Bio-Rad held an earnings results conference call on August 3, 2023, with Edward Chung, Head of Investor Relations, Norman Schwartz, CEO, Ilan Daskal, CFO, Andy Last, COO, Simon May, President of the Life Science Group, and Dara Wright, President of the Clinical Diagnostics Group in attendance. The call discussed the second quarter 2023 financial results and key business trends. Edward Chung cautioned that there may be risks and uncertainties in the forward-looking statements made during the call, and Ilan Daskal took over the call to review the non-GAAP financials.

In the second quarter, Bio-Rad experienced strong demand for their clinical diagnostic products, but saw a softening of demand in their BioPharma segment. This resulted in a more modest growth of their overall core business. BioPharma customers reduced their inventory levels and experienced a tighter funding environment, resulting in a larger impact to their BioPharma business than previously communicated. However, they saw strong and consistent demand from academia in all regions across the Life Science portfolio.

During the quarter, the company had strong demand for their QX600 Droplet Digital PCR System, and completed a cross licensing and royalty agreement with QIAGEN related to digital PCR intellectual property. The core Life Science business grew mid-single digit and the Clinical Diagnostics business saw strong growth, particularly in China. The company launched the IH-500 next instrument, with updated software and increased security, and increased product supply with the new Singapore facility. The company is encouraged by the increased demand for Clinical Diagnostics systems and reagent pull-through.

Andy reviewed the progress the company has made in reducing back orders and the results of the second quarter. Net sales for the quarter were $681.1 million, a decline of 1.4% on a reported basis and 0.3% on a currency-neutral basis. Core revenue, excluding COVID-related sales, increased 4.6% on a currency-neutral basis. Sales of the Life Science Group for the quarter were $300.2 million, a decline of 6.9% on a reported basis and 5.8% on a currency-neutral basis. The company also incurred a onetime $2.3 million R&D expense related to a cross-license agreement and will receive ongoing royalties from the arrangement of $500,000 per quarter.

The Life Science Group experienced 4.5% year-over-year currency-neutral core revenue growth, excluding COVID-related sales, primarily from Droplet Digital PCR and qPCR products. However, process chromatography posted a mid-teens year-over-year revenue decline, and the underlying Life Science business decreased 4.2% due to reduced COVID-related sales. The Clinical Diagnostics Group saw 3.3% reported growth and 4.8% currency-neutral core revenue growth, driven by strong demand for diagnostic testing systems, primarily within diabetes and blood typing, as well as quality control products.

In Q2 of 2023, the Diagnostics Group posted strong double-digit currency-neutral year-over-year core revenue growth in Asia, while remaining largely flat in the Americas and Europe. Gross margin for the quarter was 53.2% on a GAAP basis, a decline from 57.2% in Q2 of 2022 due to unfavorable product mix and lower than forecasted revenue in the Life Science Group. SG&A expenses were maintained at the year ago level through tight expense management, while R&D expenses increased slightly to 9.5% of sales. Operating income was $89.6 million or 13.2% of sales, a decrease from $122.9 million or 17.8% of sales in Q2 of 2022. The reported results were negatively impacted by a change in fair market value of equity security holdings, while increased interest income from investments resulted in net other income of $5.4 million.

The effective tax rate for the second quarter of 2023 was 22.5%, compared to 24.2% the same period in 2022. This resulted in a reported net loss of $1.162 billion or $39.59 diluted loss per share. On a non-GAAP basis, excluding certain atypical and unique items, the gross margin was 54.4%, SG&A was 29.2%, and R&D was 9.3%. This resulted in a non-GAAP operating margin of 15.8%, compared to 19.2% in Q2 of 2022.

The second quarter of 2023 saw a non-GAAP effective tax rate of 22.5%, compared to 19% in 2022, due to the geographical mix of earnings. Net income and diluted earnings per share were $88.5 million and $3, respectively, compared to $103.4 million and $3.44 in the same period the previous year. During the quarter, the company purchased 549,863 shares of its stock at an average price of $377.2, for a total cost of $207.4 million, and authorized a new share repurchase program of up to $500 million. The balance sheet saw a decline in cash and short-term investments due to share repurchases, and an increase in inventory due to softer demand and elevated order. Net cash generated from operating activities was $98.1 million, and adjusted EBITDA was $137.9 million or 20.2% of sales.

In Q2 of 2023, adjusted EBITDA was 23.2% of sales and net capital expenditures were $34.6 million. For the rest of the year, there is expected to be increased software sales for the Life Science Group and continued instrument demand within Diagnostics. The financial outlook for 2023 has been revised to 80 basis points of currency-neutral revenue growth, with 4% year-over-year core revenue growth expected for the second half of the year. This is due to a revenue shortfall in the second quarter driven by weakness in BioPharma and softer demand in China, as well as process chromatography demand and softness in other BioPharma and in China.

The Life Science Group is expected to have a 4% currency-neutral revenue decline for 2023 and a 6% year-over-year sales growth excluding COVID and process chromatography related sales. The Diagnostics Group is expected to have a 5.5% core revenue growth for the year. Non-GAAP gross margin is expected to be 54.5%, and non-GAAP operating margin is expected to be 16%. Adjusted EBITDA margin is expected to be 21.5%. For the second half of the year, the Life Science Group is expected to have 7% core revenue growth, the Diagnostics Group is expected to have 8% core revenue growth, non-GAAP gross margin is expected to be 54.5%, non-GAAP operating margin is expected to be 18%, and adjusted EBITDA margin is expected to be 22%.

Patrick Donnelly from Citi asked about the softness in the process chrome piece, to which Simon May responded that there has been a shift in purchasing patterns and a general softness in demand that is spilling through to the second half of the year. Andy Last then added that there are headwinds in China hitting both the Life Science and Diagnostics sides, and there is some cautiousness on the Diagnostics side due to the economic environment. There are no expectations of improvement in the back half of the year.

In the first half, Life Science, including the BioPharma component, was soft, while Diagnostics was relatively good. However, the macroeconomic situation in China is causing caution for the second half. Gross margins are being impacted by inventory and material costs, and inflationary environment. However, a disciplined approach to operating expenses is helping to insulate the bottom line.

Ilan Daskal was asked about the outlook for BioPharma in 2023 and if any of the weakness was spilling over to ddPCR. Simon May responded that it is too soon to call any signs of recovery in BioPharma and that there is a strong presence of ddPCR in emerging BioPharma. He noted that the introduction of QX600 and the advanced multiplexing capabilities are offsetting the softness in BioPharma. Ilan was then asked about the phasing of revenue growth and margins between 3Q and 4Q, but he did not provide any further color.

Ilan Daskal and Andy Last explain that the fourth quarter of the year is usually a stronger quarter due to seasonality, and that gross margins are slightly higher due to fall through. They also explain that they will take a disciplined approach to operating expenses, and that inventory levels are near the peak due to the movement of diagnostics manufacturing from France to Singapore and the unexpected downturn in lifeline.

Tim Daley from Wells Fargo asked about the expected growth level of process chromatography in 2024, and Ilan Daskal and Andy Last responded that they are not expecting a pent-up demand in 2024 and that the orders that have been pushed out are transitory shifts in timing. They do not anticipate any changes in the shape of the market share or long-term expectations.

In the quarter, the transition to the new manufacturing in Singapore went well and both plants are now past the foreclose shutdowns in France, fully focused on ramping up production in Singapore. The diagnostics backlog was also made progress on and it is expected to take the full year to complete. Inventory burn down is expected in the coming quarters.

Jack Meehan asked Ilan Daskal about gross margin, to which he responded that the heavy lifting was mostly done and that they would continue to benefit from their European sites. Simon May then commented that it was too soon to predict how the issues in BioPharma would affect the first half of 2024. Lastly, Norman Schwartz mentioned that there was plenty of cash on their balance sheet and that monetizing a piece of their Sartorius stake to buy more of their own shares was not an issue in the near-term.

Sartorius saw strong double-digit growth in ddPCRs in the quarter, and have grown the franchise significantly in the last few years. Production challenges were cleared out, and there are no constraints moving forward. Competitively, there have been no changes in the last quarter. Sales of the product have gone into both new markets and new customers, as well as upgrades for current PCR customers.

The speaker is discussing the uptake of their products across multiple industries, and the approximate ratio of equipment to consumables. He also states that operating expenses in the second half of the year will be slightly lower than in the first half, as a percent of sales.

The conference call concluded with Edward Chung thanking the participants for joining. Simon May declined to answer a question about the QIAGEN digital PCR cross licensing deal due to confidentiality provisions, and Edward Chung mentioned that they will be participating in the Wells Fargo Healthcare Conference in Boston next month.

This summary was generated with AI and may contain some inaccuracies.