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

All right. Good afternoon, everyone, and welcome back to day 2 of the 45th Annual TD Cowen Healthcare Conference. I'm Kyle Boucher, an associate on the Life Science and Diagnostic Tools team, and I am pleased to introduce Bio-Techne, Kim Kelderman, President and CEO; and Jim Hippel, CFO. Welcome, guys. I guess jumping right in. So welcome to the conference, first of all. It's great to have Bio-Techne join us for a fireside chat. We've got a pretty big question list here. We'd like to go through your business, your key priorities, growth pillars, thoughts on capital deployment and a few other topics that hopefully, we can get to. To begin, I guess, can you take a minute to give us the 1-minute pitch and overview of Bio-Techne's business? What is Bio-Techne -- where do you play within the life science tools market? And in your words, what differentiates Bio-Techne the most and makes it unique from other tools companies?

Well, first of all, thank you, Dan, Kyle, for hosting us. Very exciting. Bio-Techne, yes, like the true dynamics and the value of the company is basically in the duality of a portion of it is our core business that took us almost 50 years to design a wonderful portfolio of proteins. We have 6,000 or so proteins. With that know-how and this build of this portfolio over those decades, we've been able to amass a wonderful portfolio of about 400,000 antibodies. And that portfolio, of course, has been able to penetrate the markets are very essential building blocks for almost any research or manufacturing company. And we created a real good position in life sciences that way. Now that's not where it ended because through organic development as well as inorganic activity, M&A, about 18 or so over the last decade, we've been able to invest in certain vertical markets. We chose those vertical markets based upon megatrends in the industry, and we created defensible positions in fast-growing nascent markets. And we created those four vertical growth markets in cell and gene therapy, in proteomic analysis, in precision diagnostics as well as in spatial biology, right? And those vertical markets, not only over the last couple of quarters, but over many years now, several years, have been outgrowing the market and have created the growth for our company. So if you think about our company as an investor, you do not have to make a trade-off. We have under normalized conditions, an entitlement of mid-teens growth, and we have fantastic margin because of this portfolio of building blocks that are real high-margin products. So that's kind of the mix of our company and what also makes it very unique.

Got it. All right. So you've been in the CEO seat now for just over a year. You took the helm officially last February. And prior to that, you were the President of the Diagnostics and Genomics segment since 2018. Can you reflect on your first year as CEO, you started leading Bio-Techne in a pretty difficult period for tools. And how did you manage through the environment?

Yes. I used to have a lot of hair a year ago. But anyway, it's a true honor the Board has selected me to lead this fantastic company. Of course, initially looked at is the mission and vision, what we should really aspire to and fine-tuned it, then double-clicked on the strategy, making sure that we have a real crisp strategy, not only around our core portfolio, but also around our growth verticals, make sure that we keep and/or increase investment in the areas where we see a real differentiated and differentiated growth, make sure that we took some cost out where it was not -- where it's not viable, right? So we even divested a business like the fetal bovine serum, which was lower growth, lower margin, didn't fit our portfolio as well. Make sure that we have top-notch management in the team, aligned in our organization structure aligned with our strategy. And then last but not least, we started looking at some of our footprint, our operational footprint. So we had distribution centers going into Europe. So I collapsed it into one and made sure that we have a strategy around our operational footprint. do not need to be in every country to manufacture everywhere. So we have a centralized center of excellence strategy where now we have real centers of excellence to distribute globally. So a real strengthening of the organization, and I'm really happy seeing not only how we have grown over the last year and outperformed the overall market, but I'm also quite pleased with the position we're in right now. So we are -- we make sure that we have invested behind a recovery rather than in front of it. And that means we're really nicely positioned for accelerated growth. Like our last quarter, we grew 9%. But we're also nicely positioned that in case there are other turbulences, which no doubt you'll ask about, we can weather those pretty well as well.

Got it. Okay. And then -- so moving over to sort of your guidance philosophy. Bio-Techne doesn't explicitly provide financial guidance. But over the long term, the company aims to outpace the life science tools market by 500 to 1,000 basis points per year, assuming underlying end market growth of 4% to 6% over the long term. What are Bio-Techne's key drivers that allow you to outpace the market at such a strong rate?

So the 54% of our revenues are coming from this core portfolio. And the core portfolio is still very important to our company, and we intend to outpace market growth by 1 or 2 percentage points. And that's because there's very high quality, very high consistency, and we have a great go-to-market model with fantastic customer intimacy. But the true growth comes from our growth verticals. And I just mentioned all 4 of them, but the cell and gene therapy by now $80 million run rate business, $60 million of that is GMP proteins. So GMP proteins last quarter grew 90%. The quarter before, it was 40% or so. And the 12 months trailing as well as the CAGR over the last couple of years have been fantastic. And absolutely drives growth. But the same is true for ProteinSimple, the protein analysis instrumentation portfolio, mid-teens last quarter. The same is true for spatial biology, mid-teens last quarter and obviously, very exciting markets. And then the diagnostics portfolio, where we have our prostate test that has been growing 30-ish percent in volume and our kitted business from Asuragen as well as the Exosome Dx portfolio also has been in that ballpark. So you can see that all 4 of those growth verticals have been nicely delivering on the outpacing of our overall market, and that allowed us to -- allowed us historically, but will also allow us going forward to outpace the market by 500 to 1,000 basis points.

All right. So moving over to your customers and geographies. Pharma makes up around 50% of your overall revenues. And in fiscal Q2, you noted that pharma revenue saw pretty broad-based strength and grew mid-teens. Can you discuss what you're seeing in terms of activity levels between the larger pharma customers and the smaller biotech customers? And what's embedded in your expectations for '25?

Yes. So I'll do a little bit of double click. So yes, 50% is biopharma of our revenues, 30% comes from large pharma and 20% comes from biotech. Jim and I have talked about how we looked at the fiscal year 2025, and we mentioned that our first quarter would be very similar to the last quarter of '24. We thought and we think that biotech would be recovering in Q2 because of the funding levels being better in '24, and that would trickle through. Then we assumed and assessed China to be back in the black in Q3 and that large pharma would start spending in line with their budgets in our fiscal Q2. And that has been playing out pretty much as we expected other than that large pharma was a little bit earlier in their recovery than we expected. So that really drove the outperformance of the 9% in the last quarter, and it's a great indicator for overall health of that end market. And we assume that the last quarter was kind of in line with what we are seeing going forward for that end market.

And Kim, just on pharma, given your consumables orientation, do you tend to see pharma spend come back first versus instrumentation? I mean I think the broader diversified tools peers have all talked about pharma recovering, but it's been a choppy ride in the last couple of years. I think there's still some hesitation from investors to believe it until they really see a play out in the numbers. So just maybe talk through kind of the lead lag effect, if you will, about what you're seeing versus maybe a more instrument-oriented play.

Yes. As you know, the -- our overall portfolio, 90% of it is related to consumables and/or services and only 10% of our revenue related to instrumentation. But kind of a differentiator is that our instrumentation is not very high-value CapEx. They're typically sitting anywhere between $50,000 and $100,000 a piece. We have some more expensive models now. But overall, they're lower CapEx items. And many of our instruments are very much related to efficiency gains. So rather than you're going to buy something expensive and now your overall expenses go up, you're going to buy something that's not that expensive and your cost base goes down, your consistency of your results goes up. And therefore, your time lines to the finish of your project are shorter. So your time lines to make money starts getting shorter. So overall, we are -- the portfolio is really aligned with efficiencies. The real encouraging data point I can share is that out of the last 9 quarters, 8 quarters of those our consumables directly related to our instrumentation have been growing double digits. So utilization of our installed base has been really high. And that would lead you to believe that at some point, people are going to bump into capacity constraints and we'll have to start investing in new instrumentation. And we're really glad to see that in Q2, our instrumentation volumes or revenues was for the first time since a longer time back in the black, and it was low single digits, excluding China, it was mid-single digits. And knowing that the utilization is so high and with some recovery, I would believe you would see it in our case, on both sides, the consumables as well as the instruments.

Yes. And for pharma specifically, it was very broad-based. It was very nice to see we saw growth in instruments for the first time again, as Kim alluded to, not just across the board, but specifically for large pharma. We saw cell and gene therapy be very, very strong with regards to our large pharma customers. And the consumables, call it, RUO run rate business, not quite back to where we expect to be in a more, call it a normalized market, but saw the best performance in pharma in that area that we've seen in probably 1.5 years. So it was pretty broad-based.

And maybe last one and turn it. In terms of being normal, you've heard IRA, pipeline reprioritization, maybe it's the macro interest rates. I don't know like when your salespeople are meeting with pharma customers, like when do we get back to normal? Like what are the factors you think that are still not there even though things are getting better?

Personally, I think it's just a matter of timing. I mean we -- as Kim talked about, we had assumed that large pharma wouldn't really start to come back. We wouldn't see it really until our fourth quarter, the calendar Q2, mainly because our main customer in pharma is the researcher at the bench, right? So by the time the budgets get approved by the Board and get trickled down to where the actual researcher knows how much they can spend, it's often the March, April time frame. So that's why we didn't expect to see it because we -- until then, but the underlying assumption around all of that was that much of the reprioritization and restructuring that pharma was reacting to as a result of IRA was going to be largely behind us in calendar year '24. And that in calendar year '25, the amount of R&D spend wouldn't necessarily be -- the growth wouldn't necessarily be different than '24. It would just be more widespread as opposed to targeted towards less riskier programs if it wasn't '24. So that was the thesis. I think what was nice to see was that thesis started to occur earlier than we expected before the calendar year was even out. And I can't tell you for sure why that's the case, except to say that if I put myself in my -- our customers' CFO shoes, I wouldn't be allowing that spend if I felt like next year was going to be another tough year, right? So to me, it was a positive sign, and it wasn't necessarily very narrow or specific. It was fairly broad-based. And what we were hearing from our sales team towards the back half of the December quarter was that customers were saying they were banging their head against the wall, you're long trying to get something approved. Even though it was in their budget, they couldn't get it approved. And then all of a sudden, the Evil CFO started letting it go through in the calendar Q4. So as an evil CFO myself, I wouldn't allow it to happen unless I thought there was a brighter future ahead in the year ahead. So that's a thesis, but we'll see how that plays out as we continue throughout the back half of our fiscal year.

Okay. Moving over to the academic side. Clearly, there's been quite a bit of volatility on the funding side. I'm sure you've had a million questions about that today. But can you discuss your exposure to NIH funding? And what type of impact have you seen from the new administration's actions to restrict funding?

Yes, certainly brought some volatility in that end market, academic end markets to just scope how large our exposure is. Bio-Techne's overall academic end markets globally represent 20% of our revenues. The U.S. academic market, 10% 5% of our revenue is related to accounts that have some sort of NIH grants and then 1% or less than 1% of our revenue is related to NIH specifically. So that scopes it. There are a couple of dynamics that I feel are important to take into consideration. One of them being that in general, there is a consensus that higher-end capital equipment is going to be more impacted than the smaller cost orders if it comes to reagents. Fortunately, our portfolio is really aligned with 90% of our revenues related to reagents and core ingredients for research. Secondly, as I mentioned earlier, our protein analysis instrumentation portfolio is very much aligned with, of course, doing important research in proteomics, which we know is a very important new trend, but also it's aligned with efficiencies and automating previously manual clunky processes and therefore, maybe even bring savings to certain laboratories and to our customers overall. So that is very nicely aligned with a constrained environment. And then last but not least, NIH overall funding is, of course, important for life science tools. But for us, what we've noticed over the last specifically 5 years was that the use of proceeds was even more so important. And that think about during and after the pandemic, lots of the proceeds for NIH funding were aligned with vaccination technologies with infectious diseases. And our portfolio did not align nicely with that end market. We always stayed away from infectious diseases. But we always aligned with chronic diseases, neurology and oncology, et cetera. And the rhetoric overall is that's more interest and more of the funding will be funneled in that end market, which, therefore, the use of proceeds would be more aligned with our portfolio. And therefore, that could also mitigate some of the nervousness in this end market, at least for Bio-Techne. You wanted to add any other dynamics?

No, I think you nailed it pretty well. All right. I'd like to move over to your segments and growth pillars. And just to start from a high level on proteomics. Some in the life science tools space have said we're entering the age of proteomics with the increased interest in studying proteins as a national -- a natural evolution of genomics. To what extent has Bio-Techne seen a demand lift from broader interest in proteins across your Protein Sciences segment, which is around 70% of revenue or so?

Yes. Proteomics, certainly, you see in some of our strategic decks. We feel that proteomics is one of the megatrends. And our portfolio, obviously, is very nicely aligned. We have a segment called Protein Sciences, 72% indeed of our revenues. And there, of course, we have the 5 decades of know-how and portfolio of proteins themselves. With those high-quality proteins, we have been able to create the antibody portfolio. And to accelerate our growth, we went into this growth vertical of protein analysis. And it all made sense because not only do you use those proteins and protein know-how to then look at this instrumentation to make the instrumentation look better and the results of it look better, but also we needed the instrumentation to look and assess how good our products are and characterize them early. So the whole portfolio was to internally build our capabilities, but it also nicely aligns with the megatrend of proteomics. And it's not only in the Protein Sciences segment. We also -- and we also talk regularly about our spatial biology part where you used to only look at RNAs and that proteins were a little bit harder to do and multiomics being important. So now you look at the RNA as well as the proteomics side and weave it all together, so you get a much better view on the biological pathway. So we're big believers that protein and proteomics are going to be a feasible -- much more feasible than in the past, a wave of research and that there will be a lot of attention there.

So you've identified four key pillars that make up about 45% of your revenue across the portfolio, including cell and gene therapy, ProteinSimple, spatial biology, molecular diagnostics. We'll get to spatial molecular shortly, but starting with cell and gene therapy, you sized this previously as roughly a $4 billion market growing low teens with Techne having about 2% share and growing over 30% long term. I think you discussed it earlier, but can you remind us how big this business is today and your key offerings within cell and gene therapy? And maybe speak a little bit about the Wols& Wolf investment as well.

Yes. Thanks for the question. And you mentioned that it is now a substantial part of our portfolio, 46% of our revenues coming from these growth verticals. I want to remind you that like in 2019, just before the pandemic, those growth verticals were only 30% of our revenue. So you can see how our revenue mix has changed. And of course, because those growth verticals have been outgrowing the overall market and of course, our core reagents part of the portfolio. So $80 million in -- as I mentioned, for the cell and gene therapy vertical, $60 million of that related to GMP proteins, but we also have GMP media and GMP small molecules. So that's more or less the balance. We invested early in this portfolio. Not only were we the leader in proteins and cytokines. Those are very important for cell growth. So we were early inventors of these cytokines. And then we were also very early in making those available under GMP formats. And of course, the moment you start going to clinical studies and you start going into therapies, you will need GMP certified materials. And so those things all have to come together. Of course, with the know-how and the quality of your ingredients, we built a large manufacturing capacity and capabilities. And at the end of the day, we also bought a part, and we will fully own Wilson Wolf at some point, which is a very innovative as well as patented kind of container to grow your cells in a very efficient, scalable and cost-efficient way and combine that with the key reagents that we have amassed over time, we have a real competitive solution for cell and gene therapy.

Got it. Okay. And another growth pillar here, ProteinSimple. You don't disclose specifically, but we estimate it's somewhere around $275 million between both instruments and consumables. You noted that instruments grew low single digits in FQ2, first returned to growth in about 2 years. And on the instrument-specific consumable side, they grew high teens in FQ2, which I believe you said was 8 out of 9 of the prior quarters where consumables grew double digits. Can you speak a little bit about the ProteinSimple franchise, what your sort of attach rate is for Bio-Techne consumables on the instruments and what your outlook is for instruments from here?

Yes. It's almost going on to $300 million. So your calculations are right. estimations are very correct. And I think just the philosophy of keeping it -- keeping -- providing automation for processes that are key to research and manufacturing and make them affordable and reproducible is just fundamental really fundamentally really Nifty value proposition. And then knowing that we have, for a long time, really been the ones that are the leaders in this space with limited competition and knowing that we have this real nice synergy by being able to pull through our high-margin core reagents on a very differentiated instrumentation that will provide efficiencies for our customers is a true win-win setup. And yes, we're really enthusiastic about that franchise. And we -- last quarter, it grew double -- mid-teens. And that's a number that we're really comfortable with looking into the future.

Got it. So your other 2 growth pillars I just mentioned earlier, molecular diagnostics and spatial biology. In your Investor Day deck from 2023, you sized the spatial market at about $5 billion, growing low double digits with your long-term growth rate being over 20%. And you sized the molecular diagnostics market at $9 billion, growing low double digits and again, with Bio-Techne growing over 20%. So I guess starting with spatial. You grew this business about mid-teens in the fiscal second quarter. What's your strategy within the spatial market? Can you discuss any market trends you're seeing, if you're taking share? And if so, from who?

Yes. So I think the interest in the spatial biology space kind of validates that it is very important to have a spatial view of how cells communicate and how they evolve and how treatments would make a difference in certain diseases. So it's a very important way to study and diagnose certain diseases. So it is -- the space is kind of evolving and growing, and there's lots of interest in there. We were early on with our RNA detection mechanism. We did an acquisition in 2017 of ACD, which by now is more or less a $110 million run rate in reagents only, all related to RNA. And of course, you can run these reagents on the larger throughput LICA and the Ventana instrumentation. But in translational, which is really where we want to be, it was important for us to have an instrument. And that's why 1.5 years ago, we bought Lunaphore. We feel that the Lunaphore instrument has just like our ProteinSimple instrumentation, a really competitive advantage, very reliable, fully automated multi-omic instrument that can provide high plex information on both the RNA and on the proteomic side. So very competitive instrument and then it can pull through the RNAscope reagents we have. But even more importantly, it can also pull through the proteomic side is antibody based. And we have obviously 400,000 antibodies in our portfolio. And over the last couple of months, we have really worked hard on getting the antibodies validated for the combat instrumentation. So now that instrument is taking share. It's been growing fantastically, really living up to our expectations, and it pulls through our core RNA reagents and it pulls through -- will start pulling through our antibodies, R&D system branded antibodies.

Just on the Lunaphore, you talked about taking share. Just what's been the share gain trend there? Like are you growing above the market? Is it all share gain? Just give us a flavor for what's happening in that business?

Yes. So the last couple of quarters, we've been growing 15% in the spatial biology business as aggregate, right? And I think there's other public companies in that space. And I feel that we have been outperforming their results. And not surprisingly, again, I think we have a very competitive positioning. And I'm glad that as an aggregate with some of the other players that we really enable the industry and the end market of spatial biology by providing various tools. And it's very important to understand that in discovery, you would like to get as much information on one sample as possible. And there are certain automation and solutions for that. And then in the translational where we really focus, you need some higher volume and some more consistent results all the way into the clinic, which where we -- more or less 10% of our revenues come out of the clinic now as well. So that continuum we all, as an industry, are trying to help our customers with.

Got it. Okay. Maybe one more here. We've got about a minute left. M&A is one of the keys to your story. You mentioned earlier the company has acquired around 18 companies over the past 10-plus years. Can you discuss your deal pipeline today? What specific areas you'd like to add to the Technip portfolio? And what's the ideal profile for a business Technip you'd like to add?

So I think we've always said and obviously also behaved accordingly that it's our main purpose of capital deployment. We're very interested in adding to our family. Of course, we would like to build out our core portfolio. There are other types of antibodies, companies with novel things that we could add to our core portfolio. We also have our 4 growth verticals and the one in specifically cell and gene therapy, where we have the upcoming acquisition of Wilson Wolf. There are many other ingredients necessary for cell and gene therapy that we could add to our portfolio. And it doesn't exclude that we wouldn't add to any of the other growth verticals, but those would be our two main areas of interest.

Got it. Okay. Maybe one more real quick one. What excites you the most about the Bio-Techne story?

You don't have to do a trade-off. You can invest in a company that has accelerating growth in a very healthy end market. Life sciences is not going to go away. Health care is not going to go away. People will want to grow old and in a healthy way. So we enable it. We have the -- the core portfolio with very high margins, and we have the growth vectors with very high growth. You combine those 2, you have a fast-growing, high-margin company, which is very well positioned for the future.

All right. With that, Kim, Jim?

Thank you very much.

Thank you.