Bio-Rad Laboratories, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Q2 2021 BioRad Laboratories, Inc. Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touchtone telephone. I would now like to turn the conference over to your host, Mr. Edward Chung, Head of Investor Relations. Sir, please go ahead.

Thank you, Joanna. Good afternoon. Thank you all for joining us. Today, we will review the second quarter 2021 financial results and provide an update on key business trends for Bio-Rad. With me on the phone today are Norman Schwartz, our Chief Executive Officer, Ilan Daskal, Executive Vice President and Chief Financial Officer, and the last, Executive Vice President and Chief Operating Officer, Annette Tumulon, President of the Live Science Group, Andara Wright, President of the Clinical Diagnostics Group. Before we begin our review, I'd like to caution everyone that we will be making forward-looking statements about management's goals, plans, expectations, our future financial performance, and other matters. These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties. Included in these forward-looking statements are commentary regarding the impact of the COVID-19 pandemic on BI-RAD's results, operations, and steps BI-RAD is taking in response to the pandemic. Our actual results may differ materially from these plans and expectations, and the impact and duration of the COVID-19 pandemic is unknown. You should not place undue reliance on these forward-looking statements, and I encourage you to review our filings with the SEC where we discuss in detail the risk factors in our business. The company does not intend to update any forward-looking statements made during the call today. Finally, our remarks today will include references to non-GAAP net income and diluted earnings per share, which are financial measures that are not defined under generally accepted accounting principles. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings release. With that, I will now turn the call over to Ilan Dasko, our Executive Vice President and Chief Financial Officer.

Thank you, Ed. Good afternoon. Thank you all for joining us, and we hope that you and your families are well and staying healthy during these challenging times. And also, we want to officially welcome Edward Chang as our Head of Investor Relations. Before I begin the detailed second quarter discussion, I would like to ask Andy Lust, our Chief Operating Officer, to provide an update on bioret operations in light of the current pandemic-related environment that we are experiencing globally. Andy?

Thank you, Alain. So, I'd like to take a few minutes to review our current state of operations around the world. Overall, BioRat has adapted well to the working constraints that COVID has imposed upon us, and we find ourselves able to respond and react well to everyday operational changes and demands. We continue to make solid progress on our core strategies, support of our customers, and the safety of our employees. With the improvement in our end markets after the significant downturn a year ago, We are responding well to increased demand, but as with other manufacturers and life sciences, we are having to work hard to procure raw materials in some challenged areas, such as plastics and electronic components, as well as dealing with increased pressure on raw material costs. We also continue to experience higher than typical logistics costs, as indicated in our Q1 call. With the emergence of the COVID-19 Delta variant, we are maintaining our work from home policies for the near term as we work on return to the workplace plans targeted for later this quarter. And we continue to monitor the global pandemic situation carefully given the fluidity the Delta variant has created. Employee safety remains a principal focus and we are pleased with our safety record and the growing vaccination status of our organization. As we enter Q3, we expect the emergence of the Delta variant will continue to create some challenges, and we are maintaining vigilance and flexibility as a result. Overall, we expect to see continued improvement in our end markets through the second half of the year as our customers continue to adapt. However, the new Delta variant clearly introduces an element of uncertainty as we move forward. Thank you for your attention, and I'll pass it back to Alain now.

Thank you, Andy. Now I would like to review the results of the second quarter. Net sales for the second quarter of 2021 were $715.9 million, which is a 33.4% increase on a reported basis, versus $536.9 million in Q2 of 2020. On a currency-neutral basis, sales increased 27.5%. On a geographic basis, we experienced currency-neutral growth across all three regions. Sales of our core products in the second quarter of last year were negatively impacted by the pandemic, and generally we are seeing a continued gradual capacity improvement at both academic and diagnostic labs, which we estimate between 90% and 95% of pre-COVID levels. We estimate that the COVID-19 related sales were about $68 million in the quarter. Sales of the Life Science Group in the second quarter of 2021 were $334.2 million, compared to $252.1 million in Q2 of 2020, which is a 32.6% increase on a reported basis and a 27.1% increase on a currency-neutral basis. The year-over-year sales growth in the second quarter was driven mainly by increases in western blotting, droplet digital PCR, and qPCR products. We have seen strong growth in the biopharma market for our droplet digital PCR platform. We are also seeing a healthy uptake for ddPCR in wastewater solutions. Government funding towards public health leads is driving increased demand for our DDP-CR products that offer automated solutions with high accuracy and sensitivity. Process media, which can fluctuate on a quarterly basis, saw a year-over-year double-digit growth versus the same quarter last year. Excluding process media sales, the underlying life science business grew 29.1% on a currency-neutral basis versus Q2 of 2020. On a geographic basis, life science currency-neutral year-over-year sales grew across all regions. Before moving on, I would like to highlight the broad legal settlement with Tenex Genomics announced earlier this week. This settlement resolves the multi-year global litigation with Tenex over outstanding issues in the field of single-cell and includes a global cross-license agreement. In addition to past and future royalties, BioRed received broad freedom to operate in the single-cell market and maintained exclusivity to our Microwell single-cell IP. We estimate that the future royalty payments from this legal settlement could total $110 to $140 million over the life of the agreement, which runs through the year 2030. This includes payments of $32 million in the third quarter for back royalties owed to BioRed for the period from November 2018 through December 2020, as well as for settlement fees and interest. Sales of the clinical diagnostics group in the second quarter were $380.2 million, compared to $283.2 million in Q2 of 2020, which is a 34.3% increase on a reported basis and a 28% increase on a currency-neutral basis. During the second quarter, the diagnostics group posted double-digit growth across all of its product lines. The year-over-year growth was driven by a recovery of routine testing. Elective surgery recovery is still progressing, although at a slower pace. On a geographic basis, the diagnostics group currency-neutral year-over-year sales grew across all regions. Our diagnostics group announced last month a partnership with C-Gene, which is a global leader in multiplex molecular diagnostics. BioRed will exclusively market the C-Gene test in the U.S., pending regulatory approvals. C-Gene's diagnostic products have high sensitivity and specificity and are optimized to work with BioRed CFX real-time PCR systems. The reported gross margin for the second quarter of 2021 was 56.1% on a gap basis, and compares to 54.6% in Q2 of 2020. Recall that the gross margin in Q2 of 2020 included an $8 million customs duty charge. And excluding that charge, the Q2 gross margin further improved this quarter as a result of our productivity and efficiency initiatives. However, as mentioned, we currently see increased pressure on raw material costs and higher logistics costs. Amortization related to prior acquisitions recorded in cost of goods sold was $4.6 million and compared to $5 million in Q2 of 2020. SG&A expenses for Q2 of 2021 were $213.4 million, or 29.8% of sales, compared to $189.3 million, or 35.3% in Q2 of 2020. Increases in SG&A expenses was mainly the result of employee-related performance compensation expense. Total amortization expense related to acquisitions recorded in SG&A for the quarter was $2.4 million versus $2.3 million in Q2 of 2020. Research and development expense in Q2 was $63.4 million or 8.9% of sales compared to $52 million, or 9.7% of sales in Q2 of 2020. Q2 operating income was $124.8 million, or 17.4% of sales, compared to $51.7 million, or 9.6% of sales in Q2 of 2020. Looking below the operating line, The change in fair market value of equity securities holdings added $1 billion and $31 million of income to the reported results and is substantially related to the holdings of the shares of Sartorius AG. Also during the quarter, interest and other income resulted in net other income of $1.3 million, primarily due to foreign exchange, and compared to $10.7 million of income last year. Q2 of 2020 includes an $8.9 million dividend from Sartorius, which was declared in June and was paid in July. In 2021, the Sartorius dividend was declared in the first quarter. The effective tax rate for the second quarter of 2021 was 21%, compared to 22.4% for the same period in 2020. the tax rates for both periods were driven by the large unrealized gain in equity securities. In addition, the second quarter of 2021 effective tax rate was lower also due to a lapse of statute of limitations of certain tax reserves. Reported net income for the second quarter was $914.1 million, and diluted earnings per share were $30.32. This is a decrease from last year and is related to changes in valuation of the Sartorius holdings. Moving on to the non-GAAP results. Looking at the results on a non-GAAP basis, we have excluded certain atypical and unique items that impacted both the gross and operating margins, as well as other incomes. These items are detailed in the reconciliation table in the press release. Looking at the non-GAAP results for the second quarter, in cost of goods sold, we have excluded $4.6 million of amortization of purchased intangibles and $1.2 million of restructuring related expenses. These exclusions moved the gross margin for the second quarter of 2021 to a non-GAAP gross margin of 56.9% versus 55.5% in Q2 of 2020. Non-GAAP SG&A in the second quarter of 2021 was 29.2% versus 33.9% in Q2 of 2020. In SG&A, on a non-GAAP basis, we have excluded amortization of purchased intangibles of $2.4 million legal-related expenses of $8.8 million, and restructuring and acquisition-related benefits of $7 million. Non-GAAP R&D expense in the second quarter of 2021 was 9.1% versus 9.8% in Q2 of 2020. In R&D, on a non-GAAP basis, we have excluded $2.1 million of restructuring benefits. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 17.4% on a GAAP basis to 18.5% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin in Q2 of 2020 of 11.8%. We have also excluded certain items below the operating line which are the increase in value of the Sartorius equity holdings of $1 billion and $31 million, and the $1.8 million loss associated with venture investments. The non-GET effective tax rate for the second quarter of 2021 was 21.5%, compared to 23.8% for the same period in 2020. The lower rate in 2021 was driven by the geographic mix of earnings. And finally, non-GAAP net income for the second quarter of 2021 was $106.6 million, or $3.54 diluted earnings per share, compared to $48.3 million, or $1.61 per share in Q2 of 2020. Moving on to the balance sheet. Total cash and short-term investments at the end of Q2 were $1,167,000,000 compared to $1,025,000,000 at the end of Q1 of 2021. During the second quarter, we did not purchase any shares of our stock. For the second quarter of 2021, net cash generated from operating activities was $154.6 million, which compares to $92.1 million in Q2 of 2020. This increase mainly reflects higher operating profits. The adjusted EBITDA for the second quarter of 2021 was 22.3% of sales. The adjusted EBITDA in Q2 of 2020 was 18.6%, and excluding the Sartorius dividend was 16.9%. Net capital expenditures for the second quarter of 2021 were $23.4 million, and depreciation and amortization for the second quarter was $33.7 million. Moving on to the guidance. Andy previously alluded to continued uncertainties surrounding the pandemic, which could create some challenges, and we look Sorry, as we look to the back half of this year. That being said, with customers continuing to adapt in this environment, we assume a gradual return to pre-pandemic activity and a more normalized business mix during the second half of 2021. We are now guiding non-GAAP currency-neutral revenue growth to be between 10% and 10.5% for 2021 versus our prior guidance of 5.5% to 6%. This updated outlook assumes the full-year COVID-related sales to be between $200 and $210 million, of which approximately $40 to $50 million are projected for the second half of 2021. Excluding COVID-related sales, the non-GET year-over-year currency-neutral sales growth in the second half is expected to be between 13% and 14%. This represents between 4.5 and 5.5% growth in the second half of 2021 over the first half of 2021. Full-year non-GAAP gross margin is now projected to be between 57 and 57.5%. Full-year non-GAAP operating margin is forecasted to be about 19%, which assumes higher operating expenses in the second half of 2021 versus the first half, as we are anticipating continued gradual return to more normal activity levels. This guidance excludes any benefit related to the settlement with 10X Genomics. Our updated annual non-GAAP effective tax rate for 2021 is projected to be between 23% and 24%. Full-year adjusted EBITDA margin It's forecasted to be between 23 and 23.5%. That concludes our prepared remarks, and we will now open the line to take your questions. Operators?

Thank you. Ladies and gentlemen, if you would like to ask a question, you may press star, then the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. Your first question comes from the line of Patrick Donnelly from Citi. Your line is open.

Thanks, guys. Maybe to start on the margin, Ilan, I mean, it was a really strong performance, nice to see kind of flow through to the raise in the back half. Can you just talk through, I guess, the levers you're seeing? How much of it is just the high-margin COVID stuff coming through versus – I know a lot of the restructuring is kind of the out years, but just in terms of some of the cost initiatives you have going, just kind of wondering the moving pieces on the margin side, what levers you guys are pulling there?

Hey, good afternoon, Patrick. Thanks for the question. Yeah, you know, when you think about the margin, and let's start with the gross margin, we do see already, you know, a lot of benefit from the various initiatives that we had around, you know, the efficiencies and productivity. and that was definitely part of the results for this quarter and will continue to be part of the guidance in the second half of the year. There were some headwinds associated with FX, et cetera, but for the most part, the benefit is associated with the ongoing initiatives around productivity and initiative. Similarly, we continue to see the fall through not only from the higher guidance on the top line, and obviously improved utilization in the second half, but continued also benefits from those efficiencies and productivity. And then you have the mixed impact for the COVID versus first half versus second half. Obviously, the drop-off of the COVID-related sales to about 40 to 50 million in the second half does create kind of some level of headwind to the overall margins.

And are you seeing anything in terms of the offset in terms of input costs or supply chain issues? I'm hearing that from a few peers, just wondering what you guys are seeing on that front. Do you want to take it, Daniel?

Well, I mean, I don't think we're breaking it out, but we are certainly experiencing and absorbing some high costs coming through from logistics and The rest is really some modest raw material increases and then, you know, just challenges in procurement.

Yeah, and freight.

And freight, yeah. Right.

Okay. And then maybe one for Annette on the single-cell side. You know, it's great to see the litigation be over for you guys. With cell C, I know you guys have previously talked, I think, about seeing some products maybe roll out potentially later this year. Is that still the plan? And, again, it feels like the 10X stuff clears the decks for you guys, so I just wanted to get an update on that front in terms of timing and expectations.

Yeah. Annette, if you're able to respond.

Sure. Sure. So, you know, we acquired CELSI, and their technology was pretty early stage. And I will admit that we were slowed down a little bit by COVID and getting all the staff on board for the investment we want to make in R&D. That said, we're making really good progress, and we expect products to start rolling out in early 2022. Okay, that's helpful.

And one quick last one for Norm. Just on the balance sheet, capital allocation, any changes in terms of your thoughts on Sartorius or your large M&A? I know you guys are always looking. We'd love just an update in terms of what the pipeline looks like and your desire there.

Yeah. I mean, I guess I would say we continue to evaluate a robust number of what I call both tuck-in and technology opportunities and candidate to look for something more transformational. So we continue to work on all of that.

Understood. Thank you, guys.

Thank you, Ben.

Your next question comes from the line of Brandon Couillard of Jefferies. Your line is open.

Hey, thanks. Good afternoon. Lon, so you took up the core growth guidance for the year by 400 basis points, of which the COVID revenues only account for 100 BIPs of that. Can you just talk about what areas of the business you're seeing the most upside in, and could you share sort of an updated view on the two segments, what you're penciling in for the full year in terms of organic growth between life sciences and DX?

Sure. Andy, do you want to start?

Sure. So I think the uptick that we are forecasting, Brandon, is fairly broad-based. Clearly the core business is coming back on both academic and in the institutional side as well as the industrial side, which has been more robust in the background anyhow. Clinical is coming back nicely across all the regions, maybe with the exception of collective surgeries, which still seem to be lagging a little bit behind the more routine testing. And that's broad-based as well. So as we look to the second half, it's really across all of our product lines in both market segments in all regions. So I think that's the summary version of our second half.

Yeah, and Brendan, I will add also that also when we compare it to the 2019 kind of results on a two-year stack, Overall, for BioRev, it represents over 10% for the two-year stack growth. Right, right, yeah.

Okay, as a follow-up on that, I mean, any color you could share with us, Alon, in terms of the phasing of revenues and margins between 3Q and 4Q? I mean, 4Q is typically your highest revenue quarter, and as a result, you're most profitable seasonally. Any just color you're able to share as we sort of update our models for the back half?

Yeah, you know... Obviously, as you mentioned, Brendan, the fourth quarter seasonally usually is higher, but, you know, this year is a little bit, you know, kind of unpredictable. You know, the first half was a very, you know, very good, you know, first half. Generally speaking, there is some benefit always from, you know, the follow-through to the utilization and the gross margin when you have a higher, you know, top line. So it's a gradual, you know, improvement on the bottom line as well as the gross margin. But again, it will depend, you know, how the top line will shape up.

Gotcha. Okay. One for Annette in terms of the DDPCR business. Can you just talk about, you know, what you see as kind of the top three drivers of growth right now in terms of in markets or applications? And any color you can share between, you know, how The mix of demand has evolved between the QX1 and the legacy platform about a year into that launch now.

Sure. We're seeing really strong demand in pharma and biopharma for the QX1 system because it was really, frankly, developed for that market segment. So really strong growth. It's adding a lot of incremental growth to the business. and the QX1, but we also have strong demand for our QX200 systems. You know, the wastewater surveillance market is evolving, and we're now seeing more uptake in EMEA. It started in the U.S. We don't expect that to slow down, and we still sell an awful lot of QX200 systems into pharma and biopharma as well. So, you know, really strong. And our academic market has always been strong. And it's a good mix across all three segments of platforms and the consumables that go along with it.

Super. I'll come back in the queue. Thanks. Thank you, Brendan.

Your next question is coming from the line of Dan Leonard from Wells Fargo. Your line is open.

Thank you. So I was hoping maybe you could elaborate further on the demand drivers in your life sciences business, even excluding COVID. If you look at the two-year stack compared to 2019, the growth rates are double digits in life science, and that is not the trajectory we're used to seeing from that business. So any further color you could offer on the big demand drivers?

Annette, do you want to take that one?

Sure, sure. We're definitely seeing strong recovery. So that's part of what's behind it. But you're right. Our growth, if you look at growth over 2019 pre-COVID, is really strong. It's a strong funding environment. One of the benefits maybe of the pandemic is that governments, certainly in the U.S. and to some extent the E.U., have really poured a lot of funding into translational medicine, infectious disease, vaccine development. And we have a broad product portfolio that speaks to customer need across all of that. So we think that's really driving a lot of the growth, and we're optimistic about the environment moving forward. Thank you.

So that touches a bit on my next question. Do you think that this is sustainable or is it something you worry about as a challenging comparison as we roll into 2022?

So then, you know, we cannot comment today on the 2022 numbers, generally speaking. I mean, let's leave it on the guide for that.

Alon, a couple quick clarifications on the royalty settlement. First off, did you say you're going to not include any royalties from 10X Genomics in your P&O? You'll non-gap those out?

So, no, I'm not sure that I'm going to non-gap, but it was not included in our guidance that I provided.

Okay. And is that $110 million plus number, is that a net number, net of the royalties you might owe them, or is that... Is that what they'll owe you potentially between now and 2030?

So net of what are you referring to them exactly? Sorry.

So it was a cross-license agreement, right? So presumably there's some chance you pay them some money, they pay you some money. Is the $110 million a net number or is it a gross number?

So these are the amounts that we anticipate to receive from 10X.

From 10X. Okay, thank you.

Sure.

Your next question is from the line of Jack Meehan from Nefron Research. Your line is open.

Thank you. Good afternoon. I was wondering if you could give a little bit more color on the duration of the COVID revenue that you see. So you have $40 to $50 million in the back half of the year. Just as you kind of look at the tail here, do you have any view as to what might carry on beyond 2021? You know, how much, you know, is there some portion that seems more durable? Do you like wastewater in there?

So, Sandy, so there's potential for wastewater to be more durable. Again, that very much depends on the funding environment. But as you know, the majority of our revenues have been driven by instrumentation, and we do view that market as becoming more very saturated in terms of capacity right now. We do have some test revenue, but it's very small in relation to the instruments and to our peer sets. So we currently see COVID tailing off to a relatively small number by the end of this year. and then we'll see what 22 brings in our guidance for next year when we get there.

Got it. And this is the second consecutive quarter you've called out Western blotting as an area of strength within life sciences. Was wondering, you know, if there was anything specific that's been driving that demand, or if you just think it's more kind of funding in general that's been supportive of

I think it's more a general funding trend, and it's kind of a staple in labs. So we view it as labs are getting up and running and just kind of doing the routine kind of characterization work that they typically do. And it did dry up during COVID, and now the labs are coming back. And it's broad-based, broad-based return.

Great. And then, you know, maybe just on the diagnostic side, was just curious, you know, you called out the elective procedures, but if you look at kind of the product families within clinical diagnostics, do you think any are taking longer to come back than you might have expected or, you know, could have some lingering impact as you exit the year?

Dara, do you want to answer that question?

Sure, no, just just that one really, I mean, blood blood typing is the product family that's associated with elective surgery. So that's, you know, that's the area that's most impacted when the hospital systems get overwhelmed by by COVID cases. But all other areas of routine testing, you know, diabetes, quality control, etc, are all in line with what Elan said, you know, right around 95% to pre COVID levels. So a really good recovery across the core and across all regions.

Great. That's all I have. Have a good night. Thank you, Jay.

Thank you.

Thank you. Once again, if you would like to ask a question, you may press star 1 on your telephone keypad. I am not showing any other questions as of this moment. I would like to turn the conference back to the management.

Thank you for joining today's call. We appreciate your interest and we look forward to connecting soon. Bye-bye.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.