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

Good morning. Thanks, everybody, for joining us. Welcome to the Jefferies 2020 Virtual Global Healthcare Conference. I'm Brandon Couillard, senior life science tools and diagnostics analyst. Very happy to have Bio-Techne with us back at the conference this year. And here to give us an update and an overview, Mr. Chuck Kummeth, CEO. Chuck?

Thanks, Brandon. Well, thanks to all of you attending. I'd rather be in New York, but in better times, I guess, I'll all come back. So we're going to go through a short presentation here on kind of where we're at with our company and the future and such. First, of course, is the safe harbor. And we recommend you all go to our website and see all the right information and how we display it. But we have forward guiding comments here. So you understand that. First slide here on the company overview is one you've seen before if you've seen us talk. We have grown a bit. We have 2,200-plus employees. We have reached a $10 billion market cap recently. We are a fiscal year. So we've got 1 month left to go on this year, but last year, $714 million in revenue. We were on track for a good 10-plus percent organic growth here as we guided. But of course, the virus is -- it's hurt things dramatically starting last quarter and in this quarter. We are known for a, essentially, R&D systems brand and research consumables. We are 82% consumables. We are roughly 10% instruments. Instruments are all pretty proteomic-based, and they do something usually measuring proteins in some form or another. Strong IP in every one of them. So it's a good gross margin level of business for us. They all have consumables that are used and sell with the instrument and continue to sell. We are a bit services, and we have some royalties that are also growing. The platforms we have in the company really range on the right of the slide. They range from antibodies, proteins. Proteins we're #1 in the world. Antibodies are probably top 5. Again, mainly known for research. We'll talk about it later, but we're moving very strongly into selling gene therapies, of which we need GMP branded materials. We're building a new factory and the proteins is foremost in our mind for that. Our automated protein analysis instruments, 3 or 4 in mind. The #1 we talk about usually is our Simple Western platform. That's a picture there of Wes. Been a stellar grower, 20-plus percent grower up until recently with the virus given that it sells into the academic research labs as well as biopharma. So it's taken a hit, but it will come back nicely. We're going into tissue biopsy and liquid biopsy with acquisitions in both. We'll talk about both in a little more detail later. And on the bottom there, controls, clinical controls. We do a lot of OEM work. We are essentially the controls for really all instrumentation for all hospitals that do any kind of blood analysis, cell counting, et cetera. And that's really how the company formed 42 years ago. So on fiscal '19 revenue by customer, we are split 37% biopharma and 25% academia. This is a global number. We do a lot of OEM distributors. Primarily that's an Asian number. We sell and fulfill through distribution. We have grown to 15% Asia. We're -- still we're pretty well close to 28% and 57% on Americas versus EMEA for the 7 years that I've been here. So pretty well distributed and not too uncommon from a life sciences kind of company. We've had a pretty good run here for the 7 years I've been here. And last year, we finished at 10%. We probably won't this year. We were on track to beat this, but we see a strong future, probably stronger than ever, and we'll talk about that. We have 4 key strategies for our growth. We focus on geographic expansion. As an example, we have grown from $12 million in sales in China to over [ $60 million ] in the last 7 years. So we've grown about 14 people to 150 plus. We are focused now on India. We are still focused on building out Europe. We've just now, in the last couple of years, completed a full subsidiary model in Europe with 4 of the largest countries having full subsidiaries: France, U.K., Germany, Italy. We are an innovation company. We spend roughly [ 90% ] of our revenue on innovation, R&D. We have a lot of platforms. We have 250 PhDs in this company. A large of percentage of PhDs at the research site here in Minneapolis, our headquarters, and reagents. We focus a lot on collaboration. We focus a lot on patents now and IP, and it's paying off. So we've had -- we probably, in terms of first year revenue off of new products introduced, in the 7 years I've been here, we've improved our number by 500% for first year sales. And we're pretty much staying about steady state there. It used to be a company of kind of throwing things against the wall and see what sticks, putting things out there based on research papers. And we have a much more typical holistic approach using voice of customer, and we're marketing on other areas to understand what we should make and why. We have a very key strategy around our growth doing M&A and market expansion. We've done 15 acquisitions in the past 7 years. And they're truly mostly gap-filling-type bolt-on acquisitions, and I'll talk a little bit on that. And lastly, in 7 years, we've grown from 780 people to nearly 2,300. We've grown from a dozen sites to over 30 globally. You can't have that kind of growth and that many acquisitions without having an issue around culture and what you want your culture to be. So we focus a lot on our culture, the creation of our culture, the sustainability of our culture and how we attract talent and how we keep talent. And we've had a pretty good track record for that. Our track record is based on what we call our mission, which is EPIC. It's Epic Tools for Epic Science. And the EPIC is merely an acronym for Empowerment, Passion, Innovation and Collaboration. We try to release potential. We try to develop people. We've done a lot to make this a real company. So we made a really small type of company with the right tools. We're linked from Salesforce.com to LiMS systems to the things that employees and people need to do their jobs with the most productivity they can. We try to interview and we try to search for people who have a real passion that really want to make a difference. I've worked in a lot of different businesses in 25 years at 3M and a lot of industrial businesses. And I can tell you one thing about health care and life sciences people. They really do care about people and making a difference in terms of the health of people in general. And so it's really nice to see we focus on that. Innovation, I talked about. It takes a balance. It takes a recipe of collaboration. We do have a tech council where we have innovators from each of the different divisions working together, trying to create new platforms out of the platforms we have to give us -- and so if we come from differentiated position, we should be able to create new differentiated positions. This is not unlike what 3M does and has a strong history in doing. And it's what I know and it's kind of the model we've been running really. We try to have balanced teams. We try to have the right ratio of wall climbers to the mortals. If you have all wall climbers, they fight a lot. If you -- but you got to have a wall climber to leave the rope for the mortals. So it is about creating the right teams that can actually get things done. We just focus a lot on that. We try to have a culture of allowing time for people to work on their own experiments, their own passions. We try to develop a culture here where it's okay to fail. You can usually learn the most from failures, and we try to build off of that, and it's helped us a lot. And lastly, you have to -- this used to be a company of very much a noncollaborative nature. I think in life sciences and biopharma in general, there is a strong necessity of being secretive and trade secrets. And it tends to generate -- it can generate a culture of working a lot by yourself and being very careful and being very secretive. But where there's a lot of power, if you can find out a way to do things collaboratively and still keep things protected, and so we focused hard on that, and it's worked. We do have enough employees now both in Europe and in Asia to actually really use geographies to actually build on more collaboration for different kinds of innovation that -- to solve needs of different geographies, which is also very important as you become a global country -- company that we have been. We are set up into 2 segments, Protein Sciences segment and a Diagnostics and Genomics segment. We have 5 different businesses and call them divisions within them. And the largest part of the company, roughly 2/3, is the Protein Sciences segment. The Reagent Solutions is one division and Analytical Solutions the other. And they're really the reagents and the instruments that use the reagents. So we try to have these bundled together. They work together. We sell together. We develop together. And these are the brands mostly coming off of different acquisitions we've made that sell through this segment. We are known for our proteins. So we sell tens of thousands of products in the space and instrumentation solutions. We've become very mature with 3 very important platforms and the protein simply being the one -- the biggest one. Now the R&D Systems is there because we also moved our assays into the Analytical Solutions. They used to be in Reagent Solutions, but the assays really work well with different systems, especially the SimplePlex platform within ProteinSimple. On the Diagnostics and Genomics segment, the history of the company in diagnostics, R&D Systems, Clinical Controls, but we also have a lot of antibody-based support businesses with BioPacific (sic) [ BiosPacific ] as well as a lot of OEM development that we do for, call it, big diagnostics companies and other concerns they have in instrumentation and new controls. And then one of the newest divisions, we have the Genomics division. We have our ACD technology platform in there as well as our latest acquisition, Exosome Diagnostics. So this is a tissue and a liquid biopsy-based technical platforms, which we think have a lot of scale and a lot of synergies in our science with the other 3 areas in the company we see. A little bit on Protein Sciences. So we're known for proteins. R&D Systems is the gold standard brand. We sell 6,000-plus different varieties of proteins. Been doing it for 35 years. We're known for our quality. We're known for our bioactivity. We're not known for a low price. We're known for great margins. We have bioactivity that can outpace our competitors sometimes by 20:1. So paying a premium for our products isn't a big issue for our customers. Our antibodies, a little different this year. It's a very, very large market, very diversified. We sell -- we make 20,000 varieties of antibodies. And we distribute and sell another 250,000 from about 60 different suppliers on top of that. So we do have the world's largest catalog in antibodies. We're not the largest antibody supplier. We're probably in the top 5. We are known for what we do. And we have taken share, and we've grown double-digit consistently for the last few years. A lot it's due to our website and the digital strategies that we've done in the company to try to build out this business. Instruments within Protein Sciences, as I mentioned, we have our Simple Western platform. We have our biologics platform, Maurice. And we have Ella, our microfluidics immunoassay platform primarily. And those 3 are all growing nicely, all double-digit growers. And Ella, we'll talk a little bit about when we get to talking about COVID and that side. Ella has been -- grew 40% last quarter. This quarter, we'll probably grow 75% or better. We probably could grow more, but we can't -- we're selling all we can make. And it's all based around COVID testing, COVID research. In assays, we are the world leader in ELISA. We invented the category. Been doing it for 35 years. Thousands of products, as you'd expect. And our new serological tests that we're bringing to market here this month that we have a big press release on and we're getting a lot of interest in is an ELISA kit from ELISA. So very ubiquitous and open system platform. A lot of automation out there to run it. So we're expecting big things from this test. So I'll talk more about that. With Diagnostics and Genomics, the tools I mentioned, we have the largest controls diagnostics lab in the world. We have 30 to 40 different vendors' instrumentation for hospitals in our lab. We have a lot of room with secret next-generation platforms. We work with -- we are the world leader in providing controls, many of them with the brands of the instrument provider. But anybody who is anybody in providing instrumentation for hospital systems related to DNA blood needs a control that's needed by the regulation, and we provide that control. The tissue biopsy and the [ sub-late ] spatial analysis, the RNAscope platform is a heavy grower and essentially because of RNAscope. We do have a multiplex version that's out now, and we're working on a very highly multiplex version. But this is a technology that can take analysis -- spatial analysis down to a single cell, which is very critical these days and highly sought after. We do have a new corona-based test as well. We can analyze and identify COVID-19 in lung tissue, and it's being used to analyze the absorption of and the growth of that into other tissues, other organs as well. And then liquid biopsy, the Exosome Diagnostics platform. We have a Medicare-approved released test for prostate cancer. It's growing -- was growing really well before the COVID hit. Urologists, they kind of all shut down. They're coming back online. We have a home kit version out right now as well. We are Medicare-approved. That's all going. And we have 4 other indications coming up, 2 in urine and 2 in blood, that we're working on their way towards their own clinicals or partnerships to drive clinical. So a big future for Exosome Diagnostics in the liquid biopsy realm. And there's a slide later on that, I think, too. So now what's happening around COVID-19? So we have a lot of projects going on. I'm not going to go through everything, but the biggest and foremost that we're working with is serological. We have a quantitative serological assay that can -- as a second step to a step payout that other companies have as well. We are totally IgG, and we can virtually eliminate any false positive or false negative. We are waiting for an EUA in the next couple of weeks and the FDA, which we can finalize pricing with. And then we are currently working with solidifying deals with all the largest reference labs, different country governments, et cetera, to try and get this into the market where it's very badly needed because it will be the only quantitative test in the market, the only foolproof way to tell a patient they're ready and -- immune and ready to go back to work. Ella, I mentioned we'll probably turn this $20 million business into somewhere near $40 million in the coming year, be very material. It is a perfect screener for doing COVID testing. It's already been in the works in China as -- in clinicals for cytokine storm. And of course, COVID-19 is an immune response type of situation. So this is a great potential test and great for research to really help identify patients that are going to be susceptible for cytokine storm. So it's a patient monitoring system as well and it's being used. But it's also good for any microfluidic immunoassay where you need automation. It's 1-hour sample to data. So it's very fast, very sensitive. And it's done well because of that. We also -- as you see, we're selling virus spike. We're selling different antibodies. We're selling nucleocapsid. We make and sell RBD, probably the best RBD in the market, which is the primary protein based on the sequence of the COVID-19 virus. So we have assays. We have reagents. We have instrumentation. And we have ELISA serologicals coming to market with COVID and some will be around a long time, and some are highly scalable, as you already know, from previous discussions we've had and our press releases, et cetera. So this is the most exciting thing we're currently doing in the company. When we saw the hit to the company come with -- when everybody saw it as well come mid-February, we did pivot about 150 people of the RSD division towards research here and things that we could do because we wanted to help out. And working with Mount Sinai, it's been a fabulous collaboration, and we do think we are onto something that's going to make a real difference in the world. And we're just excited to be able to help provide that. We did this kit, which typically takes about 18 months to do, an ELISA kit, from concept and protein all the way through. We did it in 8 weeks, which is kind of unheard of. We worked around the clock. We have a lot of employees we need to thank and take care of here. They've really outdone themselves pulling this off in a record time frame. So starting to sum it together, we really have 5 legs to the stool in our company. We are -- I understand that from your point of view, maybe you think we're a very complex company with a lot of moving parts for the size we are, and that's true. We do have roughly 50,000 products we make. We are in tissue biopsy. We are in liquid biopsy. So we see it as a whole platform for the future for different sets of diagnostics, primarily in oncology and neurology, where there's more money to be made. Our core, our antibodies, proteins, assays, small molecule, they really flow in all ways. There are synergies technically in all these spaces. So we see that as the core. It's also the highest margin side of our company, and it pays the bills. So we have the ability to actually do these acquisitions and do these experiments and grow these other businesses. So we have -- whilst there's synergies in there today, from our research reagents, the tissue biopsy is scaling up big right now. Liquid biopsy, just starting to come. Instruments are doing well and really hitting their stride. The next-generation division we have is the cell therapy and cell culture gene therapy. And we're just getting started. We have a JV in place and we have our own flow -- workflow. We're moving into -- from preclinical to clinical that's non-viral vector related. As you know, all the methods out there, which is 1,000 clinicals in place right now, are all viral vector related. And viruses are hard to work with, expensive, unpredictable, and we have a better way. So we're really bullish. We have a JV in place, partners, 2 of them, Fresenius Kabi for a leukapheresis instrument, to tie this all together with the patient; and then also Wilson Wolf, the bioreactor. Everything else in the workflow, from proteins to instrumentation for doing the QC work, to spatial analysis using RNAscope, the [ B technology ] with the Quad Technology, an acquisition we made, and then our own gene editing methodology with B-MoGen. So we have the full workflow for next-generation gene therapy, we think. And we see a $300 million division with this business 5 years out. It's only at $30 million right now. But it's growing high double digit. A little bit on liquid biopsy. Why did we take exosome versus go with the flow out there, cell-free DNA or certainly in tumor cells? And it really is the best platform. For one, there's a lot of abundancy. The ability to enrich and select is there. The quality is very good. As an example, you start looking at analyzing blood with cell-free DNA, you've got 1,000 potential things to get rid of and filter. And the cell-free DNA doesn't tell you where in the body it came from. It doesn't tell you the organ of origin. Exosomes out -- or the proteins on the surface have that data. Inside the exosome is a fully protected RNA. So you can do molecular analysis, and that's what we do. We're looking for a gene signature that makes this technology work. So we think it is the liquid biopsy of the future, and it's doing remarkably well. We've got a lot of interest. A lot of indication it's ready for clinicals so -- that are done validating, and we have partnership discussions going on. So more coming on that. I guess I just mentioned most of this already, but the Exosome Diagnostic prostate kit, it starts with a simple urine sample. Okay. There's extraction done. We do the PCR analysis. That's all it is, is PCR, looking for this 3-gene sequence. And then we have our own algorithm that we work through to give a score that basically tells the urologist as a tool whether this patient should go forward with a biopsy or not. So this is for patients, men over 50, when they get their first PSA of 3 or higher over there. And to date, urologists don't have a lot of tools. So they're conservative and they prescribe that first biopsy. Because of that, over 90% come back negative. And 5% to 7% of these biopsies have complications and 3% go septic. So there's a lot of legal risk. There's a lot of risk to the patient. And there's just a better way. You can just pee in a cup and you can find out whether you need that biopsy or not. We have a high sensitivity with this test. It's a rule-out test. And everyone we come -- have come on board to use this or learn more about it becomes a believer. So it's working its way. I mentioned this before. This is just a diagram. It shows our cell and gene therapy workflow. You can see we're working around the da Vinci here, everything from extraction all the way to putting the therapy back into the patient. We have all the technologies to really complete the loop. So we are working on active CAR-T-based therapies with partners. And we expect to have a strong and long future in this area. And from here, we're working with NK and other areas as well. So more to come but big, big future. So people ask us all the time, so we're fairly diversified, 5 divisions and a lot of technologies, a lot of products. How many [ products ] are we in for with market potential? When I and the team came 6, 7 years ago, it was roughly about a $2 billion to $3 billion type of market we're really addressing. Now with these acquisitions and expansions, these new divisions, we're looking at $10 billion plus of market potential here. And we're really in the early innings of market penetration in virtually all of them. So on Ella, we're at roughly less than 15%, maybe 10% even, and it's been growing 20%. As the biologics platforms move from large molecule with pharma to cell and gene therapies, we're finding new markets to become spec-ed in for analysis in the QC work. We're just getting started with all the diagnostics, whether liquid or tissue biopsy. Spatial analysis has just started to get going, and with the multiplexing versions of RNAscope, we see a lot of potential. And this also could be a $200 million plus business all by itself in about 5 years. And then research isn't going to go away. I mean our proteins, our assays, our antibodies. It may be a roughly 5 or so type of growth rate in the market. But we've been growing higher because, one, we've been taking share in antibodies and we've been expanding our platforms and proteins, and GMP proteins are just as an example. We will likely double our business in proteins in the next 5 years just because of moving from research to now going into GMP production level markets for the proteins. Because of all these, we're on record from a couple of years ago this fall of saying by '23, we'll be at a $1.2 billion revenue and roughly a 40% op margin rate. You can see down below how we rank by the growth rates in each area in the mix. And we're on track to actually see this. We'll probably put up a number this fall and move us to FY '25, and it will be $1.5 billion or more and operating margins at easily at 40%. And this is with no COVID whatsoever involved in the numbers. And the COVID numbers involved in this could be anywhere from a nice add-on to double the company. It all depends on what kind of traction we get with our testing and our Ella, et cetera. And that concludes my presentation on our company, Bio-Techne. It's been a great journey. We're having fun. And I think we're proving a lot. I think we've shown we can be fluid, we can move and be nimble. I think COVID has shown that as well. I hope that we'll -- we'll tell you a lot of great results involving our COVID solutions here at the next earnings call.

Thanks so much for being here, Chuck.

Thank you.