Bio-Rad Laboratories Q2 2023 Earnings Report

Bio-Rad Laboratories EPS Results

• Actual EPS: $3.00
• Consensus EPS: $2.55
• Beat/Miss: Beat by +$0.45
• One Year Ago EPS: $3.38

Bio-Rad Laboratories Revenue Results

• Actual Revenue: $681.10 million
• Expected Revenue: $697.96 million
• Beat/Miss: Missed by -$16.86 million
• YoY Revenue Growth: -1.40%

Bio-Rad Laboratories Announcement Details

• Quarter: Q2 2023
• Date: 8/3/2023
• Time: After Market Closes
• Conference Call Date: Thursday, August 3, 2023
• Conference Call Time: 5:00PM ET

Bio-Rad Laboratories (NYSE:BIO) is a life science research and clinical diagnostics company headquartered in Hercules, California. Founded in 1952 by David and Alice Schwartz, the company develops, manufactures and markets products used by academic, pharmaceutical, biotechnology, healthcare and government customers.

Its Life Science segment provides instruments, reagents, consumables and software for applications including genomics, digital PCR, gene expression analysis, protein purification, cell biology and biopharmaceutical quality control. Bio-Rad’s products are designed to support drug discovery, biological research, production and laboratory testing.

Through its Clinical Diagnostics segment, Bio-Rad offers systems and products for quality control, immunohematology and blood typing, diabetes monitoring, infectious disease testing and other clinical laboratory applications. The company serves customers in North America, Europe, Asia-Pacific and other international markets, and is led by President and Chief Executive Officer Norman D. Schwartz.

Bio-Rad Laboratories Q2 2023 Earnings Call Transcript

Key Takeaways

• Bio-Rad experienced continued softness in its biopharma segment, with process chromatography media orders pushed into 2024 and drag on overall Life Science growth.
• Full-year guidance was sharply revised down, with currency-neutral revenue growth now at ~0.8% (vs. ~4.5% prior) and non-GAAP operating margin cut to ~16% (from ~17.5%).
• Core Life Science revenue rose ~4.6% on a currency-neutral basis, driven by double-digit growth in Droplet Digital PCR and strong adoption of the QX600 system.
• Clinical Diagnostics revenue grew ~4.6% ccn, led by diabetes, immunohematology and quality controls, as the new Singapore facility ramps to clear backlog by year-end.
• The Board approved a new $500 million share repurchase program, underscoring management’s view that the stock remains undervalued and enabling opportunistic buybacks.

Presentation

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Bio-Rad Second Quarter 2023 Earnings Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 3rd, 2023. I would now like to turn the conference over to Edward Chung, Head of Investor Relations. Please go ahead.

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

Good afternoon, everyone, and thank you for joining us. Today, we will review the Second Quarter of 2023 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 Wright, President of the Clinical Diagnostics Group. Before we begin our review, I would 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. Our actual results may differ materially from these plans, goals, and expectations.

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

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 financials, including 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. With that, I will now turn the call over to Ilan Daskal, our Chief Financial Officer.

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

Thank you, Ed. Good afternoon, everyone, and thank you all for joining us. Before I begin the detailed second-quarter 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 Laboratories]

Thank you, Ilan. Good afternoon, everybody. The second quarter of the year proved to be a continuation of trends from the first quarter of the year. We experienced ongoing strong demand for our clinical diagnostic products, contrasted by further softening of demand in the biopharma segment of our Life Science business. The net result was a more modest growth of our overall core business than expected. On the operational front, we made meaningful progress in order backlog reduction. In Q2, we experienced a further decline in demand from our biopharma customers, particularly for our process chromatography media, but also extending to other product lines. This resulted from a continuation of soft sales into emerging biotech companies, plus we also experienced headwinds from larger biopharma.

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

While some of this was already forecasted for the remainder of the year, Q2 revealed a significant delivery extension of existing orders for our process chromatography media beyond 2023. The softness is a result of customers reducing their inventory levels in bioprocessing, and a tighter funding environment across biopharma is indicated in Q1. Overall, we now anticipate a larger impact to our biopharma business from the downturn than previously communicated. We do view the softness in process chromatography as transient, but do not anticipate broad-based recovery in 2023. In contrast, we remain positive on continued demand for Life Science products in academic markets. We saw strong and consistent demand from academia in all regions across the Life Science portfolio and experienced strong double-digit growth for ddPCR despite the negative biopharma macro trends.

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

In particular, we are very pleased with the ongoing demand for our new QX600 Droplet Digital PCR system. During the quarter, we held our Droplet Digital PCR World event, which received excellent attendance and engagement, reinforcing the long-term growth potential of our platform in this product area. We also know that demand broadly from the China Life Science segment continued to be weak, and the expected second-half recovery is now in question against the backdrop of a slow economic recovery. During the quarter, we also completed a cross-licensing and royalty agreement with QIAGEN related to digital PCR intellectual property. Overall, despite the biopharma downturn, our core Life Science business grew mid-single digit. During the quarter, we achieved our Life Science backlog reduction targets and do not foresee product supply being a major constraint for the second half of the year.

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

We were pleased to see continued demand recovery for our Clinical Diagnostics business, in particular across Asia Pacific, led by solid performance in China, although we continue to monitor the China macro environment. We saw strong growth in our diabetes franchise and solid growth in our immunohematology and quality controls businesses. During the quarter, we launched the IH-500 NEXT instrument, which includes updated software, enhancing the functionality of the system, along with increased security from potential cyber attacks. This platform update increases the competitiveness of our transfusion medicine portfolio. Overall, product supply increased through the quarter as our new Singapore facility continued to ramp up. We now have improved line of sight to reducing our backlog for the diagnostics business group by year-end, and continue to focus on expanding capacity.

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

In closing, we continue to be encouraged with the demand of our Clinical Diagnostics business, with the increased placement of diagnostic systems supporting future growth and reagent pull-through. In addition, we continue to focus on the solid progress we have made in reducing our back orders. The diagnostics business performance, however, is not offsetting the continued negative trends for the Life Science Group this year, specifically for biopharma accounts. Building on our environmental, social, and governance priorities, we recently published our 2022 Corporate Sustainability Report, which highlights the progress we've made in multiple areas and reflects our commitment to society and to our stakeholders. At this point, I'd like to close and pass you back to Ilan Daskal.

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

Great. Thank you, Andy. Now I would like to review the results of the second quarter. Net sales for the second quarter of 2023 were $681.1 million, which is a decline of 1.4% on a reported basis, versus $691.1 million in Q2 of 2022, and a 0.3% decline on a currency neutral basis. The second quarter year-over-year revenue decline was mainly the result of significantly lower COVID-related sales of about $0.4 million, versus approximately $33 million in the same period last year. Core revenue, which excludes COVID-related sales, increased 4.6% on a currency neutral basis.

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

The second quarter revenue included $6 million of revenue from a one-time licensing fee, as well as royalties of $500,000, both associated with a cross-license agreement related to digital PCR intellectual property. We currently estimate receiving ongoing royalties from this arrangement of about $500,000 per quarter. We incurred a one-time, $2.3 million R&D expense related to this cross-license agreement. We do not anticipate any royalty obligations on our end for the foreseeable future. On a geographic basis, we experienced currency neutral year-over-year core revenue growth in all three regions.

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

Sales of the Life Science Group in the second quarter of 2023 were $300.2 million, compared to $322.4 million in Q2 of 2022, which is a decline of 6.9% on a reported basis and a 5.8% decline on a currency neutral basis. Excluding COVID-related sales, the Life Science Group year-over-year currency neutral core revenue growth was 4.5%, was primarily supported by strong growth in Droplet Digital PCR and qPCR products. As Andy alluded to earlier, our Q2 results were impacted by the previously highlighted soft demand within early-stage biotech companies, as well as increased headwinds from larger biopharma companies who are delaying capital investments and reducing bioprocessing inventory. In addition, we experienced weaker demand from government accounts in China due to softening macroeconomic conditions.

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

Process chromatography posted a mid-teens year-over-year revenue decline, and we now anticipate a mid to high single-digit decline for the full year versus our prior expectation of double-digit growth. Excluding process chromatography sales, the underlying Life Science business decreased 4.2% on a currency neutral basis versus Q2 of 2022, and was a result of lower COVID-related sales. The Life Science Group revenue, excluding process chromatography and COVID-related sales, grew 8.5% on a currency neutral basis. On a geographic basis, Life Science experienced currency neutral year-over-year core revenue growth in the Americas and Europe, while Q2 core revenue posted a decline in Asia.

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

Sales of the Clinical Diagnostics Group in the second quarter were $380.1 million, compared to $367.8 million in Q2 of 2022, or 3.3% growth on a reported basis and a 4.6% growth on a currency-neutral basis. Core Clinical Diagnostics year-over-year revenue, which excludes COVID-related sales, increased 4.8% on a currency-neutral basis, as routine testing continues to normalize to pre-pandemic levels. Growth of the Clinical Diagnostics Group was driven by strong demand for diagnostic testing systems primarily within diabetes and blood typing, as well as nice growth from our quality controls portfolio. On a geographic basis, the Diagnostics Group posted strong double-digit currency-neutral year-over-year core revenue growth in Asia, and was largely flat in the Americas and in Europe.

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

The reported gross margin for the second quarter of 2023 was 53.2% on a GAAP basis, compares to 57.2% in Q2 of 2022. The year-over-year gross margin decline was mainly due to unfavorable product mix, with a higher than anticipated percentage of instrument sales versus reagents, as well as lower than forecasted revenue in the Life Science Group. The year-over-year gross margin was further impacted by higher material and logistics costs, as well as inventory reserves. Amortization related to prior acquisitions recorded in cost of goods sold was $4.3 million, compared to $4.5 million in Q2 of 2022.

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

SG&A expenses for Q2 of 2023 were $207.8 million, or 30.5% of sales, compared to $207.8 million or 30.1% in Q2 of 2022. We were able to maintain SG&A spend flat from the year ago level through tight expense management. Total amortization expense related to acquisitions recorded in SG&A for the quarter was $1.6 million, versus $1.8 million in Q2 of 2022. Research and development expense in the second quarter was $65 million, or 9.5% of sales, compared to $64.3 million, or 9.3% of sales in Q2 of 2022.

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

Q2 operating income was $89.6 million, or 13.2% of sales, compared to $122.9 million, or 17.8% of sales in Q2 of 2022, as a result of the softer top line and gross margin fall through. Looking below the operating line, the change in fair market value of equity security holdings, which are substantially related to Bio-Rad's ownership of Sartorius AG shares, negatively impact the reported result by $1.595 billion. During the quarter, interest and other income resulted in net other income of $5.4 million, compared to net other expense of $4.9 million last year, primarily driven by increased interest income from investments.

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

The effective tax rate for the second quarter of 2023 was 22.5%, compared to 24.2% for the same period in 2022. The tax rate for both periods were driven by the large unrealized loss in equity securities. Reported net loss for the second quarter was $1.162 billion, or $39.59 diluted loss per share, compared to a loss, of loss of $925 million, or $31.05 diluted loss per share in Q2 of 2022. This change from last year is largely related to changes in the valuation of the Sartorius holdings. Moving on to the non-GAAP results.

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

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 second quarter, in cost of goods sold, we have excluded $4.3 million of amortization of purchased intangibles and $3.4 million of restructuring expense. These exclusions moved the gross margin from 53.2% for the second quarter of 2023 to a non-GAAP gross margin of 54.4% versus 57.8% in Q2 of 2022. Non-GAAP SG&A in the second quarter of 2023 was 29.2% versus 29.3% in Q2 of 2022.

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

In SG&A, on a non-GAAP basis, we have excluded $6.3 million of restructuring-related expenses, amortization of purchased intangibles of $1.6 million, an in vitro diagnostic registration fee in Europe for previously approved products of $2 million, and an acquisition-related benefit of $800,000. Non-GAAP R&D in the second quarter of 2023 was 9.3%, which is the same as in Q2 of 2022. In R&D, on a non-GAAP basis, we have excluded $1.1 million of restructuring expenses and $400,000 of acquisition-related costs. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 13.2% on a GAAP basis to 15.8% on a non-GAAP basis.

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

This non-GAAP operating margin compares to a non-GAAP operating margin of 19.2% in Q2 of 2022. 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 $1.595 billion, and about a $900,000 loss associated with venture investments. The non-GAAP effective tax rate for the second quarter of 2023 was 22.5%, compared to 19% for the same period in 2022. The higher rate in 2023 was driven by geographical mix of earnings.

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

Finally, non-GAAP net income for the second quarter of 2023 was $88.5 million, or $3 diluted earnings per share, compared to $103.4 million, or diluted earnings per share of $3.44 in Q2 of 2022. Moving on to the balance sheet. During the second quarter, we purchased 549,863 shares of our stock at an average share price of $377.20, for a total cost of $207.4 million. Having completed the previous share repurchase program, the board has authorized a new share repurchase program of up to $500 million of our stock. We plan to continue with our disciplined approach as part of our capital allocation strategy.

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

Total cash and short-term investments at the end of Q2 was $1.728 billion, compared to $1.857 billion at the end of Q1 of 2023. The decline in cash and short-term investments from the first quarter was primarily due to share repurchases during the quarter. Inventory at the end of Q2 reached $776.6 million from $752.9 million in the prior quarter. The higher inventory level was driven mainly by higher finished goods inventory within the Life Science Group as a result of the softer demand, as well as higher raw material and work-in-process inventory within the Diagnostics Group, as we continue to manage the elevated backorder.

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

For the second quarter of 2023, net cash generated from operating activities was $98.1 million, which compares to $53.3 million in Q2 of 2022. This increase mainly reflects timing of tax payments. The adjusted EBITDA for the second quarter of 2023 was $137.9 million, or 20.2% of sales. The adjusted EBITDA in Q2 of 2022 was $160.4 million, or 23.2% of sales. Net capital expenditures for the second quarter of 2023 were $34.6 million, and depreciation and amortization for the second quarter was $35.9 million. Moving on to the non-GAAP guidance. For the balance of the year, we expect much softer sales for the Life Science Group and continued instrument demand within Diagnostics.

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

While we ramped up production for the QX600 and have worked through our backorders for the Life Science Group, an elevated order backlog remains for our Diagnostics Group. We continue to anticipate working through these backorders during the remainder of this year. As we indicated during our Q1 call, we continue to anticipate about $5 million in reduction of our elevated order backlog for each of the two remaining quarters of this year. Given the current market outlook, we are revising our 2023 financial outlook as follows: We now guide currency-neutral revenue growth in 2023 to be approximately 80 basis points versus about 4.5% previously. For the full year, we estimate, excuse me, we estimate currency neutral revenue growth, excluding COVID-related sales, to be about 4.5%, versus about 8.5% in our prior guidance.

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

Of the 400 basis points core revenue guide down, 90 basis points are related to the second quarter revenue shortfall, driven by weakness in biopharma and softer demand in China, somewhat offset by 20 basis points from the one-time license fees. The remaining 330 basis points reduction is attributed to approximately 150 basis points related to process chromatography demand, and 140 basis points due to continued softness in other biopharma and in China, and 40 basis points for the Diagnostics Group, reflecting a more cautious view around the macro environment in China. For the second half of the year, we expect about 4% year-over-year core revenue growth versus 5.4% year-over-year growth in the first half of 2023.

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

This represents about 7.5% core revenue growth in the second half of 2023, over the first half of 2023. For the Life Science Group, we expect about 4% currency neutral revenue decline for 2023. When excluding COVID-related sales, the Life Science Group full-year growth is now projected to be approximately 4%. This represents core revenue growth to be about 7% for the second half of the year over the first half of 2023. The Life Science Group year-over-year sales growth, excluding COVID and process chromatography-related sales, is expected to be about 6%. For the Diagnostics Group, while we remain encouraged with the overall demand, we are now guiding core revenue growth to be about 5.5%.

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

This represents core revenue growth for the Diagnostics Group of about 8% for the second half of the year over the first half of 2023. Full-year non-GAAP gross margin is now projected to be about 54.5% versus 55%-55.5% previously, reflecting our updated expectation of shifting product mix and volumes. For the second half of the year, we now anticipate gross margin to be about 54.5%. We now project full-year non-GAAP operating margin to be about 16% versus approximately 17.5% in our prior guidance, as we continue with our disciplined approach with operating expenses. For the second half of the year, we expect operating margin to be about 18% versus our prior guide of 21%.

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

Full-year adjusted EBITDA margin is expected to be about 21.5% versus about 23% in our prior guidance. For the second half of the year, we expect adjusted EBITDA margin to be approximately 22% versus our prior guide of 25%. Over the next several months, we expect to gain better feasibility of the market dynamics, specifically around the longevity of the softness in biopharma and its impact, if any, on our previously communicated 2025 targets. That concludes our prepared remarks, and we will now open the line to take your questions.

[Operator]

Thank you. Ladies and gentlemen, we'll now begin the question and answer session. If at any time you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. One moment for your first question. Okay, your first question? One moment. Your first question comes from Patrick Donnelly from Citi. Patrick, please go ahead.

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

Hey, guys. Thank you for taking the questions. Allow maybe to start on the process chromatography piece. Can you just talk about, I guess, the softness you're seeing? Is that just, you know, the purchasing is getting pushed out, just soft budgets on the biopharma side? Maybe just kind of give a little more color as to what you're seeing, and then it appears you're not assuming any improvement in the back half. Just want to confirm that. Yeah, maybe just a bit more color on the process chromatography side.

[Simon May, EVP and President - Life Science Group at Bio-Rad Laboratories]

Hey, Patrick, this is Simon May speaking. I think in the second half of the year, we're seeing some shifts in purchasing patterns. There are some orders that we've already secured, which are getting pushed out. That's the main aspect. We're seeing a general softness in demand that's spilling through into the second half of the year here. You know, we're detecting some potential signals of improvement. From our side, it's really too early to call, and we're not seeing that reflected in the opportunity funnels at this time. As we've said earlier, we remain pretty optimistic that this is transient, and we're going to see pickup, hopefully at some stage in 2024.

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

Okay, that's helpful. Then maybe in China, you know, you're certainly not alone seeing some headwinds over there. I mean, it sounds like it's hitting both the Life Science side and then the macro, maybe some cautiousness on, on the Diagnostics. Can you just talk about, I guess, are you seeing it hit both now? Is the Diagnostics a little more kind of forward caution, just because what you're, you're seeing on the economic side, the Life Science side, and then, yeah, maybe just expectations in the back half. I know there's a part of the cut, but what, what is China going to look like in 2H?

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

Yeah. Hey, Patrick, Andy here. I think for H one, I think our story is fairly consistent and, and, you know, a lot of softness in Life Science, which includes the biopharma component segment of that piece of the business. Diagnostics is relatively good for us in the first half, but we are certainly cautious about the second half, given the macroeconomic situation in China, and that's true for both Life Science and the Diagnostics side from our point of view right now.

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

Okay, that's, that's fair. Then maybe last one, just on the margin side, can you just talk about, you know, it sounds like the gross margins are getting a little bit impacted by some inventory and material costs, and what you guys can do to maybe insulate the bottom line a little bit. I'm sure you're taking some cost actions, maybe just give us a bit of color on, on what you guys are doing and, and, you know, how projectable that is into next year in terms of, you know, just how we should think about the base case on the margins. Thank you.

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

Yeah. Thank you, Patrick. This is Ilan. There are a few aspects to call out. First, on the margin, some aspects are transitory, some are related to the inflationary environment overall. For example, material is still kind of elevated in terms of the overall cost, and it's higher than last year. You know, the product mix was definitely, you know, a headwind in terms of the mix between our Life Science Group and the Diagnostics, as well as within our Diagnostics Group with more instruments, which should be a benefit, you know, thinking, you know, more into 2024. There are other kind of more of elevated one-time as, as the reserve, et cetera. On the other hand, you know, we continue with, with a very, very disciplined approach in terms of the overall operating expenses.

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

You can see that the fall-through to the operating income is much smaller than the impact on the gross margin, and that will continue to be the approach. Again, as I said, it's kind of a mixed bag of kind of aspects that do impact, you know, and did impact this time around. Some are more, more transitory, some, you know, we'll have to wait to see how the inflationary environment will continue to shape up.

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

Understood. Thanks, Ilan.

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

Sure.

[Operator]

Your next question comes from Brandon Couillard from Jefferies. Brandon, please go ahead.

[Brandon Couillard, Equity Analyst at Jefferies LLC]

Thanks. Good afternoon. Ilan, if I just look at, you know, your pie chart, I mean, biopharma is only 17% of your mix. Would you give us the outlook for that group as in, in total? What do you expect that biopharma to do in 2023, and how it compares to your prior view? Simon, question for you: is any of that weakness spilling over to ddPCR at all, or do you see pretty consistent demand, budgets are there for those instruments, given, you know, how differentiated it is?

[Simon May, EVP and President - Life Science Group at Bio-Rad Laboratories]

Yeah, Brandon, this is Simon. I think in our biopharma business, we've obviously got a chunk that's process chromatography, and I think we've already provided commentary there. I think where 2023 is concerned, it's certainly too soon to call any signs of recovery, and again, we'll see what 2024 brings. Definitely spills over into our digital PCR business. You know, we've got a strong footprint and presence in emerging biopharma and digital PCR. We had a very strong quarter, notwithstanding that, in the second quarter, with robust double-digit growth and with the introduction of QX600 and the way that our customers are responding very positively to the advanced multiplexing capabilities there. That's kind of offsetting the softness that we're seeing in biopharma.

[Simon May, EVP and President - Life Science Group at Bio-Rad Laboratories]

We're definitely seeing that impact outside of process chromatography, but it tends to be a different kind of impact, which is more related to VC/PE funding with smaller emerging biotechs.

[Brandon Couillard, Equity Analyst at Jefferies LLC]

Okay. Then I guess, Ilan, any color you can share with us in terms of the phasing for revenue growth and margins between 3Q and 4Q? You've got a tougher comp in the fourth quarter. Then just in terms of the margins, I know that's always kind of the, the peak margin quarter of the year, given the higher volumes. Any more color you can share with us how we should think about the phasing 3Q and 4Q?

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

Sure. You know, generally, Brandon, as you know, the fourth quarter tends to be a stronger, stronger quarter for us. I mean, generally, you know, we think you know about the third and fourth quarter to be stronger, but definitely the fourth quarter, you know, its usual seasonality is stronger there than even the third quarter. In terms of the gross margin, you know, it's, it's more again, benefiting the fourth quarter from the fourth rule. It's a slight benefit, but it's, it's, it's not a huge difference since we did guide for about 54.5% for the second half. You know, when it comes to the operating expenses, we will continue, as I mentioned earlier, with a very disciplined approach in terms of the expenses.

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

We expect it to be lower on a percent basis of sales, on a percent basis, potentially slightly higher, but it's a very, very disciplined approach.

[Brandon Couillard, Equity Analyst at Jefferies LLC]

Okay. Then just in terms of inventory levels, I mean, I'm just surprised they continue to climb to this degree. I mean, is this the peak level in 2Q, and we should expect them to come down sequentially from here? Just help us understand, like, when that expected to top out, I suppose.

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

Oh, I'm sorry, Brandon. This is Andy here. We're near the top of this inventory build that's been going on, which as we've reported before, is a result of the Diagnostics manufacturing moving from France to Singapore. Then the lead time required on purchase of raw material through to finished product. Then with the Life Science downturn that clearly was not expected anywhere close to this level of magnitude, we got to catch up with that. So I think that we're largely ahead of this at this point in time, and we'll be looking toward normalization of inventory as we move forward.

[Brandon Couillard, Equity Analyst at Jefferies LLC]

Okay. Thank you.

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

Thank you, Brandon.

[Operator]

Your next question comes from Tim Daley from Wells Fargo. Tim, please go ahead.

[Tim Daley, VP, Senior Equity Research Analyst - Life Science Tools, Diagnostics, and Pharma Services at Wells Fargo Securities]

Thanks, everybody. I think everybody said transient at least once on today's call, describing the biopharma headwinds, but then also said not recovering till 2024. You know, descriptions around the process chromatography cut seem to be a lot timing rather than demand destruction or loss. Just curious about, you know, as we progress forward and thinking about the contribution in 2024 for process chromatography, maybe above normal growth levels or above the kind of expected levels, and then, you know, just additional comments on the long targets here, given, you know, lower base, I guess, grow losses.

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

Tim, this is Ilan. I'll start, and then maybe Andy and Simon can chime in. You know, generally speaking, first of all, you know, we're not yet guiding for 2024. We're generally not necessarily expecting a pent-up demand in process chromatography in 2024. We see it more as transitory and push-outs of orders and these are kind of think about it like a permanent push-out. So it's not that 2024, we expect process chromatography to be elevated, due to a pent-up demand.

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

Well, I think there's an element in the question there about funnel, and this isn't a change in the shape of our market share or expectations over the long term. This is orders that we're expecting that have been pushed out. In that regard, this is a transitory shift. Timing, I think, is the word you used, Tim. That's the way we look at it. What we are unclear on, and so on, taking a position on right now is, is when that timing fully resolves.

[Tim Daley, VP, Senior Equity Research Analyst - Life Science Tools, Diagnostics, and Pharma Services at Wells Fargo Securities]

All right, got it. Second one, I know we've touched on China a bit, but China Diagnostics was a nice tailwind this quarter. I know you took some of that out of the guide, but, just to help us understand, you know, how much of that was maybe reopening tailwinds versus underlying growth and what the full China growth expectations are for the year within Diagnostics?

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

I think it has to do more with, you know, the current macro environment that we continue to monitor for the remainder of the year. I don't know that it's necessarily a leg of, you know, the reopening necessarily, as it is more being more cautious that, you know, the environment will not change drastically. I mean, overall, you know, diagnostics is expected to achieve 5.5% year-over-year growth, which is a really nice growth for them. You know, China performed so far really well for us. Again, with everything that we hear, we have to continue to monitor the second half, specifically.

[Tim Daley, VP, Senior Equity Research Analyst - Life Science Tools, Diagnostics, and Pharma Services at Wells Fargo Securities]

All right, perfect. Thank you. Appreciate the time.

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

Thank you, Tim.

[Operator]

Your next question comes from Jack Meehan, from Nephron Research. Jack, please go ahead.

[Jack Meehan, Partner and Equity Research Analyst- Life Science Tools and Diagnostics at Nephron Research]

Thank you. Good afternoon. Andy, I was wondering, and or maybe for Ilan as well, just the transition to the new manufacturing site in Singapore, just operationally, how did that go during the quarter? Can you talk about, how that might contribute to your thinking around margins in the second half of the year?

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

What I'll answer the first half, Jack. It went well, and, you know, both plants, we're now past the four global shutdowns in France. 100% focused now on the ramping of production in Singapore. It is going well. We did make progress in the quarter on the diagnostics backlog, but as we've indicated before it's gonna take the full year. We feel good about achieving that right now, and I think we communicated here some, some further inventory backlog, sorry, burn down in the coming quarters. You know, after the early difficulties, I believe we're, we're on track now. As it relates to gross margin, do you want to comment on that?

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

Sure. Jack, obviously the heavy lifting, as Andy mentioned, you know, is behind us. We continue to ramp. I mean, a lot of it has been achieved we continue to realize kind of more benefit. The two European sites are closed, we will have a slightly additional kind of benefit probably going into next year, it will be fully ramped up. That's where we are right now.

[Jack Meehan, Partner and Equity Research Analyst- Life Science Tools and Diagnostics at Nephron Research]

Great. Okay. Then, you know, there's been a lot discussed about kind of some of the issues you're seeing in biopharma at the moment. I was just curious this might be a difficult question to answer here in early August, but what you think is the likelihood of some of these, you know, issues extending, you know, through to the first half of 2024? What are you hearing from customers?

[Simon May, EVP and President - Life Science Group at Bio-Rad Laboratories]

This is Simon. I think the simple answer is, it's too soon to say. I think we've kind of covered this, 2x or 3x already. We're not seeing signs of material recovery in our funnels in the second half of the year. There's some commentary around some shifts in the funding environment, but that's very early. It's gonna take time for that to trickle through to the coal face, and quite simply, we just think it's too soon to call 2024.

[Jack Meehan, Partner and Equity Research Analyst- Life Science Tools and Diagnostics at Nephron Research]

That's fair. Last question for Norman. You know, the new repurchase authorization, that's a nice kind of endorsement of, you know, maybe the value you see in Bio-Rad shares now. I was curious what your latest thinking is on the Sartorius stake. You know, just given where Bio-Rad stock is trading, I'm curious, would you ever consider monetizing a piece of this just to buy more of your own shares? Talk about kind of the commitment to that. Thanks.

[Norman Schwartz, Chairman, President, and CEO at Bio-Rad Laboratories]

Well, certainly we've got plenty of cash on our balance sheet at the moment. That shouldn't be an issue, certainly in the near term. Obviously, we continue to see Sartorius as strategic for us. With respect to repurchase, we certainly continue to view that our valuation is low relative to peers. As we go forward, looking at when we repurchase, balance between obviously different uses of cash, and different priorities. But it's nice to have that new authorization in place and give us the opportunity to opportunistically buy back from time to time.

[Jack Meehan, Partner and Equity Research Analyst- Life Science Tools and Diagnostics at Nephron Research]

Agreed. Okay. Thank you.

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

Thank you, Jack.

[Operator]

Your next question comes from Conor McNamara from RBC Capital. Conor, please go ahead.

[Conor McNamara, Equity Research Analyst - Life Science Tools and Diagnostics at RBC Capital Markets]

Hi, good afternoon. Thanks for taking the questions, guys. Can you talk more about the ddPCR, the strong double-digit growth you saw? Is there any more competitive pressure in the market there? Is there any pent-up demand or manufacturing issues on ddPCRs at all on the diagnostics side?

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

Hey, Conor, Andy here. Yeah, we were very pleased with the performance in the quarter, despite the challenges of softness in the biopharma segment. The new instrument is going very, very well for us. We cleared out all our production challenges in the quarter, no constraints moving forward. You know, we've grown that franchise quite meaningfully in that segment over the last few years, so our strategy for growing there has been very successful. We feel very positive about the forward-looking potential, and biopharma is a point of weakness in the middle of it. Competitively, I don't think anything has really changed, certainly not within the last quarter, and that's all baked into our thinking at this point in time.

[Conor McNamara, Equity Research Analyst - Life Science Tools and Diagnostics at RBC Capital Markets]

Great. Thanks for that, Andy. Just, just as a follow-up, if you look at the success of that product, how much of that, those sales are going into either new markets or new customers versus, upgrading current PCR customers? I don't know if you have that data available.

[Simon May, EVP and President - Life Science Group at Bio-Rad Laboratories]

This is Simon. I can talk to that. I think it's a bit of a spread. We're seeing a good number of customers who are upgrading from existing systems. I'd say we've actually been pleasantly surprised at the uptake that we're seeing in biopharma, where that multiplexing capability gives those customers a significant productivity advantage. Then the third area where we're seeing uptake is in oncology research and clinical development, where, again, the multiplexing and the sensitivity of the system really serves that need very well. It's kind of broad-based.

[Conor McNamara, Equity Research Analyst - Life Science Tools and Diagnostics at RBC Capital Markets]

Got it. Thanks. Just finally, on ddPCR, can you remind us the consumable pull-through, you know, with these placements, are you still kind of at that 50/50 equipment versus consumables on ddPCR? What's the tail there as far as when that should accelerate on the consumable side?

[Simon May, EVP and President - Life Science Group at Bio-Rad Laboratories]

In very approximate terms, we're still there, and I think over time, we still expect that to weight increasingly towards consumables, and I think we're seeing that trend play out.

[Conor McNamara, Equity Research Analyst - Life Science Tools and Diagnostics at RBC Capital Markets]

Great, thank you for that. Last question for me is on the OpEx side. You know, you were down sequentially on total operating expenses. How should we think about that cadence for the rest of the year and then going into next year? Is this a good run rate from Q2, or is there anything that's abnormal in Q2?

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

Sure. Yeah, this is Ilan. You know, as a percent of sales, we expect the second half at least to be, slightly lower than that. On a dollar basis, maybe slightly higher, but we, we try to continue to be very disciplined in terms of the expenses overall.

[Conor McNamara, Equity Research Analyst - Life Science Tools and Diagnostics at RBC Capital Markets]

Got it. Thanks, guys. Appreciate it.

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

Thank you.

[Operator]

We have a follow-up question from Brandon Couillard from Jefferies. Brandon, please go ahead.

[Brandon Couillard, Equity Analyst at Jefferies LLC]

Sorry, Ilan, just to clarify, are you saying OpEx in the second half up or down compared to the first half?

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

As a percent of sales, it's going to be slightly lower. On a dollar basis, potentially slightly higher, but not meaningfully higher.

[Brandon Couillard, Equity Analyst at Jefferies LLC]

Okay, that makes sense. A follow-up question for, for Simon. I'm just curious, the QIAGEN digital PCR cross-licensing deal, what do you get out of it? Why strike that deal with them?

[Simon May, EVP and President - Life Science Group at Bio-Rad Laboratories]

Can't really answer that, Brandon. The terms of the deal are confidential. I think we've already said what we're going to say about it in the script here. I think we're pretty happy with the terms, and that's about where we have to leave it because of the confidentiality provisions we've got around it.

[Brandon Couillard, Equity Analyst at Jefferies LLC]

Okay. I'll leave it there. Thank you.

[Operator]

Okay, there are no further questions at this time. I'll now turn it back to Edward Chung for closing remarks.

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

Thank you for joining our call today. We will be participating at the Wells Fargo Healthcare Conference in Boston next month. As always, we appreciate your interest, and we look forward to connecting soon. Thanks.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Participants

Executives

• Andy Last, EVP and COO
• Edward Chung, Head of Investor Relations
• Ilan Daskal, EVP and CFO
• Norman Schwartz, Chairman, President, and CEO
• Simon May, EVP and President - Life Science Group

Analysts

• Brandon Couillard, Equity Analyst at Jefferies LLC
• Conor McNamara, Equity Research Analyst - Life Science Tools and Diagnostics at RBC Capital Markets
• Jack Meehan, Partner and Equity Research Analyst- Life Science Tools and Diagnostics at Nephron Research
• Patrick Donnelly, Managing Director, Equity Research at Citi
• Tim Daley, VP, Senior Equity Research Analyst - Life Science Tools, Diagnostics, and Pharma Services at Wells Fargo Securities