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

There we go. I'm Catherine Schulte. I cover life sciences and diagnostics here at Baird. Very excited to have Revvity presenting today. From the company, we have the CEO, Prahlad Singh. And I think we are going to dive right into Q&A. But if you have a question, you can e-mail it to [email protected], and I will pass it along. So Prahlad, thanks so much for joining us.

Nice to be here, Catherine, this evening.

You as well.

May be just starting off, you just completed your full quarter as Revvity. Maybe just talk through how customers, employees, the company has worked through that rebrand? And anything else you can talk about the transition?

It's very interesting to see the transformation live as you go through the process over the past -- it's been now 4 months since the branding and name change. And there is just a sense -- you can feel a palpable sense of excitement. I'll start internally with the employees, the brand name. And if you just look on social media and the impact that you see of it -- can you hear me now? Good. So the impact that you see of it, it's really palpable. And on the whole concept around science first and innovation is really making a difference. Externally, even as we talk to employees and some of the relationships and partnerships we've announced with key pharma and biotech, the name has started to resonate and people have started to associate it with as we've said, science first and innovation. So it's really exciting to see this process.

And then as this new Revvity, you laid out a 10% midterm organic growth target, that assumed a stable macro environment. And clearly, we have not seen that in recent quarters. So how should we think about how to put some guardrails on that number? And what would it really take to get back to that 10% number?

No, it's a good question, Catherine. I mean, when we laid out the 10%, obviously, the company had already done much higher than that for a period of time. The macro environment, obviously, it has not been a fun one for anyone of us. But I think if you look at what we have put together as part of Revvity. And if you look at the Diagnostics business, the assets that we have and the portfolio that we have, whether it's around reproductive health, around autoimmune allergy and around applied genomics, infectious disease such as tuberculosis, it provides for higher than market growth that is sustainable over a period of time. Similarly, on the Life Sciences side, with the acquisition and the -- bringing in the BioLegend portfolio into the family. We now have assets that will allow for sustainable above-market growth over a sustainable period of time. So we really feel good about the portfolio that we have now. And irrespective of the market environment is always going to be at the top tier of our peer group. And that is -- our portfolio is what is going to differentiate us over the long period of time.

I think we're starting to see that play out this year to some extent. And part of the rationale around the divestment was moving away from some of the more cyclically exposed areas. Maybe just provide an update for how you view the business and the potential downturn or a recession scenario?

I think we all will get impacted to some measure or other with the macro environment. No one is totally immune to it. But I think what we feel really good about is that as we look at the impact that we have -- let me give you a data point, right? Life Sciences instrument is now 9% to 10% of our total portfolio. And that is the one that will get probably impacted the most by the macro environment. 80-plus percent of our business now is reagents, consumables and recurring revenue stream. So that is what will allow us to be in the top percentile from an organic growth perspective as we look at our peer group.

And then I think on your last earnings call, your updated 2023 guidance called for about a 4-point incremental headwind from pharma and biotech weakness, maybe just given your conversations with customers or your team, what do you think is driving this slowdown within pharma? And what do you think it will take to see a rebound there?

Again, for us, the big impact, obviously, as I said, Catherine, is felt mostly around the life sciences instrument side of the portfolio, and that tends to be a big ticket item. And again, what we are seeing is that in most cases, it's CFO or C-suite-driven decision around large CapEx spending. And it is more around let us sort of pause a bit and see how and why we should be spending that. And again, this is -- thinking through if I were to as to what were the reasons around that. One, obviously, big pharma biotech have been very consistently spending above market over the past few years. And I think there might be a calibration required for a period of time for that to come to what is normal levels of growth for that side of the business. Secondly, the higher interest rates and the raising interest rates, obviously, causes pause. And there are other places where they can put their cash for better use. So I think what we are seeing more is a delay on spending and people are sort of saying, let's see what happens with the macro environment and let us see that come down to a bit more normal. And then we will restart the spending around CapEx.

Yes. And I think we've seen similar cycles in pharma and biotech before, maybe 4 or 5 years ago, saw a slowdown on the capital equipment side. How long do these cycles normally last? And maybe what's different in the cycle that you're seeing today?

Again, it's very difficult to predict or speculate as to how long these cycles last. I mean, typically, if you look at historically, we've seen these go for not more than 4 quarters over a period of time. And generally, they come back. But again, that would be just based on historical patterns that you see. And again, I'll come back to the fact that for us, what this does, this is the reason, Catherine, as you started when you kicked off your remarks. This is the reason we sort of transformed the portfolio and did what we've done over the past several years. It's been a sprint, but the whole thought process around the acquisitions of 10, 12 companies in high-growth, high-margin areas, divestment of 1/3 of our business nearly in low growth, low-margin areas, where we were not honestly as competitive to some of our peer groups. Now positions us in a way to some way sort of insulate and soften the impact of such tough market environments.

Maybe moving on to China has been a key topic for this group. You've kind of talked about a tale of 2 cities within China and your Life Sciences business versus your Diagnostics. Can you maybe talk about the end market differences there? What's primarily driving the weakness on the life sciences side?

Yes. I think just -- and as you said, China is a topic that is in everybody's mind. Just to sort of lay the groundwork, right? We have 17% of our revenue in China. 10% of that is Diagnostics. And 90% of that is reagents and assays that are a few to a few hundred dollars at the most. And these are around reproductive health and immunodiagnostics. And essentially, that has played out the way pretty much as we've seen it play out and as we predicted it would play out. Life Sciences is about 7% of our revenue and 60% of that, again, is reagents and consumables and assays. Only 40% of our business there is around life sciences instruments. So if you put that in perspective of the whole company, that's about 2% of the company. So it is a small percent that gets impacted. And again, I think, given the maturity level of the pharma biotech industry in China, you see that getting impacted from a budgetary perspective. I think there was a bolus of stimulus that came out towards the end of the first quarter, early second quarter, but that evaporated. But as we've seen, these things turn on a dime in China. So as of now, we are not assuming any stimulus and that's how we forecasted when we came out of our forecast at the end of the second quarter.

And you mentioned these things can turn on the dime. Do you think -- how much of this life sciences weakness do you think is tied to a lack of stimulus or stimulus could really help there versus some of the broader economic concerns within China?

Again, I think it's difficult to speculate as to what is causing, but I would imagine it's a combination of both factors. What we have done in our forecast, we have not assumed any stimulus, and that's what we have forecasted for the rest of the year.

And then you talked about strength on the diagnostic side. Maybe talk about immunodiagnostics specifically. What are your expectations there? Maybe how you view your competitive positioning within China? And if you've seen any push towards local players on the diagnostic side?

I mean, immunodiagnostics, if you recall, Catherine at the end of the first quarter, we said that these nonessential life-saving diagnostic tests will be the last ones to come back into the mainstream. And it played out pretty much as we said, as you saw from our second quarter earnings call, and it continues to pretty much be in line of what we had forecasted, and we have forecasted for the rest of the year. I think the differentiation we have with our portfolio around immunodiagnostics is that the panel that our EUROIMMUN business provides for the marketplace is very comprehensive and it has got enough differentiated where there is not enough local competition. So our focus has always been that in the China marketplace, we provide a portfolio which is differentiated and does not have a lot of local competition. And it has pretty much played out. And the pipeline of products that we have going into the NMPA for approval over the next several years ensures that, that differentiation remains.

And clearly, a lot of near-term headwinds within China, but we've heard a number of your peers talk about, hey, maybe this will continue to be a growth region after we get through these headwinds, but maybe not at the levels that we saw pre-COVID I guess, has anything changed in your mind in terms of that mid- to long-term growth outlook for China?

Again, I think this is where the portfolio differentiation comes into play, Catherine. Yes, China will have a headwind for us, but it is around the life sciences instrument side of the business, which again is 40% of 7% or 17%, right? And this is where we sort of need to ensure that we why we've done what we've done in terms of our portfolio is to sort of ensure that there is some level of insulation for that. So whether it's going to be a 2-quarter or a 4-quarter pressure, it is going to be on the life sciences instrument, i.e., the big-ticket items that the cell analyzers or the single cell imaging systems that we have.

Yes. maybe focusing on the life sciences portfolio more broadly. You've made a lot of acquisitions in this segment over the last several years, I think somewhere around 40% of your Life Sciences business. You didn't even own pre-COVID. So maybe just give us a picture for how all these new pieces fit together into a cohesive offering?

Yes. I mean if you recall, and just to take a step back around the portfolio transformation, when I came into my role, we did that first with the Diagnostics business. It was, as you know, essentially a newborn screening and a reproductive health business. So the idea was how do we take that and expand the addressable market for diagnostics. And where that's where we added assets around autoimmune, allergy and infectious diseases. And then COVID hit, and COVID for us, fortunately allowed us to have a robust balance sheet, which we could use to do the same on the Life Sciences side of the business because you know -- we knew at that point the $600 million, $700 million of COVID revenue with 1 day go away that we were having. And the intent really was to sort of how do we replace that with high-growth, high-margin businesses. This is when we added BioLegend, Horizon, Nexcelom, SIRION Biotech on the Life Sciences side. And the intent really was we already had a go-to-market strategy with our small molecule portfolio in preclinical research and discovery, and we wanted to replicate that on the large molecule and the biomolecule side and sort of have a more comprehensive value proposition for our customers. With the addition of these assets, now we kept moving more and more upstream or as upstream as you can go. All the way from licensing technologies, as you saw from our AstraZeneca press release to being able to provide them tools, software, reagents, consumables and capabilities to do their research. And we really feel good about the assets that we have put together, which is very comprehensive and sort of smooth -- flow smoothly through the preclinical and discovery -- preclinical research and discovery value chain.

Yes. You talked about that focus on upstream kind of preclinical discovery. Can you talk about some of the downstream opportunities you see for the business, whether it's GMP reagents or software used in Phase I or II clinical trials. How do you envision your portfolio progressing on that side?

That's a great question. I mean what we -- for a company that is going to focus on innovation, it is as important to know what you're not going to do as you're going to do. I think we have already stated that we are not going to do BMO. We are not going to do commercial manufacturing cGMP but where the opportunities present for us is around GMP, both on the software side and on the reagent side, specifically on the antibody side. So -- and we've talked about this, how we are publicly going to continue to invest in GMP manufacturing, especially on BioLegend side and sort of expand our software portfolio, the signal software portfolio on to the clinical side of the value stream. And that's where a lot of our internal NPI efforts are ongoing.

You mentioned BioLegend, that's a big chunk of the new portfolio. So just any update on how that's performing relative to your expectations at the time of the deal? Any surprises either to the positive or negative?

I think BioLegend, if you recall, when we did the EUROIMMUN acquisition, I said that's going to be the best acquisition in our company's history. BioLegend now has sort of become the largest and obviously, it's done much beyond our own expectations. And I think some of the synergies around commercial, logistics and all, was something that we expected. The real advantage that we have seen is around the R&D potential that we now have by bringing BioLegend into the portfolio. And how it has continued to narrow the chasm between research and discovery of clinical diagnostics reagents in the company. For scientists to be able to sit in a room and sort of design and define as to what antibodies the needs are for whether it's EUROIMMUN for our legacy diagnostics business, Instead of having to wait to work with a third party, they now have an in-house resource of some of the smartest scientists at BioLegend that can focus on developing the antibodies that they would need as an example.

We have one question from the audience around cell and gene therapies and some of the production bottlenecks that we're seeing in the industry. I know you focus more on the discovery market. And any comments there? And then if you could just talk about how your portfolio is positioned to take advantage of that market?

I think consciously, our focus has always been to remain upstream. And I think irrespective of the downstream, over the next decade, we strongly believe that a disproportionate amount of funding will continue to go into the early clinic -- early research and discovery of therapeutics that are -- on cell and gene therapy. So -- and that was one of the reasons that we focused on the early a, smaller, there are not large CapEx requirements. It's more around the accessibility and availability of reagents, consumables that benchtop scientists can use to conduct their research. And that is where their focus -- our focus has been, whether it's around Nexcelom, for cell counting, cell imaging or around providing reagents with BioLegend or licensing technology as we are doing with the Horizon and SIRION portfolio. So our focus has been more on the upstream. And that's -- as I said, it's as important to know where you're not going to put your resources or your efforts in it. So we don't really have an intention or it's not one of our strategic priorities to play downstream on that market.

And then maybe shifting to diagnostics. How do you see your diagnostics portfolio evolving over time? You talked about the transformation with the EUROIMMUN deal. You've said its gotten more involved on the genomics lab side of the market. How do you view the attractiveness of being that kind of platform instrumentation player versus expanding your service lab offerings? And where do you think that portfolio will go over time?

I think the difference that has become with the portfolio now Catherine, is by concentrating on life sciences and diagnostics with the assets that we have, our discussions with our customers has become more as a partner rather than as a vendor. It's not that we respond to RFPs now and say, okay, this is the price, and we can give you a discount because of what all we have. It is more about the technology that we are bringing in. And that could be all the way upstream from licensing technology to pharma biotech to be able to work with them to develop companion diagnostics around genomics or rare diseases and eventually use our infrastructure of labs around continents to be able to screen patients for them. So they have the right patient cohort to be able to provide some rather expensive therapies. So that's the whole value chain that we try to work with our pharma biotech partners and bring both the Life Sciences and Diagnostics side of the portfolio together. So as you look over the next few years, you'll find more and more of these partnerships being developed. Whether it's starting with licensing that are milestone based, all the way to be using our [OUMENG] infrastructure to do esoteric lab services and finding the right patient cohort for our pharma partners.

Maybe if we shift to capital deployment. Historically, PerkinElmer had pursued a kind of bolt-on M&A strategy. Has anything changed with the transition to Revvity, any key areas that would be a focus for you to add inorganically preference for life sciences versus diagnostics?

I think it is, obviously, from a criteria perspective, it would be the right asset that is a better strategic fit, whether it's on the diagnostics side or the life sciences side of the business. I think one of the things that are not as well understood is why do founder entrepreneur led companies come to join Revvity, or what was PerkinElmer. I think that is one of our biggest competitive advantages. And I think that has served us well, whether it's through EUROIMMUN, Tulip, BioLegend, we have some of the smartest people on the planet in this space who are our advisory board that are our employees of the company. And I think that strategy is going to continue. So it is going to be more around the strategic fit of how it would fit into the portfolio. And I think -- I don't think that's going to change whether it was PerkinElmer or it is Revvity now.

Yes. And how are you thinking about valuations in the current market environment? Any preference for public versus private? And how should we think about kind of optimal target leverage ratios for you?

I think, as I said, our first criteria is to find the right strategic fit, right technology fit for what we are looking in. We tend not to get into companies that are process-driven. We generally tend to sort of start building a relationship with companies that may not want to be sold today. But they might think about doing that 3, 4, 6 quarters down the road. And that's essentially what has been our recipe for success and secret sauce. And I think -- that is where you will continue to see us play more rather than in a competitive M&A market place.

Right? We have about 5 minutes left. So we have 3 questions that we're going to be asking every company that we have here. So we're going to dive into those now. As you think about the next 12 to 18 months, what are the 2 biggest opportunities that you see for your business?

I think the differentiation of our portfolio and how it will start showing from its financial profile, over the next period that you define is going to be the biggest opportunity that we will see live. And I think as you pointed out earlier, we've started seeing it even this year in a tough market environment. I think that is going to be the biggest opportunity.

And then same question over the next 12 to 18 months. But on the opposite side, what are the 2 biggest potential challenges that you see for your business?

I think the geopolitical environment and the macro environment, it's no different than for any other peer company in our peer group. Those are going to be two of the biggest challenges that we all will collectively be facing.

And then what is something that investors and/or analysts don't ask you very often, but you wish that they would?

I think one of the things I mentioned earlier is why is it that these founder entrepreneur companies come to Revvity or what was PerkinElmer? And why is it that these guys -- what is -- what is it that clicks for you? That's never been sort of a question that has been asked a lot. And I think also around our portfolio, around our NPIs, we tend to not get a lot of questions around our NPI portfolio as to digging deeper into what is it in reproductive health, what is the impact of a Duchene muscular dystrophy assay or a spinal muscular atrophy assay. When some of the biotech companies have got FDA approval and what impact that could have. I think those two things tend to get a bit overlooked.

And maybe a question from the audience around the academic end market. You had strong results in that end market in the second quarter. Any thoughts on the durability of that growth and where you see NIH budgets and broader academic funding globally going?

Yes. I mean academia has done very well for us, and we expect it to do -- expect it to continue to do well. I mean, NIH is, what, less than or 1% of our total revenue impact. So it does not really change or move the needle for us much in terms of the impact on funding of NIH. And then I think it's more because, as I've said, majority of BioLegend, using them as an example, commercial teams are PhDs and masters. And they spend most of the times in academic labs sort of helping design the epitopes and the antibodies that the researchers would want to manufacturing. And that partnership sort of pays of in the long run. So we continue to expect it to do quite well.

And then maybe just with some of the recent news of consolidation in the space had a major antibody player expected to be taken out by a bigger tools company. Any thoughts on how your portfolio performs when you see some of that consolidation with competitors?

I think we feel very strongly that BioLegend is the best asset in that space, and it has demonstrated its excellence over a long period of time. And I think we are very proud that it is part of our portfolio, and I thought -- I think it's going to be paying great dividends for the company in the long run. So I'll leave it at that in terms of our M&A strategy on that space.

All right. Great. Well, with that, we will leave it there. Prahlad, thanks so much for joining us, and thanks, everyone, for attending.

Thank you, Catherine.