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

Right. I guess we can get started. Good morning, everybody. Welcome to Miami. Thank you for coming, first day, kicking it off here with Dr. Prahlad Singh of PerkinElmer. Maybe if you just want to start off and give some real high-level takeaways from the quarter, and how the year is progressing for you guys, and then we can start digging in.

Yes. I mean as we've talked about at the beginning when we did our earnings call, we are excited about the year. We are excited about our strategy. I mean, I'm sure most, if not all of you, saw the announcement and the close of the divestiture of our applied enterprise and services business. And we've set up the company to be a pure-play life sciences and diagnostics business, which is high growth and high margin. And that was essentially stage 1 of the culmination of the transformation process that we started many years ago. And we've set the company up really well for the future and the year.

Yes. You guys closed that just for this conference, right?

I did that last night after market closed, just so I couldn't answer it here.

Right. So talking a little bit about the quarter and kind of the demand, I mean the -- on the guidance, you guys have, it's a back half weighted guide, just like the rest of tools. But as I look across the complex, you're one of the cleaner stories out there, right? There's not -- have any COVID. There's not a ton of instrument demand questions, there's no bioprocessing. So kind of walk us through the demand environment as you see it, and what's baked in the guide, and then we'll dig into China next.

Sure. So look, actually, if you look at our guidance, it's pretty well balanced throughout the year. There is no assumption that the second half is going to be significantly strong in that sense. Because if you look at our comp, pretty much we are assuming 9% quarter-over-quarter except for the first quarter, which had a high comp from a year ago of 13%. So it's going to be a little lower. But outside of that, it's pretty well balanced. Our markets are doing well. Again, the benefit that we have is now we are pure-play life sciences and diagnostics. And if you look in life sciences, biologics cell and gene therapy, continue to play an important role and are the growth story. And the way the company is now sort of structured is if you even look at cell and gene therapy, majority of the investment is going to go on the research side. And that is where we now have fully integrated workflows that we plan into play. With all the acquisitions that we have made over the past 24 to 30 months, they are now coming into play. So that sort of gives us the growth impetus that we look on the life sciences side. On the diagnostics side, I think outside of -- as we have said, China immunodiagnostics, which had pressure last year, and I'm sure we're going to talk about that. It has done very well. So if you look at our assumption around 9% growth for the year, it assumes low double digits for life sciences and high single digits for diagnostic.

And then on the diagnostics, particularly with China, can you give us a sense of -- we've heard mixed data reports. So some are saying that the utilization is coming back stronger than expected. Just give us a sense of the trend line you're seeing from what you guys originally had outlined.

Sure. So let's peel the onion around our China business, right. Our China business is constituted of 60% diagnostics, 40% life sciences and applied genomics. Our life sciences business has grown more than 20% over the past 3 years, and our applied genomics has grown even more than that, and we continue to expect those businesses to do very well. 60% of our business in China is diagnostics, of which 60% is immunodiagnostics. And that's the one which was impacted. And it was impacted because it is non-acute care diagnostics. So the way to think of it, China has started coming back to normal. And I think we all see that in the pictures. We all have colleagues and friends that are saying that. Our assumption in our guidance is that it will come to full normalization in the second half of the year. But there is no denying the fact that China has coming back to normal. Now what you have to keep in mind is that for us, what that means is that more than 60% of our total revenue from China will start kicking off, right? I think the non-acute diagnostics, our assumption is that it will fully ramp back up to normal in the second half of the year. And it's simply for the reason that if you're a health care institution or a patient, you are going to wait to go for something which is non-acute till things in a health care institution format comes back to full normalization, i.e., there is availability of nurses, testing capability, and the first triage of testing that happens are more of urgent care that is non-COVID basis. So it's just a matter of process of that moving forward. But our confidence in our China business is very strong. It is 17% of our revenue, and we expect it to grow low double digits as we look forward.

Okay. And then so thinking here out to the -- as the behavioral aspect comes back on the non-acute diagnostics start coming back, how that utilization plays out into '24. I know you're not going to talk about the specific numbers, but if we start getting back to even pre-COVID utilization levels, give us a sense of what that would mean for the Diagnostics business going forward, you're doing low doubles now because it be a significant step-up there from here?

I think China will continue to be, as I said. Again, you have to look at the company as a whole. Our story is now pretty simple, actually. If you just try to decipher it, we are a life sciences and diagnostic company. We are a pure-play company that provides assays, consumables, reagents and software to our customers, which account for more than 80% of our revenue. We are going to grow double digits as we have said in our medium-term outlook. We are going to grow 10%. We are going to go split 30% operating margin. Just to put that in perspective, through 4, 5 years ago, PerkinElmer was a $3 billion company spitting out 20% operating margin. Today, PerkinElmer is a $3 billion company spitting out 30% operating margin. So a 4%, 5% grower, we're saying yes to 9% grower. So I think that's the transformation that we are talking about here.

Yes. As you say, you simplify it, we peek under the hood. There's a lot of room, business there. So when you think about the applied genomics and thinking about that, right? So you guys have -- you've been very acquisitive. You're talking about the instrumentation side of the business starting to be saturated. Give us a sense of what that business is doing? And then kind of where that fits in within the portfolio, and we can jump off into that the cell and gene therapy stuff.

Sure. I mean, if you look at it over the past 2, 3 years, we've said non-COVID, that business has grown more than 25%, and I think I'm being conservative in my assumption. And I think we started seeing some slowing down and tapering in the third to the fourth quarter because I think there was some saturation in the marketplace. And it will take some time to readjust. But I think if you just go back and look at the new launches that we are having in that, that's one of the portfolios where we have a lot of new NPIs coming into play. BioQule was just launched at Med Lab, and it has gotten a lot of traction. Having a tabletop automated -- fully automated sample prep system is really one of the key demands as NGS gets decentralized. And that has a key play. And we've got some other very attractive NPIs coming out in the applied genomics space. So I think that business is going to continue to grow in double digits.

Okay. And so when you think about the evolving environment of the sequencing workflow, you're talking about going to decentralize, and you're referencing the clinic on that side, right, the clinical application? Or are you just talking in general?

I think in general, on the clinic side, for sure, but also on the research side, there's a lot of opportunity because even if you list -- look in the clinical environment, right, you take a look at our reference lab. They might want to do a big run. But at the same time, they might want to do a quick and accurate, efficient, smaller run to be able to test out a set of samples, which we don't want to put it in there. And this is where BioQule and NPIs like that, allow you to be able to do that sample prep without significant expertise that you might not need.

Simplifies the workflow.

Absolutely.

And that's pretty much where you guys are playing right now across the portfolio is really trying to simplify the aspects. You might not have the Keystone instrument like the sequencer, but you're trying to offer and simplify everything around it. Is that correct?

I mean, look, if you look at it, if you recall, I've said this about newborn screening. RUSP, what newborn screening thought us is that how do you own the workflow? And how do you ring fence it all the way from the dry blood spot card to the informatics piece of what gets it? Similarly, we are trying to do that. We then saw that aspect playing around from sample to sequencer. Or another way we look at it is you surround the sequencer. So if you are able to provide your customers with validated, but flexible workflow that are not closed in systems, but provide them the options and provide them the instruments and assays. It goes a long way.

Okay. And then so moving on to cell and gene therapy, right? So if we're thinking about your portfolio evolution, diagnostics, especially repro, I mean you guys are from the prenatal to postnatal and that's kind of what you built from your early days of Perkin. So you're going to do that with life sciences. Talk about the cell and gene therapy business, and where you are in building that portfolio, how much further we need to go and kind of what are the pieces you need to add?

Sure. I mean during COVID, that was one of our most diligent efforts around how do we fill our portfolio. The realization for us was that we had done a very good job around small molecules in research side, especially preclinical research. But I think as the industry was moving more and more towards biomolecules, cell and gene therapy, that's where we did not have the right portfolio. And that's our acquisitions pre around BioLegend, SIRION and Horizon, Nexcelom Biosciences is how do we fill and put a continuous workflow that allows customers to look for what cell lines they are looking for, what reagents they are looking for, how do they look at the cells, how do they count the cell, how do they attest the viability of the cells. That has been our focus area. And that's where I think we've built a very strong portfolio. Now of course, there are some gaps in that portfolio. We'll continue to fill, and we'll continue to be acquisitive in that space.

And on BioLegend, that was predominantly an RUO offering. Talk about the opportunity that you see in taking and building out the GMP capabilities, early phase clinic goals and rolling up from there?

Yes. And I think one of the realizations was that BioLegend was very strong in the RUO preclinical research side. But they said goodbye to their customers as they moved into the GMP and the pilot plant and the clinical stage. So it was for us a natural extension of continuing to support our customers as they moved into that, and that's what we've said that organically, one of the big areas of investment for us is going to be building our GMP capabilities around cytokines, antibodies and reagents on the BioLegend side.

So they would provide the preclinical discovery work and then as that moved into the clinic, they had to find a different supplier, so it is just a matter of scaling up and providing a GMP?

Absolutely.

And when is that coming online?

Well, it has already started. They have a small facility. We just continue to organically invest and build that out.

Okay. And so talk about the win rates that you're seeing there. And I mean, are you eventually going to -- because at some point, you're going to have to stop with that same customer. They're going to find other suppliers they get to later stage, right? So are you going to eventually go into clinical CGMP?

I think we'll be in the CGMP space, yes, I don't think we are going to move into the mass side around manufacturing and CDMOs and all, but that's where our sweet spot is going to be.

Okay. And then so on BioLegend, as it's been talk about how that's paced throughout the year from a growth perspective versus what you guys had originally thought in the deal model, just kind of a state of the union on the BioLegend piece right now and what you're thinking about for '23?

Sure. So I think the way to think of it is, if you guys' recall, when I did the EUROIMMUN acquisition, what I had said is that you should assume a 12% organic growth for EUROIMMUN forever. And at least for the last 5 years, it has beaten that [indiscernible] What I would just encourage you to think of it is not as BioLegend, but our research business, our reagents business. We have a $700 million plus research business now, reagents business sitting in our life sciences portfolio. And you should assume that, that's going to grow in the double digits for the foreseeable future. I mean that's the strength of that portfolio now that we have built with the acquisition of BioLegend, Horizon and what we had from Cisbio and our legacy PerkinElmer portfolio.

And on Horizon, it's a little -- it's not discussed as much here, but can you talk about -- I mean, the opportunity there was really the CRISPR screening capabilities that they brought, and really just bolstering your cell and gene therapy platform. Give us an update on Horizon, we haven't heard much about that?

Yes. I mean, Horizon and SIRION together, they are really playing 2 as a tango, right? I mean they provide the vehicles, the AAV vectors and these guys do the cell line, the servicing capability, the pinpoint base editing, which is sort of, as I've talked about is the next chapter in the CRISPR growth story that we've licensed the technology from Rutgers, and BioLegend has got several deals going on with big pharma in trying to, a, either license that technology, provide them the tools and capabilities to do that in-house, or provide specialized services so that, again, do it in the Horizon campus for big pharma and biotech. So they continue to be a really important cog in our wheel on the reagent side of life sciences.

Keeping -- Brian kept busy over there.

Yes. He's trying to do something.

Awesome. All right. You mentioned EUROIMMUN before, you guided to 8% to 12%, I think, when you did the deal. Now it's been growing mid-teens. Talk about what's going on there. I mean, it was predominantly China and European exposure, one of the big growth drivers was expanding in the U.S. Talk about where we are in that storyboard?

So EUROIMMUN has grown 12% plus since we've done the deal. And if -- it was ex China immunodiagnostics, it would have continued to grow much higher. I mean obviously, China immandiagnostics has been a challenge. But if you take that out, even outside of that, they have gone significantly higher than that. Of course, Luke, as you point out, U.S. is a key part of that growth story. When we acquired EUROIMMUN, U.S. was only 5% of their revenue. And they are significantly higher than that, and they are growing much faster than the rest of the EUROIMMUN business.

So is it like 10% of that business?

Probably more than that.

More than that. How much of that is due to the portfolio expansion?

Both. It's in a portfolio spend. Majority of it is, of course, portfolio expansion. And as we've said, as they get more and more reagents through the regulatory approval process, as they bring in more products into the market, it's going to be the growth story. The big thing that we'll hopefully be able to display at AACR is the launch of the Accentis platform. Majority of the customers in the U.S. are large reference labs. And what they were really looking for a fully automated random-access platform, where the full strength of EUROIMMUN's portfolio could play a role. And now that they are in the process of getting that launched. And they got CE Mark, I think, end of December or early Jan. And as they bring that into the U.S., that is going to further provide impetus to the growth story of EUROIMMUN in the U.S.

And where on the diagnostics workflow, I mean it was on like the immune-based obviously, because of the name, but diagnostics. Are you expanding outside of that? Or are you staying pretty much within that sweet spot?

It [indiscernible] based technology, but it's going to be autoimmune, allergy. And as you look further neurodegenerative diseases and a portfolio that we've talked about publicly.

Right. All right. And so let's talk about the new business, the rebranding, but more importantly, the improved fundamental profile. So as you look out you guided to double-digit top line, 30% plus. If you look at the margin, where you guys jumped off from 4Q. Talk about the conservatism that you have baked in within that margin guide for the year, and really the puts and takes that you see throughout the year there?

I'm glad you think 30% is conservative.

I get it, it's like 34%, right?

But I think the way I look at it is -- look, I think if you look in the fourth quarter, we took 32.5% somewhere in that range, right? And I think the 30% guide is more based on the factors. We had $31 million of COVID revenue in that 30%. So obviously, that was a big impetus. There's a lot of moving parts with the disc ops and con’t ops and all, but Max and Steve can talk to the cows come home, and I'm sure they can keep. But I think the fact of the matter is we've taken $100 million of COVID out of our guidance. And we have still said that it's going to be growing at 30%. And then I think what we should assume is 30% for us is our baseline. And if you look at the medium-term outlook for the company, 10% and 30%, and is going to be assumed, should be assumed as our platform. And that's what we have built. And that's the level of confidence that we have in our capability.

And certainly when you think of that medium-term guide here, how as you think about the drop-through on a lot of this incremental, how much are you thinking about investing? So that if you're expanding margins 100 basis points a year? Are you going to plow back 70 or 50 basis points kind of ring-fence what the internal investment should look like?

I think we've publicly said that we're going to have preteens EPS growth over that. So outside of that, we are going to continue to invest in R&D. We are going to continue to invest in CGMP as we've said, and we're going to continue to invest in an e-commerce engine because the majority of our business now is on the life sciences reagent side, one of the key successes of BioLegend is that you put an order in, in Boston, at 3:00 p.m. in the evening and 10 a.m. next morning, you have your reagents at your doorstep. And that is because of their e-commerce engine and the way they have set that fundamental. We need to now take that and extrapolate and then expand it to the full business.

How much of your business is on e-commerce right now?

Minimal. I mean, I would say low single digits.

Low singles?

And BioLegend is more than 50% of their revenue is e-commerce.

And as you -- do you have like any metrics? Or is it still too early to say, all right, when you get the same customer now ordering on e-commerce, you see the basket increased by 20%?

Or be close to the deal 4:00 p.m. last night. It's just a few hours to be able to digest that. But really, the opportunity for us to look is think of it this way, right? If you look at the business, as I said, 80% of it is consumables, software and reagents. And that is the opportunity that we have in the medium to long-term. So if over the next 3 to 4 years, we are able to take 30% of our business, total business on an e-commerce engine. That is going to be a big success story for us. Because not only is the fact that the customers have easy access to your portfolio. It obviously has an impact on your OpEx, too, right?

It's a proven track record. Yes. Why didn't you have it before? Is it just because of all the different businesses?

It's just so disparate a portfolio. We had 7 businesses, all of them at some scale in a sense, right? So we had to build out these businesses. So if you just go back, right? First, I did that with the diagnostic side of the portfolio. Then we did that on the life sciences side of the portfolio. And we reached a point where the life sciences and diagnostics business, both from a growth and margin profile looked very different than on applied enterprise and services business. And that's what led to the divestment of that business. And now again, I come back to what we are, which is a pure-play life sciences and diagnostic company.

Yes. And you guys have -- I know it just closed, what are the plans for those proceeds?

Well, I think we've talked about publicly, there are 2, 3 aspects to it, right? One, it's going to take time to get all of that because it's going to come in various jurisdictions around tax jurisdictions around the world. We've got 1.3, $1.3 billion of debt that we have to pay off in the next I would say, 16 to 18 months. So that's obviously going to be a big component of that. And then we are going to continue to be acquisitive. I've never shied away from saying that, that we are an acquisitive company, and our track record shows that we've done a pretty good job on the acquisitions that we have made. So we'll continue to be to do that and build out -- continue to fill gaps in our portfolio across life sciences.

On the M&A piece, how constrained is the organization internally, given that you guys have done so many deals?

I think if you look all, Luke, and I think I spoke to you this last year when we were at your conference is before we started this M&A train, we will build out an integration transformation office. And that was the key driver on how we are going to do integration. I've done 10 years of my life has been on strategy, BD and M&A. So we've got a lot of expertise in the company as to what to do this. And it's a pretty well thought out strategy.

Yes. But I mean just from an internal like just having the people from the integration perspective? Are they stretched in? Are they ready to keep going?

I mean the last acquisition we did was more than 14 months ago or more, 18 months ago, I would say.

All right. So last one here. I remember last year; you basically did a mic drop on me. So update us on the confidence level as you're looking out. So from the quarter perspective, the medium-term and long-term. Obviously, you're going to be very bullish here, but give us a sense of how the quarter has been pacing out versus your expectations? And then as you're going into the end of the year and then as we launch into '24 and '25?

Yes. Luke, I said that last year that I was always being confident, I'm confident, and we'll be supremely confident in our ability. That's not changed. And I think even if you just go back and look at the past 12 months, we've delivered on that, right? So I think the way to look at the company is if you just look at our current portfolio and look at the past 2, 3 years, despite COVID, that portfolio has grown high single, low double. So there is not a whole lot that we really need to do to put it on a growth platform. We've already set a very strong foundation for this business to grow double digits in the medium-term. And that's what the business is now. And then again, 30% plus operating margin, it's already doing that. So there's -- again, we sort of, as I say, put the infrastructure in place for us to see that.

Awesome. Thank you again.

Thanks, Luke.

Great seeing you.

Thank you.