PKI - PerkinElmer Inc. (PKI) Presents at Cowen 43rd Annual Health Care Conference (Transcript)
2023-03-09 11:18:02 ET
PerkinElmer Inc. (PKI)
Cowen 43rd Annual Health Care Conference
March 06, 2023 9:10 AM ET
Company Participants
Maxwell Krakowiak - CFO
Conference Call Participants
Max Masucci - Cowen and Company
Presentation
Max Masucci
We have Max Krakowiak, CFO, PerkinElmer. Thank you to both of you for being here.
Just as a quick reminder, we made an out-of-consensus upgrade call on Perkin in early January. There have been 2 additional upgrade sense. Our view is that the company's recent acquisitions, particularly BioLegend and its forthcoming divestitures make the go-forward Perkin much different from the Legacy Perkin that many investors are familiar with. So with that said, our questions will be focused on the topics that we uncovered during our process of upgrading the stock.
So before we jump into some questions that are specific to the continuing operations, I just want to hit a few big picture questions.
Just latest expectations for when the planned business divestiture will close. Are there any risk factors that we should be aware of in terms of successfully completing that sale?
Question-and-Answer Session
A - Maxwell Krakowiak
Yes, sure. So I'd say from the divestiture standpoint, we're still on track with [Technical Difficulty] and right now, we'll both seem ahead towards that deadline. And I wouldn't say there's any material risk to call at this point, Max.
Max Masucci
Okay. Great. And then have you fully completed the integration of BioLegend? Or is that still in process? And generally speaking, compared to your expectations, how has BioLegend performed under the umbrella of PerkinElmer?
Maxwell Krakowiak
Yes. So maybe tackling the second part first in terms of how the business has performed, I'd say it's performed very well. So if you look at our roughly $700 million reagents business, BioLegend is obviously the largest portion of that business. That business has continued to perform well, growing low double digits through the past 3 years here. In BioLegend we expect to continue to be a healthy contributor going forward.
In terms of the integration, I would say our strategy on integration is unique to each acquisition. And in terms of BioLegend, I'd say, we're still very much in the early innings of that integration. And I'd say, maybe to give you a little bit of an example of how we treat each one differently specifically related to BioLegend, BioLegend review is sort of the new center of excellence for our reagents business and rather than force it to be integrated into the legacy PerkinElmer side of the house, we'll actually be doing more reverse integrations into BioLegend and giving them more insight and access into our legacy business, which we think both has a lot of commercial synergies for us going forward.
Max Masucci
Yes. And some multifactorial, I guess, it's complementary to the Diagnostics division as well, which maybe we'll have some time to touch on later on. But so keeping with some of the bigger picture questions just to bring everybody up to speed. The messaging has been that we have around $2 billion in unencumbered cash available to deploy for M&A buybacks, other purposes over the next 2 years. So if you compare the Perkin business before the plans, divestitures to the Perkin of today, what's your latest view around the prioritization of buybacks and debt paydowns versus M&A?
Maxwell Krakowiak
Yes. So maybe just to clarify one comment, too. So it's $2 billion unencumbered debt over the next 3 years as opposed to 2 years. And I would say, maybe to talk about the debt first. So from a debt perspective, we do have about $1.3 billion coming due over the next what from now like 18 months. And so that's included when we say $2 billion of unencumbered cash. And so we'll pay off that short-term debt.
And then from a long-term debt perspective, we have a very favorable long-term debt stack. So we've -- average maturity goes out to 2031. It's like 2.5% interest rate. So from a long-term debt perspective, we feel very confident in the position that we're in. In terms of the go-forward capital deployment across acquisition and buybacks, I would say, a, we're still committed to remaining investment grade. But b, from an acquisition standpoint, that continues to be, I would say, our primary focus of capital deployment. So I don't think that strategy has necessarily changed the types of companies we're going after.
But then as it relates to share buyback, it's something we're continuously monitoring. I think if we're in an instance where we continue to believe the stock is undervalued for what we think it's worth, maybe that's something that becomes more interesting to us, but it's something we're going to continue to monitor and watch closely.
Max Masucci
Great. And so it sounds like -- I mean, the BioLegend acquisition was the largest in the history of the company. It did around $380 million in revenues in '22, I believe. So going forward on the M&A front, are there any stringent criteria for acquisitions that you might make, especially now that you've done some housekeeping and you have really 2 clear-cut divisions of Life Sciences and Diagnostics?
Maxwell Krakowiak
Yes, maybe just to reiterate on of the points you made. First, we are going to remain investment grade. The second in terms of the criteria is obviously strategy and technology comes first. And we've got to make sure that it fits with our long-term road map. And then from a financial performance perspective of a prospective company, yes, the criteria probably has gotten tighter. I mean that doesn't mean we wouldn't necessarily do something that might be below our new financial profile of the technology is worth it.
But I think we've worked really hard to create the new financial profile of our go-forward company, and we think that's a profile that's differentiated. And so I think it would take something really special to be dilutive from a financial perspective out of the gate.
Max Masucci
Makes sense. And then let's move over to the Life Sciences continuing operations which we would consider a key factor in our upgrade. So as we think about the 2023 Life Sciences continuing operations, revenue growth, profitability and the margins, what would you consider within that segment, the most important factors that will determine your ability to accelerate growth or improve that segment's profitability in Life Sciences? Is it new product lines? Is it initiatives where you're integrating some BioLegend capabilities with the legacy Perkin reagent business or something else?
Maxwell Krakowiak
Yes. So maybe just one tweak to the question, too. I don't know that we necessarily need to "accelerate" the performance of the Life Sciences business. I think if you look, again, over the past couple of years, it's grown low double digits. That's sort of our midterm algorithm for that business. So I think it's more just continuing to do the things that we've been doing really well over the past couple of years. And so if you look at the portfolio and sort of our midterm outlook or algorithm, that would imply [Technical Difficulty] low double digits. It has consistently over the past couple of years. It has our informatics business growing low to mid-teens, again, which is consistent with what it's done over the past couple of years.
And then from an instruments perspective, it's mid- to high single digits, which I would say, over the past couple of years, we've probably been performing closer to that high single-digit mark. So from a growth perspective, we think we're already kind of there. There are some new technologies that we've started to talk about externally that we're really excited for, whether that be around building out some new GMP capabilities. Whether that be around some of the viral vector technology that we have coming out of our recent SIRION acquisition or whether that be the new base editing technology that we're hopeful to have a commercial launch early in '23.
So there are definitely some new technologies that we're excited about that further support our growth outlook. And then I'd say from a profitability standpoint, we've mentioned 30% operating margin guidance for next year. When you look at it from a segment perspective, life sciences is above that company average. And I would say that we consider ourselves to be best in class, probably from a profitability standpoint in the life sciences space. And so again, there's a lot of things we're excited about operationally, whether that be new synergies related to acquisitions. I think we're still just scratching the surface on some of the manufacturing productivity initiatives we have around freight logistics, some of our manufacturing sites. So there's definitely still a lot of things, coals in the fire, if you will, to continue to help from a profitability standpoint. But I wouldn't say we need anything groundbreaking to already be considered what we think best in class.
Max Masucci
Yes. Yes, yes. You guys, I mean, have definitely transformed in a major way. But everybody looks to the future, right? And so that's why we're here. One of the reasons why I asked that last question was just because our checks have shown that over half of the BioLegend customers were ordering through the company's online e-commerce platform versus a single-digit percentage of customers ordering the Legacy non-BioLegend reagent offering.
So just curious, how quickly can you sort of enable the online ordering for the legacy Perkin reagents? And then would that have more of an impact? I'm assuming the answer is both, but would that have more of an impact on accelerating growth or improving the margin profile of that business?
Maxwell Krakowiak
For sure. And I think we mentioned e-commerce is going to be one of the areas that we're going to invest in from a CapEx perspective going forward. I would say when you think about the time line of it, there's the new platform we'll be coming out with, yes, we're probably thinking sometime in early 2024 is when we really start to see some of the fruits of that.
But I'd say there are other short-term things that we're doing to continue to improve our e-commerce channel. So we've mentioned BioLegend catching some of our legacy products. So some of those have already been made available on the BioLegend e-commerce platform. So there's some short-term quick things that we're doing to try and pick up volume there. And then in terms of the long-term benefit, yes, you're right, it's both from a growth and a profitability standpoint.
Max Masucci
Okay. Great. And yes. Similarly, you made a comment on some interest in new GMP offerings. That was the next question that we had. It just seems like the company has been increasingly vocal around the opportunity to support your customers' transition from research into the clinic, right? Versus being a little bit more heavily weighted towards the front end. So is there any -- is there anything you can give us in terms of new products, new capabilities, GMP-related that we can keep on our radar, whether it's in '23 or '24 to support that end-to-end support of those customers?
Maxwell Krakowiak
Yes. I mean I think, obviously, GMP is one of them, right? And I think the way you teed it up is the right way to think about it. I mean we already have the products RUO today. And so for us to build out the GMP capabilities is not, I would say, a massive overhaul for us. We doesn't require an incremental massive amount of extra capacity. It's really just making our manufacturing facilities GMP quality. And what it's going to enable us to do is today, what happens is we leave money on the table as soon as our customers go into the Phase I clinical trials. And so getting that GMP capability will allow us to play a little bit further downstream and get that Phase I volume, but it also helps our customers out tremendously and helps them accelerate their transition from research into clinical. And so we think that's something that would be very beneficial for us over the next couple of years.
And then I think I already mentioned the other pieces of technology that we're really excited about around the viral vectors of our recent SIRION acquisition and the base editing in Horizon. But those, I think, we're still early innings, but we are excited about the longer potential, for sure.
Max Masucci
Yes, absolutely. So Horizon, you acquired the company in late 2020, I believe. And then I think SIRION and BioLegend were in mid-2021. So I know it's still early, but how is that -- have you seen any early evidence of success in that strategy thus far?
Maxwell Krakowiak
Yes. I mean, again, I think in terms of the context of our overall Life Sciences, strategy, we're very excited about what those acquisitions bring to us. And I'd say, again, I know it's sometimes can feel like it's been a long time since we acquired them. But I think given also some of the nature of the companies we have purchased, whether mostly founder-led companies, part of that culture integration is just as much us learning from them as it is them learning from us.
And so yes, we're taking our time with it. It's still in early innings, but there's no less excitement, I would say, around any of those acquisitions.
Max Masucci
Yes, absolutely. All right. In the absence of time, I do have a question that I received via e-mail and so. When we flip over to Diagnostics division. And so starting with ImmunoDx, so that particular business represent over half of the 2022 revenues in Diagnostics and we'll likely the swing factor for the 2023 Diagnostics segment growth. And in Q4, the lower COVID-related revenues in the lockdowns were a headwind, but the non-COVID ImmunoDX revenues grew double digits.
So understanding that it's only been about 3 weeks since your call. Have you seen -- can you give us any insights into the trends that you've seen in China related to COVID policy changes? And then maybe if -- how that stacks up with your expectations at the time when you were setting your guide?
Maxwell Krakowiak
Yes. So maybe tackling the guidance question first, and then I'll go into the China specifically. So for the guidance for next year, what we've baked in from a diagnostic standpoint is sort of the low double digits Immunodiagnostics globally on a non-COVID basis. And then we've got Applied Genomics and Reproductive Health at sort of the mid-single digits level.
So within Immunodiagnostics, again, everything outside of China has been growing low double digits for the past couple of years. We expect that to continue. And then specifically within China, Immunodiagnostics -- to your point, this is our biggest swing factor on the Diagnostics guidance side. And I would say our expectation there is that the first quarter is going to continue to be challenged. And if we looked at -- it was down high single digits in the fourth quarter. We said the first quarter is probably going to be slightly worse than that. We expect a gradual improvement in Q2 with really the "return to normal" in the second half of the year. And that's all really just related to what we're actually testing in China. It's nonacute. We expect sort of be the last aspect of diagnostic testing in a hospital setting to return to normal. And I think that's why we've baked that in the guidance as more of a second half return to normal.
Max Masucci
That absolutely makes sense. Okay. And then the other question that I wanted to make sure we snuck in before we're up on time is just EUROIMMUN and Oxford Immunotec are the 2 businesses that make up the majority of ImmunoDX. So Oxford, I believe, has seen some nice operating margin gains under the umbrella of Perkin and as a standalone was a decent gross margin business, but not a great operating margin business.
And so in -- Oxford has been delivering some solid growth in '23 and '24 as the EUROIMMUN Oxford mix sort of evolves. Is there an opportunity for -- if you do have a rising mix of Oxford, is there an opportunity to -- for the ImmunoDX operating margins or even the overall Diagnostic segment operating margins to tick higher?
Maxwell Krakowiak
Yes. So maybe talking about Oxford first specifically, I would say that you're right there, gross margin is probably accretive to the overall gross margin of the company. So I think going forward, we said we'll be something in the low to mid-60s from a gross margin perspective. So it is accretive to that. I would say, from an operating margin perspective, though, I don't think we've seen as much of an uptick as we would have anticipated.
And the reason why I say that is Oxford has also very much been impacted by the lockdowns in China, that is a decent part of their business. So we've had some volume leverage headwinds there. Now our thesis is that as China returns to normal, the Oxford operating margins should start to see that volume leverage pick up. So yes, I think there's definitely room for improvement there.
In terms of the overall diagnostics new segment margins, again, as I mentioned, 30% operating margin company guidance for next year. Diagnostics will be slightly below that with Life Sciences being above and then you've got your corporate overhead. But from a Diagnostic standpoint, I wouldn't think if it's any different than the Life Sciences side. There are still things we're really excited from an operating margin expansion standpoint. We'll have the ability to grow into our stranded costs from the divestiture here over the next couple of years. But there's also a lot of operating initiatives that we're really excited about, and that's both in the life sciences and the diagnostics side.
Max Masucci
Great. And I think I might have time to sneak in 2 more on Reproductive Health. So we can cover everything. Over the next year, if you look at the Reproductive Health business and you look at newborn screening, do you see growth in newborn screening coming more from the inclusion of more diseases on state-specific panels in the U.S.? Or is the growth opportunity in newborn screening more heavily tilted towards menu expansion in key regions internationally?
Maxwell Krakowiak
Yes. So maybe to just to paint a broader sort of macro picture, if you will. So there's about 140 million babies tested annually -- or born annually, about 1/3 of those are tested. So there is both opportunity from what we would consider geographic expansion and just testing more babies, but then also the ability for menu expansion where of the babies that are tested today, which we do the vast majority of, yes, there's an opportunity to add continued test to that panel. So I'd say it's both from that perspective in terms of the growth algorithm.
And then lastly, the market's been -- it's been -- negative mid-single-digit decline for the past 4 or 5 years. We don't expect that to be the terminal growth rate. So any uptick there is only further tailwinds for us. And again, we've been consistently growing mid-single digits in a market that's declining mid-single digits. So I think we feel -- I think we're excited about the future of our newborn screening business.
Max Masucci
Great. All right. Last question here. Only because you guys mentioned the 75% year-over-year growth in Vanadis revenues recently. So can you just give us some visibility into the ideal customer that chooses to adopt Vanadis versus a send-out lab. And then how many of those sort of, I guess, you would call greenfield adopters there are in the U.S.? And then just more generally, is there a way for us to frame when Vanadis becomes a large enough revenue contributor to move the needle, so to say, in Reproductive Health?
Maxwell Krakowiak
Yes. There's couple of questions packed in there. So maybe first, from a customer standpoint, I think the way to think about the ideal customer is probably someone who's running 5,000 tests on their system. And that's going to be either a multi-center OB GYN or it's going to be [Technical Difficulty] and so I think that's probably the target group. I don't think I have an exact number of customers, right, that I would feel in the U.S.
But then in terms of sort of your second question on the materiality of it and when that happens. I don't think we've got a set date here in the calendar. I think we continue to be very excited and pleased with the progress that Vanadis is making. And hopefully, we're going to have a couple of publications here in 2023, that's going to further help accelerate some of the growth in the U.S.
Max Masucci
Yes. I mean, do you see it as more of a -- as a displacing platform? Or do you see it as more of something that's complementary and addressing an unmet need today by [indiscernible] of the world.
Maxwell Krakowiak
I think it's a little bit of mix of both, truthfully. And yes, there will be some -- I mean, look, we have a prenatal testing business today, and there will be some cannibalization there, but we think it's going to grow above and beyond that. And yes, I do think it's meeting an unmet need in the market both from a price, but also from a customer experience standpoint.
Max Masucci
Fantastic. Well, that's all the time we have. We covered a lot. So thanks for being here. Thanks for the detailed responses.
Maxwell Krakowiak
Absolutely.
Max Masucci
Always a pleasure.
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PerkinElmer Inc. (PKI) Presents at Cowen 43rd Annual Health Care Conference (Transcript)