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

Great. Welcome, everybody. Good morning. My name is Matt Sykes, the Life Science Tools and Diagnostics Analyst at Goldman Sachs. And I have the pleasure of welcoming Kim Kelderman, the President and CEO of Bio-Techne. Kim, thank you very much for joining us this morning.

Thank you, Matt. It's always a pleasure coming over.

Great. So maybe just to start out, maybe just a brief description of Bio-Techne for people in the audience and then maybe just kind of touch on the performance last quarter relative to peers, it was a pretty strong quarter, and just sort of what was the drivers of that? Have you seen any continued momentum of that as we sit here today in June?

Yes. Thank you. I think Bio-Techne is one of the unicorns in life sciences. It's a company that has innovation as well as M&A at it's core, very innovative. We're one of the last midsized companies with great agility and a great product offering, a combination of core products that have been around for 47 years that we go to market with. These are like proteins and antibodies and many other building blocks for research. And then we have built 4 growth verticals that we utilize these core products and that we feel are positioned in very fast-growing end markets, where we have very defensible positions. At the end of the calendar year '23, we were talking about 3 headwinds that influenced or could influence our quarter. And we were talking about destocking, which had been bugging us over the calendar year 2023. But we also mentioned that we thought at the beginning of calendar 2024, that would be behind us. And fortunately, that was the case. Two other headwinds we had mentioned was the China funding malaise as well as the clouds that have been hanging over the pharma -- biopharma industry. And we had hoped and mentioned that in the very first calendar quarter for this year that these headwinds would stabilize. And fortunately, that became true. And with that, we ended up with 2% growth in the company. That was the best 2% growth we ever had, right? We -- it was basically a combination of these 4 businesses, the core business and the 4 growth businesses. We have 2 segments that we report in. One is Protein Sciences segment that had a negative 1% growth. It's most exposed to the general research and biopharma. So it was under some pressure. But the Diagnostics and Genomics segment, which is the other segment, that one grew by 10% and reported 16%. The difference in there is an acquisition, Lunaphore. And yes. So overall, that resulted then in 2% growth. And yes, if you think about how we pushed it into the black, it was really based upon some of the growth verticals that I just mentioned. To begin with, cell and gene therapy, it grew 30%, primarily based on GMP proteins. Those grew 40%. So the -- that vertical is now about $80 million for us in run rate and becoming bigger. And we invested heavily in there. We'll talk more about it later and the beautiful play we have with Wilson Wolf in there, but that's for later in the talk. The second growth vertical basically Protein Sciences, protein analytics. The instrumentation is under pressure and has been under pressure. But we are very pleased to see that the utilization of these -- the installed base in the market is good because for 6 consecutive quarters, we've now seen double-digit growth in the consumables that go on these instruments. So there's a green shoot there as well. Spatial biology. There, we've done an acquisition last year of Lunaphore and we see strong demand for these instruments. And then last but not least, our Molecular Diagnostics division, where we have the first product that we came to market with was the prostate test, and that has been growing nicely around 25% in volumes. And yes, so those 4 growth verticals, just like our [ theses ], have continued to outperform the market, and that really created the difference between our peer group and us in which we ended up in the black. And jumping to the bottom line, [ 33% ] in operating margins, a consecutive improvement of 290 basis points. And then, I would say, in that is a [ 230 ] basis points headwinds from the new acquisition, Lunaphore. So overall, we would be sitting just north of 35% if you take that acquisition out. And that's also where we want to be, 35% -- anywhere between 35% and 40% is our usual range that we are targeting.

Got it. And just staying high level again, your focus on consumables differentiates you a bit, certainly gives you a little bit more high recurring revenue, more defensiveness. The inventory issues, obviously, threw a bit of a monkey wrench into that. But maybe just talk about how that business positions you to be more resilient, more defensive in these kind of environments.

Yes, you're right, 81% of our revenues come from consumables, 10% from instrumentation and then some royalties and service revenues for another 10% more or less. And therefore, the margin of the portfolio sits in consumables. We feel that consumables are a little bit more resilient because, obviously, they're not dependent on CapEx budgets, but it is still important you have an installed base. And that's what we are really happy with, the installed base and more or less the resilience in pull-through. For me, that means that the instrumentation, even in the -- with the headwinds that I just mentioned, is still being utilized. And that means that you can still pull through your consumables. And I also feel that the moment funding in China as well as in biopharma would improve that the first things that you usually spend your money on with the least hurdles of approvals and scrutiny are your consumables to further ramp the number of [ results ] that you create within your budget. The nice thing that I feel is that with the increased utilization of our instruments, more capacity if the installed base gets used, and that would that our customers would increase their capacity as well over time and that we would then see pull-through of instruments again into the market.

Got it. There's been a lot of focus on the strong funding quarter for biotech in Q1, and there are some expectations that continues. I know there's a lag period of a few quarters for that to come through. But just given what we saw in the first quarter, are you starting to see any signs of increased business activity in that space from those customers?

Yes. So we are now 5 months into the year, and we follow it closely, and I bet most of you do, too. We look at their funding and the funds raised in biopharma. And that data looks strong, right? It looks at an increase of 78% or so year-over-year. But take into consideration that last year was an extraordinary year to the negative side. So therefore, we often look at funding levels against the [ pre-COVID ] period, and we're still positive against those. The 5 months doesn't make it a trend yet, right? So we definitely -- when we had our earnings call, it was only a couple of months, so we were careful. Now, there's 2 more added to that sequence of good funding months, which is definitely encouraging. But certainly, we want to be careful in mentioning and assuming that this then cures all wounds. I think that we need to see a continuation of this type of levels of funding, and that will certainly continue our thesis. You're right, we typically assume 2, 3 quarters of delay between funding cycles and it flowing through to the life science tools industry. And of course, that depends a little bit on the type of product. Consumable, a little earlier, as I mentioned, less scrutiny around spend. And the moment you switch on programs or you accelerate programs, it immediately demands more results. And therefore, you pull through more consumables. And then a little bit later in that same funding cycle, you would see pull-through of instrumentation.

Got it. Just sticking with biopharma but focusing on the large pharma side, [ visibility ]. Are there any signs of kind of reduced hesitation there? And what would it take you to really kind of call an inflection in demand from the large pharma side?

[ It has ] been stable for us as we would like it to see on the normalized conditions. There are certainly [Audio Gap] in large pharma. We see [Audio Gap] larger's layoffs in pharma industry. The budgets were made for most of these companies at the end of the calendar year last year, which were also months and quarters of -- where there were some clouds hanging over the industry in general. There's been a repositioning of the pipeline, the R&D pipeline in regards to IRA, Inflation Reduction Act. And therefore, I think it's a little bit in turbulence. As I mentioned, we've been happy that for us, it's more or less stable, but it doesn't provide the pool as we would see under normalized conditions. No doubt that in -- with the stabilization of interest rates, stabilization of end markets that we feel towards the [ end of ] this calendar year, their R&D budgets, we assume, will be stronger and in line with the stabilization. And therefore, we think that 2026 will be a -- pharma will be [ instead ] stable, might become a driver, again, of the results.

Got it. You touched China for briefly in your opening comments, and you've called out the stabilization in China over the last few quarters. Now you've got the potential impact of [ stimulus ], which has become a major topic for investors. Another company in the sector kind of pointed to some friction in starting out without spending just due to the complexity of the program. Our feeling is kind of it's not only a lending program, so the transmission mechanism might take a little bit longer, but it's also a 3-year program, so maybe the urgency isn't quite there yet. What are you kind of seeing in China? What are your expectations for the [ stimulus program ] in terms of impact and potential timing?

Yes. That's a very good question. I think first and foremost, our installed base has been pulling through double-digit consumables for 6 quarters in a row. So capacity is being used. And therefore, I believe that if funding come through that there will be a demand for instrumentation. Our instrumentation is all focused around automating manual and/or clunky processes, very fundamental processes. So just to optimize your efficiencies, your consistent [Audio Gap] overhead and/or the number of people in your [Audio Gap] instruments. And therefore, feel that they would be on the top of your wish list in the moment you get something in. The -- and we have some data on that because in calendar 2022, there was a similar funding [ post-COVID ] in China. And 2 quarters later, we saw [ against ] the same -- very close to [ 20% ]. And that's a [Audio Gap] and that's also the reason that we highlighted that we feel there's one more tough comparable in China for us, which is, again, in the quarter we're in right now. And then we'll lap that. Our comparables, going forward, will be easier. But we also feel that the stimulus would come our way. And it's definitely a mechanism that we feel has been effective for us in the past.

Got it. You've talked in the past about you still view China as one of the faster-growth regions longer term. And you've been able to grow in that region due to some of the services and the products you're offering. What gives you confidence in sort of structural growth within China? Because there's a lot of debate of cyclical versus structural and how China might be changing. What is your view on kind of -- looking at the portfolio that you're serving to that market?

Thanks, Matt. China, overall, it's heavily debated, but our fundamental view for that we're looking at a region that has 1.4 billion people, right? That's an aging population. Those people all would like to have proper health care. The government has the responsibility to provide this to their population and has been very keen on being somewhat independent from the West, coming up with their own vaccines and their own treatments. So that [Audio Gap] in research and development and that you want to push these -- the life sciences forward, and that's right up our alley, right? As I mentioned, our instrumentation is all around efficiencies in getting the right data points. Cell and gene therapy is a very, very lucrative investment area for China to kind of leapfrog the small molecule efforts over the last couple of decades that we went through in the West and come up with cures for diseases that were previously not really treatable. So I think that overall, that picture would just scream that it would be a the fastest-growing region in our portfolio compared to the U.S. and Europe. And therefore, we are very bullish on China long term.

Got it. Just kind of switching to some of your growth drivers, you talked about the cell and gene therapy, very strong quarter, 30% growth. I think you mentioned it's about an $80 million business for you today. How significant of a growth driver do you expect that business to be? It sounds like you're putting a lot of investment into it. And what are you most excited about? And what's differentiated about your approach to that market for customers?

Excellent. Yes, we are very bullish on cell and gene therapy. If you see the initial results and initial approvals, as I mentioned, these approaches are curing diseases that we, in the past, didn't dream of treating very well. Quality of life is very important and is obviously boosted by the overall industry and the opportunities therein. We have long-standing capabilities of producing and designing antibodies, but mainly proteins that go into the processes to push forward cell and gene therapy. We have created a GMP portfolio of reagents because it's near patient and/or inpatient. Therefore, we made sure that our RUO products are also able to migrate into a GMP environment, which is a requirement from a regulatory point of view, obviously. And we've added different ingredients that you would need to grow cells, right? So we have GMP media, GMP cytokines, chemokines, proteins, obviously, and small molecules. So we have a real nice portfolio of GMP consumables. And the one that brings it all together is the and the GRx. And GRx is a kind of an incubator or a small container that is being produced by Wilson Wolf. Wilson Wolf is a company that we currently own [ 20% ] of. This container is to grow immune cells. And as I said, it's disposable. But then again, it's a unique patented solution, which pulls through all these core reagents that we have in our portfolio. And therefore, we are thinking that this solution, which is scalable, very competitive and is in almost half of all the clinical studies in the world right now, it's being used -- so we -- yes, we were thinking that we are having a very defensible position that is scalable and very efficient, cost efficient as well. And that will go through a lot of our very high-margin core reagents.

Got it. Maybe a little bit about the spatial segment. You talked a little bit about it in your opening comments. Certainly, a lot of growth potential there, also increased competition. Could you maybe talk about how you fit into that market? How COMET is really differentiated in this space? And then, kind of any updates on the production front in that business?

Yes. The spatial industry for us is we started investing in this space 7 years ago or so, and we're very bullish on it. At that time, 7 years ago, people were still wondering whether spatial was going to be an industry in the first place or at all. But we were pretty convinced that this is going to be an important tool in furthering science and further treatments and/or diagnostics into a pipeline. Overall, what you usually see in this space is that there is a discovery phase, where people would like to see many hundreds, if not thousands, of markers. And the bigger providers in that space for that solution are NanoString as well as 10X. And those customers then get from this discovery phase a hypothesis as to which of these markers are of importance. And at that point, you will have to start looking at more samples, different patients and/or different [ tissues ]. And you will have to have really repeatable results with spatial context. And that's where our solution comes into play. We have 120 million or so in run rate spatial reagents from the ACD acquisition we did 7 years ago. And then 1 year ago, we added an instrumentation solution, a solution that can run 4 slides at the same time and very efficiently, fully automated, meaning there's no manual steps in between. You can run it overnight. So you do that in just 5 work days. You're sitting around 20 slides a week, which is a very high number compared to other solutions. And the interesting thing is that it is very easy to set up your instrument. You would usually want to see your RNA markers, what happens in -- when a DNA translates into RNA, so you can see all your RNA markers. And we happen to have 50,000 probes in our catalog and can design any custom probe for you if you'd need one. And then in addition, in the same run, you can look at your proteins. And that's eventually where everything translates to is very important. And for that, you would need antibodies, right? The real cool thing about this instrument is that you can continue to use the antibodies that you use to manually or -- in your initial experiments. And you can continue to use it. So that way, you don't have to toss your old data. But if you're just starting or if you're willing to change, we happen to have 400,000 antibodies in our catalog and they're continuously screening antibodies that could go on the COMET instrumentation. So with easy setup, multi-omics, fully automated and then having the tremendous portfolio of antibodies as well as 50,000 RNA scope probes, we feel that we have the most rounded portfolio and automation that will be a force to be reckoned with in this space. And yes, that's why we're so excited about special biology.

Good. I know we've talked a lot about consumables. You do have an instrument portfolio, and you mentioned the percentage of it. But just given the debates around instrumentation and sort of the weaker capital budgets and things like that, that we've experienced, are you seeing any incrementally positive trends there? And just kind of remind us what your expectations are for instrument growth over the course of this year. And how you see kind of the puts and takes over the course of this year playing out for instrumentation and [ capital ] equipment demand?

Yes. Yes. So our ProteinSimple franchise is basically the core of this instrumentation. There are 4 different instrumentation pipelines. As I mentioned earlier, the fundamental value proposition of those product lines are to make processes -- clunky processes or manual processes more mated and simple to do. And we do believe that, that is a value proposition that holds at any time, but specifically under constrained budgets. Maybe the constrained CapEx budgets do not help, but the value proposition is there nonetheless. The moment things normalize, I think this will be a strong tailwind for the product lines. And in the meantime, while we have the headwinds from China as well as the headwinds from biotech -- biopharma, we have made sure that our sales force gets more savvy and went to their customers in academic. And we're very happy to see that even though in the past, academic customers would say, "Hey, automation is not that important for us. Our overhead is not very expensive, and our students need to learn how to do these manual processes," we start seeing that there is traction in the academic markets as well just because efficiency as well as consistency of results, fewer people in laboratory are becoming requirements or desires in that industry as well. And we're very, very positive about the traction that we now are seeing in this academic markets, which certainly helped leveling out some of the pain that we wouldn't have been able to flex over there. So kudos to the sales team for flexing into the academic space. Yes, I think that overall, the green shoots we've seen in some of the product lines. This namely Western blot has starting to grow again. And that's a green shoot we'll be very happy with. And that was mainly in academic markets, but we are certain that the value proposition holds in the biopharma markets and that the increased funding levels that we have seen eventually become a tailwind for our instrumentation portfolio.

Got it. You touched on the prostate cancer test and the early success you are having there in liquid biopsy. How long is the runway for growth there? Who are you competing against? Or how are you differentiated? And how are you planning to leverage the strength in liquid biopsy maybe across the portfolio, just given what you've seen in the prostate test?

So we have done 2 acquisitions in this liquid biopsy vertical. And that's basically 7 years ago, it was ExosomeDx, right, which came with this prostate test. And then we've also acquired, 3 years ago Asuragen, which is a company that used to be a CLIA Lab, but then ended up making kitted products out of these tests and then making sure they clear regulatory hurdles and make sure that it becomes a global product that you could sell to laboratories. Both of those, we like very much. The exosomes because we feel it's the best biological component to look at data, exosomes are little bubbles that come out of cells and then travel to other cells, and they bring high-quality DNA, RNA and protein information with them. You can fish them out because they have the same fingerprint as the originating cell. And with that, you can get a real strong signal, which is a strong competitive advantage. And because it happens, these exosomes come out of living cells, you also have a really early-in-disease signal. And we know that early detection as well as being able to be very -- have high sensitivity, high specificity are very important aspects to liquid biopsy. So the exosomes give us a sustainable, significant advantage compared to [indiscernible] DNA, circulating tumor cells. And then being able to kit those products is there Asuragen benefit that we really got. The very first test we came to market with was CLIA based or is CLIA based and is the prostate test you mentioned, we have been growing very rapidly if it comes to the volumes coming with these tests. The last couple of quarters, we're sitting around 25% growth. And that results in probably a coverage of the market in the low single digits. So that means we still have plenty of space to grow into. And that's true for all 4 verticals for us. And yes, that's why we are very confident that we can keep the pace, if it comes to growth, going forward.

Got it. Shifting now to kind of M&A, you guys have been active over the years in M&A, most recently did Lunaphore acquisition. How are you thinking about capital deployment M&A moving forward, gaps in the portfolio, in the areas that you're looking into?

Yes, M&A will continue to be a priority for us for capital deployment. You're right, we did 19 acquisitions over 10 years. Last couple of years, we did more or less 1 per year, and that was -- of course, there was some trickiness with the -- during the pandemic, and then there were also inflated price expectations. From a portfolio point of view, we love our core. 56% of the revenues are in core products, at least these building blocks I talked about, in antibodies and proteins, et cetera. We wouldn't mind strengthening it. There are companies that come up with novel antibodies and different approaches that we would be keen on adding to our portfolio. It's the foundation of our company. Then again, we also have these 4 growth verticals. And we started off in cell and gene therapy, for example. There, I talked about the GRx and how important it is to us enter the market and get a strong foothold pulling through the reagents. But there are other reagents that could go in there or there are some processes before and after the GRx usage that we feel we could add some other companies, too, as well. The nice thing is that a couple of years ago, I would have said, "Listen, we definitely need instrumentation in spatial biology. We definitely need the ability to kit and deal with regulations in liquid biopsy." We don't -- I don't -- I can't say at this moment that, "Oh, we have this need and this huge gap that we have to plug. And we have our back against the wall." It's quite the opposite. We can be very disciplined. We have the gunpowder to do something. We're really good at evaluating technologies in the earlier stage. And with that, be efficient, whether it's public or private, in acquiring companies that fit nicely in our growth verticals and/or in our core.

How are you seeing valuations, kind of bid-ask spread, expectations from sellers? Has that -- I mean, it seems like we've kind of had fits and starts. We've seen multiples compress over the last couple of years, but it's not the same for everyone. So as you look at sort of your pipeline of potential opportunities, how you see valuations and expectations of sellers matching sort of where your focus is?

Yes. Surprisingly, that even under the circumstances, we've reduced funding as well as interest rates going up, et cetera; we were hoping that we would get a phase in which we can deploy our capital rapidly and many things would be for a much better price. But maybe also good for the industry is that some of the assets that were very risky and/or long shots, indeed, got a little cheaper. But those are not really the ones that we were going after, maybe not the best companies, if you would be honest. However, the ones with lots of promise and the ones that are having real good assets and great pipelines are at a very similar level as they were before, still very expensive. And as I said, like if I would be under the gun for having to fill a gap, maybe it would have extraordinary urgency to get something done. Right now, we are still digesting the 2 acquisitions of ExoDx as well as Lunaphore to make sure that they become a tailwind on the bottom line rather than a headwind. And we are in a good position. Now as I said, we are still very eager to strengthen our portfolio. So we're still very keen on getting something done, but for the right price and for the right assets.

Got it. You've talked about and you said earlier about sort of getting to mid-30s EBITDA margin as you exit the year and sort of getting in that 35 to 40 range over the longer term. What are the drivers of that margin expansion outside of a revenue recovery? What are the levers are there to drive that margin expansion this year and then into next year to get to that goal of yours?

Yes. Volume is, of course, the one that cures all wounds, but...

Maybe things that are more in your control.

Yes. No, I get it. Well, currently, as I mentioned, the previous quarter, we were sitting at 33%. 230% headwind from Lunaphore. You take that out, so you already see the normal -- under constrained volume, is the normal EBITDA that we come to expect, it's north of 35%. Fortunately, the one -- the 2 businesses that are holding our EBITDA back a little bit are the ones going very fast. So that's obviously an indication of future health. The -- we also have done -- even though Bio-Techne is already very efficient, we've done some activities over the last couple of quarters to make us even more efficient. So we had some duplication in supply chains at 2 warehouses in Europe, going into Europe. So we created one -- a very efficient one. And we divested some product lines that are below our expectations and therefore, make sure that on our own power, we already make -- we already have the entitlement to hit the 35% to 40% EBITDA margins. Now if you think about our future, we will get a huge boost in the Wilson Wolf acquisition. I have not talked about it a lot yet. We own 20%. It does not sit in our numbers currently other than in some line outside of the P&L. And it runs at 70% operating margins. And the latest we will own this business, which is fast growing, is in 2027, December of 2027. And by then, we will own 100% of it. And if you don't think maybe that margin -- core operating margin comes down a little bit because we're a public company, and there will be some more scrutiny and probably some more ERP costs, et cetera that goes into the entity; but it'd still be 60% or so and immediately accretive. Now at the end of the day, whether we're going to sit more at the 35% or more at a 40% level will also depend on how many acquisitions we do, right? So as I mentioned, we are very good in acquiring technologies just when they go to market or just after they enter the market, and those are typically a negative EBITDA. And how many doses of M&A we take is basically going to [ pace that ]. But at the end of the day, bar those M&A acquisitions, we will -- we typically drift to 40% EBITDA margins.

Great. With that, we're out of time. But Kim, thank you so much for joining. We really appreciate your time.

Thank you so much. Cheers.