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

Hey, everyone. This is Derik De Bruin, the Life Sciences and Diagnostics Tools analyst for Bank of America. Welcome to our Virtual Vegas Health Care Conference, Day 2. Thank you, everybody, for dialing in and those of you on the line, I hope that you're enjoying this new experiment in remote conferences. Our next company up today is Bio-Techne. With us from Bio-Techne is Chuck Kummeth, Chief Executive Officer; and Jim Hippel, Chief Financial Officer. Chuck, Jim, welcome. Thanks for being here.

Thank you.

You bet [indiscernible]

So I think -- yes, go ahead. Yes. I was going to say, Chuck, I think you've got a few slides to go through, and then I'm going to follow it up with some Q&A. Slides are available through the Veracast, or I think you guys also have them elsewhere as well. But you can certainly see the slides on this one. But a little bit of a background in terms of what you're seeing in the markets, and then I've got a bunch of questions for follow-up.

All right. Well, great. We're glad to be here. I'm speaking to you from my -- our office in Minneapolis, which is certainly not in Vegas. I'd rather be in Vegas, but we'll make do. I'm going to run through the slides just pretty quickly and briefly so you can follow along or use them to formulate some questions, whatever. First slide, of course, is the safe harbor. So as we go through things, there are forward-looking statements, and we need to get through all our materials and 10-Qs and Ks and stuff online to see all the right information and displayed the right way, so I'll leave it at that. The next slide just gives an overview of the company. We're at 2,200, 2,300 employees. We're at 35 locations globally now. We finished last year fiscal year in June 30 of last year of $714 million. We were about $8 billion market cap. Now we're roughly close to $10 billion. We are about 82% consumables, 10% instruments, 5% services, 3% royalties. And our major platforms, we're a tools company and primarily tools for research and life sciences, which is a good place to be today, as you probably noticed. But we're in antibodies. We're in proteins. That means, yes, we've got a lot going on for COVID. We're on automated protein analysis tools, proteomics-based tools like an automated Western blot, single cell analysis, biologics that measure purity of proteins for biopharma online systems and such. We're the world's biggest immunoassays, where they -- we're the leader in ELISA kits. We think we created the category 35 years ago. Right now, you're hearing a lot about serologicals that are in the market. They're primarily the best -- the easiest one to work with would be an ELISA. Yes, we're working on one as well. We can talk about that. We're in tissue biopsy with our ACD platform, which is in our Genomics division. And we're in Clinical Controls, we always have been. We sell a lot of antibodies in bulk in part of Clinical Controls as well, which are going in -- a lot of the tests going out around the world right now. And then we're in liquid biopsy with our Exosome Diagnostics acquisition, and that's scaling up as well as we talked about many quarters in a row now. We also have a JV off the ground in cell and gene therapy. That's probably the most exciting thing we're doing in our core these days, and I can talk about that as well. Next slide just shows a breakdown. We are mostly concentrated in pharma/biotech, 37%, and the distributor piece of 15% is really more in Asia. We're 25% academia, which leads to our guidance this quarter being minus 10% to minus 20%. It's because academia being shut down is a big hurt, as you can imagine. We have 57% of our businesses in Americas, 28% in EMEA and 15% in Asia. We're at between 7%, 8% in China, and that's been growing very well, and it's coming back with a vengeance right now. It will be double-digit growth this quarter. So the next slide is historical growth. It's a pretty good track record. I came in 2013, jim came in '14 and most of the team came around that time. We've been together quite a while. A lot of us have worked together in the past in places like 3M and Thermo Fisher. And we had last year a 10% year, and we were on track this year for a 10% year until this virus hit, but anyway. We have 4 key strategies for sustainable growth. They're pretty ubiquitous, geographic expansion, China, India, of course. But not -- nonetheless, also Europe. Other areas, we're still expanding. Core product innovation, we're all about innovation here and about the science. Our culture is very much a 3M-type of innovation culture. We do a pretty extensive prioritization process, and we allow people to fail, we experiment a lot and we're into new products. Gap filling and M&A market expansion. So whereas a lot of M&A is tactical, but our -- we have a strategic thrust of our M&A. We've done 15 acquisitions, and they've -- for the most part have all done pretty well for adding to our growth. And then you can't grow as fast as we've grown from 700 people to 2,300 in 7 years and not have change problems. So we really focus on our culture and our talent and not only finding, but retaining, and it's a big deal here. The next slide talks about that. So we measure everybody around an acronym we call EPIC. We measure them for empowerment, their level of passion, their level of innovation and their level of collaboration. So we want people to hit their numbers, but they also have to be good corporate citizens and follow these types of leadership attributes. And if they need help, we give them help. Next slide just talks about our segment structure. We have 2 segments, and we have 2 divisions in each one. Protein Sciences segment is where the history of R&D Systems resides with the RSC (sic) [ RSD ] division, and that's reagents primarily. Analytical Solutions is where we have the instrument platforms, all proteomics based mainly. And then Diagnostics and Genomics segment is Diagnostics and -- the diagnostic tools, the control and the history of the company as well as where we have our ACD and Exosome Diagnostics business units in the Genomics division. In the Protein Sciences segment, you'll see that slide, it's Slide 9, I guess, in this deck. We are -- it's made up of proteins, antibodies, our instruments and our assays along those 2 divisions. So it's 2/3 of the company and it's where most of the margin resides as well, as you can imagine, with the proteins and antibodies. Diagnostics and Genomics, where we have the Diagnostics tools division, and that's the -- it's growing well. We'll talk about that, doing better than ever. But this is where we have our biggest investments and our biggest experiments right now in terms of acquisitions with the ACD and the Exosome Diagnostics in those 2 business entities. The next slide talks about our COVID-19 related activities. We're working on quite a few things. As you can see from the slide, and you may want to focus on that in this call, I don't know, but we are working on virus spike proteins. We're working on the nucleocapsid protein. We sell much of this stuff. Activating cell protease that facilitates viral entry into cells, we're working on that. We're working on antibodies for viral proteins and small molecule inhibitors. There's a whole list of stuff we're working on from antibodies to virus S1, S2 and N proteins; neutralizing antibodies for the ACE2 receptor; secondary antibodies, IgM, IgG and IgA. We're selling a lot of these to the Abbotts of the world, we always have actually, but now more than ever, obviously. Of course, we're in the Controls, and hospitals are busy. And so we're selling controls like we've never sold before. Small molecule as well. A lot of these small molecules are going into antiviral research and [ protease ] inhibitors of ACE2. And so we've had a pickup in that business as well. And then assays, of course. Plate-based ELISA as a serology assay is probably the biggest potential thing we've got going. We'll talk about it. We're working on a differentiated one and being we're the ELISA leader in the world, I think the world expects us to come out with something wonderful, and we hope to do that soon. The automated assay on Ella for cytokine storm around COVID is also exploding for us. We had 40% growth last quarter. This quarter, it will be 75%. It'd be more, but this is all we can make. So we're selling all we can make. We did 30 instruments last quarter. This quarter, we're trying to build 80. So just to give you an idea. The cartridge is very complicated. It's a closed system, as you remember. We've been trying to ramp that because, as you know, we already are in clinicals in China for cytokine storm with Micropoint, and we are on a 2-year glide path to a program for a hospital monitoring -- patient monitoring system that would give us tens of thousands of cartridges a year of demand when they get through their clinical. So all this has lit up around Ella for screening patients, and were being used under FDA emergency EUAs as well. And hopefully, this is going to be the event that puts Ella really on the map globally as a patient monitoring tool. We are supporting lateral flow projects as well. And we also have an LDT with our Exosome site, and we're going to do some business there just as PCR overflow for virus detection, and so we're able to do that, primarily helping out in the Boston area. And lastly, RNAscope. We have a new RNAscope set of probes through ACD that can detect the COVID virus in tissue, not only -- it's being used not only in lung, but also seeing how it expands in other organs. So that is also a big hit right now in terms of an assay. The next slide just talks -- puts it all together. So we really have our core in the middle with our antibodies, proteins, immunoassays, calibrators, small molecules, the history of the company. And those have synergies to the other 4 legs of the stool of this company: tissue biopsy; liquid biopsy; the cell and gene therapy area, which is going well, by the way. Our factory is on target, on plan, and we will be opening it this fall and qualifying it and hopefully be in business come January of this next calendar year. We've secured our first multimillion-dollar protein deal, and we have many more in the works. We fully expect that we'll be selling capacity before we have that capacity, just because of all the fear in the current world around this area with a viral vector approach. As you know, it's about a 18-month lead time out there. So we expect that to also continue with this -- with us. And then lastly, instruments on protein analysis, so those things. The final slide, just we talk about why the Exosome platform is the best liquid biopsy, a little bit about Exosome. I think we've covered that before. There's a slide on our workflow for cell and gene therapy. We have a lot of pieces of this workflow completed, and we think it's pretty much complete with the JV, given with the instrument as well as the bioreactor platform from Wilson Wolf. We think we have a complete loop here, and we're expecting big things from this -- as a business over the coming 5 years. I guess the last slides are our financial. And we really just talk about our markets. 7 years ago, we were playing in a $2 billion market space. And today, it's probably in the order of $15 billion. So we're -- we've opened up a lot of new ponds to ourselves, and we're growing quite nicely in most of them, as you know already. So the final slide, of course, is kind of what we see in our future for this -- right now, it's a 4-year view. We're going to be giving a 5-year view to you very soon. Later in the year, we're going to have an investors conference, we hope. And we'll update this chart. But we're on track for fiscal '23 to be at $1.2 billion. We are ahead of schedule on getting back to 40% on margins. And we've never felt better about our growth and our growth platforms. And with that, I'll just leave it to Derik and others for questions.

Great. Thanks, Chuck. I appreciate the overview. You guys certainly have been very busy on this. Let's talk first about just -- you made a comment about China back with a vengeance and like that. I guess can we talk a little bit about that commentary there in terms of what you're seeing there? And then I also want to go and talk about the academic and government exposure and just sort of some of your expectations in terms of when you think that segment will sort of open up?

Sure. Well, China was -- we're probably on track for a record quarter in China. And I think there was a lot of early buying. January was just phenomenal. But it was a very early Chinese New Year. So we think there was stocking for that and just getting ready. And then the virus hit and everything shut down completely, right? So for really half the quarter. And even with that, we were expecting kind of low negative single-digit growth for the quarter, and we ended up mid-single-digit positive and surprised us. And then as they turned things back on, boy, they really started buying. And I think there's just a lot of catch-up on experiments right now, and the quarter is going great. And bookings are great. Everything is great. And the instruments are right on track, and we see a double-digit or -- high double-digit quarter performing. We hope that's what happens everywhere else. But we're trying to find out more why. But I think there's a little bit of -- we're a run rate business. So people aren't in the labs. They're not using stuff. They're not ordering. But I think as they come back and turn the lights on their labs and they're throwing out their older experiments that they couldn't bring to completion, they got to start them over. I think they know right away, they've got to buy upfront to get things kind of restarted. And so I think there's an initial surge from that kind of issue. So...

I mean that was interesting, considering you were a little bit cautious when we spoke with you in January. When we spoke in January, you were a little bit more cautious on the Chinese market at the end of 2019, and it's come back. I mean what's -- I mean, I guess what sort of shifted between the end of 2019 and now? I mean, obviously, COVID is one thing that goes on with it. But I mean, if you just sort of think about the spending trends, I mean, what was sort of the big shift?

Well, I think all we can speculate is that there was -- the early New Year caused for -- and hotter-than-average January. Other than that, there probably wasn't a shift. Now the shift is all about restarting experiments. And funding, I think, is good. And I think you're going to see the same thing there. You're going to see, I think, here in the coming year or so. I think funding is going to go up. I think people are not going to be cheap around research on this stuff any longer. They've seen firsthand what happens.

Yes. Well, that certainly is our underlying thesis is that it's hard to imagine a scenario where people spend less money on diagnostics and pandemic preparedness and vaccines and all the other things like that. It just seems -- I can't imagine any politicians that are wanting to make that push right now.

After you hand over $2 trillion that last -- that burned up in a month or 2 on the EP deals and then another $3 trillion or more for stimulus, and we didn't even know whether the end is in sight yet. There were many, many trillions of dollars and how we're going to pay for it, I don't know. But when it comes to the realization that the entire NIH budget is $40 billion, a rounding there compared to what's cost this country, I don't think anyone was going to be complaining about spending more on this stuff. Now there may be a bit of a shift, more infectious diseases and antibiotics and, like I said, diagnostics than it was a year ago. But it's all good and all. It all trickles down to a company like ours. We provide picks and shovels to all this stuff.

Yes. Well, and I think that's been one of the -- I think that's sort of like one of the key debate questions right now. I mean you guys are obviously involved in selling immunotherapies and looking like that. And just sort of like is there a shift in spending priorities as people realize that things like basic infectious disease and now research has been essentially underinvested while all these other programs have sort of like seen just ridiculous amounts of money tossed at them. There's this just sort of a reprioritization of that, but I think it's still probably too early to know on this one. And the academic and government, I mean, you said the U.S. obviously down a lot, labs a lot are closed. I mean what's your sort of base case for the rest of 2020 in terms of how do you see some of these customers reengaging the rest of the year?

Well, I have my opinions, I guess. I think we're seeing just the start -- the very start of reopening right now, not enough to affect the U.S. numbers much. We're seeing obviously the big comeback in China. And I think Europe will start as well. Germany is certainly ready to go, I think. But I do think there's going to be a second and third wave. I do think it's going to take longer for antivirals to be ubiquitous everywhere. It's going to take longer, people think, for vaccines to be everywhere and for them to be -- to know whether they're really working and trusted. I mean how many people really get a flu shot even right now still, right? I mean it's going to be around a while, and I don't think it's going to be back to normal by end of this calendar year, by any means. But I think there's going to be -- there's new business. There's a lot of new COVID business. I think biopharma is going to get even hotter. And I think academia is just going to be a slow restart and slower ramp than probably people imagined. So -- and it will depend on -- I think it will all depend on the numbers. I mean if we start going the wrong way again and the states start closing again, well, then you know all bets are off, right?

True. Although on the flip side, I think now we'll be a little bit better prepared on how to actually shut down and do things and all, still in all it's going to be tougher. I guess can we talk about your -- you caught up the fact that you're a big antibody supplier for the diagnostics space. Can we sort of talk about your capacity to sort of manufacture, sort of demand going on? And then just your own sort of like development on your serology testing and like -- and such? I mean you did point out that you've got a big business there. And just some general commentary on what are supply demands, customer demands and your ability to ramp?

Yes. We don't have any supply chain issues. That's first off. So really good shape there. In terms of us being able to make antibodies and being able to source the ones we source, we don't see an issue of supporting our demand. So when it comes down to the RBD and the spike proteins and the IgG antibodies, I think, yes, we want to hold on to some of our capacity for our own serological that we're working on. We want to work on a quantitative test, not a qualitative. The 90 Workcell that are out there approved by the FDA are all virtually qualitative. And I think it's a good example is what [indiscernible] put out this morning. They put out a test, and it's IgM and IgG, and it's -- it will tell you whether you had or not. And just like the Roche and the Abbott, but it won't tell you whether you really have immunity or not or there's a lot of -- it won't fully close the loop on a false positive, right? So we want to be able to do that if we come out with a test at all. So we're just not going to be the 91st one coming out that -- we could. We're the ELISA leader. So if we do something, it will be an easy-to-do test, analyze the kit format, so it will be easy to work with. And every -- whole world has readers everywhere. So that's probably our approach. But there's a lot of approaches, right? So I can't say much more than I said at the earnings call that we're working on one, and it's looking good. And we'll give you more news when we have it, if we get it completed.

Great. Can we talk a little bit more about the Exosome product and your sort of expectations for that and sort of the trajectory for that business? And just obviously, a tremendous amount of interest in the liquid biopsy space and maybe you guys take a little bit of a different approach than most people. But I'm just sort of like your general expectations on how you see that business ramping going forward and product expansions off of that?

Yes. Well, certainly, we're currently in a pause state, right? We slowed down a lot because we were -- our channel and the way we went to market with was through the urology offices, and they're all shut down. So we have introduced a home kit version, which is starting to ramp very nicely. And that works via the urologists prescribing via the phone, and we send the kit to the patient, and they send their urine sample to our lab and we do the analysis and send the data to the doctor and the doctor informs the patient. And it's working quite well. We also have just received notification of a very important utility study has been published. And that's 1,000-patient study, and it was paid for by a big provider. And it's done very well with great controls. So we're getting a lot of good press out of that. I think that's going to help light things up for us. It's going to help on the private payer side. It's going to help also get the large insurers into the game here. So we need all that. We also had a pretty good quarter last quarter. Medicare started paying. I mentioned that we cleared $1 million of Medicare last quarter, and we did. We won't this quarter, simply because just things have shut down a lot with the urologists. But they will open and they are starting to open already, and they're figuring out more innovative ways to stay in business and the home kit's one of them. So we've also been focusing a lot on our web in webinars and training. And we are very typically getting over 100 urologists on a call at a time on our webinars right now, getting -- spinning them up on our tests. So that -- so it's not been all bad. They've got the time to learn about us finally. So I think as things open up, it will help accelerate the platform. We are -- had begun clinical on the bladder infection -- bladder cancer test and then the kidney rejection is in process. We have validated tests, as you know, on lung and breast and for -- in plasma, and we're working with potential partners for getting those into clinicals. So it's a great platform. There's a lot of things to work on, probably a decade's worth. And it's -- the ramp has certainly slowed due to the virus because of the urology shots, but it will come back around. And we'll be looking at other ways to attract -- to go to other channels as well, like primary care as an example. So -- and we're searching for more partnerships for going in those directions. So...

So you've had a -- you've done some really nice acquisitions since you've been there, ProteinSimple, Exosome, these other ones. I guess, can you sort of talk about how -- when you look at the platform now, when you look at the company, it's like is there specific areas you think that you need to augment and opportunities? And I guess, one would think that given the end market disruption that's going on right now and the volatility, there may be some more attractive opportunities there as people sort of worry about their businesses going forward. I guess sort of your thoughts on sort of like the capital deployment strategy.

Yes. I think we have well under 1.5x leverage. And we also have been paying down debt ahead of schedule. We had a nice investment, long-term investment in ChemoCentryx. It's starting to pay off and we're -- sell some of that to pay down some debt. But we're still hunting our capital for M&A. And I don't think we're looking for another leg in the stool right now. We've got enough homework to do and the virus just makes it more complicated, and we've pivoted a large amount of resources in the company on these COVID projects, which I mentioned, nearly a dozen of them earlier in the presentation. So all that's keeping us very busy. We are still hunting for more smaller acquisitions that are -- that would help us in our cell and gene therapy workflow maybe. We're always on the hunt for something regional in antibodies or in reagents. So I think there's more to come. I don't -- we're not done. And we'll just keep building our cash. I think right now, it's important to also keep our liquidity very safe while we're in this period, next 6 months to a year as well. We don't have any issues. We stress test ourselves very well here, and we're in good shape. We've promised our employees there will be no layoffs or furloughs during this quarter. And that allowed them to focus on their jobs and what we're doing, and even though a lot of them are working from home. And maybe some of them doing practically nothing, it's okay for a while. So but yes, it's M&A. It's outside of our expansion for GMP proteins. And we are certainly running at about double the normal clip on capital, $40 million a year versus the $20 million, but that's short term.

Great. A question from a client. They just wanted you to clarify the commentary on the guidance for the second quarter despite the fact that your commentary on China was so strong, which I believe, of course, is the answer that you've got 25% exposure to academic and government labs, and that's sort of like the offset to the China piece.

The way to answer it is we've given guidance of minus 10% to minus 20%, and there's a certain set of conditions to be at minus 10%. There's a certain set of conditions to end up at minus 20%. And I'll let Jim to go through those.

Yes. Sure, Chuck. So obviously, with the academic labs shutdown thus far in the quarter, we're hoping again to get back online sooner than later, but they've been shut down this quarter, a significant chunk of our run rate business, both in Europe as well as the U.S. and even biopharma has cut back what we call nonessential research and they're down anywhere between 15% and 25% with regard to their normal run rate. So that's a significant drag on the business until those people get back to work. We're anticipating that will slowly start to happen here in the second half of the quarter. And we also have all these COVID-19 projects that Chuck spoke to that are helping provide some tailwinds to these very large headwinds. And then lastly, China, and China is obviously also another nice tailwind for us with respect to the rest of the company. So in terms of the lower end range of that guidance, I think it takes longer for the researchers to get back to work and improve on the daily run rate purchases, then we'll stay close to 20%. If they get back a little quicker and/or the tailwinds from our COVID-19 projects as well as China are even better than we had expected a month or so ago, then that will provide some additional tailwind and get us closer to 10%. So that's kind of how we think about that range.

Great. Just a final question. I'm asking all the companies that are presenting here. What do you think are the long-term implications of COVID? What's going to change about your business, the way that you're doing business or the way you think your customers are doing business that you think will persist?

Well, we already had a big strategy in our digital footprint. I think digital and business on the web is going to get even more important. That's one thing, I think, we'll see. I think there'll be more people working remote than before, and it will exist for a while. I think there's going to be a fear in the world or years to come, and there'll be a lot of face masks, and we may all look like Japan has always looked. And that's going to create more incentives for more research, more funding for research. I think we're really positioned well for -- in a number of areas. I think the cell and gene therapy mission that we're on, it doesn't change at all. I think it's a big hope for us. I think nothing changes for China. We're back in that clip. And I think there's probably a bit of a delay in some of the third world countries like India and others of accelerating that growth more than likely. But all in all, I think we're in a good spot and probably never better. It's a good time to be in life sciences. And we're here for creating solutions and tools to help solve all these problems and help people. So our satisfaction for our employees has never been higher. We just conducted an engagement survey, and we had over 80-plus percent positive responses across a 76% rate of filling them in by employees. So it's a record level for us. So we know people like working here. We know they like working on the stuff. So it's good.

Great. We're at the bottom of the hour. Chuck, Jim, thank you for being here. Thanks for the work you're doing. Stay safe. And thank you to all the clients who were online. And see you next time around. Thank you. Have a great day.

Thanks, Derik.

Derik, thank you.