Revvity Inc

NYSE:RVTY

Earnings Call Transcript 2020-Q3

[Operator]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Third Quarter 2020 PerkinElmer Earnings Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Bryan Kipp, Vice President of Investor Relations. Sir, please begin.

[Bryan Kipp, executive]

Thank you, operator. Good afternoon, and welcome to the PerkinElmer Third Quarter 2020 Earnings Conference Call. With me on the call are Prahlad Singh, President and Chief Executive Officer; and Jamey Mock, Senior Vice President and Chief Financial Officer.

If you have not received a copy of our earnings press release, you may get one from the Investors section of our website at www.perkinelmer.com. Please note this call is being webcast live and will be archived on our website until November 11, 2020.

Before we begin, we need to remind everyone of the safe harbor statements that we have outlined in our earnings press release issued earlier this afternoon 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 outlined in detail in our SEC filings. Any forward-looking statements made today represent our views only as of today. We disclaim any obligation to update 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 other 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 financial measures during this call that are not reconciled to GAAP in that attachment, we will provide reconciliations promptly.

I am now pleased to introduce the President and Chief Executive Officer of PerkinElmer, Prahlad Singh. Prahlad?

[Prahlad Singh, executive]

Thank you, Bryan, and good afternoon, everyone. Our 13,000 employees continue to go above and beyond, and our year-to-date results further reinforce that reality. As I have previously mentioned, improving lives is in our organization's DNA. It is what impassions our team. I remain humbled by and immensely proud of how everyone within PerkinElmer has rallied together throughout 2020. While the guiding principles that we outlined at the onset of the pandemic remain on North Star, keeping our employees and company safe, utilizing our expansive capabilities to join in the fight against COVID-19, serving our customers with excellence during this difficult period and emerge from this crisis as a stronger company, we are also actively positioning the organization for what a post-COVID-19 world might look like. The environment will undoubtedly be different from the future we imagined a year ago.

Over the past 12 months, we have expanded into market adjacencies, built new business lines and dramatically enhanced our commercial relationships. Due to our resiliency, responsiveness and agility as an organization, we are moving ahead from a position of strength. I could not be more confident that we, as an organization, are headed in the right direction and positioned to tackle the challenges of tomorrow.

While Jamey will share the details of our financial results, overall, we once again, delivered strong financial results in the third quarter. Revenue of $964 million, grew 34% organically, driven by our COVID-related sales, which contributed $288 million and a 6% decline within our non-COVID portfolio. Results far surpassed the guidance communicated during our second quarter earnings call. Moreover, we achieved significant profitability during the third quarter. Adjusted operating margins of nearly 32% expanded approximately 1,000 basis points year-over-year, a high watermark for the company and outstripping last quarter's multi-decade high. Our adjusted earnings per share almost doubled and adjusted free cash flow grew 100% compared to the third quarter of 2019.

As I have reinforced throughout 2020, PerkinElmer at our core leads with science, whether it is through novel product introductions, unique method development, automating workflows or publishing impactful research. Leading with science is a fundamental part of our history and success. Our teams are constantly thinking about how we can narrow the chasm between experimentation to discovery to real-world insights. It is a reality that resonates with our customers. And it is something that I'm personally passionate about and I view as a pivotal cultural ideology in the next chapter of the PerkinElmer story.

Take our COVID solutions, for example. We've talked extensively over the past few months about how leading with science has propelled our efforts to help combat the pandemic. Last month, the FDA ranked PerkinElmer's SARS-CoV-2 test as #1 out of 76 tests in terms of lowest limit of detection.

If you recall, we were not first to market with the PCR assay in February. While speed is often important in innovation, our goal was never to launch a test as quickly as possible to be in the COVID-testing conversation. Our aim was to develop a high-quality test that can and will address the needs of our customers and help health providers combat the growing pandemic. Over the past few months, the clinical community has begun to recognize that not all COVID tests are created equal. And as this shift has occurred, PerkinElmer has certainly stood out.

Additionally, over the past year, we have consciously made an effort to significantly increase the velocity of studies led by PerkinElmer team members that are accepted or published in reputable scientific journals. It is an important metric that we are beginning to track more frequently as we continue to shift our focus to the future. We had over 10 studies accepted or published during the quarter, and there are several additional internal and external studies primed for the fourth quarter. A decade ago, it was rare to see a life sciences tools company publish cutting-edge research in leading scientific journals. Studies were almost entirely done in the academic of pharma setting, however, today, those lines are increasingly blurring.

With over 15 COVID-related products and more than 20 non-COVID-related products launched year-to-date as well and more than a dozen new products primed for commercialization during the fourth quarter, our new product pipeline is certainly the richest I have experienced in my career.

To just give you a sense of the kind of breakthrough innovations we are focused on. During the third quarter, our EONIS screening assay received CE-IVD approval. This assay simultaneously tests for newborns for spinal muscular atrophy, SMA; severe combined immunodeficiency, SCID; and X-linked agammaglobulinemia, XLA, in one-multiplex RT-PCR assay. The combination of DNA extraction, multiplexing and automation allows for maximum efficiency workflow by not increasing the daily hands-on workload and complexity.

Driven by recent advances in treatments, SCID and SMA are increasingly being included in mandated screening panels around the world. Bringing this assay to this point was a multiyear process, that we hope will have a positive impact on improving the quality of life for patients afflicted with these 3 debilitating genetic disorders.

In terms of COVID-related new product launches and approvals, we were pleased to recently receive CE marking for a multi-analyte PKamp respiratory SARS-CoV-2 RT-PCR panel for the direct detection of COVID-19 influenza A; influenza B; and respiratory syncytial virus, RSV, in a single test ahead of the upcoming fall flu season.

Commercially, the traction PerkinElmer is making with academic institutions, health care systems, clinical laboratories, governments and other key partners across industries also positions us well for the future. A year ago, PerkinElmer was a nascent player in the molecular diagnostics industry. However, over the past 9 months, we have more than tripled our installed base in nucleic acid extraction instruments to well over 1,000 instruments worldwide and have added hundreds of high-throughput liquid handlers to our sizable installed base. We are taking share in the magnetic-bead RNA extraction market as our high-binding-affinity magnetic-bead technology has become recognized as a best-in-class solution for RNA extraction in blood and saliva samples.

Earlier this week, I visited the state of California's new lab in Valencia, which PerkinElmer has fully outfitted as one of our lab-in-lab offerings and running a full sample-to-answer COVID-19 testing workflow to support expanded testing locally. In a matter of 8 weeks since signing the contract, we set up a fully accredited lab and are ready to process up to 40,000 samples per day starting November 1. It is an impressive feat that was only made possible by the sacrifices made by our employees from various departments in partnership with the state of California as well as various external partners.

To give you some perspective, in a normal environment, this whole process, breaking ground through accreditation, typically would have taken 12 to 18 months. And in the United Kingdom, our first turnkey Lighthouse Lab began running samples earlier this month as part of a unique collaboration with the Department of Health and Social Care. While I think it is important to reinforce that we do not intend to proactively expand our clinical laboratory presence beyond our pre-COVID scope in a post-COVID world, our breadth of capabilities and expertise puts us in a unique position to help our partners during a time of extreme need. We are living in exceptional times, and we believe that it is our duty to help combat this pandemic any way we can.

While it has certainly been a challenging year for many of us on multiple fronts, I personally find myself reflecting on how proud I am to be working at PerkinElmer. From top to bottom, our organization is passionate about helping people. We want to be a part of the solution in this ever-changing world. As I have said before, it is personal for us all.

Last month, our employees around the world participated in PerkinElmer's annual Impact Day, a special day on which we volunteer in the communities where we live and work. Although the ways we volunteered were different this year due to the pandemic, the goal remained the same: to make a difference in communities across the globe, from collecting trash and donating blood to planting trees and hosting virtual classes for children in rural areas. Our impact was felt globally.

I also want to take a moment to update people on our CSR efforts. While we just released our latest CSR report in this past June, we are already consolidating data for our next CSR update. Our teams are currently surveying stakeholder groups, including employees, customers, suppliers and investors to ensure that the CSR priorities we put in place are in line with all of our stakeholders, interests and concerns. As we expand awareness throughout our markets and geographies around who PerkinElmer is and what we stand for, we hope that customers and partners will increasingly want to align with PerkinElmer because of the kind of company we are. We do what we say, stand for what is right and put people's lives first, whether our own employees or the millions of people around the world who we indirectly impact every day.

In closing, I'll reiterate that while the future is complex and the new normal means living with and learning to cope with challenges from an individual, business and global perspective, it is also filled with new possibilities and a chance for science and community to make a difference. Through new scientific innovations, both the ones we can develop ourselves, plus the ones we can generate through partnerships and collaborations, we will continue to drive impactful solutions to address the most important challenges on the planet. And with the community of our employees, customers and partners working together, we will make this seemingly unbelievable happen. We have already seen glimpses of this as we all rose to the occasion during the pandemic, but there is much more we can do as we move into 2021 and beyond. I'm inspired, humbled and ready for the final quarter of the year and already gearing up to continue making an impact in the quarters that follow.

I'll now turn the call over to Jamey.

[James Mock, executive]

Thanks, Prahlad, and good evening, everyone. To start, I echo Prahlad: I could not be prouder of our team and more confident that PerkinElmer is well positioned into 2021 and beyond. Over the past year, we have launched dozens of new products, built significant brand equity with our partners, fostered new customer relationships and expanded our presence in multiple markets, and our organization is not slowing down. We are all laser-focused on the opportunities in front of us and truly excited about the future. To that point, we plan to host a virtual life sciences deep dive for the investment community on December 9. We have teed up exciting topics for this session, where we will walk through our discovery, informatics and enterprise businesses. Additional information on the event specifics will be communicated in the coming weeks.

Before I begin discussing our financial results, I want to remind people that our third quarter earnings call presentation has been posted on the Investors section of our website under financial information. As always, I will begin my prepared remarks by highlighting the third quarter, then I'll provide some additional color on our served end markets and financial metrics, and I will end with fourth quarter guidance. At a high level, we are extremely pleased with our third quarter and year-to-date results. The organization continues to execute well. As expected, customer engagement and business activity improved sequentially versus the second quarter.

During the third quarter, revenue grew 36% to $964 million compared to the third quarter last year, and included 1% foreign exchange and 1% net acquisition tailwinds. Organic revenue increased 34%, which is 1% better than what we had previously communicated. As Prahlad mentioned earlier, overall COVID-related products contributed $288 million in the quarter, propelled primarily by our PCR tests and RNA extraction solutions, with each contributing in excess of $100 million during the third quarter. In total, we have helped serve over 1,000 customers in their fight against COVID-19 since the onset of the pandemic. a milestone we are all certainly proud of.

By business, Diagnostics, representing 56% of total sales, increased 92% organically. Strength in our immunodiagnostics and applied genomics businesses more than offset ongoing modest declines in our reproductive health franchise. Discovery & Analytical Solutions, representing 44% of total sales, declined 3% organically as strength in our life sciences business was more than offset by pressures in food and applied markets. We were pleased to see all DAS end markets performing better than originally anticipated headed into the quarter.

On a geographic basis, both Americas and Europe grew strong double digits, and Asia Pacific grew mid-single digits. China remained in negative territory as non-COVID diagnostic trends continued to be adversely impacted by birth rates and safety measures in place to fight the pandemic.

Operationally, we are extremely pleased with our performance this quarter. Adjusted operating margins expanded approximately 1,000 basis points to 31.6%, led by volume leverage, business mix and productivity programs.

Adjusted earnings per share of $2.09 in the third quarter increased 97% versus the third quarter of 2019.

Looking further into the key drivers within our segments, let's start with our Diagnostics business. As mentioned in my earlier remarks, organic revenue increased 92% as robust growth in Europe and the Americas drove the momentum, with both regions more than doubling on an organic basis compared to the third quarter of last year. Our applied genomics business led the way, posting over 360% growth on broad-based momentum across all geographies with strength in our nucleic acid extraction and liquid handling product lines. Nucleic acid extraction and automated liquid handling grew 17x and 6x, respectively, versus the third quarter of 2019. Both have gained share and positioned our applied genomics business well to expand into broader molecular testing in a post-COVID world. Meanwhile, immunodiagnostics growth increased over 90%, with EUROIMMUN growing high single digits. Demand for our portfolio of RT-PCR assays was particularly strong across the globe, while serology demand declined sequentially as expected. Reproductive health declined mid-single digits organically, driven by lower newborn and prenatal testing in Europe and Asia Pacific. Americas increased mid-single digits, while Asia Pacific and Europe declined double digits. Newborn utilization rates rebounded to prior year levels in North America and Western Europe, while China rates continued to be impacted by birth rate declines and COVID-19-related safety measures. Early indications are that year-to-date birth rates are down high single to low double digits worldwide.

Turning to Discovery & Analytical Solutions. Organic revenue declined 3% in the third quarter versus the same period last year. By end market, we experienced mid-single-digit organic revenue growth in life sciences. Pharma biotech was up mid-single digits, driven by strength in informatics and enterprise services. Academic and government declined high single digits, a 10% sequential improvement. And discovery reagent utilization improved to positive organic growth, pointing to increased reopening activity for benchtop researchers. We estimate that pharma biotech activity is approximately 90% to 100% back to normal, and academic and government is not far behind at approximately 80% to 90%.

Applied markets declined approximately 10%, with Americas in Europe experiencing double-digit declines as funding delays continued to impact demand.

Food declined over 20% in the quarter. However, excluding cannabis, which was a strong contributor during the third quarter last year, food declined 9%, improving sequentially from down 14% in the second quarter. Perkin grew high single digits as midstream food processing companies made investments to enhance productivity by upgrading in-line solutions. Meanwhile, industrial and environmental safety declined high single digits. All regions improved sequentially by more than 5%, led by the Americas and Asia Pacific, while Europe declined double digits. Trends were consistent exiting the quarter, and we currently do not anticipate any material budget flush in the fourth quarter.

Shifting to below-the-line items. Net interest and other expense for the third quarter was approximately $14 million, and our adjusted tax rate was 19%.

Turning to the balance sheet. We finished the quarter with approximately $1.9 billion of debt and $258 million of cash. Free cash flow was $191 million in the quarter. We achieved an adjusted free cash flow conversion of 82%. Finally, we exited the quarter with a net debt-to-adjusted EBITDA ratio of approximately 1.8x, down over 1 full turn since the beginning of the year.

Closing the books on the first 9 months of 2020, we are extremely pleased with our performance, including 16% organic growth, 57% adjusted earnings per share growth and over 180% adjusted free cash flow growth, all compared to the first 3 quarters of last year. Year-to-date, adjusted free cash flow conversion was 74%, up from 42% from the comparable period last year. The DSO reduction has been a function of improved monthly linearity, process improvements and COVID-related demand. Overall, we are encouraged by our year-to-date progress and anticipate 2020 adjusted free cash flow conversion of at least 75%, excluding potential California COVID-19-related milestone payments.

Turning to the fourth quarter guidance. We are forecasting reported revenue of $1.12 billion to $1.23 billion, representing 37% to 52% organic revenue growth, including a 2% benefit from foreign exchange. Embedded in this guidance is $350 million to $450 million of COVID-related revenue, representing approximately 43% to 56% growth and an organic demand decline of 4% to 6% from our non-COVID product lines. In terms of adjusted earnings per share guidance for the quarter, we are forecasting a range of $2.60 to $3. We are assuming a 21% tax rate due to increased profits in higher-tax rate jurisdictions. All of this is detailed in the second to last page of our third quarter earnings presentation.

For the full year, we now anticipate a negligible foreign exchange headwind, approximately $47 million in adjusted interest and other expenses, a tax rate of 20% and our share count to average 112 million.

In closing, PerkinElmer has made significant progress over the past year to better position the organization for the future. We are excited for what is ahead and how we will better serve our customers. We are operating from a strong foundation, and I have no doubt that coming years will be even more fruitful for all of our stakeholders.

Operator, at this time, we would like to open the call to questions.

[Operator]

[Operator Instructions] Our first question or comment comes from the line of Vijay Kumar from Evercore ISI.

[Vijay Kumar, analyst]

Maybe one quick one on the guidance, and I had a follow-up on a big picture question. Turning to Q4, one, Jamey, the $350 million to $450 million, does it have any California contracts baked in? And when you look at the base business, why is the guide assuming mid-single declines, maybe parse -- because, I guess some of your peers are seeing flattish to perhaps positive on the base business.

[James Mock, executive]

Yes. Thanks, Vijay, and hope you're doing well. So generally speaking, I'd say we're taking a similar approach entering the fourth quarter as we did when we entered the third quarter. We've looked at order trends. We've looked at our backlog, which has grown versus when we entered the third quarter, and we feel very comfortable with our guide, and I'll kind of break it down non-COVID versus COVID.

So non-COVID, we are seeing the market improve, but the exit rates are not quite as fast as they accelerated at the end of the second quarter. However, if they continue, we think we'll be at the high end. And if they don't continue or if something happens, we'll be at the low end. It's also worth noting, Vijay, that in the fourth quarter of 2019, we had 2 very material product lines grow for us: Cannabis was quite substantial in the fourth quarter, and we're assuming no cannabis revenue in the fourth quarter of 2020; as well as informatics was substantial in the fourth quarter last year. So if you exclude those 2, we think we'd probably be better by 3 points. So instead of down 4% to 6%, we'd probably be down 1% to 3%. So DAS came in minus 3% in the third quarter. It will probably be in the same vicinity due to those comps. However, if you exclude those comps, DAS would be positive in the fourth quarter. And then Diagnostics ex COVID revenue was down 11% or 12%. And we've seen it start an uptick over the last few months. And so we are assuming that, that will be down high single digits. So that kind of explains non-COVID. It is closer to low -- minus low single digits, but we have those 2 comps.

From a COVID standpoint, you asked the question specifically on California. Yes, it is in the number at about $50 million to $75 million. The way we derived the $350 million to $450 million is the base business was $288 million in the third quarter. We're assuming the base business is mostly in that range, call it $250 million to $300 million, and then we're adding an extra $50 million to $75 million for each of the California labs and the U.K. labs, which overall gets you to the $350 million to $450 million. I think all of this is worth noting that none of this assumes any significant lockdown, obviously. COVID positivity rates are going up across the world. And right now, we are not planning on any significant lockdowns in any of this guidance. Should they happen, it could have material upside to our COVID revenue and material downside to our non-COVID revenue. But in general, that's how we kind of thought about the guidance, Vijay.

[Vijay Kumar, analyst]

And that's extremely helpful, Jamey. And then one big one for Prahlad. I think some of the comments you're making, as you look forward towards the next chapter here in the Perkin story, I guess, I'm curious, Prahlad, because I'm looking at some of these numbers, right, 100% growth in earnings. I mean, some of these numbers were astronomical. But the market isn't giving you guys the credit, right? The stock hasn't acted well. And the biggest question here is sustainability. Are these COVID revenues going to become headwinds for next year? Maybe talk about sustainability, one -- from a base COVID perspective? And when you think about these, the incremental cash flows that's come through for the company, right, to your point, Perkin was not a player in molecular like 12 months ago, what is the right way to think about capital deployment? And does it strengthen your position in the Diagnostic space?

[Prahlad Singh, executive]

It's a very good question, Vijay. I mean I think the way I would look at it, obviously, we have been giving a lot of thought to it. And over the past few months, where I personally have focused my attention on. And maybe that will sort of throw some light into how we are thinking of it, right? As I talked about, the team has been focused on the 3 guiding principles extremely well that allows me to focus most of my efforts on positioning the company for the future. And we sort of -- I'm looking at it from 3 primary areas, right? Number one is innovation. I mean looking at opportunities across the organization, both on COVID and non-COVID, but fundamentally driving innovation in a very different way and 3 key areas that I'm focusing on: NPI acceleration, focus on quality and disruptive ideas. And this is where we are having regular reviews, deep dives and what the cadence of NPIs will be over the next 2 to 3 years. And what I can tell you confidently that it will be no doubt very strong. There are lots of exciting things that we are building upon the strength that we have now. The muscle that we have exercised through COVID, we need to now expand that into new and adjacent markets.

The second one around capital deployment, right? We are in a great position. We have firepower now. And over the past year, we have gained share and expanded our presence in new markets, as you mentioned, around molecular diagnostics. So we are actively looking to deploy this capital to further bolster both on the diagnostic side and on the life sciences franchises so that we can layer additional capabilities that enhances our current positions in the market.

Let me give you an example, right? In -- as we look at -- from a disease target characterization, we have a leading position with high-content screeners and in vivo imagers. Cell selection and separation tools would go hand-in-hand with the imaging and detection capability that we have that would allow researchers to investigate which cells have changed in a population versus the subcellular level. So additional, these tools around cell detection, separation or manipulation is a natural adjacency for us. So that's an example that we would continue to bolster our efforts around capital deployment.

And the last one is on the people front. I've been focused on building an organization that has the diverse talent and deep bench strength. Over last year, if you recall, we combined our commercial teams from DAS and DX, we united R&D. Now our focus is how do we take these opportunities within commercials and bring that under one umbrella. How do we focus on the alliances and partnerships that we have built across the globe because of COVID? So those are the 3 focus areas that we have -- that I personally am putting my attention on. And that's why we feel confident about the future.

[Vijay Kumar, analyst]

That's helpful, guys. I think the only thing you missed, Prahlad, was adding maybe a single -- ahead of cell separation and detection, perhaps that's probably worth another $5 billion to market cap.

[Operator]

Our next question or comment comes from the line of Dan Arias from Stifel.

[Daniel Arias, analyst]

Prahlad, I wanted to sort of follow on, on some of those ideas that you were talking about and kind of hit on Vijay's point on sustainability. Just on the top line. Maybe starting with diagnostics. You highlighted a couple of times, just being in good shape in a post-COVID world. Can you talk to some of the early thoughts that you think you might have on how you could look in 2021 when you think about the non-COVID portions of that segment and how they're expected to drive growth? What's your expectation on the recovery ImmunoDx, again, outside of COVID? And on the reproductive health side, leaving birth rates aside and what that brings, how do you feel about accelerating growth on the back of some of these initiatives that you have there? And I guess, ultimately, where is your confidence in Diagnostics being a double-digit organic growing segment once we move past the COVID period and get into sort of normalized periods?

[Prahlad Singh, executive]

Yes. No, great question, Dan. And let's start with the reproductive health, right? As you said, we don't expect the current birth rate pressures to be a headwind of this magnitude for the foreseeable future. We expect that this will moderate at some point as conditions normalize. But outside of that, just like I gave you the example of EONIS during my prepared remarks. That is a particular segment where we can bring that product portfolio into the molecular diagnostics arena because it uses the same workflow that is currently being used for COVID, right? You use the same PCR, you use the same liquid handling, and you use the same extraction components that are already in place now at all these installed base. And as we look forward to the menu expansion around reproductive health, Dan, most of the new disorders that are either being looked at or thought of from the Rus panel as an example, DMD, SMA, they are all molecular based. So again, the methodology or the technology is moving away from immunoassay to molecular diagnostics, which sort of matches well with the new and expanded installed base that we have put together across the globe.

Similarly, as we look on the immune side -- immunoassay side, there are several other new immunodiagnostic assays that we are either working on in-house or also looking at inorganic opportunities.

Now moving on to the autoimmune and allergy side that comes from the EUROIMMUN portfolio, right? Autoimmunity, as I have said, the rate of detection of autoimmune diseases is not slowing down, and we've started already seeing signs of recovery of that even in China. And I think we'll continue to expand that portfolio by bringing in a new platform that we've -- that we have named [ excentis ], and that should be out probably sometime in the next year. Adding -- continuing to add to that portfolio is going to be an important factor for our growth. The one place where we will see some pressure in the short term is around allergies. And that's just because people are being very protective, wearing masks, and that's the portfolio that we see a pressure on. So sort of there are various ways that we are looking at expanding our portfolio around the installed base that we've already built today with our extraction portfolio, Dan.

[Daniel Arias, analyst]

Okay. That's a helpful bit of explanation there. Maybe just kind of sticking with a similar idea. I mean it sounds like one of the hopes that you have is that the awareness and the mind share you're creating in areas like sample prep and genomics is going to sort of elevate the business for the longer term. Are you seeing signs, strategic partnership opportunities or longer-term deals that make you think that, that's going to happen, that you'll see some stickiness with what you're selling now during a time when labs, quite honestly, are buying because they can get it, but once things calm down and there are multiple options, you'll be the choice that they go to?

[Prahlad Singh, executive]

Yes. I mean we have put more than 8,000 units that have been installed. Now while these labs are focused on COVID, they're also aware that -- look, we have put this infrastructure in place. Now we've got to be able to put plans in place to leverage this installed base and competency that we have set up beyond COVID. So absolutely, the partnerships those that we have announced and several that we have not announced, those customers are already discussing with us, "Hey, what else can we put through this workflow?" And again, in fact, this has gone to an extent that in Jamey's team, we are now establishing a function around alliances and partnerships that will be focused solely around these efforts of taking this forward.

[Operator]

Our next question or comment comes from the line of Derik De Bruin from Bank of America.

[Derik De Bruin, analyst]

Can we talk a little bit about sort of how you're thinking about -- I mean I know it's early and there's a lot of moving parts? Can we think about just a rebound in the core business in '21? And particularly on the DAS side, I mean I think Dan took care of the Diagnostics side [ talking about that ]. But can we talk about the DAS side and just sort of thinking about what you think is pent-up demand? What do you think is potential for bounce back on that one? I'm just trying to get a sense for how much of the core business we should sort of model in for rebound for next year.

[James Mock, executive]

Yes. Sure. Derik, hope you're doing well. So I mean I think we're, in general, coming off fairly reasonable comps this year to start with. I think life sciences, we've seen a continued uptick throughout the year. I mentioned in my prepared remarks that the discovery business is now positive, and I think we will continue to see that moving forward here. Informatics, we think, is still a strong grower heading into 2021, one source. So the life sciences business, we expect, a, we should have relatively easy comps; and b, is we're starting to see it expanding and that's probably 55% to 60% of the DAS business. So feel good about that. Food, we will not have the cannabis issue year-over-year. So cannabis in 2018, if you remember -- or 2019, I guess, if you remember, was $25 million. And this year, it's next to nothing. So we will not have that comp issue. And in fact, depending upon where the election goes and where its funding levels are, that might start to rebound again. And in addition, food and if it starts to open up a little bit, it's hard to understand what will happen with processors and restaurants and whatnot, but at least we will have already kind of lived through probably the significant shutdown. And then industrial and environmental has been relatively stable and steady. I don't anticipate a big snapback or whatnot. But I think you've got life sciences, it should be an easy comp. But I think life sciences has, a, an easy comp and should be growing nicely, particularly informatics. Food will not have a difficult comp anymore and should start to uptick. Industrial and environmental as well.

The other thing I'd say on DAS, in general, is we do have a fair amount of NPI. So Prahlad mentioned it earlier, he's been holding weekly reviews with all of our segment leaders. We are upticking our R&D. It's up 10% in the third quarter. We plan to further uptick it in the fourth quarter. So there is a cadence of improved NPIs coming out that should bode well in 2021 and beyond for the DAS business.

[Prahlad Singh, executive]

And just to add to that, also on the life sciences side, Derik, we've started seeing some increased investments from governments and CDCs around life sciences research, looking at viral path and immune responses, so I think that will also bode well for the life sciences business on the research side.

[Derik De Bruin, analyst]

Got it. And thinking about the -- it's an interesting comment. I mean one of your competitors in the RNA extraction space was sort of maintaining the fact that automated sample extraction is -- it was a headwind for them. It seems like you're certainly benefiting from that one. Can you sort of talk about the dynamics of that market? And also, just how you're sort of thinking about the evolution of -- there's more people going to like heat-labile sample preps and RNA extraction free going on with it. So like how do you -- once again, it goes to the sustainability question that Vijay was asking about. How do you sort of think about your RNA extraction business going and market share shifts and things of that nature?

[Prahlad Singh, executive]

The way I would look at it, Derik, is that there are 3 parameters that our customers look for, and that is what is important. Getting a higher extraction yield, having an easy workflow, at a low cost. And I think what COVID has definitely proved from our customers' base. I mean if you just -- all you've got to do is look at the numbers over the past 3 quarters, is that what we are able to provide with our product portfolio is the right -- the extraction use that they want, the right workflow that they want, at a cost that they want. But more importantly, I think what becomes more relevant is that as we move beyond COVID, there will be a need for continued surveillance into the future. And that's why the stickiness of this installed base is going to be very relevant and important. COVID might go away and we can debate till the cows come home, whether it goes in 3 months or 6 months or 9 months. But the surveillance of infectious diseases like COVID is here to stay. And I think that's where the stickiness of our installed base -- that gives us the confidence of the stickiness around our installed base.

[Operator]

Our next question or comment comes from the line of Tycho Peterson from JPMorgan.

[Tycho Peterson, analyst]

I'm going to take the other side and actually ask on some of the COVID tailwinds. And maybe start with the 2 labs, California and the U.K. I know you talked about 40,000 samples to start in California. Can you just remind us where those could go from a capacity standpoint? I think I read California could get up to 150,000 tests. I'm just trying to take forward a little bit into 2021. And then separately on the respiratory -- multi-analyte respiratory panel, how much of the volume do you think goes to that versus the stand-alone PCR test? And then when do you think also serology starts to pick up again?

[Prahlad Singh, executive]

Yes. So you're right, Tycho, in that the capability of the California lab could go up to 150,000. And I think we will be ready next week, in fact, where we would be up to a start up to building up to a capacity of around 40,000, 40,000.

[James Mock, executive]

Next week is 40,000. I think the state, we're working with them. By the end of the quarter, it might be at something like 80,000. And then in the first quarter, be ready for 150,000 at some point during the first quarter.

[Prahlad Singh, executive]

And around flu pack, Tycho, as you asked, we've gotten CE mark. We are awaiting FDA approval. And once we have that -- I think what we have not yet thought through, it depends to a large extent on how the state decides around which segments go under the flu pack and which ones go under a pure RT-PCR test. There might be school kids or school populations or health care populations that might go on the flu pack, whereas the others might go into RT-PCR. And I think that the capability has been set up that we can divvy it up within the labs and have different workflow for the 2 tests, but the proportion of that is yet to be determined.

[Tycho Peterson, analyst]

Okay. And then on serology, when do you think that starts to pick up again? Is that kind of mid-next year? Or what's your outlook there?

[Prahlad Singh, executive]

I think it probably is -- I mean first quarter, sometime in the first quarter as the vaccines start taking effect, I think that's -- the serology trend will start picking up along with the vaccine efforts, Tycho.

[Tycho Peterson, analyst]

Okay. And then shifting gears, you're -- I think the only company we've heard from so far that's still negative in China. Can you just -- and obviously, lower birth rates and other factors there. But can you just talk on when you think China may return to growth for you?

[Prahlad Singh, executive]

Yes. I mean I think if you -- even as we look at China now, while it has been pressured for us, there are 2 things to think of, right? One, we have a stronger Dx, a diagnostics weightage in China than DAS. And in that, again, autoimmune and as I mentioned, respiratory, those have been the ones that have seen impact. But we have started seeing flow-through now in China from our distributors. So as we as we look forward, our distributor -- the flow-through or sell-through from our distributors has continued to increase. So I would say that as we look into this quarter and next quarter, that continues to improve and it will continue to improve.

[James Mock, executive]

Yes, I would agree. And then on the DAS side, Tycho, I mean, we've already seen life sciences turn positive in China. Food and applied has been kind of down low single to mid-single. So I would anticipate by the first quarter of next year that -- with easier comps and continued uptick. And we have seen an uptick, particularly in industrial and environmental, that it has steadily grown throughout the year that I think we turn positive in DAS, and Diagnostics will be influenced by the things that Prahlad talked about, but birth rates obviously matter. Allergy is a bigger share in China for EUROIMMUN. And if everybody is wearing a mask, there's a little less allergy uptake there. But DAS would turn positive and Diagnostics, we'll see. But the long term...

[Tycho Peterson, analyst]

And then last one -- and then just last on the DAS operating margins. You flagged pulling forward some investments. A, should we think about those margins to continue to be under some pressure as you're investing for the DAS business and other particular areas you can call out? I guess you called that cellular analysis earlier. Was that kind of the main area of incremental investment?

[James Mock, executive]

That's a great question on the -- you're speaking specifically to DAS, though, Tycho?

[Tycho Peterson, analyst]

Correct. Correct.

[James Mock, executive]

Yes. DAS has been under pressure for 2 reasons. One is, you'll see in the quarter, we're probably down 500 basis points or something like that, and about half of that is -- both of them are conscious decisions. On the OpEx side, it's about half of that, and we've increased our R&D. We've mentioned earlier that we want to get ready for our analytical portfolio, our life sciences portfolio, our food portfolio. So we continue to increase R&D. We continue to work on our sales and marketing channels, particularly on food. I've mentioned that in the past that we had some work to do there, and people in general. So about half of this is a conscious decision on OpEx that should be fine, and we're making that investment now. And as soon as the volume upticks, we should be okay. Similarly, on the gross margin line, which is probably the other half, we've made a decision, which was part of the 4 principles that Prahlad outlined earlier, to keep our employees safe, and we've had no layoffs at any of our plants across the globe. So even as the volume has declined, we've had unfavorable variances due to the factory overhead and whatnot, haven't laid anybody off. And so therefore, as the volume comes back, we think that the workforce will be ready, and we're just seeing a little bit of short-term unfavorable variances.

[Operator]

[Operator Instructions] Our next question or comment comes from the line of Steve Beuchaw from Wolfe Research.

[Stephen Beuchaw, analyst]

I think most of the ground has been covered, but I want to come back to a couple of things with maybe a little bit of a different angle, if that's okay. First, on the California contract. I appreciate all the clarity of disclosure here, and frankly, really congratulations on getting that done. I wonder, though, if you could talk about that initiative and the extent to which you see more of that sort of initiatives popping up in 2021. I mean the logic here, it's pretty obvious. But I'm a little surprised that I haven't seen more headlines of that sort of thing happening. So could you speak to what you see on that front, not necessarily just in the U.S., but globally? Second is, I wonder if you could talk a little bit about, within the context of overall screening, as Derik mentioned, your -- one of your competitors made a lot of comments today. One of the comments they made was that they think next year, as it relates to testing, the market kind of splits half and half between PCR and antigen. I wonder if you could speak to that dynamic. And then I have one follow-up.

[Prahlad Singh, executive]

Okay. On the first one, Steve, I think it's a good question, right, that there are some other discussions going on and there are some other partnerships that we have across the globe, which we haven't publicly announced because of our partners' request. So I think alliances such as these take a larger importance during times of crises and pandemics like that when state -- states and governments sort of get into action and gear. But I think what these alliances forge are longer-term partnerships. And our focus really is on how do we do these. I mean California, as I said in my prepared remarks, right, within 8 weeks, we've done what should have taken 18 months. So the focus is really how do we execute flawlessly on these and build on it beyond that. But really, what we are not -- our strategic intent is not to become a reference lab. That is not something that is part of our strategy. We are doing this because we've got a 3-decade-old relationship with the state of California, and this is building on that partnership around Lab [ InLabs ]. So I think that's the way I would look at it.

To your second question around the split between antigen and RT-PCR. Our belief is that RT-PCR is the gold standard. The level of detection that you get, and especially when you look at our kit with the lowest level of detection, you could think of it from a perspective of moving on beyond a singular test to pooling. And research shows that there's a 10% -- 10-fold increase in the level of -- limit of detection of a COVID diagnostic test, and it's expected to increase the false negative rate by 13%. So there is data out there that why having an important, highly accurate, sensitive test is going to continue to play a role. Having an antigen test, which is in the high 80s or even if it's early 90s, the impact of false negative, especially for pandemic and for infectious diseases that are so contagious, does have an impact. And I think the viral loads may be missed by those assays. Did you have another question?

[Stephen Beuchaw, analyst]

Very fair. And then my follow-up actually relates to serology. That's a 2-parter. One is, you've talked in the past about giving some clarity on -- I don't know if it's multipronged is the right term, but a multilayered approach to serology, where you're looking at residual immunities from a number of different ways. I wonder if you could update your thinking on that. And then I know you've made some comments around timing around the uptake of serology. But could you give any comments around what you think the scale of it might be? I know a lot of us are contemplating the possibility that there's a fair amount of serology uptake within the context of clinical trials. But do you think that it goes beyond that?

[Prahlad Singh, executive]

Yes. See, so I think what I've talked earlier about is looking at the immune insight, right? And I think on that, we are looking both at the quantitative antibody testing and a neutralization assay as an example. But the idea really is that investigating T-cell responses for cellular immunity, I think -- we think that it's going to be important. And hopefully, we'll have a couple of COVID-related products in the pipeline that we can talk about more over the next few months.

To your second question around how big or what the impact of serology? I think it's -- my guess would be as good as yours. And honestly -- and the reason I'm saying that is because the crystal ball on that is really based on the impact and how important it being a partner for vaccine -- vaccination and vaccine will be. So I think it will gain importance and more relevance as we move from where we are today to vaccines and then beyond that for epidemiological testing. That's where I think serology will have the biggest impact.

[Operator]

Our next question or comment comes from the line of Doug Schenkel from Cowen.

[Doug Schenkel, analyst]

So you provided a lot of detail on ways you hope to offset any COVID-19 revenue that proves to not be all that durable in the long term. I'm hoping we can get a lot more quantitative versus qualitative. If it -- hadn't it been for the pandemic, and if we assume that EPS was going to grow at, say, a 12% to 15% annual CAGR, if we use 2019 as a base, you would have been on track to generate about $6 in 2022 earnings. So 2 simple questions. One, if pandemic-related revenue were to go away by the end of next year, so at some point in 2021, do you think all the initiatives and relationships that are occurring as a result of COVID-19 would put you in a position to do a lot better than $6 per share in 2022? And secondly, in such a scenario, is there actually a path for you growing earnings in 2022 if the pandemic abates in 2021?

[Prahlad Singh, executive]

So the answer to your question is that, yes, we will definitely benefit from the installed base that we have put in place. If you are asking us to give an estimate on what our EPS is going to be in 2022, Doug, I'm not going to give you that.

I don't know...

[Doug Schenkel, analyst]

[ Of course, I am not going to. ]

[James Mock, executive]

Yes, for a couple of reasons. Installed base, the additional markets that we're playing in, the customer base that we have. But also, we've generated a lot of free cash flow, going back to Prahlad's earlier points. We are spending a lot of it on innovation, capital deployment. So I think it increases the flexibility of the company. So I think we were already on that trajectory, but I think this should -- to answer your question directly, further boost our ability to at least meet that, if not beat that, for sure.

[Doug Schenkel, analyst]

Okay. And then second question on free cash flow conversion, 82% in the quarter. I know you've talked about how that is, at least in terms of growth, much, much better than what we've seen for a while. So that's great. All that said, intuitively, I would have thought it would have been a lot higher, given what we're seeing at the operating line. You're generating a ton of revenue without a ton of accompanying operating spend. So could you maybe just walk through kind of the disconnect? And why that number from a conversion standpoint isn't actually higher? And I might be making it up, but I thought I heard in your prepared remarks, Jamey, that you actually were expecting that number to go down next year. Did I hear that right? And if I heard it wrong, sorry about that. If I heard it right, why does this trend back down next year?

[James Mock, executive]

Yes. I don't think I said anything about free cash flow going down. So to put 74% into perspective, Doug, we've made a conscious decision, much like we do every year on the non-COVID side to build inventory, but we've built $120 million of inventory, which is exactly 25% of our net income. So absent the inventory build to which probably 2/3 of that is COVID-related, we would be at 100% free cash flow year-to-date.

And that was because we look at the backlog, and we've got a substantial backlog walking into next quarter. And we think it's the right thing to do to have the COVID products available. And we think that the non-COVID side will see an uptick as well outside of informatics and cannabis. So we think we're in great shape.

And actually, one more thing, just to further put a point on that. I mean the COVID-related free cash flow conversion year-to-date, while it will be wonderful in the future, is actually a drag. So if you think about $2.5 billion of volume, there's still a couple of hundred million -- and assume 30 to 60 days' payment terms, there's probably a couple of hundred million dollars of that on the balance sheet in terms of receivables. We built $80 million of inventory. So we basically eroded much of the net income on the balance sheet and working capital. But that will prove to be future excess cash. And none of this includes the $200 million that we funded to outfit the California lab that we believe we will collect in the fourth quarter.

[Doug Schenkel, analyst]

Which should all benefit you Q4 and beyond, at least that would be hope.

[James Mock, executive]

That's right.

[Operator]

Ladies and gentlemen, this concludes our question-and-answer session. At this time, I would like to turn the conference back over to Mr. Singh for any closing remarks.

[Prahlad Singh, executive]

Thank you, operator. Again, thank you for your questions. As I said at the beginning, I'm gratified and I'm proud of the organization and how everyone has rallied together. We really feel very confident that we are leading with science, and that is clearly resonating. I have no doubt that we emerged from this crisis as an even stronger company. Thank you for supporting PerkinElmer, and I look forward to providing further updates on our fourth quarterly earnings call.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.