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

Thanks, everybody, for joining us today. Welcome to the JPMorgan Healthcare Conference. My name is Casey Woodring from the Life Science Tools and Diagnostics team here at JPM. I'm pleased to be joined today by the management team of Bio-Techne. So I'll turn it over here to Kim in a second for the corporate presentation then we'll do a Q&A afterwards. So with that, Kim, take it away.

Thank you, Casey, and thank you for having us at the JPMorgan Healthcare Conference. It's always a great event, and I'm very excited giving you an update on our company. Before we get into the content, however, I want to draw your attention to the safe harbor statement, which you can find on our website, biotechnecom, in the Investor Relations section. To dive into the presentation, let's start off with the Bio-Techne's mission. We improved the quality of life by catalyzing advances in science and in medicine. This statement is what drives us every day is what excites us. And it is what creates value for our customers and for our stakeholders. Coming couple of slides, I will talk through the status and where we are as a company. And the slides after that, I will talk through the strategy going forward. So who are we? Bio-Techne headquartered in Minneapolis. I have 3,100 colleagues globally that work from 34 sites. And yes, we've been at it for 48 years. Designing a very differentiated portfolio of core reagents, protein-based core agents that are serving high-growth markets. In the middle there, you see that we report in 2 segments, the Protein Sciences segment as well as the Spatial Biology segment. In the Protein Sciences segment, you see that we have high-quality quarterly agents. We have 6,000 proteins, 400,000 antibodies. We have small molecules. They are so small, you don't even see them on the slide here. And we have immunoassay, a vast area of -- a vast menu of immunoassays. Those core reagents are instrumental to several of our growth factors. We have the proteomic analytical instrumentation. We have the cell and gene therapy business and 2 growth factors of spatial biology and precision diagnostic tools. Those also use and benefit from those core reagents. They also have their own core section, which is the diagnostic reagents and controls. Now on the right-hand side, you see that we had in 2024, a revenue of about $1.2 billion, 80% of that related to selling consumables. 9% of that allocated to instruments, 9% related to services of those instruments and 2% of their royalties. Now it's noteworthy to see that of the 80%, 11% are related to cartridges, et cetera, consumables directly related to our installed base. Now with such a consumable rich portfolio, you would expect a very high profitability profile for the company, and that's what we're very proud of. Now on the next slide, I'll double-click on the revenues and the breakdown. As you can see on the outer circle on the left that we have 72% of our revenues coming from Protein Sciences segment. It's our largest segment. 28% coming for the other segment, Diagnostics and Spatial Biology, and last year in the presentation, you will see that, that number used to be 26%. So that segment outgrew Protein Sciences and therefore, there's a little bit of a mix shift over the last year. A few highlights on the inner circle. We have the RUO reagents, which are the proteins, antibodies and small molecules, 42% of our revenues and again, those powered several of these growth verticals, the first growth vertical there is cell and gene therapy. It's 6% of our revenues and very fast growing. The protein analytical instrumentation, also optimal performance because of the core reagents, highly differentiated automation and now 24% of our revenues. The core diagnostics, 12% and 6% and 10% for the 2 growth vertical in total then the 28% for the Diagnostics segment. As you would expect from a portfolio with very high quality and differentiated reagents, our end markets are skewed towards pharma biopharma, 50% comes from there. And we're very proud of that position, but we are also very happy that we have 21% coming from academic markets. We deem those to be strategically important because technologies and scientists in the future come out of that segment. So we want to play an important role there. 17% of our revenue is from diagnostics and then 12% from distributors, which mainly cover our Asia and China regions. From a geographic perspective, 60% comes from Americas, 25% from EMEA and 50% from China APAC. In the next slide, I will summarize our foundations and of our success to date and what made us where we are. Over the decades, we created a durable and differentiated product portfolio, which gives us balanced exposure to established and emerging applications across high-growth end markets. We can play in those markets successfully because of our portfolio leverage from leading protein and antibody content and capabilities. And this resulted in a strong reputation and loyal customer base and we have an innovation machine to continue to bring new products to market. And then we have built in the meantime, a lean, nimble and diverse global organization that has a culture of ownership and accountability. Sorry about that. Leadership accountability. Well, fortunately, I read that slide word for word, so that was then -- this is a very impressive position to be in, and I will talk you more through the strategy upcoming and how we're going to actually accelerate our growth going forward by a new, more cystallized strategy. On this slide, and I call it the pyramid slide, I'll talk you through a couple of the dynamics. First off, we have on the left-hand side of this slide, the phases that a normal development project goes through. So you start off with research and discovery, you roll into a translational and development phase and eventually, you progress into a diagnostic and/or a treatment, right? Now those phases are heavily influenced by what we call megatrends. Megatrends that we have identified, we feel we need to keep an eye on, and you see those in the middle of the pyramid and it starts with Multiomic insight generation. We feel that multiomics is going to be super important and that our customers deserve real, good multiomic tools for multiomic interrogation. Proteomic interrogation will happen at scale, and we do believe that, that will happen in the research phase as well as in translational and eventually, not yet, but eventually also in the clinic. AI-enabled innovation will take broadly -- will be broadly applicable. We have novel therapeutics that are popping up and that are already making huge progress such as cell and gene therapy, precision medicine is here to stay. We know that every individual is biologically different, so it's important. And then the Pinnacle healthy aging. We know that we have an aging population globally, and we know and we want that aging happens as healthy as possible. And everybody is probably aligned with that statement. Now we are playing a very important role across these mega trends. And of course, we want to help our customers progress through those phases. And therefore, we have defined 3 growth factors on the right-hand side of this pyramid, where we want to focus as a company. The first one is discovery of novel biological insights. We have the development and manufacturing of advanced therapeutics and, of course, enable precision diagnostics. And that would then enable early diagnosis and, of course, the ability to pick the right treatment once you get diagnosed. So this is an amazing position to be in and our growth factors truly capitalize on those megatrends. On the next slide, I do show you how our differentiated portfolio actually maps to those growth verticals. On the left-hand side, you see our portfolio like you've seen it many times before and earlier in the deck, on the right-hand side, you see those 3 growth verticals that I just identified in the pyramid slide and how our portfolio maps to those growth verticals. Now for example, in the first growth vertical, the discovery of novel biological insights. Here you see that our core reagents, our spatial biology and our proteomic instrumentation play a key role. Now I want to give you some examples in there, right? So recombinant proteins and small molecules are very important in all kinds of cell-based work, including organoids. The large menu of antibodies that we have power novel proteomic platforms. The spatial biology solution we provide is one of the few that truly gives you -- gives you multiomic insight right, which is very important for neurology as well as for immuno-oncology and other end markets. Now in the instrumentation side, we have the automated ELISA and Western block, which are really enabling proteomic research applications. So you see how relevant we are in that first vector. And the second vector, not much different. There, we have a leading portfolio of GMP reagents and media, right? And if you combine that with the Wilson-Wolf G-Rex a company that we own a portion of and we will fully own in 2027, that's a bioreactor where you grow yourselves in a very efficient way. And then together with our reagents, you have a closed system that truly allows for a very cost-effective but very high-yielding a scalable workflow in cell therapies. The exceptional quality of our proteins and antibodies are truly appreciated in the early process development all the way through to high-volume GMP manufacturing. On the instrument side, all 3 of our platforms, whether it is the ELISA or the automated Simple Western or the biologics, are playing a very important role in the development and manufacturing of the therapeutics. First off, very important for process development. Secondly, our spec-ed in for QC and lot release of various therapies and that's including cell therapy, including gene therapy, RNA therapy and even protein-based therapies like ADCs, and others. So if you then look at the spatial solution, there you have the special reagents that we have combined with the automated platform COMET, very important for biodistribution. And that, again, is very important to determine whether your cell and gene therapy is effective. So also there, a tremendous positioning in this growth factor that I mentioned. Number 3 is enablement of precision diagnostics. Our know-how and our large offerings in proteomics really allows for diagnostic applications. We have a diagnostics reagents and controls. This is a very sticky business that -- where we sell into most, if not all, the large IVD companies and therefore, something fundamental for our segment. And then the molecular diagnostic kits, a few years ago, we've been so lucky to combine the Asuragen kitting capabilities and the ability to create kits for genetics as well as oncology testing and we already own the Exosome Diagnostics platform, which gives you the ability to fish out exosomes, which are great vesicles to interrogate with high-quality information. So you combine those 2, you really have an opportunity to have a distributed model of very high-quality tests where you can fish out hard to find genes and you can read hard to read genes, and with that come up with a real nice position diagnostics position that is -- that can be run on widely available QPCR instrumentation. So a real differentiated position. Last but not least, our spatial biology business in the clinic. Fortunately, we worked really hard on getting all the right regulations and quality systems in place. And now we have over 10% of our reagents in this business coming from the clinical space, and it's growing faster than the rest of that spatial biology platform -- sorry, not platform, reagents. So we're very excited about that position in this space as well. And that's exactly how we play in those 3 growth factors. And we're very, very happy to see that we are so successful there. And we are planning to be even more successful there by continuing our innovation machine. We had various R&D milestones over 2024, and I want to highlight a couple. First off, we launched our LEO instrument. It's a next-generation high-throughput, fully automated Western blood system. It's very unique. We made it exactly as the pharma -- biopharma high-power volume users wanted it. Very flexible. You can run anywhere between 25 to 100 samples within 3 hours. And we have a very strong pipeline. And I have to be very proud of the team because we promised that we would start shipping it in calendar Q1, but we have been so fortunate to already ship the first systems in the back end of our previous quarter. After 48 years of being a leader in proteomics, we amassed a fantastic proprietary database in proteins, in antibodies. We know how to characterize them. So we do have a vast database. And of course, you would be missing out if you wouldn't have AI help you use that data to then come up with AI generated hyperactive, patentable proteins and antibodies that are just unique in how they perform. We're very excited about that. We have 6 proteins now in market. We have sent out a press release about our 6 ones, so you can read all about which ones we have on market. We will continue to crank out about 9 or so of these designer proteins per year. On the multiomic spatial biology platform, there we launched our RNA scope and our protein capabilities and that you can use for visualization of tissue on the COMET system. So you can now look at the same time on the same slide at 12 RNA targets and these RNA targets come out of a catalog of about 50,000 RNA probes that we have, and we can make any custom probe for you. 24 protein targets, and you can pick any antibody you want to use, but we happen to have 400,000. So we're glad if you pick one of ours. And then on a fully automated machine. This machine is produced in Switzerland, very high quality, very consistent. It can run 4 slides at the same time, and it's truly enabling fully automation of multiomics. Now on the second vector, cell and gene therapy vector, we have launched the ProPak. These are little bags of precise quantities of GMP proteins in the right dilution, and that will really allow for closed manufacturing together with Wilson Wolf's G-Rex bioreactor, and that will then result in even better yields, even fewer mistakes and a much easier scale-up and there with a very differentiated offering. The enablement of precision diagnostics there, you've seen the announcement of us launching in the ESR1 kit. And this is the first child of the 2 parents of combining exosome with Asuragen. Here, this is an exosome-based kit in a Asuragen style. So it's distributable. And it is for the detection of 11 different ESR1 mutations in breast cancer. And if you do that monitoring correctly using this test, you'll be able to double the life expectancy of the patients and therewith and truly enable precision diagnostics. Now the next slide, we talk about our financial performance, which is, of course, related to this very differentiated portfolio. As we all know, part of fiscal year 2023 and certainly all of 2024, there were macroeconomical challenges, right? Biotech funding, large pharma spend, Chinese economy, we've heard a lot about these headwinds. But despite this dynamic, we're one of the few life science tools companies that continue to be in the black, right? So you see before and during and after COVID, we had a 12% CAGR in our growth here on the bottom left. And then the fiscal year 2024, we have been able to eke out small growth with 1%. But remind you that the Q1 of the year after, we already accelerated to 4% growth, and we're very comfortable with the forecast that we've kind of laid out and the dynamics of the markets that we've talked about over the last 2 earnings calls. And I think that's a testament to our portfolio as well as to our strategy, how we are continuing to outperform the market there. Operating income, you can see that we had a healthy CAGR of 14%, a down year in 2024, and that's driven by 2 things that we feel are temporal in nature. One is that we had a full year of our early-stage Lunaphore acquisition where we had to build, of course, invest in R&D and build manufacturing capabilities and commercial capabilities. And we had a, what I mentioned earlier, a little bit of a product mix shift between the 2 segments. You combine those 2 numbers, and you're still sitting at a 9% CAGR, which is actually pretty healthy. Now operating cash flow, there's a long story there, but -- last but not least, 18% growth over fiscal year 2024. And that's really a testament to the Bio-Techne team. We really delivered on organizational efficiencies. We had product portfolio efficiencies where we pruned the portfolio and, of course, operational efficiencies. And that really resulted in a very healthy financial year. And that, of course, helps our financial position. So what do you do with a healthy financial position and that is continue to focus on our M&A funnel, right? M&A remains a top priority for capital deployment. It's important for our go-forward strategy. And of course, we are now with these 3 growth factors talk about -- of course, more focused on the 3 growth factors I talked about. And here in the middle there, you can see our M&A priorities directly linked to those growth factors. You see most of these priorities in the discovery of novel biological insight. And of course, as a second priority, we have the development of manufacturing of advanced therapeutics. Now we could be opportunistic in growth factor 3 as well as in creating a whole new attractive market. But we do believe that we have plenty of M&A runway in the 2 growth factors I just mentioned as the first 2 priorities. Now let me look at what that means for our overall portfolio and the market sizes. As I mentioned, our portfolio serves critical applications, and we address about $28 billion in addressable markets. In the middle here, you see our core products. They're very essential, took us decades to build, and we continue to expand that offering. And of course, that offering we go directly to market with, but we also power our growth verticals proteomic analytics instrumentation where we're pushing forward with more and more applications, specifically in cell and gene therapy. Cell and gene therapy itself, on the lower left is a business unit that we are driving growing very, very fast. And we have a portfolio of state-of-the-art GMP reagents like -- and combine that with the G-Rex we have basically a very unique, efficient and scalable cell therapy solution. On top right, spatial biology. There, we can combine the 50,000 probes in the great position that ACD brought us in spatial biology. We have a state-of-the-art platform from Lunaphore to COMET. And then, of course, a vast portfolio in antibodies truly enabling a full translational multiomic solution, which is fully automated, fantastic business. Precision Diagnostics there, we have the market-leading genetic and oncology portfolio that we are so proud of from Asuragen, combine that with the exosome detection capabilities. And now you're looking at a really differentiated precision diagnostics offering where you can find hard to find genes and you can read hard to read genes on a very distributed platform. So that is really how our portfolio is positioned for sustainable above-market growth. And sustainable is an important word for us. we are committed to a sustainable future. And we continue to make progress. Here, you can see that we published our fourth corporate sustainability report. And in there, you can read all about our people and how we build a diverse and inclusive workplace. You can read about how we are advancing science and how we launched 800 new line items in 2024. We have the environment as a priority. And even though Bio-Techne is an environmental friendly type of business, we continue to reduce our footprint by looking at and prioritizing sustainable packaging projects and many others. Now last but not least, our management is supported by a very sophisticated board with deep scientific experience and business experience, and they help us overlooking the sustainability council so that we keep sustainability high on our radar. Now to my last slide. with the key takeaways. The megatrends that I showed you in the pyramid slide, today, the flywheel for all 3 of our strategic vectors. Over the last 48 years, Bio-Techne built a proteomic core portfolio, which provides leverage across all these 3 vectors. We have a strong innovation organically and M&A pipeline for inorganic growth and innovation. And we enjoy a durable position in critical applications across $28 billion of market opportunity. And this -- we will -- this enables us to have a sustainable and above-market financial performance. And how do we define above market? Well, for us, that means that we want to continue to grow 500 to 1,000 basis points faster than the market. We want to have industry-leading operating margin of 35% to 40%. And of course, we're looking at a high teens CAGR for our EPS. And we are committed to deliver this financial performance while we unlock the possibilities of science. Thank you very much for your interest in Bio-Techne.

That's a very helpful overview. So maybe just to start on the macro here. Biopharma demand has been choppy for the industry over the last year or so. What's your outlook for the remainder of fiscal '25 for that end market?

Yes. Thanks for the question. I almost had a breather here. Thanks for the question. Listen, so we all talked about how this last fiscal year -- last calendar year has been influenced by positive growth on the -- if it comes to the funding levels. We had 40% growth of funding increases over 2023, but we all know that 2023 was kind of a subdued year. So we tend to look back to 2019, the pre-COVID year, and the funding levels are actually 20% higher than that as well. So we do believe there is a healthier funding environment. We all talked about that it will take a while for it to trickle through. Jim had a very thoughtful kind of rollout of how we feel our year would roll out. And we mentioned that our Q1 would be very similar as the previous year, and we actually accelerated a little bit to 4% growth and that we would see a return to healthy spend in biopharma in Q2. And actually, we already started seeing that a little bit at the back end of Q1. And all the way up until our earnings call at the end of the first month of Q2 we still saw a healthy acceleration there. So I think we called that end market pretty right on.

That's helpful. There have been some recent concerns over the potential impact of the new administration on life science tools, including NIH budgets and the potential impact on tariffs. How do you view Techne, the potential impact there on your business?

Yes. I think from a political point of view, we -- you hear it from several of our peers as well. We do believe that is a more business-friendly environment, which will come with the new President. We have -- there are talks about reduced corporate taxes and a more friendly M&A environment. So I think that's all overall, very healthy. NIH, under the previous time that this administration was in place, grew 6% and 8% in '17 and '18. But for us, it's really, really important how the use of proceeds is. So the absolute level, of course, is beneficial if it goes up for the NIH funding, but in the meantime, for us, it's very important to put in where it gets spent. We traditionally have not aligned our company with infectious diseases. So what was really the focus of the NIH over the last couple of years, having that shift back to chronic diseases like the negative hazard, that would be actually good for us. So we are actually positive about that. We'll have to see how it all rolls out. But overall, we feel that is in a good shape. The tariffs, fortunately, we produce most of all our products in the U.S. We have the Lunaphore COMET. It gets produced in Switzerland, and we have a little bit of the small molecule revenue coming out of the U.K. But we do really not have a supply chain constraint importing from China. So we are relatively independent from that. And there we've our risk profile is also very, very low if it comes to the tariff debate.

So Techne has been one of the more vocal companies on the potential impact of Chinese stimulus on your business starting in the calendar year '25. So any updates you can share there?

I'm not sure if we were vocal. We just got that question like each session that we were in. So -- but nonetheless, China has been an important country for us, had tremendous growth for a long time. We know that at some point, there was a reset with international business pulling out of China. It was a painful couple of quarters. Then we saw stabilization and even though in a negative, the revenues from China have been accelerating. And then we called that in our Q3, which is basically calendar Q1, that we would see a normalization and that we would eke back into the black related to some of the stimulus discussions and which are long-term 3-year plans. So we feel that will get us back in the black. And with that, it will be less of a detractor. We're not saying it's going to go back to immediately to its old glory. That might happen over time, but we are just calling it for the upcoming quarters, years to be back in the black.

Got it. I guess taking all those macro factors we just talked about into account, any updates on the fiscal '25 outlook you provided during the 1Q earnings call?

Yes. We report in 2 weeks, so we'll give you more color then. But overall, the layout, how we laid it out and again, complements to Jim and the team is very logical. And so far, all our indicators and the discussions we have with customers, but also the indicators internally point into the direction that we were actually -- we're pretty much in the ballpark.

Okay. Shifting to some questions on your portfolio. Within cell and gene therapy, GMP proteins has been really strong for you guys increasing over 60% last quarter. What drove the strength? And what is the realistic growth rate for that business moving forward?

Yes. Thanks for the question. Yes, 60% we're very proud of. Obviously, you saw in the presentation how greatly that portfolio is positioned and how it's really enabling cell and gene therapy. We saw -- of course, there were some large orders, but we saw overall good strength in the business. So we have 400 customers, and we added a couple of customers at a good pace. And in the meantime, these 400 customers are, of course, working on getting their programs through the different stages I talked to you about in the pyramid slide. And now we have 57 of these customers in Phase I and a handful of those in Phase I and as you know, in Phase II, the orders get much larger. And that's why we, in Q1 talked about this could be a little lumpy going forward because these larger orders start playing in there, and it was -- it's a $60 million run rate for the GMP proteins only. So that's still a small base, and it could be a little lumpy. But -- and that's why we said we will talk about 12 months trailing. In 12 months trailing sit high teens, let's call it 20% but that has several quarters of very suppressed markets in it. So that we give us a kind of a lower guardrail and then the 60% we are really happy with. So I would -- I wouldn't say it's upper, upper guardrail, but that's certainly another part of the guardrail that we want to give you guys to kind of estimate the healthy growth. So it's north of 20%, that's for sure.