Bio-Rad Laboratories, Inc. (BIO) Earnings Call Transcript

All right. Good morning, everyone. Thanks so much for being here. First fire side of the day. So you guys all get grounding points and as much coffee as you want for being here. For anyone that I haven't met yet, my name is Eve Burstein. I cover U.S. Life Science Tools and Diagnostics here at Bernstein. No relation. It's Burstein, Bernstein. I promise, not nepotism. It's my pleasure to have Bio-Rad's CFO, Roop Lakkaraju here with us here today. Roop, you joined Bio-Rad in April 2024 from Benchmark Electronics where he served as Executive Vice President and CFO since 2018. So Roop, I know this is not your first conference this month. So thank you for being here. And we're going to skew a little bit more long term, a little bit more strategic, hopefully, touch on some topics that you don't always get to cover in these conversations. And I certainly have my list of things that I want to ask, but I want to make sure that we cover things that are interesting to you guys as well. So the Slido account is open [indiscernible].

The Board within the last 2 to 3 years. Norman Schwartz, who's been CEO for a bit of a time, really brought this new team on board. And when you look at the pedigree of this team that we have today, they come from what I would say, we are operators. We come from environments where we've seen what good looks like. And we understand the work it takes to evolve a company, if you will, especially in today's challenging markets, you alluded to the end markets being challenging and these sort of things. And they definitely are and that has an impact on our business, whether it's on the tools side or the diagnostic side. And so for us, as a team, we really have been focused on understanding the business from the ground up. What is our portfolio? Where do we have a right to win? How do we do more where we have a right to win and where we don't have a right to win how do we need to evolve our portfolio and our technology or if we can't, then what do we need to do? How do we look at M&A as a supplement to helping us get to market growth rates, which we've not consistently done from a historical standpoint, but also then expanding the margins for us and driving further free cash flow generation. And so all of these things are outputs, if you will, from a financial standpoint. but it really is dependent on what's your strategy, what markets are you going after? And what technology and unique differentiation do you have within the marketplace because you have a right to win, and therefore, you can drive growth.

Makes sense. We're going to talk about your technology in a minute. But let's stay on sort of this corporate governance topic first. And I'm sorry to have question number 2 actually be about another company that's not you. But obviously, Bio-Rad has a meaningful stake in Sartorius. I'm not going to ask you about tax, which is usually what comes up when you get that question. Let's talk strategy since you're using that. Why was the stake originally established? And what was the strategic rationale for Bio-Rad to use its money in this way? .

Yes. I mean from a CFO perspective, having that sort of investment on our balance sheet is a nice to have, if you will, right? It's been a fantastic investment. The investment really started in the late '90s into the 2000s. And -- obviously, I wasn't here at the time in terms of what was the rationale for that investment. But when you think about Sartorius from a historical standpoint, it's a tools company. And then that's where it started, if you will. They obviously in the 2010s, bought Stedem, which is bioprocess capability, which really then propelled them into being a market leader in bioprocessing and today, they really thought of it as a bioprocessing company. When you look at where that investment stake is for us, at the end of the day, one question I get quite often is, are you looking to buy Sartorius and these sort of things. I think that's 1 thing historically that the company maybe didn't articulate as well as it needed to be articulated. When you look at Sartorius, a very successful company, they had a Capital Markets Day earlier this year. They have really strong plans in terms of driving growth as well as margin expansion themselves and ultimately, further shareholder value creation. From our standpoint, as we look at Sartorius, it is a monetizable asset. We're not interested or we don't have the ability to go acquire Sartorius. And at the end of the hey, for everything that I just started out with my opening comments, we have a lot of work to do for ourselves with a focus on Bio-Rad and what we need to improve as Bio-Rad let alone worrying about Sartorius as an investment stake. And so it will continue to be a monetizable asset and investment on our balance sheet. If there is a strategic reason to utilize that, it's at our discretion to do so. Otherwise, we're going to stay focused on driving top line growth within Bio-Rad and margin expansion with Enviroidas well as free -- further improvement in free cash flow.

Makes sense. All right. Now let's talk about Bio-Rad and let's talk about your technology and where you may have a real right to win. So we'll start with digital droplet PCR. So here, your technology is really recognized for its high level of precision. I would say that competitors are sometimes recognized for their faster run times. And so what are the use cases where a customer is optimizing for precision? What are the use cases where they're optimizing for run time? And then going forward, how do you see that -- the field and that potential tension evolving? .

Yes. So first of all, yes, we arguably help create digital PCR within the marketplace and have been a market leader since the 2010s to the current date. And when you look at our technology, it is droplet digital PCR. There's other technology in the marketplace that is plate technology, and therefore, it's a little bit different. That -- our unique approach from a droplet digital standpoint allows us to get a magnitude of concentrated wells to be able to get the results in a more focused way, if you will. And really, at the end of the day, digital PCR gives you -- or it enables you to get absolute quantitation, and -- so where do you want absolute quantitation? You want it in situations where in oncology areas. in minimum residual disease areas, wastewater management areas. So these are the kinds of areas that digital PCR has tremendous appocability. And really, at the end of the day, if I simplify all of it, it's about rare event detection. that's where you use digital PCR. And when you look at our technology, there's a few different aspects beyond it being droplet digital differentiation. What we also have is the largest assay library of anyone. So when you talk about having a moat around an area and a right to win, it's these cumulative areas that we have, one droplet digital in of itself, that's the technology. Number two, our asset library, which is over 400,000 assays. And why that's important is it gives you the opportunity to apply the technology in more areas. And because of that, we also have the greatest amount of technical publications written using our digital PCR area. We have over 12,000 technical publications. That, again, is a significant leadership position versus anybody else in the marketplace. So this is why we are so excited about digital PCR and the opportunity for us as a growth driver as we move forward.

It makes sense. You mentioned things like MRD, for example. And I think today, people think about MRD as an NGS area. And when we talk to experts, some suggest that in the very long term, as the cost of NGS continues to come down. It will not only potentially prevent PCR from moving into historically NGS areas, but it could also then start to encroach on those historically PCR areas. How do you think about that? .

Yes. The cost of NGS and the timeliness to result with an NGS or sequencing technology is improving. However, I think we're going to be hard-pressed to say it's going to be a displacement. Really, they are complementary areas. If you think about sequencing technology, it's about identifying what it is you're looking at. And then you use PCR technology or digital PCR for either absolute quantitation or approximate quantitation. And so they really are complementary areas. I think depending on how very long term, you look at things, sure, maybe the cost of it and the time to result is going to improve. But I think it's hard press to look at where -- what you have to spend for a digital PCR instrument and say it's going to displace NGS broadly. And when I walk into customers, and research organization. What you see is numerous technology capabilities in that research lab, right? You will see real-time PCR. You'll see PCR. You'll see digital PCR. You may see sequencing depending upon what they do. So all of these are complementary areas and use for a specific application purposes versus displacement.

You talked about the work that the executive team is doing, really looking at where you have the right to win and then going out and winning more. What does that look like for you in digital PCR. If you've got the right to win, what are the priorities? What is it that you're working on in this business? .

So I think it's important to recognize that even though we arguably created the digital PCR area, we -- over the course of the early 2020s the market shifted, and we started out in the mid- to high end of digital PCR in terms of use cases and technology use. As the market evolved and especially as budgetary challenges emerged, in the 2020s. You saw the price point that the instruments needed to be at from an entry level really come down quite considerably. And unfortunately, because we were in the mid to high, we didn't have that entry-level instrument. And this is why we went out and did the Stella acquisition, which closed on June 30 of last year. It's also droplet digital technology, and therefore, there's a lot of synergy and R&D leverage from that standpoint. It's a very modular, highly efficient architecture. And so it was a perfect complement to our existing legacy instruments that we had from a digital PCR standpoint. And so when we look at the portfolio we have, we have the broadest portfolio in digital PCR of anyone, all the way from high throughput to that entry-level instrument. And depending upon what that application use case is, we're able to support those customers along that continuum, if you will. The other part of it then is having this assay library as large as it is and have as much applicability across different applications really gives us that further moat, if you will, right? And then, of course, the validation through technical publications. All of that is further reinforces our market leadership position. And therefore, when we go to have these conversations with customers, what you're really supporting them with is not just here's a highly efficient, effective instrument, but what you also have is this assay library and validation from a technical publication standpoint. And so we look at digital PCR as a critical area not just for the tools area but potentially into the diagnostics area. And to date, what we've done from a digital PCR in diagnostics is actually utilized partnerships, and so we have partnerships with folks like Biodesix [indiscernible], inside molecular, wherein they took our digital PCR technology and have applied it specifically in diagnostics applications. What they've shown is the validation that the digital PCR is a critical component of their solution and therefore reinforce that diagnostics capability and applicability. I think as we think about it long term, there's an opportunity for us to move digital PCR into diagnostics applications. And that's part of how do we create the next-generation solutions where we can create a right to win and help support that top line growth. These are the kinds of things that we're doing, which then accelerate that margin expansion.

Great. All right. Let's talk a little bit about the end markets because however good your technology is and whatever you're doing execution-wise to some extent, you are at the mercy of the end markets. So in a couple of questions about specific ones. In Q2, you said that later-stage and commercial stage biotech customers were showing improvement, but early-stage biotech wasn't really. And that's in contrast to some peers that did highlight some improvement in spending in early-stage biotech in the preclinical area. Is there something about your exposure or customer base that's different, that might make recovery take a little bit longer to show up. Or do you think maybe not such a big difference potentially more of a communication difference and how you talk about the end markets?

I wish it was a communication difference, quite honestly. It's always interesting to see how end markets affect or how your technology is affected by the end markets and the situation. For us, because from a -- when we look at our tools business, there's a considerable amount of our tools business that's on the A&G side. Then there's a large portion of it that is in the broader biopharma. Where we've skewed historically on biopharma purposefully coming out of the COVID period is that discovery stage that early kind of stage company especially in areas like cell and gene therapy. And for any of us who've been around, even though I'm relatively new in the industry, cell and gene therapy is not what it was, if you will, from a research standpoint. It's still important, but there's the amount of demand and activity is not there. And because of our skewing from an overall market positioning standpoint, we find ourselves in a place where the money -- yes, there's some money there, but it's not the kind of money that's flowing into later stage companies or those closer to the commercial realization. And so one of the things for us to evaluate is, is there an opportunity or the ability to pivot into those later stage where the money is flowing, the challenge is, it's -- you have to displace an existing company there or a competitor, right? And that's not an easy thing to do, especially if they've already been involved in clinical stage activity. And so if someone were to change out technology, you start from scratch. And so that's a challenge. And so we're really thinking about, okay, if the money is really going to be concentrated in other areas in the marketplace. how do we start to play there? What do we need to do? And these are the kinds of conversations we're having from a commercial standpoint.

Can I ask you how do you start to play there? What do you need to do?

Well, I think this is where the -- because we have that right to win and the capabilities of our technology, you make a value pitch to the customers. And so maybe you don't displace a competitor in existing clinical stage work. But if there's an opportunity for us to supplement new programs that they may be kicking off and therefore, they can utilize their technology, that's an opportunity. So that's maybe a way to try and do that. We're not going to displace those that are already in clinical activity, but how do we get ourselves placed for new activity as they evolve.

Yes. It's a long road?

It potentially can be. And obviously, I think the easy answer is if more money starts to flow into those discovery areas. But as -- and I'm sure you're going to touch on this, Eve in a moment. You just look at the volatility in the market still. There's money flowing, yes, but it's not uniform, in terms of where it's going or month-to-month, how much is flowing. And I think this is what not just us in Bio-Rad, but us broadly within the tools and diagnostics market space we're dealing with.

One place where we are seeing quite a bit of volatility is in academic and government end market. Well, I say quite a bit of volatility. I'd say, generally low levels, but there have been some encouraging signs, for example, NIH funding and distributions have been up. What's your base case of what happens in the academic and government end market? So for example, do you think some of those improvements that we've seen in the NIH are real changes in the way that they're operating. Are they at the beginning of the trend? Or are they just kind of random noise? And do you think midterm elections have any impact? How do you see that end market playing out?

Maybe I'll start with the latter. I don't know that I would expect to see midterm elections really having an effect on kind of NIH spend. And it's interesting because we talk about ANG, there's a U.S. considerations of ANG, right, with NIH and these sort of things. Europe has its own talk track, APAC and then China all have. So I can walk through that just a little bit. But as we think about base case for ANG when we look at the strength we've had in our instrument placement and sales over the course of last 3 quarters, and a lot of that is the QX 700 Series products, which is the newer products that we acquired through [indiscernible]. That is ANG. A lot of that is in the ANG space. And so what you're seeing is, even though it's a soft market on a global basis in ANG, customers are buying our technology in a soft market. Now they're not buying the instruments to be paperweights within their research labs, right? The intent is to do activity, to do research. And so that gives us confidence that it's a matter of time, and the time is really about the sentiment, Like, are they going to have confidence that when they're going to be giving money or when they're supposed to be given money that they'll actually get the money. And I think the biggest thing I hear when I speak to our customers or from our commercial teams as they do pulse surveys that we have completed on a regular basis by our commercial teams to us. it's really about the sentiment. It's not yet feeling confident that the money that they're supposed to get they're going to get. And so that's very much a U.S. kind of point, if you will, to be made there. Now the other part of this is NIH and how the government now is deploying the money is different, right? They're prioritizing multiyear grants versus what they had done previously. And so None of that was communicated effectively. And I think these research institutions are really trying to figure out, okay, how is this going to work? Is this how it's going to continue to be and how do we need to adapt to this world. And therefore, until they figure that out, I think they're still going to be cautious. within that time frame. Now interesting enough, for the '26 NIH budget, I think the White House is looking for further cuts. Congress is obviously pushing back and saying, at a minimum, we want it to be flat. Flat would be nice. right? No doubt about that. Ideally, it'd be up slightly. So I think there's still a lot to be played out in the U.S. As we think about areas like Europe, Europe is a little bit of a different conversation because the European institutions, the funding, the government funding is moving into other industries, right, whether that's defense or energy, these or areas. And so you're seeing a further deterioration in available funding in those environments. And then APAC actually has been positive for us, Nordics and APAC, ex China, I'll say. And so think about that as Japan, Korea, Australia, et cetera. And then in China, I think it's still yet to be determined exactly how things are. And part of that is China for China. Part of it is the government looking for potential further reductions in health care costs for the people. And so I think that's going to continue to evolve. Now for us, within China, China is a mid-single-digit kind of revenue environment for us. So it's not that significant and a little bit more skewing towards diagnostics versus tools. But each has a dynamic in of itself, right? On the tool side, you have a lot of China for China. And on the diagnostics side, you have challenges like rate reimbursement changes and these sort of things. We were affected by that in our diabetes products in 2024 and into 2025. So just it's complex environment out there, whether it's on the ANG side or the biopharma side?