The Post-COVID Destocking Cycle and What It Taught About Recurring Revenue

Introduction

The 2022-2024 destocking cycle was the most significant revenue correction in the modern history of life sciences tools. After two years of pandemic-driven demand that inflated revenue across the sector, customers dramatically reduced purchasing as they consumed built-up inventories. The episode challenged the conventional wisdom that high-recurring-revenue tools businesses are largely insulated from cyclicality, and it reshaped how healthcare bankers and investors analyze the sector.

During 2020-2021, biopharma companies and academic laboratories aggressively stockpiled consumables, reagents, and bioprocessing inputs. Pandemic uncertainty drove safety stock build-up, COVID vaccine and diagnostic production consumed enormous volumes of bioprocessing supplies, and flush government research funding accelerated procurement. Tools companies reported 15-30% organic revenue growth rates that far exceeded the sector's underlying 5-8% growth trajectory.

Starting in late 2022 and accelerating through 2023, customers reversed course. With excess inventory on shelves, they slashed new orders across virtually every consumable category. Quarterly revenue declines of 15-20% became common, with some segments (notably bioprocessing consumables at Danaher's Cytiva division) experiencing declines exceeding 20%.

The recovery was not uniform. Analytical instruments (Agilent's core business, Thermo Fisher's analytical segment) recovered relatively quickly because instrument purchases are not inventory-dependent. They are capital expenditures driven by lab expansions, technology upgrades, and grant funding cycles. By mid-2024, most instrument businesses had returned to positive organic growth.

Consumables and bioprocessing took longer. Customers had 6-12 months of excess inventory to consume before returning to normal ordering patterns. The recovery followed a predictable sequence: first, orders stabilized as inventory levels normalized; then, ordering resumed at rates roughly matching underlying consumption; finally, modest restocking created a brief acceleration above trend growth.

The destocking cycle taught three durable lessons for anyone analyzing or advising on life sciences tools companies.

First, "recurring" is a spectrum, not a binary. Service contracts with fixed annual fees are truly recurring. Spec-in protected consumables in validated manufacturing processes are highly recurring. Reagents and bioprocessing inputs purchased by R&D labs are recurring in character (they are consumed and need replenishing) but can be deferred when customers have excess inventory. Understanding where a company's "recurring" revenue sits on this spectrum is critical.

Second, COVID-era financial results must be normalized. Any comparable company analysis or precedent transaction analysis for tools companies must adjust for the COVID demand distortion. Using 2021 peak EBITDA to calculate trailing multiples would dramatically understate valuation; using 2023 trough EBITDA would dramatically overstate it. The most defensible approach is to use normalized revenue and margins that reflect the underlying demand trajectory, excluding both the pandemic surge and the destocking correction.

Destocking Cycle

A period in which customers reduce purchases of consumable products below their actual consumption rate in order to draw down excess inventory accumulated during a prior period of over-ordering. The purchasing decline is temporary (inventory eventually reaches normal levels and ordering resumes), but it can last 6-18 months and cause significant revenue and earnings misses. In life sciences tools, the 2022-2024 destocking cycle followed 2020-2021 pandemic-driven over-ordering and affected nearly every consumable-heavy business in the sector.

Third, inventory channel checks are essential due diligence. For bankers advising on tools company acquisitions, the destocking cycle demonstrated that customer inventory levels directly impact near-term revenue. Diligence should include direct inquiry into customer inventory positions for key consumable products, analysis of ordering patterns relative to consumption rates, and sensitivity analysis showing revenue impact if customers are carrying excess inventory at the time of closing.

The next article covers the IVD business model, including instrument placement, reagent pull-through, and the massive scale of the in vitro diagnostics market.