Revvity, Inc. ($RVTY)

Good morning, everybody. I'm Luke Sergott. I cover life science tools and diagnostics from Barclays. With me, I have Prahlad Singh, CEO of Revvity, 2 Vs in Revvity. And we have Steve Willoughby from IR here as well.

So let's start off, and we were just kind of talking about it, like you never got credit for Signals before. And now all of a sudden, with [ Claude ] updates, now it's like a huge issue with you guys. And you have significant launches across the platform. If you can kind of just walk us through like a 1-on-1 of what's in your Signals business or just -- and also with the new launches. But talk about the customers that you guys serve, the lumpiness -- not the lumpiness, the stickiness there, the data access, like what you're actually doing across that platform and why you feel like AI is the thread of it taking share versus the reality versus the fear?

Yes. Good morning, Luke. It's always good to be here. To start with, the Signals is a deeply embedded scientific platform where research is done today. AI is not a net disruptor, but an accelerator for the Signals platform. And I think you've heard us say that there could not be a bigger disconnect from what the external perception is of what the impact of AI is versus our internal conclusion and anticipation of how AI could help enhance and accelerate the signals business. And I think a lot of this has got to do with the education of what the Signals portfolio is and how AI dramatically enhances the capability of what Signals can bring to the clinical scientists -- to the research scientists today.

Yes. I mean -- so you have Signals One, ChemDraw, Spotfire, a couple of other smaller pieces in there. And then on top of that, you have these new launches with BioDesign, Xynthetica with a Z, and then you have the logistics. Just walk through like what these updates are, what the launch time is and how you guys think about this, how that builds on your Signals platform, if it does at all? Just walk us through kind of the strategy here with the launches.

Sure. So let's start with what's in the signals platform today, right? Number one is ChemDraw. ChemDraw is the bread and butter jelly of every research scientist that has ever gone through a grad school and done any lab research. Essentially, it is you use a mouse a keyboard and a mouse to draw molecules. And you cannot verbalize molecules. You have to draw molecules to communicate. So even with AI or when you communicate with humans or with AI or whatever, you have to be able to use ChemDraw to be able to communicate that because -- and again, having spent 20, 25 years of my career on the lab bench, I have intimate knowledge of how it works, how it worked, how it's working and how it's going to work, right? So ChemDraw is the essential DNA by which you design molecules today, small molecules. Signals One is the platform on where you design, you store, you analyze data and then you use it for your regulatory submissions and filings and your publications, et cetera. So essentially, that is the sandbox in which research happens. Or another way to think of it is it's the enterprise software for research. Spotfire is the platform where you've created dashboards that you look at the data, analyze it and you create dashboards. So pharma companies have invested and created, I would say, hundreds of thousands of dashboards, which are complex -- leveraging the complex workflows, which are used for all the filings and for the analysis of the research. So this is -- again, these abilities are going to be enhanced by AI. So this is what sort of the current portfolio is today.

Yes. And AI is going to ultimately supercharge those platforms versus just kind of...

They become more of a turbocharger to the current platform.

Okay. On the Xynthetica launch, Steve was walking us through this. This seems like pre-groundbreaking, this is totally different. We've never heard about anything like this in the space. So just walk us through very succinct clear like 1-on-1 for the dummy in me, like how this came to be and really what this does?

So let me start with the other two. This is the biggest year for the NPI launch in Signal's history. Each one of these, as we've talked, Luke, is a major NPI in its own with BioDesign, logistics and Xynthetica. BioDesign, the best way to think of it is it's the large molecule version of ChemDraw. When you are designing biomolecules, you have a string of text sequences, which is a string of peptides, and they are pretty complex. And this was a gap in our portfolio, which is now filled with BioDesign. That's the way to think of it. LabGistics essentially is an avenue and a place where you're able to extract and digitally capture all the complex workflows. So essentially, all the workflows come and LabGistics essentially a laboratory logistics component where you now have a platform where all this is housed, and this is where it's being enabled by AI. So we are leveraging AI to develop LabGistics, which essentially will become an accelerator to bring these components together, bring these packages together for submission is what LabGistics become. Xynthetica, the one that you pointed out, to put it simply, it operationalize access to machine learning models for research. So if you think of it, you have a Signals platform. So -- or to equate it, you have an iPhone. Xynthetica becomes the iOS that allows you to operate it. It operationalize access to machine learning models, whether it's through TuneLabs that we've done with Lilly through other pharma companies and private models that would be accessible to publicly available models, which we could curate and then put it on Xynthetica. So there are -- it becomes essentially a place where you have access to all these models. And then if you're on the Signals platform, you're able to operationalize access to it. That's what Xynthetica is.

So if I think about it, it's like kind of the pipes that allow you to connect signals, or whatever analysis platforms you want to use, to the anonymized data within the pharma company that they don't want to necessarily share with the larger AI company. And I heard it is like, all right, so Xynthetica could also be like thinking about the crypto, like this is like Ethereum allowing the other biotechs to access the TuneLab data set by a token that burn off through your Xynthetica and allowing all the other applications around there. Is that -- it's kind of like that iOS like system, it's based...

Operationally, it's the same. But from a monetization perspective, I would say it's more consumption-based model usage rather than on the crypto side. It's more like what OpenAI or Anthropic would be. So it would be similar to that. But essentially, that's the concept.

Yes. Okay. That's pretty interesting. And then I guess with the TuneLab, is there -- as that continues to gain access and you build out more partners there, it's obviously, the network effects continue to build. How many other customers are thinking about similar collaborations and setups?

So it's a great question. The best opportunity for us and for our customers is more show up on that ecosystem, right? So obviously, there are a lot of discussions going on. We just announced Xynthetica in December, January time frame. I think in the second half of the year is when we will start the actual productization with TuneLabs and Lilly. And there are many more discussions that are ongoing and will come to fruition with other pharma partners, with other private models, which would be available, our own proprietary models and more importantly, there's a lot of data in the public domain today. There's a lot of publications. There's a lot of data which has been their housed. The idea really is how do you curate that and provide access to research scientists through Xynthetica. So this is going to be an ongoing journey for us. But this is really a breakthrough platform for scientific research. And it's -- I mean, obviously, I would say that, but this is our channel checks through our customers. Xynthetica has not been developed out of thin air now. This is through our user groups and through our customers saying that this is the need of the hour if we are going to move in this direction.

How long has that been in the works?

A couple of years.

Okay. All right. And then so as you're thinking about this rolling on, this is a back half -- I mean, you're launching this now, but early data users as you're thinking about the guide and how you guys are back half weighted that. How much is Xynthetica or the BioDesign and logistics is later on the year, that's right. Just kind of bridge us down to how much contribution that is baked in with your underlying assumptions?

I mean I think the way to think of it, Luke, is in our LRP, we've got signals at 9% to 11%. If you look at what the annual portfolio value or the APV by which you should measure software businesses, that has been in the low to mid-teens. And that's where we've done better than what we have it in our LRP. And the assumption is we are going to continue to be in more than the APV range than what we've officially put it on the LRP. So I think that's sort of the way to measure it. And these are the irons in the fire that are going to continue to stoke the growth of signals over the next several years.

Okay. And from an upside perspective, I was -- I think like a Xynthetica, this is kind of a call option where if you get it right and like it takes off like it could and it is disruptive, like everything else could just be kind of a rounding error in the rest of your software portfolio.

I mean we think of it also as a models as a service component, right? And then this is a new revenue avenue. Today, signals is a subscription-based model, right? The more seats that are licensed, that's how the revenue is. But this is more based on consumption. So this is a totally new revenue model in our sector and in our way, which has not been done. And as I have said this publicly, if within the next 4 to 5 years, my Signals business has not doubled, then we wouldn't have done a good job.

Yes. All right. I wanted to stick with the AI and the software stuff only half the time. So I went over a little bit. But let's talk about the core business and your overall guide for the year. And kind of the philosophy around the guide, and it's typically the seasonality for you guys is always back half weighted. But talk about the conservatism that you guys see in the 2% to 3% that you have. You have some of the DRG headwinds still from China in the first half. Those are from a comp basis, just kind of rolling that off. Just walk us through where you see the most conservatism, especially considering how the NIH and academic government is still really soft, and it's not like a gangbuster year for pharma demand and discovery anyway. So just walk us through that piece of the guide.

Yes. I mean, look, in terms of the guiding philosophy, maybe if I could just go back to 2025 and see where we were at the beginning of the year, right? We came out and said 3% to 5%. And then within a matter of weeks, everything started happening, the tariffs, the administration change, DRG and on and on and on and on, right? With all those headwinds, we absorbed more than $30 million in tariff. And we had guided 3% to 5% and $4.90 to $5 EPS. We ended the year at 3% OG and $5.06 in terms of EPS despite absorbing all of that tariff. So -- and in the fall of last year, early last year, we came out and said we would be in the 2% to 3% range. And our peers came out and gave their guidance, too. We have not back from that guidance, and you know what the rest of the industry has done. We feel very comfortable and confident with what we have put out there, right? But at the same time, what we don't want to do is jump the gun and say that we've got upside of X, Y and Z. Because the unknowns are the ones that you've got to factor in, in today's environment. And then I think we've factored in enough conservatism around any potential more policy headwinds coming from China. We've factored in the disruption going on with the current situation that's prevalent. So we feel very comfortable with where we are today. And of course, as the market condition continues to improve, we will definitely revisit that. At this time, I would say pharma and biotech is in a stable market environment. You talked about the NIH factor that is doing. The reproductive health business continues to do very well. And we are looking at opportunities to sort of take advantage of some of the disruptions that have happened in our end market right now.

All right. And then I guess on the -- I want to come back to that from a competition and the market perspective. But when you're talking about like baking in enough of the downside, your guide right now is a 1,000 basis point jump from 1Q to 4Q, which is, let's say, you haven't done that historically. So -- and given that a lot of the stuff that's happened in the past has been these like macro shocks that have kind of like, oh, if we -- if they didn't happen, we would have hit our guide. Like given that there's elevated volatility right now, is there -- do you feel like that there's enough absorption built into that margin guide for Middle East conflict and whatever else that might hopefully doesn't happen?

I'm glad you asked that question, Luke, because I do want to provide clarity and more detail around the margin -- incremental margin from Q1 to Q4. Number one, on a traditional basis, you are right, the margin growth is generally 600 to 700 basis points depend on just 1Q to 4Q incremental revenue, right? So that accounts for nearly 600 basis points on its own. Recall, we have one extra week of cost in Q1. which accounts for nearly $10 million, which is not existing in the fourth quarter. So that's a natural uplift. And then the cost cutting that we have done in the fourth quarter of last year and that is ongoing right now, whether it's restructuring, plant rationalization, rooftop rationalized optimization, that will start having an impact in the second half of the year. That sort of helps bridge the gap between the 750 to 900 bps. Not only that, the benefit of that will also be seen in the first half of 2027. So one should expect not just 2026, but 2026 and 2027 to be more outsized margin expansion opportunities for the company.

Okay. All right. That's giving a lot more confidence than that.

I wanted to make sure that I provided the bridge.

No, that's all we wanted was that bridge because it's just -- it looks pretty heroic, but we break it down in small pieces, it's not as bad as feared. I want to go back to your comment on the competitive dynamic and landscape there. And this is more in tune with kind of BioLegend and what's been going on in the flow market. With Waters buying BDX or acquiring BDX, there's -- it's a duopoly market. You guys have a pretty sizable position there from the antibodies and the flow reagents within BioLegend. Talk about like the different competitive dynamics or any changes that you might see within either Waters taking over BDX, but also with Becton and Danaher owning Abcam. Like is pricing changing that dynamic? Is this like still -- can this be back to that like double digits that you talked about when you guys did the acquisition? Just walk us through how that market ultimately changed and where it's going?

Yes. I mean, clearly, we've taken share in a depressed market environment over the past couple of years, right? And then I think if you just look at our reagents business performance over the past 6 to 7 quarters, albeit one, we've grown in this market environment, right? That's sort of an indicator that the market is nearly not grown, but we've grown and we've taken share. I think our focus is -- look, there's always going to be M&A activities in the marketplace, right? There's always going to be disruption caused by that. Our focus is from a BioLegend perspective on the 3 things, right, the service quality and on-time delivery. And they've done a really good job. And it's not just on-time delivery that is the differentiator. As I have said, if you go into a lab today, in an immunology lab, you are going to have a tough time differentiating who is the BioLegend scientist there and who is the employee because our focus really is working early with our collaborators and our partners in designing the epitopes on the antibodies and making sure that we are there at the very beginning of when the conceptualization of science happens. As I have said, most, if not all, of our application scientists and all our commercial folks are PhDs and masters. So they are not account managers, but they are scientific partners to our customers. And I think this noise around on-time delivery being the advantage that BioLegend brings -- of course, that is an element to it. But at the basis of all of this is science and innovation for us. And that is what we will stay focused on. And hopefully, that will be the differentiator.

On the -- so but on that reagents business, the flow -- like your flow exposure, how much of that is between the antibodies and the reagent side? Because right now, there's a fear that with those 2 big players just pushing on the reagents, that's going to weigh on your overall reagents business. But clearly, you've shown that, that's not the case right now. So...

Yes. I mean flow is a component of BioLegend's business and BioLegend is a component of our total reagents business. Yes. So it's not just -- flow is not 70%, 80% of our total reagents business. Flow, if I would say, if you were to look at it, it's probably 30%, 35% or 30% of our total reagents business. And then outside of flow with AlphaLISA, HTRF, all of these are screening assays that are used on bio pharma biotech for their programs. And GLP-1 is one of the bigger growth drivers that has been one. And there's a lot of stickiness to this. These are not like quarterly programs. Once you get on these programs, they are on for years. And that's why you're seeing sort of the growth element from the reagents business.

And as that demand -- so and you're talking about these longer-term projects, and that's why discovery, you considered a drug discovery play or a derivative. As you're thinking about the funding environment, we just had Jim Foss from Charles River up here. I know they're a customer of yours on the instrument side. But when you're thinking about that biotech market and versus the large pharma, what do you think is like the bigger push pull on that reagent side?

I think with the uncertainty and the chaos around the whole MFN status and all of that having subsided, this is the first year where we are seeing clear sign of definitiveness from our peers in pharma biotech around investment in innovation and preclinical research. So there is a clear sign of that. I think we need to see that stability move from being stable to growth, and that would sort of be the key indicator. So I think we are in the same place where we were at the beginning of the year. Things are stable. Things are moving as we had expected. And we want to continue to see it be that and continue to grow from there.

Great. I guess in the last minute and 45 seconds, let's talk about the other half of the business in diagnostics. The -- particularly in China, the ImmunoDx, right now, the repro business is doing really well. We don't probably have time to dig into the kind of drivers of sustainability there. But as you kind of look at the ImmunoDx business, particularly in China, with DRG and that rolling off, how much of your business has already been impacted there? And what do you think is left that could be converted, particularly as it's going from the panels to the single test, like just level set where there's, I guess, untouched risk right now that's kind of weighing on people's minds.

No, it's a good question. Look, China immunodiagnostics will be less than 5% of our total business. And we've appropriately guided -- we've appropriately assumed that the impact of that as it calendarizes in the first half of this year will continue to be down. From a DRG perspective, Sunshine Act, VBP, all of the impacts that are known have been accounted for and that is already impacted. I mean, look, but at the end of the day, there could still be unknown policy headwinds. We don't know about any. There are political discussions around that. But we've accounted for enough that there could potentially be others in our guide today. So we've tried to be as conservative as it is possible to ensure that we appropriately risk mitigate any potential headwinds -- unknown headwinds coming out of China.

Outside of that, like in the out years, the last one, thinking longer term, like is that still that high single-digit plus business? Or is that more mature and structurally different?

I mean I think it's tough to tell because I think the question really is from a clinical perspective, how long can you be in a position where you are going to have a negative and an adverse impact on how clinical diagnostics is done. This is more about, are you doing the right thing by your population? That's the question. And I think that's the impact more around lives than around businesses.

Yes, it could come back. Okay. That's fair. Thank you.

Thank you, Luke.