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

Hi. This is Paul Knight, the analyst at KeyBanc on the life science industry. With me today, had been covering PerkinElmer, which I have followed since 1999 when they were known as EG&G, which, again, fast forward, I think, Steve, there will be no longer PerkinElmer soon. But Steve Willoughby, Director of Investor Relations; Alan Fletcher, Head of the Life Science Group. But Steve, I think if you could provide a little bit of intro yourself and for Alan, that would be a good place to start.

Very good. Yes. Paul, thanks for having us. Happy to be here. So Steve Willoughby, I lead IR as well as ESG for the company. I've been here just about 2 years, after also being on the sell side for nearly 20 years before joining the corporate side. And so I've also known the company not since '99, but for quite a while, externally and then, obviously, for the last 2 years on this side of the fence. With me today is Alan Fletcher, who's our SVP of our life sciences business. With the closure of our divestiture last week, where we sold and divested about 30% of the business to a private equity firm, Alan's business will represent about half of our overall company's revenue going forward, and so I thought it would be interesting to have him join us to provide some -- maybe a little bit more perspective on the life science business itself. But Alan, if you'd like to give some background as well, please go ahead.

Certainly. Thanks, Steve. Paul, nice to meet you. It's been a great opportunity here. I've joined PerkinElmer back in 2008. Again, I had followed it many years. I was a customer. I used to work at Merck pharmaceuticals, where we used and bought a lot of products, transitioned in to working for GE Healthcare and subsequently at PerkinElmer, and I joined them as the Head of Business Development. And I remember sitting down with our then CEO, Rob Friel, and asked him what the ambition was. And the logic was he wanted to build a life science and diagnostic-based company. And I think over the last sort of 15 years, we've gone through that transformation. I've personally been able to do a number of business development, strategy, marketing and P&L roles as well as a number of acquisitions that have helped build the portfolio in place. And under Prahlad's guidance, we've really been accelerating that as we did use in the COVID revenue to deliver the life science portfolio as it is today. So it's a great opportunity to talk about it. And as Steve said, we now represent half of the business, which I think when I joined the company, we were probably less than 10% of the whole company when I started in 2008.

So Alan, thanks for the background. What was it that put the accelerator on the transformation? It was obviously cash flow from COVID. But what were all the elements that came together, in your opinion, for this rapid change?

Yes. I think if you think about it, Paul, how we were positioning the market itself, COVID was rapidly producing a significant impact in the way in which our customers and the way in which the industry was changing. And I think what we were looking at was it was an intentional move from our strategy to really sort of turn the company into a faster growing, more profitable company, really addressing end markets where we can have a leading market position. And I think that is now the situation we had with the remaining life science and diagnostic businesses that probably helps us now that we've divested out of the analytical business, which was part of the portfolio up until, as Steve said, last week. We adopted this approach in diagnostics, I think, back when EUROIMMUN joined us. It's an opportunity to really drive market penetration and change the profile of the company. I think what we were trying to do in life science was we had a very, very strong core foundation in proteins. But the ability then to expand into genomics with the addition of Horizon and SIRION, they provided us with novel capabilities in the generic technologies such as CRISPR and RNAi. And obviously, the viral the delivery systems that SIRION have in AAVs, which I mean one of the best to deliver in systems available on the market today, really opened up a whole dynamic area for us in terms of market opportunity. We then obviously have the opportunity then to step a little bit more downstream and add Nexcelom into the portfolio, which again opened up a cell counting area for us, which really sort of opened up the area of cell and gene therapy and a large potential play that we have in that area. And then finally, BioLegend came on board, which is our largest acquisition to date, and that really established us with a core competency in antibody production, really opened up 2 complementary areas. One, we had a very strong process in driving in the academic market presence, which complemented our current presence in biotech and pharma, and really be able to look that in place and obviously add the size and capabilities of that portfolio to the business. It also transformed the lock and feel of the business because we now ultimately have 70% from our reagent consumables and software business with 30% dependency on instruments, which is a much more changeable profile in terms of the renewable rent revenue that's coming into the company. It was all of that real background in place then put us in a position that we were able to divest out of the AES business and really now focus on our key end customers, be they academic, pharma, biotech or clinical.

You split up the pieces of life science now. In terms of your thinking, your management of the group, is it 2 businesses, 3? What's your perspective on that?

Yes. So I look at it as a fundamental capabilities in 3 particular areas. And I think if you think of the capabilities, more translational, so they translate between research customers and potentially clinical customer. You have capabilities in the reagents business. That's obviously the core fundamentals of BioLegend and how that is complemented by the core biomarker technologies that we have in the original PerkinElmer business, which has one of the broadest capabilities of biomarker kits in place. So we have BioLegend producing the components. We have the kit development using our proprietary technology, such as Alpha and HTRF, dividing biomarker discovery kits. And then subsequently, what we also have is we have an instrumentation business that complements that across the board, and that's really focusing on detection. When I look at our fundamental plate readers, we detect anything that emits light, and it highly complements our biomarker portfolios. And then we have a very large imaging franchise, both in the cellular area, with our high content platforms and also our cell counting from Nexcelom, supported by our analog imaging portfolio, which comes traditionally from the IVIS brand, which gives us a large insight into research in terms of visualization of disease using either CT bioluminescence or potentially fluorescence as well as launched ultrasound portfolio. And we complement all of that with a third arm, which I look at as a services arm, which provides our ability to do services -- high-quality private service work for the company in terms of rerun the Horizon Discovery portfolio. So looking at proof of principles, looking at capabilities of doing CRISPR screening using arrays or technologies of that nature and then complementing that in terms of providing our customers with the ability to do a high-level cellular bioproduction cell line development and the ability to deliver that to the customer who has tools, where subsequently where they're looking to profile them using other parts of our portfolio. So I look at it as the 3 arms. I look at the capabilities in genomics, in proteomics and cellomics as being the key fundamentals of the capability, and they're really been supported by our cross-business collaborations with our automation partners and our informatics business as we ultimately look to try and provide solutions for our customers.

And what are the steps you see near term? I mean what's the easy part now that you've done the acquisitions? What do you think is the -- what's the heavy lifting part that takes a couple of years?

That's right. I think when you think about -- it was probably the largest expansion that we had done in the period of time that we have been together as a company. And I think one of the things we look at is rather than classifying in the integration, we're looking at how you basically bring together transformation and innovation and take the best of the best. I do think you're right. We were able to identify some of the key areas going forward. I think some of the longer-term steps we're looking at is how do you consolidate the digital presence of the company as we go forward in terms of the ability to transact looking at e-commerce, the ability potentially to market as one company and then really drive and put the consolidation in place as we believe will be the foundations for us to deliver the 10% organic growth and the operating margins that we've committed to. I think if you think about the real benefits, we're starting to see them now. We have BioLegend, which is a tremendous content development business. It builds antibodies. And as Steve and I will tell you, antibodies are used across our portfolio in life science and diagnostics. So having that core capability in-house now really allows us to accelerate the innovation that comes in place but also allows us to get speed to market increases as we move forward. We're also looking at having the other capabilities. We have Horizon using oligonucleotide synthesis being used in a number of other parts of the business both on the life science side and the diagnostic side. And then simple, one of our franchises in India, Tulip, that's actually using some of their raw materials are now being produced by some of the reagent sites that we have. And those are really sort of the longer-term steps. So we're building up the internal capabilities of digital and e-commerce. We're building up the supply chain internal dependencies on ourselves rather than external suppliers. And ultimately, those will come to benefit as we drive the business going forward. In terms, our customers also have more of a one-stop shop for the portfolios that they need across the solutions that they're looking for.

What's the culture of PerkinElmer now?

Oh, I would say it's interesting because you'll see more as we go through as we launch the new brand, but I think transformation and innovative are 2 of the most that we're sort of really looking out of there. It's driving that culture of serving customers with science is really where we're looking to. I think uniting around that and being able to drive a universal, translational technology platforms and serve our customers in a different way has really sort of driven that culture of innovation. And I think a lot of that is down to both the core competence that we have, but also a number of the partners that have joined us.

Now post renaming, as we're really past the most significant pieces of M&A, who are the peers to PerkinElmer now? Is it a Bio-Techne? Is it a few divisions of Danaher? Who's the comparable, do you think?

It's a very interesting question because I think as we come out and we talked a lot about this as we look at our new identity and our new brand, which we will be unveiling in May, but we believe we're now a very unique company in the market. I think we certainly are. We are a market-leading organic growth company on the top line. We potentially have 30% operating margins with the opportunity to look at market-leading expansion expected in 75 to 100 basis points. We have an extremely clean balance sheet. So if you think about that, it's very difficult to find a company that has that profile that can reflect how we compare. Let's not say, we do compete with the larger companies such as the -- in some of our several businesses, but they are individual parts of the portfolio. And if you think about the size and breadth of some of the larger companies out there, it's more how we compete with them rather than the scale of the company. We focus on, in particular, what we believe is more innovation and more scientific support of our customers. And if you think about some of the different customers out there, you mentioned Bio-Techne, they are -- they compete with part of our portfolio. But again, we have a number of opportunities to expand out in different areas. So it's difficult to find one direct competitor. But in the markets that we have, we're positioning ourselves to be one of the leaders in all of those areas. And being #1 or 2 in those marketplaces, meaning we're monitoring it and really sort of organizing ourselves to be a unique proposition as we go into the marketplace, now we are clear in the divestiture.

And Paul, when you talk about peers, too, you could obviously look at it from a competitive standpoint, you can look at it from a financial standpoint. And when you look at it from a financial standpoint, there are other companies out there who can grow organically 10% plus that have 30% operating margins. But there are companies out there, I don't believe, that can do that and have $3 billion in revenue. And so we feel like we have top-tier financial metrics at scale as well.

Got it. Got it. A side question, Steve, how did you convince firms in what was a pretty robust valuation environment to get these acquisitions done?

I think it's something that a lot of people, including Alan and Prahlad and others, spend a lot of time on. I mean I think maybe Alan can touch on a bit in terms of the culture we have at the company and the culture -- of how that culture is transforming. I think part of it, too, is putting these different pieces together. And maybe Alan can even speak to BioLegend, seeing the potential and what the combination of the company is. But then also how we manage the integration is a little bit different than maybe some other companies, which could be sometimes attractive to some of the businesses that we've acquired. I think also just the type of businesses that we are attracted to and that are attractive to us are predominantly more privately-owned companies, founder-led, entrepreneurial-type businesses that can flourish to an even greater degree under the sort of overall corporate umbrella. But Alan, if you want to provide any more thoughts on the integration or something.

Yes. So I think one of the things we look at, we don't have a one model fits all for this participation in terms of integration. And we look at it as a combination of making up the best of the best, and we're not trying to change our core facilities if we find a way in which any new partner can really develop us and help us. And I think that's really critical because in the case of BioLegend as an example, we've centralized them around the content development engine for the whole company, so the ability for them to expand and to have the freedom and really drive and serve that. I think the commonality behind that is we had a common -- I think certainly under Prahlad's guidance. Unless there is a cultural fit with the individuals, it doesn't matter how good the technology is. You can't succeed unless you have a united culture for the people first. And that's one of the drivers. I think we think alike. I think one of the things that's really telling to that is I think, Steve, we have a fact that if you go back over the history of PerkinElmer, and we've done a lot of acquisitions even since I joined in 2008, we still have 80% plus of the founders or the #2s in the company still working for us today. So they've maintained their career. They've been able to develop their careers, and they've also gone on to hire and control and drive more innovation across the whole organization. And that's, I think, a real sort of testament to the ability for us to adapt and ability to change and embrace them as we go forward.

A couple of questions from investors and that is, does the makeup of the sales force need to change? Or is it where you need it to be?

So I would say as we've gone through the separation of the company, we've looked very closely at that. I think we have, over the last 3 or 4 years with the influx of individuals on the commercial organization, been able to adapt our commercial presence into adjusting to the new portfolios that we have, the establishment of dedicated reagent teams, the complementation of that with scientific consultants and really driving that. And sort of the overlap where some of the platforms share between life sciences and diagnostics. I think what we're really looking at is how we focus on the customer. I think what will be part of the driver behind the fact that we actually did separate the company was exactly from that perspective. It's how do you serve a smaller customer pool but in a more dedicated way. And subsequently, the environmental customers are now served by best, by the legacy PerkinElmer company, which has its own commercial channel, whilst we're able to focus now and pay our attention on the life science and diagnostics and really build out our capabilities to serve those even better.

I think the other thing too, Alan, to add as it relates to the commercial strategy, it's just one area where we are spending more focus and we'll be spending some more dollars both this year and probably even in the next year is e-commerce. E-commerce is an area where as a company overall, we are underpenetrated as compared to probably where we should be as it pertains to the percentage of revenue we generate from e-commerce. And so as we build out now with the company being more simplified with the divestiture, we can not only more easily implement a new comprehensive e-commerce platform, but hopefully, a better platform overall, which should not only drive revenue synergies, but obviously, hopefully, some operational synergies as well.

Steve, could you just give us -- I know you put out the press release and talked to some of the numbers behind rebranding and kind of repositioning. Could you reiterate those?

Yes. I mean in terms of when or how, I mean so..

When and how much.

And how much, sure. So we filed a proxy 2 weeks ago. We'll have a shareholder meeting at the end of April. Because we're domiciled in the state of Massachusetts, there was a state law in Massachusetts whereby we need to receive shareholder approval to actually change the name of the business. And until we receive that shareholder approval in late April, we'll continue to operate under the PerkinElmer name. Subsequent to that, we'll look to rebrand the company. It's -- when you're rebranding a company of our size with 11,000 people, $3 billion of revenue, very global in nature, it's quite the undertaking. I think it's one of those things that in my short time being at the company, there's been a lot of significant undertakings in a fairly short period of time through all of the acquisitions, to divesting 30% of the company, to now rebranding the entire company. I think what's been interesting to be a part of and to see is throughout all of that, we've also continued to execute at a very high level. And so with all of these, I call them, extracurricular activities, the company has been able to continue to put up very strong numbers and at least meet, if not exceed, all of our financial projections as well.

And another couple of questions outside is the China recovery. What's the read on that or your view there?

Sure. So we've had our immunodiagnostics business, which represents about 5% or 6% of total company revenue in China. It has been impacted by the lockdowns. And so that business, we're still assuming here in the first quarter, declines year-over-year because of the sort of reopening and the impact from the COVID exposures and whatnot. We do expect our immunodiagnostics business to improve as the year goes on and hopefully get -- start to get back to normal in the second half of the year. And so for the full year, while we expect the immunodiagnostics business in China to be down low double digits in the first quarter, we're actually assuming low double-digit growth for the full year. So obviously, assuming a more significant recovery as the year progresses. The thing to know about our business that's been impacted in China, and maybe I'll let Alan discuss his business, too, but the business that has been impacted, we do non-acute diagnostic testing. And so we need life to return to normal, which it seems like life is starting to return to normal. We need the COVID patients to leave the hospital. We need the more acute patients to go into the hospital. We need them to leave, and then we need capacity to start doing the non-acute diagnostic testing. And so that's why we're not assuming that this business will return until sort of the second half of the year, returning to normal until the second half of the year. What have been interesting and maybe a little underappreciated is, over the last 3 years through COVID, through lockdowns and through the reopening, our life science business has continued to perform at an extremely high level. So maybe, Alan, if you want to provide some perspective on maybe that or applied genomics or other businesses outside of this piece that's immunodiagnostics.

That's right. I think, Steve, as you said, if you -- historically, if you look back at the life science business in China, we grew at a 20% organic through 2021 and '22, which has been a tremendous opportunity for us even though COVID is going on. And if you think about applied genomics and our DNA and automation platforms, they were even greater than that. It's almost 50% growth as across that board. And I think that showed the robustness of our portfolio and our applicability of our portfolio to the customers. And subsequently, the ability to mitigate the risk of some of the changes that have happened and offset against our diagnostic business has really enabled us to sort of weather the storm as we go forward. And I think that's where that consistent run rate that we've seen for life science and applied genomics is something that we are benefiting from, our ability to have the right portfolio in the right way to deliver to the customer. And then subsequently, I hope as we said, that will give us the good stent as the diagnostic business returns ultimately, as Steve described.

Are you a direct beneficiary of spatial biology?

I would say -- are we a direct beneficiary? I would say indirect is the best way to put it. From a spatial biology perspective, it's an area that we've looked at, too. I think it's a very exciting area. It's a highly complementary area to where we have. We play because we provide a lot of the content that the spatial biology companies utilize in developing the solutions that they have. So a lot of the platforms, they rely on the content. They come that -- a lot of the majority of that content is provided by the franchises that we have, and that's really enabled us to sort of play with a number of partners across the board whilst we take a very close look at, ultimately, where do you want to place your bets because there's many different ways of looking at it. I think it's an extremely exciting area in play at the moment. And as we look to develop the first sort of really translational and diagnostic implementation of spatial biology, it's highly complementing to our imaging portfolio today. So we're watching that brief. We're watching the IP landscape, which is equally as complex in that area. So I would describe this as indirectly benefiting but also having great insights into where we believe the field might go.

A lot of company is involved more directly in biologic production, and this conference have been talking about what they're seeing is a greater level of diversification beyond monoclonal antibodies like mRNA, cell therapy, et cetera. Would you agree with that kind of viewpoint, Alan?

Oh, absolutely. I think if you think about -- we all -- COVID taught us one thing, that biologics work, and the ability to have a vaccine generated by mRNA really sort of changed the world in terms of the ability to -- for people's acceptance and move the market forward. And I believe that both cell and gene therapy will revolutionize health care moving forward. But they're very different in terms of their approach, but they're very similar in terms of their workflows. And I think one of the reasons that when we were looking to expand our portfolio was the capabilities to bring in gene editing and base editing and also the capabilities then subsequently to deliver that modified content to the right part of the cell. So I think it's good to see that people are talking about how the diversification is coming into place in terms of some of the large-scale manufacturers. We're actually focusing our strategy in that area more upstream because our customers are telling us that they have learned in the process through COVID that getting the ability to have the right specialized content produced in the right quality at a much earlier stage, so using GMP at a much earlier research stage, ultimately eases the burden when they come downstream to manufacture. So one of the things that we've been looking at is how do we add high-value technology. So we have base editing with Horizon. We have the viral delivery systems of SIRION. We have the capabilities of BioLegend to produce antibodies, cytokines and media at scale and potentially now with GMP. And how do you provide all that added value upstream, which ultimately will transition downstream with the development? And as those therapeutics are then moved into scale manufacturing, we also have the Nexcelom capabilities, which will provide QA/QC. Do you have the right potential markets in there? Have you got the right quality, the right purity of the cells on a consistent basis? So we're playing in the value-add components area and, at the moment, allowing the large-scale CDMOs to scale up. Ultimately, if you look longer term, and I talk longer term being sort of the 5-, 10-year horizon, will we step into that space? It could be a potential. But at the moment, we believe the real value-add is in this exciting field and really looking at it as it goes forward. Because with the whole field developing, I think there's biological complexity. There's limited solutions out there. And more importantly, there's really, I would say, developing guidance in terms of regulation coming through, and we are very well positioned to understand that and develop our solutions appropriately.

Would it be fair to say that you're certainly a leader in monoclonal antibody technology? But is your ability to provide a platform around it that makes PerkinElmer much more unique?

Yes. I've always said this across the board. The real franchise that we have is actually providing our customers with answers. And a lot of companies out there can do testing, and they can provide the data back to them. But if you think about the solutions that we have, we have proprietary technologies which can be utilized across a mild variety of species, be they cells, be they genes, be they animals, be they portfolio. We also have our automation platforms and more importantly our informatics platform. So we turn all of that data into information.

Yes. I think PerkinElmer has been a platform-rich company a long time. Has it not?

It really has been. It's been the approach since the foundations of the company. I think what we've been able to do is expand that outside the traditional core platforms into the new and exciting areas of cells and genes.

And then another question is, geographically, what is the low-hanging fruit like? Was BioLegend U.S.-centric? Is there a global integration that can open up new markets geographically?

Yes. I think -- so I think if you think about the business itself, certainly, BioLegend were well established in terms of their North American presence. We are, off from a core business, equally balanced across the geographics. I think ultimately, I think now in the new company, we're probably 45% U.S., 25% Asia and 30% Europe or some in that sort of ballpark, so it's reasonably well balanced across the board. But what we are looking at is the areas where all of our partners that have joined us have had indirect presence or a limited presence, and we're able then to support them with more of our approach. Conversely, as Steve mentioned earlier, we're then utilizing the electronic and digital footprint that they have to leverage that and expand our portfolio. So I really think that at the moment, it's a global approach for all of them. And that long term, again, is baked into the considerations that we have and why we believe we can sustain ourselves as a 10% organic growth company with good operating margins moving forward.

And what's interesting, too, Paul, on the diagnostics side of the business in a number of the businesses, we're actually underpenetrated in the U.S. So we're on -- maybe in some of the life science businesses, there are some opportunities to expand outside the U.S. On the diagnostics side, there's very good growth opportunities and expansion opportunities inside the U.S. as well.

And how is -- I know you've talked about 2023 for the last several conferences. But what's kind of the refresh on 2023 outlook, Steve?

Yes. I mean we're still looking for 9% organic growth this year. We're starting out with 30% operating margins as the new company, and we look to build up those in the future. I think we might have touched on earlier, we're looking for 75 to 100 basis points of margin expansion annually going forward. So again, I think sort of industry-leading levels of margin expansion moving forward. When you look at the 2 businesses, over the coming years, we expect Alan's business in life sciences to grow on the low double digits, the diagnostics business to grow on the high single digits. Both of those expectations are in line with what those businesses have done historically. So there really nothing needs to change or improve to do the 10% growth that we're expecting over the medium term. For this year itself, we've talked about the 9% organic growth. And we've said as we move through the year, when you look at it on a 2-year average basis, so taking into account the year ago comp, we expect a 2-year average to be around that same 9% each quarter, keeping in mind that here in the first quarter, we have a 13% year ago comp. So we'll -- we're assuming obviously a little bit lighter for organic growth this quarter here.

And one last question, Al. Externally, was -- are there areas where you've been direct -- sorry, not direct, but can be direct now?

Sure. Alan, you have any examples?

So I would say -- so if you look at the direct portfolio itself, I would say the one area we are -- as a core business, we've sort of developed direct across the board, if you look at BioLegend and some of the complementations coming in, specifically in Asia Pacific, and I'll leave one very example. We've had a very strong life science direct presence in Australia. BioLegend have -- but we've also established very good relationships with some of the key institutes down there. They have absorbed the Nexcelom and BioLegend portfolios, which were actually in Nexcelom's case wasn't even present in that part of the world. In BioLegend, we're using a distributor who was a nonexclusive distributor to that. So we've absorbed those immediately and already seeing the uptick of that potential capability in expanding that. So that's just one example of where we've looked at the capabilities. But I think we've developed a good direct presence across the life science business certainly across the board, and I think that's where we've been able to benefit some of the partners that are coming.

With that, Alan, great debut. And exciting time to be in the life science industry. Is it not?

Oh, it is. I think it's the next -- it's just starting the next revolution, as I said. It's going to be very interesting to watch.

Yes.

Thank you, Steve.

Sure. Thanks, Paul.

Bye-bye. Thanks for joining.