Hi, this is Paul Knight, the Analyst at KeyBanc, on the Life Sciences industry, with me today, covering PerkinElmer, which I have followed since 1999 when they were known as EG&G. Which again, fast forward, I think Steve, they'll be no longer PerkinElmer soon. Steve Willoughby, Director of Investor Relations, Alan Fletcher, head of the Life Sciences group. Steve, I think if you could provide a little bit of intro yourself and for Alan, that'd be a good place to start.
Very good. Yeah, Paul, thanks for having us. Happy to be here. Steve Willoughby, I lead IR as well as the ESG for the company. I've been here just about 2 years after also being on the sell side for nearly 20 years before joining the corporate side. I've also known the company, not since 1999, but you know, for quite a while, externally, and then obviously for the last 2 years, you know, on this side of the fence. You know, with me today is Alan Fletcher, who's our SVP of our Life Sciences business.
You know, with the closure of our divestiture last week, where we sold and divested about 30% of the business to a private equity firm, you know, Alan's business will represent about half of our overall company's revenue going forward. I thought it'd be interesting to have him join us to provide some maybe a little bit more perspective on the Life Sciences business itself. Alan, if you'd like to give some background as well, please go ahead.
Certainly. Thanks, Steve. Paul, nice to meet you. It's been great opportunity here. You know, I joined PerkinElmer back in 2008. Again, had followed it many years. I was a customer. I used to work at Merck Pharmaceuticals, many years, bought a lot of products. Transitioned into working for GE Healthcare and then subsequently to PerkinElmer. I joined them as a Head of Business Development. I remember sitting down with our then CEO Rob Friel and asked him, you know, what the ambition was. The logic was he wanted to build a life science and diagnostic-based company. I think over the last sort of 15 years, we've gone through that transformation.
I've personally been able to do a number of business development, strategy, marketing, and P&L roles, as well as, you know, a number of acquisitions that have helped build the portfolio in place. Under Prahlad's guidance, we've really been accelerating that as we did, using the COVID revenue to deliver the life science portfolio as it is today. It's a great opportunity to talk about it, and as Steve said, we now represent half the business, which I think when I joined the company, we were probably less than 10% of the whole company when I, started in 2008.
I was on mute. Alan, thanks for the background. What was it that put the accelerator on the transformation? It was obviously cash flow from COVID, but what were all the elements that came together, in your opinion, for this rapid change?
Yeah. I think, you know, if you think about, Paul, how we were positioning the market itself, you know, COVID was rapidly producing a significant impact in the way in which our customers and the way in which the industry was changing. I think what we were looking at was it was an intentional move from our strategy to really sort of turn the company into a faster growing, more profitable company, really addressing end markets where we could have a leading market position. I think that is now, you know, the situation we had with the remaining Life Sciences and Diagnostics businesses that probably helps us now that we've divested out the analytical business, which was part of the portfolio up until, as Steve said last week.
You know, we adopted this approach in diagnostics, I think, back when Euroimmun joined us. It's an opportunity to really drive, you know, market penetration and change the profile of the company. I think what we were trying to do in Life Sciences was we had a very, very strong core foundation in proteins, but the ability then to expand into genomics with the addition of Horizon and SIRION, they provided us with novel capabilities in the genomic technology such as CRISPR and RNAi, and obviously the viral delivery systems that SIRION have in AAVs, which are, you know, one of the best deliverable systems available on the market today, really opened up a whole dynamic area for us in terms of market opportunity.
We then obviously had the opportunity then to step a little bit more downstream and add Nexcelom into the portfolio, which again, opened up a cell counting area for us, which really sort of opened up the area of cell and gene therapy and a large potential play that we have in that area. Finally, BioLegend came on board, which is our largest acquisition to date. That really established us with a core competency in antibody production. Really opened up two complementary areas. One, they had a very strong process in driving in the academic market presence, which complemented our current presence in biotech and pharma, and really be able to look that in place and obviously add the size and capabilities of that portfolio to the business.
It also transformed the look and feel of the business because, you know, we ultimately now have 70% from a reagent, consumables, and software business, with 30% dependency on instruments, which is a much more changeable profile in terms of the renewable revenue that's coming into the company. It was all of that real background in place then put us in a position that we were able to divest out the AES business, and really now focus on our key end customers, either academic, pharma, biotech or clinical.
How do you split up the pieces of Life Sciences now in terms of your thinking, your management of the group? Is it two businesses, three? What, what's your perspective on that?
Yes. I look at it as a fundamental capabilities in three particular areas. I think if you think of the capabilities more translational, so they translate between research customers and potentially clinical customers. You have capabilities in the reagents business. That's obviously the core fundamentals of BioLegend, and how that is complemented by the core biomarker technologies that we have in the original PerkinElmer business, which has one of the broadest capabilities of biomarker kits in place. We have BioLegend producing the components. We have the kit development using our proprietary technologies such as Alpha and HTRF, dividing biomarker discovery kits. Subsequently, what we also have is we have an instrumentation business that complements that across the board, and that's really focusing on detection.
Where I look at our fundamental plate readers, we detect anything that emits light, that highly complements our biomarker portfolios. Then we have a very large imaging franchise, both in the cellular area, with our high-content platforms and also our cell counting platforms from Nexcelom. Supported by our animal imaging portfolio, which comes traditionally from the IVIS brand, which gives us a large insight into research in terms of visualization of disease using either CT, bioluminescence or potentially fluorescence, as well as the newly launched ultrasound portfolio. We complement all of that with a third arm, which I look at as the services arm, which provides our ability to do, you know, for high quality private service work for the company, in terms of really around the Horizon Discovery portfolio.
Looking at proof of principles, looking at capabilities of doing CRISPR screening using arrays or technologies of that nature, and then complementing that in terms of providing our customers with the ability to do, you know, high-level cellular bioproduction, cell line development, and the ability to deliver that to the customer as tools, where subsequently we're then looking to profile them using other parts of our portfolio. I look at it as the three arms. I look at the capabilities in genomics, in proteomics and cellomics as being the key fundamentals of the capability, and they're really then supported by our, you know, cross-business collaborations with our automation partners and our informatics business as we ultimately look to try and provide solutions for our customers.
What are the, you know, the steps you see near term? I mean, what's the easy part now that you've done the acquisitions? What do you think, what's the heavy lifting part that takes a couple years?
That's right. I think, you know, when you think about, you know, it was probably the largest expansion that we had done in the period of time that we have been together as a company. I think, you know, one of the things we look at is rather than me classifying it as integration, we're looking at how you basically bring together transformation and innovation and take the best of the best. I think you're right. We were able to identify some of the key areas going forward.
I think some of the longer term steps we've looking at is how do you consolidate the digital presence of the company as we go forward in terms of the ability to transact, looking at e-commerce, the ability potentially to market as one company, and then really derive and put the consolidation in place, as we believe will be the foundations for us to deliver the 10% organic growth and the operating margins that we've committed to. I think if you think about the real benefits, we're starting to see them now. We have BioLegend, which is a tremendous content development org business. It builds antibodies. As Steve and I will tell you, antibodies are used across our portfolio in Life Sciences and Diagnostics.
Having that core capability in-house now really allows us to accelerate the innovation that comes in place, but also allows us to get speed to market increases as we move forward. We're also looking at how the other capabilities. We have Horizon using oligonucleotide synthesis being used in a number of other parts of the business, both on the Life Sciences side and the Diagnostics side. Simple, you know, one of our franchise in India, Tulip, that's actually using some of their raw materials are now being produced by some of the reagent sites that we have. Those are really sort of the longer term steps. We're building up the internal capabilities of digital and e-commerce. We're building up the supply chain, internal dependencies on ourselves rather than external suppliers.
Ultimately, those will come to benefit as we drive the business going forward. In terms, our customers also have more of a one-stop shop for the portfolios that they need across the solutions that they're looking for.
What's the culture of PerkinElmer now?
Oh, I would say it's interesting because, you know, you'll see more as we go through as we launch the new brand. I think transformation and innovative are two of the words that we're sort of really looking out of there. It's driving that culture of serving customers with science is really where we're looking to. I think uniting around that and being able to drive a universal translational technology platforms and serve our customers in a different way has really sort of driven that culture of innovation. I think a lot of that is down to both the core competencies we have, but also a number of the partners that have joined us.
Now, you know, post-renaming, you know, as we really pass the most significant pieces of M&A, who are the peers to PerkinElmer now? Is it a Bio-Techne? Is it a few divisions of Danaher? Who's the comparable, do you think?
It's, it's a very interesting question because I think, you know, as we, as we come out, and we've talked a lot about this as we look at our new identity and our new brand, which we'll be unveiling in May, but we believe we're now a very unique company in the market. I think, you know, we certainly are. We're a market-leading organic growth company on the top line. We potentially have 30% operating margins with the opportunity to look at market-leading expansion expected, you know, in 75-100 basis points. We have an extremely clean balance sheet. If you think about that, you know, it's very difficult to find a company that has that profile that can reflect how we compete.
That's not saying we do compete with the larger companies such as Danaher, in some of our several businesses, but they're individual parts of the portfolio. You know, if you think about the size and breadth of some of the larger companies out there, it's more how we compete with them rather than the scale of the company. We focus on, in particular, what we believe is more innovation and more scientific support of our customers. You know, if you think about some of the different customers out there, you mentioned Bio-Techne. They compete with part of our portfolio. Again, we have a number of opportunities to expand out in different areas. It's difficult to find one direct competitor, but in the markets that we have, we're positioning ourselves to be one of the leaders in all of those areas.
Being number one or two in those marketplaces mean we're monitoring and really sort of organizing ourselves to be, you know, a unique proposition as we go into the marketplace now we are clear of the divestiture.
Paul, when you talk about peers too, you can obviously look at it from a competitive standpoint, you can look at it from a financial standpoint. you know, when you look at it from a financial standpoint, you know, there are other companies out there who can grow organically, you know, 10%+ or that, you know, have, you know, 30% operating margins. There are companies out there, I don't believe that, you know, can do that and have $3 billion in revenue. So, you know, we feel like we have, you know, top-tier, you know, financial metrics, you know, at scale as well.
Got it. Got it. A side question, Steve. How did you convince firms in what was a pretty robust valuation environment to get these acquisitions done?
You know, I think, you know, it's something that a lot of people, including Alan and Prahlad and others, spend a lot of time on. I mean, I think maybe Alan can touch on a bit, you know, in terms of the culture we have at the company and the culture of how that culture is transforming. You know, I think part of it too is, you know, putting these different pieces together and, you know, maybe Alan could even speak to, you know, BioLegend seeing the potential in what the combination of the company is. Also, you know, how we manage the, you know, integration is a little bit different than maybe some other companies, which could be, you know, sometimes attractive, you know, to some of the businesses that we've acquired.
I think also just the type of businesses that, you know, we are attracted to and you know, that are attracted to us are predominantly more, you know, privately owned companies, founder-led, entrepreneurial type businesses that can flourish to an even greater degree, you know, under, you know, the sort of overall corporate umbrella. Alan, if you wanna provide any more thoughts maybe on the integration or something.
I think, you know, one of the things we'd look at, well, we don't have a one model fits all for this participation in terms of integration. We look at it as a combination of making up the best of the best, and we're not frightened to change our core facilities if we find a way in which any new partner can really develop us and help us. I think that's really critical because in the case of BioLegend, as an example, you know, we've centralized them around the content development engine for the whole company. The ability for them to expand and to have the freedom and really drive and serve that.
I think the commonality behind this, we had a common, I think certainly under Prahlad's guidance, you know, unless there is a cultural fit with the individuals, it doesn't matter how good the technology is. You can't succeed unless you have a united culture for the people, first. That's one of the drivers, I think, we think alike. I think one of the things that's really telling to that is that I think, Steve, we have a fact that if you go back over the history of PerkinElmer, and we've done a lot of acquisitions even since I joined in 2008, we still have 89%, 80% + of the founders or the number twos in the company still working for us today.
They've maintained their career, they've been able to develop their careers, and they've also gone on to hire and control, you know, drive more innovation across the whole organization. That's, I think, a real sort of testament to the ability for us to adapt and the ability for us to change and embrace them as we go forward.
Couple of questions out from investors, and that is, does the makeup of the sales force need to change, or is it where you need it to be?
I would say, you know, as we've gone through the separation of the company, we've looked very closely at that. I think we have, over the last 3 or 4 years with the influx of individuals in the commercial organizations, being able to adapt our commercial presence into adjusting to the new portfolios that we have. The establishment of dedicated reagent teams, the complementation of that with scientific consultants and really driving that. Sort of the overlap where some of the platforms share between Life Sciences and Diagnostics. I think what we're really looking at is how we focus on the customer. I think the part of the driver behind the fact that we actually did separate the company was exactly from that perspective. It's how do you serve a smaller customer pool, but in a more dedicated way?
Subsequently, the environmental customers are now served by best by the legacy PerkinElmer company, which has its own commercial channel, whilst we're able to focus now on and pair our attention on the Life Sciences and Diagnostics and really build out our capabilities to serve those even better.
I think the other thing too, Alan, to add as it relates to the commercial strategy is just one area where, you know, we are spending more focus and we'll be spending some more dollars, you know, both this year and probably even in next year is e-commerce. You know, e-commerce is an area where, as a company overall, you know, we are under-penetrated as compared to probably where we should be as it pertains to the percentage of revenue we generate, you know, from e-commerce. As we build out now with the company being more simplified, with the divestiture, you know, we can not only more easily implement, a new, comprehensive e-commerce platform, but hopefully, you know, a better-platform overall, which should not only drive, you know, revenue synergies, but obviously, hopefully some operational synergies as well.
Steve, I know you put out the press release and talked to some of the numbers behind rebranding and kinda repositioning. Could you reiterate those?
Yeah. I mean, in terms of like, in terms of when or, and how? I mean,
When and how much?
Yeah, and how much? Sure. You know, we filed a proxy two weeks ago. We'll have a shareholder meeting, the end of April. Because we're domiciled in the state of Massachusetts, there's a state law in Massachusetts whereby we need to receive shareholder approval to actually change the name of the business. Until we receive that shareholder approval in late April, you know, we'll continue to operate, you know, under the PerkinElmer name. Subsequent to that, we'll look to, you know, rebrand the company. You know, it's, you know. When you're rebranding a company of our size with 11,000 people, $3 billion in revenue, very global in nature, you know, it's quite the undertaking.
I think, you know, it's one of those things that, you know, in my short time being at the company, there's been a lot of significant undertakings in a fairly short period of time. Through, you know, all of the acquisitions to divesting 30% of the company, to now, you know, rebranding the entire company. I think what's been interesting to be a part of and to see is throughout all of that, we've also continued to execute at a very high level. With, you know, all of these, I call them extracurricular activities, you know, the company's been able to continue to put up very strong numbers and at least meet, if not exceed, you know, all of our financial projections as well.
Another couple of questions outside is, the China recovery, what's the read on that or your view there?
Sure. You know, we, you know, we've had our Immunodiagnostics business, which it represents, you know, about 5% or 6% of total company revenue in China. You know, has been impacted by the lockdowns. You know, so that business, we're still assuming here in the first quarter, it declined year-over-year because of the sort of reopening and the impact from, you know, the COVID exposures and whatnot. You know, we do expect our Immunodiagnostics business to, you know, improve as the year goes on, and hopefully start to get back to normal in the second half of the year. For the full year, while we expect the, you know, the Immunodiagnostics business in China to be down low double digits in the first quarter, we're actually assuming low double-digit growth for the full year.
Obviously assuming, you know, a more significant recovery as the year progresses. The thing to know about our business, you know, and that's been impacted in China, and maybe I'll let Alan discuss his business too. The business that has been impacted, you know, we do non-acute diagnostic testing.
Yeah.
You know, we need life to return to normal, which it seems like life is starting to return to normal. We need the COVID patients to leave the hospital. We need the more acute patients to go into the hospital. We need them to leave, and then we need capacity to start doing the non-acute diagnostic testing. That's why we're not assuming that this business will return until sort of the second half of the year, return to normal until the second half of the year. What's been interesting and maybe a little underappreciated is, you know, over the last 3 years, through COVID, through lockdowns, and through the reopening, you know, our Life Sciences business has continued to perform at extremely high level.
Maybe, Alan, if you want to provide some perspective on maybe that or applied genomics or other businesses, you know, outside of this, you know, piece that's Immunodiagnostics.
That's right. I think, Steve, as you said, you know, if you historically, if you look back at the Life Sciences business in China, we grew it at 20% organic, you know, through 2021 and 2022, which has been a tremendous opportunity for us, even though COVID is going on. If you think about applied genomics and our DNA and automation platforms, they were even greater than that. It was almost 50% growth across that board. I think that showed the robustness of our portfolio and our applicability of our portfolio to the customers. Subsequently, the ability to mitigate the risk of some of the changes that have happened and offset against our Diagnostics business has really enabled us to sort of, you know, weather the storm as we go forward.
I think that's where that consistent run rate that we've seen for life science and applied genomics is something that we're benefiting from. Our ability to have the right portfolio in the right way to deliver to the customer, and then subsequently, hopefully, as you said, that that will get us to in as good stead as the Diagnostics business returns ultimately, as Steve described.
Are you a direct beneficiary of spatial biology?
Are we a direct beneficiary? I would say indirect is the best way to put it.
Yeah.
From a spatial biology perspective, it's an area that we've looked at, routinely. I think it's a very exciting area. It's a highly complementary area to where we have. We play because we provide a lot of the content that these spatial biology companies utilize in developing the solutions that they have. A lot of the platforms, they rely on the content that come out. A lot of the majority of that content is provided by the franchises that we have.
Yeah.
That's really enabled us to sort of play with a number of partners across the board whilst we take a very close look at ultimately, where do you wanna place your bets? Because there's many different ways of looking at it. I think it's, as I said, extremely exciting area in play at the moment. As we look to develop the first sort of really translational and diagnostic implementation of spatial biology, it's highly complementary to our imaging portfolio today. We're watching that brief. We're watching the IP landscape, which is equally as complex in that area. I would describe us as indirectly benefiting, but also having great insights into where we believe the field might go.
A lot of companies involved more directly in biologic production this in this conference have been talking about what they're seeing is, you know, a greater level of diversification beyond monoclonal antibodies like mRNA, cell therapy, et cetera. Would you agree with that kind of viewpoint, Alan?
Oh, absolutely. I think, you know, if you think about, you know, COVID taught us one thing, that biologics work. The ability to have a vaccine generated by mRNA, really sort of changed the world in terms of the ability for people's acceptance and move the market forward. I believe that, you know, both cell and gene therapy will revolutionize healthcare moving forward. They're very different in terms of their approach, but they're very similar in terms of their workflows. I think, you know, one of the reasons that when we were looking to expand our portfolio was the capabilities to bring in gene editing and base editing, and also the capabilities then subsequently to deliver that modified content to the right part of the cell.
I think, you know, it's good to see that people are talking about how the diversification's coming into place in terms of some of the large scale manufacturers. We're actually focusing our strategy in that area more upstream, because our customers are telling us that they have learnt in the process through COVID that getting the ability to have the right specialized content produced in the right quality at a much earlier stage, say using GMP at a much earlier research stage, ultimately eases the burden when they come downstream to manufacture.
Mm.
One of the things that we've been looking at is how do we add high value technologies. We have base editing with Horizon, we have the viral delivery systems of SIRION, we have the capabilities of BioLegend to produce antibodies, cytokines, and media at scale and potentially now with GMP. How do you provide all that added value upstream, which ultimately will transition downstream with the development. As those therapeutics are then moved into scale manufacturing, we also have the Nexcelom capabilities, which will provide QA/QC. Do you have the right potential markers in there? Have you got the right quality, the right purity of the cells on a consistent basis? We're playing in the value add components area, and at the moment allowing the large scale CMOs to scale up.
Ultimately, you know, if you look longer term, and I talk longer term being sort of the 5, 10-year horizon, will we step into that space? It could be a potential, but at the moment, we believe the real value add is in this exciting field and really looking at it as it goes forward. With the whole field developing, I think, you know, there's biological complexity. There's, you know, limited solutions out there. More importantly, there's really, I would say, developing guidance in terms of regulation coming through. We're very well positioned to understand that and develop our solutions appropriately.
Would it be fair to say that you're certainly a leader in monoclonal antibody technology, but is your ability to provide a platform around it, that makes PerkinElmer much more unique?
Yeah. I've always said this across the board. You know, the real franchise that we have is actually providing our customers with answers. You know, a lot of companies out there can do testing, and they can provide the data back to them. If you think about the solutions that we have, we have proprietary technologies which can be utilized across a wide variety of species, be they cells, be they genes, be they.
Yeah.
Animals, be they portfolio. We also have our automation platforms, more importantly, our informatics platform.
Yeah.
We can turn all of that data into information.
Yeah. Although I think PerkinElmer has been a platform-rich company a long time, has it not?
It certainly has been our, and, you know, it's been the approach since the foundations of the company. I think what we've been able to do is expand that outside the traditional core platforms into the now and the exciting areas of cells and genes.
Another question is, you know, geographically, what is the low-hanging fruit? Like, was BioLegend U.S.-centric? Is there a global integration that can, you know, open up new markets geographically?
Yeah. I think, you know, I think if you think about the business itself, certainly BioLegend were well established in terms of their North American presence. We are, you know, to draw from a core business, you know, equally balanced across the geographicals. I think, ultimately, I think now in the new company, we're probably 45% U.S., 25% Asia, and 30% Europe or some in that sort of ballpark. It's reasonably well balanced across the board. What we are looking at is the areas where all of our partners that have joined us have had indirect presence or limited presence, and we're able then to support them with more of our approach. Conversely, as Steve mentioned earlier, we're then utilizing the electronic and digital footprint that they have to leverage that and expand our portfolio.
I really think that at the moment, there's it's a global approach for all of them. That long term, again, is baked into the considerations that we have and why we believe we can sustain ourselves as a 10% organic growth company with good operating margins moving forward.
What's interesting too, Paul, on the Diagnostics side of the business, in a number of the businesses, we're actually under-penetrated in the US. you know, we're on maybe in some of the Life Sciences businesses, there's some opportunities, you know, to expand outside the U.S. On the Diagnostics side, there's very good growth opportunities and expansion opportunities inside the U.S. as well.
You know, I know you've talked about 2023 for the last several conferences, but what's kind of the refresh on 2023 outlook, Steve?
I mean, you know, we're still looking for, you know, 9% organic growth this year. We're starting out with 30% operating margins as the new company, we look to build off those in the future. You know, I think we might have touched on earlier, you know, we're looking for 75-100 basis points of margin expansion annually going forward. Again, I think sort of, you know, industry-leading levels of margin expansion moving forward. You know, when you look at the two businesses, you know, over the coming years, you know, we expect Alan's business in Life Sciences to grow in the low double digits, the Diagnostics business to grow in the high single digits. Both of those expectations are in line with what those businesses have done historically.
You know, really nothing needs to, you know, change or improve, you know, to do, you know, the 10% growth that we're expecting over the medium term. You know, for this year itself, you know, we've talked about, you know, the 9% organic growth. We've said as we move through the year, when you look at it on a two-year average basis, so taking into account the year ago comp, you know, we expect the two-year average to be around that same 9% each quarter. You know, keeping in mind that here in the first quarter, you know, we have a 13% year ago comp. We're assuming obviously a little bit lighter for organic growth, you know, this quarter here.
One last question, Al. Externally was, are there areas where you've been sorry, not direct, but can be direct now?
Sure. Alan, do you have any examples?
I would say, if you look at the direct portfolio itself, I would say the one area is, we are as a core business, we've sort of developed direct across the board. If you look at BioLegend and some of the complementations coming in, specifically in Asia-Pacific, I'll use one very example. We've had a very strong life science direct presence in Australia. BioLegend have, you know, but we've also established very good relationships with some of the key institutes down there. They have absorbed the Nexcelom and BioLegend portfolios, which were, well, actually in Nexcelom's case, wasn't even present in that part of the world. BioLegend were using a distributor who was a non-exclusive distributor to that. We've absorbed those immediately, and already seeing the uptick of that potential capability in expanding that.
That's just one example of where we've looked at the capabilities. I think, you know, we've developed a good direct presence across the Life Sciences business, certainly, across the board. I think that's where we've been able to benefit some of the partners that have come in.
You know, with that, Alan, great debut and, you know, an exciting time to be in the life science industry, is it not?
Oh, it is. I think it's just starting the next revolution, as I said. It's gonna be very interesting to watch.
Yeah.
Thank you, Steve.
Sure. Thanks, Paul.
Thank you.
Thanks, everybody. Bye-bye. Thanks for calling.