Bio-Rad Laboratories, Inc.

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 4/5

Bio-Rad Laboratories, Inc. is a global manufacturer and distributor of life science research and clinical diagnostic products, offering a diverse range of products and services across various sectors.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Bio-Rad Laboratories, Inc. operates through two primary segments: Life Science and Clinical Diagnostics. The Life Science segment provides products and systems used in biological research, drug discovery, and biopharmaceutical production. The Clinical Diagnostics segment develops, manufactures, and markets products and systems used to analyze body fluids, tissues, and other biological materials in medical laboratories.

  • Revenue Distribution: Bio-Rad’s revenue streams are fairly balanced between the two divisions. Approximately 59% of the total revenues come from the Life Science segment and around 41% from the Clinical Diagnostics segment. They have a global reach with about 55% of revenues from the U.S., and 45% from other international locations (Europe, Asia, and Latin America).

  • Industry Trends: The industries Bio-Rad operates in are heavily reliant on scientific innovation, regulatory approvals, and technological advancements. There is a growing demand for diagnostics, biotechnology research, and personalized medicine. Also, they are impacted by government regulations, healthcare reforms, and changes in reimbursement levels. The industry has also been affected by global supply chain issues, and currency fluctuations as well.

  • Margins: For their most recent quarter, gross profit was 53.6%, slightly decreased from 54.1% the previous year. However, their operating margins improved to 10.2% up from 3.9%, due to restructuring activities, which has reduced operating expenses. There is still a lot of price and margin compression in the industry, which will affect margins going forward.

  • Competitive Landscape: Bio-Rad competes against both large, well-established firms and smaller specialty players. The competition for Life Science tools is fierce, with companies like Thermo Fisher Scientific, Danaher, and Agilent among the rivals. The Clinical Diagnostics market is also highly competitive, dominated by players such as Roche, Abbott, and Siemens Healthcare. They must constantly innovate and provide competitive pricing to maintain their current edge.

  • What Makes Bio-Rad Different?
  • They have a diversified portfolio across the life sciences and clinical diagnostics, rather than only competing in a single vertical like some competitors.
  • They maintain a focus on higher-growth markets like diagnostics. They are also trying to leverage their broad product catalog and distribution channels to win market share. * They have built their businesses to help make scientific advances in fields of medicine and research, not just a commodity company.
  • They have a global presence, having offices, partners, and manufacturing capabilities around the globe.

Financial Analysis Bio-Rad’s financial performance is mixed. While revenue growth has been relatively low, restructuring efforts and cost reductions have improved the company’s profitability.

  • Recent Results:
    • For the nine months ending September 30, 2024, their net sales decreased by -0.5%, mainly due to currency.
    • Their operating profit increased from ($40) million in 2023 to $269 million in 2024 in nine months.
    • Their net income was $(105.1) million in 2023 vs $789 million for 2024 in nine months.
    • Basic EPS was (2.62) in 2023 vs $21.52 for 2024 in nine months.
    • Diluted EPS was (2.63) in 2023 vs $28.26 in 2024 in nine months.
  • Revenue: In the most recent quarter, they have experienced a slight revenue decline year over year due to currency headwinds. While sales in the Clinical Diagnostics segment were somewhat flat, Life Science sales decreased by 5.8%.
  • Profitability: Gross margins remain reasonably solid, but operating margin has significantly improved. There was a decrease in costs of sales from 49.7% to 46.4% and general and administrative expenses from 32.8% to 26.1%. In addition, Research and development expenses were down from 12% to 10%.
  • Liquidity and Debt: The debt load increased from 970 million at Dec 31, 2023, to 1.199 billion at September 30, 2024 due to debt financing. Free cash flow was negative for the period, and the company has taken out new term loans. Their current assets are also considerably larger than their current liabilities which gives the company a decent cash position.
  • Cash Flow: Cash from operations was down YoY from 1.7 billion to 1.1 billion in nine months and from 270 million to -48 million in three months periods. Cash from financing had increased by an amount from 1.184 to 1.440 billion in six months. Cash from investing were down from -89 to -14 million in three months, which is the result of decreasing purchases of short-term securities and investments.
  • Share Repurchases: The company has been repurchasing shares regularly which could increase share prices, as they are reducing the overall float.
  • Capital Structure: They currently have a debt-to-equity ratio of 42%.

Moat Analysis: Bio-Rad possesses several factors that contribute to a limited economic moat. Their most significant source of competitive advantage comes from its intangible assets in its brand name and customer relationships. But these sources of competitive advantage aren’t very strong.

  • Intangible Assets (Narrow Moat): Their brand name in biotechnology and diagnostics is somewhat meaningful, and brand loyalty can lead to repeat purchases. In addition, their relationships with large, institutional customers and government agencies can give the company an edge in obtaining contracts, and securing long-term sales. * The switching cost for a healthcare laboratory to move to a different supplier can be very high which provides Bio-Rad with some stickiness.

  • Lack of Switching Costs: A large portion of their revenues comes from commoditized products and services, such as biochemicals and antibodies. In these areas, it is tough to build a moat as they can be easily replicated. These commoditized businesses face intense price competition.
  • Competition: The industry has several large players and a variety of new entrants into the market. The highly competitive nature of the space makes it difficult for the companies to command a high level of value. Their smaller competitors may also be able to offer new and innovative products that could cause the moat to be very susceptible to erosion from competition.

Rating: 2.5 / 5. Bio-Rad has built a small moat using intangible assets and brand recognition in the niche market they are in, however they do face fierce competition across a wide variety of products and services.

Risks to the Moat

  • Technological disruption: The life science and diagnostics sectors are constantly evolving, and the rapid introduction of new technologies could make their existing products obsolete. This is a high-risk area where competitors can gain an edge by creating newer, better products, which could disrupt their market dominance.
  • Pricing Pressures: The increased pricing competition in the healthcare sector, along with government reforms, may have an adverse impact on their margins. Moreover, the increasing shift towards value-based health care means that there will be greater pressure to decrease prices on products.

Business Resilience:

  • Business Diversification: The company’s revenue is well diversified across two segments and different geographical locations. Their diversified customer base across many different sectors in biotech, pharmaceuticals, diagnostics, hospitals, food, and government, reduces dependence on any particular segment. They also provide products and services which are essential for both medical research and testing and also life-saving products. As a result, the products they provide tend to be essential and less volatile.
  • Recurrent Revenues: Much of the company’s business revolves around recurring sales of products and services, making the company’s revenue streams stable. While they might be dependent on customer budgets, the recurring revenues makes the business quite reliable to a degree.

Management Discussion of Recent Concerns and Controversies

  • Supply chain issues: BIO is seeing global supply chains still being affected from the pandemic. Also Russia/Ukraine war also caused supply issues along with increased energy costs. This can impact their costs and profitability.
  • However, management states they have been successful in mitigating the supply chain issues and they are well-positioned to work with their global suppliers.
  • Currency Headwinds: They have experienced significant negative currency impact from foreign currencies, with a -3.5% effect to revenue YoY. Management has been actively hedging and managing these effects.
  • These currency effects are not assumed to continue, and so they are expecting this effect to diminish in the coming periods.
  • Restructuring: They have had multiple restructurings in the past and they mention another restructuring will improve profitability.
    • They have made cuts in R&D and manufacturing facilities. These restructurings have helped boost operating margins, but they can also impact future profitability through missed opportunities.

Understandability: The business model is relatively easy to understand, with the company making money from selling reagents, equipment, testing supplies and services. The company has two major segments that provide these offerings, which are fairly simple to distinguish. In the end, most of the business drivers come down to price, cost, and growth. Rating: 3 / 5

Balance Sheet Health: BIO has moderate debt but decent cash holdings. Their liquidity is also high as their current assets are higher than their current liabilities. All of this shows the business is in a financially healthy position. Rating: 4 / 5