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

Okay. Great. Welcome, everyone, to SVB Leerink Global Healthcare Conference. I'm Puneet Souda. I cover life science tools and diagnostics here. And it's my pleasure to be hosting a well-recognized company in our space, Bio-Techne. Chuck Kummeth, CEO, joining us from Bio-Techne today. Also Jim Hippel, CFO; and from -- Dave Clair from the Investor Relations. So welcome, guys. Pleasure to have you at our conference.

Thanks, Puneet.

Glad to be here. I wouldn't miss Leerink.

Thanks, Chuck. All right. So maybe just housekeeping items for those online. Please submit your questions through the website, and I'll cover them as we go through the conversation. So maybe just to set the stage, I mean, Bio-Techne is a unique company with 80% plus consumables and anyone that knows life science tools, that's absolutely important that helps you drive the mid-teens -- that's helping them drive mid-teens top line growth as well as high gross margins, 72%. Op margins that are reaching 40%, and maybe Jim can tell us if there's more upside to that. And a very unique profile in my view and great execution by the management team so far over the years, in fact, since Chuck joined Bio-Techne back in 2013. The company is synonymous with proteins and now proteomics, in my view, and expanding into cell and gene therapy consumables and to GMP proteins, more regulated stuff, more stickier stuff, where there's more annuity like revenue streams longer term.

So with that, Chuck, maybe at a high level, you put the $2 billion FY '26 target out there. Growth seems solid on the RUO proteins business. You have GMP proteins ramping up. So maybe walk us through how you get to that $2 billion and how sort of reachable is that. Maybe how -- again, it can -- or maybe how conservative is that now after with Wilson Wolf, which wasn't there when you announced this $2 billion target.

Sure. And I would agree, it's probably conservative now with Wilson Wolf for sure. We feel better about the $2 billion number now than we did about -- talking about a $1 billion 5 years ago, and we just crossed that hurdle. But historically, we have felt -- we tried to get the core back online, which we did years and years ago. And the model was always to get back to mid-single-digit growth kind of riding with the markets are growing, but we've been taking share and doing double-digit growth. And so our model, going forward, in our core is only 7% to get to $2 billion. That said, in our proteomics instrumentation, we need 15% plus, and we think we can do 17% in that model. And we've been doing better than that, as you know. Our spatial area has been -- it's low double digits right now, but historically, over 20%. We do see a 20%, 25% growth going forward in the next 4 to 5 years in our spatial area as well. And then you didn't mention our molecular diagnostics area. It's a liquid biopsy. We see that as a $1 billion platform. Exosomes are here to stay and becoming more and more recognized every day. We see a 50% grower there. And when you add on Asuragen on top of that, it's even more safe. And then lastly, as you mentioned, cell and gene therapy, which is really the big unknown and the big upside for us, and where Wilson Wolf now lives as well, and that's another 50% grower in our model. And we're growing 80% there as a category and about 180% last quarter in proteins alone. So we're well north of the target. We're well north on every one of the metrics we need to get to $2 billion. So kind of layering on top of that, to your point, Wilson Wolf is, 5 years from now, we think a $250 million revenue entity at probably 60% op margins. So it should put us at $2.25 billion or say it makes it $2 billion, safer to say, whatever you want to do, so.

That's great, Chuck. Let's talk a little bit about the quarter. Maybe, Jim. You grew 16% in FY 2Q December year-end here. Really a pleasant surprise given what was going on with Omicron in sort of the last 2 weeks. And we are hearing the sluggishness in the academic labs. A few of you -- some in the peer group that have more instrumentations are hearing about that. And as a result, that's getting reflected into their guide. But maybe tell us how sustainable is the momentum considering now GMP proteins in the business? How sustainable is that despite a tougher comp in the next 2 to 3 quarters?

Yes. We feel like the momentum that we've seen, if you look at it from a sequential perspective, is as strong as ever and will continue to be strong here in the back half of the year. Yes, the academic market is a bit softer for a lot of reasons we talked about during our earnings call. You've heard from the other companies and the same thing, whether it's Omicron based or whether it's budget delays, issues with NIH, et cetera, being approved by Congress. But those are all temporary, right? I mean, already Omicron is on its way down. Eventually a budget's got to get passed and there's all indications it will be a good one for funding of life sciences. So it's all temporary in nature. So we feel like the academic market will actually continue to improve throughout the remainder of -- the back half of last year where, particularly, you get into the remainder of the calendar year '22. And when you peel back some of our more project-related type products, whether it be certain instruments, whether it be our spatial biology, which is more project-based and also some large bulk orders and other reagents, when you peel those out, when you look at the underlying run rate of our day-to-day reagent sales into the academic market, it's actually -- it was stronger -- it was as strong in Q2 as it was in Q1 and the quarter before that. So we feel overall pretty good about the momentum. And what we're seeing here is relatively temporary.

But all net for the company, 19% for half 1, and this is on 2 quarters ago of a softened academic market, Omicron related, and it's going away fast. So they're going more upside going forward, which speaks to what we need to do to get -- we've talked about mid-single -- mid-double -- mid-teen growth for the year on top of '19 half 1, and we only need like 11-ish or so to really reach that number. So it's looking good for us, we think. And biopharma has been so hot, and so the momentum is so good. It's been washing out any softness in academia anyway, so.

Yes. Super helpful. On the GMP protein side, I mean it won't be right if I don't start selling gene therapy. That's obviously a fast-growing new market for you with the IL-7s, the IL-10s and the IL-15s. Maybe, Chuck, I mean, remind us the expectation for revenue 3 to 4 years out here for the GMP proteins business and cell and gene therapy business overall. Now you have Wilson Wolf there as well into that. So how should we think about that? And the demand is as strong here in the near term, but investors ask us, if -- is there any reason that any of this market can hit an air pocket? Just anything you're hearing from customers in terms of the trials or just -- the funding has grown a lot for cell and gene therapy over the last few years? Yes?

Yes, I think there's more risk of updrafts than air pockets. So we're looking -- 180% last quarter on top of 160% the quarter before. 6 months ago, a $20 million run rate, now to a $30 million run rate annualized. We've talked about roughly doubling the next couple 2, 3 years until we get into the J curve of things coming further into clinicals, right, and there's more demand for our larger orders. And we're exceeding those comments currently. So I think it's safe to say in 3 years, we should be $100-plus million there and mostly out of our factory, I would assume, by then because our headquarters can only do about $40 million annualized, and we can do roughly $200 million out of our new factory. And you'd need to get to year 5 or so to get to the full 200-ish, we think, because we do think we need to get further along with actual things coming out of the other end of the clinicals and the demand going into bigger orders. We have roughly 150 customers, tail is very long. We have roughly a dozen or so that are, I'd say, larger and a few of those are contracted now for clinicals and for larger orders later on and we're assuming they'll get through. But the upside is big. We know from scale already, they've got over 700 customers, and Wilson Wolf, over 800. So there's a long way to go here yet for getting more share into the current clinical set where a lot of these, we're not even in yet, right? So it's a bright future, it's just a matter is it going to be $100 million plus what in 3 years and then in 5 years, $200 million plus what. I mean it could be a lot more than that. It's just hard to know. I mean, the market is so embryonic. I think the air pocket comment, I think is probably better stressed around the overall market, how fast will it develop? How fast will we get to -- right, today, we have 3 products in the market, right? 3 drugs, cell therapies and when will it be 20? When will it be 50? Is it 3 years? Is it 5 years? Is it 10 years? That's what's going to gauge our major ramp, right? So...

The other comment I'd make on the air pocket, Puneet, would be, if there was a relatively few set of therapies or companies that were chasing this cell and gene therapy, then it's going to be more lumpy. There's more chances for an air pocket here or there. But we're talking about so many different therapies, so many different biotech companies developing therapy -- developing these therapies that there's the sheer number of them would suggest that statistically, the...

And let's not discount the growth we're seeing in regenerative medicine. It's another big area that's growing well for us, and we will be on top of all this. And there's a component of our growth that's part of that too. And we're going to be a big player in regenerative. And along with our small molecule, Tocris unit, it's -- we're seeing incredible growth out of Tocris because of regenerative medicine, as an example, so.

Yes. No, super helpful and thanks for clarifying this point. I agree with you. On ScaleReady, a question we get, are you spec-ed into any of the commercially approved drugs just yet? Or is it largely clinical?

No. All clinics. We're not in any -- we're not involved in the correction of any of the approved drugs.

Okay. Okay. No, that's right, really big opportunity here. Maybe on the Wilson Wolf deal, Chuck, that's a really interesting deal that you did here. Maybe tell us sort of how that came about and your confidence in Wilson Wolf reaching some of the numbers you've talked about. I think $225 million in revenue, $135 million EBITDA longer term. I think you outlined the business doing $50 million today. So maybe just what gives you confidence in reaching those targets and by when? Yes.

They had a record sales day yesterday. So they're ramping like you cannot believe. I don't think it will be that long for us to get to the first milestone, which is us taking 20% of the company for $250 million. So I've known John Wilson for roughly 14 years back to my days at Thermo Fisher. Everybody in the industry has tried to buy John over the years. As you know, when cell factories and cell line production really came into being roughly a decade ago, and you remember the T-flasks and the cell factories and all these, everybody got into it including Thermo. John came out with a bioreactor that was -- it allowed you to bring oxygen in from the outside through a one-way membrane and it allowed you to fill the flask up all the way completely. Otherwise, you have to leave about 90% vacant for air, for oxygen to feed the cells. And so this is a major, major improvement in production and yield, all right? So he had an incredible traction. He licensed that, moved that off to -- I think Corning and others are using it today. And he focused on the next generation there, which he calls G-Rex, seeing what was coming. He started working a decade ago with the major players and KOLs out there out of Baylor and UPAN and I mean, he is so well networked at all the leading KOLs that have saved lives already, and they've used G-Rex. G-Rex is really already more or less a de facto standard. And where it really -- where it really becomes important is for NK and for T cell therapies. T cells don't like bags. T cells like to remain near a hard surface and next to each other and connected and be fed and not have a lot of it -- and not be disturbed, perfect for the G-Rex platform. That, working alongside with these people looking for solutions, allowed him to get front and center and into all these early clinicals, right? So we stayed in touch as we built our franchise here. We wanted to work with John. We certainly tried to buy him as well, but we couldn't, nor could we buy Fresenius, so we've started a JV. So we have the leukapheresis instrument with Fresenius Kabi. We have our own proteins and all the things you know in our own workflow. We've talked about numerous times, but then we have the bioreactor with Wilson Wolf as well. So together -- we sell together. And we take home our own revenue, recognizing into our own entities from the market consortium. It's really not a -- it's not a dictionary versed JV, okay? So we all put an equal share to run the consortium and then we keep our own revenue. So this is really important though, because John and that team are able to -- the whole team were able to push our proteins. We're now trying to use that leverage to get our proteins embedded and bundled into the bioreactors of G-Rex and being looked at as -- and equalization studies to get into not only future clinicals, but to get into the ones that are currently going, all right? So that's kind of our plan. It's been -- starting to work. The deal then, it's been going great. We've been going at it a couple of years. And John came to me last fall and said, well, I want to talk about trying to move things up. I want to be focusing more of my time on R&D and next-generation and being in the field with the clinicians and doing what I do therapeutic-wise. And this company is getting bigger and bigger, and it's becoming more of an operating challenge and I'd like you guys to operate it. So could we -- it was always the intent that maybe you'd buy us out -- buy the JV out someday. We're a few years ahead of that, of course, but could you look at that? And I told him, quite frankly, you're growing so fast and you're so profitable, I don't think we can afford you especially out there. So if you want us to take over your baby and our teams are really well integrated already, then we got to figure out a way for us to make that work, get a piece of it now and hope that we can make that happen down the road. So we worked together on that, and that came -- we came up with an option to buy. So we paid money upfront for an option. And that option is to get to a Phase 1, which we get 20% of the company and we paid $250 million for that roughly. And he needs to be at either $92 million in revenue or $55 million EBITDA, and we think that will be in under a year and he'll be there. He'll probably hit the EBITDA line first, to be honest. And at that point, we're -- it's an option and it's a call and a put, so it's -- we're tied together. There's no way out. And from that point, Phase 2 is we figure 4 years down the line, 4 to 5, we'll take the rest of the company for $1 billion. And the goal there, the trigger point is $226 million in revenue or $136 million in EBITDA, so roughly again that 60% number. There has to be an endpoint, right? So we've given an extra 2 years. So at the end of 2027, if he hasn't achieved that $225 million or $136 million, we pay out at the same multiple -- revenue multiple, that we would have at the $226 million which is 4.4. So we basically are getting Wilson Wolf for 4.4x revenue.

And that's attractive.

It's going to disrupt a lot of comparable tables for the M&A guys around the world for a few years. So -- it's not without risk. It's why as we -- it's good for both of us. It lets him focus. We're helping operate the company already. We're helping -- he has to get audited results monthly now, financials. So we're helping him to get that next level, becoming a real business, a real company. And it's getting there because it's on a $50 million-plus run rate right now. And if I annualize off of yesterday's sales, it'd be much bigger. He's doing very well. Again, 800 customers. And he has over 20 that are doing over $1 million a year piece right now, just 20 of the 800. So this thing could explode long term, especially if he's right. If he's correct about cells being picky and not liking bags and you got the rest of the world chasing this with bag technology, it's going to fall in his lap, a lot of it. So -- and remember, at the end of the day, it's all about yield. And we've got a great solution here with our proteins and how we do things and how we're going to do media next. So we'll be able to do -- have a very high efficiency what you can get done on his size bioreactor compared to the competition, and especially as compared to bags. So...

Got it. And that's -- thanks for all that insight. Super helpful and congrats on all the progress there and the growth that you're seeing. So just given the time, let me switch over to the proteomic side of the business. As I said, Bio-Techne is synonymous with proteins. You guys have been leading the charge there for years. As you see the proteomics ecosystem growing, how do you see Bio-Techne positioned with -- on one side, you have the antibodies, on one side you have the ProteinSimple capabilities. Maybe just talk to us sort of what is sustainable -- maybe for Jim briefly, what is the sustainable Protein Sciences long-term sort of growth rate we should imagine boiling all of that down? But what are some of the areas where you will continue to be excited the most on the RUO proteins or the research side of the proteins business?

Why don't I take it first? It's more strategic than the numbers. So you got the big screeners out there, 10X Genomics and NanoString and others. And we're actually working with many of them. We're in the 100 -- 1 to 100 flex kind of area, right? So again, as you screen, you come down and then there's kind of a high cost per sample in that range. We don't really live and play there. So we live and play when you get down further. We are in the 10s of samples, we're the leader in Luminex, and we have lots of capabilities there. But as you get further down, we've got our Ella platform as well as our RNA scope with our spatial biology platforms in which we can go 1 to 10-ish right now. We'll get to 1 to 50, I think, within a year or so. Here, it's all about getting single cell resolution and really getting down to identifying and then measure that bite, that analyte that you're looking to become a biomarker, right? So -- and at some point, you've got to stop buoying the ocean and get down to real -- really good detail and measurable content, and that's what our instruments are known for. And we're known for -- you get a great result for the money, right? Our instruments are very good value for what you pay and very fast bench type and such. And with that, Jim may want to comment on the numbers here and our growth rates and where we see the adjacencies going, but they're all good stories.

Well, I think Chuck laid it out nicely early on in terms of our path to $2 billion. And at the end of the day, we see -- we only have our models to [indiscernible] to be a high single-digit grower, and we've been exceeding that. And so there's upside there, we think, for all the reasons Chuck just said. On the instrument side, same thing. We think, relatively conservative built into our model, 15% kind of CAGR going forward, and we've been doing much better than that the past couple of years or more. So those are kind of numbers behind it, and you meld those 2 together and that kind of gets you to where the segment is. But given the momentum that we're in with life science research overall, particularly in the biopharma side, but even on the academic side, those -- we feel pretty good about those growth rates being sustained for the foreseeable future.

Yes, we started seeing the lift before the pandemic hit, academic included. And I would say it's going through the pandemic, we started really reaching our tipping points. There's a cross in the chasm tipping point, data point here for our businesses. We're now at 2,500-plus Simple Western machines, 750 Ellas out there, well over 1,000 biologics. So these are now getting at points where it used to be we needed a demo to get a sale, now we're at -- 90% of our sales are without demos because they've already got a machine and they want 2 or 3 more. So it's -- we're getting to that point. And even on top of all that, as we measure our share positions, we don't think we're beyond 10% in most of our -- most of the ponds we live in, maybe 15% on Simple Western. But again, I said 2,500 machines, we've got another 15,000 to go probably. It will take years. And the demand just keeps increasing and the applications keep growing. We're seeing integration now into cell and gene therapy, regenerative medicine, types of QC testing, things that we didn't expect them to be used in. Even biopharma, even going back to doing Westerns, which they kind of walked away from it because they're ugly and messy, and they started using their mass specs instead, well, this is a better way to do it and cheaper, and they can free up a mass spec. So we're -- we're seeing growth on many, many new fronts, which is really driving the whole package of what you're seeing from our, call it, proteomics franchise.

That's important point, Chuck, given the instrument side. I'll just add to that too on the reagent side, probably not stressing it enough that not only now is the overall market backdrop very strong, but we're taking share. I mean, we feel that we're taking share in protein. We're taking share in antibodies. And I think it's our execution, our digital strategies, our commercial strategies that we've been working on tirelessly for the past 7 to 8 years, we're seeing the fruit from that labor. And continuing to see -- continuing to take share. So it's a strong market, and we're performing exceedingly well versus our peers.

We are -- I also want to put a plug in here for the team. We're attracting a lot of talent. This is a company that 10 years ago, nobody heard about. And we're on the rise. We're tracking very, very good senior-level executives. When I started here, it was hard to get people to come here because nobody ever heard of us. It's not like that anymore. And we've always been known as a great company for customer support with our proteins, our antibodies. But we extended that now with our brand and our website, and our digital experience and customers like working with Bio-Techne because they know they're going to get -- they're not leaving a message, they're not talking to robots. They're talking to real scientists on the line. We invest in that customer touch and we care about our culture. We put a lot into our HR as you know, globally. You cannot grow as fast as we are without having a big focus on your HR and the people side of everything and what we're about and about the science and about saving lives and about ESG and being about equity. It all matters here. Our headcount here, we're over 50% female in this company as an example. Our -- we're 70% female on supervisors and higher. So it's pretty remarkable. We're 25% Chinese in our company. And so we've scored big. We're starting to get a lot of awards. You may have noticed we got the Inc. award. We got the Forbes award for Best Employer. So we're starting to get noticed, and I feel as proud about that for the team as I do about our technical successes.

It's fabulous, Chuck. Let me switch gears to diagnostics. That's an important segment for you, obviously, liquid biopsy with Exosome Diagnostics. You have a strong pipeline and you have a test, EPI test in the marketplace. Maybe just give us a download on the progress that you are seeing in terms of sort of reaching back out to the urologist -- reaching back -- the reps reaching out back to the urologist recovery in that business? And maybe just briefly on Asuragen too. I mean I saw Matt leaving for another company. And so how are you thinking about leadership and positioning in -- leadership in diagnostics?

Well, Matt had been here at Asuragen for quite a while, but not as long as Lynne had. Lynne's a runner up. And Lynne was running it years ago, when we tried to buy them the first time. So we're happy to have Lynne here running things. Probably one of the better decisions I've made in my career is buying Asuragen to be able to bolt on to Exosome and put serious operators in charge of our liquid biopsy program. So this Asuragen team knows what they're doing. And they know it in the commercial side, the R&D side, the operations side, the strategic side. Lynne is personally in charge of running the deal on ExoTRU right now, which we're very -- we've made a lot of progress on. And I think it's imminent, but we can't say any yet. We're never done or done. But a phenomenal job. Tom Copa, who used to be Head of Commercial at Luminex. Great guy and he's taken the bull by the horns commercially. We're above pre-pandemic test rates now and the numbers are growing steadily. They've continued since our earnings call. It's been really good to watch. Clearly, I think we see patients going back to see urologists, but it's more than that. I think we're starting to work better on what the message should be. It's not as much about talk -- trying to convince urologists to walk away from biopsy revenue. It's more about this test will actually help you do more, biopsy, right? Because you're going to be biopsy revenue where it matters with a high EPI score. This patient needs to have a biopsy, needs work done. And so that's resonating well. We've kind of changed our whole focus with how we deal with our urologist customers, and it's working.

It convinces patients that should get a biopsy to actually get one.

Yes. I think the data point for us was we found out that in the old way it was done, off a PSA when the urologists would tell me I had to come in for the biopsy, 60% of the time, they didn't show up. So when you get the bad PSA score and you get a high EPI score, you're showing up, you know you need it. And that was the emphasis of our Cal Ripken, Jr. campaign a little over a year ago, which we're looking at renewing as well again. Cal would like to continue to help because Cal believes that we really helped him a lot, so.

That's great. Jim, just last one on -- maybe for you, and Chuck, you too. As in capital deployment, $400 million buyback, a slight change in the approach there. Maybe just tell us a little bit about what you're seeing out there in the -- is this a reflection of what you're seeing out there in the M&A funnel? Obviously, Wilson Wolf was a really good deal. But I mean, overall, how is the funnel looking? What valuation expectations are there? And how did you come to sort of this decision of buyback?

I'll touch on the capital allocation, I'll let Chuck talk about the funnel if that's okay. So the reality is there's 3 factors I'd say that came together in terms of the $400 million buyback. First and foremost, we had a minor buyback program in place prior to that, which we used intermittently. And that -- we used up that approval. So we needed a new one in place just to have at our fingertips when we wanted to exercise that. So that's number one. Number two, we are, at the end of the last quarter, pretty much net debt 0. And we have a great credit line, a lot of power we can use, but meanwhile, cash will continue to build. So I'd like to see to put that cash -- continue to put that cash to work until we can execute some more M&A and why not use that cash to buy back stock. And then the third item, of course, is there's been a pullback in the market as we've all suffered through here the last 6 weeks. And so it's also an opportune time to take advantage of that. So it's really just those 3 factors. But in terms of the size of the authorization, the intention of it, the idea here was not to send a message that we're moving away from M&A or that's not our #1 priority, it still is. But make the authorization big enough that it's meaningful and something that we could use our own cash flow for it to basically buy back stock for the upcoming 1, 1.5 years and not necessarily take away any of our dry powder with regards to leverage. So that's kind of the...

Well, historically, we've been authorized by the Board to go all the way to even 4x even if we wanted to. We've never been beyond 2. So we had a good safe extra turn or so to use, which is roughly 400. So that's kind of the guideline that we could do this, and probably still not really affect our funnel or the way we usually do M&A. We do mostly private deals. Prices have just been too high in the public markets on the process auctions and maybe it will change now, but we still think we have plenty of firepower to do more M&A. Our funnel's no different, no worse than it's ever been, and we're active in deals right now. So you just never know it, so.

That's fabulous. We are past the time. Thank you again, Jim, Chuck. This is -- never enough time to talk about all the exciting things that Bio-Techne is involved with. But wonderful having you at our conference and have a good rest of the day, guys.

Thanks a lot, Puneet. Good talking to you.

Thank you.