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

Hi everybody. We'll get started. Good afternoon. My name is Valerie Dixon. I'm a Managing Director that covers the life sciences tools and diagnostics space in Morgan Stanley's investment banking team. Very excited to host Bio-Techne in our fireside chat this afternoon. We have Jim Hippel, the CFO; and David Clair, the Head of Investor Relations. But first for important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your sales rep. With that out of the way, we can get started. So Jim, thanks for being here.

Thanks for having us.

We'd love to give you an opportunity to, if you don't mind, just spend a few minutes to tell folks who aren't familiar with the story. We should be by now, a little bit introduction and your latest thoughts on Bio-Techne.

Sure. I'll be a little brief here. I mean Bio-Techne as a company has been around for 40-some years, pretty much created the proteomics production for commercial business. Essentially, we are the world leader in our research use proteins, antibodies from those proteins and assays that are made from those high-quality antibodies, pretty much invented the category, again, some 40 years ago. And over the past 8 or 9 years under Chuck Kummeth, CEO tenure, he's built up a leadership team who has strategically moved the company forward and great strides to enter much larger markets, leverage our core reagent portfolio into much larger markets, both by taking our assay expertise into the genomics route with regards to spatial biology as well as downstream into larger commercial diagnostic markets for -- ultimately for patients in the form of the Exosome Diagnostic platform. And we've taken our core proteomics business and have parlayed that into unique instrument platforms that are productivity tools for our customers that use our reagents; and now more recently, trying to move more downstream also into -- closer to drug clinical trials and ultimately production with the new and emerging cell and gene therapy space. So that's pretty much it in a nutshell. Our sort of core reagent business has continued to do very, very well. Geographically as well, we expanded a lot in China. And we kind of have 4 legs of what I call major growth ahead of us. We've expanded our addressable markets from roughly a couple of billion 9 years ago, so somewhere between $15 billion and $20 billion today. And we're still less than 10% penetrated in all of those markets, so a lot of room to grow.

Yes. I think, yes, we need to pull back those layers a little bit for people to appreciate all the different growth drivers here. But this has been an incredible milestone year because, for the first time, you surpassed $1 billion in revenue, which is really exciting given if you're under 10% penetrated in 6 different markets, you got a long runway to go. You put out some new targets doubling by fiscal year '26. Why is it important to this organization to put out those types of revenue targets in the public domain like that?

Well, I mean, it's what drives us internally first and foremost. And so if you're going to talk about it that much internally and you're going to recruit off that, you might as well make it public as well. But I mean that's what we're laser focused on. And we are laser focused on that back when we were a $300 million business, and we told people we'd be $600 million. And then $600 million, we said we'd be $1.2 billion, and we're down there right now. So the bottom line is, is that we've gone from $300 million to $1.1 billion in the course of 9 years or so -- 8 or 9 years. And like you said earlier, we still feel we're much closer to the beginning of this journey than we are anywhere near the end. And so -- and because we believe it. And we have the platforms, the science and the management know-how in terms of how to get there and execute. So...

So -- but you're the CFO. That must be annoying if you get the question every single quarter when you're out -- when you have a target that's out there for 4.5 years to hit a certain number. So as you think about the elements of your business right now, what does it take to get there? What are the key assumptions in terms of a sustainable -- now, we're talking 14%, 15% organic growth. Is M&A baked into that? What are your other assumptions?

So no, no M&A is baked into that. So M&A will be upside, and we will do more M&A. So there will be upside. Honestly, having those kind of long-term targets and aspirations and making them public and having our 3,000 strong employees behind it, in my mind, it actually takes less stress off the quarterly results because it's really about the destination and not as much about the journey and how you get there. If you've got 5-, 10-year horizons, you're going to have aberrations. You're going to have macro events. And we have a great team that can manage through them. But at the end of the day, it's the 5-year, the 10-year is what's going to drive ultimate value for our company and for our employees and for our customers. And so -- and how we get there, if you look at those various attributes I talked about, our instrumentation platforms, our cell and gene therapy strategy, our spatial biology, I mean we used to kind of joke that we were like a stable of unicorns, but it's kind of got a bad name right now. So maybe it's a stable of thoroughbreds. But the reality is for a company like us to have not just 1 product line but dozens of product lines, not just 1 market but 4 key markets that are in their emerging state and we are very well positioned for very strong growth, that's what gives us a lot of the confidence that we have.

Yes. I hear you using words like core franchise, core reagents. A lot of folks still consider you to be a reagents business, team controls. So how would you describe this transformation to these various product lines, genomics, protein sciences, diagnostics, getting into the clinic? What do you want to be when you grow up? Like what is the profile and mix going to look like as you're looking ahead the next 4 or 5 years?

It's always hard to predict what you might do from an inorganic perspective because we're very opportunistic that way. And it's not like it's going to be a catch all. We don't -- we're not interested in commoditized businesses. We're interested in businesses that are unique to -- somewhat unique to the world even. That's what gets you high gross margins. That's what gives you high bottom line margins. That's what our company historically has been all about. But our reagents are used in so many different applications. And they're at the core of the start of every research project. It's still a pretty wide avenue of opportunity. And being life sciences, there's always a new mouse trap around the corner, which is what keeps it exciting and vibrant, right? So it's not like a -- it's hard to predict exactly what we'll look like. I would say that's -- we put a 5-year plan out there that says, organically, here's what we'll look like. And I think we laid that pretty clear. Ironically, when you look at our 2 segments, the mix 3 to 5 years from now will largely be the mix it is today, just a lot bigger. And what we have in terms of the 2 real, I'd say, largest dynamic growers with the biggest market potential, on the Diagnostics and Genomics side, we have our Exosome platform, which is a platform, not just one test, and that -- so that has huge, huge potential. And then our PSS business, Protein Sciences segment business, we have our -- largely our cell and gene therapy, which is also just a huge space. And those 2, I think, will compete a decade from now as to which is very important to the company. My hope is they're both in still heavy competition for that title.

Just in the near term, what's getting you excited about 2023?

What's getting me excited about 2023? Well, I'd tell you right now, one of the most exciting parts is our Diagnostics and Genomics segment overall. Last year was a bit of a tougher year for our spatial business. There were some external environment issues with the academic being a bit softer and it's a little more academic bent right now. But we also had some execution issues in the sense it was, call it, the great resignation. I call it the great rotation. But it was a lot of movement of people. And that business is -- spatial is hot. It's hot for talent. We have some of the best in the business, and so there was a lot of rotation in that space, which creates some open territories, things like that. The good news is we've got those largely resolved, and we were back to double-digit growth in Q4, and we see that continue as we move forward. So I'm excited about the story on diagnostics and genomics. The past year to 18 months may have been, I don't want to say unbelievable, but more questioned, understandably so by the external investment community. Internally, we've never doubted its effort, its possibilities. And I think '23 will be a year where everyone else sees that as well.

So -- interesting. So there were a couple of acquisitions in there, Asuragen, ExosomeDX. Obviously, they feel like they're starting to gain traction. So are there particular milestones that you're anticipating around those businesses or just starting to get the momentum from the investments that you've made in personnel and...

Yes. Specifically on the Exosome Diagnostics, their commercial test they have today, which is the prostate test, cancer test.

Yes.

We purposely have not really made a lot of additional investment in that business the past 2 years because it was -- we felt -- we made investment more on the digital front in terms of webinars and things like that since so many doctors are basically sitting at home and patients not going to the doctor trying to get visibility that way. But in terms of investing in headcount and things like that, not a whole lot of investment. But we are starting -- now we're getting that emergence back. We are putting more money, and we're filling out the rest of the sales group. And it doesn't have to be a very large sales group because we're talking about the urology community, which isn't that large. We're probably halfway there up until now, and we see finishing out that second half of investment in this year and in next year. But we talked about last quarter, the test rates were up 70%. It's really starting to materialize the way we had envisioned. And some exciting things about that. I mean, why? Why now? Obviously, COVID is behind it. That helps. But the marketing message has changed as well. When we first bought the company and the management team and at that point in time, their go-to-market message was all around preventing biopsies, which was very much a pro patient marketing message and somewhat true. And it was true. The problem is you're marketing it to doctors first. And doctors didn't want to hear that. They immediately just thought about revenue going away. And the other statistic that's out there that was not appreciated was that 60% of all recommended biopsies of the patients never show up. And when a surgeon -- we brought a surgeon that -- a very experienced team came on. They identified this right away as an opportunity in terms of the messaging. Coincidentally, at the same time, Cal Ripken came to us with his story, which fit in that story pattern absolutely perfectly because he was exactly that scenario where he had creeping PSA score. He had a family history, did not want the biopsy at all, even though his doctor was recommending it. And his doctor said, "Hey, you just pee in a cup and see how it goes." And he did. And the test basically had red flares and says, you probably should get a biopsy and made him get one, and it saved his life. And so he's a great example of that, but that's been the change in the whole marketing message, and that resonates with doctors. And really quickly to put that in perspective also, we think right now roughly of the urology space, roughly 10% of doctors have actually tried our product, but there's a lot more doctors to go after. And we didn't really scratch the surface. But within that 10%, it ranges anywhere from 4 tests per quarter to 100 tests per quarter. So there's a huge opportunity for most of those doctors to get up to a ramp rate that's exponentially more than where they're at today. So there's just a lot of opportunity there.

Fantastic. You have a different fiscal year-end than a lot of your peers, and you posted some pretty impressive results for calendar second quarter. That would be your fiscal year-end. 17% organic growth, which is category leading. Can you just talk about where the pockets of strength were there, some end market dynamics, geographic areas of strength and weakness, and what you're seeing?

Yes. And just to clarify, we have 17% for the year and 14% for the quarter. But nonetheless, we thought we had great results as well. And it is -- it was -- I mean in our Protein Sciences segment, which is 75% of our business today, is across all categories, reagents, antibodies, proteins. You flip over the instrument platforms, all 3 of our main instrument platforms were double-digit growth. So it was extremely impressive performance by the teams across the board from a product line category perspective. I'd say from an end market perspective, if you look at it from geography, both Europe and Americas were in the mid-teens growth, mid- to high teens. If there was 1 soft pot, of course, it was China, which, for obvious reasons, being shut down for 2 to 3 months. Even with China at -- slightly shrinking for the quarter, we still pulled out those kinds of numbers. And China usually grows 20% -- between 20% and 30% for us, right? And then when you look at the -- peel that onion back and look at the end markets, in Europe, it was actually fairly balanced between biopharma and academic. In the U.S., all year long biopharma is blowing out of the water, and academic was a bit of a laggard. We did see academic start to come back in Q4 from low single digits up to mid-single digits. We think that's probably because of the lagged effect of COVID. I think academic institutions were a little bit more slow to come back and more eager to jump -- stay home when there was flare-ups and so forth. And then, of course, the budget's kind of getting resolved, and there was a lot of anxiety around that, and that became more clear in March. So we think academic will be a good year for us in '23.

Great. Thinking about the headline concerns that you guys are talking about, supply chain, inflation, Europe, energy crisis, COVID lockdown policies, sounds like...

It's scary, yes.

A little bit boogeyman, but it sounds like you've been relatively insulated from that. Are there -- is there any one of those areas, you mentioned labor, that is kind of a downside concern to you?

Well, to give you some examples of what we've overcome and then I'll share with you some concerns as CFO I have going forward, which won't be probably any different here -- from any other CFO sitting up here. But in terms of stuff we've overcome this past year, I think the 2 biggest things would be the labor shortage issue and the rotation issue and then, to a lesser extent, the supply chain issue. I'll start supply chain first in the sense that we have yet to miss one customer order because of the supply chain issue. So admittedly, we don't have a lot of material content in our products, so it's not as big of an issue as it might be for other companies, but particularly in our instruments business, we do. The teams have done just a great job anticipating it, getting the right sourcing. We start to stock up on certain inventories that we felt like were at risk, and we've been able to, again, serve our customer needs without a hitch. The bigger issue has been people, and we've been behind in our investment plans for about a year -- 1.5 years, 2 years. We did make some great progress in Q4 in catching up. But clearly, the great rotation was -- I mean, put it in perspective, we added a net, I think, 350 employees, something like that last year, but we hired 1,000 out of 3,000. So we were able to produce 17% growth for the year when basically 1/3 of our workforce was in rotation. So that says a lot about the other 2/3 that gutted it out. So that, to me, is a huge opportunity going forward in terms of productivity. Risk going forward, I mean, I think as I stand up here, we've gotten some questions around, hey, we grew so much the last couple of years. Why the forward view seems to be a little bit more tempered? I think looking at the macro environment for the next 12 months, it's very different than it was when we were sitting here 12 months ago, what have you, Europe being probably the biggest question mark as to what's going to happen there. You mentioned insulated. The words I describe it is I think no one's immune from a situation like that, call it, recession or otherwise. But we are more insulated than most industries. And I think as a company, we're also very well positioned to weather any kind of storm. Most of our growth is about taking market share, not necessarily need to be in growing markets. So I think we'll do fine. The history shows we did fine. If you go back to the Great Recession, I think we shrank 1%. And we were much smaller, narrower and less globally minded company back then. So...

Right. Switching gears a little bit. Cell and gene therapy has been a theme for a while. It's an area where you've made considerable investment. Can you talk about what you see as the potential there and further, an update on the Wilson Wolf option agreement and when do you think that might be triggered?

Sure. So we -- just like we view liquid biopsy as being the tip of the spear for where diagnostics is going, we believe cell and gene therapy is the next generation of therapies. And the CAR-T therapy for cancer is what gets a lot of attention. That's what everyone thinks about. But it's much more than just that. There's the whole regenerative medicine side, which actually for us and for our products is actually bigger for us than even CAR-T is. We probably don't talk about that enough. And we're actually in better position in that space than we are in CAR-T, and we're well positioned in both. But it is the future of medicine and every -- I'm not a scientist, but every scientist I talk to, both that work for us, customers that I talk to, I sat in plane ride over here with a doctor who was going off with me for 2 hours about it. I mean it's real, and it's the next wave of medicine, and we are extremely well positioned as a company to support that effort and how so is really by productivity because the biggest -- as an early-stage industry, which it kind of is a new way of doing drugs, the biggest issue is how you make these therapies in a productive fashion enough that it can actually be cost effective for patients to use in a wider scale. And all of our tools are geared towards that aim -- that end game, making it more productive, more scalable and more cost-efficient, higher yields, anything that goes along with that, which gets to the G-Rex with Wilson Wolf. So Wilson Wolf has a cell culture device that, in a container about this big, can -- on a single-use patient basis, can do the same thing that a competitor's instrument half the size of the stage would take to do. So it's extremely cost effective, high yields, and it's really taking the space by storm. They're already placed with 800 different customers. They've been a partner with us in our ScaleReady venture, which is a co-marketing agreement for many modular steps of this workflow, CAR-T workflow. And we're so well connected with John Wilson and Wilson Wolf that we were able to work a deal out with him, where we kind of buy his company in stages. And so I could spend 2 hours going on the background of how that was worked out. But to answer your question pointedly, we will make a 20% investment in his company when he achieves $92 million of revenue or...

Very specific.

Or $55 million of EBITDA, which John Wilson actually had asked that, that be put in there, like I've never had anyone actually say they want an EBITDA target. He thinks he'll hit that one even quicker, which we anticipate more of those 2 targets will be hit probably no later than our third quarter of this year. And then that will be like a $250 million investment we'll make for 20% of the company. And then when they hit -- correct me if I'm wrong, your data. I often get it wrong, but I think it's $226 million in revenue and -- or $136 million in EBITDA, we purchased the remaining 80% for another $1 billion. It translates into a 4.4x revenue deal, and it's a 50-plus percent EBITDA margin business. So we think it's quite a sweet deal, and we're extremely excited about it. And none of that's baked into our outlook at this point.

Great. I'm going to hit at one more, and then I'll open it up, so raise your hands so that the mic can find you if you have a question when you think about it. On your capital deployment strategy, you talked about it a lot. You've been very acquisitive, I think, 17 to 20 acquisitions over your tenure. With the cash you have in your balance sheet, can you talk about what you're looking at in terms of capital deployment? How big of an acquisition do you think you can do if it's something more transformative? And I'll pause there, but I have a follow-up to that.

Sure. I mean we get this question a lot, particularly as of late in the last year or so because there's been a notable slowdown in actual acquisitions we've actually gotten to the finish line. And that's really a reflection of our discipline. I mean we got a lot of questions. Were we too acquisitive or moving too fast in some of the earlier years? But the reality is our strategy hasn't changed one bit with regards to our approach, our financial hurdles, metrics that we look for, the strategic synergies that we look for. And because our reagents touch so many applications within life sciences, it does create quite a wide web of opportunities. And if you're too siloed on one, you're never going to -- you're going to see on every 5 years and not 1 a year or 2 a year. So we have a fairly wide web. Now that being said, clearly, the cell and gene therapy space, the spatial biology space are some of the more interesting spaces right now. But it's life sciences. And before you know it, there's something new in some other area that you never thought would there ever be a new innovation ever and there's one that pops up, and we want to be -- make sure that we're involved with that. So again, it's -- and M&A will continue to be the #1 priority for capital allocation the next 10 years, just as it has been in the last 9 years. I don't -- we're in a space where I think you almost have to -- you have to have that kind of mindset with regards to capital allocation.

Yes. I mean given the market environment we're in, there are a lot of bargains out there. So as you look across the landscape, has your funnel increased in some of the areas that were out of reach before in terms of valuations or multiples?

Yes. And probably partly to answer your last question, I didn't fully answer. We like to talk at an angle -- hit a [ bill ] well above our belt or so to speak, but barely. We've looked at acquisitions -- obviously, we do a lot of small ones, but we looked at some that were multi-multibillion. And using our stock as currency, we have no issue with that if it's the right deal, right? So we do have a very wide spectrum. And I'm sorry, the question you asked before I jumped at [indiscernible]?

The cheap stocks.

Oh, yes. Well, valuations. So the external market appears that way. I think most of the deals, we've hit all the deals we've done and where most of our opportunities are in the private market. It takes a little longer for that to settle in. I think this adjustment won't take as long as perhaps other cycles have just because the main reason for the escalation in private equity deals or private deals becoming not doable because they would just put it on the table. Here's our number, and if you don't like it, we're going to IPO, right? That was the #1 competition, and that's now kind of off the table at least for a while. So I think the reality of where valuations are will come down faster than it has in past cycles. And so yes, that should open up more opportunities for us to actually complete a deal.

Great. Any questions from the audience before I move on? All right. I'll continue here. Obviously, big announcement, CEO leadership change. I can go through all of his accolades. But obviously, he's had a strong number to you to help them with that increasing the market cap from $2.5 billion to I forget what it is today, something north of $12 billion.

Yes.

$300 million in revenue, you mentioned to now $1.1 billion this year, all the acquisitions that we mentioned. So obviously, whoever takes over the reins has big shoes to fill. So from your perspective, what do you believe is required to kind of take Bio-Techne to the next 10 years?

Yes. I mean it's my perspective, but I have a feeling if Chuck was sitting up here today, he'd be saying a similar thing. And that is I think Chuck would tell you his biggest accomplishment is -- there's the things that have been done over the past 9 years, but what makes them so great is that they're enduring. And it starts with a team. And he -- from scratch, he has built a leadership team that is -- I've worked a lot of big companies, and I wouldn't take any other team over this one, trade them for anything. They all come from bigger -- but most of them come from bigger companies. They know how to scale. And they all came in for the same reason I did 9 years ago, and that is I want to be able to grow exponentially, not incrementally. I want to be able to have a strategy and see it carried out and see the benefits of that. And so we all come from other places where we maybe felt more frustrated because we couldn't experience that, and we all see the opportunity here. And Chuck told me this 9 years ago and still true today, he said you left Thermo to be a CFO of a private equity, which I did. He goes, because you wanted the exponential growth and the excitement around that. He said this is the best of both worlds. It's got all the opportunity of a start-up and you never have to go beg for money again because we're going to make so much money. And he was absolutely right. And here we are fast forward almost 9 years, and it's more true today than it even was back then in my opinion. And so it's really the legacy of team, culture. Strategy has been the same strategy essentially for the past 9 years. Obviously, we polish it up every year and tweak it. But whether -- if it's an internal candidate that takes it, there's no question that if it's embedded in our culture, we'll just be carrying the beacon on for the next 10 years to replicate or more -- do even more than what we did the last 10. And I think that makes sense. The Board does its diligence and looks outside as well because I think there's a lot of -- I think there will be a lot more excitement, outside excitement about the company interest than there was perhaps 9 years ago. So we should absolutely look for the cream of the crop. And -- but whoever it is, it's got to be someone who is not looking to do what Chuck needed to do 9 years ago, which is revamp it. It needs someone who buys into the culture, buys into the strategy, might have their own ideas and hopefully does have ideas, fresh ideas of how to take it even farther but not necessarily change at wholesale.

So it sounds to me like there should be a high probability this is an internal candidate.

Yes. There's 3 great candidates -- maybe 2 great candidates and 1 so, so candidate. But yes, I mean -- and we're all -- we all have each other's back, and -- but we know the Board is doing external one, and we all accept that. We all get that. And the reality too is that it's still ways away. I mean even -- Chuck, he'll be here for 2 years. He'll likely be an Executive Chairman, and then he isn't going away. He's going to be on the Board. He'll be calling us every day like he does now. So it's going to not change that much at all. So...

I think based on past performance, that's a good thing. We're out of time. Thank you very much for participating.

Thanks again for having us.