PerkinElmer, Inc. (PKI)
January 11, 2012 5:30 pm ET
Robert F. Friel - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Finance Committee
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
All right. We're going to go ahead and get started. I'm Tycho Peterson. It's my pleasure to introduce our next company this afternoon, PerkinElmer. For those interested in the breakout, it's going to be in the Olympic Room. So let me turn over to Rob to talk more about Perkin.
Robert F. Friel
Great. Thanks, Tycho. Thank you all for joining us this afternoon. So I'll just mention, with me today is Andy Wilson, our Chief Financial Officer, so somewhere over here; and Kevin Hrusovsky, who is the CEO of Caliper and has now joined PerkinElmer as the President of our life sciences and technology business.
So today I'd like to do a couple of things. First of all give you an overview of the company, but really focus a little bit more on our strategy. And I know, particularly in meeting with some of the investors over the last day or 2, there's been some discussion around the activity, particularly in 2011 with acquisitions, and it may appear they were putting together a disparate collection of technologies. And I want to really focus today on the rationale and the strategy behind some of the acquisitions we've done, specifically in 2011, and really sort of do that in the context of what we see are tremendous value-creation opportunities within PerkinElmer to really drive and assist our customers in improving world health for the next couple of years.
Before I do that, I do want to remind everyone that to the extent we're using non-GAAP information that you should consult with a reconciliation which we have done on our website, www.perkinelmer.com. And to the extent that I use forward-looking comments, I want you to make sure that you consult with the SEC documents and, of course, the 10-Qs and the 10-Ks.
So as I said, if you look at -- a lot of the moves of the actions that we've taken over 2011, it was a busy year and it was really driven by 3 fundamental themes. So first of all, it's -- our goal is to really put together differentiated solutions based on strong and hopefully intellectually or protected intellectual property that is application driven. Those applications are focused on attractive segments and improving health. And you see there that they fundamentally resolve around 3 areas: diagnostics, research and environmental. And I think one of the things that's somewhat unique to PerkinElmer is we've got great channel and access in emerging markets. And as I'll explain a little while, what we'll see is continued evolution on a hierarchy of medical needs, that we have the ability to take those and drive them into the emerging markets. So developed for the developed markets and then bridging that into the emerging markets, and I'll give you a little bit of perspective on that.
Before I start though in those discussions, I do want to give you a quick overview for some of you that are not as familiar with PerkinElmer. So you can see from the slide, about a $2.1 billion revenue company. You can see fairly geographically dispersed, less, I mean, 50% of our revenue in North America. And then actually, evenly split between Western Europe and the emerging markets. And you can see on the right side of the slide, our split between instruments, reagents, consumables and service and software, giving us about 60% of our revenue related to recurring revenue. And then the other point there on the bottom I want to make is a lot of intellectual property, 3,300 patents. And actually 2012 will represent the 75th year for PerkinElmer where we've been developing excellent technology, really using inspired innovation to assist our customers.
And with regard to that technology, I really want to focus on where that is directed and I thought would be interesting look. This is a study that was done by IBM Global Business Services that really focused on fundamental changes that are occurring in the healthcare system, and it really used sort of the Maslow's hierarchy to sort of lay out really some of the motivation and really value perceptions of stakeholders in healthcare, and to a large extent this is governing healthcare needs. And you can see there on the bottom, it starts with sort of rudimentary environmental needs, things like clean water and air, then moves up to the sort of the basic healthcare needs of preventive screening, immunization, medical necessities. So this thing, this will be sort of acute care and treatment, and then of course health enhancements and then ultimately sort of driving toward that optimal or personalized health.
And interestingly enough is when you think about the resources required, there's less resources required on sort of the bottom half of the triangle and the resources increase as you go up the triangle. And so I think PerkinElmer's got an opportunity to play almost across this entire triangle here. So if you look at our addressable markets, so with the exception of the health enhancements, we play within the research area, really focused at the medical necessities there. So about a $5 billion addressable market for us and you'll see most of our end markets grow in sort of the mid to high single digits. However, I will point out that we are targeting specific areas, specific subsections of those markets where we think the growth is considerably higher. We'll get into them on the discussion. You can see the diagnostic markets in the environmental health markets. And then we also have a service and software offerings that really cut across all 3 markets, about a $6 billion addressable market also growing in the 5% to 7% range.
So across PerkinElmer, what you see is about a $21 billion addressable market, mid single-digit growth. I would say with the acquisitions that we made specifically in 2011, we've probably added about $5 billion of addressable market, and I'll give you a little perspective of where that's from. And again if you think about $2.1 billion of revenue, we're sort of running around 10% market share with, I think, a significant opportunity to increase our market share in a number of our end markets.
I think when you look across this hierarchy of needs, our customers are really looking for 3 fundamental capabilities from their supply base. And the first is almost in every area that I've identified, there's a need to both identify and measure things like disease states, therapeutic responses, contaminants and adulterants. Then once you've identified it, you've got to be able to analyze it and assess it. And so here's where there's a lot of software -- opportunities for our software applications and then ultimately, assist our customer's manage both the instruments that they're doing and also help them with their application capabilities. And of course all of our customers or most of our customers are global in nature, so that the ability to provide them global support is critical.
So if you step back in 2008, PerkinElmer, I would say, fundamentally had 3 strong characteristics. One is we had very good analytical capabilities, I would say, really focused in biochemical analysis. We had a very strong service capability, and we had great global reach, scale and brand. And so we set out over the last couple of years to build out capabilities in the areas of molecular detection and reagents, imaging, sample prep and informatics. And what I would say is similar to sort of putting together a complicated puzzle, until you really get that last critical piece in place, it's really sometimes difficult to figure out the picture that you're trying to build, and I think that's one of the things that Caliper has done for us now.
So you can see the number of areas that Caliper fills in. And then when you take the Caliper capabilities and combine that with the number of acquisitions that we've done over the last 3 years, you see that we now have a very significant capability. And we go into 2012 really with strengths across instrument reagents in both biochemical, analytical and molecular capabilities. I'll talk about this a little bit, but probably unmatched breadth within imaging, very strong sample prep and informatics capability, and then that combines with what was already strong service and channel support.
And rather than get into every one of these, I do want spike out 2 in particular, and that is our imaging capability. And when you look across the combination of assets and technology we put together in PerkinElmer, you'll see that's actually starting with DNA, going into cells, tissues, animal models, and actually into human, we've got unsurpassed capability from an imaging perspective.
And then moving into the molecular and sample prep area and of course, I wanted to highlight a topic that has been talked about quite a lot during this conference here, which is next gen sequencing. Through the combination of Caliper and our acquisition of Geospiza, we've put together a terrific suite of products on the front end, which is really probably one of the biggest bottlenecks within sequencing and then of course, in the back end from an informatics perspective.
So again I think when you look at the capabilities that we put together, quite impressive across PerkinElmer, and I'd like to give you a sense of how we're going to be able to take that and drive that across this hierarchy and, as I said before, not only in the developed area, but in the emerging area. And what this chart really tries to depict is it basically says that -- let me just get it right here. It basically says that from a developed perspective, the focus will really be more in the middle of the pyramid. And from an emerging perspective, it will really be on the bottom of the pyramid. And so what we'll do is we'll continue to build sort of disruptive technology focused on the middle of the pyramid, and then use our channels through environmental and genetic screening and newborn screening that then sort of be the bridge to take that technology into the emerging markets.
And I want to give you some examples of how we're going to be able to do that. And one of the things I sort of alluded to before is why it's so critical is that the analysis that the UN says is by 2020, there'll be some $8 billion -- or 8 billion people on the earth. Over 90% of them will be in developed or emerging countries. And in fact, what this shows is of the 21 cities that have more than 10 million people, 16 of those cities will also be located in the emerging markets.
So with that, let me talk about specifically what we do, and then give you some examples of how we've been able to really make a significant difference for the better for our customers. So first of all on the Environmental Health side, really around environmental contaminant and identification solutions, and we apply that not only in air and water, but also in food and soil as well. So again, let me just run through these relatively quickly, and I try to take an example of each instance. But in the case of air, we partnered with a group down in Texas to help sort of monitor ozone contaminants and really made dramatic progress there. In the case of water, we're working with a lab out of the U.K. to really improve their throughput and productivity using one of our new products, the Optima OES, and really see a nice progress there. I think the other area that we see nice progress is with the tsunami that occurred in Japan last year. The Japanese reached out to us specifically to work with them, to put up new capabilities and detection capabilities in order to detect radiation in the soil. And I think that's worked really well.
So I think when you look across the globe, I tried to spike out areas where we're improving productivity. We're improving sensitivity, improving speed. And I think going forward, that is providing us the channels into some of these emerging markets.
So if you look at on the, what I'll call the basic healthcare needs, what we do here, as I mentioned before, is diagnostic screening and also some digital medical imaging. And here we've also seen some tremendous progress, particularly in the last 12 months. And again, I'll just spike out a couple. In the prenatal area, working with the Russian Ministry of Health to really improve their whole prenatal screening. You can see how we were able to harmonize their screening systems across all of Russia. In the newborn area, what -- we really worked with the health officials in Egypt to build one of the largest newborn screening labs in the globe actually. And you can see each of those are our GSP instrumentation that has the ability to do very rapid analysis of newborn screening.
Moving into more sort of infectious disease. Some of our automation and liquid handling was used in Brazil to improve and increase the detection of HIV. We're also working with Angola. And this is something that's actually been funded by the Chevron Corporation to look for sickle cell in infants in Angola, and we're really seeing a dramatic improvement in infant mortality there. And then finally in China, we've got a terrific channel into both Tier 2 and Tier 3 hospitals and here, we're making a dramatic improvement on the screening for hepatitis B. And I sort of note there on the bottom that right now, we have the only locally made reagents that meet international standards for purposes of hepatitis screening. So I hope that gives you a perspective of how we're able to utilize these channels to drive increased healthcare and improved healthcare into emerging markets.
But having said that, when you look at sort of the mid to the higher end of the pyramid, we also are bringing in some disruptive technology there as well. So in the area of preclinical imaging and biomarker research, let me just touch on these relatively quickly. So in the area of cancer research, this is some terrific technology that we brought in from Caliper. And you can see here that they worked with Mass General to really improve the ability to see circulating tumor cells -- significant factor. So we now believe with some of the technology that Mass General has and using some of the Caliper imaging technology, that we can see one cancer cell per 1 billion of normal cells. And we think that's going to have a dramatic impact, as I said, fairly disruptive impact on cancer and biomarker analysis.
In the area of sort of screening, this was something where we worked with the Ontario Agency of Health and we were able to improve the diagnosis of respiratory diseases, including influenza. Then you can see there, we got faster patient screening, again another area where we're making a significant improvement in health.
And then finally, in the research area, using some of our screening capabilities both from an instrument and a reagent side, and we've worked with researchers in really better quantifying the impact of cancer drugs. In this case, it's lung cancer. And again, we're seeing good receptivity with this exciting technology.
And then finally before I leave the pyramid, just sort of focusing on the fact that we also have, across all these areas, very strong service and software and informatics capability. We have some 1,500 service engineers across the globe, providing that global support to our key customers. And the benefit here is that not only are we improving the productivity of the lives of our customers, but we're also enabling to get better usage out of the knowledge and data that they develop. So through our informatics and search capabilities, a much better usage out of their experimentation and, of course, improving them. They're ensuring the protection of their intellectual property.
I just give you a one quick example here, something that's -- actually, there's an article written on this in a magazine in the last quarter here, where our OneSource Laboratory Service has been partnering with Merck over a number of years here. We cover about 50,000 of their assets, have some 70 PerkinElmer employees on-site in a number of Merck locations, and you can see the types of productivity they're getting. So instead of a 1 to 2 day turnaround response with regard to maintenance issues, it's now down to 1 to 2 hours. And this is something that Merck has validated, that their productivity went to -- lab from asset utilization is up 20%. We're now combining that with some informatics businesses that we acquired and together now, we're really seeing some dramatic improvement.
So in and of itself, I think some of the electronic notebook activities with Merck, with CambridgeSoft, you can see there's provided some real productivity, but now we have the ability to take the service and the informatics. And I think it really provides differentiation relative to some of the, I would say, other largest -- larger service providers and I think really puts us in good shape to continue to work with our customers through and improve their capabilities and their productivity.
And then finally, I'll just sort of talk a little bit about sort of the -- I would say the long-term societal goal which is to really get to this personalized health, and just give you a sense of sort of what that might look like. So you can think about when a child is born, we'll do some type of genotype, maybe phenotype, sort of understanding what their genetic makeup looks like. We'll probably understand sort of the environmental aspects of it. We're increasing finding more and more somatic mutations that are driving a lot of the diseases we see. But we'll take that information, we'll combine that into a model that'll determine some type of probability of disease. And then we'll either do some lifestyle modifications which will be the exercise, diet or a number of other things, or we'll go into some kind of personalized medical intervention with the ultimate goal of living much longer. And if you think about PerkinElmer now, we play on the screening side. As I sort of give you a sense, we play on the environmental side. We've got some very interesting technologies around personalized medicine.
So I think -- and when you sort of step back away from it, we've got this very significant opportunity to improve health in the sort of environmental and screening side. We're driving some really disruptive technologies into the therapeutic area and other sort of more advanced medical applications. And then if you think about where we may be in a couple of years in this personalized medicine, personalized health flow that we actually are building up some very significant capabilities.
So I think what you see today is a split with 50% of our revenue in Human Health; 50% of our revenue in Environmental Health. So I think it gives us a great perspective to benefit from growth trajectories in both of those segments. And in fact if you look over the last 4 years, from a financial perspective, we've been able to drive revenue growth about 30%. So we went from about $1.4 billion to $1.9 billion in 2011. When you pro forma with Caliper in for the full year, that's the $2.1 billion that I showed before, and that works out to be about a compounded growth rate on the top line of about 8%. If you exclude 2009 for the recession, we actually grew at a compounded rate of about 12%.
And then we've been able to get good traction on the bottom line. So while we're growing the top line on an 8% annual rate, we're actually growing the bottom line at 18%. So during that same period of time, 2007 to 2011, we almost doubled our earnings per share from $0.87 to a forecasted range for 2011 in $1.66 to $1.68. And so as we think about the next couple of years, if we can grow and we feel comfortable growing the top line at 8%, that would put us at about $2.6 billion in revenue. We stated a number of years ago that our goal by 2014 was to get to 18% operating margins, and we're well on track to do that. We'll probably end 2011 in a sort of mid-teens.
However, as I said before if you exclude the recession in 2009 and also when we think about some of the acquisitions we've made and the capabilities we've built up that if you look at about a 12% top line growth, that would take us to $3 billion in revenue. And with that incremental profitability, we think we could be well north of 18% from an operating margin perspective. So from a financial perspective, I think we're in very good shape to sort of, again, drive good top line growth. And again historically, and I believe in the future we'll be able to continue to drive good bottom line operating margin expansion as well.
So let me sort of pull it all together as where I started off and, hopefully, given you a perspective over the last 20, 25 minutes that some of the activities that we did in 2011, combined with some of the things we did in 2009 and 2010, have really allowed us to put together a terrific portfolio of technology that allows us to provide differentiated solutions and very application driven. So a number of years ago within PerkinElmer, there was a lot of technology that was sort of going out to the various markets, and I think we've now flipped that around and be very focused on end markets that will drive the technology capabilities that we will continue to build out, give you a sense of sort of the attractive segments of improving health that I think we can be instrumental and working with our customers to make a dramatic difference. And then this bridge of using our channel and our capabilities through our environmental and screening businesses to take disruptive technologies in the developed world and drive them into the emerging markets.
And I think that combination is incredibly powerful when you think about the opportunity to drive financial returns and at the same time make a dramatic improvement in world health, with the ultimate grow -- goal of trying to significantly improve life expectancy. And not only improve life expectancy, but make sure the quality of life for everyone as well. So as we like to say at PerkinElmer, all these things for the better.
So I want to thank you for your attention and look forward to answering any questions that you have at the breakout session. Thank you very much.
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