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

All right. Good afternoon, everybody. I'm Jacob Johnson, the life science tools and diagnostics analyst here at Stephens. Welcome to day 2 of the Stephens Conference. Happy to be joined by the Bio-Techne team this afternoon. We got CEO, Chuck Kummeth; CFO, Jim Hippel; along with Dave Clair, Senior Director of IR and Corporate Development. [Operator Instructions] With that out of the way, Chuck, maybe to kick things off, if you just want to give a brief overview of the Bio-Techne story, and then we'll jump into Q&A.

Sure. Well, I just had my 30th earnings call, so it's been 7.5 years. Jim is here on the call with me, he's close behind me at -- going on 7 years. Dave just joined a year ago, but he's been working with us for at least 3, if not 4. And been a big help, by the way. We are a reagents, tools -- reagents and tools company for life sciences industry. We have a lot of products. We're very complicated for our size. We're knocking on the door of $800 million annual run rate revenue-wise, hopefully this year or better. But when I started, we are roughly $300 million and shrinking. We've been growing double digit up to COVID. In this last quarter, we've reattained a double-digit growth trajectory, and we have lots to talk about, how we do -- how we'll continue doing that and even increasing that. We're known for 40 years in the reagents for research, mainly proteins and antibodies. We have roughly 50,000 reagents that we make and sell, and then we actually distribute another 250,000 antibodies on top of that, so an extensive catalog. With that, you need a very, very good website and search engine. We have that. It's taken us years to build. We're known for that now. We're also known for our pretty posters and lots of great collateral and content that researchers around the world like to plaster in their walls. If you're in biology and you went to school of biology, there isn't any way you can get through your curricula [ without ] understanding what -- who R&D Systems is. R&D Systems is the original name of the company, and it is our main brand for our reagents category. We've done a lot of acquisitions in the last 7 years to help improve our growth. We have a strong balance sheet and great cash flow, we put it to work. We have decent leverage. We've done 15 acquisitions, and we've expanded our range now into instrumentation. Proteome is mostly based instrumentation that deals with measuring proteins and such, uses antibodies, et cetera. So synergistic with our reagents. We've also -- are big in assays. We're the world leader and the creator of what the ELISA assay is. And we see -- we're in assays and multiplexing as well. We supply antibody pairs to everybody in multiplexing immunoassay platforms like Luminex, Meso Scale, Quanterix, others. Everybody who's in it, we sell to them. So we are a little bit the Intel Inside. We command a pretty penny for that, though, we [ get ] royalties across the board, and it's been very good for the company. Being we're in assays, we thought, well, why not be further in diagnostics? Because diagnostics are nothing more than application-specific assays. And so we've done acquisitions in both tissue-based and liquid-based diagnostics. So the genomics ACD platform, which is a spatial interrogation platform, or we can talk about genetic and format. And then we have Exosome Diagnostics, which is an exosome-based platform, which we have released a Medicare-approved prostate cancer test, urine-based and noninvasive. So very, very interesting and very, very much-needed tool in the world of urology, given the current situations based off a PSA test, which isn't a very good ruler. So all in all, we have -- and then we have a -- our latest adventure is cell and gene therapy. And we're -- that's more organic. We're kind of building that from within. We've just finished the completion of a $50 million, 60,000 square foot factory for developing and manufacturing of GMP proteins, which is a very key part of the cell and gene therapy workflow. We've done other smaller acquisitions that are also in that workflow, things for selection activation, gene editing, so nearly a complete workflow. We also have a JV with 2 partners for the bioreactor component and a leukapheresis instrument that ties it all together, from Fresenius Kabi. And we call that brand, that JV as scale-ready. And all in all, it makes us, we think, the most complete cell and gene therapy workflow in the world, and the only workflow that's nonviral. So we do not use viral vectors in our method, which is -- well, given what we've gone through this year, it's pretty much -- everyone knows, viruses aren't a good thing to work with. So with that, 5 legs in the stool for growth, too many products for our size but we deal with it, a lot of innovation, a lot of great executives taken from around the industry from everybody you've known and loved over the years, I'm sure, as investors. And we're having fun. We've got a long way to go. We see a path to $1.5 billion revenue and 40% op margins in 5 years. And we have a very, very detailed, structured plan of how to get there. We've been talking about it, that plan, for already years, and we're ahead of schedule. So with that, I'll leave it to you, Jacob.

Thanks for that, Chuck. Maybe just rather than diving into the 50,000 products, maybe taking the 10,000-foot view, you just reported a really strong first quarter, double-digit organic growth. Maybe just to start off, can you talk about what you're seeing -- about demand trends kind of by end market, geography, thus far in your fiscal 2021?

Yes. Well, we had a great quarter, as you said, and that's coming off of a really strong comp of 13% from the year before. So we are pretty happy to see this. It's always good to begin the year ahead of forecast. That's good. We saw a nice comeback in rebuilding our academic footprint. And even though our reagents are still mostly flat, instrumentation and our genomics platform and our geographic growth is all really, really good and all north of double digit. We had one instrument platform, our Simple Plex platform, up near 80% organic growth. It's -- there's some COVID funding revenue in that as well. Our Simple Western, our only -- world's only automated Western blot line form also experienced mid-30s for growth, and that's the best you've seen in a couple of years for that. So that's come back nicely. By region, biopharma was strong, mid-teens. We are mid-single-digit academia. So great numbers all around for us, but even with still a recovering academia, which is 25% of our market, company-wide or worldwide. China was high-teens, should have been 20s, but Beijing shut down on us again for half the quarter, as you saw, and -- but they're all back online. So we've had 7 years of consistent 20-plus percent growth in China, and we feel confident about that for years to come, to be honest. APAC in general, has been off to a good start. Japan is doing really well. India is the only really troublesome point. And COVID has that still pretty well shut down, that's why. Europe was very strong for years for us. We did some consolidation of our distribution locally, we reorganized, and then we kind of ran out of gas 1.5 years or so, 2 years ago, and we spent some time redesigning that. And we've barely gotten the ink dry in that design before COVID hit, so we had a hard time measuring the progress. But had a great Q1 here in Europe, and so we think our changes are working. Funding is strong in all regions of the world. And even though there are shutdowns occurring now and more lockdowns occurring, it doesn't appear to be affecting laboratories or schools right now. So laboratories and universities are remaining open. They've got a lot of research to get done. Most of them are behind and -- behind in their grants and they got to stay compliant. So we feel pretty bullish about the academic space going forward. So...

Maybe a couple of follow-ups on that. I mean you mentioned really strong instrument performance in the quarter. I think it was led by your Simple Western. I guess as we look longer term, obviously, that seems to be really resonating in this COVID environment. But when we get beyond COVID, do you think there will be kind of an increased shift or a continued shift to automated solutions like this? Is anyone going to want to go back to a manual process?

No, I think you're exactly right. There will -- this is -- if anything, COVID is going to probably improve the inflection of acceptance for Simple Western. I think the social distance and the redesign of laboratories for social distance, the duplicity, you're not allowed to share that instrument down the hall anymore, you have to get your own. And that's helped this last quarter. And a lot of supervisors have to go back to the bench to help set up these labs, and they could see firsthand, "Wow, these are cool instruments. They are actually a lot easier to work with then doing it the old way." So I think the change is a good one for that. And I -- we had already kind of crossed that chasm for growth. Simple Western was growing at plus 20% before COVID, and I think we're back there safely for the future now, too. The Simple Plex, I think, that's always been our sleeper. That's a multiplexed immunoassay automated device, sample the data in 1 hour. And it's microfluidics, so it's very fast. And it -- so we can plex up to 8 different analytes. So it's a very unique instrument. Very highly sensitive because of that microfluidic capability in the way the system works in general. It can work anywhere from normal research all the way to point-of-care diagnostics. In fact, it was being used in triage in Italy when they crashed last summer, and we had a lot of sales. In fact, we couldn't sell enough. We couldn't make enough to what we sold, we had a near 100% growth quarter then. That's going to continue. I think we're going to see that platform going to many diagnostics' different avenues going forward as well. So...

And then maybe one other kind of high-level COVID question. Chuck, you always seem to have your pulse on the funding environment. Longer term, what do you think the longer-term implications are from COVID-19 in terms of life sciences funding, both here in the U.S. and I'll be interested in kind of thoughts on a more global perspective as well?

Well, with the $40 billion NIH budget that allowed a $5 trillion problem to occur, and now that the whole world knows what an antibody is and does, I think that it's safe to say our research for life science funding, including infectious diseases, is going to be going up. Some of the budgets are starting to come out now. We're starting to see numbers for next year, and they're all on the rise. Actually, I'm kind of surprised they're not bigger, but there may be a second or third wave of funding. I got to believe, when this is all behind us, that there will be extra avenues of research, if not to prevent pandemics, but areas -- even like antibiotics and things that were in short supply and is very -- made it very apparent that we're behind the curve where we need to be. But you have gone soft the last few years because there's not been enough money in it for people to do development, so maybe that will change.

Got it. And then maybe one last line that's kind of COVID questions. You've got this serology test where you partnered with Kantaro and Mount Sinai. Can you just remind us where that is in the EUA process? I think you have CE mark in Europe. And then just kind of talk economics to Bio-Techne from this work. And then how it compares to other serology tests that are out in the market right now.

Well, as exciting as cell and gene therapy is and our Exosome platform, the flavor of the day for excitement certainly is our serology test. And everybody wants to talk about it. We've been talking about it for a while, and the FDA does what the FDA does and moves slower than you want. But we have a CE mark, even though we submitted to the FDA 2 months before we submitted in Europe. We have complete quantitative claims, including full neutralization in Europe. The EUA we're requesting in the U.S. will not have neutralization. It's a claim, so it will be semi-quantitative even though it will work fully quantitative and will probably become de facto standard after Europe. But we're resubmitting data and testing with Mount Sinai for neutralization, just to see its -- the -- a way they'd rather see the data, I guess. And we're through the gauntlet, we're told, even though they're 800 EUAs behind. We're top of the pile, and we've been told it's coming. So it's just a matter of, hopefully, days. But it is the FDA, so who knows?

Got it. And then just maybe one other question...

Everything is submitted. So there's nothing left to do. So...

Got it. Just waiting on the FDA. Just one other question here. In terms of the opportunity for serology tests, I think right now, serology testing is relatively low versus PCR testing. Can you just talk about what the volume ramp could look like for this test? And is this something where a vaccine is really going to drive demand for a serology test? So what's the kind of the catalyst for us to start seeing...

Yes, let me talk about it. We've learned a lot over the -- I mean, the past few months. I mean we're probably ready to go 3, 4 months ago. And we were probably thinking back then there will be a lot of people who want to know were they sick at one time, do they have antibodies. And how safe are they to be going out, right? And there probably would have been a need. And then there was a launch of a lot of inferior serology tests that came out, qualitative-based ones, and they were measuring, in many cases, the wrong thing. And too many false positives and not clear enough to give a real answer. And not a good enough, scientifically or accuracy-wise, to let a health care worker go back to work or something like that, they just report. It did put some tarnish on the whole category of serology. So we'll have to cross that. But we see a huge need still. For one, there is no reference. The FDA may be dealing with us for our serology test, but there has to be a serology test as a reference for every vaccine. And the vaccine makers had to start early. So they all have their own home brew serology tests. The FDA knows literally nothing about it. And they're probably not scalable, they're probably based off a polyclonal antibody situation, which isn't a product, so we couldn't go that route. We went after a full monoclonal approach so we could build it in a cell line, which is much harder and you have less signal to work with, very difficult for yield, et cetera. But there's going to be all kinds of weird references out there. That's why you're going to see a big variance with these different vaccines. And by the way, by the nature of the disease itself, the immune response has been that -- a [ gene ] varies widely in a patient, from no symptoms to death, it's going to be the same way with vaccines. And we think there's going to be a big bow wave of demand as they start hitting the streets here in January. And the very first wave of demand will be elderly people who have been locked up for the last 9 months and want to know is it safe and to go see their grandkids now. And even though these vaccines are 90% efficacy, you're going to wonder if you're in the 10%. So there's going to be demand. And after that, I think the vaccine maker's -- the next generation of their vaccines, though they won't cut as many corners, there's more boxes to check. And we're hoping to have our serology test become a global standard as a reference. And so we're working hard on that because, one, we're not working alone. We've got the power of Mount Sinai behind us and Kantaro, and we're dealing with many different governments right now, and it's looking pretty hopeful. In terms of scale, it's just an ELISA kit for us. We've been doing it for 35 years. So there isn't a lot of extra capital for us. And in terms of laboratory, everybody has a reader. So this thing can grow quickly and be used by almost any lab that has automated ELISA, which almost any sizable lab does. So we can make a lot of them. We can currently, right now, build as many as 10 million tests a month. And our economics are, even though a single step test is reimbursed at $42, we think our test will get reimbursed at something north of $80. It's a 2-step test, and -- but we can't submit for pricing to CMS until we get the EUA. And if it's that range, there's going to be a lot of support and interest for the channel. And that channel is important because we may be able to make 10 million tests a month, but conducting 10 million blood draws a month is a big problem. You have to have a channel into all these labs to get this done. So you have to get the support and the [ buying ] and the [ helping arms ] of the Quest, the Hologics, the Tier 2 CLIA labs, LabCorp, that's all important. That's the engine to get this done. And there's a lot of interest. We are well on our way in Europe, but we can't really do much business with these guys until we have an EUA here. You can imagine after all the false starts and serology, how many companies have tried to get some -- get a deal going with LabCorp only to fall in its face. So rightly so, these guys are waiting until there's real proof that we have something. So we're real hopeful still. I think there's a lot of demand. I think the bow wave is just next year. I think after that, years 1, 2, 3 to 10, I think there's still going to be demand. They still don't know a lot about a scenario of a person who's had a disease and has antibodies. What happens if you give them an mRNA vaccine? If you already have antibodies, are you spiking your system and you put yourself into an immune response situation? So it's -- it could be dangerous. There are no people in the studies that had -- that previously had COVID. So that's a big unknown right now. So we're expecting there to be still strong demand even we come to Generation 1 and 2 of the vaccines. And then don't forget, it's widely unknown and it will be very variable how long immunity exists for everybody. We aren't experts. And this includes Dr. Florian Krammer, probably the world's most authority in this matter, the coronavirus family. And he thinks it's at least 6 months, and could be as long as 2 years for some people, but probably not longer. So now the good news is this virus doesn't mutate very much. It's not like flu where you're guessing every year what the vaccine should be. So it's a booster more than a redesign every year. But even so, you probably aren't going to want it until you've run out of your antibodies. So... And how we price it, we're pricing it like ELISA. So we're not considering anything with CMS reimbursement for the channel. We expect to get between $5 and $10 a test for [ our team to -- and ] that will be plenty for us. So...

All right. I think we did 15 minutes of COVID, maybe we can move on to more exciting stuff.

Yes. True.

Cell and gene therapy, Chuck, you mentioned it a couple of times. I think GMP proteins is the question a lot of investors have been asking about. I guess a couple of questions here. Maybe first, talk about the role these GMP proteins play in the cell and gene therapy workflow. Why the interest in GMP versus plain old proteins? And then maybe just touch on some of the demand you've been seeing for these GMP proteins.

Yes. Sure. Well, we're the world leader in proteins, we pretty much created the category 35 years ago. But it's been all for research. And -- but we really haven't been too much in the production -- in drug production. We're more into drug discovery as a tool manufacturer. So when this started all happening 5, 6, 7 years ago, we really weren't there. And a little company called Miltenyi built a system for cell extraction and sorting and to start this whole endeavor. And to make it all work, you have to have a food supply for these cell lines, and they're proteins. So they came out with what's called GMP proteins. So GMP means nothing more than good manufacturing practice. It's really a self-declared regulatory delineation of the quality and -- of your product line, that it's safe for regulatory-type endeavors. And it means it's very expensive to build factories to do it. So... But anyway, we started having big pharma- and new pharma-type customers come to us a few years ago, asking us if they would order certain proteins, would we be able to make $5 million, $10 million, $15 million of 1 protein for them for an annual supply. And we were kind of shocked. It's kind of a joke. I mean after 35 years, we don't sell more than $2 million of any protein. So -- and we don't have the lines to do it there. Our -- we make little bitty batches of stuff. So it's not really meant for production. We make 10,000 varieties of proteins, by the way. We do have a GMP portfolio now, it's 50. And we're the biggest catalog out there. But we can't make enough at one time to supply the big guys coming out of clinicals. So now fast forward 3, 4 years, there were 1,000 clinicals going on, there are 3 products in the market. They're expecting to have 20 to 25 per year coming up by 2025, and the future of oncology is probably cell therapies. And we all know about the little girl in Ms. Whitehead's story, and we have the miracles that are happening, right, with CAR-T and NK, et cetera. And so we decided to get in this. We make the world's best quality protein, and we think it's kind of ours to lose. Now to help us, everybody is scared to death that what's going to throttle the growth of cell therapies -- cell and gene therapies is going to be a shortage of badly needed reagents to make the process work, the workflow. If you can't feed these cell lines, you can't grow the cell lines. So proteins are a necessary step. And there's only a handful of companies in the world that can make these proteins. And by far, we're the world's best quality version of that. So I think, personally, it will be an everybody-wins scenario for the next 5, 10 years, and it's more or less for us if we build it, they will come. We have one large company contract signed. We're working on closing a second. We're in development with half a dozen others. None of them want less than $10 million a year of what they think they need once they get into production. But these are cell therapies, and they're all coming to us while they're in their clinicals, which means they're still over a year away. So we look at this as a 5-year ramp to fill the capacity of about $140 million to $200 million. And it's more of a J-curve. We have a run rate business right now of roughly $10 million. It will probably double this year, and it will double the year after that. And we'll migrate as much of this as fast as we can with the new facility that we just opened. And we're qualifying it, and it will be up for production in January. So it's a great story, and it's just a needed workflow. It's not the only thing we're doing in cell and gene therapy. We have a full workflow design, especially for a nonviral vector methodology. So we have a bead technology that's nonmagnetic, which is really good because these magnetic beads don't all get taken out, and it can be in your body, and it's not a great thing. We have a version of bead technology of which we use to aggregate and select the cells for doing things with them, feeding them, adding antibodies, whatever. And when we want to get rid of our beads, we just dissolve them. We add a secret sauce type of an enzyme that dissolves them, they just go away. It was an acquisition we made. We also have a gene-editing technology called -- from B-MoGen, a company with a technology we call TcBuster, and it is essentially electroporation technology. So we get into the cell in -- into the transcript -- of the design spot and transcript with the SNP we're trying to locate through holes in the cell wall that we create through electrifying the bath in which the cells are residing in, it's called electroporation. Much more effective way of doing higher yield, much lower cost, and you know what you're getting in the outcome. Viruses are tricky. Viruses don't always work as expected, and that's why you see variances in how they react. And so using a viral vector as a carrier to attack the cell isn't always the best way. But it is the process of record. It's been around for 20 years. So that's what we've got to beat out. So we think the next generation of clinicals will have our technology. We're in dozens of preclinicals and being tested, and people love our workflow. So it's going to happen. So that's a snippet on our direction. It's all starting. It's growing. It's a great future for us, but it's probably the longest range, large revenue we're looking at.

A couple of follow-ups after everything you mentioned there, Chuck. Maybe just one quick one. When you say you're seeing people who will need $10 million worth of GMP proteins, that would be for a -- if their therapy is commercially approved, that's the kind of demand you would see from a potentially...

Yes.

[ Both commercial? ] Okay.

That's a ramped-up therapy, probably in a year or 2 at least of its production.

Got you. And then you mentioned B-MoGen and Quad, and talked about kind of where those play in the workflow. But can you just remind us when the time line for those deals may be starting to generate more meaningful revenues, what the revenue opportunity is from those assets and maybe where we are in that?

Well, we're in the millions of dollars now with TcBuster. It's being accepted and adopted. I think the bead technology is a little behind that because -- just because of work issues in the workflow, but that will scale. Once we start scaling in clinicals, both of those platforms have the ability to get to $50 million, $60 million a year of revenue, annually probably. You add that to the $150 million-or-so with proteins, and then you have our other instrumentation and other parts of the workflow we have, we think we can build a $300 million division in 5 years around cell therapies.

And then something else you mentioned earlier, I just want to circle back on. You've got this JV with Wilson Wolf and Fresenius Kabi. Can you just talk about what that JV entails and how that's progressing?