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

Good morning, everybody. My name is Luke Sergott, I cover life science, tools and diagnostics here at Barclays. Today, with me, I have the pleasure of Mr. Prahlad Singh, or Dr. Singh, from Revvity, CEO.

Given we have a limited amount of time here, get right into it. Start with the LifeSci business. You've built a pretty robust drug discovery side. Talk about the demand there. It's been soft across the paradigm for a while, last few quarters so talk about the demand that you're seeing and really kind of where you play and why you might be insulated from some of the areas of weakness that others have seen.

Sure, Luke. It's good to be here. I always have interesting discussions with you. But talking about life sciences as an end market and then how we play there. I think -- as we've gone through this journey of portfolio transformation over the past several years, in Life Sciences, our focus has sort of gone from being a leader on the preclinical stage for small molecules, and we made significant investments to build the same kind of portfolio on the biomolecule side of it. And our focus is always being that how do we proactively differentiate our offering to our customers, especially as we look at the clinical research and development. We don't do any commodity products, we don't do any routine large products that might be used for routine work in the lab. It's always been focused on how can we provide either technology or tools and capabilities to leverage that technology or, on the other hand, reagents for that purposes, that helps them a be much more efficient, faster and cheaper to do drug development. And that has what has been our focus. Starting first on the small molecules and now moving to biologics, especially in the cell and gene therapies, right? The second part of your question is what is the market demand has been. I think as we saw in the September -- since September, I would say that the market has stabilized. And that stability has continued and we hope that it stays the same as we have seen at that time.

And then on stability there so from -- as you're making that pudge more into the biologics discovery side, walk us through kind of the demand from, as you're saying stable, is that biologics? Or is that on the large one or the small molecule? Do those tend to move each other, just how that dynamic plays out?

Yes. Again, the research programs where these big pharma or small midsized pharma biotech play, they are multiyear programs. They are not sort of dependent on moves up and down a quarter, it was more around the underlying stability that we have started seeing in the market. I see that as a positive trend. And hopefully, that continues into the year.

Okay. And then is the stability and how do you think about that with the year-to-date funding rates that's been on the biotech side, and I understand that a lot of that's going to go towards the development and trials, but that's -- trickle through, how in the past has that started to materialize in your bookings?

Yes. I mean we see that as a positive trend. And hopefully that results in a positive outlook as we look forward to the next few quarters. Of course, it takes time for funds to translate from when it's funded to the bank. And that's what we need to see how quickly or how much time that takes to happen. But anything that would come from that would be upside because we've not assumed any of that in our guidance as of now.

Right. And then on the guidance, segue here. Through the different assumptions baked in your different -- in the subsegments or reagents up mid-singles, instruments down high single, software, high singles. Kind of just walk us through the underlying drivers of each of those, what you're seeing, and then kind of sources of upside or downside that you're in...

Yes, I think we -- when we guided at the beginning of the year, we didn't assume any big uplift in the environment. As I said we're assuming the stability would continue, and so far that has panned out. If you just look at breaking down into the pieces, there were 2 pieces that were unique to us versus last year. One was the software business, which we had pointed out earlier in the year, last year, there were not that many renewals and now that goes back into a growth phase this year. And second was the Revvity Omics business for us last year, which was unique in terms of partnerships that didn't pan out last year, which we expect that to come back, and not just the anniversary of it but also for the partnerships to come back. So those are 2 positive trends that we have seen. On the Life Sciences instrument side, we were seeing them to be down close to double digits. But the reagent side of the business, we've assume them to be lower single digits. And the diagnostics side of the business, again, we've assumed it to be in the same trend that we saw in the last year which being up higher low single. So essentially, that's sort of where we have ended up 2%. But I think where -- look it's important to also realize that if you look at how we performed in 2023, the differentiated portfolio shine. Because if you look at our peer group, we were the ones who were at the upper quartile in terms of what we delivered in terms of organic growth for the year. And we expect that similar performance to continue.

All right. So just tying that piece of the guidance to LifeSci, and the first question was on the discovery so with the instruments being down close to double digits, high single digit guide. So talk about where you play within that discovery paradigm, like why it's down? And then what we should be looking at for that to recover? And the same thing, I guess, as you're thinking about reagents of mid-single digits, like what's, from an antibody perspective, from BioLegend, and a lot of that goes to its flow, like is that cell gene therapy driving that? Is that -- as we're looking for the KPIs to start improving here.

I mean obviously, cell and gene therapy is a big driver of that market and play there. But clearly, if you look at our portfolio now, it is -- we don't have something that build large inventories as you took the example of BioLegend. Delivery there is 24 hours. So it's not that customers take a lot of large inventory and store it. And for us, the big precursor of the market turnaround happening when we see our fast run rate reagent flow-through happening at the same clip that it tends to happen in the growth market. So for us, that becomes a very good indicator. I think the Life Sciences instruments, especially the more unique last ticket items, those are much more CapEx dependent. So obviously, that will take a bit longer time for that to turn around, and then see the impact of whether a funding coming in or the market turnaround happening taking a longer period of time.

All right. Sounds good. On the software side, you just introduced clinical trial software. You're talking about this is one of the upside drivers this year [indiscernible] growth because you don't have the contract renewal timing differences. So talk about, on the software piece, really where your -- the plan here is over the next 3 years, like do you fully continue to build out new applications, new modules or is this just more about market penetration?

That's a great question. I mean, look, the way I would think of our software business is it's not very dissimilar to where our Life Sciences business was a few years where we played largely in the small molecules, preclinical research and development space. Our software business is a couple of hundred million dollar business with slightly higher operating margins than our Life Sciences business average. So it's a darn good business. And I'm not going to say whether it's 3 years or whatever, over the next few years, we expect that business to double. And the reason we say that is what we have done is very akin to what we've done on the Life Sciences side of the business, i.e., take it from small molecules to bio-molecules. That's one growth trajectory. The other growth trajectory is take it from preclinical to the clinical side of the portfolio. So the one announcement that we just had is how we are putting the clinical suite out. And essentially, it takes the analytical capabilities that we have had on the preclinical research side now, onto the clinical side. So you take the data and the information that the data aggregators bring to the CROs on the clinical side. And on top of that, this is more like an intelligence platform that allows our customers and researchers to use the analytical capabilities of the software that we provide for data that they might want to read out of it.

So they'll use it for like the clinical trial piece of proper signals and from the data that was built from the discovery side and using the new data coming in from the clinic [indiscernible].

And that is one aspect of it. But the other aspect is just on the clinical, as all the clinical platforms provide the data, sits on top of that to provide analytical tools that can be used.

Okay. And then so as this moves, you guys talk about moving this more towards SaaS-based model. It sounds like more projects type of functions, and that's what I guess, how pharma is looking at it. So what's the pushback? Or what's it going to take to convert more pharma into that SaaS model?

I mean there is not really much pushback. It's [indiscernible] of time as we introduce more and more capabilities and tools, the more the expansion into SaaS happens. Now close to 1/3 of our software business is in SaaS, and that growth trajectory continues. So we don't see that slowing down. It's just a matter of time. As we introduce more capabilities on the platform and the offering, the more it moves towards the SaaS portfolio.

And then so how many of your existing biopharma customers are now using some part of your software?

I mean this is, for us, fortunately, we have a very entrenched customer base, let's say, probably a majority of the top 50 pharma biotech are using our software suite, and maybe I would say, 17, 18 of the top 20 are using it.

How many of your -- of all your biopharma customers though, how many -- I'm just thinking of more penetration in the existing customer base.

That's great. I mean, look, on the pharma biotech customers, that's a long tail. So there is still a lot to go and get. But I guess what I'm saying is, on the top 50, we already are there. But that's another growth opportunity as we go and capture more and more of the payoff.

Got you. Just turning on China LifeSci, you're at the halfway point. So in guide, you don't expect a stimulus, it's clearly not happening anytime soon. So talk about the demand there and across the different end markets, again, you're more pharma based, but just give us a sense of what you guys have been seeing and how the quarter has been trending versus what you were expecting when you issue guide?

Yes, and again, I'm obviously not giving you mid-quarter trends. But I mean, if we look at our China portfolio, look, 17% of our revenue comes out of China, 10% is in Diagnostics, 7% is in Life Sciences. I think we've talked about the Diagnostics side of the portfolio pretty intensively over the past several quarters and years, that we've taken time to build. And it is differentiated because it's in reproductive health because it is in immunodiagnostics. And that's where we see -- continued to see traction, given how, I would say, specialized, and not use the word niche that portfolio is. On the Life Sciences side of it, 7% of it, more than 50% is now revenue -- reagent base. If there is a large stimulus, we might not have a big impact of it, but it will definitely benefit our business. But if you look at the key perspective, our China business grew -- versus everybody dumbing down not just close to double digits but significant double digits. That is the differentiation of our portfolio. And to some extent, that does not get the attention from our investor base. But we've really been very thoughtful in what to bring to China, when to bring it and how to bring it. And I think that's, I would say, our USP for the China market.

And to dig in a little bit on that, why you actually grew China last year and you're talking about differentiated model that's now LifeSci, reagents, the instruments and software. Talk about where you saw particular strength like where all the demand was coming from versus others that were struggling.

Sure. I mean, look, on the immunodiagnostic side of the business, as I have said before, the awareness around autoimmune disease still continues to be in its infancy. And it still continues to be in its, I would say, infancy even in developed market. And definitely, in a lot of the growth markets, China, India, Brazil, you still have a lot more awareness that continues to get generated around autoimmune disease. So the profile for the immunodiagnostics business to continue to grow in double digits over the next several years is very bright. On the reproductive health, the newborn screening, obviously, business has obviously been impacted by the birth rates. Hopefully, this is the Year of the Dragon so we see a change in that. But we continue to bring in new menus, around Duchenne muscular dystrophy, spinal muscular atrophy. We tried to continue to keep our portfolio strengthened by adding more and more in this order. So that has helped us in China. On the Life Sciences side of the business, the more reagents that we have introduced into the marketplace has definitely benefited us. And look, we have been -- we are not immune to the impact of the stimulus, but we have not been impacted as severely as some of our peer groups have been.

Okay. And then lastly, on the LifeSci piece so from the BIOSECURE Act, any of your customers that are going to be impacted or meaningfully like near-term disruption? Clearly, this could be a cherry and opportunity for you versus as the work comes over here, but just how you just kind of look at that in the near term.

Yes. I don't think -- again, as I mentioned earlier, most of what we sell now in China are $500 or $200, $1,000 kits, that are shipped overnight. So it's not that we are selling large, million -- majority of our revenue doesn't come from large $0.5 million or $1 million instruments that would swing the needle for us whether it's BIOSECURE Act or any [ VBP ] or pick any one of those examples, right? And that's why I come back to strategically, what we've tried to do is bring a portfolio into a particular market that is what the market needs, whether it's in terms of localization, whether it's in terms of having a differentiated portfolio that is a market read rather than it being a routine me-too test or a me-too assay in the market.

Okay. And then from a local competition standpoint coming in a commoditized stuff, give us a sense of how much of your business could be impacted from that. You just talked about very differentiated products, but obviously, there's going to be some stuff on...

Yes. And I think we see some of that. And as you see, we recently announced a different distribution model for some of our more routine legacy products that we had in the infectious disease side of it. So strategically, we continue to look at our portfolio and see how we can transform it to address some of these needs. The other aspect is you will see some pricing pressure, and we assume some of that pricing pressure in the 5% to 7%, that is getting impacted because of local competition.

I guess that's a good segue into -- could you talk about -- why are you guys making that change now in that go-to-market strategy and going in direct on those less technical products?

I mean it's just finding the right partner who would take that -- these were more routine tests that were there, HIV, HBP, HPV, things that were very routine, and it didn't make sense still to have that portfolio considering that we are trying to continue to build a more differentiated portfolio. So it was a good opportunity for us to get that into a new distribution path.

And was it something that simulated in the market, you're like, okay, let's just take advantage of this opportunity? Or is this actually many years in the plan just waiting to find the right partner?

It wasn't many years in the plan, but we are always on the lookout on how do we continue to optimize the portfolio that we have for our markets. It was neither overnight nor many years, it's just the right sort of planning...

And then so on the diagnostics, the guide for low single digits for the year, walk us through kind of how you think you're playing out, pretty big step up here in the second half for you, how much of that's seasonality versus actually recovery in some of the markets, or just walk us through the [indiscernible].

On the diagnostics side?

On the diagnostics side.

Yes. I mean again, there's not a whole lot that change quarter-by-quarter on the diagnostics side of the business. it generally tends to play out in this manner. On birth rates we continue to see pressure, but we've got some NPIs coming out, and we continue to have the geographic expansion opportunities. Diagnostics will continue to grow in its healthy pace. And U.S. continues to be a strong market for us as more and more NPIs get approved in the U.S. [indiscernible] that's continued to be one of the drivers. So again, it's a portfolio that we have built now over a period of time where we are not competing, whether it's around 2 or we have the routine tests, we have a specialized portfolio where there's a high market demand for it.

And how does that play into the second half step-up like as you were thinking about that from your guide perspective?

It's more around anniversary on some of the CapEx investments that might have happened, but it's nothing outside of...

Got you. And you're talking about the U.S. continuing to step up and grow healthy. Now EUROIMMUN when you guys did the deal, this is one of the major growth drivers and strategies for that business. Has kind of taken a little bit longer to penetrate the United States market. So talk about some of the hurdles that you guys have had to overcome. And are we hitting an inflection point where the U.S. could be much more penetrating the market, we can see a much more incremental step-up for EUROIMMUN going forward?

Yes. I mean if you look at it, EUROIMMUN, as I have said when we did the deal in 2017, and that you should assume it's going to grow 12%? And it's grown that and more. So it's done fairly well. And one of the bigger drivers for it is actually the U.S. market. It was 5% of EUROIMMUN revenue when we acquired, and it's 15% of it. So the U.S. has actually grown at a CAGR of 25% over the period that it has been as part of our family. So it's done really well. It will continue to do really well because it is still underpenetrated despite that 25% CAGR that it has demonstrated. And if it's nothing more than just the amount of time, resources and energy it requires to get more and more assets through the FDA, and the approval process and time that it takes for those assays to get approved. So we -- in the EUROIMMUN, and the immunodiagnostics business, will continue to have a bright future globally, but more so in the U.S. as it continues to be one of the larger markets from an opportunity perspective.

And then on the -- from a menu perspective of EUROIMMUN in the United States, are you guys at that critical point where you have a majority of the portfolio where you can go to a lab and then say, okay, yes, and anything else is just an ancillary? Or do you need to add 3 or 4 more tests to get to that critical point?

I think we need to add a few more tests, but also I would say in the autoimmune side, we do have a pretty critical mass. On the allergy side, we need to continue to build the menu in the U.S.

And then so who are the key competitors there from the autoimmune and then the allergy, I know Thermo has a big allergy business.

Yes, on the allergy side, as you named Thermo is a big competitor there. On the autoimmune side, I think we have a market leadership position there as well in the competitors. But the expansive menu that EUROIMMUN brings to the portfolio technically is what drives it towards leadership position.

Okay. Just talk a bit little more long-term guide here, [indiscernible] think a little bit outside of the quarter. So you guys just walked down your long-term guide, from the double digits, now you're down to [ 60 ], 75 basis points of margin expansion. As you do the bottoms-up build, that's pretty consistent from different subsegments that you can get. So how much conservatism is baked into there, like when you guys think about that long-term guide, what needs to happen for us to get over that and then what some of the risks there for you to come under?

Yes. I think when we came back with our long-range planning, there were 2 or 3 things, Luke, that we wanted to calibrate. One is when we came out with our midterm plan in 2022, it was a very different time frame. Markets were growing at double digits on the Life Sciences side pretty well. And that wasn't normal, but neither was 2023. So for us, it was that we went back and looked at historically and a bottoms-up planning around what is the growth -- inherent growth rate for the Life Sciences side of the business. The second aspect is what we also realized is having an absolute number for a defined period was not the right way to look at it, but rather have an underlying market growth on which you look at your portfolio and say what is the incremental growth that you would have on the market over a period of time rather than a defined period of time. So those were sort of the 2 corrections or adjustments in our assumptions around how we look at the market growth. In terms of the portfolio, look, the Life Sciences reagent and our Software business is going to grow 9% to 11%. That's the inherent growth rate. On the instrument side of Life Sciences and Applied Genomics, that's going to grow single digits. And our reproductive health business is going to grow 2% to 4%, either the birth rate improves, you get more opportunities there, our software business grows at a much faster pace than we think it is. I think we have a good level of prudence in our assumptions. And then that's one of the reasons for the investments on the top line.

Makes sense. And the last thing here, last couple of seconds. So with -- on that same vein, you've made a lot of portfolio changes, you just closed a big divestiture, rebranding. So talk about what do you think the biggest opportunities are for you guys over the next 3 years.

Yes. I think the part of our story, which we continue to communicate more and more, is how our portfolio has changed in terms of what transformation that we have done has made us more of a partner of pharma biotech rather than a vendor. And that's the piece which is going to allow us to have a much more differentiated performance because what we bring is knowledge, technology and capabilities of say from preclinical research and discovery to the clinical lab, in terms of just identifying and helping them develop the target, but also at the back end, identifying and following up on their patient population for their clinical studies and post approval. So we are, as part of the journey all the way from the beginning to approval for our pharma biotech customers. And that's the piece of the story that still needs to get better understood and absorbed by the investor community.

Got you. Thanks. That's all the time we had. I didn't even get to ask my famous question for you. Thanks, mate. Good to see you.