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

Okay. Welcome back to the Life Sciences track of the Stifel Healthcare Conference. Our next company is Bio-Techne. We're happy to have Chuck Kummeth and Jim Hippel here with us. Guys, thanks a bunch for joining us today.

Good to be here.

Good old-fashioned fireside chat. I figure we could just sort of take 30 minutes and walk through the business, some of the things that you're seeing, some of the ways that you're thinking about the outlook. And maybe just to jump right into it, Chuck, you've always kind of been a guy that's had a good finger on the pulse of his customer base. There's obviously a lot going on in terms of what the impact of COVID is and how labs of different types are reacting to it. Any up-to-date view on how you think customers are reacting to what we're seeing today in the market, rising cases, I mean, Europe and U.S.? Anything that you feel like is translating right now one way or another?

Not a whole lot different from the earnings call, I would say. But I will say it's a very fluid situation. We're getting pretty bad [Technical Difficulty] very, very quickly. So who's to say. But I think in terms of up to last week, everything we've been told in the U.S. or Europe was that labs and schools stay open, even in the event of a lockdown like Europe is going through. But we'll see how bad it gets. I think people are working towards more social distancing. I think there's a lot of retail components that are really in trouble now, bars, restaurants, et cetera. But the professional side industry itself, I think there's a lot of -- I think everyone wants to keep that open, at least for mission-critical stuff, and that's what we're hearing. I hear even in the U.S. that from Thanksgiving through New Year's, a lot of labs are not only going to stay open, they're going to double down. They're going to be caught up because they got to stay compliant with their funding. And students may be going home but not grad students maybe. And labs are doubling down, getting a lot of extra work done in fact is what we're hearing. Europe, nothing's changed. Labs appear to be staying open. Schools are open for the most part. And we see a pretty good start to the quarter as we've already implied and told you. Nothing else has changed there. I think, yes, nothing really -- China as well, kind of no new news, but that could all change by next week. We'll see. But right now nothing.

Okay. Your comment on the call was that so long -- Europe should continue to ramp so long as that labs stay open. So I took that to mean that so long as we don't go back to true closures, then your demand profile in Europe and the revenue base of the company continue to accelerate sequentially -- that it's really true closures and guys can't show up and open up the doors and do experiments. Because to your point, a lot of these labs are trying to catch up for the end of the year, given what they missed in the spring.

I'd say for the most part, that's true. I think this last quarter in Europe was significantly better than the quarter before or even a few before. So to stay on that trajectory may be a stretch, but I think incremental improvement to some degree, I think, is probably still okay and still vowed as long as labs don't shut down. So there is a new funding, both in Europe and the U.S., that's been recently announced, and the numbers are up roughly 5% or so in that range. And that's going to help us, too.

Yes. Okay. That's great. So maybe we jump into some of the business topics that I was hoping to hit on and start with GMP proteins. This is an area where you sound pretty excited about the opportunity. What's left to get to production mode on the new facility? And then can you walk us through the way in which you're thinking about the revenue progression for GMP proteins? I think you got that exact question on the call, too. But that's certainly something that's top of mind for folks that are trying to understand, okay, I've got this opportunity a couple of years out, 5 years out, that's $250 million, $300 million. What's the way to get there?

Sure. Well, some GMP proteins, I think we're more or less within a month or 2 of a 2-year project here of getting this factory built and open. And we have open and the ribbon has been cut, Mayor has been there, all that. The newspaper articles have been written. So all that's done. So now we're working on validating. And we'll be validating into January. And that means we have to make -- if we want to sell a certain product we have to have 3 consistent lots of that product, and it has to meet all the very rigid requirements that we put on ourselves as we sell any proteins. We'll be building at scale some levels. So some of this will go to inventory if it's acceptable. And we hope that customers will start coming for it next year. We do have one signed contract, we're imminent on another, and we're in negotiation with a half a dozen others. And it all comes down to timing for their clinicals. So the bigger the customer, the earlier they're coming and getting ready for the future, which could be a year or 2 away, yet. And yet they want to get ready and understand they have access to capacity. Nobody wants to get caught like they have in plasmids and other things in viral vector methods. And so as this industry becomes an industry, it becomes very sizable in scale, as in we have hundreds of new indications over the next decade, there'll be a real need for these reagents. And if they're not there, then this industry can't form and grow. So that's all in place. It's -- our capacity by design is between $140 million and $200 million of GMP protein revenue, very dependent on the mix. And we think it will take us 5 years or so to fill it. We're just guessing. It's a bit of J-curve as mentioned before, because they'll start buying to qualify. And then as they get into production and ramp their therapy, which is a year to 2 years away for most of them, the orders get quite large. We've been asked to be ready to build as much as $10 million to $15 million of one program, one protein for them for one single application over time here. So we're expecting it to ramp and be quite -- very nice. That's just one part of the wheel of cell and gene therapy workflow that we're working on. We have, as you know, a bead technology that's nonmagnetic [ being ], and we have a gene editing technology, the B-MoGen. It's not viral vector, it's a different methodology. And we have, of course, our equipment, which can be used in the QC processes. They're in from our automated ELISA to biological protein purity measurement tools and biologics, Simple Westerns, et cetera. We have, of course, a big line of antibodies, and we have spatial interrogation methodologies around using RNAscope from ACD, which is important. So we have a lot of the wheel addressed. We have a JV with -- for our leukapheresis instrument with Fresenius Kabi and the bioreactor that we're working with to start here is Wilson Wolf. And by the way, both of these 2 companies have been out there longer than we have working in the viral vector methods and they have -- are into 100 different customers, if not preclinicals and clinicals. And we're being -- we're getting visibility based off of those relationships as well. Wilson Wolf has been wonderful for us because they're already involved in so many clinicals as a bioreactor of spec. So we would like to do equivalency testing for GMP proteins and probably a lyophilized ProDot form as soon as we can, as many as we can. So that's all underway. When you add these all up, that's how we get to $250 million to $300 million over 5 years. It's not just GMP proteins. It's 50, 60 here, 50, 60 there to the $140 million or so with proteins, and we think it's a nice division 5 years about at least that level. And could be bigger, it might take longer. We're able to scale this if we need to. So --.

Okay. That's a very helpful way of thinking about it. You mentioned that the way in which you scale up on revenues is dependent upon the mix. Can you just expand on that a little bit? Is that trying to understand what these companies asked for first? Or is that trying to understand the price element around them. What --?

Yes. It's pretty easy. It's -- we have the largest catalog of GMP proteins right now, about 50 and -- as compared to thousands of proteins for research. So the largest selling protein out there for GMP is IL-2, was the first one. If we fill that factory with just IL-2, it's probably closer to $140 million in revenue. It's not as difficult a protein, and the yield is very high. But if we have to go to IL-7 or IL-10 or IL-15 with a larger part of the mix, that garnishes probably more higher price and more revenue. All of the above will happen. It will depend on what the customer is looking for, but we have the ability to scale up the entire catalog of 50 we have and even more if we need to from our very extensive research catalog. So --.

Okay. Okay. And then just maybe...

It comes down to yield, right, Dan. It comes down to yield and complexity and all that. So they're not the same, right? So in terms of complexity and scalability yield and then therefore, price. So --.

So you think 2021 is the year where, a, first of all, you're able to make this stuff. You've cut the ribbon and you've got validation where you need it? And b, you'll understand more about this mix that you're talking about? So it's a situation where in the back half of the year, it seems like your visibility on this business will be higher.

Yes, I'd say so. It's not -- I don't know of any real great differences in workflow to make IL-2 versus IL-15. They're different and there's yield differences, but the workflow, the testing, fermenting, everything is very similar. So it probably comes down to really knowing more about what you need for what and try to dedicate as much of that line as you can for a time being before. So you're not doing switch outs too often or too much downtime or whatever else.

Do you feel like your competitors are scaling up as well? You made some comment to say, you guys are obviously not the only one looking at this opportunity. Where -- when you stack up, where you are capacity wise in a year or 2? Do you think you'll be relative to some of other companies?

Well, we've sort of been catching up a bit against Miltenyi and CellGenix who kind of got there first. We know PeproTech is also building a factory. They're private. We heard it's going slow. They're also supposedly for sale as a company, all that could bear in. Sino -- there's a lot of little guys out there, and I'm sure they're all trying -- or trying to differentiate, do something as well. I think it's going to be a -- an everybody wins kind of market for 5 years or more. I just don't know if there will be enough [ rages ] to go around. I'm hoping on it actually because I want the industry to form. And we'd like a shot at doing equivalency to go take share from the other guys that were there first, that our process is a record for a lot of things in clinicals right now. So yes, when you look at the gross margin and what it takes for true capital to get into this. And really, there's no IP. It's trade secret more than anything else. I'm sure a lot of people will try. But a lot will try getting into proteins forever in general. I mean we -- we're the world leader, and it's not protected. The barriers to entry are quite low, really, except for one thing: the complexity, the hardness to do this. It's very difficult to make quality product, and we have a 35-year head start on all these places. So we've got a lot of tricks that we know how to use to increase the bioactivity, et cetera, and we don't expect to let anybody even catch-up to us in terms of lot-to-lot consistency, quality or bioactivity.

Okay. All right. That's great. Thank you for kind of fleshing that out a bit because that is something that we spend a lot of time talking to clients about. Another one that we spend a lot of time talking to folks about is the protein business, specifically the Simple Western business. I mean, to me, this has always kind of felt like one of those chunky portions of the portfolio where the revenue base is high enough and the growth is high enough to where -- when you have it working for you, it really does move the organic growth rate. I think on the quarter, when I was asking about Simple Western in the quarter, you had mentioned growth was 30% for the quarter. Was this Simple Western specifically or was this proteins overall? And the reason I ask that is because I'm trying to understand, a, how much Ella is figuring into that mix because I think that business is on a really good trajectory mid-COVID and if we can call it out of COVID, I don't know if that's probably fair at this point.

No. We had a great quarter, as you know. And we aren't giving detailed stats anymore by product line or platform, but the growth rate, it was north of 30%, just in Simple Western. Much higher than that in Ella on a SimplePlex. [ Biologics ] had a pretty good quarter as well, double digits. So across the board, ASD as a division did really, really well. Even the assays, which are part of ASD, even the Quantikine or ELISA had a pretty good quarter and showed pretty, I'd say, better-than-average quarterly growth. So we attribute a lot of this, Dan, to just the restarts. There's a lot of restarting going on with these labs, and they're ordering up and there's also purchasing for duplicity. They're having to practice shifting and staggered shifts and more social distancing. So the [ instrument ] that you were allowed to use down the hall, you're not getting access anymore. You've got to buy your own. So there's a lot of that going on right now. How long it goes? I don't know. But we are in the core well north of 10% organic growth. And we've seen that continue, as Jim and I said. And for the year, our annual guidance, and we see a double-digit year coming. To some extent, that's not [ in your new ] surprises pandemic-wise, but also pretty weak Q4 as a comp, too, it should help us.

Okay. Is it fair to say that for automated Western blot, which has just been a remarkably consistent grower, the academic side of the equation stands to improve because, to your point, you've got an automated solution that eliminates 3 -- 2 or 3 guys standing next to each other in a lab bench. And so therefore, the benefits of the efficiency and the speed and the social distancing aspect of it can work for that business more so than it has in the past. Because my understanding is that pharma, being less price-sensitive, has been driving at least a larger portion of that business, but I'm wondering whether that's going to continue to be true.

Well, academic was always a big portion. And therefore, the previous 2 quarters, you saw weak numbers in Simple Western, while there was so much academic shut down. With a partial restart, we saw quite acceleration back to Simple Western. And maybe some of it really is just extra growth in biopharma. This is a platform that is still really low in market share yet in the application share. So it's really on its ramp, [ past products in the chasm ], and it's headed up. So with academia coming back and then these other issues I brought up about the duplicity and all that, it's helping drive growth. And we had one of the best quarters in year at Simple Western. All in all, I think it will continue because I think that as a platform it's still so low in share that I think it's going to keep growing nicely, double-digit at least. I think another factor that happened, too, as these institutions were laying out more [Technical Difficulty] staggered shifting and such, there was the need, we were told, for a lot of supervisors to get their hands dirty again, to get things started and start doing stuff. I don't know about you, but if I were going to go back to lab after 10 years, the last thing I'd want to do is a hand Western blot. So think -- what we've been told is that it became kind of front and center for some of these managers to see just how productive this tool could be, and therefore, it really helped create need. Also, these are automated platforms. And since you are on staggered shifts, you're expected to be out of the lab a big portion of your time maybe working from home, you can start these experiments and you can go home and you can monitor remotely and you can do the results -- your write-ups from home. So if you're doing Westerns by hand, you've got to be in the lab the whole time. So just the fact that this equipment allow you to be more remote and work more remote is also probably one reason to attribute the extra growth we've had.

Yes. Okay. Okay. That's great. Maybe just moving to ACD. I know -- I'm not sure how much you intend on talking to the individual product lines inside the genomics portfolio. But I know for us, we do still try to look at this business by itself and understand the growth trajectory and where it is. So I guess my question for Jim would be, Jim, can you kind of level set us on ACD? We had 2020 kind of exiting at $70 million, $75 million in revenue. Is that ballpark correct? And then, Chuck, when I think about the growth trajectory going forward, a, I'm interested in your view on just spatial transcriptomics and spatial genomics as both a competitive element working against you, but also a synergistic element because you have some partnerships there. And then also, I'd love to know whether you think that the 20%-plus growth that could materialize for that business needs clinical uptake, true clinical usage, Ella, Leica or Ventana or some of these other platforms really getting going. So there's a lot in there. I'll -- sorry for that.

There's a lot to unpack there, Dan.