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

Good morning, everyone. This is Derik De Bruin, the senior life sciences and diagnostic tools analyst from Bank of America. Here with my colleague, Mike Ryskin. Welcome to the 2021 virtual Viva Las Vegas Bank of America Healthcare Conference. Thank you for joining us today. We appreciate your participation and attention. Our next company this morning is PerkinElmer. And with us from Perkin is Prahlad Singh, President and CEO. Prahlad, welcome. Thank you for being here.

Thank you, Derik.

So to set the stage, would you like to make a few opening remarks or I can jump right into the plethora of questions I have for you?

I'm sure you do. Good morning, and thank you, Derik. Thank you, Mike. Maybe just sort of to reiterate, as we ended the earnings call -- was that a couple of weeks ago?

Last week.

Last week. Derik, where we are as a company today is really a result -- while we say that it has emerged stronger post COVID, this has actually been a resilient effort over the past couple of years. Now in the beginning of 2019 when I took on as the CEO, right, we've focused on building the new PKI or the foundation for the new PKI, which is around innovation, customer experience, talent and an operational excellence infrastructure. COVID for us became really a proof point that the fruits of our labor started showing the effect and impact of it early on. And as we look at that and as we emerge out of this pandemic, our core growth has come roaring back. We increased the full year guidance while our COVID payments continue to be in -- with guidance. We continue to execute well. And honestly, we have a much clearer line of sight to our long-term guidance, even than what we had 4 months ago at the health care conference when we announced that in January. We continue to make significant investments in businesses, both internally and externally, from an R&D perspective and from an inorganic perspective. And that is going to continue, which is going to position us much faster for future growth. So really excited about where we are and what we've accomplished so far.

Great. That's a really good setup for this. I mean, look, I mean, I've covered Perkin for a long time, and I certainly was shocked by the magnitude of your response and how quickly you responded to it. I mean you have -- you actually had a bigger COVID business than QIAGEN, which is shocking, I mean, when you sort of think about their position in sample prep. So I guess the question is like how do you think this has changed the view of customers and going forward? And is this going to allow you to win new business, right? How much of this is stick -- I mean we realized testing is going to fall apart. We understand that. We get it. It's going to roll over. But there has to be some lingering impact to the business because you were able to respond so quickly. So what do you think has changed to sort of like how customers view PKI?

Yes. Good question, Derik. I think to some extent, I would be naive -- it would be naive of me to say that even we were not, to some extent, surprised by how our customers geared towards our product portfolio. We always had the confidence that we would build or innovate quickly. So if you keep in mind, we are not very big, but we are not very small either. We are pretty [ aged, ] and the global infrastructure that we had in place with COVID, we had a kit out, which is now the most sensitive kit on the market today. 6, 7 weeks into the pandemic, we were not the first ones out the gate, but we came out with the best product, and we always have confidence in our extraction capabilities with the chemagen portfolio. But COVID gave us an opportunity to work with our customers and innovate around higher extraction yields, lower protocol -- and shorter protocol times and at a lower cost. And that, what we've done with RNA can now be done with DNA and can be done with different sample types, saliva, sputum, even a whole host of other sample types. But what that makes it now is the stickiness that we have started seeing from those customers because it has gone from beyond just being around chemagen or extraction to RT-PCR, and it's gone beyond that to explorer, our newest launch, which has come out with the system that can do up to 10,000 samples per day, not just in COVID labs, but in NGS Labs. We have not lost a tender to date on that, Derik. And that lucrative capability is showing that this stickiness is going to remain even when the COVID PCR test is going to go away.

So, okay. That sets up a couple of great questions on [ this one. ] So you talked about in 2023 at my competitor's conference that there's basically $100 million in durable COVID-related revenues as you see that. Is that -- when you look at that $100 million number, number one, is that just a good base to put in the model for '22 to start with just to sort of like sweep the deck and then maybe there's upside to that number? And in that $100 million, is that $100 million still what you would consider directly COVID? Or does it include these tailwinds from the rest of the business? Or is that now -- or sort of are you thinking of that as more in the core?

Yes. So for us, $100 million is base job. Now that's the "at least $100 million" is what we expect as the run rate from durable revenue. And the assumption that we have made is only around extraction. You have nothing related to any PCR [ applying ] test that we would [ have that. ] So it's really, we've tried to ensure that that's a minimum to get, and we will get that. And I think that's the way I would think that through. We really feel very confident because we have significantly de-risked it with no testing assumptions in there from a PCR perspective, going close to 0.

Got it. Mike, I think you wanted to ask a question.

I was -- yes. Derik, I was just going to jump in real quick on that. And what about the -- specifically, the California lab, the U.K. lab? So what are your expectations for -- I know there's some specifics to the contracts in terms of renewal opportunity later this year. The Wales lab goes into early next year, I believe. Sort of what are you assuming for those? Are you assuming they renew or don't renew? And how do those fade over time? I think we've got in our model that, that was about $300 million combined in 1Q. And then, I mean, I think we're assuming that fades pretty gradually going forward, but sort of what are your assumptions for later this year and for renewal next year?

Sure, Mike. Let me talk to you about the durability around the COVID revenue that I mentioned, right? We are not making any assumptions around anything beyond the contracts that are in place there. When we say about durability of COVID revenue, that's stickiness around what we would expect from the extraction installed base that we have put in. We have put in -- [ we ] said about 1,750 units last year, and that hasn't stopped. And we expect that to -- so the stickiness is related to that. We continue to have great conversations with California. Added with U.K., as you know, one of the labs did get expanded. And we continue to, as I said, have conversations with California. But none of those are assumed or none of those are assumed in the $100 million durable revenue, that we have [ put forward ].

Okay. Okay.

So getting -- one of the questions we got from investors is like, obviously, Perkin has a little bit higher exposure than some of your peers to the Indian market given your Tulip acquisition. Could you talk about what you've seen in India? And does this -- does the current unfortunate situation there have a potential negative impact later on?

So just to put it in perspective, India is $100 million business for us. $4 billion -- close to whatever $4 billion company. It's $100 million revenue. So it's not really material for us, right, in that sense. But what is material, both on a personal level and on a professional level, is the impact the pandemic is having on lives. Our focus has been to ensure the safety and security, number one, of our employees and their families; and number two is whatever we can do to help the citizens of the country. And I think last week, we announced that we've donated nearly 1 million rapid antigen tests to the government, and we continue to work with the government and with the network of U.S.-based Indian companies, U.S.-based companies that are working with Biden Administration to help to the extent we can in India. So honestly, our focus right now is doing whatever we can to help save lives there.

Got it. Perkin, like some of the other companies, has enjoyed a nice tailwind from all the COVID cash that has come in. I think you've done 2 deals and have deployed about $800 million in capital with -- between Horizon and Oxford. I guess can you remind us what the revenue growth profile, the margin profiles are for these deals? And I guess when you look at the opportunity out there going forward, I mean, you're -- you still have a lot of ability to deploy capital, but would love some more sort of like thoughts on the M&A environment, how you're looking at it, what these recent deals add to the business.

Sure. So let me get through the numbers question, and then I'll talk about the strategic angle [ as to it. ] I think both of those are approximately $75 million in revenue this year. I'm looking at my new colleague, Steve Willoughby so he can slap me if I'm saying something which is not right. And each of them will continue to grow double digits into the future. And both of those businesses really will improve over time as the revenue ramp up -- ramps up on the margin side and get closer to what our corporate margins are. But I think more importantly, Derik, what we should talk about is the strategic rationale as to why we did those acquisitions. Oxford is a perfect fit with what we have tried to do with Europe. Building franchise in diagnostics around autoimmune, allergies and infectious diseases. Tuberculosis is the #2 cause of death after COVID in infectious diseases. And I think Oxford is a perfect fit, both from a portfolio perspective, channel perspective and what we are trying to build around infectious diseases. It gives us now an additional beachhead to continue to build on the infectious diseases platform. Similarly for us, Horizon is really a platform opportunity that gives us a beachhead in this space of cell and gene therapy. We've got a very strong portfolio in preclinical discovery and research. Our intent is really to take that what we have around small molecules and build the same around biologics, especially as we look at the arena of cell and gene therapy, cell isolation, cell analysis, cell storage, cell engineering, cell imaging; and similarly on the gene side, gene editing, CRISPR. These are research arenas that are going to see a significant amount of investments over the next decade. And our goal is to provide the scientists and researchers with the tools and wherewithal that they need to do their research. So strategically, our focus is to use the Horizon as a beachhead around which we build a strong and fast-growing cell and gene therapy business. And I think you will see, hopefully, more announcements coming from us in the near future.

Got it. That's really helpful. And I guess let's move on to the noncore -- the core business or the non-COVID business, I mean, was up 10% in the quarter on an organic basis, good pickup. Where are you still seeing pockets of lingering softness in the market? And then I want to talk a little bit about some of the business specifics in DAS and Diagnostics.

Sure. I think one -- and as I mentioned during the quarterly earnings call, uniformly across regions and across businesses, we saw most of the markets coming back and -- coming back. And it was not that we saw any pent-up demand, but we saw uniformly, it coming back from a growth perspective. If there was one arena where I would point out that we still need to see full recovery back to where 2019 was, it would be around the reproductive health and newborn screening. And I think that's primarily birth rates -- you saw what came out from China. You saw last week what we heard around the U.S. I mean we are hoping and we are confident that we will compensate for that over the year with the new menu expansion opportunities around SMA, DMD and X-ALD that we have launched. That will hopefully more than compensate for that. But if there was one that I would point out, it could be the softness around birth rates, which were there -- which we still need to see recovery from.

So on that point, I think you mentioned China. That's a question we've been debating the last couple of days. Obviously, the data just came out. So could you opine on that a little bit? How is that coming in relative to your expectations? And what does that mean for the business? I realize it's just one data point, but it [ has gotten ] some that's gotten some attention given -- just given how meaningful it is.

Yes. I mean keep in mind, if you look at it from an overall company perspective, there is one subset of one business in China, right? So it is impacted, but we've got a whole host of other NPIs. Keep in mind, also the number of disorders that we have approved in China versus what is in the pipeline with the NMPA is still more, right? California tests for 80 disorders, Pennsylvania tests for 12, and China right now tests mostly for 2 to 4, 4 to 6, I would say, right? So there are still a lot of disorders that are in the pipeline for approval. But as they get approved, that will more than compensate for the decline in birth rates. Yes.

So staying on China, how has the EUROIMMUN business recovered? Has autoimmune testing in the region regained traction? I mean that's been a big market. That was a big headwind last year. And obviously, that was a big driver of the EUROIMMUN business.

Yes. In the first quarter, China autoimmune has come back. And it is back to, if I'm not wrong, close to 2019 levels and above that, actually. And I think the trend has not slowed down. I would -- and again, it's very clear. If you look -- as we hear stories from our colleagues, they're not traveling here. But there's no masks. People are out. It is normal. I think whenever there is a spurt of infections in any area, the government has mastered the process by which they are able to go in and shut it down. So "China is back to normal." And I think that goes across businesses for all of us including autoimmune testing.

So where is EUROIMMUN in expanding its footprint in the U.S.? There is still an opportunity for it. I mean, obviously, probably a little bit delay because of the pandemic, but how much opportunity still is there in the U.S. market?

Yes. So let's start with the COVID side of it, right? Obviously, COVID had an impact on EUROIMMUN's traditional business in the U.S. because the focus has shifted more towards the serology side. Most of our serology offering, if you recall, Derik, came from the EUROIMMUN side of our business in the U.S. And to some extent, that has continued because they've got a quantifiable assay out there on serology. They've got a neutralization assay. So the -- we continue to have a full pipeline on the COVID side. And on the non-COVID side, again, it has started recovering in the U.S. And testing has started to regain and get closer to what it was in 2019 levels. And in the same way, we are going to continue to submit assays for approval, 510(k) and the random access platform that I've talked to you all earlier about. So hopefully, go for approval towards the end of this year.

And switching topics back to the DAS. Are you seeing -- is what you're seeing in that market as it picks up right now, is it more catch-up spending or is it incremental new demand? That is, are you seeing any signs that the customers are spending more as they look into the macroeconomic recovery and higher R&D levels? Or is it still too early to tell that there's some incremental spend?

I don't think it's pent-up demand because we are seeing it uniformly and across business segments. I think there are some [ early news ] when new funding has come through. I pointed out the CDC opportunity in China where the government is funding CDC for testing of hazardous elements, and we won a pretty good-sized tender there with our LC and -- LC business, particularly. So we are seeing some pockets where there are new funding coming through. But I think we are seeing growth like our peers across the board.

Great. A couple of others in DAS. I mean are you looking at all to -- I mean what are your sort of plans for the radioisotope business? I mean that -- how big is that now? And is it still a drag on the overall growth?

Yes. I mean, again, it is a business, which I think it's a small business for us, it's been in perpetual decline over a period of time. And the way we managed it is more from a margin and a cash flow perspective. Actually, we recently walked away from one of the smaller product lines that no longer made sense for us, but it's nothing really material or significant enough to report or highlight.

Got it. So Perkin is a leading supplier of products used in the cannabis testing market, and I always like to state that Vanadis rhymes with cannabis, but that's the separate thing. So when we talk about cannabis, and that took a hit in 2020. But obviously, now we've got this legalization push across the U.S. Like how do you sort of see that business as sort of evolving for Perkin?

Yes. I think it will come back, Derik. I just don't think it will come back with the same level it did in, I would say, 2019 because I think while the ballots have spoken, but this still needs to get actualized in terms of incremental funding, people setting up labs, testing, regulations coming into place. So I think it will take its due course of time over the next several quarters, but I would -- I imagine it will come back. I just don't think it will be to the same level in 2021 as it was in '20.

Got it. So Prahlad, you did mention -- you did lay out some target for 2023. And I thought it was intriguing in your interest -- in your opening remarks, you actually feel better about those targets now, 4 months into it, than you did when you talked about them at Tycho's conference. So can you -- you've laid out that 650 -- $6.50 -- greater than $6.50 EPS target by 2023. And some of it -- there were some M&A in that but not M&A in that. But -- so I guess when you have that number out there, is your confidence that you're going to be able to do -- I guess this sort of level of confidence, is that $6.50 numbers you put out there, a stretch goal when you put it out there? Or was that the -- look, this is the absolute thing we know we can do and everything else is like gravy on the up side?

Yes. Let me -- maybe I did not do as good a job as I should have done in the January conference. So I'm going to do with yours. I feel very confident about that $6.50 now. That is a number for us to beat. And I think we have continued to invest strongly in our businesses, both organically and inorganic. From an R&D perspective, we've ramped up R&D 22% year-over-year just from a 1Q perspective as we look at non-COVID revenue growth coming in about 10%. We have a stronger organic outlook for the year for our non-COVID business, as you know, that we increased our guidance at the beginning -- at our earnings call last year. More importantly, our inorganic engine is going to continue to rev up. It has not slowed down. We have figured out the right formula, and I'm saying this very confidently, of how to bring in businesses that strategically fit very well with what we have in different businesses. I think the thing, Derik, is that we are not really a disparate set of businesses anymore. Our focus is around life sciences and diagnostics. And that's what we are building our portfolio around. Very high-growth end markets, and that's where we are adding assets to our portfolio. And if you look at our inorganic track record over the past 5 years, that's EUROIMMUN, Tulip, Cisbio -- I mean I could go on and on. They have done exceedingly well individually as a business, but more importantly, within PerkinElmer. And I think that's both the organic investments that we have made and what we have laid out from an inorganic [ pattern ] gives me the confidence to be able to say that, that from an EPS perspective, $6.50 for us is a number to beat, not to achieve.

Got it. So what's embedded in the op margin for that $6.50 number? Obviously, you're balancing investments in the business with some M&A that you've got the decrementals from the COVID testing rolling off. I mean you're -- consensus is $9.41 this year. So there's a pretty big drop-off in sort of coming with that. So how should we think about the operating margin for '23?

Yes. I think the way I would say is we still feel very good about the 23-plus percent that we -- in 2023, which essentially implies a 75 bps per year. And given that for us, 2020, the way we look at it organically, it was a lost cause in the core side of the business. But with no workforce adjustment, core margin expansion for us will be stronger this year than it was last year to compensate for that. So really good -- we feel good about the 23 plus percent number that we have laid out for '23.

Got it. How should we think about your tax rate? I mean there's a lot of changes going on in Washington. There's a lot of movements around the world. I mean is there -- how stable do you think your tax are going to be? Is there a room for movement on either direction?

Sure. I think the way I would look at it, just given with everything that's going on, I think, one, to keep in mind that only 25% of our net income is derived from the U.S., right, unlike others. So even with what last week we heard from the administration, and if -- given that even if it could go up to 25%, for us, the impact is anywhere around 1%. That's sort of the range that one would look at. I think the larger impact, if there is any aggregate change around the GILTI tax, that would obviously have an impact. But keep in mind that our peers will have a much larger impact than we would even in that case. So I think that's the way I would frame it where we are today versus what we see coming down the pipe.

Got it. So we're getting near the top of the hour, and I've got a couple of boilerplate questions. Mike, unless you have anything specific that's coming from investors. My monitor crashed. So...

I'm good. I don't think we have any questions in the queue. Yes. Go ahead.

Great. Okay. I can't see the screen. Okay. So how should we -- so I guess, Prahlad, how do you think the industry has changed in general and PKI, in particular, in the wake of the COVID pandemic, right? I mean just sort of a big sort of like catch all question on what's the future look like, an easy question.

I think the easiest question sometimes come out with the most toughest responses, right? I think the way I look at it now from a PerkinElmer perspective, Derik, we are really not, as I said earlier, a disparate group of business anymore. We have a clear strategy around diagnostics and life sciences. You've seen that from the acquisitions we've made. You've seen that from the way we've responded to COVID. And most importantly, post COVID, what really debate -- the debates that we see internally is, a, how do we leverage the opportunity that COVID has provided, not just from a product portfolio perspective in terms of durability long term, but the muscles that we have learned to exercise, which we didn't know existed in the organization. I think the talent, the bench strength, the agility, the innovation that we have been able to see flourish during the COVID pandemic is really something that we've got to figure out how to borrow and then leverage it over the next several years. I think from an industry perspective, we've seen a lot of collaboration and -- with our customers. I think the mindset of the customer has also changed. They are not really looking for products. They are looking for workflows, solutions, which makes it easier for them to do their job. And this is something which we excel in. Just look at newborn screening. We've worked decades with our customers in countries to build that franchise. Look at autoimmune testing. And look at preclinical research and discovery. Look at OneSource. So we've got several proof points that tell us that we feel very confident of the future that is ahead of us, Derik.

Great. We have 1 minute left, and so I want to squeeze in a -- an ESG question. We get a lot of questions from investors on ESG. Perkin is actually fairly well -- currently highly held by number of SRI funds and such. How are you sort of thinking about -- what are the sort of the most important criteria for evaluating Perkin on ESG basis?

Very good question, and it's something that's also front and center for us, Derik. I think our whole business, if you just look at the end markets that we serve on, is really evolving around what ESG needs to be and what we do for a living in the markets that we compete in the various [ hotter ] environment [ and testing, ] et cetera. We've spent really the past year engaging both stakeholders internally and externally to see how we further expand our focus on ESG. But really, this is, given that the last 20 seconds, what I want to leave with you, I want to give a more deeper dive into it at the Analyst Day. So I'm going to use this as a plot if you want to know exactly what we're doing, come to the Analyst Day, and we'll be happy to share it with you.

And with that, right on time for us. Thank you so much for being here. Investors, thank you for listening. It's [ high ] season [ but often ] and we appreciate it. Thank you, Prahlad. Thanks, everybody. Have a great day.

Thank you, Derik. Thanks, Mike.

Thanks, Prahlad. Thank you.