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

Awesome. Good morning, everyone. This is Rachel Vatnsdal from the Life Science Tools and Diagnostics team. Welcome to the Bio-Techne presentation. I have the management team up on stage with me. So this will be a 40-minute session, roughly 20, 25 minutes of presentation, followed by Q&A. If any of you in the room do have questions, feel free to either submit the questions via the portal or you can ping me directly. And with that, I will pass it off to Kim for the presentation.

Thank you, Rachel. Thank you, JPMorgan, for hosting the company every year at this fantastic conference. Let me draw your attention to the safe harbor statement. You can find it on biotechne.com. And with that, let me start with introducing myself. My name is Kim Kelderman, I'm going to be -- I am President and I'm going to be CEO of Bio-Techne on February 1. I want to thank the Board of Directors of Bio-Techne for the confidence they instilled in me and of course, I want to thank Chuck Kummeth, for the -- the outgoing CEO for the tremendous work he's done for the company, truly transformative and, of course, for the support he gave me to my career. My career started in the Netherlands with Medtronic and then moving over 6 countries, managing various sizes of businesses of various complexities. I ended up in the U.S. Before I joined Bio-Techne, I worked for 8 years with Thermo Fisher Scientific, where the last couple of years, I managed the business with a similar profile as Bio-Techne has. 2018, I joined Bio-Techne as a President of Diagnostics and Genomics. And obviously, did a good job otherwise, I wouldn't be standing here, I guess. Doubled the revenue for the Spatial Biology business, commercialized the first ExosomeDx-based platform in the prostate cancer test. And then I completed 2 acquisitions to kind of fortify those 2 businesses, Asuragen as well as Lunaphore. Before I go on, I want to talk a little bit about our mission, right? So we focus on improving the quality of life by catalyzing advances in science and in medicine, right? And we feel this is a real nice guidance for the team to work towards to. But there's one thing foundational that I want to mention and that is a sustainable future. We've published our third corporate sustainability report. And that's also something you can find online. And in there, we describe all the progress we've made on the ESG front. We used to, of course, focus on the east side, on the larger -- in our larger sites but now we've also focused on all our sites globally. Socially, we have a fantastic culture, a great global team. I'm very proud of the team, specifically because some of our employees do great work and charitable work in their free time and, of course, boost the connection of our societies and communities. Last but not least, our Board tremendous understanding of the scientific areas we're working in and fantastic understanding of our business processes. And that will really help to guide management in executing on the strategy as well as on our risk assessments. Now on the following slide, I will talk to you about the business overview, right? Our company is headquartered in Minneapolis. It has 3,100 employees globally. And last fiscal year, we achieved over $1.1 billion in revenues. 81% of the revenue came from consumable, right? 10% of that came out of instruments. And that's kind of the root cause for our very nice EBITDA percentage, if you will. The company has two reporting segments. One is Protein Sciences. You see the different businesses in there, 3 core businesses and a growth platform in analytical instrumentation. And then the other segment is Diagnostics and Genomics. I'll call it DGS going forward. In there, you see a spatial biology business, you see the molecular diagnostic business. It's combined with the liquid biopsy business, and then we have a business in diagnostic reagents and controls. If you double-click on these revenues, right? On the left-hand side, you see the outer circle describing the percentage of revenue that we have from the different segments. You see that the lion's share comes from PSS, the Protein Sciences segment and the balance comes from DGS, 26%. If you look at the inner circle there, you can see that on the 9:00 position and the 3:00 position, we have the core businesses, that's 44% in PSS and 12% in DGS. So that's 56% of our revenues that are actually related to our core businesses, the businesses that we worked many decades on to establish. And then all the other percentages will relate to our growth verticals. And there you see Spatial Biology. You see liquid biopsy, you see our analytical instrumentation and you see our cell and gene therapy. If you look to the right, you see our markets and obviously, 50% in pharma biotech, 20% in academia, 70% in diagnostics and 13% on distributors that we mainly use for Asia-PAC and China. From a geographic point of view, you see 60% of our revenues come from Americas, 24% from EMEA and then 16% from Asia-PAC and China. Now look at our markets that we're playing in. Ten years ago, our addressable market was $3 billion, right? Right now, it's $27 billion. It's a huge difference. And I can describe a little bit why that is because the core products that I talked about earlier, they addressed 10 years ago, about $3 billion. And that market has grown, right? We've grown with it, mid-single digits and we have a nice position in that market. The difference, however, is that we've entered these 4 growth verticals, and those have added substantially -- substantial and large markets, as you can see in this -- in the column of market size. They grow fast and then we have outpaced that growth. So in principle, that validates for us that we have real good positions and strong offerings in these growth verticals. In the meantime, you can see on the right-hand side that we have certain market positions but that there is still plenty of room for us to grow in there. So there's a long, long head space for us to grow into. In summary, we will present -- we are well positioned in several large high-growth markets. How are we going to grow into those markets? Well, there's, of course, a strategy with 5 pillars that we deploy. At the bottom here, you see that our culture, our people, our Bio-Techne family is foundational to all the things we do. So if you look at the left top, we are growing our core industry. So rather than just harvest, we're absolutely investing in keeping our core businesses healthy and growing. But in the meantime, we also leverage these core businesses to enter a new space. In those new spaces, I already mentioned them. We have 4 of them, where we have great traction and a great position. Now in the meantime, as many of you will know, we have deployed a very strong M&A strategy. We've also innovated internally. It's the 2 signature dishes from Bio-Techne actually and then last but not least, we will continue to improve the best-in-class customer experience so that our customers can utilize our e-commerce platform to smoothly transact and find the products that we would like to sell them. Now on the last slide, you see -- we start looking at how this principle and the synergy between the core businesses and the growth verticals really works. So look at the left, the core products, antibodies, proteins, immunoassays, calibrators controls and small molecules. It took us decades to put that portfolio together, right? And then in the meantime, organically and inorganically we have built these growth verticals on the right. So we've built proteomic analytics vertical, for example, starting with the ProteinSimple acquisition, and we continue to innovate there. But there is a real nice strong position in that market but these instruments enjoy real high-quality reagents, real high-quality immunoassays that they pull from the core and there we've differentiate not only on their own basis but also on the content that they pull through. The exact same is true for spatial biology, liquid biopsy and of course, for cell and gene therapy. Let's double-click on the core products. As I mentioned, $6 billion market, we're growing a little bit faster than the market, and we have a fantastic offering in proteins, antibodies, small molecules and so on. The next slide, I'll describe why we feel that we've been so successful in this market. And it is because we have tons of choice, right? You do need to have menu. And choice, if you think about it, 6,000 proteins, 400,000 antibodies, an expansive menu of small molecules and large protein portfolio of immunoassays, right? And another factor why we have been so successful is because our customers have confidence in our products. And that's because we manufacture under very stringent quality standards. We test every lot of proteins. We build our antibodies from the best-in-class proteins, and then there is no surprise that our company has the most publications in that area in our space. Last but not least, as I mentioned, we're still innovating in our core of course, by scaling our factories and by improving our yields but we're also using AI to drive new product development. And what is also interesting to see and pretty unique is that we have this [ cause ] divisional collaborations where the teams in the core work together with the teams in the growth verticals and then fine-tune the products and offering and optimize them for our solutions. So it's quite a unique combination. If we go to our first growth vertical, the protein analytical instruments. This business, you can see on the left-hand side, has been growing 19% year-over-year for 5 years. And that doesn't really surprise me because the underlying principle of those 4 platforms you see here is that they automate clunky and/or manual processes, right? And we believe that automation for our customer will continue to be very, very important. Who wouldn't like efficiencies and who wouldn't like consistency in their results. And therefore, I believe we have a long-term competitive advantage and you combine that with the content that we pull out of the core, which is the highest quality. Now you're looking at a win-win situation in this space so I'm having real high expectations going forward just as well. The next slide, you can see that we've been growing this market from $2 billion to $3 billion and that's by a combination of things. One is we have continued to innovate in these boxes, so that there's more capabilities but we've also expanded our applications that you can run on these instrumentations. An example in biologics here, is that we use -- we have an instrument on the market called Maurice. But most recently, a couple of months ago, we launched Maurice Flex and that Maurice Flex brings the capability of fractionation to the instrument. And that means that you can now have parts of your sample goes directly into a mass spec. And if you think about improving a clunky process, that's an excellent example. Now in addition with this solution, we can now play in the HPLC and exchange play -- space. Across these 3 platforms, we've also launched plenty of very exciting cell and gene therapy applications. And then a last note I want to make here on this slide is the bottom right, you can see that our -- the ELISA platform now has ISO certification and that creates opportunities for us to collaborate with customers that want to enter in the clinical space. If we go to our second growth platform, Spatial Biology, near and dear to my heart. The -- it's a combination of ACD and Lunaphore and combining those really gave us a fully automated spatial multiomic workflow, right? So if you think about it, ACD has 47,000 RNA probes that you can get out of the catalog. We can also make a custom probe for you at any time. And in the -- on the other hand, we have plenty of antibodies. We have beautiful panels too, they -- they're called SPYRE in case you want your antibodies. But it's an open instrument, so you can also use the primary antibodies you were already using, which is actually really nice if you already generated data with your antibodies, you don't have to swap. So it's a fantastic set up for your workflow, very easy to do. As usual, if I talk about the workflow, you will have to do your tissue processing like for any workflow. But then on our instruments, you can load 4 slides -- up to 4 slides at the same time, and it goes into a fully automated workflow where hybridization, the RNA detection as well as the protein detection, including the imaging and image analysis at the end of the workflow is all automated. So you basically walk away and you can have it run overnight. Now compare that to some existing workflows, it's usually only one slide. And there's usually always some manual steps in between somewhere in the workflow that make it much harder to run overnight. Most other workflows are also several days long and ours is just overnight, times 5 days. So you could run easily 20 samples, which is a record-setting workflow in our setup. So very excited about the SPYRE. We will launch soon an assay that will give you 12 RNA probes and 20 antibodies, and that combination all in one slide, all in one workflow is just going to be extremely powerful and is a big step towards our mission in Spatial, which is to have a multiomic view same slide full assessment of your tissue and that is just the combination of these 2 acquisitions. We have the antibodies from R&D systems, a fully automated platform from Lunaphore that will give you a full antibody protein view. And then on the right-hand side, you see that the ACD reagents also on the Lunaphore platform will give you a full spectrum of anything you would want to study on the RNA side, and you can do that in any species in any organ and of course, this is very important for various diseases, right, specifically in the immune system, in gene therapy but also in neurology and other diseases. So if I go to a third growth vertical, the liquid biopsy molecular diagnostics, the combination of Exosome and Asuragen. On the top, you see our on-market products, there are 12 of them, 2 of those are IVD approved. And one I wanted to highlight is the ExoDx prostate test. That's basically our first test that's based on the Exosome platform where we utilize Exosomes. I will talk about that part more in the next slide. The test has been seeing a great adoption. We passed 100,000 tests last year, and we are very excited that it has such traction because it's just an indicator of what's to come out of that portfolio. What's in the pipeline you see underneath the line. We have various project. You see in bold there on the left, the colorectal cancer test, and that's because we're generating data for that test right now. It's both because we do not own a channel for this assay. We have a urology channel and a clinical channel. But for the colorectal test, we like to partner. So if a company happens to be around that would like to be able to partner on a colorectal test, please reach out and send us an e-mail. On the right-hand side, you see that we have solid tumor mutations. The ESR1 is the first mutation we will launch in this calendar year. We will bring out more of those mutations, also exosome based so they will be fast, cheap, very accurate, repeatable. And then we already have partnered with Thermo Fisher Scientific on our transplant rejection test, and we think that partnership is going incredibly well and that we picked Thermo Fisher as a partner because of their channels into the transplant centers, which are unbelievably strong. Why exosomes? Well, first of all, these exosomes are little bubbles that come out of -- pop out of living cells, right? So think of Lava Lamp, where little bubbles come popping out of a bigger bubble, and these bubbles are designed to -- for intercellular communication. So for a diagnostic test, you can look at different modalities, right? So some companies look at circulating tumor cells, some look at cell-free DNA. And we highlighted in blue here are really [indiscernible] about the exosomes ones. And why? Well, it's because the exosomes of RNA information, DNA information, also proteomic information and most importantly, they have early abundance. That means they are floating around early stages of disease. And everybody knows how important it is to have early detection of a disease. So that's the main, main reason we really feel that the exosomes are going to be a differentiator. In the meantime, you also have an ability to enrich them and select them. The information in them is extremely stable because they are designed to keep that information intact. And then outside of the exosome as the exact same fingerprint as the originating cell, and that's why you can also find out where the exosome came from the cell of origin but you can also, therefore, select them and enrich them. On the right-hand side is a little table that basically shows that the moment you throw in the cell -- the exoRNA information, your test becomes significantly more specific. And that's not a surprise because at the bottom here, you see one cell secretes tens of thousands of exosomes every day. That's how the secretes know no cell-free DNA until it dies. And when it dies, it basically sends out only two copies that are uncontracted, right? And therefore, we believe that long term, our portfolio based upon these exosomes is going to be outperforming all other tests in the markets. Our third growth platform, cell and gene therapy, it's basically a lot of our core products that we've been enabled to either make them GMP level and/or use them in the workflows for cell culture, for regenerative medicine in immune cell therapy, right? It's an unbelievable match. It was a vertical market that we are very excited about. We invested organically and inorganically to establish the GMP manufacturing. And now we're having a real nice play in there. And I want to highlight the skill-ready G-Rex part that we have in there. The G-Rex is a Wilson Wolf product. It's basically a container in which you can grow your immune cells, the ones that you would put back into a patient after you manipulate them. And this container is just amazing, the results like growing on a flat surface. It's got a semi-permeable bottom in it. So air comes in. And then, of course, the cell needs a broth to really grow in and we are the ones that know how to make the best broth. So there's obviously GMP media in there, we have GMP cytokines, we have proteins, we also have a nonviral gene editing technology that all are going to get pulled through this G-Rex. And the G-Rex is scalable, and we feel that it is a real differentiator in the end market as well, and we have the best quality agents that you can pull through. We work with Wilson Wolf through a JV, which is skill ready. But this last year, we also bought already 20% of the company. And we have a mechanism in place to -- at the latest on the full company at the end of calendar year 2027. Very exciting just as well. So if I then look at the key tactics of the company, right, where we have done innovation that I just described in the platform but we've also bolstered these verticals through M&A and inorganic growth. So here, you see a long history, 10 years of our revenue growth. But more importantly, you see on top, the 19 acquisitions we've done over the last 10 years, right? And if you think about capital deployment, the first $0.5 billion that we spend on that vertical of analytical instrumentation, Think about it as the acquisitions in 2015 of CyVek as well as ProteinSimple. And then most recently, in fiscal year '22, we added Namocell, the cell sorter to that portfolio. Think about the second growth vertical, it's the Spatial Biology. We deployed another $0.5 billion there. You see at '17 -- 2017, you see the ACD acquisition, and then 2023, we added the instrumentation of Lunaphore. The third growth vertical, we almost spent $0.5 billion. And that was the combination of ExosomeDx in 2019 as well as the Asuragen acquisition in 2021. The fourth growth vertical, a cell and gene therapy, we did multiple acquisitions. In total, we spent $375 million but think about the organic spend we had as well in building facilities and building GMP processes. So oddly, that's also almost $0.5 billion spent. So in total, we deployed about $2 billion over the last 10 years to really build these verticals that I just talked about. And that is basically, in summary, what's happened, right? The core products on the left are antibodies, proteins, et cetera. That's a portfolio of products that we worked 47 years on to get in our portfolio. So we have a tremendous position there with the highest quality of core reagents. Now in areas where there is a large addressable market and where there is good growth, we've tried to deploy those core reagents and build these verticals. So you already know about the different verticals but in the verticals, we always make sure that we added differentiated companies that have long-term either IP or capabilities that you can't just copy. So there's a differentiated advantage. And then we created the best reagents for those technologies, and now we have a win-win because the core product teams see that they can sell to the markets, they can also sell internally to these verticals. And the vertical teams have these wonderful technologies but also the best content in the world to now differentiate in the market. And that's why I believe those verticals are one by one outperforming the market growth as we just saw in the earlier slides. And that's why I was super excited about this portfolio. And that's why I'm also confident about our long-term financial performance. We will have mid-teens organic growth. On the revenue side, we will be very high in the '30s of the -- on the operating margin, and we will be high teens for our EPS CAGR in the coming 5 years. It's a fantastic portfolio and a fantastic setup. And with that, we'll go to the question and answers.

Perfect. Thank you, Kim. So the first question I actually wanted to ask was for you. You're about to become the CEO next month. And so can you just walk us through what are your top priorities? And then should we anticipate any change in strategy as well?

Yes, Rachel, thank you for the question. As you just saw, we have a [ excellent ] strategy how to compete in this market and how to grow the company to where it belongs. We've also talked very similarly about that strategy during our Investor Day in September. So I don't think there's any need to change any of that around on the short term at all. The main ingredients of our company, innovation as well as acquisition are also in a great spot. We will continue to deploy those. The only part that will be slightly different for my upcoming quarters is likely the difference in market right now. For 10 years, we had a go-go-go environment where investing was just the right thing to do. And right now, markets are a little bit more constrained. So looking a little bit more internally about our footprint, our efficiencies and making sure that we get ready to come out when stronger than anybody else, while when the headwinds subside. We're also building a factory, a GMP factory in China, so we can serve that market once it rebalances locally. So we're basically doing a little bit more of an internal cleanup and efficiency effort that we've not had to do so far yet.

Helpful. And then I wanted to push on the outlook that you provided during your last earnings call, you suggested that your fiscal 2Q would likely be flattish. So now that we're through some of the months here, could you just kind of walk us through how that has trended?

I'll take that one since I'm the one that provided that outlook. [indiscernible] from this one. So obviously, we historically don't preannounce anything before our earnings call, which will be in early February. But as you'll recall at the end of the last earnings call in October, we messaged that -- and we're not the only ones, many of our peers did too but we messaged at the last couple of weeks of the quarter biotech took a second leg down and we were also seeing some more conservatism of our pharma customers, particularly in North America, and that trend had continued through October. And we had predicted that, that would have a negative impact in our Q2 relative to Q1. And that's pretty much how the quarter has played out as expected at that time. We also talked about China getting worse before it got better and that also has played out. Obviously, we're hoping to provide a lot more clarity with a forward view a month from now or so. But what I will share with you is that at this moment, I think we feel like we're in a bottoming process. And if you listen to many of our peer companies, I think it's much of the same. I don't think anyone is going to stick their neck out and say we are at a bottom because no one ever can ever call a true bottom. But it definitely feels in a lot of ways like a bottoming process, and we're probably more in the middle of that process as opposed to the beginning of that process. Why do I say that right now? There's a couple -- there's one anecdotal reason that being that we're hearing from our own reps in the field that the demand for our products, particularly for larger purchases of reagents and for our instrumentation is as high as it's ever been. Our researchers love our products and they want them. It's the evil CFOs of these companies who are holding back on their budgets as they closed out the year. And so they're saying, don't go away, please come back. Now does that mean we're going to expect a big spike here in Q1? I'm not saying that, but that what's important -- most important for the long term is that our customers really desire our products, and that demand is as great as it's ever been. Another, I would say, quantitative view of that is when you look at our instruments, even though our new instrument placements are down because of the budgetary constraints, the use of those instruments, which we have a good visibility to because they can only buy the consumables from us are at record highs, way higher than even were during the peak of COVID. We're talking about almost 20% growth across the board in all of our instrument platforms. So again, speaks to the satiable demand of our products and what we hope will be a pent-up demand once budget starts to get released. With regards to China, our team was messaging to us throughout the quarter. They felt like we -- it may be a bottom in China. And now no one is expecting a swift rebound but we may be at a bottom. Quantitatively, I can tell you, December started to demonstrate that. So we'll know a lot more as we get into January because one month doesn't make a trend but we're hopeful that, that will start to at least stabilize in China and then perhaps after the Chinese New Year start to see some funds flow there as well. So that's kind of the lay of land and we're looking at generally very carefully, and we'll provide more updates in our earnings release in February.

Great. That's helpful. And then I wanted to just touch on the competitive landscape. We've seen some recent consolidation in the sector. So can you talk about how does that impact the competition?

Yes. Thank you. The -- well, namely the two larger acquisitions have been Abcam and Olink. With Abcam -- we have competed with Abcam for a long, long time, and we are happy that the transaction went through. We really respect them a lot. We know that they have a great business system to improve operational performance. But I don't think that, that will change our situation. We have been innovating, investing in the core business. We have great channels. We also are improving operationally as anyone else would do. And I think we're ready to compete, and I'm very confident that we will continue to be successful there. The Olink side, other than that, we also would have liked that asset, it went to Thermo Fisher Scientific, and that's the best -- the second-best option because we provide a lot of content for the platform, and it pulls through nicely, just to like same setup as the other growth verticals I talked about. And therefore, we really invested in the success of the platform. And if it goes to a good company that can place many instruments, it will be for our benefit because we'll see more pull through. So we're quite happy how it played out.

Helpful. Then I wanted to touch on this topic of destocking. So destocking has obviously been a headwind for the business. So can you discuss where we are with this trend? And then when could that potentially turn into a tailwind?

Yes. Destocking, as we all know, there were some supply chain issues a year ago and a little bit longer than that. So many companies stocked up. For 3 quarters or so, we saw some of this destocking. We also mentioned in the Q1 call that we thought that this last calendar Q4 would be the last quarter that we would see that, and that's mainly because many larger companies draw their finish line at the end of the calendar year. And from there, they obviously optimize their inventory position to as low as possible. And from there, we expect also looking at our order book that things will pick up again. And that headwind will go away.

Helpful. Then I wanted to spend a minute talking about cell and gene therapy. So despite some of the challenges that we've seen on the biotech funding side, you still deliver 25% growth overall and almost 40% growth in GMP proteins. Can you kind of walk us through what is the offering? How are you -- what is really driving behind this growth? And then as a follow-up, Wilson Wolf is a key part of that strategy. So what does that really bring to the table for Techne as well?

Yes. It's obviously a very important area to be in. We saw the size, we saw the growth rates. We believe that cell and gene therapy is going to be key to curing diseases that we've not been able to cure in the past. So it will continue to be a big driver. And during my presentation, I kind of showed how important and scalable and efficient the G-Rex solution is and how it pulls through all our core reagents that we're so proud of and including the core agents that we invested in heavily to get them to the GMP standards. And that's really a couple of years advantage that we have in offering into that space. So we're really confident that we did the right things, and we'll certainly continue to put lots of attention and possibly capital to work to continue that broaden that offering.

Helpful. Then maybe looking at your instrument business, even despite the challenging macro, that increased 9% in fiscal 1Q. So can you kind of walk through why were you able to grow at this level? And then how should we think about the long-term trajectory for that instrument portfolio?