Here we go. I'm Catherine Schulte. I cover life sciences and diagnostics here at Baird. Very excited to have Revvity here presenting today. From the company, we have the CEO, Prahlad Singh, and I think we are gonna dive right into Q&A, but if you have a question, you can email it to sessionone@rwbaird.com, and I will pass it along. Prahlad, thanks so much for joining us.
It's nice to be here, Catherine. Good to see you.
You as well. Maybe just starting off, you know, you just completed your full quarter as Revvity. Maybe just talk through how customers, employees, the company has worked through that rebrand, and anything else you can talk about the transition.
You know, it's very interesting to see the transformation live as you go through the process over the past. You know, it's been now four months since the brand, branding and name change, and, you know, and there is just a sense, you know, you can feel a palpable sense of excitement, you know, outside internally with the employees. You know, the, the brand name and, you know, and, and if you just look on social media and the impact that you see of it... Can you hear me now? Oh, good. So, you know, the impact that you see of it, it's really palpable. And, you know, and the whole concept around science first and innovation is really making a difference.
You know, externally, even as we talk to employees and, you know, and some of the relationships and partnerships we've announced with key pharma and biotech, you know, the name has started to resonate, and people have started to associate it with, as we've said, science first and innovation. So it's really exciting to see this process.
And then, as this new Revvity, you know, you laid out a 10% midterm organic growth target, but that assumed a stable macro environment, and clearly, we have not seen that in recent quarters. So how should we think about how to put some guardrails on that number, and what would it really take to get back to that 10% number?
No, it's a good question, Catherine. I mean, when we laid out the 10%, obviously, you know, the company had already done, you know, much higher than that for a period of time. The macro environment, obviously, it has not been a fun one for any one of us. But I think if you look at what we have put together as part of Revvity, and if you look at the diagnostics business, you know, the assets that we have and the portfolio that we have, you know, whether it's around reproductive health, around autoimmune allergy, and, you know, around applied genomics, infectious disease such as tuberculosis, it provides for higher than market growth that is sustainable over a period of time.
Similarly, on the life sciences side, you know, with the acquisition and the, bringing in the BioLegend portfolio into the family, we now have assets that will allow for sustainable above-market growth over a sustainable period of time. So we really feel good about the portfolio that we have now, and, you know, irrespective of the market environment, it is always going to be at the top tier of our peer group, and that is, our portfolio is what is going to differentiate us over the long period of time.
I think we're starting to see that play out this year to some extent, and part of the rationale around the divestment was moving away from some of the more cyclically exposed areas. Maybe just provide an update for how you view the business in a potential downturn or recession scenario.
I think, you know, we all will get impacted to some measure or other with the macro environment. You know, no one is totally immune to it. But I think what we feel really good about is that as we look at the impact that we have... You know, let me give you a data point, right? Life sciences instrument is now 9%-10% of our total portfolio, and that is the one that will get, you know, probably impacted the most by the macro environment. 80%+ of our business now is reagents, consumables, and a recurring revenue stream. So that is what will allow us to be in the top percentile from an organic growth perspective as we look at our peer group.
Then I think on your last earnings call, you know, your updated, excuse me, 2023 guidance, called for about a four-point incremental headwind from pharma and biotech weakness. Maybe just given your conversations with customers or your team, you know, what do you think is driving this slowdown within pharma, and what do you think it'll take to see a rebound there?
Again, for us, the big impact, obviously, as I said, Catherine, is felt mostly around the life sciences instrument side of the portfolio, and that tend to be big ticket item. You know, and again, what we are seeing is that in most cases it's, you know, CFO or C-suite-driven decision around large CapEx spending. And it is more around, you know, let us sort of pause a bit and see how and why we should be spending that. And, you know, and again, this is hypothetical, you know, thinking through, if I were to as to what were the reasons around that?
One, you know, obviously, you know, big pharma, biotech have been very consistently spending, you know, above market over the past few years, and I think there might be a calibration required for a period of time for that to come to what is normal levels of growth for that side of the business. You know, secondly, you know, the higher interest rates and the raising interest rates obviously causes pause. And there are other, you know, places where they can put their cash for better use. So I think what we are seeing more is a delay on spending, and people are sort of saying, "Let's see what happens with the macro environment, and let us see that come down to a bit more normal, and then we will restart the spending around CapEx.
Yeah. I think, excuse me, we've seen similar cycles in pharma and biotech before. Maybe, you know, four or five years ago, saw a slowdown on the capital equipment side. You know, how long do these cycles normally last? Maybe what's different in the cycle that you're seeing today?
Again, you know, it's very difficult to predict or speculate as to how long these cycles last. I mean, typically, if you look at historically, you know, we've seen these go for not more than four quarters, you know, over a period of time, and generally, they come back. But again, that would be just based on historical patterns that you see. And again, I'll come back to the fact that, you know, for us, what this does, this is the reason, Catherine, as you started when you, you know, kicked off your remarks, this is the reason we sort of transformed the portfolio and did what we've done over the past, you know, several years.
It's been a sprint, but the whole thought process around, you know, the acquisitions of 10, 12 companies in high growth, high margin areas, divestment of one-third of our business nearly in low growth, low margin areas, where we were not, you know, honestly as competitive to some of our peer groups, now positions us, in a way, to some way, sort of insulate and, and soften the impact of, such a tough market environments.
Maybe moving on to China has been a key topic for this group. You've kind of talked about a tale of two cities within China and your life sciences business versus your diagnostics. Can you maybe talk about the end market differences there? You know, what's primarily driving the weakness on the life sciences side?
Yeah. I think, you know, as you said, China is a topic that is, you know, in everybody's mind. You know, just to sort of lay the groundwork, right? We have 17% of our revenue in China. 10% of that is diagnostics, and 90% of that is reagents and assays that are a few to a few hundred dollars at the most, and these are around reproductive health and immunodiagnostics. Essentially, that has played out the way pretty much as we've seen it play out and as we predicted it would play out. Life sciences is about 7% of our revenue, and 60% of that, again, is reagents and consumables and assays. Only 40% of our business there is around life sciences instruments.
So if you put that in perspective of the whole company, that's about 2% of the company. So it is a small percent that gets impacted. And, you know, again, I think given the maturity level of the pharma biotech industry in China, you see that getting impacted from a budgetary perspective. I think, you know, there was a bolus of stimulus that came out towards the end of the first quarter, early second quarter, but that evaporated. But as we've seen, these things turn on a dime in China. So, you know, as of now, we are not assuming any stimulus, and that's how we forecasted when we came out of our forecast at the end of the second quarter.
You mentioned these things can turn on a dime. Do you think, you know, how much of this life sciences weakness do you think is tied to a lack of stimulus or a stimulus could really help there versus some of the, you know, broader economic concerns within China?
Again, I think it's difficult to speculate as to what is causing, but, you know, I would imagine it's a combination of both factors. What we have done in our forecast, we've not assumed any stimulus, and that's what we have forecasted for the rest of the year.
Then you talked about strength on the diagnostic side. Maybe talk about immunodiagnostics specifically, what are your expectations there? Maybe how you view your competitive positioning within China and if you've seen any, you know, push towards local players on the diagnostic side.
Yeah, I mean, you know, immunodiagnostics, if you recall, Catherine, at the end of the first quarter, you know, we said that these non-essential life-saving diagnostic tests will be the last ones to come, you know, back into the mainstream. It played out pretty much as we said, you know, as you saw from our second quarter earnings call. It continues to pretty much be in line of what we had forecasted, and we have forecasted for the rest of the year. I think the differentiation we have with our portfolio on immunodiagnostics is that the panel that our Euroimmun business provides for the marketplace is very comprehensive, and it has got enough differentiated where there is not enough local competition.
Our focus has always been that in the China marketplace, we provide a portfolio which is differentiated and does not have a lot of local competition, and it has pretty much played out. The pipeline of products that we have going into the NMPA for approval over the next several years ensures that that differentiation remains.
Clearly, a lot of near-term headwinds within China, but, you know, we've heard a number of your peers talk about, "Hey, maybe, you know, this will continue to be a growth region after we get through these headwinds, but maybe not at the levels that we saw pre-COVID." I guess, has anything changed in your mind in terms of that mid to long-term growth outlook for China?
Again, I, I think this is where the portfolio differentiation comes into play, Catherine. Yes, China will have headwind for us, but it is around the life sciences instrument side of the business, you know, which again, is 40% of 7% of 17%, right? And this is where we sort of need to ensure that we—why we've done what we've done in terms of our portfolio is to sort of ensure that there is some level of insulation for that. So, you know, whether it's going to be a two-quarter or a four-quarter pressure, it is going to be on the life sciences instrument, i.e., the big-ticket items that, you know, the cell analyzers or the single-cell imaging systems that we have.
Yeah. And maybe focusing on the life sciences portfolio more broadly, you've made a lot of acquisitions in this segment over the last several years, I think somewhere around 40% of your life sciences business you didn't even own pre-COVID. So maybe just give us a picture for how all these new pieces fit together into a cohesive offering.
Yeah. I mean, if you recall, you know, and just to take a step back around the portfolio transformation, you know, when I came into my role, you know, we did that first with the diagnostics business. It was, as you know, essentially a newborn screening and a reproductive health business. So the idea was: How do we take that and expand the addressable market for diagnostics? And where—that's where we added portfolio assets around autoimmune, allergy, and infectious diseases. And then COVID hit, and COVID, for us, fortunately, you know, allowed us to have a robust balance sheet, which we could use to do the same on the life sciences side of the business, because, you know, we knew at that point that the $600-700 million of COVID revenue would one day go away, that we were having.
The intent really was to sort of: How do we replace that with high-growth, high-margin businesses? This is when we added BioLegend, Horizon, Nexcelom, Sirion Biotech on the life sciences side. The intent really was we already had a go-to-market strategy with a small molecule portfolio in preclinical research and discovery, and we wanted to replicate that on the large molecule and the biomolecule side, and sort of have a more comprehensive value proposition for our customers. With the addition of these assets, now we kept moving more and more upstream, or as upstream as you can go, all the way from licensing technologies, as you saw from our AstraZeneca press release, to being able to provide them tools, software, reagents, consumables, and capabilities to do their research.
We really feel good about the assets that we have put together, which is very comprehensive and sort of, you know, smooth, flows smoothly through the preclinical research and discovery value chain.
Yeah. So you talked about that focus on upstream, kind of preclinical discovery. You know, can you talk about some of the downstream opportunities you see for the business, whether it's GMP reagents or software used in phase one or two clinical trials? You know, how do you envision your portfolio progressing on that side?
That's a great question. I mean, you know, what we all-- You know, for a company that is going to focus on innovation, it is as important to know what you're not going to do as you're going to do. I think we've already, you know, stated that we are not gonna do CDMO, we are not gonna do commercial manufacturing or cGMP. But where the opportunity is present for us is around GMP, both on the software side and on the reagent side, specifically on the antibody side. So-- and we've talked about this, you know, how we are publicly going to continue to invest in GMP manufacturing, especially on BioLegend side, and sort of expand our software portfolio, the Signals software portfolio, onto the clinical side of the value stream, and that's where a lot of our internal NPI efforts are ongoing.
You mentioned BioLegend, that's a big chunk of the new portfolio. So just any update on how that's performing relative to your expectations at the time of the deal? You know, any surprises, either to the positive or negative?
I think BioLegend, you know, if you recall, when we did the Euroimmun acquisition, I said that's gonna be the best acquisition in our company's history. BioLegend now has sort of, you know, become the largest and obviously has done much beyond our own expectations. And I think, you know, some of the synergies around commercial, logistics, and all, was something that we expected. The real advantage that we have seen is around the R&D potential that we now have by bringing BioLegend into the portfolio, and how it has continued to narrow the chasm between research and discovery of clinical diagnostics reagents in the company.
You know, for scientists to be able to sit in a room and sort of design and define as to what antibodies the needs are, you know, for whether it's Euroimmun or for our legacy diagnostics business, instead of having to wait, to work with a third party, they now have an in-house resource of some of the smartest scientists at BioLegend that can focus on developing the antibodies that they would need, as an example.
We have one question from the audience around cell and gene therapies and some of the production bottlenecks that we're seeing in the industry. I know you focus more on, on the discovery market, but any comments there? And then if you could just talk about how your portfolio is positioned to take advantage of-
Yeah
... that market.
I think, you know, consciously, our focus has always been to remain upstream. You know, I think irrespective of the downstream, over the next decade, we strongly believe that a disproportionate amount of funding will continue to go into the early clinic, early research and discovery of therapeutics that use cell and gene, as, on cell and gene therapy. So, and that was one of the reasons that we focused on the early end. A, smaller, there are not large CapEx requirements. It's more around the accessibility and availability of reagents, consumables that bench-top scientists can use to conduct their research. And that is where their focus, our focus has been. You know, whether it's around Nexcelom for cell counting, cell imaging, or around providing reagents with BioLegend, or licensing technology as we are doing with the Horizon and Sirion portfolio.
So our focus has been more on the upstream, and that's, as I said, it's as important to know where you're not gonna put your resources or your efforts in. So we don't really have an intention, or it's not one of our strategic priorities to play downstream on that market.
And then maybe shifting to diagnostics, you know, how do you see your diagnostics portfolio evolving over time? You talked about the transformation with the Euroimmun acquisition deal. You've since gotten more involved on the genomics labs side of the market. You know, how do you view the attractiveness of being that kind of platform instrumentation player versus expanding your service lab offerings? And, you know, where do you think that portfolio will go over time?
I think the difference that has become with the portfolio now, Catherine, is by concentrating on life sciences and diagnostics, with the assets that we have, you know, our discussions with our customers has become more as a partner rather than as a vendor.
You know, it's not that we respond to RFPs now and say: "Okay, you know, this is the price, and we can give you a discount because of what all we have." It is more about the technology that we are bringing in, and that could be all the way upstream from licensing technology to pharma biotech, to be able to work with them to develop companion diagnostics around a genomics or rare diseases, and eventually use our infrastructure of labs around continents to be able to screen patients, for them, so they have the right patient, cohort to be able to provide some rather expensive therapies. So that's the whole value chain that we try to work with our pharma biotech partners, partners, and bring both the life sciences and diagnostic side of the portfolio together.
As you look over the next few years, you'll find more and more of these partnerships being developed, whether it's starting with licensing that are milestone-based, all the way to be using our omics infrastructure to do esoteric lab services and finding the right patient cohort for our pharma biotech partners.
Maybe if we shift to capital deployment, you know, historically, PerkinElmer had pursued a kind of bolt-on M&A strategy. Has anything changed with the transition to Revvity? Any key areas that would be a focus for you to add inorganically, preference for life sciences versus diagnostics?
I think it is, you know, obviously from a criteria perspective, it would be the right asset that is a better strategic fit, whether it's on the diagnostic side or the life sciences side of the business. You know, I think, one of the things that are not as well understood is why do founder, entrepreneur-led companies come to join Revvity or what was PerkinElmer? I think that is one of our biggest competitive advantages, and then I think that has served us well, whether it's through Euroimmun, Tulip, BioLegend. You know, we have some of the smartest people on the planet in this space who are our advisory board, that are employees of the company. And I think that strategy is going to continue. So it is going to be more around the strategic fit of how it would fit into the portfolio.
I don't think that's gonna change whether it was PerkinElmer or it is Revvity now.
Yeah. And how are you thinking about valuations in the current market environment? Any preference for public versus private, and how should we think about kind of optimal target leverage ratios for you?
I think, you know, as I said, our first criteria is to find the right strategic fit, right technology fit for what we are looking in. You know, we tend not to get into, you know, companies that are process-driven. We generally tend to sort of start building a relationship with companies that may not wanna be sold today, but they might, you know, think about doing that three, four, six quarters down the road. And that's essentially what has been our secret recipe for success and secret sauce, and I think that is where you will continue to see us play more rather than in a competitive, any M&A marketplace.
Right. And we have about five minutes left, so we have three questions that we're gonna be asking every company that we have here. So we're gonna dive into those now. As you think about, you know, the next 12-18 months, what are the two biggest opportunities that you see for your business?
I think the differentiation of our portfolio and how it'll start showing from its financial profile over the next period that you define is going to be the biggest opportunity that we will see live. I think, as you pointed out earlier, we've started seeing it even this year in a tough market environment. I think that is going to be the biggest opportunity.
And then, same question over the next 12-18 months, but on the opposite side, what are the two biggest potential challenges that you see for your business?
I think the geopolitical environment and the macro environment, you know, it's no different than for any other peer company in our peer group. Those are going to be two of the biggest challenges that we all will collectively be facing.
What is something that investors and/or analysts don't ask you very often, but you wish that they would?
I think one of the things I mentioned earlier is: Why is it that these founder entrepreneur companies come to Revvity or what was PerkinElmer? And why is it that these guys... what is it that clicks for you? You know, that's never been sort of a question that has been asked a lot. And I think, you know, also around our portfolio, around our NPIs. We tend to not get a lot of questions around our NPI portfolio as to, you know, digging deeper into what is it in reproductive health, you know, what is the impact of a Duchenne Muscular Dystrophy assay or a spinal muscular atrophy assay, when, you know, some of the biotech companies have got FDA approval, and what impact that could have? I think those two things tend to get a bit overlooked.
Maybe a question from the audience around the academic end market. You had strong results in that end market in the second quarter. Any thoughts on the durability of that growth and where you see NIH budgets and, you know, broader academic funding globally going?
Yeah, I mean, academia has done very well for us, and we expect it to do, expect it to continue to do well. I mean, NIH is what? Less than or 1% of our total revenue impact, so it does not really change or move the needle for us much in terms of the impact on funding of NIH. And then I think it's more because, you know, as I've said, majority of BioLegend's, using them as an example, commercial teams are PhDs and masters, and they spend most of the times in academic labs sort of helping design the epitopes and the antibodies that the researchers would want to manufacturing, and that partnership sort of pays off in the long run. So we continue to expect it to do quite well.
And then maybe just with some of the recent news of consolidation in the space, had a major antibody player, expected to be taken out by a, a bigger tools company. You know, any thoughts on how, you know, your portfolio performs when you see some of that consolidation with competitors?
I think we feel very strongly that BioLegend is the best asset in that space, and it has demonstrated its, you know, excellence over a long period of time. I think we are very proud that it is part of our portfolio, and I thought it I think it's going to be paying great dividends for the company in the long run. So I'll leave it at that in terms of our M&A strategy on-
Yeah
... on that space.
All right, great. Well, with that, we will leave it there. Prahlad, thanks so much for joining us, and thanks everyone for attending.
Thank you.