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

All right. We'll get started. Hello, everyone. My name is Jay Jin, and I'm part of the health care technology and distribution team here at Credit Suisse. Thanks, everyone, for joining us today. Next up, we have Jim Hippel, Chief Financial Officer from Bio-Techne for a presentation. By way of background, Bio-Techne engages in development, manufacture and sale of biotechnology reagents and instruments for the research and clinical diagnostic markets. I will now hand it over to Jim for the presentation. But if anyone from the audience wants to ask any questions, please e-mail them to me at [email protected]. With that, Jim, over to you.

Great, Jay. Thank you very much. It's great to be here. Welcome, everyone. When I give an overview of our company, it's going to be geared probably a little more towards those of you who may not be as aware of our company and what we do. Next slide, Dave. So of course, I'll start with the safe harbor. I will be likely making some statements that might be forward-looking for you, and I encourage you all to read the forward-looking statements in detail that are posted in the Investor Relations section of our corporate website. Okay. So Bio-Techne is a 40-year-old life science tools company, mostly comprised, you can see here, of consumable revenue streams. And during this period over the last 40 years, at its core, we have been the world's leading provider of proteins, antibodies and immunoassays that are used in life science research. We consider ourselves the picks and shovels of drug and diagnostic discovery. We sell to practically every life science researcher in the world, both academic and in biopharma. We have over 1 million different customers that we sell to and literally hundreds of thousands of products. And there's no one single product that constitutes more than $2 million of our annual revenue. Having a business model like this can be challenging to grow but also difficult to kill. We like to joke that to kill this business would be like death by 10,000 paper cuts. But over the last 8 years, under Chuck Kummeth's leadership, the company has undergone a transformation to reinvigorate the growth of its core but also to expand and leverage its portfolio to gain access into much bigger markets for growth. This has included adding an instrument line -- adding a line of novel instruments to our portfolio that automate the protein detection lab processes as well as expanding our assay portfolio into genomics for use in spatial tissue, liquid biopsy and other molecular diagnostic applications. [ Next slide, Dave ]. Our growth strategy has not only been product portfolio based, but also geographic and end market focused, with a shift to more growth from Asia and Europe and more growth from biopharma biotech, which is less dependent on government funding. On the left-hand side, you can see our sales distribution by end market. And you can see that our pharma biotech is nearly double that of our academia end market. 8 years ago, those 2 pieces of the pie would have been roughly the same size. And on the right-hand side, the breakout by geography, you see Asia now represents 17% of our portfolio, with more than half of that coming out of China. 8 years ago, that would have been just a sliver on this pie. And to illustrate, using China as an example, we just, this last quarter, lapped a recurring revenue -- annual recurring revenue of $100 million. 8 years ago, that number was less than $20 million. So significant growth, particularly out of China. Next slide. So our growth strategy has been executed really via 4 main pillars. You can see them here, geographic expansion, core product innovation, gap filling M&A and then culture creation and talent. I've already talked about the geographic expansion, particularly in Asia, but we still think there's plenty to do -- plenty more to do there. China, we still think, is in the early days of its life science ambitions, and we are very well positioned to continue to see the kind of growth out of China that we've seen in the last 5 years continue into the next 5 years. But we also think India will be a much bigger player in life sciences in the next 5 to 10 years ahead as well. Under core product innovation, with tens of thousands of products that we make in-house, you really need a process to prioritize what you make and what you -- what new products you develop to be commercially successful. And we have put those processes in place over the course of the last 8 years to do a much better job of identifying the commercial need and the research need for specific products. To put that into some context, as an example, 8 years ago, we would produce roughly 2,200 new reagent products every year. And those 2,200 products generate roughly $2 million of first year annual revenue. The last couple of years, we've produced roughly 1,500 new products every year, but those 1,500 new products have generated well more than $10 million of new revenue in its first year of launch. Under gap filling M&A, we've been using our tremendous cash flow and leveraged our strong balance sheet to be very acquisitive over the past 8 years. It's really this strategy that has built the much broader portfolio that we have today and create our -- vastly expanded our TAM, all while staying true to our core. At the end of the day, all of our M&A has had some connection back to our core reagents. And when you do 15-plus acquisitions over the course of 8 years as well as transform an existing low or no growth company into a high-growth company, it recreates a lot of culture creation and talent retention, and that's been a huge focus for our company, and I'm proud to say we've been very successful there as well. Next slide. Now our culture has been embedded with environmental, social and governance sustainability qualities long before these considerations became more mainstream with investors, customers and regulators. Our manufacturing processes are very low -- have a very low carbon footprint to begin with, but that doesn't stop us from concentrating on energy management, water management, and particularly waste management as it pertains to our packaging materials, and that's something that we'll continue to focus on going forward, particularly on the packaging. From a social perspective, more than half of our workforce are women, and that includes women in the scientific fields and PhDs. And over 30% of our workforce are ethnic minorities. In fact, in Minneapolis, which is our largest location, we have nearly 1,000 employees, roughly 30% of our workforce here are ethnic Chinese. And from a government's perspective, we have a very well-balanced board, both scientifically and with good business management experience. You really need both in a company like ours, that's so scientifically driven. And as Board members have retired over the past 8 years, I think we've done a nice job of replacing those with more diverse backgrounds, including 20% of our Board now made up of women. And our Chairman is independent. So we're led by an independent Chair. So the strong execution of our strategy by our people has been demonstrated by an increase in organic growth, adjusted operating margin and cash flow from operations every year since Chuck became CEO, with a notable exception being, of course, fiscal year '20 with the COVID pandemic, where we were on track to 11% growth 3 quarters into the year. And then when the shutdowns occurred in our fourth quarter, that dramatically lowered our growth rate for the entire year. And then, of course, the catch-up we had in fiscal year '21, had we had finished at 11% growth as planned in fiscal year '20, our actual organic growth in 2021 would have been closer to 13%, but still a positive trajectory in -- to the up and right direction. Next slide. All right. So now I'll dive a little deeper into our growth drivers by starting with how we're organized by our 2 segments. On the left-hand side, you see our Protein Sciences segment. And this is the home of our core proteins and antibodies that you see in proteomic research reagents business unit. Down below that, you see our key brands with R&D Systems being the legacy brand, the most recognizable brand and really is known in the industry for standing for quality. To the right of that, you see our protenomic analytic tools. This is essentially where our assays and instruments product lines live. And you can see the 2 brands there, R&D Systems for immunoassays and ProteinSimple for the instrumentation. Then over to the right, we have our Diagnostics and Genomics segment with 3 business units comprising that segment. Starting with our Diagnostics Reagents, this is essentially an OEM business. We call it our picks and shovels for the diagnostic industry, and the -- it's mostly an OEM business. To the extent we do sell any retail, it's retailed mostly under the R&D Systems brand. And now with our recent acquisition of Asuragen, Asuragen has some molecular diagnostic controls that now are part of this business unit that was historically all proteomic. Moving on to our Molecular Diagnostics business unit. This is our most recent and newly formed business unit that combines our 2 most recent acquisitions, Asuragen and Exosome Diagnostics. And we see the combination of these 2 businesses with the Exosome platform at its core really being the -- taking the lead as our center of excellence for our growth platforms in diagnostics going forward. And then finally, we have our spatial biology business unit. That's where our ACD-branded products lie. That's basically an RNA and DNA institute technology. Okay. Now let's dive a little deeper into the various segments, starting with Protein Sciences. Next slide. And starting with our core proteins and antibodies. So if we weren't the first, we were definitely one of the first companies 4 years ago to commercialize proteins for research use, and we're by far the market leader. We focus on the type of proteins that are called cytokines, which reside on the surface of cells and are messengers for oncology and neuroscience pathways in the body. We're known for our quality of proteins. And in fact, we make -- we produce a bioassay for every single protein that we develop that essentially proves the bioactivity of the protein, essentially, how alive is that protein and how much successful you get out of it in your research activity. And most proteins we will not release for sale unless we have a bioassay to prove its bioactivity. And in many cases, the bioassay is more difficult to produce than the making of the protein itself. Our protein business is very hard to replicate. It's taken 120 PhDs, over 4 years of collective know-how, to produce a catalog that's of greater than 6,000 proteins. Moving on to antibodies where we are a top 5 supplier in this very large and fragmented market. We're a high-quality producer, especially those antibodies that are derived and made from our high-quality proteins. We also source over 100,000 antibodies under the -- our Novus brand. And this business -- what has driven the growth in this business and we think made it very successful for us is our digital solutions activity. If you think about over hundreds of thousands of antibodies that are out there, a researcher is going to need to go online very quickly, do a search for what they're looking for, find what they're looking for, and get the data they need and know they're making the right choice of reagent. And that's what our digital solutions team has been focused on very heavily the last 5 years, search engine optimization, to get the researcher to our website, and then putting tons of content on our website to keep that researcher there, keep them engaged, want them to buy our product and buy other products that are related to their research needs. What our proteins and antibodies used for in research, they're used for a lot of different things with proteins. They're used to grow cells, different chain cells. They're used in antibody production. They're used as calibrators and controls for diagnostics. They're used to grow media. They're used as biomarkers and disease monitoring. And more recently, the GMP grade of proteins are being used heavily in cell and gene therapy as the food to grow cells that are genetically reengineered before they're put back into the body. We see this GMP proteins as being a huge, huge growth opportunity for us within cell and gene therapy within our protein business. We think this alone can double our protein business over the next 5 years. At the end of the day, we are the world's leader in research-use-only proteins. Shame on us if we're not the world leader in GMP grade for the next generation of therapies, that being cell and gene therapy. And we've completed a brand-new factory dedicated to GMP production of proteins that has a capacity of over $200 million worth of proteins. And just as of this week, it is now producing commercially available to sell protein. So we're very excited about that. On the antibody side, very, very big market, used for a big -- very wide range of various life science processes, whether it's in immunoassays, western blot, flow cytometry. They're used in therapeutic agents, and they're used in immunizations for blocking activation activity. So a very, very big market in antibodies, and we're well positioned to succeed there as well. All right. So now moving on to the other product category within Protein Sciences, the proteomic analytical tools. It starts with our gold standard ELISA immunoassay. It's part of our core. Why it's a gold standard is because at the end of the day, it's a very high-quality assay when that researcher absolutely needs to know the right -- 100% the right answer. It starts from the fact that we make the highest quality proteins, which makes the highest quality antibodies. And those high-quality antibody pairs result in a very high-quality ELISA assay. But with our expansion into instruments, basically automating assays as a productivity tool, but -- as a productivity tool as it pertains to assays. We've given all of our instruments human names because they're basically automating a human activity -- manual activity. And if you start off to the upper right with Simple Plex, this is an instrument that actually automates the ELISA immunoassay. What would take 6 hours to do a manual ELISA assay for one target, Simple Plex can do in 1 hour and do multiple targets at a time and also uses -- all of these instruments, in fact, use much less sample. So where productivity, speed and less sample size are all very precious anecdotes for researchers, and it's where these instruments thrive in terms of gaining market share. On the lower right, we have our Simple Western platform. That instrument is named Jess. And Simple Western automates the western block process. For those of you who might know what a western block process, it's a very common process using labs to identify a protein in a sample. It's a very messy process. It requires a lot of gels, a lot of steps. It can take up to 2 days to perform, and it's not very repeatable. Simple Western instrument does all of that with a push of the button in 3 hours, some sample to answer, and it's very repeatable and very accurate data with a small sample size. And then finally, our biologics platform goes by the name of Maurice. And Maurice is really our main and only instrument that's actually used in production for drugs where it's used as a QC tool for looking at the quality of protein purity and drug manufacturing. Okay. Now I'll go to the Diagnostics and Genomics segment, starting with spatial biology. So spatial biology is basically an application where IHC is used today. IHC stands for immunohistochemistry. And it's a process where you're basically looking for a target protein in a tissue sample without destroying the sample. It's also seen spatially where the target protein resides in the sample. The problem with IHC is that it uses antibodies to detect the proteins, and antibodies are known for being finicky and don't always work. In fact, there are a lot of proteins that don't even have a known antibody to attach to it and to use for identification. So that's where our RNA-ish technology comes into play with ACD where with essentially 100% accuracy at a single cell level, ACD's technology can identify the gene or the RNA that produces the protein of interest that a researcher is looking for. So it basically answers the question: why look for the protein if the DNA or RNA that makes that protein doesn't even exist? So look for that first. If you find it, then you can move on to IHC and do other experiments using proteins and antibodies. Okay. Moving on to our Molecular Diagnostics business, which the key technology platform there is our exosome-based liquid biopsy. This is a platform that uses exosomes to find biomarkers in bodily fluids such as blood and urine. And let me just real quickly kind of give a debrief on what are exosomes. Essentially, exosomes -- I think a good illustration you see there on the left-hand side there, I think of them as like bubbles that encapsulate DNA and RNA from the originating cell. And these bubbles are excreted from every single cell on the body, alive or dead, and excreted into your various bodily fluids. The key technology that's used out there mostly in liquid biopsy today is cell-free DNA. And there are a number of reasons why we believe the exosome technology is a superior way to identify early indications of disease over cell-free DNA. Starting with just the sheer number of them that exist in the fluids in the body. There are many, many more exosomes excreted from cells in the blood in the urine than there is cell-free DNA. And there's a lot of other junk in your blood that makes for a lot of noise. So having more to select from is a huge plus. Also, once you can find the cell-free DNA and get over that issue, then you have to be able to read it. And cell-free DNA floating around particularly in the blood stream is constantly getting eaten away by various enzymes that are also in the bloodstream. And so it has a fairly short life to be able to be of any use with regard to reading that DNA strain. Whereas in exosomes, it's completely protected by that bubble wrapping, so to speak, around it. So once you find the exosome, interrogate it, you find the perfect RNA and DNA inside. The other important differentiation is that with cell-free DNA, it's not always easy to tell where in the body that DNA originated from. But with exosomes, that bubble membrane that surrounds the DNA and RNA is actually made from the same protein as the originating cell. So after you've interrogated that RNA and DNA, you know exactly what organ in the body it came from. And finally, and arguably most importantly, the advantage of exosomes over cell-free DNA is how early in a diagnosis you can actually achieve. And this has to do with the biology. The fact that cell-free DNA is excreted from dying cells, whereas exosomes are excreted from growing, living cells, naturally allow for an earlier diagnosis using exosomes versus cell-free DNA. Okay. So that's the technology. With regards to commercialization, our first test that has been commercialized is referred to as the EPI test. It's also now rebranded the ExoDx Prostate test. It's for -- essentially used in the care for potential prostate cancer. It's a need because up to 90% of prostate biopsies are unnecessary, simply because they use only PSA. PSA is really the only tool out there that a urologist can use to determine whether or not they do a biopsy. And it's very unreliable. It's basically like flipping a coin 50-50. And getting the unnecessary biopsy is definitely not a good thing. Obviously, it's very invasive, but also 7% of all biopsies get infection and 4% actually go septic. So if you can avoid a biopsy, you definitely want to do so. What our test does is reduces the need of unnecessary biopsies. It's essentially a rule-out test. It will rule out whether or not you have high-grade cancer, and therefore, don't need a biopsy, and it does so with roughly a 92% accuracy. So much, much better than flipping a coin. It's 1 of 3 liquid biopsy prostate cancer tests that are currently on the market but is -- the other 2, one of them is blood-based where it requires a blood draw, whereas ours simply just needs a urine sample. The other test that also is urine-based requires a 3-minute aggressive DRE massage prior to urination, which, again, is not very -- noninvasive, if you ask me. So there's definitely some advantages from a patient perspective to our test. It also has -- we also have an at-home kit for it since it's going to be simply done with urination in a cup, but it also is technically superior from a doctor's perspective. And you can see there at the bottom of the page, we've got a pipeline of other indications lined up where this platform can be used, and whether it's kidney, breast cancer, various other organ cancers. And then also, we are in partnerships with over a dozen big pharma accounts for companion diagnostics on therapies they're working on. So a lot of interest in this technology from a pharma group as well. Okay. Next slide. The other piece of our division is, of course, Asuragen. This is our most recent acquisition. They're a great business on their own where they make high-quality genetic screening and oncology tests and are growing very rapidly in that space. But for us, strategically, the importance of Asuragen was the team that came with it. Very strong, experienced industry and regulatory teams. And that will allow us to speed up our commercialization of various products using our exosome platform. And they are very, very excited about that technology. They're -- all of our top technical people have looked at it, and can't wait to take it on and really exploit it. So a very strategic acquisition for us for the overall platform. And then last, our Diagnostic Reagents business. This is essentially our controls and kits and reagents that we sell to almost every diagnostic instrument maker in the world. Again, it's mostly an OEM business. Kind of a fun fact, though, about this business, a key component of these reagents is our hematology controls. And our hematology controls is actually what our company was founded on over 40 years ago. And it was -- one of our scientists back then took a byproduct that was plasma from that process of making those controls, and from it, created our first commercial RUO proteins for sale. So this division actually gave birth to our entire core business of proteins, antibodies and assays. All right. Now I just kind of want to give -- go through -- now that I've gone through all the product categories, I do want to talk about cell and gene therapy and how important that is becoming for the industry overall and definitely for our company. With over 1,000 clinical trials ongoing, I mean, this treatment represents the tip of the spear of where cancer therapies are heading. And for illustration, this chart presents a simplistic flywheel for a CAR-T cell therapy process, again, to illustrate how widely we play in the manufacturing of these therapies. I'll quickly kind of go through this, but it starts in the upper right where you extract the white blood cells from the body. And then from that, you use antibody-coated beads to activate the T cells. Most therapies today use metal-based beads. We have a technology that uses polymer-based beads that dissolve, and therefore, keeps from having metal fragments to be reentered back inside the body. Those active T cells are then reprogrammed or genetically engineered to fight the bad cancer that they want to be programmed to go fight. And today, that's mostly done by viral vectors, but we have a technology that uses transposon that does it without using viruses. And anything that can avoid putting viruses back in the body is probably a good thing as well. So we're very excited about that technology, and we have a lot of interest from cell and gene therapies companies in it. And then once those genes have been reprogrammed, you kind of have to test for it now to make sure that it took to the cells being expressed. And our AC technology -- ACD technology is a great tool for that. And once you've proven that the cells are taking on the new gene, you now have to grow those cells up in great volumes before you put them back in the body, and that's where our GMP proteins come into play. They act as food for these cells. And then as you're growing these cells, you got to continue to monitor cells to make sure they're continuing to express the new genes that they were reprogrammed to have, and our antibodies are used in various flow cytometry and IHC processes for that. And then ultimately, these cells are put back into the body, and the patient needs to be monitored for any kind of rejection or what they call cytokine storm. And our Ella technology has proven very useful in that capacity and has a potential for clinical use as well. And this is just an example. The reality is many of our other platforms also are utilized in the cell and gene therapy space, both in research and potentially in production capabilities, such as our Simple Western platform as well as our biologic instruments. So a very exciting space for us, and we have big -- we think a big avenue for growth. Speaking of growth, we have a lot of -- a very large addressable market. If you go back 8 years ago, it was mostly just that top line that was our addressable market, but it was even smaller back then because we've increased that with our acquisitions that we've done in antibodies in particular. But bottom line here is that very big markets, very solid markets, and overall, a very low market share penetration, which is why we still think as a company, we are still in the very early stages of our growth. And in particular, the cell and gene therapy and liquid biopsy that you see kind of in the middle of the page there are the biggest growth potentials, and they're growing the fastest, and, by far, the least penetrated in those markets. So at the end of the day, we think in this $20 billion market opportunity, we can take some market share in our reagents due to our superior quality as well as our digital solutions execution. Within our analytical tools in spatial biology, we've got market-disruptive technologies and productivity advantages. And within liquid biopsy and cell and gene therapy, it's just so -- it's in infant stages. It's going to be probably an everybody wins, and we have some great technologies to fully participate in. And my last slide is to capture our vision for how we will get at least 10% of this market opportunity over the next 5 years. We finished this past year, we think, on a 13% normalized organic growth rate. I've laid out here left to right on the bottom our key product categories that we just talked through. You can see the various product lines within each of those product categories above that and the various brands that they're sold under. And our core products, our core reagents, proteins, antibodies, our ELISA assays, diagnostic tools all in, we believe we can get upper single-digit growth over the long term. End markets are strong. Even the academic funding is the strongest it's ever been. So our core reagents, with their quality and the digital solutions marketing behind them, we think, will do very -- continue to do very well. Our instrument platform, as you saw in the prior page, is still very underpenetrated, less than 10% market share. And even though they're 2 to 3x bigger than when we bought them 7 years ago, they're growing faster now than they ever have. So there's still a huge market there to go after in that space. And in spatial biology, very similar story. A little -- a couple of years behind Simple Western and its growth curve, but multibillion-dollar market now with DNA scope. And it's had growth rates north of 20%. It's still very underpenetrated. And just like ProteinSimple, we don't see any reason why that can't continue. If we were just to stop there, we believe that our organic growth rate going forward will continue at roughly a 13% annualized rate, but we have on top of that the whole liquid biopsy opportunity that we just talked about with Exosome Diagnostics, in particular, and of course, the cell and gene therapy, which is really encompassing our entire company, but especially the GMP proteins piece of it. And as those 2 growth activities really kick in 3 to 5 years from now, we expect our growth trajectory to increase up to the high teens as we knock on the door, taking over 10% market share and getting to that $2 billion revenue mark in about 5 years. We like to think of our product portfolio as being a stable of unicorns, and we think that's what's going to propel us from just under $1 billion to $2 billion over the next 5 years. That ends my formal presentation. Thank you very much. I don't know if there's any questions.

Yes. Thank you, Jim, for the presentation. Definitely looking forward to learning more about the company moving forward. It does look like there are no questions coming from the audience. So I would just like to thank everyone for participating and all who are tuning in. Take care, everyone.

All right. Thank you.