Bio-Rad's Expanding Profit Margins and Stake in Sartorius Drive Long-Term Value

Senior Equity Analyst

Jay Lee

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Bio-Rad develops products and solutions for the life sciences research and clinical diagnostic markets and enjoys niche market leadership in diagnostic quality controls, antigens, and digital polymerase chain reaction, or dPCR, molecular testing. Bio-Rad’s business relies on the razor-and-blade model typically seen in the diagnostic market, and consumable reagents account for about 70% of total sales, with these reagents often sold at a higher margin than their associated equipment and instruments.

Bio-Rad’s strategy involves maintaining its current positioning in key markets such as blood typing and quality controls while capitalizing on strong demand for molecular diagnostics. It is also focused on improving operational efficiency, which has long lagged peers. In the longer term, Bio-Rad’s success will depend on whether the firm can successfully invest in research and development to maintain diagnostic specializations. We have a positive outlook for Bio-Rad, especially in clinical diagnostics, but the firm faces material competitive risks, particularly in molecular diagnostics, which is a fairly competitive space.

Bio-Rad began investing in Sartorius in the early 2000s and owns approximately 33% of the combined ordinary and preferred shares. After subtracting deferred taxes, this investment constitutes approximately 40% of our fair value estimate. Sartorius is a bioprocessing and life sciences supplier that specializes in single use technology used in biologics manufacturing, a business with attractive long-term growth prospects that enjoys strong regulatory barriers to entry and razor-and-blade switching costs. Although Bio-Rad does not own a controlling stake, this investment is highly material to our model valuation and the company’s share price. The majority of Sartorius shares are held by a family trust that expires in 2028. We expect no significant changes to Bio-Rad’s holding for at least the next few years.

Business Strategy & Outlook

Bio-Rad has a wide economic moat supported by switching costs from an equipment installed base in clinical diagnostics, much of which is closed-loop systems that generate recurring consumables revenue, as well as its noncontrolling holding of wide-moat Sartorius shares. A secondary moat source is intangible assets related to its strong market positions in niche clinical diagnostic markets. The company is a leader in many of its product lines, with about 80% of sales from products in which Bio-Rad has a top market position. While current market strength does not guarantee future market leadership or shareholder returns, the diagnostic and life sciences markets tend to favor strong incumbents, as the complexity of instruments and analysis creates lasting system familiarity benefits for practitioners.

We see an economic moat in Bio-Rad’s clinical diagnostics business unit (56% of sales). This segment sells a variety of testing systems to hospital labs, reference labs, and transfusion labs that allow them to run in vitro diagnostics on patients’ tissue, blood, or urine samples. We consider the reagent consumable-driven revenue base, which is 75% of segment sales, to be indicative of lasting recurring sales that contribute to the firm’s moat.

One of its major product segments is immunohematology, where Bio-Rad offers a full product line for blood banks and transfusion labs. We believe Bio-Rad has been able to maintain a top-three market position through niche specialization and by offering one-stop shopping for blood bank and transfusion customers. We believe switching costs are the dominant moat source in this unit, due to the closed-loop razor-and-blade model for its equipment and consumables sales. Additionally, we think its strong market positioning and clients’ familiarity with Bio-Rad’s test systems supports ongoing incumbency.

Another product that contributes to its economic moat is Bio-Rad’s D-100 system for diabetic testing, a niche where the company holds market leadership. Disclosures from Bio-Rad suggest that diabetes is one of the firm’s fastest-growing markets in diagnostics, with market growth of 6%-8% compared with mid-single-digit growth in other diagnostic areas.

This segment also sells diagnostic quality controls, which are control tests run on diagnostic instruments made by the largest diagnostic manufacturers, such as Roche and Abbott. We do not think this is a moatworthy business, as there are few barriers to entry (vendors simply need to prove their control tests are effective) and test differentiation can be limited.

In life sciences (44% of sales), Bio-Rad sells various life sciences tools used by research labs, biopharmaceutical manufacturers, and food testers. Example products include western blot machines used to separate and identify proteins in the lab, chromatography products used for purifying proteins during bioproduction, and digital polymerase chain reaction tools used to identify and analyze genetic material. We think Bio-Rad has some traces of intangible assets tied to its differentiated droplet-based dPCR platform and associated switching costs from consumables. However, we do not think they currently are strong enough to support a moat for this segment. Unlike clinical diagnostics, which is primarily a consumables business (at 75% of sales), Bio-Rad’s life sciences division is more equipment-driven, with equipment and consumables each accounting for roughly 50% of sales. In our view, the even split of equipment and consumables suggests that there is not a meaningful razor-and-blade model, along with the reliance on lower-margin equipment, which is likely to face higher market competition in the next few years.

One of Bio-Rad’s key strengths in life sciences is dPCR, a form of cutting-edge PCR that enables greater sensitivity, precision, and quantification compared with traditional PCR methods. Its ability to detect rare events and minute signals has applications in niche areas, including single-cell analysis, translational research, cell and gene therapies, liquid biopsy diagnostics, and others. Although Bio-Rad has strong market positioning in this emerging technology, we do not think its strength here represents a lasting economic moat, as current PCR methods are often effective enough to meet customer needs. Although this market could become more significant as more applications of dPCR are established, we are hesitant to ascribe a moat to this business for now. 

The segment also contains other less material business lines, such as chromatography, western blot protein analysis, and protein sample preparation. On balance, the lack of moat in dPCR and relatively low returns of the business, with operating margin under 15%, suggests that Bio-Rad does not have an economic moat in life sciences.

We think the stake in wide-moat Sartorius contributes to Bio-Rad’s moat. Although Bio-Rad does not have a controlling stake, Sartorius accounts for approximately 40% of Bio-Rad’s fair value in our model and is highly material to the company’s share price and valuation.

Sartorius is a bioprocessing and life sciences supplier that specializes in single-use technology for biologics manufacturing. We think its business has attractive long-term prospects driven by continued adoption of biologics therapies in the clinic, including antibody drugs and cell and gene therapies. Sartorius’ wide moat is backed by its strong reputation for quality and extraordinarily high switching costs, which arise from the highly regulated and mission-critical nature of biologics manufacturing. Its equipment and consumables sales also benefit from the razor-and-blade business model. The majority of Sartorius shares are held by a family trust that expires in 2028. We expect no significant changes to Bio-Rad’s holding for at least the next few years.

We do not see significant governance-related risks under the environmental, social, and governance risk framework that could affect Bio-Rad's moat.

Bio-Rad and 10x Genomics have been involved in legal wrangling over patent protections for droplet digital PCR technology since 10x came to market as a public company in 2019. Bio-Rad won the latest iteration of the patent battle and was awarded $24 million plus royalties in 2020. In July 2021, Bio-Rad and 10x reached a settlement that resolved all remaining patent disputes. Bio-Rad will receive license royalty payments of up to $140 million from 10x over the next decade.

Wide

Economic Moat

Bio-Rad Laboratories

Bio-Rad Laboratories, Inc. engages in the development and production of specialty chemicals used in biochemical, pharmaceutical, and other life science research applications. It operates through the Life Sciences and Clinical Diagnostics segments. The Life Science segment develops, manufactures, and markets reagents, apparatus, and laboratory instruments. The Clinical Diagnostics segment designs, manufactures, sells, and supports test systems, informatics systems, and test kits. The company was founded by David S. Schwartz and Alice N. Schwartz in 1952 and is headquartered in Hercules, CA.

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Bio-Rad Laboratories, Inc. engages in the development and production of specialty chemicals used in biochemical, pharmaceutical, and other life science research applications. It operates through the Life Science and Clinical Diagnostics segments. The Life Science segment develops, manufactures, and markets reagents, apparatus, and laboratory instruments. The Clinical Diagnostics segment designs, manufactures, sells, and supports test systems, informatics systems, and test kits. The company was founded by David S. Schwartz and Alice N. Schwartz in 1952 and is headquartered in Hercules, CA.

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