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

All right. Good morning, everybody. I'm Luke Sergott. I cover life science tools and diagnostics here at Barclays. It's my pleasure here to introduce Chuck Kummeth, CEO of Bio-Techne. Known each other for a long time, and thank you for joining us here first in person down in Miami.

Good place to start getting out.

That's right. Right. All right. Well, so I guess we could kick it off. I've been starting everything, all these sessions with the macro. I know that there's limited exposure here from Russia and Ukraine, but are you guys -- just talk about demand trends within Europe that you're seeing. Any spillover? Any slowing of orders or anything like that across any of your end markets?

No, we're really just kind of getting over the whole Brexit thing, to be honest. So we hadn't anything as softening out of being U.K. based. And when Brexit came full force, we had to actually start figuring how to get stuff in and out of mainland Europe and not having to go through 2 sets of customs and stuff because Europe was punishing U.K. So we're setting up a distribution site, warehousing in Dublin. And that's almost ready to go and all new AX ERP system and everything else. But it's all really good. I mean, we've got very minimal exposure for Russia, and we've cut that off, of course, like everybody else is doing, but it's almost nothing through distributor. But we also are -- the whole Brexit thing also created more of a movement to get back to country for country. So we'd have all our French-speaking people in U.K., everybody kind of handling things, and we've moved everybody back to their country. So -- and that's been easier to hire that way, too. So we've built out in France a new office. And we have Italy, of course, from our acquisition down there, and then we have our building in Germany. So we have -- along with that in the U.K., we have really a full subsidiary model now in Europe, and it's working quite well. As you might remember, 2 years ago or so, we started focusing on a big cross-selling campaign, right? [ Really ] getting our people, they all sell the instruments to measure proteins with the proteins and antibodies, and that's also gone very well. We've turned over a lot of salespeople a couple of years ago. And we're just ramping that up. So we're seeing -- as you've seen, the results we're pretty good in Europe, but we are not seeing much change right now. It's kind of steady [indiscernible] goes, should be a double-digit growth. It's been that way. We don't see anything hopefully not changing. We'll see, I mean, if things get worse in Ukraine, the things will weaken [indiscernible] or whatever happen I suppose. But right now, it's pretty good.

All right. And so when thinking about inflation, tools benefit in this environment. And you guys are always able to pass on or not always. You're able to pass on a lot of pricing. Can you talk about that?

Yes.

Any segments where there might be pushback? Any types of contracts and like if it's more difficult over a master service agreement or anything?

Well, you remember, I'm a 25-year 3M guy and kind of lifelong consumables which is kind of guy. And after that, I ran LCD for Thermo. So I've got a long history of moving consumables, and you only get so many opportunities to already raise price. It come around about once a decade. And so we're all over it right now and have been all year. As you know, we put in place or if we turn this company around and major real company, we put in metrics so we could actually measure. And we have been about a 1% net price per year in our growth. This year, it will be closer to 3%. And that's -- I'm not sure where we will net that far out or not, but it shouldn't easily net to, but depends on how much we have to give back for wage inflation and things like that, that we're -- the rule -- kind of the rule I gave people is you've got to go find at least 3x what you're asking us for business by business for any kind of wage increases. And we've done wage increases literally for professionals across the board, like everybody else has. And the attrition is high. And if you're not doing the extra to keep your best people this year, you're going to lose them. So we've done that, but we've covered with pricing. And we have a really good model, and we have a good team. We have specialized people full time on price at this point. We're nothing like Thermo with a whole department at Fisher. It could depend on, but we get it done. And it's not -- given to your MSA side, we only have the one part of the company. It's the OEM side with our Diagnostic Reagents. That's the -- yes, but it's Novartis and Roche of the world. And those contracts are once or twice, you would get a chance. But even there, we're raising prices they expect because they are. So it's just a little more lumpy, right?

Yes.

But we're coming to that. We've had growth in glucose. We haven't seen that in 5 years. That's mainly from price. So it's going okay.

Okay. And we were talking about this before about the Bio-Techne funding. I think it's -- we were discussing where, it's a key question from the investor side, but everybody we talk to on the company side, they're not seeing it. So walk us through, what you're doing?

I'm still confused. They started coming up last quarter, even maybe a little bit the quarter before that about softening Bio-Techne, and we're not seeing it either. So I mean, it's certainly been up and down in academic, I'm sure it gets to that. And it was on again, off again. Off again with Omicron, now we're back on again. But biotech has been booming for us. And we're even hearing some tough comps right now, right? And this quarter for us is a 22% comp. Next quarter, 39% but that's because year before was a disaster from COVID so it's not -- actually this quarter, we think it's tougher for us then next quarter. But 22's a tough comp. And we're still -- the momentum in biotech is steady. We had like a 50% quarter a year ago in instruments. So I think if anything, we're just seeing a tougher comp in instruments, but the demand is there. We're -- we reached these tipping points for instruments so now the demos aren't required. They're kind of selling themselves, and we're at roughly 140 Simple Western a quarter. That's fantastic to be over 100. Biologics has just been booming even better than Simple Western. And that's because of the take up for, I think, cell and gene therapy, new applications. And Ella has just been -- our Simple Plex, has just been kind of steadily growing as we reach more applications, more uses, right?

Yes. And is it -- do you think it's something that you're -- from the segment where you're exposed in biotech, so you're emerging or is it you're seeing a wholesale across the entire industry?

Well, I can't speak for too much on the side where we live, but we're just not that big yet. So we're still, I think, living a time where off of our investments from 3, 4, 5 years ago, they're just coming to fruition. And we're reaching critical mass finally. I mean, the growth has been good, but we're talking about taking $100 million businesses to $200 million. So it's not $1 billion or $2 billion. So it's -- there's a lot of room left. We're -- you know the 7 markets we kind of address, and we're lower than 10% share in every one of them. So it's -- the arms are wide open for us still. So I think we're just because of that. We will do $1.1 billion or $1.2 billion this year. But it's across 5 divisions and a dozen platforms, right? So there's still a lot of room for us.

And you were talking a little bit about you think you're just starting to see the benefits of all the work that you put in the last 2, 3 years in this segment. Talk about -- digging a little bit more there what you're referring to.

Well, the easiest explanation or example would be on AdWords spending. We have a full team now doing data analytics and attribution. We can tell -- we have a -- we've built out a pretty big department of inside sales. And we can tell online when people are searching and looking at buying our products. And we can hear now in realtime with -- it looks like you're on doctor so-and-sos research area, have you read this paper? Do you know about these types of things you should be looking at for continuing to work? So we're getting that good.

It's pretty creepy.

It's pretty creepy actually. We can actually see where they are and everything else. So it's -- and we keep -- I keep testing the team and tell them when they ask them [indiscernible]. But right now, we're still getting roughly $7 return for every dollar we invest in AdWords. So we can actually measure what we get for sales.

How much of your consumables portfolio is going through that channel right now?

Still less than 1/3. Everything ends up being transaction eventually electronically, but where is the source, where -- the source from somebody really online doing it through SEO searching and us fulfilling electronically, it's still not the majority of the company.

And have you seen -- give us a sense of a customer pre-SEO and then after SEO, the kind of spend that they're -- you're seeing, wallet share gain?

Well, they usually get online. We've got 0.5 million products [ yet to launch ]. You've got to have SEO, right? And they're making purchases for different sets of antibodies. You can tell what researchers are doing, and then we can follow up. We could actually call them, we can do whatever. Usually, when they start, they continue. If we suffer anywhere in competition, especially in proteins might be -- beginning work with academia, and they might be going to a cheaper, a less quality-driven company because it's just expensive, right, for academia. And then as they get towards our paper, they'll move towards our products. Biopharma kind of stay with us from beginning to end. They don't risk their research or clinical, going to top quality. And when it comes to proteins, we're #1 by far. So antibodies is kind of wild west still, and it always will be.

Yes, I remember from my days dealing with some of those companies.

We've made [ ground there ]. We're definitely in the top 5 now, and we've taken share from everybody, I think. So it's growing well with double-digit growth and strong double digit growth. And that's continuing, so.

Let's talk about Wilson Wolf and change gears and talk about this agreement. It's really going to get into the next segment, we're talking cell and gene therapy, where you guys have really leaned in pretty heavily. So give us like the sense of the underlying growth rate here for the company and then what the agreement is?

Well, I first tried to buy John, John Wilson from Wilson Wolf, when I was in Thermo almost like 14 years ago. So it's a hell of a deal, but it's taken 14 years to get there. If you guys have ever known John Wilson, this guy, he's out there. He's a mad man, but he's genius. There's probably nobody more integrated with the KOLs in the world in cell and gene therapy than John Wilson. The Wilson Wolf is the bioreactor in the solution. They have just -- they might even have some FDA-approved solutions now. There's only like 5 drugs approved, right? And I think they're being used in one of them maybe, but they've got 800 customers. And now we've got 150 through scale ready. They've got 800. So this is becoming a de facto standard for bioreactors for all cell and gene therapy. And what makes it so cool, of course, is that it's a reactor that has a membrane in the bottom and where you see all the fancy videos of cell factories and flasks and things flashing around. And they're very little media in the containers because they have to have a lot of oxygen in there to feed the cells. Wilson Wolf products can fill them all the way up because they suck air from the outside through a one-way membrane. And so it's a vast improvement in the whole solution. And it's a hard surface and through 10, 15 years of work in cell and gene therapy, which makes them #1. A little unknown fact, as T cells and NK cells, they don't like to be moved. They like sticking together on the surface layer on the bottom and not being -- and being fed and grow and not being touched. They don't like bags. So most of the world is going after cell and gene therapies are bags, and T cells don't like bags. So they're going to -- they have a big advantage right from the [ get go ]. The deal, of course, we are trying to close the loop and make a full solution for workflow for cell and gene therapy. And we need a box, and we looked at Fresenius Kabi's box. And we looked at Wilson Wolf, and they're local or close to us. And of course, they won't sell. So we created scale-ready JV going on 3 years, and it's been very successful. John came to me last fall, and things are going great. And it's at a $50-plus million run rate. And John is a KOL guy. He's got 2 other companies in therapeutics. He wants to be out there. He doesn't want to be running operations, building a factory and growing the business. He want us to take over more and more of it. Well, we can help, but this is going to get really big, John. I don't think we're going to -- the JV idea was for us to buy out in 7 or 8 years. But I don't think we're going to be able to afford you. It's just going to get too big. And of course, this is a pre-Christmas, right, when evaluations were even higher than they are. And he came back a month later and said, "This is not acceptable. I really want -- expected you and your team to be taking care of my team," and they kind of integrate already. And so we sat at a whiteboard for a day, figuring out a deal that could makes sense. And so because if we don't get a piece to you now or some way to get you, I don't see how it's ever going to happen. It's going to go -- it's going to be another Aldevron story -- and we're going to come in second. So the deal was very clear. We paid him an option. And is it public now, we can say the number on the option? No, we don't. It's not material, but it was enough to get -- if something fell apart in core, we could say we had a reason to have this, right? And it has to be substantial enough to give a court recognition to us that we had ties to get the company, right? So we'll take -- with that option, it gives us rights to buy the first 20% of this company when he reaches $92 million in revenue or $55 million in EBIT. And yes, at 60% EBIT. He's already at 45% EBIT and he's at a $50 million run rate. This thing is a money machine. We expect that to be in about a year or less. He's had -- he said, days in the last couple of weeks of like $800,000 of sales a day. It's just ramping fast. And he's -- nothing's even approved yet. This is all through clinical customers. He has 20 customers over $1 million a year right now, and it's growing very quickly.

And then scale on the biologics, what's the scale that they can get to on a yield basis?

Well, I'll get to that in a second. The Phase II, so we get 20% at that point, which is about a year. And that totally locks us in. So nothing is really -- we really have gotten no credit from The Street yet, I think, for that deal. And probably because we don't own anything yet, but in the year, we'll have 20%. And at that point, there's no way -- we had to put in a call by the way for us and him. And then we take the Phase II. We buy the rest of the company when he reaches $226 million in revenue or $136 million in EBIT, which we think will be in 4 years. I think the scale potential is probably $300 million to $400 million at least. So it will be its own division as part of our cell and gene therapy segment as it grows, right? So -- but our growth rate has been over 100% in cell and gene therapy. Our protein growth rate has been 180% last quarter. And his is no different. He's just rocketing. We have 150 customers. We have a couple of dozen we're actually contracting with now. We're starting to get in the areas. And we're -- we ever talked about cell and gene therapy, we're also -- these GMP products are also going into regenerative medicine as well, right? So and his as well. So it's kind of untalked about it, it's another home market that really isn't baked in anyone's model, to be honest.

Yes. Where are we on the adoption curve in cell and gene therapy? I mean, we only have 23, I think, approved right now?

No, it's 5 or 6 on cell therapies, yes and the 800 customers. I mean, there's 1,300 clinics in the U.S. There's -- we hear 300 plus in China. We know there's 300-plus in Europe. A quarter, we will make it. There's a lot of overlap. A lot of people are chasing the same thing. The good thing for us, of course, is we're selling all of them. We're like selling the picks and shovels, right? So we sell to all of them. And -- but we have -- even though we have a pretty good sized business already and he does as well, there's nothing really beyond clinicals. We know the kind of scale we're talking about. It can be $10 million to $50 million per customer. We know that from our GMP work, and that's the expectation they have from us is anywhere from $10 million to $50 million if they win. That's why we built a factory that can do $200-plus million of GMP protein. So with that in Wilson Wolf and other things in our portfolio, we expect to have $600 million to $1 billion cell and gene therapy business within 5 years, and that's our plan. And I think the momentum is unstoppable at this point. I mean, everyone is going after this. So.

And what's your exposure? Is it -- right now, obviously, it's mostly on exposure, but how are you thinking about getting exposure to the production side?

Well, we're there. This is -- will be used in production, but we're not a CDMO. We'll be selling into their production. We don't have to worry about the regulatory risk. They do everything really. Yes, these are components. I mean, the proteins are kind of like the food for the cell line really only way to think of it. The instruments we sell are for the QC side of it, right? Wilson Wolf is the bioreactor side of it. Fresenius Kabi is the leukapheresis side of it, so in the application itself for the patients. And so we're more on the workflow and not the creation of made for stock, allogeneic therapies, right? We'll be a component of building that, but we're not doing it.

All right. So how does scale ready position you guys to continue to capture and really to gain share?

Well, mainly because we have power because we have a full workflow. So the only thing I like is Miltenyi. And they kind of started off, credit to them. But they have a workflow that's very cumbersome, very clunky because they were first. The Miltenyi workflow has to be tied to the patient in an ICU for 3 weeks, very expensive. Everyone now is going after cell and gene therapies in a more modular component of action, where you can do parts of the process away from patients and then bring it together. And like Wilson Wolf is a bioreactor doesn't have to be tied to the patient. It can be on a shelf somewhere over the system, right? Same with our products. So we're going to save a lot of money because we're not tying up in ICU or a patient at the same time with the [ patients health ]. We have a lot of -- we probably don't have enough in cell sorting, but some things were still maybe open on. But we're -- I think beyond Miltenyi, we have the most complete cell therapy workflow there is in the world. And that's what's getting us traction and interest. And having, of course, John Wilson and having Wilson Wolf be the point of our spear with 800 customers been out there for long. He can go into an account and say, "I know you have been, you got it from a clinical and you're using Miltenyi proteins, but we've got to tell you, Bio-Techne's got better protein. They created a category 35 years ago. And they're able to actually -- I maybe actually give you bioreactors with proteins already embedded with media, so you don't have to break your sterility." so and their eyes light up. So right now, it's really a clunky operation to do the work, you got to [ weld bags ] and together, and there's a lot of complexity to doing cell therapies. And we're trying to decomplicate that. And it's going to take a couple of years, but what I see in 3 to 5 years is that we'll be selling bioreactors already complete with media and proteins already embedded for the application.

It's off the shelf?

Off the shelf.

Let's see. We've got a couple of more minutes here, probably a couple of more questions. So let's talk about the end markets. You guys were talking about academic and government, slower to recover. Give us a sense of where -- how the demand paced? What the order book looked like through the quarter? And anything that changes on your expectations or outlook?

Well, it's certainly been improving, and we predicted improvement after Omicron in January. And people were home, they came back to work, and they went back home again after Christmas. And certainly, academia was the biggest brunt of that. But it's kind of back on now. People are back, and we're seeing things opening back up heavily. We're obviously quiet right now, but I think we'll stay behind our predictions in the quarter, and things will get better in academia, and they're kind of on track. Nothing is as good as the momentum we have in biotech. Again, the confusion of why people are seeing softness is we're not seeing it and most of my peers I talked about, are seeing it either. So I don't know who is, but academia is improving. I think we're all still waiting on a budget and NIH. I think that's pending. I think it will be good. I'm not sure it will be at record levels. We don't know yet, but it isn't really stopping anything right now. So.

All right. And then are you seeing any pause in [ R1 ] spending just waiting for the budget? For just typical kind of environment?

Pretty typical. And remember, we're mostly run rate stuff. We're not selling mass specs, so there is no -- we're not a budget plus kind of company. So we don't really benefit from that. But for us, the bigger deal will be like snowstorms. If people aren't in a lab, they're not using stuff, and they're not buying stuff, right? So it's more about that. We need people in the labs working for us to be doing well, and it's definitely going in the right direction.

All right. Last couple here, let's change gears on spatial and ACB growth, right? So since a lot of your competitors coming to market. Give us a sense of the competitive landscape, how you guys stack up the application set?

Yes, we're kind of thrilled to see what is coming in. Most people coming in are coming in at the protein screening side, very high in plex, right? 10X Genomics, NanoString, we're way below that. So we're -- you can use those technologies to screen. And then when you get down to your final [ dozen ], then you want to start looking at cells. And then we've got RNAscope is a perfect tool for doing that because we can get -- we can give you a single cell revolution with RNAscope. And we have a DNAscope now. We have BaseScope. We have a bunch of variations that also help, and all this is really still discovery. We actually bought the company thinking we're going to get -- because we sell antibodies in IHC. And this was supposedly going to be a new way to do tissue analysis in IHC. You guys may or may not know, but when you're looking at a tumor, [ frozen slicing ] FFD 20 -- you [indiscernible] it and your -- an IHC depends on how the antibody that can locate the proteins that show expression for the tumor to show us malignant. And 25% of the time, you don't have a protein. They don't know what to do. And that's what the leading would be to use RNAscope because we can look for the gene sequences instead. And if you find the genes and you possibly have cancer, you still don't know expression, but you got to a lot more information. And unlike IHC, a morphology of looking at tissue samples with our technology is totally preserved. You don't destroy the tissue sample. You can use it. You learn that information, you can do with other things, you can do IHC then you might know enough to actually go find an antibody or something, too. So that all helps. And that's all pathology, right? And we haven't gotten there yet. To be honest, most of our tremendous growth has been through discovery still. So we're still working towards getting to pathology, which is why we did the deal with Akoya. And what we've been told is that even though we have LiCa and we have ANTENNA, they're using -- those are bigger systems. Most pathologists, they just want something smaller, and they want to look at stuff. And so we need a lower level of automation. So we've done a deal that with Akoya for that, and we'll keep driving that direction. But all of that in really kind of is in tandem with on the discovery side with the 10Xs and NanoString. In fact, we've got a deal with NanoString, right? So we work together, and we could probably help them sell more of their stuff the other way around. And so we do have a HiPlex and XPlex coming. HiPlex is on the market. We can collect up to 12 at a time. And with XPlex, we'll be able to plex in banks of 12, so maybe up to 100. Going past 100, you'd be going into NanoString world, right? But again, we're -- ours is kit-based technology. We're going to have a low-level automation. NanoString's a very expensive box. So at some point, we might cross another area. But right now, we're the under 100 plex. And as we build out our low plexing, that's going to even further expand our business, we think. So.

It's a hot area. Yes. I mean how do you think about that market segment though where you're playing in the low plex? How big is that for you guys? How could that...

Well, I see it's alone well over $1 billion. And the discovery side, we're in about a $100 million run rate right now for this size of business. I always thought it could get to $300 million or so, but it might need some pathology. It's certainly hundreds of millions of dollars. But we have to -- the whole market is probably much bigger, but you got to split it up with the high screening people, right? So, we see -- our plan is to have a roughly 20%, 24% growth rate over 5 years still with that business.

Yes.

We've been as high as 30, 40. We've got tough comps right now. We're low double-digit because last year, we were in the 30s for growth. So -- and we haven't got the pathology yet, so I'm still pushing on that. Now with Akoya, it's going to help a lot, I think so.

That's all the time. I appreciate it.

Thank you.

Thank you, Chuck.