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

All right. Great. Good morning, everyone. I'm Puneet Souda. I cover life science tools and diagnostics here at Leerink. My pleasure to be hosting the next team here from Bio-Techne, CEO, Kim Kelderman. Kim, glad to have you here at our conference.

Yes. Thank you, Puneet, and thanks for having us, obviously, in this place. A full place.

So as we go through the conversation, please send me questions if you have, and I'll try to cover as we go.

Maybe Kim, just to start off a bit on the product segments that you serve, you got the RUO antibodies, the cytokines, the cell and gene therapy, and Protein Sciences, and the diagnostic business as well. I mean the quarter came in slightly better at 2% organic. Maybe take a minute and tell us where you feel more confident with the segments, which businesses, which product segments where you're more confident on the recovery versus the rest and where it could take a little bit longer.

Thanks for the question, Puneet. Yes, let's quickly recap the quarter Q3, which is the calendar Q1 for us. Came in at the 2%, you mentioned, basically a combination of the Protein Sciences segment coming in at negative 1% and Diagnostics and Genomics at 10% growth. That would be 16% growth, including the Lunaphore acquisition. And that actually kind of got us to the results we looked at. We had kind of mentioned that this quarter was going to be in that range just because we had discussed the headwinds the quarter earlier, headwinds being the funding in pharma, biopharma as well as the China markets. We've also indicated that we feel de-stocking was behind us at the end of the calendar year. And that's exactly how it came in. So the result is good. It's all relative, obviously. And we did so in a very efficient way. I think we had an increase of 280 basis points year-over-year on the bottom line and resulting at 33% EBITDA. And yes, we saw some of those green shoots that we talked about, right? One was in -- through our talks in China about funding and one was or is -- at that time, we saw one or 2 good months as it comes to biotech funding. And by now, we know that it's 4 months of reasonable results in biotech funding, right, and now that everybody is looking at relatively similar numbers there. But 4 months is obviously more encouraging than 2 months by now. It still is not a trend, and it still doesn't indicate a V-shaped recovery. But it does indicate that there is some strength building, which we are very enthusiastic about, right? And we do know that once that funding starts improving, that it takes a couple of quarters to trickle down to the life science tools companies, including ours. But that eventually will end up there. And if you then think about which portfolio we are most enthusiastic about for an earlier recovery, that would be the consumables, right? Our consumables are the ones that get pulled through. And we know that if there's new funding, people switch their equipment back on and start pulling through the consumables and/or they start their projects or restart their projects, and that could also pull through our core reagents, right? And that's where we feel that the recovery would be. And that would be where we've been most [ suggestive ] about short term.

And you talked about the biotech funding. I mean now 4 months versus -- so we saw it sort of in the first quarter. On the consumable side, how long does it take for that to flow? And wondering if you're already seeing some of these signs from biotech funding?

It's hard to say if it's from the new funding or whether it was from programs still running. Typically, you and I last talked also in a beautiful location. Typically, we feel that if funding gets released, it will shorter-term impact and pull through the reagents versus equipment because there's typically a little bit more scrutiny on what instruments shall we buy and getting the right approvals internally before that starts pulling through. So we always say 2, plus/minus 1 quarter, but it could well be that in a moment, you switch, get funding. It will take a quarter or 2 to pull through to the agents or start buying the agents and then a quarter of -- 3 or 4 quarters to get the funding to really end up in revenue for the life science tools if it comes to equipment.

Got it. Okay. And what are you hearing from the academic customers? And maybe just -- I know you talked about this with biotech customers. But yes, what are you hearing from the academic side?

Academic side has been relatively stable, right? Yes, there are some ups and downs in different countries around the world, but I would call it stable in general with the HORIZON funding, with the NIH funding in the U.S. And we feel that we've done actually pretty well in academic. As you know, we've originally as a company been doing really well in pharma, biopharma. But with the lull in funding for biopharma, I must give compliments to our sales team flexing into the academic sector. And we've done relatively well there. We have -- we had flat growth. That was on a year ago, a quarter where there was a mid-double-digits growth in academic in Europe. So we had a tough comparable and still ended up flat. And then it is the low single digits in the biopharma side that, of course, was driven mainly because of cell and gene therapy. So if you look at those 2, the academic side has been very stable. And we think that we will have some benefits from now being more able to sell in the academic because of this lull in the last year. So I think we will benefit from a continuous healthy revenue stream from the academic side.

Got it. One of the major questions for Bio-Techne, when we look historically, obviously, 2023 is sort of rough patch for the industry. But historically, you have grown low double digits top line organic growth. I know, look, fiscal '24 isn't over yet. But maybe if you just sort of look out next couple of quarters, do you think we can start to get back to that historical growth pattern for in fiscal '25 maybe?

I think our entitlements, right, our long-term view is certainly to be in the mid-double-digits growth, right? So then the question is how quickly do you get there? And I think that's actually a question for everybody too, on the front of their mind, if you think about it. But the only answer that is really achievable, if you don't know when funding and when economic -- the economy turns, is to talk about relative performance. And we have, over the last couple of quarters, throughout the whole last 5 quarters, actually, we have continued to outperform our peer group by anywhere between 500 and 1,000 basis points. Of course, the peer group moves -- kind of like indicates how market is growing. So we could translate that to 500 to 1,000 basis points better than market. So then it basically gets paced by where the market sits, right? So historically, the market sits anywhere between 5% and 7% of growth, and that's when we sit in the mid-double digits. And on the way there, at some point, we will cross the double-digit line. That's when we'll get back to the -- to those double digits. When exactly is really hard to say because we have identified China as well as biopharma funding to be the gatekeepers of that.

But at least the comps should be getting easier going forward and...

That's a given. Yes. We have Q4, which we are now in, right, where the China comp is still pretty significant. And that was just because of one of these fund -- 2022 fund -- calendar year 2022 fund rolled in and became a peak of instrument sales for Bio-Techne exactly 1 year ago. So we still have one tough quarter. And from there, it's clear that the comparables will be easier.

Okay. I want to come back to China. But before that, maybe just let's touch on the Protein Sciences segment. The RUO antibody market, based on what you saw in the quarter, I mean, and what we heard from peers, it was a softer market. But maybe just tell us a little bit -- and that's no surprise given the times of recovery still. Maybe just update what are you seeing in that side of the business? What are some of the green shoots? What gives you confidence in overall the research use-only antibodies market?

Yes. I think that, as you know, the antibody market is about $3 billion. We enjoy a 5% market share. I think we've very effectively competed in just core products over the last decade. We've certainly have a fantastic library of antibodies and a very innovative smart team that creates new antibodies consistently and continuously. Very good value proposition. So that's the reason why we, I think, have outperformed the market slightly over a long time period. Green shoots, I must say that we were positively surprised to see antibodies, the antibody business, growing by 30% almost in China last quarter. And that's definitely a green shoot for us. Overall, core reagents were 20% plus in China. And then we are also very optimistic about us enlarging our addressable market by launching in the coming months the GMP antibodies. That would be adding a 20% market share, and we would be one of the earliest to go in, early ones to go into that market, and compete effectively just like we've done at the -- with the protein GMP side.

Do you -- what's the sort of growth rate that you expect in longer term for this market? And I'm asking that because competitively speaking, there were some acquisitions and they are with some of your larger peers now. Does that change the makeup of the market? What do you expect to be sort of the long-term growth rate for the RUO antibody side?

RUO antibodies. The overall, I think that market is typically anywhere between 5% and 10% growth, basically mid-single digits. I'd say it grows mid-single digits, and we would perform anywhere between mid and high single digits. So that means we're still making -- taking market share. And I think, first of all, it's a very fragmented market, right? So there's many different pockets where you can build your strength. And I think that, yes, we have a lot of respect for the larger companies in the life science tools. But we're nimble. We're really well connected to the customer. We have a tremendous know-how or technology know-how. But also, the products have the right consistency in bioactivity that can just, on their own, outcompete. So with a good sales team and a good discipline behind it, I think that we will continue to be able to perform slightly better than our peers.

When you look at -- just want to touch on instruments briefly, Ella, [ Rez ], other instruments that you have for immunoassays, and I think it's still the only automated Western blot solution on the market. Tell us a little bit about what are you seeing on that front? Are you seeing sort of recovery? Or do you expect that to be more gated still, just given sort of the consumables pick up first and then instrumentation?

Overall, the consumables pick up first. Instrumentation will be too. But on specific product lines, it might differ a little bit. We had a tremendous quarter in West. And I think the theme of automating clunky and/or manual processes is going to continue to resonate with customers. Even under economic pressure or maybe especially under economic pressure because overhead is not cheaper, right? And you want to do your experiment maybe overnight, highly automated, and you want it to be consistent. So the automation product lines we have in ProteinSimple all have a wonderful value proposition in that way. Yes, and I think that overall, yes, it will -- the utilization of these -- of that equipment that is in the market will increase, and then new boxes will be bought. But in West, the one that you specifically mentioned, I think there, we have still a long way to go. And we could see that pick up first when it comes to the automated product lines.

Let's shift gears to China. There's obviously talk of stimulus there. You have -- I mean, now the footprint is smaller. But you -- maybe just talk to us in terms of the expectations from stimulus coming all the way to sort of the consumables and products you serve. And what's your long-term view on China? Because I think that still is a question just given what had happened sort of last year.

Yes, it's a great question, especially because there is no easy definitive answer, right? So I think overall, if you look big picture, China, 1.2 billion people, health care, high on the agenda. There is a certain trend to wanting to be independent from -- if it comes to vaccines or medications. So there is a lot of activity in the territory, and we can definitely help boosting the output there. Again, automation is important. Having the right high-quality reagents and ingredients is important, and that's what we're strong at. We -- just in case there is going to be more constraints on what you can buy or sell into China, what you can buy if you're in China, we have a China-for-China facility. We built a bigger one with GMP capabilities. That is in process. And then if it comes to the specific fundings, we're zooming into this year's funding. When and how it gets distributed is still somewhat fluid, but we do see some traction if it comes to inbound requests, right, for our sales force to already start spec-ing which instruments and which reagents would be the best. So we see some traction in dialogue. And then the last data point I can give you is that when a similar program was launched in 2022, it had great -- it gave us great traction. And that's why we still have one tough comparable in this quarter because that was a funding cycle that really boosted our results.