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

All right. We'll go ahead and get started. Everybody, good morning. Welcome to the Wells Fargo Healthcare Conference. I'm Brandon Couillard. I cover tools and diagnostics and here at the firm. Thrilled to have Bio-Techne with us at the conference again this year. And joining us to my left, CEO; Kim Kelderman, and CFO, Jim Hippel. Thank you both for being here.

Great to be here. Thank you.

Kim, you've been CEO for a little over 6 months now. You led DGS before. Just curious if you start off, what has surprised you when you look at the company from a higher-level perspective. Are there any synergies maybe you didn't notice before or holes in the portfolio that you maybe weren't aware of before?

Thanks, Ben, and thanks for the invite here in this great conference. We are always happy to join and also got to work with your banking team over the last year, and it's a little bit light. So thanks for the invite. Thanks for the question. Yes, it's been 7, 8 months, it feels like a couple of years, but it's certainly interesting. The nice thing though is that we've been with the company a little over 6.5 years in total, so managing diagnostics and genomics. And that segment has 2 growth verticals out of the 4 growth verticals in it. So building the special biology business as well as the liquid biopsy business, those were obviously very familiar to me. Becoming CEO, and it's obviously a great honor because it's a true unicorn in the field, right? Our midsized company with fantastic agility and in innovation as well as in M&A and a great honor for me. What I did in the first couple of months, of course, is looking at the other 2 growth verticals I was not as familiar with. And you asked about what is a surprise. To my surprise, those growth verticals are also positioned in very viable, very fast-growing, substantial markets. And they are also having a true competitive advantage. And I say also, think about spatial biology where we now have great solution for RNA. We have antibodies for proteins. And we have a very competitive instrument that can pull through those reagents, very similar situation in cell and gene therapy, which obviously has a different setup with a consumable, the G-Rex, which pulls through our core agents but a very competitive positioning that can pull through the agents. And the same is also true for the protein analysis, right? Everybody knows that we had this era where we wanted to read RNA and then we wanted to read, sorry, DNA and only some of that expresses. So we started reading RNA and then we started eventually exploring proteins, and it's a big move in the market and our proteomic analysis instrumentation is very nicely aligned with understanding proteins better and also pull through those reagents. Now that leaves us with the fifth business, which is basically our core business, the former R&D systems, which is 48 years in the making with 6,000 proteins and 400,000 antibodies in this portfolio. And there, it's also great to see that we have fantastic know-how internally great R&D teams, real good customer understanding and a selling team that is very familiar with the customers and can help them up to speed really quickly, getting the right ingredients and the right set up for their experience and their projects. So the surprise really was that I had hoped or expected that 3 out of 4 would be very valuable, but it's actually 4 out of 4, and it is a positive surprise. So I'm quite happy with that setup.

Coming off your fiscal 4Q quarter, what would be kind of top 1 or 2 things you want to leave people with? And just remind us where you sort of see the forward year in terms of the guide.

Talking about fourth quarter, fortunately, that quarter came in line with our expectation. And I think the Street's expectations. So we, Jim and I always have to figure out on what other markets going to do, how is our positioning? Will we continue to outperform our peers and the market by at least 500 basis points. And the good news is we have continuously done so over the last fiscal year. And our Q4 came in line because we had kind of forecasted that there would be one more tough comparable in China for Q4, and that's why we would continue to be low single digits, and that became true. We came in at $306 million, which was 1% organic growth. Very strong performance in Diagnostics and Genomics with 9% growth, reported 15%. And that's mainly the difference there is mainly the addition of Lunaphore revenues. And then the Protein Sciences segment was declining low single digits, negative 3 and that was because this business is particularly hard hit by the slump in the China business which influences the protein and analytic instrumentation, as well as the lackluster funding levels in pharma, biopharma which by now, actually, we've talked about a forecast, we'll get through it probably. But we feel the funding in pharma, specifically biopharma is improving. So we think that we are coming out of those levels over time. But our Q4 was like we thought it was going to be.

Maybe just touching on China. I think it was down high single digits in the quarter. What are you expecting for the next 12 months, is that putting stimulus aside? And then in terms of stimulus, can you talk about your exposure to that. I think you pointed to a benefit in the second half of fiscal year. Are you starting to see orders yet from those accounts?

Yes. Thanks for the question on China. The overall, our 8% of our revenues are linked to the business in China. Overall, we are very confident about the market about that market specifically because there's 1.4 billion people that deserve good health care. And China has really made a big push in trying to be independent of Western treatments and vaccines and/or medication. And -- in order to do so, certain investment is needed. And I think the government is committed whether it is through stimulus or whether it is through overall funding and creating opportunities for research and for pharma, biopharma to make progress in that country's priority. And we are essential in providing the tools to make that progress. And therefore, we believe it's going to be a strong fast-growing market for us going forward.

If I could, I'll just add a little bit to that with regards to the stimulus. And I mean, I think in some respects, we view the stimulus is less of a traditional typical stimulus you see in China, where it's a short jolt one quarter thing. They already announced the government did. It's a multiyear program. We see it more as a return to funding in general, where, frankly, this past year, the government choke up funding dramatically overall. And it's really more of a signal of them having the money in the future to rejuvenate funding again in technology and specifically life sciences, and they're standing on tools, at least out of the gate. We don't think this is like a return to the old growth rates of China right away, but I think we think it's the start of a gradual recovery in China.

Maybe shifting gears. On your last call, you talked about continued softness in pharma similar to other peers. It sounds like you expect that to continue into calendar '24. If we look at your business mix, if you break down this way sort of between like preclinical, let's say, Phase I, Phase II and then later stage exposure. How would you -- you say the spreads across that pipeline, if you will, if you look at it that way? And remind us what the biotech versus kind of large pharma, small molecule business.

Yes. I think that just high level, the 50% of our revenues are related to pharma, biopharma, 30% of that is large pharma, and 20% of that is small biopharma. You mentioned that there was some constrained funding from pharma side. And yes, we saw that pretty much in our Q3, Q4, which is basically the beginning of the calendar year. Most pharma does budget in calendar cycles. And when they were creating their budgets at the end of last calendar year. Obviously, interest rates were super high. There is some uncertainty in the end markets. The IRA was looming or is looming, was looming, and they have to think about what kind of approach do you take show your product lines projects and which ones do you invest behind and which ones you hold or stop. And we feel that this is kind of a reshuffling the deck year and where people are careful. And we do feel though that some of the risk is out of the market. There's more clarity. And majority of the pharma companies are actually doing really well. And we think that will translate in robust R&D budgets, and that will then translate into life science tools companies being able to continue to help their programs and see increased activity levels. And that's what we're aiming at and thinking those scenario would be as of the new budgeting year, which would be the budgets usually roll out in the first quarter of a new calendar year. And that's why we're trying to be on the base case side, the safe side, we are assuming we see some of that trickling through in the second calendar quarter, but our fourth quarter. If it comes to the mix on what stage of funding, that was the second half of your question. I think generally, if there is a time of uncertainty, you would reduce your early-stage discovery funding because it's not having any immediate impact on your pipeline and your revenue short term. But then again, all those companies know that you can't mortgage the too long. So we do believe if R&D budgets normalizing that the activity level there will pick up again as well. Fortunately, our product pipeline is -- various of our products are also focused on various stages of projects. So it's never fun if the original research gets squeezed a little bit, but overall, we feel that we are nicely positioned across the life cycle of a project.

And I would just add to that too that I think our growth verticals in particular are nicely positioned across all phases of research, not just early discovery. So even if there is a shift in pharma, focusing at least in the short term on the more clinical stage or even later age cynical that still bodes well for our key growth pillars in our instrumentation, our spatial franchise and our cell and gene therapy franchise.

Life science reagents, there's been weakness here across the industry. seems to be tied to pharma reallocating dollars at least toward more clinical programs, perhaps away from discovery and kind of Phase 1. There's also been some competitive changes out there, obviously with Abcam and Danaher. Can you just talk about how this business is positioned why you think there's been such weakness and maybe when you expect growth to rebound?

This is specific form for a large pharma or...

Yes, like reagents and antibody, in particular.

Yes. So the agents are more sensitive to the early-stage discovery. However, we've obviously invested organically in all the GMP capabilities. And the GMP capabilities are more downstream, right? So the moment you do your discovery and you know which antibody or which protein you're going with your therapy, then you want to get to the GMP-grade materials. And as you're aware, we've made a big investment over the last couple of years in the GMP protein facility and saw such a success that we have added a specific facility for small molecules, which is also a very, very fast-growing part of our business. And now this last couple of months, we've launched our first GMP antibodies. And if you think about those GMP ones, they're obviously the materials you use in the clinical stages. And therefore, they -- those are more robust throughout the usage of them are more robust and scaling throughout the clinical studies and into commercial.

I'd just say, too, with regards to the consumables in general, considering that we have a very large consumables portfolio, a smaller instrument portfolio, we see time to momentum change happen at first within our consumables. So for example, in large pharma, we saw drop-offs in our run rates right away in January and February right after their budgets got enacted. We're hearing more about other CROs and other peer companies talking about pharma pressure right now. Whereas for us, from has been stable pretty much since January, February. So we saw the drop-off in consumables, and we saw it level off. And likewise, when funding returns, whether it's pharma or small biotech or China, you typically see it in the reagents first. And an example of that would be why we have some confidence in China recovering around the road to recovery is the last couple of quarters in a row, we actually have seen double-digit growth within our core reagents in China despite overall negative growth driven by the instruments. So at least think whether we're in the biotech funding turns into spend, next year, pharma budgets start to normalize, we think we'll see it in our reagents first.

Got you. Maybe switching gears over to Simple Western. It's historically been a 15% to 20% grower. Do you think the business returned to that level? And where are you in terms of penetrating the academic portion of that market?

Yes, absolutely. I think on average, the overall addressable market, we are sub-20% penetrated. So there's still lots of fat space. The competitor really is the manual version of Simple Western. And that is -- that's not very efficient, not very precise, not fun, not fast. Anyway, so there's a huge opportunity for our Simple Western instrument to make a difference there. Some companies actually try to avoid doing with Simple Western because of the clunkiness of the process and are now coming back to it because there's finally an automated solution. That's why I think that the entitlement is to be double digits there. We've seen that. We've seen that our consumables related to the Simple Western are growing double digits. So all indications are that there's rebound in or normalizing, I should say, of funding that we will be right back where historical growth rates have been. Now if you then look at, is it a steel product line as such, and that's -- the answer is no because we have continued to innovate in 2 directions. One is in the applications you can use it for. So we continue to work on application applications that our customers can utilize. And then in the meantime, we've also announced the LEO, which is a next-generation, very flexible, high throughput machine. But not everybody wants 100 samples at the same time. So it is flexible in that you can run 25 to 100 over 3 hours with 8 markers per channel, very powerful innovation that should actually add to the attractiveness of that product line.

Yes. That's going to be my next question is you announced the upcoming launch of the LEO platform. What's left that you had a new instrument introduction there. And what does that add to the business or the market opportunity at the high end?

Yes. So within Protein Simple franchise, we had Mores Flex earlier this calendar year. it's a launch where obviously, the insulin itself got much better at performing the things you could already expect from the Maris, but we added the fractionation capability. And that basically means that a portion of the sample of interest you can now directly inject on a mass spec rather than having to do all kinds of transitions and transfers. So it really opens up a much larger opportunity and that was the MauriceFlex, which was half a year ago. So the LEO is coming in about at the beginning of the calendar year. There, I think it's the same market where as I mentioned, many people want to get out of the manual western block and that this instrument provides that opportunity, but also people that moved away from it and that other technologies can now come back and utilize LEO and for the automated Western blot bars. There, I'm not sure if it's a market increase or a different addressable market. It's the same addressable market, but it just makes it bigger and it makes it more viable for high-volume users to now come back to [indiscernible] So it does increase the international market, but it's not a new part of the market.

If we look at Simple Plex. Can you talk about the utilization across the installed base and the longer-term part of the way, I think you get to $1 billion of revenue for Diagnostics the usage and uptake of that of Simple Plex in diagnostics. What do you think we start to see that coming through?

Yes. The nice thing there is that we have a corporate theme that I mentioned that we want to be able that our technologies can grow with the customer from discovery through translational into clinical applications. So that's why we have the GMP reagents and so on and so forth. But this also is true for instrumentation. So we picked the Ella instrumentation to get 13485 approval and therewith can be an instrument that is used closer to the patient and point-of-care situations. It's a very fast turnaround time, 90 minutes, very sensitive. So you can basically utilize it in diagnostic opportunities. The very first one that we publicly announced was Novomol-Dx. They will utilize the Ella for ocular inflammation and to determine who should go to surgery and what type of surgery. And that's the first publicly announced collaboration, but we're certainly having a hopper with other diagnostics opportunities. And we see opportunities in neural and traumatic brain injury and other indications would be important if somebody walks into the ER to quickly determine what's going on with the patient. So obviously, Diagnostics is a patient space. So we'd have to collaborate and get the approvals and get the uptake of these different assays. But we think -- we know that the first revenue is the first true ella applications will roll out in the coming year. And then we will bolt on the other opportunities with different diagnostic companies as we go.

Maybe switching gears over to spatial and Lunaphore. Can you talk about what markets moving forward plays in, how those are growing, who the competitors are and kind of what separates wire from others in the market?

Yes. So we are -- as I mentioned, we're really happy with the Lunaphore for has made. Obviously, the integration was fantastic. The team is very high caliber. We have, the instrument is very robust and the capability instruments are unprecedented in the market. So first of all, we really believe in the spatial biology market as such because knowing what happens where precisely repeatably is, for us, a given, especially with the up-and-coming cell and gene therapy and the wave in new technologies around Nevo sciences. So we believe that this is going to be important. The instrument one and the only in the market that can run both on the same slide, the proteomic as well as the RNA. So multiomics really indications. So it can visualize on the same slide, everything you want to know about RNAs and everything you want to know about what then therefore happens with the different proteins, 12 RNAs and 24 protein targets at the same time on 1 slide. Fully automated, runs overnight, and you don't have to move your slide from a stainer to a microscope and then into some different software for visualization. It's basically set and forget it runs overnight, and you can do 4 samples in parallel. So that gives you a 20 sample capacity, which is also unique in the market. And you can utilize our 50,000 RNA probes or any custom probe that you would like, and you can utilize your own antibodies that you like or you can pick from our 400,000 antibody catalog and pull through these high-margin, high-quality antibodies. So for us, it's truly it's a very viable, very important market to enable research and progress towards diagnostics is the best instrument and it has access and pulls through the best reagents, right? RNAscope reagents right now are $120 million run rate. And there with, you can do your comparison there with the largest spatial biology reagents franchise. And now we've just fortified it with antibodies as well as an instrument. So I'm very excited about this end market.

You talked about not being able to meet demand for winter what needs to be done to rectify that? And how big is the backlog? And how long will it take you to draw it down?

Yes. Fortunately, it was not the situation that -- like so we have a certain model and certain uptake expectations, and it was not that we didn't meet manufacturing capacity towards a model we did. But what was above expectations was the original uptake in orders. So we had to accelerate our ramp for manufacturing. And that so far, we've worked really hard on that for the last 2 quarters. the current quarter we're in, we feel that we will be at the breakeven point, and then we will work down the backlog in the coming quarters. So it should not be a topic anymore going forward. And yes, I think it's really an indication of how well the instrument is liked in the field, and we see some customers ordering a second box and few customers even ordering a third one. And the first one you just have to sell and you have to convince the customer. But the second one is basically sold because of the first one, right? The first one has the performance of it and how it works is basically the true story, and we're really happy to see that there is repeat orders because it indicates that the instrument is doing well in use.

How is Wilson Wolf performed in the current environment? How are they positioned for 25? And any chance you complete that acquisition before the end of '27?

So Wilson Wolf, obviously, is a company that has the G-Rex, just as a quick reminder, the G-Rex is a bioreactor, a small bioreactor that has a nifty solution in getting oxygen to the cells you would be growing in there. Wilson Wolf is important to us because this oxygen makes the cells grow fast, but they also need food, which are proteins, proteins and many all kinds of cell signaling, and that's why we have our GMP small molecules. So it's a whole system that we're trying to boost there. The end markets biotech were really suppressed over the last year, and Wilson Wolf has had therefore, flattish growth, which we're actually pretty happy with because that we still indicating that it's outperforming the market. Four of the last 7 approvals in cell and gene therapy have been with using the G-Rex as the vehicle to grow yourselves. And then those 4 customers that are about to go commercial or are starting to go commercial, have submitted their forecast. And even though this year was not as planned, with the forecast Wilson Wolf itself, things that they could still hit their milestones. To your question, like when is it going to be yours December 31, 2027. We would acquire the asset for 4.4x, 12 months trailing, basically, the revenue in 2027. However, there are top line and bottom line milestones that can be achieved that would pull that deal in. And we thought that, that would not be the case anymore with a lull in the markets. But seeing the forecast from those customers that are going commercial, it might well happen.

Jim, if we look at the guide for '25, you're looking for, I think, low to mid-single-digit growth in the first half, high single digits in the back half. What's informing that view of that acceleration and what parts of the portfolio do you expect to be above that level, which ones might be lower?

Let me get more specific around that guide. So it's really about the pace of recovery. We're the first ones sticking our next out truly in 2025. So we had to really sit back and reflect on what does the recovery look like and how does that play out at least conceptually. The good news is that we're actually talking about recovery and not trying to catch a falling knife. Like we feel like we've all been doing this industry for the past 2 years. And we had a good fiscal year '24 was a very stable year for us albeit growth that we don't like to see. We did still grow at 1% for the year. We're 1% for Q4 and not a whole lot of variation throughout the year. So it does suggest a bottoming. As we think about recovery, we talked about at least right we're here and now when we did our last earnings call, first month into the quarter, hadn't seen any real inflection points as of yet. We call basically low single-digit growth to start the year. But from there, biotech's funding has been strong the first 6, 7 months of the year, significantly over fiscal year '23 and even higher than fiscal year '19 by like 25%. At some point, that funding will turn into spending. And we're hopeful that will start to kick in, in our December quarter. And that's what kind of elevates us up to the mid -- low end of the mid-single digits. And then from there, we think the next stage of recovery, we'll see from China. As we talk a lot about China already from a stimulus perspective. All indications are that will start to translate into revenues in the January, February time frame, so call that our third quarter. And that would get us cumulatively then into the high end of the mid-single-digit growth. And the last piece is the pharma recovery. And that's a little more ambiguous because there's not any outside data you can exactly point to, to say there's a leading indicator except to say -- and Kim's talked a lot about this already, when big funnel was doing their budgets back in October, November last year for this year, it was probably the darkest period for our space over the last many years, both from a macro perspective, understanding where inflation and rates were going, but also from a micro perspective, industry's perspective with regards to the impact of inflation Reduction Act and how that would play out. So this has been a year of reset for pharma. We've talked a lot about that already. And pharma usually does that once and it's done, it's because it's expensive and time-consuming to figure out how you're going to adjust your pipeline. So this is the year of adjustment. And we believe in 2025, things are a lot more clear now than they were 9 months ago, and they'll get back to kind of resuming their budgets as normal on a new baseline, but resuming their kind of the cadence of increasing budgets as normal going forward. We're predicting right now that we wouldn't see that until our June quarter call it in April, May, just because of the timing of how long it takes for budgets once they get approved by their boards, call it in late January, early February, and these very large companies disseminate down to the individual researcher who we actually sell to and buy from us on a day-to-day basis. So that gets to the high single digits by our Q4 cumulatively. Why we're not seeing double digits is because I'm not going to sit here and say, well, the first one is the call for a full market recovery by June 2025, but we think we'll be well on our way. And we do think that by the end of 2025, it will be a normalized market, and we will be double digits as we talk about fiscal year '26 a year from now.

Kim, I mean, biotech has always been in the acquisitive company. Where should we look for you to be active when it comes to M&A? How are you feeling about what's your appetite for larger deals as opposed to more bolt-ons and where the biggest holes in the portfolio you'd like to be active in them?

Yes, it is our favorite capital deployment mechanism. And we've been pretty good at it, right? I think the process of maintaining a list and maintaining relationships with possible targets, being able to evaluate their technologies and to then have a successful integration is kind of a signature dish that we become -- became pretty proud of and that we're pretty good at. We have a list with private public, large, small companies as long as they fit our -- either our core and strengthen our core because we know that's foundational to our long-term growth or one of the growth verticals. That would be important to me. I don't want to have yet another -- something that we have to that will be outside of our current strategy. I think the 4 growth verticals that we've defined are very promising. We have great positions in there, and we should fortify those. Now 2 years ago, if you would have asked me like, where do you have a real gap, what do you need to do? I would have said I need an instrument and special that fortunately happened, and we executed on that. I don't see a huge gap for us to operate. So there's not like, hey, there's a whole gear set missing in order to make Bio-Techne a viable or a fantastic company going forward. However, strengthening or broadening the workflow in, for example, cell and gene therapy, making sure that we participate not only as the G-Rex with all the ingredients, but maybe in the steps before, maybe in the steps behind, that would be very valuable investments and additions in my mind. So the core and cell gene therapy would be most likely.

Unfortunately, we're out of time, so I have to leave it there. Thanks so much for being here. Everybody, have a great day.

Thank you. Have a good day.