Hi, this is Jason Wittes. I'm one of the senior healthcare analysts here at Roth Capital. Today we're very happy to have Harvard Bioscience. We've got CEO Jim Green and CFO Jen Cote . With that, both of you, thank you so much for joining us. Why don't we start with just some overview questions for the business? Jim, you and I know each other from Analogic days.
Yes, we do.
It seems like Harvard is actually somewhat set up similarly with sort of these smaller divisions, sort of self-managing businesses. Is that the right way to think about it, or how do you look at it?
First, let me thank you and thank Roth for inviting me to be here. Great conference. Of course, great to see you, Jason. You know me. You know a little bit of my philosophy around business. To answer your question, yes, it's interesting. It reminds me a lot of what I picked up originally with Analogic. There were about nine different operating divisions, very separate, operating separately. Over the course of a few years, we consolidated down to one core main business area in Boston. We built a green field in China for low-cost supply. We put our technology team that was in Europe and really focused there on new development. This is a very similar type of business, where it was built by a number of acquisitions.
I think when I took over originally, we had something like 14 different sites, 18 different product lines. Really, in many ways, too many sites, too many product lines. Really very difficult to leverage that for growth or for anything. Very similar type of philosophy. We consolidated down from the 14 sites down to eight, and really three major engineering, science, and production sites, and then five much smaller specialized areas. Again, very similar situation. We've really taken a lot of the cost out of the business, consolidated. Our gross margins are among the best in the life science tools business. Yeah, we're a very similar type of structure. Also, I wouldn't say similar types of headwinds that we've seen during Analogic days. We had the Great Recession, had to deal with a 40% reduction in revenue.
Here, we've had a few things that hit us with COVID, interest rates situation with the relationship with China. Of course, life sciences have had some issues. Now we have a bit of unknown, as we know, with the whole situation with NIH and academic funding. Lots of things to do, I would say.
Yeah. Definitely want to get to those. Before that, I do just want to get some more general questions. That is, basically, Harvard is very well positioned, basically from drug discovery to preclinical. You've got arguably several products which are gold standards within that area. How do you sort of categorize your businesses, and especially the core? What kind of growth rates, normalized growth rates, should we look for from those businesses?
Sure.
I will ask you about the macro next, believe me.
OK. OK, I think that's what a lot of people are interested in. Yes. We think of the—we basically organize the business into two technological areas. One is our cellular molecular products. These are leading technologies that are used mainly in the creation of new compounds. You'll see that in academic research. You'll see it in research departments of all the big biopharmas and biotech companies. They know our technology for creating new types of compounds. They also know our cellular molecular products for the initial cellular level testing that takes place with drugs. That, again, you'll see that heavy in academic research. You'll see it heavy in research departments of biopharma companies. The other area that we focus on is our preclinical systems. That's heavily in vivo type systems, where you're testing.
Once the drugs are created, you'll test those drugs on various groups of populations of models to make sure that you have to validate with the regulatory agencies, FDA and such, that a drug that goes through the development process, that it is safe and effective, that it's non-toxic to mammals and to humans. That's something that's required of every drug. Again, that's another area where we are a leader in that space. It's actually become it's over half our business at this point is on the preclinical side.
Listen, you've got a well-established customer base. Obviously, the macro we'll talk about. You also got basically the highest gross margins in the industry. The stock is trading at all-time lows here. Let's address the elephant in the room. What's going on here? What's your view?
Yeah, that's a great question. One, of course, that keeps me up at night off and on. Whenever a company is significantly dislocated, the public value from what the underlying value of the business is, it's real important to understand what's causing that. I look at where we are. I mean, certainly, we've had a situation with we're replacing our debt this year. We're in the middle of putting that together. That, of course, is a little bit of noise for investors, or maybe more than a little. The investors, they saw that we came out of 2000 we came out of 2024 with things starting to improve. Certainly, our preclinical business, by the way, has been solid all through this time frame and is actually not all that affected by what's happening with NIH and academics.
The noise around NIH and academics has really given a lot of, it's really lowered the visibility of what's happening on that part of the business. The way I like to look at when something like that happens, I will tend to look at the sum of the parts of the business that we have and look at where are things going well, which horses are running, and you feed them well, like our preclinical business, what we're doing with telemetry. That's a very strong growth part of our business. That's over half of our business. It's the highest gross margins that we have. I look at the cellular molecular part of the business and how that is selling into academic research and into research departments, and how and why is that being delayed somewhat, and what's the noise around that.
With that, again, when I look at this situation with NIH and some of the delays in purchasing, I don't really see it affecting the preclinical business, which is my main growth business. I do see it affecting the products, the more cellular molecular ones. What we do there is introducing new technologies, like our new mesh organoid technology, that will help us offset some of those purchasing delays. Our products, they're essential in the building of these new drugs. I would say that when I think about the long run and the focus as the pharmaceutical industry gets back to going after their core goal of going after diseases of the aged, neuro-based diseases, cardiac cancer, that's going to be where we expect things to really get back on track.
You brought it up. Of course, we're going to get there anyways. That's what is going on with academic funding in the NIH?
It is hard. We started to see a little bit of noise with it in Q4. The good news for us is, even though we saw our cellular molecular sales start to drop off some, and it had to do with delays in purchasing, people who had already had budgets were deciding, you know what? Maybe we want to hold off. We do not really know what is going on with our budgets. NIH does not necessarily address all of academic research. It is probably more like 30% of it. It does, of course, have an influence on the rest of academic research. As that started to, we started to see more delays in purchasing there, we just, of course, focused on getting our new products delivered.
Again, when things are kind of noisy like that, it's natural for our CFOs and CEOs like myself to say, you know what? Let's just hold off until we know that things are clean, until we know that we have the budget, and we're going to spend it, and we're going to continue to advance what we're doing. My philosophy is, like I said, look at the sum of the business and say, let's focus on what's really growing and making sure that we're dramatically keeping our costs down, make sure we're paying our bills, that we're servicing our debts and our capital needs, and continue then. Then look at those areas where there is some slow in purchasing and look at how we're going to address that and how we're going to continue to be lean through this space, ride it out.
Mainly, you want to grow past it in the areas that are growing.
Preclinical has kind of chugged along, kind of from your view, and it's somewhat immune to the macro?
Yeah. I wouldn't say it's been completely immune, but certainly we saw a nice recovery throughout the year moving into Q4. Our preclinical business grew faster and actually outgrew some of the reductions that we saw, the delays in the cellular molecular side. We are very, very excited about that. Its sales are based on primarily sales to CROs, pharma companies. Pharma companies have used us for telemetry and for safety and pharmacology measuring. We are the gold standard there. They have been using our technology for north of 30 years. They are going to keep doing that. As they outsource these drugs to Charles River or Labcorp or whatever, they want to make sure that they are using the same type of measurement techniques so that they can look at data across the continuum. They need to be able to see 30 years of data.
That's a very safe business for us. It's very consumable-based. It's our best gross margins. Again, a great core business for us. We're going to get through this time with a little bit of chaos in the academic side. Still, as we get back to the normal world, these technologies are essential. We have very few competitors in these spaces or well-known. We'll get through this. We've been through it before, just like we've done in the past. We'll get through it here too.
Got it. Related to this regionally, your global company, maybe just give us a little color on what you're seeing there.
Certainly, it looks like we thought China was a problem last year. It does seem like it's settled out. We saw it start to stabilize and tick up a little late in the year. We think this year is we don't have great visibility there. Certainly, we have a feeling that China will be fine, unless, of course, something could always happen at the macro level that causes the problem. None of our technologies have been identified for any kind of quid pro quo problems that the governments have had. They've talked about energy and other areas. Spaces like ours are essential. We don't really have it's hard to find competitors to us in Asia. We think Asia-Pacific should be fine. In Europe, we saw things start to pick up a little in Q4 again. Europe seems like it's doing OK.
We all know, though, that there could be some issues there because of the budget situation there. They have got to figure out how they are going to fund and continue to support the war effort. At the same time, a lot of our technologies, for instance, our new organoid technologies, we really saw the initial first real uptake in Europe, heavily in the academic side there and with some of the big pharma companies. We are pretty happy with how that is going. In the U.S., you have got the basic run rate of new drug development, so the CROs. We see that as very stable. There has been some difficulty periodically with the pharma companies. We have heard about sometimes somebody is laying off. Overall, I think the U.S. should be pretty decent. That is kind of where we are with that.
Again, getting back to the question about the stock price, I mean, this company, typically, if you look at our EBITDA, we're typically traded something like 15-18 times. There is no reason to think that we're not going to get back to that. It may take a little time as we get through some of these headwinds. The basic underlying business is rock solid. We're growing this business. We're investing in new technologies, key areas, where we see very solid growth in certain key areas, the ones that count. We know how to manage the cost.
Got it. No, they make a compelling argument here, especially given that valuation. You also brought up organoids. I wanted to talk about some of your breakout opportunities. Organoids is probably one of the big ones here. Can you discuss what they are, how they fit in, and kind of what the opportunity is for Harvard?
Sure. Sure. Thanks, Jason. Historically, once you create a new compound, the first thing you'll do is you'll test to see how the compound affects human cells. And then if it looks like it's doing what you expect or it's not doing what you don't expect, then they'll move on to groups of cells. Where our equipment really starts to come in there is our MEA systems and our patch clamp systems, where you're electrophysiologically measuring how these cells are reacting or not reacting to these new compounds. Once you've done that, and by the way, cells don't live very long. Typically, you're talking about a few days, maybe. Typically, I mean, and historically, you would then have to go to if you got through that phase, you would go to large populations of small animals.
You'd be talking maybe thousands of small animals and exposing them to this drug to see what happens to the population. At that point, there is typically a lot of yield loss. A lot of the drugs fail at that point. I think the data suggests that about 10% of new drug starts get through that phase. That means 90% fail. What we've introduced with the use of our MEA mesh and organoid systems is to go beyond a group of cells but to actually allow our customers to build organoids, which are essentially a proxy for a full organ. Where they're starting today is brain. We have a number of companies and researchers who develop organoids, brain organoids. You basically grow it on our mesh.
Since the mesh provides the ability for the organoid to be hydrated, to be fed, to be given oxygen and nutrients, the organoids are living much longer. Brain organoids, we've seen live up to a year. Cardiac organoids also. The thought here is we knew initially we would get a lot of demand for the mesh systems for organoid research. That means mainly new research on the brain. Things like you look at Alzheimer's research. You look at epilepsy. Again, looking at the diseases of the aged, that's where a lot of research is taking place. That's where the initial uptake is happening on this product.
We also see this in some of our areas, we're working with more of the industrial companies, like CROs and pharma companies, to look at providing not just research on the brain, but an initial filter for toxicology and safety effects. There, we're working with some large companies to look at correlation studies around how do our organoids work with, let's say, a group of, let's say, a particular animal, like rat brains. How does the population of the animals perform and correlate to how their brains perform under this in vitro test? This is envisioned as a way to make the drug development cycle much faster.
You could maybe, instead of having a yield of 10%, if you could filter out the drugs that would have failed and you could tell early on, then the pharma companies can play best ball and only put in the compounds that they know get through that phase and have a much higher probability of passing. It is a cost reduction situation. It is a cycle time improvement. At the end, it means more revenue for the pharma companies and the CROs running these tests. This is, again, organoids, it has been a technology emerging for a number of years. There was never an efficient way to do it because you would have to take the organoid out, look at it under a microscope, and you would have a research scientist saying, well, here is what is happening. Using our system, we actually are embedded within the organoid.
We electrophysiologically measure what's happening with the neurons or with the cardiac cells. Are they firing appropriately? Is the neural network building appropriately? Is it being affected positively or negatively when you apply a certain compound to it? Again, this is probably, in my mind, one of the few things I've worked on over the years where there's a chance that this could really help make a change in the way things are done in the market. Very exciting time.
Yeah, absolutely. Maybe you've kind of hinted at, I think, on the last call, kind of the initial customers here. Can you just elaborate on sort of how the customer base is evolving for organoids?
Yeah. I mean, as we thought, we'd initially get a lot of uptake with advanced research sites. Places like Stanford, the high-end academic researchers are picking it up or have already picked it up now. We even have, we just recently, the NIH itself has now picked it up for neural-based testing. Michigan, it's a who's who of the researchers in academic development areas. Also, we're seeing now adoption in the industrial side. We have a specialized CRO company in France that's now testing the typical toxicology and safety pharmacology agents using organoids using our system. This is starting to develop this concept of an in vitro filter. Companies like Roche and Novo Nordisk and others, there are also, we see this developing with us very nicely.
As I get to the big pharma companies, they're thinking about it for an efficient way to take a drug that they've done and to efficiently get it through the market and through the long-term activities associated with preclinical testing. Again, that's where we see the big volume as we start to go to the big industrial players because now they're not going to buy one or two systems and a handful of consumables. There we see the opportunity to have much more consumable driven on this with these bio-tissue chips.
Got it. Definitely a really interesting new product category here. Maybe also in terms of new products, I think you just recently launched a new implantable defibrillator, excuse me, not defibrillator, telemetry platform. Maybe you could discuss that and sort of how that initial launch is going.
Sure. That's a great question. Yeah, we introduced it last year, the first version, with only a couple of endpoints because our plan now is to have our family of implantables migrate to where they can not only have to have today, you have to have an individual animal and an individual housing with a receiver underneath the box. It is intensive. There is a lot of equipment. It is costly. What we have been asked to do and what this now allows us to do is with this type of platform, we are rolling out and we actually are launching it this weekend at Society for Toxicology, where we are showing now with the biopotential capabilities. That means now we are adding to the base platform that can we call it SOHO, for shared housing. The base platform can now go in these animal models.
The animals can all live in the same place. You could have up to 16 animals in a particular housing. We can now measure what is going on physiologically in all these animals. If they need 32 animals, they will know by an extra system. If they need 100, they can scale up. It is much more efficient. It also provides, if you think about it, now these animals are more in their natural environment. You can see how their blood pressure, how their cardiac rhythm is working when they are now exposed to these new drugs and see it while they are in their more natural habitat. Very critical for us. It was something we have been asked to do. We knew we needed to do it because it was really rolling out in Europe initially.
That's rolling out everywhere, an expectation that you want these animal models to be able to, you want to be able to have them live in what their natural environment looks like and then see how things might change with them when they're now using these new drugs. We would expect much of our platform or much of our core systems are going to migrate to both. There will be the standard versions, and then there will be the ones where they really want to be able to go to high populations in a shared environment. Again, we're rolling it out this week. We've already seen a dramatic uptick in quotes where this will be shown. It's one of the featured products shown at Cytotoxicology here. This started yesterday. That's really picking up.
It is going to be a core driver to our main telemetry business, which is, I mean, again, telemetry is probably half our business. Really important that this business continue to grow and be strong and continue to generate the kind of profits that it does.
Great. Look forward to that. In terms of just generally growth rates, I mean, these new initiatives, organoids, the implantable telemetry, I assume those are kind of the growth pieces. Those are easily growing double digits. I assume the core is kind of growing with market. What's the math here in terms of understanding that the macro is a big determinant? If I think about core versus emerging, what's the mix of business? How should we think about potential growth rates here?
Great question. When I think about, and again, the way we model this is, and you're exactly right, the core business of what we currently sell would typically go with the market. Now, by introducing the new SOHO systems, that, of course, would drive our base business, which is, again, arguably $50 million. That should give us a nice pop to that base business that would help us grow faster than the market. Our expectation is, and then we look at the other two areas or the three areas with organoids themselves. That should be growing. We expect that to grow dramatically. Even though it's on a smaller base, it's maybe 6, 7.
I mean, it sounds like that's a real breakout opportunity for you.
It is. It is. That should be growing. We should be seeing 50% CAGRs plus. It is on a smaller base. When you take something going from last year, maybe it is $7 million this year, I would expect to see that grow 50% or better. Now you are starting to talk about every $1 million of growth is a full point of growth for the company.
Yeah.
The new products, we expect to be driving close to double-digit growth on their own in the business in a normal world. Of course, some of these headwinds are we're going to get through some of these headwinds with academic funding. The core business itself, the new product should be generating close to double-digit growth on its own. Then we add what the market's doing. If the market's flat to at least giving us a few points of growth, we would expect to be in that double-digit growth range. With our cost structure and the gross margins we have, the dropdown is dramatic. A dollar of growth, we expect drops down 60-70 cents down to the bottom line. Again, we're in a really good position with this.
Very interesting products, very solid products that people buy from us and continue to buy and will continue to buy.
You brought up another good point here. This is a very leverageable P&L. It sounds like every dollar is incremental at this point. You're pretty much set in terms of your fixed cost. It sounds like in terms of OpEx, you're pretty much optimized where you want to be. It should be that every dollar we see is roughly an incremental dollar, meaning it's a variable. We see 60%-70% margins straight to the bottom line on these.
That's exactly right. By the way, you mentioned OpEx. We are continuing to, like I said, because of the kind of unknown situation with academics right now, we are continuing to lean the business. I expect to see further reductions as we make sure that we're lean and clean through this period and continuing to be able to make sure we have the EBITDA to be able to service our debt, service our CapEx needs. As this growth starts to pop in, this thing changes dramatically. If you remember when I first took over before COVID and everything, I mean, the first four or five quarters of growth, this company stock price went from about a buck and a half to nearly $9. When you're thinly traded like us, there's a real opportunity for this to really develop value very fast.
Great. We're out of time. Great stuff, great story. You just highlighted the opportunity here with the stock.
Thank you.
Thank you so much, Jim and Jen.
Thank you.