Bio-Rad Laboratories, Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the BioRad 3rd Quarter 2023 Financial Results Conference Call and Webcast. At this time, all lines are in the listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press the star zero for the operator. And please be advised that today's call is being recorded on Thursday, October 26, 2023. I would now like to turn the conference over to Edward Chung, Head of Investor Relations. Please go ahead.

Good afternoon, everyone. Thank you for joining us. Today, we will review the third quarter 2023 financial results and provide an update on key business trends for BIRAD. With me on the call today are Norman Schwartz, our Chief Executive Officer, Elon Doskell, 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 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 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 these reconciliations of the non-GAAP financial measures to comparable GAAP results contained in our earnings release. With that, I will now turn the call over to Andy Lass, our Executive Vice President and Chief Operating Officer, to provide an update on BioRad's global operations.

Many thanks, Ed, and good afternoon to everybody, and thank you for joining us. Well, the third quarter of the year fell below our expectations. The ongoing challenges within the biopharma segment and economic constraints in China continue to drive lower life sciences performance in the quarter. Clinical diagnostic sales were weaker than we forecasted, impacted mainly by the softer China market conditions. We still anticipate a strong year-over-year growth. The clinical diagnostics grew in the fourth quarter. We continue to successfully maintain focus on tight cost control, and on the supply chain front, we experienced modest constraints in supply for our clinical business, which impacted Q3 sales. Backlog remains on track to meet our year-end expectations. In Q3, we experienced further reduced demand from biopharma customers for our process chromatography and from both biopharma and smaller biotech customers for our life science research products. The continued tight spending environment in this segment constrained core DD-PCR sales, which were roughly flat from the year-ago period. Academic and government sales for life sciences were strong in the Americas, but showed declines in APAC driven down by China economic and policy constraints. EMEA academic sales were roughly flat, reflecting a soft funding environment in Germany, offset by stronger performance in the other European countries. While DDPCR sales within the quarter were softer than expected as a result of biopharma spending, we remained very positive on the long-term growth outlook for the platform. During the quarter, we were encouraged by several noteworthy announcements involving DDPCR. On the clinical testing front, our QX1 platform has been selected for SMA testing for all newborns in Hong Kong. And here in the US, Genoscopy announced they have published the results of their pivotal CRC Prevent Clinical Trial, reporting the highest sensitivity for detecting colorectal cancer among similar tests, powered by our QXDX DD-PCR platform. Additionally in the U.S., Verily won a major multi-year national wastewater testing contract from the CDC based on our QX600 platform. We see these as contributors to future growth and a strong reinforcement of the versatility and impact of the technology. As highlighted earlier, China was a continued challenge in Q3 for our life sciences business and unfortunately the economic constraints have now also impacted our clinical diagnostics business which in the first half of the year had been a positive for us in this region. We have now further constrained our expectations for China for the year end and look to 2024 before we expect to see signs of recovery. Our clinical business overall had a mixed quarter. We saw growth in demand in the US and Europe as expected which was partially offset by the softness in China. In particular, we were pleased with the continued momentum for our immunohematology and diabetes franchises in the quarter. Despite the market challenges of this year, we view our strategy framework as being very solid and our platforms and market opportunities as providing sustainable long-term growth. We continue to focus on driving and improving our execution and with completion of a single global instance of SAP have now completed a major component of operational improvement. Looking to the end of the year, we continue to expect the biopharma and small biotech company turn down and ongoing constraints in China and Russia to impact the overall growth through our life sciences business. Although we do expect to see sequentially improved sales in the final quarter of the We remain positive on the momentum and continued growth in the clinical diagnostics business, although somewhat moderated by the greater market constraints in China, as well as ongoing trade restrictions in Russia. Thank you, and at this point I will now pass you to Alain to review the financial results.

Thank you, Andy. Now I would like to review the results of the third quarter. Net sales for the third quarter of 2023 were $632.1 million, which is a decline of 7.1% on a reported basis versus $680.8 million in Q3 of 2022 and a 7.9% decline on a currency-neutral basis. The third quarter year-over-year revenue decline was primarily the result of ongoing weakness in the biopharma end markets, impacting the sales of our lifetime tools and bioprocessing products. In addition, we experienced weaker demand in China as a result of the macroeconomic environment, as well as the local Made in China initiatives. COVID-related sales in Q3 were $300,000 versus about $17.2 million in Q3 last year. Core revenue, which excludes COVID-related sales, decreased 5.5% on a currency-neutral basis. On a geographic basis, currency-neutral year-over-year core revenue decreased in Asia and Europe, partially offset by increased sales in the Americas. Sales of the Life Science Group in the third quarter of 2023 were $263.5 million, compared to $317.9 million in Q3 of 2022, which is a decline of 17.1% on a reported basis and a 17.8% decline on a currency-neutral basis. Excluding COVID-related sales, the Life Science Group year-over-year currency-neutral core revenue decreased 13.7% and was primarily driven by lower sales of QPCR process chromatography, Western bloating products, and about flat year-over-year DDPCR revenue. Excluding process chromatography sales, the underlying life science business decreased 16.7% on a currency-neutral basis versus Q3 of 2022. The life science group revenue, excluding process chromatography and COVID-related sales, decreased 11.6% on a currency-neutral basis. On a geographic basis, life science year-over-year core revenue decreased in Asia and Europe, partially offset by modest increased sales in the Americas. Sales of the clinical diagnostics group in the third quarter were $368.1 million, compared to $361.9 million in Q3 of 2022, or growth of 1.7% on a reported basis, and a 1% growth on a currency neutral basis. Core clinical diagnostics year-over-year revenue, which excludes COVID-related sales, increased 1.4% on a currency neutral basis. Growth of the clinical diagnostics group was primarily driven by blood typing and diabetes products, as well as growth from our quality controls portfolio. On a geographic basis, the diagnostics group posted currency-neutral year-over-year core revenue growth in the Americas and Europe, partially offset by the decline in Asia. The reported gross margin for the third quarter of 2023 was 53.1% on a gap basis and compares to 54.7% in Q3 of 2022. The year-over-year gross margin decline was mainly due to unfavorable product mix, lower manufacturing volumes, higher material costs and inventory reserves, and was partially offset by improved logistics costs. Amortization related to prior acquisitions recorded in cost of goods sold was $4.5 million, compared to $4.4 million in Q3 of 2022. Third quarter operating expenses benefited from our cost-cutting initiatives, as well as a contingent consideration benefit of $18.9 million from last year's acquisition of Curiosity Diagnostics. SG&A expenses for Q3 of 2023 were $201.2 million, or 31.8% of sales, compared to $211.1 million, or 31% in Q3 of 2022. The lower SG&A in the quarter included $4.1 million in contingent consideration benefit that I mentioned earlier, as well as lower employee-related expenses. Total amortization expense related to acquisition recorded in SG&A for the quarter was $1.6 million versus $1.8 million in Q3 of 2022. Research and development expense in the third quarter was $43.5 million or 6.9% of sales compared to $66.8 million or 9.8% of sales in Q3 of 2022. The significantly lower R&D expenses recorded in the third quarter included $14.8 million in contingent consideration benefit that I mentioned earlier, as well as lower project and employee related expenses. Q3 operating income was $90.9 million or 14.4% of sales compared to $94.6 million or 13.9% of sales in Q3 of 2022. Looking below the operating line, the change in fair market value of equity security holdings, which are substantially related to Biores ownership of Sartorius HE shares, added $36.4 million of income to the reported results. During the quarter, interest and other income resulted in net other income of $9.7 million compared to net other expense of $13 million last year, primarily driven by increased interest income from investments. The effective tax rate for the third quarter of 2023 was 22.5% compared to 21.5% in Q3 of last year. The effective tax rate this quarter was primarily affected by an unrealized gain in equity securities, and the tax rate reported in Q3 of 2022 was primarily affected by an unrealized loss in equity securities. Reported net income for the third quarter was $106.3 million, or $3.64 diluted earnings per share, compared to a loss of $162.8 million, or $5.48 diluted loss per share in Q3 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 third quarter, in cost of goods sold, we have excluded $4.5 million of amortization of purchased intangibles and a small restructuring expense. These exclusions moved the gross margin from 53.1% for the third quarter of 2023 to a non-GET gross margin of 53.9% versus 55.6% in Q3 of 2022. Non-GET SG&A in the third quarter of 2023 was 31.7% versus 30% in Q3 of 2022. In SG&A, on a non-GAAP basis, we have excluded $4.1 million of an acquisition related to the contingent consideration benefit mentioned earlier, an in vitro diagnostic registration fee in Europe for previously approved products of $1.9 million, amortization of purchased intangibles of $1.6 million, and $1.3 million of restructuring-related expenses. Non-GET R&D in the third quarter of 2023 was 9.2 percent versus 9.7 percent in Q3 of 2022. In R&D, on a non-GET basis, we have excluded $14.8 million of an acquisition related to the contingent consideration benefit mentioned earlier and a small restructuring benefit. The cumulative sum of these non-GET adjustments result in moving the quarterly operating margin from 14.4% on a GAAP basis to 12.9% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin of 15.8% in Q3 of 2022. We have also excluded certain items below the operating line, which are the increase in value of the Sartorius equity securities and loan receivable holdings of $36.4 million, $2.5 million gain from the release of an escrow for an acquisition, and about a $700,000 loss associated with venture investments. The non-GET effective tax rate for the third quarter of 2023 was 23.9% compared to 21.7% for the same period in 2022. The higher rate in 2023 was driven by geographical mix of earnings and reduced compensation related deductions. We continue to estimate the full year non-GAAP tax rate to be between 22% and 23%. And finally, non-GAAP net income for the third quarter of 2023 was $68.1 million, or $2.33 diluted earnings per share, compared to $79.2 million or diluted earnings per share of $2.64 in Q3 of 2022. Moving on to the balance sheet. During the third quarter, we purchased 58,478 shares of our stock at an average share price of $364.61 for a total cost of $21.3 million. We still have nearly $480 million remaining in our board-authorized share repurchase program and plan to continue with our opportunistic approach to buybacks as part of our capital allocation strategy. Total cash and short-term investments at the end of Q3 was $1,765,000,000. compared to $1,728,000,000 at the end of Q2 of 2023. The increase in cash and short-term investment from the second quarter was primarily due to changes in working capital. Inventory at the end of Q3 was $775.8 million, which is slightly lower than the inventory in the prior quarter. For the third quarter of 2023, net cash generated from operating activities was $97.7 million, which compares to $11 million in Q3 of 2022. This increase mainly reflects changes in working capital and income tax payments. The adjusted EBITDA for the third quarter of 2023 was $112.7 million, or 17.8 percent of sales. The adjusted EBITDA in Q3 of 2022 was $135.7 million, or 19.9 percent of sales. Net capital expenditures for the third quarter of 2023 were $44 million, and depreciation and amortization for the third quarter was $37.3 million. Moving on to the non-GAAP guidance. Given the current market environment, we are revising our 2023 financial outlook as follows. We now expect about a 3.5% currency neutral year-over-year revenue decline in 2023 versus a growth of about 80 basis points previously. For the full year, we estimate currency neutral year-over-year revenue growth excluding COVID-related sales, to be between 0 and 50 basis points versus about 4.5% in our prior guidance. Of the 400 to 450 basis points core revenue guide down, 250 basis points are related to the third quarter revenue shortfall, of which approximately 200 basis points is related to weakness in biopharma, and remaining 50 basis points related to lower clinical diagnostic sales. The remaining 150 to 200 basis points reduction is attributed to reduce process chromatography and other biopharma demand, as well as continued softness in China. For the life science group, we expect about a 12% currency-neutral revenue decline for 2023, and when excluding COVID-related sales, The life science group currency neutral revenue decline is projected to be between 4% and 5%. Excluding COVID and process chromatography related sales, life science group revenue is expected to decline between 2% and 3%. For the diagnostics group, while we remain encouraged with the overall demand, we are now guiding core revenue growth to be about 4.5%, versus 5.5% previously. Full-year non-GAAP gross margin is now projected to be about 54% versus about 54.5% previously, reflecting our updated expectation of shift in product mix and volume. We now project full-year non-GAAP operating margin to be about 14.5% versus approximately 16% in our prior guidance as we continue to carefully manage discretionary expenses. And full year adjusted EBITDA margin is expected to be between 20 and 20.5% versus about 21.5% in our prior guidance. And now I'll turn the call over to Norman for a few remarks. Norman?

Thank you, Ilan. I guess I just wanted to take a minute here to really recognize Elon and his contributions over the last several years. As part of our transformation, Elon has been a very valued member of the team, working to improve financial planning and reporting processes, as well as to enhance the company's external profile with the financial community. I think we all very much appreciate his guidance and contributions, which do position us well for our continuing transformation. As you might imagine, we have initiated a search for a successor, and in the meantime, we have a strong, capable team who can manage very well in the interim. So maybe while I have the floor, maybe a closing comment about this year. Certainly it's not unfolded the way we or many of our peers first envisioned it. Kind of coming out of the pandemic, I think it has been challenging to predict the pace of recovery or market normalization, really all exacerbated by inflation we've not seen in 20 years, geopolitical events, and of course the biopharma disruption. I think if I think about it a little bit, I think what we can be confident of is that our markets are buoyant and I feel the outlook is positive. There could always be a few more bumps in the road in the near term, but I do feel the company is really as well positioned to navigate what might come our way. And just maybe to reemphasize a point that Andy made, you know, longer term, our strategy and vision for the future really has not changed. With that, operator, I think we'll open the line up to questions.

Thank you. And ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your cell phone keypad. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the call-in process, please press the star followed by the number two. And if you're using a speakerphone, please flip the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Brandon Collard from Jefferies. Your line is open.

Hey, thanks. Good afternoon. I'm not sure if this is a better question for Andy or Alon, but the magnitude of the guidance reset in life sciences relative to where you started the year is the most dramatic of any of your peers by far. Why does there seem to be such an inability to accurately forecast the business and demand trends? And how do we assess whether this is in fact a market dynamic as opposed to potential share losses?

Could you just say the very last piece again, Brandon? Didn't catch your very last few words.

Yeah, I was saying, how do we assess whether this is, in fact, a market dynamic versus potential share losses in life cycles?

Oh, okay. Look, I think that we came out of 2022 with really good trajectory, and the effects that some companies had seen, particularly in bioprocessing, were not showing up for us. And I think that's something that we communicated at the end of the first quarter, that that was a surprise. And it took a while within 2023 for those effects to really roll out into into our funnel and start to experience the deferred orders being pushed out. I think the other factor that no one anticipated and which was meaningful for us was the Silicon Valley Bank collapse and the knock-on effects of that, which you know, really impacted the spending profile of the smaller biotech companies. And we've had significant trajectory in the smaller biotechs for, in particular, our Droplet Digital PCR platform, which also had some halo effects around it. So, you know, I think it took a couple of quarters for those effects to really materialize for us because our profile is a little different to some of the other players. So that's how I view it. And then, of course, since then, spending has not improved. Order push-outs have continued. And it's very difficult to gauge the true inflection point right now. And I think that's probably a message that's coming across broadly from other players in the category as well.

This is Simon. Maybe I'll just add to that as well, because as we look at our funnels and we look at our win-loss ratios across the portfolio, whether you're talking about Western blot or gene expression or digital PCR or our bioprocess business, we really don't see any significant shifts there. I mean, obviously, the conditions in China and biopharma have really deteriorated. But the feedback that we consistently get from the field is that there's still a high level of interest in the products. The products that we've launched have been really well received. And again, the funnel dynamics in terms of win-loss ratios are not seeing any significant shifts So we really do believe that this is a bunch of transient effects that are compounding and it's making for a very difficult year, but I don't think there are any macro shifts in our competitive positioning in life sciences.

Alon, I think the revised guide implies 4Q revenue steps up to about 700 million, I believe. 4Q is usually seasonally very strong for buy rent, but this isn't a normal environment either. So how be risked is that revenue outlook? What are some of the variables that can swing that target up or down that you're keeping in mind?

So Sandy, The variables that might swing that, I think they're the same. The variables would really be the same that we're experiencing, just a little bit more acute. If China gets definitively worse than the trajectory it's on, for example, if academia really pulled back from spending, that could have an effect. We're not expecting a Q4 budget flush this year. That's not in our thinking. you know, if that materializes, that's good news, but we're not planning on that. I think other than that, I don't think we see anything that may be, you know, meaningful that we could predict.

Yeah, Brandon, I will add to, you know, the inputs that Andy just mentioned. Generally speaking, you know, we have not deviated from our approach of kind of coming up with the realistic what we see in front of us in terms of the forecast and the guidance. So I don't know that, you know, we are underestimating or overestimating our projections. And, you know, definitely the fourth quarter this time around is an unusual circumstance in addition to the, you know, the macroeconomic kind of environment. To end this kind of input, maybe the China environment today, I mean, I think it's going to continue well into the end of the year. So the smaller biotechnology companies' environment in terms of the funding environment are not expected to improve in our mind through the end of this year. So I agree with you. Historically, traditionally, the fourth quarter used to be a stronger seasonality kind of quarter for us. That is not the case this time around.

Last one, and I'll jump back in the queue. Andy, given you and Elan started at BioRad around the same time, you've worked very closely together. You've both been instrumental to BioRad's transformation last four years or so. In light of his departure, I think investors would like to know, are you happy with the operational direction of the company? Are you adequately incentivized to stay the course, or do you have an eye to retirement anytime soon?

Yeah, Brandon, thanks. And first, can I just say I'm really sad to see Elan move on, and you're right. We have worked extremely closely. He and I are in each other's offices virtually every day. So it's been a really good journey. I want to thank Elan for that personally on this call. Thank you. But my point of view right now is we started this transition. It's not finished. And the focus really is on the transformation of the company and executing against the strategy framework, which I firmly believe has the potential to increase operating performance for the company moving forward. Thank you.

Thanks, Brenda.

Your next question comes from the line of Patrick Donnelly from Citi. Your line is open.

Hey, guys. Thanks for taking the questions. Maybe another one on the 4Q ramp, but on the margin side, a pretty meaningful step up from whether it's sequential or the prior part of the year. Can you just talk about the moving pieces to get to that implied margin? I think it's 16 and a half, 17% type margin in 4Q. Yeah, just the path to get there and get people comfortable that that's a realistic number.

Sure. Hey, Patrick, this is Elon. I'll start and Andy can chime in. But obviously, you know, on the top line, you know, we baked in kind of the updated mix with, you know, the softer life science. And overall, I mean, you know, on the operating expenses, you know, we plan to continue some of those, you know, initiatives that we have been working on. And already in the third quarter, you can see that, you know, the operating expenses came in, you know, lower on a dollar basis. So we, you know, we continue to work on additional initiatives going into the fourth quarter. And again, overall for the bottom line, I mean, we feel it is a realistic, you know, projection here.

Yeah, my only add with, you know, we're still focused on keeping our operating cost structure as tight as possible. So the volume and mix, you know, will have a decent flow through the quarter operating margins.

Okay. And then maybe on China, if you could just talk about that market, you know, a little bit surprising to see the diagnostics piece softer as well. Can you just talk about what you're seeing? Is it various policies over there that's impacting things? It would be helpful just to get a little more discussion there.

Oh, okay.

So the policies, I mean, are clearly impacting both life science and the diagnostics side of the business. and they have the Made in China for China, there's the anti-corruption, there's volume-based pricing, and then you layer on top of that recession, and the government, I think, that is generally struggling to find the right way to stimulate the market. You can add in an extra effect of capital markets, soft for biopharma, which was a focus for us for expansion and growth of those pieces of our portfolio. They all have varying impacts to both sides of the business. It's just been a really tough ride through China and there's just no current clear reason to think that it's going to improve in Q4. And on the clinical side, it just created a softer pull for our products in China, in the quarter. And, you know, we still have had a little bit of backlog on our clinical business, as we called out, which, you know, by the end of this year, we should be roughly where we expect to be. We may finish with a very slightly elevated backlog on clinical side. products at the end of the year, but we're pretty much on track, relatively speaking, for that.

Okay. On the diagnostic side, is it more the instrumentation? Obviously, the VBP stuff comes up quite often with all diagnostic players. Are you guys seeing anything on that front yet?

What was the question?

Oh, the volume-based pricing. Sorry, yeah, we were just having difficulty hearing it. Dara, do you want to comment on BPP?

Sure. It's starting to impact how we navigate tender requirements. So I think how that's translating to reality is things are a little bit slower as we're navigating how best to position for new deal considerations. But value-based pricing, it has historically been applied to other sectors, but in a couple of provinces we're starting to see it So I think right now it's just sort of impacting sort of forward-looking risk. And then, as Andy said, we're still working through some supply chain fulfillment challenges and backlog, which were waved a bit towards that region as well. And we're working through that and have lines of sight for a really solid Q4 landing.

Okay. And maybe last one, just on the PCR side, you guys called out, I think, qPCR weakness. It seemed like ddPCR stepped down as well. Can you just talk about what you're seeing in that market? Is it just a broader slowdown? Is it specific pockets there would be helpful?

I think, again, it's a compounding of issues that we've already touched on here. So we've obviously got a fairly significant qPCR, digital PCR footprint in Biopharma. And again, the slowdown in early biotechs. We've seen a continuation of layoffs and project deferrals. That's impacted the business. We've got the COVID compare. We've got all the challenges in China that we've already talked about. And I think on top of everything else, there's kind of a glut of systems out there in the market that were placed in the pandemic. And there's a bit of free capacity out there. So you roll all of these things together. Again, we refreshed our QPCR platform over the last couple of years. And again, the feedback that we get from out in the field is really positive in terms of how these products are being received in the market. But this compounding of market conditions right now is what's adding up to a tough environment.

May I just add one extra comment? You look for the silver lining on occasion. Customer demand in small biotech biopharma, the desire to take in digital PCR in particular remains very strong. What we're actually experiencing is just the deferral of when they're going to make the purchase because they're constrained on cash expenditure and some other changes going on structurally and on program focus. So the demand side remains very encouraging.

Okay, thanks, guys.

Thanks, Benjamin.

Thank you. Your next question comes from the line of Jack Meehan from NetPrin. Your line is open.

Thanks. Good afternoon. So just wanted to talk about how the quarter played out here. So revenue was about 8% below the street. Can you just talk about kind of the pacing of the quarter? Was most of the pressure you saw in September? And is it possible there were any – orders that's flipped into 4Q for any reason?

I think, Jack, hi, this is Yilan. The way, you know, to think about it, I think we saw it throughout the quarter, but it accelerated towards the end of the quarter. So the pace was kind of, of decline was stronger towards the end of the quarter. But throughout the quarter, it started to get weaker and weaker, but definitely it accelerated, you know, towards the end.

Okay. And, you know, Norman, I know you mentioned, you know, in your comments, there's the potential for maybe a couple more bumps in the road along the way. I think there's a debate, you know, amongst tools investors around, you know, are we further through the cutting cycle or, you know, could there be kind of new risks ahead because of some of the changes in the funding environment for customers? Just curious, like, you know, maybe like what you're seeing through October, you know, do you, I guess, like, Kind of what was the thinking that went behind the fourth quarter guide that you've built here?

Well, you know, I think, you know, certainly in terms of the fourth quarter guide, we, you know, we looked very carefully at kind of the order book and the funnel, the sales funnel, kind of accumulating as much data as we can to get the best assessment of where we think we'll land for the year. Uh, you know, when I think about bumps in the road, you know, I think about, you know, the, I think there were a lot of people that, that, uh, they kind of thought the pandemic is over and everything will be back to normal next week. And, uh, and, you know, I think we're seeing a continuation of that with the, uh, with some of this, uh, kind of biopharma meltdown and the readjustments that are being made in some of these programs. Um, You know, it just, I think we just have to be careful about, you know, about calling the end and saying, you know, there's always possible that there's something else that might bubble up.

Understood. Okay. And then on the income statement, you know, you previously talked about kind of OpEx reductions. I was looking at the SG&A line kind of on a non-GAAP basis. It actually is. increased a little bit sequentially and that was despite kind of revenue declining sequentially. So I was just wondering if you could talk about what happened in SG&A in the quarter and like is there room to like pull more cost out in the lower top line?

So usually, you know, it was a minor kind of step up, Jack. You know, usually on the fourth quarter we see a much higher kind of step up in SG&A. which, you know, this time around, actually more of the initiatives that we have been working on will kick in in the fourth quarter. So we don't anticipate, you know, the traditional step up in the fourth quarter. For the third quarter, it wasn't, you know, that material.

Okay. Thank you, guys. Thank you.

Your next question comes from the line of Tim Daly from Wells Fargo. Your line is open.

Great. Thank you. So first on the process chromatography business. So I think you were previously expecting down mid-single to high single decline. With the update today, I'm getting 13% down or so for the year. But even with that, that implies a pretty significant step up in the fourth quarter. I think almost like 80% sequential dollar increase from 3Q to 4Q. First off, are these numbers that I'm kind of getting to in the right ballpark? And then secondly, can you help us understand the visibility confidence that you have to kind of get that big sequential step up, especially given the commentary around a slower or lower than typical seasonality for this year end?

Yeah. Hi, this is Andy.

So yeah, I think maybe some of the math might be a little off there. I think the process crime overall is going to end up at a lower number. It's kind of the guidance implication there. It's kind of like mid-teens. I don't think we're seeing a meaningful step up in process crime in Q4. I think that's really probably just a bit of math there. It's slightly higher.

All right. Got it. That's helpful. And then, Andy, can you, you know, the supply chain impacts weighing on the third quarter diagnostics revenues, can you just provide some detail on, like, what is that, how big the impact was in the quarter, and if you expect those delayed revenues to be fully recuperated in the fourth quarter?

Yeah. So, essentially, you know, obviously we've been communicating supply chain challenge on the clinical side because, you know, various effects of COVID plus removed our plants from France to Singapore. We're catching up quickly, but it's sometimes difficult to get the pacing of that right. So if you get a bit of delay, you also get a bit of pull through, consumable pull through delay as well. And so that factored a bit in to our Q3. But we are looking at a Pretty strong Q4, and we have a good line of sight now. Our plant in Singapore is really cranking. We've done a lot of work leading out the workflows there. And so we're going to get the benefit of that in Q4 and also get some pull-through effects. So Q3 just ended up being softer as a result overall.

All right. Thank you. And then, you know, final one here for Norman. With the 23 guidance now, 400 basis points lower, you know, that mid-term CAGR for 2025, the guidance updated in May, now has an incremental 100 basis points or so steeper, I guess, headwinds in front of it. So, given the current environment, how are you evaluating the 2025 target? Or is this something that maybe we'll wait until a new CFO is in the seat to put their own fingerprints on?

So, Tim, this is Ilan. I'll chime in, and then, you know, Norman probably will have some additional color. But, you know, already in the prior quarter, we communicated that the 2025 targets, from our perspective, is kind of in a holding pattern. We would like to get more insight and visibility going into 2024 in order to shape, you know, our thinking about the 2025 targets. So probably, you know, in the next kind of earnings call early next year when we have the 2024 kind of guidance in front of us, the 2025 numbers, you know, we'll know how to think about it and to see whether the reason impact and what magnitude, et cetera. I don't know.

I think that covers it pretty well.

Okay, great. Well, Alon, great working with you. Hope you all the best in the next endeavor. And thanks, everybody, for the time.

Thanks, team. Likewise.

Thank you. Your next question comes from the line of Connor McNamara from RBC Capital. Your line is open.

Hi, guys. Thanks for taking the questions. Just without getting into 2024 guidance, just how should we think about 2024 in general and just which headwinds that you called out in this quarter are likely to persist in 2024 and which are likely to end by the end of this year?

Hey, Conor, this is Elon. So I can start, you know, with obviously various aspects that are associated with the macroeconomic. You know, I'm not sure personally that, you know, China will recover like in a few weeks. So that may take a little bit longer. The funding environment, which is obviously indirectly linked, you know, to the treasury yield. is here to stay. The inflationary environment is here to stay for a while. So that does and probably will continue for a while to have some impact on the smaller biotechnology companies' funding and the way they think about the pace of their spend. So these are definitely areas that we want to kind of think about and then Not to mention the geopolitical everywhere now that is getting to probably a new level that we have not experienced before. There are multiple fronts there. When you think about Europe, overall for us, Europe, generally speaking, is doing okay for us. But when you think about the macroeconomic, Germany is probably already in a recession. So it's going to be interesting. I mean, specifically domestically, we're going into an election year domestically. So we'll have to wait and see how everything will shape up. But that doesn't have to do anything with our own kind of organic initiatives, products, new products, the end markets that are not disappearing. They're not going anywhere. So it's only, from my perspective, only a timing issue.

Okay, great. And just following up to Patrick's question about PCR, can you just talk about DDPCR specifically? Because that slowdown was worse than any of your other business units. So can you give investors some framework to think about how we can get comfort that that's definitely a market environment and not competitive pressure? Because there have been some competitors out there making some noise. So we just want to make sure that you still feel good about your market position there in DDPCR.

I still think we feel good about the position. I mean, we've made no secret of the fact that the competitive landscape is intensifying. And as we reflect on Q3, I think as we called out in the script, we've had a couple of really notable wins there that we think are going to help continue to position us well for the future. I think what we really saw in Q3, again, is an exacerbation of these biopharma impacts. We have particular strength in the early biotech sector, and I think what we saw in Q3 was a cumulative impact of these deferred projects and layoffs and the continuing extremely tight budget environment. Once again, we're seeing a lot of interest in the products, but the money is just not flowing. We continue to see healthy adoption and really strong acceptance of our QH600 platform. So as we look to the future, if we all believe that these impacts in biopharma are transient, then when we emerge from it, we think we're going to be in a really strong position. And then, of course, we've got competitors who are playing more in the lower-end segments, and we plan to enter there with the QX continuum platform in 2024. So for sure, the competitive pressure is intensifying, but I think we've got compelling responses. And where we've got leading positions in these segments, will continue to do well as and when these markets recover.

Great. Thanks for that, Simon. And just a quick follow-up on pricing. And I guess this is across everything in life sciences. What's the pricing environment like and how should we think about that going forward?

Yeah, I think that, you know, the environment is still inflationary, as you probably appreciate, on the clinical side, you know, tender-driven business, you can only take very modest and periodic price increases, and we do that when we get that opportunity. On life science, you know, there is still an inflationary effect. And, you know, we will still look to try and take modest price increases as we move forward to help offset our inflationary pressures that we're receiving. And, you know, we expect to do, we've done that this year, we expect to do that next year. And I think in the quarter we probably got, you know, just over a point of price, point and a half of price on a net basis. And I think that that should at least be a floor.

We've seen a mixed impact there. We process Chrome as well. Yeah. Yeah. Okay.

Thanks. And just final question. This is for Norm. Just given the recent sell-off in the space and specifically in your stock, you know, how does that change your acquisition strategy, if at all? And would you still consider issuing equity to pursue an acquisition target in this environment?

So I think that, you know, kind of in light of the recent stock dislocation, I think, you know, we will very much consider continuing our share repurchases as part of our capital allocation strategy. And obviously, at this point, not such a good currency for M&A. I think, in fact, you know, while we do continue to kind of look at opportunities, I think it's probably fair to say that more of our focus over the next several quarters will be centered around, you know, kind of navigating our markets and our continued operational transformation.

Great. Thanks for the time, and thanks for the questions, you guys. And, Lon, we wish you the best of luck, and it's been a pleasure working with you.

Thank you, Connor. I appreciate it. Likewise.

There are no further questions at this time. I would like to turn it back to Edward Chung for further remarks.

Thank you for joining today's call. As always, we appreciate your interest, and we look forward to connecting soon. Thanks, operator.

Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you for participating in MeNow Disconnect. conference call. Thank you for participating in MeNow Disconnect.