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

Jim, the first question that I have here -- and let's talk a little bit about the quarter.

You've traditionally grown about 10% to 12%. You maintained your guide there. Maybe just give us -- provide a bit of a backdrop of what happened in the quarter, onetime items. Are some of those things -- do you expect some of those to continue into the next couple of quarters here? And how should we think about the 10% to 12% for this year?

So yes, so Q2 was a lower quarter for us organic growth-wise and -- than what we've been accustomed to seeing. It was really -- a lot of it is driven out of Europe. Europe was -- it was down actually year-over-year for us, which has been double-digit growth for a number of years in a row, quarter-wise. And fundamentally in Europe, if you -- there's a number of onetime -- I call them onetimers, there are big deals. So as we -- we've been pushing the sales team to go more and more upstream and go after more big reagent deals even with pharma as opposed to just the day-to-day vial sales. And Europe was successful with that last year, but didn't -- they were one-and-done and didn't necessarily repeat that this year. And if you back those out and look at their daily run rate -- normal sales, they're actually mid single-digit grower in the last quarter. So it wasn't as bad as it appears. Having said that, we are in the business to continue to grow regardless of how -- whether there's big deals or small deals and so they're expected to find new deals next year, right? But we -- we've spent some time over there and realized that there's some tweaks we needed to do to structure them better, to take advantage of that and get more of those big deals. So for example, in the U.S.-- the U.S. commercial model, particularly for our reagents, is very different than it has been in Europe, even before Chuck and I started 7 years ago. And that Europe was always much a rep sale, driving demand for the reagents, whereas in the U.S., 7 years ago, it was all inside sales. There was really no digital, whatsoever, and there was no field reps. And what we've invested in over the past 6, 7 years is both on the digital side in the U.S., which is now a big part -- or even for our growth in the U.S. for antibodies, in particular, but also protein, and also in a select number of reps to focus on big deals. And that's been ingrained now for a number of years in the U.S. and they find new deals every year. So we don't have -- talk about these timing issues within the U.S. Also the pharma concentration is much larger in the U.S. So you may have onetimers by company, but in aggregate, we're always growing, right? So Europe wasn't set up that way, and we're working now to tweak that, so that their sales reps in the field are more focused on the big deals, so they can find those and repeat those. And investing more in inside sales and digital solutions there to repeat the success we've had in the U.S.

Got it. Okay. And just remind me how large is Europe for you? And sort of how should we think about that geography based on the sort of the customer feedback that you're getting so far. I appreciate the onetimers that happened here. But overall, how should we be thinking about Europe?

Well, Europe is -- it's just under 30% of our total revenues, it's around 27%, 28%. So it's obviously a sizable chunk. It's an important piece of our business. And I think from the tweaks we're making, we're actually implementing it right away. We'll start to see benefits from that right away. We don't have as many of those headwinds going forward as we did in the past quarter, although there are some. So we are expecting growth to get back to at least mid-single digit, if not high single-digit, by the end of the year in that business.

Got it. I wanted to touch briefly on this topic, given sort of yesterday's market impact and the questions we're getting on China. Chuck reminded us that there were some disruptions that were happening. But help us understand sort of how much of the supply chain sort of exposure do you have? And importantly, how should we think about as this -- if the coronavirus situation was to continue to grow? How should we think about Techne in that context and having a presence in China? And can you remind us how much share for you?

Sure. So our total global revenues in China is roughly 8% of our total company. The good news is that our -- the supply chain impact is very minimal. In fact, for at least 95%, 96% of the business, it's 0%, because almost all of our reagents business is made here in the U.S. in Minneapolis. There are some downstream suppliers within our instrument business. There are 3 or 4 levels down in the supply chain that may have some exposure to China. We're still investigating and understanding what that is, how material it is and how replaceable it is. But worst case, it's -- I expect 1% or 2% of our business. But there's time we think to mitigate that anyway. So bottom line is supply chain is not what we're overly worried about. And with regards to the impact on our revenue, at the end of the day, 90% of our business is consumer-based, run rate-based. So if the researchers aren't going to work, they're not buying every single material. So that is the current struggle we have in China right now or at least for the last 3 weeks, is that for the most part, they haven't been going to work. And so they haven't been buying -- they haven't been placing orders. All I can tell you is what we've seen so far, January was an outstanding month for us. It was even better than second quarter was. But once news about the virus hit right at the start of February, and people were told to stay home, it's right up. So February has been bad. And the big question is what would March be? And we don't know because they are starting to come back to work, but it's all going to depend on how fast they come back to work and then what their behaviors will be like once they do. You can see where they might be cautious and not buy because they don't know how long they're going to able to stay at work or they could do the opposite, and they could actually try to hoard product because they're concerned about supply in the future. Anyone's guess, and we just have to play out and see what happens. We think ultimately, it's a rather short-term impact. I think the concern -- maybe another concern would be -- longer term, would be how far is this spread in Europe, right? Because if it's continues to spread in Europe, and there's more concern about people going to work there, you could have a similar situation in Europe, just like how you have in China, and that would obviously be a short-term problem for our business, as long as people aren't going to work. So it's going to be -- it's going to impact it. It's hard to say to what extent at this point. Longer term, I think it only strengthens the result China will have in continuing to invest more and more in the life science space. So not that you wish these kind of things to happen. But in terms of China, they've invested -- double their investment in life science research, twice over the last 2, 5-year plans and their next 5-year plan, I think, they are going to do up here very soon. And I'm guessing this will only strengthen the result to invest more. So I think long-term will be good for our space. Short term, it's obviously a problem that people aren't going to work.

Got it. Okay. So looking at the long term at the last Investor Day, I think, back in 2018, you put out $1.2 billion target in fiscal year '23, 40% operating margin -- or reaching 40% operating margin. Is that still in your line of sight? And can you give us a sense on the operating margin improvement here? And how should we be thinking in the context of Exosome, which I'll get into in a minute.

Sure. So the revenue line is definitely our line of sight. In fact, if you look at our track record of organic growth, we've increased our organic growth rate every year, except for one, I think it was the same year-over-year. But basically, we went from no growth to 10% growth last year. Over the past 7 years, we've increased that rate every year, and we expect that trajectory to continue. I mean we have 4 major growth platforms on top of our core business. Our core business has been actually performing better than we anticipated. So for clarity, our core business, we consider as our proteins, our antibodies and our immunoassays, our live assays, has been high single-digit, even low double-digit growth in some quarters. So we only expect when we put that number out there that we'd be mid-single-digit growers. So we're actually overperforming there. But then you layer around that our 4 key growth platforms, one being the instruments, the automated assays that use our reagents. That has been, more recently, a 20%-plus grower, but at least 15% since we acquired the company 4 years ago, and it's still less than 10% penetrated in the market that we -- that market potential we see for it. Our tissue biopsy business, ACD, our genomic solutions for that, similar and that it's been growing for the most part, on average, over 20% since we acquired that business 3 years ago. It is also less than 10% penetrated in its addressable market. So we see that continuing. And that's based -- those 2 growth platforms, our instruments and our ACD business, will be what continues to give us accelerated organic growth over the next several years. And then beyond that, our next 2 growth platforms, being our Exosome, the liquid biopsy player as well as our cell and gene therapy player, we expect those to really ramp, particularly 3 years out and beyond and be the driver for continued acceleration growth in years 3 through 7 or 8. So what's great -- what we like about our business and our story is that it's not a one-trick pony, it's not just one platform that we're betting on. We've got 4 very solid growth platforms that's all unique, all strong patent protection and so forth, and a lot of runway ahead of them. That's why we think the revenue is very attainable. On the margin side, what gets missed at times is that if you actually back out the Exosome piece of our business, we're already in the high 30s. So gain of 40% isn't really that much of a stretch for the most of our business. Our ACD business was losing money 3 years ago. It's now in the mid-teens, and it expands 300 or 400 basis points every year. Our instrument business was losing money when we bought that. It's now in the mid-20s, and it also expands 200 to 300 basis points every year as it continues to scale. And then we need Exosome to produce some revenue. And obviously, that will reduce the drag it has on the overall margin. So we have a very pretty clear path of 40%.

Okay. So on the Exosome revenue, tell us what you're baking into the guide this year? And what's your expectation here for the ramp now that you have the LCD from NGS behind you?

Yes. I won't say specifically what we have, it's not a material amount because we don't need a material amount from Exosome to get to a double-digit growth, considering we had double-digit growth last year without Exo. So it's -- we're a year behind where we thought we'd be with Exo due to the year delay in Medicare, primarily. So I'm not going to get too specific about what's in there for this year. But we hope to provide some more color come to the end of our fiscal year in June because we'll now have 6 months of Medicare run rate behind us and have a better sense for the shape of that curve going forward.

Okay. Let's talk about the protein segment. This is obviously a core business for you, and a number of important drivers there. But the one that you talked about, instruments, tell us where are some of the areas that -- where you can see consistent growth for years to come? And what sort of -- what parts of the portfolio in the protein segment that you're most excited about?

Well, yes, on the Protein Sciences segment, that's where our instruments play. So our automated solutions and what we're most excited about within that, the instrument platform, there's 3 of them. There's the more recent iCE platform, which is for QC testing for biologic drugs. And then we have the Simple Western platform, which is the automated Western blot system, the Wes and Jess, we call it. And then we have the Simple Plex, which is the automated Eliza, and we call that Ella. And right -- the most runway in which the biggest growth and the fastest right now is Simple Western, and that's what I mentioned earlier. It's roughly somewhere between $500 million, $1 billion market if the world converted to automated Western blots. And we're less than 10% penetrated right now. So that's still a huge upside for us. Simple Plex, maybe a smaller addressable market, but growing faster right now than our Simple Western. And that has some kind of bluebird potential with it with regards to various diagnostic plays. You've heard me and you know about, Puneet, the Micropoint deal we signed in China, where they're using our technology, using our instrument as a diagnostic tool for cytokine storm in cell and gene therapy. And it's currently in clinical trials right now in China. And if that gets all the way through, we will be the sole provider of cartridges for that platform. And that, by itself, could turn that business into a $50 million or $100 million business. So -- I mean it's still a bit of a long shot, but those are the kind of bluebird opportunities that platform has. And then what we're most pleasantly surprised and pleased about is our overall core antibodies and proteins. Like I said before, been growing low -- high single to low double-digit growth, and we never anticipated that. Our digital solutions team has really done an outstanding job, and we're really addressing that millennial demand. It's now in the workforce heavily and making those decisions on purchasing. And then finally, I'll mention cell and gene therapy because that player, it will be part of our Protein Sciences segment, at least initially. I think it's big enough that it could be its own segment or division someday, but that's primarily going to come from components within that division. And we have -- almost every part of our protein sciences portfolio has played a part in that cell and gene therapy workflow. In fact, even our ACD business, which is in the diagnostics and Genomics segment also has a part in terms of quality control of that cell and gene therapy as it goes through the process. So our instruments, our reagents, our new technologies like -- for our new nonviral technologies for gene editing, our non-magnetic technologies for cell separation. All these things could come out of that segment and can be a huge, huge driver for growth, particularly years 3 and beyond when these clinical trials start coming into commercialization.

Got it. So let's talk about cell and gene therapy, obviously, an exciting market, early stages still in this market. So you talked about protein. I mean, obviously, protein is your strength as a company. Tell us about the manufacturing -- the facility that's coming up, timing of that and then potential ramp once it's a strength to you.

Sure, I may have probably hit that ground on why we chose to do this to begin with. I mean we do sell GMP-grade proteins today. And in fact, the business has gone from nothing to around $3 million to $5 million in a matter of 3 years. So it's grown a lot, but it's on a very small base. And it's a small number in a small base because it's basically going to clinical trials. But when these things hit commercial scale is when the need will dramatically increase. As an example, we had one pharma company preparing for this eventual need come to us, just ask, how quickly can we spool up $10 million of a given protein for their cell -- for their eventual cell and gene therapy. And we said, well, it'll take about 10 years, again under our current practices. And they need it in 6 months, and that's when we said, okay. The analogy I like to use, it's not a 100% accurate but it's a good analogy, is we make our proteins today in beakers. And we put a beaker, form in the freezer and it lasts 10 years, because we sell it in little microscopic vials, all right? That's for research. Think of GMP-grade for production, you need it in barrels. And so you need -- all the steps, all the equipment, all the facilities space that's needed, which might be the size of our room, for research needs to be a size of a factory for GMP grade. So it's replicating what we do, but at a much larger scale. And that's why we're investing in a separate GMP-grade factory so that the next customer comes, and maybe we'll go back to the same customer. I'm not sure they're going to have other solution anyway, and they need -- and when they have that need, we're there to fulfill it.