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

Go ahead and get started. I'm Catherine Schulte, I cover life sciences and diagnostics here at Baird. Very excited to have Bio-Techne here with us today. From the company, we have CFO, Jim Hippel; and Head of IR, Dave Clair. So Dave, Jim, thanks so much for joining us.

Thanks for having us, and thanks for all of you. I can't believe it Clair. We got considered and we're bumping into a happy hour here. So I appreciate that.

I think we're going to dive right into Q&A. If anyone from the audience has a question, you can send it to [email protected], and I will pass it along to the team. So maybe first starting off, coming off your Investor Day last week, maybe just give us a high-level update of what were the big kind of positives or downward revisions versus your prior outlook.

Well, I think the main purpose for the Investor Day, and I think it was real successful in doing so was really just -- in this environment that we're coming up that we refer to [indiscernible] the COVID hangover to just remind everyone and reassert about the long-term opportunities in our space and particularly within our company and how we're positioned in our key growth platforms. And as we go through this process now about every couple of years, it's as good for us internally, frankly, as it is, hopefully, for all of you as investors because there's a lot of -- there's a lot of soul searching and challenging each other and challenging our assumptions that go through the process of putting the story together externally. And what's invigorating about it is we always come out of it feeling better, stronger and more rallying the troops than before. And I think it was important in this time frame to kind of reassert the strength of our company and the amazing growth opportunities we have ahead of us particularly in the key emerging areas of cell and gene therapy, liquid biopsy and into facial biology. So hopefully, that resonated.

Yes. And you laid out a path to over $2 billion in revenue in fiscal '28. I think most investors were expecting that the last target you laid out, which was $2 billion in fiscal '26, I think most expected that to get pushed. I think we're at $1.5 billion for fiscal '26. But maybe we're a little surprised that Wilson Wolf was in your fiscal '28 number. Based on some work that our team did, trying to rebuild one of the charts in your deck, I think we are working out that fiscal '28 could be closer to $2.3 billion for that over $2 billion. Is that in the right ballpark? And any comments on that?

It's right in the middle of the range, isn't it? So it's definitely within the realm of possibility. I think the approach this time versus -- and we made the targets 2 years ago for fiscal year '26. There's a couple of things. Let's just start with the baseline and what the environment was like 2 years ago, that we were at the peak of the COVID halo as we referred to it. There was really no insight at that point in time. There wasn't even vaccines out at that point in time. And so we thought we were in a multiyear cycle, with COVID the way it was accelerated growth rates across all of our platforms, frankly, that were fueled by -- and also the funding environment too in terms of very low interest rates, which lasted for another year beyond that actually. So not as an excuse, but clearly, it was a very frothy time to start it from a baseline perspective. The other key point to make in terms of our [ 4K ] or 5-year view then versus now is -- there were elements -- we even talked about it, there was inflection points that were within that 5-year outlook that, frankly, were outside of our control. And so as we thought about making 5-year targets going forward, let's derisk those items that we can't necessarily control and only put in numbers that we feel like we can control from an execution perspective and leave those inflection points as potential upside. So that was kind of the philosophy going into this target studying session. So it's not that it's a weaker outlook. It's more of a derisked outlook. And I think we've left a lot of opportunity for upside for the items we didn't include. And I think also, there's 2 aspects to it. Yes, there's the Wilson Wolf, that's now included versus not before, which we always say our outlooks don't include M&A because you can't predict what I made is going to happen in the future, but Wilson Wolf is very predictable. That is inevitable, we will buy it, so it just made sense to include it. And on the other end of the spectrum, when you look at the very near term, we're clearly still in the midst of a COVID hangover period. So the growth rates do need to pick up from '24 to '28 to compensate for that as well. So we took that in consideration also. In terms of the items that were derisked, specifically interesting enough, cell and gene therapy, which is our largest area of opportunity. It's also our biggest area of growth over the past 3 years, where we're 4x bigger now than we were -- 3x to 4x bigger now than we were just 3 years ago. We had even aspirations for faster growth than that due to inflection points of potential therapies going commercial. And I think what we've learned, not just we as a company, but the industry has learned is that it's taking longer for these trials to get through the different phases and then ultimately become commercialized. Some of this is because of FDA bottleneck. But I think also, it's because it's not following the same path as the biologics did where typically 4 to 5 years. And what I've read is that makes sense is that these cell therapies are -- they're looking for cures, not just treatments. And so it takes longer to prove that something to actually cure particularly something around cancer. So in retrospect, it all kind of makes sense. So we've taken all the commercialization aspect out of our current 5-year view. It's in our 10-year view, but not in our 5-year view. And it's not to say that there's not some that could get that far that quickly, but let's leave it as upside. Where our growth, and we're going to still have tremendous growth in cell and gene therapy. It's going to come from winning new customers and those customers continuing to progress both from preclinical and clinical, just as Q4 -- this last Q4 is a great example, right? Our GMP proteins business grew 60% in this environment. 20% of that came from new customers and the other 40% came from customers progressing. So that gives you a sense of the leverage you get for every new customer. That was part of the biggest area of that. And aside from the baseline kind of being different in the macro environment, that was the biggest difference. The last second biggest would have been our exosome simply because we were yet another year delayed in getting the full reimbursement that mirrored the NCC guideline. As you may recall, if you follow us, I didn't incur to this past January, February. So since that's happened, it's taking off like wildfire. And so again, we still -- the long-term aspirations are as strong as they ever have been. It's just a year delayed.

Yes. And maybe taking a look at the near-term outlook for fiscal '24, you kind of talked about first half up mid-single digits, back half up high single digits on getting through the COVID hangover as you guys have called it customer destocking, China funding environment. Have any of your assumptions around that changed since you talked through that and specifically around the ramp that you should see in the back half?

No, there's been nothing that's changed from a macro perspective, now from our own business, specific perspective that would change that view. We're definitely most confident in the destocking headwind going away just because the math would suggest if nothing else, but tracking those customers, they will be behind the inventory by that point in time. So that we feel like it's closely in the bag as you can get. In China, we still feel like it will be better in the second half than what we'll see here in the first half. But it's still -- that's still the big wildcard as to how much better and what that overall impact is to the company. I think a worst-case scenario doesn't get that much better and therefore, the only upside we get is from the destocking going away, which is still a 2-point headwind every -- in the last couple of quarters. The best case scenario, it comes back full strength with funding, and that could get us knock on the door double-digit growth. the likelihood is probably somewhere in the middle.

Yes. So I guess, what are your expectations for China in fiscal '24, maybe first half versus back half? And what could it be if we saw stimulus?

Yes. We haven't given strategic guidance by region, and I won't do that here. But what I'd say is that I think China for the first half will be worse for us than it has been any given quarter in fiscal year '23. But not we -- knock on wood, not nearly as bad as what we're hearing from some of many of our peers. And I think part of that is not because we're so much better than our peers. It's more about how we're positioned in China versus our peers. A higher percentage of our revenue in China comes from the pure research side of China, which is more impacted by the government funding as opposed to many of our peers have a higher concentration in their revenue more downstream into bioprocessing CDMOs, and that's where there's, I think, a bigger question, Mark, with regards to a true realignment or restructuring of what's happening there. That impacts us, to some degree, but not nearly as much as it does others. And so that's why our -- I think our assessment of China is not as negatively severe as it is in some of our peer companies. So that's how we're thinking about it for the first half. In the second half, and it just -- it is a bit of a wildcard in terms of how much -- how quickly that funding comes back. And what we're focused on is still a long term as we always are. There's been blips in China before. And fundamentally, health care in China is still publicly of highest performance from the national interest. If you spend any time in China, which I've been spending a lot of time there over the past 20-plus years, and you walk through any other particularly Tier 2, Tier 3 hospitals, you will see they got a long ways to go. So there's no reason to think that regardless of economic potential macroeconomic headwinds are facing right now, we are in government policy shifts and so forth that, that's going to change. And it's clearly essential to their -- really it's even to the political likelihood to make sure that their people continue to increase their access to good health care. So I think it's fundamentally going to be a long-term strong growth region for us and for our industry. And the other -- even there's a lot of discussion around from a geopolitical perspective, if they start focusing on domestic versus international even as far as banning international imports and things of that sort of way that I highly doubt that will and it happen any time in the near future, even intermediate future in our space simply because not just with us, but in all of our peers when it comes to the research side because they just don't have nearly the capacity to replace what we provide. And they're probably a decade or more away from even coming close to that.

And you kind of echoed your conviction around this become -- still being a long-term growth driver. And I think we've heard other tools names in the space say the same thing of high conviction that this will come back, will be a region of growth. But we've now had several saying that they don't think it's going to get back to the kind of growth that we saw in the 2010 to 2019 type time frame. I guess what's your take on that in terms of where that normalized...

Well, I guess, I'd go back to the same reasons why we're not predicting as dire this year as others are because a lot of the growth from some of these other companies came from the bioprocessing and CDMO. Areas which did have -- we were kind of jealous and envious that we weren't in that space for the past 3 or 4 years because it was rapidly growing so fast. But those companies who depended on that for growth, I think there could be a structural realignment there. And I can see why it now relying just on the academic side, where they had less exposure perhaps than we do, relatively speaking, that they won't see the growth rates. But again, we feel like not only the government's emphasis on good -- on strong health care, but our positioning within the key growth markets of life sciences that we will continue to have very strong growth in China. It will lead the world's regionally in growth, we believe.

Europe, shifting to a different region has been performing very nicely, low double-digit growth this past quarter. Can you just talk to some of the investments or changes you've made in the commercial organization there over the last several years. And maybe what's driving that strong growth?

Well, we have continually upgraded the team over the past decade when the opportunity presents itself. And we've expanded the footprint within Europe, so that there's much more home offices, so to speak, by country. So there's more of a local feel like particularly in the key countries. I think that's helped a lot. We have strengthened our inventory position in Europe so that the turnaround times have improved. So that has definitely helped. We have a new leader there overall that -- can't give them all the credit for because he's relatively new, but he's fantastic, and I think he's going to continue to knock it out of the park there. So I think we've done things over the years that have definitely taken a lot of the -- extremely variable for us, high beta up and down. And that has definitely mellowed out. It's been a more consistent, much more in line with what we see in the U.S. in terms of growth rates. So it's a general statement I'd make, I think from a more acute perspective with regards to the past 2 quarters, what's interesting was that Europe kind of let us into the COVID hangover, the first half of last year and the U.S. has kind of followed that in the last 2 quarters of fiscal year '23. The fact that Europe kind of flipped, I'm not saying it's a complete foreshadowing, but we're hopeful that, that might be a sign that if they let us into it, they'll lead us out of it perhaps as well.

Yes. And then from a customer standpoint, this past quarter, you guys talked about thinking that biotech funding has kind of stabilized and you're starting to see stabilized activity levels. I guess when do you think that becomes a tailwind for that business? And what are you seeing from some of your smaller biotech customers?

Our growth rates in our smaller biotech customers have been fairly comparable to our larger pharma ones for the past 2 to 3 quarters. So when we say stabilize, I guess that's kind of what we mean by that. There's not a big divergence there. They're all relatively softer compared to growth rates we saw the prior 2 or 3 years. But when you think about the baseline that the growth rates they're coming off of, it shouldn't really be a shock or a surprise. So the resiliency of the revenue, I think, is very strong. And the resiliency of the overall space is relatively strong. Biotech is still annualized much stronger revenues than it was 3 years ago before COVID. And I think at the end of the day, there's still a lot of money out there slashing her out in the private equity arena and VC arena. And I think from a sitting out here, we focus on the public markets and what we see there, and that's definitely been slowed down dramatically, but it's still quite active in the private markets, and there's still a lot of money there. And I'd say it's not -- and when money does come back, it seems to always go to biotech first versus other industries. So we're pretty -- we've seen these cycles in biotech funding before, and they tend to be rather shortened duration and shallow in depth. And I think we're going to -- that's the same -- I think that will be the same case here. Because structures -- because, again, fundamentally, we're not in a major recession. There's still a lot of money out there and the innovation that's going on in biotech and life sciences has never been greater. So it's an exciting place to put money.

Yes. Maybe focusing on your Protein Sciences segment, starting with your kind of core research reagent business. Your conviction in the growth outlook there, I think at your Analyst Day, you talked about 7% growth in that category. And maybe comment on some of the consolidation that we're seeing in the space of a couple of years ago and announced a couple of weeks ago.

So again, that growth rate was a bit less than what we had put in the last 5-year forecast. Somewhat -- some conservatism built in. Keeping in mind that actually our core reagents and our instrumentation are the 2 categories that are actually ahead of where we thought we'd be at this point because they benefit much more from the COVID halo than was anticipated at the time. But there's also a mixed component within that reagent. So there's like 3 major categories, actually 4 major categories in that core areas. It's RUO proteins, RUO antibodies, our ELISA kits, assays and our diagnostic reagents. And I would say in that growth rate you mentioned, we expect our proteins and antibodies would be above that growth rate, and we expect our ELISA's that are much more established and our diagnostic reagents are also very well established to be somewhat below that run rate. So that's kind of where you get to the average. I'm sorry, Catherine, the second part of your question?

Consolidation in the space?

Yes. You think let's just put out there, Danaher's acquisition of that, right. Yes. So I mean no disrespect at all to Abcam or Danaher or Thermo or anyone I mentioned because clearly, they're great companies and robust competitors. But we said this about Thermo and -- or about PeproTech that was bought by Thermo a little over a year ago that we didn't expect there to be a material change in the competitive environment or in nature. And here we are over a year later, and that's proven to be true. And with Danaher, it's basically the same message we have with regards to Abcam. I think Abcam -- I think Danaher will benefit by having Abcam, but I'm not so convinced -- we're not convinced that Abcam will do much to make Abcam more competitive in the marketplace or against us specifically. Danaher doesn't have an antibody play. They don't necessarily know a lot about that. That's why they needed it as a -- to fill in their portfolio. So -- and that was what we said about Thermo Fisher and Peprotech, and that so far has played out. So we're not -- we're not concerned about it, but we're not necessarily cocky about it either. We'll keep a close eye on it. But Abcam has always been a very affordable competitor. And we think they will continue to be, but we don't expect it to be necessarily any stronger or weaker than it was before under Danaher's ownership. And where Danaher will benefit Abcam, which in turn will benefit Danaher's. They'll DBS, right? So they'll drive profitability for sure, but we're not necessarily worried about it from a change in competitive environment.

And we had the opportunity to tour your new GMP facility a few weeks ago, which was great to see. Can you just give us an update -- remind us where you are from a capacity standpoint I think earlier you talked about, hey, there's 60% growth, 20% was from new customers, 40% from further penetrating existing customers. How do you think about that growth going forward? How much is wallet share or growth of existing programs versus new customers?

Well, so first of all, on the capacity question or comment. Yes, I just can't wait until our actual -- as fast our revenue is growing. I can -- we thought it's growing faster than our capacity is. The scientists seem to be able to figure out every 6 months how to continue to increase the yield of that factory. As a reminder, when we first built it, the estimates that our team was given us was approximately $200 million max of capacity, and now it's north of $1 billion of max capacity. Part of it is just the nature of their conservatism, but part of it is they truly are. They never made it in this type of quantities before. Typically, it's made in a beaker for research, right? So that the surprising themselves in terms of how they're being able to get so much greater yields when you make these proteins to scale. So it will be a long ways off before we save other capacity there, I think. So I think that's not an issue, but it's also a great selling point for our customers because that is why we built the factory. We still believe it's the largest factory out there in the world for GMP proteins because our customers were telling us that was their #1 concern about commercialization was that proteins was a big choke point in terms of supply. So to build it and they will come model. With regards to -- sorry, Catherine I couldn't take. It's late in the day, I can only take one question at a time. The second part of that question was?

Thinking about growth going forward, new customers versus your existing programs?

Yes. So I can iterate is already in terms of how we derisked our 5-year view by taking out the commercialization. So really, it's more of the same in terms of the next 5 years, there's still a lot of customers. There'll be new customers along the way that don't even exist today, even though we're in this biotech funding kind of "Funk" that's where money will go back first. And to put it in perspective, Wilson Wolf and their G-Rex has 800 customers, and we're knocking on the door at 400. So there's still a lot more customers to win over. And what's really good about our story is almost all of our customers are in the very early stage of development. Most of -- almost all of them are in preclinicals. And so that volume per customer has amazing opportunity to scale even without any new customers, and we intend to get new customers -- clearly get new customers. So -- and the amount of scale per customer, even within the preclinical goes up dramatically, from when they first start off to when they're ready to go IND. And then again, dramatically goes up throughout the phases of clinical progression. So -- and then they get commercial, and that's a whole step function change. But -- that's why we have a lot of confidence in our growth trajectory and projections going forward based on the figures we put out there because it really is just a matter of these customers scaling.

M&A has become bigger and bigger part of the story since Chuck joined the company. I guess as you think about going forward from here, you have Wilson Wolf in the pipeline. How do you think about your appetite for M&A? Would you be open to a larger deal? Or do you think you'll continue to kind of have these tuck-ins?

Yes, yes and yes. Yes. I mean we've been saying this for a decade and nothing changes that at the end of the day, we still are only a $1 billion revenue company and compare that to the [ mammoths ] that are out there, it's still nothing I always joke with Dave, why needs like 0.5% market share steel, and we can double the size of the company, right? So that's the awesome opportunity we have ahead of us. And a great -- I think -- and Chuck has mentioned this, that there's 1 fundamental change about our story now even 2 years ago versus, say, 10 years ago was that without M&A, we wouldn't have had our instrument platforms. We wouldn't have had our special biology platform. We wouldn't have had our spatial -- our liquid biopsy platform. And now without M&A, we don't need M&A to double the size of the company again. But we could have said -- we could have said, "Hey -- 9 years ago, we could have said, "Hey, ProteinSimple by itself, will double the company so we can stop now. And then we could have stopped after we got, and we didn't, we kept going. And that's what's so exciting about this space. There's always a new invention. There's always a new dynamic to our -- 9 years ago, we -- the spatial biology, the term they need exist, right -- liquid biopsy almost the same way. Cell and gene therapy did not hardly at all, right? So I can't tell you what we'll own 5 years now because we probably don't even know. That's what's so cool and excited about this space. Maybe a bit of a copout for the answer, but to talk about what we know today, where our focus is, we'll continue to be around that cell and gene therapy area. It is still nascent. It's still evolving. There's still new tools being developed to continue -- ultimately, what we want to be a part of is the ability to scale these therapies so they can be accessible to all patients. And G-Rex is a big part of that, our GMP protein will be part of that, but there's constantly new invention and there will be more that we don't even know about that will -- that will enable that, and we want to be part of that. And you can't invent it all yourself, even Thermo can't invent it all it self or Danaher, where they get to buy stuff. And so we'll be doing the same.

Yes. We've got a couple of minutes left. We have 3 questions we're asking every company. So we'll get Dave to chime in with his thoughts on these 2. But Jim, as you think about the next 12 to 18 months, what are the 2 biggest opportunities that you see for the business?

Next 12 to 18 months. I'm extremely excited about spatial biology now that we have [indiscernible]. I mean we talked about our spatial platform being a 20%-plus grower and in the early days, it was and then some. Because keeping in mind that we bought it 5 years ago, it was $25 million in revenue, now it's 4x the size. So it's not necessarily chump change in terms of growth, but we expected it to be maintain that 20% plus kind of growth even at the size of this today. And it has. It's been double digit, but not 20%. And the key limiting growth factor or limiting factor to growth and really taking that market expansion to the next level has been automation and now digital [indiscernible] platform. You got the perfect fit. And so I'm not probably near -- very near term, I'm the most excited about that even in the environment we're in right now.

Well he stole my answer. I'd say, I guess, for me, personally, the second would be the traction we're getting in GMP proteins. I mean, you saw the facility. It's state-of-the-art. It's set up for very high volume, and we're seeing a lot of traction. So it's very exciting.

All right. Well, Dave, go first on this next one. Then Jim can try.

I think he can take next so he stole my answer.

Yes, exactly. When you think about next 12 to 18 months, what are the 2 biggest potential challenges that you see for the business?

I think Jim addressed probably the biggest I don't know if it's necessarily a challenge, but the biggest uncertainty is kind of how China is going to evolve throughout the next 12 to 18 months.

12 to 18 months. Yes. I think unless -- I mean, I know China is still in a bit but unknown by that. When you go out 12, 18 months, I'm less concerned about China than I am perhaps about. The other factor, which is how fast does the funding really flow back in the biotech and pharma have the confidence to continue to reinvest at the rate they have been and I don't mean to have been meaning COVID, but like even in '19, '20. So again, these cycles tend to be short and shallow. But 12 to 18 months is a kind of enough window, right? It could still be that short and shallow window. So that would probably be -- that would be my biggest macro thing to keep my eye on.

Yes. Last one, what is something that investors and/or analysts don't ask you very often, but you wish that they would?

Investors or analysts don't ask me? Oh, Catherine...

Or Dave you can fill in here.

Wish they'd ask us.

They ask me so many questions. I just wish they wouldn't ask.

That's got it covered. Maybe that's the answer.

Yes. Well, I tell you what I wish they had asked me.

As CFO, what do you think is more important growth or profitability?

What's you answer?

You didn't know that was the idea. I just answered your question. No, I'll answer you. In fairness, I'll answer the question because I think I love the answer. And that is both I mean I think that, to me, is a differentiator for our company is if you go back a decade ago, we were a profitable company, but low to no growth. And I think we've broken the paradigm that you have to choose between one or the other because we become a growth company and we've maintained still best-in-class profitability. And that's why I'm most proud of our company, frankly, is to be able to walk that fine line and be able to say, both, to me, that's [ rarefied ] air, and I intend to stay there.

Okay. Great. Well, Jim, Dave, thanks so much and thanks, everyone, for joining.

Thank you.

Thank you.