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

Thanks for joining us. I'm Tom Peterson, I'm an associate on our life sciences and diagnostics team here at Baird. We're excited to have Bio-Techne presenting today. Representing the company, we have CEO, Kim Kelderman, and CFO, Jim Hippel. Thank you both for joining us.

Thank you, Tom.

So before we begin, just a reminder to refer to Baird's website for our published research and other important disclosures about what we're going to be discussing. I think we're just going to hop right into Q&A.

Kim, I wanted to start with you a lot to talk about in 30 minutes, I thought we would start at a high level. With your first couple of quarters in the CEO role, what have been your initial takeaways, set of priorities? And how are you thinking about imparting your own strategic vision on to Bio-Techne.

Yes. Well, first of all, thanks for having us at the Baird conference. It's always an honor. It's also an honor to be CEO of Bio-Techne. I joined the company more or less 7 years ago, had a great time putting together the strategy for diagnostics and genomics and very successfully so. Over the last 1.5, 2 years, the process of transitioning with Chuck was very well organized and well perceived as well. And the first couple of quarters. I did a deep dive in the Protein Sciences segment. And of course, looked at the setup and the strategy of the company, very impressed with the depth of the offering in the Protein Sciences segment with all the antibodies and proteins that fuel life sciences and are the foundational biological stepping stones for life sciences research. And then how these 4 verticals that we've built over time have very -- are serving very fast-growing markets with very differentiated technologies. We've acquired more or less 2 companies per vertical and how these verticals per definition pull through our core reagents and the core reagents have very high margins, and that creates a kind of a best of both worlds, high margin, but also a fast-growing company. So that makes it, of course, very exciting to enter the space, the company at this level. But initially, you want to make sure of that theory holds water. And we did quite a deep dive on the strategical side, and I'm very happy to -- I figured 3 out of 4 would be a good ratio, but I'm very happy to feel very comfortable with 4 out of 4 right now. And then of course, the end markets were not as strong. I will talk about that a lot, not as strong in all aspects. So that's why we took time to evaluate the -- our footprint, right? Our 19 acquisitions, of course, many locations. And we evaluated the -- how we have staffed our organization and whether we could fine-tune that. And then we also looked at our portfolio of different, different product lines. And found a couple of product lines that are not fitting with the company and that we are divesting. For example, it's a fetal bovine serum, which is a subscale business, which very competitive, very low margins. So we decided to sell it and fine-tune the portfolio that way. We had some duplication of 2 distribution centers into Europe. We collapsed that into one. So we did some house cleaning while we were strengthening our portfolio, mainly into those 4 growth verticals that we're so excited about.

Great. Really helpful overview. We're coming out of fiscal 4Q for Bio-Techne. That means you have the honor or the challenge of giving a 12-month forward outlook before some of your peers. So maybe at a high level, if you could walk through the fiscal '25 guide, the cadence work, organic growth and some of the key end markets that you're focused on as a management team for that drive back to a more normalized growth environment.

Yes. Yes. I think that what we did is since we have the honor to be the first ones to talk about 2 quarters into next calendar year, we just took a careful but very logical approach. And we've bounced it off with many industry leaders as well as, of course, people that follow the industry, and that's also the feedback we're getting, right? But the dynamics are as follows: the very first quarter -- fiscal quarter that we're in currently, we feel that there's no real inflection points on the horizon. We've talked about stabilizing markets for the 2, 3 quarters in a row now. And we continue to see the stabilization. And therefore, we've guided in line with our previous quarters. But we do see on different levels, some inflection points, if we think there is going to be an improving environment in the biopharma world. We have seen a very healthy funding in biopharma especially if you compare to 2023, but that was a real depressed year. So we compare typically internally against 2019, just before the pandemic when things were still normalized, and you had a very healthy 9-year bull market. So that's the level of funding that we compare against, and right now, the funding level sits just over 20% increase compared to those -- to that year. So we do know that there's been 6, 7 months of good funding coming into the biopharma space. So our second quarter, we feel with the usual 2, 3 quarters delay, this money will come trickling into our industry. And that would then create a small acceleration of our growth rates. In addition, if we look at Q3, we know that China has been really depressed over the last 2 years or so. And we see some signs of stabilization. We see some signs of acceleration of activity. And we know that there is a stimulus program that's in the works. So taking those 2, 3 variables that we have visibility to, we believe that there's -- there will be a step up in activity from the China corner in the very first quarter of the calendar year. That would be our Q3. And then last but not least, we also believe that the pharma markets that have been frugal and careful, that they will have a little bit of a more confident view on the markets, and therefore, will also be more interested in continuing their investment in research and switching on programs. And then will result in a tailwind for us towards the back end of our fiscal year. And that's how we built the forecast, and that's how we've guided, not only just a number, but more or less the dimensions and the inflection points and the inflection drivers so that we can kind of do a sanity check and can follow us along and see how that all comes together.

Great. Let's take some of those items in turn, maybe starting with China. You've been messaging stability over the last couple of quarters. What are you hearing currently from your team on the ground in China. And if you could parse out the differences and what you're seeing from the core reagents versus the instrumentation portfolio.

Yes. The -- well, the instrumentation portfolio has been under pressure, right, as it has been for most everybody in CapEx being a reality in the Chinese market at the moment. But we have seen stabilization. And what is really encouraging is that our installed base in China pulls through these cartridges that are specific to the instruments. And over the last 7 quarters, those cartridges and consumables related to the instruments have been growing double digits. And the first time growing double digits in -- earlier, let's say, 5 quarters ago, it was kind of like, well, that's all on suppressed levels, so we shouldn't get too enthusiastic. But once we started growing now 3 quarters over a full year of double digits. So it's double digits on top of double digits, we knew that this is an indication of how much our instrumentation installed base is getting used and that it is getting used more and more every year. And that gives us confidence in the fact that the moment there is more room for CapEx spend that we would be high on the wish list to get going again. And I think that makes sense because -- of course, automation of manual processes like the ProteinSimple franchise does is good for consistency of results for speeds to results, but it is also good for your efficiencies because there's less manual labor involved, and therefore, it will help you continue cost, which is obviously a very strong value proposition right now. The second part you asked about was the reagents, right? The reagents you could use on any instrument or a new manual process. And there, we had the sign that in China, this also went back into growth and actually the last 2 quarters also double-digit growth, which also shows a health and/or activity level that is increasing. So therefore, I mentioned there are several factors that makes us confident about China. One is the actual activity level as well as the funding program that's on the horizon.

And with some peers speaking to instrumentation pauses or maybe a pocket of softness as people await stimulus details, would you continue to expect that kind of core reagent growth in the first half of your fiscal year in '25 ahead of any potential broader stimulus distributions in calendar '25?

That's what I expect, yes. Yes.

I wanted to ask, too, about BIOSECURE given the recent movement here from the U.S. House. Any impact to Bio-Techne's business specifically? And then maybe at a broader level, how you're thinking about the strategy and competitive positioning in China against the general or geopolitical backdrop?

Yes. So BIOSECURE Act, I think, obviously made some progress. It's not a done deal, but it's making progress. And just to put it in perspective for you, about 1% of our revenues is linked to companies or could be linked to companies that are subject to the Act. And what we believe is that the activities that these companies are doing are not going to disappear. So sometimes you worry about like if somebody shuts down a factory and does not move it and/or business goes away, then it's just gone, right? We believe that we have a real nice reach globally. We believe that these activities will pop up somewhere else. And we have a real good link into the different companies. So I think we can follow that business. And therefore, the total exposure is way less than -- under 1%. The second part of the question was about Chinese competition, if I remember correctly, yes. So with constrained funding levels, I think the Chinese competition levels also have been somewhat subdued. The nice thing though is that we found our business always relatively immune because over the 48 years in which we created those designer proteins as well as these cartridges on these instruments, they -- those are not easy to make. So of course, you have your patents, but you also have the how hard is it to copy aspects of it, right? And I think that in our fortune -- in our occasion, we have -- we just have really hard to copy high-level scientific products. And that sets us a little bit apart. And that's why I feel confident that we can continue to help China increasing their -- improving their health care and increasing their activity level in life sciences and that we will have a good market there over time.

Got it. Let's maybe step back away from China and think about large pharma overall. We talked about pipeline prioritization, site consolidations, head count reductions. What gives you confidence that the worst of these consolidations, head count reductions are behind you? We've got questions about if this could be an atypical cycle for pharma given some of the post-COVID normalization plus IRA. And maybe just at a high level, if you could walk us through the assumptions for large pharma budgets in calendar '25.

Yes. Yes. As you know, the 2024 levels were pretty subdued, and I believe -- or we believe that those budgets were set in September, October last year when, at that time, interest rates were still on the climb or at least it was not very clear in which direction or if they would stabilize or it would continue to increase and there was some clarity and risk on that front. IRA was hanging in the air with a lot less information and understanding of the impact than we have right now. So it is, of course, prudent as a C-suite to put up budgets that are more on the careful side. And on top of that, even if you have a budget that allows you for some room, once you're in 2024 and you have a constrained environment, you do want to make sure that you underspend against your budget, right? With some of those things now creating -- having much more clarity around them with more than half of them are doing actually really well with some revenue growth on the top line and some healthier business -- healthier P&L. We do believe that R&D budgets might not really immediately normalize, but they would at least improve. And since we have a baseline with really constrained environment, we do believe this will be a step-up for us in general, bar, all kinds of crazy things that could happen in the meantime, but that our assumption, our base case is really that would trickle through at the very back end of our fiscal year.

Got it. That's helpful. Maybe if we flip over to academia. What's your expectation for the next 12 months in terms of where budgets and funding sits for academic customers? And specifically, if you have any sort of geographic insights into differences between NIH funding or Europe, and then obviously, we've kind of spoken on China already.

Let me go high level, academic business for us is about 21% of our revenues. We really like the academic markets because we feel that that's where many of the capabilities that then roll into pharma and biotech are created. And that's where people fall in love with technologies, brands and abilities of the product. So we feel it's important. We are underrepresented in that end market. So we've really focused on getting better there. I think the market is also now more perceptive to high-quality reagents and to have automation where students used to or universities used to think like, hey, western blot manually, they are just learning it. They're very cheap labor, so it's all fine. We should stick with manual. Now -- you can see it's almost from going from a typewriter to a computer, right? Now you can see that students do not really have to learn the manual process anymore, and they would also like to get high-quality fast results. And we -- our instrument value proposition actually resonates in the academic end markets now as well. So we've done relatively nice in those markets. We can do even better. And we will do better just because the funding overall has been so tilted shifted to anything in infectious diseases, right? And of course, with the pandemic wanting to study out of different viruses work, bacteria and how vaccines kind of could help out and how to evolve those. I mean that's been the lion's share of where the funding has been going over the last couple of years and rightfully so. However, neuro diseases, neurological diseases, cancer has not gone away. And we feel that even if funding would stay flat or slightly decline. We have to shift backwards into our backyard. We always, as a company, had contentiously avoided infectious diseases. But we have really fine-tuned our portfolio towards cell and gene therapy, towards neurosciences and oncology. So with the fluctuation back of these funds into the traditional markets, if you will, that will definitely be a good driver for us.

Got it. I wanted to touch on the ProteinSimple portfolio. I think as a whole, the instrument portfolio has probably held up better than peers. What's driving the relative strength in the ProteinSimple portfolio? And what's the kind of biggest swing factor here in the next year or so in terms of getting back to that more 15% plus kind of growth outlook that you highlighted at the Investor Day?

Yes. First of all, I think it's just a fantastic concept to have simple solutions for very clunky manual processes, right? So that is just a very high-value proposition. Secondly, proteomics it was always in the making, but we were never really there, but we are getting closer, closer and people are obviously focusing more on proteomics. As you know, the history, originally, 30, 40 years ago, people were reading DNA, but not all the DNA was relevant, so people started looking at RNA and we sequenced all the RNA possible. But that, at some point, a protein could still come out a little bit different because it falls different or there are different mechanisms there. So eventually, really studying the biological building blocks of proteins is just a megatrend, and we want to serve it in the right way. So best products for automation, a megatrend of going into proteomics. And then I think the next thing is really the -- how do we serve it. And we have beautiful reagents as well as the instrument. And that combination pull-through is going to be very, very compelling going forward for our customers.

Got it. Well, maybe let's flip and turn to GMP proteins. You have the facility in place, you should have sufficient capacity for the medium term at the very least. Maybe at a high level, if you could frame the level of customer interest in the funnel that you've built here. What's your visibility around near-term demand? And how should we think about that customer funnel progressing from preclinical and into early clinical phases in terms of the revenue contribution over time?

Yes. So we're like, overall, the -- our GMP efforts have been across our portfolio. So we believe that the further research goes along into clinicals and into eventually a diagnostic or a therapy, the customers want to make that journey. And typically, the closer you get to the patient, the higher the regulatory hurdles. And the more precise you want your stuff to be, right, whether it's an instrument or whether it's a reagent. So we, as a company, is really focused for the last 5 years on making sure that we can make that journey. So we did a 1345 approval for some of our instruments. We did make sure that we can offer GMP versions of our RUO reagents. And we can see what our customers are doing in the RUO field. And then the moment they are ready to actually adopt some of these ingredients into a Phase I clinical or any point later, they swap to the GMP versions. And we've done so for the GMP factories. We're in GMP protein factories. We invested organically pretty heavily into those facilities. Yes, you said we had capacity. We used to talk about how many millions, [ $250 million ] or so, we used to say, what could come out of one of these factories. But with the yields while validating and while having very stringent controls understanding your processes, yields increased 50x. So by now, we don't talk about capacity constraints anymore. The moment we talk about it, I'll be very happy. It's not going to happen anytime soon. So we are well taken care of from that point of view. We did a very similar investment in the small molecule business. That grew very, very rapidly these last couple of quarters, the GMP small molecules, obviously, also related to cell and gene therapy, making sure that we have GMP capabilities. And then last but not least, over the last couple of months, we've launched GMP antibodies, which the GMP proteins is about a $300 million market. GMP antibody is a $600 million market. So more room to -- a bigger pool to swim in.

Got it. Let's turn to Diagnostics and Genomics. ExosomeDx and EPI have been impressive growth story as you've gotten reimbursement in place and some of the commercial capabilities there. But you've started to talk more about the combined platform of ExosomeDx and Asuragen. So I wonder if you could comment about how you see those portfolios and capabilities coming together. And then maybe any near-term product launches. I know you have the breast cancer test coming up later this year.

Yes. Thanks for highlighting that, Tom. The -- I'm very excited about it, not only the Dx -- sorry, the ExosomeDx platform by itself, right? We do know that the exosomes, little bubbles that come out of cells, living cells give you the ability to -- once you fish them out, to interrogate them, high-quality information, also early abundance, so in early stages of the disease and with high sensitivity. Those are really compelling capabilities or abilities that we have by interrogating those exosomes. But what we also always knew is that we are a product company that -- and that we would like to distribute globally and that we would like to use channels into laboratories that we already have. And that's why we always liked the long-term play of combining Asuragen, which used to be a CLIA-based business 10 years ago and then translated their products all into kits and sell them into laboratories through laboratory channel. And I acquired that entity to basically combine those 2 capabilities, clear regulatory hurdles, if necessary, and then distribute into laboratories with kitted products. Now the first test, as you mentioned, is a ESR1 test, very important to us because it's a monitoring test for resistance against treatment -- endocrine treatment for breast cancer. And not only horrible disease, very frequent in -- the most frequent cancer in female. Good treatments available were just not -- not always at the right time. So that's what this test, the information that this test will provide. And it is exosome-based. So it brings these 2 capabilities together, and that's exactly where we want to be. Asuragen also is bringing out a newer version of their genetic screening test which is an 11-marker test, very much aligned with ACOG and the previous tests that Asuragen brought to market were already very competitive and fast-growing for us, but this will only bolster the opportunity and it's also a test that we would sell into laboratories.

Got it. Let's flip to Spatial Biology. You did the Lunaphore deal a little over a year ago, I believe it's the most recent deal that you made. But why was COMET the right instrument for your portfolio? And give us a sense for sort of the key competitors and competitive advantages that you see in your instrument platform.

Yes, you're right. So the -- it was the most recent acquisition, larger acquisition for us. We really liked it because 4, 5 years ago, people were asking like, is this spatial biology going to be a market, yes or no? And we were very determined to play a role in spatial, because 6 years ago, we acquired ACD, right, which are RNA probes and reagents only. And for 5 years, been growing that business significantly into like a run rate of [ $120 million ] with 50,000 RNA probes and we can make any probe you really want. So just like the other core reagents, we were looking at other ways how you can pull through these reagents and bring it to market and knowing that automation and proteomics are megatrends. We wanted to have an automated solution. And why it is most competitive? The box is very high quality. You -- most solutions in the market, you would have to do your simple prep. And then between the stainer and between the imaging, you would have to do several other manual steps. This system runs through night or through your day, but all automated all the way to an image. So no manual interception necessary. It has true multiomics. So as I said, the RNA, you can run 12 RNA targets and 24 proteomic targets, so you can really see the translation. Is there an RNA? And is it really blocking or creating more of a certain protein that you're looking for? And it runs 4 samples at the same time. So if you would work only 5 days, you could run 5x4 samples, right, unless you start doing shifts and it goes up significantly. But 20 samples a week, which is also record-setting in the industry. What I really, really like is that if you already did some research and you have an antibody of choice, you can continue to use your antibody on this instrument. So it's basically, yes, it can run your proteomics but -- antibody detection, but it doesn't have to be a specific one. And most other platforms require you to use a specific antibody. So very open system. It will pull through our antibodies as well as our RNA scope. So we think it will be one of our -- the highest pull-through platform in our portfolio. So very competitive. I'm very enthusiastic about a great acquisition.

Great. Well, we've got about 15 seconds left, so I'll sneak a quick one in on M&A. Jim, maybe loop you in. Just current thoughts on M&A funnel, valuations and just given the acquisitive history of Bio-Techne, and kind of how you're framing the opportunity set.

Well, it's still a top priority for us on capital allocation, what's helped build our company over the last 10 years, and we think we'll continue to build our company over the next 10 years. Very innovative space. So if you're not doing M&A, in my opinion, you're not -- you're going to fall behind. The funnel is -- it's always a plentiful funnel. The reality, though, is that the better assets out there are still wanting very high premium prices, particularly in the private sector where we tend to play. And the less expensive ones are less expensive for a really good reason. So we're patient. We've been very diligent and strict on our financial measures and making sure we get the returns that our shareholders demand. And we'll continue to dance and develop relationships with many of these private sector companies out there that are innovative and building new products and come up with clever ways to partner with them and maybe help commercialize their products and things of that sort. But it will continue to be a strong part of our strategy going forward.

Great. Well, I think we'll wrap there. Kim, Jim, thanks so much for joining us.

Of course. Thank you.

Yes. Thank you, Tom.