Bruker Corporation (BRKR) Earnings Call Transcript & Summary

Maybe a related question, but for Gerald. Does any of this -- or what's happening with this AI thematic change, how you think about capital allocation?

I don't think our capital allocation decisions have really changed. I mean most of our capital is being deployed for innovation in the R&D field. After that, it becomes maybe more around our capacity constraints, particularly as it relates to some of the semi pieces that we've been talking about, where we've made pretty significant CapEx investments to build capacity. And then after that, we began to look at opportunities on the M&A side and certainly part of our dividend and kind of return capital to shareholders thereafter. But I don't think our priorities have really changed. I think we're hopefully getting back to a place where we've got the kind of -- we're building enough capital and cash flow to be able to get back to it to play the game at a higher level.

Since we did some sizable acquisitions in 2024, with the smaller acquisitions we've done since then tended to often strengthen our infectious disease and microbiology diagnostics business with NGS reflex testing with an additional capability to do fast AST to metagenomic software, again, an NGS application. We don't make sequencers. We know where to buy them. And then we get particular new capabilities on liquid array and direct from blood and on reflex testing and microbiology. We like, of course, at Bruker to also build out the aftermarket and consumables component. Years ago when we're a pure instrument or nearly pure instruments still meant 20%, 25% aftermarket service upgrades, et cetera. Now at least it's at 40%. It's probably going to go -- it's clearly going towards 50-50 as diagnostics, but also spatial biology have a lot more consumables and razor blade pull-through. So that remains an important area where we are interested. And then one area that we haven't mentioned yet is our recent [ Mi metas ] acquisition in the Netherlands, in [ Leiden]. We actually acquired 90% of the company because we wanted the founders and management to keep driving this. And every time you go to a -- this is about drug discovery and development and preclinical work. People want to complement their animal models, which there's not so much for ethical and economic reasons, maybe those as well, but primarily because often they just don't work that well, certainly don't work well in neurodegeneration. The track record in going from mouse to men in cancer drugs is horrible 95% of drugs do not tail probably because the immune systems are so different for humans. So they want humanized microphysiological systems or sometimes it's called [ NAMS ] for new approach and we looked at all the smallish companies in that space. There are quite a few that started up. It had a bit of a hype and then it had a dissolution phase. And we thought we picked the one that has the best content, the best organs on a chip -- humanized physiological relevance but also the best automation that's scalable because they use microtiter plates. And we're actually quite delighted with that. It's only about a $10 million business, but that could move to $50 million or $100 million over the years, plus it will pull in a lot of spatial and metabolomics proteomic tools sort of the tip of the spear. It is a very -- that AI and multiomics and spatial is actually a very, very high priority for drug companies. And as I went to some of these drug discovery meetings and I look at AstraZeneca and Novartis. I mean picking names in random, they all somewhere on their circle of things to do that are strategically important is organs on a chip, organoids, but you want to go beyond that because you want to have multi-organ capabilities. You want to have a little bit of an immune system that's simulated. So this makes us smaller acquisition is, I think, strategically another very, very important addition for next-generation drug discovery and development.

And maybe following on that point, are there particular therapeutic categories or disease areas that you're seeing particular interest in within the portfolio? Or is it more these kind of different approaches, looking at organ on a chip and trying to understand more of biology from a different perspective? What's the right way to think about that?

So they tend to be different companies in that space don't only have different technologies, but sometimes different content, and they have these different disease, disease area specializations there, cardiovascular metabolic, cardiovascular disease, vascular problems, of course, cancer play a significant role. For our other tools, I think it's -- a lot of it is oncology-driven spatial biology eventually merging with tissue diagnostics or complementing tissue diagnostics that tends to be not only, but primarily for oncology, tissue pathology. And autoimmunity and neurodegeneration are runners up, I would say, but I think oncology is the most important one.

Got it. And when you evaluate whether it's a company or even a new instrument or technology that you think about developing more organically, where is it today that you're kind of most focused and what kind of separates -- or how do you think about the ultimate commercial potential versus what's critically important from a scientific perspective, even if it may be more niche. How do you balance those?

Well, we still sometimes find niche or technological opportunities where we can innovate because we can technologically leapfrog or do something very, very differentiated but we more and more look at the overall disease biology actually and say, okay, well, if metabolomics and small molecules are an important part or I could pick something else come maybe I'll take a second example in a moment. Well, what's really required. Not only do we have a hammer and do we have a screwdriver and what can I do with those 2 tools? But what's the toolkit that's required, what's generally available tends to be sequencing in our case because we think there's plenty of options there. And so what's really required to get a deeper understanding to make drug discovery more successful, ultimately, maybe faster and cheaper and/or to make biomarker and diagnostics discovery for cancer and other applications more successful, more differentiated and with a shorter value of death or whatever they call that. And so we then didn't build the [ Tim's omni ] because we could, because we said, "Hey, we have a wrench that nobody else has, what do we do with that?" We said, okay, proteomics or bottom-up proteomics, which is proteomic 1.0. We really need to understand these functional or pathological molecules we need to understand intact proteoform. That is so hard, but why don't we take a big step forward in that. And now we can characterize antibodies and now we can have better tools for immunopeptidomics. They also help us in targeted protein degraders. These are not things we all figured out upfront, but these are things, as you learn, oh, my God, we have new applications. It's fantastic fundamental we thought we've got to get from gene expression at an average protein group level to proteo farms because that's where the pathology occurs. That's where drug targets can be very different depending on whether they're [ glycoxalated ] or where they're glycosylated. Hope -- it used to be hopelessly complex, and there was no lamp post. So people said, well, then I won't go there because I can't see anything. But now there is a flashlight and it gets stronger every day. And now people say, yes, absolutely, that's what we need. That's why very unusual for the [ TIM's Omni ] technology and proteoforms that pharma invests so early in the new technology. Normally, they leave that in academia for a few years. Right now, they're half or more of our business because they know how much they're missing and how it might benefit them to have a much deeper understanding of their disease biology and of their targets and mechanism of action, not just shooting more bullets at their target, what if it's not the right target or what if the target is really a mix of targets and you need to understand that in a better way. So it's -- the short answer is much more driven by customer needs and overall NMR, mass spec, other vendors, cryo-EM or alpha fold integration to get the best information on [ multiomics ] structural and dynamics binding interactions in function is sort of how do we get functional deeper functional information. And then, okay, that range or that hammer over there, we could make that better and more sensitive or higher throughput or whatever it may be. And that I think has also led to higher margin products for us because we don't compete. We still compete on technology, but very often, we have very unique solutions that got nobody else can answer these high-impact questions.

Right. Perhaps shifting gears to diagnostics, you all recently established microbiology and infection diagnostics as a stand-alone group. What does that structure allow you to do differently? And how are you -- how would you like investors to think about what you're doing in diagnostics more broadly?

Great. Yes. So yes, that's north of $500 million or $550 million business that's grown so rapidly. It also has -- it had in organic growth with the addition of the [ Elite ] molecular diagnostics business, that's a delight. Again, this year, they're placing their genius, ingenious, [indiscernible], systems ahead of business plan. They're growing very high single digits, sometimes above double -- just into the double digits. Just like the S curve is highly nonlinear for a while, they were steadily improving their margins in the mid to upper teens and now all of a sudden, they're jumping well into the 20s. So it's a beautiful business. Overall, microbiology, infectious disease, including some other product lines, we think there's a lot of opportunity for innovation. That's been somewhat of an area that was not very innovative in recent years. And innovation with impact, not so faster the syndromic panel market and others, [ BioMeriein ] particular, have shown how important that market is, but it's still expensive. Can we bring that into the mainstream? Can we do sepsis detection better? Can we, in some cases, by NGS or other means do it direct from blood, things that shave off a day or 2, which may be critical and life-saving or shortening the ICU time for a patient and also improving the long-term outlook and recovery. Are there things that have a big medical impact and unmet medical need? And we just found by focusing on that area. And yes, we're not in MRD, that's a wonderful field, but we're really, really good at this, and we have a unique and pretty broad set now of tools, including some of the new NGS applications on other people's sequencers that are really coming together here in terms of -- I think we're the innovation leader in much of that field. And we've been enough of a niche strategy that we're not directly colliding with [ Roche ] or Abbott or [ Hologic]. And that's good. Sometimes they need our more specific MDx tools as part of their big tender for a big university hospital because we take care of some of the long esoteric tail. But esoteric tail sounds a little underwhelming, but it's actually a nice market and had some very nice right to exist and nice margins plus some of these new capabilities. So it's very exciting. Allow me one more comment. Longer term, having that diagnostics business that right now is microbiology and infectious disease, but so many of our protein proteomics, epidomics as well and then spatial biology tools kind of -- when they grow up, some of them will be in LDTs and in regulated IVDR and FDA diagnostics and therefore, having a diagnostics business with the experience, the regulatory apparatus that you need in Europe, in the U.S. and other countries is really very, very important. So that we don't all of a sudden have to hand that over to someone else when maybe the margins and the sustainability of some of these today are [ UO ] proteomics or spatial biologies transition, at least in part towards the regulated higher barriers to entry higher-margin worlds, which were -- which we think will inevitably happen, and we want to drive that and not get stuck in the RUO world.

Right. Maybe a question for Gerald. Given where we sit today, how are you -- what are you seeing in terms of growth for the rest of the year in terms of the markets and some of the different end markets that Frank mentioned across the tool side of the business versus diagnostics? What's most important to understand?

I think the first point is that for us, fiscal year '26 is still reflected a relatively gradual recovery in the overall market. We are seeing really solid signals that many of the elements of our market are starting to really improve. I'd say probably the #1 piece is biopharma for us. we saw really strong order growth in the second quarter even on a first half perspective, it was quite solid for us. I'd say in the other end markets, we've talked a little bit about semi, mostly being driven by the AI demand field, but that's staggering order growth levels for us actually in the first quarter and the second quarter. So continue to feel quite solid and optimistic and encouraged about that. I think the other areas outside of the U.S. for academic and government research end markets were quite strong for us. Here, we're talking about at least in the second quarter, greater than 20% order growth for us outside the U.S. and [indiscernible]. And then I think the other piece that's quite important for us because we had not seen this in a more sustained way really was China. We saw strong order growth greater again than 20% order growth in the second quarter. And we're continuing to see solid order performance in China across a broad spectrum of categories, whether it's semi, which we can still sell a limited number of products into the semi field in China, but that's quite solid. I think biopharma quite strong. And encouragingly for us on the academic and government research side in China also performing quite well, not only in the second quarter, but what we've seen so far thus far into the third. So China seems to be -- I mean this is a major headwind for us, especially in 2025 with a couple of quarters of good solid China order growth that will help propel. This will not drive most of our '26 performance, but certainly help our '27 performance dramatically. So solid on those sides.

Great. Maybe just to close it out, Frank, what's one thing that you wish more investors have understood about your business?

The one thing, I think I'm actually delighted that deep tech and semiconductor people now understand that better, the [ Fusion ] world, the defense world, that's smaller, but it's also coming along. I think the I think the transition of our mass spec NMR and of our spatial biology tools in how impactful that will be to have a deeper understanding of disease biology 2.0 drug discovery and diagnostics biomarker development, how compelling and differentiated that is, I think isn't that visible yet because initially, some of the more late-stage biopharma and bioprocessing have been the better growing areas. And they were underrepresented. And so other companies have done remarkably well with -- and resumed growth earlier. I think as we come back to growth, we may well get back to the 200 to 300 bps long-term algorithm, above-market algorithm for growth that we've had maybe by '28, but we may also get into a [ Hyper ] is strong, but a very strong growth phase as we had in '21, '24. We're setting ourselves up for that. And if that doesn't succeed getting to do 300 bps above market, is a very probable scenario, but I think there's a very significant upside to that.

Okay. Great. Thank you very much for joining us.

Thank you. Thank you. Thanks for having us.