15/04/2024, 09:30 Bio-Rad _ A Lackluster Picks-And-Shovels Life Science Company With A Key Investment Kicker _ Seeking Alpha

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Bio-Rad: A Lackluster Picks-And-Shovels Life

Science Company With A Key Investment Kicker
Apr. 14, 2024 1:23 AM ET | Bio-Rad Laboratories, Inc. (BIO) Stock, BIO.B Stock | 2 Comments

Stephen Simpson
19.5K Followers

Summary
Bio-Rad is a "picks and shovels" company in the life sciences industry, but lacks standout
growth, margins, or returns, and that has been largely true for more than two decades.

Recent trends in the life sciences space have been challenging, driving, double-digit
declines in Bio-Rad's Life Sciences segment, and neither biopharma nor
academic/government budgets look great for 2024.

Bio-Rad's holdings in Sartorius bring significant value to the company, but Sartorius
shares have sold off considerably since the bioproduction bubble popped and investor
enthusiasm has faded.

There's an interesting some-of-the-parts story here, particularly if bioproduction growth

resumes after a period of capacity digestion, but it's hard to love Bio-Rad on a standalone
basis.

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I have a long history with Bio-Rad (NYSE:BIO) (NYSE:BIO.B), having covered this life
sciences company long ago in my sell-side days. It has always been an odd duck in the life
sciences world and remains so, with the company better thought of as a “picks and shovels”
company with broad exposure to biomedical research and clinical diagnostics, but not really a
high-value area of expertise that allows it to stand out on growth, margins, or returns.

To that end, revenue has grown around 5% annualized over the last two decades and while
Bio-Rad shares have outperformed the S&P 500, they’ve been left behind by more dynamic
players like Agilent (A), bioMerieux, Bio-Techne (TECH), Danaher (DHR), and Thermo
Fisher (TMO).

At this point, Bio-Rad is a strange stock to evaluate. I’m not that excited about “core Bio-Rad”,
even with the company’s ongoing decade-long restructuring and transformation process, but I
can’t ignore the value that the company’s holdings in Sartorius (OTCPK:SARTF) (a leading
German life sciences and bioproduction company) brings to the table. With that holding, I think
there’s an argument that Bio-Rad shares are worth a look on a sum-of-the-parts basis.

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This Year (2024) Isn’t Looking Like A Banner Year

Recent trends in the life sciences space haven’t been great, as biopharma companies have
pulled back significantly after spending ahead of their prior capex budgets during the pandemic
to meet the surge in demand, and as academic and government labs deal with softer budgets.

To that end, Bio-Rad saw double-digit declines in its Life Sciences segment in the last two
quarters (down 17% yoy in Q4 and almost 14% in Q3), with fairly broad weakness across
categories. While Bio-Rad was facing a challenging comp from a strong end-of-2022 budget
flush, demand from China for life science tools and products practically collapsed in the second
half of 2023 for the industry, and Bio-Rad likewise saw meaningful weakness here. At the same
time, demand from biopharma has been weak as companies have held off on new instrument
purchases and worked down consumables inventories.

I’m not seeing a lot of joy on the near-term horizon here, either. The NIH budget allocation for
2024 was not great (sub-1% growth) and Horizon Europe is looking at a 2% cut. While China
recently passed a stimulus effort targeting the science and technology sectors, I don’t expect a
quick bounce here. The best-case scenario may be Bio-Rad’s “picks and shovels” business
finding stability before some of its peers, as customers will still need consumables for core
functions like PCR, chromatography, and cytometry.

Clinical Diagnostics was stronger for Bio-Rad in the second half of 2023, and I expect that to
continue into 2024. Businesses like diabetes (HbA1c testing and the like), blood typing,
autoimmune testing, and QC aren’t growth markets, but they’re usually pretty steady when
patient counts at hospitals are back to normal (as they are now).

Growth Opportunities, But Likely To Blend Into The Background

The good and bad of Bio-Rad is that there’s nothing really special about the story in terms of
growth drivers.

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The company does have leverage to growth opportunities in areas like liquid biopsy, cell/gene
therapy, and proteomics through its digital PCR offerings (Droplet Digital PCR in particular), but
there are plenty of players in digital PCR, including Thermo Fisher, and I don’t see the “can’t
miss” aspect to Bio-Rad’s offering that will make it a clear winner in the market. Likewise in
areas like cell biology and bioproduction – Bio-Rad has offerings that make them a participant
in these attractive (over the long term, at least) markets, but nothing that, to me, looks like it will
drive clear leadership. Again, as much as it’s a cliché, I think that “picks and shovels”
description fits here. Bio-Rad has the instruments and consumables to participate in the future
growth of a wide range of biomedical research areas of interest, but nothing that will really
elevate them as a “go to” name. I don’t think it's coincidence, then, that Bio-Rad’s historical
revenue growth rate is pretty close to the historical growth rate I often here quoted for the life
sciences space in general (around 5%).

So too in the Clinical Diagnostics business. I like the company’s efforts to expand its PCR-
based offerings for molecular diagnostics (a large market where Bio-Rad hasn’t historically had
a big presence), including the 2022 deal for Curiosity diagnostics, but I don’t think companies
like Roche (OTCQX:RHHBY), Becton, Dickinson (BDX), or Danaher are losing sleep about
Bio-Rad seeking a bigger presence in MDx.

Sartorius Is The Elephant In The Room

You can’t really talk about Bio-Rad, at least an as investment candidate, without giving some
attention to Sartorius. Over a period of more than 20 years, Bio-Rad has accumulated a sizable
position in the company, owning 38% of the ordinary shares and 28% of the preferred shares.

Sartorius is a major German life sciences company with a sizable presence in areas like
research tools (including sample prep, cell analysis and cytometry, calibration/QC, and process
filtration) as well as bioproduction.

Seemingly bottomless demand for bioproduction capacity (to make antibody therapies, cell
therapies, gene therapies and the like), drove the shares up more than 4x from early 2020 to
the fall of 2021, but like others in the space (Danaher, Thermo, et al.) there has been a painful
hangover as biopharma companies have pulled back on their spending and investor
enthusiasm has deflated.

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With the value of Bio-Rad’s Sartorius holdings currently around $6.8B (or around $235/share),
the future performance of Sartorius clearly will have a huge impact on Bio-Rad. I’m still bullish
on balance for the bioprocessing/bioproduction space, as biopharma pipelines remain full of
antibody drug candidates and as other areas like cell therapies, gene therapies, and RNA
therapies are still in their early stages, but the market is in a digestion phase following that
initial surge in demand (in part to address opportunities for generic antibody treatments, as well
as pandemic-related products) and there will likely be a more measured pace of growth from
here.

The Outlook
On its own merits, I expect around 3% to 4% long-term growth from Bio-Rad. The potential to
grow at a faster rate is there, but it seems as though this company always ends up a little short
of its peers/rivals, and I think 5% long-term growth is probably too ambitious. For the 20-plus
years I’ve followed this company, it has always been conservative and risk-averse, and it’s
tough to match, let alone outperform, your market when your rivals are willing to take more
risks.

With a huge distribution network and comparatively high SG&A and R&D spending, Bio-Rad
has never really stood out on margins – over two decades the company has averaged a free
cash flow margin around 9%. There have been “windfall” periods over the years, when
products like mad cow testing saw a surge in demand, but that’s a long track record.

More recently, the company has been taking steps to try to boost its long-term operating
margin potential, part of a three-phase decade-long transformation plan, but SG&A spending
was still over 30% of sales in 2023, and it’s a big ask to get closer to peers in the low-20%’s. I’d
also note that with the company’s huge array of product offerings, it will be difficult to ever get
to parity, as those product lines require R&D and SG&A to remain viable. With that, I think it
may be difficult to surpass 20% EBITDA margins (excluding Sartorius dividends) for the next
few years.

Even if I give credit to management and assume they’ll hit (and sustain) their improvement
targets, it’s hard for me to see free cash flow margins growing much beyond the low-teens
(11%-12%) on a sustained basis. That’s enough to support "high-mid" single-digit FCF growth,
but that alone does not drive an attractive valuation.

I value Bio-Rad by discounting those cash flows back and through a margin/return-driven
EV/EBITDA approach that I use for other life sciences companies, and then adding in the
present value of the Sartorius holdings. That gets me to a $405-$440 value range.

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The Bottom Line

Comparing today’s price to my value estimates leads me to think that the Street either really
doesn’t like the Bio-Rad business, valuing it even less than I do, or is very much skeptical
around the long-term value of the Sartorius holdings (or some combination). Clearly Bio-Rad
couldn’t cash out and get all of that value today (I’m assuming taxes would apply), but even
factoring in taxes, I get a fair value in the $350’s-$380’s.

Something isn’t quite adding up, and that intrigues me. It doesn’t intrigue me enough to have
this high on watch list, after decades of watching Bio-Rad I just don’t agree with management’s
core approach to the business, and I’d rather own other businesses I like better, but even I’ll
concede there’s an attractive enough price for almost any business.

This article was written by

Stephen Simpson Follow

19.5K Followers

Stephen Simpson is a freelance financial writer and investor.Spent close to 15 years on the Street (sell-side, buy-side,
equities, bonds).

Analyst’s Disclosure: I/we have a beneficial long position in the shares of RHHBY either through stock ownership, options, or other
derivatives. 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.

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