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

Okay. Good morning, everybody. Welcome to day 2 of the 2024 Stifel Healthcare Conference. I'm Dan Arias. I'm the Life Sciences and Diagnostics Analyst here at the firm. Couple of early morning elevator issues that we're working through, but it seems like we've gotten that straightened out. And so now that we have, happy to have the Bio-Techne guys with us here, CEO, Kim Kelderman; CFO, Jim Hippel. Gentlemen, glad to see you made to the fifth floor. Thanks for doing that. Happy to spend some time with you today.

Good to be here, Dan. Thanks.

Yes, Dan. Thanks.

Sure. So I was thinking about the way this session today and Kim, it kind of felt like maybe one way to do it would be to say that we're coming up on a year of your time as CEO, not entirely, but we're getting close.

And so maybe just as a way of backdrop, you can talk a little bit about the focuses that you've had since you've been here some of the things that you've thought have been priorities. And then maybe what you found to be surprising about the role or the things that you need to do? And then what has gone the way that you kind of expected them to?

Thank you for the insightful question, Dan. Well, it's my sixth year with Bio-Techne and yes, 12 months as COO and CEO. The -- Chuck and Jim have done a great job over the last 10 years, putting a lot of chess pieces on the board. When I started, inherited a fantastic team, fantastic company. My focus has really been around clarifying strategic intent, the pillars, our growth pillars, making sure that we have a good mechanism to deploy our strategies, making sure that it's clear what we want and what we do not want to achieve as a company. And we have executed against it in the beginning. What is also nice is that we now have more clarity as to what kind of projects we want to work on, also more clarity as to what M&A we would want to do. 10 years ago, we have kind of like a white paper, so you could acquire basically most anything and then weave it together. But we now have the 4 growth verticals in our core markets. So we know that we want to strengthen those and that we can execute against our strategy to bolster those specific growth verticals. And last but not least, operationally, especially in the end markets, in the phase where the end markets are in a lull. Strategically, we have put some more effort in our operational footprint and effectiveness of the organization. And we went through all our product lines. decided to part ways and divest our fetal bovine serum, closed one of the European distribution centers. So we basically did some cleanup. And yes, on top of that, we've made sure that we've really been precise in executing against our promises. And so far, so good.

Usually, I save the M&A questions for the last 5 minutes or so, but I want to ask about that since you brought it up. Do you see the philosophy on M&A as having evolved from 10 years ago to your point? Or is it an evolution since when Chuck had his view on what deal should be done or Chuck and Jim had their view on what deals should be done?

Yes. I think, first of all, we do have very low leverage, right? So we're below 1. So we are absolutely in the market to look at interesting targets. We have been disciplined, though, and make sure that we would want to buy the right companies with the right quality, but also with the right background and companies that would fit in our strategic pillars. And you know the 4 pillars, we'll probably talk more about those. And we still have a core to also compete in. And those would be good spots to invest in. The nice thing though is that we don't really need to acquire something at the moment because most of the verticals have the essential ingredients if that makes sense to already compete organically. Philosophy-wise, yes, more precision behind the targets, making sure that we acquired a high-quality targets and the selection of technologies as well as integration, we've always been pretty good at.

If I could just add on to that. I mean I think it is more of an evolution because as Kim explained, it was a white paper 10 years ago, and it was really about how do we acquire the right assets to leverage our core and really turn this into a growth company. And by definition of a growth company, it's a double-digit growth company on a sustained level in normal markets. And we've done the acquisitions. We've built the growth pillars that now really allows us, we think, to do that for the next decade, really without any M&A. But it is life sciences. And M&A has got to be a core part of staying on top of innovation and what's new out there.

So you've got the scaffolding of the business, and now it's more about just adding strategically what you think sets you up well for the future.

Well put.

Let me ask you about margins in the context of M&A? Because I feel like I've always understood what your philosophy has been, which is to say here is the margin target for our business, but we are not going to be shy about doing the deals that we feel are appropriate. And if the margin has to reflect that, the margin has to reflect that.

Correct.

But there was a time when 40% was the op margin goal, and you're now materially lower than that, working your way back up to 35%. Does profitability for the overall company -- is it more of a priority than it used to be in the sense that M&A might not -- you might not want to do as much dilutive M&A as you had in the past when you were flirting with 40%?

I'll jump on this and then -- I mean I think naturally -- yes, I mean, that just makes sense that we're going to be even more targeted around what kind of M&A we do and what kind of strategic importance it has when we're in a situation where we're on the low end of our margin rate we'd like to be at. With regards to the 40% target, 40% when we model our own business out organically, we get there, I hate to say easily, but we get there quite naturally over the course of 5 to 7 years. But the reality is we've kind of put out there, hey, 35% to 40%. And the idea here is we want to be a company that's not only a growth company, but also in the upper tier of profitability, and I be able to give investors -- you don't have to choose between one or the other, you could have both with us. And so profitability is very -- it's as equally important to us as growth. And I think with the actions we've been taking over the past 1.5 years to really kind of sharpen the saw, so to speak, with regards to making sure we have the right level set of folks in the current environment and that we're doing in the right places, rationalizing certain product lines as we've done as well as certain locations and making ourselves more efficient there, so that when the markets normalize and our growth rates accelerate, we'll get even more leverage than we've seen in the past and so that's our path to get back to that 35% to 40% range. With regards to M&A, does it make M&A that much more in terms of the near-term profitability important right now? Yes. But doesn't make it -- it doesn't necessarily need to be -- we exclude it altogether.

Yes. Okay. But just to understand the way that you're thinking about margins. So 2025, lower growth year, some of these things that you talked about in terms of cost initiatives, some things around comp expenses that are maybe onetime-ish. Once we clear fiscal '25, does it feel like this is a business that can be reliably margin expansion on an annual basis for the most part?

Absolutely.

Unless we acquire something.

Right, unless we do a deal that says otherwise.

Yes.

Okay. I want to talk a little bit about GMP proteins. I feel like on the call, that was the area where things got the most attention, where maybe most interesting just from a growth perspective, that business, GMP reagents were up 60% in the quarter. Can you talk about what drove that? Was it existing customers scaling up? Are you starting to see new customers come into the mix?

Yes. Actually, both. We had really good momentum in some of the customers that are further along in the clinical phases, right? We have about 57 customers that are in Phase I and II, a handful are actually in 2. And the orders from the preclinical phase to clinical Phase II are just -- I wouldn't say exponentially, but they're multiples bigger than the orders in preclinical. So the business by definition will be a little bit lumpy as these customers progress through their clinical stages, which we feel is a good sign, right, when we progress. On the other hand, we've added a healthy number of new customers to our 400. And we've also seen very healthy order size, order frequency from the balance of these -- the customers, not large customers at this point in time. So overall, we feel the business is absolutely heading in the right direction. 12 trailing -- 12 months trailing, we are sitting high teens in growth. We just wanted to make sure we mentioned that number more often and not just because otherwise, if there's a 60% quarter, we don't want to set expectations that, that's going to happen every quarter. But we are very confident that this business sees some -- we'll see -- continue to see some real nice traction.

Yes. Your comment, I believe, was maintained very strong growth, but it does sound like you're going somewhat out of your way to remind people that fiscal 2Q is probably not likely to be a 60% quarter. Is there -- could you put some guardrails on what a reasonable growth rate that you would -- what would be an acceptable growth rate in your mind given the comp and the lumpiness that we're talking about?

The guardrails there would say like, let's say, not every quarter is going to be 60%. It could happen, but it won't be every quarter. And then if you look at the 12-month trailing, that was in constrained funding for pharma environment. So for me, the upper teens would be a lower limit.

Yes. So that's a great way to ask sort of a follow-on question to the idea, which is what do you see as a relationship between biotech funding, where the emerging sets of companies that are developing drugs like this play and the growth and acceleration of the GMP/cell therapy business?

Yes. I think pharma funding overall has been very healthy, right? It was a little bit lumpy throughout the year. But overall, significantly up over last year. Now last year was obviously an extraordinary negative year. So we tend to look back to 2019. You can see PEVC funding at 30% higher than '19 and then the biopharma funding itself just as well. So significantly up, the question is like when and how do you -- will you see the money trickling through to life science tools and that is, in our mind, something that we currently see. And that was also at the beginning of the fiscal year when Jim laid out our stepping through the year and with the differences in the growth rate. Biopharma funding coming back and trickling through to us would be a Q2 event. And fortunately, we did start seeing at the end of Q1. So that seems to be nicely on time and taking place as taking hold as we had expected.

Yes, you were one of -- sorry, Jim.

Well, I was going to add that with regards to the GMP or the cell and gene therapy asset, we've always believed that where we'd see the funding come back, the funding start to turn into spending first, would be in our cell and gene therapy portfolio. And we saw some -- we call them green shoots, but some spurts of life back in Q3, for example, 2024 or call it the first quarter of this calendar year, where we started to see some nice growth in cell and gene therapy, again, but then it kind of leveled off again, that lumpy. What's encouraging right now is not only that we have a good quarter, just finished a good quarter in cell and gene therapy. But we do have visibility, at least for the next couple of quarters more that customers have told us of sustained growth there. So it does appear that, that momentum is building. And so -- but we also look at when it comes to small biotechs, we take the cell and gene therapy out of our portfolio and just look at our core. And that's where we're seeing a much more gradual uplift in momentum in biotech, but nonetheless, it's there. So there are just some positive signs there that, that funding start to turn to spend.

Okay. So that's catalog reagents sort of your run rate consumables business and you feel like that is on a steady reacceleration path?

I would say a slow pretty acceleration path. But yes, it's -- yes, it's not a light switch, but it's encouraging after 1.5 years of deceleration.

Less than that. Right.

What's pretty unique is that there is such a big difference in the end customers where some of them got really nice valuation. They got their money in, fundraised and they're off to the races and actually want to accelerate and there we've accelerated spend. And some others are still trying to restructure debt and/or maybe even closing the doors. So overall, there's this vastly different approach for those -- for our different customers. But bottom line, if you add it all up and looking at the funding coming in, also, especially for GMP proteins, the funding related to cell and gene therapy has been very, very strong, even more so than overall funding. So we feel that is, that is really a driver. Even though it's a little hectic in the headlines and some of the things that are happening with our customers are a little confusing. We feel bottom line, it is steadily improving.

If I could just because we talked about so much about cell and gene therapy in the context of biotech and smaller biotech, but the reality is I think roughly half of our revenue in cell and gene therapy does come from larger pharma customers as well. And we've also seen an uptick in our cell and gene therapy business with both larger pharma customers too. So it hasn't been just small biotech.

Okay. But if I could just finish the point on small biotech, do you have visibility on the spending improvement that you've seen? And is it from customers that have raised money, which for those of us standing around, would sort of be proof positive that one of -- what these companies were waiting for is to have a more solid balance sheet situation. Now that they do, they might spend differently versus some market dynamic where maybe they're not sure that they want to develop the drugs that they thought they wanted to develop 3 years ago?

I'll be honest with you, it's very hard to answer that question because we sell to all of them. And so I would argue that particularly for a company our size to have the breadth of basically touching all these customers is a bit unique. So if you have a more narrow set of customers, what you might be seeing will depend on what their customer base looks like because at any given time there's some that are doing well. There are some that are not. Our business is truly an aggregate of those biotech customers. And so that's when we say in aggregate, it does appear to be slowly coming back. How much of that is coming from exactly which category of biotech and what stage of biotech is very difficult for us to see.

It's parsing through the numbers in a way that's probably challenging.

You have thousands of customers and you sell a little bit to the time.

Okay. Maybe just staying on Protein Sciences and talking a little bit about one on Simple Western and then one on Simple Plex. Simple Western, in my mind is one of these businesses that I've always kind of liked because the market position is very clear. There aren't too many solutions similar to what you have. There's obviously a lot of greenfield when it comes to bringing automation into that field. It's been a 15% to 20% growing business in the past. Things obviously slowed for lots of reasons, one being the instrumentation market, one being the biopharma market. Do you think that that's a business that when we think about where your legacy segments aligned is one that you can pencil in growth rates that resemble what we saw pre-COVID?

Yes, absolutely. I think that it's a combination of several things. But first of all, it's a relatively large addressable market. It's clear that biopharma as well as academic want to move to automated solutions that are repeatable and very precise results coming out of these tests. And in the meantime, we know that we have been pushing forward a number of applications in -- for the platform, and we continuously grow where and how you can use the instrument. And on top of that, we have a really exciting launch in the pipeline that we have announced a couple of months ago of the instrument called Leo, which is very flexible, high volume throughput, fast turnaround instrument within 3 hours, you get your results, and you can run anywhere between 25 and 100 samples at the same time with 8-plex. So very powerful instrument that will even bolster our play in this exciting Western block market, which for many was an area that people wanted to leave and now we see actually people coming back.

I would just say that to add to Kim's qualitative reasons quantitatively, we still believe it's less than 20% penetrated in the market and continue to expand its use case and how do we grow the Western blot market because people are coming back to it. But also, you look at what our consumables have done, the specific consumables on those instruments this entire, call it, slowdown post-COVID. We've had almost -- well, almost every quarter, we've had double-digit growth rates in our consumables. So even though CapEx has been -- budgets have been constrained. The people who have the instruments are using them like crazy. And that gives us added confidence that the double-digit growth rates will well continue once the CapEx budgets come back.

Okay. So we would underwrite double digit. And we'll see whether it's 15/20, but we're comfortable with double is right now.

Absolutely.

Okay. And then maybe on Simple Plex, the dynamic into and out of COVID was very clear in that you guys placed a ton of those systems for labs doing immunoassays. But I don't know that I fully understand how the consumables trail behind them has looked out of COVID. It naturally had to have dipped because the amount of work being done just wasn't the same as it was in 2021 or '22. But can you put the consumables trail in the context of maybe that lower phase out of COVID, are you starting to reaccelerate. Does it resemble something?

Yes. Very insightful question. So yes, in 2021, I'll give you some guardrails. The -- since we have doubled our installed base. So yes, we have increased capacity in the market. And during 2021, the utilization of the installed base was extremely high. So you're right. It dropped off if, it comes to the number of consumables per instrument. But we have doubled the installed base and we are still trailing right now higher if it comes to total consumables being used versus 2021. So overall, yes, more capacity in the field. So not per instrument, the same throughput, but in aggregate, still as much throughput if not more, compared to 2021.

Okay. That's helpful. Okay. Maybe I'll jump over to the diagnostics and genomics side and ask a question about Lunaphore. Lunaphore is an interesting spatial platform to me because I go to AGBT every year. It's not the first product that you see but it's a clinical translational tool. So I sort of understand why that is. It seems to be doing very well by all accounts when I hear you talk about it. Can you talk a little bit about where that system is resonating and then when we think about the scope of spatial instrumentation, what is the threshold on multiplexing that drives the decision to buy that box? In other words, is there a certain number of genes or proteins where once you get above that, it makes sense to buy a box from 10x Genomics or once you're below that, it makes sense to buy Lunaphore system?

Yes. So we are very happy with the Lunaphore acquisition. We feel it's a very unique instrument in that it can -- all the way from the beginning, all the way to imaging and having an image on your drive, all fully automated, very fast turnaround time, and you can run 4 slides at the same time, which is vastly unique in the market. It plays in the translational part of spatial, that's about 60%, 70% of the total revenue dollars of this addressable market, it's about $5 billion in addressable market. So it has the lion's share access there. But very often, if a scientist goes through a project or a project team goes through a project, you start off with your hypothesis testing and in that, you look at thousands of markers. And the moment you have tens of markers that you -- or less fewer that are of interest, you would swap to an instrument like ours. Right now, we have 24 proteins and 12 RNA markers you can look at, at the same time, which is true multiomics, which is also relatively unique. Now did we see data last week on the trade show with 300 markers? Yes, it's possible, right? But is that the sweet spot for the instrument? Not at this point in time. But I would say thousands versus tens is the differentiator.

Okay. A couple of minutes left, Jim, I want to hit on just growth. And to your point on the comment that you made earlier on, this is set up to be a double-digit growing business. What do you see as the potential for Bio-Techne to return to double-digit organic growth? And within that is a question just about do you still feel like this idea that you can grow 500-plus basis points faster than peers is a valid one. If I look at the consensus numbers for the back half of this year, it's kind of like 3% to 4% growth on calendar 2025, you're a few points above that. You're not 500 to 1,000 basis points above that. So when do you think that, that algorithm really starts to click?

It really comes down to when the overall markets get to their long-term growth average, which is mid-single digits. We believe in a mid-single-digit environment from a market perspective. We are a double-digit grower. And if you look at our track record, both during the -- when the market was growing at that rate or even better, we were at -- we were solid double digits. And then throughout this post-COVID slump the markets have been in, we've only had one quarter where the company has not grown. There's not too many companies in our space that can say that, say growing organically, importantly. And when you look at our growth -- the 4 growth pillars we talk about, all 4 of them have maintained very nice growth rates even throughout the slope -- now not the double digit necessarily, but at least mid-single digit, which has helped kept the overall company in the black throughout this period. You also look at the mix of our core products versus our growth -- we call our growth pillars. You go back to fiscal year '19, our core was around 70% of our revenue. And now it's about 55% of our revenue, not because it shrank that much, but because the growth pillars have continued to outpace the market. So with a portfolio that the growth pillars are still way underpenetrated with regards to their potential, their market potential and now a large or even larger part of our overall portfolio as a company. When the markets come back and our core can get back to that mid-single-digit growth rate or a little bit better. We think it's off the races with our growth pillars, and that's what keeps us in double digits.

Okay. Kim, anything to add on just the strategic view on investments that you think needs to be made in order to sort of safeguard that double-digit growth, not just beyond just the return to it and keeping yourself on that double-digit trajectory.

Yes, like Jim mentioned, large, fast-growing markets. That also means that there are many new entrants and that means you have to continue to be at the forefront of innovation and that's where the investment lies. So you will clearly see that after I would say, 1 year, 1.5 years of kind of optimizing the execution of the company, including the R&D pipeline. You will see very regularly product launches, larger product launches that will give that extra boost to our growth but also to make sure that we continue to gain market share.

Okay. I mean a company the size of yours, it's always kind of funny to talk about new product launches because needle movers are harder to find when you have a catalog as big as large as Bio-Techne, but do you see this as a year where, to your point, some of the new things entering the market will be -- can be helpful to the growth rate?

Yes, for sure. And I think the one that I just mentioned, Leo, with a price point of $270,000 and the prelaunch and the enthusiasm around this instrument arriving has been significant. So very encouraging. And therefore, I think this instrument will have popper boost, give a popper boost to the growth rates for PSS for Protein Sciences segment.

Okay. We lost a few minutes early in the session, but I feel like we made up for it, okay, in the middle of it at the end. So gentlemen, thanks a bunch for spending some time here. Happy early Thanksgiving wishes to both of you guys, and I will talk to you soon.

Thanks Dan.

Yes, thank you. We got through the fireman deck and great talking to you.

Always uphill from there.