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

All right. Greenlight means [ re-life ]. Our next session is Bio-Techne. We're lucky to have with us CEO of Bio-Techne, Chuck Kummeth. I'm Dan Leonard, I'm the life science tools analyst at Credit Suisse. Welcome, Chuck.

Glad to be here, Dan.

Thanks for coming. You just reported your quarter a week ago. So I thought a good way to start-off the fireside chat would be to highlight key takeaways from your September quarter results.

Sure. Well, the first thing is here it was, missed top line, I wouldn't say bottom line, but first missed ten or 11 quarters or so. But we kind of talked about that weeks before at different conferences, which was already really reflected in the stock, got mainly Europe. So, Europe was a little softer for us kind of a coming together a lot of for us at the same time, timing, comps, lot of different issues. The biggest thing for our quarter was tough comps, when we look across our peer set, our comps were double the levels of any of our peers saw. We're looking at 20% to 25% comps across our business, so it was really hard to overcome that. And we did really well, we did double digit across the board nearly in the U.S., just Europe was really pretty, pretty, pretty negative because again 20% plus comps primarily, but also some softness to a little bit in the -- the smaller biotech side of things funding wise and we had 1% of COVID headwinds. Just a few nits and nets kind of picked away, we had obviously like FX issue like everybody else. And -- but in general though of how the quarter stock flew from it and we expect it to be a good -- all except for the examples that we talk about Europe and really across-the-board and the number one thing really where we spend most quarters talking about how long it's going to take for us to get our Exosome Diagnostics running and our [ SPP ] back on track and they're knocking another park, so it's a really strong quarter for our whole digital and Genomics side of business -- Diagnostics and Genomics and especially exosome and we had 115% organic growth. We had 70 plus percent volume growth. We had 17% organic growth in our spatial business and that was mixed equally 17% biopharma and academia, so that's really a good indicator for that business that we're back on-track with that. So even our diagnostic reagents business, which is usually kind of volatile and usually mid-single-digits was low-double-digits growth and I do think we're finally with a pipeline that we can safely say it's a high-single digit grower for hopefully ever, but it's really looking great. So that's how the business is clearly smoking. Spatial doing the best, I can spend in couple of years. And North America on our core assays, antibodies, proteins, solid just waiting on Europe and then I should point out that September-October have been already so really good for Europe, so it gets kind of back to double-digit organic growth we hope so.

Was about half a dozen things, I want to circle back to from those opening remarks. First-off, on October trends, I thought it wasn't entirely clear on the call whether the October messaging was globally or return to double-digit growth, if that was a global comment or whether that was specific to the US, but it sounds like you're saying that's inclusive of Europe as well.

It's primarily Europe...

Primarily Europe?

Europe was the strongest. We'll see how we end-up here, but the US as well the US was really strong, so but it's definitely a big snapback for Europe.

So the business grew double-digits in both September and October?

Yes.

Okay. In smaller biotech, can you remind me how much exposure you frame for the business to small cap burn, capital market dependent biotech?

Well, we and what we call biopharma, our pharma used to be the significant piece of that. And now it's about 2/3 of biotech to 1/3 pharma. And that, that biotech is -- there is a good half that smaller, we sell to everybody and you know we're deeply engaged in any preclinicals and clinicals and a lot of in-licensing everything across-the-board where we sell a lot of juice for making things happen, right? And so people come to us early and so we're involved the very early stages. And I think companies in general are pretty well-funded, but they're being cautious now. So, there is definitely a cautiousness of buying and that's we saw mainly in Europe this last quarter, it wasn't that they were out of money, but they are worried about the future, they're worried about energy this winter. They're worried about the Ukraine and there and you can look at our booking levels, instruments -- our booking levels are -- our funnel is great. It's a strongest funnel we've ever had, so we should have solid bookings and it's taking longer to book. So it's taking longer to get capital decisions, it's taking longer to get purchase orders. Our purchase order size about the same in our reagents, not too much change there, just to growing cautiousness of maybe impending budgets getting softer or something but.

And how is that manifesting back to you, is that coming in just lower daily rates of sales to a certain cohort of customers, is that feedback from your sales team or how is that attribution getting bets?

Well, it's lower sales in Europe as last quarter because it was slower uptick in bookings and instruments as well as their agents, so no doubt.

Okay.

But, it's been picking-up in Europe and we'll see what happens, but I think going forward for the entire economy, I think for us, I think -- I think there is a consciousness it's growing. So and you just see it, but I'm just -- there is a recession probably coming in -- we've never, we're pretty resilient for recessions, but I think people are getting more careful is coming here and what they're spending on some.

With all that uncertainty, how are you -- what would you call your key initiatives and how are you managing the business over the next 12 to 18 months?

Well, I think it's -- I'd say the key tactic is still our digital platform, really focusing on digital excellence whether it's Ad word, spend in marketing and in webinars and all the things we do hundreds of things monthly. So we're really focused on that and making sure we're touching the customers and helping them understand we're there for them. I think having next it's the head count, it's the workforce, we've been seeing a lot of attrition last couple of years like everybody else, we were nearly at full strength here this last quarter, but not yet and so we're focused on becoming full strength in the areas that where we have growth and we have a lot of sites or things like spatial, exosomes, Namocell. China, we are definitely trying to fill out our teams completely, we're not worried about the future or any conservatism. So...

How do you see your business evolving in China?

Gangbusters. So it's come back 10 full points as last quarter, it will probably do that again this quarter hopefully. So we think we'll be at a -- we're getting a plan this year just under 20% because it's hard to make up a negative 4 start and we ever but and 6 this quarter. So but it should be over 20% run rate and by Q4 we think. So, no issues at all and now there is this, this big windfall coming. We hear about that for life sciences research, so hopefully we'll share in some of that should be upside.

How are you trying to position to benefit from that?

We have pretty good connections to with the government and institutions that are going to be receiving this and so we're making sure they're aware of it and where they can get in on and kind of works together with relationship, with institutions and receive that kind of funding.

And then what are you doing on the pricing...

And we do that direct, right? So we fulfill to a large extent through master dealers in China, but more and more the last few years, we've taken the relationships direct. So very, very close relationship with our sales team, we're now 200 people strong in China from '12 10 years ago, right? So we understand exactly where we are with the customers now.

Would you consider moving manufacturing locally?

While we do, already make, we bought PrimeGene and make proteins there and we're just launching a big new facility GMP factory in -- off the Suzhou area, but that's going to be our, well after for regen medicine locally there and then CAR-T and others like CGT, Celgene therapy. So, there is going to be a big relation all under the clinicals going on there to, just a lot of future there, so we want to be in on that. So I see that as our primary motivation for manufacturing would be in advanced things and China for China.

Is that analogous to the facility you just put up in Saint Paul?

It would not be, it would be more equal like not in a million in that, that's we equate to. There would be analogous just smaller. We're going to have to go a million and some things as well, but I don't -- I see us doing that in Saint Paul but I don't see us doing $1 million in China, I guess that's my point.

Understood. Pricing is a hot topic amongst all companies in the economy right now, what is Bio-Techne trying to do to drive pricing in inflationary environment?

Cover inflation and we covered it by roughly 40 basis-points since last quarter, so we had -- we had roughly 4% net price which is a record for us since I've been there. So I think we're doing all the right things to cover our costs and stay at the margin levels we're expected to be at. And more to come, we're going to do some more in January, where the biggest price changes are in July, January 1.

How would pricing tailwind over calendar '23 compared to what you've experienced in calendar '22?

Probably a net 3 better...

Better?

Yes.

In '23?

Yes, '22, let me think.

You guys are off-cycle, so I always...

I'm trying to get exactly...

Try to fair and [indiscernible].

It's probably close to 2, probably we should do better, maybe not the full former every now. So...

Understood.

Because there's a new way of coming in January mainly. So...

That's typical correct that you have January..

Very typical, right?

Well let's pivot to talking about some of the line items within the 2 business units you pour Protein Sciences and Diagnostics and Genomics. To start-off on Protein Sciences, the core reagents, part of that business is the historical core of Bio-Techne, that had been growing double digit, surprisingly been growing double-digits for years now.

Right.

And...

We only promised for mid-single digit. We're little victims of our own success there too. People get used to it right?

So what drove that double digit, the acceleration to double digit? And how do you -- if that line softens to mid-single as per your long-term plan? What are the options?

We've updated that, [ Red Rick ] I think it's more of a high single-digit long term. I don't think we'll have to worry about being at mid-single digit. But our models to get to our goals only rely on that. So it's all upside. So -- but what got us there, I think is a lot of factors. One, we became a real company. We reached a tipping point in a lot of different businesses and by size. We created real websites and real SEO and we have real marketing. We went from 5 people in marketing to over 80 since I've been there. We've been from 12 people in IT to 120 some, right? So we're very deep into the analytics of selling online and digital and understanding our customers and understanding what it means today to deal with customers who are usually starting their day with search before they order, right and trying to figure out what they need. So it's working very well for us. A lot of synergies with a lot of instruments, we are buying in bundles, a lot of one-stop shopping. We have Bio-Techne kind of what we call the one web right now. So we've taken really almost a couple of dozen websites from different acquisitions and we've been working on melding them together, so we can do really one-stop shopping with the customer. As recently as a year ago, if you wanted to buy antibodies, proteins, some assays, certain kind of instruments, you may have to be in 3 or 4 different websites to do it and then 3 or 4 different orders. So we've gotten that kind of taking care of. And even through all that down, we still grew double digit as we were taking this journey. So just the better and bigger we got, the more it's given us extra synergy in the market, branding, when we were spending $5 million to $6 million a year now in Edwards. So it's thousands. So it's 3, 4 years ago, you could search our software Bio-Techne and you wouldn't find us, now we're always in the first page. So it's helped. So that's helped us catch up to Abcam antibodies, we've taken share from Abcam we feel. We've always been #1 proteins, but proteins has been on fire for a lot of reasons, proteomics, COVID, everything else and we've been riding that wave and trying to capitalize on it. And I think it's going to remain because the research side of proteins with proteomics remains very strong, at least high single-digit growth for us I think. And then assays, they just refuse to get old and die. We're really inventor of the ELISA kit and 35 years old and we still pull off double-digit quarter for growth, which I find amazing. But we're not stopping there, we're a bit the Intel side there inside there as well, we're in Luminex, we're in Quanterix, we're in Meso Scale, we're in everything out there in assays, we're selling content into receiving benefits, royalties or whatever. So we understand that multiplex world and it's -- again, it's -- the customers see us becoming more important there and we're the -- we've always been a solid quality brand and I think it's just -- it's helped more customers gravitate to us I guess over the last few years, so it's helped get us to double-digit growth. So because at the end of the day, it's still not that big, right? So, that's -- comparing us to Danaher or thermal, we're still nothing. So good growth, but still small, still long way to go.

Well, I'd hate to classify all that work you just described as low-hanging fruit because it sounds like a lot of work expanding your marketing team, expanding your IT team to the various search functionalities, website consolidation. Do you -- is there a path of continued work like this you need to accomplish to...

Continue? Okay. I'd say the journey in website design is over half done. So in ERP, so we had originally like 15 ERPs, we're going to have like down to 4 right next year. So I'm not one to go into -- let's have one elegant ERP system for the whole company and cost you $1 billion and 2 years late to get there like everybody else talks about it, that's what people have tried to do. And they just import that they all talk to each other. You just got to be able to understand your order flow and your workflow and you can make it work. You don't have to squeeze out that last a little bit of elegance and triple the cost. So I've been in a lot of ERP in my career and they don't make money. They help -- they're supposed to help you make money and they can do the opposite if you're not careful. So...

Understood. So that's the RUO side of your business? How are you feeling about the GMP reagent efforts you've been undertaking?

It's still I think the biggest thrust of our future. I mean it's between that and exosomes that's the biggest platform potentially. And I think leading so far be Celgene therapy which is north of $80 million is a category for us and still growing solid double-digit growth. The protein piece is the most important piece. And of course -- we're that's a slog of getting into more and more clinicals and the equivalency test and as fast as that market will become a market, we'll be there as a leader. So I don't think there's any issue there. It's just more about when and if.

Can you update us on your efforts to build out a broader workflow in cell therapy?

Yes, we just launched couple more products. We have them -- we have now 40 in the menu for the Clean regen medicine. We have a 11 or so that are not even made by anybody else. Our Celgene therapy is right now a little bit over half regen med. So it's -- we're the clear leader in that part of the space, whereas on the CAR-T side we're not, we're third or fourth. So there's more upside there. Everyone thinks that's where the big care it is. So we're driving for it like everybody else, but I do think it will be everybody wins for 5 years and no one will be all making up this stuff as these things start coming off the other end, the clinicals. So we have a handful of large customers and we have 150 customers, but most of them are small and you actually asked about where we're focused on. We're focused on turning menu accounts into 2 new accounts and a couple of more waves, so that's the mission. And that doesn't happen until you get to Phase II, Phase III typically. So...

Are you in any workflows that are in Phase II, Phase III or commercial?

Phase II, Phase III, I can't comment on commercial, but...

Okay.

Maybe.

Moving on to the instrument business. Maurice has been the big surprise to me...

Yes, me too.

We're on the same page then. I wouldn't have expected that to be a continued source of upside.

We know why though.

So walk us through that, what's been driving the growth? How durable is the growth in that product category?

Yes, so when we bought ProteinSimple, there were largely 2 categories we cared about, that was the Simple Western platform and the Maurice platform, which met the biologics platform those I expect all that then. And the iCE platform served a roughly a $500 million market for protein purity testing. It's basically a QC test on the line for pharma as they're testing proteins in their workflow. And that's what it was. And Simple Western, we knew was $1 billion-plus opportunity of going after converting a hand Western market into automated Westerns, right? So our focus was there. And it's gone very well. It's growing really well, but as you point out, every quarter this biologic platform and we launched Maurice and then there was a switch from iCE to Maurice that gave us some lift. And then people wanted to have the advanced Lynne system out there in power by waters, it's kind of standard. We got that implemented and that gave us some the lift, a lot more attraction to our platform. And then kids kept growing from there and then we kept trying to figure out why are we still growing 30-plus percent, we went 7 or 8 quarters in a row of that and it was never supposed to do that well. And we didn't feed it like that for sure, anyway we're putting most of our focus on Simple Western to be honest. But we have since changed that about a year, realizing what's going on. And what's going on is that it's more than a tool for just protein purity. It's being used instead of an exchange. It's also being used as people to back up a second. In the pharma world, there's 2 factions in these giant companies. You have your development teams and your production teams and they're both great big entities run by Executive Vice Presidents they have their own jets and everything else. So they're big thing themselves. And of course, the development team is for new stuff, right and then put forward new processes and try and bring new things to the factory. And the factory is supposed to save money, make things as cheap as possible. And what ends up happening is, the factory people say, yes, I like this new flow, but I've got all these HPLCs that are in my warehouse that are free. They're all written off and they work just fine and I'll move to new stuff as this HPLC or on exchange would have started wearing out. And that's what's been happening especially HPLC that's been wearing out instead I guess working with columns and repacking, it's mess, it's not great science. And you go to Maurice, it's a cartridge, it's hands-free, it's clean, it's quick and it's just -- it's more productive. And so we've been taking share from HPLC as the production size of these customers are moving into finding new capital, rather than buying new HPLC, they're switching to new processes like ours. All right? We only really had the one competitor, which was known [ Sciex ] and we've been beating on hands down every year I've had this as far as I know. So a combination of growth in the core around protein purity is still needed, a movement to some cell and gene therapy as new speccing is happening for this device, empower and new ways to have it be better useful and then switching out older other capital test methods like ion exchange and HPLC. All those things combined helped us in growth double the rate we thought it would grow. So -- and it doesn't look like it's done yet. So...

The installed base of liquid chromatography is pretty large.

Pretty large exactly.

Is that a way you're framing the opportunity or do you frame in some...

I don't think you can frame with it, we can take out HPLC. I think it's more special than niches like I said, it's massive, right? So -- and we're talking about a $100 million platform that could we think get to $300 million, but it's not going to be the $3 billion, $4 billion in HPLC as ever, right? So...

Maurice itself is a $100 million platform right now?

Oh, yes.

And can you give us an update on Simple Western? How is that tracking in your plan?

Well, it was growing actually better than Maurice, but Maurice is kind of doing so well, now they're about hand-in-hand. So Simple Western is still little smaller. It's still probably 15% to 17% of the share out there for replacing hand Westerns, I don't think we'll ever get all of them, but I think we've got room to double or triple at least for sure before there's any kind of worry about new innovation and something. So -- and it's just gone very well, the cartridges work great. We have extensive antibody library to go with it. And it's probably -- it's the best acquisition of any we've done, I think, clearly, so...

What about Simple Plex, what are you latest thoughts on the growth there?

Still a sleeper, I think it's got a lot of potential, lot of areas, clean diagnostics. So we're finishing up a 1345 process for new factory.

What does that mean?

It means it's medical ready to be taken into clinical applications.

Okay.

So from there, you have to make a device in a 1345 facility if you want to take it through a 510(k) process.

Is that being driven by a customer of yours or you're proactively doing that?

All of them, yes many. So remember, we had -- it's kind of gone soft and cold with that company in China, Micropoint.

Sure, Micropoint.

That was the same, that's 510(k) like process just to become a patient monitoring system in a hospital. So we think there'll be a lot of demand for things like that here in the U.S. too once we get 1345 here stamp for it, as well as we get ready to go to a CE mark in Europe. So it's more than just a biomarker and analytics you can do more, it's a diagnostic. So because of its sensitivity is so high because it's dynamic range is so wide for a larger dynamic range in one hour sample the data, it's near point of care. So we're working on new cartridge constructs too that aren't so multiplexed that may have just a few samples, so it could actually be a point of care for somebody if they wanted to. So a lot of different ways that can grow and it's been growing heavy double digit and it looks like it will continue for some time. So...

And then you flagged the Spatial Biology...

Very profitable, right? Because people realize that this is a platform where the technology is as much in the cartridge in the box. Box is not very expensive. It's not -- the cartridges were worth of technology and all the ideas and that's what makes it really a beautiful thing. So...

Chuck, I think we're going to eventually run out of time before I hit the Diagnostics and Genomics section...

Whatever you like Dan.

Thoroughly, unfortunately, but maybe we can touch briefly on Spatial Biology and then I would like to talk to you about your CEO succession plan.

Sure.

Before we get to that, Spatial Biology, it's been a mixed quarter across the peer set in that...

Tough for us.

It's up for you. So talk to me about what are you seeing that's different? What is your growth...

We had an easier comp there because we've been in the comeback trail there anyway, right? So -- because we had heavy attrition, we lost a lot of our sales force. The way I'd assess this now and it's come full circle. But a year ago, in the spatial market, all the noise generated was by 10x and [indiscernible] in spending gobs and gobs of money. And we just kind of get lost. And people thinking that we're like on the same plans them the same kind of application we're not, I mean, their discovery, way at the high multiplexed and were a translational on the other end. And they're more of a once and done application. We're more of a -- you always got to do it. It's a much, much heavier cycle flow. And I think it just got a little -- we got a little lost in that and what's going on out there on your goal. And then we -- and because of that, we lost a lot of key reps that went over to those companies into being spatial, the hot spatial companies. Most of them come back now. So we're back at full strength, but we were down -- 6 months ago, we were down 25% of our reps in a lot of key areas. So there's no way to win with that. I mean this is all already there, publicly we talked about this more than one quarter, but that's all been pretty well corrected and this last quarter was the first quarter we could say we're really back to strength, new leadership, we actually -- new leadership for division as well and it's going very well. So this is a 20% grower, it has to be and I'll change stuff until it is again. So that's simple. Spatial is huge for so many applications and this method of doing spatial cell analysis at a single cell level, it's one of a kind. It's the best there is. So anyway...

Final topic, Chuck, your eye on the beach earlier.

Yes, I know I like that beach. It looks good.

Talk to me about your retirement.

Yes, so it's not going soon, it's still 1.5 years away or so, but I did -- I have worked with my Board to after -- when you've been somewhere 10 years, you've gone -- I guess kind of credibility I can lay out a slow glide path to a way that investors would like to see true succession. So we're doing a search. We are also -- we have 3 internal candidates that I have carefully groomed I think all can do the job. And we'll just see how it plays out here. But I hope to move to Executive Chair for a year to help groom in this new CEO and then move to Chair after that if the Board willing and that's my goal, whether I can do it or not, I will see. But it's not a next quarter, I'm out kind of thing. It's -- we got a long glide path here to move to a succession. And we're going to -- the Board and the nominees be very careful how they look. My goal is, since I've been in the company, the company has gone growing about 6x or so. And we'll look for somebody who can take up the next 10 years and grow another 5, 6x. So -- and this should be hopefully a $50 billion, $60 billion market cap company by then and that's the kind of individual we're looking forward to lead the next phase of the company. So...

And is there any anticipated time line on when you'd hope to reach the next decision gate, narrow the funnel of candidates, communicate to investors where you are on that path?

Well, I'm not in charge, [indiscernible] right today. But I would say by next Spring, we'll start talking about something. Well, we'll keep updating as we learn stuff. I think there's no reason not to be that transparent. So the more transparent, the better I think so.

All right. Well, with that, we're out of time.

All right. Thank you.

Chuck, thanks for joining us today.