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

Thanks, Bio-Techne, and glad you all came. It's been a while since we've been standing-room only. Thank you. Safe harbor, of course, I think you guys all know what that is. We always need time. All right, Bio-Techne. So I've been here about 10 years at the helm. At this point, we're roughly between $12 billion and $13 billion market cap. We are largely a life science tools company, we're getting into diagnostics as well. It's very related to assays, which we -- we know a lot about. You can see we're 81% consumables, 11% instruments, but a full 10% is consumables for the instruments. So the cartridges that make them work. So we're roughly really a 20% instrument-based company as well. We have these 8 more or less platforms here that we have our businesses arranged under by technology, proteins that are most known for. We're the world leader in proteins for research. We're one of the top players in antibodies. There's only 100 of us out there. We're pretty big compared to most. Immunoassay's, we are the inventor and creator of the ELISA kits. We've been around -- we've been around 47 years as a company, which is why we have that great stocks in a little more or less, I think. But we've got into instruments, instruments that measure and proteomics-based applications and use a lot of consumables. That's a synergy. We've gotten a lot into spatial biology in the last year, off an acquisition, also related to antibodies and processes like IHC, which we're very much involved in. Molecular Diagnostics came [ with ] an acquisition. We're a leader in controls and reagents for diagnostics and molecular made sense to have that. And another big new area is liquid biopsy, Exosome Diagnostics and acquisition -- we made -- I've got a couple of slides on that. So for the most part, the new thing coming off a lot protein [indiscernible] cell and gene therapies. I'll talk about that as well. So diversified, not that big yet, but getting bigger, roughly 12 different business platforms, all doing pretty well. Softening climate right now. I'm sure we'll talk about [ when we ] have questions. But overall, it's been a pretty good growth trajectory in the last 10 years I've been here. So we finished the fiscal year last year at [ 1.1 ]. You can see our split. We're still about roughly half biopharma, biotech, definitely moving more towards biotech. 10 years ago, we were about half academia, half biotech or pharma, I should say. We've mitigated a lot of that risk in academic because of the funding ups and downs. So you can see the result. It's pretty safe zone, I think. But the pharma side is now pharma, biotech and small biotech. And we've become more or less one of the go-to players providing tools, regencies with too small biotech, a lot of new applications like cell and gene therapy and that's -- it still has its up and downs, as you guys know. The split on the international side is about the same as it's always been. We still growing within a point or 2 in every area. Even though Asia is -- we've grown a lot in all areas, but Asia is kept out. China is now roughly 9% to 10% of our overall [ orders ] 3 to 10 years ago. I have mostly the same strategies that most everybody else has [Technical Difficulty]. We are still a products company. We're big on innovation. We have a lot of it. We launched a lot of new products a year. We are very focused on geographic expansion in China for sure, but also India now and other areas, even Europe were still expanding. We have -- it's not a tactic. It's really a strategy. We do a lot of M&A on the slide showing that, but we've done a lot of bolt-on M&A to try and bolster synergies to our core reagents platforms, which have been the life for of the company. Culture and talent, got to have that, a lot of focus on it. We've had a lot of attrition in the last couple of years like everybody else -- but a big story here. We've grown from 800 people to 3,000 plus in the time I've been there. And we've added a new pillar this year, and that's a world-class customer journey. All this growth has created a need for an awful lot of integration, systems, e-commerce, loading up the website with images, etcetera, etcetera, so taking care of that customer for what's called a world-class journey, really helping them understand why they're with us for what they want to buy, able to buy more online with one visit, not going into multiple websites to buy things, that's a big issue and that's where we're focused on. Of course, we have ESG in our miss. We've -- on the social and governance, I think we've always been pretty good. It's been more about taking credit for things we have -- we have done well. We're over 50% globally female. And actually, our management and above are 70% female. We are 35% actual minorities. We're about 25% Chinese as a company globally, and there is more in Minneapolis than there is China, to be honest. On the diversity, the Board is very good as well and then we [indiscernible] everybody else. We're working towards the emissions side of this equation, working in [indiscernible]. And we're doing okay in our Scope 1 and Scope 2. I'm not a big polluter, making antibody isn't been -- not a big deal. Financial results since I've been there. Here, the key thing to look at is the continual growth and continual improvement, but we've been laying a lot of investments in building out a strategy, call it laying track for the last 5 years, at least. Now we're seeing a lot of the upside from that, not just COVID-related. We have very little COVID sales. I will say we certainly benefit from a COVID overhang from places like customers like vaccine makers who clearly had a booming couple of years, examples like that. But it's been a remarkable journey of improving visibility, improving brands, acquisitions that made sense, strategies that have given us openings into new work flows that are scaling quick like cell and gene therapy, etcetera. And just diving deeper on the protein sciences segment, roughly 75% of the company, and that's broken down between 2 divisions, proteomic research reagents and then the analytical tools. So it's really just proteins and antibodies on one side, the assays and instruments on the other. They're both divisions about the same size for roughly 75% of the company. Protein, we pretty much created the category 40-some years ago, TGF-Beta. We now have over 6,000 proteins in our catalog. We are the largest manufacturer proteins for research. It stands for the reason, [ we should try ] to go after GMP proteins for cell and gene therapy as we're doing that at a very fast clip. As I said, [indiscernible] tracked for the last 5 years and working on a large work flow so we can actually win big in this area. We're known for our proteins for being the highest quality, the highest bio activity. We don't have any competitor within really almost a factor of 10 in a lot of categories of bio activity. Pricing usually, we're more than double our nearest competitor. It just sits speaks to the quality and the lock-to-lock consistency. Antibodies very different game here. We source from about [ 6 ] different suppliers that makes up about 30% of our volume. The other 70% is self-made. We make these antibodies off of our proteins. And we have a really high-quality, great protein, you use it in an animal [indiscernible], then you can make also wonderful antibodies. So we do from there to antibody all way to assays and we've been doing it for a long time, so. And I mentioned 6,000 proteins. We actually have a catalog of over 400,000 antibodies. So the largest catalog in the world for antibodies, we're not the largest supplier though. On the tool side, including assays, we have a lot of different categories, Simple Western the world's only automated Western blot solution. Biologics, more than just measuring protein on the line for pharma for protein purity and now we're getting after trying to eliminate LC going right to mass spec with fractionalization, but we're known for charge and identity analysis as well as other fractionalization opportunities. Simple Plex, kind of a dark course for us as an instrument. It's a microfluidic immunoassay platform, can multiplex as many as 8 different analytes in the cartridge. The technology is as much in the cartridge, as it is the instrument, very low-cost instrument bearing between $25,000 and $50,000. Used primarily [ to mostly ] for biomarker discovery. We did catch a few [ new waves ] during COVID. It was used in Italy when patients were dying in hospital halls. You could load things like D-dimer and IL-6 in these cartridges and you could actually understand which patients were likely to go down versus up, [ off of ] respiratory. But we -- because of this, we think it has a big future in diagnostics. It's a 1-hour sample of the data, 4 logs of dynamic range, sensitivity, remarkable that's nearly as strong sensitivity as Quanterix at 1/10th price. So -- and our latest acquisition here is in single cell isolation, single cell analysis, and that's for cell and gene therapy, and that's [ nanocell ]. Sold over 100 instruments of that so far. SimplePlex we are going to cross 1,000 instruments this quarter. Biologics were about 1,500, Simple Western over 2,500, and you're going to see coming up a share position. We are low share positions still in all these categories. I mentioned, I won't go to too deeply, but just we bought these instruments and platforms for one use, and they're finding more uses, more applications all the time. So our TAM is expanding. There just doesn't seem to be any end in sight of how people are using our instruments -- so they're just known as a big bang for the buck bench top size, pretty low cost compared to other things of that type of class, so. And all this is for this. We're all living in this proteomic revolution. So from discovery all the way to validated ALS assays, we're in the midst of all, we're just perfectly positioned with how proteomics has come on strong in the last few years, and we're right in the middle, and we love it. A little bit in diagnostics and genomics, 3 different divisions: Spatial Biology, which was an acquisition in ACBI's still our brand, Molecular Diagnostics, with Asuragen and Exosome Diagnostics of course. And then the oldest business in the company, how the company is founded was the controls of reagents business, since I mentioned. And we have many brands here, but we're the world leader in how hospitals take care of their equipment [indiscernible] counting blood cells or whatever else. All strong for us, the lowest op margin business we have at least 30%. So we range anywhere from 30% to 50% plus from an aggregate in the high 30s, and our goal is to get to 40%, which we've been at many times in the past. It's a matter of decision on investment. Our goal is to get to $2 billion in the next 3 or 4 years with a [ 4% ] on margins, and we're well on track, we think. A little bit on spatial biology. It's novel in situ hybridization assay essentially, has single-cell resolution. We have launched a new set of dyes, we call Vivid dyes that give us even more spatial integrity. What's beautiful about this technology is that the morphology of your tissue, which is becoming more and more precious for all researchers and hospitals, if the tissue remains intact, [ more of ] the morphology is preserved. So we can look at anything you want any area of tissue you want, [ through ] analysis. And then if you want to divide or see later something else you can. This has implications for our pathology and for many different applications. So far, it's still used mostly in drug discovery and biomarker and cell analysis. Now over a $100 million business for us. It was an acquisition good 5 years ago. Over the [indiscernible] the assays are [ catered ] around probe. We have over 40,000 probes. I don't know how many species, but I know it's dozens, the species and publications are just crazy over 7,000 publications per day. So quickly becoming a standard. So moving further into diagnostics. You guys have all heard about liquid biopsy, and there's 3 categories really circulating tumor cells, cell for G&A, which most of the companies out there are involved [ and third ] liquid biopsy in the exosomes, and we're almost the only one. We find exosomes to be a better platform in general. There's many more of them. You're interrogating RNA, not DNA. It's not being destroyed by enzymes and blood and fragments. The exosomes come out of cells in all stages of life of the cell, whereas the other 2 categories by the time you get a lot of information, it's really from dying cells or cells that are already in trouble already. CTCs are so bad by the time you even know CTCs in the bloodstream is interrogated, it's almost the patients not doing so well. So exosomes, we think, have a really bright future. The RNA is perfectly preserved within the exosome. And what you don't get in other technologies, there's actually proteins that live on the surface of the exosome and tell you where it came from. You want to go after a cancer, you have to know the origin. So it's also very important that way. We have a product on the market. And it's -- the first one is a prostate test, it is Medicare approved. We've now received all the reconsideration's that we had in the original NCC guidelines from 4 years ago. So it was designed to be a surveillance test. It's a remarkable test. It has high sensitivity and it's growing right now at a 3-digit level. So ExoTRU is the next product in the pipeline. Both of these are urine-based and they're very non invasive. Another real nice factor for both of these is that you can do these, you can be at home, you can mail in the samples and down below for kidney rejection. That's always been a problem is having to go to the transplant centers and stick around for biopsies every quarter. And we're -- in kidney, in 10 years, half of all fail and 15% fail in the first year. So biopsy and testing integrity of that transplant is important. And here, it's really just peeing in a cup and we have incredible results. The data meets everything else in the market, so to speak -- that are all more invasive. We've licensed this to Thermo and they're actively making an LDT and then working within their lab jurisdiction. Hopefully, in the market under a year. But we're not done there. We've had a large pipeline of potential products, including colorectal, kidney, almost every organ, we have the ideas of the signature. These are all done with a gene sequence on the interrogation within the RNA or to be combined with [indiscernible] to actually add more integrity to the test. And there's a good dozen things we have on the drawing work. We are actively seeking partners in many of them. Some we will do ourselves. We can't do them all ourselves. So we're kind of seeing where it goes. But a bright future, we think it's a platform. And if you look out 10 years, we think it's a $1 billion platform. Molecular products came with Asuragen as to our world-leading controls business. Nothing too fancy here, just a CLIA-based and well-known brand and [indiscernible] business. You'll notice on the left, all of these share positions are given. I'll give a summary chart at the end, but we don't have any position we're working. We have over 20% share or so. The oldest business, as I mentioned, are the controls and reagents. We -- most of the strip tests out there for COVID are built with antibodies that come from us, or players like us. We're a leading category for that, but also controls for many, many -- virtually everybody doing blood-related instrumentation hospitals. We are the control of choice. So moving on to cell and gene therapy. So again, we're trying to complete a work flow to try and be more than just relevant to challenging therapy as the market expands and grows to have a winning work flow, you have to have a bioreactor. We inked the deal, I guess, almost a couple of years ago with Wilson Wolf. And last week, we just announced our first trigger. So we now own 20% of the company, and it culminates in a full acquisition by no later than December 31, 2027. A very, it's not a [ typo and a multiple ]. It's a very good deal. We're taking care of his team and his company is 15 minutes down the road, and he wants us to take care of he's more of a KOL, the owner of this and a widget maker and we're good at making widgets. So we're picking up more of that and that's wanted us a really wonderful deal structure for this. This, too, is a potential billion-dollar type of platform. They have 800 customers and cell and gene therapy. We have 180. It is arguably after the [indiscernible] from cell and gene therapy, probably the only other de facto standard in the industry would be this bioreactor, very important for T cell and therapies involving T cells. Many people are going after T cells with [ bag ] technologies. T cells don't like bags. The cells like hard surfaces to grow in. They don't want to be -- they don't want to be bothered with. So they're having incredible support here. What makes this technology so fabulous is that you may have all seen T-flask and different cell factories and they're filled with media, usually orange in color and usually about 10% of that glass remain largely empty because you need to feed the cells enough oxygen. And John's wonderful creation was a membrane on the outside that allows you to take the oxygen in one way from the outside world, and you can fill the flash cell completely. So the yield is incredibly better, all right? The overall cost is much better, too. And our work flow is away from the ICU, away from the patient as long as possible. So it will end up being a much lower-cost therapeutic solution. We also have doubled down on proteins. So we're a little late to the game, but 3 years ago, we put in place -- started putting place [indiscernible] facility, in 61,000 square feet and we now have had some yield improvements as of recently. Now we can make the capacity as well over $400 million in certain mixed configurations, we can think as much as $1 billion or more of protein. So we're ready to go. The business is growing strong double-digits. And like I said, we have 180 customers. They're largely preclinical in the Phase I clinicals and over time, we're going to keep growing this thing, as part of the overall work flow. So here it is. We're known for regenerative medicine in our proteins but also immune cell therapy, it is the T cells. So we have more places in the work flow on the T cell down below. You can see in the bottom if you can read it or we can't read them. But our instruments are used in all the QC components. We're going to have media, we have antibodies. We have the proteins. We have the bioreactor. We just have almost a complete work flow, probably still missing cryo-preservation and -- but not too much else. So we're well on our way with our own media, a couple of different varieties as a matter of fact. And we're in the game there. On top, in stem cell therapy for regenerative, we're the world leader for that for protein. So we have about a dozen or so different products in production. We'll probably double that menu in the next year. And we only have 4 or 5 with [indiscernible] T cell. It's probably what we need for a year, so to be honest. So over time, we think we'll win though because 6,000 proteins for research. Our closest competitor, there's 500 of our products that they can't even make. We're only one in the world who can make them. We're known as the go-to for a difficult protein. We do a lot of custom work. I think over time, as the cell and gene therapy market evolves, there will be a need for more specific unique type proteins to help people differentiate their category, their drug, and we'll definitely -- it'll just play to our sweet spot as a company. So our technology leadership. So what do you think happens? We think we're a $2 billion company in general within 5 years or less, but you can tack on another $2 billion for cell and gene therapy to look out 10 years. So a lot coming here, and you can see it's all fitting all the different things in the bottom that we have for products in our work flow that are going to contribute to getting there, including G-Rex but also [indiscernible] base media, cell culture, [ TC buster ]. I didn't mention that, but we have a new platform to do gene editing that eliminates the need for viral vectors and lentiviral [ AAV ] virus. It's doing really well. We have over a dozen customers, and we have 20 more talking to us to try and get in the mix for their clinicals. What happens in 10 years if half of the market goes away from viral to something like this. I mean it's another $1 billion plus. So this is a big potential home run for us. It's looking very good so far technically. And we have actually millions of dollars of revenue already. So it's on its way. So you saw on the left, all these charts, the market share well positioned, I talked about, here is kind of a summary. We've taken the company from 10 years ago of living in about a $3 billion kind of pod working just for agents, just antibodies, proteins and Elisa kits to all these different platforms you've done either organically or from acquisitions. And here, they all live on one sheet and there really isn't a large share position anywhere. Lots of exciting areas. There are lots of research, lots of interest, and we have low penetration. We have a growing and emerging brand in the space. Here's the breakdown, how we get to the $2 billion Dan, Dan always like this one. But it builds up. We are -- at these growth rates are better in every category. So we do feel we're well on our way to reaching these kinds of targets. We do a prioritization of zero-based bottoms-up program every year in our company. We outline and look at every work stream, every dollar is spent and then we look forward and we basically pick what's the best places to put our capital and kill projects early if they're not working out, etcetera. We -- last year, as an example, we took 400 work streams that the company is based around, not only product but productivity, manufacturing processes as well, had enough money to support 300 of them. And we look out 5 years as part of the whole modeling process. The first year almost ends up being in the budget for the next year if you've done it right, it's close. Then we look out 5 years as well. We've actually looked back now, the 10 years I've been here and seeing how close were we predicting out 5 years, year after year. I mean, who does that, first of all. We've done it, looked at the math, we've been within 5% every year, looking out 5 years. So when I say we're going to get to $2 billion there's a 95% chance we're going to get there. We've got the data to show you if you want to look at it. Anyway, that's my 10 or 15 minutes and time for Q&A. My voice holds up, I sound terrible, I am sorry.

So I don't know... I have few questions [indiscernible] maybe I'll ask the first question would just be -- just kind of state of pharma, Chuck, you've always been pretty transparent about what's going on? And you mentioned of biotech [indiscernible] net debt, it seems like pharma will be a good start, but some of the mortgage rate appears [indiscernible] slowed down. So just kind of as we look at what you're seeing from your customers [indiscernible] want to bucket a biotech, where do you want to characterize it?

Well, you're right, we're pretty transparent. We don't give guidance, but we -- things are ugly enough last quarter. We said this quarter will also suck and it's going to be like we said, probably single-digit kind of growth. We first started seeing issues really in Q1, and we chalk a lot of it up to maybe purchase forwarding because of pricing hit in July on other things. But it's worse than that. I think we're really seeing good old-fashioned de stocking happen. Now I think there was a lot of stocking up in our area, mostly reagents and assays and things, not instruments. But from supply chain risk, just old fashioned supply chain risk that we're all talking about a year ago and not having that risk and I know I gave the same orders, we had potential risk in our instruments. One quarter, we didn't have enough paint to paint the skins on the machines, we made it through. But I gave the order, let's not have a -- let's not lose a sale on 20 instruments if we're missing a [ $0.10 ] sensor, so load up. And everybody did that, concerning reagents. And I think we're living through some of that. I think also the COVID hangover is real. I think we're all not as good as we all thought we were a year or 2 years ago, to be honest, we all had some booming a couple of years and some better than others. I mean we had 50% growth in our [ instant ] platforms. It's kind of unheard of. So it's not -- those are tough comps. So we're living through those tough comps right now. I mentioned our split with pharma versus biotech. We are seeing conservatism on all fronts. It's taking an extra signature or 2 to get instruments even at pharma levels, and the conversion rates have slowed down. On the reagents and there is a lot of our businesses run rate, which is still strongly double digit, no problem run rate. No problem in pharma for reagents, but on our OEM, our bigger deals and like supporting clinicals for a lot of start-up or smaller biotechs [ in the ] last year, they were all swinging for the fence 2 years ago and last year, and they're running out of money. That next round they thought they could get, they're not getting and also money is tight. So we're seeing an effect from that. We started talking about it 3 quarters ago, and now everyone else is talking about it finally. We thought we were alone, but it's real. I think we just got to work through it. The comps [ would be easy come Q1 ] when the markets come back, oncology is not going -- cancer is not going away, and that's why we primarily provide tools for it. So I'm a little surprised that we're sitting here in mid-to-high single-digit budget for NIH coming off of the COVID. I already thought it'd be stronger than that for quite a while, given we lost [ $8 trillion ], of our $40 billion budget that we weren't prepared to deal with, but it is what it is. We'll see. We can survive just fine on 5% to 10% NIH increases, and it's helped us. We grow about the same level as they do. So it's very successful. In our reagents business, we [ ever modeled anyway. ] We expect more in the sort of new things and they're growing quickly. So...

What's the -- is there an early look at fiscal '24 for NIH and [indiscernible].

Yes. Some of the [ one on one ], people have said there's been talk about it could be flat or whatever, but we've heard this before. I mean, Trump tried making it flat and cutting it in fact, but it's one area it seems our Congress agrees on. So I expect it will be 5% to 10%, like it always has been, especially the potential political suicide saying, they are not going to fund research after coming out of COVID, I don't know. But I think it will end up being better than people think. So it's just not that big, given the risk.

Is there any just kind of a large form for a moment, I mean outside of the overage and the catch-up and [indiscernible] is there any slowdown or pause just given the [ strip ] pricing from [indiscernible] some uncertainty for I'm just wondering if you're seeing any impact on that front?

Not yet, but it's public information, but one of our Board members is Head of R&D for BMS. He's in a lot of meetings talking about the pipeline for 2028 price caps. So they're all talking about affecting all the way to very soon to now. So if it's not reversed in the administration, there is going to be an impact. It's affecting what they think they can do, what they can invest in. So it's not here yet, but it's probably coming.

Right. And [indiscernible] would you think that they would just shift in the areas where they can kind of get the better pricing? Or do think it actually could lead to kind of the contraction in spending on the allocation, not contraction, but they see a reduction from what they might [indiscernible].

I think it will be a mixed change. They just -- they're going to prioritize where they think the best potential benefit and try to mitigate the risk they see. They're going to pick the things where there might be less of an issue for a price cap and there's more margin or whatever. I'm guessing, but I'm assuming they're also -- their probability of success is probably a big factor too. What do they know they can do versus what's more of a 50-50, all that goes into prioritization, right?

Maybe on Wilson Wolf since you just kind of [indiscernible] just what a 50% type growth opportunity? Just I mean it seems like it's...

Yes, [ somewhat ] better.

Just what's the competitive positioning of their technology?

Well, it's really [indiscernible] bottle of steroids since you get $1,000 for it. That's what the significance is. It's loaded with IP, just the fact that you can get your option from the outside is huge. John's a mechanical engineer and mechanical engineers tend to be very good at creating IP, and he's done years and years of layers of it [indiscernible]. It looks very solid to us. It marries up well to bags for the pre-stage processes. But in general, if we live in a non-allogeneic world like we think we are, it's single-patient type therapies, it's going to be, I think, a huge platform. People talk about how will the price be an issue? Is there enough room there to expand cell and gene therapy, if we don't get the [ allogenic ]. And John will just look at you and say, you know what the cost of chemo is. So it's -- there's nothing cheap in any of these solutions. So I think there'll be indications that do go [ allogenic ] and made to stock on the shelf or probably some blood cancers or something, but -- but in general, it's going to be not that and he's sitting perfectly positioned for that, basically a G-Rex per patient, so.

So we've done something like converting work and this idea like [indiscernible] last 20 years in genomics -- it's not that [ cut and done ]. But even though we just said [indiscernible] it could be a little pressure. But are you seeing [indiscernible] discarding all those like -- are you seeing like an aggregate level of focus and attention towards the protein company, but it sounds like a lot of the small little emerging kind of [indiscernible] spending then and [indiscernible].

Well, in academia, we don't see an issue yet. If budgets go down going forward, there may be but it isn't yet. Our academic is kind of the way it's been because it runs [ more large ] like our run rate business. They don't do big deals, right? They don't do custom. They don't do OEM deals. So we can measure that because [indiscernible] on the web. We might be doing better in mitigating some of that risk because we're constantly improving our website and we're buying more AdWord clicks and things like that to improve our process. We're essentially getting still $8 to 1. Every dollar we put towards AdWords with Google, we're getting it back. And it started at 30 and I just -- we just keep giving the team more money saying, well until it asks until it keeps spending. And so that might be someone as well trying to keeping it up. But I don't -- the reagents of that for all the proteins [ that you ] buy for research and for clinicals at those levels is still kind of a [ roaming ] here. So it's not really -- [ we did not ] more care about the quality and how well they work. And there are [ fair cuts ] that are not usually there. It's just not that big part of the work flow, so.

Chuck thank you for [indiscernible]. Thank you very much.