All right, we'll go ahead and get started. Good afternoon. Welcome to the Wells Fargo Healthcare Conference. I'm Brandon Couillard. I cover life science tools and diagnostics. It is my great pleasure to have Bio-Rad with us at the conference this year. Joining us for this conversation, Chairman and CEO, Norm Schwartz, as well as new CFO, Roop Lakkaraju. Did I say that right?
That's right.
Norm, Roop, thanks so much for being here. Really appreciate it.
Yeah, our pleasure.
Maybe to start off, Norm, you recently announced a new COO, Jon DiVincenzo.
DiVincenzo.
DiVincenzo, excuse me. Former LabCorp executive, formerly PKI. This completes kind of the refresh, if you will, of the kind of senior leadership team. He was running actually a much different business, you know, at LabCorp, more services, clinical trials, central lab. What about his background and experience did you find attractive for this role at Bio-Rad?
Yeah, we're really happy to have Jon join us. You know, he comes from a kind of long background in life science and diagnostics. If you look back through his history, you know, really good experience through his time at Millipore and then Merck, and then he got an opportunity to be CEO of Enzymatics for a while, until that got acquired, and then, as you say, moved on to PerkinElmer, and then more recently has kind of flipped over to what we think of as the diagnostic side. So, kind of running clinical trials, and I think got a really good understanding of the kind of diagnostics world from that experience.
You know, if I look at the experience, you know, through product development, marketing, manufacturing, global experience, you know, and his overall general management kind of profile really fits well with what we were looking for.
He was also appointed President, which is a new-
Mm-hmm.
Distinction, title that you relinquished. What's the significance of that? Is it more internally? What should we view it externally?
Well, I think that, you know, as we looked at candidates and thinking about attracting, you know, people with potential for the long-term, that was an important consideration. You know, we have looked at succession as a key item in the mix as we attracted kind of new talent, and so that seemed appropriate as part of the process.
Roop, you've been at the company, you know, since mid-April.
Mm-hmm.
I want to get your initial impressions. Any surprises, good or bad, since taking over the CFO role? Where are you spending the majority of your time today, and maybe how has that evolved, you know, as you've gotten more intimate with the business?
Yeah, so I don't think there's any surprises coming in from my perspective. I think the time I've spent is really to understand. You know, it's my first foray into healthcare, so part of this is understanding both the clinical side and the life sciences side. We've got quite a diverse set of products and market areas that we serve, and so really understanding that and the drivers associated with it, and then really understanding kind of the business model and, you know, where the opportunities are, right? I think the company has been on a transformation journey and made a tremendous progress over the last 10 years in terms of margin expansion.
But I also think that there's still opportunity in terms of incremental margin expansion as well as cash flow improvement on top of, you know, revenue growth over time that we would expect to see.
I really do want to dig into that transformation process. You know, and part of, you know, coming to Bio-Rad, have you done a benchmarking analysis on margins, cash flow, working capital? And, I mean, it's not that hard to kind of see.
Yeah.
It's black and white.
Yeah.
Right? But where are the biggest opportunities where you think, you know, the lowest hanging fruit is, you know, on, you know, cash conversion-
Mm-hmm.
- cost out, that you think are actionable-
Yeah
- in the next, call it, 12 months?
Yeah. Well, I think part of it's continuing the journey we've been on in terms of, you know, if you look at some of the executives we brought on who come from, you know, what I term high-performance companies, right? Companies that are focused on execution. They've brought either that Lean Six Sigma point of view, for example, our supply chain head, who's been with us a little bit more than a year. And you know, you look at the transformation that we have going on within the factories, just from a productivity standpoint, the improvements we're making from a supply chain standpoint, both from an alignment to our sales and forecasting improvements, but also, you know, procurement leverage, right? And then logistics efficiencies.
These are all things that have been worked on, that are starting to take hold, and you're seeing that in our margin, in the most recent couple of quarters, in terms of what we've announced. And I think, again, there's more that we have an opportunity to drive there, as we move forward.
Maybe switching gears over to the SBUs. I want to start with life sciences. I mean, the end markets have been weaker than expected for a while now. I mean, you took down the guide by 10 points for the full year in the second quarter. Can you unpack just what you're seeing, you know, between biopharma R&D, government and academic, and then the manufacturing or bioprocess?
Yes, sir.
Chrom piece of the business, and, you know, which has surprised the most negatively to the downside? Or, are any of them stable or getting better in market-wise?
Yeah. Yeah. So there's a lot of moving pieces there. Obviously, you know, the kind of fundamental piece is the academic market. And I think that while we, you know, if I take, first of all, the Americas, especially the U.S., and think about the NIH budgets, there was an increase in the NIH budget this year, fairly modest. And so, you know, that market is moving along okay. I think people are still a little bit conservative in their spending. If I look at Europe, kind of a mixed bag. You know, places like Germany, a little weak, some of the countries in the Nordics, stronger. Again, a kind of a mixed bag throughout Europe.
And then in Asia, mostly affected by China, is kind of anyone's guess right now as to what, how that's all gonna recover. So that's kind of the view from a geographic point of view, especially for the academic area. So kind of moving on to the kind of biotech, biopharma, and there are really, as I see it, three pieces to the puzzle. You've got the biopharma production piece, which has been a stocking, destocking scenario. And for us, we're still not through all of that destocking.
And primarily because of where our products are used in the process, there was more stocking that happened, more insurance that these companies wanted to have for those particular critical raw materials. And so they're kind of still working through the destocking process. At the same time, I think during COVID, a number of the pharmaceutical companies stood up some extra programs, had extra money coming in, extra programs, and I think what we've seen in the last six months is a lot of kind of kind retuning, readjusting to normal of those some of those extra programs.
And then on the biotech side, third piece of the puzzle, this is really all about the biotech funding, which has been weak, and, you know, now we're starting to see a rebound in that. I would say that it has not turned into the orders yet. I think there's still a lot of conservatism there. But, you know, it will come back. It's just gonna take a little longer than we originally thought when the year started out.
On process chromatography, how much of that business is clinical trials versus commercial, and-
Most of it's really commercial. I mean, you can think about kind of the process there. You have in that process you plant thousands of seeds, and some of those seeds actually turn into what you might call base hits, and then a few of those turn into home runs, and that's kind of the way to look at that market, if I can mix my metaphors.
Roop, can you put any numbers around the magnitude of decline anticipated in that business in 2024? Are we talking, like, down 30%-40%? I mean, that's a much bigger number than, you know, many other kind of comparable bioprocess business I can find.
Yeah. So on a year-over-year basis for the full year, it'll be in that, you know, slightly above 30%. Although from where the first half came out to where the second half is expected to come out, there's sequential improvement in 2024. So the destocking that Norman was talking about is taking course, or is running its course, but incrementally, we're seeing some slight uptick. You know, not on a step function basis, but just gradual improvement. And I think that also gives us confidence that the destocking will continue. Unfortunately, it will continue into 2025 at varying points, depending upon the customers, but we are seeing customers that will eventually get back to what, you know, will be perceived as a normalized level, in process chromatography.
Digital PCR has been a huge growth driver the last several years. I think you talked about it being flat in 2023.
Mm-hmm.
You talked about it being maybe down low single digits in 2024.
Right.
What is the right growth outlook for this business over the next three years? Where are we, just in the bigger picture, adoption cycle of dPCR relative to-
Yeah.
qPCR?
Yeah, go ahead.
I think in terms of where we are, you know, it's taken hold in research environments, especially for oncology applications. There's still more opportunity in there. And I think some of the new entrants over the past few years further validates the ddPCR kind of market as a whole. And for us, centrally, it's a pillar for our growth from a long-term standpoint, just as we had indicated in 2022. I think that still is the case. I think the slowness, specifically for us in 2024, is more to do with biotech, biopharma kind of funding, and those dollars, you know, translating into actual orders. I think the sentiment has improved.
People are wanting to think about buying something, but the actual act of buying something is not at the rate we'd like to see it.
Any updated numbers you can share in terms of the end market, the end markets of ddPCR? You know, how much is clinical versus research today, and maybe how much of the mix is equipment and consumables versus consumables?
So it's a-
Been a long time since you shared a number like that.
Yeah, it's pretty much all, pretty much all a research market still, in terms of its application. That's the largest part of it, and it's a pretty good mix between reagents and consumables, about 50/50 today. It will probably evolve a little more to the more typical profile of maybe 30/70 over time, but right now, it's about 50/50.
The QX Continuum has seen some delays. You know, you've characterized it as opening up a much larger, actually, part of the routine use market, if you will. How much do you expect the TAM to expand for ddPCR with that introduction, and do you still expect it to launch in the fourth quarter?
Okay, a number of questions in there. Yeah. Yeah, still we're looking at a year-end launch. I don't have a good number for you on kind of what that TAM is, but you know, when we started, of course, there was a kind of the market, which was what we entered the market with, which was the QX100. And then the customer demand and interest was in kind of moving up the capability scale. So they wanted more multiplexing, and then at the highest end, they wanted more automation. And what we've seen now, of course, is the kind of the opening up of what we consider to be the low-end market, where the QX Continuum is targeted.
You know exactly where that will end up, how much it'll open up a new market and how much is going to encroach into the qPCR market. I think it's still... the jury's still out a little bit.
Is the fourth quarter launch firm, or is there a chance that might slip into 2025?
You never know, but it's, that's what we're targeting.
Okay. Lastly, I want to close the loop on China, get a sense of what you're seeing there. I think it's about 10% of your total overall revenue mix. Any change of visibility there recently in the breakdown? Just what's embedded in the guide for the year for China-
Mm-hmm.
- and remind us how much is diagnostics and life sciences?
Yeah, just in terms, I guess, in terms of the market for us, we actually haven't quantified the percentage of China specifically, but APAC for us is 20%. China is the biggest, just to put that out there. I think China is still evolving, right? I think there's a number of different considerations that are still at play with China. And from a guide perspective, we haven't assumed that there's gonna be some, you know, tremendous improvement in the China market or environment. It's kind of continued course and speed of what we've seen so far this year, really within the guide, right? And so if China happens to turn around, maybe that's an opportunity, right, for us from an overall guide perspective.
But frankly, with everything that's transpiring, whether it's their economy, whether it's the, you know, stimulus and how long it's taking to take hold, if you will, or not take hold.
Mm-hmm.
I think it's an open question as to where that... but at the end of the day, China is the second largest, you know, market in, from a healthcare standpoint, and it's an important market, right, and we continue to invest in that market.
Can you touch on the VBP-related headwinds that you're seeing in diagnostics there and?
You know, we haven't seen very much in the VBP area. That's-
Why not?
primarily been targeted at the kind of the more general diagnostics.
Chemistry and-
Chemistry-
High volume
Yeah, large immunoassay, those kinds of things. You know, our specialty areas have not been affected like some of the kind of large general areas. You know, obviously, we continue to keep a close eye on that. You know, as you know, as time goes on, do they kind of continue to kind of come down into these specialty areas? Not clear.
I'm surprised you're not seeing it in diabetes, you know. I-
Yeah
can understand other parts of the business, but maybe-
Yeah, 'cause it's such a specialty technique that we have. Yeah, it hasn't come down there.
Okay. Switching gears to diagnostics, you know, or just help us, you know, segment the business with any more granularity between infectious disease, diabetes, blood typing, QC, and where are you best positioned competitively? Are you gaining share in any, you know, one of those areas, and what's that stemming from?
So if I, if I kind of go across some of the, some of the verticals in, in diagnostics, if I take the infectious disease area, that's kind of fairly mature for us, stable. It's diabetes, a little bit of a mixed bag. Some countries growing, some stable. Let's see, think about, immunohematology. I think we are managing to take some share in the immunohematology area. Controls are doing well. And then, you know, the autoimmune area, where we have a, a unique platform and technology, continues to grow pretty well. So that's kind of the, the overview.
Maybe switching gears over to margins. First, I want to touch on the guide, you know, for the year. And the back half, Roop, seems to embed an OpEx build aside from the IPR&D-
Mm-hmm.
- charge.
Yep.
It seems to imply OpEx, you know, of mid-single digits in the back half. Did you leave extra cushion there to kind of meet expectations and, you know, if that is real, you know, where is that spend going?
Yeah. So, there's a couple different pieces to, I think, that question. The first part is, the second quarter OpEx was a bit lower, and I think we purposefully managed that OpEx in that second quarter to be a bit more aggressive in tamping spend because we really wanted to get an assessment of where that top line is going and how the end markets are looking and have better intelligence about that. As we look at the back half of the year, we said, based on our understanding of how the markets are moving, to allow some projects that we otherwise really need to get done in 2024, specifically the R&D space and these areas, right?
To your question of, is there a little bit of room, we're still very cognizant because of kind of the life sciences and markets and a little bit of the choppiness there, being very mindful of our spend. And so, you know, could there be a little bit of room there? Yeah, potentially, and I think, you know, I wouldn't say we're conservative about it, but we're reasonable about kind of what's there and opportunities with our cost-saving actions to still provide some improvement.
SG&A dollars, Roop, have basically been flat.
Mm-hmm.
$200 million a quarter since you finished ERP, like-
Yep
Four or five years ago.
Yep.
Will that go higher if revenue growth comes back? And is there scope for more efficiency, more productivity in SG&A than maybe we believe?
I'll take the latter first. I think there's still opportunities from a productivity, and I think especially as you know, automation tools and potentially AI and other things can help in terms of driving efficiencies there. So there's opportunities there. I think to the initial part of the questions, I think the rate at which OpEx might grow is more normalized to merit in these sort of things, not necessarily outsized investments in SG&A of any sort. And therefore, we would expect to see the revenue growth be at a faster rate than any kind of OpEx incremental, you know, increase, if you will. But I think generally, the OpEx will be in a tighter range from to where it is today, and you'll see the cost leverage improve as we return to top-line growth.
Okay. Norman, the R&D, you know, spend $250 million a year, it's really kind of hard to argue that you're getting a great return on that investment. I mean, whether that's measured in versus relative organic growth, just in product introductions, is that too naive? What are you most excited about in the pipeline, and are you really spending that amount of money as efficiently, perhaps, as you could be?
No.
Okay.
So that's the short answer, is that I think we can do a lot better in that. And you know, we are looking kind of more today at kind of where we're spending that money, and what it means for basically sales growth. You know, people measure it from time to time in terms of, you know, product freshness and that kind of thing. In my mind, it's just return on investment. In other words, does that give you more sales dollars? And so, I think there's work to do there in terms of, kind of picking the projects more carefully, getting them across the finish line faster. Yeah, there's work to do.
And Brandon, I think I would just add to Norman's answer there, is the new leadership we have with fresh perspectives, and especially coming out of environments that are execution-oriented, I think are going to help us there.
Is that something that, you know, it's been underway in 2024? Or is that more of a 2025 story in terms of, like, reprioritizing those dollars maybe toward the highest growth areas, and maybe the total amount of spend doesn't need to be 10% of revenue anymore, maybe 8% or 9%?
Well, I would say over the last three or four years, we've done more to focus that money. It used to be largely based on your sales volume, what you could spend in certain areas. But we've done more to kind of pull that up and then reallocate it to where the opportunities are. So we have changed a little bit the way we do it. But there's still more to do to get the return out of that.
Roop, you mentioned the new head of supply chain, Sedat Erdonmez, if I'm pronouncing that right?
Yep.
Former Bayer at-- or former Danaher guy.
Mm-hmm. Mm-hmm.
You know, supply chain, I've always thought since the day you finished ERP-
Mm-hmm.
was an untapped opportunity.
Mm-hmm.
Doesn't seem like a lot's happened in five years.
Yeah.
Is that still a significant source of savings? What is he doing differently-
Yeah.
In terms of, like, applying that DBS know-how and, you know. Is it a sizable bucket for, you know, cash flow and cost out?
Yeah. So, is it a sizable bucket? It still is opportunity for us, and I think it's a sizable bucket. And the sizable bucket, really, from a supply chain standpoint, should be broken down from a factory execution standpoint, right? And especially with Sedat's background in Lean Six Sigma, and just applying deeper Lean principles from a factory execution standpoint is gonna be helpful from a productivity standpoint. The second part of that, from a supply chain standpoint, is procurement, right? And just buying power leverage. I think with the ERP we have and improving our data analytics around supplier spend and consolidation and buying power, I think over time, that is also an incremental opportunity for us.
And the final piece is just looking at, you know, the DCs that we have and the network that we have, how we support those DCs, the timing. I think there's some cost synergies or efficiency improvements that can be had there. All of that will also help from a cash flow standpoint, right? So it's not just a margin story, but it's a cash flow story, and I think we've got opportunity to improve cash flows as well, and that's largely from an inventory standpoint, especially, right? The amount of inventory we have is too high. Part of that's necessitated by market constraints still. Those aren't behind us. But as we continue to improve execution and alignment from an S&OE, that'll also improve the inventory management and cash flow.
To come back to the transformation which, you know, started in 2018, I mean, operating margins, which to me, the best metric, you know, free cash flow margin, whatever, it's the same, same thing, I mean, have now round-tripped-
Mm-hmm.
back to where they were, give or take, in 2017, 2018, before this whole effort started.
Yeah.
You know, granted, it's maybe not the best year to comp that off, given the market environment, right? And but what else would you point to as tangible evidence of, like, you've made progress on, you know, this five, six-year effort, if not operating margins?
I mean, I think it's a fair point, right? And part of, you know, I can't speak to eighteen and those periods, if you will. I can only see where we are today and the opportunity in front of us, right? And what I can say about that is, I think the company has made forward steps and improvements in certain areas that haven't maybe sustained as much as the company would like and then the market would like. I think as we look forward, though, with the changes that we're making, the intent is to drive sustained improvement, right? That take hold, and I think when you look at 2024 and some of the talk track that we've had during our quarterly calls, it speaks to some of the improvements that are sustainable improvements, right?
Even while top line revenue is negative, right? And so that's the opportunity in front of us, and I think as we see where 2024 finishes up and have a good baseline to really judge the next three years, our intent is to provide, in an investor day in 2025, kind of a three-year outlook and, you know, a roadmap to how we drive further margin expansion.
Okay. That was gonna be my next question is, you know, ballpark timeline on when you might be in a position to refresh, you know, that LRP-
Yeah
... you know, outlook. Would it be kinda after the fourth quarter and kind of the year's fully closed, maybe like a mid-
Yeah
..2025 type of event?
I think we wanna see how 2024 shakes out and report our numbers. I think it'd be a spring-
Okay
End of 2025. And in the event that the markets are still choppy, we'll be very clear about what 2025 might look like and maybe have the investor day, you know, in the fall of 2025. But the intent is in 2025 to give an updated view of kind of what our point of view on growth and markets, as well as then how the business model can continue to evolve.
Okay. Back on that, you know, last quarter call, you talked about a small, I think, technology acquisition-
Mm-hmm
Planned for the second half, which will incur a $30 million IPR&D charge that won't be excluded from the non-GAAP figures.
Yeah, that's correct.
Everyone knows.
Yeah.
But-
It's not in our guidance that we provided or updated guidance.
Right
... the IPR&D is not in that guidance, so it needs to be additive as a one-time charge.
Yeah. So take the 12%-13% operating margin-
Add that.
Add the $30 million on top of that.
Right
to get to kind of the actual, but
That's it.
What is that? Kind of why bother with some $30 million, you know, like, small pre-revenue, you know, acquisition, and, yeah, can you name the last successful acquisition that Bio-Rad did?
So, okay. So, I think this particular opportunity, while it is still early stage, I think is, you know, it really positions us well with the droplet technology in, in this kind of biopharma discovery area, for antibodies and, and, you know, the technology has been developed over a number of years, and, you know, platforms are pretty well along, pretty far along. So, we do think it's an opportunity to enhance our portfolio, kind of not only in, in the droplet technology area, but for kind of biopharma-focused business. And so that's, that's what that's all about. So, okay, so we've done...
If I think of the last, say, four or five years, you know, what have we done? We've done a couple of early stage things. I think it's a little too early to claim victory on those, but they're still working along. I think back, one that comes to mind is Exact Diagnostics, which kind of folded into our diagnostics controls business. A couple of others that we've done, they've kind of folded into kind of life science in terms of building our cell biology portfolio. What else? A couple that we've done that obviously have supported the ddPCR area. So while they don't stand out as individuals, they have added to the baseline.
I have to touch on Sartorius. I get the question all the time, and there seems to be a view, perhaps, that maybe your position has pivoted somewhat. I just wanna make sure... Well, let me ask it this way. At the board level, are you considering any range of alternatives that have perhaps not been of discussion in the past?
I don't think that, that at the board level, it's changed. I think that, you know, if, if there were possibility of combining the two companies, I think it would be, you know, an incredible combination. You'd have, you'd have life science, you'd have biopharma, you'd have diagnostics, you'd have kind of like three legs under the stool. I think it's, it's, it's pretty obvious today that the, the kind of relative values of the two companies make that, not a feasible transaction. And so, you know, we've got, you know, obviously a, a lot of optionality. We've got, with that, with those shares, you know, they could be liquidated. We could do, we could do a lot of things with them.
Last question, Norman, this is, you know, one we posed in our launch. I don't think it's totally clear to investors, to myself, I've covered Bio-Rad forever. I've known you forever. I don't know what you want. You know, if it's to affect the Sartorius transaction, if it's to, for Bio-Rad to remain independent or to get to 20% operating margin, like, what is, like, your top priority, you know, three years from now? And what should, you know, investors kind of look at?
Yeah, I think the top priority is to continue to make Bio-Rad a sustainable company. You know, that could be in a lot of ways. It could be through M&A, it could be through operating margins. I think operating margins are extremely important to us. For me, that's kind of the fundamental of how you sustain a company, which is you've got to have good operating margins, so yeah, that's what we're looking to do: continue to grow, continue to add technologies, continue to be, at the end of the day, more valuable to our customers. That's what we're looking for.
Super. Well, unfortunately, we're out of time. Norman, Roop, thanks so much for being here. Everybody, have a great day.
Thanks, Brandon. Thanks for having us. Appreciate it.