Bio-Rad Laboratories Q3 2023 Earnings Call Transcript

Presentation

[Operator]

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Bio-Rad Third Quarter 2023 Financial Results Conference Call and Webcast. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session [Operator Instructions] and please be advised that today's call is being recorded on Thursday, October 26, 2023.

I would now like to turn the conference over to Edward Chung, Head of Investor Relations. Please go ahead.

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

Good afternoon, everyone, and thank you for joining us today. We will review the third quarter 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'd like to caution everyone that we will be making forward-looking statements about management's goals, plans, and expectations, our future financial performance, and other matters. These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties. Our actual results may differ materially from these plans, goals, and expectations. 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 reconciliations of the non-GAAP financial measures to comparable GAAP results contained in our earnings release.

With that, I will now turn the call over to Andy Last, our Executive Vice-President and Chief Operating Officer to provide an update on Bio-Rad's global operations.

[Andrew Last, Executive Vice President, Chief Operating Officer at Bio-Rad Laboratories]

Many thanks, Ed, and good afternoon to everybody, and thank you for joining us. Well, the third quarter of the year fell below our expectations. The ongoing challenges within the BioPharma segment and economic constraints in China continued to drive lower Life Sciences performance in the quarter. Clinical Diagnostics sales were weaker than we forecasted, impacted mainly by the softer China market conditions. We still anticipate a strong year-over-year growth in the Clinical Diagnostics Group in the fourth quarter. We continue to successfully maintain focus on tight cost control and on the supply-chain front, we experienced modest constraints in supply for our clinical business which impacted Q3 sales.

Backlog remains on track to meet our year-end expectations. In Q3, we experienced further reduced demand from biopharma customers for our process chromatography resins and from both biopharma and smaller biotech customers for our life science research projects -- products. The continued tight spending environment in this segment constrains core DD PCR sales which were roughly flat from the year-ago period. Academic and government sales for Life Sciences was strong in the Americas. but show declines in APAC driven down by China's economic and policy constraints. EMEA academic sales were roughly flat, reflecting a soft funding environment in Germany offset by stronger performance in the other European countries.

While the DD PCR sales within the quarter was softer than expected as a result of platform and spending, we remain very positive on the long-term growth outlook for the platform. During the quarter, we were encouraged by several noteworthy announcements involving DD PCR. On the clinical testing front, our QX ONE platform has been selected for SMA testing for all newborns in Hong Kong, and here in the US Geneoscopy announced they have published the results of the pivotal CRC-PREVENT clinical trial reporting the highest sensitivity for detecting colorectal cancer amongst similar tests powered by our QXDx ddPCR platform.

Additionally, in the US, Verily won a major multi-wastewater testing contract from the CDC based on our QX600 platform. We see these as contributors to future growth and a strong reinforcement of the versatility and impact of the technology. As highlighted earlier, China was the continued challenge in Q3 for our Life Sciences business, and unfortunately, the economic constraints have now also impacted our Clinical Diagnostics business, which in the first half of the year has been a positive for us in this region. We have now further constrained our expectations for China for the year-end and look to 2024 before we expect to see signs of recovery.

Our clinical business overall had a mixed quarter. We saw growth in demand in the US and Europe as expected, which was partially offset by the softness in China. In particular, we were pleased with the continued momentum for our immunohematology and diabetes franchises in the quarter. Despite the market challenges this year, we view our strategy framework has been very solid and our platforms and market opportunities are providing sustainable long-term growth. We continue to focus on driving and improving our execution and with the completion of a single global instance of SAP have now completed a major component of operational improvement.

Looking to the end of the year, we continue to expect the biopharma and small biotech company term -- company turned down and ongoing constraints in China and Russia to impact the overall growth for our Life Sciences business. Although we do expect to see sequentially improved sales in the final quarter of the year. We remain positive on the momentum and continued growth in the Clinical Diagnostics business, although it's somewhat moderated by the greater market constraints in China as well as ongoing trade restrictions in Russia.

Thank you. And at this point, I will now pass you to Ilan to review the financial results.

[Ilan Daskal, Executive Vice President, Chief Financial Officer at Bio-Rad Laboratories]

Thank you, Andy. Now, I would like to review the results of the third quarter. Net sales for the third quarter of 2023 was $632.1 million, which is a decline of 7.1% on a reported basis versus $680.8 million in Q3 of 2022 and 7.9% decline on a currency-neutral basis. The third quarter year-over-year revenue decline was primarily the result of ongoing weakness in the biopharma end-markets impacting the sales of our life science tools and bioprocessing products.

In addition, we experienced weaker demand in China as a result of the macroeconomic environment as well as the local Made in China initiatives. COVID-related sales in Q3 were $300,000 versus about $17.2 million in Q3 last year. Core revenue, which excludes COVID-related sales decreased 5.5% on a currency-neutral basis. On a geographic basis, currency-neutral year-over-year core revenue decreased in Asia and Europe, partially offset by increased sales in the Americas. Sales of the Life Science Group in the third quarter of 2023 were $263.5 million compared to $317.9 million in Q3 of 2022, which is a decline of 17.1% on a reported basis and a 17.8% decline on a currency-neutral basis. Excluding COVID-related sales, the Life Science Group year-over-year currency-neutral core revenue decreased 13.7% and was primarily driven by lower sales of qPCR, process chromatography, western blotting products, and about flat year-over-year ddPCR revenue.

Excluding process chromatography sales, the underlying Life Science business decreased 16.7% on a currency-neutral basis versus Q3 of 2022. The Life Science Group revenue excluding process chromatography and COVID-related sales decreased 11.6% on a currency-neutral basis. On a geographic basis, Life Science year-over-year core revenue decreased in Asia and Europe, partially offset by a modest increase in sales in the Americas. Sales of the Clinical Diagnostics Group in the third quarter were $368.1 million compared to $361.9 million in Q3 of 2022, a growth of 1.7% on a reported basis and a 1% growth on a currency-neutral basis.

Core Clinical Diagnostics year-over-year revenue which excludes COVID-related sales increased 1.4% on a currency-neutral basis. Growth of the Clinical Diagnostics Group was primarily driven by blood typing in diabetes products, as well as growth from our quality controls portfolio. On a geographic basis, the Diagnostics Group posted currency-neutral year-over-year core revenue growth in the Americas and Europe partially offset by the decline in Asia. The reported gross margin for the third quarter of 2023 was 53.1% on a GAAP basis and compares to 54.7% in Q3 of 2022. The year-over-year gross margin decline was mainly due to unfavorable product mix, lower manufacturing volumes, higher material costs, and inventory reserves, and was partially offset by improved logistics costs.

Amortization related to prior acquisitions recorded in cost of goods sold was $4.5 million compared to $4.4 million in Q3 of 2022. Third quarter operating expenses benefited from our cost-cutting initiatives, as well as a contingent consideration benefit of $18.9 million from last year's acquisition of Curiosity Diagnostics. SG&A expenses for Q3 of 2023 were $201.2 million or 31.8% of sales compared to $211.1 million or 31% in Q3 of 2022. The lower SG&A in the quarter included $4.1 million in contingent consideration benefits that I mentioned earlier, as well as lower employee-related expenses.

Total amortization expense related to acquisitions recorded in SG&A for the quarter was $1.6 million versus $1.8 million in Q3 of 2022. Research and development expense in the third quarter was $43.5 million or 6.9% of sales compared to $66.8 million or 9.8% of sales in Q3 of 2022. This significantly lower R&D expenses recorded in the third quarter included $14.8 million in contingent consideration benefit that I mentioned earlier, as well as lower project and employee-related expenses. Q3 operating income was $90.9 million or 14.4% of sales. Compared to $94.6 million or 13.9% of sales in Q3 of 2022.

Looking below the operating line, the change in fair market value of equity securities holdings, which are substantially related to Bio-Rad's ownership of Sartorius AG shares, added $36.4 million of income to the reported results. During the quarter, interest and other income resulted in net other income of $9.7 million compared to net other expense of $13 million last year, primarily driven by increased interest income from investments. The effective tax rate for the third quarter of 2023 was 22.5% compared to 21.5% in Q3 of last year. The effective tax rate this quarter was primarily affected by an unrealized gain in equity securities and the tax rate reported in Q3 of 2022 was primarily affected by an unrealized loss in equity securities. Reported net income for the third quarter was 106.3 million or $3.64 diluted earnings per share compared to a loss of 162.8 million or $5.48 diluted loss per share in Q3 of 2022. This change from last year is largely related to changes in the valuation of the Sartorius Group.

Moving on to the non-GAAP results. Looking at the results on a non-GAAP basis, we have excluded certain typical and unique items that impacted both the gross and operating margins, as well as other income. These items are detailed in the reconciliation tables in the press release. Looking at the non-GAAP results for the third quarter, in cost of goods sold, we have excluded $4.5 million of amortization of purchased intangibles, and a small restructuring expense. These exclusions moved the gross margin from 53.1% for the third quarter of 2023 to a non-GAAP gross margin of 53.9% versus 55.6% in Q3 of 2022.

Non-GAAP SG&A in the third quarter of 2023 was 31.7% versus 30% in Q3 of 2022. In SG&A, on a non-GAAP basis, we have excluded $4.1 million of an acquisition related to the contingent consideration benefit mentioned earlier and In Vitro Diagnostic registration fee in Europe for previously approved products of $1.9 million, amortization of purchased intangibles of $1.6 million and $1.3 million of restructuring-related expenses.

Non-GAAP R&D in the third quarter of 2023 was 9.2% versus 9.7% in Q3 of 2022. In R&D, on a non-GAAP basis, we have excluded $14.8 million of an acquisition related to the contingent consideration benefit mentioned earlier and a small restructuring benefit. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 14.4% on a GAAP basis to 12.9% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin of 15.8% in Q3 of 2022.

We have also excluded certain items below the operating line, which are the increase in value of the Sartorius equity securities and loan receivable holdings of $36.4 million, $2.5 million gain from the release of an escrow for an acquisition, and about $700,000 loss associated with venture investments.

The non-GAAP effective tax rate for the third quarter of 2023 was 23.9% compared to 21.7% for the same period in 2022. The higher rate in 2023 was driven by a geographical mix of earnings and reduced compensation-related deductions. We continue to estimate the full-year non-GAAP tax rate to be between 22% and 23%. And finally, non-GAAP net income for the third quarter of 2023 was $68.1 million or $2.33 diluted earnings per share, compared to $79.2 million or diluted earnings per share of $2.64 in Q3 of 2022.

Moving onto the balance sheet. During the third quarter, we purchased 58,478 shares of our stock at an average share price of $364.61 for a total cost of $21.3 million. We still have nearly $480 million remaining in our Board-authorized share repurchase program and plan to continue with our opportunistic approach to buybacks as part of our capital allocation strategy.

Total cash and short-term investments at the end of Q3 was $1.765 million compared to $1.728 million at the end of Q2 of 2023. The increase in cash and short-term investments from the second quarter was primarily due to changes in working capital. Inventory at the end of Q3 was $775.8 million, which is slightly lower than the inventory in the prior quarter.

For the third quarter of 2023, net cash generated from operating activities was $97.7 million, which compares to $11 million in Q3 of 2022. This increase mainly reflects changes in working capital and income tax payments. The adjusted EBITDA for the third quarter of 2023 was $112.7 million or 17.8% of sales. The adjusted EBITDA in Q3 of 2022 was $135.7 million or 19.9% of sales. Net capital expenditures for the third quarter of 2023 were $44 million, and depreciation and amortization for the third quarter was 37.3 million.

Moving on to the non-GAAP guidance. Given the current market environment, we are revising our 2023 financial outlook as follows. We now expect about a 3.5% currency-neutral year-over-year revenue decline in 2023 versus a growth of about 80 basis points previously. For the full year, we estimate currency-neutral year-over-year revenue growth excluding COVID-related sales to be between zero and 50 basis points versus about 4.5% in our prior guidance. Of the 400 basis points to 450 basis points core revenue breakdown, 250 basis points are related to the third quarter revenue shortfall, of which approximately 200 basis points is related to weakness in biopharma and the remaining 60 basis points is related to lower clinical diagnostic. The remaining 150 basis points to 200 basis points reduction is attributed to reduced process chromatography and other biopharma demand as well as continued softness in China.

For the Life Science Group, we expect a 12% currency-neutral revenue decline for 2023, and when excluding COVID-related sales, the Life Science Group currency-neutral revenue decline is projected to be between 4% and 5%. Excluding COVID and process chromatography-related sales Life Science Group revenue is expected to decline between 2% and 3%.

For the Diagnostics Group. While we remain encouraged with the overall demand we are now guiding core revenue growth to be about 4.5% versus 5.5% previously. Full-year non-GAAP gross margin is now projected to be about 54% versus about 54.5% previously reflecting our updated expectation of shift in product mix and volume. We now project a full-year non-GAAP operating margin to be about 14.5% versus approximately 16% in our prior guidance. As we continue to carefully manage discretionary expenses and full-year adjusted EBITDA margin is expected to be between 20% and 20.5% versus about 21.5% in our prior guidance.

And now I'll turn the call over to Norman for a few remarks. Norman?

[Norman Schwartz, Chairman of the Board, President and Chief Executive Officer at Bio-Rad Laboratories]

Thank you, Ilan. So. I guess, I just wanted to take a minute here to really recognize Ilan and his contributions over the last several years. As part of our transformation, Ilan has been a very valued member of the team kind of working to improve financial planning and reporting processes as well as to enhance the Company's external profile with the financial community. I think we all, very much appreciate his guidance and contributions, which do position us well for our continuing transformation. As you might imagine, we have initiated a search for his successor, and in the meantime, we have a strong capable team who can manage very well in the interim.

So maybe, well, as the floor, maybe a closing comment about this year, certainly it's not unfolded the way we or many of our peers first envisioned it. Coming out of the pandemic, I think it has been challenging to predict the pace of recovery or market normalization, really all exacerbated by inflation, we've not seen in 20 years, geopolitical events, and of course the biopharma disruption. I think if I think about it a little bit, I think what we can be confident as I have said, our markets are buoyant and I feel the outlook is positive. There could always be a few more bumps in the road in the near term, but I do feel the company is really is well-positioned to navigate what might come our way. And just maybe to reemphasize a point that Andy made. Longer-term, our strategy and vision for the future really has not changed.

With that, operator, I think we will open the line-up to questions.

Questions and Answers

[Operator]

And ladies and gentlemen we will now begin the question-and-answer session [Operator Instructions] Your first question comes from the line of Brandon Couillard from Jefferies. Your line is open.

[Brandon Couillard, Analyst at Jefferies Financial Group]

Hey, thanks, good afternoon. Actually, this is another question for Andy, Ilan. But the magnitude of the guidance reset in Life Sciences, relative to where you started the year is the most dramatic of any of your peers by far. There seems to be such an inability ability to accurately forecast the business and demand trends and how do we assess whether this is in fact a market dynamic as opposed to potential share losses?

[Andrew Last, Executive Vice President, Chief Operating Officer at Bio-Rad Laboratories]

Could you just say very large piece again, Brandon didn't catch the very last few words.

[Brandon Couillard, Analyst at Jefferies Financial Group]

Yeah, okay. How do we assess whether this is, in fact, a market dynamic versus potential share losses in Life Science?

[Andrew Last, Executive Vice President, Chief Operating Officer at Bio-Rad Laboratories]

Okay. Look I think that we came out of 2022 with a really good trajectory and the effects that some companies have seen particularly in bioprocessing were not showing up for us and I think that's something that we communicated at the end of the first quarter. That wasn't a surprise and it took a while within 2023 for those effects to really roll out into our funnel and start to experience the deferred orders being pushed out.

And then the other factor that no one anticipated and which was meaningful for us was the Silicon Valley Bank collapse and the knock-on effects of that, which really impacted the spending profile of the smaller biotech companies, and we've had a significant trajectory in the smaller biotechs for, in particular, Droplet Digital PCR platform, which also has some halo effect around it. So, I think it took a couple of quarters for those effects to really materialize for us because our profiles are a little different to some of the other players. So that's how I view it, and then, of course, since then spending has not improved, order push-outs have continued and it's very difficult to gauge the true inflection point right now and I think that is probably a message that's coming across broadly from other players in the category as well.

[Simon May, Executive Vice President, President, Life Science Group at Bio-Rad Laboratories]

This is Simon, maybe I'll just add to that as well because as we look at our funnels and we look at our win-loss ratios across the portfolio, whether you're talking about western blot or gene expression or digital PCR or our bioprocess business. We really don't see any significant shifts there. I mean obviously, the conditions in China for biopharma have really deteriorated. The feedback that we consistently get from the field is not there is still a high level of interest in the products, the products that we've launched have been really well-received, and again the formal dynamics in terms of win-loss ratios are not seeing any significant shifts. So we really do believe that this is a bunch of transient and it makes other compounds and just makes you a very, very typical year, but I don't think there are any macro shifts in our competitive positioning in Life Sciences.

[Brandon Couillard, Analyst at Jefferies Financial Group]

One, I think the revised guide implies 4Q revenue steps up to about $700 million I believe. 4Q is usually seasonally very strong for Bio if there isn't any normal environment, either. So I'll be risks is that revenue outlook. What are some of the variables that could swing that target up or down keeping in mind?

[Andrew Last, Executive Vice President, Chief Operating Officer at Bio-Rad Laboratories]

So, the variables that might swing that I think they are the same that the variable would really be the same that we're experiencing, just a little bit more acute if China gets definitively worse than the trajectory it is on, for example. That would with academia really pulled back from spending that could have an effect. We're not expecting a Q4 budget flush this year that's not in our thinking. If that materializes that's good news but we're not planning on that. I think other than that, I don't think we see anything that may be meaningful that we could predict it.

[Ilan Daskal, Executive Vice President, Chief Financial Officer at Bio-Rad Laboratories]

Brendan, I will add to the inputs that Andy just mentioned. Generally speaking, we have not deviated from our approach of kind of coming up with realistic what we see in front of us in terms of the 4% of guidance. So I don't know that we are underestimating or overestimating our projections. And definitely, the fourth quarter this time around is an unusual circumstance in addition to the macroeconomic kind of environment to this kind of input with mainly the China environment today. I mean, I think it's going to continue well into the end of the year. So the smaller biotechnology companies' environment in terms of the funding environment are not expected to improve in our mind through the end of this year. So I agree with you. Historically, traditionally the fourth quarter used to be a stronger seasonality kind of quarter for us. That is not the case this time around.

[Brandon Couillard, Analyst at Jefferies Financial Group]

Right. Last one and I'll jump back in the queue. Andy, given you and Ilan started Bio-Rad around the same time, we've worked very closely together, you both have been instrumental to Bio-Rad's transformation, last four years or so. In light of his departure, I think investors would like to know, are you happy with the operational direction of the company, are you adequately incentivized to stay the course or do you have any in mind to retire anytime soon?

[Andrew Last, Executive Vice President, Chief Operating Officer at Bio-Rad Laboratories]

Yeah, Brandon. Thanks. First, can I just say, I'm really sad to see Ilan move on and you're right, we have worked extremely closely in each other's offices, virtually every day. So it's been a really good journey and I want to thank Ilan for that. [Speech Overlap] My point of view right now is we started this transition. It's not finished and the focus is really is on the transformation of the company and executing against the strategy framework, which I firmly believe has the potential to increase operating performance for the company moving forward.

[Brandon Couillard, Analyst at Jefferies Financial Group]

Thank you.

[Ilan Daskal, Executive Vice President, Chief Financial Officer at Bio-Rad Laboratories]

Thanks, Brendon.

[Operator]

Your next question comes from the line of Patrick Donnelly from Citi. Your line is open.

[Patrick Donnelly, Analyst at Smith Barney Citigroup]

Hey guys, thanks for taking the questions. Maybe another one on the 4Q ramp. But on the margin side a pretty meaningful step up from whether it's sequential or the rest of the prior part of the year. Can you just talk about the moving pieces to get to that implied margin, I think it's 16.5%, 17% type margin in 4Q. Yeah, just a path to get there and get people comfortable that that's a realistic number.

[Ilan Daskal, Executive Vice President, Chief Financial Officer at Bio-Rad Laboratories]

Sure, hey, Patrick, this is Ilan, I'll start and Andy can chime in. But obviously, on the top line we baked in, kind of the updated mix with the softer Life Science. And overall, I mean, on the operating expenses we plan to continue some of those initiatives that we have been working on, and already in the third quarter you can see that the operating expenses came in lower on a dollar basis. So we -- we continue to work on additional initiatives going into the fourth quarter. And -- and again, overall for the bottom line, I mean we feel it is a realistic projection here.

[Andrew Last, Executive Vice President, Chief Operating Officer at Bio-Rad Laboratories]

Andy here. We're still focused on keeping our operating cost structure types as tight as possible. So the volume and mix will have a decent flow through for the fourth quarter operating margins.

[Patrick Donnelly, Analyst at Smith Barney Citigroup]

Okay. And then maybe on China, maybe just if you could just talk about that market a little bit surprising to see the Diagnostics piece softer as well. Can you just talk about what you're seeing at various policies over there that's impacting things? It would be helpful to get a little more discussion there.

[Andrew Last, Executive Vice President, Chief Operating Officer at Bio-Rad Laboratories]

Okay, so-so the policies, I mean clearly impacting both life science and the diagnostics side of the business and they have Made in China for China, an interruption volume-based pricing and you layer on top of that recession and the government I think that is generally is struggling to find the right way to stimulate the market. You can add an extra effect of capital markets for biopharma, which was a focus for us for expansion and growth of those pieces of our portfolio. They all have varying impacts to both sides of the business. It's just been a really tough ride through in China and there's just no current clear reason to think that it's going to improve in Q4. And on the clinical side, it just created a softer pull for our products in China in the quarter and we still have had a little bit of backlog on our clinical businesses as we called out, which by the end of this year, we should be roughly where we expect to be, we might have finished with a very slightly elevated backlog on clinical products at the end of the year but we're pretty much on track relatively speaking.

[Patrick Donnelly, Analyst at Smith Barney Citigroup]

Okay, on the Diagnostics side with more of the instrumentation. Obviously, the VBP stuff comes up quite often with all diagnostic players. Have you guys seen anything on that front yet?

[Andrew Last, Executive Vice President, Chief Operating Officer at Bio-Rad Laboratories]

[Indecipherable] we are glad to send. Dara, do you want to comment on ddPCR?

[Dara Wright, Executive Vice President, President, Clinical Diagnostics Group at Bio-Rad Laboratories]

Sure. It's starting to impact how we navigate tender requirements, so I think how that's translating to reality is things are a little bit slower as per navigating how best to position for new deal considerations, but value-based pricing has historically been applied to other sectors but in a couple of provinces we're starting to see it reach into two IVD. So, I think right now it's just sort of impacting forward-looking risk. And then as Andy said, we're still working through some supply-chain fulfillment challenges in backlog, which were wasted a bit towards that region as well and we're working through that and outline site wherever really solid Q4 landing.

[Patrick Donnelly, Analyst at Smith Barney Citigroup]

Okay. And maybe last one, just on the PCR side, you guys called out, I think qPCR weakness. It seemed like qPCR stepped down as well. Can you just talk about what you're seeing in that market? Is it just a broader slowdown, any specific pockets there that would be helpful?

[Andrew Last, Executive Vice President, Chief Operating Officer at Bio-Rad Laboratories]

I think the compounding issues that we've already touched on here. So we've obviously got a fairly significant qPCR, digital PCR footprint in biopharma and it again slows down in early biotechs. We've seen a continuation of layoffs and project deferrals that's impacting the business. We've got the COVID compare. We've got all the challenges in China that we've already talked about and I think on top of everything else, there's kind of a global of systems out there in the market that did the pandemic. That's a bit of free capacity out there. So you roll all of these things together.

Again, we refreshed our qPCR platform over the last couple of years, and again the feedback that we get from the field is just really positive in terms of how these products are being received in the market, but this compounding of market conditions right now is what's adding up to the environment.

[Norman Schwartz, Chairman of the Board, President and Chief Executive Officer at Bio-Rad Laboratories]

Right. If I could just add one extra comment. You look for the silver lining on occasion and the customer demand in small biotech biopharma, the desire to take in digital PCR, in particular, remained very strong. What we're actually experiencing is just the deferral of when they're going to make the purchase. You do not because they are constrained on the kind of cash expenditure and some other changes going on structurally on the comp program and focus. So the demand side remains very encouraging.

[Patrick Donnelly, Analyst at Smith Barney Citigroup]

Okay, thanks, guys.

[Andrew Last, Executive Vice President, Chief Operating Officer at Bio-Rad Laboratories]

Thanks, Patrick.

[Operator]

Thank you. Your next question comes from the line of Jack Meehan from Nephron. Your line is open.

[Jack Meehan, Analyst at Nephron Research]

Thanks, good afternoon. So just wanted to talk about how the quarter played out here. So, revenue was about 8% below the Street. Can you just talk about kind of the pacing in the quarter, was most of the pressure you saw in September, and is it possible there are any orders that slipped into 4Q for any reason?

[Ilan Daskal, Executive Vice President, Chief Financial Officer at Bio-Rad Laboratories]

I think, Jack. Hi, this is Ilan. The way to think about it. I think we saw it throughout the quarter, but it accelerated towards the end of the quarter. So the pace was kind of decline was stronger towards the end of the quarter but throughout the quarter it started to get weaker and weaker but definitely it accelerated towards the end.

[Jack Meehan, Analyst at Nephron Research]

Okay. And Norman, I know you mentioned in your comments. There is potential for maybe a couple more bumps in the road along the way. I think there's a debate amongst investors around whether are we further through the cutting cycle. Could there be kind of new risks ahead because of some of the changes in the funding environment for customers? Just curious, like maybe like what you're seeing through October, do you, I guess like, kind of what was the thinking that went behind the fourth quarter guide that you've built here?

[Norman Schwartz, Chairman of the Board, President and Chief Executive Officer at Bio-Rad Laboratories]

Well, I think certainly, in terms of the fourth quarter guide we -- we've looked very carefully at kind of the order book and the funnel, the sales funnel kind of accumulating as much data as we can to get to the best assessment of where we think we'll land for the year. When I think about bumps in the road, I think about the -- I think there were a lot of people that kind of thought the pandemic is over and everything will be back to normal next week and I think we're seeing a continuation of that with the -- with some of this kind of biopharma meltdown and the readjustments that are being made in some of these programs. It's just, I think we just have to be careful about calling the end and saying, there's always possible that there is something else that might bubble up.

[Jack Meehan, Analyst at Nephron Research]

Understood, okay. And then on the income statement, you previously talked about kind of opex reductions. I was looking at the SG&A line from a non-GAAP basis has actually it increased a little bit sequentially and that was despite revenue declining sequentially. So I was just wondering if you could talk about what happened in SG&A in the quarter. And like, is there room to like pull more cost-out given the lower topline?

[Andrew Last, Executive Vice President, Chief Operating Officer at Bio-Rad Laboratories]

So, usually what you see is there's a minor kind of step-up usually in the fourth quarter, we see a much higher kind of step-up in SG&A which this time around, actually more of the initiatives that we have been working on will kick in on the fourth quarter -- in the fourth quarter. So we don't anticipate the traditional step-up in the fourth quarter. For the third quarter, it wasn't that material.

[Jack Meehan, Analyst at Nephron Research]

Okay, thank you guys.

[Andrew Last, Executive Vice President, Chief Operating Officer at Bio-Rad Laboratories]

Thank you.

[Operator]

Your next question comes from the line of Tim Daley from Wells Fargo. Your line is open.

[Timothy Daley, Analyst at Wells Fargo & Company]

Great. Thank you. So first on the process chromatography business. So, I think you were previously expecting down mid-single to-high single decline. What's the update today, I'm going to 13% down or so for the year but even with that, that implies a pretty significant step up in the fourth quarter. I think, almost like 80% sequential dollar increase from 3Q to 4Q. So first off, I think the numbers, that I'm kind of getting two in the right ballpark. And then secondly, can you help us understand the visibility confidence that you have to kind of get that big sequential step-up, especially given the commentary around a slower lower than typical seasonality for this year-end?

[Andrew Last, Executive Vice President, Chief Operating Officer at Bio-Rad Laboratories]

Yeah, hi, this is Andy. So, yeah. I think maybe it is kind of some of the math might be a little up there. I think the process chrome overall is going to, it's going to end up at a lower number. It's kind of the guidance implication there and it's kind of like mid-teens. And so I don't think we're seeing a meaningful step up in-process chrome in Q4 but yeah, I think that's really probably just a bit of math there, it's slightly higher.

[Timothy Daley, Analyst at Wells Fargo & Company]

All right. Got it. That's helpful. And then, Andy, can you the supply-chain impacts weighing on the third quarter Diagnostics revenues? Can you just provide some detail on like what is that, how big the impact was in the quarter? And if you expect those delayed revenues to be fully recuperated in the fourth quarter?

[Andrew Last, Executive Vice President, Chief Operating Officer at Bio-Rad Laboratories]

Yeah. So essentially, obviously we've been communicating supply-chain challenges on the clinical side because various effects of COVID plus moved our plants from France to Singapore. We're catching up quickly, but it's sometimes difficult to get the pacing of that, right, so you get a bit of delay, you also get a bit of pull-through consumable pull-through delay as well and so that's back to the bit into our Q3 but we are looking at a quick strong Q4, and we have a good line-of-sight now. Our plant in Singapore is really cranking. We've done a lot of work, leading out workflows there. And so we're going to get the benefit of that in Q4 and also get some pull-through effect. So Q3 just ended up being softer as a result, overall.

[Timothy Daley, Analyst at Wells Fargo & Company]

Alright. Thank you. And then a final one here for Norman. With the '23 guidance now 400 basis points lower than the mid-term CAGR for 2025, the guidance updated in May now has an incremental 100 basis points or so steeper, I guess headwinds in front of it. So given the current environment, how are you evaluating the 2025 target, or is this something that maybe will wait until a new CFO is in the seat, to put around fingerprints on as well? So, Tim, this is Ilan chiming in, and then Norman probably will have some additional color. But already in the prior quarter, we communicated that the 2025 targets from our perspective is kind of in a holding pattern. We would like to get more insight and visibility going into 2024, in order to shape our thinking about the 2025 targets. So probably, in the next kind of earnings call early next year when we have the 2024 guidance in front of us, the 2025 numbers. We're not going to think about it and see what the reason impact and what magnitude etc.

[Norman Schwartz, Chairman of the Board, President and Chief Executive Officer at Bio-Rad Laboratories]

And I think that covers it pretty well.

[Ilan Daskal, Executive Vice President, Chief Financial Officer at Bio-Rad Laboratories]

Yeah.

[Timothy Daley, Analyst at Wells Fargo & Company]

Great. Well, Ilan, great working with you. Hope, you all the best in the next endeavor, and thanks everybody for your time.

[Norman Schwartz, Chairman of the Board, President and Chief Executive Officer at Bio-Rad Laboratories]

Thanks, Tim. Likewise.

[Operator]

Thank you. Your next question comes from the line of Connor McNamara, RBC Capital. Your line is open.

[Conor McNamara, Analyst at RBC Capital Markets]

Hi, guys. Thanks for taking the questions. Just without getting into 2024 guidance, just how should we think about 2024, in general, and just which headwinds that you called out in this quarter are likely to persist in 2024 and which are likely to end by the end of this year?

[Ilan Daskal, Executive Vice President, Chief Financial Officer at Bio-Rad Laboratories]

Hey, Conor. This is Ilan. So I can start, obviously, there are various aspects that are associated with the macroeconomics. I'm not sure personally that China will recover like in a few weeks. So that may take a little bit longer. The funding environment, which is obviously indirectly linked to the treasury yield is here to stay, the inflationary environment is here to stay for a while. So, it does and probably will continue for a while to have some impact on the smaller biotechnology companies' funding and the way they think about the pace of their spend. So, these are definitely areas a bit that we want to kind of think about it, to think about and then you not to mention the geopolitical everyone now that he is getting kind of to probably a new less than the level that we have not experienced before, so there are multiple fronts there that. And when you think about Europe, I mean overall for us, Europe generally speaking is doing okay for us but when you think about the macroeconomics, Germany is probably already in a recession. So -- so it's going to be interesting income in and specifically domestically we're going into an election year domestically, so we'll have to wait and see how everything will shape up, but it doesn't -- it doesn't have to do anything with our own kind of organic initiatives, products, new products, the end-markets that are not disappearing, they are not going anywhere. So it's only from my perspective, only a timing issue.

[Conor McNamara, Analyst at RBC Capital Markets]

Okay, great. And just following up to Patrick's question about PCR. Can you just talk about ddPCR specifically because that slowdown was worse than any of your other business units? So how do we, can you give investors some framework to think about that how we can get comfort as that's definitely the market environment and not competitive pressures because there have been some competitors out there making some noise? I just want to make sure that you still feel good about your market position and ddPCR.

[Simon May, Executive Vice President, President, Life Science Group at Bio-Rad Laboratories]

DdPCR, still think, we feel good about the position. I mean, we've made no secret of the fact that the competitive landscape is incentive volume, and as we reflect on Q3, I think as we called out in the script, we've had a couple of really notable wins there that we think are going to help continue to position us well for the future.

I think what we really saw in Q3, again, it's an exacerbation of these five pharma impacts we have particular strength in the early biotech sector and I think what we saw in Q3 was a cumulative impact of these deferred projects and the layoffs that Are continuing, extremely tight budget environment. Once again, we're seeing a lot of interest in the products but the money is just not flowing. We continue to see healthy adoption and really strong acceptance of our QX600 platform. So as we look to the future, we all believe that these impacts are transient and when we emerge from it, we think we're going to be in a really strong position. And then, of course, we've got competitors who play more in the lower-end segments and we plan to enter the QX Continuum platform in 2024. So, for sure the competitive pressures incentive volume. I think we got compelling responses and where we've got leading positions in these segments we will continue to do well as and when these markets recover.

[Conor McNamara, Analyst at RBC Capital Markets]

Great, thanks for that, Simon. And just a quick follow-up on pricing and I guess this is across everything in Life Sciences. What's the pricing environment like, and how should we think about that going forward?

[Andrew Last, Executive Vice President, Chief Operating Officer at Bio-Rad Laboratories]

Yeah, I think the environment is still inflationary as you probably appreciate on the Clinical side and tender-driven business. You cannot take very modest and periodic price increases and we do that when we get that opportunity. On Life Science, the -- there is still an inflationary effect and we will still look to try and take modest price increases as we move forward to help offset the inflationary pressures that we're receiving and we expect to do, we've done that this year we expect to do that next year. I think in the quarter, we probably got, and just over a point, a point and a half of price on a net basis. And I think that should at least be a floor.

[Norman Schwartz, Chairman of the Board, President and Chief Executive Officer at Bio-Rad Laboratories]

We've seen the biggest impact that will process as well.

[Andrew Last, Executive Vice President, Chief Operating Officer at Bio-Rad Laboratories]

Yeah. Yeah.

[Conor McNamara, Analyst at RBC Capital Markets]

Okay, thanks. And just a final question, Mr. Norm. Just given the recent sell-off in space and specifically in your stock. How does that change your acquisition strategy if at all and would you still considering, and would you still consider issuing equity to pursue an acquisition target in this environment?

[Norman Schwartz, Chairman of the Board, President and Chief Executive Officer at Bio-Rad Laboratories]

So I think that is kind of in light of the recent stock dislocation. I think we will very much consider continuing our share repurchases as part of our capital allocation strategy and obviously, at this point not such a good currency for M&A.

I think, in fact, well, we're well we do continue to kind of look at opportunities. I think it's probably fair to say that more of our focus over the next several quarters will be centered around kind of navigating our markets and our continued operational transformation.

[Conor McNamara, Analyst at RBC Capital Markets]

Great. Thanks for the time and thanks for the questions you guys and Ilan, we wish you the best of luck and it's been a pleasure working with you.

[Ilan Daskal, Executive Vice President, Chief Financial Officer at Bio-Rad Laboratories]

Thank you, Conor. Appreciate it likewise.

[Operator]

There are no further questions at this time. I would like to turn it back to add Edward Chung for further remarks.

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

Thank you for joining today's call. As always, we appreciate your interest and we look forward to connecting soon. Thanks, operator.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Edward Chung, Head, Investor Relations
• Andrew Last, Executive Vice President, Chief Operating Officer
• Ilan Daskal, Executive Vice President, Chief Financial Officer
• Norman Schwartz, Chairman of the Board, President and Chief Executive Officer
• Simon May, Executive Vice President, President, Life Science Group
• Dara Wright, Executive Vice President, President, Clinical Diagnostics Group

Analysts

• Brandon Couillard, Jefferies Financial Group Inc.
• Patrick Donnelly, Smith Barney Citigroup
• Jack Meehan, Nephron Research
• Timothy Daley, Wells Fargo & Company
• Conor McNamara, RBC Capital Markets