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

Good morning, everybody. Thanks for being here. It's Steve Beuchaw from Wolfe Research. We're going to have about a 25 -- sorry, 35-minute conversation here with Prahlad Singh and Bryan Kipp from PerkinElmer, the company's CEO and Head of Investor Relations. Guys, thanks for being here.

Thank you for the opportunity.

Prahlad and I were just chatting, and he reminded me, and not that I needed the reminder, I was thinking about it as well, that it was actually the first fireside chat last year at the first-ever Wolfe Healthcare Conference. So he will forever be an important part of the lore of this event, whether it's in-person or virtual. So thanks, again, Prahlad.

Welcome, Steve.

I wonder if we could start with some perspective from you as we sit here in the midst of this very tough year that has, in some ways, been a really good year for PerkinElmer. How do you want to frame up the path for Perkin from here for folks who might know the Perkin of 2019? It's a different exercise with Perkin than it is with some because you're not just growing quickly, but you've taken a lot of share, and you've been able to act in a very timely way with position in some markets that are of particular importance amidst COVID. So I've got some details I want to ask around that point. But maybe I'll just -- I'll leave it there. How do you describe to people what you think Perkin looks like in a post-COVID environment relative to what we might have known the company as a year ago?

No, Steve, in order to sort of look at the future, you've got to -- in order to gaze into the future, you have to, to some extent, look back into the past and sort of trace your footsteps to see where you've come from, where you were. In the past 5 years, we've put a lot of time and attention and focus on transforming our portfolio. As you know, I've talked about this. We've aligned ourself into attractive growth end markets. We've expanded our geographic reach. We've been very acquisitive. The Diagnostics business, since I've been here, has gone from $450 million to $1.1 billion last year and $2 billion -- north of $2 billion this year, obviously, with COVID. But more importantly, I think a lot of it -- last year, for me, was recognizing that there was a need to create a better organizational foundation to position ourself for the next phase of growth, and we consciously reduced the friction between DAS and DX. We were too complex as an organization for the size of company we are. And we did that by combining the commercial teams by uniting R&D. And essentially, it has been a -- fundamentally a mechanical shift in the thought process and then the way we've functioned as a company. Well, most importantly, a lot of my time and attention has gone in actively changing and evolving the culture of the company and across the organization. We are evolving about how we think about our competitive position and the opportunities that lie ahead of us. But fundamentally, we are a life sciences and diagnostics company, and that is where our focus would be. Now if you ask me to gaze into the future, what I would say is that you should see us 2 to 3 years from now to be 80% of our portfolio in the diagnostics and life sciences side of the business, which obviously, along with it now, has the repercussions of enhanced margins and higher growth. My focus has been around 3 things recently: around innovation, customer experience and people. I personally review one key NPI every week. And the thought process is not to just get an update around the NPI but more how do we drive behavior of collaboration and cooperation across commercial, product management, R&D, operations and other functions. And we've started seeing the results of that around the speed, agility and simplicity that is now emancipating from the organization as you look at the plethora of NPIs that we are seeing around COVID. What is also sort of, to some extent, lost in the noise around COVID is the number of NPIs that we have launched on the non-COVID side of the business. I don't know exactly the number, Bryan, but it's somewhere in the 20-plus range, right?

Yes.

So that is holding. Around customer experience, the combining of the commercial teams from DAS and DX has not just resulted in better customer intimacy, faster decision-making, but it has also reduced our cost to serve. And the last one, Steve, is around people and talent, right? The profile of our employees has rapidly changed from one which was more engineering-focused and maybe in the developed part of the world to more around a young scientist that's diverse in the developing part of the world. And the efficiency, the rewards, the incentives that you have to provide to that employee profile is very different. They are very hungry, very impatient and much more like what you would see in the high-tech world than you would see in a traditional scientific tools company. So we are really in the midst of this evolution and enhancement to becoming a pure diagnostics and life sciences company, Steve.

It's a tall order to take on that much, even if it's not in the midst of a pandemic. I do want to come back specifically to the NPI point when we transition over to DAS here in a few minutes but a couple of things I want to touch on first. Before I start to get into some of the detailed points, I want to remind everyone on the webcast that if you do have any questions, feel free to shoot them over to me on email. I'll ask them anonymously for you or if you're on the web interface, feel free to just pop them into the question box there, and I'll make sure to tackle those. So I want to decompose some of this evolution. You made an interesting point about what the revenue mix of the company might be at some point in the future between Diagnostics and DAS. The one that, of course, everybody is probably most curious about is around not just testing necessarily but all things COVID-related because you guys have made some, I believe, sticky placements, sticky in a good way, of liquid handlers and testing automation systems that might have a lot of a role beyond COVID. And you've emerged in a way that I think has almost shocked a lot of people as a player in extraction and sample prep. Can you talk about how sticky you think all this is? If you are right now running, I think it's like $350 million to $450 million a quarter of COVID-related revenue. So much of that is really share gain. If it's, let's say, $1.5 billion of COVID-related revenue annualized, if we get asked to the point where it's post-COVID, can you hold on to $0.5 million -- sorry, $0.5 billion of that on a per-year basis between sample prep, liquid handling and all these things where you've made this big surge here over the course of 2020.

It's a very good question. And as you can imagine, that's something that we are debating, discussing internally at the same time as we are managing the pandemic. The way to think, though, of this, Steve, is break -- I would break it down into 3 specific pieces, right? One is why is there so much stickiness with our extraction units, right? And it's not just about RNA. It could be for DNA. It could be for anything. Our market -- our installed base has gone from a few hundred units to north of -- significantly north of 1,000-plus units. And the reason really for that is that now our customers are experiencing that you can have an automated and validated but flexible workflow that allows me to significantly reduce my protocol time and cost while, at the same time, allowing me to be hands-off and efficient. So why wouldn't I not continue to use that beyond COVID. So there is a stickiness to that on a stand-alone basis not attaching it to the best PCR test that's out there in the market. Now -- so that's one component of it. The second component of it is, okay, once COVID goes away, what do we do, right, with this installed base. So whatever the revenue aspects that you talked about, right, as you quantify that, one component is that this has continued to stick on its own merit. The second piece of it is that our focus is now how do we provide more PCR-based testing or molecular testing for those labs. I've talked about Vanadis being an opportunity to bring into these labs around our reproductive health franchise. On the prenatal side, Vanadis brings an opportunity. On the neonatal side, you have the opportunity along with the molecular tests that are coming out for genetic disorders, such as SMA, DMD, X-ALD and obviously, SCID, which has already been approved. So that gives us a natural entry point because we are already there with our reproductive health franchise. The third component of it is around inorganic. We are very actively -- we are very active on the M&A side, and we are going to continue to expand our menu of offering around the molecular side to ensure that this stickiness goes beyond just the extraction and encompasses a full -- more value proposition to our customer.

So can we go a little deeper on one element of that? You've talked about for parts of this, so setting aside research or LDT setting, setting aside Vanadis for right now and focusing on molecular diagnostics, you've referenced expanding your molecular diagnostic presence with partnerships to try to leverage that installed base. Is that incremental to what you've talked about here? Are there partnerships that you need to enter into to bring in assay developers to try to keep those systems busy and monetized over time? Or is this more of an internal development initiative from Perkin?

Well, I mean, let me give you -- maybe I'll use COVID as an example, right? Our ability to respond to COVID with all the molecular tests that we have gotten out has been all organic and all internal. We've not had to partner or get a test from some company outside the U.S. and Korea or Japan to be able to bring to our portfolio and distribute that. It has all -- it's all organic and all [indiscernible]. What we will be doing is we will be increasing our investments in R&D to continue to fuel that engine of growth. Having said that, we will continue to be acquisitive to expand our menu on the molecular side. So it will be a combination of both, Steve, internal and external.

Okay. Last thing I want to touch on as it relates to molecular diagnostics around COVID are the labs that you've set up here lately in the U.K. and in California. And just judging from a comment that you made back on your earnings call, I think there might be another one in the hopper. These labs have a lot of capacity. I wonder how do you repurpose these over time, and maybe you've already answered that. Maybe these become molecular reproductive labs where you can deliver LDTs. Is there another layer to it? How do you keep that capacity productive over time?

Well, I think the near term, obviously, I still think that PCR testing is here to stay in a meaningful way at least in 2021. As vaccines come into play, this is going to move more and more into population-based screening around epidemiology, testing of antibody titer levels, effectiveness of vaccines. So for the near term, there is going to be enough of a bandwidth and -- going through these labs. I think longer term, as you pointed out, think of it, right, in -- pick a state, that right now outsources as NIPT testing to some of the labs outside their own capability. Now wouldn't this be a good cost-saving measure and efficiency for the state budget to be able to leverage that infrastructure they have already invested in to do NIPT or prenatal testing? So that's the way I would -- that's the way to think about it.

The dynamics around reproductive right now are complex. Birth rates are a drag maybe most acutely in China, but they're not particularly robust. In general, how do you think that changes over time? Are there drivers. Are there mileposts? And then you made a point about NIPT and send-out labs. It seems like NIPT reimbursement is getting better. But it's hard for me to know whether that's a sort of good thing or maybe it's a headwind, if the NIPT, cfDNA screens are getting paid for more. How do you piece that together? And how important is Medicaid in the U.S. for uptake on Vanadis?

So there are 3 pieces to that question, right? So let's start with the birth rates. Birth rates have been challenged for the past 2, 3 years. I mean, I think since beginning of 2019 or end of 2018, I've been talking about double-digit declines, especially in some of the emerging markets. That is just not sustainable, right? I mean you cannot have double-digit declines in birth rates 3 years in a row. And so we think that our assumption going into 2021 that it's going to be flattish to low single-digit decline. And we think that, hopefully, it will be better than that, but that's the assumption we are going to go with. Obviously, to compensate for that, we've put a lot of effort around menu expansion. The SCID came out and then we got DMD approval. Hopefully, we will have X-ALD and SMA out soon. So menu expansion, obviously, is a way to buffer for the declines in birth rates. Second aspect is around NIPT. I think, obviously, the ACOG paper -- the ACOG and payer coverage, obviously, are all [indiscernible] that didn't occur pre-COVID, continue to be structural diverse post-COVID. But I think the more important aspect that you asked around reimbursement and how does Medicaid play a role, remember, if a lab does 10,000 tests per year, our cost to the lab is $100. So any -- even anything about that is an upside for the lab. So the natural inclination for a lab would be to go for the test, which is most efficient and still gives the same results. So in fact, what you said, actually, we think similarly that the Vanadis franchise is better positioned in a post-COVID world than it was pre-COVID, just because of the ACOG coverage -- the ACOG decision and the payer coverage.

Okay. I like the enthusiasm. I guess last one on Diagnostics. So we'll probably have some pretty substantial contributions within Diagnostics from COVID, perhaps even with an incremental contribution from serology in the first half of the year. And then over the course of the year, some of the nonmolecular -- maybe in China, nonmolecular, segments of the business get better. Reproductive gets better. Is it safe to think about this as a healthy double-digit grower from here in a post-COVID or, let's call it, post-2020 environment?

I think we've -- I don't know if we've given a target or forecast as to longer term what specifically our Diagnostics business is going to grow or anyone. But I think the way I would encourage folks to think of it, right, that given the portfolio that we have and the growth accelerators that we have around Vanadis, around the new NPIs that we have talked about on the reproductive side and the installed base with applied genomics for the extraction and on the EUROIMMUN side with the Excentis random-access platform coming out, we feel very comfortable and confident that we will be growing above market on the Diagnostics side of the business.