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

Okay. Thanks, everyone, for joining us this morning. We're kicking off the Life Sciences -- on the Life Sciences side, but biotech, a pleasure to have with us the management team. We have the CEO, Chuck Kummeth, we have CFO, Jim Hippel, with us. We also have the President of our Protein Sciences Will Geist and from Investor Relations, David Clair. So with that, Chuck and Jim, thanks for taking the time for being with us this morning.

Sure.

So I wanted to start with -- this -- the last quarter, this was unusual for biotech. You guys are known as one of the high-end premier companies, right, 80% reagents very stable. There were some moving parts here. So I just want to start with some near-term dynamics. Q1 organic, it came in a little below your LRP as provisions rate. Maybe just talk about what was the comp issue? Did anything surprise you and how the Q played out in some context around how we should be thinking about it?

Sure. Well, there were other conferences, we talked a couple of months before that the quarter was starting out weaker in Europe than we predicted. There was a lot of vacation, a lot of pent-up demand. They are just for a lot of labs not working. And the comps are incredible. I don't think -- I think we underestimated just how strong the comps were a year ago. They were roughly double our -- any of our comparable companies comps out there, when it's roughly 20% or higher, in fact, in our 25% in our protein areas. So really hard wall to get over, I guess. But -- we used to show growth in some areas, we had comps as high as 50%. So it was a really, really amazing quarter of the year before. And so we still show 7% growth on top of all that. And a real -- and it was really largely due to Europe. U.S. was actually pretty good, mostly double digit across the board. So Europe was definitely a standout negative. And more or less the reason. We also probably had some pull-aheads. As you remember, the Q4 quarter, we were destined to come in around $11 million, we came in $14 million. We came in really hot the last couple of weeks, and we had some pull forwards for sure. We had a lot of pricing changes start July 1, and so we had some people stocking we think, and that also impacted us. early in the quarter and a lot due to stocking too, I think, because you predict if it was, it's you turn around by now, and Europe has turned around quite a bit this quarter. So much better quarter going.

That's helpful context, Chuck. Maybe on this couple of points, right? You had mentioned Europe has turned around, is this as simple as people coming back from vacation and getting back in the lab or -- I know some of your peers have spoken about softer Europe, and that seems to be more macro related. So how.

There is a little bit of that, too. Europe has come back very nicely so far this quarter, but I don't -- we've had a couple of years of 20% type growth. So I don't think we'll see that in a while. And Europe has definitely softened from a couple of years ago. There's a conservatism that's just out there right now, call it, energy, call it, the war in Ukraine, Brexit just coming off and things like that. So it's definitely a bit softer, but there is good demand in the quarter, things have bounced back pretty well compared to July and August.

Got you. And so you start to put that into context, I think Europe was down mid-single digits. Should we be thinking of Europe perhaps landing in the positive territory as we look at the Q and the.

We couldn't talk too much about the quarter, we're still in. We got a whole December to get through, but that's our hope, yes.

That's helpful. And this whole topic of stocking dynamics. It's been hard to get our hand around our freight, right? You do have the biopharma, bioprocessing companies talk about it. I know you have a biopharma exposure, but I think it's different from bioproduction. So with new saystocking, how is that different from what other companies are speaking talking about -- give us a little bit of context on what is the stocking dynamic? And is that like a 3-month impact? Or are we done with the stocking dynamics?

Well, primarily in reagents and usually it's a couple of month type of thing. So you could stock proteins and antibodies longer. They will last if you have the right freezers and such. Kids [Leica] doesn't such have shelf life issues. So you wouldn't see stocking beyond 6 months for sure, probably for those that just wouldn't be a natural thing. And like I already said, things have bounced back pretty well. We've got a pretty tight organization, and we can get out there and find out what's going on. And when we try to find out what's going on a lot last quarter in July and August, there were a lot of customers just missing. They weren't back to work yet. So just labs weren't open. And it's a mix of academia and biotech. I would say not as much on the large pharma, but certainly the biotech customers as well as academia, that was the case. I think there was probably some stocking in biopharma where they have procurement processes and such as well. But the demand was stronger in large pharma.

Understood. Understood. And another target that's come up as I think you had called out China lockdown impacts. Again, we're seeing some headlines the past couple of days and lock down some ones in China. How should.

Yes. Let see what happens here. We had a pretty good quarter for China given the circumstances, and it's coming back. It's been -- continued to come back. Up until this week, it's been seeing a very strong quarter, in fact. So we predict we're back to 20-plus percent growth by end of the year. And we just see it's too early to know what's going to happen now. I guess, if the thing is going to lock down and get or not. But as long as Shanghai stays open, where our warehouse is, I think we can supply most to China and the issues for us before because when Shanghai was locked down, that's where our warehousing is it shows up in China. So that's corrected at this point, and we'll see. But right now, we've seen a very solid growing business back in China.

Understood. And you did bring about macro. I think a couple of my companies, we've seen exposure to treat revenue either by pharma companies or perhaps pre-revenue diagnostic companies or perhaps companies that going to have issue, right? Is there some way to characterize your exposure to those kinds of customers and any macro risks that you see?

Well, we're roughly 60-40, call it, biopharma to academia and globally, 25% academia. If you split up the biopharma, it's at least half biotech versus large pharma. So it may be even a little higher. And if you continue to drill down, we've got a good 1/3 to 1/2 of that are smaller biotechs. And I think up until this quarter, funding has been pretty good. I think they've been well funded. I think the conservatism looking forward is about their future funding needs. And because of that, they don't know what's going to happen here. Things are getting cautious. They probably are slowing down their spending. So we're hearing that. But it's not a majority of our business, but certainly, it's a fair percentage. We supply every sized life science company. So.

Got you. And just given that revenue exposure between biopharma and academia, I'm assuming there's no industrial exposure here. How did the business perform back in '08, '09? Is that a relevant way to think about if there is a macro?

No, company was much different back then. All we did was reagents back then. None of us were there. And it was such a different company without any kind of websites, advertising, anything. It's pretty hard to say, but it was still showing growth. We've been back and look and we had we had single-digit growth even back then. So it shrunk only a few quarters in the past 20 years, but one of the quarters was the quarter I arrived. So it was definitely on the downswing at that point. So.

Got you. And given we have Will on the call here Will, maybe one for you here. Protein sciences, I think this is an exciting area for you guys. But just talk about your customer mix in this area, right? What does biopharma? Do you have any applied customers academia? And who do you compete with in this area?

Yes, sure. Chuck kind of touched a little bit on the mix. So about 2/3 of our customers are biopharma, about 1/3 are academics. We do have some business in the applied markets, but it's kind of -- if I think of that as like that translational space, where folks will be leveraging our content, whether that's protein or antibodies content, in some sort of applied application like a diagnostics application. So we do participate in that regard. If we think about this segment, it's a pretty broad segment. We've got analytical systems and proteins and antibodies. If we think of the core businesses, folks are competing with on the protein side would be PeproTech, ACRO and companies like CellGenix. And then on the antibody side, it would be -- there's a myriad of players in the space, as you can imagine, but they include Abcam and Thermo Fisher some of the folks that would certainly be on folks' radar.

Because you bought about PeproTech. I think Thermo did acquire PeproTech. Have you seen any change in comparative landscape? I know.

There's been no impact from the PeproTech purpose purchase yet. So I think over time, we might see something they certainly have the capital backing to do more with it, but they don't have any protein experience to speak of. So I don't know what they would offer there. I think their main purpose is to be vertical in their bioprocessing direction with going after CMO, CDMOs in that business more than becoming big in research, so to speak, on. They're probably the last of the party on GMP. So it certainly didn't buy them for that so.

In [B2C] product. GMP proteins. How big is GMP proteins in -- it looks like this is one area where you have a differentiated offering or an advantage, if you will.

Yes, we've invested the win in GMP proteins. I mean we are the protein leader in the world, have been at it for 40 years, and -- but we've never been beyond research. And so this is our -- we've been at it for 3 years now, but we built very large facility dedicated to GMP proteins. It's beautiful. And we are landing a lot of business. We're in an awful lot of clinicals and preclinicals at the moment. We are way further ahead than PeproTech, but we're certainly behind where MELTEMI and CellGenix where they're a couple of years ahead of us. So they have most of the lion's share of current clinicals going, but we're catching up fast, we think. Some studies have us at second. And if you're talking CAR-T, that's really that we're talking about in terms of regenerative medicine, we are #1. So we have the largest library, catalog of GMP proteins and mostly because of regenerative medicine. We have roughly 40 and nobody else competes with that. So we have a lot of proteins nobody else can even make. So we plan to be the winner long term, and we're set up for it. So kind of shame on us if we don't do that.

You mentioned a lot of the business is clinical, preclinical, should we think about those areas transitioning into post-approval sort of stage.

Yes, we've got 150 customers. I mean we're nothing like the de facto standard out there in CAR-T like Wilson Wolf is, but we're coming. And -- but we only have a dozen or so larger customers and that are in Phase I to call it or higher clinicals. But it takes time, and we have amazing quality and we have we think the world's best lot-to-lot consistency, which is really important for this. And we have the scalability that they're looking for. So it's all ready to go, and it's growing quickly. I think last year, fiscal year, we grew 85% in our GMP protein category. So.

And sorry, just on the topic, Chuck, once the structure get approved, is there like a step function change in...

How it should be. I mean that's why we did this. So it's -- there may be -- you've heard the stats we've all heard over 1,000 clinicals going on there. There won't be 1,000 drugs, but there will certainly be hundreds and you don't need hundreds to fill this factory. I mean there is a single customer that's come to us that serious is that's working on a contract that doesn't need at least $10 million a year of a single protein once they were in production. So this is nothing like research. This is scale. So.

Got you. And I had this question on Wilson Wolf. Since you brought it up -- it's an interesting deal, right? This reminds me of a biotech deal, right, based on milestones, you don't see life science deals. Why was the structure like this? I was just curious.

Well, we buy mostly small companies. There's usually an earn-out component, and that's kind of the way it's done, trying to hold on the talent, et cetera, and they don't have an awful lot of revenue to start working with multiples and the standard approaches. But in the case of Wilson Wolf, you've got to understand John Wilson and John Wilson has been at it a long time. He really is beyond being just a CEO, he's really a KOL in the CAR-T arena. He knows everybody, everybody knows him. He has over 800 customers. We've been at it for a long time. I first tried in buying his company when I worked at Thermo Fisher, it's 14 years ago. So people ask me how long it took to do this deal done? I just say, 14 years about. So it had to be creative because that's the way you get things done with John Wilson. So it's as simple as that. He's not ready to let go yet, but he wants us to have his baby. It's just 15 minutes down the road. Our teams are pretty well integrated already. Obviously, we have a scale ready to JV. So we've been working together for years on the commercial front. And it is a home run offer to offer a closed system solution long term, G-Rex with media and proteins in a sterile closed system. That's our goal. And he wants that to happen. And he also wants to be on the front line with the doctors and clinicians and not be making stuff. So we're taking over more and more of the production and helping out with the scaling of this company, which is growing quite quickly. And that's why it came to the terms we did. So it's in phases. It's in tranches. The multiples are very, very nice, as you know, and that's because he wants us to be the suite to make things work out for his team.

Got you. And what's the -- I think the first milestone payment is $250 million? What is that based on?

First milestone payment is a double trigger either off of EBITDA or revenue. And the revenue number would be $92 million and the EBITDA number is $55 million. And we're probably going to hit EBITDA first. So -- and you're saying, wow, how could it be 60% op margins? He's actually running at 70% op margins. So it's a wonderful business. And as it scales, it's only going to get more wonderful. So that gives us 20%. So we have a call and a put option before that, a significant amount. It was $25 million, which would hold up in court that we have the we do have the company. So we essentially have purchased a company without having a yet. So we're just waiting for the milestones to play out, and we do think the first milestone should play out here in the second half of this fiscal year. So.

And where is that business growing at right now?

It also has softened a little bit. It's been a 100% type grower up until this year. If you ask them why things have softened a little, it isn't the usual answer you're getting like we just started this discussion. It's not funding. It's more about patients. The world is running out of patients for all these new clinicals that their trend started. So -- so there's been a bit of a slowdown in patient studies. So -- but it's a bit lumpy. You realize out of the 1,000 clinicals going on, there's another 10,000 that want to happen. So there's an awful lot of clinical is being planned. And to find -- to get those clinicals going, you have to find the patients. So it takes time. So.

Understood. And then maybe a couple of here last minute or 2 guidance questions for you, Jim. Q1 organic at 7%. I think the guide is implying mid-teens kind of growth in the back half. What drives this acceleration? What are you assuming for inflation, pricing, et cetera, in your fiscal '23 guide?

Yes. Well, I wouldn't go as far as say implied mid-teens. I think what we've stated is that we think we have a path back to double-digit growth for the remainder of the year. And we have a bottom-up forecast, of course, that from the -- from our own sales reps who say they have the funnels to get there. From a top down, it holds water in the sense that although our comps are still difficult for the remainder of the year, they progressively get less difficult. And the major headwinds that we had this quarter and our absolute results, which was Europe and China should become tailwinds sequentially as we progress throughout the year. We talked about China and China is already improving, and they see back to 20% growth by the time we get to the back half of the year. And they're a significant part of our business now that 10% of our company. And of course, Europe, we -- Chuck talked about Europe improving as well. So as those 2, call it, laggards that were that drove down our organic growth in Q1 kind of ramp back up again and those comps get a little bit less difficult going forward. That's kind of our high level as high double digits should be in the cards.

Got you. And then maybe just one quick 30-second LRP question. Your $2 billion of revenues by fiscal '26. Does that include any M&A in your margin target 40% that I think it's assumed annual margin expansion. What drives that, Jim?

Well, that your first question is no. The $2 billion target is not included in any M&A, so including Wilson Wolf. So that would all be upside to that aspiration. The 40% really isn't that big of a stretch. I mean you think about we've hit 40% in certain quarters in the past. I mean it's really more purposeful in terms of our investments and our pace of investments is what keeps us below 40% right now. We think we can keep that pace of investments up and continue to grow top line and get leverage to get us to 40%. But the real the reality is to why we think we could actually get beyond 4 if we chose to. We've not gone as far as to say that for a number of -- a couple of reasons. One is I think our rate of investments could increase. Once we hit that 40% mark, it can continue to grow to feed growth for the next 5, 10 years. But also, we will do more M&A. And not all M&A is going to be accretive. In fact, almost no M&A is going to be accretive like Wilson Wolf. So kind of set the expectations that something around 40% or maybe even sub-40s long term what's in the cards with including M&A.

You also remember, too, we've not really given any credit from the Street yet on the Wilson Wolf deal. There's been nothing baked in there. And that is totally accretive to our goals. So you could say our $2 billion goal now is really $2 billion in the quarter. You add in that kind of revenue at a 60% to 70% op margin. It's going to give us more safety to hit the 40% overall. So.

That 60% certainly was -- that was a big number. That was impressive. Gentlemen, I think we're out of time. This is fantastic. Thank you for your time this morning.

Thank you. Good to be here.

Okay. Thanks, everyone, for joining us this morning.