PerkinElmer, Inc. (NYSE:PKI) Q4 2022 Earnings Call Transcript

PerkinElmer, Inc. (NYSE:PKI) Q4 2022 Earnings Call Transcript February 14, 2023

Operator: Hello, and welcome to the PerkinElmer Fourth Quarter 2022 Earnings Conference Call. My name is Alex, and I’ll be coordinating the call today. I will now hand over to your host, Steve Willoughby, SVP of Investor Relations. Please go ahead.

Steve Willoughby: Thank you, operator. Good morning, everyone, and welcome to PerkinElmer’s fourth quarter 2022 earnings conference call. On the call with me today are Prahlad Singh, our President and Chief Executive Officer; and Max Krakowiak, our Senior Vice President and Chief Financial Officer. Before we begin, I’d like to remind everyone of the Safe Harbor statements that we’ve outlined in our press release issued earlier this morning and also those in our SEC filings. Statements or comments made on this call may be forward-looking statements, which may include but are not necessarily limited to financial projections or other statements of the company’s plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties.

The company’s actual results may differ significantly from those projected or suggested by any forward-looking statements due to a variety of factors, which are discussed in detail in our SEC filings. Any forward-looking statements made today represent our views as of today. We disclaim any obligation to update these forward-looking statements in the future, even if our estimates change. So you should not rely on any of today’s forward-looking statements as representing our views as of any date after today. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release.

To the extent we use non-GAAP measures during the call that are not reconciled to GAAP, we will provide reconciliations promptly. I’ll now turn it over to our President and Chief Executive Officer, Prahlad Singh. Prahlad?

Prahlad Singh: Thank you, Steve, and good morning, everyone. Before I begin, I want to express my deep sorrow for our colleagues, along with their friends and families in Turkey and Syria following the recent earthquake. What you are having to go through is something no one ever thinks can happen. And I want you to know that PerkinElmer will be supporting you in any way we can. Needless to say, the start of the year has been an eventful one, and from a business perspective, we have hit the ground running after finishing 2022 on a strong note that played out right in line with our expectations from the start of the quarter. We continue to successfully navigate an evolving macroenvironment, particularly in China, while staying tremendously focused on executing our upcoming divestiture of our Analytical and Enterprise Solutions business, which we expect to complete before the end of March.

Amid these undertakings, we, again, exceeded our total adjusted revenue and adjusted EPS targets for the quarter. The continued high level of execution throughout a period of transition for the company is a testament to the team we’ve built, the processes we’ve implemented and the quality of the businesses that comprise our new company. I couldn’t be more excited for our future, and the impact I expect us to have by helping our customers develop and deliver novel scientific breakthroughs that will have a profound impact on improving global health in the future. I would be remiss not to also thank all our colleagues who have spent a significant amount of time and effort preparing for the upcoming split of the company, including those roughly 6,000 employees who will be part of the divestiture.

I look forward to watching what the Analytical and Enterprise Solutions business can accomplish in the years to come, and thank you for all your efforts and impact which have made getting to this point a reality. As it pertains to the future of our Life Science and Diagnostics business, which is going to be renamed and rebranded in the months following the close of the divestiture, a significant amount of work has already taken place to prepare for this transition. I’m eager to share with you and our employees more about the direction of the new company in the near future. As I have highlighted to you over the last several quarters, the level of focus on material innovation that is now occurring within the company has meaningfully increased.

This was again on display over the last few months as our new high-throughput random access chemiluminescent diagnostic testing platform, the Excentis received its CE Mark and began initial commercial installations. While the test menu for this platform will continue to ramp over the next several years, it marked a multi-year effort of significant development to bring this next-generation platform to market. We will look to also bring this new system to the U.S. market in the coming year. With the low and medium throughput platforms that were added with the acquisition of IDS in 2021, the initial launch of the Excentis now provides a complete portfolio of chemiluminescent analyzer platforms spanning all throughputs to support our full spectrum of customers.

We were also excited to see in early January that the GAMT disorder was added to the RUSP panel for newborn screening in the United States. This deficiency can result in severe intellectual disabilities if it goes undetected and untreated within the first few years of a child’s life, and we continue to collaborate with KOLs to support their research and pilot programs on this. With our EONIS platform for SMA and SCID screening receiving FDA authorization last quarter, the recent additions of GAMT and MPS II are examples of the continuous innovation from our reproductive health business, allowing it to continue to grow despite well-known birth rate pressures over the last several years. In our Life Sciences business, we continue to bring innovation to the cell and gene therapy industry with the launch of adeno-associated virus AAV detection kits, which leverage our proprietary AlphaLISA technology and help researchers quickly and easily characterize viral vector particles being introduced.

Additionally, we signed a collaboration agreement in December with a leading global biotechnology company to identify novel AAV vectors aimed at crossing the blood-brain barrier. Working in conjunction with Professor Grimes Lab at the University Clinic, Heidelberg, our in-house team of viral vector experts in Munich, Germany are tasked with developing a novel generation of gene delivery vectors for treating a growing population affected with neurodegenerative diseases. The scope, high unmet clinical need and social challenge underpinning this collaboration is an illustrative example of just how much we have transformed our life science portfolio over the past few years. We are not only increasingly aligned with rapidly evolving and attractive fields like cell and gene therapy, but we’ve positioned ourselves to be uniquely focused to help accelerate these advancing fields forward.

In addition to continuing to invest in our R&D, we are also significantly focusing on internally developing our people. In the fourth quarter, we launched three new employee resource groups centered on supporting our Hispanic employees, our veterans and our employees with disabilities. We also started several employee networking groups to help employees with similar interests get to know one another and communicate across the company. These are both great examples of the change in culture that has been occurring at the company recently, which I expect to even further accelerate as we enter the next exciting phase of our corporate journey. While Max will share more details with you in a bit, it was encouraging to see our Life Science and Diagnostics business finish off the year on a strong note resulting in 9% non-COVID organic growth for the full year.

This was despite an approximate 300 basis point headwind from the lockdowns in China negatively impacting our immunodiagnostics business which we had assumed in our most recent guidance. At this point, we have continued to see an impact from the change in COVID policy in China and assume that we will not see our immunodiagnostics business there return to normal until the second half of 2023, which will have a big tough end impact on our overall expected growth for the year, particularly in the first half. As it relates to COVID, we have been a significant player in the response to the pandemic with the both lab-based PCR and the several government lab contracts we participated in. The testing mandates now ending in most areas around the world, it has recently resulted in a strict and dramatic decline in the demand for lab-based PCR tests and supplemental lab capacity.

While Max will provide more detail, we have decided to completely remove all COVID revenue from our guidance for the year and let what we expect to be minimal related revenue provide modest upside to our official guidance, a significant change from our prior expectations. Despite these two impacts, we are looking for 2023 to be another very strong year overall and one that will set the new company off on a great foundation to build upon in the years to come. As we execute on our transformation and the future accretive capital deployment opportunities it provides, we will unlock the full scientific, operational and financial potential of our Life Science and Diagnostics business resulting in a best-in-class culture, market-leading innovation and top-tier shareholder returns.

Our business is in an excellent position today with tremendous additional opportunity right in front of us that we are going to capitalize on. With that, I’ll now turn the call over to Max.

Max Krakowiak: Thanks, Prahlad, and good morning, everybody. As Prahlad mentioned, we are nearing the completion of our planned divestiture of our Applied and Enterprise Solutions business to New Mountain Capital, which we expect to wrap up before the end of March. Following the deal closure, we will continue our work to rebrand the company with an expectation of unveiling our new identity within the next few months. Until then, we will continue to refer to the Life Science and Diagnostics business externally as PerkinElmer just as we do today. With that said, we’re very excited to share with you our new name, identity and mission when the time comes. As it pertains to the divestiture, our teams across both businesses are working extremely hard to ensure a smooth transition and I am grateful for everyone’s continued efforts as we work towards a close over the coming weeks.

While there has been and will continue to be a lot of work involved, I’m even more confident that this decision will maximize the long-term potential of both businesses and I look-forward to seeing it come to fruition. Once the deal is closed, we expect to set aside a sizable portion of the after-tax proceeds to prepare for our upcoming debt maturities over the next 18 months with an initial $500 million coming due this September. This will still leave us with ample capacity to pursue additional capital deployment activities as they arise, such as continuing our track record of finding strategically important and accretive acquisitions. With these proceeds and the cash we expect to generate, we will have more than $2 billion of additional unencumbered cash available to deploy over the next three years without taking on any new debt.

We expect our future organic and inorganic investments will only further bolster the strong medium-term financial outlook we have previously provided. As it relates to the fourth quarter, we saw a strong performance despite continued challenges from disruptions in China, and we were again able to exceed our revenue and adjusted EPS targets. While most of my comments during the fourth quarter refer to just our Life Science and Diagnostics segments, which I’ll refer to as continuing ops, I thought I’d first start with a brief look at the combined company’s performance including the businesses that are intended to be divested. On a combined basis, including continuing ops and discontinued ops, we generated total adjusted revenues in fourth quarter of $1.09 billion, which was solidly above the high-end of our guidance.

Non-COVID organic growth for the combined businesses was 8% in line with our guidance while an FX headwind of approximately 5% and COVID revenues of $31 million were both slightly favorable to our expectations. As expected, there was no inorganic contribution from recent acquisitions. In relation to the P&L, our combined company adjusted operating margins were 27.3% for the quarter. We continue to see a benefit from our recent initiatives within our supply chain, operational expense management, and again, delivered strong pricing performance as we realized more than 200 basis points of positive impact in the quarter. Despite some modest non-operating expense pressures and a slightly higher tax rate, we were still able to generate $1.70 of adjusted EPS for the combined company, which was $0.04 above the midpoint and $0.03 above the high-end of our expectations.

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Moving beyond the P&L, we generated $112 million of adjusted free cash flow in the quarter, which was pressured on a year-over-year basis by a significantly lower COVID revenues, the divestiture and deal-related costs and the timing of tax payments. These dynamics are expected to continue in 2023 as COVID continues to roll off and we complete the divestiture and other activities related to the rebranding of the company. We continued our planned deleveraging by paying down another $53 million of debt in the quarter, bringing the full-year debt reduction to nearly $600 million. This resulted in our net leverage finishing at 2.7x at the end of the year. So far this year, we’ve already opportunistically paid down $30 million of shorter duration debt and continue to be well-positioned from a capital structure standpoint ahead of our upcoming divestiture.

Upon complete retirement of this shorter-term debt over the next two years, we will have approximately $3.2 billion of debt outstanding at an average fixed interest rate of 2.6% with a seven-year average duration. I would now like to provide some commentary pertaining to our fourth quarter and full year business trends. To give some perspective on what the company will look like going forward, all of my following commentary will only pertain to our continuing operations, which consist of our Life Science and Diagnostics business, and excludes our Applied and Enterprise Solutions businesses. Our Life Science and Diagnostics business generated 8% non-COVID organic growth in the quarter, which was in line with our expectations. For the full year, our Life Sciences and Diagnostics business grew 9% organically, excluding COVID, which includes a 300 basis point headwind from the China lockdowns.

So I’d say, it was a very strong year overall. Geographically, our Life Science and Diagnostics business grew in the high single-digits organically excluding COVID in all major regions in the quarter, including the Americas, Europe and Asia Pacific, with China growing in the low single-digit overall. For the full year, Americas and Europe, both grew in the low double-digits organically, while Asia grew in the mid-single-digits, with China being down in the low single-digits year-over-year. From a segment perspective, our Life Science business, which is currently being reported as our DAS continuing operations business for the time being, generated adjusted total revenue of $347 million in the quarter. This was up 9% year-over-year and represented 47% of our continuing ops total revenue.

Organically, the business grew 13% with mid-teens growth from pharma and high-single-digit growth from academic and government. From a product perspective, our Life Science research reagents, assays and pharma services represented approximately 54% of our total life science business in 2022, including acquisitions and grew in the low double-digits organically in the quarter and for the full year. Our instrument and related services, which represented approximately 31% of our Life Science revenue in 2022 also grew in the low double-digits in the quarter, which finished off an exceptional year with approximately 20% organic growth. Finally, our informatics business, which represented the remaining 15% of our Life Science revenue in 2022, grew in the mid-teens organically in the fourth quarter, also finishing off an outstanding year of approximately 20% organic growth.

Moving to our Diagnostics segment, we generated $394 million of total revenue in the quarter. This was down 44% year-over-year and represented 53% of our total continuing ops revenue. Organically, the business was down 39% year-over-year due to the $31 million of COVID revenue we generated being down significantly from the $336 million in the year-ago period. On a non-COVID basis, the diagnostics business grew 4% in the quarter and 5% for the full year. When excluding our immunodiagnostics business in China, our Diagnostics segment generated high single-digit non-COVID organic growth in 2022. While the pressures in China remained significant in the fourth quarter, the impact was largely in line with our expectation of our immunodiagnostics business in the region being down in the high single-digits year-over-year.

Excluding China, our immunodiagnostics business continued to perform very well and grew in the high-teens organically year-over-year in the quarter excluding COVID and was up mid-teens organically ex-COVID outside of China for the full year. So to look at it another way, when including the impact from lockdowns, our immunodiagnostics business was still up approximately 10% in the fourth quarter ex-COVID and grew low to mid-single-digits for the full year overall. On a non-COVID organic basis, our reproductive health business declined slightly year-over-year in the fourth quarter, but we’re still able to deliver mid single-digit growth for the full year. Favorable trends in Europe were offset by softness in Asia and a, slowing birth rate again in the Americas as global population growth pressures continue.

These macro-dynamics are masking the solid progress we are making with menu and geographic expansion, driven by our recent new product introductions and commercial execution. Our applied genomics business also declined slightly year-over-year on a non-COVID organic basis in the quarter. However, for the full year, the business grew organically in the high single-digits excluding COVID, resulting in a high-teens CAGR over the last three years, while this market is likely going through somewhat of demand adjustments from an instrument perspective given how many were sold over the last three years. We continue to feel very good about our new products in this area as well as our improved market positioning and consumables. Now as it pertains to our outlook for 2023, we expect it to be another strong year financially while we also worked through managing the transition with the divestiture and rebranding as a new company.

All of the forward-looking guidance commentary I’m about to provide only pertains to our remaining life science and diagnostics company and exclude the businesses that are soon to be divested. I would also note for your modeling purposes, that we have provided some additional historical performance metrics. As it pertains to the life science and diagnostics company quarterly non-COVID organic growth performance during 2022 and a reconciliation document that can be found on our investor website. First, as it pertains to COVID while our performance in the fourth quarter was still in line with our expectations. We did see a significant slowing in global demand as the year came to a finish. This fall off and COVID related demand and even more dramatically accelerated so far here in 2023 and we now expect COVID to represent less than 50 basis points of our overall revenue for the year.

While we will continue to report what our actual COVID revenue is each quarter this year, given the uncertainty of PCR testing over the remainder of the year and the immaterial contribution, we now currently project. We felt it would be prudent to just completely take it out of our assumptions for the year and let it be modestly incremental to our stated guidance. For our non-COVID business we anticipate another very strong year for our continuing ops life science and diagnostics business. But I expect you 9% non-COVID organic growth this year. This is driven by our assumption for low-double-digit growth in our life sciences business and high single-digit growth in diagnostics. As we have previously commented there continues to remain significant uncertainty as it pertains to the timing and magnitude of the potential rebound in non-acute diagnostic testing demand in China which so far quarter-to-date.

We have not seen meaningfully improve. While some may project that non-COVID diagnostic testing demand to rebound more significantly in the short-term, we are continuing to assume that our immunodiagnostics business in the region does not normalized until starting in the second half of the year. Should it normalize more quickly or significantly than this, it would present upside to our current assumptions. Consequently, we are expecting our overall immunodiagnostics to grow in the low double-digits in 2023 excluding COVID. Lastly, we are not assuming any revenue contribution from recent acquisitions and FX is currently expected to be neutral to our total year revenue. This results in our expected total 2023 revenue to be approximately $2.94 billion.

With our updated expectation for now having zero COVID revenue in our guidance for the year and despite historically carrying a very favorable margin profile compared to the rest of the business. I’m proud to share that we still expect to average 30% operating margins in 2023 in our life science and diagnostics business. Our ability to overcome this approximate 100 basis point operating margin headwind further reinforces the power of the underlying business and our ability to execute during this period of transition. We are assuming approximately $90 million of net interest and other expense this year, which is benefiting from the assumption of some additional interest income starting in the second quarter, but it’s also being negatively impacted by a significant year-over-year increase in our pension expense throughout the year, that is primarily driven by higher interest rates.

As for taxes, we continue to expect that the new company will start with an approximate 20% tax rate that we believe we can work to improve in the years to come. Our diluted share count should stay relatively stable at around 126.5 million average shares outstanding, this all results in us expecting adjusted EPS this year of $5.05. I note, this guidance includes approximately $0.45 of combined headwinds from the removal of all COVID revenue in our guidance compared to our previous $100 million expectation and the increased pension expense we are forecasting. To give you some perspective on the financial power of our life science and diagnostics business, this guidance implies at least the mid-teens underlying year-over-year EPS growth when excluding COVID completely in both years.

In terms of phasing, we expect our non-COVID organic growth to be fairly consistent throughout the year when taking year-ago comps into account. So on a two year average basis, we expect our non-COVID organic growth each quarter this year to be around that 9% we are expecting for the full year. From an EPS perspective, given our elevated prior year Q1 comps of 13% which is our most difficult comp of the year, we expect less operating leverage here in 1Q. Additionally, our 1Q operating margins will continue to be pressured by the impact of continuing ops accounting rules, until we close the divestiture. Moving to below the line, we will also not materially benefit in the first quarter from the increase in interest income. We anticipate once we receive the divestiture proceeds.

And finally, we expect our Q1 adjusted tax rate to be slightly above our full year average rate. Consequently, we expect the first quarter to represent approximately 19% to 20% of our full year adjusted EPS. With that, I’d like to turn it back over to Prahlad for some closing remarks. Prahlad?

Prahlad Singh: Thank you, Max. 2022 was clearly another strong year for PerkinElmer, but if we take a step-back and look at the past three years. Our focus was always to emerge from COVID as a stronger company. We believe that chapter has been successfully completed for both, the analytical and enterprise business as well as our new life science and diagnostics business. Within those three years our rapid and significant response to the COVID pandemic enabled more than 10 acquisitions fast-tracking the transformation of our company to higher growth and higher margin areas. Additionally, we embarked on a significant undertaking of splitting the company into two distinct businesses and yet through all that we’ve consistently executed on our financial targets which is a testament to our employees and pleasure we have created.

Looking forward, 2023 will be no different as our teams rise to the challenge of finishing the divestiture, rebranding our company and continuously executing against our financial commitments. We are in an excellent position today and our future is very bright. With that operator, we would now like to open up the call for questions.

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Q&A Session

Operator: Thank you. Our first question for today comes from Derik de Bruin of Bank of America. Derik, your line is now open. Please go ahead.

Derik de Bruin: Hi, good morning and thank you for taking the questions. So just Max, just to clarify something so your – your full end interest expense guide includes I’m just sort of – what are you assuming in terms of interest, interest income on the incremental. Just trying to make sure that $90 million guiding you’re guiding is an all-in number is sort of like how you see it – if there is some potential upside of that depending on the interest rate?

Max Krakowiak: Yes, hi Derik. So for your question, yes, it is an all-in number. So right now, we’re going to be probably putting aside, somewhere between $800 million and $900 million of the after tax proceeds into treasuries that will match up with the short-term debt that we have on our books. We’ve got the $500 million note coming due in Q3, 2023 and then we’ve got another $800 million coming due in Q3, 2024. And so our assumption is that, that $800 million to $900 million will initially go, there’s a chance for upside, but that is an all-in number there.

Derik de Bruin: Great, thank you for clear clarity. And when you look at the China progression in immunodiagnostics just sort of thinking about the one half of two halves expectation, I appreciate the color on the overall commentary on the business, but can you just sort of walk through how you’re sort of seeing that flow through the model?

Prahlad Singh: So well, maybe just to go back Derik, when you look – when we’ve seen China in our assumption right now is that it will be – overall China for us will be double-digit or growing above our company average growth rate for the – for 2023. And our assumption right now is it will come and come more into the second half of the quarter rather than – the second half of the year. And the first quarter, what we are assuming is China IDX will be worse than what we had approximately in the fourth quarter of 2022.

Derik de Bruin: Okay. Great. And then just one final, if I may. Pricing assumptions for 2023?

Max Krakowiak: Yes. So from a pricing standpoint, Derek, we’re assuming at least 100 bps pricing contribution in 2023.

Derik de Bruin: Great, thank you very much.

Operator: Thank you. Our next question comes from Patrick Donnelly of Citi. Patrick, your line is now open. Please go ahead.

Patrick Donnelly: Good morning, guys. Thank you for taking the questions. Maybe following up on Derek there on the China piece. Prahlad, it was encouraging to hear you guys talk about 1Q being consistent with that, call it, 9% for the year, given the China headwinds upfront, COVID coming out of the model, obviously. Can you just talk about, I guess, it seems like you have good visibility into 1Q being at that level, when China comes back in that back half, I would have thought that would accelerate growth. Can you just talk about, I guess, the cadence throughout the year, why the back half wouldn’t be stronger? Is it just layering in a level of conservatism in the back half? And then if China does indeed recover, you can kind of ride that to higher numbers. Just trying to get a sense there, given the 1Q guidance was pretty healthy from where we were standing.

Prahlad Singh: I think Derek, – Patrick, sorry, you’re right, I think if China – right now, the way we’ve assumed that it comes back to a normal growth rate in the second half of the year. Obviously, whether if it comes back faster or is more significant earlier than that, that would be upside to the model. And also, if the stimulus continues to sort of show its impact earlier, then that might be upside. So I think we’ve just been prudent in our guidance, seeing what we have seen in the first month of the – in the quarter when post – just before the spring festival. And it’s been only a week since people have started coming back from this spring festival. So I think I would just say, we are being cautious in our guidance and continue to watch it closely.

Patrick Donnelly: Okay. Understood. And then maybe on the margin side, certainly understand 1Q being a little lighter just given some of the continued ops piece. Can you just talk about, again, I guess, how we think about that throughout the year? And then particularly near-term, not – obviously, not asking for ’24, ’25 guidance just yet, but it seems like as those stranded costs come out, I wouldn’t see any reason why we wouldn’t be kind of 100 bps plus in the near term, just naturally as those come out. Can you just talk about, I guess, how that progresses in terms of the model? Again, the exit rate should be a little bit higher than I would think the near-term years skew on the upside as some of those stranded costs come out. But it would be helpful just to get a sense for what those look like as we work our way through the model here.

Max Krakowiak: Yes. Hi, Patrick. So the way I would think about it from a margin perspective in 2023 is if you go back to what we mentioned on the call, we are implying sort of a mid-teens EPS growth year-over-year when you strip out COVID from both periods. Implied in that mid-teens EPS growth is obviously the 9% organic growth, and then we are expecting about 100 basis points of margin expansion year-over-year on a non-COVID basis. So we are already to see about maybe 40% of that comes through the gross margin expansion, about 60% of that comes through operating expense leverage. So we feel good about the margin expansion we expect next year, which gives us, I think, even further momentum to your point on the midterm outlook and us feeling very confident in our margin expansion targets that we previously have put out there and don’t see any reason why 100 basis points per year is out of the question.

Patrick Donnelly: Great, thanks guys.

Operator: Thank you. Our next question comes from Josh Waldman of Cleveland Research. Josh, your line is now open. Please go ahead.

Joshua Waldman: Hi, good morning guys. Thanks for taking my questions. A couple for you. First, I wondered if you could provide an update on BioLegend, maybe what the business grew here in Q4. Curious if it was impacted by China lockdowns, and thus, maybe represents potential upside to the model. And then just curious, what you’re assuming for that business within that 9% non-COVID guide for ’23?

Prahlad Singh: Yes, Josh. Overall, as you know, our Life Sciences business continued to grow very well, our reagents business, and it grew double-digits for the year. We did not see any material change in the trend in 3Q or 4Q in our reagents business in China or any place else. BioLegend and our overall Life Sciences reagent business continues to do very well, and we expect it to continue to grow double-digits as we’ve said earlier.

Joshua Waldman: Got it. And then Prahlad or Max, I wondered if you could comment on what you’re seeing from maybe biotech and early-stage pharma accounts. It sounds like Pharma was up mid-teens in the Life Science segment, but applied genomics maybe a bit lighter. Just wondered if you’re seeing any indication that these accounts are slowing spend. Anything leaving you more cautious on outlook within this end market?

Max Krakowiak: Yes, I’d say, first, from just a materiality standpoint, right, I mean the biotech or smaller accounts, which I think you’re more referring to are only less than 5% of overall revenue. So even if we were to start to see some noise there, it’s not overly material to the company. I think that’s one piece of context I’d say first. Second, in terms of sort of the split between applied genomics versus the Life Sciences business, we are seeing a little bit of a slowdown in applied genomics. As we mentioned in our prepared remarks, we do think there’s a little bit of saturation just from the amount of instruments that have been placed over the past three years. That might continue a little bit here in Q1. We expect by the end of the year, applied genomics will be sort of at its normal run rate from an overall organic growth standpoint.

Joshua Waldman: Got it. Appreciate it.

Operator: Thank you. Our next question comes from Liza Garcia with UBS. Your line is now open. Please go-ahead.

Liza Garcia: Hi, guys. Good morning. Thanks for taking the question. So I guess, if we could start on talking about the informatics business, it’s just been a bit since the last DAS deep dive, I think it was like 2022. So how do you think about the right growth trajectory for that business given the 20% that you guys got to accrue this year?

Max Krakowiak: Hi, Liza, so I’d say, first, we’ve been very pleased with the performance of our informatics business, not only really in 2022, but over the last couple of years, it’s had about a mid-teens CAGR. I would say that is sort of our normal, I would expect long-term growth rate. The only point I would call out with informatics is there are some timings of renewals, et cetera. So at times, the growth rate can be lumpy. But I would say, overall, we are very pleased with the performance. I don’t think 20% is the go-forward growth rate. I do expect that to come down a little bit here in 2023, but we are very happy with the performance of that business.

Liza Garcia: Awesome. Thank you. And then I guess, just talking a little bit into like the reproductive health. I guess, a little bit softer this quarter, but – with the birth pressures, but you did have the – you’ve highlighted the FDA marketing authorization for SCID and SMA. How should we think about that? And kind of if you could provide any qualitative kind of update on Vanadis? That would be great.

Prahlad Singh: Yes, Liza. So I think on reproductive health, on birth rates, continued to unfortunately have pressure in 2022. But I think, as you pointed out, right, we continue to have new reagents going through approval. While we got the approval, there are two new indications or disorders, as you know, that got approved by the RUSP panel, which I had in my prepared remarks, MPS II and now GAMT. So our menu expansion opportunities continue to bolster the reproductive health business. The thing is that as it gets approved by the RUSP panel and the FDA, states pick them up for adoption in their menu panel on a sequential basis. So some of them might come into play in 2023, the first half, some in the second half. So the states have the mandate based on their own flexibility as to when they want to bring out.

Vanadis continues to do well. And I think as we’ve said, it grew more than 75% commercially last year and we continue to put in new installations. The value proposition that it brings to the table is gaining more and more traction with our customers now, more so in the U.S.

Liza Garcia: Okay. Thank you.

Operator: Thank you. Our next question comes from Dan Arias from Stifel. Dan, your line is now open. Please go ahead.

Dan Arias: Good morning, guys. Thanks a bunch. Prahlad or Max, I hate to put too fine of a point on it, but the return to normalization for EUROIMMUN in the second half of the year, is that to say getting there by year-end or is that more like you think you’d improve through midyear and you can get back to normalization at some point in 3Q or 4Q? I’m sure you’re not interested in giving growth rates by quarter, but it would just be helpful to get a sense for the shape of the curve, sort of to Derek and Patrick’s point, just given that it does seem like that’s the biggest swing factor here for growth in 2023.

Max Krakowiak: Yes. Hi, Dan. So the way I would think about it is when we look at the EUROIMMUN business in China and the ramp throughout the year, as we mentioned in the prepared remarks here, Q1 will be still a little bit of a headwind. We do expect it to be potentially even worse from a growth rate perspective than what we saw in Q4, which is approximately high single-digits. And so as you think about the ramp over the course of next year, I would think – or this year, excuse me, I would think about it in the context of the two-year average stack should continue to get better each and every quarter, so Q1 to Q4 and I think we’ve given all those prior year comps in previous calls here throughout 2022. And then I would expect sort of that the full year growth rate of that EUROIMMUN business to be in the low double-digits, low-teens, which is sort of the historical growth rate we’ve seen from that business.

Dan Arias: Yes. Okay. That is helpful. And then maybe on margins and M&A, you’ve been pretty upfront here about having this extra dry powder that you think you can deploy for M&A later in the year 2024. So it feels like you’re active there, but you’ve also made op margin improvement in one of the key selling points of the spin. So I guess, I’m just curious to what extent do you have an appetite for something that might be strategically positive, but dilutive to margins.

Prahlad Singh: It depends on the opportunity, Dan. So it’s tough to give a specific response to the question because it depends. As I’ve said earlier, we continue to be very active. We continue to look at opportunities that are in our sweet spot, which is more founder, entrepreneur-owned companies. Depends on what the opportunity is, is probably the best way to respond to the question. Let me give you an example. If it’s a breakthrough technology like Vanadis, we would do it. But generally, if you look at the deals we’ve done, that should be a pretty good precursor of the deals we will do.

Dan Arias: Do you think that the – if the revenue trajectory one that Vanadis has right now, that would still be something you’d be interested in?

Prahlad Singh: Yes, it depends on the technology. So that’s why I said that. Probably the shortest answer would have been, it depends.

Dan Arias: Okay. Thanks, Prahlad.

Prahlad Singh: Yes.

Operator: Thank you. Our next question for today comes from Jack Meehan of Nephron Research. Jack, your line is now open. Please go ahead.

Jack Meehan: Thank you. Good morning. Wanted to ask, so the $5.05 EPS guide for continuing ops, just trying to bridge this to newco. Can you provide latest thoughts on potential for trap cost versus the costs that are going to get allocated to spin? I guess, how close is this $5.05 to what newco EPS looks like?

Max Krakowiak: Yes, Jack, the way I would think about it is the $5.05 guidance includes the impact of continuing ops accounting headwinds that we’re going to have in the first quarter or really the first couple of months until the divestiture closes. And then for the remainder of the year, yes, that – cont ops accounting will more or less turn into stranded costs, but that will be partially offset also by the TSAs that we will have. So sort of net-net, it all more or less washes out over the course of the year. We think $5.05 is a very good indication of what sort of the true LSDx performance is once you kind of put all that together.

Jack Meehan: Okay. That’s helpful. And then one business question. Within Diagnostics, the applied genomics business, so understand the COVID headwind there, but I guess, the non-COVID also down low single-digit in the quarter. Can you just talk about what you’re seeing, I guess, from like – there’s obviously been a lot of instruments placed throughout the pandemic. Do you think there could be some hangover to start 2023?

Max Krakowiak: Yes. I think I mentioned that earlier as well in one of the responses. I do probably – we do probably anticipate that to continue here in the first quarter. But I think as we look over in the full year for applied genomics, we probably expect it to be slightly down from this year on a non-COVID basis. So in 2022, it was high single-digits. We probably expect it for the full year to be slightly below that, but we do expect it to rebound sort of after the first quarter here.

Jack Meehan: Got it. Thank you, Max.

Operator: Thank you. Our next question for today comes from Paul Knight of KeyBanc. Paul, your line is now open. Please go-ahead.

Paul Knight: Hi, Prahlad. Is the – are the advances in spatial biology and faster flow cytometry, is this accelerating do you think the market for BioLegend or closed systems kind of keeping it where it’s been? So kind of what’s your opinion on this dynamic going forward for BioLegend?

Prahlad Singh: I think spatial biology and proteomics and all of that is a growing area, Paul. But I think BioLegend and our Life Sciences research reagents business overall is a very strong portfolio that we are able to now deploy globally with the channels that we have access to that BioLegend didn’t have. So I think the growth trajectory over the next foreseeable future just is in terms of providing the commercial footprint, the infrastructure, the capabilities and competencies of overall PerkinElmer rather than one particular area of growth.

Paul Knight: And then last, regarding – with your better – I shouldn’t say better, bigger platform, I would assume your M&A pipeline looks pretty robust now going into the next couple of years.

Prahlad Singh: Yes. We will continue to be acquisitive as we have been, and we continue – we will continue to add growth trajectories to our portfolio given that we will have a robust balance sheet and we’ll have an even more robust balance sheet post the divestiture.

Paul Knight: Okay, thank you.

Operator: Thank you. Our next question comes from Max Masucci from Cowen. Max, your line is now open. Please go-ahead.

Max Masucci: Hi, thanks for taking the questions. First one, there is a GMA publication released last week. It was supporting broader use of rapid whole genome sequencing, for instance, – which today I believe is included in around six state Medicaid policies in the US. So it would be great to hear just generally your latest outlook for new reimbursement wins for newborn screening in the US this year, if that’s changed at all?

Prahlad Singh: Max, as you know very well, today, the way that newborn screening is done, that the states pay for it, right, it’s not reimbursed. It’s sort of – it’s not a private insurance or an insurance reimbursement play. And I think the way our view of this is that going forward, newborn screening will continue to be mandated by the states and by RUSP and by the newborn screening law. In terms of rapid genome sequencing, as you said, for newborns, that as you – is going to be an area of interest for us and for others. There are certain regions where we are playing a role in it. But I think it will continue to be more esoteric and specialized for the foreseeable future. The cost the turnaround and the speed and the scale and magnitude, by which newborn screening is done by the state labs today is unmatched and it will continue to be so.

Max Masucci: That’s great, very helpful color, final one from me. It’s nice to see the strong organic growth in the life sciences continuing operations, It would be great to hear some additional detail around the growth that you saw in the quarter for the legacy life sciences reagents business versus BioLegend and then sort of where we are in terms of realizing the operational synergies between BioLegend and the legacy Perkin reagent business?

Max Krakowiak: Yes, so maybe I’ll answer the first question on the growth rates, and then I’ll let Prahlad talk about the synergies here Max. So – again from an overall reagent standpoint in both the fourth quarter and the full year, we’ve performed at a low double-digit. I would say that was pretty consistent across all, our reagent portfolio, there’s not one shining star versus another. So I think we’re pleased overall with our reagents growth across everything from BioLegend, just bio some of our legacy reagent product lines, et-cetera. It was strong growth overall for everybody.

Prahlad Singh: Yes and just to add to that BioLegend has a really strong team and the leadership there has worked with PerkinElmer team in terms of identifying exploring and now executing on synergistic opportunities and it’s not just around commercial and operational, but also around technology and how do we continue to close the gap and the bridge between life sciences and diagnostics. So I think on all fronts, the teams are firing on all cylinders there, could not be more happy about that.

Max Masucci: Great, thanks for taking the questions.

Operator: Thank you. Our next question comes from Dan Leonard from Credit Suisse. Dan, your line is now open. Please go ahead.

Dan Leonard: Great, thank you. I appreciate you taking COVID revenue out of your forecast, but curious, have your views changed at all on the non-COVID pull-through opportunity from instruments placed during COVID?

Max Krakowiak: Yes, Dan it’s a great question. I would say, not really. And the reason why I say it look as we enter the sort of the fourth year of the pandemic. We now believe that customers have already largely transition sort of their underutilized former COVID capacity to other areas. So we think we’ve already started to kind of see this pull-through and it’s kind of already occurred in our base. And we also think that’s kind of why our applied genomics business has grown on a high-teen CAGR over the past three years, including high single-digits this year and then over 50% in 2021.

Dan Leonard: Understood and Max, my follow-up. I’m trying to better understand the EBIT margin bridge from the 32% plus in Q4 to the 30% guidance for 2023, both for RemainCo. I know there’s some COVID revenue in Q4, but not overly material. So what are the other drivers of the walk-down from that 32% to 30%? Thank you.

Max Krakowiak: Yes, look truthfully, Dan. I would say it is heavily the walk-down is predominantly COVID. The one thing I’d say about the COVID mix that we had in Q4 was a very favorable product mix. And so, I know historically, we’ve quoted that COVID incremental’s are sort of above our company gross margin. I think in the fourth quarter, it was an outsized margin mix related to our COVID products. I think once you normalize that for the fourth quarter, you’re a little bit closer to sort of a 30% operating margin exit rate for continuing ops. Which then if you then factor in next year and 100 basis points of margin improvement you know the math sort of works out, but it wasn’t significant pull out of COVID here from a margin perspective in the fourth quarter.

Dan Leonard: Okay, got it that makes sense. Thank you.

Operator: Thank you. Our next question comes from Matt Sykes of Goldman Sachs. Matt, your line is now open. Please go ahead.

Matt Sykes: Thanks, good morning. Thanks taking my question. Maybe just to clarify just following-up on Dan’s last question on margins, just if we focus on diagnostics you did 28.7% in the fourth quarter, and that was significantly lower COVID revenue than you’ve done in the past? So should we see that 28.7% just for diagnostics is being closer to the lower end, troughing as we kind of look out to 2023, understand that there is some China-related impact and other things like that, but just wanted to get a sense for that 28.7% where that is and sort of the range of margins you think diagnostics can do over the course of ’23?

Max Krakowiak: Yes, hey Matt. So the way I would think about the margin composition of our life sciences and diagnostics business in 2023 is our life sciences business should be above the company average diagnostics will be slightly below. And then you have about two to three points of headwind just from our corporate expenses. So I think that’s kind of how I would think about the market splits for 2023.

Matt Sykes: Got it, thank you. And then just, Max post the debt pay-downs. Going into ’24, how are you thinking about sort of a target net leverage, prior to any acquisitions like what’s your comfortable range to be in sort of on an ongoing basis?

Max Krakowiak: Yes, I think it’s a great question. So we are definitely committed to remaining investment-grade. And so, I think that’s what you’ll see sort of reflected in our comfort from a leverage perspective. That’s probably the best way to think about it Matt.

Matt Sykes: All right, thank you.

Operator: Thank you. Our next question comes from Rachel Vatnsdal from JPMorgan. Rachel, your line is now open. Please go ahead.

Rachel Vatnsdal: Great, thanks for taking the question. And so first off there’s been a lot of discussion on China as it relates to the diagnostic side business. But you also flagged some of those tailwinds related to the potential stimulus? So can you just give us some color on what’s assumed within your guidance for China stimulus tailwind? And then how do you think Perkin position to benefit from that. And then on timing, how long do you think that that stimulus benefit could play-out for us? Thanks.

Prahlad Singh: Yes, hey Rachel good morning. It’s on the stimulus. It’s been only a week since folks have come back from the spring festival. So right now, our assumption is that if any – if we expect the stimulus to see strong growth or propelling strong growth that will be upside to our current assumption. But, I would say that we have just heard quite a bit of discussion around it. I think – the actions on that will be something that we look forward to see in the rest of this quarter and the next quarter.

Rachel Vatnsdal: Helpful. And then maybe just a follow-up on your comments around and consistent guidance throughout the year on that non-COVID organic growth so can you just clarify that you mean on a stack basis. So for example, 1Q is 9% on a two-year stack versus 13% in the prior year. So that imply more like a 5% organic growth in 1Q or kind of how should we think about that on that commentary? Thanks.

Max Krakowiak: Yes, hey Rachel. I think that’s – exactly the right way to think about it, that sort of average 9% stack in Q1 would imply something in the mid-single-digit range for Q1.

Rachel Vatnsdal: Great. And then last quick one from me. Just your commentary so you guys grew high single-digits ex COVID during 4Q in Europe, which was encouraging. But can you just talk about how have conversations with customers evolved in the past few weeks? It sounds like things have gotten better just from the energy crisis, less on severe winter than anyone was expecting. So what’s your kind of outlook for Europe for the year as well? Thank you.

Max Krakowiak: Yes, I think for Europe. What we’ve implied is that the growth rate for 2023 should be a little bit less than. I think what we’re saying from a company average standpoint, something in the mid to-high single-digits is probably our sort of assumption right now for Europe.

Prahlad Singh: And qualitatively, Rachel, what you said is pretty much what’s playing out.

Rachel Vatnsdal: Great to hear, that’s it from me. Thank you guys.

Operator: Thank you. Our final question for today comes from Vijay Kumar from Evercore ISI. Vijay, your line is now open. Please go ahead. I’m sorry Vijay. We’re not receiving any audio. Your line is now open. Please go ahead. Sorry Vijay – you might be on mute, sorry Vijay, we’re not receiving any audio. My apologies we’re not receiving any audio from Vijay.

Prahlad Singh: We will touch base with him. Post this.

Max Krakowiak: Yes, we’ll follow-up with him. We can probably just wrap-up now. Thank you everyone for your time, your questions this morning and we look forward to speaking with everyone again next quarter. Take care.

Prahlad Singh: Thank you.

Operator: Thank you for joining today’s call. You may now disconnect your lines.