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

All right. Good morning. I'm [ Chris ] from the life science tools and diagnostics research team. With me today is Bio-Techne. From Bio-Techne, we have Jim, who is CFO. He's going to go right through a presentation, and we have a breakout session next door. So with that, let me turn it over to Jim.

Great. Thank you. Great to be here. Thanks for joining me early this morning. It's our first time our company has been at the Cowen conference. So it's a pleasure to be here. Of course, our safe harbor statement and forward-looking statements, you can go to our website and read that in detail. To start with just an overview generally of our company. Bio-Techne is actually a 40-year-old life science tools company, historically known for its reagents portfolio, primarily proteins, antibodies and immunoassays, immunoassay kits. But over the last 6 or 7 years, we've been transforming the company from what was kind of a rather sleepy, privately run public company into a more scalable company for growth and reinvigorating the growth in its core but also expanding its opportunities in larger markets, larger markets such as instrumentation and liquid biopsy and tissue biopsy. From a geographic and end market perspective, we've also focused our growth in expanding or penetrating more deeply globally, outside just the Americas, as well as focused on the pharma/biotech end market segment where the budgets aren't as constrained as they are in academic. So 7 years ago, before Chuck comes -- joined as CEO, if you were to look at these charts, you'd see that the academic and biopharma tech were roughly about the same percentage of the pie. And now pharma/biotech is about 50% more than academic of that pie. And within the regional profile, 7 years ago, Asia would have been just a sliver, and now it's roughly 15% of our pie. So it does -- these charts do demonstrate where our strategy is taking us from an end market perspective. And overall, the results of our strategy has indeed shown that we've gotten back to very solid organic growth. When Chuck started, yes, I think it was about 4 or 5 years straight of relatively flat organic growth. And ever since then, as we execute upon this strategy, we've seen organic growth increase each and every year practically, now last year, up to double-digit growth, and we absolutely expect to see that continue going forward. So our strategies are basically around 4 very simple key pillars. The first one has been around geographic expansion, which, where we illustrate to you, been really focused particularly on Asia and even more specifically on China, where, in China, we've had 20%-plus growth every year for the past 6 years. Also to reinnovate the growth within our core, one of the areas we've focused on is prioritizing what we actually produce for new products. As a portfolio that has tens of thousands of self-made products, deciding what to produce -- new products every year can be quite a challenge. And so we've put in some pretty rigorous prioritization processes to make sure that we are making new products that are truly in demand for the current research that's going on today. To illustrate the success of that focus, 7 years ago, the company produced over 2,000 new products a year for about $2 million of new first year revenue. And now we average about 1,500 new products a year, so less new products, but about $10 million a year of new first year revenue. Our strategy has also been heavily involved with M&A to build out our product portfolio and to get into much larger markets. And it's been particularly seen in our -- as I mentioned earlier, in our instrument portfolio as well as our tissue and liquid biopsy portfolios. And when you do -- we've done 15 acquisitions, most very small, but when you do 15 acquisitions over the course of 7 years and you try to transform a 40-year-old, very sleepy company into a more modern, scalable company, you've got all kinds of issues with integration. And it's very, very important you focus on culture -- creating a culture because, frankly, that it created one from scratch because we went from 700 employees to 2,200 employees in about 5 years. And so it's really about making a new inclusive culture for everyone and retain the top talent that we can. Now let's focus a bit more on that culture a bit. We actually came up with our internal mission for our employees, Epic Tools for Epic Science. It's a bit gimmicky perhaps, but believe it or not, it resonates very, very well with our employees. It's very easy to remember and also highlights really the importance they know and they feel they make with regards to the progression of life science. Even though what we make is very, very small, it is extremely vitally important to the success of furthering our knowledge of biology and of medicine. And also, EPIC conveniently also is the acronym for 4 of our key values for our employees, which is empowerment, passion, innovation and collaboration. And all of our employees are essentially evaluated every year on how they show these 4 attributes in their work every day. I'd say it's been successful in terms of be able to create a culture from scratch. Practically, it takes years. That's very difficult to do, but that you can only -- the success of -- you can try to find data that substantiates whether you're being successful or not. And I think one example I'll give you is every year since we've been doing this, we give out employee surveys with a number of questions to our employees and try to figure how we can make it a better workplace for them. And one of the key questions, of course, is, are you satisfied with working in Bio-Techne? And would you recommend Bio-Techne to a fellow family member or colleague? And 6 years ago when we first started doing these surveys, the answer to those 2 questions was yes on about 50% of our employees. Last week, we just got the results of our most recent survey, and it's over 90%. So we're very proud of those results. And at the end of the day, it takes people to execute on our strategy, so you got to have the people with you. All right. So back to the business. Our business is organized into 2 primary segments: Protein Sciences segment and Diagnostics and Genomics segment. Within the Protein Sciences segment, that's where basically all of our core reagents reside as well as our instrumentation that uses those reagents. Our key brands there -- there's a number listed, but our key brands there are the R&D Systems brand for the reagents, which is a 40-year-old brand, and anyone who's worked in a lab will recognize that brand right off the bat. It has been the gold standard for proteins, and ELISA Kits, in particular, for the better part of 40 years. And ProteinSimple is the branding of our instrumentation. Over on the Diagnostics and Genomics segment, that's where our Diagnostic Tools division resides, which is mostly an OEM business to OEM instrument makers -- diagnostic instrument makers; and then our Genomics division, which is where our tissue biopsy and liquid biopsy technologies reside. And the key brands there are ACD for the tissue biopsy and ExosomeDx for the liquid biopsy. So diving a little deeper now into the actual products within our segments. For Protein Sciences, of course, proteins, that's what the company, first and foremost, is known for. We pretty much are the 800-pound gorilla within the research protein market. We basically invented the category of commercializing proteins for research use 40 years ago. What makes our proteins unique compared to the smaller competition that's out there is really the quality of our proteins. Proteins are very, very difficult to make. And it's even more difficult to make them so that they're alive or very bioactive. The more bioactive your proteins are, more they resemble protein in their natural state, the better your experiment results and the more results you can get from those experiments. Even more difficult than making the protein itself is coming up with a bioassay that actually proves its bioactivity. And Bio-Techne does not sell a protein and does not offer for sale a protein that we cannot prove its bioactivity from a bioassay. We're the only company that does that. And we actually really have hundreds of proteins that we've never even released for sale. They're sitting in our freezers because we still can't come up with a bioassay that proves its bioactivity. That just kind of gives you an example of the importance that we place on the quality of our proteins and why it's become the gold standard in the industry. Antibodies is also a very important part of our portfolio in Protein Sciences segment. Historically, our antibodies, even though we made thousands of them, were still fairly narrow because there's literally hundreds of thousands of antibodies. But historically, we focused on antibodies that were made from our proteins, and a really good protein makes a really good antibody. With the acquisition of Novus that we did about 5 years ago now, we expanded our breadth within antibodies, now had access to over hundreds of thousands antibodies, which is really what you need to be a dominant player within the space. It's a multibillion-dollar space, extremely fragmented, and we're probably -- as small as we are in antibodies, we're probably still a top 5 producer and supplier of antibodies. Where we've been very successful here is with -- particularly with the acquisition of Novus, they were very, very -- they have a very solid digital solutions program, which we obviously inherited with the acquisition and then it's since built upon. What does that mean? When you're a researcher and there's hundreds of thousands of antibodies to choose from, generally speaking, you're not going to go through a paper catalog to figure out what you need. You're going to go to Google, and you're going to type in the antibody you're looking for. And you better come up with #1, 2 or 3, otherwise, you'll never see that customer. And then once they get to your website, you better have a fairly interactive website to get them all the information they need, all the data, all the support that validates the quality and the uses of -- and applications of that antibody for them to ultimately make that purchase. 7 years ago, we had absolutely no digital marketing, and our website was a PDF file of our paper catalog. That's all it was. If you go to our website today, it's very much an interactive experience. I'd say it's world-class up there with the top life science tools companies, and we put a lot of emphasis on our SEO, search engine optimization, capabilities to drive activity to our website. And as a result, our antibodies have been growing double-digit for the past several years. Small molecules is also a piece of this business under our Tocris brand. And then finally, our instruments are based here as well. The 2 key growth platforms within our instruments are the Simple Western and Simple Plex. Simple Western, the instrument name -- we give our instrument human names because they essentially automate a human process. So within Simple Western, the instruments are namely Wes and Jess, 2 different models. And they essentially automate the western blot process that's done in almost every single laboratory -- life science laboratory in the world, whether it's academic or biopharma. It's a very messy process we've done manually for the past 30 years, can take up to 2 days to do and is, therefore, not very repeatable, not very reliable. Our platform is still today, the only platform that truly automates that from end-to-end and at the push of the button can do the whole process in 3 hours without any human intervention and with much more repeatable and higher-quality results. Our Simple Plex platform, very similar, except for a different application for the immunoassay, ELISA's. Those -- traditionally a manual process as well that can take 6 hours just to do one. Our system can do many at the push of a button in about 1 hour. So those 2 platforms have been our key growth platforms within the instrument business. And in the case of Simple Western, they use our antibodies as part of that application. Moving on to the Diagnostics and Genomics segment. So our Diagnostic Tools division is here. This is essentially -- again, our OEM business, this is essentially controls, kit manufacturing and specialty reagent production for -- again, almost every single diagnostic instrument maker in the world we do this for. We're probably the world leader in the space. In fact, this company was actually founded on our hematology control business 40 years ago. And as a side note, one of the scientists back then was taking the plasma that was used from -- that was discovered from the blood and ultimately thrown in the trash and from that, he extracted the first TGF-beta and made it available for commercial sale. And that was the whole birth of our protein business. So a little side note for some of those who wonder why we even have this business, it's actually the core of where everything came from. So tissue biopsy spatial analysis, this is of the ACD acquisition, ACD brand. The best way I can explain this business in this market is there's a lab process called IHC, immunohistochemistry, that's used most commonly by pathologists. And it's simply a tissue on a slide, you stain it with antibodies, you slather with antibodies, put some plastic chemical on a bit. It lights up and shows on the tissue where the protein of interest is located and where it's morphed to without destroying the sample, which is important in pathology. The problem with using antibodies is that they're finicky. They don't always work. And even more so, roughly estimate up to 20% of protein targets of interest of pathologists don't even have a known antibody that works at all. So they have to resort to other means such as PCR and things like that, but that destroys the sample and doesn't give them the spatial analysis that they would prefer. ACD is technology -- is the first technology and is most precise to be able to valid and look for the protein of interest, first, look for the gene. And not only look for the gene but do it in the same -- exact same application, the same way you do IHC, so it doesn't destroy the sample and gives you that spatial analysis on the tissue where the gene of interest is showing up. The bottom line is before you start looking for the gene -- or before you start looking for the protein that you may or may not find, look for the gene that expresses the protein first. If the gene is not there, you can stop looking. If the gene is there, then you may want to continue on with IHC. Pathology market is a very large market, and we think this technology has amazing potential ahead of it. And then last piece of our business within this segment is our liquid biopsy platform. It's an exosome-based platform, which I'll explain in greater detail here in a moment. And we currently have biomarkers, essentially pre-revenue right now, although starting to have revenue this calendar year. And already, it's not just a one test liquid biopsy platform. It's a multi -- the platform technology has multi-biomarkers for prostate cancer, bladder cancer, kidney transplant rejection, lung cancer, breast cancer, and we're working on very close to certain neurological disorders for biomarkers as well. And I'll talk more about that in a moment. So in summary, we have basically key -- 4 key growth platforms that all has synergies with our core reagent portfolio. Lower right here, you have the instrument platforms. In the upper left, you have the tissue biopsy ACD platform, which is kind of that here and now growth that we're experiencing in the near term and will for the next several years at least. And in the upper right, we have the liquid biopsy, which I talked about, and the cell and gene therapy, which I have yet to talk about but I will, which is where we believe our growth platforms of the future are, meaning years, especially years 5 and beyond. So very nice that we have layers and platforms of growth that stagger for the next decade, we believe. So I'm going to dive a little deeper now into the liquid biopsy piece, the exosome platform. Generally speaking, in liquid biopsy, there's, historically up until very recently with our platform, been 2 met ways of going at liquid biopsy. Liquid biopsy, I'm sure most of you are familiar of that in this room given this conference that liquid biopsy is really tip of the spear of where diagnostics are going. So we chose -- if we were going to get the diagnostics, which we wanted to because it was a much bigger market for assays than just research, we want to be with the tip of the spear was, and that was in liquid. The 2 technologies that have been prevailing so far are CTC, circulating tumor cells, and cell-free DNA, and more sold now towards cell-free DNA, largely because circulating tumor cells are very difficult to work because that time you have enough of them in your bloodstream or in your other bodily fluids, it's often too late by the time you can diagnose it. So most other companies that are dealing with liquid biopsy right now are using cell-free DNA. So I'll talk more about that. The issues or hurdles that companies have with cell-free DNA, as it's been explained to me, is that number one, particularly in your blood, trying to find the DNA strand of interest is extremely difficult to do. As you can imagine, there's all kinds of junk floating around in your blood, not to mention all kinds of other cell-free DNA. So trying to find a specific one you're looking for is, to me as it's been explained, like trying to find Waldo on the beach. It's very, very difficult. But let's say you overcome that hurdle and you find a way to find that particular DNA strand. Now you want to be able to read it, see if it had the biomarker you're looking for. The other issue with cell-free DNA is that it's floating around in your blood, as an example. There's all kinds of enzymes and things in your blood that are constantly eating away at those cell-free DNA. So the life of that cell-free DNA is very short. So even if you find what you're looking for, you often cannot read the biomarker that you're trying to read, the sequence you're trying to read. So -- but now let's assume you can overcome that hurdle. You can find it, and you can read it and you actually find the biomarker that you're looking for. The other challenge you have with cell-free DNA is, well, where did it come from? It may be a biomarker that you know -- you believe is associated with a cancer, but what cancer? Did it come from the liver? Did it come from the kidney? Did it come from the lung? There's really nothing in that sequence that can tell you that. What tells you that is protein. Okay? So now let's go to exosomes and how our exosomes differ. As our scientists tell me -- the scientists have known about exosomes for decades, and they were largely ignored because they were considered the waste buckets of the cell. They're like the little vesicles, I think, those little bubbles. They are constantly excreted from the cells. Largely due to the work of Johan Skog who now works for us because he started ExosomeDx, and honestly, he could be -- he might get a Nobel Prize someday for his work on exosomes. Largely due to his work, they have now realized that exosome is actually playing an important part in intercell messaging because within those vesicles or bubbles is active RNA and DNA. So a lot of -- even drug companies are now looking at different therapeutic applications for exosomes as well. So back to Diagnostics. These vesicles are -- great amounts by cells, way more than cell-free DNA. So you have abundant more of these to look for in your bodily fluids than you do cell-free DNA. They're easier to find. Once you find them and you can extract through that membrane and get inside that vesicle, the RNA, DNA that's within that is perfectly protected by that membrane. So there's no risk or issue of can you read it or not, unlike cell-free DNA. And last, once you read it and you get the biomarkers you're looking for, you know exactly where in the body it came from because the membrane that protects that RNA and DNA is made from the same protein in the originating cell. So that gives you more information than cell-free DNA. And the last bit I'll share with you that -- how they explain to me is that with exosomes, that platform, the biology works for you. In cell-free DNA, the biology is working against you. So what does that mean? How it's explained to me is that exosomes are only excreted from cells in the dying process of the cell -- I'm sorry, cell-free DNA. Cell-free DNA is only -- excreted from cells in the dying process of the cells. Whereas exosomes are excreted from cells from the time they're born, all through their growth and when they die. So what does that mean? That means you have the opportunity for much earlier diagnosis with exosomes than you do cell-free DNA. So it's for all those scientific reasons is why we got very excited about exosomes as a diagnostic platform. So our first diagnostic test is -- to go to market is the prostate cancer test. So what it's addressing is basically unneeded or unnecessary prostate biopsies. They say up to 90% of all prostate biopsies are essentially unnecessary because they find that there's no high-grade prostate cancer. And one of the reasons why there's so many unneeded biopsies is because the only tool urologists have today to determine whether you should have a biopsy is your PSA score. And every one basically believes PSA score is not much better than a flip of a coin. It wasn't even -- the PSA wasn't even designed to be a prostate cancer screener, but it's the only tool that exists. Now it does work in the sense that if you have a very high PSA score, say, over 10, you probably have a high probability of prostate. Cancer-wise, you probably should have the biopsy. If you have a score under 2, generally speaking, it's not going to be a sign of any kind of high-grade cancer cells. We'll just monitor it and see you next year and see if that gets any worse. But there's a huge population of men over 50 that have the score between 2 and 10. They call it the gray zone, and there's no statement, there's no SOP for how doctors are to treat a patient in that range. And they said, it's up to 1 million patients a year just in the U.S. that fall in that range. What our test is designed for is that if you have that score within 2 and 10, all you do is simply pee in a cup, and we analyze that sample and come back to you with 92% accuracy that you don't have prostate cancer. So it's a negative -- or it's a rule out test. Our test will rule out that you don't have a high-grade prostate cancer so don't bother with a biopsy. So that's what the market is [ intended for ]. It's a very big market, and we're very excited about launching that. We just got Medicare approval in December. We're working on private payers, and we're really excited about seeing this ramp over the next several years.

So what's the sensitivity?

I always get confusing the sensitivity and the specificity. It's -- I'd say, I believe it's -- do you know which one is which, Kim?

Detecting of true positive sensitivity.

All I remember is that a rule out only requires a high score in one of those. Rule in requires a high score on both. And it has the high score on the one that's necessary for that. All right. Next platform I want to spend a little more detail on is cell and gene therapy. So like liquid biopsy, the tip of the spear where diagnostics are going, cell and gene therapy is the tip of the spear where particularly cancer treatment is going, right? I think we all hear about this. It's kind of a hot topic.

Why is that? So why is it that it's only a rule out? Why can't you do the other [indiscernible]?

We haven't got the biomarkers completely found yet. I'll tell you, we're working on it. We're working on it. We're getting close, but we don't have the right biomarkers to get that right -- the high score on both of those sensitivity and specificity in order to [ tend that ]. But that is an opportunity, which we don't have built in any of our numbers yet because it's not -- we don't -- it's not quite there yet. The only thing is you can get there within a couple of years. And if that's the case, it would be revolutionary because it will completely replace the PSA. It would be huge.

And the marker, is it your job [indiscernible] the marker?

Yes. Our -- we have -- Johan's R&D team are the ones that come up with the markers. Yes. So back to cell and gene therapy. My very simplistic view of trying to understand the cell and gene therapy workflow is you extract white blood cells out of the human body. From those white cells, you got to extract the T cells and separate the T cells and activate them. And then you have to genetically modify them so that when they're eventually put back in the body, they attack the bad guys cells, the cancer. But before you do that, you have to grow them in huge numbers after you genetically modify them so they actually are effective once they go back in the body, right? What we started hearing from our customers several years ago as these clinical trials start to really take off, and by the way, there are over 1,000 clinical trials ongoing right now, was that their #1 concern, our customers' #1 concern wasn't about the success of the clinical trial. Their #1 concern was about how they're going to produce this therapy in an efficient manner and scale that's going to be required for a number of patients that need it. And more specifically, what they were most concerned about was the availability of GMP-grade proteins. Why? Because GMP-grade proteins is the food that feeds the cells that multiplies the cells. And we've been told by almost all of our customers and by other external validation sources that even a small percentage of these clinical trials get all the way through, there's not enough GMP-grade protein in the world available to feed all the cells necessary to treat the patients that could benefit from this. So that was -- there were some early tips that we got from customers was we heard what we're needing at least. We heard what we needed to hear. And as the world leader in research-grade proteins and the company who basically started the whole category, shame on us if we weren't going to be the leader in the GMP proteins that supply the cell and gene therapy market. So we actually have started construction on a dedicated GMP factory for -- a dedicated GMP protein factory that has an initial capacity of $140 million and can expand to $200 million. And we already have customers coming to us and are very excited about the fact that they have a supply for this in the future. We also, along the way, have acquired a few other key technologies that exist in this workflow that we think are better technologies than exist today. One is around gene editing. That is an alternative to viral vectoring, which we can talk more about in Q&A, if you'd like. And the other technology we acquired was Quad, which is a bead technology, which we believe is their technology using polymer-based beads is much better than the current magnetic beads that are used today. But again, I'll leave that to Q&A if you want to hear more about that. So in terms of what does this all mean in terms of monetary potential, you see the key product categories on the left-hand side there, the top one being our reagents, followed by our instruments, cell gene therapy, the tools, tissue pathology, liquid biopsy, all very, very large markets, well over $10 billion market potential. On the far right, you can see our current penetration, which is low to extremely low as it stands today. And then our relative growth rates compared to the market in both instruments and in tissue pathology, our growth rates are significantly higher than the market, simply because we've got a new technology that's supplanting the existing technology, largely manual-based or antibody-based technologies today. And then we have 2 categories, huge categories, which have very large market potentials that really are infinite because they're basically pre-revenue today, but we think will be a very big part of our company 5 years from now. In terms of absolute numbers, this is a numbers that we put out there about -- I guess about 2.5 years ago, 5-year numbers, aspirational numbers for us. We're on track still. We're not coming off this target internally. It gets us to $1.2 billion by fiscal year [ '20 -- ended ] fiscal year '23 at a 40% operating margin. And the key drivers of how we can get there are outlined below. You can see the analytical solutions, that's actually our instruments division, our instruments business, needs to grow at least 15%, which it has been growing actually almost north of 20% now for the last 2 or 3 years. And then down below in the Diagnostics and Genomics, 2 of the key growth platforms, ACD, tissue biopsy, needs to grow at least 20%, which it has been doing. Put that in perspective, that business was $25 million when we bought it 3 years ago, and now it's almost triple the size. So it's been doing very, very well. And then ExoDx, again, pre-revenue today, but we like to see that be a $150 million business in 3 to 4 years from now. What you don't see in here is the growth platform of cell and gene therapy because we were still in the very early days of developing that strategy 2.5 years ago, so we didn't have numbers for that yet. So whether that's upside of these numbers or whether that's risk mitigation of these numbers, I'll let you decide, but it's again another reason why we feel really good about these targets. On the op margin side, to get to 40%, we are -- we're in the low 30s to mid-30s today as a company, but if you actually strip out the Exosome Diagnostics business, which is pre-revenue, we're in the high 30s. So it's getting to 40% is really not that much of a stretch. It's really based on getting our Exosome Diagnostic ramping and getting that profitable within this time period. And with that, I will close my opening presentation. We can go to Q&A.

We have the breakout session in [ Nantucket ], which I think is that way or that way, but we'll go there right now.

Okay, great. Can we install a microphone or...

[indiscernible]