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

Good morning. This is Paul Knight, the life science analyst at KeyBanc. It's a pleasure to have with me Will Geist and David Clair from Techne. Will is running the Proteins division. David now a long timer at the company as Investor Relations, Head and Vice President. Lots of things to talk about, but I think Will be a time kind of introduce you and what brought you to Bio-Techne. Some of the things you're thinking about as you look at the opportunity.

Yes. Thanks so much, Paul. It's really a pleasure to be here. I appreciate you hosting the chat today. Yes. So Will Geist, President of the Protein Sciences segment. I've been in the role now for a little over 2 years. You asked me what brought me to Bio-Techne. And for me, it's pretty simple. It's really kind of the culture, the vision and the strategy that Bio-Techne offers. Culturally, we're very direct, highly operational and execution-based team, really strong pull from that. I think from a vision perspective, the areas that we're playing in, leveraging our core technology in cell and gene therapy, spatial applications and liquid biopsy, resonate with me certainly from a mission perspective and wanted to make an impact on society and science. And then from a strategy standpoint, we've got a really proven winning strategy, both with expanding our market through acquisitions as well as just execution in the spaces that we play in. So those are all draws for me. Over the last 2 years, we've really worked to refine that strategy. It's kind of winter came into our marketplace and kind of slowed things down. We've recognized that as an opportunity to reset and refocus some areas, whether that's commercially with some transformation efforts here in North America, and bringing on new leadership in areas like Europe and kind of -- deciding on how to invest in the future, whether it's our core portfolio or our strategic growth pillars. So -- that mission is certainly not completed at all, but we're a little over 2 years into it and looking forward to the next 5 or 10 years here as we continue to have a great impact.

And as a long-term participant and observer in the industry, Will. What do you think happened to this reset in budgets, meaning is it excluding China, that's a different discussion, I know. What do you think is the reset? Is it lack of cash post-COVID, Bio-Techne funding? What are your thoughts there?

Yes. Certainly, I think you know that there is this incredible unprecedented investment coming into this space and the area that we call the post-COVID halo period. I've always been a believer that science will save the world and kind of advanced society period. And certainly, the way we've invested in that as a society, especially in North America, in the Western part of the world and with the rest of the world coming online now, I think that long-term view remains there. I'm incredibly bullish and positive in our industry. I think there was a natural step down as capital markets became more restrained, and wanted to monitor kind of their bets into this field. I think what we're seeing now, and we've got a couple of months now of increased funding coming back into the marketplace. When we look out to the future, we still think that we're probably a couple of quarters away from that wind coming into the sales of this industry. But we've got some kind of nice early indicators there. And I think as we think of this period, what we have seen is that companies that are delivering productivity solutions like our ProteinSimple portfolio, are uniquely positioned with content in these emerging fields of spatial biology and high-throughput proteomics. We think those companies, and we are one of those, we're probably the leader in that space are going to win kind of out long term.

And then the -- I'd just highlight some of the businesses within the Protein Sciences segment. Why don't you highlight the one you'd like to talk about for starters. Is it spatial biology? Is it ProteinSimple? I'll let you start. I have a couple of questions around this topic.

Sure. Of course, they're all interrelated, thankfully from a strategy perspective, that's the case. Why don't we start out with cell and gene therapy, if you'd like?

Yes. In cell and gene therapy, what are your key products?

Yes. So in cell and gene therapy, if we think of this space as immuno-oncology, regenerative medicine and then finally, kind of gene therapy. So we're really uniquely positioned across the cell culture components of immuno-oncology and regenerative medicine. So regenerative medicine would be things like working with pluripotent stem cells. In immuno-oncology, we'll be working to weaponize T cells for those folks who aren't familiar with it. And gene therapy is the insertion of a gene so that the body can -- to replace kind of a damaged gene so that the body can produce a protein that would correct whatever the abnormality or misfunction is. So we manufacture cell culture reagents. We have GMP-grade T cell media and iPSC medias. We manufacture GMP proteins. So we get the broadest range of GMP proteins available. That's really critical in regenerative medicine space. We've got a nice market-leading position in a very nascent market. In Oncology, we make kind of the 3 or 4 critical GMP proteins that would be leveraged there to grow cells. We've also got a portfolio of small molecules that are leveraged, particularly in the regenerative medicine side, and they're complementary to our media and our proteins in that space and that they help kind of keep cells in a certain state. Those things are like ROCK inhibitors, [ active Nas ], things that we kind of are uniquely positioned in the market that we're investing in. And then finally, if we think of just a self-culture manufacturing component, we've invested in Wilson Wolf. So we've got a 20% stake. We'll own that entire company by the end of 2027. And think about that for immuno-oncology, they've got a tremendous position with greater than 700 customers in that space. 4 of the last 5 approved drugs in cell and gene therapy are manufactured in that G-Rex format. And think of the G-Rex as the application store where our proteins, antibodies and cell culture agents will be deployed. And we're working with Wilson Wolf to deliver an aseptic cell culture system. So as our customers start early on before clinical trials doing research, they can leverage kind of the open format and they'll drive more and more value as they take it into the clinic. So we're uniquely positioned there. And then I'll finally finish off with, as I mentioned [ everything ] is so complementary. So we think of our instruments portfolio as a growth vector as well. So our instruments are really leveraged across cell and gene therapy in 3 ways, Maurice platform is for adenovirus characterization empty/full capsid release, it's leveraged across both cell -- or sorry, immuno-oncology, regenerative and gene therapies. Ella is leveraged for targeted potency assays and other applications. Our Simple Western platform is also leveraged and is currently leveraged at an FDA-approved gene therapy drug. And then finally, our spatial biology portfolio is leveraged to characterize where these therapies and proteins -- or excuse me, the therapies are being directed within the body. So in a sense, while we are very anchored in the self-culture manufacturing component of the space, we've got the characterization side that comes online and tools that are used in both the development and the actual quality control for the products.

I'll start with the broadest question first, and that is there's been mentioned at many meetings over the last several years, how really nonstandard it is to be in the cell therapy production business or an innovator -- how nonstandard gene therapy really is, are we getting there? And do you think you're kind of one of the leaders to get us there?

Yes. So certainly, I think what you're pointing out, essentially, it's a nascent industry, right? So all of the standards kind of being built up around us are unique. These are by definition, early-in process. So kind of how do you standardize and automate and make these accessible therapies. I think one of the great debates happening in society is the cost of medicine. And certainly, for these applications, they're oftentimes onetime life-saving events, but it may cost hundreds of thousands of dollars. And so as you think of not just kind of standardizing and automating that and the efficiencies that would bring and reducing costs, we're really focused on that. When we think of our mission, it's not about just getting to the drug is making it accessible to the masses. And so as we've invested in the G-Rex and into scale-ready joint venture that we've got, the whole idea there is to offer superior solutions that can be automated, that ultimately drive down the cost of manufacturing, but also the research and development phase. As funding has dried up to this marketplace, we're seeing tremendous adoption of kind of the tools that we use for early research and development of the G-Rex platform and our proteins and antibodies in the space. And -- the good news is if you get to a drug, it's actually super scalable in these formats. We look at some of the other industry standards like the [ Miltenyi ] platform, that doesn't scale at all, and we'll only continue to expand the cost of access to these drugs. So we think we're incredibly well positioned. We've got a really nice value proposition in the space. And if you think of immuno-oncology, for example, the G-Rex is already utilizing almost half of all the clinical trials, right? And so our idea is just we want to have a very big footprint in the pre-IND workflow so we can kind of keep carrying the portfolio. And that app store with, of course, our applications into the broader clinical marketplace.

What portion do you think that Bio-Techne is opposed to cell and gene therapy?

Could you rephrase the question, I'm sorry?

Of the talk, maybe, David, this is for you. On the total revenue, what portion is related to the cell and gene therapy marketplace?

Yes. So the cell and gene therapy, the GMP proteins, the kind of the reagent side of the business is about 7% of our portfolio at this point, 7% of the total company. Although like Will was just talking, it really -- it's a little challenging to quantify because it touches so many different areas of the portfolio, instrumentation, spatial biology. So it's a little challenging to give you a number beyond that, Paul.

Right. Got it. the GMP production business, Will, that's new. It's been online now, I guess, a year. How's business at the GMP site in St. Paul?

Yes. So we've been manufacturing GMP proteins for much longer than -- whatever, St. Paul, came on line over a couple of years ago. And so as I said, we're seeing strong adoption of our GMP proteins really across the board. Out of St. Paul we're primarily manufacturing for immuno-oncology applications. And so we've seen really nice adoption and uptake of our GMP portfolio there. And then in our Minneapolis location where we manufacture a very -- a much broader range of GMP proteins, those are leveraged really across the regenerative medicine and in immuno-oncology space. So we're really well positioned in both cases. As I mentioned in our strategy is to place lots of bets on the table for our customers in the regenerative medicine space. We have more GMP proteins available than anybody, but we also have kind of this track record of delivering kind of highly active proteins into that space kind of uniquely so. And we're finding there, particularly that there's a nice value position. In addition to that, on the regenerative side, we leverage our Tocris molecules business. So that marketplace uses several products, including ROCK inhibitor, active Na and others. And we've expanded and are investing in our GMP small molecules manufacturing as well. So we see a very nice upside and complementarity between the proteins and the small molecules piece, in addition to the cell culture side of that equation.

Okay. I know that I think a while back, you had mentioned about 1/4 of your customers were really early stage. That was kind of the right data point, was it not, David?

Yes. So Paul, about 50% of our business is biopharma at this point. Of that 50%, less than 20% are, what I would classify as, smaller biopharma. So yes, you're in the ballpark.

Yes. How is that market looking now, still -- well, seeing IPOs, right?

Yes. I mean I think after a very challenging 4Q -- calendar 4Q for the biotech funding environment, I think the reports that we were at, we were at the lowest funding level since 2016. What we've seen as January and February have recovered pretty nicely. I'm sure you've been reading the same reports that we have been. So that's an encouraging signal. We'd probably expect over the next 1 to 2 quarters, that will start to flow down to us and impact our business.

Yes. I hear there's a lot of pipes in the world today as well.

Yes. That's good.

Yes. That's good. And Will, I mean, what's your experience? I mean as I look back, look, there was obviously a COVID dividend with all of that cash from COVID, it's funding non-COVID R&D, I would assume. Do you think that's going to be a potential with GLP-1s as well if we have a handful of pharmaceutical firms with a lot of extra cash? Do you see that filtering into research budgets in general?

Yes. We really do. I think, again, I'll reflect back in the first part of your statement, which was thinking through what did -- what came from COVID, right? So when we came from COVID was this tremendous focus on proteomics, right, and immunology. So we saw this incredible standup of kind of capacity and capabilities across the marketplace. And so our view is that eventually translates into kind of these early development programs that will kind of filter through? So yes, the answer is, hey, with that capital that's on hand, how is it going to be deployed and invested? We think that -- we planted many, many seeds kind of from that COVID halo. But what happened is we have this tremendous drive in immunology in the space, again, think of that as advanced -- as fueling a proteomics kind of revolution. So as the discovery is happening with these high-throughput platforms that leverage our content, everything kind of comes back to how can we leverage that capacity and capability. So we do think that, that carries through. And so we get it from 2 ways. We get it from -- we will benefit from the leveraging of our content, but actually the systems that we've got that have really pointed out that pharma biotech segment for protein characterization and content deployment. Those are -- that's the win all day long for us, and it's already been -- it's demonstrated growth over a long period of time. And -- we expect that to continue to grow as capital and some of the cautiousness comes out of the marketplace.

How do you feel about your positioning in spatial biology?

I'm sorry. How do we...

How do you position in spatial biology?

Sure. Yes. It's one of those, I think, really unique and beautiful stories of content -- unique technology in the ACD double Z probe technology. The proteomics content that we bring in from the antibody space, along with the Lunaphore investment to automate RNAscope, which is -- leverages our ACD portfolio and double Z probe technology. But that platform deploys both antibodies and the ACD RNAscope technology. So now you go from a world where you had a multi-day very low throughput application space to one that is automated and simple. And so in the fourth quarter of this year -- of our fiscal year, we'll be launching kind of the first fully automated multiomics platform. And so kind of zoom back, while we started developing content here 4 years ago, and who would have imagined in the future, how valuable that content would be deployed on that system. So we have a history of deploying content on both our systems and other systems. But you now kind of get this cutting-edge component of spatial biology we'll be doing that same thing. So imagine we've got another vector coming in where discovery is going to be happening, and we're going to be pulling through as discoveries happen, excuse me, start getting translated, that will pull-through again back to that strategy of licensing our portfolio and optimizing our content for specific applications along in partnering with our customers.

It's hard for investors to size and put spatial biology into a frame of reference. How would you help the community understand it well? Would you say, hey, it's a business that's growing 20%? Is it 10% of the scientific community utilizes that spatial biology? How big is it for us at Techne now? I mean how would you frame that up for us and your own thinking?

Yes. I'll start off and maybe I'll ask David to comment a little bit more on the general marketplace. So we think of ourselves as we're the largest spatial biology company in the marketplace. So with just the revenue alone, excluding -- we already were, right? So we add Lunaphore and we consider that to be an accelerator for us in the space. So we've got a leading position in the market. As I think about the broader market, I know that it's growing in high teens, maybe low 20s, David, you can probably comment on that more explicitly than I can. And we've got a tremendous position in the market. And I think a unique position with our content and how we're deploying it kind of going forward. So again, we're very bullish on it. But, I think, relative to participation, David, do you want to maybe add and comment on that?

Yes. I mean the spatial biology market is growing north of 20% at this point. And we think with ACD and Lunaphore combined, we're going to be growing well north of market. I think the rate that we provided during our Investor Day was 30-ish percent or north of 30% was kind of our expected growth rate over the intermediate term. ACD is annualizing north of $110 million at this point. You combine Lunaphore with that, and we're on our way to potentially north of $130 million.

Okay.

Question from outside, is your operating margin was compressed in the second quarter from mix shift linked to Lunaphore. China weaker funding, what's your normalized op margin, David?

Yes. I mean the way that we look at it, Paul, is that the first half of any fiscal year tends to be a little bit lower from an operating margin perspective. You have -- obviously, our first quarter is over the summer months where activity is a little bit lower than -- you have the holidays in the second quarter, so obviously, a little bit depressed there as well. And then the second half of the year is, we typically see a lift in volume and that translates into our operating margin. We did mention that we're expecting to finish the year in the mid-30s from an operating margin perspective. So 34% to 36% is the range to think about, probably little bit more comfortable at this point at the lower end of that range, but that's the range. And we're expecting it to be a fairly linear progression. So our third quarter will have an uplift and then our fourth quarter, again, finish the year in the mid-30s.

And then we can't have a conversation right now without talking a little bit about China. I mean I don't think this guidance for -- through June of this year through fiscal '24 really assumes much of a rally. Is that kind of a fair assumption?

Yes. I mean, I think really, I'd just reiterate what we said, Paul, is that we're really -- we're encouraged with the stabilization that we're seeing in China. So we saw after a couple of challenging months where it was down month-over-month, we did see December stabilize. That stabilization continued into January. And then it's encouraging. So yes, you're right. The guidance that we provided is more for that stabilization to continue.

Yes. Okay. In the -- I mean one of my favorite technologies has always been, well, ProteinSimple and the automation of Western blotting. Where are you in share market there? It seems like why wouldn't I go from traditional slab gel to ProteinSimple but if you could talk to that.

Yes. Thanks for that. It's always nice to point out something. We've got a really strong, strong position in there and really revolutionize that application. Maybe a couple of comments on that. So we think in the pharma biotech space, if you're doing Western you do it on the Simple Western platform, right? And if you're not, you're going to be doing it on the Simple Western platform. We get tremendous demand from pharma and biotech there to continue to advance that. And so we see a future where that platform goes beyond its current kind of application space as we kind of refine all of the parameters around it and around consistency, et cetera. As we refine that we can see that almost coming online is another immunoassay type of portfolio -- platform that gets leveraged across similar applications for an immunoassay depending on the tools. So we're investing in that. We would expect to be able to deliver those things to the market here over the next 24 months or so. As we think of the platform being adopted in the academic space, certainly, cost of labor and needs for efficiency are different in that space. So I think if you ask an academic researcher if they want to leverage Simple Western, the answer 100% of the time be, yes. But we got a situation where essentially the labor is free in that market. So time and labor, while you think they -- well, I would like to think that they matter more right now that they don't. So that is a little bit of a drag there, but we see continued adoption, right? We've got more than 3,000 instruments placed. That's going to continue to ramp. We're deploying our content and other content on the platform. So we see no end insight for the platform to continue to ramp and take share. It's one of those breakthroughs that the ProteinSimple team brought forward in the marketplace, and we're investing heavily to continue to expand the applications on the instrument.

[ For naming ] names, there's a lot of technologies in spatial biology that are doing massive analysis of the proteome so to speak. I match that with your leadership in monoclonal antibodies, are you not going to usually be involved in some of these panels that are being developed by these huge throughput products and spatial? I mean how can they not avoid getting involved with some of your [ maps ]?

Yes. Again, I'll kind of come back to the piece I shared at our Investor Day, and I consistently share. We have a unique position in content that nobody else has. If you're doing high-throughput applications and spatial applications, you are leveraging our antibodies, right? So the facto standard right now in high-throughput proteomics that company leverages our content. We are able to participate in that revenue through licensing and commercial supply agreements. And as you can imagine, as that gets translated into diagnostic or other application, we carry forward, all right. So it makes sense that folks who make a discovery with an antibody given the complexity of proteins that they want to carry that through. They may want to refine it and they'll want to play it on whatever instrument helps them get the best answer. We have a couple of instruments that would enable them to do that with our partnership with Luminex. And we've announced a couple of quarters ago that we're potentially infection applications that we're a preferred partner there because essentially, everybody on that platform leverages our content anyway. So they chose us as a partner. And we want to provide a path for people to leverage and deploy our content. And again, we're casting a very broad net with the tremendous uptake of high-throughput proteomics. And I mentioned earlier, this convergence, excuse me, in the spatial. If you're doing spatial applications, you're leveraging antibodies, you're leveraging our antibodies, most likely. May be you're leveraging others as well, but we've got more shots on goal typically than any other provider does. And we're not slowing down. We're keeping the accelerator down in terms of how we innovate and leverage things like AI for advanced development. We've got partnerships that leverage our kind of broad library of clones -- sister clones for our launch products. And so -- yes, content is a really strong play long term for Bio-Techne, frankly, for this industry and for society. So we're really excited to be taking a really strong and responsible leadership role in that regard.

Destocking, was it an issue for Techne in the business?

There was some impact from destocking. So we've talked about it in the past, particularly on our license and commercial supply business. So I think of that as our kind of OEM and supply out. So as the industry was hit is kind of winter came post halo. We saw that there was a significant ramp-up in stocking. I think we've spoken explicitly about that in the past. And what we're seeing is that, that is now, we think, in the rearview mirror as we go forward. Maybe there's a couple of crumbs still left around from that. But just generally speaking, destocking is something that did impact us. And as we look to the future, will not have much of an impact on us.

David, what's your current long-term growth rate guide?

Yes. So in our Investor Day, we laid out a mid-teens growth rate, Paul. But I think the way to think about it is over the period call it, the COVID hangover that we've been going through. We've pretty consistently outperformed our competitors in the market by 500, 600, 700, 800 basis points. And as the market recovers, we would expect that spread to continue. So I think you take the market growth and then you add that premium growth that we've been delivering ahead of the market, and that's what we'd expect.

Right. And kind of an unknown. Some people are talking 1% market growth right now. But -- that's all subject to each company's opinion.

Yes.

And then, Will, I guess, as we wrap it up -- sorry, question here is the -- I guess, your long-term view on this China market, is it -- is R&D going to be a priority in the future in that marketplace or no? I, myself, I've seen the hospitals vendors kind of recover, but R&D not. What's your read on the political makeup there?

Sure. I'll answer a couple of. I will address the hospital side. So your clinicians in China have to publish as part of what they do. So there's [indiscernible] in that marketplace to research. So -- and much of that, of course, happens in the hospitals themselves or kind of associated universities. As we think of China, I think, longer term, the view is that they've got a tremendous investment that they've already made into this space. They're certainly kind of due for a reboot. I can't imagine they're going to walk away from the most critical investment. I think they also are thinking about the health care economics aspects of things, and they know that for them to be successful in deploying these technologies in their society, they're going to have to continue to invest. We did hear last week that we would expect some investment coming back in terms of stimulus in the instrument space. We're still waiting to understand how that gets characterized. But it looks like it will be deployed in those areas where we are uniquely positioned, meaning advanced therapies, that type of work as it relates to cell and gene therapy and maybe biologics. But we will see. Our long-term view there is that they're committed to this space. What is -- does it J-curve? Are we at the bottom of a cap that eventually kind of grows back up? We feel very, very good about it. We're well positioned. We are still making investments in China. So we're building a new GMP manufacturing facility there to serve the Chinese market. We still sell a lot of our GMP proteins from the Minneapolis and St. Paul sites into that marketplace. But we also feel that longer term that there may be a China for China, particularly on things like the reagents part, hence that investment. So we're placing a bet that is bullish on China. In terms of our instrument portfolio, our instruments are so unique. They are not things that ever would be easily replaced in that marketplace. So there isn't any view of a China-for-China approach with our instruments portfolio. They're not easily copied and they're critical in all aspects of research, development and manufacturing processes. So again, I think we feel very strongly that long term China does recover. But it's hard to call the ball on the exact kind of ramp and what that curve looks like.

Well, with that, we're at 10:20 in our stop time, but I really appreciate your time, Will, and David, thank you.

Thank you. Thanks, everybody, who joined.