Bio-Rad Laboratories Q4 2022 Earnings Results & Report

Bio-Rad Laboratories EPS Results

• Actual EPS: $3.31
• Consensus EPS: $3.45
• Beat/Miss: Missed by -$0.14
• One Year Ago EPS: $3.21
• EPS Beat Rate: 4 of last 8 quarters

Bio-Rad Laboratories Revenue Results

• Actual Revenue: $730.29 million
• Expected Revenue: $741.01 million
• Beat/Miss: Missed by -$10.72 million
• YoY Revenue Growth: -0.30%

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 Q4 2022 Earnings Call Transcript

Key Takeaways

• Bio-Rad reported Q4 net sales of $730.3 M (−0.3% reported, +5.8% currency-neutral) and full-year sales of $2.8 B (−4.1% reported, +0.3% currency-neutral), with core revenue ex-COVID up 10.6% CC in Q4 and 7.2% CC for 2022.
• The company continued to face supply chain constraints in Q4, ending the year with an elevated backlog of approximately $50 M, and expects to normalize backorders in H2 2023 as its Singapore manufacturing transition completes.
• Life Science growth was driven by strong placements of the QX600 droplet digital PCR platform, double-digit gains in process chromatography, western blotting and qPCR, and an exclusive licensing agreement with NeuPro to accelerate oncology assay development.
• For 2023, Bio-Rad guides to 6–7% currency-neutral revenue growth (10–11% ex-COVID), with Life Science up 8–9% (16–18% ex-COVID) and Clinical Diagnostics ~5%; it expects non-GAAP gross margin to improve from 57% to 58% by year-end, a 19.5% operating margin and ~25% adjusted EBITDA margin.
• Strengthening its balance sheet, the company closed 2022 with $1.796 B in cash and short-term investments, generated $194 M in operating cash, repurchased 497 K shares for $216 M, retains ~$207 M in its buyback program and plans to leverage debt capacity for future M&A.

Presentation

[Operator]

Good afternoon, ladies and gentlemen. Thank you for attending today's Bio-Rad fourth quarter and full year 2022 earnings results conference call. My name is Tia, 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 one on your telephone keypad. I would now like to pass the conference over to your host, Edward Chung, with Bio-Rad. Please proceed.

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

Thanks, Tia. Good afternoon, everyone, thank you for joining us today. Today, we will review the fourth quarter and full year 2022 financial results and provide an update on key business trends for Bio-Rad. With me on the call today are Norman Schwartz, our Chief Executive Officer, Ilan Daskal, Executive Vice President and Chief Financial Officer, Andy Last, Executive Vice President and Chief Operating Officer, Simon May, President of the Life Science Group, and Dara Grantham 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, VP of Investor Relations at Bio-Rad]

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. It is difficult to predict the full extent of potential impact the pandemic could have in the future. You should not place undue reliance on these forward-looking statements. 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 will include references to non-GAAP financials, including net income and diluted earnings per share, which are financial measures that are not defined under generally accepted accounting principles.

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

Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings release. With that, I'll now turn the call over to Ilan Daskal, our CFO.

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

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

[Andy Last, EVP and COO at Bio-Rad]

Okay. Many thanks, Ilan. Good afternoon, everybody. As we enter Q four, we continued our focus on improving our supply chain situation. During the quarter, some supply chain component constraints still persisted for a number of instruments, but overall were less problematic, and our primary focus was on production to meet demand. As a result, we made solid progress on reducing our backlog in the quarter. However, there was a resulting impact on product sales mix, and as expected, we still exited Q4 with an elevated backlog position for both our Life Science and Clinical Diagnostic businesses. Inventory levels remained high as we continued to source components to support demand, our manufacturing transition to Singapore, backlog reduction, and better secure supply continuity through the coming year.

[Andy Last, EVP and COO at Bio-Rad]

While still high, logistics costs showed improvements in Q4, although higher cost of materials continued to persist from purchases earlier in the year. Despite the product supply challenges experienced throughout 2022, we have been extremely pleased with the level of customer support and willingness to work through our backlog with us. As anticipated during the quarter, the global effects of COVID on our business continued to diminish, and in particular, COVID-related sales were roughly in line with our expectations. Overall operations within Bio-Rad were back to normal, with the exception of China, where changing government policy from their previous zero-tolerance policy led to a large increase in infection rates, impacting a significant percent of the country and our employees. This also had a negative impact on demand for our routine diagnostic tests in China.

[Andy Last, EVP and COO at Bio-Rad]

The fourth quarter also displayed continued strong demand trends across our portfolio, and in particular, we were very pleased with strong placements for the recently launched QX600 Droplet Digital PCR platform. Initial adopters include customers at the cutting edge of oncology research and testing, such as Biodesix, a diagnostics company, which is developing a minimal residual disease test for Memorial Sloan Kettering Cancer Center on the platform. Also of note during the fourth quarter, we entered into an exclusive licensing agreement with NuProbe to accelerate the development of next generation, highly multiplexed digital PCR assays for oncology applications. As we enter 2023, we have now developed a strong pipeline across multiple customer segments for the QX600, and in conjunction with our portfolio of many thousands of assays, we expect to see continued strong growth of our Droplet Digital PCR portfolio in 2023.

[Andy Last, EVP and COO at Bio-Rad]

Q4 sales of our Process Chromatography franchise also displayed strong double-digit growth, and we are pleased with the continued performance of this business and adoption of the recently launched pre-packed columns, as well as increasing interest in our Nuvia resins for new biological therapeutics and vaccines. Looking toward 2023, overall demand remains strong and we continue to drive disciplined execution of our strategy. While we still have some challenges in supply chain, our primary activity is now on scaling production to reduce our instrument backlog and regrowing demand, particularly in the Clinical Diagnostics business. We anticipate backlog will be normalized in the second half of the year. In the back half of the year, we are planning for the introduction of two new platforms from our development pipeline, the QX Continuum and our second-generation single-cell platform.

[Andy Last, EVP and COO at Bio-Rad]

The Continuum represents the next generation Droplet Digital PCR system with an integrated workflow that's designed to be cost-effective. Our single-cell application targets the large single-cell multi-omics market. With the COVID pandemic largely behind us, we do not anticipate any meaningful COVID-related sales in 2023. We continue to monitor the Russia and Ukraine war situation and potential for further sanctions and downside. Thank you for your attention, and I will now pass you back to Andy.

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

Thank you, Andy. Now I would like to review the results of the fourth quarter and full year. Net sales for the fourth quarter of 2022 were $730.3 million, which is a 0.3% decline on a reported basis versus $732.8 million in Q4 of 2021. On a currency neutral basis, the year-over-year revenue growth was 5.8%. As expected, COVID-related sales continued to taper and were about $13 million in the quarter. Year-over-year core revenue, which excludes COVID-related sales, increased 10.6% on a currency neutral basis. On a geographic basis, we experienced double-digit currency neutral year-over-year core revenue growth in the Americas and Asia, while Europe posted a more modest increase, primarily reflecting ongoing supply chain constraints for diagnostic products.

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

As Andy mentioned earlier, despite improvements in the supply chain, we estimate that we ended 2022 with an elevated order backlog of approximately $50 million, of which we expect to retain about $30 million. Sales of the Life Science Group in the fourth quarter of 2022 were $359.7 million, compared to $326.6 million in Q4 of 2021, which is an increase of 10.1% on a reported basis and growth of 16.4% on a currency neutral basis. The underlying Life Science year-over-year currency neutral core revenue growth was 28.1% and benefited in part from the reduction of order backlog. The year-over-year growth was primarily driven by Droplet Digital PCR, Process Chromatography, and Western blotting.

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

We also saw good growth for our qPCR products, in part driven by the uptake of our new CFX Opus platform. We continued to experience strong initial customer interest and demand for our recently introduced QX600 ddPCR system, and we expect a more meaningful revenue contribution from this platform in 2023. Process Chromatography, which can fluctuate on a quarterly basis, again posted strong double-digit year-over-year growth. Excluding Process Chromatography sales, the underlying Life Science business grew 14% on a currency neutral basis versus Q4 of 2021 and was partially offset by lower COVID-related sales. When also excluding COVID-related sales, revenue growth was 27.1% on a currency neutral basis. On a geographic basis, Life Science experienced currency neutral year-over-year core revenue growth across all three regions.

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

Sales of the Clinical Diagnostics Group in the fourth quarter were $369.6 million, compared to $404.9 million in Q4 of 2021, which is an 8.7% decline on a reported basis and a 2.9% decline on a currency neutral basis. Core clinical diagnostics year-over-year revenue, which excludes COVID-related sales, declined 1.9% on a currency neutral basis. Clinical Diagnostics Group revenue, which was primarily impacted by ongoing supply chain constraints, which delayed instrument placements across multiple platforms and the uptake of associated consumables.

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

On a geographic basis, the Clinical Diagnostics Group year-over-year currency neutral core revenue grew in the Americas and declined in Europe and in Asia. In addition to supply chain constraints, Asia Pacific sales were also impacted by COVID dynamics in China, resulting in lower volume of routine testing. During the fourth quarter of 2022, we corrected two accounting policies and believe these changes are immaterial to our overall financials. We determined that R&D expenses associated with developing and enhancing our cloud-based capabilities that incurred during the years 2020 through 2022 should have been capitalized. We revised our historical financial statements to reflect this correction, and it will be reflected in our 10-K filing.

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

For full year 2022, the correction was about $5 million, or about 20 basis points headwind to gross margin. The benefit of about $8 million or about 30 basis points for operating margin. The benefit for the full year Adjusted EBITDA margin is $15 million or about 50 basis points. By comparison, the 2021 full year gross margin headwind is estimated to be about $3 million or about 10 basis points, with an operating margin benefit of $11 million or about 40 basis points, and Adjusted EBITDA margin benefit of $15 million or 50 basis points. In addition, we corrected our policy on the timing of revenue recognition related to certain equipment that requires installation, and we believe that it contributed $5 million-$10 million of one-time revenue to the quarter.

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

The reported gross margin for the fourth quarter of 2022 was 54.4% on a GAAP basis and compares to 54.6% in Q4 of 2021. The fourth quarter year-over-year gross margin decline was mainly due to an unfavorable product mix, reflecting a higher percentage of instrument sales, lower COVID sales, and higher raw material costs associated with supply chain constraints. Amortization related to prior acquisitions recorded in cost of goods sold was $4.4 million as compared to $4.7 million in Q4 of 2021. SG&A expenses for Q4 of 2022 were $212.2 million or 29.1% of sales, compared to $224.1 million or 30.6% in Q4 of 2021.

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

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 $1.7 million versus $1.8 million in Q4 of 2021. Research and development expense in the fourth quarter was $66.2 million or 9.1% of sales, compared to $66.9 million or 9.1% of sales in Q4 of 2021, and consistent with our targeted R&D investment. Q4 operating income was $118.7 million or 16.2% of sales, compared to $108.9 million or 14.9% of sales in Q4 of 2021.

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

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, added $979 million of income to the reported results. During the quarter, interest and other income resulted in net other expense of $6.1 million compared to net other income of $7.5 million last year. Q4 of 2022 included a $14.4 million charge associated with an investment interment. Overall, we generated $16.6 million in interest income during the fourth quarter from our cash balance, partially offset by $11.7 million in interest expense related to our $1.2 billion notes.

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

The effective tax rate for the fourth quarter of 2022 was 24.2%, compared to 22.8% for the same period in 2021. The effective tax rate reported in Q4 of 2022 was partially affected by an unrealized gain in equity securities, and the tax rate reported in Q4 of 2021 was primarily affected by an unrealized loss in equity securities. Reported net income for the fourth quarter was $828 million, or $27.78 diluted earnings per share, compared to a loss of $1,572 million, or a diluted loss per share of $52.54 in Q4 of 2021. This increase from last year is largely related to changes in the valuation of the Sartorius holdings.

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

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. These items are detailed in the reconciliation table in the press release. Looking at the non-GAAP results for the fourth quarter, in cost of goods sold, we have excluded $4.4 million of amortization of purchased intangibles and a small restructuring benefit. These exclusions moved the gross margin for the fourth quarter of 2022 to a non-GAAP gross margin of 54.9% versus 55.2% in Q4 of 2021. Non-GAAP SG&A in the fourth quarter of 2022 was 28.5% versus 30.2% in Q4 of 2021.

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

In SG&A, on a non-GAAP basis, we have excluded amortization of purchased intangibles of $1.7 million and in vitro diagnostic registration fee in Europe for previously approved products of $2.5 million, acquisition-related benefit of $500,000 and $700,000 of legal expenses, as well as restructuring-related expenses. Non-GAAP R&D expense in the fourth quarter of 2022 was 9.1% versus 9.4% in Q4 of 2021. In R&D, on a non-GAAP basis, we have excluded a small restructuring benefit. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 16.2% on a GAAP basis to 17.4% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin of 15.7% in Q4 of 2021.

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

We have also excluded certain items below the operating line, which are the increase in value of the Sartorius equity securities and loan receivable of $979 million, a $14.4 million loss associated with an investment impairment, and $1.7 million loss on venture investments. The non-GAAP effective tax rate for the fourth quarter of 2022 was 28.1%, which is consistent with our full year tax rate guidance compared to 20.4% for the same period in 2021. The higher rate in 2022 was driven by geographical mix of earnings.

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

Finally, non-GAAP net income for the fourth quarter of 2022 was $98.5 million or $3.31 diluted earnings per share, compared to $98.5 million or diluted earnings per share of $3.26 in Q4 of 2021. Moving on to the full year results. Net sales for the full year of 2022 were $2.802 billion, which is a 4.1% decline on a reported basis. Excuse me, as compared with $2.923 billion in 2021. On a currency neutral basis, full year 2022 net sales increased by 0.3%.

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

When also excluding in 2021 a one-time $32 million settlement for back royalties from 10x, sales in 2022 grew 1.5% on a currency neutral basis. COVID-related sales for the full year were about $109 million, compared to $266 million in 2021. Year-over-year core revenue, which excludes COVID-related sales and the legal settlement, increased 7.2% on a currency neutral basis. Sales of the Life Science Group for 2022 were $1.347 billion. Excluding the 2021 legal settlement, the year-over-year growth was 2.7% on a currency neutral basis. When excluding COVID-related sales and the 2021 legal settlement, Life Science year-over-year currency neutral core revenue growth was 15.2%.

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

The majority of the year-over-year core growth was driven by Droplet Digital PCR, Process Chromatography, our qPCR products, and Western blot. On a geographic basis, Life Science currency neutral full year core revenue grew across all three regions. Sales of Clinical Diagnostics products for 2022 were $1.451 billion, which is a 0.4% growth on a currency neutral basis. When excluding COVID-related sales, Clinical Diagnostics year-over-year currency neutral core revenue growth was 1.3%, which was impacted by supply chain constraints. On a geographic basis, Clinical Diagnostics currency neutral full year core revenue grew in the Americas and Europe, while sales declined in Asia, primarily due to COVID lockdowns in China.

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

As mentioned earlier, the year-ago comparisons for gross, operating, and Adjusted EBITDA margin have been modestly revised due to our adoption of capitalized internal use software accounting. The full year non-GAAP gross margin was 56.6% compared to 57.2% in 2021. The year-over-year margin decline was driven mainly by product mix, lower COVID sales, higher logistics and expedited freight costs, as well as higher raw material costs. Full year non-GAAP SG&A expense was $805.4 million or 28.7% of sales, compared to $824 million or 28.5% in 2021. The lower SG&A spend benefited from a strong dollar and more normalized employee-related costs, somewhat offset by higher discretionary expenses.

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

Full year non-GAAP R&D was $256.7 million or 9.2% of sales, versus $247.6 million or 8.6% in 2021. Full year non-GAAP operating income was 18.7% compared to 20.1% in 2021, largely due to the various impacts of our supply chain constraints during the past year. Lastly, the non-GAAP effective tax rate for the full year of 2022 was 22%, which was consistent with our guidance range and compares to 21.2% in 2021. Moving on to the balance sheet.

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

Total cash and short-term investments at the end of 2022 was $1,796 million, compared to $875 million at the end of 2021, and $1,856 million at the end of the third quarter of 2022. The change in cash and short-term investments for the third quarter of 2022 was primarily due to working capital and share repurchases. Inventory at the end of Q4 reached $719.3 million, from $685.9 million in the prior quarter. The increase in inventory continues to reflect our supply chain constraints and is mainly due to carrying higher levels of raw materials.

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

As we anticipate further easing in our supply chain constraints in 2023, we would expect to lower inventory levels over the next 8 quarters. For the fourth quarter of 2022, net cash generated from operating activities was $79.7 million, which compares to $161.1 million in Q4 of 2021. This decrease mainly reflect changes in working capital. For the full year of 2022, net cash generated from operations was $194.4 million versus $669.5 million in 2021. This decrease also mainly reflect changes in working capital.

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

During the fourth quarter, we purchased 241,000 shares of our stock for a total cost of $91 million or an average purchase price of approximately $376 per share as we continue to be opportunistic with our share buyback program. We still have a total of approximately $207 million available under the current board-authorized program. Full year share buybacks totaled 497,000 shares for approximately $216 million. In 2021, we purchased about 90,000 shares of our stock for $50 million. Adjusted EBITDA for the fourth quarter of 2022 was 21.4% of sales. The Adjusted EBITDA in Q4 of 2021 was 19.5%.

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

Full year adjusted EBITDA, including the Sartorius dividend, was $667.9 million or about 23.8%, compared to 24.6% in 2021. Net capital expenditures for the fourth quarter of 2022 were $34.7 million, and full year CapEx spend was $112.6 million. Depreciation and amortization for the fourth quarter was $35.5 million and $137.3 million for the full year. Moving on to the non-GAAP guidance for 2023. While the supply chain constraints have created a more than anticipated challenge during 2022, we believe that it is transitory and does not change our thinking about our 2025 financial outlook.

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

We expect that our backorder dynamics will continue to normalize. As I mentioned earlier, we assume to recover in 2023 about $30 million of the order backlog from 2022. We are guiding a currency neutral revenue growth in 2023 to be between 6% and 7%. Starting in 2023, we do not anticipate breaking out COVID-related sales as its contribution becomes immaterial to our overall revenue base. When excluding the 2022 COVID-related sales, we estimate currency neutral revenue growth in 2023 to be between 10% and 11%. The Life Science Group year-over-year currency neutral revenue growth is expected to be between 8% and 9%. When normalizing for 2022 COVID-related sales, we expect to be between 16% and 18% currency neutral year-over-year revenue growth for the Life Science Group.

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

For the Diagnostics Group, we estimate currency neutral revenue growth of about 5% as we expect supply chain constraints to normalize in 2023. When excluding COVID-related sales, we expect revenue growth between 5%-5.5% for the Diagnostics Group. Due to the elevated order backlog during 2022, we realized about 1% price improvement, which was below the inflationary trends in our overall cost. For 2023, we assume price increase realization between 1.5%-1.8%, mainly within the Life Science Group. Full year non-GAAP gross margin is projected to be about 57% in the first half of 2023, and improving to 58% towards the end of the year as we cycle through higher material costs embedded in our inventory, and we expect our logistics costs to normalize.

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

Full year non-GAAP operating margin is projected to be approximately 19.5%. We estimate the non-GAAP full year tax rate to be between 22% and 23%. CapEx is projected to be approximately $180 million as we plan to complete our ERP implementation in Asia, as well as capacity expansion to support our multi-year growth strategy. Finally, full year Adjusted EBITDA margin is expected to be about 25%. Now I'll turn the call over to Norman for a few remarks. Norman.

[Norman Schwartz, CEO at Bio-Rad]

Thank you, Ilan. I guess I would say that, you know, after three pandemic influenced years, it is really encouraging to see signs of returning to a, what I think of as a more normalized business environment. As you might imagine, everybody here is really looking forward to putting the challenges of the last few years behind us. I guess I would add that the muscle building and improvements that we made as a result during this time, I think will continue to be valuable for us going forward.

[Norman Schwartz, CEO at Bio-Rad]

If I think about the macro view a little bit, even though China and Russia, you know, as Andy mentioned earlier, continue to be a little bit challenged, it would appear that most of our markets around the world will be strong in 2023, really supported by a, kind of a solid funding environment around our targeted markets. I think overall, we are certainly pleased with the progress that we're making on our strategic initiatives. I think it's fair to say we have a robust pipeline of products in development to support our ambitions going forward. you know, we're continuing also to evaluate opportunities to add to our portfolio inorganically. A lot to look forward to.

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

Operator, that concludes our prepared remarks, and we'll now open the line to take your questions.

[Operator]

We will now begin the QA session. If you would like to ask a question, please press star followed by one on your touchtone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, 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 to allow questions to generate in queue. The first question comes from the line of Patrick Donnelly with Citi. Please proceed.

[Patrick Donnelly, Managing Director of Equity Research at Citi]

Hey, guys. Thank you for taking the questions. Ilan, maybe first, probably Andy as well, just on the guidance, you know, pretty healthy Life Science number there, 16%-18% ex the COVID. Can you just talk about, you know, the growth drivers there? How much of that is, you know, maybe some of that backlog catch up, and also maybe just the pacing across the year. Obviously, a lot goes into it between COVID and comps. It'd be helpful just to get your perspective about the right way to think about that piece. Again, maybe some of the growth drivers that play into it.

[Andy Last, EVP and COO at Bio-Rad]

Yeah. Hi, Patrick. Thanks for the question. Andy here. As we look at 2023 revenue overall, let me just break it down between the two business areas. Overall, I would say, you know, the strategic drivers revenue growth remain, you know, consistent with our Digital PCR platform. Process Chromatography, continued growth in that platform area. We're also going to benefit from new PCR products that were launched during the past year, and we've got some more coming during 2023. I think our focus on biopharma penetration, where we're largely underrepresented still, is also a very significant driver as we look to our growth in Life Science.

[Andy Last, EVP and COO at Bio-Rad]

As a backdrop, we see Life Science funding broadly being positive and in all regions of the world. That's our general story on Life Science. As I look to the Clinical business, really it's a continued growth of quality controls, continued share gains in our Immunohematology business. We've had some recent wins there, and we've got a growing demand pipeline. I would say also continued growth in Asia Pac, and in particular kind of recovery in China more in the second half of 2023. Backlog reduction will be a feature in more the first half of the year. You know, I think it was mentioned in our script that, you know, Clinical has probably got the larger of the backlog challenge as we enter 2023.

[Andy Last, EVP and COO at Bio-Rad]

We have a really clear line of sight now. Q4 was still a bit challenging for us. Growth will kind of improve through the year, for the business overall. I think that that's pretty much a wrap up of how we're looking at 2023.

[Patrick Donnelly, Managing Director of Equity Research at Citi]

Okay. That's, that's very helpful. Maybe, you know, to your point there in terms of early in the year, you know, a little bit of supply chain, a little bit of China. Can you just talk about the impact you saw in 4Q? You know, it seemed like the diagnostics piece, clearly, you know, some headwinds both from ship delays and probably China. Maybe just talk through, I guess, what you saw there in terms of the impact and then the expectation, how much of this lingers into 1Q, you know, particularly maybe the China piece and just what the right way to think about that is.

[Andy Last, EVP and COO at Bio-Rad]

Yeah. You know, it as we've mentioned before, the ability to overcome the supply chain constraints in the life science is much easier than the clinical side of the business, and that did persist for us through Q4. You know, in Q4 in China with the change in government policy, that kind of basically represented both supply chain challenge as well as some demand drop-off. China didn't really perform quite as expected for us in Q4. As we go into Q1, really our focus is on production. The improvement in volume on our instrument platforms to meet the backlog burn down and growing demand. It's less a component issue for us now on the clinical business.

[Andy Last, EVP and COO at Bio-Rad]

It is much more ramping the volume of production as we go. We believe that's a first half phenomena for us.

[Patrick Donnelly, Managing Director of Equity Research at Citi]

Okay. If I could sneak one more in for Ilan, maybe on the margin piece. You know, nice numbers here this year. Thinking about 2023 and then, you know, just the path, continued path to some of the targets you laid out at the Analyst Day last year. Can you just talk about, I guess, the key levers you have in 2023 and then, you know, similarly as we think about that EBITDA moving towards, I think it was a 28% number in 2025. You know, those levers that are still left to pull. I know some of the restructuring probably comes into play this year. It'll be helpful just to talk about the moving pieces this year and then again, the confidence as we work our way towards that 28% number.

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

Sure. Thank you, Patrick. Appreciate the question. You know, if you look at the challenges that, you know, we experienced in 2022 and we think about 2023, specifically around supply chain constraints and the impact on, you know, elevated cost of raw materials specifically, and higher logistics cost. As Andy mentioned earlier, we believe it's going to continue to improve and that's part of our thinking in terms of if you think about the gross margin, the improvement of gross margin throughout 2023, specifically in the second half of it.

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

When you think about the other internal initiatives that we have in terms of productivity and efficiencies, in terms of the restructuring that we completed, and the move to Singapore that is in the final phases of additional manufacturing footprint. All these initiatives, you know, will also contribute towards the achievement of the 2025 goals. That's kind of what gives us, you know, the confidence level that, you know, the challenges that we went through in 2022 are more transitory, will continue to some extent into 2023. It does not change our thinking about the 2025 model and the targets that we laid out back in the Investor Day.

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

Obviously that comes on top of all the top line kind of growth drivers that, you know.

[Patrick Donnelly, Managing Director of Equity Research at Citi]

Yeah.

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

you know, that you're aware of.

[Patrick Donnelly, Managing Director of Equity Research at Citi]

Right. Thank you, guys. I appreciate it.

[Operator]

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

[Dan Leonard, Life Sciences and Diagnostics Analyst at Credit Suisse]

Hello. Thank you for taking the questions. My first question on the 2023 sales guidance. I guess how important are those second half product launches you mentioned, the Continuum and the second generation single cell instrument? How important are they to the 2023 sales outlook, or are these more 2024 drivers?

[Andy Last, EVP and COO at Bio-Rad]

Yeah. Thanks, Dan. It, they're not a material contributor in 2023. This is really staging our 2024 revenue there. That introductions to the market, but no material contribution.

[Dan Leonard, Life Sciences and Diagnostics Analyst at Credit Suisse]

Andy, possibly you can give an update on the Singapore manufacturing transition.

[Andy Last, EVP and COO at Bio-Rad]

Yeah, happy to do so. The plant is up and running in Singapore across all the product lines. We're very pleased with the plant coming up to speed. I would say that the other key consideration here is that we still have our French plants operating. That wasn't our initial plan at this point in time, but we've kept them open because of the back order reduction challenges that we have. We're keeping our plants open through the first half to the end of Q2. Then we'll finally close those plants and continue to grow capacity in the Singapore facilities. At this point, all has moved well. We've just had some kind of small diversions, I would say, in the past year.

[Dan Leonard, Life Sciences and Diagnostics Analyst at Credit Suisse]

Understood. My final question, this might be related. llan, I think you mentioned it would take 8 quarters to normalize inventory. Why would it take so long, and is there any opportunity to normalize sooner?

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

Generally speaking, Dan, first of all, 2023, we plan to have a lower inventory level than 2022, just as the target we set to ourselves. Some of the procurement or the procured raw material was done for instruments that, and components that will last longer than the next 4 quarters. On purpose, we wanted to have some elevated level of raw material, and I do not see any risk of any write-offs for those since these are all for instrument buildup. That was kind of part of our thinking in terms of kind of the long-term plan. That's the reason that it will take probably 8 quarters to normalize.

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

As you can imagine, despite the fact that, you know, component availability, became kind of, or it eased in terms of, you know, availability, but it's not yet back to kind of a normalized level, and we still have some challenges there. Maybe, Andy, you want to-

[Andy Last, EVP and COO at Bio-Rad]

Yeah. Just there's kind of a carry forward effect from keeping the clinical plants open on two sides of the world as well for, you know, 2 to 3 quarters longer than anticipated. Just some double down on inventory that we will then have to also burn through. That's another contributory factor.

[Dan Leonard, Life Sciences and Diagnostics Analyst at Credit Suisse]

Got it. Thank you.

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

Thank you, Dan.

[Operator]

Thank you. The next question comes from the line of Brandon Couillard with Jefferies. Please proceed.

[Brandon Couillard, SVP and Senior Analyst of Equity Research Healthcare, Dental, Diagnostics, and Life Science Tools at Jefferies]

Hey, thanks. Good afternoon, guys. Just a question on the full year growth outlook. Just wanna make sure I got this right. We take out kind of the COVID headwind, assume that goes to zero. You're talking about core growth, you know, in the double digits. I think you said 10%-11% for the year, which is ahead of your sort of LRP that you laid out at the Analyst Day. Can you just talk about level of confidence in that level of growth and, you know, where in the portfolio you may have been a little more, you know, conservative in terms of your expectations?

[Andy Last, EVP and COO at Bio-Rad]

It's Andy here. You broke up a little bit at the end there, sorry. I mean, we, you know, we have a fairly diligent process for building our plans for the year, bottoms up by region, by portfolio or area. Look, the macro trends for us seem pretty robust on a fully global basis. Portfolio areas of growth that we've highlighted before are very consistently performing. I think 2022 didn't quite, you know, we didn't quite reach, you know, our initial growth expectations, fully realized growth expectations. You've got a little bit of a comp benefit there too, and a little bit of benefit coming through from some elevated back order that we're taking into 2023.

[Andy Last, EVP and COO at Bio-Rad]

When we look at our growth aspirations, which portions of the portfolio we expect to continue to grow. We've got new product contribution, both from products launched within 2022 and some new ones in particular areas of the portfolio. This year, you know, we feel we've got, you know, a good growth trajectory for the business going forward.

[Brandon Couillard, SVP and Senior Analyst of Equity Research Healthcare, Dental, Diagnostics, and Life Science Tools at Jefferies]

Got it. On the digital PCR business, any changes in the competitive landscape that you're seeing in the market? I know Roche has launched their system. Any kind of updated stats on that segment that you could share with us in terms of the instrument versus consumable mix, where that stands today, and maybe the end market mix, maybe between biopharma diagnostics and just research. What that looks like now.

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

Yeah. This is Simon. As we think about the digital PCR business overall, I'll say we're pretty pleased with the growth trajectory that we saw throughout 2022.

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

New product introductions and compound that with the burn down that we've started to see in the order backlog. We feel good that we've got some momentum as we come into 2023. We talked previously about the market dynamics. Yeah, there's emerging competition, and we see it as a double-edged sword. It's expanding the addressable opportunity, but it's also something that we take very seriously. As some of the earlier comments have mentioned, we're excited about the QX600 launch and the initial uptake that we're seeing with that. When you blend the capabilities of that platform with the assay capabilities we've secured access to with NuProbe, we believe we're gonna be able to access segments of the market in a way that we weren't always able to do, and we can be best in class in terms of performance.

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

We think we've got a lot of momentum, and we also continue to feel very good about the mix between instruments and consumables as we head into 2023. We see a lot of data points out in the market as well, and I think from our viewpoint, that's just really corroborated how good we felt about the performance in 2022 and how particularly bullish we are coming into 2023.

[Brandon Couillard, SVP and Senior Analyst of Equity Research Healthcare, Dental, Diagnostics, and Life Science Tools at Jefferies]

Okay, Simon, while I've got you on the NuProbe licensing, the oncology content for dPCR, what's the timeline for commercialization of that? You've also had a couple of other partnership announcements recently. One with Cytek on the StarBright Flow Cytometry dyes. There's another one with Element Biosciences for RNA Library Prep kits. Are any of those material in terms of revenue contributors in 2023? Is this part of a broader strategy to monetize more of the content you have in the portfolio through partnerships?

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

I wouldn't think about any of those as being material in 2023. I think we're gonna have a pretty significant emphasis on assay development around NuProbe in 2023. I mean, we've already got a lot of oncology content in the Digital PCR franchise. It generates a lot of revenue for us already, and I think that's gonna be a meaningful extension over time from 2024 onwards. Similarly, with the Cytek agreement that you mentioned, you know, we've got best-in-class performing dyes there with StarBright, and in addition to pushing direct portfolio, we're certainly wide open to partnerships there, and we think the partnership with Cytek is gonna serve us well over time. Again, not meaningful in 2023.

[Brandon Couillard, SVP and Senior Analyst of Equity Research Healthcare, Dental, Diagnostics, and Life Science Tools at Jefferies]

Okay, last one, Ilan. Did you mention a $5 million-$10 million one-time revenue benefit in the fourth quarter? What's the operating impact of that at the operating income line?

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

Brandon, it's, you know, on average, kind of the gross margin, you know, benefit. It's not, anything, you know, higher or lower. It's blended average for the gross margin. It is a one time, for the fourth quarter between $5 million-$10 million, as I mentioned.

[Brandon Couillard, SVP and Senior Analyst of Equity Research Healthcare, Dental, Diagnostics, and Life Science Tools at Jefferies]

Thank you very much.

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

Thank you, Brandon.

[Operator]

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

[Jack Meehan, Partner of Life Science Tools and Diagnostics at Nephron Research]

Thank you. Good afternoon. I wanted to start with M&A for Norman. Just based on what you're seeing now, and if you look out for 2023, do you think tuck-in deals are more or less likely than something more transformative? Either for you or Alon, just latest thoughts on balance sheet and, you know, willingness for using equity as part of a deal.

[Norman Schwartz, CEO at Bio-Rad]

Yeah. Yeah, we're kind of encouraged by what we see for 2023. If you think about the, you know, rising interest rates have, I think slowed other people down a little bit. We certainly see opportunities out there, whether they would be more tuck-in or more transformational. I think that's certainly. I mean, we'll see what we manage to find. You know, we would hope to do something a little larger. We've done a number of these, smaller tuck-ins, especially these kind of, technology additions to the portfolio. I think we're looking now for something with a, you know, a top line and a bottom line.

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

Jack, I would add in terms of, you know, the mix between equity and debt, our preference is again, to try and maximize, you know, the debt capacity, and maybe even you can call it a little bit stretching it. You know, if historically we were discussing around 3x of gross leverage, you know, we'll try to be even above that so long as we maintain our investment grade level. That, you know, can provide us kind of a nice size to target a nice size opportunity.

[Jack Meehan, Partner of Life Science Tools and Diagnostics at Nephron Research]

Great. Just wanted to ask you a little bit more about potential for backlog flush in 2023. You talked about $50 million of elevated backlog, and I think I heard you say you think you can capture $30 million of that. It's just smaller than I would have expected. When I look at the inventory balance, you know, at year-end, up about $150 million year-over-year. I was just curious, like, your line of sight into that and any color on... Is it mostly life sciences?

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

Yeah. Jack, maybe one comment from my side, you know, maybe that is also related to the fact that it will take us about 8 quarters and not 4 quarters, you know, to normalize that, you know, inventory level, since we did procure on purpose, you know, in certain components, longer term kind of capacity. Probably that explains, you know, the reason for the higher elevated and, you know, the kind of normalization and capturing kind of the order backlog or elevated order backlog during 2023.

[Jack Meehan, Partner of Life Science Tools and Diagnostics at Nephron Research]

Okay. Then, final one, for you, Ilan, and maybe also for Andy. The margin target of 19.5%. Off the new accounting in 2022, I think that's 80 basis points of expansion year-over-year. You know, if I look over multiple years in the past, you've done, you know, over 100 a year, maybe even better than that. I know there's some dynamics with COVID and supply chain, is there anything notable you would call out for why kind of the trend line's a little below the historical levels?

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

It's a good question, Jack. Some of the challenges obviously from 2022 will continue in part of 2023. That is still a headwind when you think about the higher cost of material that we have to flush through the inventory cycle, and that has an impact on gross margin, obviously. It's a fall through to the operating margin. I think that's kind of the main item that we have to kind of work through during 2023. That's again, the reason that we do believe that it's still transitory and that that's exactly the basis for our thinking in terms of still confirming the 2025 target model.

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

By that time, you know, we believe that, you know, those issues, you know, will no longer be there.

[Jack Meehan, Partner of Life Science Tools and Diagnostics at Nephron Research]

Sounds good. Thank you.

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

Thank you, Jack.

[Operator]

Thank you. To ask a question, please press star one. There are no additional questions at this time. I will now hand it back to the management team for closing remarks.

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

Thank you for joining today's call. We will be at the Citi Conference in early March and hope to see some of you there. As always, I appreciate your interest, and we look forward to connecting soon.

[Operator]

That concludes today's conference call. Thank you. You may now disconnect your line.

Participants

Executives

• Ilan Daskal, EVP and CFO

Analysts

• Andy Last, EVP and COO at Bio-Rad
• Brandon Couillard, SVP and Senior Analyst of Equity Research Healthcare, Dental, Diagnostics, and Life Science Tools at Jefferies
• Dan Leonard, Life Sciences and Diagnostics Analyst at Credit Suisse
• Edward Chung, VP of Investor Relations at Bio-Rad
• Jack Meehan, Partner of Life Science Tools and Diagnostics at Nephron Research
• Norman Schwartz, CEO at Bio-Rad
• Patrick Donnelly, Managing Director of Equity Research at Citi
• Simon May, President of Life Science Group at Bio-Rad