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

Yes. This is Paul Knight, the life science analyst at KeyBanc. It's my pleasure to have Steve Willoughby, Head of Investor Relations; and Yves Dubaquie, who's Head of the Diagnostics business at the company. Just a couple of housekeeping items. We will allow -- there's availability to ask questions off of your screen. You can just ask them on the screen or you can e-mail me at [email protected]. With that said, Revvity has transformed dramatically during the 4 years or so of COVID and post COVID with many acquisitions and the divestiture of its core analytical instruments business. But we're here to kind of talk about the current state of business at Revvity. And Steve, you can start, make some introductions if you'd like or you can at least get it going.

Sure. Yes. Thanks, Paul. Thanks for having us. We're happy to be here. As you mentioned, for those of you who have not been following the company closely, Revvity has gone through a very significant transformation over the last 3 to 4 years through a dramatic portfolio adjustment. We reinvested the significant COVID proceeds we were able to generate. We were able to accomplish 12 acquisitions in a little over 2 years and then subsequently worked on divesting, as you mentioned, our analytical food and pharma services business, which was about 30% of the company at the time. And so following that, last May, we then reformed and rebranded as Revvity. And so Revvity has now been in existence for about 9 months. We've been extremely busy before we became Revvity and obviously since we've become Revvity as well and -- putting all these different pieces together and really starting to harmonize things over the last 9 to 12 months. So it's an exciting time for the company as we really start to show what Revvity really is to investors and to the outside world.

And Yves, could you give us just a brief background on yourself? That would be super helpful.

Yes, happy to. So thanks for having me. I'm Yves Dubaquie I'm leading the Diagnostics business, so responsible for the portfolio strategy and R&D in Diagnostics. I've been doing this for about 2 years. Background is primarily scientific, trained as a biochemist, but worked along the value chain in licensing, M&A roles in the life science diagnostics industry and in pharma. Happy to be here.

Yves, the business of Diagnostics at PerkinElmer, about $1.5 billion, not quite, but $1.5 billion, about half the company, a little more than half. There's a few pieces to Diagnostics. Could you kind of give us your breakdown of how we should think about the businesses in the Diagnostics segment?

Just to give you an overview of the segments, so we think of it obviously in, I'd say, 3 main parts. One is autoimmune and allergy testing. This is obviously, again, a specialty market, where we're primarily operating in diagnostic specialty markets where we have a strong leadership position. That's the case in autoimmune and allergy testing. This is part of our immunodiagnostics business, where we also made an acquisition several years ago with EUROIMMUN. The other part is certainly the most traditional Diagnostics business at Revvity is the reproductive health business. We have a leadership position there. We're really testing newborn babies, and we'll talk more about that, I suppose, later. But this is a very strong business with a still growing business despite the fact that we have birth rate declines globally. And then the last part is what we call applied genomics. This is really a sample preparation tools and reagents business for genomics. So we have all the required instruments and reagents to -- necessary to prepare samples for next-generation sequencing. And that also came together through a couple of acquisitions and internal developments.

And when you think about the revenue size, Paul, the immunodiagnostics business, the autoimmune/allergy and latent tuberculosis is about half the Diagnostics segment. We anticipate it being the fastest-growing piece of the segment as well. And then reproductive health is around 1/3 of the segment, and then the remainder is the sequencing sample prep business.

Starting with the sequencing business, is it Sequencing as a Service, basically?

No, it's enabling customers to do sequencing, so to do their preparation themselves. We do have a clinical lab -- sequencing lab or actually a network of labs across the globe, pretty much 1 in each of the 5 continents. That does provide a sequencing service or does provide sequencing services for customers for pharma. And in the U.S., it has been primarily also a backup laboratory for our reproductive health customers. So if they have something ongoing in the lab and cannot do this function which has to be done, obviously, on a daily basis, then they can sort of help them out and pick up that work. But that will be then the service part. But the applied genomics piece itself is really more enabling our customers or selling instruments reagents for them to do that.

What's the growth rate of applied genomics?

We assumed in our new LRP, our new long-range plan, that applied genomics should grow in the 3% to 5% range. It was down high single digits last year. We're assuming it to be down high single digits this year. But what's interesting about that is despite back-to-back years of down high single digits, it still brings the 5-year CAGR to positive high single digits, which shows you how strong this business was in the 2020 through 2022 time frame, even on a non-COVID basis. So we were experiencing exceptional growth excluding COVID-related sales during the pandemic years. And so that's now come down here recently. That will -- eventually, it will be a temporary disruption. But we expect 3% to 5% growth in the long-range plan. Hopefully, we do a little bit better than that.

And it was down, what, due to biotech financing, lack thereof?

Yes. It's been basically subject to the same pressures that we've seen our customers like pharma/biotech. I mean those are sometimes capital investments like liquid handling stations or automation around that sample preparation. So it was -- it just behaves more like liquid -- sorry, more like life science instrumentation in that sense than Diagnostics.

Right. And then a little under half of the business is sold into clinical labs. And so as you can imagine, with all of the instrumentation that clinical customers bought for COVID that they have a lot of instruments now that are being sort of repurposed or digested now that COVID's over. And so that has depressed their demand for new instrumentation. This is one business though that while it's under pressure right now, we have a very strong new product pipeline here, some of which has already come to market. But we also have quite a number of novel and innovative products coming in this business over the next 12 to 18 months.

And again, as you know, next-generation sequencing is starting to make inroads in diagnostics as well. So it positions us ideally, right, to sort of take these -- what our research use only solutions today but sort of build them out and sort of plan for the future to utilize those platforms in diagnostic applications.

Okay. The reproductive health, I know, has probably been around since I knew the company in 1999. Is it not?

It's -- yes, it's been over 20 years. Yes.

Now that is in effect your -- that's newborn testing. What else is in this reproductive health side of the business?

So yes, you have the newborn screening business, which I mentioned. Again, this is probably...

2/3...

2/3 of it, yes.

2/3 of the reproductive health business is newborns.

And that has been growing, I'd say, mid-single digit, which is really a great track record given the birth rate decline, right? We assume that about 4% to 5% globally is negative birth rate decline in the past years. And the reason why that is, is twofold, right? We're using here a geographic expansion, where there's still states that are not testing babies. And this is -- these are mainly public health initiatives so they take longer to develop. But once we obviously have an agreement with a particular state, those are very sticky agreements. And then the second part is just menu expansion, and that's twofold. Menu expansion can be bringing a new test to the menu itself. This -- we have about plus 75 tests or so. Not every state or every country tests for all of these conditions, so they make the determination. And then the other one is just adding obviously an existing test to that menu in particular state or in a particular country. The other parts of the reproductive health business are prenatal testing. Here, we have a biochemical prenatal testing business that uses biochemical markers. That has been declining, but this decline has been partially offset by the growth of Vanadis. Vanadis is our NIPT solution, which has been growing double digit, and they're still doing that. And we expand into maternal as well in that sense, working our way upstream from the birth, if you will.

I recall that, what, you supply, very -- like I think you're supplying state labs with the system, correct?

That is correct. In the U.S., the state labs are tasked with doing the newborn screening. So we're obviously supplying the instrument, the test, the software, right, to have chain of custody of the sample. Then you got to report back to the hospitals and so forth. And one of our key differentiators is that it all starts with a drop of blood on a dried blood spot card, which is basically taken at the hospital right after birth with a little heel prick. And that sample is very, very stable. It can be then transported to those labs. And that's how the journey -- the diagnostic journey starts.

And then as we mentioned earlier, we have a clinical lab network around the world. We have 5 clinical labs in each of 5 main continents. That business is called Revvity Omics. And a little over half of that business is providing backup testing capacity for our newborn business. So for states or governments who want to either outsource or need to temporarily outsource the testing of samples, we provide that capacity for them. So it's from the dried blood spot card to the analyzer, to the software, to providing backup testing capacity. So it's a fully comprehensive offering we provide these government customers because newborn screening is government-mandated, government-paid for globally.

Yes. Right. And I'm sure a lot of countries are adding more to the menu as well, right, not just U.S.

Oh, absolutely. And again, it's also driven by progress in therapeutics, right, if you think about what are the treatments available, obviously. And for instance, if I pick one example, spinal muscular atrophy, there are treatments there where we know that the earlier the treatment is given to the baby, the better the patient outcome. So it's really important to get those recognized, the babies, and not later in -- when they're 2 or 3 years old. Again, great story in Brazil. Just to give you an example. We implemented SMA screening beginning of the year in Brazil. And within 2 weeks, a baby was identified with SMA. We made national news there as well. So I mean it just shows the purpose as well that we have here with that particular business.

Yes. And then could you talk to the autoimmune/allergy test business. I mean that -- was that predominantly EUROIMMUN that you acquired several years ago now?

Yes. So we acquired EUROIMMUN in the latter half of 2017. So it's been 6-or-so years now. And that's where that business started was with EUROIMMUN. And the majority of the immunodiagnostics business today is still autoimmune. And then there's also a blood-based allergy business as well. And then we've subsequently added to that business via acquisition both Immunodiagnostic Systems, IDS, which brings tumor chemiluminescence and endocrinology exposure. And then we also added the acquisition of Oxford Immunotec, which gets us into the latent TB market. So it's -- the vast majority of it is autoimmune, but then there's also, I would say, allergy, some endocrinology and then latent TB as well.

Yes. Okay. Growth rate of the autoimmune business in general?

So immunodiagnostics, which, again, is about half of our overall Diagnostics business, so over $700 million in annual revenue, we expect to grow 9% to 11% in our updated long-range plan. I think the thing that's important to understand about our immunodiagnostics business maybe compared to some other publicly traded diagnostics businesses is we are in very specific markets intentionally, markets that we believe have durable, faster underlying market growth rates. For example, autoimmune is a market that is growing in the high single digits. Latent tuberculosis is a market that's growing actually probably even slightly higher than that, high single digits to maybe 10%. And so these are markets where we have a leadership position, are faster-growing, which we believe is durable. And so it's one of the reasons why we expect our Diagnostics business to have higher-than-average growth rates in the future compared to what I would consider to be the broader diagnostics market.

Right. And it also strikes me, Yves and Steve, as a business that you're really not exposed to a lot of pricing risk. Is that a fair assumption?

Yes. You get obviously pricing pressure everywhere a little bit. But for instance, in China, it's a good example that this particular business has not been subject to the VBP restrictions that we've seen or pricing pressures. However, of course, we have seen price erosion over the last 2, 3 years of about 5%. So even if it were subjected to the VBP down the road, it would not be as drastic as what we've seen with other businesses. I think the differentiation here is really it's a highly complex and high-technology testing with a multitude of parameters. So we have really a fully complete offering of panels. But again, it's also a highly technical business. But going back to China, it's not part of the commoditized or more common types of diagnostic procedures, which are larger in volume, and hence, have been subjected to VBP.

Yes. I think the other thing -- the important thing to understand, too, Paul, is we're not running the tests ourselves. We're supplying the assays and instrumentation to the labs who are conducting the test themselves.

Yes. And I think, too, EUROIMMUN was really more of a global player, not really a U.S. player at the time of acquisition, correct?

Yes. So when we acquired it 6 years ago, it was actually very much under-indexed to the United States, and it actually continues to be that way today. So when we acquired EUROIMMUN, only about 5% of its revenue was derived in the U.S. Today, that's about 15%. So that -- it means that since we -- since EUROIMMUN was added to the business, its revenue has been growing at about a 25% CAGR over a many year period. But even with it only being 15%, it's still -- we would consider it very much under-indexed when you think about the normal geographic dispersion of a diagnostics business. Normally, you think of the U.S. representing sort of 35% to 40% of its global revenue, and it's only 15% today. So as we continue to get FDA approval for more and more of the menu and more and more of the tests, we expect the U.S. to continue to grow above average and ultimately represent a greater portion of the overall revenue mix.

And I think many of the NPIs...

New products.

New products, sorry, thank you. Many of the new products that we develop center around automation of the workflow. For instance, UNIQO 160 is an instrument that automates 7 different manual steps. And basically, it gives you a sample to answer -- sample-to-result answer. And those automated solutions resonate obviously well in the U.S. market where clinical labs are obviously under pressure, under-resourced in terms of...

Labor is more expensive.

Labor, exactly. So those are certainly great points for the U.S. market as well.

Is EUROIMMUN -- it's really -- is it a clinical lab, a technology or platform versus R&D?

It's clinical.

Yes, solely clinical. Yes.

Yes. So in Europe, it would be under IVDR and selling -- either FDA-approved or then a clinical lab would validate it as...

As an LDT as well.

As an LDT, as a laboratory developed test in the U.S.

And then reproductive health is a little bit of the other side of it, right, in the sense that it was really more of a U.S. business. And you've been expanding globally, Steve.

Yes and no. I mean it's a fairly -- I would say the U.S. is probably still the largest market for reproductive health, but it's very much a global business, whether it's in Asia, in China, certainly in Europe. I would say that on average, the U.S. -- probably each baby is tested for more assays per baby on average than outside the United States. So that's actually a huge area of growth opportunity for us is that -- for example, you take the state of California. Every baby is tested for over 50 different disorders. I believe in Ohio, where I live, it's around 30. But you go to the U.K., it's only like 16 or 17; and then China, it's, what, 7 or 8. And so as we are able to have governments expand the panel from 8 assays to 10 or 12, that's all incremental revenue stream going forward as babies are born.

And again, if you just look at the macro picture, right, only 1/3 of all babies born globally today are being screened with either one or more conditions -- or one or more conditions. So that leaves obviously plenty of headroom for expansion -- geographic expansion but also menu expansion.

Yes. Almost 100 million babies go untested around the world every year.

Yes. Okay. Yes. And the strategy, of course, of what Revvity does is to acquire. You've acquired Oxford Immunotec. What are you looking for in an acquisition? And then what do you then do on integration to pick up margin, pick up synergy? Kind of what's the business plan is on what you're doing with M&A and subsequent activity?

Look, I mean, we're obviously looking continuously at M&A opportunities both in life sciences and diagnostics. The good news is we don't have to do an M&A transaction. But obviously, if it's the right strategic fit and also the right financial profile, we will certainly act upon that. In terms of -- you mentioned integration. I mean we're integrating IDS into the immunodiagnostics business, the same for Oxford into our Revvity business. I think you have the usual things like distribution and logistics optimization, footprint consolidation, vendor consolidation. Can you leverage the e-commerce platform? Those are obviously low-hanging fruit. But I think the biggest -- in my opinion, the biggest opportunity is in-sourcing. So we can start to in-source raw materials from one part of the business and use it for products in the other part. To give you 2 examples, I mean, we could do that, obviously, with BioLegend, just a strong variety of antibodies. We can use those antibodies and use them in a diagnostic test as we plan for a new product. The same goes for Horizon, which was an acquisition, which manufactures oligonucleotides, amongst other things. We can use those oligonucleotides and use them in our IVD assays. So I think that in-sourcing has a strong synergy potential there.

Yes. I mean, if you think about it, BioLegend is obviously a global leading manufacturer and innovator of antibodies. And what drives some of the uniqueness in our diagnostic assays is the novelty of the antibody. And so by having that world leader of developing very innovative antibodies in-house, BioLegend and our diagnostic teams from an R&D perspective can work hand in hand, no red tape with no royalties or licensing fees with no NDAs and really come up with what is the best potential solution when we're looking to develop new diagnostic tests either in existing markets that we play in today or some areas that we don't necessarily play in today that we're looking to get into in the future, how can we come up with that next great clinical diagnostic test. And so that's something that I think is -- just the speed of innovation we anticipate to increase by having the various pieces of the business all under one roof.

Yes. I think the last source of synergy in Diagnostics then is really porting assays or tests from one platform to another, right? And we utilize an IDS CLIA platform in reproductive health, for instance. So those -- that gives us, obviously, options. It gives us great opportunities to expand either the platform or the menu. And I think that's -- that takes a little longer, obviously, because you have to validate it on that particular platform. But that's, I'd say, the longer-range synergy opportunities.

And I would assume that you're developing expertise in the developing in next-gen sequencing tests as well, right?

Correct, correct. I mean we have that in-house already. I mean, Madhuri Hegde, our Chief Scientific Officer, she used to be faculty at Emory University. And she's a specialist in rare diseases and in genomics. So she clearly can lead the way there, and we're capitalizing on that.

And then, Yves, do you have as many lists to acquire on your side as the other side of Revvity?

Of course. We always -- as I said, we're always looking. But I think important to again reiterate: we're looking at specialty markets where we can win, where we can have a leading position. We're looking obviously at pockets of high-growth markets. And we certainly try to stay away from the more commoditized type of assays. And obviously, right now, there's a lot of, for instance, smaller companies that were built up during COVID with point-of-care-type platforms. But the question is how valuable is that model going forward. So we're scrutinizing carefully.

Yes. And I think the thing too, Paul, is we have significant internal innovation across the company. But there is a lot of things in the works within his business. Whether it's within EUROIMMUN or within Oxford Immunotec or within -- or even our reproductive health business or with what we're doing from the clinical lab perspective, this Revvity Omics business as well, where we have clinical labs in the world. Some of the innovation on the diagnostics side, it doesn't happen overnight because of the regulatory nature of it. But there are some things in the works that I would say are very significant within his business.

And maybe one last point as we think about the organic nature, right? So if you think about the life science business, right, where we have a tremendous amount of platforms that are being used preclinically, we have gene editing technologies that we can out-license to a biotech company. As we then -- as these companies move there along the drug development process into clinical, we, again, can support them through our clinical labs. And finally, we can also then develop either companion diagnostics or diagnostic tests for those drugs, if they're on the market to monitor treatment and so forth. So it gives us multiple touch points with those pharma/biotech partners. And it also informs us what are the treatments of the future, and it informs also what is the diagnostic need for those treatments in the future. So I think it's a very synergistic loop that we're creating between life science and diagnostics.

And this sort of strategic partnership -- strategic scientific partnership model that Yves was talking about is something that couldn't have existed 3 or 4 or 5 years ago within the company because of the -- we didn't have all the pieces. I would also say what we -- the types of conversations we were having with some of the largest pharmaceutical and biotech companies in the world, I'm not sure if other companies can be having those types of discussions as well because of the capabilities we have between our expertise on the diagnostics side and our ability to develop those very difficult-to-invent clinical diagnostics, but also having genomic testing labs dispersed around the world that's also unique, then let alone having the novel antibodies and other content development that we have from a preclinical standpoint. So being able to help customers scientifically invent the drug, find patients and then screen patients is -- all high-value areas amongst a more complete workflow.

Yes. I mean -- and I would assume you're kind of early days as with some of these integration activity. Like you haven't really owned BioLegend more than, what, a couple of years now, Steve?

Years. Yes, 2 years.

My other impression is you're really -- you're a system supplier, which obviously has its advantage for reagent sales, not running the lab equipment as much as maybe a pure play. My other read on this is your price point for your test is probably not -- it's somewhere between a reference lab and a molecular -- a higher-priced molecular test. I mean you're probably, therefore, less susceptible to the pricing surprises we can sometimes see or the lack of commercial reimbursement. Is that kind of the way to think about it.

Yes. I mean, typically, again, we're selling to the clinical labs themselves. They will obviously look for reimbursement for those tests. But obviously, the economics have to stack up and have to make it work for the clinical lab as well.

Right. They've figured out already what they're going to get paid for?

Exactly, yes.

Correct, correct.

That's refreshing. Having...

Yes. We're not chasing down the reimbursement of the Diagnostics side.

No, that's not -- it's not on us, yes.

Yes. I mean it seems to me like -- what do you think a clinical EUROIMMUN test cost would be, is in the few hundreds of dollars?

It really depends because we have panels, we have more individualized tests. Often, as you know, we're selling under a reagent rental scheme, where obviously the...

Instrumentation.

Instrumentation is basically provided as part of the deal but at a higher reagent price. So that's why it's a bit difficult to sort of break that down.

Yes. And then, Steve, kind of as we wrap it up here, one question is where are you -- could you kind of repeat where you are with overall Revvity organic, what do you think the industry growth rate is and then kind of what you see as growth rate in a more normalized period? I guess that means 2024 and beyond.

Hopefully, yes. I mean so we view the broader life science tools and diagnostics industries to be normally growing in the 4% to 6% range. Obviously, it's not going to be in that range every year. There are some years like last year and as we're looking at this year where it could be a little bit more difficult than that. But then there's also going to be years like 2020 through 2022 where it's stronger than that. But we think normal growth for the industries that we play in is in the 4% to 6% range. And then because of the more differentiated types of businesses we are in, whether it's in Diagnostics or in life sciences, our products, we believe, should have higher -- inherently higher growth rates compared to the broader markets. And so consequently, we expect the overall business to grow 200 basis points above industry growth rates. And I think that will be true like you saw in 2023, when we were able to grow 200 basis points, we were up 2% when the markets were flat to down. I would say similarly here in 2024, our guidance is calling for low single-digit growth, when the vast majority of our peers are calling for flat to slightly down organic growth. And so our intent is to be able to show stronger and differentiated both organic growth, margin expansion and overall margins through varying macro cycles.

Yes. Okay. Perfect. We hit the clock. But Yves, what a great business. Pleasure to meet you. Thanks for your time, Steve. Good as always.

Thanks. Thanks, Paul.

Thanks for having us.