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

Okay. All right. Great. Okay. Good morning, everyone. I'm Puneet Souda, Life Science Tools and Diagnostic Analyst here. And it's my pleasure to be hosting Prahlad Singh, CEO of Revvity, joining with me on the stage here. And Prahlad, welcome to our conference. Great to have you with us here in Miami.

Good morning, Puneet, I have a bit of a niggle so my voice might sound a little weird, but I'm getting over a cold so hopefully, it's not too bad.

Okay. We'll manage through it. So great. So maybe first one, if I could.

There's been a lot of conversation on portfolio transformation. But now that transformed portfolio is sort of operating under NIH worries. Maybe to set the stage, Revvity looks a lot different today versus a few years ago, 80% of the mix in recurring revenues, you have diverse positions in reagents, antibody software, ImmunoDx. A lot of those things that you talked about at the Investor Day, 6% to 8% long-term growth guide and 3% to 5% organic that you're guiding for 2025. But obviously, I mean a lot of noise have appeared. Does that -- does this noise, either near-term, medium-term or longer-term, change any of the views that you had that you laid out at the Investor Day in the last quarter call? Maybe let's start there.

Yes. In any company's life cycle, portfolio transformation is an evolutionary process, right? So I wouldn't say that the transformation is complete, but it's going to continue to be ongoing. But connecting it to what you said at the beginning of your question and to the end of your question, the reason the portfolio transformation was done the way it was done and what has been done was exactly for times like these. You want to build a resilient portfolio, which is sort of defensive to market vagaries and economic vagaries. And I think the balance between Life Sciences and Diagnostics gives us that. And if you add our fast-growing software business to that, that adds another accelerator to it. So we're really happy with the way the evolution has been from, as you pointed out, 7 years ago when we started this transformation to where we are at 80% of our business revenue coming from consumables, software and services, and 20% coming from the instrument size. And even there, those are noncommoditized specialized instruments, which ends up being a vehicle for our consumables and assays that we are building on the consumable side. So we are at a point where the portfolio, I think, is well suited to address both our customer needs from Life Sciences and a Diagnostic perspective.

Got it. And a question that's emerging right now, is the change in the customer behavior from the U.S. academic side, just given the NIH IDC cuts, the pressure, the NIH noise is not necessarily declining sort of every week, there is some noise in terms of either graduate students or if it's the CSR or if it's the $400 million cuts to a single university. Again, lawsuits will continue. But just given the uncertainty and the anxiety backdrop, are you seeing any change in the behavior from the customer ordering patterns?

Look, it's a topical issue right now. But I think we just need to level set, right, 1% of our revenue exposure is from direct NIH and 5% from total academia and government in the U.S. So just to sort of level set the exposure that we have to that, doesn't mean that we are totally immune to this noise, but at the same time, our exposure is pretty limited to this space. And I think that is, again, leads back to the point where we've got a portfolio that is well suited for ups and downs in the marketplace.

Got it. No, that's super helpful. Maybe switching gears to China. There is -- again, correct me if I'm wrong, but I don't think Canada and Mexico tariffs are a major concern for you. But in terms of China, you have a position there, obviously, in Diagnostics, but at the same time also in tools. Maybe just elaborate on the tool side. How much is China for China? How much is sort of being manufactured out of the U.S. so it can be shipped in China and not be impacted by either the tariffs or retaliatory tariffs? So maybe just give us a view of the overall China picture?

Yes. So just to give you a sense, roughly, I think 16% of our revenue exposure is from China, 10% of that is on the Diagnostic side. And I think we've talked about our Diagnostics business in China, ad nauseam over the past several months. But on the Life Sciences side, I think of the 6%, I think 3% to 4% are on the instrument side and probably 2% to 3% is on the consumable side. Quite a bit of our instruments, we are now transferring to in China for China on the tools side. And on the reagent side, the BioLegend component is there that we ship and on the legacy side, too. So that sort of gives you a setting of what our exposure is on Diagnostics, on the tools, Life Sciences side on tools and instruments, tools and reagents. I think we are pretty well balanced. And even on the tool -- instrument side, there is not a lot of competition that we have. We sell high content screening, in vivo imaging, instrumentation, which are pretty specialized equipment.

Yes. Yes. No, point well taken on that. Maybe this is not a fair question, but just anticipating the next move from White House is always challenging. But just given the noise we have seen on tariffs in different geographies, just wondering, how -- if there were tariffs action taken against Europe, I just want to understand sort of how you're positioned there? Any contingencies that you're building or anticipating?

Yes. Look, if there is a tariff issue with Europe, it's not going to be isolated to Revvity, right, #1. Number two, I think you have to think of it from a perspective of the products that we make in Europe. That's our autoimmune testing and newborn screening. I mean if there is an issue there, then all newborn screening is today paid by states and the federal government. It's not a Medicaid or Medicare reimbursable and it's the law. So it would require an act of law literally to have to stop selling those products here. So there are other implications from a health perspective and a screening perspective of the large population that will be impacted if that comes to play.

Got it. Got it. Okay. One positive news, at least on the stimulus side in China was 30% more upside to the CNY 1 trillion bond stimulus that they had. Maybe just tell us, how does that help your China business and maybe what is holding up certain provinces and processing some of these applications? And how much of a tailwind could it be?

Yes. I mean, again, just like we didn't have a lot of downside from our portfolio, the way our specialized portfolio is built, we don't have a lot of upside. It's not that the stimulus is going to take the pendulum all the way to the right, right? We might have some modest upside to it. But again, what it comes down to the product portfolio that we have, it's around specialized Life Sciences equipment. So there will be a modest tailwind from it, but it's not going to really significantly move the needle.

Got it. Okay. And I know you talked quite a bit about -- since we're on the topic of China, China value-based pricing. Expectation is, I think you've outlined that it's about 3% to 5% in 2025 with immunodiagnostics up mid-single digit, net of mid-single-digit pricing headwind. What are you currently seeing in terms of the overall core demand recovery there? And then in terms of value-based pricing, maybe just help us calibrate if there's anything, any new updates there? Could there be -- the usual question that we're getting is could there be further downside risk to it? Or has it been fairly quantified? And do you feel confident about how it's bookended today?

Yes. I mean as you pointed out, Puneet, this is a question that I've answered only a few times. Look, the fact is that value-based pricing, the Sunshine Act, all of these have been at play. Local competition in China has been there for several years. I think when we guided at the beginning of the year, we were pretty prudent and we accounted for these aspects into our guidance, and we feel very good about it. There is nothing that has -- I'm not giving any intra-quarter guidance, but the whole idea of us being prudent at the beginning of the quarter when we guided for the year was to ensure that we take as much of these economic or market vagaries into our assumption when we guide. And look, will there be some day that these aspects will have a bigger role? Maybe. But what we are very confident today is the portfolio that we have set up is specialized enough in that it has a unique niche and a position in the market today where we have enough innovation that there is a customer need and a demand for those products. And sort of that is our focus. And strategically, that's how we are of continuing to build and transform our product portfolio.

As you talked about the -- your thought on guidance, as you established, at 3% to 5%. Just maybe help us understand, given the times we're in right now, uncertainty, all of those, but there's potential for upside. So what are some of the levers as you think about potential for upside? I've been positively surprised in the last quarter in terms of -- I mean, last few quarters in terms of -- despite the market challenges, you had performed well. So just maybe just give us a sense of where could there be more room for potential upside to those expectations?

Yes. Again, I'm not giving any intra-quarter guidance, but talking about the last 2 quarters, Puneet, as I have said earlier, for us, we get a pretty early insight into what is happening into the marketplace given our exposure to reagents on the pharma/biotech side. And I think the sequential growth that you saw from -- in the third quarter and then in the fourth quarter on our reagents business is an early indicator. And that's what we pointed out during our Q4 earnings call. And however, our intent was to give out a guidance for the year that was prudent enough and ensure that we assumed, given new administration coming in, given new policies that might take place, that we are confident enough to provide the guidance that we feel very good about, and that's where we are.

Okay. Switching gears to pharma side, obviously, a lot of cuts and restructuring and changes on the impact to the R&D side. We obviously felt that across the sector. What are you seeing from those customers this year as they -- I'm sure they -- many of them have set their budgets by January. Just wondering if you're getting a view in terms of -- if the sort of the reductions that we saw last year in R&D, are those the types of reduction that they are still continuing? Or is that all behind at this point?

I think as we said during our Q4 earnings call, we found that there was a level of stability now in terms of site closure or rationalization around headcount. And again, on the preclinical discovery and research side, we were seeing more signs of stability than instability with our pharma/biotech customers.

Let's talk about reagents, core antibodies, products that over the -- I would say, at least if I look at the last 2 quarters, you have outperformed some of your peers in the antibodies business. I won't name the peers. But given sort of how -- what BioLegend's portfolio is. Maybe can you talk a bit about where that differentiation is? How that outperformance is working in a time like this? Is it a function of competitors facing some headwinds, whereas you're not or how you're positioned in flow cytometry? Maybe what are some of the other areas that investors need to understand in order to understand why BioLegend is performing better versus peers?

Yes. I mean our whole reagents portfolio, I want to make sure that we don't provide specific guidance around one part of our business, but our whole reagents portfolio continues to do very well. And again, the reason and the rationale is the same. We work very early with research scientists at the bench level and ensuring, a, what epitopes they are looking at, what antibodies they need, what target areas they need to focus on. And then also, what screening assays they need as part of their structure activity relationships that they're going to be doing over a period of time. And I think that has been beneficial because once you get on one of these screening assays, you're on a program for several quarters. And then I think it is as much innovation, but also, I mean, it's the same. You can check the boxes around innovation, customer relationships, working with bench-level chemists. And this is something that our reagents business has been doing over a period of time. And you start bearing and seeing the fruits of that labor. Essentially, that's what it is.

And is there -- can you talk a little bit about -- when we were initially are working on Revvity and doing a research, one of the facts we realized that in terms of cost, BioLegend was able to manage their cost better versus peers. Maybe that's happening with other parts of the reagent portfolio, too. Could you talk a little bit about that? And how are you able to deliver lower COGS and deliver margins as a result?

Yes. I mean you visited the BioLegend campus and you saw how they operate and those that had an opportunity to see it, it's pretty evident that they have a very -- from early discovery all the way to getting product out the door, they have a process which is very well aligned, quite automated and very lean. And then I think that aspect has been one of the synergistic opportunities that we have seen from the acquisition and being able to leverage that across our reagents portfolio has been very beneficial to us. We've talked about our e-commerce capability. BioLegend came in, nearly 40%, 50% of their business was on e-commerce. For us, legacy business, it wasn't Bringing in a new e-commerce platform, leveraging our full portfolio across it is, again, another iron in the fire. So the idea really is what growth accelerators you keep putting in, not just for tomorrow, but for the several quarters and years. And that's what the reagents business and across the portfolio at Revvity. The team has been able to exercise that muscle, and I think that's -- the benefit of that is what we are going to see as we continue down the road.

Got it. Got it. Touching on another aspect of proteins. I mean the GMP proteins, obviously, early days for you there. It takes time to get spec-ed into some of these cell and gene therapies and CAR Ts and other modalities that are emerging in the marketplace. Maybe -- and obviously, no market is completely greenfield, but maybe just talk to us about where you see the opportunity, how much contribution you think you can see this year and where could that -- where do you see the upside in that market longer-term?

Yes. I think it's just what I said to the previous question, this is just another proof point in that. When we laid out our LRP for Revvity, and part of that is the reagents business growing at what it is, right? One of the growth accelerators is -- for that is the GMP capabilities that we have introduced. And as you pointed out, there is not a flip of a switch that sort of makes this change from going x percent to y percent. But the intent really of adding and enhancing that capability in our portfolio was to ensure we have enough growth accelerators, and GMP being one of them.

Got it. Maybe if I could switch to the instrumentation side, the high-content screening, the imaging platforms you have. I think what you're seeing on the instrumentation, given the current state of the market, I'd love to know, is that -- are you seeing more continued stabilization on the consumables side and the instrumentation side. There's a view, obviously, given the challenges of the backdrop of the market. You have an IA situation. You also have China, there is a view that, obviously, instrumentations are going to be -- it's going to be a little bit challenged. But obviously -- but when we look at the overall portfolio, you have a strong position in pharma. So maybe can you help us tease that out a little bit as to why instrumentation for you should continue to perform this year, just given the portfolio and positioning of high-content screening, imaging of the capabilities that you have?

Yes. I mean there are 2 aspects to it. One, obviously, is the innovation that we are continuing to bring, like taking in vivo imaging as an example. We fully turned the portfolio over, I think, in the fall of '23, and we started seeing the benefit of that. With the new launches that we have planned coming out, the idea really is, again, as you pointed out, it's, for us, it's not selling how many number of units that you can get out, whether it's from a QA or a QC perspective? But how can you bring a specialized portfolio into the marketplace that there is a need from a customer perspective. So as we bring AI and ML in all those aspects into our instrument portfolio, it makes it much more productive and efficient for the researcher in terms of doing their experimentation. And in today's cost environment that is an added benefit that we are able to hopefully provide to our customers. So the basic hypothesis and our intent is how do we put a portfolio that on the Life Sciences side that helps researchers be as productive and efficient that they can be and increase the speed at which they are innovating. And then I think that's our strategic intent, especially around the instrument side of the business.

Got it. Just switching gears, given the time. Let me ask you about reproductive health. What will it take to sort of penetrate the $100 million on screen birth that globally that you have talked about. You have a strong position in that market. Maybe are there access or infrastructure limitations in developing regions that sort of gave that? Maybe help us understand why penetration has been -- it appears somewhat slower, but I think it needs to -- I think you've laid out 250 bps growth from increased adoption of existing assays and 100 bps from the geographic expansion there. So just trying to understand. Give us maybe, how -- so in terms of timeline, how are you thinking about it? And then also any other drivers that you think could help potentially accelerate that?

Yes. I mean one has to really understand the depth of newborn screening in the reproductive health side of our business. So in our view, actually, the geographic and menu expansion has been very good, especially in a market environment where birth rates are declining across the globe, right? To put it in perspective, it takes decades, not years or quarters, for a country to take adoption across the board. It took us 13 years in China to go from 0 kids being screened. And this, I'm talking about in the '70s, '80s and '90s, to now most of the population being screened. When I joined the company, just to give you an example, in India, there were 200,000 babies being screened. And today, there are nearly close to 2 million babies being screened. Indonesia is another example, where there was no screening to where now, quite a few of newborns are being screened. So it is not something that happens overnight. You really have to work arm in arm with the government officials and federal, state, local municipalities to implement newborn screening. So for us, this is not a quarterly journey. This is a journey that will continue. We are very proud of what we do, not just from business and a financial perspective, but also this is a vision and a mission opportunity for us as a company. So I think I -- if you just look at the performance of our newborn screening and reproductive health business, it has done better than what we have expected ourselves and definitely much better than what we have guided. And I think it will continue to do so for both reasons. One, which you mentioned, the geographic expansion. But the second, more importantly, is the menu expansion because the rare diseases that we are now starting to screen and test for, these are ones for which pharma is developing therapies, and these therapies tend to be pretty expensive. And you want to ensure that there is appropriate screening done at the right time for their -- for us to be able to identify who would be the right kids to be put on therapy early on in the journey.

Yes. The targeting is very important. Totally appreciate it. In terms of EUROIMMUN's business, if I could ask on the diagnostic end, EUROIMMUN CIBD menu, you are working towards FDA approvals. There are 2 incumbents at least in the market -- U.S. market side. Can you talk a little bit about sort of how you're taking the FDA approval strategy and menu expansion, again, getting the menu through FDA and then potentially taking share in that market?

Yes. And I might get my number wrong, so I'm going to look at Steve. I think EUROIMMUN is growing at, what, a 25% CAGR. So -- and let me talk about our autoimmune immunodiagnostics business. Again, I try to look at the whole portfolio. It's been growing at a 25% CAGR. It's now 15% of EUROIMMUN business -- our autoimmune business, and it should be closer to 40% given the size of the U.S. market. So it's at a very rapid growth. It is one of the fastest-growing geographies for our autoimmune business. And it is a matter of how we continue to get the FDA approvals for the assays that we submit. It's a portfolio that has a lot of IP around it. So for us, competition, of course, is relevant and important. But our focus is what we can do in terms of innovation and how do we stay ahead of the game, whether it's around going from just basic autoimmune screening to organ-specific, whether it's neuro or nephro, how do we come out with autoimmune testing for those specific organs. And that's where EUROIMMUN's innovation plays a very important role in our immunodiagnostics business.

Just following up on that in terms of overall diagnostic margins. You've talked about how diagnostic has the most margin opportunity. You're talking about, obviously, a very strong growth CAGR there. You made a move of using initially distributors versus dedicated sales channel previously in China for some of the immunodiagnostic business. What's -- what would you say is left in terms of chasing more profitability on those sides of businesses?

Yes. I mean there's -- you can go just down the P&L on the diagnostics side, there's still opportunities around gross margin opportunities, footprint rationalization, the cost structure we are using, leveraging our e-commerce capabilities. I mean, going from a sole sourcing vendor to different -- from a sourcing opportunity perspective, those are long tails because when you're changing, say, for example, a raw material you're using on a diagnostics get it's very different than doing on the Life Sciences side of it because this is under a regulatory purview. So the opportunities are up and down the P&L. And we feel -- and I think I've said it, our margin story is the most underappreciated part of our business. And I would say that if -- in the next few years, you will see us in the mid-30s, and diagnostics will be one of the key drivers for that margin opportunity.

Yes. No, I appreciate that as I did more work. I mean, Diagnostics margins and that part could be understood and appreciated more. Maybe let me just given the time to ask you a little bit about software. In the current times, are you continuing to see those licenses and contracts and some of the -- as you're moving from prem to SaaS, some of the software contracts that you have, are you continuing to see those stability in those? Some of them are in academic settings. However, you're servicing pharma a lot more here. Maybe just talk to us about sort of how software is faring in this current environment.

Yes. Again, I'm not going to give intra-quarter guidance, but we feel very good about the prudent guidance that we provided at the beginning of the year, Puneet. And I think software business is a key component and a key growth driver for our business.

Just -- all right, we're actually at the time. But thank you again, Prahlad. Thanks for all those insightful comments.

Thank you, Puneet.