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

[Audio Gap] life science tools and diagnostics team working with Derik De Bruin. And joining us for our next slot is Chuck Kummeth, Chief Executive Officer of Bio-Techne. Format's going to be a fire side chat. Feel free to fire off any questions if you want to jump in.

But just to get the ball rolling, Chuck, since BofA doesn't cover you, maybe you can give us a little bit of introduction, the portfolio, your offerings, how you fit into the life science tools ecosystem?

Well, we've kind of become a proteomics kind of world lately. I mean a decade ago, it was all about NGS, and all of a sudden lo and behold this proteomics is cool again, a little help in the pandemic but it doesn't hurt. But we're situated position, we think perfectly because of that, we've been around 46 years, and we're the world leader in proteins for research, which is the most fundamental tool you can have in doing proteomics. We're in the top 5 in antibodies. We're a leader in assays. We're the creator of the ELISA Kit, and we've leveraged that to go up a level into instrumentation, proteomics-based instrumentation that uses these reagents or measures things or does biomarker discovery. And then we've gone out longitudinally with our assay prowess. We've always had some approved diagnostic assay. I mean diagnostics in our mind are nothing more than application-specific regulated assays. So we have expanded that direction with Exosome Diagnostics is a liquid biopsy platform, leveraging a lot of our internal science to help them as well, and Asuragen is an add on to that. You can't do anything looking forward to proteomics, especially going from discovery to translational without having spatial in mind. And again, spatial as a lot of antibodies use, and that's where we bought ACD, and we're going -- using going into the nucleus now for that. And that's on fire, and it's going to be a great platform. We need automation on that front where we have automation on other fronts, but that's just kind of a 1-, 2-, 3-layer approach to our portfolio, and we're still not very big. So all these addressable markets we're in or we're sub-10% share in all of them. So there's -- it's led to an extraordinary growth run. I've been here 9 years, and I've -- I think -- I think the last 3-year CAGR is roughly 14%. We just did some work all the lumpiness of COVID, people wanting what's the real number. It's kind of the game plan we're on. It's been doing well.

Great. A lot to dive into there, but I guess I'll start with, you talked about some of the markets you participate in and how they've evolved in recent years. The one thing we've certainly noticed is there's been a lot of M&A in the space. Abcam has done a decent number of deals. Perkin Elmer and BioLegend, Thermo and PeproTech. So from where you're sitting, how are you seeing the competitive landscape evolve? And sort of could you reevaluate the landscape in 2022?

Well, things are getting cheaper, including us. So we're probably in a few people's game boards too. But there is no doubt that we've been -- we've done 17 acquisitions since I've been there, so it's no record by any chance. But for our little company, that's a lot of deals. They have all been kind of block-and-tackle deals, nothing transformational for our size company. Some things have grown to that level. I mean ProteinSimple, people threw a lot of stones at also we went towards instruments 6, 7 years ago and paid $300 million for this asset, and this asset today is probably worth $3 billion. So it was a good move. I think we're going to have a better year. We're always working on deals. We did some last year. We'll do some this year. We walk away from more than we win obviously because things have been pricey, and they're getting better. One leverage point that was there last year that they can't use this year is if they don't get their price, they'll just do an IPO, not so easy this year. So some things are going in our favor. We also have a really good track record for how we treat our integration and the assets. And in fact, a good half of my leadership team are leaders that came with the [ Indian ] companies we bought. So in most cases, they've done better with our company than they did with selling their own company to us. So that gets around. We actually have a lot of inbound requests and people want to talk to us about partnering or doing more, whatever. So it's -- because they see how the others have been treated and that sometimes looks a lot better than looking into the jaws of another round of dilution of funding in wholesale.

And thinking about the markets, I mean, one point you made is that it's always a little bit challenging to quantify the growth rate in the markets given all the things going on especially with COVID. Something we've always struggled in when we think about the antibody market and some of the assay markets given there's so many different ways you could bracket it and split it up. If you think about your core markets, adjusting for COVID, adjusting for some of the comps, what's your view of the long-term growth trajectory? And especially if you could comment on the impact of things like spatial, things like cell and gene therapy, some of these new growthier areas.

I'll start at core first, but as you know, we had an Investor Day a year back, and we talked about going from the 1 year $1 billion plan to the $2 billion plan, and we think we're ahead of schedule for that, especially with our Wilson Wolf. And that's based on trajectories of all the growth rates of these divisions, these businesses we have. And our models have our core at 7%, and we've been running close to 20% now for a couple of years and then some. So at some point, you've got to admit that we're off and start changing things, I guess. We're admitting that we're victim of our own success. So trying to understand what's going on because we think we're a 30% share in proteins, and we're growing near 20%. So how does that work? And we think that market is only growing like 4. Antibodies, we think about 8-ish, a little better, right? And we're growing about 20%. So we know we're taking share in antibodies. And we know that our website, our digital experience, our AdWords campaigns, our SEO, our engines we've been working on for many years, and we're Abcam level now, where we're taking share, we already have been for a while. Proteins, I don't -- I'm not really sure to be honest. I would have thought it'd be really difficult to grow 3, 4x the market rate when you're at a 30% share level. So either the market is much bigger than we think or the growth of this market is much bigger than we think, probably 1 of those 2 things, and we don't have an answer yet. But we'll take the success. And we certainly are taking some share from Pepper Tech and others but not as dramatic as we are in antibodies. So...

Yes. That makes me feel better to hear you say that because we're coming at the same problems where we're like the math doesn't add up.

Doesn't add up, I agree.

Either everyone is growing a little bit faster or a lot faster. There are someone feeding a lot of share that we don't know about.

You also asked about the new stuff of cell and gene therapy. And Exosomes, those are 50% growth engines for 5 years, and we're probably would be much bigger than that on cell gene therapy. Exosomes, that's probably about right because the slowness of regulated platforms is -- it is what it is, right? So -- but it's improving, and I think we'll be on track. But cell and gene therapy is -- it's just a holding a tiger by the tail quite literally. And it's 100% kind of growth numbers already across the board. We'll end this year at 100% growth in proteins. And we'll do that again next year, and I think it will go up after that once we get more things out the other end getting through clinicals. So -- and we have a growing component for [ genital ] medicine as well. So when you grow stem cells, it's pretty much the same process and you got to feed them too. So GMP proteins are getting really, really good look at that. So that's on course. Then if you layer on Wilson Wolf when we acquired that here partially into this year and then the rest of it in 3, 4 years probably, that doubles the whole business again. So we think we have a $1 billion platform looking out a decade in cell and gene therapy, and we think we have a $1 billion platform looking on a decade or so in Exosomes. And everything else we're doing is more picks and shovels, and we're okay but it doesn't have the scale. Proteins can then grow so fast, gets so big.

And what gives you confidence in the durability of growth in those markets? I mean we talk about visibility and it's usually like order visibility and that's a couple of months or a couple of quarters, maybe. So what gives you 5- to 10-year visibility on, hey, this demand is sustainable and these markets really are going to be that big?

Well, in cell and gene therapy, it's the future of oncology. So I think it's undisputed at this point that that's going to be the way cancer has dealt with. I think the holy grail will be solid tumor. And I've just been in ALD last week and listened to Carl June talking about the great strides there of how they're going to attack and eat up these solid tumors and they're going to crack it. So it's going to be a whole new way of doing things and the size of that market is it's -- we're all afraid to put the numbers down, to be honest. It's massive. On the Exosome side, it's just about better science. In terms of liquid biopsy, Exosomes, they just hands down beat cell free DNA or certainly in tumor cells. And so we just think it's a better signature. And we can do it by itself or we can combine it with cell-free DNA. And it's modestly inexpensive tests. It's PCR. It's not sequencing. So we think it's got a lot of runway. They're one thing to do. They just did a big deal with us, and they're already asking us for new stuff to work on again. So I think we're on our way now with getting beyond the credibility gap and starting to leverage the platform. Our prostate test is growing nicely. We got Cal Ripken Junior signed up again here. I'll be heading to AAUA tomorrow and seeing him, and he's been a great advocate since he thinks we saved his life. I'm not sure we did, but it's all good. But yes, that's -- I think the other one [indiscernible] is spatial. Spatial is really just another category of tools that is just growing really well because spatial integrity, moving from discovery to translational, you got to get done that cellular approach of seeing what you have. It's just never been more important. And we're the best solution out there, so highest resolution, highest signal. So it's going to grow.

And How much investment do you need to continue to allocate to these areas to sustain the growth on your side both from a manufacturing path, from an innovation perspective?

Well, we've never been a high capital business, right? So that's always been good. But certainly, as you go more towards regulated spaces like GMP, it's more capital, but the return on invested capital were 20s and up. So this is a much better way for us to spend our money than doing acquisitions. We're all struggling to get to 10% in 5 years on M&A deal, right? Here, that we don't have paybacks on anything we do under over 2 years. We're expanding literally every site we have. Every one of our businesses has grown beyond its border, it seems. So we're expanding. And all in, every site, we're not going to clear $70 million this year. So it's still not that capital intensive. Now that we got the GMP protein factory behind us, it's -- that's a little -- it's like pharma grades. It's expensive. But everything else, not that not so bad.

And then I have to ask some more near-term questions that have come in from a couple of clients. As far as end market exposure, potential challenges, areas that keep coming up are academic funding, both NIH and globally, especially with all the uncertainty in the economy and then pharma and biotech in early and unprofitable biotechs and their ability to sustain their own pipeline. So what are you seeing on both of those fronts?

I know there are some companies in our industry that have been struggling with biotech, and so we've been getting questions about what do you see in the biotech funding seems to be in trouble. We're not seeing it. Our momentum has been incredible. We had one of the best quarters in the company's history this last quarter, and the momentum is still strong. The only kink we're going to have in the early this quarter will probably be China, like along than everybody else. But biopharma, we were between 20% and 30%-some growth, depending on region when business was strong. Even academia, we are mid-teens in Europe but we're low single digit here in the U.S. But we just got the budget approved in March, right? So it's going to start improving. We think again now there's no -- uncertainty is kind of go behind us. So -- and also the academia goes in cycles, and we're definitely kind of in a lighter cycle. I think there was -- coming off of all the work done for the pandemic, I think there's a lot of -- people are tired, programs are tired. There were a lot of people not at work and brought them back. And then they'll Omicron hit, sent them back home and especially in academia. So that's took its toll the last couple of quarters. I think it's going to get better now. So...

And you mentioned on the China, just that's on the west as well, so might as well.

Yes, a lot of our warehouse is in Shanghai. So it couldn't be a worse place, right? So it's -- so as Shanghai opens up, we'll get our warehouse with them we can ship everywhere else. As other cities get going to lock down, they're going into a city by city lockdown, right? So we know 2 things are happening. Either they are improving their vaccines much more than we thought. Or this virus, these variants, really they're a much higher horror factor but they're not as deadly because people don't appear to be dying, right? And it's the really old people and immunocompromised people in China, according to our teams there. And that's going to -- if that's the way it's really going to be. Are they going to end up doing what we did? They're going to just be opening things and let people get sick and work through it. So I don't think it's going to be a year-long event here in China, and they're going to have to provide stimulus at some level, too. We can stimulus at some point as well. So I don't think -- in the end, they're still going to get off a lot easier than we did, I think, to be honest. So -- and 2 years ago, remember, we all had the bad pandemic quarter and we still grew single digit, but we came back with a vengeance the very next quarter, and it's been just off to the races ever since. It's 2 years of quarters. So we had 32% growth last quarter. So we're still not that big in China. There's a long way to go yet. So...

And right now, what's your assumption on when things start to lift and the lockdown start to reverse and things sort of go back to normal?

My prediction would be -- we're a quarter away from that but that's if they decide to just suck it up and go with it. I mean I don't know. But if people aren't dying, I don't know -- I don't see why they can take their economy to nothing. So -- but we'll see. They are very stringent. I mean we know from our people live in apartments, and they have government people in the buildings, and you're not allowed to leave your apartment. And if you leave your apartment, you could caught, it's not good. So they're very strict, much more than we are here. And that's probably going to help. But I was telling somebody today, you could have an entirely total lockdown but you got to keep -- some of the wheels have got to be turned. Even if it's 1% of your people, health care people, whatever, and that fraction of a percent would be always still needs to get this pandemic to still go everywhere. I mean there's no way around it. I don't think so. So we just got to wait for them to work through it. Hopefully, they're making their vaccines better, along everything else and they'll get through it fast, and we'll get back to a normal future with most people either vaccinated or had at once and are mostly immune. So...

Now we've been asking that question pretty much every management team here and the last couple of weeks in earnings and it seems like every day, everyone's got a different opinion on -- it's getting better now. It will get better by June, August, end of year so that...

Cases are rising again now. Well, we're not done with variants.

Yes. Any questions from the audience?

You got to remember, too, we know as a company, you guys hear about Delta and Omicron and LBA2. We sell over 120 protein spike variants to this virus to the research. So we sell more than anybody. So there are a lot of varying possibilities out there that could be -- could spell trouble. But you hope that these viruses play like other viruses, and every time they mutate, they're trying to survive too and not kill their host, right? So hopefully, it will be like a bad flu in a year. So we'll see.

I think we had a question.

Yes?

[indiscernible] rejection, but if you look kind of beyond those opportunities, you think about minus 10 years. What are kind of the obvious areas?

We have a multi-analyte call it like a mini grail type of application we're looking at gene -- 170 genes on a play week, and we're looking at that. We can improve Epi so it could truly be a higher specificity test and be both rule in and rule out. We could do that now. We could do everything -- every organ you can think of kidney, whatever, we've got a signature for, and most of them have been validated, but no clinical as yet. So we're either going to do them or partner. And the biggest decision on doing here now it's more about the channel. We've got to create a whole new channel of sales force or not. And also, our [indiscernible] MAC NGS is not one of the easiest to work with. One of the big reasons with the Thermo for this because it probably saved over a year in commercialization because they're in the CareDx MAC. Your ancillary won't say a rubber stamp, but a lot easier than us starting from square one with NGS. And they already want new things. So they have other organ rejection products they want us to do for them. So when I say there's a dozen and 10 years out, this is a $1 billion platform. I'm not kidding. It's at least that. So we have blood plasma versions for bread -- breast and lung right now. They're validated, ready for clinicals. We could do a colorectal on top of cell for DNA, make -- hopefully make a solution like Cologuard even more -- even better. I mean for me, I mean I would look for a solution there where you want to find polyps at every size, not just when they're cancerous. We get colonoscopies to get rid of polyps before their cancer, not be told they're cancerous afterwards. So I think that's a possibility we could work on with -- maybe with Kevin, we'll see. But I'd love to. So there's a lot of run, a lot of potential. So we prioritize. And we have this Asuragen leadership team. I'm not kidding you. It's like 1 month, we had like a 20% improvement in execution just because these guys know how to run a diagnostics business and know how what the message should be with doctors and what's right way to sell through. And what's the right way to white glove the first time you sell through it through a doctor's office, so you're not leaving the chance things that can go wrong and leave a bad experience, learned a lot the last 6 months with the Asuragen team, I'd tell you that. And they say the same things. Some of the big reasons they allowed us to buy them because they wanted Exosomes to play with. So...

Okay. And maybe another topic that's been very -- at the front of mind for a lot of investors has been the ability to take price and sort of how that's been pushed through the portfolio where you're having more success, where you're having some challenges, sort of...

Well, you saw our numbers, 39.6% margin. So we're still ahead of schedule getting to 40%. And how do you do that with all the wage inflation and all the all the inflation we've seen because we've seen it too. So we have pushed a lot of price this year. We are not a commodities broker, right? So we're known for really good difficult science-based products and you can price up if you have to. If you can't raise prices this year, you're never going to be raise prices and people understand it. So you get away with it. And you don't get too many chances. You get -- you usually get like one chance a decade to do -- really go after it. So I did that at LCD at Thermo, 25 years at 3M. You only have so many times you can really price up widgets, and we did that and with good reason. And we've always been like a 1% net company. That's a goal I've kind of to try to get to. And this year, we're probably closer to 2%. So we're more than covering inflation, some -- and we're maybe not done. I mean we instruments are probably our biggest risk area, making the components and such. And so we'll see. But you also can't do it willy-nilly. It's usually July 1, January 1. And you have to be careful in your contracts. If you've tied yourself to just CPI, you're a little behind right now. So you got to be careful if you contract and look forward. But we're doing all that, and it's going to be fine.

Are there -- is there any pushback from customers sort of -- and how frequently can you mention twice a year? Is that sufficient to you either come back again and again? Because we've heard different feedback from other companies in terms of what they're hearing from customers.

We don't have a lot of customers that are so big that we have global supply agreements in place. So that's where you're run in trouble. So we're very diversified, as you know, our customer base and prices kind of where they are. So in a lot of cases, we're the only game in town, and that's the price. We're not a cheap protein, but we're a highly bioactive protein. We are cheaper in antibodies than Abcam, and we probably can price up, but like everything else, it's a portfolio, right? So you've got things you can price and things you can't. It's a commodity side of everything right. So instruments, we've taken up, but we were a very cheap instrument for which we're always a good bang for the buck instrument platform anyway. So we probably had more pricing room in that. So it wasn't really made with too much difficulty. I think on our spatial biology, we're pretty pricey there compared to other methods and IHC and such. So I think we're going to be careful there. We've had not as much success, but everything is different.

So I think in this environment, I mean you mentioned exactly. It's not necessarily commoditized products. It's very specialized antibodies, a lot of these reagents. But even with that, if everybody is taking price and everyone's taking a 2% price or 3% or in that ballpark, then as long as you don't really stand out 1 way or the other, it doesn't really mean anything. And at the end of the day, if the scientist has to do -- the workflow has to do the project, what are they guided.

Well, instruments are one thing, but on reagents, the impact of reagents on clinical is a rounding error. So...

And then the other point that we've had increasing discussions around is labor inflation, wage inflation and not just from a price perspective but also from a difficulty finding talent because there are a lot of people hiring, there are a lot of people expanding capacity both on the research side, the sales side, the manufacturing side. So could you talk about the workforce, the talent pool of just hardcore biology?

We're still in double-digit attrition. We're better than we were 6 months ago, but it's still not good, especially the younger people. It's mostly to employees in the company 3 years or less. In a lot of cases, they've never been at a site yet. They've been working from home the whole time. They work for us, and they're picked off of the phone call. We do -- we [ we've excellent reviews ] [indiscernible] and are you unhappy? No. You like it here? Yes. What are you going to do? I thought after this year, I'm just tired and I'm going to take a year off. I mean it's we've heard it all. It has been a lot of that. There's just fatigue. And again, people's values have changed. I think people not working in offices for a year and some of this change some of -- a lot of people's values with what makes them tick as a person or how they want to work. And if you're an IT, I mean if you're not allowed to work at home part time in IT, you're not working for that company anymore. We were like all in '20 for hiring. Finally, we had to go to a policy with manager approval of 2 days a week or better, you can work at home or we weren't going to get any more IT people. And that's just the world has changed. And maybe it will come back. I don't know. I will tell you that I don't believe at all in young people working at home and not being mentored and sponsored and seeing the activity in office and the 3-minute water cooler talks and just there's a lot of reasons to work collaboratively. And I think with senior people are specialized people works okay, but it's not a good thing for young people. And there -- you already see articles off there, how the promotion gap is growing. The people going in the office are getting promoted and the people working at home are not getting promoted. Go figure, a big surprise. So we're not through this yet. It's going to be a while. We just did an engagement survey because of all this, 76% participation, which is really good for a survey across the whole company globally. And we had 88% positive results, even on the comp stuff, which usually never score well anywhere. But -- so no one is really that unhappy. They just want different. So we'll grind through it, but I do know it creates a lot of fatigue. You really can't run a business not for very long with great execution if you got double-digit attrition. It gets very difficult. So that means the good people are working way harder to cover for the people that are not there we're not working as hard, so you don't want to lose them, right? So we've done other things, too. So we've extended equity stock options to all salespeople across the company. And that's a little unique. Usually, you've got a bonus model or a commission model for commercial. So we've morphed that. And that's done a lot to keep our salespeople intact, and it won't take a long couple of years, and they'll have a bank and they won't be leaving with a phone call. So...

Any other questions from the audience? I got a couple more. All right. It's something you touched on earlier, but it's a point we've debated for a while is sort of the evolution of the company, the evolution of the space and where do you see the next leg taking in? And is it more via M&A? Is it more the internal investment? Sort of what do you see as the future opportunities? And what does Techne look like 5, 10 years or more?

Well, in 5 years, we're a little less now, we'll be at $2 billion. With Wilson Wolf, we'll be at $2.3 billion to $2.5 billion. In 10 years, we'll be $5 billion. And we'll probably -- instead of being 5 divisions, will be 10 to 15. I think you'll see cell and gene therapies break into a few things. I think we'll have 3 or 4 different platforms division-wise for diagnostics. We'll have more automation for some of our platforms. We'll probably have 1 or 2 more instrument platforms to go with our -- ones we have that are more around productivity, next-generation flow cytometry, things that work with our reagents and our kind of content, I think would make sense. None of that's going away, right? There's lots of innovation. We did a deal with Akoya for automating our spatial area. There's a handful of new countries like that. We're not buying anybody yet. I kind of want to wait and see who emerges as a leader and what team might work best with our company, whatever. So we'll probably do something in that area as well.

But what's [indiscernible] vertical?

I think the key thing is that -- we're not serially -- M&A is not a serial strategy for us. We have 2 segments, 5 divisions. It's a good 5 unique legs to the stool in our company, and we're opportunistic along all 5. And whenever opportunity presents itself anywhere there, we have strategies for all of them are important for M&A, not just one. If I had to pick, if there was a 3-way tie, but certainly would go cell and gene therapy maybe first, but it never works like that anyway. That makes sense?

No, absolutely. Yes. Got about a minute left. I'm going to go back to Derik's default closing questions of what's underappreciated about the company? What's misunderstood? Or if there's anything that we're not asking about any topics that you think people are not given enough attention to.

Well, certainly, there's nothing baked in Wilson Wolf. We don't own anything yet, but this company is ours. So that will be a big add-on here within a year or 2. 70% of our supervisors now so virtually our management in this company, 70% are females. That's unheard of. We're 25% Chinese. So our diversity is very big deal. So we take our culture very seriously there. We have a lot of ERGs. And we're -- I think we've got a nice culture that doesn't have a lot of politics yet. And I think what also differentiates us is our prioritization process that we do every year. It takes us 3, 4 months and allows us to really focus on what we're going to do and not do and get everybody in the decision ends up being -- it ends up flowing into what it becomes a budget every year, but it's a bottoms up. So I'm not handing on targets, you've got to do this, you got to do that. It comes up to us and then we review and help. And we actually usually tone them down, I don't think you can do that, that's too much. So when they own it and they build it up through prioritization, they're more apt to provide -- to execute, and that's worked for me for a long time, that methodology. So a lot of unknown things we just don't talk about that we are doing to build the company because we've grown from 800 people when I joined and now we're going to cross 3,000 this year. And like I tell my team, and now it's getting very heuristic. Now there's a real bell curve. And at those tails, you're going to see everything, divorces, love triangles, all the stuff you don't want to see in a company. And also, it's all going to happen. So get ready. So it gets harder the bigger you get.

Okay. And well, on that note, I don't have any...

We're no different than anybody else.

All right, Chuck, thanks so much.

Thank you.

Appreciate it. Great time.