All right. Good morning, everybody. I'm Doug Schenkel, and on behalf of UBS, it is my pleasure to welcome Roop Lakkaraju, EVP and Chief Financial Officer of Bio-Rad. Roop, thank you for being here this morning.
Thanks for having us, Doug.
Bio-Rad sits at a unique position today, balancing a still mixed demand environment against a more active focus on portfolio priorities, margins, and capital allocation. The company also, of course, has a meaningful stake in Sartorius, which introduces an interesting dimension in bioprocessing. As I've started to look at Bio-Rad more and more, I mean, it's a company I haven't formally covered in my career. It's a company, of course, I've followed across my career. It does seem like a lot is changing, and it's not necessarily your father's Bio-Rad. Things are evolving. I think it's a really interesting time to sit down and talk about a few things this morning. With that in mind, maybe the best place to start is to really talk about how things are evolving at Bio-Rad, and then from a growth gap algorithm standpoint.
Really what I'm talking about is, if we think about how you've been growing more in the low single digits, how do we go from those levels of growth recently to get back to market growth? What are the key steps? How much of this is execution versus portfolio evolution? Maybe we can start there.
Yeah, appreciate the setup, Doug. I've been with the company for about two and a half years now, and we have pretty much an all-new executive suite
Right
that's joined Norman. Norman's the one who's hired us, obviously. It's an exciting time. We have a lot of transformation going on, and I appreciate the setup that you just provided. I think as we think about market growth rate, this is critical. To your point, historically, we've been, let's call it 1.5%-2%, as you said. It's multiple elements here, but it starts, in order to drive market growth rates, you got to have portfolio. One of the things that we have doubled down on, if you will, is R&D vitality. Part of that is execution in terms of driving R&D vitality. We've got numerous examples. Most recently, we just announced a new imager technology that we brought out two quarters ahead of schedule, right? That's not something we've historically been able to do.
Not only that, but we've incorporated AI technology within there in terms of image analysis and what that provides. We're thinking about how the markets are evolving and what are the needs, and how we can execute more effectively, and we have other examples of that. I think part of this is that R&D vitality and improving that portfolio. Part of that is also just execution.
Right.
Predictable execution that we need to have, because when we look at the top line growth rate opportunity, that's one thing, but the margin expansion opportunity is maybe just as great for us. Part of that is our own self-help that we've been working on over the last two years. Part of it is looking at M&A opportunities that can accelerate top line growth, but also margin expansion. Happy to unpack that a little bit with us here today, but it's all of those elements, if you will.
From a signpost standpoint, what should we be looking for in terms of, hey, Roop and the team are doing a good job when it comes to better commercial execution, better cost management, and R&D vitality? What should we be looking for and over what timeframe?
Yeah, I mean, what we've talked about, it's already been a multi-year journey, and really we're doing a lot of foundational things. A lot of what we talked about, or I just mentioned just now, are foundational things that we're putting in place. As we think about moving things forward, last few years, we've had negative growth rate. It's been a declining rate. Part of that end market challenges and where our portfolio sits as it relates to market opportunities, but part of it is execution, as we've talked about. That's one aspect of, hey, do we turn to a positive growth rate? Do we then march ourselves up towards market growth rate? Unfortunately, there's no silver bullet that takes us from where we have been to that market growth rate, where we want to put that. That's one aspect of it.
The second piece is the continued margin expansion, and the margin expansion's both gross margin expansion based on mix evolution, based on execution improvements, and it's also operating margin, obviously, and that's the other piece of that. From an R&D vitality, that's a little bit more difficult because that's an internal metric that we monitor and measure and drive to. But from an external standpoint, really it's the pace of new product introductions that we bring to market. You've seen some of that over the last couple years. As an example, we bought a small company last year in the Droplet Digital PCR technology area, Stilla Technologies, which has been core to our ddPCR instrument strength over the last one year. When you look at, we have over 400,000 assays on digital PCR within Bio-Rad.
We were able to port that within a year, all of that over to the Stilla technology. And those are critical improvements to make because then that's a differentiator for us, and so it allows us to position that technology in the marketplace with that assay library, which is market leading. And so it's these sort of things that you can measure specifically that ultimately have an impact on top line and margin expansion.
I know the third quarter, it's not where you want to be, but it was a step in the right direction, right?
Yeah.
Q3 sales returned to constant currency growth, just under 1%. How important is that? Does that improvement in some ways demonstrate the progress you're making? Essentially, how much of it is what you're doing versus market improvement?
Yeah, there's a lot of both. I think end markets, there are areas that the end markets are improving from where they were. That's important, and there's more, we think, in terms of market evolution there. It is so much about what we are trying to do ourselves. Quarters fluctuate, as you know, Doug, right? But it's over multiple quarters, are we building successes in numerous areas? We think we are, and it's starting to show up in those numbers. We promised margin expansion over the next few years, and we're going to steadily click through that to get towards those targets that we've set.
You gave me a nice setup there in terms of end markets getting better, and I'm putting words in your mouth. It's Still early though, right?
Yeah, I would say it's early in numerous areas.
What's getting better more quickly, and then where are we still looking for signs of improvement?
Yeah, the one area that's continued to be good over the last couple of years, you could argue, last X quarters, is large pharma, bioprocessing. We've got a smallish business in process chromatography, which we sit in the polishing stage. It continues to move to up and to the right, so we appreciate that opportunity. As we think about other end markets, though, A&G as an example, I think depending upon the geography that you're talking about, it varies. In the U.S., we'll see where NIH budget falls out. I think researchers want to get research done for the grants they have, and it's imperative that they do. That's an opportunity, I think, for us. If you look at Europe, they're moving budgets around to defense and other things, but they also are driving medical research. China's another opportunity.
I think in these pockets in A&G, there's sentiment improvement because there's the desire to get back to a more normalized world, if you will. But there's still end market challenges, whether it's geopolitical or other things that are-
Yeah, it will be interesting to see if the psychology of things gets a little bit better.
I appreciate you saying it that way, because it really is the psychology. It is the sentiment that these researchers have inside the institutions that is really impacting kind of the level of activity, if you will.
Right.
Right? That is an area that we will see. I think from a broader biopharma, ex-large pharma, that is the money is moving into those areas. It is especially moving into later stage commercial areas. For us, our portfolio skews towards discovery stage. We think ultimately that money does cascade down into the discovery stage as well, where we are well-positioned. But over time, we also want to see what we can do in the commercial space.
You talked about biopharma being a little bit better. You talked about larger pharma being better. It has been a really good funding year, as Tommy had mentioned earlier. At one point fairly recently, we pulled the data, and funding into biopharma had doubled year-over-year.
Yeah.
How important is that to Bio-Rad?
Ultimately, it is important, right? Now it is a matter of where does that funding go, and does it get into our customer base's hands, or does it trickle down, and over what timeframe? We think ultimately funding getting into the broader biopharma is good, and now it is, again, a matter of time, and we are focused on identifying those opportunities commercially.
Okay. I think we made it 10 minutes without me asking an AI question. So, where do you see the most tangible opportunity with AI for Bio-Rad? How do you think about it from an internal productivity standpoint, and then how do you think about it in terms of increasing demand? That last part may tie into what we just talked about, new company creation, more funding.
Yeah. If you are not using AI internally and within your products, then we think you are missing an important evolution in the marketplace. It is critical. As we think about our internal usage, we have increased our internal usage from a productivity standpoint, just in terms of functional areas, whether that is in finance or in commercial or in R&D, right? Every area, supply chain. So every functional area is using AI and driving productivity, and we are measuring that productivity. I think the other part of it, though, is products. It is critical that we incorporate, and you are starting to see that in terms of how we are accelerating software development, as an example.
We talked about that a couple of quarters ago on an earnings call. You look at the latest imager technology that we brought out. It has got AI capability in terms of image analysis for Western blot analysis.
We are very mindful of ensuring that we are driving AI adoption and incorporation within our products, and you will see more of that over time. I think when you marry that with automation and really workflow efficiency, that's where the power is, and that's how we are thinking about things from an R&D evolution and vitality standpoint.
Internally.
Internally. Then bringing those products to market in support of our customers, improving their productivity. You have less researchers on the RUO side today than you did, let's say, two years ago because of funding challenges. These are opportunities for us to help our customers in terms of their productivity as well, and that's how we look at it.
What about customers actually spending more because of AI or having new customers because of AI? Are you seeing that as an opportunity?
I think it's still early days, if you will, from that standpoint. Customers are talking about it, but it's about, again, how can we accelerate insights? How do we do more in silico analysis to then isolate where we want to do our wet lab work? These sort of things and be more focused and be more efficient, these sort of things. So I think you are seeing these things evolve, which are opportunities for us, and we have to be very mindful of how that's evolving as well.
All right. Let's pivot to talk about some of the segments and build off of the recent updates. Life Sciences.
About 40% of sales. Chromatography.
Yeah
And correct me if I'm messing up anything.
Yep.
Chromatography. I think the segment grew, was it about 2.5%?
Yeah
in the third quarter?
Yep.
Excluding chrom.
That's right.
But declined just over 2%, I think it was 2.4% with chrom.
Yep.
What is going on there? Inventory, timing, demand, and what gets us to growth without making an exclusion?
Yeah. So you are right. Tools is roughly somewhere around 40-ish percent of total revenue, depending on which quarter you are talking about. To unpack that a little bit, from a process chromatography standpoint, we came into the year, we have talked about. Actually, I will step back. In 2025, we started talking about process chromatography as a potentially a high single digit, which is kind of growth opportunity for us, and that is where we had it pegged. With that said, we had some customers who had some government policy changes that are unrelated to their own execution for certain vaccines that were in the marketplace. That changed our dynamic for 2026 and 2027. As a result, you are seeing process chromatography be executed as expected, but at a lower level. We are going to get back to growth here starting in 2027 and beyond.
The idea here is, as we have said, get to mid-single digits and then ultimately let that grow into high single digits, because we have got opportunities or programs in clinical phases that are migrating towards commercial that we think can be successful commercial therapeutics. When you look at ex-process chromatography, our Life Science area, whether it is our. We have got a broad PCR portfolio, both real-time PCR, qPCR, and Droplet Digital PCR. Droplet Digital PCR is the highest growth rate area for us, mid-single-
7% in the quarter, right?
Yeah, 7% in the quarter. We kind of look at it as a mid-single digit opportunity on a long-term sustainable basis. And you have some derivative areas of that, which is the applied markets, right? Whether that's wastewater testing, whether that's you got other applied markets that the PCR technology applies. That's another mid-single digit area for us, right? As we bring out imaging technology in some of these other areas, those are opportunities for future growth rate. And the focus is, how do we get tools to a mid-single digit across the portfolio while having something like process chromatography being a high single digit on a longer-term basis? So, there's opportunity for us, and this is where I think the end markets can help us a little bit. It can provide a little bit more of a tailwind.
But from our standpoint, we're very focused on execution, whether it's new product introductions or just execution within the customer base we have.
All right. There's a lot I want to follow up there on chrom.
Yes.
One thing, and this is more education for me. Just how you described it was really helpful. Does that revenue come back at some point?
Yeah. I mean, I think we've got a pause with some of the customers that had the vaccine because they've taken their product needs down in terms of the resins. That does help support getting back to that mid to high single digit on a longer-term basis. That plus having our customers continue migrating through the clinical phases towards commercial are the drivers of opportunity there.
We talked about the 7% ddPCR growth in the quarter. Instruments had a really good quarter
Yes
as well.
Yes.
You were up more than 20%?
More than 20% for the third quarter in a row.
What is driving that across the portfolio, and how much of this is upgrades versus competitive wins?
Yeah.
Those are obviously very robust numbers.
Yeah. What is really supporting our ability to drive that instrument sales, especially if you think about this, Doug Schenkel, considering the softness in the A&G end market? This is especially important to us within, and it validates the quality of our products and the value creation that our products provide to the researchers. So we really like that aspect of it. What is really behind that is our legacy Droplet Digital PCR instruments, but really it is the new technology that we just acquired.
When you look at the QX700, which is the series of product there, marry that with the largest assay portfolio of anyone in the marketplace, those elements really have driven the growth in instrument sales over the course of the last three quarters.
But even the fourth quarter of last year, which is the first quarter that we were in the market selling the QX700 products, we had low double-digit growth rate there as well. We are seeing that. Now, what we would love to see, and I am sure you are going to jump to this next, is the consumable pull-through.
Yeah.
It has not normalized yet from our standpoint. And usually it takes six to 12 months to have research get to a more normal level of pull-through. That has been a bit slower because of all the end market softness that we have talked about. But we think over time that is a tailwind for us in our ddPCR area as we think about another growth driver to support getting to market growth rates.
Follow-up on the QX700. The full assay library is almost there, right?
Yeah.
Are you there yet?
It is there.
Okay. That helps too, right?
Absolutely.
Okay.
It is critical.
What's the next major unlock from Stilla that hasn't shown up in numbers yet?
I think it is that consumable pull-through.
Okay.
Right? I really do think when you look at having more than 20% growth rate for three quarters in a row for instruments, with the consumables lagging as much as they are, that is the kind of the element that is to come, and that is going to be a nice growth driver as we move forward, hopefully in 2027 and beyond.
Within tools, China, I think it is 6% of
Yes
total sales. You returned to growth in the third quarter across Life Science tools, across the sector.
Yeah.
We're hearing about improvement in China. What are you seeing, and are you getting to the point where you feel like, all right, this is in, as we've talked about, one quarter doesn't make a trend.
Right.
Are you seeing things that make you feel better about China?
Well, first of all, China is a critically important geo to be in, and we're committed to that. We've done some things, again, in terms of improving our own execution. Things like, we didn't have very much of a footprint from a manufacturing standpoint.
Right
China for China. We made a decision at the end of last year to put some manufacturing capacity for our tools, certain SKUs within our tools portfolio. We got that executed in the first quarter of this year. And what that allows us to do is participate in more government tenders and these sort of things. So we see that as an opportunity moving forward. Our ddPCR, our process chromatography areas, those are especially important areas in tools for us in China, as we look at it. And part of what we're really evaluating from a China strategy standpoint is, what else do we need to do? And we actually have a team of executives and folks over in China spending right now to really assess market conditions and identify where further opportunities are.
Do you think you can maintain growth in China for the foreseeable future?
I think it's going to be volatile. When you look at our portfolio in China, like you said, it's about a mid-single digit-
Yeah
area of revenue, it's a bit more skewed towards diagnostics than the tools, but the tools are an opportunity, for sure.
Makes sense. We're going to pivot to diagnostics, but as I think about, this is kind of my transition question with ddPCR-
Yeah
and clinical. I mean, there's companies, Geneoscopy is one of them. They're here. A tangible example of where this technology
Yeah
is being moved into diagnostics. As you think about the growth algo for that platform, could clinical ddPCR become a key part of what drives an acceleration of growth for the company?
Yeah. It's another vector that we think is an opportunity. Let me step back for a moment, because you mentioned Geneoscopy, and Andrew and the team there have done a fantastic job of executing and really driving value to customers. We made these decisions purposefully as we thought about, do we want to dive directly into bringing digital PCR into the DX side, or do we use these partnerships? Some of these are investments, right, that we have. So we chose those partnerships because we wanted that market validation from these companies, because that's their core business, if you will. What's transpired over the past few years is that validation of using ddPCR to help promote their diagnostics needs. We've seen that not just with them, but other such partnerships and investments that we made.
Now what you have is the market looking at, to your point, "Hey, does it make sense to bring ddPCR into the diagnostics side?" I think that's something to come over the coming years, especially as it gains traction. We definitely think that that's an opportunity for us.
More broadly, this goes back to something we talked about earlier, keeping in mind Clinical Diagnostics grew about 3% in the third quarter. I am sure you want that to be higher.
Yes
Over time.
Yes.
You see the opportunities. Again, is this an area where you think you have the right portfolio as we sit here today?
We have some very good areas in diagnostics. I mean, when you look at our quality systems, we are market leaders in there. When you look at our immunohematology area, again, we have got a very strong position. We need to drive further life cycle evolution in our diagnostics portfolio. I also look at M&A, and we talked about it, I mentioned it earlier. We look at M&A, and we have changed how we do M&A here, because we have a history of maybe doing some deals that have not panned out as well as they need to be. That has been a headwind and a drag, but we changed how we approach it and how we execute, and Stilla is a great example of that.
We are looking for We're really agnostic from a tools or DX, but if we could find DX assets that can help support that product evolution, especially in the molecular area or some of these areas, where there is growth opportunities, that would be very interesting.
One thing, more near term and looking back at Q3, that growth rate, how much of that was underlying improvement versus timing dynamics, like in quality systems and diabetes?
Yeah, there was a bit of timing in there, especially in China. There is underlying strength, but of course, as we talked about quarter to quarter, there's going to be volatility. This last third quarter had some of that timing in orders that really helped us support what we posted. But ultimately, we are gaining traction in numerous areas.
What do you think, keeping in mind some of your R&D being redirected towards quality controls, how do you think about that opportunity? It's a pretty fragmented market. That seems like it could be something that would be pretty meaningful for you over time, or at least could be.
Yeah. I mean, it's meaningful for us today, and we think because of that market leadership. Because, as you said, it's a bit fragmented, it's an opportunity from an M&A standpoint, from a tuck-in, and these sort of things. We actively think about these things, have it on our heat maps, and really evaluating that. As we continue to drive internal R&D dollars over to quality controls, where we have that right to win.
Right
accelerating that, and then looking for M&A opportunities to further our position.
Yeah, I mean, it's interesting. You have the clear leadership position in that vertical, but it sounds like there may be some opportunities to close some gaps in the portfolio, either internally or inorganically, to actually take the growth rate to another level.
Yeah, there's definitely opportunity. I don't know that I would say there are gaps, but there's opportunities to expand our reach.
Okay
from a product positioning standpoint. Do we quality controls in oncology areas or some of these? What are those opportunities? And we're really thinking through that and being mindful of how do we optimize our returns.
All right. Let's spend the rest of our time talking about the P&L, the balance sheet, and strategic. Starting on margins, in the third quarter, non-GAAP operating margin improved, I think, 100 basis points
Yes
year over year to 12.8%. How important is that? And, as we think about that as a signpost, where do you go from here? In the quarter, it does seem like there were structural efficiencies.
R&D spend came down. I think there may have been some mixed benefit. Can you help us unpack this?
Yeah, no, absolutely. It's an important stepping stone, right, of continue. Our focus is driving that operating margin expansion. When you compare us to peers, we've got a tremendous opportunity in terms of expanding our margins. When we start to unpack where did it come from, part of it is about execution and the efficiencies we're driving across the enterprise, whether that's in the COGS area or the OPEX area. Part of it is mix. We had a especially strong process chromatography quarter. We had quality control strength, and these are areas that really help. When you look at the instrument sales from a QX700, strong margins with those instruments, right? So, we have mix that's really helped, but underlying that is also execution improvements.
For us, it's about building blocks of margin expansion towards what we've said is a near-term target , or near term, let's call it over the next two to three years, of how do we get to mid-teens. That becomes a milestone, not the destination, as we continue to march up from that over time. Each of these are building blocks to get there.
You've talked about, I think it's $30 million-$35 million in targeted net annual savings ramping.
I think between now and sometime in 2028.
That's right.
When you think about the opportunities to reinvest in some of the areas you're talking about, the margin improvement targets you just talked about, how do you balance those things?
Well, it's an and conversation.
Okay.
Right? It really is, because you have to invest, as we've talked about, there's so many areas that we're investing in. Folks have asked, the restructuring charge, most recent restructuring charge that we took is much larger than what you just quoted of $30 million-$35 million in net savings that really take hold in 2028. It kind of, starting in 2027, we'll start to see some benefit. It's because the net number is lower because we are investing in capabilities to help support what we're trying to execute from a strategy standpoint. We're doing it together, in terms of being mindful of where we spend and how much we spend and getting returns for that, but also investing appropriately so we can accelerate, whether it's top-line growth or that margin expansion.
The charges and the investment you made in the quarter, I mean, free cash flow did drop
Yep
a bit in the quarter. It does seem like you need a bit of improvement, if I'm doing the math right, to get to the target, which I think is $290 million-$340 million
That's right.
for the year.
That is right.
Is the right way to think about this, you took a lot of the investment and a lot of the charges in Q3, and that does not repeat in the fourth quarter?
Yeah, I mean, that is absolutely right. So, we did about 210 through the first three quarters of this year. We stand by the range of 290-340. There is working capital opportunities. We seek to, again, rationalize our CapEx, because again, we want to ensure we are going to get the returns where we are investing. So, all of that is to help support that free cash flow range that you just cited. But we also look at it between the margin expansion and further working capital efficiencies that we can drive over multiple years. There is further free cash flow expansion that we think is out there for us. So, really, it is top-line growth, getting to that market growth rate. It is that margin expansion, and it is free cash flow improvement in terms of our focus areas.
And in terms of just fourth quarter P&L guidance, even though things are getting a bit better, as we have talked about throughout our discussion here, it does not sound like you have notable improvement in end market conditions factoring into your assumptions.
We don't. It's kind of continuation of the third quarter as we think about the fourth quarter. We made a few different comments within our last earnings call. We really think these conditions, just because the turn of the calendar happens, doesn't mean that these headwinds cease, if you will, at the beginning of the new year. They're going to carry into the 2027 period. Question is how deep in the 2027 might we see those headwinds.
Publicly described constructive dialogue with Elliott and broad alignment on execution and capital allocation. Is that really consistent with a lot of what we've talked about here in this discussion in terms of how you're evolving priorities and how you are allocating capital?
Yeah, absolutely. I mean, whether it's the investor sitting in the room here or the investors that we will talk to throughout today, everyone has the same consistent kind of opportunities that they see for us. It's not surprising. As we've laid out to the investment community at large where we think those opportunities are and how we intend to go after them, I think broadly we have alignment with the investment base. Now it's a matter of, okay, when, right? When, right? Everyone has that sense of urgency, as we do. We've got strong alignment with the investment community at large, and Elliott is part of that.
Sartorius. How important is Sartorius as part of the Bio-Rad story?
It's not that important, quite honestly. I say that from our own execution standpoint. I mean, we do own Sartorius from an economic interest standpoint, so it is important from that standpoint.
It's a great investment.
It's a strong asset. It's a tremendous asset, an incredibly successful asset. So I don't want to minimize the importance of the investment because it's been so successful. But Sartorius doesn't impact our day-to-day operations. We have so much improvement from a day-to-day operational standpoint. That's where we're focused. When we look at Sartorius, I look at Sartorius, and we look in the board, it's an opportunity to continue to be a growing asset and appreciate on our balance sheet. It gives us optionality. It's a monetizable asset, as we've spoken about in the time I've been here. But that's a monetizable asset sitting on our balance sheet, not something that's driving top-line growth and margin expansion for us on a day-to-day basis, where our focus is.
Anything you can share in terms of what would How would you favor monetizing the stake versus holding for further appreciation? Any framework that you can share with us?
I mean, I don't know that I've got there's any scientific framework to really speak of. As I just said, we've got so much our own improvement to do. As we think about M&A opportunities, these things, could it be a monetizable asset towards an M&A deal? Sure. But it's not necessary. When you look at the strength of our balance sheet today, we're a positive net cash standpoint, right? One of the strongest balance sheets you're going to find out there, and then you have this monetizable asset. So we've got liquidity ourselves to do the kinds of deals, because we're not looking to do transformative deals. We want to do deals that have products that are in the marketplace, that have a market position, that can help accelerate that top-line growth and that margin expansion that we've spoken about numerous times today. That's our focus.
But outside of that, it really is about how do we focus on our own execution.
In closing, as we think about I mean, you've been with the company for a couple of years.
As we think ahead two, three years, if we think about if we're looking at the company at that point and we say, "Wow, Roop and the team crushed it. They did a really good job," what are the three things we're going to point to?
The three things I would say is marching towards that market growth rate. If we talk about it in three years, the product portfolios take time to shift. If M&A can help support accelerating that shift, then we can talk about market growth rates. But continue getting towards market growth rate, if not there, over the next few years. Get to that mid-teens operating margin, as that's within the next few years target. If we can accelerate that, again, we're going to be focused on accelerating it. Then finally, driving further free cash flow expansion from where we are today. If we drive that operating margin expansion, that free cash flow will also grow, and then it's about working capital unlock from the balance sheet.
All right. That's fantastic. Let's leave it there. Really appreciate you being here, Roop.
Thanks, Doug. Appreciate it.