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

Hey, everyone. Good afternoon. I'm Tejas Savant, I cover the life sciences here at Morgan Stanley. Before we begin, for important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, do reach out to your Morgan Stanley sales rep. So it's my pleasure this afternoon to host Techne. And on behalf of the company, we have Kim Kelderman, CEO and Jim Hippel, CFO. So thanks so much for joining us, guys.

Maybe just to kick things off, Kim, you're relatively new to the CEO seat, although you're not new to Techne, you took over from I think in February, it was in 2024. So can you talk a little bit about your strategic vision for Techne, your key learnings so far. What has surprised you to the upside? And where do you see the most room to improve?

Well, first of all, thanks for having us at this great conference and a great first question. Yes. So yes, you're right. I've been with Bio-Techne over 6.5 years and built the Diagnostics and Genomics segment by doubling the revenues and head count as well as entering new spaces. The most important one is spatial biology and diagnostics genomics, the liquid biopsy. The first 9 months, I'd say 9 because there was the COO transition, which kind of like already gave me a little bit of a head start in doing the assessment. Surprise is to the upside is actually that the strategy is just very solid. We have this 48-year in the making core business that has all the proteins and hundreds of thousands of antibodies in it with which we go to market and usually outcompete in the market with these core reagents, the biological building blocks. However, we invested over the last decade or so in different -- four different verticals. We call them growth pillars. And those are basically the proteomic analytics, the ProteinSimple franchise. We have the spatial biology, cell and gene therapy and the liquid biopsy verticals. And when I started, of course, I wanted to make sure that the verticals newer to me that were in the Protein Sciences segment, that they are also based on very sound principles where they utilize these high-margin core reagents, but that they go to market with very defensible, very high value proposition offerings. And fortunately I was always thinking like, hey, if 3 out of 4 are really competitive, that will be great. And you asked for a positive surprise. I -- we found and I've concluded that all 4 of these markets are real markets, our offerings are really competitive. And yes, there's huge synergies with these core reagents that we have. So that's the summary of my first 6 months.

Got it. Fair enough. Maybe let's start with the recap of the most recent quarter. What played out differently compared to your initial expectations?

I think the quarter came more or less in line with our expectations and Street expectations, right? $306 million in revenue, 1% growth was very much in the ballpark. We had earnings per share of $0.49, which was also right where we were bagged. And if I go back even a quarter or 2, you've heard on the earnings calls that we talked about headwinds, three namely, which were the -- originally it was the destocking. And we had called that, that would be over at the end of the calendar year, our second quarter fiscal year. And we were right on that and it totally turned like we had thought it would and those headwinds abated. The other headwinds we talked about were China and biopharma, biopharma, biotech end markets. And we had called that they would stabilize and that they would not get worse quarter-over-quarter, and they didn't. So they have been in the bottoming out process and that resulted in our low single-digit growth that we had forecasted. And that was actually pretty much in line with how we saw it. We also knew that Diagnostics and Genomics segment would do relatively well, and they did with 9% growth and then 16% -- 15% or 16% if you would include the inorganic Lunaphore acquisition. And then there was a negative growth on the Protein Sciences segment and low single digits. And that was also in line with what we expect because that segment is very exposed to the biopharma as well as to the China markets.

Got it. Fair enough. So that's actually a good segue into my next couple of questions on end markets and geographies. So starting with biopharma. It sounds like towards the end of the year, you saw some signs of improvement. Can you just elaborate on the trends that give you confidence that the end market is definitively stabilizing here? And then maybe to set the stage, 50% of your revenue is biopharma. So if you can just break it out between large cap pharma versus biotech? And then within biotech, of course, you've got the emerging companies versus the more mature ones, that would be helpful.

Yes. So I'll start with the -- well, maybe I'll do the breakout first. So 50% of our revenues come from pharma, biopharma, and that is 30%, 20% of our total breakout. So that will give you the quantity of -- or the impact that these markets have on our revenues. Your very first question was what gives you confidence, right? So we've seen the bottoming out process. We've seen stable end markets. And the confidence really comes from internal markers as well as from the external data that we've seen a very first quarter in the calendar year saw a real good funding going into the biopharma markets. Yes, it stepped down a little bit quarter-over-quarter, but still if you look at year-to-date funding levels compared to 2019, you're still 20% plus up. And then yes, they're 40% up over 2023, but that was a very suppressed year, so we like to look back at 2019 pre-pandemic. And those are very healthy funding levels. In the meantime, we've seen that our instrument utilization, obviously, there was some pressure on instrumentation, CapEx spend, but the utilization of our instruments has been really, really good. We have had double-digit growth on the consumables that go on to those instruments for 7 quarters in a row. And that means that our end markets are using our instruments a lot and more and more. And that gives us confidence that once the funding comes in, whether it's China or biopharma there is a demand -- or there is usage of our installed base. That means capacity is being used and that means that additional capacity will be necessary, and that's what we're seeing as an internal driver for our optimism long term.

Got it. And you haven't sort of noticed any recent shift in spending trends from either large pharma or biotech? Is that a fair assessment? I mean where I'm coming from is one of the large preclinical CROs out there recently called out a pretty deep sort of like softening, if you will, in June and July. And then of course, I mean, it's early discovery work that was impacted for them. But then more recently, another smaller CRO talked about a pickup in cancellations in the biotech side as well. So just curious as to whether that's percolating up through your channel conversations.

Yes. I think that we are actually more in the forefront, right? So we have large part of our portfolio directly goes into biopharma and pharma end markets on the discovery side. Most of the time or all the time, I should say, we book and ship within days. So we saw that weakness earlier in the time frame, so in the quarters before. And so we believe that when we say stabilizing and scrapping the bottom that is already in there.

Fair enough. Switching to academic and government, relatively stable sort of low single-digit market with expectations for that to continue going forward. But then on the other hand, we do hear concerns around the horizon budget cuts over in Europe as they pivot more towards defense spending. And then NIH growth is expected to be sort of flattish for fiscal '25, especially once you adjust for inflation. Can you speak to the dynamics that make you sort of a little bit more optimistic in that end market?

Yes, thanks for the question. There's various dynamics there that I'm a little bit more optimistic about. But by far, the most important one is that economic funding is still reasonably high. And secondly, it has been very tailored towards the infectious diseases, right, with the pandemic -- right in the pandemic and during the pandemic, after the pandemic, there was a lot of research funding, therefore, flowing into understanding the virus, understanding vaccines, operating mechanism. So -- and we have over the last half decade conscientiously avoided the end markets of infectious diseases. I think they are a great opportunity, great companies. There was no reason for us to pile on to that end market. So we avoided it. And that meant during the pandemic, we were not one of the super high flyers. But it also means that after the dynamic, when funds and allocation of funds normalized back to neurology and oncology, that really is a tailwind for us because that's where our product lines are positioned and that's where we believe that the allocation of funds will move towards.

Fair enough. Let's switch to China. Obviously, a huge area of focus for you guys, but also just generally for everybody at the conference. You expect to see some benefit from stimulus there although probably not until 2025, what's the latest you are hearing just around clarity around the regional disbursable time lines and priority areas of focus?

Yes. So I could take a step back and just say that, yes, China has seen quite some headwinds from funding available for general researchers because a lot of it went to fighting the pandemic and managing the pandemic. Doesn't take away that China is very keen on providing fantastic health care to their population and that they will continue to invest in furthering that and life sciences will be important. So that's why we are positioned, I believe, very well. There is a big effort in the cell and gene therapy, which we have a vertical market for. We -- our instrumentation is very much aligned with automating clunky manual processes. Even in China, resources became more important. There's been obviously an inflation on salary cost around the world. So head count pressures and efficiencies are important, and our instrument portfolio is nicely aligned with that. We do believe that the 4-year funding plan will be a stimulant to the end markets. And we know that 21 of the -- 21 states out of the 34 have submitted their request for funding. And what we hear is that at the beginning of 2025, those funds will be disbursed and we are a strong believer like we saw the last time a program like this was implemented, that we will be a beneficiary of these funds.

And just to put a finer point on that, are you confident that we start seeing order pickup sort of essentially in Jan next year or is little bit later in the year just given what you said about the number of provinces that have submitted documentation for the disbursal of the funds. And what parts of your portfolio could see the most meaningful benefit once the dollars start -- or I guess, the Yuan start to flow?

Yes. So I do think that, obviously, the instrumentation part of the portfolio, that's what the funds are earmarked for, right, for a refresh of instrumentation, modernization of the instrumentation. The nice thing is that, like I mentioned before, globally, but also in China, it has been true that our consumables related to these instruments have been growing double digits for 7 quarters in a row. That means capacity has been used up further of our installed base. And that means that if you want to progress your projects and/or start more projects that you will want to add capacity to your testing fleet. And as I mentioned, the efficiencies it brings are also of importance, right? To get reproducible results at a very cost-efficient price, is a good selling proposition. And so I think the funding for instrumentation will immediately impact instrumentation fleet but then again, I also have the internal indicator that the utilization of our installed base has been growing double digits.

Got it. Fair enough. Are there pockets of excess capacity in China at all, Kim, in your opinion? And from a portfolio positioning standpoint, do you need to do anything differently to sort of fully benefit from the stimulus?

I do not believe that we have -- as I mentioned earlier, there was no huge -- we didn't have a huge position in the infectious diseases. So we did not have a huge bolus of sales in any particular either consumable or instruments. So I don't think we have excess capacity that we have to work through. In fact, it's the opposite. I do believe, and I'm repeating myself a little bit, the efficiencies our instrumentation bring, the repeatability, but also the growth of these consumables indicate that we would benefit from the instruments. We don't have a huge capacity that we have to work through. And I don't think that there are other portfolio shifts that we need to do in order to benefit more from the funding.

Got it. Let's switch to the business segments. We'll start with the protein sciences side, specifically on the antibodies front. There's been a bit of consolidation in that space recently, Danaher and Abcam, PeproTech and Thermo, has this impacted your market position? Are you noticing any sort of different market approaches from these companies, particularly in terms of discounting or bundling of solutions or things like that?

So -- yes, it's like we are keenly aware of these acquisitions, and we are also admirers of the Danaher organization as well as the ThermoFisher Scientific company that has done these really good acquisitions. Historically, we have competed with these product lines or these companies pre-acquisition very successfully. And we're also holding our own while they are being part of these larger companies. I think we have a charm of being a midsized company in which we can benefit from not only a real solid scientific base internally. We also have a very consultative selling team where if you're a customer that wants to solve the problem and you want to detect a particular protein, what antibody should I use or if you want to grow your cells, which protein should you use? So our team can really help you kickstart your projects and shorten the time lines to success. Then again, once you know which -- what antibody or which protein you want to use, you want to have an ease of ordering and you want to be reminded of our reagents frequently. So many feet in the street and the ease of order is important, and that's obviously what the larger companies have. But that's also the obvious reason for us to sign the collaboration with ThermoFisher for the Fisher Channel access. And we have had a relationship for 10 years. We're successfully in the U.S. And then earlier this fiscal year, we've signed a -- sorry, earlier this calendar year, we signed an agreement to do a very similar -- to have a very similar setup for Europe with the Fisher channel. So that way, we have basically a little bit of both, right? Very, very high tech sales force, consultative and we have the reach. So we believe that having both of these position us really, really well to compete long term.

Fair enough. I want to talk a little bit about cell and gene therapy. You flagged it as an important growth vertical for you guys. But the market has grown a little bit slower than anticipated due to scrutiny around safety profiles and perhaps even limited approvals to date. And now there's this concern around pharma reprioritization towards larger indications due to the IRA, right? So how do you think about sort of the growth prospects here, Walk us through how the business performed in '24 for you guys? And what is your expectation for cell and gene therapy in '25?

Yes. I think cell and gene therapy as such as an end market, in spite of IRA and other fluctuations in the end markets, the promise of cell and gene therapy of curing diseases that would otherwise have never thought of we would even have a significant influence on or positive impact on is just amazing. So I do believe that cell and gene therapy is here to stay. Now just like the small molecules 30, 40 years ago, are there going to be clinical studies that fail? And are there going to be hiccups in regulations and in approvals? Absolutely, right? It's a nascent market. It's a new opportunity. So there will be the waves that come with that. However, our positioning in cell and gene therapy is fantastic. We have a great portfolio of reagents. And as you know, we have a fantastic portfolio in our RUO reagents, but we have ported the most important and most relevant ones over into our GMP facilities. And we have that for antibodies, GMP antibodies, you have GMP proteins, both leading portfolio and then we have GMP small molecules. So with that, portfolio, we can go to market, especially in gen medicine directly, and that's what our cell and gene therapy in-house team is doing a lot and has been growing -- it's been growing mid-single digits for the year, and that's in a very constrained environment. So we're usually having much higher expectations for that business under normal market conditions. And then you know about our play in the Wilson Wolf in this G-Rex product line, which is obviously a bioreactor, a small disposable bioreactor, which allows oxygen to get to the cells really quickly, which is a patented method to grow your T cells much faster and more efficient. And to do so, you would need GMP proteins and you would need ingredients that come out of our core, high-margin core portfolio. So also there, we see this tremendous symbiosis, Wilson Wolf, G-Rex in 45% of all clinical trials. It's very scalable, very nifty solution to growing your cells. And then it's the last 4 approvals of cell and gene therapies or in this case, cell therapies have been done while using the G-Rex solution. So we have very high expectations of the product line, and we know that the same principle there holds true as well because this time, not an instrument, but disposable that still pulls through our core reagent.

Got it. Switching to Proteomic instrumentation. I think it was at your Investor Day last year that you talked about strong double-digit momentum in the installed base. I think it was in that 2019 to '23 period, right? Now obviously, right now with the macro factors at play, it's going to be short of that. But do you think you can get back to that sort of double-digit growth in the installed base? And then just double-clicking one level deeper, I think you've got the Leo system coming up in July. You've got, I think, Ella, which did really well for you double-digit growth this quarter as well. So just contextualize the new launches and the upcoming launch, I guess, for Leo and just the broader portfolio growth.

Yes. So I'm really glad to see that we have some major launches that come into this, the protein sciences or the protein analytics. Earlier this year, we announced MauriceFlex, right, which is updated version of the Maurice. But it allows for fractionation capabilities. And so the CE will fractionate your sample, but it allows you to immediately put it on to mass spec, right? And that's, again, in line with simple and automated. That's a huge benefit and will continue to drive the adoption of the Maurice in biologics and MauriceFlex, in this case. In line with our customer feedback, we had obviously fantastic results in western blot, automated western blotting and that's why we announced the Leo. Leo gives you fantastic flexibility. You can run anywhere between 25 to 100 samples with up to 8 markers per sample in a very fast throughput and in a very automated, consistent, repeatable way, in line with the demand of biopharma and specifically large pharma. And we announced this instrument so that larger pharma can budget for it properly. And we will launch at the beginning of the calendar year. And I think that will continue to drive novel capabilities in the portfolio. And in the meantime, we have also made sure that there are continuous release of new applications in new fields and different fields for all 4 of our instrument lines. So overall, we've seen -- we are a strong believer that automation as well as proteomics are mega trends. Our product lines within ProteinSimple are aligned with those. And we believe that we can get back to our historical growth and as already mentioned, the consumables on these instruments already have been growing double digit, right? So there's no reason why those wouldn't align.

Perfect. That was actually my next question. I think 7 quarters of double-digit growth on the consumable side. Switching to Diagnostics and Genomics, Kim, home-base for you. So let's start with Lunaphore. Many of your spatial peers are seeing instrument weakness and you're actually seeing pretty robust uptake. What are the key factors that could explain this divergence, if you will? And just walk us through the differentiation for COMET versus other spatial platforms in the market? Who do you run into most often and head-to-head?

Yes. So first of all, thanks for mentioning Lunaphore acquisition. We closed it little bit over a year ago. The integration has gone really, really well, fantastic team and fantastic instruments, right? So I think, of course, higher funding levels will always boost adoption of a new platform. But there's no doubt that spatial and spatial biology in general, is a very up and coming, very important aspect to see what is happening where in pathology is very important. A couple of reasons why I think we are doing really well. One is we are earlier in the adoption cycle. So obviously, very different base that we're starting from, right? So we just launched this instrument 2, 3 quarters ago. But the real reason is, in my mind that it's incredibly competitive, right? It's one of the few systems that can run 4 samples at the same time, fully automated from staining all the way to imaging. You can run it overnight. So if you run it overnight and you do 4 samples, you can do 20 a week or so, which is far outpacing any competitive solution. And then another unique in the world aspect is that it can truly do on the same slide, multiomics, right? And we believe that many of our customers always ask like, is there a way that we can see the translation of -- there's an RNA, this RNA indeed expressed into a protein or the other way around. We have MicroRNA, did it block the creation of certain proteins or overproduction of certain proteins. So the regulation there and seeing the biological pathway is just -- is very unique. And we just launched a solution where you can see 12 RNA targets with RNA scope, and we have 50,000 different probes, and we can make any custom probes if you want. And we also have this as a 24 biological targets for protein. And that's true multiomics. And with all the other benefits I just mentioned, I'm not surprised that there is a very healthy demand for the COMET right now.

Got it. So 2 follow-ups there. I mean it's a tough time from a macro perspective to be launching a new instrument. So what's the pricing environment like? Are you having to sort of essentially prioritize feeding the installed base at this stage of your journey, given that you're relatively early in the installed base sort of phase. And second, any color you can share on just the feedback you've got on that multiomic launch so far. Has adding this feature opened up conversations with new customers already?

Yes. I think the pricing environment is actually really robust for us right now. And that's because we can be relatively selective. We are -- we have talked publicly about our demand outstripping our capacity. Now we're working hard on reversing that and making sure that our capacity is at a level where we can keep up and/or even be able to overdeliver compared to demand. And that is happening, right, this quarter, where those lines should cross. But on the other hand, there is a tremendous value in the COMET itself. So we didn't see the -- we do not see the need to reduce pricing right now. Historically, pre-commercial, we had several early feedback customers with an earlier revision of the instrument. There, we have to make sure that we entice customers to use it, share the data and they got a much better deal on the COMET once it became commercial. But for just normal sales, not the early adopters, key opinion leaders, but the normal sales have all been within the ranges that we expect -- actually a little higher than we had expected that we could hold.

Got it. Other supply constraints now largely behind you? And over what sort of period do you expect to work down the instrument backlog?

Yes. As I mentioned, the lines are of capacity and demand are in the process of crossing each other during this quarter. And I would expect another quarter or so to work down the backlog, and we should be -- of course, it depends on how the markets are going to develop. But we should be according to our projections into normal zone between those 2 in the back half of our fiscal year.

Got it. Would the entry of a large sequencing vendor like Illumina into the spatial biology niche impact how you think about positioning for COMET. Or is that really a problem for the DNA barcoding based approaches out there?

I think the latter, I'm really happy to see that. First of all, that people are agreeing that understanding what genetically happens, where is indeed an equation to be solved. If you think about tissue and in situ, what happens where in a tissue in pathology, that is something that eventually people will come to. And there is a translational space -- sorry, there's the discovery phase where you would like to see which markers and what happens in biology, but then if you want to see what happens where with repeatable high specificity, automated solutions, we're always welcoming the customers in that phase. And then we have the best solution with 400,000 antibodies, 50,000 RNA targets and a fantastic instrument, as I mentioned already. But then again, we've also proven with our customers that we can get closer to clinical studies and actually into the clinic with our HPV probes for human papilloma virus and have an IVDR -- IVDD approval -- correct, IVDR approval on our HPV probes in Europe. And it just shows the technology can have the consistency and reproducibility and is designed under 1345. so that it can make its way into the clinic, which is super important, of course, for pathology and the pathologist as such.

Got it. Switching to molecular diagnostics, Asuragen has been a really nice growth driver for you. You've got some exciting launches in the offer as well. I think you've got an ESR1 mutation kit and then expanded carrier screening. Can you just talk about the opportunity you see for these products?

Of course, well, our original acquisition of ExosomeDx was based upon the platform where we believe exosomes, the little bubbles that come out of cells early -- even early in the disease state, you see abundance of these exosomes. They have very high quality information. So interrogating those will give you we believe, superior results over cell-free DNA or circulating tumor cells. So that is the modality we've been using. In the meantime, we do believe that a kitted solution that we distribute to labs, laboratories, is more scalable. And that's why we basically had the Asuragen acquisition, right? They brought a laboratory channel and that team has the capability of creating really repeatable results in kitted solutions. So now the ESR1 that you just mentioned, will come out in the coming quarter. It will have the combination of being exosome-based and it is a kitted solution so that we can distribute it through a laboratory channel. So it's basically the first child from both parents of the ExosomeDx as well as the Asuragen pipeline. So we are really happy to see that, that is the first assay to come out. That doesn't take away -- and we are very excited about future assays, but it doesn't take away that both these entities at what they originally did. So the genetic testing from Asuragen as well as the EPI test both have been growing very nicely as well. So we're quite pleased with both independently, and we're now very excited about the first combination products.

Got it. You've guided to sort of low to mid-single-digit growth in the first half of '25 and high single digit in the back half. Now knowing that your fiscal year is off by 6 months versus everybody else. A lot of your peers are speaking of sort of mid-single-digit growth next year, right? And so the question we often get is, at least for calendar '25, do you think Techne can grow at sort of somewhere in that low teens range, given how we've historically performed.

Well, thanks for acknowledging that we're the first company to stick -- officially stick our neck out for 2025. And yes, I've heard some of the sound bites from some of the companies talking about recovery in 2025, and I'm not here to dispute that or concur with that. I think wait till you have to actually officially come out with guidance, and we'll see what they have to say. And I hope it's -- I hope they are bet on a recovery. There's a lot of bigger companies have a lot greater visibility than we do. But having said that, we had to put a plan together. And the good news is we're putting a plan together based on our recovery and not trying to catch a falling knife of when the deceleration of growth is going to stop. And that was very encouraging after 2 years of trying to do that and frankly speaking not just us, but I think the entire industry. And 2024 was a year of consistency and stabilization. We grew 1% for the year. We grew 1% from Q4, and there wasn't a whole lot of variation throughout the year. So that's good news. Now the question is when does it recover and how does it recover? And we had to look at our key end markets, biotech, China and big pharma because those are the 3 that have been pressured. And our view was, right now, as of our last earnings call in August, there wasn't any material change in our run rate. So we've been at single -- low single-digit growth, we figured we'll continue with low single-digit growth out of the gates. But what could get us to the low end of mid-single-digit growth would be a biotech recovery. We've seen the biotech funding. We haven't seen the spending yet, but that should be coming. And we expect by December quarter, we should start to see some of that. Follow on the following quarter, Kim already talked a little about China and our expectations there. And we do believe that in the early part of our Q3, we'll start to see the China stimulus hit. That should get us into the upper range of the mid-single digits, let's say. And the last, but most ambiguous is big pharma. There's no external data I can point to say, this is why we think they'll recover except to say that it's been a very tough year for Big Pharma in terms of rebaselining their year and the uncertainty that was there on IRA and around the macroeconomic times back in November and October when they were doing their budgets for this year. I think there's a lot more clarity now. I think a lot more reason for them to feel optimistic, but we've got to wait for the next budget cycle for that to kick in. And our view is that by the time their boards approve it and it gets to simulate down deep in the organization, we'll start to see that recovery in our numbers in the June quarter. And that gets us to the high single digits. The only reason why I'm not saying double digits yet is because that would imply a full market recovery by June of 2025, and I'm not sticking my neck out that far. But I do believe, but hopeful that by the end of the calendar year, we'll be back to a full recovery and at that point in time, we'll be at a double-digit growth.

Perfect. So that's a great place to leave it at. Thank you both for doing this.

Thanks for having us.