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

Okay. We'll go ahead and get started. Thanks, everybody, for being here. Good morning. Welcome to the Jefferies 2022 Global Healthcare Conference back in person. It's great to see everybody. I'm Brandon Couillard, I cover the life science tools and diagnostics space. Very happy to have Bio-Techne with us back at the conference this year. And here to share an update with us, CEO, Chuck Kummeth. Chuck?

Thank you. Is this working? Can you hear me? Good. All right. Well, we'll get this started. It's been a while since we have given a presentation actually, so it's good to be back. All right, good. First, our safe harbor. You guys have all seen these before, but we recommend you go online and look at our reconciliations and see all the real data. Overview of our company. We're about a $15 billion company as of January to now. Like everybody else, we've come down a fair amount, but not as much as most, so that's good. We finished last fiscal year at $931 million. This year, we're clocking in $1.1 billion or better. We're about where we told the world we'd be, roughly a mid-teens kind of growth rate for this year. We are -- right now, we're at 2,900 employees. So the 9 years I've been there, we've grown quite a bit from 800 up till today. We're headquartered in Minneapolis. We have 35 sites though because we've done 18 acquisitions, and they've been bolt-ons and such. We are more of a tool, a picks and shovels type company, so we're 81% consumables. We do have some instrument platforms and 10% of those consumables are related to instruments. So it's really a 20% kind of an instrument-based business model. And we have a fair amount of growing royalties and services as well. You can see the platforms there on the right, so we're the world leader in proteins. We pretty much created the category 35, 40 years ago. We're one of the top 5 in antibodies, along with -- there's about 100 players out there and that's very fragmented, as most of you know. Immunoassays, we're very -- if not the leader, we're probably close to. We are the world leader in ELISAs. We created ELISA kits 35 years ago, and the R&D Systems brand is the gold standard brand for all these types of reagents and assays. We have automated protein analysis instruments, I'll talk about that. And basically, we have 3 platforms that we sell. We're into spatial biology with an acquisition, ACD, 4 years ago, and we are probably the leading business in spatial biology right now. And we're into liquid biopsy. With all this assay technology, we went into diagnostics. We look at diagnostics, it's nothing more than where the application-specific assays, and so we thought we'd try our hand and that's been going very well. Along with that, we've been like their products and we have reagents controls. We're the world leader in controls for hospital-based equipment. So a lot of stuff packed in, really a little package yet. We're just not that big a company yet, but we do have, I think, a very nicely sized life sciences portfolio. And a lot of them are unicorns. So we're -- a lot of them in the stable. Here's our breakdown. So we're still mostly in Americas. We have a pretty good size business in EMEA and growing in Asia. In the 9 years I've been here, that hasn't changed too much. It's gone from about 12% to 17% in Asia, and then we've dropped a couple of points in the U.S., but still largely there. What has changed a lot is on the left side. We used to be very, very heavy academia, and that has come down significantly, and we see that as a risk mitigation. So we're -- we've now grown into biopharma, which is by far the biggest area for the company. And our distribution OEM has grown a lot as well. We are the world leader in Luminex-based technology. So as an example, we are the Intel Inside for Luminex, so to speak. So the antibody pairs, unless everybody's panels come from us, so -- and distribution is more Asia related in our OEM business as well. And again, didn't crack $1 billion last year, but we will this year, Brandon. Pretty easy, kind of a 4 quadrant here for strategies. We were definitely small enough and we focused a lot on geographic expansion yet, especially China, and India is coming. I'm a products guy. I spent 25 years at 3M and then 4 at Thermo, and I have always been a products guy. Spent most of my career in the laboratory. So innovation is kind of in my DNA and we do a lot around innovation and measure it and everything else. So M&A is also a big part of our strategy. We're nearly a 40% operating margin business so we create a lot of cash, and we want to put that cash to work. Even with 18 deals on our belt over the last 9 years, we are now back to net debt-free. So we've -- we need to go back to work here in. And then lastly, we're working on a lot on the ESG like everybody else, but we always focused a lot on our talent and our culture. I really always wanted to build a culture that was based on product innovation but also, as much as possible, politics-free culture and then really focus on a meritocracy, and it's really worked well for us. Most of our executives have come with acquisitions and stayed, and I'd say it's attribute to we've got a pretty good thing going. And as I mentioned, though, we are definitely focused on ESG. We'll have a lot in our annual report and our proxy coming out here later this year. We've always been pretty good at social and governance side. It's more about taking credit for that and getting it written up. But environmental, we're like everybody else. We've got to figure out how to measure this stuff, and I don't think you're going to see us as a big polluter or anything. But like everybody else, we have to take an effort of measuring what we are using, and we're very serious about it. And we have to because our young employees, as you guys know, are all very serious about this. If you don't have a big focus on this, you won't attract young talent, so it's very important. It's also the right thing to do. Financially, it's been a really good run for us. We had a -- you got to kind of look at the COVID years as a divide by 2 scenario. But if you do that, we're kind of 11% in '20 and then 13% million last year. And I had mentioned, this year, we're on track to kind of hit the guidance we gave, which is roughly 15% or so. We should be in that ballpark, so it's been nothing but up. Big step-up in income. We really focus on our operations. We're all from big businesses. We're all Six Sigma trained or something, and we all understand operations. And we strive for efficiencies as we scale our businesses and it's working. And when you do that right, guess what, you get more cash, right? So the cash has been growing as well. We're 5 divisions in the company, 5 distinct business units, and we separate it by 2 segments, the Protein Sciences and the Diagnostics and Genomics. And that's how we report and that's how we govern ourselves as well. So I want to go into each of these divisions a little bit, but the deck's online. It would take a long time to go through all of it in detail. But primarily, we have the reagents and instruments on one side and proteomics in the other. It's where we put in the genomics and our diagnostics and our OEM business and such, and I'll go into each one. So starting with Protein Sciences. It's kind of the core of R&D Systems. It's where our proteins and antibodies live as well as our immunoassays and our instruments. They are all related to protein discovery, biomarker discovery, more or less. And it's quite a big portfolio. If you guys have never looked on our website, you'd be probably shocked. For our size of company, we actually make and sell over 6,000 proteins. We make and sell over 40,000 antibodies. And then we source another 400,000 antibodies from about 60 different suppliers, which makes us, I think, the largest supplier of antibodies in the world. With that, you have to have a hell of a website because you need a good search engine to get through all this, and we have an exceptional search engine on our website. Immunoassay is no different. We have thousands of immunoassays, ELISA kits, Luminex. And then we have our instruments, which are in 3 different areas, but one of them also, an immunoassay platform, microfluidic, which I'll talk about a little bit. So on the reagent side, first, proteins and antibodies. We -- we're by far the best protein reagent maker in the world for quality, for purity, for bioactivity. We're known for the R&D Systems brand. It's nearly 40 years old and it's a gold standard brand. From a great protein, you can generate and create a great antibody. And from a great antibody, guess what, you can create a really good assay. So they kind of go as 1, 2, 3, and we're just known for that. It's a pretty good sizable market. I'm going to show you a slide at the end. It talks about all our other markets, but we're really under 10% share in all the markets we serve, including this one. Even though we've been in it forever and we're the leader in proteins, we probably are roughly 30% to 40% share in proteins in that market, but it's a small part of the overall market that we play in for research reagents. And applications, so we're in pretty much everything. We're the picks and shovels guys. So from biomarker discovery to cell imaging to Western blotting, people doing flow, we sell antibodies for flow. We're one of the world leaders for immunoassays as I mentioned. We create the category for proteins. TGF-beta was our first protein. It's still our largest seller. We also have a small molecule business unit with Tocris as a brand, and we're the world leader in ROCK inhibitor, so it's another example. And guess what? Small molecules is catching a lot of traction for GMP for cell therapies as well. So it's been -- it's growing the best it's ever grown for us. On the tool side, as I mentioned, you got the assays on top there. They all kind of flow together. Simple Plex, microfluidic, 4 logs, a dynamic range, 1-hour sample to answer. No crosstalk, we can do up to 8. We can plex 8 different analytes at a time with no -- 0 crosstalk. So there's nothing like it. It's so good, it can really be a diagnostics platform. So we are taking it through a 14 -- 1345 process as well as a 510(k) process. Western blots, well, everyone in this room who's worked in a lab has done a Western blot probably by hand. It's a right of passage taught in every institution, but it's messy. It takes 1 to 2 days. You got to work with gels. You got to transfer to films. It's only as good as you do it yourself. It's what's very variable by the person doing the work. And we have an instrument, the only one in the world that automate it. So our platform is fully automated. It's a 3-hour process. The plot looks spectacular at the end. It's very reproducible because of that. It's finding a lot of applications we didn't think about even, so we've got -- we've had double-digit growth in all 3 of these instrument platforms. But on a simple Western, as an example, big pharma really doesn't waste time on doing hand Westerns. They've got a lot of mass specs sitting around and so they can use that. It's kind of like smashing hands with a hammer, but it works really well. Well, guess what, it's expensive to run mass specs to do this. So they have now seen what this tool can do and we're selling a lot into big pharma who are coming back to doing Westerns again. So it's one example. But primarily, they're -- this is just biomarker discovery-related work. On the bottom, biologics, that instrument is also a very quick instrument, 15 minutes. It's used in a lot of manufacturing lines and drug companies for measuring protein purity for protein-based drugs. But it's also finding a big home and traction now is in cell therapies. So it's becoming a QC type of instrument in cell therapies as well. Again, on the left, you can see the market's huge. We're a fraction. Just to tell you a little bit Simple Western. That market is $1 billion, $1.5 billion. And it's all reagents, it's all consumables. We are lucky for 15% yet in that market. We've been at this 5 years. We've got over 2,800 machines in the field, and we're really just getting started, to be honest. So it used to be no one believed it, so you had to do a demo before you could sell anything. And now 90% of our sales are without demos. So it's really -- all 3 of these have kind of hit their tipping point kind of across that chasm, and they're really starting to accelerate their growth. Which is usually when it happens, you usually get to about 1,000 instruments in the field, and then now there's enough awareness and people seen them, and Sally down the road has used one and just wants one now of her own, right? So we get a lot of orders like that now, no demo required. So moving on to Diagnostics and Genomics. These are really 3 different business units. We have the spatial biology unit, which is the ACD brand, which was a company we purchased 4 years ago. Electro diagnostics, which is our exosome platform, our liquid biopsy platform, and Asuragen, which is a carrier screening diagnostics platform and a 15-year-old company that's for experts and regulatories. So we combine them into one division so that the exosome children had adult supervision, so to speak, so -- and it was greatly needed, trust me. Diagnostic reagents has been around forever, with the beginning of the company, actually. We were originally just a controls company. We are the world leader in controls. It's not that big a business, you don't like to do so much. But we -- it's steady. It's 30% op margins and it's forever. We're having a nice tailwind in COVID because a lot of these tests you're all doing, they need antibodies and they buy their antibodies in bulk from us, so we're getting a lot of COVID tests. So starting first is spatial biology. It's in situ hybridization, a lot of patent IP protection. The beautiful thing about this is that it's translational down to single-cell resolution. So you hear a lot about spatial these days in screening and screening up to thousands maybe of analytes at a time, proteins, et cetera. At the end of the day, you got to get translation. You got to look at a tissue and you got to look at cells individually to find out what's going on, and this is what this technology does. So we are downstream from everybody out there doing a large plex. And we're the world leader in it. We have the best resolution because we have a tremendous signal because of the Z probe technology, the amplification technology that works in situ. And it doesn't destroy your sample. Your sample, your morphology is totally preserved. So even if you want to do other things, you can once you played with our stuff on your tissue sample. So it's been a double-digit grower. And again, you can look on the left. Over $1 billion market, I think it's probably even bigger than that when you think about where spatial is heading and why there's so much activity, and we're barely scratching the surface for share yet. A little bit about exosomes. And a lot of people ask us, why are you guys in liquid biopsy and what makes exosomes so special? And can you really compete with the big guys out there in cell-free DNA, the grails and the exact sciences of the world, et cetera? And we actually think, yes. Exosome is just to win as a platform on every scale. The best reason why though is because exosomes are in every bodily fluid in your body, and they carry cells from every organ in your body all the time. And exosomes come off of living cells as well as dying and dead cells. For a cell-free DNA, it's mostly the dead cells. So if you're looking -- if you're trying to find evidence of tumors or cancer and for cell-free DNA, it's not upstream enough, it's not preventative enough, so exosomes are way earlier. And they're wonderful because their vesicles that hold active RNA, completely intact and ready to interrogate. And that's the basis of our IP is how we actually isolate and interrogate the exosomes to get at the RNA. That's what makes us so special. And from all of that, we can make an amazing diagnostic. And we have a big future. If you think about things like Parkinson's and Alzheimer's where you've got a blood-brain barrier to worry about, this is an excellent companion diagnostic platform. Because we can tweak, you can take a blood sample and you can interrogate the exosomes for RNA that came from the brain. And it's just one of the key areas to go after, actually understanding what's going on. So we have a lot of partnerships going after neuroscience and using exosomes. Probably a few years out but there's a lot of activity with us. We've done -- the early stuff is easier on urine, and we have a great test in the market for prostate cancer. We've signed up Cal Ripken Jr. as a spokesperson. He thinks we saved his life. I heard him personally say that on a stage just a month ago. It's been wonderful to help out The Iron Man, and he's very grateful and he's been a blast to work with, too. But it's literally pee-in-a-cup technology, and we just did a second test that is now licensed to Thermo Fisher and for kidney rejection. And as you know, kidney rejection is a really big, big issue for many people. And most people don't realize, but in your first year of a kidney transplant, 15% fail. And by year 10, 50% fail. So you have to have an active surveillance on this organ. And up until recently, there are some blood tests in the market. But up until recently, it was doing biopsy. And you had to travel to an organ center to do all this stuff, so it's very difficult to maintain a lifestyle when you've had a transplant. With us, you can pee in a cup and mail it in, and then we can find out with a 7-gene signature what's going on. It's PCR based, so it's quick, it's cheap and it works, and we have papers on it to prove it. We're worth spending in the market. So that's just getting started. But we have 2 in the market, and 10 years from now, we think this is a $1 billion platform, quite frankly, as a platform. It will be a half a dozen to a dozen different indications, but if you look out a decade, this is going to be a monster. And I just said all this basically, so we have the evidence. We have the studies. Kind of a remarkable thing if up until now, there's just been PSA as a test. And if you're a male and it goes above 4.0 and the urologists, they play conservative and you get a biopsy and they're not pleasant. And so guess what, you get your first diagnosis and told you come in for a biopsy, 60% of the patients don't show up. But if they go through our test and you get an EPI score which mandates that you should have it, we have 80% show up nearly. So it's really good for urologists to understand that this is a tool that can really help them with their practice and it isn't just replacing biopsy revenue. So it took us a while to figure that out, but it is amazing and it does work. And we're very close to being able to have it be approved for surveillance as well. So that's the last thing to get through Medicare here, but we're very close to that, hopefully. We also have Asuragen. I mentioned we bought them. They're the world leader in Fragile X and BCR-able, but they also have now a cystic fibrosis test and an SMA test in the market. But we just as much bought them for their people. They're regulatory experts, and combining this group with our exosome group gives us a powerhouse business unit for -- in a diagnostics market. And it's helped improve everything in our operations around our own exosome platform and the revenue is scaling accordingly because of it. And probably lastly, our reagents. Thousands of products, but we're the world leader. And if you're in the hospital and you're having your blood sample for anything, these blood counters and things have to be -- every shift, they have to be tested, and so we sell the controls for all this. And we sell them worldwide and it's a good solid business. And then we do -- off of that, we also do OEM work, so a lot of antibodies are sold in bulk and in OEM as well. So we're -- we also go beyond just antibodies. So a lot of the assays you see by other diagnostic players out there are actually kind of made by us and OEMs. So we're an assembler, so to speak. So we're good at making up brew. Now I'll talk about our latest growth platform. This is where we probably have the biggest push in the company and our biggest investments, and we're really banking on this happening. And we're showing some data to show we're on the right track. So you guys have all heard about the miracles happening out in cell therapies using T cells, so we're all over that. So we're trying to close the loop here with a complete workflow for T cell therapy and in NK cell therapy. And that includes having the BMP proteins, which we built a $50 million factory recently to do that. It's capable of making as much as $200 million of protein a year, and that's online now. It's -- we sell beads. We sell instruments for these QC work we talked about. We can aggregate. We also have JV with 2 companies, Fresenius Kabi and Wilson Wolf, with a bioreactor and the leukophoresis instrument, which is also critical. And we have a dream, we have a holy grail dream, and that's to really sell the bioreactor someday with the media and our proteins all already embedded, ready to go to work. Right now, if you know much about cell therapies, what's done in the hospitals with patients, it's a lot of handwork. It's a lot of breaking sterility. You're welding bags together. You're doing extra tubing, and it's kind of a mishmash of stuff. And guess what, you also heard it's very expensive. It's very expensive because of all this complexity around it. We're trying to eliminate a lot of that complexity and bring costs down over time, which we think we will do. And a lot is based on Wilson Wolf. So we have an agreement to purchase them. Right now, it's a call in the company, and we have a first tranche that we'll pick up when they hit either $55 million in EBITDA or $92 million in revenue, which we think will be later this year. So they are on a tear growth wise, as we are. We're growing 100% organically with our GMP proteins and he's in the same kind of ballpark. The difference is he's been at it about 10 years longer. So Wilson Wolf has -- created by John Wilson and he's -- works for every KOL industry and known by name. He's been doing us for over a decade, and he has over 800 customers. And you really could call that contraption. That is really the bioreactor de facto standard in the industry now. And we'll have it as part of our company. And you're going to see that full in media and with -- embedded with proteins and other reagents coming from us in the coming years. We'll pick up the whole company when it reaches $225 million in revenue or $136 million in EBITDA. And yes, that's a full 60% EBITDA model, and they're running at that profitability right now, so it's real. And that will take no more than 3 or 4 years, and we have to come up with $1 billion to do that. But as you guys look at your multiples table, you're going to see that's a pretty good deal. This is the one we got to build, yes. Sorry about this. Just a slide just to show how our tools are working. We have tools that will work in the process of gene therapy for identification, the purity, the potency and the stability, so all facets. And we could have a slide just like this also on regenerative medicine. So we're the world leader in that as well, so supplying the tools for that is growing as an industry. So we've really got all the things we think we needed to do there to win, and it's picking up steam. And every one of these platforms are growing high double digit in the cell and gene therapy space. And this is probably the last slide. This shows the major markets we serve. We are just scratching the surface in every market we're serving. So we're a little over $1 billion company today, but we hope to be, in less than 5 years, at $2 billion. And we feel better about that number now than we did about this chart 5 years ago when I said $1 billion, so we're on track. And you can see how it all adds up. We need to have 50% growth in our cell therapy business and our exosome business, and we're running close to 100%. We need to be high single digits in our core businesses, our reagents business, and we're running double digit and we have been for years. So we think we're on a pretty good track. And there's no Wilson Wolf in this number either, so you really can tack on another $300 million at least on that. So we think we're going to be there. So with that, thank you.