Revvity, Inc. ($RVTY)

All right. Good morning, everyone. I'm Evie Koslosky, the life science tools and diagnostics analyst here at Goldman Sachs. I'm joined here by Prahlad Singh,the President and CEO of Revvity. Thank you so much for being here. Maybe to kick us off. You had a solid start to the year, growth driven by both Diagnostics and Life Sciences. Maybe start by walking through some of the key take rates in the quarter and how things have progressed since then.

Yes. Just as we look at the businesses, as you said, we had a great start to the year. On the Diagnostics side, reproductive health franchise continues to do very well. Immunodiagnostic to ex China was performing well across other geographies. On the Life Sciences side, [indiscernible] planned single, our reagents business grew low single coming back, as we've said now for a couple of quarters, academia and research did well. So it was more broad-based, and we've started seeing signs of recovery, as we pointed out during the earnings call across geographies and across end markets. So we feel very optimistic as to what's in front of us.

Great. And sort of the other major announcement on your quarterly call is the divestiture of your China immunodiagnostics business. So maybe digging into some of the implications there. That was a drag on growth but also on the cash flow side as well. So maybe now that you strip that out, how do you think about plans for reinvesting this cash flow? And any particular areas in the remaining portfolio that you would focus it on?

Yes. I mean, again, as we mentioned during the earnings call, this is -- and we expect to close on this towards the end of 2027. And as you said, it was a drag both on growth and on cash flow. So we don't expect to have a huge cash influx coming in from the acquisition -- from the divestiture, but we would typically use it whatever comes in for typically the share buybacks, which is probably our primary target right now or look at tuck-in acquisitions that would fill any gaps you would have in our portfolio. But primarily, I think if you would see us, we will continue to be -- as we have been aggressive on our share buyback.

Yes. And maybe touching on some of the logistics of the divestiture itself. You signed a letter of intent. Can you talk through your confidence in the level of communication that you have with the management-led buyer group? And then when we should expect to see kind of a definitive agreement on the deal?

Yes. As we've said -- and then as you mentioned, Evie, the buyers, they are the management team that have led and created this business over the past few decades. We have a very high degree of confidence in their ability to run the business and for us on closing the deal. Timing-wise, we hope to sign in the near future. And when we do, we'll sort of publicly announce it. But it is progressing very well.

Great. And shifting to diagnostics and maybe specifically, reproductive health, which I think had a very healthy growth rate low double digits. So I understand there's -- you have the Genomics England contribution, you had extra selling days, but there's also some revenue specific drivers there. So maybe walk us through the moving pieces and then how durable the above LRP growth is in reproductive health.

Yes. I mean, again, let's start from the LRP piece that you pointed out. The reproductive health business has done much better than what we have had in our LRP model. And this is despite significant pressure on both rates that we've seen across geographies. So I think inherently and fundamentally, what we have put in place in terms of geographic expansion. As we know, there are nearly 100 million new bonds today that are still not screened and menu expansion with more and more emergence of therapeutics for rare diseases. There is a desire and intent to have a screening program for those diseases, SMA, DMD, MPS II, there are a whole host of these rare diseases, which require screening programs. So that has really been the engine of growth for the reproductive health business. In terms of the extra -- that reproductive health really didn't contribute towards that. All of that came from the reagent side of the business. So on the Life Sciences reagent side of the business.

And I think within newborn screening, the guide does imply a little bit of a step down in growth from 1Q. How much conservative is baked into that assumption? And why shouldn't we see the strength kind of continue in that market?

Yes. I mean, I think as you pointed out, maybe there is a level of conservatism and the guidance that we have for the reproductive health business. And as we pointed out in the first quarter, it is not just in the reproductive health business. If you look at the way we've guided for the year, we don't have any ramp in the second half at all. So I think we feel very comfortable and optimistic about the way we've guided for the year. And the reproductive health business, if you look at it, it's not that the growth that came in, in the first quarter was from any one-offs or any big CapEx deals that we did. So we feel -- I would say, very optimistic about the way we have forecasted it.

Great. And you touched on the geographic expansion a little bit earlier, but maybe dig in that a bit more. Are there any particular areas where you're finding success in penetrating new markets?

Yes. I would say globally, we are seeing markets where wherever new bond screening programs are going. And then even in there, it is a twofold approach. Areas where newborn screening today has been adopted. They are taking on newer disorders, which were not screened. U.K. and France being 2 primary examples where the number of disorders that they are screening for has now increased. Italy has always been at the forefront of screening, type 1 diabetes that they have launched. That's the only country right now that screens all new bonds for type 1 diabetes. Among emerging geographies, Indonesia, India are 2 countries where we are starting to see and adoption of newborn screening at the more basic level, TSA PKU, basic disorders that program and prove that country starts screaming for.

Great. And moving to the ex China immunodiagnostics, this grew mid-single digit in 1Q. Is there a framework we should think about moving forward on the path to ramp back to the LRP target of 9% to 11%.

Yes. I think obviously, China has been a drag on that business for some time. But if you look at other geographies, right? I mean, U.S. is a primary example, as we said, it was 5% of the revenue for [indiscernible], when we acquired the business, it's around 15% to 20%. Rightfully, it should be around 40%, 45% of revenue coming from the U.S. So there is a lot of traction in this geography, Latin America, Asia, parts of Europe, that the incidence of detection of autoimmune diseases is still in its nascency, and that's where I think the EUROIMMUN business and overall immunodiagnostics portfolio will do well. I think the 1 piece that has been a bit of has dragged it a bit has been the Oxford Immunotec business with latent tuberculosis as you've heard, whether it's around immigration policies or around testing for latent TB has seen a significant slowdown. So until that comes back up and ramps up, that will be the one, I would say, the opposite side of it, where it will be a bit of a drag on the portfolio.

Got it. And I guess, within the U.S. IDX market, what are the gating factors for driving further penetration there, maybe excluding TB I think in the past, you've talked about additional automation. So maybe where are you in terms of commercializing the high throughput system? And how should we think about the penetration ramp in the U.S. over time?

So the automation and the high throughput system is for latent tuberculosis. So that as that comes on board, obviously, that will help get some more market share on the latent tuberculosis side. But outside of that, it is just us getting more and more assays through the system, whether it's through the FDA regulatory bodies or putting LDTs out in the marketplace. So on autoimmune side, there is still a lot of room and leeway for growth in the U.S. marketplace. On the latent TB side is where we would need to get the high throughput system into place.

Okay. And shifting to the Life Sciences side of the portfolio, the [indiscernible] growth in 1Q, which is a slight acceleration off of the 4Q exit rate. Maybe talk through some of the moving pieces in that portfolio, how much of an impact did the extra selling days have versus underlying improvement of what you saw in the end markets?

Yes, I would say the extra selling days were probably about 1% of the growth that you saw, but I would say, 50 bps of it was also a drag from the snow and the storm days that we expressed. As you know, this is a run rate business. So every day, that reagents are not used as a lay lost. So I would say it was overall a 50 bps net improvement from net benefit from the extra selling days. I would say, again, if you recall, for us, what [indiscernible] even academia and research of life and coming back, which is actually a very good sign.

Yes. Digging into the biopharma biotech piece to start, we've seen improved funding in recent quarters. This can take a while to translate into performance for the tools companies maybe less so on the consumables side. But it feels like a lot of that funding is actually focused on clinical stage assets rather than preclinical. So what are you hearing in the market? And maybe help us understand how should we should think about these recent funding improvements in biotech?

Yes. I think it's -- just to bifurcate the question. You're absolutely right. when the funding that you are seeing primarily tends to go into clinical side of it, and that's where you see the initial benefit of it, both in terms of the actual clinical trials. But everything else that supports that piece to get new therapeutics out for approval and commercialization. But overall, I think these fundings eventually requires that you start filling the funnel back from an innovation perspective through discovery and development. And I think that's where, if you recall, what we've said is over the last couple of quarters, we are starting to see signs of that coming back clearly, as you've seen in our performance on both in the fourth quarter and even in the first quarter. And this is where eventually, whether it's big pharma or biotech or even mid small pharma biotech, the innovation engine will have to take off.

And then you mentioned an improvement in the academic end market. I guess, what are you seeing from those customers? The budget the NH budget seems to be slightly higher. Are you seeing that start to flow through? And what's the activity level at the academic customer?

I would say, still at the initial stages because in the first quarter, there was still a level of nervousness that is this permanent? Or is there going to be another wave or another policy change that might impact there? So as you would naturally expect there is a level of nervousness and edginess in that customer base, but that eventually is starting to subside. And then what whatever the new normal is essentially taking place in that signs, I would say, of research, but signs of growth in pharma biotech. That's the way I would differentiate between those 2 end markets.

Okay. That makes sense. And another piece of the life science portfolio that's been particularly strong for revenue is the China piece. We've seen a lot of funding go into that market from MNC pharma sort of entering the region. I guess, why is revenue well positioned to capitalize on this growth? And what are you seeing from the biotech investments there? And maybe how you think about the durability of that market in China?

Yes. I mean China, if you look and you compare our performance in the Life Sciences side of China versus our peers over the last even 2.5, 3 years when the market has been quite depressed we've done exceedingly well. And I think that is where the differentiation in our portfolio shows up. And I know we are talking about the China, but even about China as a region, but even in other geographies, that is where we are going to start seeing the benefit of the portfolio that we have. If you look on the platform side, we probably sell noncommoditized specialty instruments we are also on the reagent side. Once we get into a program, whether it's for screening or validation purposes, they are very sticky. So they are there for several years. And it is a big turn for a customer to swap from what they are using to another reagent or an -- and that's the benefit that we are seeing in terms of how the growth of our reagents business is taking on and also on the life sciences platform side.

Great. And then another kind of key growth driver that you mentioned on the earnings call was GLP-1s and the impact those have on your instrument portfolio. Can you remind us how your portfolio is positioned in that market?

Yes. I mean, again, it comes down to screening and validation. Once a customer puts a screening program. I mean the harder rate to get into that program, whether it's from a validation perspective, or a screening perspective is high. But once you get into that program and GLP-1 is a classic example, as GLP-1s are being explored for newer indications they are already on the screening pathway where our assays and our platforms are being used. So that stickiness is where we see the advantage coming from. And as more and more. And then GLP-1 is just 1 example, whether it's around GLP-1s, neurodegenerative diseases or nephrology these are areas where there is a lot of stickiness to our reagents, and that's the benefit that we will see earlier on, I would say, than compared to our peers.

Okay. Okay. And shifting to the Signals business, I mean you've had a lot of recent innovation in the signal software side, maybe highlight some of the recent and upcoming launches and then the timing of when we should expect those to actually flow through the P&L.

Yes. I mean I think as Steve likes to say, either 1 of these NPIs would be 1 of the biggest launches that we would have in the history of that business and having 3 of them in the same year. is going to pay very rich dividends over the next several years for that business and Revit as a whole. I mean starting with bio design that was essentially adding features to our signals on portfolio in the large molecule area, where we did have a gap. And then I think this fills that gap on the biomolecules and the large molecule side. Sintetica, which we announced the partnership and launched off it earlier in January, will be launched in a couple of weeks. So that launch is coming up. And that brings the ecosystem of 200-plus biotech companies that tune labs and Lilly brings to the table. And then the last 1 is logistics that essentially provides an integrated AI integrated workflow into signals 1, seamlessly bringing in from discovery to filings to taking it on to the clinical, 1 unique enterprise-level platform that is able to have all of this ecosystem for drug discovery to commercialization.

Great. And then biodesign is 1 is very recently launched, and you mentioned that it kind of fills this unmet need. I guess, what has the early feedback been on that launch? And -- and what are you hearing from customers?

Yes. I mean I think if you recall, the way we develop our NPI portfolio, especially on the signal side, is through user groups that we hold 3 to 4 times a year. So biodesign is an ask from our customers. So the features that they are is something that they have been trying and playing with for several quarters, even before the launch of it. And then I think early beta customer feedback has been pretty positive. But typically, it takes a couple of quarters or a few quarters before you start seeing traction and it all comes down to contract renewals or when those features are added on to the new contract for the customer.

Okay. And the ACD/Labs acquisition, which closed in January, are there any areas of the offer portfolio where you feel another small tuck-in acquisition would make sense? And how do you balance the decision to build versus buy?

Yes. I mean ACD/Labs is a perfect example of a tuck-in for the Signals portfolio specifically where it was an add-on. It provided a lot of synergies, both from a revenue perspective and from a cost perspective as it seamlessly integrates to our offering today. We have a great team of talent that came along with the acquisition. And not only are they going to help with what -- currently, ACD/Labs offers, but also the newer pipeline. And then I think as we look for opportunities, if something comes along that fits that mold, whether it's in signals or in life sciences or diagnostics, we will continue to be acquisitive.

Would there be like a ranking of where you would be focused on more? Is it more when the deal comes along or...

I think more than ranking, we tend to look at strategic fit, unmet need and financial profile. I think we sort of rank more based on those 3 elements than which company it is.

Okay. Okay. And AI impacts, thinking about your software portfolio, what's the risk that pharma companies try to develop some of these software solutions in-house, and then thinking about that investment from a pharma biotech perspective, how quickly could they replicate these internally using AI? And would it even make sense for them to do so?

Well, let me start by saying, Signals is in every pharma and biotech environment today from a research perspective. It is the plan of record over the past several decades in terms of where all the research is done where all the data is collected, where all the analysis is done, but more important, where all the information is housed for QA, QC, nomenclature IP filing, regulatory filings. So I would say that it is the system of record. Now would you be able to eventually move to a point where some of the mundane and more routine work can be done in an automated fashion. Absolutely. But I think the real benefit for our customers, which our customers also fully appreciate and you realize is how do we take advantage of what automation and what AI does to bring it into the ecosystem and work and collaborate together so that the output improves both product productivity and efficiency for our customers. And I think that is where our focus is on working with all of all, if not some of the automated automation companies.

Yes. The other question we get from investors often related to AI is how pharma companies change their behaviors in the preclinical R&D settings in terms of wet lab work versus in silico and I think an emerging theme is the need to actually build out data sets to fuel AI models. So what instruments in your portfolio to be most exposed to this trend? And how do you kind of see that playing out over the longer term?

I mean we've talked -- we and others have talked about this lab in the loop model, right? When you start with in silico design, you take it to the wet lab, you do the validation post discovery and then take that data, come back to the in silico design. I think our portfolio is the best suited, and I'm not just saying because of where I sit. But if you think about it, right, on the in silico side, you've got signals -- that sort of is the plan of record in terms of the platform where in silico designing would be done. As these compounds come and become lead candidates, they would go through the validation phase in discovery and into validation. This is where high content screening is required, as you go into animal studies, you would require in vivo imaging, you require reagents to do the research and then move to screening and validation. This is where our reagent portfolio fits well. So I think the way the portfolio is designed and unlocking the value of the portfolio is what the new process as in silico designing becomes an integral part of drug discovery will start playing a role.

And as the data set build out something that will be continuous over time. Will it get to the point where you have your data set and you can just keep going back to that same set? Or will it be something they have to continue to do over time?

I mean, I think it's like akin to saying that in the next 5 years, drug discovery will be done, and then there will be no more drug discovery, right? So it's not going to happen, right? There's always going to be new diseases, unfortunately, and there's always going to be new discoveries, both for existing diseases and newer diseases. So I don't think innovation is going to stop. I think what definitely will happen is that it will be much faster, much more efficient, much more productive. So I think the way to envision it is that there'll be a whole lot more therapeutics coming out at a faster pace, but that will require where the bottleneck will end up being is around the validation of these compounds. As these lead candidates move from early discovery to lead candidates to IND candidates. That's where the validation probably. Or another way to think of it is that the amount of the funnel, as I keep saying, might get narrower but the stem of the funnel will get broader. So you'll have a lot more compounds moving into the development phase, that will require more and more of our reagents and instruments.

Okay. And when we talk about some of these trends, I guess, what are you seeing today with customers? Or like are these more conversations that you're having as they talk about their plans longer term?

I think some of the initial growth rates that we are starting to see in our portfolio is a direct result of this. As the discovery -- I would say probably towards the second half of last year, when there was a new way of stock of thinking and more of certainty around MFN status and sanctions and tariffs and all of that. And as the discovery engine started to take traction, again, we've started to see this new behavior coming into play, where this is now another integral part of discussion around drug discovery and development.

Okay. Maybe shifting to guide. You updated the pro forma organic revenue growth, it's 3% to 4% now for the full year. but that kind of implies a step down from what you saw in 1Q. So maybe remind us of some of the moving pieces as we move throughout the remainder of the year? And then anything on cadence that you would call out?

Yes, I think we did close to 6% pro forma in 1Q, and we've said 2% to 3% in the second quarter. I mean I think the best way to think of it, EV, is that we have no ramp up in the second half. And then I think that's what should give a significant level of confidence to our investors and shareholders as to how we have structured and guided to the second half. You talked about reproductive health as to how much conservatism you might expect to be baked in our reagents business is starting to do very well in pharma, biotech and academia research is coming back. And our platforms business, again, grew mid-single digits in the first quarter, and we expect that to continue to do well. So I would say rather than skepticism, there is a significant way of optimism on our side and then some level of conservative conservatism that we have built in our forecast.

That's great. And on the margin piece, the divestiture helps, but you also had some underlying margin and EPS improvement as well in the first quarter. excluding the divestitures. So how should we think about the margin cadence throughout the year? And I know there was an impact in selling days in -- so I guess, should this actually help you later in terms of ramp?

Yes. I mean I think we did 24% in the first quarter, which was better than what we had expected, and this was despite, I think, 50 bps from FX drag. And 100 bps coming from the extra week that we have, which would not be there in the second quarter. And I think we are at 27% in the second quarter. And in the second half, we had 29 and 33. I think we'll start seeing, as we have said, the impact of the cost measures that we have taken in the second half of the year. And the fourth quarter is just the normal volume growth that you see typically in the business towards the end of the year. So again, we feel very comfortable with the margin profile that we have now. especially as we look at it pro forma. But I think more importantly, we as we move into 2027, that is also going to be a significant driver of continued margin growth into 2027 and beyond.

And that's like operating leverage kind of on some of these end markets coming back.

And the calendarization that we would naturally see from the second half of this year on to the first half of next year. Because these are structural costs that are coming out of the system, whether it's from rooftop optimization integration activities that are going on in the company, and we'll start -- and the as these will have a lasting favorable impact on the margin.

Okay. Great. And you touched on it a little bit before, but the capital deployment strategy in balancing between share repurchase and M&A moving forward, how do you view the M&A environment? And then you balancing with your aggressive share repurchase strategy.

Yes. I think if you were to ask you today, we still feel that share buyback is the best opportunity that we have in the marketplace. But at the same time, as we've said, we will continue to keep our eyes and ears open. And as long as there is a strategic fit a good financial profile and something that fills a gap in our portfolio. We'll continue to do more tuck-in acquisitions similar to the ACD/Labs acquisitions. But outside of that, we've got the bond that we have to pay off, which we plan to do in the second half of the year and be acquisitive around share buyback. We feel very strongly there is -- today, there is no better opportunity than buying our shares back. Given the growth profile that we have, for this year and beyond. I mean, if you were to -- all we need is for the pharma market to come back to normal, and we are already in our LRP range. If you look at our Signals business, if you look at our reproductive health business, we are already in an LRP range. It's life sciences speeds of the portfolio with pharma biotech coming back, we feel very good that we will soon be in the LRP range of what we have projected.

Yes. And I guess touching on the pharma biotech piece. I mean, we've seen the funding improve, but is there anything else that you think has fundamentally changed in that market? I mean, I think as we look at the tools broadly, not even just for revenue specifically, but there's a concern of is this market, something that has fundamentally changed now post COVID. I guess how do you kind of see the moving pieces of what we should look for of this coming back?

I think there were 2 or 3 things that really hit Pharma Biotech post COVID. One, was that there's significant amount of overbuying that happened during the COVID phase. I don't think people really appreciated the amount of money that was spent during COVID in pharma biotech. Then we had the interest issue, inflation issue, CapEx spending drying up I mean there were so many acronyms of 3-letter word policy changes that were happening then tariffs hit. So we've had -- pharma Biotech has had to endure a significant amount of external policy changes that have impacted the end market. But at the end of the day, as these therapeutics are going off a patent clip, right? If the pharma biotech industries to succeed, survive and as a human generation we need the therapeutics, and that is only possible through innovation and bring it back to -- if you look at it, whether it's through in silico design or drug discovery and development. Over the past 5-plus years, we've done a really good job assembling a portfolio that fits that Infinity in a loop model which we've talked about for a couple of years now and now it's -- we're glad to see that it is coming to fruition and it's actually playing out as we had hoped for. And that benefits us because not only do we have the software component of it. But even on the reagents and instruments side, the noncommoditized portfolio that we have fully leverages this opportunity. So we are really excited with the portfolio we have and we hope to be able to demonstrate the value of it in the next quarters.

Great. And then 1 thing you have talked about in the past is building out some GMP capacity as well. So how do you view that shifting over time and your ability to kind of stay with these programs in the early stage through the clinical.

Yes. I think the way to think of it, it is 1 of the growth drivers. It's 1 of the ins that we have in the fire because, as you know, to get on to a GMP program, it takes a few years for it to get on. But once you are on, not different to our reagent side of the business, they become very tricky and lumpy. But I think as we get into late 2027, 2028, we are going to start seeing the benefit of that. But that is 1 of the is that we have in Fire. The extended number of disorders on reproductive health the application of automation and machine learning on our life sciences platforms business, all of these are growth drivers, the partnership opportunities that we have with pharma biotech whether it's around T1D with Sanofi or tune labs with Lilly or what we are doing with on population genomics with the U.K. and gel as an example. These are all growth drivers that add to the baseline that we have on our LRP. So there are significant opportunities about that provide upside to what we have put on the LRP.

Great. And just, I guess, with a couple of minutes we have left, what do you feel investors are most underappreciating about the Revvity storage today? I mean, you walked through some of these growth drivers. But if you had to call out a couple as probably most exciting over the next couple of years?

I think I talked about them just 30 seconds ago. But I think the component that really is -- we feel not fully appreciated this, our ability to be executed. I think as we've brought this in, we are still a very new company and our investors are looking that will we be able to execute consistently and flawlessly -- and I think we've shown that over the past several quarters, and we will continue to do so. If you look at our cash flow conversion, I would contend that it is at least the best, if not amongst the best in the industry. If you look at our organic growth rate this year, it is in the top quartile on the margin profile, we probably will have the significant margin improvement that we will see this year that will continue in the next several years. So in each of these components, I think you will see the benefit that bringing together this portfolio will have on our financial profile.

Great. All right. Good place to end. Thank you so much.

Thanks, Evie. Thank you.