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Robert F. Friel - Chairman, Chief Executive Officer, President and Member of Finance Committee


Charles Anthony Butler - Barclays Capital, Research Division

PerkinElmer, Inc. (PKI) Barclays Global Healthcare Conference March 12, 2013 2:30 PM ET

Charles Anthony Butler - Barclays Capital, Research Division

Good afternoon. I'm Tony Butler. Thanks very much for attending the session. Rob Friel, who's the Chairman and CEO of a PerkinElmer is with us today. We also have Andy, the CFO, and Tommy Thomas, who's the Head of IR.

I did want to mention that we will have a breakout session just across the hall in New Yorker Sands.

The format will be Rob's going to actually make some introductory comments. He will have some slides. I'll probably ask a couple of questions depending on our time. We have 4 questions lined up for the audience response system. So beware, it'll be -- I think it'll be a lot of fun.

Rob, thank you for coming.

Robert F. Friel

Great. Thanks, Tony. Good afternoon, everyone, and as Tony said, I'll make a couple introductory comments. Before I do, I want to remind everyone to the extent that we have forward-looking comments here. We'd ask everyone to check with our website at and to the extent we use non-GAAP financials, we'll have a reconciliation to the GAAP financial statements.

Just wanted to spend a couple of minutes and just do a quick overview of PerkinElmer for you, to some of you that are not as familiar with the company. So you can see up there, it's a global technology company really focused in 2 areas: Human and Environmental Health.

A very global company. We operate in over 150 countries. We're in about 43 separate countries on a direct basis. As you can see up there, about 7,400 employees worldwide. Revenue in 2012 was about $2.1 billion with EBITDA of about $400 million, so about a 20% EBITDA number.

And then you can see the distribution of the 2 pies. First of all, on the left-hand side, you see the geographic distribution of our revenue. And just a couple of things I'll point out there is first of all, you see the emerging markets at 28% actually exceeds the amount of revenue we have in Western Europe. And then the other thing I would say on the other pie there, just pointing out the distribution of the products, with about 45% of our revenue coming from instruments and components, a little under 25% of our revenue in reagents and consumables and about 1/3 of our revenue in service and informatics. And I think that kind of provides us some nice resiliency, particularly in difficult economic environments, with now 55% of our revenue coming from service, informatics and consumables.

When I think about PerkinElmer, I would say, first of all, it's focused around 3 core capabilities. And actually, if you go back to the history of the company, it really is all about detection and, more recently, imaging. And then I would say in the more recent past, we've added our capabilities in informatics because as our instrumentation around detection and imaging continues to get better and better, generating more information, the informatics aspect of it is becoming increasingly more important.

So what I think about PerkinElmer is our ability to really detect things very accurately, in a lot of cases, very early. And we focus those in really 3 key end markets; 2 of those are really focused around the Human Health area, and those are diagnostics and life science research; and 1 of them is in the environmental space. And you can see up there from the slides, we're really focused on, as I mentioned before, we're using this detection and imaging capability to, first, on the diagnostics side, to hopefully find disease earlier and, therefore, improve the outcome for our patients and customers; and on the life science research area, we're really helping the pharmaceutical and biotech companies discover better drugs sooner; and then on the environmental side, similarly, trying to find things whether it's in air, water, food, even within the soil and identifying those contaminants early enough to avoid significant human health issues.

Just running through the 3 areas relatively quickly. The diagnostics area for us, I would say, diagnostics generally is probably a $50 billion or $60 billion market. For the areas we operate in, our addressable market is around $4 billion, and you can see on the left-hand side here, the 3 key areas that we are focused on: Newborn and prenatal screening, so think of it as sort of reproductive health; we have a business in infectious disease that is really focused in the emerging markets; and then we have a medical and imaging franchise. You see some of the growth drivers that why we believe this market can grow in the sort of 6% to 8% and, if you look historically, that's what this business has done.

And then on the right-hand side there, I lay out some of the capabilities, so whether it's our ability to detect biochemical and molecular indications. We have the digital x-ray panels that I talked about and we also have the strong informatics and service capability within this business.

I think some of the areas that allow us, some of the reasons why we're able to be successful here is, first of all, we've got some great market positions. So both in newborn and first trimester prenatal screening, we're #1 in the world. We've got some excellent customer relationships for long periods of time. And I think a very strong brand that's recognized across the globe. In many of these countries, we've been there for some 30 or 40 years.

I just want to drill down on a couple of the areas and starting first with the newborn area to give you a sense of if you look across the globe, about 130 million births. What this chart depicts is that the majority of those are some 122 million babies that are born each year are really outside North America and Western Europe.

If you look at the amount of babies that are screened, you can see, to a large extent, almost 100% in both Western Europe and North America, but something around 45% in the developed areas or developing parts of the globe.

If you look at it from a test perspective in the U.S., where we're doing the most expansive testing, we do, on average, about 30, and that ranges from the low 20s in some states to as high as 54 in a couple of the states. In Europe, again, a fairly wide distribution of testing, but the average is around 6. And as you can see, the average tests in the rest of the world is around 2.

When you think about the market opportunity here, in both North America and Western Europe, it's about $125 million. And what we've assumed here for the rest of the world is that they, on average, screen for 10 disorders and we go from 45% of children being tested to about 60%. If you, in fact, assume that the rest of the world did testing at the level of North America, the market would be closer to $3 billion.

As I mentioned before, we have a very nice position. So what's shaded in the blue here is everywhere that we are testing for newborn, and again, what we're testing for is metabolic disorders that can be cured, in most cases, through diet or drugs, we screen today in 91 countries and our market shares are fairly extensive across each of the regions of the world. So they range from 50% in the rest of the world to as high as a little over 70% in North America. So, on average, we've got about 65% of global market share with regard to newborn screening.

Moving now into prenatal side. I think we've got a very comprehensive offering here. So it starts with biochemical screening. So this is where we're doing screening in the first trimester for things like Down Syndrome. There's been a lot of press recently about this now moving into -- for high-risk mothers, into the noninvasive prenatal testing or NIPT. And we announced in January a collaboration with Verinata that gives us access to their verifi test, and then we also provide chromosomal microarrays through our acquisition of Signature Genomics we made a number of years ago.

So across this very important area of prenatal screening, we think we've got the most complete solution from both the patient perspective, as well as the physician. And it complements some of the work we've been doing in the biochemical screening area with NTD where currently, we have over 160 million covered lives from a payer perspective. And so as our work with Verinata now over the last couple of weeks, we've been working to expand the coverage with their products. And, as I said, we can now go to our customers, which in a lot of cases are the maternal and fetal medicine doctors and offer them this complete solution, whether they want to do biochemical screening, whether they want to do noninvasive or actually whether they want to get into chromosomal microarray and analysis from that perspective.

And then finally, in the diagnostic area and to spend a second on our infectious disease testing. And here as I mentioned previously, it's focused on the emerging markets. So just looking at China, for example, the 2 areas we are selling products into is the IVD market, which is about a $2 billion market today and we do some blood screening. And in nucleic acid testing area, you can see the capabilities in the middle, which are SFDA approved both for immunochemistry, as well as molecular tests.

We think these are both quite attractive markets where we believe the IVD market is growing in the area of 25%. And in the blood screening area, particularly around nucleic acid testing, that has now being mandated by the Chinese government that by 2015, all blood screening will be -- have to be tested for nucleic acid. And so we think that'll go from $75 million market today to virtually doubling over the next 5 years to $150 million market.

When we think about our capabilities and our advantages, what we're trying to do is combine a very nice cost position because these are produced and the technology is performed in China. And we combine that with a very good local channel, as well as high sensitivity and what I would call international quality.

So our approach here, and as many of you know, this is a sort of a proxy for the health care system in China, as depicted, the Chinese hospital system and you've got 2 or 3 hospitals, which are the sort of the top tier and they have a tendency to go with the newest technology, highest quality. In most cases, they are the international suppliers. You've got the largest segment, which is the level II and you've got the level I, which is really mostly supplied by a local company, it's the older technology. And we're really focusing right in the middle of that, as I mentioned before, where we can provide very strong quality, excellent technology capabilities at a very reasonable cost. So we're pricing ourselves a little bit above the local suppliers and significantly below the international suppliers. And I think we've got a huge opportunity to gain a significant piece of the market.

And then branching that out from China, we will become CE-marked and then be able to go into a number of other of the emerging markets that I have depicted there in the bottom right.

So it gives you a sense of our diagnostic strategy, which is I would describe as globally around reproductive health, and in the infectious disease area, really focused largely in the emerging markets.

Focusing on the other 2 market areas is life science research. It's for us about a $600 million business. You see the addressable market there; for us, it's about $5 billion. This one we think for us grows in the 3% to 5%. You can see some of the drivers there. And similarly, you see the capabilities again around detection and imaging and we combine with that a strong service offering and informatics. And I would say similar to the diagnostics markets for us, we have very good brand recognition. We're able to put together very good integrated solutions and particularly in this area, we have very strong intellectual property. And across the company, we have over 3,000 patents and a lot of them in this area of life science research.

And the third area that we're focused on from a market perspective is environmental and we would sort of broadly define environmental to include food, water, air and some of the industrial markets like petrochemical and chemical. Again, we think good growth drivers here where this is probably a 5% to 7% grower. Some of that is regulatory, some of that is as companies want to access a global supply chain, it requires them to do more and more testing, largely to protect their own reputations from some issues that could arise because of where they're sourcing some of their supplies.

You can see our capabilities there are fairly broad based from a detection capability. And then again, combining that with the ability to provide great service and in informatics. And finally, similarly strong brand recognition, a good global distribution care. And I think here in particular, because of the period of time we've been in and around a number of these applications, I think the reason why customers come to PerkinElmer is because we understand their applications, in most cases, much better than our competitors.

I'll spend a minute or 2 here on the financials. So if you look historically from '07 to 2012, over the last 5 years, revenue is up about 50%, which translates to about an 8% compounded basis. I would say there's 3 fundamental reasons for that growth. One is we've been able to significantly expand our emerging markets presence there and you can see it's up almost doubled during this period of time.

The second area we really focus is on our new products. Some people refer to this as the vitality index and so we've been able to significantly move this from about 12% of our revenue in 2009, which is when we began tracking this, almost doubling it to 23% in 2012. A lot of that has been focused on research and development, but also through some of the acquisitions that we've made, most notably, Caliper. I think we've brought a much more innovative group of people into the organization, much more entrepreneurial.

And then finally, as I mentioned before, we've been focused on making it a more resilient portfolio. So there's been a big emphasis on improving the percentage of service and consumables and you can see during this period of time, taking it from just over $700 million to over $1 billion of our revenue now from that group of products.

In the operating margin, we have a good success here, up from about 12% and we ended 2012 at 16.5%. Again, probably when you think about the drivers to this, I feel good about that we were able to do it I would say in a good way from the perspective of strong gross margin expansion to focus in on productivity within our factories, some of this is because of an improved mix. We've been able to expand operating margins while continuing to grow R&D as a percentage of sales, and the majority of the leverage really comes from the SG&A areas where you can see over 100-basis point of expansion. While we've been able to grow revenue at an 8% compounded basis. Obviously, we've been able to contain the rest generally [ph] G&A growth at a much lower number.

If we -- as we look over the next 5 years, we feel when you look at both inorganic and organic growth, we can achieve that 8% CAGR as we've done the previous 5 years. That would put us over $3 billion in revenue. And the growth drivers, again, will come from similar types of actions that we took from the '07 to 2012 time frame, you can see them there on the right. And similarly, on the operating margin side, we think coming off of the 16.5% in 2012, we've got a stated objective to get to 18% by 2014, but clearly, we don't want to stop there. And so we've now put in 5-year plan to get us over 20% by the 2017 time horizon, and again, you can see the drivers there.

Let me just wrap up with so I would say sort of 3 takeaways, hopefully you've got from the past 15 minutes or so. Again, it starts with excellent technology in those 3 areas that I highlighted around detection, imaging and informatics. We focus those terrific capabilities in what we think they are very high growth and attractive end markets where we can bring differentiated capabilities. And then finally, we combine this to really make a significant difference in both Human and Environmental Health, and you can read some of the things there that we can really feel and I think all the employees at PerkinElmer feel terrific about our ability to improve the quality of life, particularly in the areas of Human and Environmental Health.

So let me wrap it up there and then we'll have a couple minutes left for some questions and then we'll go to the patient part.

Question-and-Answer Session

Charles Anthony Butler - Barclays Capital, Research Division

Sure. Thank you, Rob, very much for that overview. Just really 2 brief questions and maybe we have some time for the audience response questions. One is really around the emerging markets. As you alluded to earlier, the emerging market growth has been strong. Should it continue at the current rate, do you think it'll inflect, go higher? Can you just provide us some additional color around the growth in that region?

Robert F. Friel

I think our view is that the emerging market growth that we've seen over the last couple of years, which has been in the sort of low to mid-teens, should continue for the foreseeable future. And the reason why I think we feel strongly about that is when you think about the 3 areas that we're focused on, I think they're all critical areas, particularly for the emerging markets. So starting with Environmental, I think sort of the environmental areas is probably one of the significant barriers to continued industrialization for a lot of these emerging areas. So governments are continuing to put a lot of emphasis in investment there. I think when you consider diagnostics and the pressure that a lot of these countries are coming under to get their population access to better health care, it's going to require them to do more work in and around diagnostics and particularly the screening area on the reproductive side and also in the infectious disease area. So again, I like our position there. And then finally in the research area, a lot of these countries want to build independent capabilities from the life science research. And so you're seeing investment organically by the country, but then you're also seeing a lot of the multinational pharmaceutical companies go there to access those markets and to access the lower-cost opportunities for research. So I think in all 3 of those areas, we think we'll continue to see significant opportunities and be able to maintain that double-digit growth that we've experienced.

Charles Anthony Butler - Barclays Capital, Research Division

And on an op margin basis, you guys have done a phenomenal job increasing op margins on a fairly consistent basis. You made some references today on R&D and SG&A. You've got some goals of greater than 20%. Is it -- would you argue that the low-hanging fruit's been had? Is it harder to get to the 20% or greater than 20%, if you will, by '17 than certainly it has been to get to the current, whatever, 16.5% that you've reported?

Robert F. Friel

I think there's been some opportunities that we've been able to achieve in the last couple of years because of the approach to go sort of operating company than a holding company. And I think we'll be able to continue to get some benefits here in probably in the next 12 to 18 months. But I wouldn't say we are starved of opportunities because while I think we've been able to benefit from those things over the last, say, 36 or 48 months, the analogy I'll say it's sort of climbing a mountain; the higher you get, the more you see. And I think we now see greater opportunities in some other areas like indirect spend, in areas like how we go to market. And so I don't feel, at this point, that we're starved for opportunities to continue to see ways to make PerkinElmer more efficient so that we can continue to drive productivity. I think the other thing is during this period of time while we've had good margin expansion, I also want to reemphasize that we've been investing back in the business in the form of R&D and building infrastructure. So another big contributor, I think, going forward will be our organic growth. So I think as we consider sort of post '14, the opportunity to expand our organic growth is also a big driver to the continued expansion of our operating margins.

Charles Anthony Butler - Barclays Capital, Research Division

Perfect. Maybe we can go to our audience response questions if we may, and remember, your little toy in front of you, well, I'm going to ask you to play too, but watch which button you push. So remember, before the music stops, try to get your selection in as quickly as possible. First question: Under sequestration, do you feel PKI will have a 10% hit to revenues, #1; 5% hit to revenues #2; 3, is a 1% hit to revenue or no hit at all?


Here you go. Interesting. Next question. In 2 years, where do you think operating margins will go, great discussion so far today: 16%, 18%, 20%, 22%? There's obviously been a goal to get over 22% by 2017. Let's see how everybody feels about that.


That's fairly in line with comments, I think; 80% for '18. Next question, then: PerkinElmer's organic sales growth and adjusted earnings per share for the past 3 years have been below peers, in line with peers or above peers?


Pretty simple answer there; when we look back historically. Clearly, above peers. And the last question is organic sales growth and adjusted earnings per share for the next 3 years, will again be below peers, in line with peers or above peers?


Well, consistent with the past. So people expect more of the same. Well, terrific. Thank you very much for your time. We look forward to seeing you across the hall in New Yorker Sands. Thank you, Rob.

Robert F. Friel

Thank you.

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