Revvity, Inc. (RVTY) Earnings Call Transcript & Summary

Good morning, everyone. This is Derik De Bruin, the Bank of America life sciences and diagnostic tools analyst. Welcome to the 2020 Bank of America Virtual Vegas Healthcare Conference. We appreciate everybody dialing in. We appreciate everybody being accommodating in this new world that we're living in, and your patience as we sort of work through some of the kinks in the process. And we just want you to know that we really appreciate all your interest in the name. So to kick off this morning sessions on the life science tools side, we have with us PerkinElmer. Today, with -- from Perkin, we have Chief Executive Officer; Prahlad Singh; CFO, Jamey Mock; and Bryan Kipp from IR is on and my associate, Mike Ryskin, is on as well. And with that, I'm going to turn it over to Prahlad, and I think you've got some opening remarks. I think there are some slides that you want to go through to give a little bit deeper dive into your COVID portfolio and some of the other things. And I'll turn it over to you before we start the Q&A. Thanks for being here. All yours.

Thank you, Derik. Thank you for the opportunity. And again, I appreciate you guys doing this, especially given the new format and new circumstances that we all live in. I just thought it was opportune that while Jamey and I had a chance to talk about our COVID capability and what we have been doing around that is that given that that's front and center of all our mind, I would just kick it off by providing a little bit deeper dive into our capabilities around COVID. And the slides, I presume, are posted on the virtual webcast. I will start by just sort of pointing you out to our safe harbor statement and drawing your attention to that. But as you sort of move to Slide 4, our focus at the beginning of this pandemic was around 4 things, right? The 4 pillars that we focused on were on response, ramp, redundancy and what the outcome of that would be. Our #1 priority was when we started was safety first, right? How do we employ health and safety measures across our functional teams and sort of do that in a way that we continue to serve our customers with the broadest and the highest quality of COVID offering that we could bring to fore. We also sort of went from 0 to 1 million tests per week, and that ramping up capability was very important as we started bringing products to the market and through regulatory processes, both in CE and FDA approvals. The thing that we also realized and became very cognizant of that it was very important to build redundancy, not just from a product perspective, but also from a supply chain perspective, initially, given issues around logistics risk, regulatory hurdles, et cetera, that we enable building up of scale and having alternative options available, and I'll talk to you a bit in the next few slides as to what we have done towards that. But most importantly, I think what this has now resulted with our work over the past several weeks has positioned us very well that it allows us to drive positive outcomes across the globe and continue to make an impact on our customers by providing high-quality testing products. But all of this has been with the focus that safety is of the primary importance. So as you move to Slide 5, it sort of gives you an overview of our capabilities and footprint around the globe. And the reason that this becomes important is not just from a regulatory perspective, but also from a process of in region, for region. So having an ability, say, for example, in India, to be able to provide products in market because as most of you might know, India has sort of put a ban on exporting COVID-related products that are manufactured in-country outside the country. So having an in country, for country presence was important for us. We had a strong portfolio around extraction. The ability for us to now manufacture it at different sites across the planet, so that we can meet our customers' demand as PCR started ramping up early in February became important. And similarly, as in early April, we saw serology coming to fore, right, around antibody testing. So again, ensuring that we build our capabilities and redundancies is what our focus has been on. As you move to Slide 6, it sort of gives you an overview of our complete portfolio around PCR testing, starting with sample prep using our JANUS platform; and then moving on, the RNA extraction kits and instruments; again, there are different versions of it for developing markets and also for Europe and the U.S. as needed; PCR setup and then kits both from our EUROIMMUN subsidiary and from PerkinElmer, one which is EUA approved and the other which is CE Mark. We talked about the capability when we did our earnings call as to where we were on that day, and we continue to focus on ramping up our ability to provide millions of tests both around the extraction kits and PCR. Similarly, as you move to Slide 7, you'll see that even from our antibody testing capabilities, and even I have talked at length that how we are sort of letting science lead the way in terms of our ability to do serology testing. But the value proposition that we bring to fore to our customers is all the way from collection devices, to automation and different modalities of detection, be it chemiluminescence or ELISA. As you look to Slide 8, I think the focus for us has been is not just around PCR or antibody testing, the benefit of our portfolio now is that we bring to our customers capabilities that extend beyond diagnostics. For example, with our applied markets customers, we've been able to work and provide applications that allow them to do fast and reliable quantification of alcohol in hand sanitizers for the FDA and WHO requirements. With our discovery portfolio in life sciences, we are providing assays for virology research, which is going on in all the big pharma and small pharma companies to find therapies. And then on the informatics sides of the portfolio, right, providing our customers and pharma and biotech with templates that allow them to qualify antibodies or solutions that would help them in the analysis and promote drug discovery. So our focus has been in providing a breadth -- the full breadth of our portfolio to tackle this pandemic. However, the thing that we have focused on is basically that our guiding principles have been fourfold. Number one, ensure the safety of our employees and company; number two, ensure that we fully leverage our expansive capabilities to fight against COVID-19 and ensure that we serve our customers with excellence. But I think that the fourth and most important thing is that while all this is going on, we want to ensure that we emerge from this crisis as a stronger company. If you look at our breadth of our portfolio around diagnostics, we have been able to start all the way from collection devices, automation, liquid handling to the kits and the software platform as needed. But while all this is going on, in real time, we continue to innovate and deliver solutions to our customers with more rapid speed. And the way we have done that is that all the work that we have put in over the past 1.5 years in bringing the organization together and empowering our leaders and removing layers is now bearing fruit. And we continue to be confident that PerkinElmer will emerge from this crisis as a stronger company. So Derik, I just sort of wanted to use the opportunity to provide an overview of what we have been doing specifically around COVID and then sort of provide a deeper dive into it than what we were able to do during the earnings call.

Yes. No, that's great. And you preempted a bunch of my questions. So that's good. But I appreciate the detail.

So Prahlad, I'm sitting here looking at your conference call and looking at your slides here, and I'm just sort of thinking back, I mean, the first time I hosted PerkinElmer for a conference was all the way back in the early 2000s when I was -- when I was an associate at Salomon Smith Barney. And I go back and I think about what PerkinElmer was in the early 2000s and where the company is today, and it's a vastly different organization. And I think can you just -- I think it's a good perspective to offer to investors to think about how the company has transformed over the last decade? Because I don't know if it's really -- I don't know as many people appreciate just how much different the company is.

No, Derik, it's a great and timely question. Our earnings call was on 5th, and I think it was my sixth year anniversary with the company and Jamey's 2 years. And we were sort of having a discussion as to what has happened during this period and beyond. 2019 actually marked the end of our 5-year plan. So let's go back and look at the 2 previous 5-year plans that we've had in place. In 2009, we had about $1.5 billion in revenue and about $200 million in operating profit. And essentially, the company was organized more like a holding company with several independent businesses that played in multiple market segments. And I can only imagine the role that you guys had to play in trying to figure out what was going on a decade ago. But as it progressed, at the end of 2014, we were about $2.2 billion in revenue and about $400 million in operating profit. And we were structured more around technology verticals of human and environmental health. But just fast forward toward the end of 2019, we were almost $3 billion with around $600 million in operating profit. So over the past decade, we've nearly doubled our revenue and tripled our operating profits, while increasing our margins by almost 800 basis points. So if you factor below the line items, we almost 4x earnings per share over the decade. But more importantly, strategically, at the same time, we've moved away from being more of a holding company model to one that is a focused operating model, starting with aligning our businesses around a clear long-term strategic plan, which is behind the 4 key pillars I've talked about earlier. Number one, focus the portfolio in attractive end markets where we have a right to win, i.e. more heavily weighted towards diagnostics and life sciences and now recently food. We've shifted the product mix towards more recurring revenue streams in reagents, services, software and consumables. We've diversified and strengthened our geographic presence to take advantage of emerging market opportunities, specifically in China and India. And most importantly, we've continued to be very acquisitive and our M&A activity has worked to rapidly shift the portfolio using our balance sheet in addition to internal resources. So I would say, we are a very different company and a lot has changed over the past decade.

Great. And so as you sort of take over the helm of the company and you look forward on this one, it's like what's -- I guess, what is your -- how do you sort of see the company evolving from here? And really, what do you think is the biggest underlying competitive strength of PerkinElmer?

I mean, Derik, we view the breadth of our capabilities, and I provided sort of a snapshot à la COVID a few minutes ago and our relative size, around $3 billion in revenues, has unique competitive strengths. We've got strong competencies in the markets we operate. We are spending around a couple of hundred million dollars per year in R&D. But we have a top 3 market position in about 65% to 70% of our product lines. So what do I mean by that? What that data suggests is our relative size actually allows us to be nimbler in responding to evolving market dynamics and customer needs. Our breadth also allows us to marry technologies and create full workflow solutions to simplify processes for our customer. And given our size and breadth, we also have areas, which are white space, which we can take advantage of and essentially do more inorganic or organic investments to expand our served addressable markets. And going forward, I would say that we should expect the company to continue to be more nimble, more innovative and definitely more acquisitive as we continue to further enhance our position and right to win in the marketplace.

Great. So let's break that down and sort of talk about coming out of the first quarter, you were down 1% organically, I think which is better than what we've thought, basically, both DAS and diagnostics were down the same bit. Can you talk about some of the geographic headwinds you saw? I mean, you have big businesses in China, France and Italy, in India. How are those regions rebounding as social distance measures are eased in some of those areas?

Yes. I mean as we talked on the earnings call, in the first quarter, China for us declined nearly over 30%. Europe overall performed well and was up in double digits. India actually declined double digits because the government put a ban on all flights coming in and out of the country. And import -- export restrictions still are in place. More importantly, the COVID-related shutdowns impacted March pretty severely there. In terms of regional rebounding, I think China is probably the one that we are seeing as a guide as to how countries would shut down and reopen. China, as we saw, went from a total shutdown to a gradual rebound in business activity as the social distancing measures were eased. And I think what we are also seeing over the course of the week, over the course of the past few weeks, that it's going to be more like months and not days as things open up. France and Italy have started to ease restrictions. I think it's too early to say that do we expect a similar pattern in Europe as we have seen in China? Obviously, governmental measures and the -- plays an important role as to how they are implemented and followed by the general population. In India, we expect business activity to continue to remain muted for the time being. I mean I just read a statistic that in the month of April, there was not a single car in the whole country that was bought, not 1, 0, 0 cars were bought in the county. So I think different countries will have different measures in place. And I think the way we look at it, our ability to have products in country, for country and in region, for region, allows us to be nimble and serve our customers as needed.

Great. One of the questions that came up a lot after the earnings call was, I think people were asking questions about the serology portfolio and particularly how you're thinking about these products and relationship to the fact that you do have some other bigger competitors out there on the market. So can you talk about how your serology or your immune business is positioned relative to some of the bigger players in the market? And some of your thoughts on pricing and sort of like demand for those products?

I mean -- so Derik, I'll try and break the question into 2, 3, right? One is our position around serology and the second is around our total portfolio for COVID and pricing, et cetera. In terms of serology, the reason that we feel very confident with our portfolio and our offering is the fact that we are letting science lead the way. And I think there is still -- the jury is out in terms of whether a level of antibody titer or ratio tells whether one has immunity or not. But outside of that, from a diagnostics perspective, we feel having a highly specific IgG test that, post 3 weeks, gives a very high level of sensitivity is what is most important. And I think focusing on the S1 spike protein for our IgG early on has given us the competitive edge. I think LabCorp today came out with a press release that they are going to use dry blood spot cards with our serology kit that is going to allow employees to sort of do testing from home. So our focus is, let science lead the way, work with our customers to provide differentiated solutions that allows us to continue to be successful. So it's -- again, in order for us, as you pointed out, there are all the big players in the market. But I think where we are focused on is to provide something which is differentiated from what everyone else is doing. And in terms of -- sorry, Derik, go ahead.

And when you look at the -- go ahead. No, go ahead.

No, the second part of your question was around pricing. I think in terms of pricing, molecular testing is the highest, we've said around $10 to $20 range. Serology is the next one, I would say, in probably single digits and RNA extraction kits are at the low and probably a couple of dollars a test.

Great. That's really helpful. And sort of like how do you -- can you -- when you look at your second quarter numbers, you've got quite a bit into your -- the COVID tailwind. I think you're talking about a plus 8% to plus 15% tailwind. How sort of that in terms of RNA extraction versus molecular versus serology, just sort of a -- can you give us some sort of relative idea on the mix?

I think in terms of breakdown, I would say, our assumption is around 50% serology and 50% molecular testing and RNA extraction. In terms of, I guess, the more weighted part of the question was sustainability. I think it's anybody's guess, Derik. I think we have visibility in the second quarter due to our backlog and current order trends. But beyond 2Q, the visibility becomes much more opaque. I think the RNA extraction kit demand will be somewhat correlated with RT-PCR testing volume across the globe. Most molecular tests are utilizing extraction reagents, and we expect that demand to continue till extraction -- till PCR continues. We are also working with partners who are doing epidemiology studies related to COVID-19 that will last through at least the end of the year. And there are some large institutions that we are working on to make that happen. So we have some visibility as we look into the second half of the year, but the landscape is, I would say, far from clear.

And I guess, how do you -- there's a lot of questions about returning to work and how testing is going to be utilized, I mean, since you obviously have all the tools, how are you going to be utilizing testing for your employees?

I think we've started -- what has become -- it was very pertinent for us, especially when we looked at the portfolio that we were bringing to fore. So the number one thing that we've put in place, Derik, as of now, is that the only employees that need to come into work, need to come into work. Productivity, honestly, has not gone down. And if anything, it's gone up from working from home. Our focus was primarily around manufacturing and R&D. And what we did on the operations floor is very early in the process, in February, we divided our manufacturing sections in terms of floors, subsections, subassemblies, so that if there was something happening in one place, it did not impact the other places. So workflow, movement of products and subassemblies and assemblies became very important. Similarly, on R&D, right, staggered workforces coming in at different days, that's the primary step that we have taken so far. As we look forward, we are working with the Mass Biotech Council and our regional peers here locally, and we are working more as a cohort to see what we do, whether those are -- as this moves forward, whether it will be temperature checks or tests, I think it's still TBD, early in the process, though.

Great. Let's move on to the DAS segment. And I think the biggest question we're getting from investors is, when do you think [ those ] customers will return to the lab? I mean I realize you're put into life sciences and food and like that. So I think if you could do some general thoughts on where those markets are right now? And when do you expect to see people returning to work?

Yes, Derik, I think you probably will hear similar themes from us as you would from all our other peers, right? I think there's still too many unknowns to opine on when conditions will get closer to normal for our DAS-related customers. We've seen some of our large pharma and biotech customers starting to talk about when they might relax stay-at-home policies similar to us. Outside of pharma and biotech, I think academic and government labs timing will be very highly variable. Some labs are deemed essential and are actively helping combat COVID. But others are still closed and could remain so until students return to universities, as an example. I think it will be hard for universities to fill open roles for research, assistance or support staff or graduate students being away from campus, which could actually impact the normalization process. I mean it's not very dissimilar to what we saw early on in China that even though when universities opened, I mean, the first 2, 3 weeks were still -- still they are focused on around what safety measures, what processes that they bring into place there. In core industrial and environmental, I think fine chemical producers and those that help support PPE manufacturing, et cetera, could see that -- we could see some increased investment there in analytical tools. But outside of that, I think it could take months to years for capital investment to rebound in those markets. At least that's the assumption that we are moving forward with as we plan out.

Can you -- I think it's an interesting point on that. I mean the company is obviously a lot less cyclical and tied to capital equipment and then purchases than it was in the past. I guess what is your basically cyclical exposure? On top of the COVID situation, we also are facing a massive great recession. Can you sort of talk about the cyclical exposure of the company now?

I think -- I mean, if you look at it as -- us as a company, I think we are 1/3 right now around instruments, right? And 2/3 of our portfolio are more around -- diagnostics, let's say, as an example, is 40%, 41% of our portfolio. So let's start with diagnostics, right? We've seen around our applied genomics and COVID-related businesses continue to gain traction, right? Our reproductive health portfolio, as an example, had a significant downturn in China. We don't expect that to be similar to that outside of the China marketplace. So I think that will start coming back. And similarly around autoimmune, right? Once the market start opening up, that will start coming back. So I think the ramp-up for the rebound around diagnostics will be faster. Similarly, around life sciences and food testing. Food testing will continue to become more and more of an important player. I think the piece that is around industrial and environmental, which is, what, around 11% to 13% or 12%? Yes. That's the piece that I think that will take a little longer to rebound. And then I think it's anybody's guess at this point of time that these cyclical end markets how long that would take. But if you have to keep in mind, Derik, a decade ago, we were over 40% exposed to industrial and environmental safety end markets. So compared to that, we've come a long way, and I think that's the piece that will continue to make our portfolio much more resilient to such a, I would call, black swan events.

Great. We're coming towards the bottom of the...

Derik, can I squeeze in --

Yes.

Can I squeeze in a quick question, Derik?

Sure.

Prahlad, sorry, just a quick one for me. This is Mike on Derik's team. I appreciate all the color you provided on the various workflows for both antibody testing and RT-PCR you had on Slide 6 and 7, really helpful overview. But going back to your earlier comment on the LabCorp press release this morning about the fingerprint test and the offering there. I just want to ask, in recent days and weeks, for other vendors, we've seen a lot of debate back and forth about the actual specificity and sensitivity of some of these tests. Even things that seem to be really well-validated as 99.9% specificity are coming back from the field and some people are saying, "Oh, potentially, you're seeing 5%, 10%, 20% error." Just thinking bigger picture, as you move from some of your sort of more central lab offerings, some of the more automated tested you would think would have higher accuracy as you move to some of the point-of-care and decentralized, how do you ensure that other sources of error aren't being introduced into the system, whether it's user error, sample prep, transport logistics, anything like that? Because from our understanding, if you're getting even 90%, 95% specificity sensitivity, you're losing a lot of value of the test. So as you see yourself moving from -- or providing offerings, not just in the central lab, but more decentralized, how do you ensure you still have sort of stability and confidence in the test?

It's a very good question, Mike. I think the thing is that what you have to keep in mind, and specifically, there are 2 parts to the response to the question that you asked, right? Keep in mind, as it relates to the LabCorp press release, the test is the same, right? It is the same ELISA lab-based test. The only difference that we are working with our customers is to the avenue of the sample collection. And if you put that in -- to put that in perspective, right? With our reproductive health customers, all 4 million babies in the United States use our dry blood spot cards. So it's something that we've got a lot of expertise and competencies in over the past several decades. So it's the same puncher, it's the same extraction methodology. And what LabCorp has done is they have validated it on serology. So you're absolutely right that what will become important is not probably as much the manner or matter of collection device, but the test. And I think having a test like the one which we have for IgG, which is highly sensitive and specific post 21 days, to demonstrate the level of IgG and the titer and the ratios in the bloodstream is going to be important. And I think keep that in mind, the reason that is important is that as the infection rates are still low in the general population and as you pointed out, even 5% to 7% of false positive or false negative, can have a big impact on the overall population.

And with that, we're out of time. Thank you, gentlemen, for participating and thank all those audience members for listening. Have a great day, everybody, and be safe. Thanks.

Thank you, Derik.