PerkinElmer Inc

LSE:0KHE

Earnings Call Transcript 2023-Q3

[Operator]

Hello, and welcome to the Q3 2023 Revvity Earnings Conference Call. My name is Alex. I'll be coordinating the call today.

[Operator Instructions]

I'll now hand it over to your host, Steve Willoughby, Senior Vice President, Investor Relations. Please go ahead.

[Stephen Willoughby, executive]

Thank you, operator. Good morning, everyone, and welcome to Revvity's Third Quarter 2023 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 would like to remind everyone of the safe harbor statements that we have 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 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 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.

I'll now turn it over to our President and Chief Executive Officer, Prahlad Singh. Prahlad?

[Prahlad Singh, executive]

Thank you, Steve, and good morning, everyone. Revvity has been built to help accelerate the advancement of human health through science while also being able to execute at a high level through various macroeconomic conditions. This unique and differentiated profile is intended to help make a profound impact on the future of health care and to insulate our performance during periods of macro pressure while still allowing us to capitalize when industry tailwinds are at our back.

We and others are in the midst of one of those periods of macroeconomic and industry pressure. This is evident with the increased headwinds that we began to experience during the second quarter which intensified during the most recent quarter. While we attempted to build some cushion into our assumptions, should industry dynamics worsen, the level of increased challenges we face from our pharma and biotech customers, particularly in September, was more than we anticipated. As a result, while our total company organic revenue grew by 1% in the quarter, we finished well below our mid-single-digit assumption from 90 days ago.

Our lighter-than-expected revenue was driven by softness that occurred fairly late in the quarter. Given this last minute pressure, I'm very proud of our continued strong margin and earnings' performance as the incremental headwinds in September left us very little time to try to properly manage our expenses. Our adjusted EPS in the quarter of $1.18 was still in line with the low end of our implied guidance despite our revenues coming in meaningfully below our expectations. The downturn in demand from our pharma and biotech customers led our Life Sciences business declining in the low single digits organically in the quarter, which was below our low single-digit growth expectation.

The softer spending from pharma and biotech customers also put pressure on our applied genomics and genomic lab businesses within our Diagnostics segment. While our sizable immunodiagnostics business performed extremely well and grew in the high teens overall, including high teens growth in China, the pressure from softer pharma spending impacting parts of this segment resulted in our overall Diagnostics business growing 4% organically year-over-year in the quarter, excluding COVID slightly below our mid- to high single-digit expectations.

While Max will touch on this in more detail, we anticipate these end-market headwinds to continue through the fourth quarter, resulting in our non-COVID organic growth expected to be down in the mid-single digits year-over-year, which would bring our full year non-COVID organic growth to approximately 2%.

As to when this industry downturn might dissipate, we do not have a crystal ball, but we remain confident as ever in the future potential of our industry and for Revvity itself. As of right now, though, we are anticipating the pharma-biotech headwinds persist into at least the first half of '24.

There is currently a wide range of potential outcomes for next year, which is why we want to take the next few months to further evaluate underlying trends. This range of potential outcomes infuse the possibility that organic growth could be in a similar range to what we are now expecting for this year, with the second half of the year, likely being stronger than the first half. Given this current outlook, we will look to take additional cost actions heading into next year beyond the roughly $80 million of expenses we will have cut in 2023 since some favorable items from this year are not expected to repeat at the same level in 2024.

With the heightened level of industry demand over the last few years now being followed by a subsequent correction, we are also currently analyzing our previously provided 2024 through 2026 midterm outlook to ensure it remains reflective of what we expect the business to be able to produce over that time frame. We would expect this analysis to be completed by the end of this calendar year. While the future of our end markets remain bright, and we expect global investment levels into science to rebound, we are certainly seeing more end-market pressure than we had previously anticipated in some of our markets.

As we've highlighted in the past, while we are likely more insulated from the macro and industry pressures than many of our peers, we are not immune to the current softer spending environment from pharma and biotech customers.

Our ability to still post positive organic growth in the quarter, despite these headwinds will likely stand out as earnings' season continue to progress as we prudently manage those items that are fully within our control, particularly as it relates to our margins. While we persevered through this current market, I believe we are making good progress on coming together as Revvity by focusing on our operational, commercial and R&D priorities as a new company. This focus and progress sets us up very well to prosper in the future once this period is over.

A few recent examples of this were the launch of 2 new in vivo imaging platforms, the IVIS Spectrum 2 and the Quantum GX3. These launches represent a nearly complete refresh of our market-leading in vivo imaging portfolio. The Quantum GX3, for example, with its market-leading resolution allows us to now have a competitive solution for the bone market which is a field we have not previously meaningfully participated in.

It was also great to see our initial set of Pin-point base editing reagents -- following our recent first license of our technology to a major pharma customer earlier this year. These new reagents provide customers for the first time ready-to-use consumables to allow them to begin exploring the scientific potential of our novel base editing technology and its unique ability to perform complex and multi-gene editing.

Our ability to now offer these 2 customers is another proof point for how we are leading with science and working to democratize base editing technology for all. You may have also seen recently that we've entered into 2 new important commercial collaborations.

First, we announced a collaboration with Element Biosciences to use their cutting-edge AVITI sequencer system, combined with our significant portfolio of sample prep instruments and consumables to jointly offer unique complete NGS workflows. We expect this collaboration to initially focus on continuing to expand our NGS presence in newborn screening.

Secondly, we also recently announced an agreement with Danaher SCIEX business to begin providing their mass specs in select markets as a new option to be used with our newer base, newborn screening reagents in our customers' workflows. While expanding the breadth of instruments we offer our customers in our newborn screening business, we are providing them a greater range of options to choose from that are fully supported by both companies. Both these recent collaborations are great examples of how we seek to provide our customers the most cutting-edge and efficient solutions even if sometimes they may not fully reside within the foul balls of Revvity itself.

Our recently released 2023 ESG report also highlights how we are having a meaningful impact on society. This year's report shows how we have dramatically expanded our environmental data collection efforts across the new company to provide us with an even more solid footing to build on in the years to come.

Based on stakeholder feedback from our last materiality assessment, the report also highlights our continued focus on top employee issues and how we have introduced many new company policies targeting emerging topics such as bioethics, animal welfare and sustainable procurement amongst others.

Finally, we have provided a new external ESG goals that we plan to pursue going forward. These include a 50% reduction in our Scope 1 and 2 emissions over the next decade, maintaining greater than 40% of senior leadership roles held by females and achieving a 75% or greater employee satisfaction rate.

In closing, before handing it to Max, our industry is currently going through one of its most difficult periods in the last 2 decades. While this period is not enjoyable for anyone, I'm thankful for the transformation that has occurred at the company over the last 3 years, including our successful divestiture back in March.

As I mentioned, we are not immune to the current pressures. But I think you will see that Revvity has been built to perform better than most to macroeconomic environments, including tough ones like we are now in. We are focused on maintaining our strong relative margin profile and are making good progress on our operational, commercial and R&D initiatives. We also have a strong balance sheet, which we believe will likely become an even greater asset to us in the coming quarters. I'm excited about our future and know we will come out of this period an even stronger and more efficient company than we are already today.

With that, I'll now turn the call over to Max.

[Maxwell Krakowiak, executive]

Thanks, Prahlad, and good morning, everyone. The company has gone through a significant amount of change over the past year and has continued to execute at a high level as our employees have risen to the occasion to overcome the dynamic environment we've been facing so far this year. We are now in the midst of our next challenge as we saw a noticeable step-down in demand from our pharma and biotech customers as we progress through the quarter, especially in September. Although we expect these headwinds to continue, we remain focused on the items that are within our control and remain excited about the opportunities that lie ahead for our new company.

As Prahlad has mentioned, we continue to make progress on our strategic initiatives across R&D, operations and sales and marketing, while continuing to rightsize the business. In addition to the previously discussed $60 million of cost actions we have taken so far this year, given the softer topline trends we experienced as the third quarter progressed, we have identified another $20 million of further cost reductions that will impact the remainder of this year.

Since we currently expect the softer pharma biotech spending to be in place for at least a few more quarters, we are also working to take additional actions to properly align our cost structure as we head into next year, to ensure we appropriately balance strategic investments while preserving our elevated margin profile.

Now moving on to our third quarter results. The company generated 1% non-COVID organic growth overall in the quarter which resulted in total revenue of $671 million, which was down 6% due to the drop in COVID-related revenues compared to a year ago. Of the 400 basis points lower-than-anticipated organic growth we experienced in the quarter versus the midpoint of our guidance, approximately 300 basis points of the shortfall was pressure related to our instrument and software businesses while 100 basis points was from softer reagent and consumable demand, particularly in September. APEC added 1% to our third quarter revenue, and we again had no incremental contribution from acquisitions.

As it relates to our P&L, we generated 27.5% adjusted operating margins in the quarter overall, which were largely in line with our 28% expectation despite the late fall off of revenue in the quarter. Our gross margins of 61% were down from last quarter due to a combination of less volume leverage and an unfavorable mix shift. We incurred a favorable pricing impact of approximately 150 basis points in the quarter, which is helping to offset the continued inflation we are seeing across parts of the business. For the full year, we now expect at least 125 basis points of net pricing realization for the company overall.

Looking below the line, we had net interest expense of $7 million, which was again favorable by a couple of million compared to our expectations. This favorability was primarily driven by better-than-expected interest income as we did a better-than-anticipated job of repatriating our cash so far this year. Our adjusted tax rate was 18% in the quarter, which was favorable to our expectations.

We also continued to repurchase shares in the quarter buying back $111 million in total, bringing our year-to-date repurchase activity to $384 million. We averaged 124.2 million shares in the quarter and exited the quarter with 123.5 million shares outstanding.

Moving beyond the P&L, we generated adjusted free cash flow of $8 million in the quarter which on a year-over-year basis continue to be pressured from the drop in COVID revenues and roughly $21 million of outflows associated with onetime divestiture-related costs and rebranding activities. We expect some of these outflows to reverse over the coming months and positively impact our investing cash flow when they come back to us.

On a year-to-date basis, our adjusted cash flow has been $2 million, which includes a headwind of nearly $200 million from onetime divestiture and rebranding-related activities. As for capital deployment, we continue to remain active in the quarter. As mentioned, we bought back another $111 million of stock, and we paid off the remaining $467 million of our 2023 bond which matured in mid-September.

We have significant cash and equivalents on our balance sheet and are well positioned to pay off the $800 million bond we have coming due next September. With this activity, we finished the quarter with a net debt to adjusted EBITDA leverage ratio of 2.8x.

I will now provide some commentary on our third quarter business trends, which is also included in the quarterly slide presentation on our Investor Relations website.

The 1% non-COVID organic growth in the quarter was comprised of a 3% decline in our Life Sciences segment and 4% growth in Diagnostics. Geographically, we declined in the low single digits in the Americas, grew low single digits in Europe and grew mid-single digits in Asia with China growing in the high single digits overall. Within China, we saw our Diagnostics segment grow in the low double digits, driven by high-teens growth in immunodiagnostics. This was offset by low single-digit growth in Life Sciences.

Looking ahead to the fourth quarter, we continue to expect our immunodiagnostics business to grow well in China, but likely more at a low double-digit rate as comps continue to strengthen. From a segment perspective, our Life Sciences business generated total adjusted revenue of $308 million in the quarter. This was down 2% on a reported basis and 3% on an organic basis. From a customer perspective, sales in the pharma biotech declined in the high single digits organically, which was offset by low double-digit growth from academic and government customers. Our Life Sciences instrument revenue was down high single digits while our reagent licensing and specialty pharma services revenue declined low single digits year-over-year.

The step-down in reagent growth was driven by as anticipated lower licensing and pharma services revenue year-over-year and some pressure from the pharma biotech customer weakness. While our reagent sales has been largely immune from some of the softer trends we started to see in the first half of the year, as we progress through the third quarter, we did begin to see some pullback on consumable spending from these customers as well.

Our Revvity signal software business grew in the low double digits as it benefited from the timing of renewals year-over-year. We continue to expect this business to be down double digits in the fourth quarter as we assume minimal new contract sales, and we have fewer multiyear contract renewals this quarter.

At our Diagnostics segment, we generated $363 million of total adjusted revenue in the quarter which was down 9% on a reported basis and 10% on an organic basis. On a non-COVID basis, the segment grew 4% versus a year ago. Our immunodiagnostics business grew in the high teens organically, excluding COVID. It is great to see this business in China continue to normalize and I would again reiterate how important and impressive it is that this significant franchise continues to grow at a very high rate outside of China as well. We expect this business, which represents more than 25% of our total company revenue to continue to grow in the double digits globally in the years to come.

In our reproductive health business, overall organic revenue declined in the mid-single digits year-over-year. We experienced mid-single-digit positive growth in our newborn business which was offset by weaker trends in prenatal and continued known headwinds in our Revvity omics, genomics lab business, which should subside by the end of this year. Our applied genomics business incurred increased pressure from the slowdown in pharma biotech spending and declined organically in the low double digits when excluding COVID across both instruments and consumables. While Prahlad has already provided some high-level commentary as it pertains to our guidance expectations, I thought I would provide some additional color.

End-market demand has been a very fluid and somewhat volatile issue that continues throughout this year. For the fourth quarter, we expect our non-COVID organic growth to decline in the mid-single digits year-over-year as we expect our Life Sciences business to decline in the low double digits and our Diagnostics business to decline in the low single digits. For your modeling purposes, we would point you to the lower end of our total company organic growth range and highlight that we expect our operating margins to be similar to this past quarter.

Net interest and other expense is expected to be approximately $50 million as we will have less interest income going forward after paying off the remainder of our $500 million bond in mid-September, resulting in less cash available to invest. With a 16% tax rate, we expect adjusted EPS in the fourth quarter of $1.14 to $1.18. When combined with our year-to-date performance, this fourth quarter outlook equates to full year 2023 non-COVID organic growth of approximately 2%. We expect FX to be a 1% headwind and M&A to have no impact on the full year. This results in our 2023 total revenue now expected to be in the range of $2.72 billion to $2.74 billion. With the lower expected volumes, we now expect 28% adjusted operating margins this year, down from our 29% prior outlook.

Below the operating line, we do have some favorability that we expect to drive our adjusted net interest and other expense to be approximately $57 million this year in total, down slightly from our prior outlook. We experienced some favorability in the third quarter, which we expect to continue into the fourth. So we are now looking for a full year adjusted tax rate of 20%, down from our prior 21% outlook.

Given our additional share repurchase in the quarter, we now expect the full year average fully diluted share count of a little under 125 million shares, down slightly from our prior assumption. This guidance now reflects our expected adjusted EPS to be in the range of $4.53 to $4.57 for the full year overall and is detailed on the second last page of our earnings presentation.

While Prahlad already provided some high-level thoughts on 2024, the only 2 things I would add are that while there are a wide range of potential outcomes for our organic growth next year, if growth did end up looking similar to what we now expect for this year, we would expect to have nominal margin expansion as the further cost actions we plan to take will be partially offset by general inflation and some costs returning.

Secondly, we'd expect our net interest and other expense to be up approximately 40% next year as we will have significantly less interest income after paying off the remainder of the $500 million bond a month ago and the $800 million bond this upcoming September. While we are currently going through a challenging market environment that may extend for at least a few more quarters, we are confident in our ability to continue rising to the occasion as we have done over the past couple of years.

We remain focused on the items in our control such as our significant cost control actions and executing on our operational initiatives. These actions will allow us to be well positioned to capitalize on the exciting future opportunities in front of us as we continue to shape Revvity to realize its full potential.

With that, operator, we would now like to open up the call for questions.

[Operator]

[Operator Instructions]

Our first question for today comes from Patrick Donnelly of Citi.

[Patrick Donnelly, analyst]

Prahlad, maybe one for you, just in terms of the cadence of the quarter, it sounds like you flagged September as being quite a bit worse. Can you just talk about, I guess, what you saw as is kind of that exit rate what you've seen so far in October? And maybe specifically on reagents, it seems like those softened maybe more than others, just what you saw from customers and what you're hearing on the go-forward on that piece.

[Prahlad Singh, executive]

Sure, Patrick. As we entered September, what we realized is that the pressure on the reagent side was more than we anticipated. And some of it was what we realized is the site consolidations and the closure of some site from big pharma, which obviously impacted the reagents numbers, and we saw that impact.

Second one was the CRO side in China, that continue to see more pressure than anticipated as we came closer towards the end of the quarter. Also, if you keep in mind, if our licensing comp revenue shows up in our reagents number. So if you were to -- ex licensing, our revenue for the reagents would have been flat.

[Patrick Donnelly, analyst]

Okay. That's helpful. And then maybe one, just as we think about kind of the end of this year into early next, Prahlad, it was helpful here, you kind of talk about the first half of next year, maybe some of these headwinds lingering. It sounds like 4Q is maybe down mid-single non-COVID and Max, kind of framing up maybe as next year does look similar to this year, you're kind of in that low single range.

Is it the right way to think about the first half as we model maybe thinking about something in that down mid-single range and then ramping and is it just going to be easier comps in the second half? Is there any visibility into a level of improvement? Or for now, given, as you said, the range of outcomes, is it just uncertainty?

[Prahlad Singh, executive]

Yes, I think it's a fair question. Patrick, I think what we want to do is, as we said in our prepared remarks, we want to take the time to see how the macro evolves over the next couple of months and provide a more complete update towards the year-end. I think as we look at the line and as we and our peers have pointed out, as we look into the 4Q and especially on the instrument side of the business, generally, if you recall, 4Q generally tends to have a budget flush. That budget flush, we are very comfortable saying that, that's not -- there is no visibility into that.

But more importantly, I think as we look also into the first half of the year, we are not assuming a ramp-up in the first half. But in the second half, as you pointed out, obviously, because a lower comp, but also as things start coming back, our expectation is that it definitely would be better than as we would see in the first half. Max, anything I'm missing?

[Maxwell Krakowiak, executive]

No, I'm done, Prahlad.

[Operator]

Our next question comes from Vijay Kumar of Evercore.

[Vijay Kumar, analyst]

Prahlad, maybe just one on your September commentary on the guidance. So the guidance changed by $90 million. Is that all pharma? What is it assuming for China that $90 million change in guidance in that implied minus 5% for Q4? Is that the trend you guys saw in September and that's what the guidance is as you look into Q4?

[Prahlad Singh, executive]

I think majority of that, obviously, is on the Life Sciences side of the business, Vijay. Our assumption around instruments is that they would be down double digits.

Our assumption around reagents is that it would be flat versus 3Q. I think, also to keep in mind, on the Diagnostics side, applied genomics is getting impacted because it's the overlap of customers that we see on pharma biotech. Our IDX business in China and everywhere else, while it continues to grow, it's got a much tougher comp in 4Q versus what we had in 3Q. So it's probably a combination of all the 3 things that I pointed out, which is what is leading us to what we've guided in 4Q.

[Vijay Kumar, analyst]

Understood. Max, one for you. The -- I just want to understand your '24 comments here. But did you say -- did I hear you correctly when you said no operating leverage if revenue outlook was similar to fiscal '23 on a base organic basis? And I think you said net interest and other of 40%. Can you just put a dollar number, please? What's the right base when you say up 40%?

[Maxwell Krakowiak, executive]

Yes. So a couple of points there, Vijay. One, I would say for 2024, right, I think we were saying there's a wide range of potential outcomes for next year, and we're going to take the next couple of months to further refine it. In the event that organic growth did look similar to this year, you are correct, we said that there will be nominal margin expansion, right, very low single-digit growth year-over-year. In terms of your interest and other question, the 40% growth is off a $57 million number this year, which we provided in our prepared remarks. And the reason for the increase year-over-year is because of the lower cash balance we have on average in '24. As we mentioned, we paid off the $500 million note in Q3 of this year, and we've got another $800 million that we have to pay off in September of next year.

[Operator]

Our next question comes from Derik De Bruin of Bank of America.

[Derik De Bruin, analyst]

Just to put a point on it on the '24 outlook. I mean, can you hold EPS flat or with the cost cutting? Or should we think about it as potentially being down year-over-year?

[Maxwell Krakowiak, executive]

Yes. I think as we mentioned, Derik, right, we are not providing a guidance here for 2024. If we said there's a potential range of outcomes, I think in the event that organic growth did look similar, we've given you enough pieces to go ahead and model down to the EPS. But again, we're going to take the next couple of months to really refine what the organic growth assumption is, which will have a big impact on what our ultimate EPS is for next year.

[Derik De Bruin, analyst]

Got it. And just a little bit more color on what's going on at BioLegend and Horizon and just talk about sort of like some of the trends in pharma. Are they just -- I mean, are they hesitating on spending? Are they doing it? Just any more incremental color you can sort of like give us on what's going on with that end market.

[Prahlad Singh, executive]

Sure, Derik. Let me talk about BioLegend. BioLegend did better than our overall reagents business that we talked about and they did quite good. I think, obviously, it also has seen some softening. And primarily, that is what it is seeing, especially as we look at China. We've given the CRO business depression in that marketplace. I think on the Horizon side, we get a lot of service business that comes there from pharma biotech, which has started -- which has seen softening.

So on the Horizon side, on the reagent side, while it's okay, but the service revenue that comes from Horizon because of the cell line development work, et cetera, that they do, that has seen softening. So any spending coming out of pharma biotech has seen softening, which is the general trend that we have observed.

[Derik De Bruin, analyst]

Got it. And services in general being more so than just than the consumables?

[Prahlad Singh, executive]

Yes, absolutely.

[Operator]

Our next question comes from Andrew Cooper of Raymond James.

[Andrew Cooper, analyst]

Maybe first, just on some of the cost actions you called out, I think it was $60 million up to $80 million now with the $20 million coming. Just can you clarify, are those annualized numbers or for the year? And then how much should we think about that being a tailwind as we think about moving into 2024, some of what you pulled out this year that continues to benefit even if you don't necessarily pull out incremental dollars?

[Maxwell Krakowiak, executive]

Yes, Andrew. So the way I would think about the cost of the $80 million number is the reduction that we have in our P&L and financials for this year. As you think about it for next year, we mentioned a little bit in the prepared remarks, we will have some costs that were -- a tailwind for us this year that are going to come back into our financials for next year, which is kind of getting offset by some of the annualization of the cost actions we have taken this year. And so that is kind of balance each other out. And then again, as I mentioned in one of the previous Q&A, it's going to ultimately depend on what our organic growth looks like for next year as well.

[Andrew Cooper, analyst]

Okay. Helpful. And then, maybe just can you give us a sense for a little bit of the sizing of how you might break up the end market within the Diagnostics business really with kind of the intent of how much of that business is more exposed to pharma biotech versus what is sort of true clinical and probably not impacted by the same end-market headwinds that we talked about for pharma biotech?

[Maxwell Krakowiak, executive]

Yes, it's a great question. And so I think you've heard about us talk about the Diagnostics business being impacted by pharma biotech and really 2 of our business signs. The first is the applied genomics business, which as a reminder, is roughly $250 million of revenue per year. About 60% of that business goes into the pharma biotech customer base. And then you've got the second piece is our Revvity omics business, which is -- last year, that was roughly an $80 million business for us. I would say more than half of that business is related to the pharma biotech customers as well.

[Operator]

Our next question comes from Eve Burstein of Bernstein Research.

[Eve Burstein, analyst]

So as part of your portfolio transformation, you've talked a lot about how the new portfolio should allow you to grow well above market average.

I know that you're going to revisit your midterm outlook, and we'll wait to hear specific numbers on '24 and longer term from you. But 2 questions. One is just do you expect to be more resilient than your peers on average next year? And do you expect to grow significantly above market growth next year, whatever that average is?

[Prahlad Singh, executive]

Yes. I think there are 2 ways to look at it, right? We definitely feel very confident that our portfolio continues to remain differentiated. As we -- even in this tough market environment, let me point out to a couple of things that we feel are bright spots. Our immunodiagnostics business globally grew in the high teens, especially in China, it has continued to grow in the high teens and will grow 10%. China performance, we had low double digits growth there. Over the year -- for the full year, we will expect mid-single digits growth there. So I think if you look at China, if you look at our immunodiagnostics business, that continues to be resilient.

Our neonatal business despite pressure from both rate continues to do very well. Even on the Life Sciences side, despite the depression that we saw in 3Q, our reagents business will still grow mid-single digits for the year even when you include the licensing comp headwinds that we have for this year. And going forward also, we expect our reagents business to be resilient and continue to do very well.

At the end of the day, what it comes down to is the pressure from pharma biotech on CapEx spending, which is on the Life Sciences instrument side and also on some on the software renewal side that we had. So that pressure, we expect, as I pointed out, to sort of elongate into the first half of next year. But from a portfolio perspective, we feel very confident that we will be differentiated.

[Eve Burstein, analyst]

Got it. And then maybe just one follow-up. You talked about immunodiagnostics in China being quite strong and a high point for your portfolio. Some of your peers have also had positive things to say about the market environment for Diagnostics in China, volumes being up, being spared by anticorruption crackdown. Has there been any signs of weakness or of the crackdown scope expanding to include Diagnostics or from where you're standing today, does it just look like smooth sailing?

[Prahlad Singh, executive]

From a business perspective, we have seen no to very minimal impact in our business. If anything, it's just more delays versus any cancellation. I think in the longer term, this will probably benefit multinationals more given the anticorruption initiative that the government has going on.

[Operator]

Our next question comes from Jack Meehan of Nephron Research.

[Jack Meehan, analyst]

Wanted to ask the Diagnostics business, Max, I think I heard down low single digit forecast for the fourth quarter. I just want to confirm that's on a non-COVID basis. And then if you compare it versus the third quarter results, it's a bit of a moderation. Just talk about what's changing kind of in the year-end?

[Maxwell Krakowiak, executive]

Yes, sure. Jack, so actually, for the fourth quarter guidance for our Diagnostics business will be roughly flat for the fourth quarter. And so when you then look at it versus the third quarter, really the drop versus the mid-single digits growth in the third quarter was driven by the fact that our applied genomics business, as I previously mentioned, continues to face increased headwinds from the pharma biotech. That is really the only thing that I would say is changing dramatically from the third quarter to the fourth quarter.

The other 2 pieces of it, albeit they're smaller is, one, we have a heavier CapEx instrumentation comp in our reproductive health business in the fourth quarter. And the second is immunodiagnostics China does have a tougher comp in the fourth quarter. If you remember, third quarter of last year was down high teens, and the fourth quarter was down mid-single digits. So I would say, those are the kind of 3 key pieces quarter-over-quarter.

[Jack Meehan, analyst]

Great. Okay. And then sticking on Diagnostics in China, getting a lot of questions about the volume-based procurement initiatives in the region. Prahlad or Max, just curious how you kind of frame any exposure there for your Diagnostics business and kind of thoughts on what that can mean for pricing over the coming years?

[Prahlad Singh, executive]

Yes. And Jack, we've talked about this earlier, right? I think our NPIs are differentiated enough. I mean I think if you -- just to frame it, roughly high single to probably 10% of our DX business will see some impact from value-based pricing. And over the years, we've continued to see mid-single-digit price rate declines in China on our portfolio.

However, we've continued to compensate for that with newer NPIs and increased volume that we have seen, and we expect to continue to see that more than offset the price decline and result in double digits immunodiagnostics growth for our portfolio there into the future. As we assume sort of flat growth for reproductive health and applied genomics in China, DX are in mid-single digits overall for the whole year though. I think the future potential impact from VBP price expanding, we will see it decline each year, given the mid-single-digit gradual price decline that we currently continue to see in China.

[Operator]

Our next question comes from Matt Sykes of Goldman Sachs.

[Matthew Sykes, analyst]

Maybe just to start on the academic government end market. You showed pretty solid growth in the quarter. How are you thinking about that end market in the context of some of the budgets being set over time, whether it's NIH or others in terms of the stability of that end market as we move into '24?

[Maxwell Krakowiak, executive]

So as we look at our academic and government customer base, as a reminder, that's about 25% of our Life Sciences portfolio. And in the quarter, it did grow low double digits. The other point I would call out is that instruments makes up about 50% of that, while reagents makes up the other 50%. Our reagents business has continued to kind of grow at a mid-teens level year-to-date in the academic and government portfolio. We expect that to continue really maybe the, I would say, unique dynamic this year is really more around the instrument growth in academic and government.

If you remember, they had much easier comps in 2022, they were coming off of. So instruments are posting, I would say, a healthier growth rate than what we would probably suspect long term. But again, you're only talking about half of that portfolio is really instrumentation.

[Matthew Sykes, analyst]

Got it. And then just more of a high-level question. As you saw some of that demand from pharma biotech drop off in September, could you maybe characterize the nature of that slowing in spend, just given the fact that a lot of these large pharma companies have big budget decisions to make and turning that around and respending sometimes takes a lot of time. I'm just wondering, do you see these sort of the slowdown in spending is sort of a transitory in terms of '23 budgets? Or do you think there's some bigger reprioritizations and spending and budget decisions moving forward into '24?

[Prahlad Singh, executive]

Matt, I think from my perspective and just looking at the customer buying behavior, it's not that. As we entered September, we saw more of a pausing or a cancellation rather than saying that this is going to be continuous. I think just given the IRA Act, customers are more than anything just ensuring that they calibrate and get their costs in line now.

So I think it's just more planning and ensuring that their cost structure is ready to address the IRA Act as it comes into play into 2025. So from our perspective, it is transitory and it will be there for a few quarters.

[Operator]

Our next question comes from Josh Waldman of Cleveland Research.

[Joshua Waldman, analyst]

First, Max, can you help us think about the right earnings base for '24? I mean, you have $80 million of cost reductions this year. I guess, how much of that is discretionary comp that will be coming back into the business? And then it sounds like you have higher interest expense, maybe tax rate and share count or tailwinds. Just curious if you think the $455 million guide for this year is the right way to think about the base entering next year? Or is it below that?

[Maxwell Krakowiak, executive]

Look, I appreciate the question. I think as I mentioned before, in 2024, we are not giving guidance on EPS or anything of that nature or getting specific. We're going to take the next couple of months to really refine our organic growth outlook of what we anticipate for next year. I think we were trying to get ahead in saying in one of the possible scenarios that it did look similar to this year, we wanted to kind of get out front in terms of some of the margin commentary and what that would look like. But again, we're going to take the next couple of months to really refine what we expect our organic growth to be for 2024.

[Prahlad Singh, executive]

And again, I'll just add to this, Josh, because I know, obviously, people are curious on 2024. We really need to take the time to ensure that we understand what customer buying behavior looks like and how it evolves -- the macro evolves over the next few months. But I think more importantly, as Max said, we are taking the right measures. We are taking action to protect our top quartile margin profile despite revenue growth weakness and that includes the cost-cutting measures that we've already taken, and we will continue to take to protect and even expand our margins.

[Joshua Waldman, analyst]

Got it. Okay. And then, Prahlad, I wondered if you could provide more context on how the quarter progressed in the Life Science business. You obviously mentioned tighter reagents, but curious how instrument demand progressed. And then I guess, how confident are you that you fully capture the potential downside? I mean, I think Max said, the Life Science business is expected to be down double digits in the fourth quarter. It's a wide range, I guess, any more context you can provide on kind of the right landing point for the Life Science business.

[Prahlad Singh, executive]

Look, I mean, I think on the Life Sciences instruments side, we've assumed double-digit decline in the fourth quarter, and we've kept our reagents flat versus our third quarter.

And essentially, the way I would say it is that we pattern that based on the buying behavior of our customer towards the end of the quarter, which was -- as we said, and both Max and I pointed out, it was more of a steeper decline in the second half of the quarter.

[Maxwell Krakowiak, executive]

Yes. The one other piece I would add, Josh, is that normally, we do see sort of a sequential dollar step-up in the fourth quarter from our Life Sciences instrumentation. Usually, that's about a 20% volume step-up quarter-over-quarter, we have taken that now fully out of our guidance for the fourth quarter. I think the last time we spoke in our third -- our second quarter earnings call, we had reduced it, but we had not fully eliminated the step-up between the third and the fourth quarter, and now we have fully taken out any sequential step-up on instrumentation.

[Operator]

Our next question comes from Dan Brennan of TD Cowen.

[Daniel Brennan, analyst]

Just maybe on the immunodiagnostics business since that's been such a driver here. You guys sounded very positive on the continuation. Can you just give us a little color on kind of what you're seeing there globally and the confidence that, that kind of double-digit growth continues here in '24?

[Prahlad Singh, executive]

I mean, again, that has been a bright spot, as you pointed out, and we continue to expect that to do well. Look, as we've said about EUROIMMUN and Max pointed out today, you should assume that our EUROIMMUN business is going to continue to grow in the double digits. And I mean, there are 2, 3 reasons, our growth drivers that we've pointed out, one is obviously the awareness of autoimmune disease and the continued growth of that, especially as we see that in emerging markets, launch of new NPIs and more specifically in the United States, but also in other markets, they have come out with a few new assays and instruments that are starting to see traction and they have a very healthy pipeline, more importantly, as we look going forward, which is what gives us the confidence in the growth of that business.

[Daniel Brennan, analyst]

Great. And then maybe just on the free cash flow. You talked about some of the one-off headwinds here with the divestiture and also some of the rebranding. How should we be thinking about today if we think about conversion into '24 at this point on free cash flow?

[Maxwell Krakowiak, executive]

Yes, Dan. Yes. So I think starting with the free cash flow number, Brennan, we mentioned a little bit in the prepared remarks, if you were to sort of normalize for some of these AES outflows, et cetera, our year-to-date conversion is roughly about 160% on a free cash flow conversion basis.

We would expect to finish this year above 100% once you adjust for those items. And I think we do feel confident that our new portfolio as Revvity will enable us to do better cash flow performance than we have done historically. And so we remain encouraged that we're going to continue that strong performance into 2024.

[Operator]

Our next question comes from Luke Sergott of Barclays.

[Luke Sergott, analyst]

I have 2 quick cleanups and then I have better question on the quarter. So can you -- you talked earlier about the instruments being down double digits in the quarter. Is that year-over-year or quarter-over-quarter? And then can you update us what EUROIMMUN did?

[Maxwell Krakowiak, executive]

So from an instrument standpoint, that is a year-over-year stat. When you look at it again, quarter-over-quarter, as I think I just mentioned, it's relatively flat volumes from a sequential standpoint versus the third quarter for the instrumentation. In terms of EUROIMMUN, I think that we have -- we don't necessarily disclose individual business lines, but our overall immunodiagnostics business, as we mentioned, grew in the high teens in the third quarter and EUROIMMUN is the, by far, the largest piece of that business.

[Luke Sergott, analyst]

Got you. And then, so just trying to figure out here how the quarter sounded like it could continue to get worse. And so is it safe to assume like the step-down in September was something like 25%, 30%? And then does your current guide contemplate the demand environment getting worse? Or is it just kind of steady state at these levels that you exited September in?

[Maxwell Krakowiak, executive]

Yes. So I think it depends on what piece of the portfolio you're really talking about in terms of the September performance. I would say just though overall for our guidance and the way that we thought about the fourth quarter is contemplating those exit rates we saw in September and October, and that is what we have sort of baked into our guidance here for the fourth.

[Operator]

Our next question comes from Dan Leonard of UBS.

[Daniel Leonard, analyst]

I just want to make sure I understand all the moving pieces in China. I think you said the expectation is mid-single digit growth for the year. How would you break that down between Life Sciences and Diagnostics?

[Maxwell Krakowiak, executive]

Yes. So for China, you're right, mid-single digits for the full year. Life Sciences will be roughly low-single-digits growth and Diagnostics will be high single-digits growth.

[Daniel Leonard, analyst]

Appreciate that. And then on Diagnostics in China specifically, I appreciate you had that high-teens result, a growth result in immunodiagnostics, but that was off of a high teens' decline. So in aggregate, it doesn't seem like the business is growing a whole lot, but you're not overly concerned about volume-based procurement. It sounds like there are several offsets and you're bullish on the long term. So I was hopeful that maybe you could help me reconcile some of those comments.

[Maxwell Krakowiak, executive]

Yes, I think that's right. We do remain very bullish on our immunodiagnostics franchise, not only in China, but globally. To your point on the comp, that's correct, those 2 KPIs were the right numbers. The thing I would mention though is we've been pretty consistent in saying that we were not expecting a huge jump from pent-up demand, right? There's still only a certain amount of volume that can go through the hospitals from a testing perspective. And so what we have seen is that the third quarter does return to sort of normalized growth -- normalized volumes from our testing business.

[Prahlad Singh, executive]

And even if you look at the full year, immunodiagnostics, China will continue to grow double digits.

[Operator]

Our next question comes from Dan Arias of Stifel.

[Daniel Arias, analyst]

Max, just going back to applied genomics, the comp gets several points easier in the coming quarter. I think you were down year-over-year in 4Q last year. But obviously, you are talking about these incremental pharma headwinds. So what sequentially are you expecting there?

Does the low double-digit decline this quarter moved to something lower? Or can you kind of be in that same neighborhood, just given the easier comp?

[Maxwell Krakowiak, executive]

No, I think it will -- similar to the Life Sciences instrument side, we are not expecting much of a volume step-up, anything maybe in the applied genomics side, there might be a little bit of pressure quarter-over-quarter from a sequential volume standpoint. And so I do think it will continue to be pressured here in the fourth quarter, maybe even so a little bit more than what we saw in the third quarter.

[Daniel Leonard, analyst]

Okay. And then maybe, Prahlad, just big picture. I mean, is the state of the end-market environment right now impacting your view on M&A? Are you more or less enthused about doing another deal and does the priority list of the preference list, does it change at all just given the way that things are moving around here? Just curious about your appetite for additional M&A here?

[Prahlad Singh, executive]

It's a great question. We continue to keep our M&A pipeline right, and we continue to look for opportunities. Obviously, we are going to be very diligent in terms of the valuation, et cetera. But strategically, the fundamentals of the business that we've established are focused on growth, which is differentiated. Obviously, the market has shifted in the short term, but we are focused on ensuring that, a, we can control what we can right now and also we continue to build for the future. So we will continue to be active. I think the timing is something that is not predictable because, as you know, we are not really always looking for targets which are out in the public environment.

[Operator]

Our final question for today comes from Catherine Schulte of Baird.

[Catherine Ramsey, analyst]

Maybe just on the comments on reexamining your midterm growth outlook. Is that more of a comment on the Life Sciences side of the business? Or do you think the Diagnostics side needs to be reevaluated as well?

[Prahlad Singh, executive]

I think the way I would look at it, Catherine, is on the Diagnostics side, obviously, the applied genomics side of the business where there is overlap with pharma biotech. I would say that I would call out that, that's probably a component that we would look at. But outside of that, the immunodiagnostics, the neonatal business that, that is not something that we would see any impact on.

[Catherine Ramsey, analyst]

Okay. And then I just want to clarify your comments on reagents for the fourth quarter. I think you both said that those would be flat versus the third quarter. Is that on a dollar basis sequentially? How should we think about reagents year-over-year growth rate in the fourth quarter?

[Maxwell Krakowiak, executive]

So for the reagent standpoint, the flat is actually the growth performance year-over-year. In terms of a dollar change versus the third quarter, it will be slightly up versus the third quarter.

[Operator]

Thank you. I will now hand back to Steve Willoughby for any further remarks.

[Stephen Willoughby, executive]

Thank you, Alex. Hope everyone has a good day, and we're here all week. Take care.

[Operator]

Thank you for joining today's call. You may now disconnect your lines.