PerkinElmer, Inc.

Ladies and gentlemen, welcome to the Perkins-Elmert Third Quarter 2022 Earnings Call. My name is Glenn, and I'm your moderator for today's call. If you would like to ask a question during the presentation, you may do so by pressing star 1 on the telephone keypad. I will now hand you over to your host, Steve Wallaby, to begin.

Steve, please go ahead. Thank you, Operator.

Good morning, everyone, and welcome to Perkin Elmer's third quarter 2022 earnings conference call. On the call with me today are Prahlad Singh, our president and chief executive officer, and Max Grykowiak, our senior vice president and chief financial officer. If you have not yet received a copy of our earnings press release or slide presentation, you may find copies of them on the investor section of our website. Please note that this call is being webcast and will be archived on our website. Before we begin, I'd like to remind everyone of the safe harbor statements that we have outlined in our press release issued earlier this morning, and also those in our SEC filings. Statements or comments made on this call may be forward-looking statements, which may include but are not necessarily limited to financial projections or other statements of the company's plans, objectives, expectations, or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested by any forward-looking statements due to a variety of factors which are discussed in detail in our SEC filings. Any forward-looking statements made today represent our views as of today. We disclaim any obligation to update these forward-looking statements in the future, even if our estimates change. So you should not rely on any of today's forward-looking statements as representing our views as of any date after today. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent we use non-GAAP measures during this call that are not reconciled to GAAP, we will provide reconciliations promptly. I'll now turn it over to our President and Chief Executive Officer, Prahlad Singh. Prahlad?

Thanks, Steve, and good morning, everyone. We achieved yet another excellent quarter in Q3, both financially and operationally, again exceeding the financial commitments we have provided. This consistency in our results is a testament to both the resilient and reliable execution of our teams and the significant transformation of the company itself over the last several years. We have worked diligently to transform the company into an organization that functions at an exceptionally high level with strong operational and financial rigor, while at the same time strengthening our corporate culture and making a positive impact in the communities where we live and work. I'm especially proud that our team has continued to execute at a high level, while many individuals both internally and externally, have been extremely busy over the last 90 days, working through the necessary steps to ensure that the divestiture of our analytical, food, and enterprise services business is accomplished with precision and on time. As it pertains to the planned divestiture, our teams are collaborating well, and New Mountain Capital has been a great partner that has been appropriately engaged to ensure a smooth transition. We remain on track to complete the transaction in the first quarter of next year and to then unveil to the public a new corporate name, brand, and identity for the life sciences and diagnostics business. While businesses are always evolving, the culmination of the closing of the divestiture and the rebranding of the remaining business It will mark the completion of the major portfolio transformation we have undertaken over the last several years. We are very happy with the strength of our balance sheet and will look to redeploy the nearly $2 billion of after-tax proceeds we will receive from the divestiture through a combination of funding upcoming debt maturities, opportunistic share repurchases, and of course, continued strategic and value-creating M&A. Upon the transaction closing, we will become a more simplified company with over 80% of our revenue recurring in nature and nearly zero exposure to more cyclical end markets such as industrial, applied, and environmental. We expect the life sciences and diagnostics business to generate 10% organic growth and 30% operating margins following the divestiture with even stronger working capital dynamics consistent with the outlook we provided at the deal announcement last quarter. I appreciate all the effort that is going into completing this transaction by many of our employees who are demonstrating their tenacity by simultaneously executing flawlessly on day-to-day operations as evident in our strong third quarter results announced today. As it pertains to our third quarter results, I'm pleased to see the company again exceeded our initial expectations by generating 9% pro forma non-COVID organic revenue growth in the quarter ahead of our 6% to 8% guidance. While effects was again a greater than anticipated headwind, The business was able to mitigate the impacts, leading to pro forma adjusted EPS in the quarter of $1.51, solidly above the 140 to 145 we were anticipating. Max will provide more details later, but I was glad to see our life science business continue to show outstanding performance by again growing in the double digits while the significant headwind from China lockdowns on our diagnostics business was in line with our expectations. This trend leads us to again increase our pro forma non-COVID organic growth and pro forma adjusted EPS guidance for the full year. All in all, heading into the end of the year, we are performing at a very high level across our entire business. including those divisions that we intend to divest. I'm looking forward to the first quarter of next year when we expect to begin operating as a more streamlined and focused high-growth, high-margin business that has leading positions in several attractive end markets. Our new life sciences and diagnostics company will be dedicated to helping close the chasm between research in the lab and entering clinical trials, and then from those trials to hopeful cures. I believe that our focus on enabling customers to invent and developing the next groundbreaking therapeutic or to effectively diagnose disease, we can build on the impact we are already having on global health and can meaningfully further improve the quality of life around the world in the years to come. Our increasing contribution to global health has always been driven by the new innovations we consistently bring to the market to meet and anticipate customer needs in an ever-changing field of science and healthcare. This innovative spirit was evident again over the last few months as we introduced a number of exciting new products across the business. In our diagnostics business, our Oxford Immunotech franchise received FDA approval in late September for its T-cell select reagent kit and related complete workflow. This new workflow significantly increases the use of automation for our clinically superior T-SPOT TB test for latent tuberculosis, dramatically reducing the amount of manual hands-on time required to complete the test. I'm excited to see the impact that this even more competitive offering can have on this business over the coming quarters, as the U.S. market represents more than half of the global IGR and latent TB testing market, one in which Oxford has historically been under-penetrated. In our life sciences business, in addition to regularly introducing hundreds of new consumables, antibodies, and reagent kits each quarter, we recently launched the Celica PLX system and workflow from our next long business. This new system builds upon its existing highest revenue generating line, the Celica MX. The Celica PLX is unique in the industry as it combines image cytometry with cell counting, allowing for scientists working in cell and gene therapy to perform both cell identification and cell viability work all in one instrument. This platform utilizes proprietary consumables that contain antibodies from our BioLegend business, as well as user-friendly software resulting in simplified scientific workflow while also improving cell integrity. This is made possible due to the less potential cell damage as a result of reduced manual interaction throughout the analysis. Alongside positively contributing to the advancement of global health by leading with science, we also remain very focused on how the specific actions we take can impact our people and our communities. In our latest ESG report, which we published just yesterday, We highlight the significant progress we are making in these areas. From recently signing on to support the UN Global Compact, increasing our commitment to reducing our scope one and two emissions by 50% by 2032. We are providing increased transparencies in areas such as our emissions, our diversity, and our enhanced government policies. I encourage you to read more in the report and on our new ESG dedicated website, esg.perkinhelmer.com. Moreover, it's encouraging to see several third party ESG rating agencies recognize our progress by recently either upgrading or improving our various scores within their respective rating platforms. In closing, before I turn it over to Max, I again want to thank all our employees for their dedication and strong execution over the past few months, which has continued to enable us to perform at a very high level. This strong and consistent execution over not just the last 90 days, but over the last several years, during a time when there has been significant change occurring inside the company and around the world, has been what has allowed us to position both the business we intend to divest and the remaining life sciences and diagnostics business on strong foundations for future success. I'm highly confident in our ability to continue to execute over the coming months as we complete the divestiture and look to redeploy the proceeds in the most value creating way possible. all while achieving the strong financial outlook which we have outlined. With that, I would like to turn the call over to Max to provide more specifics on our recent performance and an update on our outlook. Max?

Thanks, Vlad, and good morning, everyone. I'd like to start by saying it's been a pleasure to meet many of you over the last couple months, and I look forward to connecting with many more of you in the near future. As Claude highlighted, we've had an active but productive last few months in which our teams have been able to continue to perform at a very high level. This is evident in our strong Q3 performance despite continued macro pressures, as well as the incremental activities many have undertaken internally since we announced our proposed divestiture back in early August. From a high level, we had another terrific quarter financially as we again were able to meet or exceed our guidance across the board. We generated pro forma total company adjusted revenues of $1.03 billion, which was at the high end of our expectations, despite foreign exchange pressures clearly coming in greater than we were facing 90 days ago. We were able to offset these incremental FX pressures with our pro forma organic revenue declining only 13%. This was driven by the company generating 9% pro forma non-COVID organic growth which was above our 6 to 8% guidance. This growth includes an approximately 200 basis point headwind from significant pressures in some specific areas of our business in China due to the continued lockdowns in the region. The double-digit year-over-year decline we experienced in our immunodiagnostics business in China was in line with our expectations. These pressures were offset by continued strong double-digit non-COVID growth in our diagnostics business outside of China immunodiagnostics and continued double-digit organic growth in our DAS segment on a pro forma basis. Beyond our organic growth, the contributions from recent acquisitions added 8% to our total revenue in line with our expectations. Strong year-over-year growth from BioLegend helped contribute to mid-teens pro forma organic growth for our combined life science reagents portfolio overall in the quarter. While COVID-related revenues have continued to decrease meaningfully throughout the year, we were able to generate $54 million in total revenue from these products and services in the third quarter, which was slightly above our expectations. We continue to expect demand for our COVID-related offerings to decline sequentially and are assuming we reach our expected terminal run rate of $25 million per quarter of COVID-related revenues starting here in the fourth quarter. Finally, it shouldn't come as a surprise given what has occurred in the macro economy over the last few months, but foreign exchange was a 6% headwind to our total revenue in the quarter. This impact was 200 basis points larger than we had projected in early August. From a margin perspective, we saw nice volume leverage and stronger pricing realization while managing expenses well despite inflationary pressures continuing on a year-over-year basis. This led to pro forma adjusted operating margins of 26.3 percent in the quarter. Along with the organic revenue upside, this resulted in pro forma adjusted earnings per share, $1.51, which was eight cents above the midpoint and six cents above the high end of our expectations. Moving beyond the P&L, we continue to see solid cash generation in the quarter with adjusted free cash flow coming in at 144 million. We continued our deleveraging by paying down 58 million of debt in the quarter, including retiring our remaining 50 million of variable rate debt, resulting in a 2.4 times leverage at the end of the quarter. So far in the fourth quarter, we have opportunistically retired an additional $45 million of our $1.3 billion of shorter duration debt. Upon complete retirement of this shorter term debt over the next two years, we will have approximately $3.2 billion of debt outstanding at an average fixed interest rate of 2.6% with a seven-year average duration. I'd now like to provide a bit more color on the performance of our businesses and what we are seeing in the end markets in which we participate. From a geographic perspective, our 9% non-COVID pro forma organic growth in the quarter was led by low double digit growth in the Americas, while both Europe and Asia Pacific grew in the high single digits. China was flat overall, but grew in the low double digits, excluding the immunodiagnostic business, which was impacted by COVID lockdowns. When looking at our businesses, starting with our discovery and analytical solution segment, total pro forma revenue was $633 million in the quarter. This was up 23% year over year and represented 61% of our total revenue. Organically, the segment grew 12% on a pro forma basis, with double-digit growth from pharma being partially offset by relatively flat performance from academic and government customers. We continue to see strong double-digit growth in our pre-clinical discovery business, driven by strong growth in our imaging portfolio, and as I previously mentioned, our overall life sciences reagent portfolio grew in the mid-teens year-over-year on a pro-pharma basis. Our informatics business continued to show strong organic growth and was up nearly 20% year over year. The applied analytical and enterprise services business that we intended to vet grew in the low double digits, while our remaining life science business grew 14% organically overall in the quarter and is on pace for strong double digit growth for the full year. Our diagnostic segment generated $399 million of total revenue in the quarter, which was down 39% and represented 39% of our overall total revenue. Organically, the business was down 33% due to significantly lower COVID volumes year over year. However, on a non-COVID basis, the business was up 5%, which included an approximate 500 basis point headwind impact from the China lockdown pressures that we face in the quarter, primarily in our immunodiagnostics business. As previously mentioned, the lockdown-related headwinds we face in China remain significant. These pressures that were in line with our expectations resulted in our immunodiagnostics business in the country being down in the mid to high teens year over year organically. Outside of China, our immunodiagnostics business grew in the mid-teens organically, excluding COVID, an improvement from the low double digits it was up in the second quarter. These geographically differing rates of growth combined to result in low single-digit non-COVID organic growth for our immunodiagnostics business overall in the quarter. Our reproductive health business grew in the high single digits on a non-COVID basis in the quarter, as we saw strong growth in Europe and solid growth in both the Americas and Asia Pacific. Despite continued pressures on global birth rates, the high single-digit organic growth we saw in the quarter continued to be driven by a combination of new product introductions ramping up, along with further geographic expansions in our newborn screening business. While still relatively small on an absolute basis, Our prenatal screening business continues to also benefit from significant year-over-year growth from vanadis, which is the only non-NGAS-based NIPT offering on the market. In our applied genomics business, we saw mid-single-digit non-COVID organic growth against a greater than 50% year-ago comparison. This business, which provides instruments and kits that are used in DNA sequencing sample prep work and other liquid handling, has now grown at an upper teens rate on average over the last three years. It continues to benefit from strong non-COVID demand from our pharma customers, success from recently introduced new products, and likely some continued share gain. We look forward to the upcoming commercial launch before year end of our recently introduced Biofuel NGS sample prep system which we expect will help bring more automation to an even broader set of potential customers. In total, the life sciences and diagnostics business that will become the new company once the disaster is finalized grew 8% organically excluding COVID, which also included a 300 basis point headwind from lockdown-related pressures on our immunodiagnostics business in China. Looking ahead to the final three months of the year, we continue to remain in a very good position despite the macro concerns and currently expect no change in our previous outlook for the fourth quarter beyond the incremental FX pressures we are facing. We are expecting 8 to 9% non-COVID pro forma organic growth in the fourth quarter, which includes our assumption that we will continue to encounter material year-over-year declines in our immunodiagnostics business in China due to lockdown-related impacts. We expect this to result in 9% overall non-COVID pro forma organic growth for the full year. For just the life sciences and diagnostics business, which will remain once we complete our planned divestiture, we are expecting approximately 8% non-COVID organic growth in the fourth quarter, which includes an expected 200 basis point headwind from lockdown-related pressures in China. For the full year, this translates into approximately 9% organic growth for the business that will remain, which includes a 300 basis point headwind from the China lockdowns. We continue to expect 610 million of revenue from COVID for the full year, with 25 million expected in the fourth quarter, as I mentioned earlier. With all of our recent acquisitions now fully in our organic growth base, we expect zero M&A contribution in the fourth quarter and anticipate M&A to contribute seven points to pro forma growth for the full year, the same impact we've been expected since the beginning of the year despite incremental FX pressures. We now expect FX to be a 7% headwind to pro forma growth in the fourth quarter, which is a few hundred basis points more of an impact than we had assumed three months ago. This brings our full year assumed impact from FX to now be 5% up from our prior 3% expectation. This guidance leads the fourth quarter to have expected total pro forma revenue in the $1.06 to $1.07 billion range, and $4.59 to $4.60 billion for the full year. Moving to below-the-line items, we continue to expect $104 million of net interest and other expenses for the full year, with $25 million expected in the fourth quarter. Additionally, we expect a 20% tax rate this quarter, leading to an estimated tax rate of 21% for the full year, unchanged from our prior outlook. In terms of pro forma adjusted EPS, we are raising our full year guidance to a new range of 789 to 791, which accounts for our outperformance in the third quarter and includes no change to our prior assumptions for the fourth quarter outside of the incremental FX pressures I discussed. The fourth quarter pro forma adjusted EPS is expected to be in the range of $1.65 to $1.67. All of this guidance is detailed on the second to last page of today's earnings presentation that is on our new investor website. In closing, while macro uncertainties still remain, I feel great about how we are positioned as a company moving forward. We've consistently shown our ability to perform and execute at a high level despite unexpected challenges and are confident in our ability to work towards a smooth closing of our proposed divestiture and to achieve our full potential thereafter. there's an incredible opportunity in front of us at Perkin Elmer. We have the team, we know how to execute, and we are hungry to help define the future of life sciences and diagnostics while continuing to deliver long-term value to our shareholders. We couldn't be more excited. With that, operator, at this time, we would like to open up the call to questions.

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star followed by 1 on the headphone keypad now. When preparing to ask your questions, please ensure your phone is unmuted locally. We have our first question. It comes from Dan Ayres from Steve-O. Dan, your line is now open.

Morning, guys. Max, obviously a lot of moving parts on COGS these days, so on the gross margin profile, How are you feeling about the 60% level that you talked about post-spin or that you guys talked about post-spin, just given that it looks like you're more like the mid-60s right now? And then on the out-margin line, the 30% target, 30-plus percent, just curious how the allocated cost piece influences the ability to get there post-spin. Do you think that happens more towards the end of the year, or can that be at that level closer to 1Q following the completion of the deal?

Yep. Hey, Dan. So I think maybe starting with the first question on the gross margin, you know, I would say we are very confident in the ability to be at sort of the 60% plus range coming out of the gate in terms of the remaining business. You know, if you think about the gross margin level we had in the third quarter coming in at the mid-50s, you know, you have to remember, too, that has the mix of the AES business, which we are divesting, which is dilutive to the overall company mix. And so, again, we feel very confident in the 60% plus gross margin exiting the divestiture. And then on the overall operating margins, you know, the way I would think about the 30% is that is what we will achieve in the first 12 months post-deal closure. Obviously, there's a little bit of timing noise with when it will close here in Q1, but in the first 12 months, the 30% is what we are targeting for the overall company.

Okay, helpful. Maybe on diagnostics, what's the current thought on just the recovery for immunodx in China, how that might shake out? And then when we think about next year, how much does the 10 plus percent organic target depend on a rebound there to start 23 per lot? I think last quarter you said that you expect to be at the 10 plus level after the close. So just checking to see whether you think the diagnostics business is expected to sort of be in a place that allows that to happen early in the year. Thanks a bunch.

Yeah. Hey, thanks Dan. Good morning. I know again, I think on both of them as we've talked about the immunodiagnostics business, you know it is performing well outside the lockdowns. You know X China, but even in China it is pretty much it was in line to the expectations that we had in third quarter as to what it would do and and the assumption that we have made and I think it's declining high single is what our assumption is for the fourth quarter and we expect it to be in that range. You know, going into next year, you know, obviously, one is naturally the comp would be, you know, much easier for the IDX China business. But overall, just, you know, with the NPIs that we have in place coming out of reproductive health, the health of the applied genomics business, and China coming out of the lockdowns, we feel pretty good about the numbers that we have for diagnostics, too.

Thank you. We have our next question. It comes from Derek DeBuren from Bank of America.

Hey, good morning. Thanks for taking my question. Hey, can you sort of talk about, I was bouncing around a little bit this morning, but can you talk a little bit about just some of the dynamics, particularly in Europe, that you're seeing right now? And also just your generally preliminary thoughts on FXED wins for next year and interest expense. I know you're paying down some debt, but just some general guidance so we can help triangulate our EPS numbers. Thanks.

Hey, Darren. So starting with the Europe question. So in the third quarter, we saw Europe performing for the remaining business within the low double-digit range, and that was with both DX and Life Sciences relatively around the same level. You know, I think as we look towards Q4, we anticipate still, I think, strong performance in the life sciences business. Diagnostics had a really strong third quarter across all end markets. Maybe that's a little bit slower here in the fourth quarter, but I'd say overall, we are not seeing anything that is a major concern in Europe. And then moving over to your comment on interest expense for next year. The interest expense is... You know, although we are paying down some debt, I think the important thing to note is that the the debt that we will be paying off will be at a very low interest rate. So the 1.3 billion that we have coming to over the course of the next two years, the interest expense is less than 1%. So although there will be some benefit, I don't think it would be something that would be overly material. And then on your last question for FX, for next year, right now we are impacting FX to have about a 3% headwind to 2023 revenues.

Got it. Thank you. And any, you know, are you still expecting to take, I mean, what was the price realization in the quarter, and are you still expecting to take price next year?

Yep, so I think for the third quarter in price, we were pleased with the results. So maybe a couple of dynamics there. So one, if you remember in the first quarter, I think we did 75 basis points. In the second quarter, we did about 150 bits. And in the third quarter, we saw more than 200 basis points from a pricing. And that's kind of in line with what we had expected to see. We do anticipate that again, kind of stepping up here in the fourth quarter. You know, as we've talked about, it takes a while for all of your annual contracts to renew. And then we do expect to have elevated price performance again in 2023. You know, I think this is one of the areas that we've been most pleased with our ability to operate, operationally execute this year, and we expect it to continue for next year. And then I apologize, Derek, was there a second question in there as well?

No, that was it. Thank you.

Thank you. We have our next question, which comes from Jack Meehan from Levon Research. Jack, your line is now open.

Thank you. Good morning. I wanted to follow up on Derek's first question and just get any updated thoughts on the speed at which you'll redeploy proceeds after the spin. Just trying to think about NUCO EPS in 2023. It sounds like M&A is your preference, especially given the fixed rate debt at low interest rates. Is an ASR something you would consider to offset some of the spin dilution?

So, you know, let me take the, you know, on the broader strategic level, Jack, as you said, right, you know, we will continue to be diligent on how we deploy capital as it comes through. And, you know, we'll continue to look at the three combinations that we've talked about earlier, you know, whether it's being opportunistic on share buybacks, on paying down debt and on the M&A side. Again, on the M&A side, our number one focus is to ensure a smooth close to the transaction that we've announced and ensure the integrations that we have ongoing on the acquisitions that we have made are complete, which to a big degree, they are already there. And then look at opportunistic deals that we can do that would fit to any gaps that we might have on our portfolio. So that trend is not going to change, and I think we'll continue on that path. Is there a second part to your question?

I don't know if you want to address specifically an ASR. Is that something you would consider?

Go ahead.

Yeah, I think, as Peralat mentioned, I think the priority for capital deployment after paying back the short-term debt over the next two years is going to be from an M&A and organic investment standpoint, which we do have other areas that we are very excited about. I mean, obviously, we'll continue to watch what's going on with the market, but I don't think the share buyback or ASR is the primary focus of capital deployment.

Fair. Okay. The follow-up, just on BioLegend, by my math, based on the M&A contribution in DAS, it looked like it had a nice sequential step-up in revenues. So I was wondering if you could just talk about, you know, maybe any quarterly dynamics and how that business is performing.

You know, and again, Jack, I think the answer you'll get from us is the same. Our life sciences reagents business overall did very well, including BioLegend. You know, all of it has a strong low double-digit growths overall. And, you know, it continues to perform in life in line with our overall reagents growth business that we are seeing at mid-teens, you know, from a pro forma growth perspective. And it continues to do well. We could not be happier with that acquisition. Teams performing and executing on all fronts. Thanks, Jack.

Thank you.

Operator. Thank you.

We have our next question. It comes from Josh Waldman from Cleveland Research. Josh, your line is now open.

Morning. Thanks for taking my questions. A couple for you on RemainCo. I think you said RemainCo grew 11% X the China lockdown headwinds. And that was, I think that was with a softer academic in markets. Can you remind us RemainCo's exposure to academic and government in any color on how RemainCo performed in those accounts? And then, you know, as we look at the – or think about the comp setup for 23 in light of a softer academic, I mean, has that changed the dynamic as presumably those accounts start to come back online more fully?

Yeah, so I think speaking maybe overall to the academic and government – government portfolio that we'll have for the remaining business, you know, it'll kind of be a high single digit percentage of the overall company. And then to answer your second question on, you know, how does it impact the 10% for next year? I think, you know, look, there's obviously puts and takes across the portfolio, but I think, again, we feel confident in our ability to hit 10% plus organic growth next year. And I think that's part of the assumption.

Got it. Thanks. And then We'll be helpful to hear you talk through how synergies are tracking across the five to six or so acquisitions you've done in the last two years. I guess any examples you could point to that suggests you've seen improved customer adoption because these assets are now within the PKI platform and then how that's being considered in your, I guess, 10% plus organic growth guide for RemainCo in 23?

Yeah, hey, Josh, this is Prahlad. I think, you know, the answer to your second part of the question is that, you know, the number that we have put out on 10% organic growth includes synergies because all the acquisitions are now pretty much integrated. You know, I gave two examples of synergies that we are already seeing on the technology front in my prepared remarks. You know, the Celica system that Nexolome launched has BioLegend antibodies that are attached to it. You know, the other one is if you look at the T-SPOT approval that we got from the FDA, the automation component that has around it has the liquid handling capability, et cetera, that comes from the legacy Perkin-Elmo applied genomics business. So those are two very, you know, near-term examples or real-life examples of how the integration is already – it's not a work in progress anymore. It's actually in motion, and it's being executed as we speak.

Got it. Appreciate it, guys.

Thank you, Josh. We have our next question. It comes from Katherine Shorty from Baird. Katherine, your line is now open.

Hey, guys. Thanks for the questions. First, now that the COVID side of your business is moderated, what are you seeing in terms of early signs of your customers shifting that capacity to non-COVID applications? How do you view what that tailwind could look like for the non-COVID diagnostic side in 23 as COVID testing further winds down?

Welcome back, Catherine. I think the way I would look at the COVID portfolio, I think, again, it will continue. And then again, my speculation is as good as anybody's on this. It continues to be sporadic in nature, and it continues to be regional in nature. For example, you have the sporadic lockdowns in China that I think over the next couple of quarters will continue to be deployed. Post-schools opening or post-vacation in Europe, we saw a slight spurt in that. So I think as we go forward, the $100 million baseline that we have assumed for 2023, will essentially be a combination of what we provide in terms of our Camogen portfolio, PCRs, instruments, and a combination of all thereof. And then I think the 100 million number is the baseline that we would assume for 2023.

Okay, got it. And then for China, can you just talk a little bit about, you know, what your overall growth expectation is for the fourth quarter and I know in the past you have not been impacted by any volume-based pricing initiatives or tender processes, but anything new you're seeing on that front in China, primarily on the diagnostic side?

Yeah. So, Catherine, maybe to answer the tacit question of our expectations for China here in the fourth quarter. So, again, China is the one region where we have seen the pressures from the immunodiagnostics business. But overall, for the remaining business in China for the fourth quarter, we are expecting about high single digits growth. Obviously, if you then normalize it for, you know, the IDX headwinds, which we have assumed is a negative high single digits here in the fourth quarter, you know, China would be even better than that, excluding that portfolio. But I think we are very confident in what we're seeing in our China business, and the team continues to perform very well.

Yeah, and to your second question, Catherine, I think, you know, we have not yet seen, you know, pricing-based pressure But it's not going to be too far. Eventually, it will start, you know, showing up. You know, as we've talked earlier, you know, it's more on the routine testing that you are, you know, that people are seeing pressure on tenders. But I think eventually it will get there. But on the con side to that, you know, I think the lower, the more mass pricing model will bring more people into testing. So the overall volume growth will hopefully help take care of any impact that you will have from pricing.

Great. Thank you. Yeah.

Thank you. We have our next question comes from Lisa Garcia from UBS. Lisa, your line is now open.

Great. Good morning, guys. Thanks so much for taking the question. I guess, first off, sticking on the topic of China and kind of thinking about made for China in China, can you provide an update on kind of where you sit with the diagnostics business and localization of manufacturing and kind of how that's ramping. I know that you had a facility in Beijing that came on this year.

Yeah. So on the reproductive health side, you know, outside of Shanghai, we pretty much have transferred most of our products that are manufactured, developed in China for China, and the local products have an MPA approvals. It was on, in Beijing, was on the euroimmune side of the business where we had started transitioning products for China in China. I would say probably 35 to 45% of our euroimmune portfolio for China is now manufactured in China and hopefully the rest of it will be done in 2023.

Great, super helpful. And then maybe I missed, but I haven't heard any backlog commentary. I would love to kind of just kind of get some, if you could just maybe speak to the backlog and kind of the trends you're seeing there and kind of how it gives you some, maybe some confidence for Q and whether it can give you any early reason to 2023.

Yeah, so from a backlog perspective, I would say overall, we are still at an elevated level versus historical. from a historical perspective. And as we continue to kind of work through some of the supply chain challenges, you know, that picture really hasn't changed as much quarter over quarter. Obviously, as the supply chain picture gets better, you know, we will continue to burn through that backlog. But I think we feel very confident with the setup we have from a backlog perspective. And we didn't see any sort of significant erosion in the third quarter. It's kind of business as usual.

Great. Thanks so much, guys.

Thank you. We have our next question, which comes from Matt Sykes from Goldman Sachs. Matt, your line is now open.

Hey, good morning, guys. Thanks for taking my questions. Maybe just to start on reproductive health, you know, you had high single-digit organic growth in the quarter. Obviously, the birth rate is a consistent headwind going forward, but can you maybe talk about some of the trends you're seeing in reproductive health driving that high single-digit organic growth, and then any update on Vanadiff in terms of installed basic growth with that instrument?

Sure, Matt. I think one of the drivers of growth for reproductive health is the one you pointed out in the latter part of your comment, which is when it is. Even though, as Matt said, it starts off a small base, its continued growth is obviously favorably impacting reproductive health. We've also talked a lot about the new NPIs that we continue to launch. So menu expansion, geographic expansion continues to help us despite the pressures that we have from birth rates. And, you know, and I think, you know, even on the birth rate side, I would say the U.S. has turned around the corner, and, you know, and we tend to have more real-time data. And I think, you know, the birth rate trends in the U.S. are ticking back upwards. So I would say those are the three drivers, Matt, that are favorably impacting the reproductive health segment. Thanks a lot. And then, Max, maybe...

Max, maybe just on overall customer inventory levels in life sciences. I'm sure shelf life kind of mitigates some of this. Maybe talk about any kind of customer level, customer inventory levels as you see that you saw in this quarter and moving forward.

Yeah, man, I don't think we've seen anything that's quote-unquote out of the ordinary. Again, our life sciences business in the third quarter grew mid-teens, and we continue to be excited about what we're seeing from an order perspective. But overall, I don't think we're seeing anything abnormal from a customer inventory level.

Yeah, and also, Matt, if you look, remember we've talked about this, right? Eighty percent of our revenue is a regular run rate business for Remainco now. And these are all vials and assays and tests. So it's not that customers are going to keep a whole lot of inventory for those products. So it really does not, it becomes a moot issue for us going forward.

Perfect. Thanks for the call.

Yeah.

Thank you. We have our next question. It comes from Vijay Kumar from Evercore ISI. Vijay, your line is now open.

Hey, guys, thanks for taking my question. And congrats on a steady friendship. Prahlad, maybe my first one to you. So I've shared all the color on the outlook for the base business, confidence in WD organic for fiscal 23. But what is the right base in fiscal 22 when you think about year-to-date trends in the base business and the employed Q4 guidance? I think we get to $3.3 billion today. Should we back out 600 million of COVID? Is 2.7 billion the right base? Or I think in the past you've spoken about 100 million of sustainable COVID revenues. Is that baked into that 2.7 or maybe just give us some color on what is the right number?

Yeah, Vijay, so from a base business perspective, let's first start with the 2022 results. I think overall for 2022 for the base business, Our guidance implies 9% organic growth, and that is with a 300 basis point headwind from our IDX China business. So if you normalize for that, our remaining business is growing low double digits for 2022. In terms of the modeling for next year, so if you take the 3.3, the way I would do it is back off the 600 million of COVID and then add back 100 million for the COVID run rate, so that should get you to about 2.8 for your base.

That's helpful. And then maybe one on margins here. 3Q, I'm assuming 3Q is the right run rate given minimal COVID revenues. We get to remain LSDX margins of 31.4. And I think you noted 30 plus confidence for fiscal 23. Is the delta between 30 and 31 plus disenergies?

Yeah, so I'd say, BJ, there's a couple of dynamics in play there. And maybe first, just to correct one point, I wouldn't say there's minimal COVID levels in Q3. You know, if you sort of quarterize 100 million, you get to about 25 million a quarter versus the 54 million that we did in 3Q. So it's still elevated from a COVID standpoint. In terms of the margins for, I think what you're asking is basically, how do I think about the continuing ops margins versus the margins that we expect for the remaining business going forward. And I would say there's really two dynamics that you need to consider. One is because of disc ops reporting, we are required to keep all shared costs in continuing ops. So that's extra costs that the continuing ops P&L is burdening. The second piece is that, again, in 3Q, we had elevated COVID. And I think for the full year of 2022, we've got $600 million of COVID, which is not the COVID expectation we will have for next year. And I think we've been pretty consistent saying in the past that COVID is an elevated gross margin versus our normal company average. And so those are two variables you need to consider. But overall, we are very confident in the 30% margin that we will have in the first 12 months post deal closure.

Sorry, just to clarify that 31.4% in 3Q for RemainCo LSDX operating margins. That includes stranded costs?

And in theory, it does because, again, if you think what I mentioned with the DISC OPS reporting rules, we are required to keep the extra shared costs in continuing OPS P&L. And so, yes, you can think of it similarly to stranded costs. It's not the exact same dollar amount, but, yes, the concept is the same.

Thank you, guys.

Thank you. Our next question comes from Patrick Donnelly from CTE. Patrick, your line is now open.

Hey, this is Jason on for Patrick. Maybe just a follow-up on gross margin. Sounds like you expect to continue to have elevated price performance in the fourth quarter next year. So just curious what you're seeing maybe on the input cost side and anything to flag across the supply chain or logistics there.

I don't know. I'd say there's anything to necessarily flag. I think we've seen somewhat of a steady state quarter over quarter from an inflation product standpoint. I think also we've been consistent in the past saying that the inflationary pressure we are seeing on the divested business is much greater than what we are seeing on the life science and diagnostics side. That's not to say it doesn't exist on the life science and diagnostics side, but it's not at the same level of materiality. And then, look, I'd say from a gross margin productivity standpoint, you're absolutely right. We are seeing, you know, continued good traction from a pricing perspective. And then we've also got productivity initiatives that are ongoing well across logistics and freight that are starting to bear fruit here. And so I think we're feeling pretty confident with the gross margin performance of the remaining business.

Got it. That's helpful. And then maybe just a follow-up on China. You mentioned you might be expecting another few quarters of lockdowns. there, and then another couple hundred basis point headwind in the fourth quarter. So 423 in that 10% number. Are you baking in any assumptions for prolonged lockdowns in the year? Thanks.

Well, I think, you know, from our perspective, we are assuming for business to start getting back to normal in China with the lockdown slowly easing down. I think the obvious thing would be from a comp perspective, it would be a very easy comp to overcome. And that's, you know, that's assumed in the guidance there, Jake.

Thank you.

We have our final questions from Matthew Masucci from Cohen & Co. Matthew, your line is now open.

Hey, thanks for taking the questions. So the California prenatal screening program kicked off on September 19th. Shortly after, we did see a motion for a preliminary injunction from some companies that were excluded. But it'd just be great to hear some high-level thoughts around your experience with the California prenatal screening program so far, and then just any expectations for how the program could contribute to reproductive health growth.

Good morning, Max. So, yeah, you know, the program went live in California for us early October. I would say, look, you know, the injunction doesn't really impact our existing business there. And, you know, things could always change, but we are just in the process of currently starting to ramp up. You know, and in terms of the impact, as we've talked about, you know, the way to look at it is to measure the performance of our overall reproductive health business, of which vanadase and prenatal is a part of. and we expect that to continue to show a healthy growth trend. So it's doing well, but it's just in its early stages of ramp up, I guess, is the way I would think of. Great.

And then can you just maybe give us a sense for how many of the MX cell counters are placed in the field, or just how many of those customers are logical adopters of the PLX benchtop system, and then You know, whether you do consider that the PLX launch a meaningful new driver of BioLegend antibody evidence.

Yeah, Max, we continue to sell both. Obviously, the MX and the PLX, it's, you know, the MX is a significant upgrade to the PLX is a significant upgrade to the MX product, which is out there. You know, as I mentioned earlier, the benefit of it is it does both the cytometry and cell counting while maintaining the viability of the cells. And it also allows us the opportunity to attach biology and antibodies to it along with the software that goes with it. You know, in terms of how many units and how many numbers of, you know, MX or PLX are there, I really don't have, you know, an exact number that I can share with you. And I think the way I would measure this, continue to look at the performance of our overall life sciences business, you know, rather than a particular product. Nexolome has been a great acquisition. It's probably been one of our biggest success stories in how smoothly the integration has gone and the way the teams have worked across in terms of combining it With the total workflow that we present to our customers, it's been a home run for us.

Great. Thanks for taking the questions.

Yeah, Max.

Thank you.

Thank you. With our next questions comes from Rachel from J.P. Morgan. Rachel, your line is now open.

Perfect. Thanks for squeezing in. So just first off on Oxford Immunotech, great to hear that you guys got the FDA approval of T-cell select. So can you just talk about if that was really in line with your expectations for timing, and then how material could that approval be?

Good morning, Rachel. You know, again, what was approved by the FDA in terms of timing, we had expected it to come in the mid-to-late summer, and I think that's where it ended up. I think in terms of the impact it does is that, you know, obviously, as you know, you probably know, U.S. represents likely more than 50 percent of the global latent TB testing market. So from a revenue perspective, it will be very beneficial that while the clinical superiority of the Oxford's test is known, it did require more labor to produce a result. So what it does now is now with this approval and addition of the workflow, It allows for much more efficient workflow to be in place. And then I think, you know, working with our partner in the U.S., which is Quest, you know, we have, we look forward to this becoming, making it much more competitive and much more automated in the U.S. marketplace.

Great. And then just to follow up on some of the earlier questions about capital deployment, you guys have said that M&A is going to be one of the main priorities So, can you just spend a minute talking about how private valuations have been in that M&A market? And then, you know, on leverage, just what type of leverage would you guys stretch to on the Romain Co. post-investiture to accomplish some of these M&A deals that you plan to do? Thanks.

Yes, Rachel. I think we'll continue to be investment grade. Let's start there. So, that's not going to change. In terms of the valuations on the private side, I mean, as you know very well, the kinds of deals we do, they do not happen overnight, and we tend to be much more focused on founder-entrepreneur companies. And I would say that there hasn't really been much change in the expectations for potential targets in that space, because those generally do not tend to be in a hurry to sell off their businesses, and it does take time. Again, we are not in a rush either. We continue to be very diligent and very strategic in the acquisitions that we will bring to the table. So I would say that we haven't seen much meaningful change in anything versus what it was, I would say, two, three quarters ago is probably the best way to answer your question.

Thank you.

We have no more further questions on the line. I will now hand back to Steve Wallaby for closing remarks.

Thank you. Thank you everybody for your time and your questions this morning. We look forward to speaking with you again next quarter and happy voting. Take care.

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