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

Okay. Great. Well, thank you, everyone, for joining us. I'm Patrick Donnelly, the tools and diagnostics analyst here at Citi. Happy to have Chuck Kummeth, the CEO of Bio-Techne; and Jim Hippel, the CFO. It's going to be a Q&A. So if you have any questions, feel free to e-mail me. And Chuck, I know you wanted to start off with a few slides. So I'll turn it over to you.

Okay. I'll wait for David, to get them up here and all right. Over the next slide. I'm just going to spend a few minutes. So just a few slides for any journalists online or people who don't know our story. So first off, with the safe harbor, I won't spend any time. You've seen this before, but of course, we have to show it. Next slide. Bio-Techne is a 43 year old company. We're fiscal, we end in June. So as of last year, we were at $739 million. We're well north $800 million this year and climbing. We're headquartered in Minneapolis. We have roughly 2,500 employees now worldwide. We've about tripled in size in the last 8 years or so since I've been here, 15 acquisitions have helped that. Probably about half of that growth and half has been organic with what we have. We have, I think, a pretty cool stock symbol being an old NASDAQ company, tech, and we're roughly in the $15 billion area for market cap, and I'll get into more of that later, too. We are largely picks and shovels company, tools, life science tools or mostly consumables. We have -- we do have some instruments through acquisition, and we have -- some of those consumables are actually cartridges that help make those instruments work. We are growing in services, and we do have a growing royalty stream as well. The company has five divisions. We're a subsidiary model, 3 regions, 5 divisions, but we are broken down into roughly a dozen, 20 or so growth platforms that are in those business units. But they fill out these areas. They're really in antibodies, proteins, where we're #1 in the world in research proteins. We really created a category 35 years ago. We're #1 in immunoassays. We also created ELISA Kits 35 years ago, and it's -- it refuses to die. It just keeps growing, even though we certainly have mitigated that risk with lots of new world multiplexing microfluid versions of systems that we also have on our own platform. We do have automated protein analysis instruments. We have 3 real platforms in this area as part of that division. The one is the -- the one I just mentioned, the other 2 or one is an automated simple automated Western blot system and a biologics protein purity QC type of platform used in production for biopharma. We also had some -- because of our background, and we're pretty good at assays. Now -- we said for a long time, we're going to be going deeper into diagnostics. We've been in diagnostics for over a little bit. But we did the acquisitions in tissue pathology with ACD, of which we have an exploding platform because of all the interest in Spatial integrity and in cyber analysis. And we have a liquid biopsy platform Exosome Diagnostics, which I'll talk more about, which is also going to be a real platform in the future and probably the only thing we have in all of our portfolio's and probably has a $1 billion potential. The oldest business in the company, are Clinical Controls and calibrators. We've done some acquisitions there, too. Nice, safe, steady business, good operating margins and real study, OEM-related. Next slide. So when you look at the 5 legs in the stool of our company in its subsidiary model, of course, we had to center all this content, which is really wonderful, and it's all prevalent based. We're very positioned, very well through the pandemic and with all the added interest in research right now, which I'm sure there are questions around. How sustainable it is. We think it's very sustainable. We are #1 in proteins. We're in the top 5 in antibodies. We're probably #1 immunoassays. Calibrators, controls we're #1 or #2 and small molecule, we're also probably number -- we're probably #2 behind Sigma actually. These feed in synergistically into all these and other areas we have, whether it's tissue biopsy with liquid biopsy, the instruments, of course use all this content. And then we have a business unit of the future that we're investing heavily within the cell and gene therapy area. We built a $50 million, 61,000 square foot GMP protein factory. But we have an entire workflow for cell and gene therapy that really provides everything what the applications of the future are looking for. And there's a 1,000 clinicals going on right now in this country, it's 300 in China, and we're getting more and more integrated into those. So more discussion on that later, too. We live in a pretty big area of potential. We have a very small share position in all of these spaces yet the TAM is up roughly $17 billion. So this is one reason we are growing so strongly, but we've been very strategic about where we've expanded and why. And through synergies with all these things tying together, but if you look on the right, you can see our penetration. We've got a long way to go. So it's a really good story. And proof is in the results. Results are pretty good. Last year's blip with COVID, of course, was one dent, but we're well on track for 15% or better this year, and it's been a pretty good story so far. Strategies are working. We've got a lot of great execution, a lot of great investments. Our digital story is good. Our websites are excellent. Our teams are excellent. We're creating a great culture that is global in nature now, and we're making more and more money. So it's all coming together. And then not very much COVID-related, to be honest, yes. So we do have a vision, and for the next 5 years, we do think we can take this company. We've never actually felt better about it. We feel more bullish than ever to up to a $1.5 billion level for revenue. And we're really ahead of schedule on getting to our goal of 40% or better operating margins. And you can see below how they all sum up. And virtually across the board, down below, we're beating all those numbers right now. So it's -- it will be probably better than this if they continue, but we're trying to provide some guidance that we think will happen next 5 years and we're at some safe growth level numbers and some safe margin numbers. And this is how we get to $1.5 billion and how we get to the 40%. But again, across the board, we're beating these and have been for quarters. So with that, it's just a really quick primer, and then we can jump back to you, Patrick, and questions.

Yes. That's perfect. Thanks, Chuck. Thanks for the intro. Maybe start high level, looking at the most recent quarter where you guys had -- biopharma was up, I think, over 20%, academia was up low teens, really strong results. How much do you think was kind of related to kind of this catch-up from maybe some pause in the spend versus share gains and just end market strength for you guys? Maybe just talk through what you saw in the most recent quarter there?

Well, on the 19% organic growth, we had 3% that was COVID-related. So there is some tailwind there. But the overhang, the halo, the trickle down from all the research that's happening and the stimulus and everything else, it is finding its way to more and more research. So it's finding its way to us because we're really, really did center positioned for supporting almost everything going on in Life Sciences research. There certainly were some pull forwards in China. There's a new tax situation there call it budget flush, whatever, I think on minimal, we're not really a budget flush kind of a model or more run rate, so you don't really see that. Academia, there certainly was a big comeback in the last couple of quarters of labs and we're not all the way back yet. Our numbers are still strong, but they're staggered. They're shifting differently. They're not able to dig burrow and use other tools down the hall. They've got to get their own. So there's some of that. There are certainly some -- as labs are coming back up to speed in the last 4 to 6 months, they're restarting their experiments and they know what to get right away. So there's an initial pop, probably some of that. But in general, we're seeing that demand continue. And the momentum is very good. And as we've been pointed out, we've got the 2 toughest quarters behind us. The next 2 are easier comps because of COVID last year. So we're seeing strong demand across the board. We've worked hard as a team for the last years of putting in place a multinational model, a subsidiary model that's a portfolio, not a one-trick pony company with a lot of great growth platforms and then we've been putting behind that, the digital investments and everything else, the websites, the commercial sales force. This is an example, we've taken this company 8 years from 25 salespeople with over 250 globally. So the stuff is starting to work. And so it's not all just even COVID or the halo effect. It's just the right timing for these things to start paying back where we're starting to hit the critical mass portion of being a sizable enough company to start getting these synergies. The cross-selling, the selling instruments with reagents, the pulling through of the instruments when you're moving reagents in and backwards and forward, that's all working. The explosion in growth in Ella, the explosion and growth in ACD as a platform. Exosome is growing very well, but still a smaller base because we do have some COVID headwinds there with that with urology being kind of soft because of COVID. Cell and gene therapy growing 100% for us or better. GMP proteins exploding. So it's all going to be a positive story mix wise as we go forward. But yes, definitely right now, there's probably a couple of percent or so of that number that is, call it, startup or resurgence or new interest or whatever, but we see it continuing.

Yes. And you touched on China there but for a second Chuck. It's obviously a big part of the story and an exciting part of the story. And I know you guys grew, I think, over 25% last quarter. You've talked about this at length about being very sustainable, big opportunity for you guys. Maybe just dive in a little bit in terms of the opportunity there in China for you, and why do you so confident in a multiyear high-level growth?

Well, you know, when I was researching come to this company as CEO or not. I think it's a much smaller business than I'd run for the previous decade in my life, but it was such a diamond rock. And I've spent 20-some years going to China first, helping 3 build out there. And then later a few more. And I'm building factories, and I think I've built 3 there, at least. I like China. And this company had hardly a presence at all. And yet you had the whole sea turtle program, all these U.S. trained scientists returning home and taking over big institutions and driving a lot of research and understanding and knowing their R&D systems brand. So it didn't take a lot of work to start investing and start seeing a dramatic increase in growth in China. And virtually from the first quarter I've been here, which is 32 quarters ago, we've seen roughly 25% or better growth. A little pause last year with some of the COVID stuff briefly, while China was down, but they weren't down long, right? They came back roaring and they're back to normal. So we've seen 25% or better last quarter, and we see momentum continue. It's hard to take China into 50%, 60% or 100%. It just doesn't work like that in China. But 25% and current growth is steady, we see that for years to come, honestly. So at least 20%. But I think we can stay at 25%. And we've taken the company from roughly $12 million from revenue in China, to now we're over $70 million. So we're still not very big in China. It's in that $1.5 billion that I talked about 5 years, we hope 10% of that will be China at that point or better, and it should be.

And I guess when you think about the kind of the growth algorithm there, how much is kind of gaining share with customers versus just to get the funding dynamics to your point is very supportive of where Techne plays there, obviously. Maybe just talk there a little bit.

Yes. We're kind of top of the pile on our growth numbers, and that's because we're getting -- we're getting both. So it's, again, the execution of our strategy is all we've been doing and investing into the last few years is starting to pay back, and it really isn't COVID-related. COVID's kind of icing on the cake here with the Investments. But there's other things that are trickling down, too. The vaccine makers are all customers, and they're booming, right? So as they're booming, they're putting more and more money into their research, their programs. So they're buying more. So it all kind of works. Some of that stuff is core, and a lot of our peer companies are probably not putting everything in the COVID bucket that they probably should be because it's just more serendipity in their core. And they're calling it core, but the impetus has been COVID, right? So it's a little bit of that, too.

Sure. Yes. Then maybe bouncing to Europe. You guys, over the years, have put up probably better results than most peers. And recently, that certainly qualifies as well. I think you were over 20% last quarter. Just talk to us what you're seeing. I think a lot of people expected it to be a little more sluggish. You guys kind of really saw a nice bounce. And then I guess, the sustainability there. Was there anything kind of one-time...

Just before COVID hit, we were just coming out of our second lull in Europe where we had to kind of retool, right? So we changed out some management and looked at our commercial models and understood that we weren't really cross-selling well enough. We were opening up different countries, and we are coming off of really buying out a lot of distributors 3 years ago and getting over that halo and so there were some things to change. We are just at the point of measuring that, whether it's working in COVID. So it's really difficult. But now we're being far enough and then the comps were easier, so now you're seeing that big come back and we're well 20% or better. Some of that is just things are working better now. Some of it was the resurgence in funding around COVID there, too, obviously. But we've never really promised Europe to be at 20% growth. I think it's -- I think -- and we were like a couple of years in a row, many quarters of 20-plus percent because of the things we talked about. But that low-hanging fruit's kind of picked. I think it's a high single digit growth for us, I guess, it's a good target. We never were double digit. I think it's when things are -- it's a portfolio we're all working together great. And as a portfolio, not everything hits at once. So there's some of that. But we do think we're safely a high single-digit growth model going forward in Europe. And again, funding there looks real strong. Momentum's good. If it stays this good, it will be better than that.

Yes. And then the last one, obviously, the U.S., you guys put up high-teens growth, again, really strong result. Maybe just talk about what you saw and then the sustainability, I guess, as we look ahead.

Again just the funding everywhere is strong, the come back's strong, the retooling of new laboratories, strong -- biopharma's strong across the board, the surge on our GMP proteins, surge in our Ella platform at 100% growth practically. All these have helped pick us up to those high teens for the quarter. We really didn't have a dog in the portfolio this last quarter. So momentum again is strong. I don't think it's doable to promise on your 20% future here, besides our company in the U.S. But if you look at our -- if you look at our $1.5 billion target, that's a 15% CAGR for 5 years, and we do think that's achievable overall. And in order do that, we've got to have strong numbers in the U.S., obviously.

Yes. I think kind of bouncing around maybe segments and product specific. Obviously, the GMP side is a big focus for investors and you guys as well. Maybe people -- for people a little less. Maybe just talk through what you guys are doing there, and then we can dive then to kind of the -- some of the guidance.

I'll start with a good story. 3, 4 years ago, we started getting approached by our larger customers, our pharma customers, and I'll call the new pharma, the Kite's and the Juno's of the world and they're -- they acknowledge that we're the world leader in proteins, and they talk to us about the coming new age of cell therapies and that they're going to need this food supply for their cell lines, and they're going to need proteins to do this, and they're going to need to be GMP quality. They're going to need to be that extra stamp of approval. And there wasn't anything out there. And they want to know if you're interested. So I purely kind of weren't because we're a research and not really in that production game. And -- but after enough came a couple of years ago, we started getting -- we also started seeing a new entrant to the area, Miltenyi, who came out of the first full workflow for this. And being there's nobody else still on the gap, they came out with selling IL-2 and some other proteins. And we said, well, let's not let somebody new coming to proteins. And if they're doing this, maybe they're going to backdoor into research later, too. We have this 35-year lead. We have 5,600 products in protein. And we're by far, the world leaders, mostly trade secret, and it's built on top of years and years of incremental knowledge of which we keep very, very tight and very controlled. Our bioactivity is sometimes 10x better than our nearest competitor. It's always, well, let's look at this. And so we build a 50,000 square -- 60,000 square foot factory actually for $50 million. And they're all trying to sign up now. They know, that they're worried, as you know from the viral viral vector lead times out there, plasmas and everything else, there's a lot of scared customers as these therapies come out the other end, and there's 1,000 of them in clinically. There's only 3 products in the market right now, and there's going to be a lot, and they're worried about these consumables, these agents are going to be throttling the whole industry. There won't be enough. So I see it as kind of everybody wins for about 5 to 10 years, and we intend to take a lot of share. And even without our factory, we're growing at 100% right now. And so we're at over a $10 million run rate, and it will probably double next year. We can make as much as $40 million of the annual proteins just in our current headquarters. It just be smaller batches. We have to get to a scalability in a factory where we can build bigger batches to get to what we think we should be, which would be $150 million to $200 million a year over 5 years and maybe more, we don't know. We have the ability to scale bigger if we want to. I guess that's not the only thing we have. That's just the big anchor in the workflow. We have our wheel technology, our nonviral gene modification technology. We have our scale ready JV, so we have bioreactors in our workflow. We have a leukophoresis instrument with Fresenius Caviar. So we're really trying to go after where Miltenyi started and be the other only full workflow out there as this industry grows, which is going to be the future, I think, of oncology.

Yes. And on some of those numbers, you mentioned kind of $10 million annual run rate now. I think you talked about doubling in a year. And then the 5-year target being, I think, somewhere around $140 million plus, I guess, how should we expect that going to be pretty linear in terms of the...

I think 2 years, it will be linear, and it should -- it should be J curve. As we start getting these therapies come -- go from Phase III into production, the ones that win are going to start asking for much bigger orders, right? So that's -- you don't get there linearly. If it has to ramp up, and we do think it will. We have 2 signed customers now in both. If they get forecast, they require more than $10 million a year, a piece. And we have some where we're close on contracting with half a dozen to a dozen others, and we're talking to the other 100 out there at least. Some of them need as much as $50 million, they say. So this is going to be a big space. So I think it's going to be -- everybody wins for a while. We've just got to get there and get credible. Leverage our gold standard R&E Systems brand and be ready to supply a great product, which we're qualifying that factory right now. So we'll have product and inventory by summer.

Yes. On some of those customer commitments. Yes, it's great to hear you have a couple and then a few more in the pipeline. I guess can you just talk through I guess how it works? It seems like you have most of the volume committed from the customer side how recurring is that business going to be if a customer fails to get a product to the market. Are you able to kind of reassign a lot? How does it work?

Yes. It's going to be ubiquitous. I mean we're doing -- we're focusing on IL-15 is a more advanced protein. There will be lots of these customers all wanting IL-15. So it isn't like there'll be special one-offs or everywhere. It won't be like that. We have the largest menu right now of GMP proteins. And even though we sell 5,600 GMP proteins, unique SKUs it's a research, we have less than 50 in our catalog in GMP, and that's still the biggest in the world. So it's not going to -- I think it'll take many years till you see a proliferation or differentiation in the kinds of proteins. But I expect that will happen. And that will play right into our wheelhouse because we're the world leader in protein design. And as customers get smarter and smarter and start thinking up different ways of different kinds of proteins they're looking for, we'll be able to design them for them, much better than any competitive bid.

Yes. And Chuck, on that $140 million target, 5 years out, I guess, do you view that as conservative? And maybe just talk through the biggest variables? Is it kind of out of your hands in terms of if these things slip commercial, that's the big upside?

It wasn't any magic number. As you know, in headquarters, we're making for research. So the reactors, everything are smaller, right? So we picked a workflow of what's the midstream size reactor, the centrifuges, everything and the things you can buy at a certain multiple leader level, about 300,000, 500,000 liter tanks and such. And when you do the role throughput yield on what that workflow would create for you in revenue would be $140 million, if it was IL-2. It's mix related. If it's all IL-15, it'd be closer to $200 million. So it's going to be mix related. And that's much larger than our entire protein business is today revenue-wise. So it's a modest goal. But we don't know. It could be 10x that. We just don't know yet. And these customers, they're big pharma, they're not real great at giving you a lot of insight view anyway. So our contracts right now are all about not a forecast of what they need, but a percentage. They are -- the ones we've contracted are required to give us 95% of their needs. So they're left of a backup, but we get 95%. So whatever it ends up being. If it ends up being $2 million or $50 million. We're going to get 95% of the orders. And that's the way we're doing our negotiating and There hasn't been any kickback on that. They actually like that because they're not tied down to giving us a number yet because they don't know either, right?

Right. And then maybe one for Jim. Just on the margin profile here. Obviously, the reagents business tends to be really high margin, I think 80% type gross margins. Maybe just talk through what GMP is going to look like as we kind of get to scale and how that progresses over a couple of years here?

Well, if pricing stays where it's at now, the margins on our GMP proteins is actually higher than our already extremely high research grade proteins. But our expectation is that with volume -- that expectations that pricing will come back down closer to what our research pricing is and therefore, be comparable, but it's still the highest margin product of our entire portfolio. I'd like to add also to the answer around the outlook for these proteins and how do we get to $140 million, $200 million. And Chuck is absolutely right in the sense of trying to find a facility that was somewhere in that sweet spot, not too big, not too small, and how it all plays out. But there are a lot of analytics behind this. Our team is tracking every single cell and gene therapy, clinical and preclinical that's out there today. There's well over 1,000 of them. They're tracking. And they've done some math to say, okay, if we are able to win X amount of those trials to convert to our proteins. And X percent of those actually get all the way through. and also what kind of indications are they for? What kind of applications are they for? And what's the population of those applications, they want to understand how big of a therapy could that be someday. And we've extrapolated all that out to get to somewhere around a $200 million number, which is why we felt like that was a safe place. The triggers for upside and downside, it is an extremely sensitive model. We think there's more room for upside than there is downside. We feel like we're very conservative in our win percentage. We felt like we're also very conservative on our customers' win percentage in terms of getting through the clinicals. So if we're right and we're overly conservative there, it could be many times bigger than that. The risk is that something tragic happens in the cell and gene therapy space where people start dying in clinicals and things like that, and they kind of shut the whole thing down.

Well, an example, Bloomberg had a big setback, right? So their indication actually cause cancer. So they cut start over. This is very embryonic, but when you've got 1,000 players in place and you got 300 in China, a lot of them are going to get to the other side, and there'll be plenty of customers.

Yes. But the general idea is if cell and gene therapy takes off as I think a lot of people expected to, you guys are extremely well positioned to kind of ride that rising tide.

Yes. We've made the investments. And there's all people trying to play catch-up right now, but some of these -- the lead times in some of these equipment pieces are, in some cases, 18 months lead times right now. So it's -- no one is going to be entering the game very quickly. So -- we started 3 years ago.

Got it. Right. Yes. And then maybe kind of shifting over to the protein instrument side. Ella has obviously had its time in the spotlight here. I think it's grown 100% for a few quarters here, Chuck. Can you just talk, I guess, any type of high-level sizing of that business, where the penetration rates are? And then where you think that long term?

Yes. We haven't topped the 100%. It's been between 80% and 90%. And it's really literally been all we can make. And the trouble is we're trying to expand and go to more shifts and get the critical equipment made that makes this thing magical. But it's going to get harder and harder to keep that growth rate until we can expand those lines. So it's really difficult to grow an instrument business that, that will rate very long. It's very difficult. I think it's a big sleeper. I've always said it was a big sleeper. Our initial negotiation with -- when we bought the company was the final negotiation was they wanted half the revenue -- if we -- if they hit $100 million in 2020 -- from nothing back then, right, zero was, it was inconceivable. So we said, sure, you can have that. And things never grow that fast, but they're only off probably a year or 2. So this thing starting to really ramp. And the issue is, it is -- has a wide berth of possible application. So it's a great research in the drug discovery tool. But it's also a great diagnostics platform. It's being used for patient monitoring at cytokine storm. It was used in triage or for COVID patients in Europe last spring. Europe, we sold out, we couldn't make enough instruments. And now we have a bunch of studies. Roche has been using it in clinicals for years, and we can't make enough cartridges. So it's really starting to hit its stride. It will be material more than that by next year. And at this growth rate in a year or 2, it would be probably bigger than Quanterix even, our largest competitor in this space. And it isn't as sensitive as Quanterix, but it's 80% of the way there. And we have things on the drawing board to make it as good. And you got to remember, it's a size of Redbox. It's one tenth the size of 1/10 the cost. So look out, this thing is a -- could be a monster. And that's why you have interest in China with a partner, taking it through CFDA for clinical applications. And we're taking it through 510(k) here in the U.S. because we think there's going to be a lot of interest.

Yes. And on that point, obviously, a lot of the recent growth, to your point there has been driven by some COVID applications, but there's a lot of attractive longer-term growth opportunity like even QC for cell and gene therapies. Maybe just talk through some of those. And then again, what the growth profile looks like, I guess, on the other side of COVID?

Have you measured that? You're exactly right. This -- you're going to have to use immunoassays in all these workflows. And this instrument is perfect for it. So it will be used. And we have it on the drawings, and then we're selling it through. And so when they come out to the run, they start looking at locking in their specs, they're looking at this platform as well. But also our biologics platform and also ACV for spatial cell interrogation with the product. So we've got a lot of our core products are going to be in the workflow. So yes.

Yes. And then Ella, you talked -- you touched on the clinical opportunity going through the 510(k) process. You have the Micropoint partnership in China. How should we expect that to trend in terms of that addressable market becoming real? And I guess, what the adoption?

I don't -- I don't think overnight. We're a year away from getting everything through regulatory with this 510(k), it takes time, as you know. But if you're looking out 5 years, I think you're going to see a lot of growth this platform. It's not going to stop. So it's going to be -- it's got legs to a couple of hundred million dollars or bigger all by itself, I think.