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

Great. Thanks for joining us for our next session. My name is Mike Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics team. And we're thrilled to host Bio-Techne. We're joined by Kim Kelderman, Chief Executive Officer. Kim, thanks so much.

No, thank you. Thank you for having us, Mike.

Great to have you. Just to kick things off, we'll start with sort of the default starting question of you reported earnings a little over a week ago, maybe 2 weeks ago. Maybe we can start with a quick summary of the fiscal 3Q results.

Yes. I think that obviously, there was the best 2% growth I ever had in my career. The -- overall, we were pleased with the results during our earnings call for Q2. We had mentioned that we saw and we're navigating 3 headwinds. One was the funding environment in biotech. The other one was the environment in China. And that we prognosed a much better destocking environment for our fiscal year Q3. And those assumptions really came through, and that's how the quarter played out. And that resulted in a 2% growth. And that was breaking out into our 2 segments, 10% growth, organic growth in Diagnostics and Genomics, 16% inorganic growth. And then the coating Sciences segment was still declining a little bit, but negative 1%. And that resulted in a 2% growth. And we're really focused on making sure that we serve our markets right and get the potential out of the company, while also optimizing our bottom line and making sure that we run the company very efficiently and that resulted in a 290 basis point improvement on the bottom line sequentially. And that's, in total, landed us at a 33% basis -- 33% EBITDA.

Great. We'll take it from there. I want to follow up on there. So you talked about some of the headwinds that you're able to overcome funding China destocking. So just consistent with what we've heard from a lot of others in this space. It's been something that's been playing in the industry for 6 to 12 months now. There's a broad expectation of that things are going to start to normalize and improve. So what's sort of your assessment of how fiscal 3Q played out? Is it just a little bit of lumpy timing fall start? Or is this really an indication that you're working through these headwinds and emerging on the other side?

Thanks for the question. I think fundamentally, we had the assumption that some of these headwinds were in the process of bottoming out, right? And in the meantime, we know that we indicated some green shoots. And that was mainly based on a couple of months of very good funding in the biotech, biopharma space. A couple of months doesn't make it a trend, but it is a green shoot, and we are well positioned to see some of those funds come in our direction in the coming quarters. And then the same for China. We were not indicating that this is all turning around and going to be a V-shape recovery, but there were some announcements around broader funding plans to modernize equipment in various industries. And we will be also there, very well positioned to capture that tailwind. In the meantime, the company has performed well against a peer group under the same environment, under a constrained funding environment. And Yes, I think that was based on the performance of our 4 growth verticals, and we always talk about 54% of our portfolio is related to our core consumables, and we always outperform the market a little bit there. But what we're really banking on right now and what we really see the differentiator is, is the 4 growth verticals that we have in our company. And those have really driven tremendous growth. And for example, our bet in cell and gene therapy has resulted in the 30% growth. We feel that is a long-term growth market and that we're really well positioned there. Our Spatial Biology business had the launch or has continued to launch the instrument called COMET from the Lunaphore acquisition, which is really going well. And then we have our protein analysis instrumentation. Even though CapEx budgets are constrained and the number of instruments we sell is not the same as last year. However, the pull-through and utilization in consumables is continuing to grow at double digits. And yes, last but not least, our liquid biopsy business, the molecular diagnostics. Our prostate cancer tests continue to grow at 25%, and our laboratory product channel, our kitted tests in this business have also been growing at 30%. So it is truly those growth verticals that are growing and pushing the company into a positive territory. And that created the differentiation with the peer group, and we continue -- we see that continuing in the future.

I want to touch on pretty much all of those growth verticals later on, but first, let me just wrap up a little bit on the end market trends. You talked about biotech, good trends in the first quarter, good indications of funding. We've all seen the numbers in terms of money raised quarter-to-date and how that's compared to the last couple of years. But just money raise doesn't necessarily translate to money spent. So sort of what's the lag time there? What are you anticipating? And how many quarters do you need to see of consistently better biotech funding to feel much more confident in biotech as an end market?

Yes, it's a good question. It's also different. So how long it takes for the funding to trickle through is different for each vertical market, there's different space as well as whether it is a consumable or equipment, right? CapEx usually takes a little bit longer when it comes to approvals, et cetera, and spending on consumables is a little easier. And of course, if you already have an installed base, you can start running your consumables relatively quickly. So taking all that differentiation into consolidation, on average, we expect a lag of 2 plus/minus 1 quarter, if you -- after a company gets funded or program gets funded. For us, the most important question is, are you sitting in a space where the funding will flow to. And I think that specifically in cell and gene therapy, we have several of our businesses aligned with that end market. And I think that everybody agrees that cell and gene therapy is a fantastic opportunity to cure diseases, we've not been able to really treat so far. And yes, we have our protein analysis portfolio that really helps looking at quantification and QC/QA of these workflows. We have our GMP portfolio of proteins and GMP cytokines, chemokines, all the different ingredients, including small molecules that you would need to fulfill the workflow. And then we also have our Spatial Biology portfolio that helps you to see while you're working on these therapies, helps you to see what happens where on a molecular level. And all these product lines are basically feeding into that end market, and we believe that, that end market across the world -- so including China and in the Western world will be an end market that will see a majority share of the funding.

Okay. So maybe we'll pivot from there to sell on gene therapy just because you've touched on it a couple of times. It's been a very promising end market for a number of years, but it's still pretty early, pretty nascent. What are you to see in that end market to feel like it's really hitting its stride? I mean, is it just a matter of time? Is it just a number of programs advancing later through pipelines. It just feels like it's been sort of in that future promise stage for a while. So when does it become more real? When does it get to where monoclonal antibodies are today, right?

Yes. And I think, of course, several aspects to that. Of course, there need to be viable treatments, right? And then they need to be able to clear that regulatory hurdles. That's, of course, always a big hurdle for companies and bringing their products to market. And then there needs to be scalable as well as affordable solutions, right? And I think that is the trick. Fortunately, our company has with innovation that really helps further on all 3 fronts. So we have, as I already said, the GMP portfolio, right, which basically means those are ingredients that are already having a certain regulatory scrutiny that go into that workflow. The scalable and the affordable part there, we are very excited about the progress we made with Wilson Wolf, right? They -- that's a company that we now own 20% of, and we will eventually own the whole thing. And they bring the G-Rex, which is basically a container with a very nifty way to get oxygen in container to the cells that you try to multiply. And yes, that container allows us to put in all the reagents, GMP cytokines, chemokines, proteins that will help these cells to divide. And more importantly, it will help you scale the number of patients, right? Because it's important that it's cost efficient and that you can scale it in your facilities. And in the case of G-Rex, the common size is 1 liter size and over 10 of those fit in incubator and many incubators fit in the laboratory or in a certain space. So it's scalable. So if you now think about all these hurdles, we're absolutely helping out on the regulatory front, on the scalable front and the cost position. So we are very, very positive on that end market and specifically because we are enable that end market to become what it will become.

I mean some of the points you touched on there, sort of the ability to scale the regulatory hurdle, the consistency dose to dose, patient to patient. There seems to be a lot of focus there from you and from others in the space. Are there any capabilities you need to add on, on top of the work you've done with Wilson Wolf to broaden the portfolio? Or do you feel like you kind of have everything covered there?

I think we have a real broad offering. So we're definitely ready to benefit from the progress that market will make. Other still gaps in -- or opportunities to add to that workflow. I think it's high on our inorganic list. So if you think about our inorganic plays, we -- there are several companies we follow and are very interested in that build out our cell and gene therapy play. We also have other targets that are related to any of the 3 other verticals I talked about. And of course, bolstering our core is never a bad idea. So I think that's more or less how we run at that space. And we've got most of the ingredients in place, no big gaps to operate. But yes, there is always other things that we would like to add to the portfolio.

Okay. All right. So moving on to some of those other growth verticals you talked about. You talked about GMP protein -- protein analysis. What's the competitive landscape there currently? How does biotech differentiate itself for some of the other players?

Yes. I think we differentiate ourselves. First of all, we have 6,000 proteins in our RUO catalog, right? And we can exactly see which proteins are of high value for certain workflows, including the cell and gene therapy workflow. Then we have this mechanism to port them over to a facility separate facility that has this GMP protein capabilities. We have over 40 GMP proteins now in the facility and some are mainstream, but some are very unique complex proteins that nobody else offers. At the end of the day, your menu is going to matter. So we are basically porting over the most important proteins into the GMP facility. On top of that, we believe that the GMP certification is important for other ingredients. So we will launch this quarter GMP antibodies. We already have GMP media and GMP cytokines and chemokines. And in Europe, we have invested in a GMP facility for small molecules. And there with, you can see that not only do we believe that menu as well as the GMP capabilities are important. And not only for cell and gene therapy, but for basically anybody that wants to go downstream from research into clinicals and into the clinical market. So we want to make sure as a company that we can support these customers along the line.

Okay. And in that market, there's been a decent amount of M&A amongst some of the other players in the last couple of years, Revvity buying BioLegend, Danaher buying Abcam. So a lot of assets have changed hands now sort of in the hands of some of the bigger players and tools. Have you noticed any change in the competitive landscape in the market?

I think companies have, of course, a desire to grow and become relevant in their space, whether they're large or small. We have tremendous respect for Thermos and Danahers of the world. But it doesn't take away that we also have competed in these different end markets for a long time and whether it is in China or in the rest of the world. So we feel comfortable that we have a very good strategy. We have a great menu, great offering and then that we are really efficient as a company. Innovation is important to us, and we have really focused on increasing the efficiency of our sales force as well. So I feel that we're really well positioned to compete on just the core reagents, as you mentioned. And then even more so on these vertical markets that I mentioned earlier, the growth drivers of the company.

Okay. Okay. Talking about spatial biology. That's a very competitive landscape. There's been a lot of new entrants in this place. Also still a really early market where we're still trying to gauge sort of what the longer-term opportunity is. Just what's your long-term outlook for that market? Where do you think that can grow?

Yes. I think let's first agree that, that is a real interesting market, right? So being able to see what happens where in the tissue is just very relevant. It has been for immuno-oncology, it is for neurology and it is also and it will be even more so important for cell gene therapy. Think about the building blocks we put together. Also that vertical, we have invested in more or less EUR 0.5 billion inorganically and of course, focused organically on building that vertical out. We have a fantastic asset in the ACD acquisition from 7 years ago, where we have the RNA agents who intellegate RNA. And over the years, we built a library of about 50,000 probes and we can make any custom probe you would want. In the meantime, over the last year, we have acquired Lunaphore, which is this automation instrument, which is basically the only one in the market that is fully automated, right, from simple, putting your sample in all the way to an image. It's a high throughput, much more throughput or more slides you can run in a week than the competitors. And then last but not least, that repeatable results, which will pull through not only our ACD reagents, but also antibodies. And the antibodies you need to look at proteins. So people want to see whether these RNAs eventually become proteins. And we can show these results on one slide and there with true multiomic and also the only true multiomic company in place. So we are certain that we will be and continue to be a very relevant, if not dominant player in the spatial industry. And yes, we're very hopeful and keen to see how it unfolds.

I mean same thing a lot of moves there recently with Bruker acquiring NanoString. You've had a lot of noise coming out of 10x. And again, there are a number of private players there. Hasn't even that changed your view of the market opportunity or sort of your positioning?