Bruker Corporation (BRKR) Earnings Call Transcript & Summary

Hey, good morning. Welcome to the Jefferies 2020 Virtual Global Healthcare Conference. I'm Brandon Couillard, Senior Life Science Tools and Diagnostics Analyst here at the firm. Here I'm happy to have Bruker with us back at the conference this year. From the company, we've got Chairman, CEO, Dr. Frank Laukien; as well as Juergen Srega, who heads Bruker's CALID unit. I'll turn it over to frank to make a few opening remarks before jumping into Q&A. [Operator Instructions] Frank, thanks for being here.

Thank you, Brandon. It's great to be at the Jefferies healthcare conference again and again with Juergen in ASMS week, although this year, of course, it's a virtual ASMS 2020 reboot, as they call it. As you will have seen from our press release that we issued for -- with our product launches for ASMS, I think we have -- we can be very pleased with our R&D productivity and the new product launches. I would argue that we are the only company that showed any real innovation and, really, new capabilities and products and even new technologies this year, with the MALDI-2 introduction, which is really the first major innovation in MALDI mass spectrometry in about 3 decades. It very -- it has major benefits. It gives about 1 to 2 orders, a factor of 10 to 100, in increased sensitivity and, in fact, it can measure certain chemical and pharmaceutically relevant small molecule classes that previously MALDI just couldn't effectively ionize. So it's a major progress, not only in research -- life science research mass spectrometry, but, in particular, it will be very, very important for pharmaceutical and biopharma mass spectrometry or MALDI imaging, which is one of the -- we're the market leader there. That's been a nice market niche that we've been growing. But with MALDI, I think by -- with MALDI-2 -- with the new MALDI-2 announcement, I think we'll convince even more pharma customers that their particular drug and metabolite distribution problems in drug development can be handled with even better sensitivity and, therefore, contrast by our timsTOF fleX solution. Moreover, the other innovations were all around 4D, 4-dimensional proteomics. This 4D isn't just a marketing gimmick, it's actually -- it's game-changing. It's very, very fundamentally important to have that fourth collision cross section or ion mobility dimension that increases the analytical capacity of the proteomics solution by a factor of 10, and you really do need that when you look at the entire proteome when you do short gradient runs for high-throughput proteomics or if you look at something like a microbiome where you may have 1 million genes instead of 21,000 human genes and that many more proteins and peptides. The last thing that I'll highlight before the Q&A is a new publication by our collaborator, Matthias Mann, that leverages deep learning and then accurate prediction of that fourth dimension of collision cross sections. Typically, when you do a human cancer cell line, you measure about 20% of the peptides that are in the human peptidome or in the human peptide universe, but he is now able to predict accurately -- very accurately from deep learning experiments the other 80%. So I think this is subtle, in a way, initially, but I think it's game-changing and really enabling that fourth dimension or 10x more powerful 4D-Proteomics, all with a very robust and high-throughput timsTOF platform. So with that, I'll pause, and I stole a lot of Juergen's thunder because that's all his new products and his new life science research solutions for pharma, pathology research and proteomics. And we are happy to take your questions.

Thanks for the intro on the data forthcoming out of ASMS. Maybe just pick up right there, Frank or Juergen. Where are we in the adoption curve for timsTOF Pro in proteomics now having come a few years post launch? And how do you feel about the uptake and how it stacks up so far versus incumbents like the Orbitrap?

Yes, Juergen, that's good for you.

Yes. Yes. Right, Brandon. That's a Good question, actually. I believe we have come quite far. Of course, as you know, we are not sharing precise numbers about our installed base and success. The most important success measure for us was, of course, finding wide global adoption by our KOLs. And I believe we can checkmark that. There's not a leading proteomics lab in this world and a respected and influential proteomics researcher in this world anymore who has not adopted timsTOF Pro as one tool to his laboratory set. Many of them may have other instruments in majority still, but suddenly, we have come that far that everyone recognizes the new capability besides robustness, besides speed, besides sensitivity, besides the fourth dimension we are offering, all of that combined opens new doors. I believe this is acknowledged in the community now and everyone who is leading has adopted, is in the process to adopt, has ordered some sort of. So we are very pleased with that success. And of course, it's also a great commercial success for us. I believe we have, most probably, more than doubled over the last 3 years since we are in the market -- our market share in that field. I'm not speculating here what it is versus the big incumbent of spec market, but certainly we are on a good path forward and exceed, I believe, a little bit even our own expectation. We are ambitious. We had ambitions when we launched, but I believe we are beyond what we expected and our ambition. So we are happy as last year I've been confirming to you, Brandon, that we are pretty successful. I believe I can echo that still this year. We are winning market share, no doubt about that.

Got you. Maybe just if we could pivot away from ASMS, Frank, we'd love to get your sort of latest views on how the business has continued to sort of trend over the last couple of months since we last got an update from you on the first quarter call and, in particular, what your current assessment is of the academic market. I mean I think there's, to some extent, a perception that the labs are shut down, 50% of those labs are shuttered right now. I want to sort of hear what you're seeing in terms of the activity, pace of reopenings and kind of the outlook for that important segment of the market for you.

I mean we had some Bruker facility closures. Sometimes, we did some accelerated vacations in April to save costs. Some facilities in France and Malaysia, we really did have to close for a while and then run with a skeleton crew. That's all ramped back up and are essentially ramping up. So by the end of Q2, Bruker will essentially be at full capacity or somewhere near full capacity. Our supply chain -- lots of complicated actions one has to take care of, but overall, our supply chain is holding up. So I don't think we will be capacity-limited. To the important question, the academic and government research sector and other nonprofits like a Scripps or a Max Planck Institute or something like that, very much what I said in the last few weeks, it's very clear that we are reopening this summer. One has to keep in mind, that's really separate from the question of whether universities will have their students, their undergraduates on campus in the summer or in the fall. That's the educational enterprise that's almost separate from the research enterprise. And everybody is gradually -- while some labs haven't been closed, right, the labs in Germany were never fully closed or most of them. In some countries, France and India, the labs really were closed completely. But now the major European and U.S. and Chinese and Japanese markets, the labs are reopening this summer. It's not a switch back on, it's gradual. Every department, every professors' group is going through their own planning of, okay, work from home as much as possible, wear masks, don't overlap at the bench or only with sufficient spacing. So everybody is doing plans, delivering them to their deans, but everybody is in the process. So by June, July, a lot of those labs will be opened. By the end of August, I think unless there is a -- I don't think there will be a second wave, but there could be local hotspots, right? So I think by the end of August, 95% or more of the labs will be opened and doing research in this new normal.

How much visibility do you have in terms of just what their budgets are going to look like, what their capital spending is going to look like? And to what extent at all -- have you seen any, I guess, order cancellations, if at all?

No, we don't get cancellations. Budgets that maybe they couldn't spend in April for an instrument, they didn't go away. Those things are available. And there's puts and takes or headwinds and tailwinds. I mean starting with the headwinds, right, some U.S. universities whose endowment came down, they may be a little bit less aggressive in spending, in hiring new faculty, in giving matching funds for an NIH grant. Although as the stock market recovers, the endowments are recovering mostly as well, to some extent, not fully. Plus they're more on a 5-year smoothing curve anyway. When in 2019, the stock market was up, I don't know, 20%, the endowments spent 20% more, and this year they're now cutting by 20%. But there is a headwind from endowments and deans becoming and provosts becoming a bit more careful in private universities. Federal funding, we think, will be very good, very strong in the U.S. Most of the rest of the world looks like it's essentially federally or the equivalent of government federally funded. In the U.S., there is a bit of a question mark about some state universities, but it's not necessarily the first year state universities with a big research enterprise. I'm not worried about the Ohio State University. They all do great. But some smaller universities, just as an example, of course, that are more geared towards their teaching enterprise for their financials, they may be hurting, but they're not our primary customers anyway. Some Chinese universities, they're reopening some. There's aggressive investment in anything pharma and drug and vaccine related. On the other hand, there may be a bit of -- there's some frugal living initiatives and things like that in some provinces where they're trying to slow down their spending a little bit even as they reopen. So I acknowledge a range of headwinds and tailwinds. It will be noisy for the rest of this year. Fundamentally, I think the academic markets will be back by September. And I think over -- as I look at more into 2021 and over a 5-year time frame, I think the life science tools spend -- smart space and diagnostic space will just get fundamentally very, very good funding. And maybe this time I think spatial omics and proteomics as we get stimulus funding, as we pull out of this whatever type or shape to recovery or after 2020, I think proteomics and spatial omics, not unlike the big boost that NGS, next-generation sequencing, got in 2009, '10, '11, I think, this time, a big scientific priority, because it is at an inflection point anyway and it is so badly needed in addition to genomics and transcriptomics, I think proteomics will see -- proteomics and spatialomics, and often they're related, of course, I think will probably see a very good boost, and we're well positioned for that.

Give us an update just in terms of state of the union, if you see it in China, there was a market down 25%, 30%...

Juergen, I'll also -- you have a big China and Asia business. So you have as much visibility as I do.

Yes. Yes, of course. Yes. So what do we see in China? I believe, yes, Q1 was, for us, disappointing from the business I'm heading. So we had a stronger expectation. Nevertheless, we see, since then, recovery. So Q2 starts off from a low base, but it's recovering. One can see we have received first orders for large instruments now again. So everything has been paused from the spring holidays in China, which created a break back then to the reopening of the country. So we see first orders coming in again. We kept doing a good in our clinical business. As you know, our MALDI Biotyper business even had seen some early uptakes and additional growth over the normal and the expected. So all in all, what we see is it's going slower. We also hear from our sales team, we had just beginning of the week some calls to discuss the market opportunities. There is some delay, some states different to other states. So it's not homogeneous across the board. It's not all in Beijing and not all in Shanghai. So when we go to other provinces, there are differences, especially in provinces where pharma industry is located. So the universities there are faster and picking up the business again and investing and collaborations they are having with their pharma customers. So all in all, it's restarting. It's a little bit slower. No question about that. For us, China was not the biggest market anyway. So we may be hit less than some of our peer groups. So overall, we see slowness. We are not correcting our expectation for the year, to summarize it. So we look for good Q3, good Q4 recovery, and we have healthy order books also. The books for China are in a healthy state for us. We are not empty. We were locked down from being able to ship and install. That's picking up again. So the revenue side is rebuilding. The order side is in a healthy state. And we expect this quarter's orders picking up slowly again, accelerating a little bit more in Q3 and, hopefully, more even in Q4 again.

And Brandon, keep in mind that if we have an order recovery in Q2, it may affect revenue in Q3 or Q4 or for some NMRs even into next Q.

Yes, that's right. Maybe, Juergen, sticking with you on CALID, I mean, you are coming off some pretty tough comps from last year. But where that business sits is more of a sweet spot in terms of the end markets relative to some other parts of Bruker. I guess, number one, do you think that business can still grow on the whole for '20? And then more at a higher level, just if you could just sort of speak to a runway that's left for MALDI Biotyper in the diagnostic setting?

Yes. Let me recap a little bit where we are. In April this year, we shipped and installed our 4,000 MALDI Biotyper globally. So we checked off that mark having now more than 4,000 instruments in the settings out there. So our number of installments is growing on the MBT side. So that business is still growing from an instrumentation expansion mid- to high single digit. The menu set which is used and the utilization of Biotypers we see growing. So the consumable stream going through this installed platform is more in the double-digit growth phase, and that's holding up, not a surprise, even gets -- sees a little bit acceleration in this turmoils of the health care system. So that business developed nicely. We have launched a new platform, which is sirius platform, which helps replacement and business is going on in those type of things. So that's healthy. The diagnostics business, which is part of that business as well, we are bolstered with the acquisition of Hain. As you know, we have completed the Hain acquisition earlier this year and own Hain now 100%. We see good growth in our mycobacteria business as well as the new business we have been developing around DNA extraction and COVID testing. So we see also good momentum there. So that business is in good shape and keeps growing very nicely for us at CALID. Our life science business wins market share in the proteomics or in the broader os space, proteomics, metabolomics, lipidomics, all of this large application space has grown nicely. So we see still a good uptake of our timsTOF Pro flagship product. And I am positive for the rest of the year on that product as well. On the CALID side, we see a little bit of drop back in our spectroscopy business, our infrared spectroscopy, applied markets, industrial research, that's, of course, suffering and seeing the headwind. So that's a little bit softer side of the CALID business overall. But all in all, in CALID, we are pretty positive for the remainder of the year.

Maybe, Frank, any update you could share with us as far as just where NMR backlog stands today, maybe some of your conversations around ultra-high field systems in markets kind of like the U.S. Is it still relatively early, I guess, in terms of their development and where you're seeing demand, which has, to date, been concentrated mostly in Europe for that -- [ these high field ] systems? So update there?

I'm on mute, sorry, caught myself. Yes, that business, we didn't slow down. In fact, you saw that we have the first 1.2 gigahertz acceptance in Italy of all places. That was pretty tough during their essential lockdown to install that in February and March and early April. So that got accepted in early April. For modeling purposes, keep in mind that the magnet is on a multiyear lease for that system and only the electronics and probe will be recognized in Q2. We have -- they came on social media. We have delivered a second 1.2 gigahertz system to the ETH University in Zurich, Switzerland, so it's already our second system that probably will not need a couple of quarters for its installation, but additional systems have come up to field and the factory. So that's all going well. As you've pointed out, there had been only one order from Asia and one order from the U.S. so far, although we had installed a 1.1 gigahertz system at St. Jude's, already in December. So I think the interest in the ultra-high field functional structural biology community in Asia and, particularly, in the U.S., is very strong now. And now that the proof in the pudding is there, these systems work, they also even are installed at customer sites, and they immediately do very relevant research, as I made it painfully clear how far behind the U.S. is in funding that. And there is a significant push with even more conviction by U.S. researchers to, over time, deal with that imbalance by simply providing that infrastructure in the U.S. as well. There's nothing very specific yet that I can point to, but the NMR community is now very vocal and convincing in the U.S. and, undoubtedly, also it's beginning country-by-country, of course, in Asia Pacific and pushing for ultra-high field funding. And there is still continued ultra-high field funding in Europe. More business and new orders will be coming through in the quarters to come. So it's not that the European market is saturated. We have the backlog. Of course, there's no cancellations in these things. We have the backlog. We have a very considerable backlog of well over $100 million. We're working that off. Obviously, so far, only one instrument -- or one 1.2 gigahertz and one 1.1 gigahertz installed from that backlog and accept it and plenty of backlog to grow for the next 2 or 3 years with that business.

Lastly, maybe just touch on capital deployment. You've historically, I think, kept a more conservative balance sheet, certainly, than many of your peers, which, I guess, in this environment is kind of an asset.

Yes.

Curious just how you think about capital deployment in the near term to the extent that you may be looking more aggressively on the M&A side, given the dislocation, what the M&A pipeline might look like right now.

While we're cutting expenses and temporary costs, we're continuing to invest in CapEx and/or Project Accelerate for capacity, for productivity, for operational excellence, for margin improvement. We haven't slowed down any of that. We're really pushing that through also in 2020, even though we're taking OpEx and other discretionary expenses down pretty significantly, as you've heard about $10 million to $15 million less in Q2. The -- there will be some smaller bolt-on M&A deals this year as well, I believe, although that's a little bit slower in the pipeline simply because of lack of travel, ability to travel and meet and things like that. So this is probably not going to be a heavy M&A year for us. But it's okay, I mean, we don't want to get distracted. We have such fundamental opportunities in 4D-Proteomics, lipidomics, metabolomics, in spatial omics, again, using mass spec tools and then in microbiology and diagnostics, driving those organic opportunities. And there are more of them. It's not only the ones that I've mentioned, obviously, NMR pharma solutions; obviously, functional structural biology by high field NMR. We're just pushing those very hard and with continued investment. So some bolt-on M&A, as in every year, but probably not too much this year, maintain our dividend. We still have a share repurchase authorization, but all of these things are more steady rather than that we swing from one to another.

Got you. Okay...

So unchanged in many ways.

We're out of time. I have to leave it there. Thank you, guys, so much for being here. Juergen, Frank, Miroslava. Good to see you, thank you.

Thanks. Bye-bye.

Thank you, Brandon.

Bye, guys.