Bio-Rad Laboratories, Inc.

Good afternoon. Thank you for attending the BioRat first quarter 2023 earnings conference call. My name is Matt, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call for an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Ed Chung, head of investor relations. Ed, please go ahead.

Thanks, Matt. Good afternoon, everyone. Thank you for joining us. Today we will review the first quarter 2023 financial results and provide an update on key business trends for Bio-Rad. With me on the call today are Norman Schwartz, our Chief Executive Officer, Alon Daskal, Executive Vice President, Chief Financial Officer, Andy Last, Executive Vice President and Chief Operating Officer, Simon May, President of the Life Science Group, and Dara Wright, President of the Clinical Diagnostics Group. Before we begin our review, I would like to caution everyone that we will be making forward-looking statements about management's goals, plans and 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. Our actual results may differ materially from these plans, goals, and expectations. 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 financials, including 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 Alon Daskal, our Executive Vice President and CFO.

Thank you, Ed. Good afternoon, and thank you all for joining us. Before I begin the detailed first quarter discussion, I would like to ask Andy Last, our Chief Operating Officer, to provide an update on BioReds global operations. Andy? Thank you, Elan.

Good afternoon, everybody. The first quarter of 2023 was characterized by solid growth for our core business, coupled with a significant reduction of COVID-related sales. However, we also experienced a number of market and operational challenges, which overall resulted in a lower than expected performance for the quarter. While demand generally across the portfolio was in line with our expectations, there was some softness in smaller biopharma companies where we have seen historically strong demand for our life science products. This correlates with funding constraints the industry started to experience in the first quarter. We also saw a lower quarter for our process chromatography products, primarily reflecting the softness due to the timing of orders. In addition, we saw a further tightening of sanctions, which impacted our business in Russia, with a negative impact on sales in the quarter. And we now expect lower overall performance for the year in Russia, especially in our life science business. On the operational front, we did not make the expected pace of progress within our supply chain to address our order backlog. And as a result, backorder reduction was modest. Of the estimated 30 million we expected to recognize from elevated 2022 back orders, we achieved a reduction of approximately $5 million in the first quarter. And we expect a similar amount for the remaining three quarters of the year. This was in part driven by a slower than expected ramp up of production in our new Singapore facility. This also contributed to higher than typical finished goods inventory as we made the transfer. Our backlog was also impacted by the shift in sales mix and by the placement of more clinical systems than expected at low margins. We also experienced cost inflation that was higher than our net price realization in the quarter. All of these factors affected gross margins for the quarter. We saw an increase in demand for our clinical business globally as the impact of COVID finally receded. In addition, demand for our newly launched DD-PCR platform, QX600, continued a strong trend line from Q4 2022. And our pipeline is robust and growing, and we are seeing strong uptake in biopharma, translational research, and oncology. The market launch of QX Continuum, our more affordable digital PCR product, remains on track for year end, and we launched a few weeks ago the new PTC Tempo product line, our next generation of PCR thermal cyclists. We completed development and early access of our ddPCR microsatellite instability kit, and we'll be launching later this quarter. This assay kit includes an automated analysis package and enables clinical researchers to assess microsatellite instability status across multiple cancers and is part of our expanding oncology assay menu for Droplet Digital PCR. Overall, we were pleased with the over 6% currency-neutral core sales growth for the first quarter, despite the year-over-year decline in COVID sales. In particular, we are very encouraged by the high demand in our clinical diagnostics business as we expand our installed base, providing a solid foundation for increased reagent pull-through and continued long-term growth. Looking forward to the remainder of this year, we expect strong demand for our clinical systems to continue, and we also expect continued double-digit demand for our life science business. We expect to see strong growth for our process chromatography business, although this is now forecasted to be slightly lower than initial estimations. On the supply chain front, we are expecting to clear our extended life science backlog by the end of the second quarter and our clinical backlog by the end of the year. In addition, as we progress through the remainder of the year, we expect production to continue to ramp up in Singapore as well as expansion of capacity for the QX600 DDPCR system as initial demand in Q1 exceeded our ability to fulfill. And with that, I'll say thank you and pass you back to Alain.

Great. Thank you, Andy. Now I would like to review the results of the first quarter. Net sales for the first quarter of 2023 were $676.8 million. which is a 3.3% decline on a reported basis versus $700.1 million in Q1 of 2022. On a currency-neutral basis, the year-over-year revenue decline was 0.3%. The first quarter year-over-year revenue decline was mainly the result of significantly lower COVID-related sales of approximately $2.6 million versus $45 million in the first quarter of last year. Core revenue, which excludes COVID-related sales, increased 6.1% year-over-year on a currency-neutral basis. As Andy alluded to earlier, our Q1 results were impacted by increased sanctions in Russia, increased early-stage biotech companies' pressures, and continuing certain supply chain challenges, including those associated with our manufacturing lines transfer and ramp-up in Asia. The production transition contributed to a continued elevated order backlog, mainly within the diagnostics group. In addition, we continue to rank capacity to accommodate the growing demand for the new QX600 DDP-CR system. On a geographic basis, we experienced currency-neutral, year-over-year core revenue growth in the Americas and Europe, while core revenue modestly declined in Asia primarily due to a tough compare for the process chromatography franchise related to a very large customer order in the year-ago period. Sales of the Life Science Group in the first quarter of 2023 were $323.6 million, compared to $347.2 million in Q1 of 2022, which is a decrease of 6.8% on a reported basis, and a decline of 3.6% on a currency-neutral basis. The underlying life science year-over-year currency-neutral core revenue growth was 9.6% and was primarily driven by our QPCR products, Western Bloating, and Droplet Digital PCR. This growth was lower than we projected as a result of increased sanctions effective sales of certain products to Russia as well as growing revenue headwind from biopharma companies due to the funding environment for early-stage biotech companies. As I mentioned earlier, we continue to ramp capacity to accommodate the growing demand for the new QX600 DD-PCR system. Process chromatography revenue, which can fluctuate on a quarterly basis, posted in mid-single-digit year-over-year decline, due to a tough compare as well as some softness in the bioprocessing market. With that being said, we still expect double-digit growth for 2023 despite a low revenue projection relative to our prior forecast. Excluding process chromatography sales, the underlying life science business declined 3.3% on a currency-neutral basis versus Q1 of 2022 and was a result of lower COVID-related sales. The life science group revenue, excluding process chromatography and COVID-related sales, grew 13.6% on a currency-neutral basis. On a geographic basis, life science experienced currency-neutral year-over-year core revenue growth in the Americas and Europe, while Q1 core revenue posted a decline in Asia due to the previously mentioned tough compare for process chromatography. Sales of the clinical diagnostics group in the first quarter were $352.1 million, compared to $351.8 million in Q1 of 2022, or largely fled on a reported basis, and a 2.8% increase on a currency neutral basis. Core clinical diagnostics year-over-year revenue, which excludes COVID-related sales, increased 3.1% on a currency neutral basis. Growth of the clinical diagnostics group was primarily driven by a robust demand for diagnostics instruments, primarily within blood typing and diabetes, which was not entirely fulfilled due to our manufacturing constraints. We continue to see strong rebound in placements of instruments in China, which should contribute to reagent pull-through volumes in the coming quarters. On a geographic basis, currency-neutral year-over-year core revenue for the diagnostics group posted a double-digit growth in Asia and were largely flat in the Americas and Europe versus the year-ago period. The reported gross margin for the first quarter of 2023 was 53.5% on a gap basis and compares to 57.5% in Q1 of 2022. The year-over-year gross margin decline was mainly due to lower COVID-related sales, unfavorable product mix, and higher cost raw materials. The gross margin this year was further impacted by a higher than anticipated percentage of instrument sales versus reagents, as well as from the lower than forecasted revenue in the life science group. In addition, we were not able to fully recover the higher inflationary cost this year, as the increases in certain raw materials and elevated logistics costs were not fully recovered in selling prices. Amortization related to prior acquisitions recorded in cost of goods sold was $4.3 million, compared to $4.5 million in Q1 of 2022. SG&A expenses for Q1 of 2023 were $225.6 million or 33.3% of sales compared to $196.7 million or 28.1% in Q1 of 2022. The increase in SG&A expenses was driven by higher employee-related expenses, a restructuring charge, and higher discretionary spend. Total amortization expense related to acquisitions recorded in SG&A for the quarter was $1.7 million versus $1.8 million in Q1 of 2022. Research and development expense in the first quarter was $75 million or 11.1% of sales compared to $59.5 million or 8.5% of sales in Q1 of 2022. The year-over-year increase was due to increased employee-related expenses following the curiosity acquisition in the third quarter of 2022, higher project-related spend, and a restructuring cost. Q1 operating income was $61.9 million, or 9.1% of sales, compared to $146.4 million, or 20.9% of sales in Q1 of 2022. Looking below the operating line, the change in fair market value of equity securities holdings, which are substantially related to BioRed's ownership of Sartorius AG shares, negatively impacted the reported results by $17.5 million. During the quarter, interest and other income resulted in net other income of $40.4 million, compared to net other income of $30.7 million last year. Q1 of 2023 included a $34.8 million dividend from Sartorius versus $31.6 million dividend in the first quarter of 2022. The effective tax rate for the first quarter of 2023 was 18.7% compared to 22.9% for the same period in 2022. The effective tax rate reported in Q1 of 2023 was primarily affected by geographical mix of earnings. The effective tax rate reported in Q1 of 2022 was primarily affected by an unrealized loss in equity securities. Reported net income for the first quarter was $69 million, or $2.32 diluted earnings per share, compared to a loss of $3,367,112.50 diluted loss per share in Q1 of 2022. This change from last year is largely related to changes in the 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 income. These items are detailed in the reconciliation table in the press release. Looking at the non-GAAP results for the first quarter, in cost of goods sold, we have excluded $4.3 million of amortization of purchased intangibles and a small restructuring expense. These exclusions moved the gross margin from 53.5% for the first quarter of 2023 to a non-GAAP gross margin of 54.2% versus 58.2% in Q1 of 2022. Non-GAAP SG&A in the first quarter of 2023 was 31.3% versus 27.2% in Q1 of 2022. In SG&A, on a non-GAAP basis, we have excluded amortization of purchased intangibles of $1.7 million an in vitro diagnostic registration fee in Europe for previously approved products of $1.9 million, acquisition-related cost of $800,000, and $9 million of restructuring-related expenses. Non-GAAP R&D expense in the first quarter of 2023 was 10.4% versus 8.5% in Q1 of 2022. In R&D, on a non-GAAP basis, we have excluded $4.2 million of restructuring expenses. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 9.1% on a GAAP basis to 12.4% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin of 22.4% in Q1 of 2022. We have also excluded certain items below the operating line, which are the decrease in value of the Sartorius equity securities and loan receivable holdings of $17.5 million and about a $1 million loss associated with venture investments. The non-GAAP effective tax rate for the first quarter of 2023 was 20.9%. compared to 19.6 percent for the same period in 2022. The higher rate in 2023 was driven by geographical mix of earnings and lower compensation-related deductions. And finally, non-GAAP net income for the first quarter of 2023 was $99.4 million, or $3.34 diluted earnings per share, compared to $151.5 million, or diluted earnings per share of $5.02 in Q1 of 2022. Moving on to the balance sheet. Total cash and short-term investments at the end of Q1 was $1,857,000,000 compared to $1,796,000,000 at the end of 2022. The change in cash and short-term investments from the fourth quarter of 2022 was primarily due to the change in working capital. Inventory at the end of Q1 reached $752.9 million from $719.3 million in the prior quarter. The higher inventory level was driven mainly by rebuilding of finished goods safety stock for certain instruments. In addition, we are rebalancing inventory levels as we complete the transition of some of our manufacturing. We did not purchase any shares of our stock during the first quarter, but as we have done in recent years, coming out of blackout periods, we will continue to be opportunistic with share buybacks, particularly when we believe there is a significant dislocation in the valuation of our stock. To that end, we have over $200 million available to deploy under the current board-authorized program. For the first quarter of 2023, net cash generated from operating activities was $98.1 million, which compares to $50.5 million in Q1 of 2022. These increase mainly reflect changes in working capital. The adjusted EBITDA for the first quarter of 2023 was $148.5 million, or 21.9% of sales, and excluding the Sartorius dividend was 16.8%. The adjusted EBITDA in Q1 of 2022 was $215.4 million, or 30.8% of sales, and excluding the Sartorius dividend was 26.3%. Net capital expenditures for the first quarter of 2023 were $35.7 million, and depreciation and amortization for the first quarter was $35.6 million. Moving on to the non-GAF guidance. Taking into account the macroeconomic factors as well as our continued operational transformation initiatives, we are revising our 2023 financial outlook as follows. We are now guiding currency-neutral revenue growth in 2023 to be about 4.5% versus 6% to 7% previously. For the full year, we estimate currency-neutral revenue growth excluding COVID-related sales to be about 8.5% versus 10 to 11% in our prior guidance. We expect the first half of 2023 core growth to be between 6.5 and 7% over the first half of 2022 and about 10% core growth in the second half of the year over the second half of 2022. The Life Science Group year-over-year currency-neutral revenue growth is expected to be about 3% versus 8% to 9%, and excluding COVID-related sales, the Life Science Group growth is projected to be about 11% versus 16% to 18% in our prior guidance. For the first half of 2023, we expect for the Life Science Group about 9.5% core growth over the first half of 2022, and about 12.5% core growth for the second half of the year over the second half of 2022. For the diagnostics group, we estimate currency-neutral revenue growth of about 6% versus 5% previously, as we are seeing improved demand dynamics in 2023. Excluding COVID-related sales, the Diagnostics Group growth is projected between 6 and 6.5% versus 5 to 5.5% in our prior guidance. For the first half of 2023, we expect for the Diagnostics Group about 4.5% core growth over the first half of 2022 and about 8% core growth for the second half of the year over the second half of 2022. Full-year non-GAAP gross margin is now projected to gradually improve throughout 2023 and be between 55 and 55.5% for the full year. For the first half of the year, we now anticipate gross margin to be between 54.5 and 55%, and for the second half of the year, to be between 55.5 and 56%. We now project full-year non-GET operating margin of approximately 17.5% versus 19.5% in our prior guidance as we plan to focus on expense management for the remainder of the year. For the first half of the year, we expect operating margin to be about 14% and reaching 21% for the second half of 2023. and full year adjusted EBITDA margin is expected to be about 23% versus 25% in our prior guidance. For the first half of the year, we expect adjusted EBITDA margin to be about 21% and in the second half of the year to be about 25%. We are also revising our targeted 2021 to 2025 currency neutral compounded annual core revenue growth rate to be 8% versus our previous target of 8.9%. For the life science business, we are now targeting about 12.4% between 2021 and 2025 versus our prior expectations of approximately 13.9%. For clinical diagnostics business, we now expect 4.4% versus 4.6 percent previously. Our gross margin in 2025 is targeted to be about 57 percent versus our previous target of 59 percent. And our adjusted EBITDA for 2025 is targeted to be about 26 percent versus our previous target of 28 percent. That concludes our prepared remarks, and we will now open the line to take your questions. Operator?

Absolutely. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Brandon Couillard with Jefferies. Your line is now open.

Hey, good afternoon, fellas. Thanks for taking the questions. Alon, appreciate all of the detail. You just walked through there, a lot to unpack. I'd just start with the 23 guidance we set on the top line. Do you help us bridge the components and the puts and takes between Russia, weakness, early-stage biopharma, lower processed media demand, and And secondarily, we'll give you the confidence in terms of the second half acceleration on the top line. Just start there.

Hi, Brandon. It's Andy, actually. So maybe I'll just walk through the answer to that. And you did capture the big levers in Russia, which has had a meaningful impact. Biopharma softness, which did have some impact, particularly in the kind of, let's call it, emerging biopharma companies and the financial access to capital in Q1, which flowed through to broader kind of slowdown in demand for our life science products. The process chrome story is not so much an emerging biopharma story as much as I think we've finally now just seen some of the effect of the overall inventory rebalancing that has been going on in the industry, and we had not been seeing that previously. I'd say the last two points to highlight on the revenue bridge would be you know, a slower pace of backorder reduction, which, you know, and I don't think we're seeing we're able to capture everything that we initially estimated. And related to our gene expression business, just generally a softer demand that is being experienced this year against the very, you know, significant install base that we had previously put out there over the last two or three years.

Okay, maybe in terms of the 25 targets, I mean, just generally conceptually why update those now, especially given what seems to be all the operational. Challenges based in the quarter and macro variables that you've discussed on the call. Number 2, can you share the what the, what the applied targets would be in terms of revenue dollars. In 25, and if my math is right with that. suggest kind of 8% organic CAGR the next three years to get there?

Yeah, Brandon, thanks for the question. So, first of all, you know, we're updating the 2025 based on our latest view and in light of, you know, the changing environment that we are experiencing. Obviously, you know, as Andy mentioned just now, you know, the entire kind of biotechnology sector and the funding And that was one of the growth drivers that we called out during the investor day. And we see headwind there, the overall inflationary kind of cost that we today believe is here to stay. I mean, I'm not sure that it is transitory and that was not taken into account when we presented during the investor day. So we are layering on, what does that mean for the next two to three years? And we do believe that it merits an update to the 2025 target model in order to set the expectation. With that said, it doesn't change our thinking in terms of the overall transformation that we are working on and everything that we still plan to achieve and all the kind of new instruments that are in the pipeline and the development and And so that doesn't change our thinking. It's more kind of, I would argue, macro-driven, and we have to kind of communicate accordingly. In terms of, you know, the growth, yes, I mean, so your math is correct. It's about, you know, on a core basis, it's about 8%, and that's the updated. If you think about the currency on a neutral basis, it's about 3%, 4%. 3.4 billion for 2025 on a currency neutral basis.

Got it. Last one for Simon, maybe. Your closest competitor in digital PCR earlier today talked about the market CAGR for the next three years in the 30 to 40 percent range. I just want to see if that's consistent with your view, how you would assess the market, and if you view the opportunity and the growth outlook differently for your business.

There's definitely emerging competition in digital PCR, without doubt. And we observe that very closely and we take it very seriously. And as we've said before, I think it really is also helping to significantly expand the market opportunity in DD-PCR. And when we hear the commentary and the disclosures from our competitors, and we kind of overlay that with the growth trajectory that we see in our own business, we think it's pretty consistent overall. Then we think it's playing out the way that we thought it would. And then when we think about our overall position today, we talked about how the demand for the QX 600 platform and customer acceptance is really fantastic. So we're feeling good about that. And in the biopharma segment, notwithstanding some of the market softness that we're seeing at the present time, we've got a very strong position there. We think the market's ultimately got very long legs. And I think we've got quite a nice moat around that business. We've got a really formidable portfolio of high performance assays. And we know in this segment that performance really, really matters. And our QX1 platform is really best in class in terms of throughput and automation. And then as was mentioned earlier, we've already got the QX Continuum platform that's in development, and I can tell you that program's running quite nicely. So when we think about the overall dynamics here, I don't think anything has fundamentally changed since we discussed this at Investor Day.

I will have a go at you. Thanks. Thank you, Brendan.

Thank you for your question. The next question is from the line of Patrick Donnelly with Citi. Your line is now open.

Hey, guys. Thanks for taking the questions. Maybe a similar vein of questions. You know, on the process Chrome side, it sounds like you saw a pretty good slowdown in the quarter. Andy, I think you called out timing as an impact, but obviously the guidance is coming down pretty fast. significantly for the year. How much do you think timing versus change in demand, you know, what do you see it in the market and what's the ability to execute the backdrop of, you know, again, if the demand is holding up, is it just a execution issue? Maybe just kind of give us a little more color there.

Yeah. I mean, um, timing is always a challenge for that business. And, and, and, and I'm sure you guys, you know, you know that well, but, um, And Q1 in particular was a tough compared to prior year for us. So that really wasn't a great surprise from that point of view. Looking forward, I think we are just starting to experience some of the kind of, we're calling it inventory rebalancing and just a more prudent or conservative approach from the end market. as we as we go forward and we feel it's prudent to reflect that in the way we're thinking about our guidance this year underlying all of that though is still extremely extremely solid and consistent demand for the process crime business the new products we've introduced have been exceedingly well received and we're starting to see uptake and traction on those so I'll go forward thesis on process chrome we're finally seeing some some of the effect that I think others have been calling out for a while we're finally seeing a little bit of that flow through to our business now

Okay. That's helpful. And Alon, maybe on the, um, on the margin side, I think you called out some, you know, maybe more, uh, aggressive expense management. You know, as you think about that first half to second half ramp in the margins, can you just talk about what levers you guys are pulling, um, you know, the visibility into hitting those numbers again, a pretty, pretty good step up from first half to the second.

Yeah. Thank you, Patrick. Appreciate the question. So, um, We have several initiatives that are in flight, and it's part of our kind of plan already. We anticipate that we will be able to realize it in the second half, and it will roll over also into next year. And these are obviously multiple initiatives that we are pretty confident that we will be able to achieve. It's part of the guidance. Obviously, it's based in. And obviously, you know, the goal there is to mitigate, you know, the softness that we, you know, guided for on the top line, as well as, you know, some aspect of the gross margin. And I think, you know, that we have a very good plan to achieve it, and it's mainly focused on the second half of this year.

Okay. And then maybe on the long-term guide, you know, life science came down, I think, 150 bps. When you think about that change to the growth build in terms of the algorithm you guys have, you know, behind the scenes there, what, I guess, what segments were the biggest step downs? I mean, did digital PCR change at all? Was it process Chrome? If you can just help us think about what softened in that algorithm is, you know, I think when you guys gave a guide, we can get a ton of building blocks. So just trying to figure out what areas, maybe it was all of them, but just if you could help us out there, it'd be helpful.

Yeah, Patrick, let me take a shot at this question. I think what we've determined is that the biopharma softness is contributing to life science growth at a slower pace. It's kind of the simplest way to think about it. And you know, with the kind of shakeup that's gone on a little bit and emerging smaller biotech companies, where we've had meaningful business and very strong growth, you know, and just it's that effect flowing through over the next couple of years. And I wouldn't think of it as anything more than that at this point in time. You know, just to reiterate that the fundamental pillars in biotech in the life science business on process chromatography and drop the digital PCR and then related products are very solid. So we're I think prudently putting forward that we see a slower growth as a result.

I think as well Russia wasn't part of the initial calculus and now it is. It's not a massive impact but it does make a dent and that flows through to the projection as well.

Understood. Thank you, guys.

Thank you, Benjamin.

Thank you for your question. The next question is from the line of Dan Leonard with Credit Suisse. Your line is now open.

Thank you. I think Brandon asked this question, but I'm not sure I caught the answer. The revised guidance still assumes a meaningful sales acceleration in 2H.

the fourth quarter comp is tough macro is not getting better so what are you looking at to support that second half ramp you want to start yeah um so so we do see you know a slightly lower growth projection from from the life science business which i think we just reflected in the commentary uh which is you know some partially offset by and improved performance in the clinical business in the second half. We're seeing actually fairly robust demand for our clinical systems that we expect to continue. So you've got a little bit of a mix shift playing out there across the two business groups, which will further help support the second half performance. It has a small mix impact on margin. which we're also reflecting because of the differential between the two business groups.

Yeah, and then I will add to that also that from there, obviously, it flows throughout the P&L. You know, the gross margin, you know, we expect it to improve as the year progresses, as well as, you know, we have a list of initiatives that are in flight and some that are scheduled, you know, to start that will, you know, benefit the second half.

And we've got one final factor, which is the burn down of backlog in the second half. And so we have much better line of sight to the phasing of that in the second half. And that will also contribute to the second half growth. And QX600 on the life science side It's a very robust pipeline.

Yeah. So on the Q600, yeah, exactly. I mean, it's about the manufacturing kind of volume that we plan to have a much higher volume in the second half than in the first half. And that's obviously a nice contribution, not only about the top line, but it's about the average margin that flows through.

Okay. And then my follow-up question, Andy, you commented on softer demand for gene expression against a significant installed base. Why isn't that a multiyear problem?

Well, I think as we move forward, it is an element. I think it's a good point you're making, Dan. It's an element that is factored into the life science forward-looking view on the 25 trajectory, right? You know, it is a factor that is hard to really quantify in the market after you've placed all these instruments over the last two plus years, three years. So it's a good call out and it's a fair point, but it is considered in our 25 re-guides for life science.

Okay, thank you.

Thank you, Dan.

Thank you for your question. The next question is from the line of Jack Meehan with Nefron Research. Your line is now open.

Thank you. Good afternoon. First question is on the Russian sanctions. Can you just quantify for us the impact that's now embedded in your forecast, and when did it start, and I guess when will it annualize?

Yeah, thank you, Jack. Appreciate the question. You know, historically, we called out that Russia was between, you know, 1% and 2% of revenue on an annual basis. Obviously, the sanctions kept accumulating. And when we started the year, we still had, you know, a nice, you know, pipeline. And I would say that about a third of our projection, more than a third of the projection for this year you know, was impacted by incremental sanctions that we had to revise it this quarter. These are not, you know, the prior sanctions. These are incremental sanctions that prevent us from, you know, shipping more than a third of our projected or prior projection for this year.

Got it. And then in the diagnostics business, so it sounded like regionally you did well in Asia. I was just curious if you could comment on what you're seeing here in the U.S. and in Europe. I think I heard largely flat. You know, we've been hearing about better volumes from a lot of the services providers, so just how is that playing through in your U.S. and Europe business?

Yeah, I believe we have Dara. She dived in remotely, so Dara, I'm not sure. Were you able to hear the question?

Yeah, thanks. Thank you. Thanks for the question. This is Dari here. Alon, can you hear me okay?

Yeah, thank you.

Great. So demand is strong in all regions, you know, elevated a bit in Asia Pacific, you know, as a consequence of China opening, you know, back up with the COVID restrictions lifted in Q1. The actual sales were were sort of biased towards asia pacific in q1 so the revenue was with bias there but but demand and and backlog um is similarly uh uh sort of higher than than uh than historically um in in amia and america so so as well as we as we burn down that backlog you know we placing uh placing instruments globally which uh increases our install base great

Then one final one for Norman. You know, we're in this, you know, macro environment, which is evolving a little bit. You know, your business should be, I think, more defensive when it's all said and done. Just was curious how kind of the evolving landscape might change your philosophy, if at all, when it comes to M&A and, you know, what you're seeing in the funnel. Thank you.

Yeah, so the funnel remains about the same. You know, obviously when you think about kind of valuations coming in, it's a little stickier on the way down. So that's a dynamic that I think we're aware of. But again, you know, we've got a couple of things in the hopper and we continue to see it as a viable option for cash deployment. as we go forward to add to the business.

Thank you for your question. The next question is a follow-up from Brandon Cooleyard. Your line is now open.

Hey, thanks. Just to push back on answer to Patrick's question. I think, I mean, the biopharma exposure that you have is only 15%. You're talking about a sliver of that overall market. First, I want to make sure I understand that right, and then what's embedded in your outlook for that earlier stage biotech customer base? Could you quantify it in terms of sizing, but also kind of what you're expecting in terms of growth from that market?

Yeah, Brandon, I mean, I don't think we've quantified or segmented our sales within the biopharma segment overall. We've done particularly well in emerging biotech, especially because of cell and gene therapy-based therapeutic development there in those companies. So that's more of a broader life science approach. product impact the the process chrome is obviously for for the much more, you know mid mid and large size by pharma companies and You know and there I think we're just we you know We're just literally subject to to the macros that have been going on across the industry Which we had not seen before and and have you know started to show up a bit for us this year and So we've moderated our growth expectations this year, although they're still good, healthy, double-digit growth for the bioprocessing side of the business.

I'll just maybe add that about a third of our life science revenue is contributed from Biopharma, but we're pretty overweight in these smaller and emerging biotech companies. Whether you're talking about process chromatography, and we've talked about this previously, how our resins really play in these emerging biologic therapeutics. And also in our life science portfolio generally, we see that halo effect in the emerging biotechs more so than big pharma, which tend to be locked up in really large contracts.

Okay. Last one for Alon, just to make sure the definitions we understand correctly. 25 EBITDA margin target. That includes the Sartorius dividend. I just want to make sure. And how much is that dividend contemplated? Is it the $34 million this year or the one from the size of the dividend from last year at the end, let's say? It's just much different.

Yeah. So, you know, we try to compare it kind of apples to apples. And, you know, back in the investor day, we said that it included about $19 million of dividend, and that's what we assume now to be consistent. Got it.

Thank you.

Thank you, Brendan.

Thank you for your question. There are no additional questions waiting at this time, so I'll pass the conference back to the management team for any closing remarks.

Thank you for joining today's call. We will be at the RBC Capital Markets Global Healthcare Conference in New York later this month, and also in New York, the Jefferies Healthcare Conference in June. As always, we appreciate your interest, and we look forward to connecting soon. Thanks.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.