Bio-Rad Laboratories, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Bio-Rad second quarter 2023 earnings results conference call. At this time, all lines are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 3rd, 2023. I would now like to turn the conference over to Edward Chung, Head of Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining us. Today, we will review the second quarter of 2023 financial results and provide an update on key business trends for BioRad. With me on the call today are Norman Schwartz, our Chief Executive Officer, Ilan Daskal, Executive Vice President and Chief Financial Officer, Andy Last, Executive Vice President and Chief Operating Officer, Simon May, President of the Life Science Group, and Dara Rai, 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 Chief Financial Officer.

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

Thank you, Alain. Good afternoon, everybody. So the second quarter of the year proved to be a continuation of trends from the first quarter of the year. We experienced ongoing strong demand for our clinical diagnostic products, contrasted by further softening of demand in the biopharma segment of our life science business. The net result was a more modest growth of our overall core business than expected. On the operational front, we made meaningful progress in order backlog reduction. In Q2 we experienced a further decline in demand from our biopharma customers, particularly for our process chromatography media, but also extending to other product lines. This resulted from a continuation of soft sales into emerging biotech companies, plus we also experienced headwinds from larger biopharma. While some of this was already forecasted for the remainder of the year, Q2 revealed a significant delivery extension of existing orders for our process chromatography media beyond 2023. The softness is a result of customers reducing their inventory levels in bioprocessing and a tighter funding environment across biopharma as indicated in Q1. Overall, we now anticipate a larger impact to our biopharma business from the downturn than previously communicated. We do view the softness and process chromatography as transient, but do not anticipate broad-based recovery in 2023. In contrast, we remain positive on continued demand for life science products in academic markets. We saw strong and consistent demand from academia in all regions across the life science portfolio, and experienced strong double-digit growth for DD-PCR despite the negative biopharma macro trends. In particular, we are very pleased with the ongoing demand for our new QX600 Droplet Digital PCR system. During the quarter, we held our Droplet Digital PCR World event, which received excellent attendance and engagement, reinforcing the long-term growth potential of our platform in this product area. We also know that demand broadly from the China life science segment continued to be weak, and the expected second half recovery is now in question against the backdrop of a slow economic recovery. During the quarter, we also completed a cross-licensing and royalty agreement with QIAGEN related to digital PCR intellectual property. Overall, despite the biopharma downturn, our core life science business grew mid-single digit. During the quarter, we achieved our life science backlog reduction targets and do not foresee product supply being a major constraint for the second half of the year. We were pleased to see continued demand recovery for our clinical diagnostics business, in particular across Asia Pacific, led by solid performance in China, although we continue to monitor the China macro environment. We saw strong growth in our diabetes franchise and solid growth in our immunohematology and quality controls businesses. During the quarter, we launched the IH500 Next instrument, which includes updated software, enhancing the functionality of the system, along with increased security from potential cyber attacks. This platform update increases the competitiveness of our transfusion medicine portfolio. Overall product supply increased through the quarter as our new Singapore facility continued to ramp up. We now have improved line of sight to reducing our backlog for the diagnostics business group by year end and continue to focus on expanding capacity. In closing, we continue to be encouraged with the demand of our clinical diagnostics business with the increased placement of diagnostic systems supporting future growth and reagent pull through. In addition, we continue to focus on the solid progress we have made in reducing our back orders. The diagnostics business performance, however, is not offsetting the continued negative trends for Life Science Group this year, specifically for biopharma accounts. Building on our environmental, social, and governance priorities, we recently published our 2022 Corporate Sustainability Report, which highlights the progress we've made in multiple areas. and reflects our commitment to society and to our stakeholders. So at this point, I'd like to close and pass you back to Alain.

Great. Thank you, Andy. Now I would like to review the results of the second quarter. Net sales for the second quarter of 2023 were $681.1 million, which is a decline of 1.4% on a reported basis, versus $691.1 million in Q2 of 2022, and a 0.3% decline on a currency-neutral basis. The second quarter year-over-year revenue decline was mainly the result of significantly lower COVID-related sales of about $0.4 million versus approximately $33 million in the same period last year. Core revenue, which excludes COVID-related sales, increased 4.6% on a currency-neutral basis. The second quarter revenue included $6 million of revenue from a one-time licensing fee, as well as royalties of $500,000, both associated with a cross-license agreement related to digital PCR intellectual property. We currently estimate receiving ongoing royalties from this arrangement of about $500,000 per quarter. We incurred a one-time $2.3 million R&D expense related to this cross-license agreement, and we do not anticipate any royalty obligations on our end for the foreseeable future. On a geographic basis, we experienced currency-neutral year-over-year core revenue growth in all three regions. Sales of the Life Science Group in the second quarter of 2023 were $300.2 million compared to $322.4 million in Q2 of 2022, which is a decline of 6.9% on a reported basis and a 5.8% decline on a currency-neutral basis. Excluding COVID-related sales, the Life Science Group year-over-year currency-neutral core revenue growth was 4.5% and was primarily supported by strong growth in droplet digital PCR and qPCR products. As Andy alluded to earlier, our Q2 results were impacted by the previously highlighted soft demand within early stage biotech companies, as well as increased headwinds from larger biopharma companies who are delaying capital investments and reducing bioprocessing inventory. In addition, we experienced weaker demand from government accounts in China due to softening macroeconomic conditions. Process chromatography posted a mid-teens year-over-year revenue decline, and we now anticipate a mid to high single-digit decline for the full year versus our prior expectation of double-digit growth. Excluding process chromatography sales, the underlying life science business, decreased 4.2% on a currency-neutral basis versus Q2 of 2022 and was a result of lower COVID-related sales. The life science group revenue, excluding process chromatography and COVID-related sales, grew 8.5% 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 Q2 core revenue posted a decline in Asia. Sales of the clinical diagnostics group in the second quarter were $380.1 million, compared to $367.8 million in Q2 of 2022, or 3.3 percent growth on a reported basis and a 4.6 percent growth on a currency-neutral basis. Core clinical diagnostics year-over-year revenue, which excludes COVID-related sales, increased 4.8% on a currency-neutral basis as routine testing continues to normalize to pre-pandemic levels. Growth of the clinical diagnostics group was driven by a strong demand for diagnostic testing systems, primarily within diabetes and blood typing, as well as nice growth from our quality controls portfolio. On a geographic basis, the Diagnostics Group posted strong double-digit currency-neutral year-over-year core revenue growth in Asia and was largely flat in the Americas and in Europe. The reported gross margin for the second quarter of 2023 was 53.2% on a GAAP basis and compares to 57.2% in Q2 of 2022. The year-over-year gross margin decline was mainly due to unfavorable product mix with a higher than anticipated percentage of instrument sales versus reagents, as well as lower than forecasted revenue in the life science group. The year-over-year gross margin was further impacted by higher material and logistics costs, as well as inventory reserves. Amortization related to prior acquisitions recorded in cost of goods sold was $4.3 million, compared to $4.5 million in Q2 of 2022. SG&A expenses for Q2 of 2023 were $207.8 million, or 30.5% of sales, compared to $207.8 million, or 30.1% in Q2 of 2022. We were able to maintain SG&A spent flat from the year-ago level through tight expense management. Total amortization expense related to acquisitions recorded in SG&A for the quarter was $1.6 million versus $1.8 million in Q2 of 2022. Research and development expense in the second quarter was $65 million, or 9.5% of sales, compared to $64.3 million, or 9.3% of sales in Q2 of 2022. Q2 operating income was $89.6 million, or 13.2% of sales, compared to $122.9 million, or 17.8% of sales in Q2 of 2022, as a result of the softer top line and gross margin fall through. Looking below the operating line, the change in fair market value of equity security holdings, which are substantially related to BioRed's ownership of Sartorius AG shares, negatively impact the reported result by $1,595,000,000. During the quarter, interest and other income resulted in net other income of $5.4 million compared to net other expense of $4.9 million last year, primarily driven by increased interest income from investments. The effective tax rate for the second quarter of 2023 was 22.5% compared to 24.2% for the same period in 2022. The tax rate for both periods were driven by the large unrealized loss in equity securities. Reported net loss for the second quarter was $1,162,000,000 or $39.59 diluted loss per share compared to a loss of $925,000,000 or $31.05 diluted loss per share in Q2 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 second quarter, In cost of goods sold, we have excluded $4.3 million of amortization of purchased intangibles and $3.4 million of restructuring expense. These exclusions moved the gross margin from 53.2% for the second quarter of 2023 to a non-GAAP gross margin of 54.4% versus 57.8% in Q2 of 2022. Non-GAAP SG&A in the second quarter of 2023 was 29.2% versus 29.3% in Q2 of 2022. In SG&A, on a non-GAAP basis, we have excluded $6.3 million of restructuring-related expenses, amortization of purchased intangibles of $1.6 million, an in vitro diagnostic registration fee in Europe for previously approved products of $2 million and an acquisition-related benefit of $800,000. Non-GAAP R&D in the second quarter of 2023 was 9.3%, which is the same as in Q2 of 2022. In R&D on a non-GAAP basis, we have excluded $1.1 million of restructuring expenses and $400,000 of acquisition-related costs. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 13.2% on a GAAP basis to 15.8% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin of 19.2% in Q2 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 $1,595,000,000 and about a $900,000 loss associated with venture investments. The non-GAAP effective tax rate for the second quarter of 2023 was 22.5% compared to 19% for the same period in 2022. The higher rate in 2023 was driven by geographical mix of earnings. And finally, non-get net income for the second quarter of 2023 was $88.5 million, or $3 diluted earnings per share, compared to $103.4 million, or diluted earnings per share of $3.44 in Q2 of 2022. Moving on to the balance sheets. During the second quarter, we purchased 549,863 shares of our stock at an average share price of $377.20 for a total cost of $207.4 million. Having completed the previous share repurchase program, the Board has authorized a new share repurchase program of up to $500 million of our stock. We plan to continue with our disciplined approach as part of our capital allocation strategy. Total cash and short-term investments at the end of Q2 was $1,728,000,000, compared to $1,857,000,000 at the end of Q1 of 2023. The decline in cash and short-term investments from the first quarter was primarily due to share repurchases during the quarter. Inventory at the end of Q2 reached $776.6 million from $752.9 million in the prior quarter. The higher inventory level was driven mainly by higher finished goods inventory within the life science group as a result of the softer demand as well as higher raw material and working process inventory within the diagnostics group as we continue to manage the elevated debt order. For the second quarter of 2023, net cash generated from operating activities was $98.1 million, which compares to $53.3 million in Q2 of 2022. This increase mainly reflects timing of tax payments. The adjusted EBITDA for the second quarter of 2023 was $137.9 million, or 20.2% of sales. The adjusted EBITDA in Q2 of 2022 was $160.4 million, or 23.2% of sales. Net capital expenditures for the second quarter of 2023 were $34.6 million, and depreciation and amortization for the second quarter was $35.9 million. Moving on to the non-GAAP guidance. For the balance of the year, we expect much softer sales for the life science group and continued instrument demand within diagnostics. While we ramped up production for the QX600, and have worked through our backorders for the life science group, an elevated order backlog remains for our diagnostics group. We continue to anticipate working through these backorders during the remainder of this year. As we indicated during our Q1 call, we continue to anticipate about $5 million in reduction of our elevated order backlog for each of the two remaining quarters of this year. Given the current market outlook, we are revising our 2023 financial outlook as follows. We now guide currency neutral revenue growth in 2023 to be approximately 80 basis points versus about 4.5% previously. For the full year, we estimate currency neutral revenue growth excluding COVID-related sales to be about 4.5%, versus about 8.5% in our prior guidance. Of the 400 basis points call revenue guided down, 90 basis points are related to the second quarter revenue shortfall, driven by weakness in biopharma and software demand in China, somewhat offset by 20 basis points from the one-time license fees. The remaining 330 basis points reduction is attributed to approximately 150 basis points related to process chromatography demand, and 140 basis points due to continued softness in other biopharma and in China, and 40 basis points for the diagnostics group reflecting a more cautious view around the macro environment in China. For the second half of the year, we expect about 4% year-over-year core revenue growth versus 5.4% year-over-year growth in the first half of 2023. This represents about 7.5% core revenue growth in the second half of 2023 over the first half of 2023. For the life science group, we expect about 4% currency-neutral revenue decline for 2023. And when excluding COVID-related sales, the life science group full-year growth is now projected to be approximately 4%. This represents core revenue growth to be about 7% for the second half of the year over the first half of 2023. The life science group year-over-year sales growth, excluding COVID and process chromatography-related sales, is expected to be about 6%. For the diagnostics group, while we remain encouraged with the overall demand, we are now guiding core revenue growth to be about 5.5%. This represents core revenue growth for the diagnostics group of about 8% for the second half of the year over the first half of 2023. Full year non-GAAP gross margin is now projected to be about 54.5% versus 55 to 55.5% previously reflecting our updated expectation of shifting product mix and volumes. For the second half of the year, we now anticipate gross margin to be about 54.5%. We now project full-year non-GAAP operating margin to be about 16% versus approximately 17.5% in our prior guidance as we continue with our disciplined approach with operating expenses. For the second half of the year, we expect operating margin to be about 18% versus our prior guide of 21%. And full year adjusted EBITDA margin is expected to be about 21.5% versus about 23% in our prior guidance. For the second half of the year, we expect adjusted EBITDA margin to be approximately 22% versus our prior guide of 25%. Over the next several months, we expect to gain better visibility of the market dynamics, specifically around the longevity of the softness in biopharma and its impact, if any, on our previously communicated 2025 targets. That concludes our prepared remarks, and we will now open the line to take your questions.

Thank you. Ladies and gentlemen, we'll now begin the question and answer session. If at any time you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. One moment for your first question. Okay, and your first question. One moment. And your first question comes from Patrick Donnelly from Citi. Patrick, please go ahead.

Hey, guys. Thank you for taking the questions. Maybe to start on the process chrome piece, can you just talk about, I guess, the softness you're seeing? Is that just, you know, the purchasing is getting pushed out, just soft budgets on the biopharma side? Maybe just kind of give a little more color there. as to what you're seeing. And then it appears you're not assuming any improvement in the back app. Just want to confirm that. So yeah, maybe just a bit more color on the process Chrome side.

Hey, Patrick. This is Simon May speaking. Yeah, I think in the second half of the year, we're seeing some shifts in purchasing patterns. There are some orders that we've already secured, which are getting pushed out. That's the main aspect. And we're seeing a general softness in demand that's spilling through into the second half of the year here. You know, we're detecting some potential signals of improvement, but from our side, it's really too early to call and we're not seeing that reflected in the opportunity funnels at this time. But as we've said earlier, we remain pretty optimistic that this is transient and we're going to see pick up hopefully at some stage in 2024.

Okay, that's helpful. And then maybe in China, you know, you're certainly not alone seeing some headwinds over there. I mean, it sounds like it's hitting both the life science side and then the macro, maybe some cautiousness on the diagnostics. Can you just talk about, I guess, are you seeing it hit both now? Is the diagnostics a little more kind of forward caution just because what you're seeing on the economic side, the life science side? And then, yeah, maybe just expectations in the back half. I know that was a part of the cut. But what is China going to look like in 2H?

Yeah. Hey, Patrick. Andy here. So I think for H1, I think our story is fairly consistent and, you know, a lot of softness in life science, which includes the biopharma component segment of that piece of the business. Diagnostics is relatively good for us in the first half, but we are certainly cautious about the second half given the macro

economic situation in in china and that that's true for both life science and the diagnostic side from our point of view right now okay that's fair and then maybe last one just on the margin side um can you just talk about you know it sounds like the gross margins are getting a little bit impacted by some inventory material costs and what you guys can do to maybe insulate the bottom line a little bit i'm sure you're taking some cost actions maybe just uh you know give us a bit of color on what you guys are doing and how projectable that is into next year in terms of just how we should think about the base case on the margins. Thank you.

Yeah. Thank you, Patrick. This is Ilan. So there are a few aspects to call out first on the margin. Some aspects are transitory. Some are related to the inflationary environment overall. For example, material is still kind of elevated in terms of the overall cost and it's higher than last year. you know the product mix was definitely you know a headwind in terms of the mix between our life science group and the diagnostics as well as within our diagnostics group with more instruments which should be a benefit you know thinking you know more into 2024 and there are other kind of more elevated one time as the reserve etc on the other hand you know We continue with a very, very disciplined approach in terms of the overall operating expenses. So you can see that the fall through to the operating income is much smaller than the impact on the gross margin. And that will continue to be the approach. But again, as I said, it's kind of a mixed bag of kind of aspects that do impact, you know, and did impact this time around. Some are more transitory. Some, you know, we'll have to wait to see how the inflationary environment will continue to shape up.

Understood. Thanks a lot.

Sure.

Your next question comes from Brandon Collier from Jefferies. Brandon, please go ahead.

Thanks. Good afternoon. A lot. If I just look at, you know, your pie chart and you buy a farm that's only 17% of your mix, the GDP Again, the outlook for that group is, in total, what do you expect that bioforming to do in 2023 and how it compares to your prior view? And Simon, question for you, is any of that weakness spilling over to DD-PCR at all, or do you see pretty consistent demand, budgets are there for those instruments, given how differentiated it is?

Yeah, Brandon, this is Simon. I think in our biopharma business, we've obviously got a chunk that's process chromatography, and I think we've already provided commentary there. I think where 2023 is concerned, it's certainly too soon to call any signs of recovery. And again, we'll see what 2024 brings. Definitely spills over into our digital PCR business. You know, we've got a strong footprint and presence in emerging biopharma and digital PCR. We had a very strong quarter notwithstanding that. in the second quarter with robust double-digit growth and with the introduction of QX600 and the way that our customers are responding very positively to the advanced multiplexing capabilities there, that's kind of offsetting the softness that we're seeing in biopharma. But we're definitely seeing that impact outside of Process Chrome, but it tends to be a different kind of impact, which is more related to VC, PE funding with smaller emerging biotechs.

Okay, and then I guess a line, any call you can share with us in terms of the phasing for revenue growth and margins between 3 Q and 4 Q, you've got a tougher comp in the 4th quarter. And then just in terms of the margins, I know that's always kind of the peak margin quarter of the year, given the higher volume. Any more call you can share with us about phasing 3 Q and 4 Q?

Sure. You know, generally, Brandon, as you know, the fourth quarter tends to be a stronger quarter for us. I mean, generally, you know, we think, you know, about the third and fourth quarter to be stronger, but definitely the fourth quarter, you know, as usual, seasonality is stronger there than even the third quarter. In terms of the gross margin, you know, it's more, again, benefiting the fourth quarter from the fall through. So it's a slight benefit, but it's not a huge difference since we did guide for about 54.5 for the second half. So, you know, and when it comes to the operating expenses, we will continue, as I mentioned earlier, with a very disciplined approach in terms of the expenses. You know, we expect it to be lower than a percent basis of sales on a dollar basis, potentially slightly higher, but it's a very, very disciplined approach.

Okay. And then just in terms of inventory levels, I mean, I'm just surprised they continue to climb to this degree. I mean, is this the peak level in 2Q, and we should expect them to come down sequentially from here? And just help us understand, like, when that,

Oh, I'm sorry, Brian. This is Andy here. Yeah, I mean, I think we're near the top of this inventory build that's been going on, which, you know, as we reported before, is the result of the diagnostics manufacturing moving from France to Singapore. And then, you know, the lead time required on purchase of raw material through the finished product. And then with the lifeline downturn that clearly was not expected anywhere close to this level of magnitude, we've got to catch up with that. So I think that we're largely ahead of this at this point in time, and we'll be looking toward normalization of inventory as we move forward.

Thank you. Thank you, Brendan.

Your next question comes from Tim Daly from Wells Fargo. Tim, please go ahead.

Thanks, everybody. So I think everybody said transient, at least one from today's call describing the biopharma headwinds, but then also said not recovering until 2024. So, you know, descriptions around the process chromatography cut seem to be a lot timing rather than demand destruction or loss. Just curious about, you know, as we progress forward and, you know, thinking about the contribution in 24 for us chromatography, maybe above normal growth levels or above the kind of expected levels. And then, you know, just additional comments on the long targets here given, you know, lower base to, I guess, grow off of.

Yeah, Tim, this is Elon. I'll start and then maybe Andy and Simon can chime in. You know, generally speaking, first of all, you know, we're not yet guiding for 24. We're generally not necessarily expecting a pent-up demand in process chromatography in 2024. We see it more as transitory and push-outs of orders, and these are kind of, think about it like a permanent kind of push-outs. So it's not that 2024 we expect process chromatography to be elevated due to a pent-up demand. I don't know, Andy.

Well, and I think there's an element in the question there about funnel. And I think this really is, this isn't a change in the shape of our market share or expectations over the long term. This is orders that we're expecting that have been pushed out. Richard Schauffler, MD, In that regard, this is, this is a transitory shift timing, I think, is the word you use 10 that's the way we look at it, what we are unclear on and so on, taking a position on right now is is when that timing fully resolved.

Richard Schauffler, MD, Alright, got it and then i'm second one, I know we've touched on China a bit, but you know China diagnostics was a nice tailwind this quarter, I know you took some of that out of the guide but. Just to help us understand, you know, how much of that was maybe reopening tailwinds versus underlying growth and, you know, what the full China growth expectations are for the year within diagnostics?

I think it has to do more with, you know, the current macro environment that we continue to monitor for the remainder of the year. I don't know that it's necessarily a leg of, you know, the reopening necessarily. as it is more kind of being more cautious that, you know, the environment will not change drastically. I mean, overall, you know, diagnostics, you know, is expected to achieve, you know, 5.5% year-over-year growth, which is a really nice growth for them. And, you know, China performed so far really well for us. But again, with everything that we hear, it will be – we have to continue to monitor the second half specifically.

right perfect thank you appreciate the time thank you your next question comes from jack mehan from nephron research jack please go ahead thank you good afternoon um andy i was wondering or maybe for elon as well um just the transition to the new manufacturing site in singapore um just operationally how did that go during the quarter and can you talk about How that might contribute to your thinking around margins in the second half of the year?

I'll answer the first half, Jack. It went well. We're now past the all closed shutdowns in France. 100% focus now on the ramping of production in Singapore. It is going well. We did make progress in the quarter. on the diagnostics backlog. But as we've indicated before, it's going to take the full year. We feel good about achieving that right now. And I think we communicated here some further events or a backlog, sorry, a burndown in the coming quarters. So after the early difficulties, I believe we're on track now. As it relates to gross margin, do you want to comment on that?

Sure. Jack, obviously the heavy lifting, as Andy mentioned, is behind us. We continue to ramp. A lot of it has been achieved. We continue to realize more benefit. The two European sites are closed. We will have slightly additional benefit also going probably into next year. once it will be fully ramped up. That's where we are right now.

Great. Okay. And then, you know, there's been a lot discussed about kind of some of the issues you're seeing in biopharma at the moment. I was just curious, like, this might be a difficult question to answer here in early August, but what you think is the likelihood of some of these, you know, issues extending, you know, through to the first half of 2024? What are you hearing from customers?

This is Simon. I think the simple answer is it's too soon to say. I think we've kind of covered this two or three times already. We're not seeing signs of material recovery in our funnels in the second half of the year. There's some commentary around some shifts in the funding environment, but that's very early. It's going to take time for that to trickle through to the coalface. And quite simply, we just think it's too soon to call 2024.

That's fair. Last question for Norman. The new repurchase authorization, that's a nice endorsement of maybe the value you see in BioRad shares now. I was curious what your latest thinking is on the Sartoria stake. Just given where BioRad stock is trading, I'm curious, would you ever consider monetizing a piece of this just to buy more of your own shares? Talk about the commitment to that. Thanks.

Well, certainly we've got plenty of cash on our balance sheet at the moment. That shouldn't be an issue, certainly in the near term. Obviously, we continue to see Sartorius as a strategic for us. With respect to repurchase, we certainly continue to view that our valuation is low relative to peers. As we go forward, looking at when we repurchase, balance between different uses of cash and Yeah, different priorities. But it's nice to have that new authorization in place and give us the opportunity to opportunistically buy back from time to time.

Agreed. Okay, thank you.

Thank you, Jed.

Your next question comes from Connor McNamara from RBC Capital. Connor, please go ahead.

Hi, and good afternoon. Thanks for taking the questions, guys. Can you talk more about the DDPCR, the strong double-digit growth you saw? Is there any more competitive pressure in the market there, and is there any pent-up demand or manufacturing issues on DDPCRs along the diagnostic side?

Hey, Connor. Andy here. So, yeah, we were very pleased with the performance in the quarter despite the challenges of softness in the biopharma segment. The new instrument is going very well for us. We cleared out all our production challenges in the quarter. No constraints moving forward. We've grown that franchise quite meaningfully in that segment over the last few years. Our strategy for growing there has been very successful. We feel very positive about the forward-looking potential and Biopharma is a point of weakness in the middle of it. Competitively, I don't think anything has really changed, certainly not within the last quarter. And that's all baked into our thinking at this point in time.

Great. Thanks for that, Andy. And just as a follow-up, if you look at the success of that product. How much of those sales are going into either new markets or new customers versus upgrading current PCR customers? I don't know if you have that data available.

This is Simon. I can talk to that. I think it's a bit of a spread. We've seen a good number of customers who were upgrading from existing systems. I'd say we've actually been pleasantly surprised that the uptake that we're seeing in Biopharma, where that multi-placing capability gives those customers a significant productivity advantage. And then the third area where we're seeing uptake is in oncology research and clinical development, where, again, the multiplexing and the sensitivity of the system really serves that need very well. So it's kind of broad-based.

Got it. Thanks. And just finally on GDPCR, can you remind us The consumable pull through, you know, with these placements, are you still kind of at that 50-50 equipment versus consumables on DDPCR, and what's the tail there as far as when that should accelerate on the consumable side?

In very approximate terms, we're still there, and I think over time we still expect that to weight increasingly towards consumables, and I think we're seeing that trend play out.

Great. Thank you for that. And last question for me is on the – OPEX side, you were down sequentially on total operating expenses. How should we think about that cadence for the rest of the year and then going into next year? Is this a good run rate from Q2 or is there anything that's abnormal in Q2?

Yeah, this is Ilan. So as a percent of sales, we expect the second half at least to be slightly lower than that. on a dollar basis, maybe slightly higher, but we try to continue to be very disciplined in terms of the expenses overall.

Got it. Thanks, guys. Appreciate it.

Thank you.

We have a follow-up question from Brandon Colliart from Jefferies. Brandon, please go ahead.

Sorry, Alon, just to clarify, are you saying OPEX in the second half up or down compared to the first half?

So as a percent of sales, it's going to be slightly lower on a DORA basis, potentially slightly higher, but not meaningfully higher.

Okay, that makes sense. Follow-up question for Simon. I'm just curious, the QIAGEN digital PCR cross-licensing deal, where do you get out of it? You know, why, I guess, strike that deal with them?

Can't really answer that, Brandon. The terms of the deal are confidential. I think we've already said what we're going to say about it in the script here. I think we're pretty happy with the terms, and that's about where we have to leave it because of the confidentiality provisions we've got around it.

I'll leave it there. Thank you. Okay. There are no further questions at this time. I'll now turn it back to Edward Chung for closing remarks.

Thank you for joining our call today. We will be participating at the Wells Fargo Healthcare Conference in Boston next month. As always, we appreciate your interest and we look forward to connecting soon. Thanks.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect.