PerkinElmer, Inc. (NYSE:PKI) Baird’s 2022 Global Healthcare Conference September 13, 2022 10:50 AM ET
Company Participants
Prahlad Singh – CEO
Conference Call Participants
Tom Peterson – Baird
Tom Peterson
Thanks, everyone. Welcome. Thank you for joining. I’m Tom Peterson, I’m an associate here on our Life Sciences and Tools list here at Baird. We’re excited to have PerkinElmer presenting today. And representing the company, we have CEO, Prahlad Singh. Prahlad, welcome.
So as far as the agenda, I think Prahlad, you’re going to give an overview here with a couple of slides, and then we’ll hop into Q&A.
Prahlad Singh
Yes. I mean rather than those slides, I’ll — I’m much more comfortable just talking. So here it goes. We are really at an exciting stage in the life cycle of our company. Our recent announcement of the divestment of the Applied and Enterprise Solutions business sort of creates a platform for a high-growth, high-margin, pure-play Life Sciences and Diagnostics company.
And sort of just to walk you through the journey, about 5 years ago when we began this, Life Sciences and Diagnostics was about 58%, 60% of our total revenue and about 40% was on the instruments side of the business. Post this divestment, we’ve laid a strong foundation for a pure-play Life Sciences and Diagnostics Company with more than 80%, 85% of our revenue being recurring in nature coming from reagents, software, assays and services. More importantly, they are in 2 very strong growth end markets of Life Sciences and Diagnostics, which tend to be at least in the portfolio that — with the portfolio that we have, a bit more resilient to economic vagaries.
For example, on the diagnostics side, we’ve got immunodiagnostics, which primarily consumes autoimmune diseases, allergies, and a big chunk of our COVID revenue right now is just coming from there. On the reproductive health side, it’s mostly around newborn screening. As most of you may know, we screen every child born in the U.S., every newborn born in the U.S. There are 140 million babies born and we — and 40 million of those newborns are screened. And we screen about 36 million of those 40 million newborns every year. And consequently, we saved 75 lives per day. So there’s a lot of passion in what we do.
And the Applied Genomics is the third pillar of a diagnostics business, which through COVID has had a very strong reaction from our customers. We’ve had more than 2,500 new customers that have an installed base of our product portfolio now consequently of what they have seen from the performance of our product portfolio on the Applied Genomics side.
Similarly, on the Life Sciences side, we’ve been a leader — market leader in preclinical research and discovery, primarily around small molecules. Over the past 3 years, we’ve done about 10 acquisitions, spending around $7.8 billion to $8 billion, primarily in the cell and gene therapy and the biomolecule side. And our strategy there was we had already a captive audience. We have the channel. We had the product portfolio around small molecules.
Now with the acquisitions that we have made, we have been able to build a workflow and a value proposition for our customers around biomolecules, cell and gene therapy and single cell genomics. We also have a strong imaging and in vivo detection business that helps both on the small molecule and large molecule side for our customers.
From a financial profile perspective, consequently because of the way we have set up the company now, it will be a 10% plus organic growth company, spitting out 30% plus operating margin. So it really makes us a pure-play company, which is in a league of our own with a $3 billion plus of revenue coming. And we are really excited about the journey that we are embarking. So Tom, that sort of is a summary of who we are and who we are about to be.
Question-and-Answer Session
Q – Tom Peterson
Yes. That’s a great overview, Prahlad. Thank you for that. So you mentioned the defensiveness of this refreshed portfolio. Let’s dig into that a little bit and maybe apply it to where we are today. I mean you saw some impacts in China, obviously, in the quarter. People are concerned about Europe and slow down there. Can you just kind of, one, give us an update on where we are today, what you’re seeing? And two, dig into where you see the defensiveness of this portfolio, post divestitures?
Prahlad Singh
Yes. Just in terms of what — in the short and near term, obviously, there are some sporadic lockdowns in China, and we see what’s happening in Europe. But we did raise our guidance. So we are one of the very few companies that went ahead coming out of the second quarter, raised our guidance for the year. So we, again, are very confident of the portfolio that we have put in place and the products that we have out in the marketplace. The opportunity that the new portfolio brings is that we are not dependent or captive around large capital-intensive businesses anymore. What we will be selling, as I said, about 80% of our revenue is recurring in nature coming from reagents, kits and software.
It’s either a SaaS model or those are $1,000 or hundreds of dollars of kits. So they are not really very capital intensive that makes us a little bit more resilient to some of these economic vagaries.
Tom Peterson
Great. And then let’s kind of sit back and look at where we are from a balance sheet perspective, I think a little under $2 billion after-tax proceeds from the deal. How should we think about sort of capital allocation priorities in the near term? Should we think about ’23 as sort of a reset year, just thoughts around how you plan to use that capital?
Prahlad Singh
Sure. So I think, number one, our focus will be to ensure a small close of the divestment that we have made, which we have said will be in 1Q ’23. Simultaneously, over the past 24 to 30 months, as I said, we’ve done several acquisitions, which are in various stages of integration into the company, and that’s going very well, and we’ll continue to do that. Having said that, obviously, the proceeds from the divestment that will come — we’ve been — we’ll continue to be acquisitive in nature, but we’ll be very diligent and very strategic in the acquisitions that we make. And always, there’s the option of share buyback, but our focus will be on continuing to grow the business, given the strong platform that we have set out for ourselves.
Tom Peterson
Great. And you mentioned — it seems like the deal is on track for the timing communicated 1Q ’23, did have a management CFO change within that process. Max is here, we won’t make him speak during his first week. But can you just maybe more broadly speak to sort of the bench of talent you see at Perkin, and why you ultimately decided that the internal capabilities were competent here?
Prahlad Singh
Yes. I mean, I think a very responsible leader has a very strong succession plan for all their directs And so do we. So it’s nothing unusual that we’ve done here. Max has been with the company for 4 years. He worked with Jimmy for 8 years. And he is the primary driver of what was going on in the company, and he was more than ready. And even in the investor community, he’s been out there for 2 months now talking to investors and shareholders. And the response has been very good. I could not be more confident and proud of the work that he will be bringing.
Tom Peterson
Great. So let’s kind of get into the non-COVID side of the business and kind of where we’re at. You raised that core guide, as you said, to 8% to 9% kind of based on 2Q outperformance, improved outlook in the back half. What are you seeing in that core business that’s driving such an outsized growth? And what’s assumed in that second half outlook?
Prahlad Singh
Yes, sure. So on the Life Sciences side of the business, as I said, on preclinical research and discovery, we continue to feel very good with the portfolio. Our customers and our portfolio is getting a lot of traction, given that we are bringing a very contiguous workflow to our customers.
Let me give you an example, right? If you look at single cell genomics, we are providing them a sample analyzer. We are providing them liquid handling platform, extraction capabilities, quality control on single cell analysis with an Exelon portfolio, ability to store and transform single cells with our Honeycomb portfolio.
So what we are able to bring to our customers is validated but flexible workflows and that is gaining a lot of traction. So we do feel very comfortable and confident with what we’ve put out there.
Tom Peterson
Great. What about pricing? You talked about pricing starting to kick in here. How impactful is that to the overall business? How should we think about normalized price? And any sort of pushback that you’re getting from customers around pricing?
Prahlad Singh
Yes, yes. That’s a great question. Again, it’s very portfolio different. And if you look at our Applied and Enterprise Solutions business, which we recently have announced the divestment, it’s much tougher to get price there. A, because we are we don’t have a very robust portfolio in all aspects of it, right? We are a smaller player. But as on the Life Sciences side of the place, we are getting a lot more traction around pricing. And I think Max said in one of the meetings, we saw 75 bps in the first quarter, we saw an incremental 75 bps in the second quarter. I mean we are not going to see 75 bps every quarter. But I think the full impact of what we have will be really in 2023 when we will see that.
And that’s where we are getting traction on pricing, both on the Life Sciences side. And even on the diagnostic side, we tend to have multiyear contracts with states around newborn screening and reproductive health. But they haven’t built levers of inflation measures that sort of start kicking in. And that’s one calendar or one financial year will allow us to get the full impact of that in ’23.
Tom Peterson
Great. And then any changes in what you’re seeing from customers in terms of inventory levels? We’ve heard sort of anecdotally whether it be genomics customers, with cash-on-hand concerns kind of changing, how much inventory they’re holding on hand? What are you seeing there, if anything at all, any changes to call from a purchasing pace standpoint?
Prahlad Singh
Yes. Again, we don’t have a large genomic services business, so we don’t see any exposure to that. And let me give you a data point, right? Our applied genomics portfolio grew 50% ex-COVID last year, 40% to 50% in that range. And it still continues to grow high single digits. So again, it comes down to — and just to use proof points, right, our chemagen portfolio, our customers got used to the fact that you can get higher extraction yields, small — shorter protocol times and at a lower cost as they work through COVID. And that is now being translated to the rest of the non-COVID portfolio.
So it’s a natural extension of what they have worked for the — with for the past 2, 3 years and seeing traction of that on the non-COVID side. Similarly, around automation, the Explorer platform, which we launched about 2.5 years in the midst of COVID. The modular approach of it now allows customers to build their lab and scale it up the way they want to. And that’s the impact that we see.
Tom Peterson
Great. Let’s get into some of the business segments and start with Diagnostics. Immunodiagnostics, the overall print number is a little distorted by what you saw in China. I think ex-China, low teens. So really some nice strength there. What are you seeing overall that’s captivating about your offering there? And would love to get into EUROIMMUN specifically and what you’re seeing?
Prahlad Singh
Sure. So when we did the EUROIMMUN acquisition, in the fourth quarter, I think, of 2017. We had said that, that will be the best acquisition the company has ever made. And we said that to assume a deal model of 12% in the deal model. And it’s beaten every quarter. And even if you take China, immunodiagnostics out, it would beat that number.
And the question then that we tend to get is why? What’s so special about EUROIMMUN. And there are 2 aspects of it. One, the portfolio that they have of the number of assays that they bring to the table for autoimmune disease is the most expensive and intensive. The second thing also is, to some extent, market-driven. The rate of incidence of detection of autoimmune diseases is, I believe, still in its nascency even in developed markets. Forget about India, China, Brazil or those markets, but even Western Europe and in the United States. Your first call point is your PCP. You don’t go to an autoimmune specialist. You go through hoops and bounds before you can go to an autoimmune expert to be able to start the diagnostic process. So…
Tom Peterson
Great. And how do you think about the present state of the installed base post-COVID and utilization of some of these new placements as you kind of move outside of a peak COVID?
Prahlad Singh
For which product portfolio?
Tom Peterson
For EUROIMMUN.
Prahlad Singh
Again, EUROIMMUN, again, 80% of their business is reagent-based. So the instruments that they place are just ways and means to get more and more reagents out there. And if you recall, Tom, in the U.S., it’s still in its infancy. So there’s still a lot of scope for growth in the United States, in continued growth in China and India, Brazil and a lot of the national markets where they continue to make placements.
Tom Peterson
You picked my question on the Americas right off the page. So good to know there. On the applied genomics side, you spoke to sort of the peak kind of COVID pressures or — pressures of the COVID tailwinds that came alongside that business. What’s the right way to think about normalized growth there, mid-single digits last quarter. What’s the outlook there?
Prahlad Singh
I would say, mid- to high single digits is what I would expect applied genomics to continue to grow over the next quarter.
Tom Peterson
Got it. And then reproductive health. I mean there’s a lot of puts and takes here between birth rates, expansion into new geographies, et cetera. So what’s the outlook on reproductive health and then maybe we can get into Vanadis specifically?
Prahlad Singh
Sure. So I mean, again, the way to think of it is there are 140 million newborns every year. Right now, only 40 million of those are tested. Again, I’m using round figures, right? And so there is still 100 million babies, newborns that are to be tested. So geographic expansion is a natural growth ladder for the reproductive health and newborn screening business.
But the second aspect is twofold around menu expansion in a lot of markets outside the U.S. and Western Europe, newborns are still tested for a very few number of disorders. For example, in Egypt, every newborn is tested for 2 disorders compared that to California where every newborn is tested for 40, 50-plus disorders at birth.
So and even within the United States, Pennsylvania attached for much lower number of disorders than Oregon. So there is still a lot of disparity where you continue to have opportunities for menu expansion within the markets when newborn screening is prevalent. The second aspect of it is the advent of new rare diseases for which there are therapies lining up. For example, SMA, DMD. There are therapies coming out from large pharma biotech. And for that, we’ve got 4 or 5 new disorders that are either in our pipeline or submitted for FDA approval, DMD, SMA, X-ALD, MPS-II being the primary 4 of those.
And generally, the process is, there’s a RAS panel from the government that recommends, and there’s a Senate committee that eventually approves this and then states pick up for adoption. So that growth trajectory is ongoing. The third aspect around newborn screening, which is very important, is birth rates. The United States had seen declining birth rates for more than 2-plus years. Over the past 2 quarters, that trend has reversed, and we are starting to see low single-digit growth in birth rates in the United States. Europe has started flattening out. China has been the wildcard with more than double-digit decline in birth rates. Birth rates in China went from 13 million newborns to 9 million, 10 million newborns. So there’s been a significant decline over the past 2, 3 years. But the government is very acutely aware of this trend and their focus really is that both incentives that they can provide to sort of, a, flatten or reverse that trend. So we feel very good about the newborn screening side of where we are headed.
Tom Peterson
Great. And then just the Vanadis update, where are we with that portfolio? I think one system placed in the U.S. or kind of early days, commercial adoption in the U.S., but just thoughts on Vanadis more broadly in that offering?
Prahlad Singh
Yes. There are quite a few systems placed in the U.S. For competitive reasons, we stopped giving out numbers of how many systems are placed in the U.S. So just using that as a starting point. Look, the ACOG guidelines were very clear in validating what we’ve been saying since Vanadis launch. OBGYN’s focus is on 13, 21 and 18. Those are the 3 chromosomes that they care about and then they are worried about.
Microdeletions are not something that they really put a lot of focus on, given the sensitivity and specificity that they provide. And Vanadis validates that science. It is science first. It’s fully automated. No, there is no whole genome sequencing done there, and it is very economically affordable. And it provides the same level on sense and spec that NGS does. So we continue to see very good traction with Vanadis in the marketplace in the United States and Europe.
Tom Peterson
Great. Let’s dig in on China a little bit, kind of ex the immunodiagnostics sort of lockdown tailwinds. Can you just remind us relative to the overall Perkin portfolio? One, sort of what the mix is from a customer and application set within China and then we can get into sort of how you feel that’s positioned long term.
Prahlad Singh
Yes. I think post divestment, I would say pre-divestment China is probably in the 20%, 22%, I think post divestment, we will be in the teens somewhere in the teens. So that’s what the composition of China will be. Obviously, immunodiagnostics is a big chunk of that portfolio. But Life Sciences continues to be also a major driver for us in the marketplace.
So our strategy in China has been in China for China. And the whole idea around the — being sure that — if I were to say that one of the aspects that we all see is protectionist measures that governments put in place. And our focus over the past 5, 7 years has been how do we develop manufacturer, have approval for our products in China, in local brands in the marketplace. And then that strategy has worked very well for us.
Tom Peterson
Great. Let’s pivot to Life Sciences. $1.3 billion of 2022 revenue, call it, low double-digit growth outlook. You obviously had the BioLegend deal, what 2021. It’s been a little a little over a year now.
Prahlad Singh
Yes, it’s been a year. It’s about a year. It’s about a year.
Tom Peterson
So can you just kind of give us an update on BioLegend and maybe the life science reagents portfolio in general, I think at the time of the deal assumed a mid-teens CAGR, so maybe slightly above sort of segment growth thoughts on where BioLegend and the reagent portfolio is?
Prahlad Singh
BioLegend is doing great. And we feel — I sort of have to take my words back and when I said that EUROIMMUN will be the best deal PerkinElmer has done now have to replace EUROIMMUN with BioLegend because, look, it has a great portfolio. It’s got — and still, the fact of the matter is that a majority of BioLegend sales still come from Europe and North America.
And from a footprint perspective, historically, PerkinElmer has a very large and strong footprint in markets where BioLegend does not play a role — a strong role. So we see a lot of growth in our synergistic opportunities there. I think the way I would look at it is our life sciences reagents portfolio is about $700 million. That’s growing double digits. And BioLegend is approximately half of that. And that portfolio for the foreseeable future will continue to grow in double digits.
Tom Peterson
Got it. What about the informatics side of that portfolio? Obviously, it’s — it’s not an instrumentation business, but you’re still playing on sort of the service side. Why did you feel like that was still an important application for that end user?
Prahlad Singh
Yes, because it’s very closely connected to Life Sciences. Most of what we do in informatic software is on the preclinical side. For those of you who are undergrad chemistry geeks, known ChemDraw, ChemDraw as part of that informatics portfolio and Electronic Lab Notebooks. But still a majority of the informatics portfolio is on the preclinical research and discovery side, which is very closely connected to the Life Sciences part of the portfolio. And that, honestly, 50% of that revenue or close to that is now coming on a SaaS-based model.
It’s moving from an on-prem to a SaaS-based model. And we see lots of growth opportunities in that marketplace because not only from that market growing, but as we move beyond preclinical to CROs and clinical, it gives us a lot of opportunities for growth.
Tom Peterson
Great. And then on the cell analysis, kind of cell and gene therapy, you’ve stood up that business really with a handful of deals over the last call it, 3, 4 years. Where do you think you are positioned today? How do you comprehensive do you feel that portfolio is? And where are some obvious areas you feel like maybe you could add to or incrementally put out some products?
Prahlad Singh
Good question, Tom. I think we’ve done a good job, both from our organic and our inorganic portfolio on the preclinical discovery side from target ID to a lead candidate. I think the work that we need to do, the opportunities that we have more is on the development side. And getting into a GMP a little bit I don’t mean bioproduction and bioprocessing, I don’t want to get into the capital intensive side of the business but more around providing GMP-grade material sort of expanding from where we are onto that. That’s an opportunity for us.
Tom Peterson
Got it. That’s helpful. So if we look at sort of M&A focus going forward, you got the Life Sciences side. I think there’s maybe some more incremental opportunities just from a market fragmentation standpoint. But can you kind of give us an idea of what a typical target might look like from an M&A standpoint, just kind of comfort levels you have with the balance sheet, we’ll assume kind of post divestiture.
Prahlad Singh
I think the way what I’ll define is what we continue to look for. The profile of the company that we tend to be most comfortable with, our founder entrepreneur own our companies. We’ve had a very high success rate: a, in acquiring them; b, in partnering with them; and three, making them successful as part of the PerkinElmer family. So that will be the sort of the profile of the company. But really, what we — our #1 criteria continues to be a strategic fit to what we want to bring in. Where does it fit into our portfolio? What does it — where does it add value? And then I think most of the acquisitions that you just mentioned tend to provide us that. And that’s where — that’s sort of without getting much more deeper, that’s the target profile that we’ll be looking at.
Tom Peterson
You did the Oxford Immunotec deal. That was obviously a public deal. But again, most of the deals you’ve done in private. So can you just give us updated thoughts on where valuations are? Have they come down sort of more in line with public markets, conversations with founders and kind of where the funnel is on the private side?
Prahlad Singh
I think I don’t think valuations have materially changed. It might have changed in the public sector, but I think it’s still too recent for seeing much deviation or calibration or for a whole lot more sense if I can use that word to come into the valuation. So it’s still — there is still time. And we are not in a hurry, again.
We still have a big divestment that we have done, and we need to ensure that, that goes smoothly. So we are not going to be jumping off, making several acquisitions in the near future.
Tom Peterson
Great. Well, one of the main cash drivers the last couple of years has been COVID testing. It’s really rolled off more recently, I think, what, $50 million assumed for 3Q and then $25 million in 4Q. That $25 million number is about the endemic rate you’ve talked about. Can you just walk us through sort of what’s assumed in that endemic kind of run rate COVID outlook? And how derisked do you think that is?
Prahlad Singh
Yes, sure. I mean I know we say COVID revenue has rolled down, but we’ll still have close to $600 million in COVID revenue in 2022. So that’s not really a pocket change for — and I think the way to think of the $25 million endemic revenue that we say, our basic assumption is we have 2,500, 3,000 new installed base. And even if you assume 10% to 15% of capacity utilized, which is the most conservative that you can, right? The reagent revenue that comes out of that, the service revenue from all the installed base that you have and some PCR testing is going to be endemic. I mean that’s going to be prevalent.
So that’s sort of the assumption and I think it’s, I would say, pretty conservative, but that’s been our track record around COVID forecasting over the past 3.5 years.
Tom Peterson
Great. Well, we have a couple of minutes left. I thought I’d finish. What’s the most underrated part of the Perkin story? What are you most excited about getting up every day? And what would be your main takeaway you want investors to have?
Prahlad Singh
I think the most underrated part of the PerkinElmer story has been our execution. I mean, over the past 4 years, as I said, we’ve done 10 acquisitions. We’ve divested 1/3 of the company, including our brand name. We’ve generated $3.5 billion in COVID revenue and executed flawlessly and beaten or met our forecast the last 16 quarters in a row.
So I think we, who are inside the company, see that, appreciate that and live that. But it’s tough for investors and shareholders from outside to see that and appreciate that. And I think we’ll just continue to deliver and meet or beat our expectations in the marketplace.
Tom Peterson
Great. Any chance we can get a sneak peek at that new ticker or company name? Or are you going to keep that one close to the chest.
Prahlad Singh
I’m ready to take suggestions. If you guys have any ideas, I’m happy to take.
Tom Peterson
Great. Well, I think we can comfortably wrap there, Prahlad. Thank you so much for joining us, and have a great rest of the conference.
Prahlad Singh
Thank you, Tom. Appreciate it.
Tom Peterson
Thank you.
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