Standard BioTools Inc. (LAB) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the 43rd JPMorgan Healthcare Conference. My name is Fanchen Zhou. I'm an associate in the Healthcare Investment Banking Group. It is my pleasure today to introduce Standard BioTools, who is going to be presenting shortly. With us today, we have Michael Egholm, CEO from Standard BioTools. The presentation today will be in the format of 20 minutes of presentation, followed by a 20-minute Q&A. With this, I'll yield the stage to Michael.

Thank you for the introduction here, and welcome, everyone here in the audience, and welcome to everyone on the webcast. And of course, special thank you to JPMorgan for hosting us here today. Standard BioTools was founded with a bold purpose to set the new standard in the life science tools industry, to empower researchers, and to hasten the pace of discovery while rewarding all our stakeholders. We do this through discipline and determination, executing on our strategy. And as I stand here today, it's a bit too real as we started this journey only a little bit less -- a little bit more than 3 years ago with a thesis of consolidation in this space, $300 million in commitment, a very small team and a completely blank slate. And today, our team has already turned that dream and vision into reality. And so we are -- two acquisitions in, $174 million in revenue, a strong team, a highly diversified portfolio of exciting technologies that will help pharma develop better drugs faster, and a very strong balance sheet with more than $300 million as of September 30 on there. And so today, I will talk of the foundation we have laid for Standard BioTools, our strategy, our tactics and what we're going to do here in the next 18 to 24 months to accelerate. I will end my presentation today on what I believe is the most exciting area in life sciences, which is plasma proteomics, where we are exceptionally well positioned and about together with Illumina to launch a truly revolutionary solution. So I'll come back and end on that note. I will be making several forward-looking statements. So I have to show you this. And now that you have all read it, let me dive in to our approach. We operate as owners, and act like investors. We're maniacally focused on getting returns on our investment, on diversifying risk and generate returns for everybody involved here. The way we operate is through our business system, Standard BioTools Business System, which is our lean operating system anchored into [indiscernible] production system, come back and talk a little bit more about it. In essence, it can really be summed out with our mantra here, without margin, there is no mission. So we're not shying away from being a business. We have a set of solutions that help enable customers to answer the questions that they have. We have business. We're not a one-trick pony. We're not an omics to show. We are business. We have several technologies that are truly exciting, several in the omics space, but we focus entirely on what it is the customer need and serving it in a sustainable way while generating returns for all our investors. The way we do this is by assembling a very strong team, I'll dive into that in a minute. We have recruited across life sciences, seasoned operators, hundreds of years of experience. Yes, some of us have been doing this for a very long time. We are consolidating high-value products and solutions, targeting high-growth, high-margin, good end markets. As I mentioned before, with two acquisitions in, $174 million in revenue, cash to do new M&A. We're not the only consolidators in this space. In fact, all the big companies in this space have grown through acquisitions. However, the way to big -- to target the rich diverse set of emerging technologies, we're a little bit like Goldilocks. We're not too big, but we're not too small either. In fact, I'll put out there, we're the only company of our profile, approaching a couple of hundred million in revenue, a portfolio of products and management team that have been there, done it, proven that we can do it, and a cash balance to go execute. We are leveraging our Standard BioTools Business System, relentlessly optimizing every process and, of course, taking out OpEx. So eventually, we can generate shareholder returns. Across the two acquisitions, we are taking out $100 million in OpEx while investing and while setting up the company's for growth, and we are targeting being EBITDA positive in '26, just already next year. Doesn't seem that far away. And now on to the team, I've put together -- we have put together a very strong team, very deep scientific expertise, very deep life sciences experience here. But all indexed of seasoned operators in this space, all people with at least a couple of decades of operating experience. Many of us at Danaher alumni possibly one of the best places, if not the best place to go learn, lean and disciplined operation. With that, I'll move on to the mix of our portfolio review. Our portfolio as a value pyramid, we have consumables on top, high-margin, high-growth recurring revenue. We sell instruments. We like instruments that have lower ASPs, not all of our instruments have that today, but pull-through is equally important. And then we have a good foundation of a service business, part Field Service, most of it is direct service business. This is the way to bring new technology to the market. Eventually, we will move this up the value pyramid and are targeting the profile on the right. In addition to changing the margin profile and the attractiveness of the business organically and inorganically, we are also looking to expand the pie. We are currently in academia and biopharma and are looking to as we grow to do target investment in other markets, very big pie that's available for us today. The market disparately needs consolidation. Valuations are down, funding is down, but innovation hasn't stopped. In fact, I would argue there's more innovation than ever. And here is where we come in with a platform, a seasoned team and operating system and a cash balance to go and consolidate this absolute best time to be here at this exact place and doing this consolidation in place. On this slide here, I'll walk through how we select among all those exciting technologies, how we select our targets, maybe possibly the most important slide, a couple of other really good slides there later, but a very important slide here. On the right, we have a snapshot of our funnel, the diverse set of markets, different mix, consumables, instruments and reagents. But the way we look to pick our target is we manically focused on whether or not we can get the right margin profile. It doesn't have to be there, but we have to see it. Equally important is we're not a science project. We do not take on projects without questions onto science. And so we focus entirely on derisked technologies. There are many technologies, I'll show you a couple of examples, where hundreds of millions have been invested and those are now ready for prime time. In fact, I would say both of our early acquisitions is exactly that. Also, it's not enough to have a great technology. We have to have a clear path to commercialization. In layman's terms, it means the technology solves a problem somebody is willing to pay for in such a way that we can make money while doing it. It sounds simple. It's hard, many, many, many targets get filled out by this. And last but not least, we are looking to applying our SBS business system. We've got to see the ability to unlock value as we acquire assets. And every asset we acquire, we take through what we now call the SBS flywheel. We set a strategy focused on the critical few, lean transformation, focusing on lead time, quality, on-time delivery, delighting customers, continuously improving all while taking cost out. A few snapshot on the lower left-hand corner of the impressive results we've gotten today, 32% improvement in adjusted EBITDA loss, a whopping 20% improvement in on-time delivery to 98%, which is industry-leading, and it's really a sign of goodness indicator on just how your entire operations work, fourfold reduction in the complaints on our leading systems. We cut the complaints by 50% in 2 successive years, and we'll do it again, a sign of what our Standard BioTools Business System can deliver. Let me dive into the two acquisitions we have done. We acquired Fluidigm a little less than 3 years ago. Great technology, has been around for a long time. We went to work, unlock the amazing technologies in there, diamonds in the rough, polish them, invested where needed to be done and the results in just the first 18 months, we brought the business back to growth, improved gross margin, reduced operating expenses and reduced cash usage by 50% in just an 18-month period. Our second case was the SomaLogic merger. We actually came to JPMorgan last year having just got approval for the deal. I had just closed a day before we went into JPMorgan. I'm really excited to stand here today and say not only did we acquire a great asset and a good cash position with that but we're now unlocked what we believe is the crown jewel in our portfolio, SomaScan technology. SomaScan is plasma proteomics. So from blood, we can do 10,000 proteins with great precision in our language, a CV of 5%. We're the only technology that can do that today. I'll come back to why that's important. Equally important, we went to work, applied the SBS flywheel, clear strategy, critical few and then Kaizen and lean transformation, and we took out $80 million in OpEx, so $100 million between the two acquisitions in OpEx while still investing for the future and setting the company up for growth. And with these two, we have now set up, applied the flywheel. We're now here $174 million jumping off point. And the next part of the phase is growth. So I just went through how we merged two businesses, how we're improving the portfolio composition, and how we apply the SBS flywheel. Next up is, of course, organic growth, and we'll keep moving these businesses forward. But we also will go after inorganic growth, as I said, possibly the best time or most opportune time, it is market here to consolidate. And as I said, we are the Goldilocks here in this field. We are not too big and not too small and definitely agile. We're going to continue to improve and walk up the value pyramid, and we're going to continue to deliver with our SBS BioTools Business System. So that's the foundation we have built and now I'll dive in to our exciting product portfolio. 80% of our products play into the field of proteomics. We live in the post-genomic area, and proteomics is already go through many, many different applications, a big market today. The most important number, maybe the single most important number, in this presentation is the predicted CAGR, mid-teens for as far as the I can see for proteomics and I would argue, we are even in the subareas of proteomics that could possibly grow even faster. Portfolio we have here, the mix is shown on the left with the pyramid. We have six different product lines, single-cell immune profiling. We have a great spatial profiling -- proteomics profiling venture, Nature Methods of the Year. We have a genomics platform, a whole exciting portfolio. I'm going to now double-click on what I before called the crown jewel, which is the SomaScan plasma proteome. Genomics is incredibly important. I was there at the early days as it happened and amazed to stand here 20 years later to see what has unfolded. But to truly study disease you have to study proteins. In fact, you have to study thousands of proteins in thousands of samples. DNA is very easy. You have A, C, Gs and Ts. Proteins are really, really hard. All the approaches, other than what has, are leveraging legacy technology, which is antibody-based technologies. It could bring you only so far and the fundamental problem is there are only so many good antibodies out there. Once you exhaust that, you can't scale anymore. In sharp contrast, SomaScan based on synthetic monoclonal DNA aptamers can scale basically in perpetuity, but we are at 10,000 protein, which is half of the canonical proteome but we're doing it with, as you can see on the graph on the right, with unparalleled precision. The last 1,000 have the same precision as the first 1,000. Sharp contrast to any other technologies and last year, we're really pleased to see no less than three different studies publishing variation of -- making public variations of the graph below. So what can you do with thousands of proteins and thousands of plasma SEMs, you can generate publications, and we have actually reached a tipping point now with more than 1,000 publications in SomaScan. Academic publications are nice, but much, much more important, we are now seeing pharmaceutical companies publishing on how they use our technology. Only a few days ago, the Novo Nordisk team and collaborators published a paper in Nature Medicine, January 3 issue, on using SomaScan, our 7,000 -- 7K version, and they used it on a couple of cohorts that were treated with semaglutide GLP-1s possibly the most exciting breakthrough in human health, possibly since antibiotics, and I haven't even tried to count how many GLP-1 companies that were at the conference, an exciting area. But what the researchers were able to show is not only confirm insulin regulation, all the things GLP were known to do actually beginning to elucidate the mechanism of all the other wonderful benefit this drug class has for the first time ever. And now you can begin to use this to triage your clinical trials and repurpose in our drugs. They also demonstrate within this paper something that's possibly even more important, as this was not good enough, that you can do smaller cohorts at earlier time point and determine whether or not to proceed with your clinical trial. Just think about where the vast amount of R&D dollars in pharma goes. I believe the approach here is extendable to most drug classes, and we have the solution. What has limited the penetration of the technology to date is that you have to use service only. So everybody had to come to us to do service. Service business is a great way of promoting a new technology, but to reach full potential and to reach beyond the initial 5%, 10% of the market, you have to have a distributed solution and here is where our partnership with Illumina comes in. Jacob talked about this here on Tuesday about their excitement about the combination of SomaScan and the NGS readout on their installed base of more than 2,000 NovaSeq. So we have an amazing point here in time where we have the evidence, the scientific evidence, no longer just academia, but pharma, fully embracing it, the proof that we can scale, which has always been a question, scale to have the proteome and now the enabling breakthrough with Illumina. I cannot wait to see what's going to happen truly at an inflection point. Very, very excited to stand here today and end on this high note. In summary, I have shared with you our approach to all the investors here. Trust me, we think and act with your interest in mind and advancing the science at the same time, I hope I've demonstrated to you what SBS can do. I would call it our not-so-secret weapon, but we've already shown you a number of data points in the value that we can unlock. And then last but not least, we're a company with a set of solutions that we're driving the science forward. If this is your first introduction to Standard BioTools, thank you for attending. And I hope we have piqued your interest. And with that, thank you for your kind attention.

Are there any questions from the audience? I can kick off with some questions. So you alluded to this during your presentation that Phase 1 of your journey has been about laying the foundation, and Phase 2 is about acceleration. So how important is M&A to the next phase of your strategy? Anything to call out on the organic side?

Yes. No. Thank you. Great question. So we laid the foundation, we've built a critical mass with plenty of cash and on our trajectory to be EBITDA flow positive on a stand-alone basis. But our ambition is incredibly high because we wake up every morning with this burning desire to bring more technologies on, we believe, needs to be on this platform to advance the science, to ultimately help patients and of course, also generate the return. So it is both, and I couldn't think of a better time to be a consolidator in this space here.

Michael. Continuing on this theme, can you talk a little bit more about the profile of the deals that you're pursuing and the criteria that you use to assess whether a potential target might be of your interest?

Yes. No, again, great question. There are so many things to pick from out there. And we do get inundated every day. We are very, very business -- and our business development team, which I'm obviously a part of, but you've got a snapshot of the diversity of companies we're looking at, but it is really true a rigorous process of the right margin profile. You have no idea how many companies you can fill out just on that alone. Again, they don't have to have the margin to date, but we've got to have line of sight to a healthy margin and a healthy growth. Then its customer value proposition. And then it goes without saying, again, there are many, many exciting technologies, I used to develop some of them myself. This is not what we do here, taking technologies that have gone through all the investments, but just need that final push and polish to be pushed over the line, final investment, but it's a timed investment, typically 18 months and to push it in for prime time. And then equally important, there are many things I could buy that I want, but we're not going to overpay. So the price is also, of course, very, very important. I don't want to do a value destroying deal even if it's an exciting company that might be growing. But with the wrong margin profile or at the wrong valuation, it doesn't work for anyone. So we do this with exceptional discipline. But I do believe we talk to just about everyone out there that's in play. Keep doing so. And again, as I said, we're targeting 4 to 6 deals here in the next 18 to 24 months.

Michael. That makes a lot of sense. And also continuing on the same theme. In your presentation, you also highlighted the cost synergies across the two acquisitions, strong balance sheet and profitability. Can you talk about the progress made by the team so far and how you're thinking about your path to profitability?

Yes. So we had a -- we started off as a jumping off point on first half '23, the two, SomaLogic and Standard BioTools, pro forma $250 million in OpEx. Generally, it's a bad thing when OpEx exceeds revenue. Who would have known? But so we knew we had to take a sledgehammer to it, and we did. But we did it with care. We went through our 90-day strat plan, focused on the critical few, which quickly allows you to peel away a lot of expenses. And then the next part is from the lean transformation. And so in less than a year, we identified and operationalized $80 million in OpEx reduction while investing for the future and setting up for growth. So the $80 million is net of all the investments we have done. We took $20 million out in the first go around, so $100 million so far, and we're not done. We'll keep going after as we get operational efficiency and just keep doing Kaizen, you're never done in the lean language. Obviously, organic growth and gross margin expansion, and then with M&A. But we're not requiring M&A to go profitable. We are doing M&A turbocharge the future growth.

Now I wanted to pivot a little bit to the Illumina partnership. If we take a closer look at this partnership, now with the Protein Prep commercial launch expected in the first half of 2025. Is there anything you can discuss in terms of the customer anticipation of this product? How do you think about customer adoption? And how big of a business could this be in the next few years?

Maybe starting from the back, how big could this be? I don't want to set any forecast for Jacob. But long term, I do truly believe that we're entering the proteomics era. The term proteomics was coined 30 years ago, with this idea that proteomics was going to parallel the genomics growth. I actually never like the term until now, where we actually finally have a scalable solution, half the proteome, the evidence that it works and now with the Illumina partnership at distributed solutions. So I'm now embracing proteomics after hearing the term for close to 30 years. So very exciting. I do not know of a single population proteomics -- genomic study out there that would not also have a proteomics component. But remember, the proteome, even though we can tell a ton from a single data point, you can tell even more of a multiple data point. Unlike the genome, it's not static. It's dynamic. And you can actually measure changes in the proteome as we age sadly. But you can also see interventions whether they work or not. So potentially proteomics could be bigger than genomics in the long term. So massive market, but you require a scalable solution, and this -- we're here like at the cusp of having that with the evidence, we're the only ones that scale, the literature evidence and now the Illumina launch. We have a very close partnership with Illumina and which is never easy to have two companies aligned, but we have truly a symbiotic relationship where we're going to go change the trajectory here and of course, make sure that the economics for both Illumina and us will actually work out really well. So we feel very good about our position, and we'll continue to invest in that.

Continuing on the Illumina topic, can you talk more about the announcement earlier this week, highlighting the launch of the pilot proteomics program with Illumina and the biopharma collaborators to analyze around 50,000 samples from the UK Biobank?

It's a great announcement. It really shows what companies can do when we put our heads together. So the UK Biobank is possibly the biggest population-based study around 600,000 samples, everybody is wanting to get into it. We believe our technology is so advantaged that we decided to make an investment together with deCODE and Illumina to generate a data set that will be out there as soon as it's ready for everybody to see. And we're really pleased to see a consortium of pharma companies behind that sponsor the next cohort. So 50,000 samples for now. I also know that there are a number of other big biobanks out there with very good data set and very good medical follow-up. And we believe we are certainly in the pole position here to win this with the recent data showing that we can scale with precision.

Michael. Last question for me. Standard BioTools recently announced that SomaScan played an important role in a study published in the current issue of the Nature Medicine conducted by Novo Nordisk, as you mentioned in the presentation. It investigates the efforts of semaglutide on the circulating proteome. Can you talk about some of the insights from this paper and how it can potentially affect the future of drug development?

No, thanks for giving me an opportunity to dive a little bit further into that. Again, I believe we're the only platform out there that have pharma companies publishing on it. So we can actually use it on clinical samples. I'll tell you, pharma companies don't give up their samples easily. They don't burn them on technologies. They don't believe working, let alone, obviously, pay us to do that. So that's a huge data point in itself. They were able to get deep mechanistic insights beyond what GLPs were originally discovered and developed for insulin control, appetite control. They're seeing all these other benefits and begin to now get an answer to why GLP-1s as a class have all these additional benefits, neurodegenerative disease, number of other addictive behavior, a number of abnormalities. And in the paper that show how the GLP-1s wants beyond what you see from the weight reduction is the reduction in a set of inflammatory proteins that themselves possible will lead to even new drug discoveries. Second part that's really exciting. So if you're a pharmaceutical company and you have a drug that can do all these wonderful things. Again, hundreds of companies are pursuing GLP-1s for a good reason. It's exciting. But if you are to differentiate yourself you need a way of measuring your benefit in one indication or another. We have the only technology that allows you to do this early on a small cohort. And that is possibly the most exciting -- as exciting as GLP-1s are and as exciting as the mechanistic insight is, is this idea of doing smaller clinical trials, possibly 500 people, 6 months readout and then do the go/no-go. You can literally see whether you have the effect or not and/or undesired effect before you go into the tens of thousands and years and typically billions of dollars required. I'm not suggesting the pharma spent less on clinical trials, I'm suggesting we can help them make better drugs faster.

Thank you, Michael. Are there any...

Thank you, Dr. Egholm. I came from China. So my question is about China. What's your strategy in China, especially considering that there could be some kind of limitation for the instrument exports there just announced yesterday? So what's the future maybe collaboration with the China companies or service providers? Or what's the forecast for the China bio tech market using your technology in the future?

No, thank you. So historically, on the legacy Standard BioTools side, we have had strong business in China. On the SomaLogic side, because we are not -- foreign company is not allowed to work on human samples. We are provided to other companies there. We, as everybody else, was surprised by the announcement yesterday, I don't understand it. I don't understand the rationale. But nonetheless, it's here, and we're currently assessing what it means. We believe and hope that we can get a -- file for license and can keep selling into China, which is -- was a growth vector. Obviously, China had funding trouble here the last year too. So China business is actually less than it could have been right now. So in that way, I guess, a silver lining. But we certainly hope that we can resolve that work with it. But it's too early to say like everybody else say, I don't know what it means, but maybe a chance to stress a bigger point. It's been a tough market. I show some very shocking stats here, funding down, revenue down, all this stuff in our field. Now you have geopolitics on it. None of that changed the thesis for us. We've built a vehicle for adding on additional companies and grow and tough times, we hate them, but it leads to more opportunity and nothing changes our thesis, full speed ahead, and we will sort of roll with it as we go along. So stay tuned, and we'll update investors as soon as we know more and understand the impact.

With that, I think we will conclude the presentation today. Thank you so much, Michael. Thank you.