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

Okay. Welcome, everybody. We're back on the Life Sciences and Diagnostics track at the Stifel Healthcare Conference. Happy to have Bio-Techne with us. Jim Hippel, CFO; Kim Kelderman, from Diagnostics and Genomics Group. Thanks, guys, very much for being with us today. A lot to talk about as is usually the case with these things. We're 1 quarter into fiscal '23, but I thought maybe a good idea would be to just sort of look back at fiscal '22 as a starting point. 17% organic growth that came off of a 22% COVID rebound year.

Maybe you can just talk a little bit about the business and what's driving growth right now as we hopefully continue to exit this pandemic period.

Yes, sure. I mean I'll even go back one step further and talk about quarter 1 of fiscal year '22 because except if you take out the quarter filing the COVID lockdowns, which was a weird-comp quarter. Our Q1 of '22 was by far the strongest quarter our company has seen in a really, really long time, that definitely in the tenure that Chuck and I have been here. And when you sit back and reflect and look at what was going on in the quarter ending September of calendar '21, arguably, it was the peak of COVID testing, the peak of COVID vaccines, the peak of small biotech investing and there was a lot of cash sloshing around with our customers, and they were taking that money and how do we reinvest it back in R&D and on other things. And so we were definitely indirect beneficiary, I think, all of our peers were as well. But that's especially we grew 20%. I don't think any of our peers grew 20% in Q1 of that year. And so it's actually a conversation I had with our Board where I say, in retrospect, you look at blowout kind of quarter that was for the whole industry. And now where COVID has come way down in all aspects since then to still grow on top of that type of headwind year-over-year, I think, says a lot about the strength of our industry and the strength of us in that industry, to be honest with you. So we feel very, very good about the momentum, both of the industry and our position in it. And even a sub-double-digit growth for this particular quarter doesn't take away from that nor the potential we see going forward. And that's why I spent some time on our call, but definitely spent a lot of time having our Board understand that you go back and look and try to take out the noise of all these COVID-related dips and waves and try to look at it from a longer-term perspective back to fiscal year '19 before COVID hit, we're at roughly a 13% trajectory, which is essentially where we felt like our business was and should be just a year, a little -- it seemed like a lot long ago, but just a little over a year ago, we had our Investor Day. And that was our expectation for the early parts of our 5-year plan was to be in that kind of low-teens realm. And then progress from there and a few years out once cell and gene therapy and other things always start to kick in. So if you look at it from that lens, we feel, again, very, very good about where we're at and how we ended. Now having settled that, it could have been better. And internally, we had plans to be better in our first quarter. There were 3 -- there were 2 additional -- aside from a tough comparison, there were 2 other headwinds that faced us, one that we expected and one that we didn't. The one that we expected was China. China improved from Q4, where they were a little bit below -- flat for the year to mid-single-digit growth but they were right on their forecast whatever their plan in fact, our team in China has been spot on with how they predict -- the COVID impacts their business every quarter since this whole thing hit. And they told us it was going to still be a mid-single-digit quarter and it was. They were still rolling as we know, rolling shutdowns that were occurring throughout the country, in Shanghai and other places. And a lot of the core academic kind of customers weren't even back to labs until October, and they knew that was happening. With as much confidence they told us 6 months ago as to how the last 6 months were going to play out, they're as confident, if not more confident in their forecast for the next 6 to 9 months, which is a rapid return of double-digit growth and even 20-plus when we get to the back half of the year. And there's some stimulus packages announcements out of China -- was about some stimulus packages that reaffirm that as well. So although that as 10% or so of our revenue is normally growing over 20% when that grows mid-single digits, that's definitely a material tailwind but expected. Unexpected was Europe. And in Europe was -- be a negative growth for the quarter. And I know -- I'll probably answer this question in -- a lot of the questions all on one here, but miles will get it all out. I'll be completely frank with you, I don't think anyone knows the full answer on Europe right now. And Europe was a little more tight because it's not United States of Europe. And when you dig into the details of Europe, every country behave a little bit differently. So it's hard to generalize it. But to the extent you can generalize it, there's 2 main headwinds that we talk about. The first one wasn't unique to Europe, but was more severe in Europe. And we talked -- I hinted about this in our last earnings call at the end of Q4 that we were seeing some slowdown, particularly in Europe and even in the U.S., and maybe hypothesize and that might have to do with vacations, simply because our reps were telling us they're not going to -- call in and knock on doors and no one's home. We just -- and then what kind of helped confirm at least that part of -- that story was when September came around, it came on back in the U.S. and came on back in Europe. The hole was deeper in Europe than it was in the U.S. And so they couldn't rebound for the quarter like the U.S. did. And in Europe, that momentum is continuing into October, which is encouraging. I can tell you anecdotally, firsthand every year for the last 10 years, my wife and I take a vacation in Europe in the month of September because the crowds are less. And during COVID, we still went and the only vacationers that were there were American vacationers. This year, me and [ Aizel ] been there in June. It was absolutely crazy and it was all European vacations, right? So for what that's worth, there wasn't anybody there but actual at more factual data is we send a survey out to a number of our customers at the end of September, early October, asked a number of questions, but the 2 that are to point here was, did you spend less money on reagents and instrumentation in July and August? And if so, why? And a resounding 1/3 came back, yes, we did because we were on vacation. So for what it's worth, there was definitely a vacation element to what happened in the first 2 months of the quarter. However, I saw firsthand well is over here, Chuck and I have been to Europe visiting customers in September. And there is definitely still the tone, this overhang of what's going to happen this winter, right, with energy crisis, Ukraine, et cetera. So there's definitely an overhang that you can just sense it when you're talking to customers and talking to people on the street there. So it's real, how impactful that was versus this vacation phenomenon on the current, it's harder to completely decipher. But the good news is that at least coming into Q2, our momentum is definitely stronger than it was going into Q1. So we're encouraged by that. And that's why we feel like double-digit growth is in the cards for the remainder of the year because with 7% growth in Q1 at a high level, the comps aren't easy for the whole year, but they get less difficult. They drop another 3 or 4 points next quarter. So that's a bit of a tailwind. Europe coming back stronger will be a tailwind and China coming back stronger will be a tailwind. And that's why we feel like that's still in the cards and the underlying momentum in the business is still fairly strong.

Yes. Okay. So let me just see if I can recap 2 key ideas there. On China, obviously a fluid situation right now, but it sounds like your assumption is that you move higher, call it, something in the low to mid-teens over the next couple of quarters and then you're likely to finish the year, I think, at 20% or so is what is where you...

It's what the team is telling us.

Yes. Okay. And then on Europe, is the assumption that underpins the double-digit growth that you continue on this trajectory that you're on, which sounds positive or if we do run into a winter issue where things get pretty choppy over there, which I think most people would acknowledge is possible, do I then have to say, okay, they're sort of -- there's risk associated with the outlook that they were talking about?

I think there would be a risk if that were to occur. I mean that's -- it's still -- it was the biggest risk, Q1 remains the biggest risk kind of going forward just because it's turned on and off a bit like a light switch. July and August turned off like a light switch and September and October turn back on like a light switch. So it's -- and that happened, it's really hard to predict much further out in the coming week and month and quarter. So but like I said, it's net-net, it's encouraging right now, but there's still -- as CFO, I worry about everything, and that's -- if you ask me what I'm worried about. I'm still worried about how that pans out for the rest of the year.

Okay. Maybe just from a product perspective, which is a difficult angle to take on Bio-Techne sometimes because it's not broken out. There's a lot of things in the portfolio. But to your point, there were a lot of things that went out the door during COVID and so now you're facing some tough comps kind of across the portfolio. When you look at business segments or product lines, where do you see the hardest comps? In other words, where do you just say to yourself, it's going to be really hard to overcome what we've done over the last, call it, 12 to 18 months?

I hate to be so general, but the reality is, is that when you look at the Protein Sciences segment, by far, the hardest comp, 26% growth in Q1 last year. And you look at it by product line, the growth was tremendously strong across every single product line. I mean in all seriousness, I mean, our Proteins Antibodies even grew 20% in Q1 and grew mid-teens throughout the remainder of the year, which is our expectation for our core reagents and RUO proteins and antibodies is high single digits, right? So had tremendous -- our instrument platforms, I mean biologics had 5 quarters in a row of over 35% growth. So that's a significant comp. That I can go down by one by one. They all are significant, and they all face the significant comps this quarter. Well, it wasn't like there was 1 or 2 drags on our portfolio this core that caused ProteinSimple to be 3%. It was category across the board. But when you put the comps last year, they were category all high as well. And I think the -- hopefully we'll get to it here soon because the real encouraging part about our company is the breadth of our portfolio, which by the way, includes our Diagnostics and Genomics segment. And we had planned all along for a software year in Protein Sciences for many of the macro reasons we're talking about. But we also would plan for a very strong year in Diagnostics and Genomics. And that's hitting all cylinders right now, and we're extremely excited about that. And so -- and in fact, there's even upside there, we think. So to the extent that things don't improve as quickly as we would like to see in Protein Sciences, there's a potential for Diagnostics and Genomics just partially cover it. Now it's still a big ask because it's still a much smaller percentage of the overall company. But it's really exciting what's coming together there right now.

Okay. Well, since you kind of introduced the idea of Diagnostics and Genomics, maybe I'll take the chance to ask about the ACD business and the spatial biology market that you play in. I went to AGBT this year, and I walked into my hotel room and there was a magazine on the bed there that had the largest spatial biology businesses in the market, and there were the traditional instrument names that I think we all are familiar with. But nowhere on the list was Bio-Techne, and I said this is a $100 million special biology business, that doesn't seem to be on the list. Can you talk a little bit about where you're playing in that market? Why you might be looked at differently than some of these box companies? And it seems like that should be a competitive headwind for you because there are so many more entrants now than there were a year or 2 ago. How do you feel like you will be able to make your mark in that market once the customer is now faced with -- there could be a dozen in spatial biology companies in 2023?

Thanks for the question and the acknowledgment of that being an exciting space to be in. So basically, there's roughly 3 phases that a project goes through when it starts with discovery, where a former company or a client, a researcher starts interrogating and looking for many, many markers, right? Hundreds, if not thousands, Bret earlier talked about how NanoString and 10x are in that space with current but also future instrumentation. We do not play in that space, and we do not directly compete with those guys because we're downstream of it. So downstream from that is when you know after interrogating those thousands of markers, when you know which one is relevant to you, one that you really or the ones that you really want to understand, that's when you go into the translational space and translational space, higher sample throughput but also accuracy single cell, single-molecule sensitivity. That's what counts there, and that's where we play. So ACD was the original acquisition. That name is well known. And we basically occupy it. So you start validating your target and then eventually, you create a test, whether it's an LDT or a clinical test at the end of the life cycle of such project. Those are the 2 phases we are dominant in. We've just filed for a CE-IVD approval and obtained it for HPV in Europe. And filing with 510(k) with the FDA to show that from your discovery after the NanoString and Tenaxis, you come to our technology and then all the way into the clinic, you'll be fine. And that's the space we occupy, that's the space we like. And that's where we'll continue to invest.

Okay. The ACD technology, the probes for ACD are used in the NanoString GeoMx system. NanoString has got some shift that's taking place within their portfolio. If the GeoMx system continues on the pace that it's at or on the trajectory that it's on, is that a headwind for the ACD business?

It would be a benefit. So again, we do not directly compete. But if you think about it, that's a symbiotic relationship, right? So once the researcher gets to find out through those technologies in 10x and once they find out which market is important to them, they will continue to interrogate it and validate those markers using ACD technology or Bio-Techne technology. And that's -- the more markers get known, the more RNA markers will be relevant and the better it will be for us.

Okay. So just to make sure that I understand there, there's no headwind coming from the use of ACD probes on GeoMx with GeoMx on a downward trajectory? I just want to make sure I understand that correct.

No. I mean that would be such a small part of our market right now so that we -- that would not be significant. We do like the symbiosis with the different companies. So if you think about the use of NanoString, if you want to find out which area in your tissue is important, you could use the ACD technology upfront of your experiment or if you find through the GeoMx technology, what part of the slide of the tissue you want to interrogate further, you can use a downstream of it. But -- so that's early stages, and we're really happy that we have that collaboration and that symbiotic relationship. But overall, our market of -- you mentioned $100 million plus is way more in the pharma, biopharma and clinical space as well as in research, very established and very broadly used already. So that is a new utilization, but I wouldn't change our trajectory.

Okay. And then to Jim's point on the Investor Day and the targets that were put out at the Investor Day, 24% growth was, I believe, what you had penciled in for ACD by 2026. Does that still feel like a reasonable goal for you? You're down, I think, in the high singles or 10% range currently. And so that implies a ramp back up to levels that you have seen in ACD in previous years -- but our...

Our 2-year CAGR is 24% actually.

But that was when the business was $35 million, $50 million in size. So the question is can you accelerate back to that 15% to 20%, 20-plus percent level?

Good memory, Dan. No. And I believe, absolutely, right? So the -- yes, during and after the COVID period, we had a tough time in -- not so much in pharma, biopharma, but mainly in academic. Academic markets have returned. So now you see high double digits for the last quarter. We feel that it can accelerate specifically because not only the market is hot, meaning that's going to grow double digit as such, but we will continue to be very relevant, if not more relevant, not only because we are a market leader in the discovery -- in the translational space but also because we have continued to drive our R&D portfolio in which we have a multiomic approaches, right? So now we can look at proteins, proteins combined with RNA, which is basically slumping up some of the IHC market. We have technology to look at single mutations, short RNAs, microRNAs, which are very relevant in the CGT space. So we believe that with all our launches that we're currently doing that will we continue to be most relevant in that space. And there's no doubt in my mind that we can continue back on the trajectory that we sell out couple of years ago.

Okay. Fantastic. Let me stay on the DX and Genomics side here and talk a little bit about the Epi business, Exosome DX I think on the call, I forget whether it was you James or Chuck, but somebody called it 2023 is the year where you might see a breakout for the EPI test. What do you think are the factors that are most tied to whether or not that happens?

Well, I'll start. I don't know if I said it or Chuck said it and correct me sure the case may be. But I see in a lot of ways, our exosome EPI test is it's where we thought it would be 2.5 years ago. And unfortunately, we lost 2.5 years due to COVID, right, at Diagnostic businesses start up to. But I'd say we're actually even in a better position than we would have been 2.5 years ago without COVID. Namely for 2 reasons, top of mind. One is with the most recent NGS ruling revision, we've now -- the reimbursement now mirrors the NCCN guideline. Finally, 100%. And why that's important is, in my mind, twofold. One is it doubles the size of our addressable market because it now allows it to be used as a recurring test once a year as opposed to once in a lifetime, which is a huge lift. There's a lot of other nuances that were differences between the NCCN guidelines and Medicare reimbursement that maybe not be very material from a market perspective. But from a nuance perspective, for a doctor to have to do all the checklist to make sure all these apply, it was pain in the a**, quite frankly, and a deterrent from them wanting to have to use this test. So I think that's -- that whole Medicare revision tied to NCCN guidelines is a huge better position -- uplift and better position where we were 2.5 years ago. I'm actually going to name 3. A second one, is the at-home test that we have. So over 30% of our tests now are being done with at-home kits. That's also extremely important because before that, that was developed for COVID, it's turned out to be a huge market acceptance driver because before we had the at-home kit, you went to see your doctor. And because it's a first draw, it's needed, you first pee in the morning. You had a test, you would come up and make another doctor's appointment to come in. If you had a PSA test, it was in the range, your doctor wanted to give you the EPI test, you had to make yet another doctor's appointment to come in first thing in the morning so they can get that first draw. Obviously, a lot of logistical issues here, even if you get the patient back to do it, right? Now the doctor just gives the patient the kit and say, go home and when you wake up tomorrow in the morning, pee in the kit and mail it in, right? So a huge ease-of-use factor. The third item that I've got to mention in terms of better position now than we would then is the marketing message, the marketing message on actually selling the test. Pre-COVID and under prior management that we have inherited with the acquisition, the marketing message was much more patient-oriented. Take this test so you can avoid unneeded biopsies, which is a correct and right message. Problem is it's not the patients to choice to often to get the test is the doctor's choice to prescribe the test. And doctors heard that and said you're taking away my biopsy revenue. I don't want anything to do with this essentially without saying that. That's what they meant. And with the longer-term studies, we've now done to help on the commercial reimbursement side, we have data that substantiates that up to 60% of patients that are actually prescribed to biopsy never show up for it. And a real-life example of that has become part of a key marketing spokesman for exosome and for the EPI test is Cal Ripken, Jr. because that's his story. He had a rising PSA score. He had history, family history, but felt fine. He's like, "I'm not doing that." And his doctor happened to know about our tests. And he was vacation in Hawaii and he said, "Listen, before you leave, it's not now just pee in this cup and let's just at least say we can't rule it out. And so we did left for Hawaii. And 2 days later, doctor called him back and said the scores off the charts. This should scare the hell out of you into getting a biopsy. And it did, he immediately flew back. And I believe they did a biopsy online grade for Stage IV cancer. He says he would have been dead in the year if it wasn't for the EPI test. So change the whole marketing message to our doctors, to the doctors who say, this can actually help you drive biopsies that are necessary and help your revenue. And that's been like a night and day change with regards to doctors acceptance. So that the ease of use in terms of prescribing the test and executing the test has all added to the momentum we're seeing now, which is now 70% growth in test counts on top of 20% growth last year. And in terms of the potential, the stat I love is roughly 15% of the urologists in the U.S. have tried the EPI test at least once. So there's still another 85% that haven't, don't even know where it exists. But even without that, of that 15%, the average number of tests per quarter that are administered by these doctors is 4. But the highest use doctors is well over 50 per quarter. So that's still just within that 15%, the potential to get -- so it's just got a huge amount of upside. And a lot of these headwinds on some of the unnecessary that we were facing. We've learned a lot in the meantime we've got now and that management team is well experienced this with the [indiscernible] team to change the whole marketing message. I mean, we're really, really excited now about the uptake of this test. Is there anything to add?

No, I think that was a more main drivers here.

Yes. What's the revenue range that would make you happy on EPI this year?

Let's say, make me happy?

You get a lot of things will make you happy. Where do you think you might come in on EPI revenues this year?

I see well north of $15 million.

Okay. Let me circle back around to something in the Protein Sciences because I do want to hit on some of the chunkier businesses that are needle movers. ACD is certainly one of them. Simple Western is one of them. GMP Proteins is also one of them. You've been talking about that business and that facility, the new facility that you built out for a couple of years. It has a lot of potential. I think it's obvious to a lot of people why pharma companies will come calling there. Chuck's comment on the call was that you've got a lot of minnows and not a lot of whales right now, which says to me that there are small orders coming in that aren't necessarily needle movers. What do you think it takes in order to get those chunky multimillion dollar orders coming through the door? Is it menu? Is it scale on year-end? Or is there something else?

It's not scale in our -- we're scaling up way ahead of the curve. And that's been the strategy all along is kind of reset. I understand the expectations around selling gene therapies. We are building for the future, not fully here and now it's kind of a chicken or the egg because you can't demonstrate to customers that you can supply them in the future when their therapies are commercialized, then they'll -- they might tend to go somewhere else, how they, frankly, I'm not sure where they would go because that sound like anyone has the scale that we're going to be able to produce, not that I know of. But it's definitely a huge selling point when they see that you're committed to it, right? And we've also said all along that the real ramp in cell and gene therapy that's when we start to become material to the numbers is in year 3 through 5 of our 5-year plan, not a year 1 through 3. Because where we are in those -- in many of those trials that are already in the clinic, it's not to say we're not trying to convert them, we are, with some limited success, but we're working on different strategies around that, but it's still tough. They don't want to change anything in the specs that's in their trial. And so we're -- all of our growth -- most of our growth, all of our growth has come to this point has been in these minnows, which is often pre-IND. Does that mean we've missed the boat? Hardly because there's all kinds of numbers and stats out. We have our own independent surveys we put out to validate this that for everyone that's in the clinic, there's at least 10 that are in the pre-IND stage, right? So there's a huge use biowave. We're still is at the tip of the spear. So that's what we've been going after, and that's what we're winning is to call the next generation, next wave of cell and gene therapy clinics. And which -- there's nothing necessarily we can do to make them become -- them becoming whales as they progress to the point.

Yes. So it's just clinical progression through the development?

More or less that's correct. Now in the meantime, don't get me wrong. We are working different strategies to see if we can't nip off a few tuner whales along the way. And our partnership with scale ready and with the GRX with Wilson Wolf is part of that strategy because he's -- because Wilson Wolf's already fairly well entrenched with many of the clinicals.

When you graduate to whale status, what does that mean? Is that a $1 million to $2 million order or is it...

Well, so right now, our definition of a whale is I can't know the exact dollar amount, but it's basically -- you're basically going to be in a pretty heavy trial. So probably $1 million or more a year, something like that, somewhere in that range. I guess we publish have a new category called Blue Whale or something like that because when they become -- they become commercial, it's worse all of that. I mean the 4 or 5 -- I think there's 5 or 6 customers now that we've got contracts actually signed with, who -- it's a type of thing where we can't commit them to a number because they don't know to get a good clinical trial but they know what their patient size is. They know if they're successful, what percentage they think they'll get and they have a pretty good sense of what that range might look like. So we say, okay, we want 95% of your future production kind of guaranteed. And it's been between $5 million and I think $20 million per year paying on the customer and on the therapy. So that's the Blue Whale, right?

That can get big.

It can get really big. And that's -- could we be off a year plus or minus? Potentially. But if and when that happens, you're not going to care because it will be big.

Yes. One of the questions, you have cell and gene therapy exposure or access to the market in several different parts of the portfolio. One of the questions that I get is how much in cell and gene therapy revenues is Bio-Techne have, what would be the number that you would kind of attach to that?

So the number that we do put out there is it's roughly $80 million or so. The reality is that it's bigger than that. And the reason I say is because that $80 million, we actually have a business unit that's more -- it's a unique business unit that is market -- organized by end market as opposed to by product. So if it's GMP Proteins, if it's antibodies, that feed small molecules, media. Those are all the different components within the kind of the reagent portion of cell and gene therapy. And that's the $80 million that we talk about. But the reality is that many of our instruments are being sold to cell and gene therapy customers for various parts of the workflow and validation, qualification, things that I can't understand, but all part of that workflow. It's still be no different in the fact that our instruments are being used in other drug therapies, they use the same purposes in cell and gene therapy. And even -- and you can maybe elaborate a little more, but our ACD technology and actually Kim alluded to it, is even used in different steps of the cell and gene therapy. So cell and gene therapy is the next-generation therapy. And it's not going to replace, but it's going to be alongside biologics, alongside small molecules. And just like our portfolio is used in all of those activities, ours will be used in cell and gene therapy, but more than just the discovery, it will also be -- or in a translation, it will be used in the production.

Okay. We're getting close here. I got to ask the CFO a margin question. It's the part of my job here. But I think the outlook this year is for 150 bps down. I have you right around 38% or so for the year. What's the key to marching back upward toward 40%? And when do you think you might get there?

Yes. So the key to knowing how you get there is knowing why we're at. So in the first quarter, down roughly 300 basis points. Three key drivers, almost equally the same. First one, FX, okay? I think we all understand that one. Second one is the pricing-inflation dynamic. So we always have inflation. We always have price to cover it, if it's usually relatively small numbers. This year, it's big numbers. So it has an impact on the margins. We're covering our inflation dollar per dollar, but just dollar for dollar. We're not making money on our pricing. So it's hurting margins. Third impact is the investments we made in the second half of the year. We talked about being understaffed, under our investments for long-term growth for 1.5 years. We made great strides in catching up in the second half of the year, especially in Q4. So we have those investments now that we're carrying into that we didn't have in the first half of last year. Q1 is our lowest quarter revenue, just seasonally, it always is. So naturally, revenues go up from here sequentially. And I think our growth rates will increase as well on top of that. So we'll continue to get leverage all that investment base. The investments are going to be much more targeted and strategic, probably more geared towards certain elements of Kim's business. So we'll get a lot more leverage of our investments going forward. And the FX impact will gradually start to diminish and diminish more rapidly as we get into Q4 towards the end of the year, assuming rates stay where they're at and don't get any worse. So that's how we get back.

That's perfect. Jim, Kim, I appreciate you guys being here. Have a Happy Thanksgiving. Good to talk to you.

Thanks for having us.

Thank you.