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

Okay. Welcome back, everyone, to the Life Sciences and Diagnostics track for the 2021 Stifel Healthcare Conference. Up with us next is Bio-Techne, and we're happy to have CFO, Jim Hippel, with us. Jim, thanks for joining us today.

Yes, Dan. Thanks for having me.

My pleasure. Maybe just to start, Jim, can you just touch on the key takeaways coming out of the quarter, the end market conditions that you're looking at and then just the supply chain concerns have been asked on every tools call this quarter. They were asked on yours. It doesn't sound like really across the board, there are too many companies that are dealing with anything too significant. But it would be great just to sort of hear your thought there, given that we do get reminded of it every day.

Yes, sure. No problem. Well, yes, I mean, as you heard from our call and you've been hearing from many folks in our space, I mean, the end markets are strong. Strongest a science is great life science tools, especially in biopharma. I mean biopharma is really hot. We had 25% growth globally in biopharma last quarter. And when you look at it from a global perspective, it's everywhere. I mean U.S., Europe, both up 20% for us. In China, up 50%, which was a record year -- a record growth quarter for us for China on what is now, by far, the biggest base. And we talked about on the call, China for the first time hit an annualized figure of $100 million revenue this past quarter. Quite remarkable, considering 8 years ago, it was under 20, right? So just no seem to be stopped in China. So it's widespread globally. It's strong in both biopharma and academic although academic took a little bit of a pause. I'm sure we'll talk about that. But biopharma for sure is red hot. And yes, so that's all going very well. Supply chain, obviously, something we're monitoring very closely. The good news for us is for 80% of our portfolio, that being reagents and other consumables, the material content is very low in those products. So it's not as much of a supply chain concern or constraint. Clearly, in our instruments is where we're monitoring the closest and there are certain components within those that are challenged. And it could be something as silly as the paint type that's used in the box, the outer shell of the instrument or a mundane circuit board that a certain line might use. And we're having issues here and there with that kind of stuff, but we've managed to get work around the past couple of quarters, and we're continuing to do that this quarter as well. We're not, at this point, seeing as any kind of a material problem for the quarter to serving our customers.

Okay. That China growth rate you mentioned 50%. I mean there's obviously a COVID component to that, but also demands elevated as well. So where are you doing best in China? And I'll -- embedded in that question is, I guess, an outlook question in terms of what should be the growth rate that we should thinking about -- think about going forward given that it just does seem like you're in a materially better position in that region than maybe you were a couple of years ago?

I guess I'll say, first of all, the COVID thing with China, I would argue that there's not a COVID tailwind there for us or an easy comp. I mean, we grew 20% last year in China. So -- it was a truly a tremendous quarter for them now. Our folks in China are careful to remind us not to expect 50% every quarter going forward. But you got to look at the broad -- the bigger story and the fact is we're continuing to maintain 20% growth in that region on an ever-increasing base. And based on what I've seen, we continue to outbeat our peers in China as well with regards to our growth rate. Why is that? I think we're very well positioned with our products. Generally speaking, we have very little to no local competition in any of our products there. Obviously, life science funding is still very strong in China. And at some point, you got to hand it to the team out there. And we've got a fantastic team led by a fantastic leader, [Indiscernible] And our attrition in China has always been relatively low compared to what you hear about in China. And with the attrition rates we're having in the U.S. and Europe and everywhere right now, China by far has the lowest attrition for us. So that -- that as a company. So that says a lot about that team. And in China, it's very much a relationship sale. And you've got just a great team that has a lot of key relationships and you just know how to sell our products. So at some point, you got to hand to the team that we have there. And for us, even though we're at a $100 million run rate now, with China, we fully -- you could argue we haven't necessarily booked this into any of our long-term guidance. But you could argue that at some point, China is -- the size of the China business could or should be the size of the U.S. someday. So there's still a long ways to go there. We're still -- $100 million is not in terms of what China can be.

Okay. Okay. And then maybe on the biopharma side, GMP proteins. I mean, you guys have spent a lot of time over the last year or so talking about that facility, what you're doing there. Can I just ask a question about menu buildout and what's needed there to meet demand? And I'm not going to ask you to fire off a bunch of cytokine means.

I can't do that.

So I'll save you that. But I am just curious in terms of the outlook for doubling revenues over the next couple of years, how much that's predicated on having a few key cytokines or whatever proteins of interest you were making today. And then what it is that's needed 3 years down the road in terms of broadening that menu? Are there a very specific set that pharma companies are coming to you today and asking for? And that happens to be $1 million, $2 million, $3 million, $4 million worth? Or is it kind of piecemeal and making yourself hole down the road really involves a broader menu?

Yes. So I'll try to explain as best I can.

Yes. I mean take your best shot. I'm not going to...

So bottom line is that any GMP protein that's requested to be made, we're making it. And because we're the best in the business at making difficult if it happened to be a difficult to make protein. Right now, our menu, given on that inbound request, our menu of GMP proteins today is 50 GMP proteins. Now on the one hand, that may sound like a lot. But keep in mind, we make -- there's over 12,000 proteins we make in-house. So 50 is really nothing. And with -- right now, we've been making these proteins and growing at 100% within our kind of GMP [ cordon off ] area that we have here in Minneapolis. We didn't wait we were almost out of capacity in Minneapolis to start to build this new GMP factory in St. Paul. We've started well in advance. And so even though we are starting to go live now this quarter with commercial ready-to-make proteins produce out of that factory, new factory, we could still double our GMP output within our existing Minneapolis factory. So there's no issues that we see not being able to service our customers. We're transitioning roughly 3 proteins at a time over that new factory based off the highest runners and where we see the most growth and most potential for scale. But we don't see the number of proteins as being a constraint at all with regard to us being able to meet our growth objectives.

Okay. And just on this idea that there are large orders waiting in the wings or sitting there as a potential business. Do you anticipate in a year or 2's time getting some of these $5 million to $10 million lots? Chuck was pretty upfront about seeing some really chunky business when it comes to some of these individual proteins that large pharmas need in size and that there aren't too many competitors or competitors for you, the suppliers for them that can deliver that.

Yes. I mean you asked probably 5 different people in our leadership team in the time frame you might get 5 different answers because kind of like when COVID will end, no one really knows, right? I mean -- and we're trying to get smarter about it, and there are some things we're doing in-house here to study the market better and understand the phasing of this and the timing of this. But at the end of the day, most of the GMP proteins we're selling today are in either very early phase, clinicals or even in preclinicals. And we're doubling our business every year just off that. So that gives you a sense of how well we're getting seeded in the next, call it, the next generation, if you want to say, of cell and gene therapies. It's not to say we're not working on getting into phases that are further along, but it's a little harder to transplant someone out and put your proteins in. It's really predicated on how fast these therapies get through the various phases and make it to commercialization. And only a small percentage, probably will. But there are literally hundreds and now approaching thousands of therapies out there. And we're finding for everyone that you hear about that's in the preclinical, there's 10 more in the pipeline that are going through phases of research to become clinical. So it's still on the tip of the spear with regard to the potential. And we're trying to -- we're getting ourselves seeded in all of those. So in terms of when we start seeing the big chunky $5 million, $10 million, $15 million annual orders, I can make an argument that it's still 3 to 4 years away depending on how long it takes these to get through. But to the extent, we're able to successfully becoming either a second source or a primary source on a trial that's further along, and we're working on those actively, then that's with the potential for that to come in even sooner happens, whether it's a couple of years out or so. In the meantime, we fully expect to continue to double our business every year up until that point. And then once you hit that inflection point of some of these therapies becoming commercialized, and then it becomes exponential from there, right? Because our entire GMP protein business today is a run rate of just north of, say, $20 million. So when you talk about single orders, that could be that size 3 or 4 years from now, that -- it's pretty massive.

Yes. And so that's another way of saying or just a thought that you could have along those lines is that there's nothing about the near-term doubling of that business that assumes that you're going to be in a position to take these really sizable orders 1 to 2 years from now. If that happens, that's sort of added incremental revenue in the 3- to 4-year time frame.

Yes. I mean I understand your question. I mean, yes, I mean the reality is we are building -- people -- we've got a lot of questions around capacity and capacity concerns. And we feel like we've built ahead of that wave. Now that being said, we're trying to dig into it deeper because we want to make sure that, that still really is the case. And -- at what point do we need to start thinking about expanding capacity even from there. If you wait until you have $150 million in that facility, it might be 28 and now that we will serve your customers. So we're doing some of the analysis now to figure out a year or 2 from now, do we have to start thinking then about maybe even expanding more? We don't know yet.

What about your competitors? I mean I'm sure they're looking at what you're doing and realizing that you might have had a good idea here. Are you seeing Miltenyi and some of these other players that you run in to do a similar thing?

Well, we hear. We hear that some of our key competitors in research proteins, and there's only a few of them. So you can imagine who they are, are in the process or works of adding the GMP's dedicated facility or expanding upon one. But it's not like it's anything that's -- we're hearing about head-to-head price war-type competition. I mean, at the end of the day, if you think about it big picture, again, our R&D systems brand proteins are the gold standard for quality because of their bioactivity and because their lot-to-lot consistency. And if that's important in research, you can only imagine how important those 2 aspects are in production and especially the lot-to-lot consistency and that's actually the most difficult hurdle to overcome when -- in scaling up these proteins, I believe. So -- and we're proving that we're doing it very well. And that's why we've gone through this long verification process within the factory to show that we can do it. And we have shown that with our first 3 proteins.

Okay. Maybe moving to protein analysis. The biologics business just remains on a [ tear ] I think it was up 50% last quarter. What are the keys there? How much of that adoption is just uptake in a really fast-growing market versus some technology improvements, some software improvements that you guys have been able to make? How does that growth really kind of manifest itself and then the obvious follow-on would be our business is up that much, what is the run rate there? I mean you've given the outlook at the Analyst Day, I'd love to hear how you get from here to your out-year target?

Yes. I think it's a little bit of both of what you've talked -- said about in terms of drivers. I mean, clearly, we talked about biopharma market being hot. And whether it's large molecule biologics or whether it's in cell and gene therapy, there's just more and more online coming on. In biopharma, it is also moving more and more to CDMOs would have to start up their own lines and they need new QC tools to support those lines. And that's where we're winning is in all these new lines. It's not so much that we're replacing anything out there that exists today. We're winning on the new lines. And -- my understanding is because of our relatively low cost and ease of use is how we win. And so we're capturing share in the CDMO market. We're capturing share in new bioproduction lines and the whole cell and gene therapy market. We're finding that our Maurice tool in particular, is being used as a QC tool in the back end, but it's also being used as part of -- initial part of the process to measure the low -- the viral vector load and the capsids that go into the process of making cell and gene therapy. So -- some of our customers are secret about what they're using their instruments for, but to the extent we can understand and learn and we also know what our customers are working on, so we can kind of put 2 and 2 together. The use for our Maurice instrument is expanding as well. As you know, we've announced about a year ago now, we got the Empower Software that allows for more LiMS connection, and that has clearly been a driver. We put it this way. It took away 1 hurdle that we have with regards to this being a useful tool, a QC tool in bioproduction. And that was probably the biggest hurdle, and that's now removed. And now it's seen as a very favorable instrument in terms of speed, cost and -- speed and cost essentially. So...

Okay. Yes. On the cell and gene side, Chuck mentioned Simple Western seeing some uptake in those markets, too. Is that -- I mean that's the first time I remember him talking about that product in those markets as an incremental opportunity that you think can be meaningful and potentially reduce the growth rate a little bit?

No question. I mean -- so Simple Western, I don't understand technically how, but Simple Western can also be used to monitor the -- I have it written down here because it's a technical term. But in terms of understanding the full versus empty AAVs to process. So I know the Simple Western tool is also used for that. Bottom line is that we are seeing tremendous growth in our Simple Western and biologics product lines among cell and gene therapy customers. And we don't know exactly every which way they're using them in the process, but they clearly are because that's been a big growth driver for those instruments. It's probably what's given the mill added juice in terms of higher growth rates than we historically have seen. And yes, you bring up a good point in terms of -- we historically have talked about our cell and gene therapy franchises being the business unit that we formerly have within our Protein Sciences segment, which focuses on the proteins, the quad B technology and the B-MoGen nonviral gene-editing technology. But the reality is, is that many pieces of our portfolio, including most of our instruments, including Simple Plex, in fact, even ACD technology is being used within cell and gene therapy to understand the gene expression after they've actually done the viral gene editing. So we're working now [Indiscernible] been how to make sure that we can expand our solutions view to customers when we approach them. And it's not just about proteins or 2 or 3 things. There's multiple ways we can help our customers in the cell and gene therapy workflow. And so yes, it's contributing to growth to almost every piece of our Protein Sciences and ACD platforms.

Yes. Another thing that, Chuck, if I'm remembering correctly that he mentioned on the call was just the selling synergies that are starting to emerge for these different businesses. I mean, is that -- are customers starting to see that? Or do you feel like that's the effort for 2022 when you think about the hiring that you need to do and just getting people to open their eyes a little bit on how the portfolio can best be used?

Yes. I mean the reality is that in some ways, the markets and the customers are ahead of us even. I mean it's happening without us even putting a large centralized effort on it. I mean the reality is our reps that sell instruments, our reps that sell ACD, our reps that sell the reagents are all having success in these accounts. And so we've got a week-long strategy meeting a couple of weeks ago, and it was hot on the topic is so okay, what can we do to actually maximize this now to have a more cohesive strategy and effort when we go to these customers in terms of our offering so that we're making sure we maximize the full potential. So I think that's still an upside for us because it's not something we've actively done, but we're looking to do. The thing I'll mention about synergies, they mean not as much cell and gene therapy related, but just in general. We talk about our digital solutions strategy. And that -- we talk about it because it's -- everyone likes to talk about digitalization, and it's a sexy thing to talk about now, but we have really been -- it's been a really a key driver to our success, particularly in our core portfolio and more specifically around antibodies. And we started this journey 7, 8 years ago when we first purchased Novus because they were well ahead of us in that arena. It was almost a reverse integration, as you know, with regards to using technology as a method for a channel to our customers. And we continue to have a great success there. We even have hired some data stations, mathematicians, et cetera, that are dedicated to understanding looking at the Internet, look and who's buying our product who's not in this finer product, but more importantly, who is on our website looking at product and understanding what research they might be working on and kind of providing an Amazon-like model to those customers. I mean what's cool, our products, particularly on the reagent side, is when someone is looking for a particular antibody or protein, we can check -- pretty narrowly figure out what kind of research they're working on. And from that, look at all of our other products and our portfolio as to what can aid in that research and make it available to them while they're on their online experience. So we've seen just tremendous -- we think there's a tight-tight correlation between the number of daily users. We have people getting to our website, how much time they spend on our website and the uptake we see in our reagents business, in particular, as a result of that. So it's pulling in instruments, it's pulling in our whole portfolio as we go to 1 Bio-Techne website.

Yes. Let me finish on the instrument side, but certainly finish on the Simple Western side, and I'll put you on the spot a little bit on this one. When I think about the different product sets that you have and the opportunity that's in front of Simple Western, which is huge. I mean, I think you're 15% penetrated there or thereabouts. The competition that you have, which seems to be next to nothing. That business seems to me to be the 1 that has the best chance to outkick the range that you've been in historically and the range that you've kind of put out in your outlook. I think it's 15%, 20%. I think it's been in that -- it's been in that range in the past. I think that's the range for the future. Would you agree with that comment? I mean is there another one that you have in mind? Or would you just -- would you agree with the idea that like more likely than not, you can do 20% in a bunch of quarters because you have in the past?

We have, especially in the last 6 quarters. I mean, Simple Western has just taken off. And I think part of that has been a, call it, a COVID-inspired realization of our customers as to the true value it brings, especially on the academic side, who are the most resistant to change and going to automation route. When now all of a sudden, academics couldn't spend full time in their labs, they can only spend some hours or days in the labs. They're seeing that Simple Western is going away, they can get their jobs done. And once you get hooked on it, you can never go back to the old way, right? So yes, I mean, I think big picture wise, too, if you think about our 3 platforms that you mentioned there, biologics is still the biggest, although Simple Western knocking on its door. In terms of market size, we've always seen Simple Western and even our Simple Plex platform in a much bigger potential overall market. And what's really been cool about Simple Western we're finding is that we think it's actually expanding with Simple Western -- the Western blot market. We are hearing from customers on the biopharma side, that they stopped using Western blot in certain workflows, certain applications years ago because it's messy and accurate, time-consuming, et cetera, et cetera. And now because they have the Simple Western tool, they're going back to it. I don't want to necessarily say it's all mass spec. But a specific example I was given to us is where they went to mass spec because they couldn't rely on Western blot for their analysis anymore. And now they're going back to Western blot because it was like hitting a nap with a hammer. And they didn't need a hammer. They just need a flyswatter, but the flyswatter that would work, right? So we actually think that our tools in Simple Western are helping expand that market. So it's a long way of saying we're trying to not -- we're obviously a much bigger business in Simple Western than we were 5, 6 years ago. And like China, our growth rates are faster now than they ever were even on a higher base. But as you mentioned, we are still very low penetrated. So yes, I think there's upside potential in Simple Western.

Sure. How about on ACD, a bit of a step down in the past quarter. It seemed like that was to your point before on academic demand and some of the choppiness that you've seen there. It seemed like that was the reason. Was that the reason that you saw that step down? And if you think that 3Q -- calendar 3Q was -- is the scariest quarter of the year for academics, should that imply that, that business comes back nicely in the fourth quarter and calendar 4Q?

Yes. I mean we certainly hope so. And if not, we'll dive in a figure how to change it because there's nothing in the spatial market that's slowing down. And there's no negativity about our products and our technology in the market. So I think there's 3 things, 2 of 3 you mentioned, I believe, but 1 is, of course, the academic being squirely in Q3. And no one fully understands why I was looking at the NIH outflows the other day and the NIH outflows were all over the place. They were up 10% 1 month down 3% another month. So even though the overall funding is strong, how the release of those funds are irregular and how quickly that -- those release of funds actually make it down to the consumable streams, et cetera, there could be a lag there as well. And of course, we talked about the vacations. There's no doubt that people are not just academics, but everyone can take a vacation was taking vacations this summer. So we believe that's part of it and knock on wood here, in the second half of this quarter, we're starting to -- it looks like it's starting to see it come back. So hopefully that's a temporary thing. It should be. There's no macro reason why academic should be overly soft. The other piece of this is in fairness for ACD, it was the 1 business unit we had -- that had the most difficult comp. I mean, we grew 10% as a company last year in Q1. ACD grew were 34%, right? So they, by far, grew faster than anyone else a year ago and had the most difficult comp. If you actually look at it on a 2-year CAGR basis, they were still over 20% CAGR. So not falling off the cliff by any means. And the third item I'll mention is an execution issue. And we've been talking about for a number of quarters now with regards to we're behind our hiring plan. And at some point, it could catch up to us. And to the extent that we're behind our hiring plan or the attrition has been tough, commercially, it's been definitely hit hardest in our ACD business. We had 6 regions that were without a rep last quarter. So very, very tough when you're down 6 reps in key regions. And that piece of it may not fully rectify itself in 1 quarter, clearly. We've made progress on filling those positions this quarter. We're not 100% there yet. And there's obviously a lag time to getting those reps up and running. So -- if there's -- we definitely expect ACD to improve this quarter versus last quarter in terms of growth rates. Whether it back to our full expectation right away this quarter remains to be seen because of those reasons.

Yes. I mean it seems like it's a seller's market in terms of good spatial talent these days. So the hiring that you expect to do, that feels like it's going to take the course -- it's going to be done over the course of 2022, right? I mean I don't imagine 1 or 2 quarters in, you have everybody you need. Is that right?

Yes. We'll see. I mean I'll tell you this, we're -- that won't -- we've felt we've filled those positions already in the first half. So -- another piece of this, this isn't just ACD, but -- and it's not just us, it's everywhere, is the leaky bucket. And we've talked about a tough hiring environment. But in fairness, it's a tougher retention environment. We've actually -- if you actually look at our gross hiring, we've been doing pretty good at it. It's the retention side of things, particularly with the age group under 30, experience under 5 years. COVID, in particular, changed their mindset a lot with regards to dedication to 1 company and longevity, et cetera. And they're the ones that are hopping around a lot from company to company, and that's been a bit of the leaky bucket that we're trying to plug.

Yes. When we did some meetings over the summer, Chuck actually made the comment that he thought that the hiring environment was the biggest headwind to growth that you guys had right now. Would you still agree with that?

I think, particularly long term, yes. I mean, it's the technical positions that are the hardest to fill, and that impacts R&D and to a lesser extent, but also it impacts commercial because our commercial folks are fairly technical. And to the extent that's impacting R&D, it's not going to show up in our numbers this quarter or maybe even this year, but it's a threat to our pipelines in the future. So getting those filled and getting those programs back on schedule is definitely important to our longer-term growth rate.

Let me finish on a strategy question. One specific to spatial and then one more broad. How interested are you in adding an instrument, a spatial instrument to the portfolio, just given that, that does seem to be an area where you're interested in expanding in general? And then on the M&A side, I mean, you and Chuck are pretty upfront about the fact that you are still consolidating and trying to scale up the business. Where would we be best served to look in terms of assets that might be most interesting for you going forward?

Yes. I mean specifically to ACD and instrumentation, clearly, that would be of interest to us, although honestly, of most interest to us is being instrument-agnostic and partnering with the existing instrument makers that are out there and getting our assays readily accessible to those instruments. That's actually the most ideal, and we're definitely pursuing those avenues. But to the extent having our own instrument would just speed up the ramp of adoption is something that we are interested both on the RUO side and the clinical side. So the reality is, though, is that you got to make sure it's the right instrument. Otherwise, it could do overall harm to your -- the perception of your solution. So first strategy, I'd say, is partner and then a backstop is acquisition if we find the right one. And we're always looking, and we're [ updating ] different technologies out there, and we'll see what comes of that. With regards to overall M&A, I mean I think it's a number of areas, single cell analysis, spatial areas still in the spatial biology, new ways of doing flow cytometry, cell and gene therapy, of course, there's all kinds of different pieces of that work for, particularly as those therapies expand. So those are the obvious areas. I think it's easier to kind of say what is less likely to be a target. And I would say that would be on a pure diagnostics side. I think we've got, we think, the best platform -- technology platform in Exosome. And now with the surgeon, we feel like we've got amazing well-skilled experienced team to make the most of that technology. So that would probably be the recycle area of any M&A would be my guess.

Okay. Last one for you, I'll let you answer it as briefly as you want to since we're down at the bottom of the hour here. On ExosomeDx, I mean, going into 2022, calendar '22, how do you feel about that business finally kind of achieving launch?

Well, better than we ever have. And I mean you know Dan, very well, that poor business has been slammed in the face ever since we bought it first with the additional year it took to get Medicare approval. And then on the heels of getting that up, of course, COVID hit, right? So it hasn't really had a fair shot at really showing what it can do. We're seeing some very encouraging signs here as of late with regards to the ramp. I know for myself getting into a doctor much less a follow-up appointment months and months in between. So there's no question people are returning back to their doctors. We're seeing it in our -- even in our OEM Diagnostics business, the uptick in the control side. So it feels like the OEM instrument makers are back, back in the game again. So if what the cards are Exo and now with the new management in place, they already are looking for seeing opportunities that perhaps we didn't see before of how to accelerate the business. So our excitement about it, frankly, is as high as it's ever been, especially now that we see more of a tailwind environment versus a headwind environment going forward.

Yes. Okay. Good stuff. Jim, thank you. Appreciate you spending some time. If I don't talk to you before then, enjoy the Thanksgiving holiday.

You too, Dan. Thanks.

Take care.

You, too.