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

All right. Great. Welcome, everyone. I'm Puneet Souda, SVB Leerink tools and diagnostic analyst here. Welcome to our conference. And it's my pleasure to be hosting Bio-Techne management team. Chuck Kummeth, CEO from Bio-Techne; CFO, Jim Hippel; and David Clair of Investor Relations joining us today. Welcome, guys. Pleasure to have you at our conference.

Thrilled to be here, Puneet.

All right. Great. So just as a housekeeping item, please submit your questions in the chat or e-mail me and I'll cover those as we go through the session here. But just to get started, before I turn it over to Chuck, and Chuck will go through a few slides here, then we'll jump into Q&A. To me, Bio-Techne is really a unique SMID cap company in our universe with 80% consumables in their revenue -- this is a company that's driving mid-teens top line growth, 72% gross margins and operating margins reaching 40%. So in my view, it's a very unique profile and obviously, a great execution by the team so far over these last couple of years. So with that, let me turn it over to Chuck to go over a few slides, and then we'll jump into questions. Chuck?

Thanks, Puneet. We'll just give you a few slides for any investors on the line who don't know a lot about us or our story. Going through the disclaimer, we're not going to spend any time on that. You've seen them before. Next slide. So as Puneet said, we're 82% consumables. We are knocking on 2,500 employees. I've been here 8 years. Most of my team has been with me at least 7 or so, Jim even longer. He's been with me at Thermo Fisher before this company. We're 35 locations worldwide. We are fiscal end of this June. So we were $739 million last year. We're tracking well north of $800 million for this year. We are, I think, one of the world's best stock ticker symbols, had that a long time. It's a 43-year-old company, so that's why, and market cap near the $15 billion level here. We're roughly 10% instruments. There's another 10% of consumables of the 82% that go along with the instruments, the cartridges that make them work [indiscernible] talk a little bit about that. We have a growing services area, and we are also growing royalties area. We are a portfolio-based life sciences company. We have roughly about a dozen different growth platforms, and they're really broken to these 6 different areas, so to speak, antibodies, proteins. And proteins, we're the world leader, have been for 35 years. Most of all our tools are research oriented, not production. But as we move towards new areas like cell and gene therapy, we're getting more and more production revenue. We have automated protein analysis equipment, not only for research and drug discovery, but also for QC applications. We are the world leader in immunoassay. We've created the ELISA kit that's world-renowned and is a standard in most pharma companies in drug discovery. We have done 15 acquisitions in the last 8 years, and one of them is in tissue pathology. The ACD platform. It's growing like crazy. We'll talk more about it. We also have gotten into tissue -- into liquid biopsy. These are both diagnostics based plays, and we'll talk more about that. That's the Exosome Diagnostics platform. And then we have clinical controls and calibrators that is the oldest part of the company, and how the company started. So all our growth platforms really fit along these different business unit arrangements. And looking at what are the legs in the stool. So in the middle, what we've grown everything from, what pays the bills and where the synergies drive from, they drive from the content. We've got a lot of content. We're very good at content. Tens of thousands of products, nearly 6,000 proteins, over 20,000 antibodies we make and sell, distributing another 250,000 on top of that. We're into small molecule programs with a unit we have in Europe. And we talk about immunoassay. We're strong in assays all the way from immunoassay all the way to multiplexing applications, and we are a little bit the intel on side and providing content to everybody out there doing multiplexing based assay platforms. So from there, tissue biopsy, the AC platform. So we -- this is how the world's moved from IAC to spatial analysis. So we want be part of that being we're the antibody business. It's growing 30% or better rate now. We think it's a long-term perspective at 20%. The Exosome platform. Of all these things up here, there's only 1 platform that could be $1 billion, and that's Exosome. This thing is -- it could be a juggernaut. We have a prostate cancer test on the market right now, diagnostic, and we are very quickly reaching the finish line here for a kidney rejection diagnostic as well. We are Medicare approved on prostate, and it's growing as well as can be growing with the patients not seeing urologists this year, but it's looking pretty good. We'll talk about it some. Instruments, a few acquisitions there, but we have 3 major programs here. One is we call the Ella platform, and that's a multiplexing microfluidic immunoassay platform. We have a simple Western, and automated Western blotting application, which is growing like crazy, and we still only have 10% market share in a very large market. And then we have a biologics platform that's used mainly in QC for protein purity and production lines for biopharma. We have a new and coming business unit called cell and gene therapy. We have built a JV with a couple of big partners as well. We are moving fast into GMP proteins first, but we also do serum, and we'll talk a little bit about that. We are trying to establish a complete workflow for cell and gene therapy, and we have a 9 viral vector methodology for gene editing, which is the really one of the world's only. So that's pretty -- in the future. So we have things that -- for today, things that are coming tomorrow and things for the future. So that's where we're organized. It's along 5 different business units, and we are subsidiary model approach. So we have regions that also share pro forma P&Ls with our business units as we grow. We live in a big TAM. So I think 8 years ago, when we did strictly content only, it was roughly $3 billion or $4 billion pond that we could sell into. Today, it's roughly $13 billion and $17 billion. And over the next 5 years, these markets, the supply markets will grow to nearly $23 billion, $24 billion. So as you can see on the right, our penetration is actually quite low across the board, which speaks to why we've had great growth rate. So we have great technologies. We have great execution. And with a small share percentage. It allows us to grow at very good rates. Here's our track record. It was going really great until COVID hit. And last year, we took a step back. But this year, we're back on track. As Puneet said, we are running mid-teens. The 2 hardest quarters of the year are behind us. We have easier comps going forward, and we're still mid-teens. So -- that momentum won't change. We'll probably exceed this more than likely unless a disaster hits, new variants or whatever. But you can see our progression as a team, as a business. The integration has gone well. And we're putting together, I think, a very nice portfolio, even though all this together is still under $1 billion in revenue. So we see a lot of growth ahead of us. Along with that, you got to make money. All our leaders have really come from big companies. Most of them have run billion dollar businesses or more. So they know how to operate. They know how to look at productivity. They know how to lead and they know how to make money. So we've done a good job of growing all our businesses and prioritizing where to place our bets and never losing sight that we're after profitable growth, not just growth. So with that, we have to have a vision for the future, and we see a 4- to 5-year outlook to get to $1.5 billion. We think we're ahead of schedule getting to 4% op margins, a little bit clouded this year because with all the travel and some other hiring stagnation given the COVID, we're way ahead of forecast in our profitability, but we're well on track to exceed that 40% once we get to $1.5 billion. And you can see below there how the components, these different divisions how they make up that growth and how they make up that operating margin. And there's not a bad player in the set here. So with that, that's a quick primer. A lot of moving parts, a very complicated company for our size. We understand that. We have tried, tried, tried very hard to demystify what we do, and we're still working on that. So with that, you probably have a lot of questions. And Jim and I are here to answer them for you.

That's great. So let me start with a big question, a big theme that we're seeing in the markets right now when it comes to proteins. And that's -- the interest level in proteomics is significantly high. Proteomics is a big umbrella as you know. But when I look at proteins, Bio-Techne is a name that's synonymous with protein. So maybe just talk to us as to how Techne is positioned in proteomics and how you can benefit overall as investment happens in this space, and this growth is driven from the new proteomics, the start-ups and whatnot and other proteomics efforts that happen in the space?

Yes, sure. Well, as I said, we're a 40-plus year old company. We are the world leader in proteins for research. We have at least a 35-year head start on anybody. There's a lot of -- there's not much IP. It's mostly trade secret. So there's a lot of secret sauce to being good at proteins. And you guys have probably all seen the pictures of proteins. It look like a bunch of ribbons, all tied together. There's a physical component as well as a chemical component. And we're masters at that physical as well as the chemical side. So we get exceptional bioactivity from the knowledge we have of actually how to create proteins. We -- from proteins -- from great proteins you can make great antibodies, from great antibodies you can make great assays, and we do all of the above. That said, these are content technologies for research only, and they've only scaled so far. So we've leveraged this into platforms that measure and work with both antibodies and proteins and that is the field of proteomics, which then stems into different applied markets, whether it's metabolomics or whatever else. Of course, we have emerging out there in the world of things like semiconductor with life sciences, and so you've got all these different chip-based ideas coming. And my background is actually electrical engineering. So I get that. Jim and I were at Thermo. We ran mass spec and some other big platforms that they have as businesses. So we understand hardware. We understand the -- where the world is going on different tool footprints. So we've positioned ourselves to remain very deep in proteomics. So as the world came up with better and better tools, we could stay hand in -- lockstep with them with the greatest content to work with these tools that are coming out by the day it seems, like some of these evaluations are unbelievable. And we just see ourselves as well positioned. I think the COVID halo of all the different funding levels and stimulus packages and the attention on antibodies and the attention on infectious diseases now does nothing more than enhance the ability for us to do even better being positioned where we are with both biopharma and academia, which we're a world leader and a world-renowned recognized gold standard brand.

That's great. Chuck, let me switch gears here a little bit and talk about the impressive growth, organic growth you printed in the quarter, 19%. This was one of the strongest ones in the last 5 years. Obviously, given a bit of the pandemic backdrop recovering from that. Maybe just give us your sense of overall the business where it stands, where -- how -- the labs that are back online. And what are you seeing in terms of the sort of the key drivers that are going to be contributing here for 2021?

Well, this last earnings call was a really fun one to do. It was my 32nd earnings call in this company, and it was actually the best we've ever done. As I mentioned, the harder quarters were the first 2 and now we're walking the easier comps due to COVID. So we see the momentum continuing. Just the excitement around getting back to work, the staggering, the shift -- staggered shifts, the duplicity of expanding labs for people having their own unique instruments, the restarting of experiments leading to a surge of labs coming back online, both biopharma and academia and regionally and internationally have led to strong core growth for us. So I guess the COVID tailwind for us is actually quite small right now. We've got a couple of dozen different products that are growing nicely, but we're not a COVID testing house per se. So we're a tools manufacturer, and we're getting, I guess, the trickle down from all the different funding that's happening due to this pandemic. Biopharma vaccine companies, all these businesses are doing much better this year due to this. They're putting more and more into funding into their own research. And whenever they're adding to their research, they're buying more R&D Systems branded products and more instruments for their work. Also, there's a big focus on productivity. And having the only -- the world's only automated simple Western blot application, this is a big -- this is a really good tool in a pandemic world. So we've had amazing growth. The Ella platform, this is also a time where we're having very fast immunoassays with high sensitivity, high dynamic range is very important. And our Ella platform is so good, it was actually being used in triage in determining who will live and who will die in Italy last spring. So we've had an amazing surge with the growth of our Ella platform. And we see a big future for it also in clinical applications. And then our big swings the last couple of years in both Exosome Diagnostics and then ACD have just been growing very, very quickly as they keep working to crossing that chasm.

That's great. Jim, a question for you on the guide. I know you didn't provide an official number here, but spoke of at least double-digit organic growth. You printed close to mid-teens, obviously, in sort of the -- as we have come out of recovery here in COVID, maybe just given the sense that, look, we have -- you have easier comps, that implies strong growth in the second half. Is there any reason why you can't deliver high teens for the full year?

Well, there's all kinds of reasons why that could happen given the variability of what's going on with this disease. But I mean, what we're trying to monitor is our current momentum, not so much year-over-year because the further you get into our fiscal year and here, the more wonky the comps get with what happened last year. So we're focusing on the current momentum of our business. And given that our business is 82% consumables, it's a pretty important thing for us to [indiscernible] anyway. And we were happy to see the -- obviously, the pickup of momentum we had in our early Q1 and it continued to increase in Q2. So I think it -- we were always confident it would come back and it would come back faster in our space and for us specifically than perhaps in other industries and other companies. It surprised us, I think, a bit about how fast it did come back for us. But I think we're pretty much where we thought we would be at this point in terms of momentum without a COVID headwind. And we're not really facing any kind of COVID headwind, if any, there's COVID tailwinds. So it's a long way of saying that if you go back 2 years ago, we're pretty much at the momentum we thought we'd be at this point in time and -- exiting Q2. And so we're not expecting any massive step-ups in our momentum in the near-term here, but the current momentum should continue. And if history is any guide, just because we are a run rate business, there's not as many holidays in Q -- in the first quarter of the calendar year as there is in the last quarter of the calendar year, we usually have a little bit of an uptick in momentum in our Q3 and Q4 relative to Q2 because of more working days, if nothing else. And so that's kind of what we're expecting at this point.

Puneet, I would add to that. If there wasn't a pandemic, it would have been a great quarter anyway for us. I mean, this comes off initiative we started 3, 4, 5 years ago. Our website is a good example of a digital model, a part of our business, driven by digital. We've invested heavily starting 3, 4 years ago, and it's really starting to pay off now. So it's coming around with great execution. And that's -- it's turning on, and it continues to give us more. So we see, as Jim said, we see great momentum going forward.

Got it. Let's talk a little bit about the core drivers. Obviously, protein segment is -- Simple Plex was an important driver here. Maybe just talk to us about that franchise how it's matured so far? And how large is that business today? And maybe sort of what growth should we expect here in the longer-term and the sustainability of that growth in the protein segment?

Sure. We aren't giving detailed, detailed numbers on the [indiscernible] but it is material company, and it's been growing 80%, 90% for a few quarters. We have actually grown more, but we're having to expand, make new buildings, build out new lines. It's everything we can do to keep up with the growth that we need to do to feed it. So we're selling everything we can make quite literally. If it keeps going the rate it's at, it's going to be the largest multiplex immunoassay in the market pretty quickly, and that includes other characters out there like Quanterix, et cetera. So this is a platform that is less than 1-hour sample the data, 4 logs of dynamic range, extremely sensitive. Our multiplexing technology is a lot in the cartridge, not just the box, which makes it -- it allows it to be smaller and much more cost effective. So it's literally 50,000 or less dollar box. And all the channels, all the analytes, and we're up to 8 now multiplexing, we have plans to do more, they're all totally independent with 0 cross dock. So that's much different than Luminex or any other kind of a multiplexing platform where you have to deal with cross dock and which allows -- limits to what you can multiplex, and also puts a lot of burden on the experience of the user to know how to deal with that. Ours is very much kind of hands off. Load your sample and buffer, put it in and go to lunch. So -- and you get back -- you come back, your plots are beautiful. So it's -- because of that, it's been seen very -- received very well. It's become a really strong word-of-mouth type of a selling proposition. Everybody wants to have them once they see them down the hall. And it has strong clinical applications. I mean we're taking it through a 510(k) process now in the U.S. It will take us about a year to get through all that, but we're hoping that spurs a lot of interest into new applications for it that are nearly point of care, but it just works so well. It's so sensitive. It's a shame not to use it in more. And of course, having the multiplexing ability makes it stand out above all -- a lot of areas, including ELISA, right? So it -- that's why we did the acquisition 6 years ago, when we saw it was the future to where ELISA might be heading someday. So even though ELISA refuses to die.

And in terms of the western part of that business, obviously, that's -- you have pointed out, that's a long tail. Where do you stand in that penetration in that market today? And where could that go in...

Somewhere between 10% and 15% share, we think. So we've got it in our model, which you saw the chart I showed, we expect it to be a 15% to 20% grower as a division, as a business. We're getting 30% numbers right now, have been for a while. I think it's a safe 20% for years, 30%, we have to keep executing well and commercially promoting as well as we are, but it's still ramping. It's on the part of the curve you want to be.

Got it. Okay. And in terms of -- obviously, antibodies are very important to that ELISA and western process. Obviously, that is the largest part of your business in the protein segment. Maybe just talk to us what -- where you're positioned right now? How -- what are your expectations in terms of the share gain in this market, in protein market. And as proteomics gain importance, obviously, these antibodies are going to be utilized more and more in a targeted fashion.

So for just antibodies in general, you mean?

Yes. Yes. Just overall the antibody portfolio.