Bio-Rad Laboratories: More Growth Ahead

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About: Bio-Rad Laboratories, Inc. (BIO)
by: Edmund Ingham
Summary

I like the look of Bio-Rad. Q119 EPS of $1.65 beat expectations by $0.5. GAAP EPS of $28.74 gives a P/E ratio of 10.8 - very low for the sector.

This is a sector with high barriers to entry in which the winners tend to perform well for shareholders. It's competitive, but there are many reasons to believe in Bio-Rad.

The company is globally diversified, has a strong suite of existing products and a pipeline of new ones targeting lucrative markets.

Currency adjusted net sales in Q119 were up 4% yoy with gross margins at 56.3% and SG&A at 37.5% of sales. Target of 20% EBITDA margin by end 2020.

Appointment of new COO and CFO can help squeeze margins and reduce tax rate - I forecast steady growth but a breakout new product could cause the price to jump sharply.

Although Bio-Rad (BIO) has been a going concern since 1957, developing chemicals for the R&D divisions of the pharmaceutical, biochemical and life sciences industries, in my opinion, the company is arguably better positioned today than at any stage of its existence.

New products are finding multiple use cases and existing ones continue to deliver diversified income streams across 3 major global markets. Plus, I believe Bio-Rad can capitalise on the new markets that are being created as the field of clinical diagnostics is disrupted by new digital technologies, and the onset of value-based healthcare and outcome driven solutions.

As such, I believe, and I am not alone in this, that a target price of between $375-$400 is achievable this year for Bio-Rad.

The Story So Far

As per the company's annual report:

"today, Bio-Rad manufactures and supplies the life science research, healthcare, analytical chemistry and other markets with a broad range of products and systems used to separate complex chemical and biological materials and to identify, analyse and purify their components."

Clinical Diagnostics

Bio-Rad reports across 2 distinct divisions and it is interesting to note that already, its Clinical Diagnostics segment is responsible for 62% of all company revenues with a total addressable global market worth around $8-9bn annually, and global sales of all products in markets served by Bio-Rad around $12bn, the company estimates. Bio-Rad says they have 3,000+ products supplying 300+ separate clinical diagnostics tests to the IVD market, which identifies and measures substances in a patient’s tissue, blood or urine.

The $5.5bn figure quoted seems reasonable in light of research published suggesting that the global IVD market is expected to grow at a CAGR of 5.7% from 2018 to reach $87.21 billion by 2024. The main drivers being an aging population (10,000 American baby boomers turn 65 every day) and an increase in drug-resistant diseases projected to kill more than 10m people worldwide by 2050, a global health concern which is fuelling research into molecular diagnostics in particular.

Life Sciences

Bio-Rad's other business division, Life Sciences, drives the remaining 38% of sales across, as per the annual company report:

"proteomics (the study of proteins), genomics (the study of genes), biopharmaceutical production, cellular biology and food safety,"

On behalf of:

"universities and medical schools, industrial research organisations, government agencies, pharmaceutical manufacturers, biotechnology researchers, food producers and food testing laboratories."

The overall addressable market for Life Sciences is estimated by the company at $5.5bn with the market estimated to be growing at a CAGR of 5%. Again, research supports Bio-Rad's optimism. According to Consultancy firm Deloitte Biotech product sales will represent 52% of the top 100 product sales across healthcare, up from 49% in 2017, and market share will increase to 31% by 2024, from 27% in 2019. Global healthcare spending is also projected to reach $10.059 Trillion by 2022, Deloitte says.

Source: Deloitte infographic - 2019 Global Life Sciences Outlook

Given that Bio-Rad sees its addressable market within Life Sciences to be worth around $9bn, that would indicate that based on $2.3bn annual revenues Bio-Rad has a roughly 10% market share across both divisions.

Although the company operates in a highly competitive market, with rival companies including Roche, Abbott Laboratories, Siemens, Danaher, Thermo Fisher, Becton Dickinson, bioMérieux, Ortho Clinical Diagnostics, Tosoh, Immucor and DiaSorin, I believe the company's unique business model and blend of services can help it to claim further market share. Additionally, the Life Sciences and Clinical Diagnostics sectors as a whole are growing at a combined CAGR of around 4.5%.

Bio-Rad well positioned to capitalise on big data revolution within healthcare and pharma industries

Across Life Sciences Bio-Rad sells products and apparatus involved in established research techniques and procedures, whilst across Clinical Diagnostics the company sells a more holistic test kit solution that they say generates recurring revenue streams that are product dependent.

Given the way that the healthcare industry is moving more and more towards value-based care and measuring positive health outcomes, it seems likely that Bio-Rad could apply its philosophy for Clinical Diagnostics, to its Life Sciences clients also, which include medical schools, industrial research organisations, government agencies, pharmaceutical manufacturers, biotechnology researchers, food producers and food testing laboratories.

In other words, as well as supplying the physical equipment, Bio-Rad has the opportunity to generate holistic and patient-focused digital analytics and insights from all of the data it collects using techniques such as AI and ML - a growing trend within the healthcare industry that is estimated to be worth $6.6bn by 2021.

Bio-Rad is nicely diversified in terms of products and services, and geographically

As per the chart below, we can see that the company has a broad range of clients, from the largest, hospital labs, to academic, reference, biopharma, transfusion and applied, and operates in 3 distinct and major regions: EMEA, Asia, and the Americas.

Source: Bio-Rad investor presentation Jan '19

Additionally, Bio-Rad's products and staff enable the company to take leading positions across numerous disciplines, as we can see from another slide in the investor presentation.

Source: Bio-Rad investor presentation Jan '19

That puts Bio-Rad in the enviable position of having numerous ways to attack different markets, whilst finding cost efficiencies by recycling use cases and learnings from parallel markets, and also by providing end-to-end services such as Lab to Clinic solutions, as illustrated below.

Source: Bio-Rad investor presentation Jan '19

New Products Look Likely To Exceed Expectations

In the company's latest annual report President & CEO Norman Schwartz discusses a number of new products that investors can get excited about, as they have unlocked unexpected use-cases and potential new revenue streams.

Digital Droplet PCR

For example, Digital Droplet technology developed by Bio-Rad targeted at the Life Science research market has been proven to reduce waiting time for test results from weeks to days, in the fields of oncology and liquid biopsy, whilst 2 kits have also become the first ever Digital Droplet PCR solutions to be approved by the FDA to monitor and quantitate the molecular response of patients with chronic myeloid leukemia under tyrosine kinase inhibitor therapy.

Schwartz notes that:

"over 3,400 peer-reviewed publications describe applications of how our ddPCR technology is leading to breakthroughs in cancer biomarker discovery, infectious diseases, genomic alternations, and gene expression, helping to improve health outcomes and save lives."

Research from Allied Markets suggests that the DDPCR market is set to grow to $1,206m by 2025, at an impressive CAGR of 18%. Digital Droplet PCR is expected to dominate market share from a technical perspective whilst increasing its share from a product perspective against consumables and reagents, and Software & Services, as per the charts below.

Source: Allied Market Research

Source: Allied Market Research

Single Cell Genomics, Vibriosis And Blood Testing

During 2018, Bio-Rad developed single cell genomic tools to study the disruption of gene expression within cells during the onset of diseases, and a new method for detecting the presence of Vibriosis in raw or undercooked seafood - a disease linked to approximately 80,000 illnesses in the U.S. every year - and 2 new blood testing products that use gel card technology for more efficient blood testing workload management.

Blood typing is a market where Bio-Rad say they have a strong leadership position in Europe and Asia, and are now targeting the #1 spot in the US market too, fuelled by recent FDA approvals and its flagship IH-100 blood typing tool.

According to Transparency Market Research "the global blood group typing market was valued at US$ 1,500.0 Mn in 2017 and is projected to reach US$ 3,556.0 Mn by 2026, expanding at a high CAGR of 10.3% from 2018 to 2026."

What's clear is that Bio-Rad is capable of successfully developing potentially market-leading products in markets that are growing, and lucrative. Whilst there is no guarantee that Bio-Rad's products will outperform its rivals in these sectors, nevertheless, there are reasons for optimism given the company's lengthy track record, high level of expertise, and the high barriers of entry into these markets, in my view.

New Hires Can Help To Drive Cost Efficiencies And Squeeze Margins

At the end of 2018 Bio-Rad said goodbye to their Chief Financial Officer of 16 years, Christine Tsingos, who retired. Tsingos has been replaced by Ilan Daskal, who joined from Lumileds and has had a lengthy career across finance and operations and M&A, which looks to be an area of focus for Bio-Rad, pursuing an acquisition-led strategy under Daskal's guidance.

Encouragingly, Daskal re-confirmed during the Q119 earnings call that in his view aggressive 2020 projections are achievable, namely to expand non-GAAP operating margin by nearly 200 basis points to achieve a longer-term goal of an adjusted EBITDA margin of 20 percent in 2020.

A second new appointment is Andy Last, Bio-Rad's new COO and Executive Vice President, who joined in April 2019. Last is an experienced campaigner within the pharma and life sciences industry having held senior positions at Berkeley Lights, Intrexon Corporation and Affymetrix, where he was responsible for driving operating margins up over 600 basis points.

There is a persuasive argument that Bio-Rad can achieve further operating cost efficiencies and potentially reduce its costs of sales and SG&A expenses, which increased by respectively 2.8% and 5.36% year on year between 2017 and 2018.

Already, in Q119, the company reported a reduced SG&A margin of 37.5% of sales versus 37.9% in Q118. On a non-GAAP basis, the gross margin in Q119 was 55.6%, versus non-GAAP 55.7% in Q118.

In 2019, Bio-Rad has targeted gross margins to be in the region of 55.5-56%, and non-GAAP operating margin of 12.5-13%, significantly ahead of the 10.7% achieved in FY18.

Additionally, the company ought to look at its tax burden, which is expected to be around 27-28% in 2019. During the Q118 earnings call Christine Tsingos targeted:

"the tax rate coming down over time to the mid-20s. And who knows where we might be able to take it from there."

This is another issue likely to be top of Daskal and Lasts' to-do lists.

Sales Performance And Forecasts

Although sales increased from $551.5m to $554m and gross profits increased from $302 to $311m between Q418 and Q119, with year-on-year growth around the 4% mark, and projected to be between 5-6% in 2019, these are not overwhelming growth figures in my view.

That said, the beauty of Bio-Rad's business model, as I mentioned before, is that it is diversified, with many different markets in which it can target growth.

A significant new product win or market share gain across any one of the many diversified markets the company operates in, across three different regions, could materially influence the bottom line, and I am of the opinion that there are more cases for upside than downside, given how consistently Bio-Rad products perform, and over such a long period.

The company knows that its flagship products will continue to perform well, but, as has proved to have been the case with, for example, the Digital Droplet PCR solutions, new use-cases for existing products, or new products developed in anticipation of new trends in testing and research methods, can provide further performance and sales impetus.

With no significant headwinds to contend with the twin goals of 12.5-13% operating margin and 20% EBITDA margin, if achieved, should support share price growth.

Share Price Performance Past, Present And Future

Had it not been for a disastrous end to 2019 for the stock market as a whole, I contend that Bio-Rad's share price could have been pushing $400 by now. Bio-Rad's share price fell from $324 in August 2018, to $225 in mid-December.

Source: Trading View

The company quickly recovered and is now trading at $315 at the time of writing. Analysts covering the stock are forecasting share price growth of between $340-375, with a consensus BUY rating.

As per the table below we can see that the earnings forecasts for the company are considered to become more consistent, and higher, over the next year.

Source: MarketBeat

Encouragingly, the company also has a number of institutional hedge fund backers, including FMR LLC, which holds a $55.8m stake, Lombard Odier Asset Management ($2.23m), GYL Financial Synergies LLC ($0.66m), Clearbridge Investments LLC ($53.3m), and Marshall Wace North America L.P ($0.59m) according to Tech Know Bits.

Risks And Verdict

The risks associated with companies like Bio-Rad fall typically around regulatory issues, product pipelines, availability of raw materials or product manufacturers, breaches of data privacy, and managing a business with significant overseas interests. 35% of Bio-Rad's business is based in EMEA and 21% in Asia, where relationships with re-sellers and overseas sales teams are crucial.

Securing patents and defending intellectual property are also concerns, as are the changing landscape of the life sciences, healthcare and pharma industries to a more value-based, data-driven model - although, as I mentioned above, I actually see this as potentially one of Bio-Rad's main competitive strengths.

I have mentioned throughout this article the longevity and consistency of Bio-Rad's offerings and it strikes me that they have rarely fallen foul of the regulators and have a track record of success getting their products approved by the FDA and overseas regulators. Certainly, when I studied recent news flow I could find no instances of Bio-Rad experiencing significant difficulties with obtaining approval for its products.

The only 2 issues I could find were an FDA warning letter issued to Bio-Rad in 2015 condemning the company for the contravention of:

"good manufacturing practice requirements of the Quality System regulation found at Title 21, Code of Federal Regulations (CFR), Part 820"

... After an inspection of one of its factories in Munchen.

And, a 2014 charge from the SEC relating to illicit payments made by the firm in Russia, Vietnam and Thailand in order to win business.

"An SEC investigation found that Bio-Rad Laboratories lacked sufficient internal controls to prevent or detect approximately $7.5 million in bribes that were paid during a five-year period and improperly recorded in books and records as legitimate expenses like commissions, advertising, and training fees. The improper payments enabled Bio-Rad to earn $35 million in illicit profits."

Bio-Rad paid $55m in fines, although the firm was said to have "self-reported its misconduct and extensively cooperated during the investigation."

Clearly, neither incident reflects well on the company, and it is to be hoped that these kinds of issues will remain well and truly in the past.

For me, Bio-Rad is a company that from a business perspective appears to have few obvious weaknesses, and numerous and diversified strengths. As with many healthcare stocks, over recent years, the share price trend has been overwhelmingly upward, but the correction in December gives investors the chance to get on board now and realise some of the growth denied to Bio-Rad by the systemic collapse of the S&P at the end of 2018.

Realistically, I would estimate Bio-Rad can grow its stock price above $370 before the end of the year, and possibly over $400, if it can continue to outperform analysts expectations and deliver cutting edge products with multiple use-cases, which can secure its leading positions in multiple, but related markets.

Disclosure: I am/we are long BIO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.