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

Good afternoon, everybody. I'm Luke Sergott. I cover life sciences tools and diagnostics at Barclays. It's my pleasure to have Prahlad Singh from PerkinElmer. And with that, if you want to make a couple of comments, and then we can just dig into some questions, if you'd like.

Sure, Luke. Thank you. It's great to see everyone. It's good to meet in person. I think sort of to kick it off, Luke, maybe just talk about the company a little bit. As you see the process of transformation that we have gone through over the past 5 years, we feel really good about where we are, obviously, covered over the last 24 months has been a major driver and a major factor in the company, but it has also given us the opportunity to continue to transform our portfolio. And where we stand today, 80% of PerkinElmer is in Life Sciences and Diagnostics. And 3/4 of our revenue comes from consumables, reagents, assays, software and services. And the group end markets that we play in are the high-growth end markets of life sciences and diagnostics. Geographically, we are very diversified. But I think most importantly, what we've put our effort and focused on is how do we continue to transform the culture of the company? How do we ensure that we have the right talent as we evolve our portfolio into the high-growth end markets. So I think we really feel very good about where we are. We've also at an earlier conference earlier in the year, came out with our 2023 target. So essentially, we've given out a forecast for the next 24 months. And again, from a company perspective, we've set up the company for a high single-digit growth company that will deliver operating margins in the late 20s, so -- or high 20s, I should say. So I'll start with that. I'm happy to take questions.

All right. So got to dig into the macro. Ukraine, Russia, there's no employee facilities in the area. But I'm just trying to figure out and just get a sense of what you guys are seeing from an overall demand perspective. If you're starting to see any cracks in the pipeline there. And contagion to overall Europe?

Yes. Let me just start by saying that it's obviously a very dire situation. It has a big impact on what's going on in the world. From a company perspective, fortunately for us, we don't have any direct presence or direct employees as you said, Luke. We also have very minimal revenue coming from the region, I think it's close to less than $20 million. So from a revenue perspective, it hasn't impacted us. We've also gone and looked back at the second layer, peeling the onion, to see if there are any of our suppliers or vendors that source from that region, and that hasn't been the case. But nevertheless, we've got presence in Finland, we've got a strong presence in Poland, in Krakow, with our shared services component there. And it does impact people indirectly. So hopefully, it stays contained in that region and hopefully it gets resolved quickly.

That's helpful. The -- and your exposure on chemical energy, remind us what that is now. You've done so many changes in the portfolio.

Yes. No, sure. Luke, as we've talked about, right, over the past 5 years, we've continued to transform the portfolio -- so that Applied is now 15% of our revenue. Food is about 5% and Life Sciences and Diagnostics constitute about 80% of our business. Of that 15%, 10% might be in the industrial business side. And of that, chemical and energy make up probably 3% or less than [ 1/3 ] of our business. So we've really made the portfolio very resilient to economic wage and inflationary pressures that you might see.

All right. And then on the inflationary environment, tools are able -- you guys are able to pass on a lot of that pricing to offset any margins. Can you dig in here a little bit on what you're seeing through 1Q, the ability to pass that on? And anything difficulty from your existing backlog that you weren't able to pass on maybe in this quarter, but you have better ability to do so in subsequent quarters?

Yes. And again, I'll go back to what I said previously, right, the current theme is that I think folks are still getting used to the fact that -- I know we get categorized as tools. But again, Applied is a very small component of our business now. Most of our work we do is a high run rate, high flow-through businesses of reagents and software. 75%, as I said, is consumables and recurring revenue stream. So so far, on the applied side, we have been able to pass. And I think we've got enough of a cushion that at least in the near to midterm, with the price increases that we've been able to put in place that it's not going to impact margin in terms of being able to absorb any inflationary pressures, I would say in the near to the midterm, yes.

Okay. On the variable rate environment, you guys have the $500 million variable rate. So any plans to repurchase that? Like what's the strategy here going forward?

Yes. I mean I think we paid off our revolver in the end of last year and the variable, we've got a [ $500 million ] term loan. I think we -- yes, we plan to pay it off in the first half of this year. Okay. outside of that, that we don't have any near-term available.

So not interest rate risk is on the table.

No. No.

Okay. All right. So -- and I guess we can start talking about China. This is everybody's favorite topic with you. You have exceptionally unique exposure here, I think, out of the entire group. So when -- particularly from the food business, I didn't really appreciate all of the different businesses that you guys had in China. And so kind of walk us through really from across your end markets, where you really play and where you're seeing strength and weakness?

Yes. So let's start with diagnostics, right? Diagnostics is essentially there in China, what we have is reproductive health and [indiscernible] diagnostics. Reproductive health, most of our product portfolio for China, is manufactured in China. We've got 25,000 square meters of facility in the output of Shanghai. And these are locally approved and NPA products that are used for that marketplace. So we are pretty good there. On the immunodiagnostic side, with the EUROIMMUN acquisition, when we did that acquisition in 2017, we started building a facility in the outskirts of Beijing and Tianjin and that facility is now up and running. And that is another additional 25,000 square meters of facility and about 20%, 25% of our product on the immunodiagnostic side in manufactured in country-for-country. And over the next 12 to 24 months, we'll transition the rest of the portfolio. So from a reproductive perspective, we feel pretty good on what we have done and what we have established. Food for us, primarily there is Meizheng, which is a local company, locally acquired and it's in the food safety side, and that continues to do very well. Life Sciences. Again, I think the benefit that we have there is it's very unique and a differentiated portfolio, where we don't have that much of a competition in the marketplace there. And especially now with the acquisitions of Horizon, SIRION, Nexcelom and BioLegend, it gives us added impetus in that marketplace for the Life Sciences business. I think the one that we probably have competition, both from a multinational perspective and regional is on the applied side. But I think, again, as I said earlier, Luke, that is a very small component of that business for us.

Okay. So I remember when there was a -- when China stopped ordering corn, that was like a modest headwind to you guys. And that was, I guess, 2018. So the portfolio has changed enough now to where any impacts from the swine flu or the soybean pressure that you're seeing that even smaller?

Yes. I think it just gets much more miniscule because the biggest component is around sim testing, a food testing that we do with Meizheng. It's again, more assays and [indiscernible] assays that the and immunoassays that they sell rather than big instruments or analytical portfolio that we would sell in the food segment there.

All right. So let's shift gears here and talk some Vanadis. So you guys -- this has been picking up after a significant investment in your personnel. It really took a little bit to get off the -- to get rolling, but now it seems to be going the right way. So just talk a little bit about what's really been building the momentum and the catalyst there and how -- the key points we need to look at as you're coming into the U.S.?

So Luke, I think I've been talking about this for prior to cover -- the market segment with Vanadis that we were going after are labs or institutions that could do between 5,000 to 10,000 tests per day. And in the U.S., there are many hospital chains which individually outsource the NIPT testing to labs. And I think what they are realizing that Vanadis allows them to have a value proposition in-house that does not require a lot of headcount, personnel or overhead that they need to build and establish. It's a fully automated system. You can have 1 technology running up to 5,000 tests per year. But more importantly, what it does is it provides low no-call rate, high level of accuracy, sensitivity and specificity around 21, 13 and 18. The 3 things that OB/GYNs are most focused on, at a very attractive selling price. And if you just put all of these pieces together, it just becomes a very compelling value proposition for large hospital chains or medium-sized hospital chains to be able to bring that in-house. And that's where we started seeing the traction with Vanadis post-COVID and that hasn't stopped so far. So if you recall, when I would talk about a just prior to COVID, I had U.S. third region priority, but I think it has jumped up now to net ahead of Asia. And we have a very strong pipeline around Vanadis.

All right. And the target there is the high the large hospital systems...

I would say medium size that can do about 2,500 to 5,000 tests, if you put there 3 or 4 institutions together, so medium- to large-sized hospital chains.

And give us a sense of how much of the NIPT market that addresses.

In the U.S., I would say more than 50%. No, again, U.S. is a very different marketplace, right? California is on its own. It does its own. The state does it. So that there's a big chunk of it. So it's pretty disparate. And I would say, in terms of our market size. But it's still an attractive market segment, I would say the most attractive market segment from amongst all.

So when you think about the high single-digit long-term growth rate, is this a significant contributor that we could point to in a waterfall? Or is this more just another arrow in the repro liver?

I would say it's a significant driver for reproductive health going from where it is today to high single digits. But for the company, yes, it is one of the growth drivers. But I think we are insulated enough that we are not dependent on 1 or 2 [ hands ] in the fire, I guess.

Right. On -- let's start -- we can start talking about the deals and the strategy here. So I mean you came from DX, you built that out to a comprehensive portfolio. It's a little different end markets, though. Talk about what you're -- from the life size side, really what are the key areas you're leaning into and how you're really going about it?

Sure. I mean look, as you said, when I joined PerkinElmer, diagnostics was a $450 million business, growing in mid-single digits, spitting out operating margin in the low 20s. And 3.5, 4 years of my tenure, we brought that up to $1.2 billion, $1.25 billion, high single-digit growth, spitting out operating margins in the high 20s to 30. Obviously, COVID had a major driver after that on the Diagnostics business. But I think what we realized is that where we were good on the Diagnostics side, at PerkinElmer is we did not try to be one for everyone. We were very focused around the end markets or sub-end markets of reproductive health, immunodiagnostics and applied genomics. And similarly, on the Life Sciences side, where we focused our energy and efforts on is how could we provide a value proposition around target identification, target optimization and getting to a lead candidate around preclinical discovery. We did not want to be a company that provides everything for everyone and dilute our efforts. So our focus was around preclinical discovery up to target-identical lead candidate. And towards that end, we had a very strong portfolio on the small molecule side. But I think what we saw as an opportunity to do the same around cell and gene therapy, single cells, and we started that with the acquisition of Horizon. To that, then we added SIRION and BioLegend and Nexcelom. And now we have a portfolio that allows us to do all of the pieces, along with our legacy PerkinElmer Life Sciences business. So it's filled a lot of gaps in our portfolio and build a business of about $1.2 billion, $1.3 billion there.

All right. So when you're thinking about how you're leading in, I mean across the 3 different segments, but LifeSci is really taking the rain is kind of the most talked about, right? So cell and gene therapy as the NGS business. So give us a sense of really what else you would like to add across that portfolio? Like what are the holes that you'd like to fill?

I mean I think if you just take a step back, right, we now have ability to do gene editing, cell line engineering with Horizon. We have SIRION that provides the viral vectors that can be the carrier vehicles. You've got Nexcelom to do QA and QC. You've got BioLegend that provides content that's needed. So as of now, I would say for some time, our focus really will be around how do we ensure that we bring in these acquisitions, integrate and build smooth workflows for our customers. So on that side, I think we are good where we are now. And I think we will probably take 12 -- the next 12 to 16 months to digest these acquisitions and make sure that they become a smooth and integrated to provide workflow solutions for our customers.

All right. And so when the -- following up on the gene therapy with Horizon and then SIRION with the viral vectors. Give us a sense of how you're playing in the overall cell and gene therapy discovery market, right?

Yes. So Luke, I think, again, as I said, right, our focus is not really to be into big bioproduction or building out plans. Our focus is really on the early stage of product discovery and product development. So again, going back to what Horizon does around gene editing, cell line engineering, providing mRNAI. What SIRION does is provides the vehicle as carriers, what Nexcelom does is the QA/QC. And now we've added breakthrough technology products like what Honeycomb brings from single cell storage, single cell analysis, and BioLegend brings in the content component of it. So really, the portfolio now that we have is pretty comprehensive there. What we need to continue to do a better job is provide a seamless link to all of these because quite a few of them are coming through acquisitions. So we need to build a seamless and an easy-to-sell value proposition to our customers. So that's really where our focus is more on the commercial side of it.

All right. And then when you're thinking about building out the commercial infrastructure, and this was a key point with Horizon as they were -- right before you guys took them out, they were -- they had so many different business lines. Are you going to do some portfolio rationalization there? Like what's the -- to make it the comprehensive portfolio that you're looking for?

No, I think if anything, we will continue to add to that portfolio because remember, with our small molecule channel, we are already addressing that customer base. So we don't have to go and build a channel. What we needed to do is provide -- add more goods to the basket of our commercial teams. And with what we brought now into the portfolio, it just gives them an added impact us to sell more. And even with these acquisitions that we have brought in -- most of them have minimal to very small presence in markets outside of U.S. and Western Europe. So just we are directly present in probably more than 100 countries. And being able to leverage that infrastructure from a commercial perspective, sales and service fees, we are able to now leverage that. So that's the low-hanging fruit that we are going after.

All right. And then on Horizon, how much of the business, the growth really come from there from COVID, right? They had the RNA, the DNA, the bioparticle [ aided by a particle production ] from Dharmacon. Any overlap there in Dharmacon and SIRION? Or did COVID really essentially open up a new market for this business?

Hopefully, it will open up a new market. It had no impact from COVID either [indiscernible] definitely did not have any revenue coming out from COVID.

All right. And then turner, just going down, taking down the M&A here so on offer. You guys are guiding to mid-teens business growth here. That was decelerating business. The lack of automation was cited a lot of versus the first, the QuantiFERON with QIAGEN. So give us a sense of what you're doing to turn that business around and reaccelerate the growth?

You just stated precisely the reason that we acquired Oxford, right? Because what we had in our portfolio was the automation component. What we needed was content. Tuberculosis is the #2 cause of that among infectious diseases after COVID. And we just -- so if you take COVID out, it is the #1 cause of that in the world. And what we did not have was content around it, what Oxford did not have was automation. And with our portfolio, especially with what we have been able to do with that portfolio with the past couple of years. And already, we've had placements of the fully comprehensive systems in several countries, and in most other countries, we are awaiting regulatory approval. So between EUROIMMUN, legacy PerkinElmer and Oxford, we have all the pieces of the puzzle to be able to gain market share in that space.

Okay. And the pricing environment? How are you thinking about that?

With specifically regarding to Oxford or is that...

Yes.

Yes, we haven't seen much impact around that having -- no. Okay so just not [indiscernible] yet.

All right. And so lastly, on BioLegend, pretty well-known across tools, but tons of synergy opportunity here for you guys in that. So walk us through that and then have a follow-up on actual how they performed.

Yes. So let me start by where the low-hanging fruits were. Obviously, as I talked about the commercial synergies, the second one was the infrastructure and capability that PerkinElmer brought to the table. And this could be as simple as contracts that we have, whether it's with our freight carriers, FedEx or UPS, just being able to leverage that across BioLegend. So that was the easy one, which is pretty much accomplished. Moving on, again, as I mentioned earlier, Luke, the presence that we have in China, in India, in Asia Pacific and Asian countries, but they were going through distributors. So that, again, was an easier not to track. I think the biggest benefit that we get out of BioLegend is really the technological centers. Even we post our due diligence when we went and looked into the company. Do we just -- we had underappreciated the opportunity that the technology synergies that would come with the acquisition. I mean, internally, for EUROIMMUN, for Cisbio, now we have content and we have an engine in-house that provides the capabilities and the reagents and the antibodies that are needed to fuel discovery within the company on the Diagnostics side and the Life Sciences side. And that we really had not appreciated as much as we have now post the initial discussions that we've had.

All right. And then so give us a sense of how you fared versus your expectations in 4Q and really the demand profile here. Did you see any indirect impact from COVID? So labs not being opened up or some of the supply constraints?

So let me just first to start by giving -- if you recall, when we did the EUROIMMUN acquisition, I said, you should expect EUROIMMUN to be 12% organic grower year-over-year consistently. And it has beaten the deal model year-over-year over the past 4.5 years that we've had it. I think BioLegend will be in the same space. It's going to be a company that's going to -- business for us, that's going to grow in the mid-teens and consistently, and they have performed and they'll continue to perform. So I don't see any impact there. In regards to COVID, in the January time frame, they did have some Omicron infections going through, just like we all had through our offices and factories. So it did have some stoppages, but it's come back [ hovering]. So it hasn't seen -- it's not going to impact in any way what the forecast that we have given out for the year of $380 million.

All right. And so that's a great segue for the last question here. And so you're thinking about the quarter and all the moving parts, we have the Omicron weakness that could impact the academic government. So just give us a sense of how demand trended versus your expectations? And if there was any changes in the pacing, back-end loaded or front-end loaded?

Yes. So I don't want to give out any intra-quarter trends or updates. But what I can say very confidently is that for the year, we have set 6% to 8% organic growth. For '23, we have set 7% to 9%. And for the first quarter of '22, we said 7% to 9%. I could not be more confident about the forecast that we have put forward.

That's a pretty strong statement to end. All right, I'm going to end on that one.

I think you should.

I think I should, too. All right, Prahlad, thank you.

Thanks, Luke.