Bio-Rad Faces Low BioPharma Demand, Competitive Pressure - ABM Indus (NYSE:ABM), Bio-Rad Laboratories (NYSE:BIO)

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Bio-Rad's BIO business performance has been affected by Biopharma's softness, macroeconomic conditions in China and competitive pressure. The stock carries a Zacks Rank #4 (Sell). Since the beginning of 2023, Bio-Rad has been witnessing softness in smaller BioPharma companies, where historically, demand for life science products has been strong. This directly correlates with the funding constraints the broader pharmaceutical industry has been experiencing. Management puts forth that BioPharma's softness has resulted in the Life Science Segment's growth at a slower pace. In the second quarter of 2024, negative BioPharma macro trends persisted. Bio-Rad experienced reduced demand from biopharma customers for its process chromatography resins and from both biopharma and smaller biotech customers for Life Science research products, reflecting the ongoing destocking trend across the industry. Bio-Rad experienced weaker second-quarter sales in Asia as China is currently entangled in a challenging research funding environment and Japan too is facing constrained funding issues. Additionally, the Korean government's spending on life science research remained soft throughout the second quarter as part of the deficit reduction. In recent times, Bio-Rad's margin performance has been affected by elevated raw material costs, increased logistics costs and higher employee-related expenses. In the second quarter, the company's gross margin was additionally impacted by an unfavorable product mix, with a higher-than-anticipated percentage of instrument sales versus reagents, as well as lower-than-projected revenues in the Life Science Group. Bio-Rad Laboratories, Inc. Price Bio-Rad Laboratories, Inc. price | Bio-Rad Laboratories, Inc. Quote These macroeconomic factors, particularly the ongoing labor unrest, rising wages and raw material costs, along with ongoing geopolitical unrest, are resulting in a significant escalation in the company's operating expenses. Bio-Rad posted a 27.8% year-over-year decline in operating profit in the second quarter. Based on all these factors, Bio-Rad lowered its adjusted operating margin projection for 2024 to 12-13% (down from the earlier guidance of 13.5-14%). For 2024, our model projects a 10.6% decline in the company's GAAP operating profit on a 3.7% rise in expenses. Meanwhile, Bio-Rad operates in a highly competitive environment dominated by firms varying from large multinational corporations with significant resources to start-ups. Also, the competitive and regulatory conditions in the markets where the company operates limit Bio-Rad's ability to switch to strategies like price increases and other drivers of cost increases. Further, the extension of the public tender commitments to multiple years by the government, resulting in a reduced number of annual tenders, has led to aggressive tender pricing by Bio-Rad's competitors. Thus, Bio-Rad faces pricing pressure resulting from increased competition, which makes it difficult for the company to manage its operational, financial and business conditions efficiently. On a positive note, Bio-Rad is consistently developing its foothold in the rapidly growing digital PCR space to address additional opportunities in the PCR market. The pipeline of Bio-Rad's QX600 Droplet Digital PCR (ddPCR) platform is currently robust and growing. Backed by the tremendous customer response, the company continues to ramp up production capacity to accommodate the ongoing demand. In the second quarter, despite the Droplet Digital PCR franchise being soft, ddPCR reagents and consumables grew low in single digits. The newly launched ddPCR assay is successfully gaining share in the oncology and cell and gene therapy markets. Considering all these factors, the company is optimistic about ddPCR's growth in the coming quarters. Sales of the clinical diagnostics group in the second quarter increased 2.1% on a reported basis and 3.2% on a currency-neutral basis. Growth of the clinical diagnostics group was primarily backed by increased demand for quality controls and blood typing products on a geographic basis. Currency-neutral year-over-year revenues in the diagnostics group posted balanced growth across all regions of the company. The company continues to invest in supporting the growth of this segment while building a position in new molecular diagnostics segments. Key Picks Some better-ranked stocks in the broader medical space are Universal Health Service UNH, Quest Diagnostics DGX and ABM Industries ABM. While Universal Health Service sports a Zacks Rank #1 (Strong Buy), Quest Diagnostics and ABM Industries carry a Zacks Rank #2 (Buy) each. Universal Health Service has an estimated long-term growth rate of 19%. UHS' earnings surpassed estimates in each of the trailing four quarters, with the average being 14.58%. Universal Health Service has gained 41.1% compared with the industry's 34.8% rise so far this year. Quest Diagnostics has an estimated long-term growth rate of 6.20%. DGX's earnings surpassed estimates in each of the trailing four quarters, with the average surprise being 3.31%. Quest Diagnostics shares have gained 3.7% so far this year compared with the industry's 10.2% rise. ABM Industries' earnings surpassed estimates in each of the trailing four quarters, delivering an average surprise of 7.34%. ABM's shares have risen 24.1% so far this year compared with the industry's 11.9% growth. To read this article on Zacks.com click here.