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

Hi. This is Jack Meehan with the Barclays Life Science Tools and Diagnostics team. Thank you for joining us this morning for the Barclays Virtual Health Care Conference. Pleased to be joined with -- now with Bio-Techne CEO, Chuck Kummeth as well as Head of Investor Relations, Dave Clair. Chuck, would you like to kick it off with any introductory comments?

Yes, thanks. I'll give a minute or 2 on just accompanying some background. So I've been here 7 years; most of my team, 5 or 6; brought in from places like Thermo Fisher and the places I've worked and as well as other areas like LifeTech, some strong team. Most of the people running our businesses have run billion-dollar things or bigger. So a great team going there. We've done 15 acquisitions in the last 6 years, and we've grown from roughly about a $300 million revenue rate. When I started to -- we were 7 -- $14 million last fiscal year; June this year, closing in on $800 million. And we have a target to get to $1.5 billion roughly 5 years or so from this call. The next fiscal year, clock's starting. We'll be doing a investors' conference this fall to try and talk about all the different changes that happened since the last one. So it's mainly 2 big acquisitions. We have 5 real pillars of the company now, areas that we drive for growth. The core part of the company, our reagent space, antibodies, proteins, assays. We're the world leader in proteins, the world leader in ELISA Kits. We're 1 of the top 5 in antibodies. We've had strong double-digit growth. In fact, this past year, we did grow at 10% organic, and we're trying to make that a common thing going forward. There are some bumps in the road and coronavirus included in China and stuff, we'll talk about today. We have a strong instrument platform for our proteomics space that leverages our reagents. We have a very strong diagnostics tools business and genomics business to follow that for tissue biopsy based off an acquisition with ACD. And then we have forayed into liquid biopsy with our Exosome platform. So strong set of platforms that have synergies together both in R&D as well as customers and channel and everything else. And we hope to keep this growth engine going, and hopefully, we see a double in the next 5 years. And we're well on track for our goal of 40% op margins, which I know everybody likes to see. So with that, I'll turn things over to the first question.

Sure. Yes, and thanks for the overview, Chuck. I wanted to start with the topic du jour, which is the coronavirus. It would be great to get an update on how you expect the virus to impact demand across the business, and maybe just talk about the supply chain as well as are you seeing any area -- pockets of potential upside come through.

Yes, sure. So as I said, this will be my 28th quarter at the helm here, and we've never had a quarter under 20% organic growth in China. This quarter will not be so. We'll be lucky to make flat. We have a chance of doing that, but we likely will be low single digit negative. We had a very strong January and even a somewhat strong February based on back orders and a lot of back orders coming into the lunar event there. But March will be pretty abysmal probably. We have -- that's further exacerbated by the fact that there aren't many planes going into China as of this point. So getting product in -- we have good inventory there for reagents, but instruments are not that way. The good side of instruments, of course, are that demand will stay there. And as long as we don't kick out another 2 to 3 quarters or so of this virus there in China, that will snap all that back and we'll not lose much. The run rate business, the reagents business, of course, is a business that's -- you're in the lab and you're using materials. And if you're not in the lab working, you're not using materials. So we're definitely a loss there. Not to say there won't be some people trying to stick to their schedule for their papers and experiments and such and try to catch up, but I think you can only rush experiments so much. So there will definitely be a loss there until we're back really online and labs are fully back to work, and we don't expect that to be until April. We know the consumer segment in China is starting to come back to work, and Apples are opening up and Starbucks and such, but it will be a while before the academic labs are back in full swing. So supply chain around that, not so bad for us. Again, if it goes out another 9 months or so, we're going to have the issue everybody else has that are run on computers and such because they're all made in China. We have a few instrument key components that we've successfully second sourced pretty well. Again, we don't see much of an impact on our supply chain for making product unless this goes out much further. In terms of reagents, we're in good shape.

Great. And I think one of the things a lot of life science tools investors have been stewing on is this idea that once the dust settles, there could actually be increased investment in life sciences. I'm just curious on -- as you think about managing the business, what are your thoughts on funding after the outbreak? And how do you think the portfolio is positioned for a potential rebound? Do you think you can recapture some of the lost work? Or is it just everything is pushed out?

Well, I think short term, we've got a loss here, but I think we'll snap back and recapture everything and then some. I think you're exactly right. These x factors -- I spent 25 years at 3M and went through SARS and a bunch of stuff, and 3M is living a nice highlight with mass right now, again, as an example. So these things for us tend to increase investment spending into health care research, vaccine research, drug discovery, et cetera. It will be the same this way, probably even more so. The U.S. are already piling on $8.3 billion on top of a $38 billion NIH budget. There's going to be some trickle down those, I guarantee you. We're already seeing an upsurge. There's a lot of research going on, on coronavirus, and guess where they're buying stuff from? We're selling a lot of small molecule products into work for antivirals that we hope see the light of day very soon from different companies out there working on it. And then we're selling a lot of kits into China right now, ACD-based kits, probe kits that can identify and detect the coronavirus, and this would be for vaccine research. So there's already -- it's already beginning. But in general, there will be a tide that lifts all boats here in the coming year or 2, probably.

Great. Okay. So maybe just turning more broadly to the end markets. Biopharma has been a real growth engine for the tools industry. It would just be great to get your thoughts on how funding is there. And maybe with and without the coronavirus impact, have you seen any change to the way sponsors are looking to invest and buy consumables?

No. We've had -- we've been steadily growing from flat 7 years ago to a 10% organic growth here last year in the company. We've been double digit in our reagents here for a couple, 2, 3 years now. Large part to the -- what I'll call the oncology tsunami, that there's just a lot of investment in things like cell and gene therapy research, and that's exploding, so it's all driving our business. But also, our digital platform, we've invested a lot into it. In fact, I asked just this week how many AdWords are we investing in now for bidding on for SEO, and it's north of 170,000. So there's a good reason why we're showing up on search very high, and it's working. So we've got strong double-digit growth in antibodies as well as proteins. And I think the only weak area we have or weaker is in our ELISA Kit, our assay area, which is very cyclical and project-driven with clinicals with big pharma, and that comes and goes. And to counter that, of course, we went into the multiplex arena, and we're a leader in Luminex. And we are the leader, we think, with some of the very high-sensitive areas like our Simple Plex platform, which is growing strong double digit. In instruments as well, things like -- we did acquisitions in areas that are strong IP and a real need like the Simple Western instrument platform we have with Jess. That's the only automated platform out there. So it's a 20% grower. We're not even 10% into the share area yet. So there's a long way to go. Biologics has been up and down, doing pretty well now, snapping back great from last quarter. Going to be a bit of a lag as we -- as the biopharma move towards cell and gene therapy and try to re-spec these types of instruments. They're not continuing investment in the old line of products that they have. So we're working hard on getting a whole new area, a whole new chapter for spec-ing our instruments in there. And then I just mentioned Simple Plex. It's a -- I think that's a sleeper, and that's going to be -- continue to be a home run for the next 5, 10 years so...

Great. And maybe just building off, you mentioned cell and gene therapy. I think -- I was curious to get your thoughts. You developed JV related to a workflow there. How do you think your workflow stacks up versus some of the traditional bioproduction manufacturers? Just -- it's obviously so nascent. Just would be great to get your perspective on...

Yes. Well, for one, I'll say it's probably -- and everybody wins in the market the next 5 years. Just -- if you did the homework 2 or 3 years when you started getting in, you're going to be rewarded, and we did. So we're pretty far along and on track for a $50 million factory for GMP proteins that will be online less than a year from now. Our workflow, we just did a JV that gives us everything from extraction, washing with our Fresenius Kabi's leukapheresis instrument to bioreaction with the Wilson Wolf reactor; our own GMP proteins; our bead technology for aggregation and selection; our gene-editing technology, B-MoGen; all the instruments I just mentioned for testing and spatial analysis along the way. So we think we have probably -- if you look at a compartmental go-forward workflow, we think we are the best. If you're talking backwards into a viral vector, well, [ Molteni ] has a complete system, but it's all very expensive. It needs to be tied up to a patient completely for 3 weeks, and it's all in line. But they got there first, and they've done really well with it. And they've kind of broken the way, the ice for all of us to go. And if you look at the -- some of these institutions out there and the companies and the volumes they're generating in this area -- and really, it's all still clinicals, mostly. This is going to be exciting time and a huge market. And being we're the research protein maker leader in the world, we hope to be the leader in proteins in general. And we think our figure is kind of ours to lose and -- in terms of providing GMP proteins to support regenerative medicine as well as T cell and other cell therapy applications.

Great. Turning back to the geographic outlook. We touched a little bit on China. I was curious maybe just to get your thoughts on Europe as well. How are you sizing up the economic environment there? And some of the puts and takes in the near term?

On China in particular?

In Europe.

Okay. So in Europe, we messaged last quarter that we were softer, and we were -- a lot of one-offs in the numbers and stuff. Normalizing everything, we had about a mid-single-digit quarter. We expect that to be better this quarter, and we're pretty sure we're on target to be better. Instruments are doing much better, as an example, than they were. And then we've taken that time to look into some of the -- not only the macro conditions year-over-year but also our execution. So we've made some changes in terms of leadership, sales leadership and in terms of field sales, and it appears to be working already. I think one component of -- we had 3 years of double-digit growth and nobody else did, and everyone wondered why we're doing so well in Europe. I think coming off a lot of acquisitions, buying out our distributors 3 years ago, gave us a little bit of low-hanging fruit, going direct and then picking all of it up. And that runs its course, and you've got to stay innovative, and you got to figure out how else to grow after you have all that in the rearview mirror. So there is a component of that. But on top of that, it was a bit of a perfect storm. We had a lot of our big biopharma customers who are just in -- either moving to cell therapies or whatever, but this is -- the cyclical nature of a lot of our -- of a lot of clinicals was lower and that distressed a lot of our businesses like our ELISA Kits. That has happened before. It's happened 2 times under my watch here. So they always seems to snap back and with a vengeance. So we're pretty bullish that we'll be high single digit going forward and kind of normalized in Europe so -- as a company, we've made a lot of investments, and we've grown an awful lot in the last 5, 6 years there. Sales force alone, we've moved from 25 reps to well north of 50, 60 now across all fronts. We're at -- we've moved from about 80 people to 275 people in Europe now. So the business is growing and we're creating infrastructure to support that growth. It's going actually overall quite well, we think.

Great. I want to next turn to your Diagnostics and Genomics segment. I can obviously...

I guess to add to your coronavirus impact, I mean this could all come to a screeching halt the next quarter in Europe, if things continue the way it is, right? But right now, Italy is the only bad spot, and it's not a big part of our business right now in Europe as well.

Good to know. And we'll all be watching the data, case by case, the next few weeks. Maybe turning now to the Diagnostics and Genomics business. When I think of the Bio-Techne approach, it's definitely a little bit more niche. But I was wondering if you could just lay out what your vision for the business is. Do you want to keep it that way? Or do you have broader aspirations over time?

Yes, we want to be -- we've been very, very clear on this, we think. We've been talking forever that we're going to get more into diagnostics. We're a leader in assays, and we view diagnostics as nothing more than an application-specific assays. And we have -- always had some FDA-approved kits. We have an FDA-approved building here with our hematology business and our controls business. So we're not foreign to regulation and -- although we're not in -- we're not a main player in diagnostics per se, and we don't want to be. We want to leverage our strong presence in oncology, neuroscience and stick to the applications around those areas. So you won't really see us diving into infectious diseases or other areas, where there's maybe more but harder to make money. And we'll leave that to the Quidels and Meridians of the world. So we're -- we see most of the innovation, most of new business, most of the upside being in oncology and neuroscience. And that's why we went, going -- we extended beyond our tissue biopsy ACD platform into liquid biopsy with Exosome. And we see Exosome as a perfect match for the kind of innovative company we are, always going into new areas with strong IP and new applications, and a bit niche but really profitable and strong growth and sizable enough for us at our size of the company and also -- we're not even a $1 billion company yet. So anything we can do that creates $100 million to $300 million new chunks of business over a short -- relatively short period of time, that's very material for us.

Yes. So maybe just dive a little bit further into the liquid biopsy side. So you made a splash in 2018 with the ExosomeDx deal. It's been probably about 1.5 years since then, maybe a little bit longer. Maybe just walk us through...

It's been longer.

Yes. I'm trying to think of the calendar in my head ...

Yes, it's been about -- it's been going on 2 years here, I guess, necessarily something. Yes, we have a pretty good track record of 15 acquisitions that were -- a lot of them we've purchased or scooped. And we've asked a lot of how we were able to get some of these when we got them in so cheap as it turns out. We've been very good at doing our analysis, doing private-related deals, taking a year, 1.5 for due diligence and then working out a really great deal for the owners and their team, et cetera, and pretty much before they really inflect up. So we've had really good -- I think a really good move at both -- ProteinSimple as well as ACD are 2 great examples. And we saw the same possibility here as well. We didn't pay an awful lot for this. One reason is because it didn't have -- it wasn't -- the guidelines weren't completed. It didn't have Medicare reimbursement. It didn't have any private payer structure yet. There wasn't really a sales force to say it. I mean it was pretty much a technology platform trying to break out. Should we -- now we have all those things, and it's growing and growing quickly. And should we have waited for that, it would have been probably north of $1 billion. So we took that risk. Now it definitely took us an extra year to get this thing going. We have found out, like our other people have, is that the move to get guidelines completed takes longer than you think, to get into Medicare reimbursement takes longer to think. Every MAC is different. We're with NGS, and their treatment of the guidelines with their LCD was narrower than we had liked. So we're dealing with that. We're going into reconsideration with them again this June. So it's all coming along. We did get great news here recently. We are going to have a utility study published, which will -- is the final hurdle coming off of a New York accreditation for the national insurers, which is going to be really big for us. We are adding to our number of lives covered weekly, and we have a large number of private payers that are working through the 1- to 2-year grind. You have to go from cash to accrual, and revenues are ramping. We'll go from 0 last quarter to roughly $1 million-plus in Medicare revenue this quarter and hopefully keep scaling very quickly. And we have our CDx side of that business. We have over a dozen partnerships. That is actually on forecast for revenue this year directly, maybe even exceed it for the -- because of the strong interest in this platform because of its potential. We have, as you know, 4 other validated indications, ready to go to clinicals. We're definitely going to be looking at bladder cancer and kidney rejection ourselves, but we're open for business with partnerships on those as well as the lung and breast cancer validated tests that we have that are plasma-oriented, and we have strong interest. We're talking to a lot of big players out there. So we're not being arrogant about this. We don't expect to hog it all. We want to grow our piece, get as much bandwidth out of our team as we can and share that platform to get it ramping as much in parallel as we can over time. So far, it's what's been -- this quarter from that quarter, I'd say, a lot more positive things happening. So...

Great. And can you elaborate a little bit more on the Medicare coverage? You talked about kind of the elongated process with NGS. And what do you have now? And what's it going to take to get that broader label?

Well, they're all so forthcoming in information, as you know. It's -- all I know that they were accepted for reconsideration. They have their meeting in June. And our goal is to get their LCD to basically be exactly the same at the very least as the NCCN Guidelines, which really put our technology as #1. It's the key to us getting this technology to be allowed for surveillance on its own or with MRI, whatever. All of these are great things. There are studies happening right now. We have a tremendous backing from urologists once they've used this test. Our reorder rate is extremely high. We were a little worried going into this process with the LCD that we had to put in place a TRF process that a urologist has to sign off for the patient so we can submit to Medicare. And that could have been anywhere on the map of traction here, and we're getting 75%, 80% sign-off. So as they're submitted to Medicare, that's being paid in. So we're getting treated as if our LCD is even broader, but we'll get it for sure taken care of. And yes, they've been difficult. I think other partnership ideas are to either build a nuclear lab or work with somebody else's nuclear lab and expand somewhere else or do the new indication somewhere else. I'm not that excited about taking extra an extra year or 2 than it should be for any of these indications just because NGS likes to move this slow or be this conservative. So we're looking elsewhere with our business, to be honest, so -- and others have done the same. We're not the first. So anyway, it's a platform. You got to look out 5 to 10 years with this technology. It's going to be very large for this company, and there will be other partners who'll be sharing in it. A good example of QIAGEN. They had research rights to this platform before we bought the company. Clearly, we're a research company. We would like to have that because we could do a lot with that, and we're working on horse trading right now around those rights. Now them being picked up by Thermo only helps our situation. We have a lot of friends there, obviously. So I expect that we'll figure out something with them in the coming year or so. But there are other potential deals as well and we're looking at a lot of fronts. Again, we're not arrogant on this. We want to build this to a $100 million-plus business or north of there as soon as we possibly can. And as you know, it's basically -- it's a kit type of business. The gross margins are very high. So with scale, we'll get a lot of leverage so...

Yes, great. Yes, and it's certainly not unusual for these things to take longer than expected. My rule of thumb is 2 to 3 years. So if you're a year behind, I think that's pretty good.

To that point, that's kind of what we were told by NGS. Another thing, you guys realize how fast you're going? You're breaking all our records. We're just laughing. I mean you got to be kidding me. But as you point out, we're new to this and -- but we're getting help. We're getting partnerships, and we're learning quickly. And we're hiring in -- the right people and it's coming together.

Yes, I agree. Maybe just turning to the operations. One thing that's always struck me with Bio-Techne is the investments you have in e-commerce. Just give us a mark-to-market what you're capturing online today and where -- what else you can do in terms of e-commerce from a capability perspective.

Well, when I joined, 75% of all the transactions here were done by either phone or paper fax. So to say we've come a long way is an understatement. We now have a sizable portion of our business working through Fisher, which is all electronic. It's really hard...

Excuse me, this is the operator. The presentation is about to end.

I guess I got to...

Chuck, do you want to...

To make it really quick, we have 170,000-plus AdWords. We have amazing search engine technology, and it's been very key to us driving double-digit growth in our -- especially our reagents business, where you have hundreds of thousands of SKUs. So we'll continue driving that. And we're doing that now leveraging that for Exosome. So exosomedx.com, take a look. You'll see what we're giving patients for information to talk to their urologists about using ExoDx instead of that first biopsy. So I, for one, would much rather pee in a cup first than the biopsy so...

Great. I'll give it a look. Well, thank you, Chuck. Thank you, Dave, and I appreciate you participating today.

Thank you.

Thank you.

[indiscernible] bye.