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

800 customers for starting, so probably the only de facto standard in the industry in terms of cell and gene therapy. In fact, out of all the clinicals going on, 45% are them, especially CAR T. A little-known fact that John Wilson's learned over 10 years of being in this is that T cells don't like bags, they like adherent solutions. They want to grow in a hard surface, arm and arm, and be not bothered with. And so GRx was perfect for that type of -- those requirements for yield. It's all about yield in the end, so...

Great. And why did you structure the acquisition the way you did?

The only way I get it done is take -- I get asked a lot how long it takes to do the deal at Wilson Wolf because arguably, John Wilson has been the most approached acquisition target in the last decade of any one in the industry, and it took me 14 years. So I first tried buying them when I was at Thermo Fisher, 14 years ago. And but he's in -- he's 15 minutes away from our headquarters in Minneapolis. When I took this job 10 years ago, we remained friends and he actually helped me prepare for the interviews. I had to learn some things like what is a cytokine.

Yes. That's sort of important for the entry for this job, I can sort of see that.

He's a cool guy, but he's different. And it's a very difficult structure. But for me to start out -- because in the end, he wanted to do something and he wouldn't sell again. So I said, "Well, thanks for playing, John," and we figured out a call put option to start. And so luckily, we're past that now in the first tranche, the first trigger, so now it's not an issue. It's not an issue of an option to buy, Wilson Wolf is more -- it's a glide path to closing the deal. So...

Got it. And when do you think you could see some of the products you're developing together, this partnership?

Well, it's 2025 to 2027. It totally runs out of gas in 2027. Whatever he's adding and we would pay it 4.4x revenue or roughly 8x EBITDA, which is like 20% of the current -- our industry average. But we're doing a lot of work helping him along the way. And I think 2026 is more likely what I see for the growth rate right now.

Got it. Let's move over to the diagnostics and genomics segment. Let's start with exosome. I think my -- I've always -- why did you -- I was always curious in the first place. It's like why did you first go down that pathway? I think diagnostics has always taken longer and costs more money than anybody ever thought it would on that one, so I'm just -- and sort of what are your plans for this?

I'll give you an answer and a version I've never given yet. 20 years ago, I was in 3M. I spent 25 years there. And I worked -- my last position there was in health care, running their medical businesses. And some of you may remember the [ fast man ] on the very first qPCR platform to hit the market. A 20-year-old platform, and ended up with -- I forgot who bought it at the end. But we tried to get it off the ground. I really fell in love of diagnostics, 3M just literally wouldn't let me do it. And ended up in Thermo Fisher, clearly different. I learned a lot more about diagnostics. We did some things there. And then coming here, learning all about how strong we were here in this company in assays, ELISAs. And more and more, I just thought, we had some diagnostics. We had some one-off, FDA-approved assays that are really diagnostics. And that will -- we should -- we're looking for more scalability. We could do this. Let's go. We had so much science in our company and so much ability around assays. And diagnostics, really nothing more than application-specific assays in a regulated environment. That last part is the hard part, though, of course. And there's a lot of dead bodies [ sitting in regulatory ]. I also didn't want to go after everything in diagnostics. Infectious diseases, I'm not in -- I don't want to be in the business of helping Bill Gates find another dollar assay for Africa. I mean there's just enough people doing that. We're an oncology company, a neuroscience research company, so I wanted to stick around assays and diagnostics around where our science is prevalent, which is oncology. And here, there are businesses to be made, right? And when I saw what exosomes could be as a liquid biopsy, my team and I, we just thought this is just so much better than cell-free DNA. It's going to be the winner. It might take a decade, but we've got a lot to learn anyway, so let's just get going and get on it. It took us a couple of years to acquire Exosome. We certainly had our mishaps with the pandemic and the treatment by our MAC in the beginning. We now have -- it took 4 years, but now the -- our MAC has actually given us the same accreditation to the NCCN guidelines. So now we can actually use the surveillance diagnostic like -- process like it was. And we have a whole platform of new tests coming. We did the deal with Thermo for a kidney rejection, not only because it was a good business deal, but it also would give us a lot more credibility where -- as a business around diagnostics because Thermo is not going to partner with idiots, right? So it's gone very well, and it's going to be a home run. Kidney rejection is huge. And we have -- there's like 10 more coming. We have a colorectal coming. We have almost every organ we could handle. So -- and other -- urine or blood, whatever, neuroscience will be huge for us because exosomes are -- they're in abundance in the blood stream, coming from the blood-brain barrier. So it's very hard to find out what's going on in the brain. So these -- there's just so much hope around exosomes. And there's lots of RNA in these exosomes, so you're not stuck on trying to find critical signal out of just a small amount of DNA that's been totally destroyed by enzymes in the blood being cell-free. So it's just a better platform. The external surface, the exosome carries proteins. It carried as a signature from what organ they came from, which is also critical on -- to dealing with cancer. So the information streams around exosomes is just, it's a slam dunk on being better. But it's going to take a while to get the whole world behind it, and we're being -- we'll be very patient.

But you feel comfortable that -- I mean, you've had some really spectacular growth in that segment in the lab.

We're okay with 87%, good growth per quarter.

A pretty good number. It's a good neighborhood, yes. Any questions from the audience? No. So then let's move on to spatial, another big market, early stages going on there. How do you sort of fit into the whole market in spatial and sort of like your thoughts on that?

Well, that's another piece of the workflow for cell and gene therapy because you have to single out these cells to see how they look when they're being grown. But in the whole proteomics space, spatial is a growing area. I'd say there's a lot more hoopla right now around the discovery on where 10X and NanoString live. But the better they do, the better we'll do because we're at the other end when you get the translational. So when you're done screening 1,000, you got to look at the top dozen, we're the right platform because RNA scope is -- doesn't affect the tissue, morphology is preserved, tremendous amount of signal even on a single cell. We have a new line of fluorophore dyes that can light up 12 to 48 at a time, all individual cells. Even so, we just -- and there are just so many of the omics as part of proteomics growth that we need to look at, at cellular activity at a tissue sample level, and that's what we have. We have 45,000-plus probes in our library, across, I think, 400 species or something like that. And it's just an amazing acquisition for us, now 5 years ago, but it's been around a while. And we see it's about a $110 million business today, growing low double digits. We're looking at automation. When we automate this platform, then we can go after more pathology, doubles the TAM. And I still see the $300 million to $400 million division here, 5 to 10 years out, so...

And how should we sort of think about -- you've got all these growth opportunities coming through, how should we sort of think about the margin profile as you sort of bring on new products and you're still waiting for reimbursement on sort of things like that? How do we think about the margin profile?

Well, we've been pretty clear. 10 years ago, we were after a path to get to $1 billion, and we're on a path to get to $2 billion. $2 billion with a 40% op margin type of goal. We're at 37-ish right now, and we still see 3, 4 years of work to do to get to $2 billion, but we're on track to hit that 40%. And it's a balance of a lot of businesses. The instruments are going to be in the 30-ish range. But our proteins and laboratory agents are like over 80. And so it's a balance. I love businesses like Exosome, like Asuragen, like our RNA scope with our spatial. They're all kit-like products, very much like our ELISA Kit business. We know how to run those. Those are all 80-plus-percent gross margin businesses. So with scale, we see a total dot around 40. So it all -- it will hit some targets, we think. Acquisition-wise or other organic adventures we do, I would trade off growth for some of that margin, extra growth. But that's kind of what we see right now is, hopefully, over the next 5, 10 years, a mid-teens kind of growth rate overall with 40% or even better operating margin. And that decision will change depending how much you want to invest, right? So we're going to -- we'll probably keep adding back to get more growth and not shoot for 50% or something like that.

And you have a long acquisition history. Can we talk about what -- is there anything incremental that the platform needs? Anything that catches your eye? And have all these private companies come to Jesus yet in terms of valuation?

We've done 18 in 10 years. I would say we're not breaking any records, but we've done okay. There's always things we want. I've -- my eyes are always bigger than my pocketbook here for this. But we've done pretty successful in private deals. I would say, again, spatial automation. We're partnering with a lot of companies right now. We'll probably try to buy something in the next year or 2, whatever, whenever it becomes available. I think we're looking for media. I think it's a big component. And probably multiple flavors of media for a couple of the applications, variability that could happen. There's -- we just picked up Namocell for single-cell sorting and analysis. I think there's more around there. If we ever found a next-generation flow, I'd be all over it. I'd like that. We ought to be also -- you got to be -- also remember that on the instrumentation side, we're only going after things that have really good IP. Our gross margins are very high. We want to hit that 40%. It means we've got to get 30 at least instruments. You never get to 30 if you don't have good IP. And the Danahers and the Thermos will make sure you don't, right? So the competition is pretty steep in instrumentation, so that makes the opportunities a little bit fewer. But we're always vigilant. I always hope -- we always hope that we're going to get 2 or 3 a year. We've been kind of on that pace, so it's been a very active year with lots of activity. A lot of inbound from small companies that are in trouble and looking for help right now this year. Not going to go public anytime soon. And big companies, too, are looking at us and looking to partner more, and it's been a very active year.

Do you need to do anything to expand your geographical footprint, same place that were originally underpenetrated?

Well, we're not done in China, yes. We've grown from 10 people to 200. And I think in -- we hit that $2 billion range, I bet it will be more like [ $500 million ]. India is very small for us right now, and we're just kind of opening it up. And they're kind of back online after a pretty brutal pandemic there. And I love what I see. And I think we'll see high double-digit growth in India starting now, going forward. And it will take 5 years, probably, to get really material, but that's going to be a component as well. Europe, it's all about just being more efficient, more cross-selling, expanding. We just hired a nice executive to run Europe, comes from Germany. Our -- probably our weakest -- our biggest opportunity is Germany in Europe, so that's going to help. Of course, we're out of Russia, like everybody else is and using distributors for the Eastern areas. And we'll grow into those areas and Israel and stuff over time as we get bigger, so there's room, there's plenty of growth.

And what about your plans?

My plans? My plans are 14 months and about 3 days, and I'll be, hopefully, staying on the Board, but Board willing. But yes, after, it will be a dozen years at that point, it's probably time for new blood and help take this company -- I'll have taken it up 5 or 6x, and the next person, hopefully, will do the same. And this will become an Agilent kind of sized company in the next 10 years, with $40 billion, $50 billion, $60 billion, and it will still be a subsidiary model. Instead of 5 divisions, it will probably be 10. And there will be synergies. And things will link up together and hopefully, everybody having fun. But more importantly, we'll be hoping to save a lot of people's lives with a lot of good science.

Yes. Who do you think is the right person or the right set of characteristics who -- they obviously need to be able to sort of manage a bunch of different...

I think what the Board is looking for is somebody that can take this company to $5 billion to $10 billion of revenue and really have the runway to think at that level, think of the scale because it's -- you won't be in a one-on-one thing, right? It's going to be tools-related and research, so it's going to be another 10, 20 acquisitions, right? And a couple of home runs here and there like cell and gene therapy, but it will be a lot more tools, a lot more of the same kind of stuff to become just a bigger portfolio of synergistic life science tools, which means it's a lot of complexity and a lot of science. And somebody has to -- if they don't understand that science, they leave. They will have to attract talent that can, right? So...

Yes. I mean this certainly is -- I mean, you're in a sort of interesting position because there's lots of interesting ideas out there that a lot of the bigger companies probably wouldn't go after that might be of more interest to you.

Yes. I've never shied away from a risk and some have played out well, and that's one of the reasons we've got some pretty good prices on some deals, right, because people didn't see what we saw. And they haven't all been perfect, though either. I mean there's -- out of these 18, probably 4 or 5 I wouldn't do again. But the track record isn't too bad, and I'd like to see us do something bigger. We haven't done anything which evolved and really -- out of 18, 4 or 5 sizable tuck-ins and most of them pretty small. But some have a lot of room, a lot of hope, like our gene editing technology, TcBuster. With that, we could take over viral and AAV. How big is that? Huge, right? So we have a few things that could really take off. But should we be in mRNA or plasmids? Or there are some other areas pretty close to home around being cDNA-like with our workflow that might make sense, right? So I'd never say never, but we have a pretty careful strategy book. So we're always looking at parallel paths at the same time. That's how you get deals done. If you're looking for one thing at a time, you'll never get anything done. So we kind of go where the opportunity is along many different axis of strategies by...

We're coming to the close here. What's underappreciated in Bio-Techne?

Well, I would say, for sure, the potential scale of these growth platforms, cell and gene therapy and exosome in particular, but as a component of cell and gene therapy, the Wilson Wolf product line platforms business. It's arguably $10 to $15 a share right now. It's not baked in just because of the -- we're going to own it, and it's amazingly scalable. And it's amazingly profitable, and it's ours. And it's time people realize it's ours. And we're -- we fully intend on getting everything out of it. And in 10 years, I think it will be $1 billion all by itself.

Great. And with that, we've come to a close. Thank you. Thanks, Chuck.

Thank you. Appreciate it.

Thanks, everybody. And have a great rest of the conference.