnings projection to sort of normalized for what appears to have been a somewhat unusual year in 2020. And if you could touch on whether you think you've been conservative in that process, just given that COVID testing does look like it's going to be part of how we get back to normal even after people have been vaccinated.

Yes. Cherilyn, this is Ryan. So certainly, there's been a tailwind from COVID in the business. And I think Andrew and Chris have talked about that. So as we look beyond that -- and again, Chris -- I think both Chris and Andrew mentioned that some of the other lateral flow POC applications have been put on hold as companies shift their focus towards COVID. So we do see that coming back. As well, the CellWriter product, which you've asked about, that's a new product, so it really launched about a year ago. And then the third factor is the growth in what we're seeing on the services and consumables side. So in terms of when that COVID tailwind dissipates, we have taken a fairly conservative view and then we're really looking past this from a valuation modeling standpoint. But I mean, there is a bit of uncertainty in that COVID tailwind could last certainly through the balance of this year.

Okay. That's helpful. And then last one for me before I get back in the queue. Can you maybe just sort of give us some background on how this all came together? And how long you've been aware of this company? And whether this was a deal that was cultivated?

Yes. So Cherilyn, we like this space. We like the ultraprecision dispensing space, and we like the position that BioDot has been in this area. I could say that we've identified this market. We got a bit more serious, call it, a year ago, and we started really having discussion with them, call it, 6 months ago. One of the things that we've been very impressed with is really the management of the organization and the team at the organization, who's staying on, by the way. And their passion around, not only the technology, but as you found their passion around delivering solutions that positively impact lives around the world, and it obviously aligns very well with how ATS views our solution set. And so we identified, we worked with them. We really were able to work through lot of the key areas that they see the potential, and they see really how to achieve their full aspiration and continue to develop their technology. And so very pleased that it came to completion today and excited about the future of our combination of 2 businesses.

You have a question from the line of Justin Keywood, Stifel GMP.

It certainly seems like a good acquisition. I just had a question on the proprietary versus third-party products at BioDot, if you could characterize that makeup.

So I can start. Sorry, go ahead, Ryan.

Yes. So the majority of their revenues are from proprietary product and on the equipment side. And then certainly, there's the services and consumables, which today is mid- to high-teens in terms of their revenues.

Okay. That's helpful. And it certainly seems like an innovative company. I'm just wondering the R&D spend as a portion of the total overall sales, if you can disclose that.

Yes. So it's been in the low double digits as a percentage of revenues. And obviously, with the COVID tailwind over the past year, that percentage has dipped. But we do anticipate sort of a normalized run rate of R&D spend in the high single digits, 8% to 10% in that range.

Okay. And then on the target revenue synergies, it seems to be a bit conservative. But was that comprised of selling BioDot's products through ATS' broader customer base or the other way around? Some additional context there would be helpful.

Yes. Chris, why don't you walk through a little bit about the overlap? And then, Justin, one of the things we've been very impressed with is because we've had overlap with customers, we've been able to have direct feedback. So Chris, why don't you provide a little bit more context?

Yes. So the -- maybe I'll start off with just the shift we see in the consumer model towards greater control of health care, the devices. They continue to evolve with more health lifestyle capabilities in the demographics. Then you kind of step that down to where the 3 swim lanes that BioDot is in, the expanding post-COVID, home POC, the clinical diagnostics space being a prime candidate for automation and the miniaturization of chip sensors, devices requiring even smaller dispense volumes and then pairing that up with what we've investigated through due diligence and part of that being the customer interviews and various customer contacts, the BioDot brand strength globally is very strong. There was a repeated theme throughout all of the interviews in terms of quality of product, reliability of the product, flexibility of BioDot to meet customer needs and overall stability and all things that we really feel that's our character, too, as we engage with customers and the feedback we get it with customers relative to ourselves. So that generated just a very nice alignment between ATS and BioDot.

Yes. Thanks, Chris. And Justin, even as to last week, in our process and approach, we've been speaking with many customers around it. One of the customers, who is a pretty big customer of BioDot, even recently had said, "We're really looking at the ability to automate the process on either end of how this comes together with as far as the test process." And so certainly, we've taken an approach that says this is the alignment for expansion with the customers as well as technology. But again, as proof point, even as to -- as recent as late last week, customers are looking for that automation solution that we view we can start to wrap the ATS capability around.

Okay. And if I could just slip in one more question. Is there any products or solutions for the manufacturing of COVID vaccines? Or is it primarily just on the testing side?

So BioDot space really is to dispense either reagent or biological content onto surfaces, whether that's slides or strips or cartridges or whatever the case may be. And then those -- that content then moves forward with whomever the manufacturer is or whomever the diagnostics firm is to administer tests or execute the next step in the manufacturing cycle. So less about a specific infectious disease and more about the process of low-volume precised dispensing.

[Operator Instructions] You have a question from the line of Mark Neville with Scotiabank.

Can I just ask one and maybe talk about the -- I can understand sort of the COVID tailwind, but maybe the difference in the margin between 2020 and 2022? I think you were north of 40% in 2020. They were north of 40%. And if I do my math, like it sort of looks like you're probably somewhere closer to the mid-20s, what you're guiding to. So maybe just speak to that.

Yes, Mark. So again, I mean the COVID tailwind has been a big impact over the last year for this business. And so part of that is there's been a lot of pull for COVID-related product. And so that's driven a lot of operating leverage in the business. As we look out and look to sort of normalized margin profile for this business, as I said, we do anticipate increasing R&D. We do anticipate building out -- continuing to build out their sales and marketing groups. So really investing in the continued growth of this business. And it's still a strong margin business post-COVID. As you said, we view this as a 20%-plus EBITDA business and certainly accretive to ATS margins from where we sit today.

Okay. Maybe on the cross-sell, I'm just curious on the geographic revenue split, is there any reason sort of why it looks the way it does? Or is there an opportunity to expand into other geographies?

Yes. Mark, there is opportunity to expand. And again, back to the thesis around BioDot becoming part of ATS, it also allows us to utilize our global footprint to really help and enable them continue to maximize their potential in the markets they serve. That said, this business has done a very good job of really delivering their solution. And Chris mentioned it earlier, we've seen -- we've heard firsthand from customers really strong feedback about their solution and around their capability. And so we're going to utilize our footprint, and Chris talked a little bit about REM, which is repeat equipment manufacturing. It's how we take one solution and build it out. That helps them meet capacity. But then additionally, you look at our service network and you look at our footprint, all these factors are things why we really like this add and why it's a strategic fit for ATS mid- and long term.

Okay. Just maybe on the -- just on the aftermarket and the consumables. The growth from 16% to call it 40%, it's pretty significant. I guess I'm just sort of curious as to the primary year. Obviously, I think CellWriter is a big one, but maybe just talk about the levers or the drivers behind that.

Yes. I can take that first, Andrew. So I think, yes, the lab environment and when you contrast that to call it, ATS' life sciences typical customer base, there's quite a difference in the technical infrastructure capability of a lab to support service, maintain complex pieces of equipment. So without that infrastructure, there's a higher incidence rate of service agreements. That's what labs expect. So that's one lane. Another lane is -- and Ryan, I think, mentioned this at some point, too, that they -- that the commercial model in the past for services was more inclusive in the CapEx. So I think alignment with ATS' commercial model for services will help accelerate that. And I think the last one would be the impact that digital can have. The need for these systems to perform. Labs have to complete tests. They're time-sensitive. So the digital connectivity and ability to be more predictive with the systems is high value for the customers.

And is there any digital capability now or sort of would Illuminate sort of fill that void?

Yes. Illuminate would fill that void among other -- among the rest of our digital offerings as well. And yes, they're at the initial stages of that journey.

Okay. I guess if I could just ask one last one. Just -- maybe just talk broadly about your M&A pipeline sort of outside this. Obviously, you have been busy. But sort of curious as to, yes, the current pipeline and what's happening.

Yes. So Mark, just -- one, very excited about the addition here. This has been certainly a bit of work. And thank you for all the team who is on or off this call for all the hard work on going through, and looking forward to adding -- having BioDot as part of the group. As we look out and we look at our funnel, it remains healthy. And with the addition of the food technology space, we're having more and more conversations on areas that we really like around regulated food in that area. And so our funnel remains healthy. All that to be said, we've got our 4 key criteria and we remain very disciplined in our approach. And so pleased with this addition, continuing to cultivate, continuing to see potential. I've had, call it, several other conversations in other areas. And when we see all the fit on our 4 criteria, we're in a position to be able to continue to move forward.

We have a question from the line of Cherilyn Radbourne with TD Securities.

I had a similar question on that 2020 margin. So that's been answered. In line, you touched on some investments that will be necessary in R&D and sales and marketing that will be reflected in the EBITDA margin. Is there any other investment more of a capital or working capital in nature that's required to scale this up?

Not material. So this is a low CapEx business. It's been in the 1% range. So from an equipment capacity standpoint, both Andrew and Chris have talked about the opportunity to utilize our REM business for capacity. So from a CapEx standpoint, it will continue to below CapEx, slightly higher working capital intensity than the rest of our ATS business. It's operating in the high-teens, low 20% range. So a bit of a change there, but also presents an opportunity to drive some efficiency there.

Okay. And then in terms of the make versus buy question here, could you just articulate why you're purchasing these capabilities instead of developing them internally? Is that because they're so technical? Or is it more of a speed to market advantage or something else?

Yes, certainly...

So I'll start. Chris, why don't I start and then you can add on. Cherilyn, we go through quite a bit of detail around this, around the make versus buy. And when we think about this asset and what it adds, and I mentioned a little bit about kind of the scale and what they do and the difficulty and level of difficulty, we start with the strategy and we start with the market and understanding and what we like about the market. And then it's really a factor and determination around our ability to execute that internally or have to go externally. And so we do all that analysis, and then we come to our solution. So this one fit obviously well in line with our ability to move very fast in adding this potential technology and really maximizing its impact in the market. Chris, certainly, feel free to add on.

Yes. I think -- yes, sure. As you said, the technical reason is certainly a key win. As Andrew mentioned, 1 trillionth of a liter dispensed accurately either through contact, through noncontact and sometimes on the fly, is certainly not trivial from a technical perspective. And that knowledge base to do that builds up over many years, decades, actually. So yes, it would be a heavy lift for us to engage in that space. That being said, it does dovetail really nicely with our innovation strategy and BioDot's road map, our road map. We're experts in precised motion control. So to pair that skill set with BioDot's dispensing capabilities, that unlocks the ability to do this at higher rates of speed as well as the low volume aspect.

There are no further questions. Back to you, Mr. Hider.

Great. Thank you, operator, and thank you for joining us today. Stay safe, and I look forward to our next call. Take care for now.

Ladies and gentlemen, this does conclude today's conference. You may now all disconnect.