From IR. We have Max Krakowiak, CFO, PerkinElmer. Thank you to both of you for being here. Just as a quick reminder, you know, we made an out of consensus upgrade call on Perkin in early January. There have been two additional upgrades since. Our view is that the company's recent acquisitions, particularly BioLegend and its forthcoming divestitures, make the go forward Perkin much different from the legacy Perkin that many investors are familiar with. With that said, our questions will be focused on the topics that we uncovered during our process of upgrading the stock. Before we jump into some questions that are specific to the continuing operations, I just wanna hit a few big picture questions. Just latest expectations for when the planned business divestiture will close.
Are there any risk factors that we should be aware of, in terms of successfully completing that sale?
Yeah, sure. I'd say from the divestiture standpoint, we're still on track to the Q1 close. It's sort of been our contract all along. Right now we're full steam ahead towards that deadline. I wouldn't say there's any, you know, material risk to call out at this point, Max.
Okay, great. Have you fully completed the integration of BioLegend, or is that still in process? Generally speaking, compared to your expectations, you know, how has BioLegend performed under the umbrella of PerkinElmer?
Maybe tackling the second part first in terms of how the business has performed. I'd say it's performed very well. If you look at our, you know, roughly $700 million reagents business, BioLegend is obviously the largest portion of that business. That business has continued to perform well, growing, you know, low double digits through the past three years here. BioLegend, we expect to continue to be a healthy contributor going forward. In terms of the integration, you know, I would say our strategy on integration is unique to each acquisition. In terms of BioLegend, I'd say we're still very much in the early innings.
Mm-hmm.
-of that integration. You know, I'd say, you know, maybe to give it a little bit of an example of how we treat each one differently, specifically related to BioLegend. You know, BioLegend we view as sort of the new center of excellence for our reagents business and r ather than force it to be integrated into the legacy PerkinElmer side of the house, we'll actually be doing more reverse integrations into BioLegend, and giving them more insight and access into our legacy business, which, you know, we think both has a lot of commercial synergies for us going forward.
Yeah. Some, you know, multifactorial, I guess, it's complimentary to the diagnostics division as well, which maybe we'll have some time to touch on later on. Keeping with some of the bigger picture questions, just to bring everybody up to speed, the messaging has been that you have around $2 billion in unencumbered cash available to deploy for M&A, buybacks, other purposes over the next 2 years. If you, compare the PerkinElmer business before the planned divestitures to the PerkinElmer of today, you know, what's your latest view around the prioritization of buybacks and debt paydowns versus M&A?
Yeah. maybe just to clarify 1 comment too. it's $2 billion of unencumbered debt over the next 3 years.
Three years.
As opposed to two years. I would say maybe to, you know, to talk about the debt first. From a debt perspective, we do have about $1.3 billion coming due over the next, what from now, like 18 months. That's included when we say $2 billion of unencumbered cash. We'll pay off that short-term debt. You know, from a long-term debt perspective, we have a very favorable long-term debt stack. We've, you know, average maturity goes out to 2031. It's at like 2.5% interest rate. From a long-term debt perspective, we feel, you know, very confident in the position that we're in.
In terms of this the go forward capital deployment across acquisition and buybacks, you know, I would say, A, we're still committed to remaining investment grade but B, from an acquisition standpoint, that continues to be, I would say, our primary focus of capital deployment. So I don't think that strategy has necessarily changed the types of companies we're going after. But then as it relates to share buyback, you know, it's something we're continuously monitoring. I think if we're in an instance where we continue to believe, you know, the stock is undervalued for what we think it's worth, you know, maybe that's something that becomes more interesting to us. It's something we're gonna continue to monitor and watch closely here.
Great. Sounds like, I mean, the BioLegend acquisition, you know, was the largest in the history of the company to, you know, get around $380 million in revenues in 2022, I believe. So going forward on the M&A front, you know, are there any stringent criteria for acquisitions that you might make? Especially now that you've done some housekeeping, and you have, you know, really two, you know, clear-cut divisions with life sciences and diagnostics.
Yeah. I mean, maybe just to reiterate one of the points you made first. We are going to remain investment grade. The second in terms of the criteria is obviously strategy and technology comes first, and we've got to make sure that it fits with our long-term roadmap. From a financial performance perspective of a prospective company, yeah, the criteria probably has gotten tighter. I mean, that doesn't mean we wouldn't necessarily do something that might be below our new financial profile if the technology is worth it. But I think we've worked really hard to create the new financial profile of our go-forward company, and we think that's a profile that's differentiated. I think it would take something really special to be diluted from a financial perspective out of the gate.
Makes sense. Then let's move over to the Life Sciences continuing operations, which, you know, we would consider a key factor in our upgrade. As we think about, you know, the 2023 Life Sciences continuing operations revenue growth, profitability and the margins, you know, what would you consider, within that segment, the most important factors that will determine your ability to accelerate growth or improve that segment's profitability in Life Sciences? Is it new product lines? Is it initiatives where you're integrating some BioLegend capabilities with the legacy PerkinElmer business, or something else?
Yeah. So, maybe just one tweak to the, to the question too. You know, I don't know that we necessarily need to quote-unquote, accelerate.
Yeah
The performance of the Life Sciences business. I think if you look again over the past couple of years, it's grown low double digits. That's sort of our midterm algorithm for that business. I think it's more of just continuing to do the things that we've been doing really well over the past couple of years. If you look at the portfolio and sort of our midterm, you know, outlook or algorithm, that would imply our low double digits. It has consistently over the past couple of years. It has our informatics business growing low to mid-teens, again, which is consistent with what it's done over the past couple of years.
From an instruments perspective, it's, you know, mid to high single digits, which I would say over the past couple of years, you know, we've probably been performing closer to that high single digit mark. So, from a growth perspective, we think we're already kind of there. There are some new technologies that we've started to talk about externally that we're really excited for, whether that be around, you know, building out some new GMP capabilities, whether that be around some of the viral vector technology that we have coming out of our recent Sirion acquisition, or whether that be, you know, the new base editing technology that, you know, we're hopeful to have a commercial launch here early in 23. There are definitely some new technologies that we're excited about that further support our growth outlook.
I'd say from a profitability standpoint, you know, we've mentioned 30%, you know, operating margin guidance for next year. When you look at it from a segment perspective, Life Sciences is above that company average. I would say that we consider ourselves to be best in class, probably from a profitability standpoint in the life sciences space. Again, there's a lot of things we're excited about operationally, whether that be new synergies related to acquisitions. I think we're still just scratching the surface on some of the manufacturing productivity initiatives we have around freight, logistics, some of our manufacturing sites. There's definitely still a lot of things, coals in the fire, if you will, to continue to help from a profitability standpoint.
I wouldn't say we need anything groundbreaking, you know, to already be considered what we think best in class.
Yeah. Yeah, yeah. You guys, I mean, have definitely transformed in a major way. But everybody looks to the future, right? That's why we're here. One of the reasons why I asked that last question was just because our, our checks have shown that, you know, over half of the BioLegend customers were ordering through their the company's online e-commerce platform versus a single-digit percentage of customers ordering the legacy non-BioLegend reagent offering. Just curious, how, you know, how quickly can, you know, can you sort of enable the online ordering for the legacy Perkin Reagents? You know, would that have more of an impact... I'm assuming the answer is both, but would that have more of an impact on accelerating growth or improving the margin profile of that business?
For sure. you know, we've mentioned e-commerce is gonna be one of the areas that we're gonna invest in from a CapEx perspective going forward. I would say when you think about the timeline of it, you know, there's the new platform we'll be coming out with. Yeah, you know, we're probably thinking sometime in early 2024 is when we'll really start to see some of the fruits of that. I'd say there are other short-term things that we're doing to continue to improve our e-commerce channel. We've mentioned BioLegend catching some of our legacy products, some of those have already been made available on the BioLegend e-commerce platform. There's some short-term quick things that we're doing to try and pick up volume there.
In terms of the long-term benefit, yeah, you're right, it's both from a growth and a profitability standpoint.
Okay, great. Yeah, similarly, you know, you made a comment on some interest in new GMP offerings. That was the next question that we had. It just seems like the company's been increasingly vocal around the opportunity to support your customers transition from research into the clinic, right? Versus being a little bit more heavily weighted towards the, you know, towards the front end. So, is there any, you know, is there anything you can give us in terms of new products, new capabilities, GMP related, that we, you know, that we can keep on our radar, whether it's in 2023 or 2024 to support that end-to-end, you know, support of those customers?
Yeah. I mean, I think obviously GMP is one of them, right? I think the way you teed it up is the right way to think about it. I mean, we already have the products RUO today.
Yeah.
For us to build out the GMP capabilities is not, I would say, a massive overhaul for us. It doesn't require every, you know, an incremental massive amount of extra capacity. It's really just making our manufacturing facilities GMP quality. What it's gonna enable us to do is, you know, today what happens is we leave money on the table as soon as our customers go into the phase 1 clinical trials. Getting that GMP capability will allow us to play a little bit further downstream and get that, you know, phase 1 volume. It also helps our customers out tremendously and helps them accelerate their transition from research into clinical. We think that's something that will be very beneficial for us over the next couple of years.
I think I already mentioned the other pieces of technology that we're really excited about around the viral vectors of our recent Sirion acquisition and, you know, the base editing in Horizon. But, those, I think, we're still early innings, but we are excited about the long-term potential for sure.
Absolutely. Horizon, you acquired the company in late 2020, I believe, I think Sirion and BioLegend were in mid 2021. I know it's still early, but, you know, how is that? Have you seen any early evidence of success in that strategy thus far?
Yeah. I mean, again, I think in terms of the context of our overall life sciences strategy, we're very excited about what those acquisitions bring to us. I'd say again, I know it's sometimes can feel like it's been a long time since we acquired them. I think given also some of the nature of the companies we have purchased, whether, you know, mostly founder-led companies, part of that culture integration is just as much us learning from them as it is them learning from us. Yeah, we're taking our time with it. It's still early innings, but there's no less excitement, I would say, around any of those acquisitions.
Yeah, absolutely. All right. In the essence of time, I do have a question that I received via email. I'm gonna flip over to diagnostics division. Starting with Immunodiagnostics. That particular business represented over half of the 2022 revenues in diagnostics and will likely be, you know, the swing factor for the 2023 diagnostics segment growth. In Q4, the lower COVID-related revenues and the lockdowns were a headwind, but the non-COVID Immunodiagnostics revenues grew double digits. Understanding that it's only been about 3 weeks since your call, you know, can you give us any insights into the trends that you've seen in China related to COVID policy changes?
Then maybe if, how that stacks up with your expectations at the time when you were setting your guide?
Yeah. Maybe tackling the guidance question first, and then I'll go into the China specifically. For the guidance for next year, what we baked in from a diagnostic standpoint is, you know, sort of the low double digits Immunodiagnostics globally on a non-COVID basis. We've got applied genomics and reproductive health at sort of the mid-single digits level.
Mm.
Within Immunodiagnostics, again, everything outside of China has been growing low double digits for the past couple of years. We expect that to continue. Specifically within China Immunodiagnostics, to your point, this is our biggest swing factor on the diagnostics guidance side. You know, I would say our expectation there is that the first quarter is gonna continue to be challenged. It was down high single digits in the fourth quarter, we said the first quarter is probably gonna be slightly worse than that. We expect a gradual improvement in Q2 with really the quote-unquote, return to normal in the second half of the year. That's all really just related to what we're actually testing in China. It's non-acute.
We expect sort of the last aspect of diagnostic testing in a hospital setting to return to normal. I think that's why we have baked that in the guidance as more of a second half return to normal.
That absolutely makes sense. Okay. Then, you know, the other question that I wanted to make sure we snuck in before we're up on time is just EUROIMMUN and Oxford Immunotec, you know, are the two businesses that make up the majority of Immunodiagnostics. Oxford, I believe, has seen some nice operating margin gains under the umbrella of Perkin, and as a standalone was a, was a decent gross margin business with not a great operating margin business. You know, in Oxford's is, you know, has been delivering some solid growth.
In 2023 and 2024 as the EUROIMMUN Oxford mix sort of evolves, is there an opportunity for, you know, if you do have a rising mix of Oxford, is there an opportunity, you know, to, for the Immunodiagnostics operating margins or even the overall diagnostic segment's operating margins to, you know, to tick higher?
Maybe talking about Oxford first specifically. You know, I would say that you're right, their gross margin is probably accretive to the overall gross margin of the company. I think going forward, we said will be something in the, you know, low to mid-60s% from a gross margin perspective. It is accretive to that. I would say from an operating margin perspective, though, I don't think we've seen as much of an uptick as we would have anticipated. The reason why I say that is, you know, Oxford has also very much been impacted by the lockdowns in China.
Yeah.
That is a decent part of their business. We've had some volume leverage headwinds there. Our thesis is that as China returns to normal, the Oxford operating margins should start to see that volume leverage pick up. Yeah, I think there's definitely room for improvement there. In terms of the overall diagnostics, these segment margins, again, as I mentioned, 30% operating margin company or guidance for next year. Diagnostics will be slightly below that, with life sciences being above, and then you've got, you know, your corporate overhead. From a diagnostic standpoint, I wouldn't think of it's any different than the life sciences side. There are still things we're really excited from an operating margin expansion standpoint.
You know, we'll have the ability to grow into our stranded costs from the divestiture over the next couple of years. There's also a lot of operating initiatives that we're, that we're really excited about, and that's both in the life sciences and the diagnostic side.
Great. I think I might have time to sneak in 2 more.
Okay.
On reproductive health.
Sure.
we can cover everything. you know, over the next year, if you look at the, reproductive health business.
Yeah
You look at newborn screening, you know, you see growth in newborn screening coming more from the inclusion of more diseases on state-specific panels in the US? Or is the growth opportunity in newborn screening more heavily tilted towards menu expansion in key regions internationally?
Yeah. Maybe two, just to paint a broader sort of a macro picture, if you will. There's about 140 million babies tested annually. Or, born annually. About a third of those are tested. There is both opportunity from what we would consider geographic expansion and just testing more babies, also the ability for menu expansion, where of the babies that are tested today, which we do the vast majority of, yeah, there's an opportunity to add, you know, continued tests to that panel. I'd say it's both from that perspective in terms of the growth algorithm. Lastly, you know, the market's been negative mid-single digits decline for the past four or five years. We don't expect that to be the terminal growth rate, so any uptick there is only, you know, further tailwinds for us.
Again, you know, we've been consistently growing mid-single digits in a market that's declining mid-single digits. I think we feel, I think we're excited about the future of our newborn screening business.
Great. All right, last question here. Only because you guys mentioned the 75% year-over-year growth in Vanadis revenues recently, can you just give us some visibility into the ideal customer that chooses to adopt Vanadis versus, you know, a send-out lab? How many of, you know, those sort of, I guess you would call, greenfield adopters there are in the US? Just more generally, is there a way for us to frame when Vanadis becomes a large enough revenue contributor to, you know, move the needle, so to say, in reproductive health?
There's a couple questions packed in there. Maybe first from a customer standpoint, I think the way to think about it, the ideal customer is probably someone who's running 5,000, you know, tests on their system. That's gonna be a, you know, either a multi-center OG, you know, BYN or it's gonna be, you know. I think that's probably the target group. I don't think I have an exact number of customers, right, that I would feel in the U.S. In terms of sort of your second question on the materiality of it and when that happens, I don't think we've got a, you know, a set date here in the calendar. I think we continue to be very excited and pleased with the progress that Vanadis is making.
You know, hopefully we're gonna have a couple publications here, in 2023 that's gonna further help accelerate some of the growth in the U.S.
Yeah. I mean, do you see it as more of a displacing platform? Or do you see it as more of something that's complementary and, you know, addressing an unmet need today, you know, by, say, the Natera of the world?
I think it's a little bit of a mix of both.
Yeah.
Truthfully. Yeah, there will be some. I mean, look, we have a prenatal testing business today, and there will be some cannibalization there. We think it's gonna grow above and beyond that. Yeah, I do think it's meeting an unmet need in the market.
Yeah.
Both from a price, but also from a customer experience standpoint.
Fantastic. Well, I think that's all the time we have. We covered a lot, so thanks for being here. Thanks for the detailed responses.
Absolutely.
Always a pleasure.