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

Hi, everybody. My name is Valerie Dixon. I'm a Managing Director at Morgan Stanley, and I lead the firm's coverage efforts in life sciences tools and diagnostics. We're happy to have today, Bio-Techne in our fireside chat and the CEO, Chuck Kummeth, to tell us a little bit about the story and why we're excited about Bio-Techne today. We just had actually an interesting and very well-attended Analyst Day for you all last Friday in New York. So we're going to try to uncover some new gems and why you should get into the story now. But for those who did not make that event and want to learn a little bit more about Techne, why don't you just kick us off, Chuck, with a few minutes on Bio-Techne?

Sure. Well, we describe ourselves as truly a life science tools and diagnostics company. We're a portfolio of a diversified platform, roughly a dozen. The company is actually 47 years old, has a pretty good stock ticker symbol, TECH, and started out as a controls company and still has that, but also got into antibodies and proteins very early, more or less created the category of proteins for research. And in the last 5 or 7 years, we've been kind of flowing into this omics -- proteomics world, and it's kind of -- we're just in a great sweet spot for driving that. But given that [ it was a ] great business, it's still only so scalable. So we diversified into instrumentation that uses these regions. And then -- and we've always been a big player in assays. In fact, we're the creator of the ELISA, I say, inventor, and we're still the world leader in ELISA. And we're good at assays. And we have a few FDA versions of them, but not enough to be dangerous. But we look at diagnostics and there are nothing more than regulated application-specific assays. And so we bought assets in those areas, too, just so we could leverage. So all 3 areas kind of roll together. We've gotten into things also that are related to antibodies. So like spatial cell interrogation, which anything that's going to jeopardize antibodies right, so we want to be part of, so we get into that. And then next generation proteins, next generation, everything is cell and gene therapy, which we've invested heavily in the last 5 years. So all in all, about 5 legs in the stool, 5 divisions, about 10 to 12 different platforms, equaling about $1.1 billion, growing very nicely. I think we have maybe the highest margins in the industry and strong M&A track record as well. And I'd say we're decent globally now, we weren't so much 10 years ago. But we're getting there and pretty much the normal splits, [ 55, 25, 15 ] kind of thing. And that's kind of where we're headed. So we can talk about any area you want. I'm sure there might be a question on China, I'm guessing.

There might be. But that's an incredible track record and scale and diversification you've built over the last 10 years and best-in-class story, however way you look at it from short-term goal and market exposure, new technology growth vectors as well as the financial profile itself being best-in-class. Now we're also nearing the end of third quarter and second quarter earnings, there were a lot of these dynamics that you just started alluding to China, the biopharma funding environment, some customer destocking and certain other businesses of your peers and some other funding weakness that might be coming from certain geographies. Let's pick those apart, if you can, and talk about some of the end market and geographic dynamics. First on the U.S. academia side, what are you hearing from customers now that we're ending third quarter on their willingness to spend this year versus maybe next year?

Well, even for market resilient and academia, in Europe, we had double-digit growth a couple of quarters ago, still high singles. In U.S., it's mid to high single. It's been kind of the way it's been. Not too bad there. What we're hearing is that there is just an overall hangover coming out of COVID everywhere. And even academia, we had an amazing instrument business through COVID and growth rates of 50% plus in some categories because everybody had to expand their labs and get more separated. And that takes a while to level out, right? So even in academia, I'd say we're stronger in reagents than we are in instrumentation from that issue. In China and Asia, we had also remarkable growth for the same reasons. And then through this whole last year, there was so much in the news about supply chain issues, chips, everything else, everybody got into, "We better stockpile," including us. I told my teams listen, "I don't want to not ship instruments because they're waiting for a $0.20 sensor." So we did it as well. And so we're just kind of coming to the end of that, I think, soon. We know because a lot of them are OEM-type arrangements, either content driven where we get royalties so we know the sales or ingredients that go into different testing kits or something, a lot of that as well. And we don't have hundreds. I mean, it's really just a couple of dozen large customers that do like that. And so we know them and they're starting to come back online. Their requests are coming in now, "can we get our next order finally?" And so this quarter will start and I think it'll get better. So all that means is we're starting to see a little bit of light in the tunnel on some of this. I think I think China threw us all for a loop here, I think it's an extra quarter or 2 of some pain, but that, too, I think, will come and go, it's my opinion.

One end market you haven't touched on yet is biopharma. How much of that funding weakness has impacted your visibility into next fiscal year?

Sure. Pharma has been kind of steady Eddie, although I think there's slowdown just because of the conservatism because of risk of economic conditions worsening and stuff and rates being high, so there's an extra signature or 2 needed. So things have just gotten slower, but they're really okay. We call it biopharma, but the bio parts, biotech, and biotech is from here to here, right? There's a little tiny biotech, there's middle, there's larger and there's the Amgens of the world. They're all very different. Funding has gotten very tight for the middle guys. If you've got a great idea and get an angel funding, you can get it. If you're 2 years in and your $10 million in an you need the next 20 for Series B, you're kind of in trouble. There isn't a lot of funding. So -- and because we become this kind of go-to player for finding leading-edge research reagents and tools, a lot of startups, a lot of small biotechs have gravitated towards us. We have found out the hard way that well, a large percentage of our biopharma really is biotech and small biotech. And so while we work through a lot of those funding issues and the 25 public companies that shouldn't be public, there's a bit of a softness to get through. But...

It's not helpful that we have pretty closed IPO markets and capital markets for the last several quarters.

Good for the M&A pipeline as they're calling us now. But one thing I'll say to it, it is biotech. That means in 2 years, there's another 25 new ones you never heard of today. So it's -- I've worked in a lot of industries, it's been on the next 3 [indiscernible]. And there's nothing like this industry for innovation, right? It's just help [ span ] by the week.

Switching gears for a little bit because it's timely news and a little plug from Morgan Stanley. We just sold Abcam to Danaher. Just want to understand because for better or for worse, there was a read-through between Abcam and Bio-Techne for some time. How would you now characterize the competitive landscape here within antibodies? And how do you expect that to change?

When I answered this question 2 years ago, around PeproTech with Thermo, I got a nasty call for Mark, that I need to be careful. I like -- my French [indiscernible] is pretty good, actually. But there hasn't been much change in the PeproTech front. I mean my answer then is largely the same for Abcam and Danaher now. Danaher doesn't have much of a position in reagents like this and certainly nothing in antibodies. So they don't offer a lot of domain knowledge or content to the story, clearly offer a lot of capital. And given all the [ press around ] Abcam last year and activism,, I guess like classified as activism, I'm sure Danaher thinks they might be able to clean up operations a little bit with DBS and do the Danaher usual model, right, and create some value. I'm sure that's mission 1 and being there a pretty good antibody supplier, and they've got a lot of diagnostics. And I'm sure there's some synergies they can work on, my guess. But it won't be overnight for sure, but we're competitors with both, we're partners with both. We even actually have business of Abcam. It just -- it's a very close-knit world.

Yes. Great. For folks that missed the Analyst Day last week, there were 2 areas that I wanted to highlight that I thought were great platform focuses of yours. One is in cell and gene therapy and the other is liquid biopsy, and I'd like to take them in turn because these are massive market opportunities. And I think might be underappreciated in your story. Can you talk a little bit about why you're so bullish on cell and gene therapy and how you're positioned to win in that market and then do the same maybe for liquid biopsy?

Sure. Well, we had our Investor Day last week, and we came in with an update of our last 5-year model from 2 years ago, and we'll deliver a new 5-year model, but we also gave an outlook of vision for 10 years. And we did that largely because the 3 big hot areas we're investing in, all did really well last year, by the way, in spite of all the slowness in the core areas, our spatial platform, our liquid biopsy platform and our cell and gene therapy platform all grew between 20% and 90% and are just like -- still like a rocket. They're where our spend is. We've been at it for a long time and -- but they're -- they take time to form its own market. There's a great paper put out by this company on what's going to happen with cell and gene therapy, and it was analyzed against immunotherapeutics and it took 40 years for that to get there, and it's $40 billion, and expectation is this will take 30 years, it will be $80 billion. I firmly believe you guys got it right. I think it will take a decade, they really get off the ground big, and then it only get bigger and it will be the future of oncology, but it's going to take a while. So it's a big J-curve for us, and we've been laying track for 5 years, and we have, I think, the most workflow for cell therapy that you can get right now, but we have to wait for just more than 8 drugs out of 4,000 clinicals to hit the market, right? It's going to take some time. But when it does, it's going to scale and scale big. And we'll be in it as a leader in proteins. We'll be the leader in media. We'll be in the leader for the instrumentation. The course of the bioreactor Wilson Wolf so we're going to have this thing -- our instrumentation for QC is we're going to have this thing fully circled and it should be, as we pointed out last week, billions of dollars.

Well, I mean, they are 8 approved drugs, but there's well over 1,000 at various stages of development. How do you play in the lead-up and the ramp-up for those programs that are in development? When can investors start to see that inflection point where you're starting to really generate?

Well, we've been out there public. We're running roughly $45 million or so of run rate just on proteins alone and it's just clinicals. And we only have a handful of Phase III, and we're in hundreds. We have 400 customers G-Rex with Wilson Wolf with 800 different systems. We need them to get to production. They needed to come out at the other end, right? And we do have a bit of a preview what's there to expect because these customers came to us 5, 6 years ago explain what they needed. They didn't want to -- a lot of them are coming from large molecule drug models, which the protein is the drug, so they had to do it themselves, but this is different. This is a reagent that enables the production, the creation of cell, the cell line to grow, not necessarily food, but it's a stabilizer and everything else. And it's not even under FDA. It's something -- it's a manufacturing component, so it's easy to deal with. So they feel okay with outsourcing that, right? And so they came with desires of if this is go to market, we need about anywhere from $10 million to $50 million a year of this one protein. I kind of laughed and said, okay, we could do that, and no one has ever done that for. And then more came and more came. And we have talked to over a dozen companies that have needs of -- in excess of $10 million a year off of 1 GMP protein. So we built a factory that can do over $1 billion of proteins, and it won't take 800 customers to fill it, more like 80. And I think -- but I think it's going to be -- it's another, I think, 8 this year, and then it will be 25 new drugs. And the FDA has said they're going to try and increase their ramp, right? But otherwise, it's going to be many years before we see hundreds, but that's going to happen, I think, eventually. And it's -- we're too far down the road. It's going to happen. And we're far ahead of everybody.

Yes. exciting. I'd love for you to do the same for liquid biopsy as a platform focus area. And how is Bio-Techne positioned to win there as well?

Similar story. We got into exosomes diagnostics because we want to be in a diagnostic platform that was scalable. And we just -- we looked at liquid biopsy because we are around it with other things using antibodies and such. And we just saw there is -- must be something we're missing because this platform just beats the hell out of cell-free DNA and certainly in tumor cells but on a number of fronts, and we negotiated for really 1.5 years before buying them. And it's been -- we definitely hit roadblocks with our MAC, NGS and then COVID was not good to us because urologists stop seeing patients, and you guys have all seen the Wall Street Journal article this week, prostate cancer is exploding partly because people stop seeing the urologist during COVID. But it's a $1 billion-plus market just there, and this is not a one-trick pony. This is -- it's just a genetic signature within an enclosed exosome that's fully intact, and there's hundreds more copies of RNA than DNA. So it's just better on all fronts from signal to accessibility to integrity everything. And they're shuttered by cells all stages of life, including young cells, not dead cells like cell for [ healing ]. So it's -- if you want an early screening diagnostic for cancer, which is everybody wants, this is the platform. As you know, we've licensed the second product to Thermo and for kidney rejection, which is a huge problem and a more than $1 billion market. And we have a better version of a prostate in the works. We have a colorectal nearly ready for trials. We have Sjögren's ready to go. They're virtually -- we have a breast and lung signature ready that's in plasma. We've got -- any body fluid has exosomes. So we've got stuff for saliva, plasma, urine and then Johan and the team are doing it for almost 20 years. So they've got quite an arsenal of content and 250 patents by the way. So we kind of own this. And I do think it will be a $1 billion-plus platform. We don't even have a $1 billion in our plan. So in that vision we put out there. So we think it's hedged, but we're being careful, but it has -- it's very exciting. I have a lot of potential. I can talk all day about this one, but...

Great. Just from a strategy perspective, a lot of your core where Bio-Techne originated from was in the reagents and quality controls and content. You obviously have instrumentation with ProteinSimple and other platforms. What is the thinking in terms of eventually starting to own the platforms themselves in some of the areas where you're venturing into spatial is one, owning a proteomics platform, owning a genomics platform? Are there other analytical technologies that might make sense for you as you continue to expand?

I think we're still thinking more tools and things that complete the loop for like cell and gene therapy. We don't have -- we're doing our own media. I would love to buy media operation and save some time there for sure, cryopreservation we don't have. We have -- we think it's a next generation of T cell-based therapies, which won't be nonviral with our TcBuster. So we have a gene editing platform that could also be very large, but it will take years to really get going. We've got more than 50 customers playing with it right now.

Are you thinking -- are you alluding to CRISPR?

No, TcBuster, the [indiscernible] technology. Take on CRISPR but it will take a while, but it works. It really does work, and it's been proven. It's just a matter of unseating some pretty strong standards right now, it takes time. But looking for another leg in the stool, we want to be another platform equally as cool as maybe liquid biopsy. I don't really see the need right now. We've got all these platforms to drive for growth, and we're not that bigger company. And Casper always used to telling, "You guys, you do hit above you -- you punch above your weight," because we've got a lot of stuff for our size company. So I don't think adding more complexity is the answer. We got to figure out ways to scale more we have, I think. But that said, if we bought Namocell, which is way kind of a next-generation flow cytometry. And I think I can see us being more in that the deeper -- I don't see us like looking at mass spec or HPC or NMR or things like that, it seems hard to protect. All of our instrumentation that we're in and we've got 6 different platforms where 70% or better gross margins because there's IP protecting them. So we have the only automated Western blot system in the world. and will always be the only one, I think. But going head to head with the banner or somebody on a mainstream platform may not be smart. So but we'll see what happens in terms of other new areas that come out of the tool or just life sciences in general, something that's novel like an exosome, who knows what's inventing. The biomes coming, right? To whole another [ sea ] of stuff, right?

Yes. You can go on any traction.

It will be -- whatever it is, it will be different in 5 years, right? We know that. So we were part of creating a culture that's all about innovation and we're embracing change. And I think the team is ready for anything as long as its heavy-duty science, they will be all in.

Great. Since we started talking about M&A, I'm going to pull on the thread a little bit more. Historically, you've done at least 2 or 3 deals a year. I think the last one you did was Lunaphore. And other than that, we really haven't seen much this year. So give a little bit about what areas you're focused on. Is there an element to this channel capabilities, geographic capabilities in addition to just kind of feeding the engine around your existing core?

No, good question. We did a media deal in China, and we had to write it off and then we were able to sell to get our money back. But I'd like to do more in China. We bought one company there. It's been great, PrimeGene. There's over 100 antibody companies beyond me why, how they're all staying alive and well on their own. I think this is a good M&A year and next year, like we talked it might be even better. I think finding the time there can be some consolidation in some of these small reagents companies probably. So our team is looking at that very deeply because there's not only a scalability theme of that, but also a regionality theme, right? I would love to pick up a few more assets in Europe just for more critical mass. We have now subsidiaries established in all the 5 major country regions, the big 4, plus Scandinavia. Germany is still one of the smaller ones. I'd love to buy a company in Germany and make it headquarters for Germany, it would be one thing that we love to do. And then I guess just always in the core, I mean, we're interested now in things that make sense that we can just get scale from. A lot of them are competitors and sometimes they become actionable, sometimes they don't, sometimes you wait a long time, but we just be patient. Wilson Wolf is a good example. I first tried buying Wilson Wolf 14 years ago when I was at Thermo, so it took a while.

Yes. And just thinking about just the overall valuation environment. Are you seeing now that maybe multiples are in a place today where you didn't think it was in reach before and now it might be more actionable just given the contraction that we've seen in this sector?

Yes. I do miss our 50-plus multiples from18 months ago, but we've all come down, and I'm told, we're still relatively high compared to the field still and we're hovering 25% to 30%, I think. I think if we hit our growth numbers and we scale the company like we say we're doing and which is $2-plus billion in '28 billion and $4 billion to $5 billion in 10 years. I think we'll have multiple expansion a little bit at that point. Even at 30%, that's over nearly a $50 billion market cap. So hitting [indiscernible] margins, I think, is given we will do that. To some degree, where we're at because we invest at a level to be where we're at. We can always focus more on cost to, if we want to, we focused on growth over finding every nickel. So there's ways to get there. I do think we'll be rewarded heavily if we could get this kind of growth that's high in size, that kind of complexity for portfolio, things that are safe, all on their own right, but then also have those world leading up margins too. There are so many companies in our space that are losing a lot of money and still have a lot of market value for some reason, right? So I don't think we've been well rewarded for the operation prowess that we have, to be honest, we're patient. We've been around 47 years, and we'll be around.

Well, best-in-class adjusted operating margins, generating a lot of cash flow, $5 billion of dry powder, excluding Wilson Wolf, what are you going to do with all the cash?

More deals. We've never had a bigger pipeline. We've never been so close and we're coming second this year to be honest. So everyone's hunting pretty hard this year. Everyone's got comps and growth targets to hit and that they can't hit them organically, they're going to hit them another way, right? So we also have quite a few companies in our space that have pretty good war chest of COVID cash, right? So for that reason, some of these assets are going for higher prices than they probably should. They deemed strategic, and they can get away with it. But I think that will trend away from that this year to smaller companies, I think. And there'll be more for sale because more of them are going to need help. So my opinion.

So Chuck, we know that you'll be retiring or stepping down from the CEO role as the Board continues to think about succession, as you keep saying, you've laid the tracks whoever takes over is going to be in an awesome position to take this company for the next 10 years of growth. What is the Board looking for in the next CEO here?

Yes. The spec is written, of course. And I think there is an M&A component for sure, M&A experience, strong operational experience, preferably running -- if not part of this company, somebody else who is big or bigger because it really isn't about -- we have 3 strong internal candidates that have worked hard and [ grooming ] they're already today, and they all have their pros and cons, but they're already and they all could do the job. It's more about in 5, 10 years and this company is so much bigger. Do they have the runway? That's the assessment the Board has to do and compare that against some external people that have or running much bigger operations right now and that are interested because you're right, this company does have a pretty big future and is going to make a lot of money and they stand to make a lot of money probably. So it's generating interest for sure. But I think we are doing all the right things. There's plenty of interest. I think the goal is to have somebody named before end of the year, I think. And it'd be nice if I could work with somebody in my last 6 months, maybe in a CEO role or something, that'd be my preference. But next summer, it will be 11 years for me, and that's pretty long CEO cycle and it's time for some new blood, and I think new ideas and shake it up a bit.

So the goal is to name your successor by your fiscal year-end, which is June 30, next or it is calendar...

It was for the calendar year, I think. I can't speak for the Board, but it's been discussed. But if they're ready, they're ready. So they're in a deep right now. Interviews are happening. We're not -- we did a 2-year prestart, right? Plenty of time to get ready, but we're definitely in it now. And I think they're all good scenario, they're all good outcomes, I think.

Great. Just to wrap up, we only have a minute left. Any final thoughts from you on why is this a good entry point for somebody new to the story or to continue to double down their investment to come into the Bio-Techne story today?

Yes, we were at a peak of $130-some a share and we're sitting here in the low 70s, almost at a 3-year low, thanks to this China flu we all experienced in these last 2 weeks. I think with the road map we have with our strong track record, and we're really just waiting for macro conditions to change and interest rates to stop going up. And I think the money is all circling the hoop, waiting for the pivot, right? And I do think if you're waiting for a bottom, we got to almost be there. I think everyone is almost there. And the reaction is going to be quick. I mean when the pivot happens, the money is going to flow quickly to the quality -- companies of quality earnings. And I could see us snapping very fast. So I think getting in now and it's pretty much, I think, near about them. And I think it's only going to be a couple of short years to see wonderful returns. I just believe it, and we've been here before, and we've proven it over and over again.

Great. Well, thank you so much for being here. It's bitter sweet because I think it will be your last Morgan Stanley Healthcare Conference, but I appreciate you joining us this week for the fireside chat.

I appreciate the time. Thank you all.

Thank you.