Bio-Techne Corporation (TECH) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Tejas Savant, and I work on the life sciences team here at JPMorgan. It's my pleasure this afternoon to introduce Charles Kummeth, CEO of Bio-Techne. At the end of his presentation, there will be a breakout with management in the room next door, which is the Elizabethan C, I believe. With that, I'd like to hand it over to Charles.

Thank you. Well, one thing I know is doing these at the very last day after 12 101s, you get a little hoarse. So sorry about that, but I'll try to speak out loud and that you can actually hear me. It's been a great -- it's been a busy 3 days as all you, I'm sure, are the same. I know you're all with me. I'm just glad it isn't raining this year, right? So anyway, here's our first slide. We actually have a tagline now, where science intersects innovation. I think everyone likes to be an innovation company, but people -- some people aspire to be a science company. To try and be both is challenging. So we're really working hard on that, and we do love this tagline. Here's our safe harbor. Of course, we encourage you to get online and read all our reconciliations because we'll be talking about forward-looking statements. All right, getting started. So where do we come? So for some of you in the room that are new to our story, and this is a bit comprehensive, we -- me and my team came roughly 6, 7 years ago. It was a company of 700 employees, about $300 million of revenue, and this is what we've grown to now so far. So we're near 2,300 employees, over $700 million as of last summer as a fiscal revenue. We've got the all-time greatest stock symbol in the world, I think, TECH, and north of $8 billion market cap, and that moves around a little bit. So pretty good valuation for what we've been doing, but we're pretty proud of what we've done, and we'll tell you all about it here. We are -- a majority of our business is in consumables. We do have instruments at 10%. And if you actually add back the consumables that make the instruments work, the cartridges and such, it's another 10%. So roughly 20% in the instrument-type business. We're a bit services, and we have a nice growing royalty stream as well. We're in a lot of applied applications that are really in research at -- you should understand, antibodies, proteins. Proteins is kind of the core to our history. We've been -- we're actually a 42-year old company and we started out in hematology controls, but we're the kind that kind of put proteins through research into a market. Clinical controls. I mentioned immunoassays. We are the world leader in Ventana and ELISA Kits for research, tissue biopsy through an acquisition and also liquid biopsy, our latest thing we've been moving into. And then we have automated protein analysis instruments that hopefully can leverage all this content. So these are the spaces I'll talk about today. In terms of our demographics, we're pretty evenly split, academia, pharma, OEM and distribution. Distribution is largely in APAC and Asia. We are 57% in Americas. EMEA stays around -- we've been growing kind of all together. Even though there's been a lot of growth, the splits haven't changed too much, except for Asia. So we were 3% in China 5, 6 years ago, and we're up to 8% in China. So that's the biggest really overall change. Not a bad track record for the last 6, 7 years. We've worked pretty hard to get to the point of becoming a double-digit grower. Now the trick is can we keep doing it or better. So that is the name of the game. We had a great first quarter, and we'll hold you all in suspense for this coming quarter. But so far, we do feel we're on our thesis for the year. We don't give official guidance. We give kind of an annual guidance. 10% to 12% is what we're hoping to land this year. We have 4 key strategies. They probably overlap a lot of people's strategies. It's more about like the devil's in the detail, but geographic expansion has been a really big part of our story, not only Asia and China, but also even in Europe. We've bought out a lot of our distributors, going direct most countries now. And we've grown from roughly 100 people to 275 in the last 5 years. So we're becoming real with enough critical mass until we start doing more of our own. Product innovation. We have a lot of products. We have 50,000 products that we make and sell, and we distribute another 300,000 antibodies that we source. So we do have the largest catalog of antibodies. And we have a lot of stuff. And we actually developed and introduced them to the market, about 1,500 new products a year, mostly reagents. And to that end, the innovation is very important. And the innovation in reagents is different innovation than instruments, and you have to measure and work accordingly differently for all of them, and we work hard at that. Some people call M&A a tactic, not a strategy. In our case, it really is a strategy. We really work hard on the hopper of targets that we're looking at to actually leverage synergies, primarily of our content, of our reagents, which are really ubiquitous across, as you know, so many applications. And then lastly, you can't triple in size in 5, 6 years and not have a change management issue. So you really got to focus on your employees. And in today's economy, keeping employees is harder than ever, as we all know. Finding talent is hard, and just try to get that microbiologist to move from here to Minnesota. They aren't doing it in January, I guarantee you. So we really care about keeping our employees. We have -- out of that size of employee population, we're nearly 300 Ph.Ds. We are over half female. In Minneapolis, the headquarters, roughly 800 employees and almost 1/3 are Chinese. So we're a bit -- we're very diverse. Here's a bit of what we've done in the last few years. These are the acquisitions by year, the areas that we're in. The numbers are down below again, but we average 2 or 3 acquisitions every year. They're primarily all bolt-ons. We are not really big enough to be focusing on cost synergy-type strategies or anything. These are, again, bolt-on strategic assets that are synergistic to what we already have in place, so we can leverage content on instruments. We can work geographically by creating more size in China, as an example. We are going after new applications. I'll talk about cell and gene therapies, and on the right, Quad and B-MoGen, are parts -- are new parts of that value stream that I'll talk about. So a little bit on the culture. EPIC is kind of our -- is kind of how we run things and we measure everybody in the company on these attributes aside from just normal performance, so empowerment, passion, innovation, collaboration. We care about this. We really want to develop people. We have a leadership forum. We really work hard at developing our talent and then do career development. We want people to really give it everything. We're -- I'm an ex-3Mer and innovation and having freedom to work and innovate is very important, to be not afraid of failing and have no punishment in failing is part of the culture we're trying to really push globally for the company and make it sustainable for decades to come. So taking risk is important. It's hard to really be innovative if you're not taking risk and then people won't take risk if they're afraid to do so or think there's punishment. And lastly, the days of the single scientist have gone away. Collaboration teams, working together, working across boundaries, countries, everything is really important. And we do that, and we also focus, of course, on how to get more consumables or solutions that work on different kinds of instruments, et cetera. So full solution thinking. A little bit about our structure. We're organized as 4 divisions in -- 2 each in 2 different segments. So we have a Protein Sciences segment and then a Diagnostics and Genomics segment. The Protein Sciences segment is roughly 2/3 of the size of the revenue of the company, and they are broken down by reagent solutions and analytical. Reagent solutions are composed of our antibodies and our protein business. So the -- most of the history of the company is sitting here. In analytical solutions, although we did move assays in this area because they work well with the SimplePlex and multiplexing systems that we have as well, all our instruments also live in those areas in this division. The brands you see that we use are down below. And for most cases, they're the brands or the brands that came with the acquisition. On the right, Diagnostics and Genomics. We have a diagnostics. It's more of a tools division. So this is where we have our controls, hematology controls, blood glass (sic) [ gas ] controls, contract manufacturing for big diagnostics, where we participate in over 185 10-Ks for big diagnostics. So we're really specced in. It's very sticky and a good, solid, steady business overall. And genomics is really our newest area. So starting first with ACD as an acquisition for tissue biopsy. The RNAscope technology for spatial imaging, single cell analysis, growing very nicely. I'll talk about it in a minute. And then lastly, Exosome Diagnostics, our first foray into a Medicare-approved cancer type of application. First one we've come out with is approved -- is for prostate cancer test, the rule out test. So first, a little bit on proteins. This is the history of the company. We have something nearing 8,000 different types of proteins for research. These are the highest value proteins you can buy in the industry for research. We're known for -- our brand is known in this area, is the gold standard with R&D systems. And we're used really in traditional applications, but it's very key also for cell therapy, gene, where things are going. We are -- we have some great, new exciting news, whereas we never knew we'd be able to have a chance of doubling this business after 35 years. But in the next 3 to 5 years, we may double this business because cell and gene therapies are going to need a lot of GMP proteins to feed these cell lines. And so we're actively going after this. We're building a $50 million factory in St. Paul, 50,000 square feet, $140 million of initial day 1 capacity that we hope to sell out. And if any of you are looking, we're taking orders so... Antibodies, the largest catalog in the world, as I mentioned. Well over 300,000, and we make -- we develop over 20,000. Our antibodies are known as very high-quality as well. Since when you develop antibodies off of very high-quality proteins, you typically get a high-quality antibody. They kind of go together, which then you can work on very high-quality assays, which we also do with these. And we're known for our asset where we sell antibodies and antibody pairs into a lot of companies that do assays. We're very deeply involved in -- everybody's involved in Luminex, but also other areas as well, other types of immunoassay platforms that are out there. We've -- we really are a little bit the Intel Inside when it comes to antibody pairs for everybody doing immunoassay automation. We even have a small molecule group. It's a collection of 30 Ph.Ds in Bristol, England, Tocris, a very well-known brand and a very well-established inhibitors and protein path degradation solutions. And right now, small molecule is kind of all the rage as well. And the GMP versions of this are also really, really growing nicely for us. We've never had better growth than the last year in this business unit. A little bit on immunoassays. So as you know, I mentioned, we are the creator of the ubiquitous of ELISA Kit. The R&D Systems brand ELISA Kit is the gold standard. As you can see, we're involved in ELISAs and assays from low to high and from homemade to fully validated. And we sell ranges in bulk formats for people to do their own. And we've just been doing this a long time. The bottom line here is if you're going to be in research assets, you're developing a research assay, you want to stick with Bio-Techne because the R&D systems brand gives you the quality you're looking for, for really consistent data. A little bit of a picture, quick picture on our line of instruments for really all protein analysis. We really stem from basic imaging through separation, immunoassays, as I mentioned, microfluidics, which is a simple Western as well, the Western blot. Automation, we're the only one in the world. And protein purity measurements in our biologics platforms. And then finally, defect analysis and -- as well. So a nice lineup. These are all instruments that we've really acquired through acquisitions. They mostly live in this analytical solutions division. They all have very foundational IP. We have gross margins near 70% in all these platforms. And we're tracking well on our way to a 30% op margin for these businesses, which is pretty good. I've managed mass spec businesses before in HPLC, and it's hard to take hardware into the realm of 30% op margins almost no matter who you are. So we're pretty proud of this. Pretty famous diagram. I think there's 29 companies still using. And I think -- but the cell and gene therapy workflow, everybody's chasing some form of this, whether it's on the bioprocessing CDMOs, CROs. We're a tools maker. So we're really chasing the new work stream here for a nonviral approach. We've made acquisitions to that effect. We have a bead technology that's not magnetic, that's easy to dissolve and give almost near perfect yield. We have gene editing technologies, transposons, which carries a better payload, quicker, faster, cheaper and higher yield as well. The GMP proteins, I mentioned, we have these test platforms that can be used as testing within the process. As an example, our SimplePlex platform is immunoassay is something we can develop a panel and do patient monitoring for cytokine storm in the hospital. But we actually have a pretty big deal going with a company in China doing this very thing in an automated format. And it's the founders of Mindray. So they're big and they're real. So a very exciting area, our newest area in the company, really, that we're really focused on. And we're very close to a complete full workflow, where you'll notice maybe if you know this stuff, you'll notice that there isn't a leukapheresis box. There's nothing tying it to the patient yet. There's also the missing bioreactor. We're going to be a little bit vanilla on bioreactors. We're going to be able to do different versions. And the box is coming. We'll have news soon, but our approach is like all new approaches here, probably more compartmentalized, away from the patient, away from that expensive ICU. So as the world's going after solutions here that are less than $400,000 a patient. This is going to be very important to get this right. We see a lot of scale here. We see this as a potential $300 million division in only 5 years from less than $30 million right now, with the anchor of this business being the GMP proteins. On Diagnostics, just quickly. We have a lot of products here. They're very stable, the controls. We work with about 30 different companies, mostly OEM for doing controls for their analyzers, counters, et cetera, and hospital equipment that, by regulatory, have to be calibrated every shift, so to speak. Very stable for us. Works well. There's also a migration to a lot of handheld equipment. So we're just in the business of doing controls. Now the ACD technology platform, our Genomics division. This is in situ hybridization. This is really coming -- the pain point here is within the IHC. So with IHC, when you're standing almost and looking for that protein expression on a tissue sample, you need that antibody to do it. And actually, 25% of the time, that antibody does not exist. So it's a big, big gap. Our methodology, as you go into the cell and you're looking for the gene within the RNA. So if there's no gene, well then, there's no chance of cancer. If there is a gene, you still don't know the expression level, but you might have more information and to back up to using IHC or some other tool methodology. And this technology does not hurt, does not destroy any morphology of the sample. You can do this all day. We have -- it's a probe technology that's patented, gives us a lot of signal. Hybridization has been around forever, but not with this much signal. So we have a lot of signal to work with. So it's really catching up fast. A 20%-plus grower, has been since we acquired it, and a long way to go. The newest product line here is we call HiPlex. We complex to 12 on the same sample. And we've just, I guess, documented the IP necessary. We can talk about a superplex version. So we're going to be coming out with a next plex version that can do in cases of 12, multiples of 12. So we've tested as high as 96. So we see a lot of value in a 96 plex version of this test with the kind of cost encountered. Other technologies, whether they either be 10x or nanostring or other, you have to get that 3 in a $1,000 box, and this is just a kit, and it works on any of your equipment you have currently in your laboratory or hospital or whatever. Everybody wants to talk to us about our foray into liquid biopsy. So these are the 3 known paradigms of liquid biopsy that -- and most all the companies in the world are derived from. And the oldest platform out there is circulating tumor cells. And they're very good for some things and probably surveillance. So after a chemo, if they're disappearing, then you know you're doing something. But by the time you have enough cells in your blood stream from shedding from your tumors, it's too late. It's not early enough. Cell-free DNA is better, but it also has problems. One in blood. There's lots of it from lots of places, and it's very hard to understand where it comes from. And it's hard to treat cancer if you don't know the origin of where it's coming from. So these are kind of known problems. Some solutions are better than others. If you're working in the stool, like, exact sciences works great because that's about the only place it can come from is the colon. So it works fabulous. Blood is 1,000 different areas. So we've migrated towards exosomes. Exosomes been around for a long time. The whole world thought, in the science, it was more of the trash bin for the body. Exosomes are released from your cells in all stages of life, early, mid and even death, where cell for DNA and others are really more at the end of the life cycle for cells. So again, a timing issue. Exosomes are small. They're so small they actually can get through the blood-brain barrier. So there's a whole another round of neuroscience applications from that. Exosomes have encapsulated RNA that are total integrity that you can interrogate, all right, so for genes that you're looking for. On the surface of the exosome are proteins, and those proteins can be interrogated to tell you where they came from. So you get origination data and you get RNA data. And of course, RNA being the language of the cell, there's a lot more copies, so you get a lot more signal. So we see exosomes as a platform that could lead to many, many kinds of new types of diagnostics, companion diagnostics, and even therapy is delivering payload. First test we've launched out of exosome diagnostics is called EPI, and it's for prostate cancer. It's a rule out test. It's really simple. You pee in a cup. There's no DRE involved. You want the first draw. You can put it in your fridge for 2 weeks and then ship it, whatever. There's no issue. It can be in a freezer for years. No problem. So much more -- much safer than cell-free DNA to deal with,, for one thing. These are the 3 genes we're looking for. It's a simple PCR test, so no next-gen sequencing. In terms of an LDT model, a CLIA lab, this is a very low-cost solution for cost-wise. And we have a proprietary algorithm that we derive from the data that comes from this, and it gives us a 92% sensitivity. So the whole goal is to eliminate that first biopsy that, that male over 50 who finds his first PSA at 2 or higher and was then told, you should probably get a biopsy, it gives you more data to know whether you should do that or not, whether you can delay it. 90% of all biopsies right now are -- come back negative because there are not any tools beyond PSA. So you all are just prescribing to be safe. And there's a 7% infection rate that goes along with this biopsy. So it's high risk. So we see a big need here. It's 1.1 million biopsies. So it's over $1 billion. And we just received Medicare reimbursement approval here at December 1. We're starting to ramp and see where it goes, but we have other things to do. This is the road map of all the validated tests we have with this platform right now. We have -- we're working on bladder cancer and kidney rejection next. Kidney rejection alone is a $2 billion market. I don't know if you know, but if you're this person who's waited a couple of years to find a kidney, you get this kidney, and then you find out that every 2 months for the first year and every quarter after that, they're going to go into you and take a biopsy, take a chunk out of it and test it for rejection. So it's really high risk, very expensive process. The tests that go along with it, some other makers out there, upwards of $2,000, $3,000. On the blood side, we have similar test validated for breast and lung. These actually also have cell-free DNA signature to go along with it. So it's a very powerful signature, we feel. And then we're talking to potential partners right now how to get those into clinicals. It's just impossible for us to work in all these in parallel. So we're looking for partnerships. We're driving the urine. Stool indications are soft right now. And we're not a company. If these things find any traction at all, it could be a real game changer for our company. So a little bit summing it up. We're a company with really 5 legs in the stool. We have this core area with this nice 40-year-old history and innovation on reagents in terms of assays, proteins, antibodies, and there are synergies with these science-wise, application-wise, commercial-wise to all these other areas that we've acquired into these adjacencies. Starting first with the instruments for protein measurement, protein analysis, proteomics, tissue biopsy with spatial type of applications on a single cell analysis. And moving to liquid biopsy, which is kind of tomorrow's revenue, this coming year's revenue streaming in. Looking 2, 3 years out, we see this wonderful opportunity with cell and gene therapy with the things we have. So some of it paying for today, some of it coming tomorrow, some of it in a couple of years. That center area here with our proteins, antibodies, extremely high gross margins, very stable, wonderful brands. Very good depth in terms of product lines and catalogs. So it's very safe overall. The markets we serve. If we were talking 5 years ago about just where these antibodies and proteins went, we'd be probably talking about a $2 billion addressable market, which isn't bad when you're $300 million. But with these other areas we're talking about lately in this discussion, we're upward to $10 billion in terms of addressable market opportunities. And you can see on the right, we just don't have a lot of market share anywhere. This is really a fragmented area, especially at the areas like antibodies. So lots and lots of players out there. So we see a lot of upside. We're executing well. We've got a great team and great executive team. There isn't anybody running any of our businesses that hasn't run a $1 billion business somewhere. So we've done really well that way. And there are some, I guess, living in Minnesota. January is not so great for some of us, but other than that, it's pretty good. We like to put together -- every 2 years, we go to New York and we give an Investors Day. This came from the one a year ago. We're going to update this year. It won't say $1.2 billion in 2023. It will say $1.5 billion 2024 mainly because we'll be adding that $300 million of cell and gene therapy to this flow. We have $150 million of Exosome in here. It might be $50 million to $100 million, it might be $500 million. There is so much opportunity. It's really going to come down to how well we execute, how well we're treated by the MACs, the NGS and such, which is another story. And partnerships, how well we do with partnering and sharing this technology and to build new markets and growing it overall. You can see how it all rolls up. We do think we have a trek back to 40% op margins as a company. If you take out the dilution from the investments in Exosome right now, we are tracking about 40% op margins currently, right now. So we feel very confident that we can not only grow this business at 10% plus organic growth, but also track our way back to a 40% op margin overall, which we feel leaves a lot of valuation left to come, so... So final slide, summary. You're around 40 years, you get a lot of citations. We're in 600,000 publications. We've -- we're -- even a new area like ACD is in over 2,000 publications already in technology, barely 5 years old. We're over 2,300 employees as of now. I'd like to say, 50,000 real products. And if you add the probe, just another 35,000 probes, but we do source a lot of antibodies. What I didn't mention to go along with that is we have an amazing digital platform now. We've been taking share from all the other antibody providers, mainly because our content and our search engines are phenomenal, and it's really working. And that we've had double-digit growth for many quarters in a row in both proteins and antibodies, primarily because we're giving researchers the ability to really fine tune their experiments and search what they need online with us and then do bundle approaches to purchasing, so... And 6 instrument platforms. It will probably be more, but I couldn't tell you today what they'd be other than possibly in more imaging areas and cellular analysis and so on. So with that, that's kind of a full quick story on our company and where we're going, how we're growing, where we're going next, and it's really focused on -- it's really 2 or 3 key areas without screwing up the stuff we've had for a long time. So all told, we'll see how it goes, and I look forward to hearing from many of you in the next room here for questions if you have any, okay? Thank you.