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

Good afternoon. Welcome to the Jefferies 2023 Global Healthcare Conference. I'm Brandy Couillard, I cover life science tools diagnostics sector. Very happy to have Bio-Techne with us back at the conference this year and here to share an update with us, Mr. Jim Hippel, CFO. Jim.

All right. Thank you, Brandon, for having us. Really appreciate it. Start off very quickly here our tagline, we're science intersects innovation, but it's much more than just a tagline. It really is at the core of what we do as a company. Our employees are all about innovation and innovating to bring science forward -- move science forward to help our customers essentially create new cures and diagnostics to help patients. So that's really at the core of what our company is all about. Now I'm sorry, I forgot to ask about the clicker. Do I hit. I'm sure you get the right button. Sorry, Brandon, which -- what do I use for a clicker here. Okay. But before I get into our story, I quickly have to remind everyone, I may very well be making some forward-looking statements. So I recommend you read our safe harbor cautionary statements on our website in our Investor Relations section. So overview of our company, and this is going to be geared more towards those investors who may be less familiar with our company. So a fairly high level, at least to start. The innovation that we have as a core attribute of our company and our people allows for differentiation in our products. And that differentiation, particularly in the form of quality, and adds much -- great high value to our customers. So we consider ourselves a high-value tools company to our customers. And that high value and that differentiation, I think, translates to a financial perspective as well to our investors and that our company traditionally has had above-average organic revenue growth and adjusted operating margins relative to peer companies in our industry. If you look on the right-hand side, it's a snapshot of our major product categories within our company. Starting with our reagents, namely our proteins and antibodies, which are essentially at the core of almost all life science research, followed by our assays and instrumentation that are used to analyze those molecules and in our case, in the most efficient and accurate way possible. And then over the last 4 or 5 years, we've made significant beachheads into new emerging markets, we think are the markets of the future for Life Sciences, and that is in spatial biology, liquid biopsy as well as cell and gene therapy. In the middle, you can see a revenue breakout of the types of products we have from a revenue profile, consumables, I should say, recurring revenue makes up nearly 90% of our business, the lion's share that is consumables with also some service and royalties thrown in. About 10% is instruments, but those instruments drive about 10% pull-through of our consumables. So our instrument franchise actually contributes more like 20% to our overall revenue profile. If you look at our revenue by geography, you can see roughly half of our revenue is in the biopharma sector, which is more than double that of our academic sector. A decade ago, they were more like 50-50. Strategically, we've made a stronger push into biopharma simply because over the long term, they tend to have larger budgets, more stable budgets and more opportunity for scale. You see an OEM section there of 15%. That's mostly our Diagnostics reagents business, which is controls and calibrators and diagnostic kits for practically every diagnostic instrument maker in the world. And distributors make about 15% of our revenue, and you can see that highly correlates to our business in Asia on the right-hand side. And speaking of Asia, that's been by far our biggest growth area and focus geographically for expansion. About more than half of that Asia revenue is out of China. And to give you a sense of the importance of the growth that, that has been for us. If you go back 10 years ago, less than $20 million of our revenue was in China, and now it's over $100 million. There's kind of 5 key operational strategies, as I call them, that drive our overall business strategy. It starts, of course, with core product innovation. We've already talked about innovation already and how important that is to us. In this space, if you're not inventing, you're dying. It's just too vibrant to not have innovation on the forefront. And even though we have tens of thousands of products that we make ourselves over the last 4 years, we still continue to pump out between 1,000 and 2,000 new products every year. Geographic expansion, obviously, a core strategy, talked about that already with regards to China, definitely focused on Asia with India. And basically anywhere in the world, if they're doing life science research, we should be there. And then finally, at bolt-on M&A, market expansion. Again, similar to the innovation, core innovation and aspect, in this space, we believe it's so vibrant that no matter how good you are innovation, you can't always keep up with what's the newest in the forefront of life sciences. And so being active of what's out there that you don't have the capacity to do on your own and acquire those companies and add in the portfolio, we think is an important long-term driver for growth and sustainability. And then a world-class customer journey. And at the end of the day, we are here ultimately to serve our customers. And we have a strong reputation for 30, 40 years of being very customer friendly in the sense of more consultative as opposed to sales. We have highly technical people on our staff that will take phone calls from our customers if they're having issues with our products. Sometimes the very same people who invented the product or first produced the product. And we've also invested a lot in our digital experience with our customers, particularly as it pertains to our website with hundreds of thousands of products, you got to have a website where customers can navigate, find what they're looking for and be proactive in giving them the information and potential products they need to make their research successful. None of this is possible, of course, without having highly talented people, and we believe we have some of the best and it all ties into having a very strong culture to keep and nourish that talent. We have what we call an epic culture, and we evaluate all of our employees on those behaviors, 4 key behaviors that make up our culture, and that's empowerment, passion, innovation and collaboration. Our culture innately has a foundation within it for a sustainable future as well. Luckily, our manufacturing processes have a very low carbon footprint to start with. So we focus our environmental efforts more on water management and waste management, particularly as it pertains to packaging. From a social perspective, half our employees are women, even the scientists and over 1/3 of our employees identify themselves as being from minority. And from a government's perspective, we have a fairly balanced Board of very strong business people as well as highly scientific advisers. 20% of our board are women, and our chair is independent. Our strategies over the past decade have resulted in very nice financial returns. As you can see from this chart, the revenue growth in total has been about 14% CAGR over the last decade and both our adjusted operating income and our operating cash flow has increased by about 2.5x over that time period. All right, diving a little deeper now into our structure. We have 2 segments with oversee 5 different divisions, starting with our Protein Sciences segment where our proteomic reagents division -- research reagents division lives. This is essentially our primarily our proteins and antibodies. The main brand there is R&D systems. Our proteomic analytical tools is where our assays and instrumentation resides. The assays brand is R&D systems. The instrumentation brand is primarily protein simple. And then over in Diagnostics and Genomics segment, we got 3 divisions. We talked about the diagnostics reagents business already within our OEM. There is some small amount of retail that we do sell in that business and it's primarily in the R&D Systems brand. Molecular diagnostics, that's the home of our liquid biopsy as well as genetic testing franchises. The liquid biopsy is under the Exosome Diagnostics brand and genetic testing is under the Asuragen. And then finally, we have our spatial biology business, which is RNA and DNA and in-situ hybridization business, and that's branded under ACD. All right. So now we'll dig even deeper now into each of the divisions with our -- starting with our proteomic research reagents. Again, the home of our proteins and antibodies. For 40 years -- 30 of the last 40 years, our company was primarily known as a protein company. Ten years ago, that was the biggest part of our business, research proteins. We're known for having the largest catalog of proteins and the highest quality proteins in the market. And by quality, that means high bio activity, which means you get more out of your experiments and strong lot to lot consistency, which is important for more lengthy experiments. In antibodies, we are also one of the largest -- we have one of the largest and not the largest catalog of antibodies as well over 400,000 antibodies. We produce tens of thousands of those antibodies ourselves, the rest we source, we source externally. Our antibodies that we source internally are known for being extremely high quality, because they're made from our very high-quality proteins. And then small molecules is a smaller part of our business, but we mentioned it here because it's becoming a more significant part of our business as we've added a GMP component, which is serving the cell and gene therapy end market and growing very, very nicely. Moving on to proteomic analytical tools. 5 key platforms here starting in the upper left with our legacy immunoassay ELISA platform. We've been considering it for 30 years or so being the gold standard in this platform as well, simply because these assays are made from our very high-quality antibodies which are made from our high-quality proteins. Down below that, you see our Simple Plex platform. This is basically an automated version of those ELISAs that allows what would otherwise be a very multi half a day, full day process for doing an ELISA, you can do it with the push of a button in an hour and has future clinical applications for this instrument as well. In the middle, at the top, you see Simple Western, this is the only fully automated Western blot system in the market. It takes a process, but that's only done manually otherwise, 2 days, 30 different steps, very manual, very messy, does it from sample to answer a push of a button in 3 hours. Below that, our Namocell platform. This is our newest platform. We acquired it as part of an acquisition a year ago. That's cell sorting and cell counter, geared towards a cell and gene therapy market, does it with very high speed, but also very high sensitivity, so it doesn't damage cells like other applications do in this space today. And then on the far right is our Biologics platform. This is essentially a QC tool that's used to measure the purity of proteins used in biological processing and manufacturing. And a lot of different differentiators here that I don't have time to get into but one of the key ones frankly, is just ease of use relative to other technologies. It's a very, very easy instrument to use and very fast. All right. Moving on to Diagnostics and Genomics. I'm going to focus today on the spatial biology and liquid biopsies since those are the 2 biggest growth drivers within this segment. Starting with the spatial biology. So again, this is the RNA scope, DNA scope technology. And the way I -- you can read the screen and read the presentation on your own, but the way I think about this as a nonscientist is, this is the genomic version of immunohistochemistry that's used in proteomics today using antibodies. And as science has evolved, we're obviously understanding not only a sample -- tissue sample, does it have a target of interest, but where it exists in that target is as important, often as knowing whether it has the target at all and have it be multi-omic meaning not just understanding the protein side of it, but the DNA and RNA that makes those proteins has -- provides the researcher with much more information -- valuable information. So this is a huge growing space. There's a discovery component to it. There's a translational component to it and eventually a clinical component to it, where we play is in the translational space. So after all the screening and high-level discovery is done, you come up with your few select targets of interest, and that's where you use our technology because of its high sensitivity and specificity. And eventually, we believe we'll be able to take this technology and continue to move with our customers as this moves further down into the clinic and ultimately to the pathologist. Liquid biopsy. So our main liquid biopsy platform is based off of exosomes. So quickly, I'll explain what an exosome is from a layman's perspective. Think of it as a vesicle that gets excreted from all your cells in your body into your bodily fluids, whether that be blood, urine, saliva, et cetera. And these vesicles within them contain the RNA and DNA from the cell from which it was excreted. Our platform on liquid biopsy is based off of these exosomes as opposed to, say, cell-free DNA, which is the platform that's -- or the biological platform, it's widely used today for liquid biopsy diagnostics. Quickly, there's going to read it here, but I'll give you my layman's version of 4 quick reasons why we believe the exosomes biological information is more superior. Number one, there's more of it. The amount of exosomes that are excreted from cells far outweighs the amount of cell-free DNA that ever gets excreted, so it's easier to find. Number two, once you find it, it's easier to read the DNA and RNA because it's protected by that vesicle covering as opposed to cell-free DNA, which is not, and therefore, gets degraded quickly over time by enzymes in the bodily fluid. Third, once you find a target of interest with exosomes, you can tell precisely where in the body it came from, which tissue, which organ it came from because that vesicle -- that bubble, so to speak, that surrounds the DNA and RNA is made from the exact same protein as this originating cell. And last, but certainly not least, what makes we think exosomes superior is that exosomes are excreted from living and dying cells -- from the cell is born through its life and its death cycle, whereas cell-free DNA is excreted from dying cells. So by definition, what that means is that using Exosome, you can find your target earlier, you can diagnose much, much earlier than you can using just cell-free DNA. So our first commercialized test using this Exosome platform is our prostate test. This is a rule out test that's geared to rule out the risk of high-grade prostate cancer. So when you -- right now, the main tool for determining whether or not you get a biopsy is your PSA score, which is pretty much a flip of the coin. And if your PSA score gets elevated, your doctor will often err on conservatism, understandably so and order a biopsy, very invasive procedure. As a result, roughly 90% of all biopsies particularly for those that are in this moderately PSA zone of 2 to 10 turn up being unnecessary. So this is -- for the patient, this is a huge benefit to help avoid all those unnecessary very invasive biopsies. From a doctor and a patient perspective, where this test is very helpful is because the test is so invasive, there's studies out there that say 70% of all patients who are recommended by their doctor to seek -- to get a biopsy, don't ever show up. And by taking this test, if the test shows you have a higher probability of having high-grade cancer, it will be a very convincing discussion for the doctor to have with that patient to get that doctor in for a biopsy. This test was launched just before COVID, unfortunately, when no one was going to see the doctor. But since the last 5 quarters or so, since COVID has dissipated, this has been taking off, growing 70% each and every quarter the past 5 quarters and it's just barely getting started. We've only touched 15% of all urologists out there, and those urologists that are using this test are still way under penetrated with regards to their usage, where our longer-range doctors are outnumbering our new doctors by 5:1 on average. So there's 5x full growth just within our existing doctors and there's another 85% to go after. Exosome being a platform is not just a one test, so we have, of course, other future tests planned for this platform, much early detection colorectal cancer is in the pipeline within the next couple of years, which is earlier than anything else on the mark today. Sjögren's Syndrome is another. ExoTRU, we actually released last year, partnering with Thermo. This is a kidney transplant rejection test. Again, the theme here is earlier. It differentiates it from the other tests in the market is a much earlier detection. And then there's a whole slew of tests out in the market today that are used for oncology monitoring that already have coverage where we in the lab are proving out that our Exosome technology can find much earlier detection using our technology. So our plan is to build our own test capability as a follow-on to test that are already on the market that already have coverage and then use our lab channels that a surgeon has for genetic testing to market those products to labs. So a huge, huge potential for this platform. And then cell and gene therapy is the last major growth platform I want to talk about today. You hear about -- this is all the buzz you hear about probably every life sciences company. Real quick, a layman education on this. We just talked about cell and gene therapy like it's one thing. It's not. There's gene therapy and there is cell therapy. Cell therapy is much larger than gene therapy. We do play in gene therapy, but it's mostly in our instrumentation that's used for the analysis during different steps of the process. But our biggest focus because it hits all of our product lines is in cell therapy. And cell therapy has 2 components to that. There's the regenerative medicine, which is like stem cell treatment, and there's the immuno cell therapy, which is commonly referred to as CAR-T. Small words, you'll have to look at this on the website yourself to read it all, but the main message here is there's multiple steps here. There's 4 main steps for regenerative medicine. There's 8 main steps for CAR-T. And if you read the real fine print there, it's way too fine for how important it is, our products play in every one of these steps in some fashion just about. So as cell and gene therapy becomes a whole new end market, it will be a big growth driver for our entire portfolio. But specifically, step #3 under regenerative medicine and step #5 under immune health therapy is where our primary focus is and where our biggest opportunity is, that's around cell growth. growing up these cells in mass to put them back into the body. And what cells need to do that is they need food and they need oxygen. Well, we have the food that's called proteins. So for the world leader in making RUO protein shaming us, we're not the real leader in making protein -- GMP-grade proteins for food for the cell growth. And that's what our customers tell us that our 2 biggest concerns around commercializing these products is a production of them to have enough GMP available proteins for growth and have a vessel that can provide enough oxygen to grow them and that they can scale these products for the average patient. So we've tried to answer -- we're in the process of answering these needs first on the protein front. Sorry, I skipped on the protein front, we've built a dedicated GMP factory, 60,000 square feet. As far as we know, it's the largest GMP protein facility out that exists. Initially, we thought it could maybe -- produce maybe $200 million worth of proteins, but as we've moved more proteins into that factory, the yields continue to increase. And now we're at a minimum of $500 million and we think more likely over $1 billion of protein can be manufactured at the facility. So definitely gives our customers the confidence that you go with us and GMP proteins will be there through the clinic and be there when you go commercial. And on the oxygen front and the container front that holds this media and the cultures as they grow, we partnered with Wilson Wolf, who has this G-Rex, a little green container, you see in the middle, that has a unique technology, a permeable membrane on the bottom of the surface that I can't read it from here, convection, sorry, a big word for me. convection versus diffusion to oxygenate the cells and it basically allows for the entire container to be oxygenated as opposed to just the surface. This is different than other methods like bags and sell jars and so forth, where only the very bottom part of that container can be utilized. This allows for a magnitude higher ability of scalability of these cell growth and ultimately, the therapies that we use for patients. We like this product so much. We're buying the company. So we bought 20% of it last quarter when they hit $55 million of EBITDA. And we had an agreement in place to purchase the remaining 80% for $1 billion when they hit $136 million EBITDA or $226 million in revenue. And yes, that is the right numbers. And yes, they've been hitting their EBITDA targets ahead of their revenue, that's how profitable this business is. Obviously, it mirrors extremely well with our GMP proteins. They actually had a head start of us in this market. They're in 800 customers, almost 4x more than what we're in. And about 45% of all clinicals that are out there to cell and gene and cell therapy are using the G-Rex today. So we're extremely excited about the marrying of these 2 and being 100% part of our business in the near future. And this is what cell and gene therapy can mean for us over the next decade, we think. You can see the various product categories along the bottom. We're currently -- we estimate around $100 million of revenue across our portfolio today is sold to cell and gene therapy applications, but the growth will impact our -- almost our entire portfolio starting from left to right in terms of magnitude. But by the time you get to the GMP reagents on the right and the Wilson Wolf, once we own that on the far right, that clearly, that's why the focus is there with regards to -- where the massive growth will come from given the volumes that are needed. So again, it could be a $2 billion piece of our business, which is double the size of our company today just in 10 years. And then that leads to my last slide here, which is the overall possibilities for our company. I mean what's awesome is that as far as we've come in the last 10 years, quadrupling the size of our company, 14% CAGR, still maintaining way above industry average margins. We're just getting started. You can see our key end markets along the left there. And 3 of those markets we just talked about in detail, spatial biology, liquid biopsy, cell and gene therapy are just at the precedence of massive growth in the future and our share is extremely low in all these categories, but especially those. So we think, if anything, our growth rate over the next decade CAGR will be higher than it was the last decade. So right on time, somehow squeezed it all that in.

Perfect. Thank you. I'll leave it there. Thanks, Jim. Thanks, everybody, for being here.