Bio-Rad Laboratories Q3 2022 Earnings Results & Report

Bio-Rad Laboratories EPS Results

• Actual EPS: $2.60
• Consensus EPS: $2.59
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $3.71
• EPS Beat Rate: 5 of last 8 quarters

Bio-Rad Laboratories Revenue Results

• Actual Revenue: $680.10 million
• Expected Revenue: $685.50 million
• Beat/Miss: Missed by -$5.40 million
• YoY Revenue Growth: -9.00%

Bio-Rad Laboratories (NYSE:BIO) develops, manufactures and markets products and systems used in life science research and clinical diagnostics. Its life science portfolio includes laboratory instruments, reagents, software and consumables used in areas such as genomics, proteomics, cell biology, biopharmaceutical development and quality control.

The company’s clinical diagnostics business provides systems, reagents and software for blood typing, infectious disease testing, diabetes monitoring, quality control and other diagnostic applications. Bio-Rad serves universities, research institutions, biotechnology and pharmaceutical companies, hospitals, clinical laboratories and industrial customers.

Founded in 1952 by David and Alice Schwartz, Bio-Rad is headquartered in Hercules, California, and operates through a global network serving customers in North America, Europe, Asia and other international markets. Norman D. Schwartz serves as the company’s chairman, president and chief executive officer.

Bio-Rad Laboratories Q3 2022 Earnings Call Transcript

Key Takeaways

• Ongoing supply chain constraints led to slower than expected product availability, elevated logistics costs and a significant order backlog that weighed on Q3 sales.
• On a currency-neutral, core basis (excluding COVID sales and last year’s one-time royalty settlement), Q3 revenue increased by 6.1%, driven by underlying growth in both Life Science and Clinical Diagnostics franchises.
• Bio-Rad launched its next-generation QX600 droplet digital PCR system and completed the acquisition of Curiosity Diagnostics, expanding its molecular testing capabilities and order pipeline.
• GAAP gross margin fell to 54.9% from 58.6% in Q3 2021 due to higher freight and raw material costs, lower COVID volumes and unfavorable product mix.
• The company reaffirmed full-year guidance, targeting high-end revenue growth of 1–2% (about 8% core) with operating margins around 19%.

Presentation

[Operator]

Good evening, and thank you for attending today's Bio-Rad Laboratories 2022 Earnings Results Conference Call. My name is Danielle, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host, Edward Chung, Head of Investor Relations of Bio-Rad. Edward, please proceed.

[Edward Chung, Head of Investor Relations at Bio-Rad Laboratories]

Thanks, Danielle. Good afternoon, and thank you all for joining us. Today, we will review the third quarter 2022 financial results and provide an update on key business trends for Bio-Rad. On the call with me today are Norman Schwartz, our Chief Executive Officer, Ilan Daskal, Executive Vice President and Chief Financial Officer, Andrew Last, Executive Vice President and Chief Operating Officer, Simon May, President of the life science group, and Dara Wright, President of the clinical diagnostics group. Before we begin our review, I'd like to caution everyone that we will be making forward-looking statements about management's goals, plans and expectations, our future financial performance, and other matters. These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties.

[Edward Chung, Head of Investor Relations at Bio-Rad Laboratories]

Included in these forward-looking statements are commentary regarding the impact of the COVID-19 pandemic on Bio-Rad's results and operations and steps Bio-Rad is taking in response to the pandemic. Our actual results may differ materially from these plans and expectations, and the impact and duration of the COVID-19 pandemic is unknown. You should not place undue reliance on these forward-looking statements, and I encourage you to review our filings with the SEC, where we discuss in detail the risk factors in our business. The company does not intend to update any forward-looking statements made during the call today. Finally, our remarks today will include references to non-GAAP net income and diluted earnings per share, which are financial measures that are not defined under generally accepted accounting principles. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings release.

[Edward Chung, Head of Investor Relations at Bio-Rad Laboratories]

With that, I will now turn the call over to Ilan Daskal, our Executive Vice President and Chief Financial Officer.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Thank you, Edward. Good afternoon, and thank you all for joining us. Before I begin the detailed third quarter discussion, I would like to ask Andrew Last, our Chief Operating Officer, to provide an update on Bio-Rad's global operations. Andy?

[Andrew Last, EVP and COO at Bio-Rad Laboratories]

All right. Thank you very much, Ilan. As the world continued its massive recovery from the pandemic, we experienced strong demand for both our life science and clinical diagnostics products, and our organization is broadly back to normal operations. We also had modestly higher-than-expected demand for COVID-related products, particularly in Asia-Pacific. However, improvement in product supply in the quarter was slower to materialize than we expected, which negatively impacted sales across several product lines, particularly early in the quarter, and we continue to carry a significant order backlog. As previously mentioned, the areas of challenge have been primarily electronic components for instruments. We did experience improved product supply as the quarter progressed, and we now see a positive improvement trend for product supply as we enter the fourth quarter. In addition, during the quarter, we experienced significantly elevated logistics costs and ongoing higher costs in raw materials.

[Andrew Last, EVP and COO at Bio-Rad Laboratories]

Inventory levels increased quarter to quarter, reflecting strength in demand and the order backlog as we focus on procuring the remaining key components. During the quarter, we launched our next generation droplet digital PCR system, QX600, which brings advanced six-color-based multiplexing and application flexibility, especially in oncology and reproductive health to our customers. We are extremely pleased with the market response and have quickly built a strong order book. Also in Q3, we completed the acquisition of Curiosity Diagnostics and their PCR ONE system. This system provides a sample-to-answer, high multiplex and rapid diagnostic PCR system to facilitate our entry into the molecular disease testing market with a differentiated platform. Integration of this Warsaw, Poland-based company is progressing very smoothly. While relatively small, our business operations in Russia have continued to be challenging as a result of increased sanctions and employee concerns over the military draft mandate.

[Andrew Last, EVP and COO at Bio-Rad Laboratories]

We expect sanctions to continue to impact operations for the near to medium term. Overall, we're very pleased with our performance in China, although the protracted zero COVID policy had some extended effect on our clinical and life science businesses in Q3, and we see the recovery to normal taking a little longer. In closing, as we enter Q4, our organization continues to focus on resolving the supply chain challenges, which importantly have already begun to ease, reducing our backlog and meeting the high level of demand we are experiencing from our customers. Thank you. I'll now pass you back to Ilan.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Thank you, Andy. Now I would like to review the results of the third quarter. Net sales for the third quarter of 2022 were $688.8 million, which is an 8.9% decline on a reported basis versus $747 million in Q3 of 2021. The third quarter decline in revenue was mainly a result of lower COVID-related sales this year, as well as the receipt of a one-time $32 million settlement for back royalties from 10x in the year ago period. On a currency neutral basis, revenue declined 4.1%. We estimate that COVID-related sales were $17 million in the quarter and continue to reflect an elevated level in demand, particularly in Asia, as a result of the ongoing outbreaks in China.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Year-over-year core revenue, which excludes COVID-related sales and the 10x $32 million settlement in the third quarter of 2021, increased 6.1% on a currency neutral basis. On a geographic basis, we experienced currency neutral year-over-year core revenue growth in Europe and Asia. Core revenue in the Americas was largely flat as a result of the supply chain constraints that we have been experiencing in the past year. As Andy mentioned earlier, we continue to carry an elevated order backlog as a result of supply chain constraints and continued strong customer demands. We are now seeing higher production volumes and anticipate reductions of order backlog through the remainder of this year.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Sales of the Life Science Group in the third quarter of 2022 were $3,317.9 million, compared to $373.5 million in Q3 of 2021, which is a 14.9% decline on a reported basis and an 11% decline on a currency neutral basis. Excluding last year's 10x settlement, the Life Science Group sales declined 6.9% on a reported basis and a 2.3% decline on a currency neutral basis. Despite supply chain constraints, the underlying Life Science year-over-year currency neutral core revenue growth was 9.4%. The year-over-year growth was primarily driven by Western Blotting, qPCR, Process Media, and our Antibody products. We continue to see a strong order backlog for ddPCR instruments as we continue to work through the supply chain challenges.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

I will highlight that ddPCR consumables continue to post strong double-digit growth. During the third quarter, we launched the QX600 ddPCR system, as previously communicated. While not material to the third quarter results, the initial market reception for the QX600 has been encouraging and we are seeing a strong order pipeline building. Process Media, which can fluctuate on a quarterly basis, continues to experience solid year-over-year growth, and we continue to expect strong double-digit growth for the franchise for the full year of 2022. Excluding Process Media sales and last year's 10x settlement, the underlying Life Science business declined 4.2% on a currency neutral basis versus Q3 of 2021 due to lower COVID-related sales. When also excluding COVID-related sales, revenue growth was 9.6% on a currency neutral basis.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

On a geographic basis, Life Science experienced currency neutral year-over-year core revenue growth in Europe and Asia and was relatively flat in the Americas. Sales of the Clinical Diagnostics Group in the third quarter were $361.9 million, compared to $372.2 million in Q3 of 2021, which is a 2.8% decline on a reported basis and growth of 3% on a currency neutral basis. Core clinical diagnostics year-over-year growth, which excludes COVID-related sales, increased 3.7% on a currency neutral basis despite headwinds from sporadic lockdowns in China. The Diagnostics Group currency neutral year-over-year increase was primarily driven by quality control, blood typing, and infectious disease products. As I mentioned earlier, supply chain constraints had an impact on instrument placements.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Despite the supply chain constraints impacting the instrument placements, we experienced increased consumables volume for diagnostics, driven by strong recovery in routine testing markets. As such, we believe that we are positioned to benefit from the strong underlying market dynamics in the coming quarters. On a geographic basis, the Diagnostics Group year-over-year currency neutral core revenue grew in the Americas and Asia and declined in Europe. The reported gross margin for the third quarter of 2022 was 44.9% on a GAAP basis and compares to 58.6% in Q3 of 2021. Recall that the third quarter of 2021 included $32 million from a legal settlement that benefited gross margin in the year ago period.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

The year-over-year gross margin decline was also impacted by significantly higher logistics and material costs, lower COVID sales, as well as overall product mix. These headwinds were partially offset by a positive currency impact due to the strong US dollar and continued operational efficiencies achieved through the restructuring efforts. While we have implemented price increases to address inflationary costs, the realized price capture has only been a partial offset due to our instrument backlog situation. Amortization related to prior acquisitions recorded in cost of goods sold was $4.4 million as compared to $4.7 million in Q3 of 2021. SG&A expenses for Q3 of 2022 were $211 million or 31% of sales, compared to $216.2 million or 28.9% in Q3 of 2021.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

The year-over-year SG&A expenses decreased mainly due to the stronger dollar and normalized employee-related benefits, but was partially offset by higher discretionary spend. Total amortization expense related to acquisitions recorded in SG&A for the quarter was $1.8 million versus $2.4 million in Q3 of 2021. Research and development expense in the third quarter was $69.9 million or 10.3% of sales, compared to $64.5 million or 8.6% of sales in Q3 of 2021. The year-over-year R&D expenses increased mainly due to project spend. Q3 operating income was $92.8 million or 13.6% of sales, compared to $156.8 million or 21% in Q3 of 2021.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Looking below the operating line, the change in fair market value of equity securities holdings, which are substantially related to Bio-Rad's ownership of Sartorius AG shares, negatively impacted the reported results by $289 million. During the quarter, interest and other income resulted in net other expense of $13 million compared to net other expense of $3.2 million last year. Q3 of 2022 included about $8 million of interest and foreign currency expense and $5 million of expense related to an investment impairment. The effective tax rate for the third quarter of 2022 was 21.5% compared to 21.8% for the same period in 2021.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

The effective tax rate reported in Q3 of 2022 was primarily affected by the unrealized loss in equity securities, and the tax rate reported in Q3 of 2021 was primarily affected by an unrealized gain in equity securities. Reported net loss for the third quarter was $164.2 million, and the diluted loss per share was $5.52, compared to $3.928 billion of net income and $129.96 per share in Q3 of 2021. This decrease from last year is largely related to changes in the valuation of the Sartorius holdings. Moving on to the non-GAAP results. Looking at the results on a non-GAAP basis, we have excluded certain atypical and unique items that impacted both the gross and operating margins, as well as other income.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

These items are detailed in the reconciliation table in the press release. Looking at the non-GAAP results for the third quarter, in cost of goods sold, we have excluded $4.4 million of amortization of purchased intangibles and $1.3 million of restructuring costs. These exclusions move the gross margin for the third quarter of 2022 to a non-GAAP gross margin of 55.7% versus 57.9% in Q3 of 2021. Non-GAAP SG&A in the third quarter of 2022 was 30% versus 29.6% in Q3 of 2021.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

In SG&A on a non-GAAP basis, we have excluded restructuring expense of $2.8 million, an in vitro diagnostic registration fee in Europe for previously approved products of $2.2 million, amortization of purchased intangibles of $1.8 million, and a small legal-related benefit. Non-GAAP R&D expense in the third quarter of 2022 was 10.2% versus 9% in Q3 of 2021. In R&D on a non-GAAP basis, we have excluded $500,000 of restructuring costs. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 13.6% on a GAAP basis to 15.5% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin of 19.4% in Q3 of 2021.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

We have also excluded certain items below the operating line, which are the decrease in value of the Sartorius equity securities and loan receivable holdings of $289 million. A $6.6 million loss associated with venture investments. The non-GAAP effective tax rate for the third quarter of 2022 was 21.6% compared to 18% for the same period in 2021. The higher rate in 2022 was driven by geographical mix of earnings, as well as a decrease in compensation-related tax deductions. Finally, non-GAAP net income for the third quarter of 2022 was $77.9 million or $2.60 diluted earnings per share, compared to $112.2 million and $3.71 per share in Q3 of 2021. Moving on to the balance sheet.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Total cash and short-term investments at the end of Q3 were $1.856 billion compared to $1.973 billion at the end of Q2 of 2022. Inventory at the end of Q3 reached $685.9 million from $657.1 million in the prior quarter. The increase was the result of the ongoing supply chain constraints. For the third quarter of 2022, net cash generated from operating activities was $7.5 million, which compares to $230.4 million in Q3 of 2021. This lower quarterly operating cash flow mainly reflects the changes in the operating results and in working capital.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

During the third quarter, we completed the acquisition of Curiosity Diagnostics for a total consideration of up to $170 million, consisting of approximately $100 million in cash and up to $70 million in future milestones. During the third quarter, we did not purchase any shares of our stock. The adjusted EBITDA for the third quarter of 2022 was $132.3 million or 19.4% of sales. The adjusted EBITDA in Q3 of 2021 was $165.1 million or 23.1% of sales. Net capital expenditures for the third quarter of 2022 were $24.1 million, and depreciation and amortization was $32.7 million. Moving on to the non-GAAP guidance.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Taking into account the strong customer demand, we maintain the full-year currency neutral revenue growth outlook to be at the high end of our guidance range of 1%-2%. Based on the stronger than anticipated COVID sales contribution year-to-date, we now assume full-year COVID-related sales of about $105 million. Core revenue growth, which excludes COVID-related sales and the prior-year legal settlement for back royalties, is now expected to be about 8%. We anticipate full-year core growth for the Life Science Group to be about 15% and the Diagnostics Group to be approximately 3%. As a result of the ongoing supply chain constraints, we now anticipate the full-year gross margin projection to be about 57% versus our prior guidance of 57.5%.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Operating income margin guidance remains at about 19% as we manage our operating expense plan for the remainder of this year. We now project an adjusted EBITDA at the low end of our prior guidance range of 24%-24.3%. We continue to execute on our overall capital allocation model, which includes 13 acquisitions, such as Curiosity, and we will continue to be opportunistic with share buybacks. I'll now turn over the call to Norman to make a few comments regarding our capital allocation strategy. Norman?

[Norman Schwartz, CEO at Bio-Rad Laboratories]

Thanks, Ilan. I thought it'd be useful to take a few minutes to address the recent rumors of a potential transaction with one of our peers. While I'm not going to comment on this speculation, I do think it would be helpful to reinforce our thinking around capital deployment in general. You know, our primary focus, as we stated a number of times, is investing in the organic growth strategy, most recently communicated our Investor Day in the first quarter of this year. In this regard, you know, we have solid R&D investment levels in the 9%-10% range, and we are also investing to improve our channel reach and capabilities to allow us to grow in our key targeted markets. Additionally, we have multiple initiatives in process focused on building our systems and operational capabilities to support this growth.

[Norman Schwartz, CEO at Bio-Rad Laboratories]

The next area of investment for us is, of course, inorganic opportunities, acquiring new products or technologies that further our strategy and at the end of the day make us more valuable to our customers. Over the last several years, we have made smaller or medium-sized acquisitions, which over time have contributed to about one-third of our growth, if you look back. In all cases, we've given careful consideration to their strategic, financial and operational fit. You know, it's clear that, you know, we've made a lot of operational progress in recent years. You know, we now feel we could acquire and absorb a larger and more transformational opportunity if it met our strategic and financial metrics. The third capital deployment avenue for us is buying back our own shares.

[Norman Schwartz, CEO at Bio-Rad Laboratories]

Even though we did not buy anything back in this last quarter, we have been active here over the last few years, and today we have about $300 million authorized by the board for this purpose. I think the point is that we see all three of these as important elements of an overall capital allocation strategy. That really concludes our prepared remarks today, and we'll now open up the line to take your questions. Danielle?

[Operator]

Certainly. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question comes from Patrick Donnelly of Citi. Please proceed.

[Patrick Donnelly, Analyst at Citi]

Hey, guys. Thank you for taking the questions. Norman, maybe I can just follow up on the capital allocation commentary there. You know, helpful perspective. I appreciate that. Maybe just given kind of that three-pronged approach, we can dive in a little bit. In terms of, you know, the larger deals, I guess you've always kind of framed those as opportunistic, few and far between. I guess, how do you see the pipeline currently? And then how do you think about the Sartorius stake in terms of, you know, using that for a deal versus the strategic value of it, you know, holding it, as we kind of look at the landscape here?

[Norman Schwartz, CEO at Bio-Rad Laboratories]

Yeah. I don't think the landscape has changed markedly in you know, in the last several months. It's still about the same as we've always said. It's you know, they're few and far between and but we do consider. We do continue to kind of look at you know, what might be possible. Certainly when we think of all of that, we still see Sartorius as very strategic and as you know, there's still five or six years left on the trust. We've got a little bit of time to wait on that.

[Patrick Donnelly, Analyst at Citi]

I guess when you think about a deal, you know, in terms of if you didn't use Sartorius, you went after a large acquisition, I know you've said in the past you would be willing to use some equity. I guess here, kind of below $400, is there more of a kind of, you know, lack of interest in kind of issuing a lot of equity with shares at this valuation? How do you think about that piece?

[Norman Schwartz, CEO at Bio-Rad Laboratories]

Well, I think it certainly depends on what the opportunity is. You know, I think we have to look at it holistically. You know, we've got obviously three elements that we can think about. We've got cash on the balance sheet. We've got debt capacity. You know, I would say we are comfortable with some economic dilution, you know, using equity. Obviously we're gonna be careful and prudent with all of that.

[Patrick Donnelly, Analyst at Citi]

Okay. That's helpful. Yeah, moving on from the capital allocation side. Ilan, maybe on the kind of near term here, just looking at the gross margin piece, can you just talk about, I guess, the headwinds you saw there? It seems like logistics, some raw materials. You know, can you just talk about, I guess, the visibility into the improvement there for Q? Obviously, you adjusted the guidance a little bit, but just maybe the moving pieces there and how we should think about that, yeah, as we get into Q4 and then even to 2023.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Sure. Thank you, Patrick. Appreciate the question. Yeah, when we look at the third quarter, definitely logistics was a headwind way above our normalized kind of level of spend, but it was kind of interrelated somewhat also to the supply chain constraints. There were still, you know, constraints in terms of specifically electronic components, as Andy mentioned in the prepared remarks. There was also some, you know, mix within kind of the revenue itself. On a positive note, you know, our manufacturing cost in terms of the FX was a little bit of a tailwind in terms of the overall cost there.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

As Andy mentioned earlier, you know, we see an improvement and we, you know, our guidance also bakes in, you know, a nice improvement in terms of the overall supply chain. We do see an increased volume that is being manufactured constantly and incrementally. That also, you know, will benefit the logistics cost overall. You know, we are very encouraged because the overall, you know, order backlog, you know, is still nice, although it's going down, but customers are still, you know, holding up. You know, logistics cost, part of it, for example, was expedited shipments because customers do come first for us.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Obviously, you know, when it comes to the fourth quarter, we can see that the order backlog is still, you know, a nice size, although it's going down with, you know, the higher volume that we're able to manufacture.

[Patrick Donnelly, Analyst at Citi]

Okay. That's helpful. Just one last one just on the 4Q guide. You know, even with you guys kind of bringing the non-core or sorry, non-COVID core down slightly, it's still implying, you know, pretty healthy uptick there in 4Q, I think into the teens even in terms of that growth. Is that just all the supply chain easing and kind of working through that backlog? Can you just frame, I guess, the visibility into the supply chain easing? Is it something you're already seeing? Then how much of that backlog can you kind of work down, convert in 4Q to kind of hit some of those numbers?

[Andrew Last, EVP and COO at Bio-Rad Laboratories]

Yeah, Patrick, it's Andy. Yeah, I think we mentioned the supply that we're already seeing it easing. We were more constrained at the beginning of the quarter than as we came out of the quarter. Now, you know, entering into Q4, we see our production improving. I think that our expectation right now is we will meaningfully work down, you know, a significant piece of our backlog as we get to the end of the year. We still expect to have some backlog as we move into the first quarter of next year. We do expect improvement, and we do have the visibility on the production at this point in time.

[Patrick Donnelly, Analyst at Citi]

Helpful. Thank you, guys.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Thank you.

[Operator]

Thank you. Our next question comes from Patrick Donnelly. My apologies, but the next question comes from Brandon Couillard of Jefferies. Please proceed.

[Brandon Couillard, Equity Analyst at Jefferies]

Hey, thanks. Good afternoon. Maybe a question for Simon. You did mention ddPCR as one of the standout growth drivers in the press release. Curious if you're seeing any just deceleration of growth in that category. Was there perhaps some customers waiting for the QX600 launch? And if you could just talk about, you know, the types of customers or markets that you know that platform will open up would be helpful. Thank you.

[Simon May, President of the Life Science Group at Bio-Rad Laboratories]

Yeah, thanks for the question, Brandon. We definitely had a few customers, I'd say, waiting for the launch of QX600. I'd say the quarter overall was a bit of a mixed bag for the franchise. We've heard already on the call that the supply chain challenges was a headwind in the third quarter, and particularly with instrument platforms. I think in ddPCR, we felt that a little more prominently than some of the other product lines. At the same time, as we've heard already, demand remains strong across multiple application segments, and we're very happy with the launch of the QX600 and the initial pipeline that we're building and seeing for that. I think in the quarter as a whole, the puts and takes kind of netted out across multiple market segments. As we enter Q4, we're tentatively confident of a rebound.

[Brandon Couillard, Equity Analyst at Jefferies]

Gotcha. Maybe one for Ilan. In terms of just back on the gross margins in the third quarter, any way to quantify the logistics, and freight and other items in terms of the year-over-year impact on gross margins in the quarter?

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Sure. You know, logistics was by far the highest kind of headwind. You know, the offset was somewhat, you know, the foreign exchange benefit throughout the global manufacturing footprint costs. Mix was, you know, probably the third kind of impact. In terms of order of magnitude, logistics was first.

[Brandon Couillard, Equity Analyst at Jefferies]

Gotcha. In case you could share what that pricing realization was in the third quarter. You mentioned some of that has been the capture is not quite what you put through in terms of the list price increases. Do we expect that to step up materially in the fourth quarter in terms of magnitude?

[Andrew Last, EVP and COO at Bio-Rad Laboratories]

Hey, yeah, this is Andy. You know, we had modest price realization through, you know, through year to date, but clearly not sufficient to overcome all of the inflationary costs here, especially since we have quite a backlog, and a lot of that backlog has been carried for a while now, so kind of pre-price increases. As our backlog unwinds, we do expect to capture more of what we've put into our price increases. We're hopeful that Q4 will see some improvement as we roll in, you know, through the quarter.

[Brandon Couillard, Equity Analyst at Jefferies]

Great. Lastly, just on the Curiosity Diagnostics acquisition in the quarter, is there any revenue associated with that business? If not, can you talk about the commercial timelines and maybe just the competitive differentiations of the multiplex platform versus, you know, others that are on the market?

[Dara Wright, President of the Clinical Diagnostics Group at Bio-Rad Laboratories]

Sure. Thanks, Brandon Couillard. This is Dara Wright. The platform is pre-commercial, so it's a technology acquisition. There's still quite a bit of work to do to complete the assay development pipeline and clinical trials. It will be going into regulated markets. We don't anticipate, you know, any material contribution next year. I think it'll be sort of beyond the 2023, you know, timeline as we roll through that development investment. At a high level, it's a rapid multiplex sample-to-answer PCR platform, and we'll be targeting initially syndromic infectious disease applications. There are quite a number of features inherent in their approach that are differentiated versus other offerings.

[Dara Wright, President of the Clinical Diagnostics Group at Bio-Rad Laboratories]

We also think it will help us extend into additional market segments not currently served by existing syndromic test platforms today. Looking forward to sharing more about that as time marches on in 2023.

[Brandon Couillard, Equity Analyst at Jefferies]

Very good. Thank you.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Thank you, Brandon.

[Operator]

Thank you. The next question comes from Dan Leonard of Credit Suisse. Please proceed.

[Dan Leonard, Analyst at Credit Suisse]

Hello. Thank you for taking the question. I have a couple. The first one on the supply chain challenges, are they influencing at all your win rate in digital PCR or any other market categories? Or do you feel like you're still winning your entitlement and just absorbing the products in backlog?

[Andrew Last, EVP and COO at Bio-Rad Laboratories]

I think we would say that we're mostly absorbing this in backlog. You know, it's hard to claim that there's not a few losses here and there. I think there are inevitably, especially on the more commoditized product areas. You know, the size of our backlog has kind of built through the year, and now we're working it down. We've been very supported by basically customer loyalty to our product offerings and, you know. That, you know, contributes a little bit to our elevated logistics costs in Q3 because we were really expediting shipments to them, you know, so a lot more air freight in Q3 as product did come off the production line. That's essentially, you know, I think how we see it right now.

[Dan Leonard, Analyst at Credit Suisse]

Understood. Just a couple follow-up on capital deployment. Ilan, does that uncertainty that Bio-Rad might be deemed an investment company under the Investment Company Act, I guess two questions, has that been resolved? Secondly, if it hasn't, does that have any impact on your ability to finance an acquisition?

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Dan, thanks for the question. We have never perceived, you know, ourselves as an investment company. This is still the case. This is not any showstopper for any potential acquisition or any target or any aspect of the capital allocation, whether it's, you know, debt or issuance of capital or equity that is blocking us from pursuing any opportunity.

[Dan Leonard, Analyst at Credit Suisse]

Thanks for that clarification. Possibly you can comment on why you didn't repurchase any shares in the quarter.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

You know, we are trying to be as much as we can opportunistic, coupled with, you know, the overall capital allocation thinking. As you can see, the market is, you know, not going maybe in the right direction, but definitely we have still about $300 million left on the plan and we'll continue to pursue the same kind of approach. You know, historically, if you recall, we had similar situations that the market was down and we were not in the market. Usually when we step in, we step in with large, you know, larger chunks, you know, and in specific quarters. You know, we will just continue to pursue the same opportunistic approach that we adopted, you know, in the past.

[Dan Leonard, Analyst at Credit Suisse]

Understood. Thank you.

[Operator]

Thank you. The next question comes from Jack Meehan of Nephron Research. Please proceed.

[Jack Meehan, Equity Research Analyst at Nephron Research]

Thank you. Good afternoon. Wanted to start on capital allocation. Norman, just given the talk of a large deal, one of the top questions I've gotten from investors is succession planning at Bio-Rad. I personally really enjoy working with you, so I hope it's not soon. But is there any color you can just share with the investment community on long-term leadership plan for Bio-Rad? If you were to do a deal that led to a much larger organization, just how would you structure a leadership team to manage that?

[Norman Schwartz, CEO at Bio-Rad Laboratories]

Yeah. Well, okay. First, I think I've still got a few more years in me. That's number one. You know, we do work on succession planning internally and, you know, have, I think, some good ideas around that. You know, I think that, you know, in terms of structuring something, I think it really depends largely on what it is. You know, we have to kind of evaluate how it fits, how it needs to be managed. You know, over the last several years, of course, we've evolved into this, a kind of more.

[Norman Schwartz, CEO at Bio-Rad Laboratories]

Oh, what would I call it? A more functional organization, you know. That's allowed us to do a number of things and make a lot of progress. Again, I think it's time and situation dependent, you know. Would we stay with that organization? Would we move to another kind of organization? Again, I think it's really all facts and circumstances.

[Jack Meehan, Equity Research Analyst at Nephron Research]

Got it. Then on the business, Ilan or Andy, can you talk about, like, when you look at the backlog, just median time to deliver versus a normal period? Or is there a way to quantify how much larger sales would have been in the quarter if the supply chain issues didn't persist? I just look at the inventory, and we're talking about, you know, tens of millions of dollars of build. Just any level of context would be helpful.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Yeah. Go ahead. I mean.

[Andrew Last, EVP and COO at Bio-Rad Laboratories]

Yeah. It's a tough one to answer. You know, it's predominantly instrument platforms, as we've indicated, electronic components and in some cases. An average is really meaningless in this regard because there's a very broad range of time associated with some of those backlogs and for particular customers. You know, it can be six weeks, it can be a few several months. You know, as the years progress, that has built, and we've built inventory, as you can see, reflective of our demand, waiting on those final components, which procurement is spending a lot of time on chasing.

[Andrew Last, EVP and COO at Bio-Rad Laboratories]

You know, I don't think it's probably appropriate to put forth what Q3 might have been because, you know, that's probably not the right kind of metric to be focused on because, you know, we're rolling into Q4 at this point in time.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Yeah. Jack, what I can add, you know, I can confirm that it was definitely much higher than the order backlog that rolled over from last year to this year, so at the end of last year.

[Jack Meehan, Equity Research Analyst at Nephron Research]

Mm-hmm.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

You know, another indication that you can look at is, you know, the higher inventory level that now we carry in the balance sheet. The incremental, you know, a lot of it is in raw materials, so, you know, when it translates into revenue, so you get kind of an order of magnitude there of, you know, kind of the opportunity, you can call it.

[Jack Meehan, Equity Research Analyst at Nephron Research]

Got it. Just the last one, Ilan, you mentioned the Russia business. I forget if it was you or Andy. Can you just remind us the size of the business for Bio-Rad and how that's performed this year? Is there a risk that you might be barred from selling to the country? Just how do you manage that?

[Andrew Last, EVP and COO at Bio-Rad Laboratories]

Yeah. I mean, we have a team focused on, you know, deciphering and executing against this myriad of sanctions that come at us. More of the business in Russia for us is clinical than life science. You know, it's between 1%-2% of sales. It fluctuates a bit on a typical year, and it is down a bit this year, as you might expect, more so on the life science side than on the clinical side. You know, and we literally have, you know, a team that's focused on, you know, just interpreting every single sanction and whether it impacts us or not, and can we load this truck as expected or not.

[Andrew Last, EVP and COO at Bio-Rad Laboratories]

You know, it's not getting better, and it's difficult to know, you know, what it really will look like, you know, by the end of this year and moving into next year.

[Jack Meehan, Equity Research Analyst at Nephron Research]

Thank you, guys.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Thank you, Jack Meehan.

[Operator]

Thank you. There are currently no additional questions registered at this time. As a reminder, it is star one on your telephone keypad to ask a question. We have a follow-up question from Brandon Couillard of Jefferies. Please proceed.

[Brandon Couillard, Equity Analyst at Jefferies]

Hey. Hey, thanks for squeezing me in. Ilan, you said you'd quantify the interest income in the third quarter and then, you know, as we look at kinda $2 billion of cash on the balance sheet and move up in rates, can you just talk about your cash, your capital allocation and, you know, what would be a reasonable interest income rate to assume on that, you know, cash position through GAAP into next year?

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Sure. Thank you, Brandon. You know, obviously, when we raised the last debt, you know, the bond, with probably a great timing, today, the 10-year treasury is above, you know, the coupon that we pay. It takes time to catch up. Specifically, if you think about the bonds, you know, it was about $11 million of an expense for the quarter, and this specific quarter was about $8 million of interest income. It continues to catch up as, you know, as we continue to roll, you know, the investments.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

It should get, you know, within the next 1-2 quarters, assuming that these interest rates will continue to be out there, at least into kind of parity, between the two, could also be kind of moving into a gain there.

[Brandon Couillard, Equity Analyst at Jefferies]

Super. Thanks.

[Ilan Daskal, EVP and CFO at Bio-Rad Laboratories]

Thank you.

[Operator]

Thank you. We have another follow-up question from Jack Meehan of Nephron Research.

[Operator]

Please proceed.

[Jack Meehan, Equity Research Analyst at Nephron Research]

Thanks. I'm back. A couple of more business questions. Process Media, not sure if I missed in the script, but just, can you give a magnitude of the growth in the quarter? You know, one topic of discussion this earnings season's been stocking dynamics with customers. Just are you seeing any of that? Just, any color on inventory trends of customers would be helpful.

[Simon May, President of the Life Science Group at Bio-Rad Laboratories]

Yeah, this is Simon. We saw high single-digit growth in process chromatography in the quarter, and we've been very conscious of the commentary elsewhere on stocking patterns. In our franchise, we haven't really been subject to supply chain challenges, and we've been able to assure our customers that we'll be delivering in a prompt fashion. We really haven't seen any noticeable change in ordering pattern or stocking from our customers, but we continue to watch it very closely, of course.

[Jack Meehan, Equity Research Analyst at Nephron Research]

Great. On the diagnostic side, the two businesses that weren't called out, diabetes and autoimmune, can you just talk about how they performed in the quarter? If they declined, like, what might have been contributing to that?

[Dara Wright, President of the Clinical Diagnostics Group at Bio-Rad Laboratories]

Yeah. The main sort of headwinds there were just supply chain related instrument placements. Those are both closed, you know, closed systems. You know, consumables across the board continue to post good growth. It was really an artifact of inability to fulfill instruments.

[Jack Meehan, Equity Research Analyst at Nephron Research]

Got it. Last one is on the China region in diagnostics. I know it sounds like in the past you've managed through the lockdowns decently, but just talk about how the region performed, any impact.

[Dara Wright, President of the Clinical Diagnostics Group at Bio-Rad Laboratories]

Sure. You know, very similar to sort of the conversation that we had last quarter in that, there are two dynamics. The most material one is the larger supply constraint dynamic, you know, given, you know, the inability to fulfill instrumentation into China. You know, second was the periodic lockdowns, which have an impact on routine testing as well as an impact on logistics flow, just getting materials, you know, into the region. At a high level, though, you know, demand remains strong. If we look at sort of the core clinical testing growth, the demand is very much in line with pre-pandemic levels.

[Dara Wright, President of the Clinical Diagnostics Group at Bio-Rad Laboratories]

The challenges really are these sort of circuit breaker events that just make the flow less than smooth over the last few quarters, as well as the supply constraint headwinds that we're working through.

[Jack Meehan, Equity Research Analyst at Nephron Research]

Great. Thank you.

[Operator]

Thank you. There are currently no additional questions registered at this time, so I'll pass the conference back over to the management team for closing remarks.

[Edward Chung, Head of Investor Relations at Bio-Rad Laboratories]

Yeah. Thank you for joining today's call. We will be participating at the upcoming Credit Suisse 31st Annual Healthcare Conference in Rancho Palos Verdes, California in November, and hope to see some of you there. As always, we appreciate your interest, and we look forward to connecting soon.

[Operator]

That concludes the conference call. Thank you for your participation. You may now disconnect your line.

Participants

Executives

• Edward Chung, Head of Investor Relations
• Ilan Daskal, EVP and CFO
• Andrew Last, EVP and COO
• Norman Schwartz, CEO
• Simon May, President of the Life Science Group
• Dara Wright, President of the Clinical Diagnostics Group

Analysts

• Patrick Donnelly, Analyst at Citi
• Brandon Couillard, Equity Analyst at Jefferies
• Dan Leonard, Analyst at Credit Suisse
• Jack Meehan, Equity Research Analyst at Nephron Research