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

Okay. Great. I'll get started. I'm Puneet Souda, I cover Life Science Tools and Diagnostics here at Leerink. And it's my pleasure to be inviting team Bio-Techne. Jim Hippel, CFO joining us on the stage. And also David Clair from Head of Investor Relations. Welcome, guys. Great to have you here.

Thanks, Puneet.

Thank you, Puneet. Always good to be here.

Okay. Awesome. So -- maybe just to start with the topic that's on everyone's mind. Given February 7, NIH [ Directs ] came out, that we had an expectation you're going to see some impact in Q1 calendar and then sort of continue through the year potentially. Things have -- seems like so far, maybe somewhat status quo on the consumables end. But again, we'll see when the numbers come out. But NIH news is necessarily -- not necessarily turning positive. We're obviously hoping that it turns positive one day because there's obviously this is the #1 medical research position that U.S. has #1 position in that, that no one would like to lose ultimately. But maybe just we continue to see layoffs in intramural. There was some $400 million cut to a university, other things that continue to remain here, anxiety levels are high. I guess -- at a high level, what are you hearing from the customers? What are you seeing on the ground? What are the field reps telling you?

Yes. So thank you, Puneet. Yes, it's been a fun month February has. And honestly, we had a sales meeting with our sales leadership yesterday to get a beat on what's going on in the field. And frankly, it was already old news because most of their information was Monday through Thursday. And of course, there was an announcement Friday from the new incoming NIH, which was some positive news. So maybe I'll sum it up in terms of how we're thinking about it, based off of what we're hearing from our customers, what we're seeing in our run rates and what we're hearing from the administration, what we're hearing from analysts kind of put it all together. And we think about early in 3 time frames. The most important, of course, is the long term. Long term, the very, very short-term meeting this quarter and then the intermediate term, which is kind of somewhere in between, which is to me means, when the dust settles and we actually -- the uncertainty is gone, whatever the answer is we know what the answer is, right? So the long term, regardless of what the outcome of the answer is of all these different iterations of [ EDICS ] and so forth have come down the pipe. We're not overly concerned about it. And they start with first framing the actual, call it, exposure, if you want to put it that way that we have to this issue. When we actually looked at all of the publicly -- it's public domain, which universities and institutions get NIH funding, we mirrored that to our database of customers and looked at our TTM revenue and said, okay, worst-case scenario, if there's a reduction in NIH funding. And there have been numbers that have been thrown out as much as 8% at the 15% indirect cap stick. So we use that as a worst case scenario because not all the revenue from these customers comes from NIH, but we don't know how much it does. 8% slice off of all that revenue was about 50 bps of headwind. So in the absolute worst-case scenario, which is there would be an 8% reduction in NIH spending, and all that spending gets spent on us by those customers, that's the worst-case scenario. So it's not a huge exposure. And we make an argument there's actually an upside. If you actually read the writing of the message that came out of the NIH regarding the 15% cap. It actually said that the intent was not to reduce net dollars that universities get, but to have the indirect money instead go into direct, which if you read that by the letter of what it says, would actually suggest maybe an increase in direct spending. I'm not someone not saying that's the case. Either my point is, it's somewhere in the middle, which is probably status quo. So our exposure is not great and the impact is not going to be a big deal. And what's more important to us, and we've always said this for our company, is NIH funding goes up and down, the boats drift up and down with it with the water level. But what's most important for us is where the current of the water is. And really, for the last 3 or 4 years, we've been more out of the current than in the current because much of those double-digit increases have gone to NIH funding increases have been directed towards COVID, COVID-related disease research and vaccine development, and that's not where we play. And if this administration actually puts its money where its mouth is in terms of prioritizing funding towards those grants that are more towards chronic disease like they have said cancer, diabetes, neurological disease, guess what, that is our wheelhouse. That is where we play. So regardless of what this outcome is, we think we will benefit ultimately long term. Okay. So long term, no strategic changes being made because of this. The very, very near term this quarter here and now. Clearly, when there's uncertainty, I don't care whether it's investors, whether it's customers or what industry it is, whenever there's uncertainty, people claim up, they pause. And I don't want to use the word free. It's got sounds rather a draconic, but they do pause in their activity. And so clearly, after the first week of February, we started to see that as well. Now having said that, it wasn't a cliff drop. It was just a -- we had very strong momentum in our academic daily run rates at the end of our Q2 and into January, we saw it noticeably momentum starts to soften a bit in February, not unexpectedly. And if you think about it, -- at the end of the day, what researchers are working on in the economic labs today was from funding that was approved much, much earlier. So those don't just stop automatically. Does the CapEx environment for future slow down a bit, yes, our exposure in CapEx and academic is fairly minimal. Our CapEx as a company is fairly minimal. And to the extent we have it, it's more geared towards biopharma. So the here and now, it's not the momentum we saw in Q2, but it's not ERF shattering either. Not enough for us to feel overly concerned about some of the soft guidance we gave for the quarter in terms of mid-single-digit growth. We are seeing strength in other areas. We continue to see strength in pharma or is to say, a recovery happening in pharma that could potentially offset any short-term headwinds we have because of this February, call it, pause we had an activity or a positive momentum. The real concern for us was the intermediate, meaning as long as there's not new NIH programs being funded, the longer that goes on, there's going to be an air pocket in the future. And we were concerned that this dragged on in the courts or otherwise for 3, 6, 9, 12 months, it could become a problem for us perhaps in fiscal year '26 in terms of a bit of an air pocket. And Friday was great news because the new incoming NIH Director basically said they're going to try to spike it back on, on March 24. And not only that, but take a look at the 15% cap and see what makes sense there is a code for negotiating for most something more reasonable. Because what we are hearing from customers is that the ones, who have a 15% gap to date don't even understand or can't comprehend why some universities get 60%, 70%. So is there froth in the system -- for sure. Anyone who's toured -- I've toured a lot of universities on customer visits and you see Zen Gardens and cafeterias that are nice, so I'm going to take my wife out to eat, right? So I mean, be a little bit exaggerated here, but money is -- it goes into a general fund and God only knows where it's met. Overall 15% probably is a bit too tight. But where we're at -- where we've been in the past is probably a bit egregious. So it ends up being somewhere in the middle. I think everyone is going to be just fine. But it's encouraging in the interim that they are turning to spike it back on. So there's not a major gap in programs rolling off and new programs coming in. So we're less concerned about that air pocket now.

Got it. No, that's very helpful perspective. And I mean it's I know it's hard to say, given just a lot of the moving parts still, but I know you usually don't give guidance, but you said sort of mid-single-digit to high-single-digit in the second half. Is that -- just given the comments that you made about sort of what happens in the medium term, is that -- was that already at the time you provided that? Was that already baking a level of prudence? Or does it need to have more prudence now?

Well, I mean, we've had that soft guidance we've maintained throughout the year up to our last earnings call and that was, of course, before all this stuff came down with academic and the 15% cap. So it's a new wrinkle in it. It's so dynamic Puneet that I'm not about to call it out. Is it a risk item for sure, but every 2 days, it seems to change. So at this point, not enough of a change for me to say there's no way we can still achieve what we set out to achieve in our Q4 at the start of the year. No way would I say that at this point. But March will be an interesting month to see how it plays out, March into April.

Okay. Just sort of shifting to another macro topic. One is China's tariffs, but on the flip side is China's stimulus. Could you talk a little bit about -- again, I believe your exposure is not that large, but -- and it's -- a lot of it is consumables still. So maybe just talk to us about -- and maybe I need to be corrected on that if you can provide sort of instrumentation versus consumable mix for China. How are you fair there? And how should we think about the tariffs risk. But on the flip side, maybe the stimulus is coming back?

So as a reminder, our business in China is roughly 8% of our revenue. These days, it was as high as 10% at one point, but it's in 8% to 9% range now. And historically, it's been a mix of about 50% instruments and 50% consumables. So it is our most highest concentration from a region perspective of instrumentation. That mix has probably shifted a bit, it's in the last year or so. I don't have an exact figure off the top of my head, but it's still instrument biased for sure. We were just in China in December, and there's no doubt the macro economy is probably going through the toughest period I've seen there in 25 years. And you can tell by just talking to the people on the street that they're feeling it as well. But our space there has been feeling it for a lot longer. And there were some actually some hopeful signs that the bottoming process is in. And I think a gradual recovery is in the works. There's a "stimulus", which I'll get to in a moment. But for us, what's more meaningful and more important is them getting kind of back to more of a business as usual with regards to their equivalent of NIH funding. So there are National Academy sciences, I think, is what they call Dave. And because we are much more consumable based there, we're much more heavily -- we're not CDMO or as heavy industry-wise there. We're much more heavy towards the academia institutions and biotech that is ultimately semi-funded through the government. So the government funding is very important for our business in China. And when we were there in December, what we were hearing was that for the first time in what seems like 2 years, their equivalent in NIH was becoming much more vocal about encouraging grants to be submitted in the upcoming year. We haven't seen much activity from that yet because it's usually it starts to kick in after the Chinese New Year and month-long celebration, which just finished. So we'll see that. But given that, and that's more important because it's more sustaining for us. Our team there feels like it will allow us to turn into the black perhaps as early as this quarter in January -- I mean, in China and get to mid-single-digit growth in 2025. Now specifically as it pertains to the stimulus, it's not stimulus in the sense of what we've gotten used to with Chinese stimulus was kind of almost a broad-based cut a check for whatever you want for your purchases. It's very, very targeted towards replacement of equipment for a technological reason. And for us specifically, there's only 1 instrument platform that pertains to because our most popular instrument in China is our Maurice biologics instrument, but almost everyone has one, they've all replaced their ICE instruments over the past 2 years. It's more of the Simple Western platform where many customers still have the old discontinued West platform. And so we're looking to upgrade them to a Jess. And we know exactly which customers they are, we know what the opportunities are because we literally have to almost hold their hand and go through the technical specs in the application process to get through. So we've seen that. We actually started to see that -- saw a couple of those trickle in last quarter. We expect a few more to trickle in this quarter. The brunt of those will probably happen in our Q4, which will help Q4 for us. But it's not a needle mover by any sense, and we're not necessarily expecting it, too. It's just another firming of the base, so to speak, is how we think about it.

Yes. No, that's helpful. And then what's interesting and you started to see some pharma and biotech recovery and in first -- fiscal first quarter of yours and fiscal second quarter, you saw strong growth in GMP proteins. Maybe just what's the latest update from the pharma side and maybe the early biotech side. What are you seeing from those customers?

Yes. So as a reminder, when we have you the first one to kind of stick our neck out for in the '25 calendar year and talk about soft guidance. We had a kind of a staggered approach, where we thought the biotech subsector with smaller biotech subsector was tried to recover to recover first just because of the strong funding we saw earlier in the year. We expected that to start to happen in our Q2. And then China to come on board and start becoming accretive to growth as opposed to a drag to growth in our Q3. And then large pharma not really start the recovery process until our Q4 just because we were expecting -- we will be assuming that pharma budgets would become more normalized, meaning not the amount that they spend, that we need different in terms of growth, but in terms of how they distribute it among their programs, they'll get back to more traditional spread among full range of discovery, translation all the way into the clinic as opposed to last year, it was definitely much more geared towards later-stage clinical stuff. But we wouldn't see that we'd thought until the April time frame when budgets get approved and get pushed down to the lab level who -- or actually our ultimate customers. We started to see biotech momentum pick up even a little bit earlier than expected in September and then in October. And that then what pleasantly surprised us was that November, we started to see pharma pickup, which was much earlier than we expected. And even more so than biotech, frankly. And that momentum has continued into January into our third quarter. So we're pleased by that. What we were hearing from customers. The substantiated this was that we had orders, some larger reagent orders and some instrument orders where our clients, our customers really wanted them, but they kept on getting -- they were in their budget, but they kept on getting turned down for approval by their evil CFOs. And all of a sudden in November, they made 1 more pass at it, and it went through. So it wasn't like there was this edict that came from above -- from the top that said, spend it or you're going to lose it or whatever. It was more just all of a sudden, things we're getting through the system and getting approved, which putting myself and my customer's shoes, if I was one of those evils. I am a evil CFO, but if I was -- one of my customer's evil CFOs, I sure wouldn't be giving a perception to my -- to the employees that things are all clear if they weren't. So I think it was a positive sign, and we saw that carry through in January, which is encouraging.

Got it. Okay. Then on -- and if I could switch great to the GMP proteins business has done well for you there. There was a bit of a pull forward that you talked about. How should we think about the growth in context of that pull forward into the sort of second half '25? Maybe if you can sort of level set us in terms of how this business -- again, this has been a strong growth. It's offset some of the other challenges in other parts of the market that you had. But maybe just talk about the sustainability of it.

Okay. So our GMP protein business is obviously 1 of our growth pillars for a reason. It's gone from less than $5 million of revenue to north of $60 million on an annualized basis in about 5 short years. Considering our [ RUO ] protein business is a little over 2 to 3x that size, but took 40, 50 years to build, right? So pretty remarkable growth. And what we're seeing now is our -- we have over 500 customers, about 85 of them or so are actually in clinical trials and about a half a dozen of those are now as far as long as Phase III. And what we're starting to see as these customers get into clinical trials and progress through them is pretty much what we hypothesized all along, which is that the amount of volumes we're going to increase exponentially from these customers as they progressed all the way through the clinical trials and then really explore once they get to commercial. And that hypothesis is proving out to be true because these half dozen or so customers, when they buy, they buy a lot of material. And now it's causing lumpiness. But it's a good lumpiness. It's a good problem to have. And as we get more and more customers in the clinical trials and progressing through clinical trials, the lumpiness will smooth out, not because of the individual customer level they smooth out, but in aggregate, they'll start to smooth out. But that causes some heartburn for folks like us -- and the finance minded folks like us in the room are trying to forecast this stuff. But that's why we started talking more and more about our trailing 12-month growth rates as it pertains to our GMP protein business because it's how you think about -- how you should think about the growth trajectory, and that's now stands at 40%. Our long-term view over the next 10 years is for a 30% CAGR. So we're above that long-term view. But that's the way I would be thinking about it. Yes, we're sitting at whatever it is, 80% or so year-to-date growth, but as you mentioned -- and Poland is now, where I like to use, because Poland but suggest we pulled it in. We did not. Our customers called us up in the assets they said they needed it earlier. So really great. So that will cause some choppiness from a quarterly growth rate perspective for sure. But as you think about building out your 1-year plus models, be thinking 30%, 40% plus. That's how I would be thinking about it.

And what's interesting is that when we look at the cell and gene therapy backdrop in the market, I mean the sentiment is not so great, but you guys are obviously levered to some of these trials that are doing well. They're needing more proteins just along those lines, I mean, Wilson Wolf, can you sort of update us where Wilson Wolf is today, size of that position? And when do you expect to pull the -- be able to pull the trigger and just remind us what that criteria is?

Yes. So I mean even in this more difficult time for biotech in particular, this past year, 1.5 years, Wilson Wolf is also doing well. I think year-to-date on our fiscal year-to-date, they're roughly 20% growth right now. So they're doing well, I'll say now, like we are. What's really exciting about Wilson Wolf is they have over 800 customers. They're in about 45% of all the cell -- immuno cell therapy trials today, and they've got almost half a dozen. I think 5 of the 9 therapies that have been approved for immuno cell therapy, they're in 5 of them, so over half. And those 5 customers have provided forecasts for their launch in the upcoming year. And just those 5 customers alone will give will so move multiple double-digit growth rates even if the whole -- even if the other 795 customers don't grow, which is probably not the case. So again, we're seeing exactly what we expected in terms of that massive inflection once you go commercial with Wilson Wolf and that's what's going to be in our sights with our GMP proteins eventually. As it pertains to purchasing the remaining 80% of Wilson Wolf, as a reminder, they have a bogey to hit either $326 million (sic) [ $226 million ] of TTM revenue or $136 million TTM of EBITDA.

$226 million.

Sorry, $226 and $136. Thank you. Dave -- that's why you're up here, keep me honest. And they'll probably hit any of those will hit the EBITDA one first. So that gives you a sense of how profitable they are. John Wilson still thinks he can hit that perhaps as early as early 2027. That's great. Forever optimus. We're still going on the path that we'll probably end up purchasing it at the end at a contracted 4.4x TTM revenue. But it will be in that ballpark, one way or the other in terms of the revenues we expect. So as pretty much on plan.

Got it. Just wondered, since we're talking about potential acquisition, just -- I mean, given the state of the market right now, biotech, that's an important pillar to Bio-Techne are those acquisitions maybe they're starting -- when they start, they're a little bit dilutive, but then they catch up, but they have a -- you've been disciplined about that, and you have a great profile whenever you acquire those assets. But maybe just give us a sense of what you're seeing in the marketplace today and given the challenges of the market.

M&A market you are saying -- yes. I think you're seeing it in the public markets, and we see it in the private markets because that's kind of where we play historically is in the private space, typically, sub-$500 million deals, right? And the assets that are very cheap, are cheap for a reason, generally speaking. And I guess true in the public sector, but also definitely true in the private sector. The assets that are strong assets that have a lot of potential real exciting science, really don't have any problem getting funding. And so those owners, why would they sell in an environment like this, that's suppressed overall market for our space. When they know they can get more in a more normalized market. So there's no hurry and they're willing to wait. And from our viewpoint, why pay you'll probably pay the same a year from now or 2 years in now that you'll pay now, but with much clearer skies than what we maybe have right now. So it's not to say we're sitting on laurels doing nothing. We've done a lot to actually beef up our corp dev organization. We've got some really strong professional people we brought in from the outside to not only hone our M&A strategy, but hone that if they are our overall company strategy overall and really focusing much more targeted on what we wanted of M&A. So that when the time is right, we're in a much better position to strike and be seen as a favorable acquirer by those potential companies. So a lot of activity goes on behind the scenes before you ever pull the trigger.

Got it. We touched on the sort of the state of the market. So maybe I can just briefly talk about the spatial platform that is well positioned on the closer to translational -- just wondering, if you're seeing any impact there, too? Or is that more defensive because comment has grown over the last few quarters?

Yes. It's all relative, but naturally, it's going to be somewhat impacted in a sense that spatial overall, and not just to comment, but our ACD business is more heavily weighted towards academic than the rest of our portfolio is. And of course, in the case of Lunaphore, it's higher-priced instruments. So from a CapEx perspective, it's going to be more sensitivity. So despite all that, it still got tremendous double-digit growth, and it's got an amazing pipeline of opportunity. I don't think we've just had one dissatisfied customer that that's been brought to our attention -- we have 1 customer who's not just bought 1 or 2 or 3, but has bought 8 of them. You don't buy 8 of these instruments unless you -- you really see the value in it. So the future there is still just amazingly exciting and the fact that it can do that well in this environment, I think, is a testament to the underlying technology of the product.

And then just -- this is a question we've been getting around, and I should have asked it with the M&A question. I mean just given the state of the academic market, does it change your view at all on things that you could potentially pursue on the M&A side. Or this is more of a, again, a temporary situation...

Well, again, our long-term view is that it's not going to be impactful to any of our strategy, and that would basically include our M&A strategy as well.

Okay. All right. Then just briefly on -- given the time, let me touch on margins. Obviously, you have a great margin profile, a 72% gross margin. You're targeting 30% to 45% -- sorry, 30% to 40% long-term target on the operating margin line. But maybe just talk to us -- what drives your confidence in the step-up in the second half? Again, recognizing that there have been challenges and that could gate it, but if those were to resolve what else what are the margin levers that you can pull? And if things were to be tough, what are the margin levers that you can pull?

Well, I think we've already pulled a lot of those margin levers in the sense that we -- over the last year, 1.5 years and especially in the last year, since Kim has been on board, we've really done as it would kind of house cleaning, right? It's what you do when you're running a 100 miles now for 3 or 4 years and then you realize you've left a lot of trash -- I wouldn't say trash, but you left lot of debris behind you got to clean up, right? So whether it's rightsizing the organization for the -- what the areas that are growing versus the areas that are not growing as much, whether it's realigned some of our portfolio, which we've done, we don't have so many distractions. We definitely have held the line on costs, and we're positioned very, very well for margin expansion when the growth returns. So I would say now what gives us confidence in the lift of incremental margin from second -- first half to second half. Honestly, it all comes back to volume pull-through because if you look historically at our profile of our revenue. Our second half revenue is always higher than our first half, and it's really just a dynamic of when people take vacations. You remember much of our revenue is generated by the individual at the lab. So if they're in the lab, they're buying our stuff, if they're not they're not. So the heavy vacations in the fall quarter, heavy vacations with holidays in the winter quarter. Not so much in the spring and early summer. So that's why our revenues are always higher in the second half. And with that -- if our cost base maintaining relatively the same, you get that incremental margin lift and you see that pull-through come into the bottom line. It's really as simple as that, which is why if there's any risk to the margin guidance we gave in the second half, it really comes down to the revenue. If the revenue is not as strong, the margin may not be as strong, but it still will be incrementally higher than the first half. And then you haven't asked it, but I kind of expect you will then what gives us confidence about in the future, getting to 35% to back to 40%. It's that same confidence that how we can get such a big step-up in margin from first half to second half, demonstrates the amazing pull-through we have on our revenues. So when we get back to double-digit growth, you can get back to that 35%-plus rather quickly.

All right. We're at almost at the time. This is always helpful. Jim, thanks for taking the time. Dave, thanks for being here.

You bet. My pleasure.