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

Yes. As you know, it was -- cannabis was a significant sales driver in the year 2019 and has been 0 through the first 3 quarters of 2020. So we are starting to see signs of life. I just had a review the other day, and there are interested buying partners on the other side. Most of this is private investment. There's not a lot of banking behind this. So a lot of it is money that was on the sidelines as COVID kind of hit here, and I'd say money might be coming back out. And so I think we're encouraged that it might not get back to the 2019 level in 2021, but I'm quite confident there will be some growth and some revenue in 2021. And I would just say, longer term, I think the trends of cannabis usage are growing. And so what we invested in at the beginning of the journey here and continue to invest in, in 2020 was to make sure that we had a full workflow. Obviously, it's centered around our QSight, but there's many other instruments. We added reagents. We're trying to add software. We're trying to add diagnostic testing to it. I believe in the long-term trends of cannabis. It might be short-term impacted right now, but I think longer term, we feel quite encouraged by it.

Maybe the way to start or to at least finish anyways is, to your point, innovation within DAS and where you think we should be focused most when we think about how the portfolio is evolving and where it will continue to evolve. I mean that's a lot of the Perkin's story, I believe, right, is that the business that you had several years ago isn't the business that you'll have in the future. What do you think we should be thinking about when we compare DAS offerings and when you think about how you're positioned to grow differently in DAS as a segment?

Yes. I mean so what we'd like to impress upon investors is that innovation is not just 1 product, it is a better cadence with higher quality and faster speed in general that we are trying to learn in this company and to drive in this company. So in life sciences, which makes up more than half of the DAS revenue, if you break down our imaging and detection portfolio of multimode detection plate readers or high-content screening or in vivo, which are our 3 large product categories, we have 2 to 3 upgrades coming in each product line over the course of the next 2 or 3 years. Similarly, in analytical technologies, AKA applied markets, if you look at spectroscopy, same thing, 2 to 3 upgrades. We just released the NexION 5000, the quadruple. We've got new upgrades coming in AA and ICP. So I don't think it's any one in particular. In Metcar, we just released the spectrum IR. In chrome yesterday, we announced our new LC. So I think it's more of a continuous innovation that we will bring -- upgrade all of our products on a 1- to 3-year -- at least some amount of upgrade, if not an all-new refresh. And I think all of our product categories have that going on right now, and that's what we've spent a lot of time on in 2020 to get ready for the coming years.

Okay. There was a point where Rob and Andy used to talk about contributions from new products. And you and Prahlad have not done that. I would imagine that maybe that's intentional. But is it fair to say if you're not going to quantify the millions of dollars that we should be thinking about that you can at least expect new product contributions to increase in the coming 12 or 24 months?

Yes. I think it's fair to say that innovation and improved customer experience and improved portfolio mix will make DAS a more consistent faster grower than in the past. And if you look at the last 3 years, DAS has averaged 5% growth, not including 2020, 2017 through 2019, which is faster than it was the previous 3 years by twofold. I think innovation is getting better, and I think customer experience is getting better. And I feel encouraged that we have a portfolio that can be a more steady grower here from a DAS perspective.

Yes. Okay. Let me switch over to DX, if I could. And I'll start with COVID, ask a couple of quick ones there, and then move on. Maybe the obvious place to start would just be the California contract and how testing is ramping up there. Then the follow-on would be just to ask about your expectations overall for COVID testing. I mean 300 million or so in 2Q, 350 million to 450 million in 3Q, so you're still on your way up. Does the vaccine news make you think differently one way or another? Does the infection spike make you think differently one way or another? Any high-level thoughts that you would want to give us into next year, I think, would be helpful for people.

Okay. So, let me try to break that apart. So California going, I would say, as expected. So we started taking samples right around November 1, and there was a break-in period that we always anticipated over the course of 2 to 3 weeks. I'd say, over the last 5-ish days, we've been taking more like 7,000 to 10,000 samples a day. And I think it's both a break in of the labor that's there to make sure that they are trained appropriately at all the appropriate stations as well as the instruments to make sure that they're performing well, and we have 6 or 7 lines there. So we have some redundant capacity out of the gate to make sure that it's performing well. And it's going as expected. So I think next week, we anticipate that, that will step up to something more like 20,000 to 30,000 samples, and we'll see where it goes from there. So that's California. I mean, as you know, we've always said that it should -- they basically wanted us to be ready for 40,000. We have the people and instruments there, and it's just in the break-in mode during this month. So I would assume by -- in the not-too-distant future, we're at 40,000. Where that goes from there is anyone's guess. What they're telling us is to start to get ready by -- to get up to about 80,000 by the end of the year. And so we'll start to bring in instruments, if that's the case. But that green light has not been given yet, so we'll see. Broadly, just in terms of COVID modeling, I mean, our view is that the vaccine was always coming out at the beginning of this year -- at the end of this year, and we'll ramp throughout next year and at some progression here. And so our view is that PCR testing would remain the gold standard certainly for the first half of 2021 and still be around likely for the second half of 2021, if not somewhat into 2022. And I think the role of the vaccine will have a significant impact on serology. I think measuring antibody titer levels not just once, but twice, 3x, 4x in a -- to make sure that the vaccine is working appropriately. So what is it at 30 days? What is it at 90 days? There's studies to suggest that titer levels might deplete and, therefore, immunity is not still there. So I think you'll see serology testing pick up substantially next year. And so I still think, unfortunately, COVID revenue will be pretty high next year is probably the best answer.

Yes. It would certainly feel -- it certainly feels like that could be true. And then maybe just to that point, I mean, what is the outlook for the pooling assay that got CE Marked for Europe? I mean when we were thinking about asymptomatic patient populations and how you go about tackling those, certainly, it felt like pooling was the answer. Or maybe not necessarily for next-gen sequencing or by next-gen sequencing, but PCR-based pooling seems like it has a future. Are you feeling like that's the case? And is there any early commercial traction that you're seeing there?

I think I would answer it by saying we always want to bring the best products to market, and I think this is another one. And we want to make sure that we are there with the right offering. And I was mentioning it to somebody earlier, there's no public official in the world that wouldn't want to reduce the cost of COVID testing in some way, shape or form. So if saliva-based asymptomatic pooling is the right solution for that particular market based on the prevalence rates, I think it'll take off. But I think it's difficult to predict whether that's going to happen. We're excited by it. We're happy and proud that we can bring it to market. And we've started to get some interest. But it's literally, I think, released last week, so a little too soon to say how big or -- also, again, it goes back to the prevalence rate of a particular population, and it's got to be pretty low prevalence for it to be effective and the right cost solution.

Okay. Maybe on EUROIMMUN, but non-COVID EUROIMMUN, what is -- how are you doing in terms of progress with automation and throughput requirements for the U.S. market? Because I think that's something Bryan and I have talked about over time, and I think you guys have made mention of just the differences between the things that you might need for the U.S. market versus the European market. And I don't -- I'm not asking to have you get too deep on the specifics, but the question is really aimed at that point, which is how do you view the evolution of the portfolio as it relates to giving U.S. customers what maybe the European customers don't necessarily need as much?

Yes. So we're excited. I mean I think the Euro lab workstation and our immunofluorescent analyzers have been growing nicely inside the U.S. recently, and we've got some more products to come to market. We've -- you and I have talked about, and we've talked about the fact that our new Excentis platform, which is a chemiluminescent random access instrument, high-throughput instrument, is important, and we -- that had been delayed a little bit due to COVID. We still plan to launch that towards the end of 2021 or maybe actually in the middle half of 2021. And then it's all about bringing the menu onto the chemiluminescent. So most of our menu is ELISA based, and we will move it to chemi based. And so I think you could see over the series of the coming years that entire menu that EUROIMMUN has move on to the Excentis and be both in autoimmune infectious disease and in allergy testing. Increasingly important inside the United States, and I think the Excentis is really going to help unlock that. But already to date, we've sold a lot of workstations and other analytical tools. And I think it's going pretty well and established a lot of different relationships, particularly over this past year.

Yes. Okay. And then sticking with EUROIMMUN and thinking sort of big picture, I mean, the EUROIMMUN growth rate is going to be pretty jacked up, for lack of a better word, for a while just given COVID and then the comps coming off of COVID. But if we think longer term and then we think back to EUROIMMUN prior to COVID, how should we think about the 12% to 15% growth rate that kind of felt like it was a landing zone for that business before COVID came into the picture here?

Yes. I mean I think our view was that EUROIMMUN brings terrific science to the table and that we had a lot of room for geographic expansion, including the U.S. that we just talked about, and that gave us the confidence to believe that we would be able to grow at 12% for the foreseeable future here. And I don't think any of that has changed due to COVID. I think, if anything, maybe it accelerated a little bit in terms of the uptick, particularly in the United States. But I think our -- their brand has grown through COVID. So maybe it helps give us confidence, but I still think that, that 12% that we've always stood by is the right long-term modeling rate for the business right now.

Okay. Maybe on the applied genomics side, and thinking about creating mindshare and just driving business on the opportunities that COVID is creating because it seems like that is a lot of what you're trying to do, right? You're trying to have people recognize that your products, even after COVID, are ones that should be used in the lab. Prahlad mentioned that you guys have placed 1,000 units in the system and in the lab base and that they should stay in use. What is needed to do that in order to really kind of make that business sticky? He also mentioned that you're working on a partnership group. What do we expect to come out of that? I guess, that's a way of just sort of asking for those of us that are wondering what -- how you will be in a better position afterwards than you were before, how would you describe that?

Yes. I mean I would describe it as I think our brand has been recognized now and that the highly automated, high-yield chemagen products are really, I'd say, turning to people's heads. The other thing, just as an aside, Dan, just recently, we actually reduced the protocol from 60 minutes to 30 minutes and doubled the amount of throughput for COVID testing related to our chemagen equipment. So I think you continue to see improved automation, high-quality yield, and I think customers will demand that in a post-COVID world as well. In terms of the partnerships, I think we have really tried to elevate our brand. And I think we have many new customers. I think as we've mentioned it before, we served over 1,000 customers for COVID. And now I think it's about how do you, in some future world, repurpose that workflow that I do not think will sit idle into something different. And so that's what the partnerships group is out there looking at. And we're excited by the opportunity.

Okay. We're ticking down here. We got a couple of minutes left, but I do want to hit on Vanadis and then ask you a margin question, and then probably finish with one capital deployment question if we have time there. But on Vanadis, I mean, I think I understand the dynamic in that 2020 has been a tough year to show up at a hospital and commit them to look at a new piece of equipment. But I am curious about whether you think 2021 can maybe be the year that 2020 was supposed to be? And then the follow-on to that would be, what is the expectation on the VALUE study and when we might see results there? When I looked on clinicaltrials.gov, the completion date was October 1 for that. Is that accurate?

So yes, that is accurate, and it's currently being written, and we expect it to be released in the first quarter of next year. I don't think it'll be by the end of this year. I think it'll be in the first quarter. So the study is done. Just to answer that. So can 2021, from a Vanadis sales perspective, be what we had anticipated in 2020? I think the answer to that is whenever labs open up so that we can get in and actually train and install labs, we'll be in a better spot than when we were entering 2020. So literally, I mean, we cannot send -- labs are shut down to some degree. We can't get field service engineers in there. We can't get salespeople in there. So it has been difficult. So most of this is digital kind of interactions from a selling standpoint, and I would say the interest due to the changes in behavior and change in payer rates is extremely high. So I think will that be January 1, 2021? It doesn't feel like that right now, given the current environment. Might it be by July 1, 2021? Maybe. So I think, Dan, we are more encouraged than when we entered 2020 that the commercial opportunity is greater than what we walked into this year. But when that time period -- when that clock starts ticking is the question still, and I think that'll be dependent upon access into the labs.

Okay. Yes, that certainly makes sense just looking out the window here. Maybe just on the margin -- the window that I have into Europe, that is not my local New Jersey window. On the margin side, if I look at the 2 businesses, the 2 segments, it feels like DAS margins are your best opportunity for improvement. Would you agree with that? And when I say that, is it -- do I also need to say that in order for DAS margins to improve significantly that you really need to be in that 5% to 6%-plus percent organic growth range in order to drive the leverage there? What are there operational things and mix elements that you think will benefit you maybe irrespective of what the organic growth profile looks like?

Yes. So I would say emphatically that we believe DAS has a lot of potential for margin expansion. I would -- I'll expand upon that. I don't think it has to be tied to growth, although that would help. I do think some growth is obviously important. Whether it needs to be mid-single digits consistently, I don't think that's the case. So let me just break down the levers here. Our analytical tools business, which makes up roughly 40% to 45% of the business, we recognize it's significantly behind our competition. We spend a lot of time on it, I've mentioned it in the past. We've got a lot of MPIs that are -- that have been totally redesigned from a cost-out standpoint coming out over the coming years here. We've also worked on significant processes from a procurement perspective. We have a little bit of site rationalization that should take effect here soon as well. So I think analytical tools has a lot of gross margin runway to go. We talked about services, which is $700 million or so of the DAS business. And there's -- we've invested in ServiceMax, we've mentioned in the past; the ability to utilize our field service engineers better and more efficiently with higher uptime in terms of billable hours, I think, is still significant; more remote technical assistance that I just talked about earlier; as well as attaching professional services into our enterprise business, I think, comes with a higher mix as well. There is a mix change ongoing in DAS as well. So Horizon will help that, Cisbio helped that, informatics helps that. So our reagents and software and services is growing at a faster pace than the instruments side. So I think you naturally have some mix impact. And yes, I mean, I think it's got to at least grow a little bit for some of this to come to fruition, but a big portion of this can happen irrespective of growth. And so we're excited that there is significant opportunity ahead. I mean last year, I think we ended at 19%, and that was up 200 basis points over the last couple of years, almost 300 basis points over the last couple of years before that. A lot of that came through the gross margin line. I see no reason why that can't repeat over the next few years here. And it should probably -- and it's probably a longer runway than that, to be honest.

Yes. Okay, that's helpful. I want to sneak in one more. I think we're at 1:50 my time, but I do want to sneak in one more just on capital deployment. The Horizon acquisition, $400 million or so, but it does seem like there is the potential for you guys to do more if I just think about cash flow generation and some milestone payments and then the potential use of the balance sheet in terms of debt. Is additional M&A on the table? And if it is, what kind of leverage ratio do you think would be tolerated for the right acquisition?

Yes, for sure. M&A has definitely helped transform our portfolio. You talked about the EUROIMMUN and chemagen and Cisbio. And some of the assets I was just talking about that have helped us in the COVID world all came from recent acquisitions. So we certainly know that M&A has helped transform our portfolio. We're excited about Horizon. So expect it to continue. We will always work with the rating agencies. I meet with them quite a bit. And normally, they like about 3x leverage, to be at not more than that level. I think we'll end the year at more like 1x leverage, so at $1 billion of EBITDA. That's a couple of billion dollars of capacity, not including Horizon. So -- and we still have strong cash flow generation next year, so -- which we've been improving over the last few years. So I still think there's a lot of room to grow, certainly from a balance sheet capacity and from an appetite from our team.

Excellent. Okay. Gentlemen, let's leave it there. I'll say thanks for joining us. Stay safe, and enjoy the Thanksgiving holiday, if I don't talk to you guys.

Yes. Thanks. You too, Dan. Thanks, everyone.