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

Good morning, everybody. Welcome to Day 3 of our healthcare conference. Luke Sergott, I cover life science tools and diagnostics here at Barclays. I have the pleasure of Bio-Techne management team, Chuck Kummeth; Jim Hippel; and et al with us. I think they're going to give a little overview, a couple of sentences or background, and we're just going to dive right in.

All right. David is going to run some slides here. It's always interesting to do these virtual. I never know if I'm talking to 5 people or 5,000, but we'll pretend it's 1,000. Okay. So this is Bio-Techne, a 43-year-old company now. Here is our usual disclaimer. We won't waste any time on this. Everybody knows what this here is about. Move on. So what are we about? So we recently touched $16 billion, but roughly $14 billion of a market cap company now. We're a fiscal company. So as of last June, we were $739, we're blowing that number out of the water this year, as everyone knows, by our numbers. We are still at roughly 35 locations worldwide, kind of a lot of locations for our size company yet, but we've been primarily a bolt-on acquisition strategy. And if we start consolidating a lot of these sites, we probably lose all the key people we retained in the acquisition. So that will be left as homework for some time later. It doesn't -- it isn't an issue for us. We're not worried about saving nickels. We're worried about growing. And our margin is as you'll see, if you don't know already, are pretty spectacular anyway. We're headquartered in Minneapolis. And with Asuragen, we are probably roughly 2,500 employees right now. I came almost 8 years ago exactly on April 1. Jim followed me a year later, but most of the management team with me are from my network or from the industry and have been here at least 6, 7 years. And we have grown from 780 people to 2,500, and we've pretty much tripled in every category of revenue, whatever, since then. We are 82% consumables, very profitable. We have moved into instruments as well. Instruments and proteomics based, mainly instruments that use our consumables. Antibodies primarily, measuring proteins, et cetera. Talk about some of that. We have services to go along with that and royalties, of course. Roughly 10% of the consumables in that number are consumables that make these instruments work. So you can see the instrument business really is roughly 20% with its consumables. The categories, the legs in the stool we have to our company, we are a subsidiary model, global and divisional. We have 5 business units right now, but they are broken down by the following type platform. There's one antibodies, proteins, which we're known for, we go back the longest with. Automated protein analysis, which I mentioned here previously. We also go back 35 years on immunoassays. We are the -- pretty much the inventor of the ELISA Kit, and it remains a very strong business today. In fact, our new serology test is nothing really more than a dedicated ELISA Kit. We did acquisitions in tissue and liquid biopsy. We see synergies of both antibodies and our molecular direction and diagnostics directions. Since we have many assays and some FDA-approved assays, so we see a lot of synergies and then we also go way back to our origins as a controls company, and we are the world leader in clinical based controls for hospital-based blood, counting type equipment, et cetera. So again, the 5 legs of the stool and how they kind of connect, we are the world leader in proteins for research. We have a big move into proteins that are GMP for cell and gene therapy. As you see in the left there, it's more future business. Today's business is really still around antibodies, proteins, assays, calibrators, small molecule, and they really leverage synergistically into not only tissue biopsy, but liquid biopsy, the Exosome platform. I'll talk about, which really of everything up here, there's only one platform we have, which is why we have to have a subsidiary approach, why we have to have this portfolio approach. None of these since can scale into the billions other than Exosome. Exosome is a platform we think could be amazingly big. And if you look out 5, 10 years. And then, of course, instruments on the bottom, which are really protein analysis based, and we are still hunting for other platforms as well that are in this space. Okay. So just a quick slide on Asuragen. We just -- we made the announcement, we won't close for another few weeks here, but it's in Austin, roughly 125 employees. Very, very well skilled, knowledgeable experience in the regulated space. We need help there. We need help, not only in our AC platform, we have diagnostics working with Leica and other partners, but also with Exosome. Which we have, as you know, our prostate test. It's cleared and we're under reimbursement. We've just announced a new test that we'll be taking through the process here for kidney rejection, and we have an entire pipeline full of new things. So getting more help here on regulatory and quality, et cetera, is very important. This acquisition has FDA-approved diagnostics. It's a wonderful business in s own right. It's a $30 million or more in revenue. It's going to be a 20% grower for us. It's a kit business. It will allow us to make the Exosome platform more kit-able, which is another big gap we have, having that ability to go from RUO to kitted devices. These people have that experience. And they have CLIA lab experience and they have jurisdiction in a different MAC area. So it gives us more flexibility as well from the MAC we're currently in, which none of them move very fast, but it's nice to have more than one if you need it. The terms, I think compared to today's valuations are quite amazing. So we spent a couple of years with this team. This team is pretty excited to come on board. They know we're not going to carve them up. We're not -- they're going to be on their own. They're going to be building their division, growing as part of our management team, with their team, helping out Exosome. We're going to give them the keys to the candy store in this company in terms of all our platforms, and they're excited to get going. And we just see a lot of synergies. We see a lot of growth potential, and they're already making money, and we sure as hell hope we have to pay this earn-out, which if we do it, the multiples are sub-5. So okay. Probably the most exciting chart, doesn't really look like it here, but it is. If you look on the right here, we live in a large TAM, and we have worked hard in this company, putting on acquisitions and building out new legs to the stool here, so to speak, in areas to expand our reach. And yet look at how lowly penetrated we are in all these spaces. So that's one reason we're growing. We had 19% organic growth last quarter. We think we have ourselves now into a mid-teens perpetual grower now, which is pretty exciting. We worked 5, 6, 7 years to get here. We have very low COVID tailwinds, but we have some, and we have a few bogies that could really light this up, if we get a little bit lucky here with our serology, we can talk about that, if you like. But the key here is that we're in always big spaces with fabulous products with a lot of IP, a lot of protection, a lot of great brand, a lot of great science, and we're very, very low on the penetration side. So a lot of growth yet to come. And you can see here our numbers kind of prove it. Given the exception of last year's COVID year, but we've rebounded pretty quickly from that. And we see the momentum for this year being at 15% or better. We see ourselves growing to a $1.5 billion revenue entity at 40% op margin in the next 5 years or so. And we see ourselves progressing in that direction and actually ahead of schedule. So all good. I guess I covered this right now, but you can see the breakdown if anything, we're conservative here, we are -- for the most part, beating all these numbers you see in the bottom. We have analytical solutions. We need 15% to 20%, we've been growing closer to 30%. RSD has been double-digit or close to it here for a few years now. We really only need mid-single-digit to hit these numbers. Genomics has also been more near 30% than 20%. So on the instrument side, you can see as well. So we're in the game here for these growth rates or better. And if we do this, is without acquisitions, which we're going to continue to do with our cash position, I mean our leverage is below 1. So we need to start doing more. But as you guys all know, the valuations are very high right now. So you have to be very selective and picky. And we've done most of our acquisitions based off relationship and a meeting of the minds on direction with the owners and the leaders of these acquisitions we've done, mostly private based. So we think we can hit these numbers and possibly exceed them. So okay.

It's a great overview. All right. So let's dig in quickly here on what you've seen over the last couple of quarters. Really strong instrument momentum across the portfolio. Just give us an idea where that's coming from. Is that a lot of catch-up business? Or is this something that you've seen building over the last couple of years, and it's just really hitting that inflection?

Yes. Well, as we mentioned on the conference call last quarter end, we really don't have a single bullet -- silver bullet here to give any reason for why we've done so well. Our success has been building for a few years. We've had great numbers in our instrument business and some of it's coming from us, crossing the chasm, and we're just reaching critical mass and we're starting to really get our tools out there. When you go from 2% penetration, roughly 10%, it starts getting to be known. You go into labs, you see our boxes. So the word-of-mouth is helping. We have a great digital presence. We've invested heavily in our digital platform, and that's also helping. There certainly is a resurgence, snap here a little bit. And as the labs, especially academia, have come back online and done staggering and duplicity, where you were borrowing Sally's instrument down the hall before, now you're not allowed to, you've got to buy your own. And we're not selling that spec, right? Our instruments are very economical, right? And they're all around productivity. These are productivity-based instruments. So going from hand on Westerns to automating your Westerns is a big productivity improvement. So if you're trying to -- COVID is a lot about that. It's about trying to do more with less right now. So all these things have helped a lot. As some of these labs have come back online, of course, they know what they need to buy right away to get their experience rerunning. So there's a bit of a resurgence. There is a little bit of budget flushing as well this last quarter and end of the year in some areas, in areas like China and stuff. So there's a little bit of that, too. We don't typically see a lot of budget flush, but we probably saw a little bit. All those things happening together gave us an exceptional quarter and well above expectations and continuing our momentum of roughly 15% or better here for the company. So it's kind of a long-winded answer, but it's a bit of -- a little bit everywhere and -- which I see as a good thing. So.

Yes, it's not -- broad-based is better. And so when we think about your ACD momentum, what do you think is behind that? And then on top of that, let's just go real holistically, as you laid out, that $1.5 billion is that's mid-single digits. That would actually imply something bad happened, right? Because your growth rate is well above that.

Yes. Well we try not to overpromise, and we try to overdeliver, which...

No, [indiscernible]

We've got 8 years of doing that now. So -- yes, a I implied, we think we can easily reach that. And we'll do acquisitions, I'm sure, as well. So it should be something much north of that, we'll see. I'm really just as excited about how we've been really doing well with our profitability, and we're really ahead of schedule on us calling back to 40% here op margins. And if you take out the dilution from Exosome, from our investments in that platform, we're well above 40% already. So picking up Asuragen, it's already profitable, helps sort of not at that possible 40% op margins that it could be, because AC is a kit manufacturer, which we know has the right gross margins to, with scale, achieve the numbers that we think we can do with them. And we know a lot about kits as well. So as these things all scale and grow, their operating margins improve, and that helps the overall number for us. And that's why you see us improving quarter-on-quarter, year-on-year with our op margins. And we -- every year or 2, we give some back as we do a new acquisition, right? But we don't have anything big or dilutive in our eyesight right now. So if we don't do a big dilutive acquisition, we should be well into the 40% range. And if we do, well, then you're going to see a lot more growth, right? You're going to see a lot much bigger number on the revenue side and have been a different -- and different, better and bigger story to go with that. We hope so.

Yes. And I guess when -- just to kind of bridge between the op margin and then Exosome, when you think about -- you talk about the potential of that business, where are those operating margins now? And then if you end up kitting up that business by using -- leveraging Asuragen, really, and you democratize it, where can those margins get to, do you think?

Well, we've been very public ever since we made the acquisition, this too is a kit like business. And it has 80-plus-percent gross margin. So as long as we don't overadvertise or go on TV or something, we should be able to easily reach 40% op margins with that business, really up and down the line with every test we do. Now we're looking really good and that would be my answer with prostate. If we go into kidney rejection and as you know, the competition is pretty expensive. If we get cross walked through CMS on a number like that, we'll be well north of this discussion. So we're trying to figure that all out right now. And reimbursement is reimbursement. You don't do yourself any favors by trying to be overly competitive and with a much lower number, even if you can afford to do so. The system takes care of itself. And we've got a lot of room here. This is a kit, you pee in a cup, and it can be done at home. It's PCR based. It's not NGS. So this is very, very economical, which is why we're okay with the prostate and if you reflect a price or a cost like that on top of kidney rejection, you can do the math, but it's pretty profitable. So all this is in our future. We're still 1.5 years away from having a reimbursement status, I'm sure. We'll be doing early access and start selling it here probably late summer. As you know, the numbers are out, they're phenomenal. And the test works really well. It's noninvasive, completely noninvasive. And we're getting in a lot of -- we're getting incredible interest ever since we've done the press release and the paper has been published so.

Okay. That's great. And on to Asuragen, let's kind of -- I was in the virtual greenroom, we were talking about it. It always comes up in our due diligence. Give us some background on that. You said that you guys have been looking at that one for a while. How that folds into the business? And really you -- it's incredibly synergistic. Give us the low-hanging fruit here of what we can expect.

Sure. Well, just a few, right from the top. We've been talking to these guys for 4 or 5 years. First of all, they're in molecular controls. And being the #1 controls leader in the world, we are maybe tied for #1, but it's not a big space, but it's how the company began 40-plus years ago. R&D Systems brand is the brand, and we sell OEM to 30 different makers of instruments for hospital equipment. So we're everywhere. But we don't have any molecular controls, and it's growing, obviously. So this has been a gap we've had to fill for a long time. That's one area. Two is this team, Matt and Lynne, as you know, everyone knows them. They're rock stars in our industry. Amazing experience. They know how to take RUO to kit-able IVD approaches. Imagine having that experience helping out with Exosome as a platform. They can't wait to get their hands on it. They've been -- we've been waiting for a couple of years. We've not lost any of the management team that we know of and we haven't closed yet, but they're all excited to come on board, and they'll be able to continue to run their business, and they won't have to worry about capital, because they know they're going to be taken care of as we expand and grow their business, which is already sizable already and profitable, just a little bit, but profitable. They have exciting diagnostics platform. They have 14 registered platforms currently, and they have a couple that are FDA-approved. We have roughly 8 or so that are CE, IVD marked as well. And they've got things in the pipeline. They compete quite well with what's out there. And in some cases, are the only way to get at this stuff. And as the world goes towards panels, the approach of a smaller panel is much more realizable for reimbursement as well. And they are known for working on some of very hard genes and hard to sequence genes. So this is -- it's a platform that kind of fits with where we're going anyway, not only with ACD, but with Exosome. So.

Okay. That makes sense. And so when we...

I see Jim lighting up here. Maybe Jim wanted to say something?

[indiscernible] light up. [indiscernible]

He just likes the fact that he got one that's profitable. Makes his job a lot easier. Yes. Okay. So let's talk a little bit about your Exo -- I mean not your Exo, your COVID test, right? You guys did the partnership, I think, with Memorial Sloan-Kettering? Or is it Sinai? Sorry?

Yes. Sinai. Yes. Kantaro. Yes.

So give us an idea of what you're seeing. We just heard some news yesterday that overall, from Quidel on their -- that the demand has fallen off about 30% to 40%, and that really kind of shook everybody.

Yes. Quidel's -- Quidel and Thermo and everybody there -- they're in the business of, are you sick now? And we're in the business of where are you sick? And are you immune? So serology is different, right? So it's much different. As more and more people, especially the elderly or the immune compromised people get vaccinated, they're going to want to know, is it all right to see my grandkids now. There was a story on TV today about being able to first time touch their grandchild in 9 months. I don't know if they were screened or not, but -- and as you go -- also as you go to strategies of one shot versus two and your efficacy goes from 95% to 60%, more of a risk, right? So there's going to be demand. I don't think it's going to be anywhere near the demand that PCR does. We're not a very big company. We don't need that. Just filling the niches would be material for us. Even so, we have not put any of this in our numbers. So we're ready to go. We have a fully CE marked, fully quantitative serology test, the only one in the world currently, and we're waiting for our FDA claim to be fully quantitative, been working very hard with them. They're very resistant to give this claim out because no, they've not done it for anybody. And it's a big statement to say, with this test, we can tell you exactly how immune you are. Are you also reading an awful lot about coming this summer soon to a town near you, if you're going to travel, there's a lot of pressure to have an immunity passport to be able to go and get into a rock concert, to get in to do whatever. We are the perfect solution to be the backbone of an immunity passport. So we're talking to all the innovators out there trying to crack this one. So I think over the next 6 months to a year, we're going to see more selling of our tests. I mean, we are stepping up. We are ramping, we are selling it. There are governments talking to us outside our own as well. There's more than a dozen possible deals, cooking, to be honest. It's just too hard to know what's going to really hit, how much critical mass will really happen from it. Maybe in a year or 2, nobody will care but just gets a vaccine and just counts on it. I don't know. But we do think there's going to be a need for understanding the level of immunity you're at. And then there's a whole variant thing, right? The more variants happen, the worse this gets, right? And so the more needs. So we do think we're going to have at least a niche position with our test. Again, it didn't cost us that much. It's an ELISA test. We know how to make these. We make them every day. We were able to pull this off in a couple of months and it usually takes us 1.5 years, but we've put a lot of resources on it. And we have it ready to go, and it's very cost effective. It's an ELISA Kit. We can do 100 tests per plate. And so the second step that makes it fully quantitative, it's less than that, but we need that claim to get the final step up in reimbursement to get the big test houses really into it. Otherwise, they can't make enough money with it. So we think it's coming, but everything I said earlier about our goals this year and our growth rates and where we're heading, doesn't have any of this in it. This is all icing on the cake.

Yes. And it's incredibly important to make that distinction that this would be the only quantitative neutralizing antibody assay out there, right? I mean that's -- I think that's why the antibody kind of fell...

We've been ready since April. We worked with the government. They took a hard look at us, and you saw how much trouble they had just getting vaccines out. They couldn't get their heads around. You want us to do a screening step first.

Yes, no.

Yes, because 60 million people have this virus, and they don't need to -- you don't need to waste a vaccine on them, and you probably could save 3, 4 months on vaccinations and probably save a couple of hundred thousand lives.

We can't agree...

We just couldn't wrap their heads around doing a screening process and getting it off first. So here we sit. It's unfortunate. We are already a long time because we cracked a Holy Grail. We're one of the world leaders in antibodies, and we found, maybe call it serendipity, but we found an amazing antibody. It's not in our catalog. It's dedicated for this, and it works really well. It has an amazing affinity and it knows how to find spike. And -- but there's no IP on this, right? So we always figured at some of the other big guys will eventually get to this. And I'm sure they will. I'm sure in a couple of years, there'll be more than one test out there and going from semiquantitative to quantitative. And some are now starting to talk about it's coming but they aren't anywhere near or as far along with the processes we are at the FDA, and trust me it's extensive. So but it's all coming. So this is all good for all of us that there will be more and more tests like this. And God forbid, there are more terrible variants on the way, and we maybe not need it as much. But if there are, this will be really needed.

All right. So that's a great way. And then just to wrap it up, I mean, as you -- like you said, in your numbers, this is not -- this is all upside. And so as we think about the back half of the year and other testing modalities falling off, you don't play in there, and you're getting an actual bump from more things being open and then you get the icing on the cake as you said. All right. That's fair. All right. That's all the time. 25 minutes goes by quickly with you guys. I'd love to...

There's a lot of moving parts in our little company and trying to make a little company into a big company.

It's hard to cover. I'll tell you that. Let's keep the conversation going. I look forward to connecting with you guys soon.

Thank you very much, Luke.

Thanks, Chuck. Talk soon.