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

Good morning, everyone. I'm Stephanie Yan from the Life Science Tools and Diagnostics team at Cowen. It is my pleasure to introduce Bio-Techne Corporation to our conference. I'll now pass it over to Jim Hippel, CFO, for the presentation.

Thank you, Stephanie. It's great to be here. Thanks for having us. Before we begin, real quickly, I'd like to mention the safe harbor cautionary statements. They will apply probably my presentation here today, and I encourage you to read these in detail in the Investors section of our website. I will begin with a high-level overview of our company. Bio-Techne has been -- it's basically a 40-year-old life sciences tools company with mostly comprised of a kind of consumable recurring revenue stream. Our primary products have been of our core business for most of this time period. It has been the world leading provider of proteins, antibodies and immunoassay. We consider ourselves the picks-and-shovels of life science research, and we basically sell to every life science researcher in the world with over 1 million customers. We have thousands of products that we provide to those researchers and not any one research product consume more than $2 million of our annual revenue. 9 years ago, under Chuck Kummeth's leadership, the company went through quite a transformation to reinvigorate the growth within its core products, but also to accelerate the growth by leveraging and expanding that portfolio into much bigger markets. Now this has included adding a novel instrument line for protein analysis as well as extending our assay portfolio into genomics for uses in spatial biology, liquid biopsy and in other lipid diagnostic applications. Our growth strategy has not only been product portfolio based but also based on geographic expansion and end-market focus, with a focus on expanding our non-U.S. revenue base and customer base and also a focus on the pharma biotech subsector given the fact that they aren't as dependent on the government funding. And as you can see here on the left-hand side, our pharma biotech end market now represents over 40% of our customers, nearly double the size of our academic end market. 9 years ago, those 2 pieces of the pie would have been about the same side. And on the right-hand side, you can see that the non-U.S. revenue now comprises almost 40% of our total revenue, with Asia, by far, growing the fastest of the 3 areas over the past 9 years, particularly as it pertains to China. China was just -- it was under $20 million of revenue 9 years ago and just crossed the $100 million annualized revenue mark last few quarters. So fantastic growth there. Our growth strategy has been executed over the past 9 years via kind of 4 main pillars. We talked about the geographic expansion that's occurred in Asia as well as Europe, particularly in China, but we still believe China is very much in the early days and the early innings of its growth trajectory. And over the next 10 years, we believe India will be a fast follower of China and be another area for hyper growth region for us. Within core product innovation, we are a company that sells tens of thousands, makes tens of thousands of products. You need to have a prioritization around what new products you're going to make. We have a very robust and formalized prioritization process within our company. And an example of the output from that, if you were to go back 9 years ago, as a company, we produced roughly 2,200 new products every year. And those 2,200 new products will generate roughly $1 million of additional revenue growth in the first year of launch. Fast-forward 9 years to today, we produce roughly 1,500 new products, so about 1/3 less, but those 1,500 new products generate well north of $10 million of new annual revenue in their first year of launch. In addition to our organic innovation and prioritization, of course, we've used our great cash flow and leveraged our balance sheet for bolt-on M&A and market expansion. As was -- had been described, and we'll continue to talk about with regards to our instrument portfolio, getting the spatial biology, genomics as well as Molecular Diagnostics. Then finally, you can't transform a 40-year-old company and simulate more than 15 acquisitions over a period of 9 years without a strong focus on culture. And our Bio-Techne Epic culture really focuses on being one Bio-Techne on how we execute, recruiting the top of talent and attracting top talent to our organization and now even more important recently, making sure we retain the top talent within our organization. Our culture has been embedded with environmental, social and governance qualities long before these considerations became a more mainstream with investors and customers and regulators. Some highlights I will point out is that our manufacturing process has a very low carbon footprint. So we focus on lower water and energy consumption as well as lower waste management, especially as it pertains to packaging materials. On the social front, more than 50% of our workforce, including scientists are women, and more than 30% of our workforce comes from minorities. And finally, on governance, we've got a very balanced Board of scientific and business expertise. We've had some recent retirees that have been replaced by women Board members who now represent 20% of our total Board, and we are led by an independent chair. The strong execution of our strategy by our people over the past 9 years has been demonstrated by an increase in organic growth, adjusted operating income and cash flow every year since Chuck became CEO 9 years ago. The notable exception would be on revenue for fiscal year '20 and '21 with the COVID impact -- the COVID interruption in 2020 and then the rapid rebound in '21. But when you normalize those 2 years, the trajectory is still intact. Operationally, we are organized under 2 reporting segments: Protein Sciences and Diagnostics and Genomics. And within them, we have 5 major product categories. Starting with Protein Sciences. We have our proteomic research reagents. This is the home of our proteins and our antibodies. And you can see the brands below that, that represents those product categories. Now the primary brand being the R&D Systems, the full real brand that represents quality for our company. Next to that, you see our proteomic analytic tools. This is where our assays and instruments reside. And you can see there, our 2 primary brands are our R&D Systems brand, which is the gold standard for immunoassays, and then the ProteinSimple brand for our instruments. Our instruments simplify the manual process. Moving on to Diagnostics and Genomics. We have our Diagnostics Reagents business, mostly an OEM business, and sells to practically every -- now, how we think about it is the picks-and-shovels business to the molecular diagnostic industry essentially, selling to every diagnostic instrument maker in the world. I mentioned the margin OEM business, but we do have some third-party sales. We sell into the R&D Systems brand. And now most recently with the Asuragen acquisition, we've added some molecular diagnostic controls into this portfolio as well. Moving on over to Molecular Diagnostics. This is really a combination of our 2 most recent acquisitions, Asuragen and Exosome Diagnostics and we'll provide for the core for that future growth within our Clinical Diagnostics franchise, centering around liquid biopsy, but also genetic screening of our oncology diagnostic kits. And finally, on the far right is our spatial biology franchise, led by our ACD branded RNA & DNA in situ for advanced tissue morphology. All right. So now we'll dig a little deeper into our product portfolio, starting with our Protein Sciences segment, where proteins, antibodies, immunoassays and instruments reside. Starting within the proteomic research reagents. We were the first company to commercialize proteins for research use, roughly 35, 40 years ago, and we're by far the market leader. The proteins we manufacture focus on cytokines, which reside on the surface of cells and our messengers for oncology and neuroscience pathways within the body. We're known for the quality -- the very high quality of our proteins, and we produce a bio acid for every protein that we manufacture that proves out the bioactivity. Sometimes the bioassay is actually more difficult to make than the protein itself. This business is really hard to replicate. It's taken 120 PhDs, 40 years of cumulative knowledge to -- and collective know-how to produce the more than 6,000 proteins that we have today. Moving on to antibodies. Antibodies, we are considered a top-5 supplier in what is a very large and fragmented market. We're a high-quality producer, given that our high-quality proteins produce high-quality antibodies. But we supplement these antibodies with a very large array of over 100,000 antibodies that we source under our Novus brand. This business, in particular, is highly supported by our world-class digital solutions team, which puts excessive data on our website to support these products as well as the amazing search engine optimization capability to bring customers to our portal and educate them on the products. A little left, you can see that addressable market size, market growth is roughly mid-single digit, but we have been and expect to continue to double the market growth rate, led by our unsurpassed quality as well as our digital marketing execution. This just highlights the many applications and research that our proteins and antibodies are used for. But again, the key for our products is the high bioactivity and lot-to-lot consistency that makes the use of our reagents very helpful and reproducible and experience over and over again. The one application I do want to point out on the protein side towards the top there is the cell and gene therapy. That is the newest and fastest-growing application, particularly for our proteins. We'll talk more about that. And in fact, we just completed a new factory that is dedicated to the production of GMP proteins, has a capacity well north of $200 million of revenue, which is why we built it, is because we think that this GMP protein application will triple the size of our protein business in 5 years. Moving on to our proteomic analytical tools and the 4 key platforms that are within that, starting with our immunoassays. And we are the world leader in immunoassays, particularly those known as Quantikine ELISAs. At the end of the day, we've produced the highest quality proteins. High-quality proteins produced high-quality antibodies. High-quality antibody pairs produce world-class gold standard assays. It's really as simple as that. Below that, we have our Simple Plex instrument, which automates the manual ELISA assay from a 6 hour process down to only 1 hour and could do multi-analytic at time. It has an instrument name called Ella. And all of our instruments have a human name, because they basically replace a human manual process. Towards the right you see our Simple Western platform. Simple Western is a platform that fully automates the western block process, probably the most common used protein identification process in any research laboratory. It takes a 2-day, very messy and repeatable process down to a 3-hour push the button answer, and it's very repeatable and very accurate. And then finally, we have our biologics platform, which is a nice instrument. And this is our instrument that is used actually in manufacturing process of bioprocessing as a QC tool for protein purity. On the left-hand side, you can see again the market size and growth rates. We have exceptional growth rates in this area because we're essentially taking massive share away from the manual markets that these instruments are attempting to replace. Okay. Now we'll move on to Diagnostics and Genomics for our social biology, Molecular Diagnostics and diagnostic reagents product lines reside. I'll start with spatial biology. So spatial biology is basically an application where immunohistochemistry or IHC is used today. Now as a reminder, IHC is looking for a target protein in a tissue sample without destroying that tissue sample. And it also shows spatially where that protein resides within that sample, which is sometimes just as important or more important than is knowing whether they're approaching this at all. The problem with IHC is that protein identification requires the use of antibodies and antibodies are rather fussy and don't always work. And there are many, many protein targets you don't even have an antibody. So to help solve that problem, our spatial biology business uses RNA and DNA technologies for novel in situ hybridization, which essentially looks for the RNA or DNA in the tissue sample that produces or makes or expresses the protein and does so with a very, very high level of accuracy, sensitivity down to the single cell level. So bottom line is why look for a protein in a sample that you may or may not find when you can start by looking for the protein -- by looking for the RNA that expresses that protein with absolute certainty using our technology. Again, the growth rates here are very large and really IHC is a very big market. We're very underpenetrated and a lot to go and catch up in IHC, in this area. Okay. So now moving on to our Molecular Diagnostics product categories. And I want to start with the exosome platform and the exosome technology and explaining a bit about what it is and why we think it's the best liquid biopsy platform outcome. First of all, exosomes are essentially vesicles that are excreted from cells, both living and dying cells, particularly those are like bubbles. And within these bubbles, that get excreted into the various liquids within our body, be it blood or urine or otherwise. And within these cells are protected DNA and RNA molecules. What makes exosomes a superior tool and technology for looking for biomarkers as it pertains a liquid biopsy is -- number one is the prevalence of these exosomes. There are many, many, many, many more exosomes in the fluids within our body than there are cell-free DNA, because the cells produce and excrete so much more of these exosomes. So they're easier to find than say cell-free DNA. Also, once you find the target of interest, it's much easier to read the RNA and DNA within the exosomes, because they are shielded by that bubble that surrounds them, so that enzymes and the fluids doesn't eat away at them. So again, once you find them, they're easier to read. And then beyond that, the other advantage would be once you can find targeted interest and you can read the signature, it's kind of helpful to know where in the body it came from. And unlike cell-free DNA, with exosomes you can readily tell where it came from because the proteins at the bubble light, as I call it, the vesicle is made from is the same protein from the originating cell. And then last but not least, I think arguably the most important advantage is the fact that because exosomes are excreted throughout the entire life cycle of the cell, from the time it's born throughout the growing process and the dying process, it allows for much earlier detection because cell-free DNA is only treated from dying cells, not the living cells. So hopefully that helps better -- helps explain why we believe this is a superior technology, the liquid biopsy. And we currently have 2 tests on the market or soon to be on the market that are commercialized. You can go to the next slide. The first one being our ExoDx prostate test or we refer to it as EPI. This is essentially a test to really help the doctor and the patient assess whether a biopsy is needed or not. Studies have shown up to 90% of all biopsies performed on the prostate are unnecessary. And that's because the only main tool being used today to determine whether to do a biopsy is PSA, and PSA isn't much better than just flipping a coin. What our test does to help in that decision process is it helps delineate patients who may have high-grade cancer to no cancer or a low-grade cancer. So it's essentially a rule out test. They guide that decision process. And we have found that it can eliminate up to 90% of all unnecessary biopsies, but also encourage those patients who the test shows has a high percent chance of having a high-grade cancer to convince them to go and get a biopsy done. The other test -- no, the other thing I'd like to mention about the EPI test, that it is urine-based. So it can be -- the collection sample can be done in your own home and doesn't require a second doctor visit. And then finally, we also have the second test that's ready for commercialization, and that's our ExoTRU kidney transplant rejection test. How this test is differentiated from the market today is, #1, is urine-based and not blood-based. So again, it can be done in a simple sample taking home. It also can delineate between irregularities in the kidney that are due to kidney failure versus just other problems that could be ongoing. So it helps delineate what's truly a transplant issue versus not a transplant issue. And then the other item, of course, is Cystoscopy detection theme, because the viral signatures that are being looked for are around the inflammation that occurs before failure as opposed to looking for signatures that indicate kidney failure. So it allows for an earlier, potential earlier catching of potential failure for the kidney. So we're very excited about this test. And luckily for us, in Thermo Fisher, we're pretty excited about it, too. And we're able to -- we've got a deal with them, that was an exclusive arrangement, where they will essentially commercialize this product, and it will be part of their ongoing buildup of their transplant portfolio, and we will receive some very high milestone payments as well as generous royalties post commercialization. So we're very excited about this arrangement. And we're hopeful that will be a list of many partnerships that we have for other indications that we also have in our war chest, including indications for lung cancer, breast cancer and other neurological diseases. The other platform within our Molecular Diagnostics products is those that came with our Asuragen acquisition, namely genetic screening and other oncology-related tests. Asuragen is a leader in this area. But for us, not only we're getting a great product portfolio with nice growth rates, but the added benefit, of course, is the experience that their leadership and their team brings to our division around the diagnostic space and the regulatory hurdles and so forth, that will really easily speed up the commercialization of our exosome platform. Then finally, we have our diagnostic reagents pipelines. We mentioned that briefly before. This is kind of the picks and shovels of the diagnostic space, manufactures and sells controls kits and reagents to almost every diagnostic instrument in the world. A fun fact about this division actually is that this was actually what our company was founded on, the hematology control piece of this division is what our company was founded on 40 years ago. And it was actually a byproduct of the plasma on using the production that our first proteins for research were derived from. So this division has a place exuberant on its own. So I've done a run through, through our major product categories. I want to touch upon a really key market opportunity. I've already kind of touched upon it a little bit here and there, but I want to focus on it, a key, key market opportunity for growth for our company in the future. And that's around cell and gene therapy. And I want to show -- hopefully demonstrate how well positioned we are as a company to support this virgin space. I think it's pretty well documented. They're well over 1,000 clinical trials now. They're ongoing in cell and gene therapy. And these treatments represent the tip of the spear of where cancer therapies are going. This diagram here represents the cell therapy workflow. And you can see the various steps that are involved. Importantly for us, you can see it in blue, the various product categories or product lines that we have in almost every -- in almost every single one of these steps that help enable the cell and gene therapy production. And the most significant from -- I think we think from a potential revenue perspective would be on the lower left, and that's the GMP proteins, and that's in the step 5 here of this process. GMP proteins are essentially what are used to feed the cells after they've been reprogrammed and grow them up before they are reinput back into the body. It takes a lot of food. It takes a lot of GMP proteins in order to grow these cells up and add. R&D Systems, our brand, biotechnical company is the world leader in proteins for research. And there's no reason why we shouldn't be the world leader in GMP proteins for cell and gene therapy production as well. You'll also notice on the lower left that these GMP proteins, they have to be -- and the cells, they have to be grown in some sort of container, we call it a bioreactor. And G-Rex is, we believe the most advanced type and low-cost producer of bioreactors that are out there, and it's growing like mad, which brings us to our next slide, in the last deal that we announced, which was with Wilson Wolf, the owner of the G-Rex product line. And again, especially this G-Rex is a cost-effective bioreactor that produces a much higher yield of cells than other technologies such as BETs. We already have a partnership with Wilson. Wilson is part of our scale-ready commercial consortium, where we try to -- where we sell our proteins together with their reactor. And his bioreactor is already used in over 800 different cell therapy customers. So it's a rapid uptake and well positioned for eventual commercialization of many of these therapies and for our proteins to piggyback from top of them. What this screen entails is essentially an option for us to fully own this company in a staged fashion over time as it grows, to where we'd ultimately buy the company for roughly $1.26 billion, which would -- if we hit their growth targets, will equate out to about 4.4x revenue multiple. So a fairly good deal. And we believe that this business will be as big, if not bigger, than our GMP proteins reagents. And [indiscernible] is profitable as well, so a very profitable business. So we're very excited about this arrangement and even more excited about Wilson Wolf being part of the Bio-Techne family in the future. Moving now, this is a bunch of different slides. You have to click through. We'll go ahead and flip through and will briefly talk about this. So this is the other side of the cell and gene therapy equation. This is the cell therapy. And we also play very well here, too, particularly in our instrument product categories. Gene therapy heavily involves viruses and viral vectors. And our instruments are used to identify the right viruses to also measure the potency, stability and the purity in the various viruses and viral vectors being used in the production. So we're seeing some nice uptake in these customer bases as well. Okay. So in summary, or this slide basically summarizes all of our addressable markets and our relative market position by our major product categories that you see kind of down there on the left-hand side of the page. And as you can see, very aligned with large markets, we are very underpenetrated in all these markets, which means we have a lot of room to grow still. By far the largest 2 markets here are the cell and gene therapy market and the liquid biopsy market and the fastest growing, and we are the least penetrative there. And we think because of this -- it's all in a $20 billion market. We're roughly a $1 billion run rate business today. So a lot more to go. And we think we can grow faster than the market because of our superior quality and execution of our digital solutions within our reagents businesses, with our disruptive productivity technologies within our instrument portfolio as well as our spatial biology franchises, and then really being so well positioned at the tip of the sphere for next-generation cell and gene therapy and liquid biopsy and diagnostics. In terms of capturing more of that share, we think we can capture -- we can capture up to 10% of that market. We'll recourse to the next year, essentially doubling the size of our business from $1 billion today to $2 billion in 5 years. How we get there, we've outlined below by our major product categories and product line within those product categories. Starting from the left, and we're executing right now at a normalized growth rate of up 13% organic growth. Our core products, we talked about protein antibodies and ELISAs controls to get to the doubling of our revenue in 5 years. This part of our business continue to do high single-digit growth. We've actually been double-digit growth now for the better part of 2 to 3 years. So hopefully and arguably, this is conservative. Moving to the right, our instrument portfolio needs to grow in the high teens. But again, we've been in the well in the 20s, averaging growth rate in the past 2 years or so, and we're still very well underpenetrated and there's more and more applications these instruments are being used for. So we're hopeful and be a bit conservative on this phase as well. And then on to the right is our spatial biology franchise with ACD, north of 20% growth. But as I've already demonstrated a very, very small market share in a very large IHC type of market. And this business right now is essentially at the size that our ProteinSimple franchise was 4 or 5 years ago. And the fastest growth rates for ProteinSimple have occurred in the past 2 or 3 years. So we can assume the fastest growth rates for ACD are still ahead of us. Those 3 categories alone allow us to maintain roughly this 13% normalized growth rate going forward. We have a checker. And the checker is our 2 tip of the spear end markets of liquid biopsy and cell and gene therapy that we just talked about in quite length and we're very well positioned for it. And as those markets continue to grow and we continue to take share and grow within them, they will grow very rapidly, particularly in the later part of these next 5 years, and that will be the accelerator that gets us to the high-teen growth as we exit fiscal year '26. So as Chuck likes to say, we think of our business as a stable of unicorns that we will continue to ride over the course of the next 5 years and more than likely beyond that. So thank you very, very much. That concludes my prepared remarks.

Thanks, Jim, for that presentation. I believe we're up on time. So thanks again, everyone, for attending, and I hope you all enjoy the rest of the conference. Thank you.

Thank you.