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

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Great. Thank you, and welcome, everybody, to the Bio-Techne fireside chat. We're lucky to have with us today, Chuck Kummeth, CEO; and Jim Hippel, CFO. This will be open Q&A format. [Operator Instructions] So with that, let's kick it off. Welcome, Chuck. Welcome, Jim.

Glad to be here.

Welcome to New York, more broadly. Tomorrow's a big day for you.

Yes. We're at the Palace. Nobody else is. It's kind of weird to be at a conference virtually at the Palace.

So I don't want to front run your event tomorrow too much, but I do a little bit. So some of the topics you'll talk about, I would like to touch on in the brief 30 minutes we have here. And the first one being you did nearly $1 billion in sales last year. How do you get to $2 billion and over what period of time?

Yes. Well, like we did a couple of years ago, the punch line of 100-slide deck that we'll go through in a lot of detail of how we build our 5-year vision, and it'll be given by Jim, but that is exactly the message we'll leave everyone and to say will hopefully show how we're going to deliberately get to $2 billion in revenue and 40% op margins. And we'll go through it market by market, business by business, almost product by product and for about 3.5, 4 hours. The 2 segment presidents will present their areas, and I'll present an overview, and Jim will present the financials at the end of the model that we did. And as you know, Dan, we've -- we're a pretty complicated little company for our size, a lot of stuff moving parts, too. We like to call our -- in this world of unicorns, we like to call ourselves, we're a stable of unicorns. We have a lot of platforms that all have great scale potential. And we're going to -- we've taken a lot of focus the last 2, 3 months building out this presentation for tomorrow to really demystify the company and do a much, much better job at really clarifying and helping people understand the science and the markets and our products and how we're built. As you know, we have 6,000 proteins in our catalog, 400,000-plus antibodies, half a dozen pretty big platform -- instrument platforms now. We've got over 10,000 different assays. In terms of Diagnostics, I'm not even sure at this point what that would come to. Probes at our ACD platform, our genomics area, we have over 40,000 probes. So it's definitely still a bit of a death by ten thousand paper cuts business. And we're searching for scale and synergies where we can, and I think we're finding a lot. And Diagnostics is probably having the biggest potential for scale. But the leverage is across the board and all our platforms. And COVID has created a nice little tailwind for us but also a halo effect. All the added research, all the added investment, all the vaccine development and manufacturing has created a real need for the kinds of products we sell. And so we've had, as you know, a great year for the past year, so.

Indeed. So with the performance you just wrapped up on your recently closed fiscal year, Jim, you had mentioned in comparison to 2019, the sales CAGR organically was 13%. To get to $2 billion in the next 5-year window, you'd have to accelerate that growth rate. What are the couple -- 2, 3 things you'd point to that would be growth accelerants over the next 5-year horizon?

Easy. Cell and gene therapy and our Exosome Diagnostics platform. Those 2 items, all the growth is still way ahead of us there. Will be a bit of a J curve, particularly in the cell and gene therapy space. But that's -- we've been able to achieve the kind of growth that we have here without the Exosome business contributing too much because if there's one piece of our business that has been negatively impacted by the pandemic, it is our Exosome prostate test, given the fact that folks have been wanting to see their doctors. So at some point, that starts to come back to normal, and we think that test will continue to take off like we did 2 years ago. And of course, cell and gene therapy, we've talked a lot about cell and gene therapy, but we're positioned extremely well there. You're going to hear a lot about that tomorrow across all of our -- across most of our platforms, especially in our GMP protein space. So those can be the 2 accelerators to our growth -- those 2 business units.

Okay. So underlying that commentary is an assumption that your core reagents business, your analytical instruments business, those are durable, double-digit growth businesses. Is that correct?

Yes.

Yes.

Plus or minus a bit -- yes.

I mean I think we seen double-digit growth in our reagents. And I think that will remain maybe forever the new norm now. We grew well beyond mid-single-digit growth, even high single digits. It's looking very strong. Now instruments, however, they've been running 50% growth, and that will level out here, and we'll probably back to the meager 15 to 20 that we've promised, and that will be the norm, so call it maybe 2, 3 years out. But right now, we're still running pretty hot. There's still a big need for productivity in these labs as they kind of come back to work. And we're all about productivity, so we're -- our instruments are definitely overselling, so.

Chuck, where do you think you are in the penetration curve? Well, let's take it category by category. Where do you think you are in the penetration curve for Simple Western?

We think we're right at about 15% or just under, so.

And what do you view as the ultimate opportunity?

I think we can get to 50%, 60%. I don't think we'll get -- take off the entire $1 billion-plus market because there's just going to be a lot of labs that just do a handful of hand Westerns a day, and they're not going to -- they're just not going to want to pick up a $50,000 machine. They don't have enough throughput. But for the most part, most labs do a fair amount of Westerns. And I think there's a big part of this market yet to be addressed. And the growth is across the board in both biopharma as academia. We have, as you know, a new academia-based version of the product that's selling crazy right now, too. And we have things on the drawing board to further improve the machines, add better software, more analytics, et cetera, more connectability.

Okay. So not even middle innings from a penetration perspective?

Not even middle inning, not even close, no.

Chuck, I would add also that you could argue to extent that we're actually growing the market because there are -- taking the biopharma space, there are customers who are now using Western blots that had not used them for a long time because of their inaccuracy in their -- the time it takes to do them. So we're finding that we're actually potentially expanding the market for a [indiscernible]

Yes. I mean you can -- in a way, Simple Western is a poor man's mass spec process, right? So you've got big pharma, biopharma who've been using mass spec like a hammer pounding on ants. So to Jim's point, they can come back now to a more reproducible better method for doing Westerns. It's very economical, so.

Can you comment on attach rate? I think part of the whole point you acquired ProteinSimple was that you would pull through more of your own antibodies on their Simple Western cartridges.

Well, it's probably the reverse, is that our channels where we have antibody experience also know how to use instruments, and so we can pull through more instruments along with selling all the content. There is certainly a lot of content being sold to instruments, but it doesn't add up to that much money all by itself. So it's a driver. And it's needed to save time but in terms of real dollars. So we have about 2,500 antibodies prequalified right now for Simple Western and out of a very large catalog, so.

Is there a way you can frame for me on a $50,000 instrument what would be the annual consumable pull-through opportunity?

Rule of thumb is about 10%.

Okay.

Yes.

I would add right now...

And it varies by machine. It's much more than that on the Ella machine, but...

Right.

But sure.

In total, our -- if you look at our total instruments revenue, our consumable revenue that's pulled through is almost the same as our instrument.

Yes. Because it's recurring. It's -- you sell the instrument once, but you're buying, it stacks, right? You're...

Right.

That's why it's important for us to keep getting boxes out there. But -- so every year, we just don't have any more to sell our content to for everyone out there, right, so.

Is there a way to help me dimensionalize the unit opportunity in Simple Western? Would you envision the world could -- so 50,000 boxes, and you've got...

Well, I think the best way, Dan, is to just understand what's out there in imagers. There's roughly 30,000 to 35,000 imagers in the field still being used roughly. So -- and when we lay out numbers tomorrow, we're at 2,000, 2,500 Simple Western machines. So we're -- we got a long ways to go.

Okay.

But they have reached their tipping points, right? So they're -- it's scaled big enough now where the word-of-mouth is out there. People have seen them. Somebody else has them down the hall. So it's giving the asset an inflection point in the curve for selling, right? So we should probably see our -- I think we'll probably see an increase for a while in terms of overall penetration. But not saying -- not seeing revenue will scale much more than it is because of the halo effect around COVID. But I think 20% is probably a safe number for years, I think.

And then how are you framing the market opportunity in multiplex protein analysis? You have a couple of shots on goal there.

Yes. Well, Ella's certainly a big one for us, being able to plex biomarker research is important. But we're also able to plex, to some degree, Simple Western, a couple anyway. And ACD is all about that, right, so.

Okay.

We're going to plex now on that platform up to 48 markers at a time, so.

So is there a way to frame what you would view as the addressable market opportunity for Ella?

It's really hard because of the clinical side. I think on the research side, I think it's -- we always thought it had legs to become at least a couple of hundred million dollar business on its own. But if you map on top of that its ability to be a clinical device for patient monitoring, it could be 3, 4x that.

Okay.

That's why we're taking it through a 510(k), and of course, we have a partner doing the same in China right now. But we saw firsthand what can happen when the right stars align in the last year, about a year ago when it was being used for patient marketing under EUA in Europe, and we couldn't make it up for it, so -- for COVID.

How are you thinking about the competitive environment in multiplex proteins?

Well, this stuff takes longer than you think. So Alamar just had their announcement. And of course, we know Yuling very well. We figure if he's 5 years away, that may be a stretch, maybe longer. But we are certainly coming into a time where proteomics is becoming kind of the way NGS was 6, 7 years ago. It seems to be a lot of innovation, a lot of new ideas, a lot of potential new ways to plex and to get down to single analyte detection, et cetera. Sensitivities had to get better. They are. There's different methods of going about it. We have good platforms that have IP around the methods we use. And with leukapheresis, it's working. But I don't think -- I think we're years away from seeing any real competition on the platforms we're in.

Okay.

I mean that's not to be said about biologics. I mean biologic, you could skin that cat with HPLC or ion exchange and things like that, too. But we have a really good cost-effective, reproducible methodology with our instruments. Very -- the ease of use is nice, and that's how we win business from production sites that have been using columns because columns are messy, right, so.

You anticipated my next question, the biologics business. How are you framing the opportunity there?

Better than ever. We're almost surprised to how it recovered 1.5 years, 2 years ago. And it's being specked into a lot of cell and gene therapy, new standards now. CDMOs are picking it up. It's being used in QC and vaccine makers. Vaccine makers have bought a lot this year. So that's why we see the numbers over 30%.

And how do you best describe folks what market need you fill with the capillary electrophoresis product as opposed to, like you said, ion exchange chromatography, HPLC, other methods doing quality control? What is the easiest way to describe the niche?

Well, in a non-technical way, which is the only way I could do it, it's certainly because of the cartridge the way it works. It's clean. It's simple. It's fast. It's economic. It's a 3-year -- 3-hour process versus many, many hours with columns. You don't have to pack columns. You don't -- it's just easier to work with. Reproducible, the software is good. We had a nice step-up last year. We got a LiMS connected via Empower from Waters. So we've got that license. And so now the connectability is better. That's an important driver as well. So I think the future, it's got to be better and better software. More web-based data analytic capability, higher and higher sensitivity, faster speeds, all those things are the road map.

Okay. So then transitioning from the analytical instruments business to the reagents business and the durability of the double-digit growth there, putting cell and gene therapy aside, what would you flag as the #1, 2 growth drivers that would sustain double-digit growth in reagents?

Well, I think we're just living in a real proteomics-based macro environment now. The research is accelerating, both in biopharma as well as academia. And as long as you've got the catalog with the machine learning and SEO, search engine capabilities, I think you stand to do well. And we've been planning for this really for years. And it's just kind of serendipity, and it kind of hit it once, but our website is just killing it. Our traffic's up double digit. We can prove that. We are using agile marketing software models. We have machine learning. We have a data team. And so we're able to really work with customers online, predicting what their needs will be, providing a much better experience. We have a one-way approach. We used to have to order things from actually different components of different websites for our company, and now we have already integrated, which is a big deal to be able to do 1 order versus 10. It saves a lot of time. And so I think that's going to drive reagents, more than anything else. And that were just the brand, the ease of use to get to, the search engine capability, the signs you're looking for, we are one of the most cited catalogs of reagents out there. And of course, researchers start in the citations because they don't want to reinvent the wheel, right? So they -- as long as they can find your stuff that was listed in the papers they're reading, then they don't get it.

Okay. How would you describe -- I know, Chuck, when you joined, there was a lot of dirty work to do around search engine optimization, building out e-commerce, building out the sales force. How would you describe where you're at now on just the basic blocking and tackling, the push to reagents business?

I think we're certainly in the middle innings here, right? I think we're ready -- I think we're capitalizing on all these investments. And right now, we're at the steep part of the curve of really watching ourselves take share and ride this wave of new interest and new research funding as it seems to be growing out there. I mean we are well past worrying about if we're going to be mid-single-digit growth anymore in reagents. I don't think we'll ever see that, at least for years. And now we've got NIH funding coming in October, rumored to be plus-20% or better. It's going to be amazing, I think.

Okay. Then moving on to Diagnostics. Can you frame for investors how you think about the different business units within Diagnostics and the growth prospects in each?

Sure. So we really have 4 components in our company there -- of Diagnostics. One is the Ella we talked about. The other is the ACD platform we talked about, and we have strong relationship with Danaher and Leica and working at in CDx areas. And then we, of course, have Exosome as a platform, which we have prostate on the market, and we're getting closer to launching a kidney rejection test. But now we have Asuragen as well. And that gives us not only molecular controls but also screening-type diagnostics, Fragile X, et cetera. And we just launched SMA, and we got cystic fibrosis coming out here momentarily. So we've got all that. We're going to be combining some of these into a new division. You'll hear more about that tomorrow with the leadership coming from Asuragen. This -- remember, we've talked about 1 gap that we've had for years. There's not enough regulatory and quality experience in the company to be in Diagnostics, and we've acquired a lot of that now with Asuragen. So that, combining with their kitting abilities and such, is going to make for a dynamo-type division in Diagnostics, oncology and aeroscience, mainly, but not -- we're not heading for the low end of the market in infectious diseases. So we think it will go well. So that's -- those are the components. I think prostate is growing nicely. Patients will -- are coming back. Home kits working. We are having amazing interest on the kidney rejection from partners that want to help commercialize this because the number -- it's a best-in-class test, numbers beat anything else out there. So how fast we can go is going to be up to kind of us, how fast we could partner or further invest in the platform. But having that Asuragen team coming to help the bench we have at Exosome is going to be huge, so.

And is the -- the divisional structure there, I was under the impression that, that could be a bit delayed because you needed to let the Asuragen team operate independently for a while with the earn-outs. Is that not the case? Can you remind us...

We're there.

You're there. Okay.

I'm more concerned about making sure this team is very happy at Bio-Techne. We give them many more toys to play with to be -- to remain happy and stay here, so.

Sure. Well, we've heard about tight labor markets from some of the other companies we've talked to this morning. So I imagine as a CEO, a business like this is probably high in your mind.

We're doing better than most of our peers but not by that much. It's very difficult for us, too.

Okay.

Which means we're not seeing 20-plus percent attrition, but we are in the teens. That's too high. Mostly all younger.

And from your comments on partnering with the kidney test, do I hear correctly that you're not looking to build your own transplant channel, but rather you'd pursue partnership to address that market?

We're ready to do either. If we get the right deal, I think we're okay of the partnership to try that. So we can -- because as you know, we've got 2 or 3 more other things in the pipeline ready to go as well, Exosome. And if we don't start partnering with some of these, it's just going to take too long going serially.

Okay.

And this is probably the right one because the market is there. There's already predicate out there with CareDx. It's a huge pain point in the industry. The MACs, even NGS, really, really want us out there, maybe unlike in prostate, right, but there certainly is an acknowledgment that we've got a great test. We've got great science here, and we could make a big impact difference for a lot of people in need, so.

Why would a MAC be especially interested?

Because they see the pain, and they're out there now reimbursing with inferior methods.

Okay. So then let's move on to cell and gene therapy. You touched that workflow in a number of different ways. So maybe just high-level frame how you're viewing that opportunity.

Well, first and foremost, we're a research protein maker, the best in the world. And so we want to -- we figure being the leader in the GMP proteins for cell and gene therapies, it's kind of ours to lose. So we built a $50 million factory. It's pretty close to being true qualifying. We're making product, putting inventory right now. And that could be $140 million to $200 million piece of business all by itself for the -- we'll call it, the future to cell and gene therapy division. But on top of that, we've got media. We've got antibodies. We've got a lot of our instrumentation. We just talked about, can be used in QC, the cell lines. You have to analyze the cells. So our ACD platform for spatial interrogation is being used and widely being -- coming expected -- accepted. Even Ella is being used in -- its immuno acid testing for a lot of cell makers right now. So we're seeing some lift there as well. Our partners in ScaleReady who have their own channels, do their own commercial bent on things with bioreactors at Wilson Wolf and leukapheresis instrument Fresenius Kabi are also creating a lot of pull-through for a lot of our reagents right now, creating a lot more awareness. We're going to go through that in a lot of detail tomorrow in terms of all the components of the business, the partners, the market, the customers, all of them, we'll build it up. There's 1,300-plus clinicals going on right now. We -- there's -- we have some form of interaction between the players and ScaleReady and us. We're something like 600 customers. So us alone and Proteins is not there yet, so we've got a big upside. And Dan, if nobody follows us, we're not seeing anybody else really chasing us too closely on doing the same strategy with building out a pretty complete workflow. If we end up getting all of this in 3 to 5 years, it's going to be massive, way bigger than hundreds of millions of dollars. So we'll see. But we're planning it. I think, as Jim said, it's a J curve. It's years 3 to 5 is when this thing really starts taking off. And we expected there'd be something north of $300 million as a division all by itself. Not to mention the gene editing assets we have as well as the bead technology that wide. So we've got no less than a dozen things in the workflow for cell and gene therapy. So it's almost a one-stop shop, so.

And just the way you're framing it, the quad beads and the vectors would be incremental to the $300 million? Or those are included in...

To part of it.

To be part of it, yes.

Probably in the $50 million, $60 million range, we think, in 5 years, but it could get much bigger after that.

Okay. And you said 3 to 5 years is the takeoff. Are we in year 2 of that 3- to 5-year curve? Or are you saying 3 to 5 years from today?

Oh, we're in year 1 today.

Year 1. Okay.

From today, yes. Even though we're at a $20-plus million run rate right now at 100% growth in proteins, it's still early days. It's still all a handful of clinicals and mostly preclinicals currently, so.

Okay. Maybe the final question in the 3 minutes we have left. How are you thinking about the spatial genomics market, your position there? What's left for you to do to build where you want to be?

Well, as you mentioned earlier, I think we've got to get to a couple of things. One is more multiplexing, which we're working on with XPlex and HiPlex. And their -- HiPlex was launched and scaling nicely. XPlex is coming. And we can plex up to 48 now. It could go higher, but we're going to need an instrument to go faster. Otherwise, this is going to take too long. And then we need automation instrumentation anyway, I think, to really go after more of the standard pathology part of the market. That if we want to start replacing a lot of IHC with this platform, we'll probably need that. But just in terms of research with RNAscope, and now we have DNAscope, which doubles the market, this is a north of $300 million division all by itself without any automation in 5 years, so.

Is it easy to find automation in this market? Or are those scarce assets?

Surprisingly, there's quite a bit of innovation around this area. I mean the world is not going to leave it all to like an antenna, right? So they're too big. So there's a lot of smaller, more nimble systems coming to market people are looking at. And we're working with some of them. We're just trying to understand whether we OEM or get a license or make an acquisition or what, so.

So maybe that's the place to end it in the final minute here. How are you looking at the business development environment?

Well, we never worked harder and got so little in the past year. We slung big at Aldevron, and we slung big at BioLegend, and we did some others as well. But as you know, things are expensive. The good news is we don't need deals anymore. We could be picky, and so we'll just keep being picky. I prefer if we could find things like we did with ACD and Protein Simple and Asuragen and others doing them privately, not going through an auction process. But they're harder to find that way. And a lot of times, they come to us because they want to be part of Bio-Techne or they need special juice that we can deliver or something. So we're an assay built for them or whatever. So we're on the hunt. We're always on the hunt. I'm very comfortable. And tomorrow, we leave everybody with a $2 billion number in their head and $800 million in EBITDA there. That's with no M&A. So we're likely going to far exceed $2 billion because I can't see us going 5 years all in the M&A, okay? So we've done 16, 17 deals in the last 7 or 8 years, and I'm sure we'll -- we should average 1 or 2 a year, I would think. Otherwise, we're going to have a pile of cash to deal with, so.

Okay. Well, with that, we're out of time. I look forward to the event tomorrow. I think that's going to occupy a part of my weekend catching up on your Analyst Day. But really appreciate you making the time for us in advance of that. This is very helpful.

Yes. Thanks a lot, Dan. We really appreciate it. And we're really looking forward to your feedback because we know how good you are at this, and getting your viewpoint in our deck and our information is going to be important to us. So we're looking forward to it, too.

Will make sure. All right. Thanks, Chuck. Thanks, Jim.

Thanks.

Thank you.