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

Luke Sergott, I cover life science diagnostics here at Barclays. With me, I have Jim Hippel, CFO of Bio-Techne; and David Clair, IR. I guess to start off, let's do the cleanup crew from some of the comments that were made yesterday. Interpretation is that the academic government market is hitting pretty hard on you guys and that the 3Q is going to be real soft. So just we want to kind of clean up some of the commentary.

Well, I appreciate the opportunity to despite the cleanup potential effort here. It's always a pleasure to be down here in Miami at this conference. So thanks for having us. Yes. So academic market and what's going on there and how does it pertain to us? Let's start making it very clear with regards to what our exposure is, regardless of what your belief are with regards to the state of the academic market. Let's talk about our exposure because I think it's been misinterpreted and misrepresented perhaps by a few publications out there. We've always said it's 20% of our global revenue is academic and roughly half of that is in the U.S., so call it 10%. And we've always estimated because it's difficult to tell exactly. We've always estimated that roughly half of our academic revenue is not directly but indirectly influenced by NIH, meaning comes from academic institutions that receive NIH funding. And obviously, with the announcements that came out in early February regarding the -- what was then the freeze on reviewing new grants as well as the proposed 15% indirect cap or cap on indirect costs. We said, let's do a bottoms-up look at it and see what our -- make sure we understand this for sure and what our exposure is. So we took a look at what the database is and all the academic institutions in the U.S. that received NIH funding and mirror that with our customer database with over 1,000 customers. And took the -- the worst-case assumption, which was going out was published by a couple of analysts back in early February was that my gosh, if this reduction comes into play I'll probably have to be funded in directly have to be funded out direct and it might be as much as an 8% reduction in NIH is kind of what was being floated out there. So I said, "All right, worst-case scenario, 8% reduction. Let's take a look at all of our TTM revenues from all of our customers that we know get NIH funding. Now does all of our revenue from those customers come from NIH funding? No, but I can't differentiate from 1 or the other. So worst-case scenario, 8% reduction on all those customers, what would that look like in the long term? It's about a 50 basis point hit. 50 basis points. It's a rounding error with regards to all the other moving parts we have in our business. So that's to kind of level set to the exposure. But let's talk about what's really happening now. And obviously, it's been -- a month of February has been a month of distraction to say the least for our customers and academic in the U.S. and as a result of distraction for the tools companies that are providing them. But here are the facts, and I'll be very specific in terms of you use the words, it's gotten softer in February because of the academic, I mean, that's going to be natural, right? I if it wasn't, you think we are lying. So let me give you a better sense of the magnitude. We started out in January with very solid growth in academic. It was actually better than it was in second quarter. And that momentum pretty much reversed is how I'd put it. It reversed in February. And where we stand today, quarter-to-date is about flat growth in our overall U.S. academic revenue. But more importantly, the first 10 days here of March we're back to low single-digit growth, and it's continuing to accelerate. So during all this distraction in February, yes, it gave up the gains that we had in January, but now we're seeing a pick back up in here in March. I personally expect to see that continue to improve as the month continues and going forward because I think there was a very important message that was sent out of the NIH on Friday, which definitely calmed us down, reaching out to our customers to see how they feel about and [indiscernible] calm them down as well, which is that the new -- incoming NIH Director basically so first day on the job on March 24, they're turning the ticket back on and reviewing NIH grants. And obviously, that's a big relief because the longer -- if that was going to be hung up in the court, so the longer it was going to take for that to get reengaged the more of a potential air pocket there would be in the future. But now we're talking about a month or 2 max, not a big deal. So that's a huge relief. And it should leave a lot of anxiety from some of our academic customers who are -- who were thinking about their next grant down the road. And then secondly, in the same statement, they said that it was also going to take a hard look at the 50% cap reduction and I understand kind of the impact of that, which is to meet code for, it's open for some negotiation. And about that 15% cap reduction, nothing misconstrued about it is they actually read the right -- the actual document that came out of the NIH in that initial February announcement. It basically said not that they were going to cut NIH funding, but they were going to use the money that was previously earmarked for indirect and they're going to refunnel that back into additional direct NIH funding grants. So you can very easily make the argument and signing the argument, it's actually in the writing that their intention is actually to increase the level of funding for NIH directly, not decrease it. And I know some of the pushback on that would be well that how our academic institution is going to cover this indirect cost if it doesn't come out of some other direct funding bucket. And some of the feedback we've heard from our customers and consistent with some of what I've heard certain analysts have written some reports recently on their feedback from academic customers is that -- is 15% of a bit probably too much of a cap -- but some of these caps or some of these indirect reimbursements that some of these universities were getting, some of our own customers were shocked to hear that peer institutions were getting so much. And 60% plus kind of things. And I can tell you firsthand, I visit a lot of these customers myself. They've been through their institutions. And I always joke that their cafeterias look nicer than the place. I take my wife for dinner and some have nice [indiscernible] gardens and everything else, right? Indirect funds often go into a general fund that can be used for anything. So to think that this is somehow going to have a drastic reduction in NIH funding. I think everyone's got it wrong. I think if the administration actually works this out, it comes to an arrangement where it's fair for everybody, it could be an increase in NIH funding across the board. So it's the uncertainty in the meantime that causes anxiety and causes concern. And February, I think, was that month, but it appears as though we're past that and with an incoming new NIH Director and kind of settling the dust a little bit. I think it's only going to get better from here.

And when you're thinking about redeploying that, it's like the $4 billion in savings, right, into direct funds. Arguably, you're going to go towards the bleeding edge of all the research, right? So proteomics, you have multi-omics, the spatial stuff. That should be also beneficial to how you guys are set up. So walk us through kind of the new products or obviously, Lunaphore and Spatial like how that's been playing out with you guys. And now that you're starting to see it come back in March, like up to low singles, like are these ongoing or obviously, the work that were ongoing grants that were just kind of paused. But like as that kind of continues to build the momentum, where in your portfolio do you see that kind of playing out first?

Yes. So I guess, first of all, thanks for mentioning that because the analogy I always use, and I try to explain this to others outside the company is with NIH funding, when it goes up and it goes down, kind of all boats rise and all boats may drift down a bit. But what is -- and we've been saying this for years, what's most important to us to our company is what the current in the water is. And honestly, for the last 3 or 4 years through all the COVID years, when double-digit increases in NIH funding were occuring, we weren't in the current. We were growing, but we weren't growing double digit in academic. And why because most of that extra funding was being directed towards COVID research, infectious disease research, vaccine development, and that's not our wheelhouse. That's not our strength of our portfolio. Our strength in our portfolio is around chronic disease. And by the way, that's where the administration has been very public in saying that's where they want to refocus and reprioritize all their funding, including NIH grants, is around chronic disease. And they've specifically called out cancer, oncology. They've called out diabetes, they've called out neurology. Guess what? Those are probably the 3 top areas of applications where our tools and reagents are used. So what's way more important for us as a company is getting back into that current. And so as a company, we're much less concerned about the absolute levels of NIH funding as long as they're not draconic reductions then we are about where that money is being spent. And so we're very encouraged about the future with regards to at least what's being said about what the priorities would be for that spending going forward. And our applications are all geared towards those. It's not towards oncology, towards spatial. You mentioned COMET, for example, so we think we're extremely well positioned to benefit from that.

And then same -- kind of the same vein of thinking on the biopharma side, right? You guys have always been a bigger push into cell therapy and some of the newer modalities biopharma with the restructuring, you have biotech is obviously still biotech right now. Talk about from the demand perspective that you guys have seen there. You've had a pretty big step up there in the last quarter, some continued improvement, talk about demand across that.

So biopharma, so biotech and big pharma combined make up 50% of our revenue. So by far, it's our largest and most important end market. And I know that 50% as a reminder, roughly 20% is smaller biotech and roughly 30% is what we call larger pharma customers. And I have a hypothesis, which set for our kind of soft guidance back in August for our fiscal year '25 was kind of a staggered approach to recovery, where we would start to see the smaller biotech momentum increase in our second quarter, which is the December quarter. And that was really predicated on the fact that there's been a nice step up in funding in biotech throughout 2024 relative to 2023 and even relative to pre-COVID and that, that funding would eventually start turning to spending by the time we got to the end of our calendar year '24. . And then followed by that in our third quarter, which we're in right now, would be a flip on China from being negative growth to positive growth. So no longer being the big headwind that it was to our growth rate. And then the last step to the stair case on the road to recovery was the large pharma, which at the time we had hypothesized would start to show strength for us in our Q4, the June quarter, simply because -- well, going back as to why. Why we think pharma is poised for recovery in our space is that if you step back even further, pharma is not trying to recover, pharma's doing great, really as a whole, that the pharma sector is doing fine. What 2024 was, was a year of reprioritization of their pipelines, largely due to the IRAC. And they reprioritized from a less risk -- less risk from a more risk kind of portfolio, meaning more on downstream clinical activities less on discovery. It doesn't mean they cut discovery completely because that's their future but they just run that pendulum back from maybe where it was geared more towards the higher risk funding and during the COVID days. And if you actually look, the amount of R&D increases that our pharma customers spent last year in 2024 increased at a pretty good clip. It was just more narrowly focused toward that clinical stage activity, which doesn't necessarily go to tools companies. It goes -- running clinical trials are very expensive and it goes to other types of cost than just tools and supplies, right? And so our thesis was that after that normalization of their pipeline, they would go back -- they still have the normal increases that they typically have because they're doing fine financially, but that those increases would be spread more evenly across their entire R&D portfolio, not just shuffle towards 1 end of it. But we would not see that as a company more than likely until the March, April time frame because you got to remember our customers even at big pharma, for the most part, who we interact with and who actually makes the purchasing decision is the individual lab person in the wet lab at the bench. And by the time those budgets get approved, these big companies can get circulated all the way down to the person in the lab, it often takes a few months, right? So that was the thesis. So from an overall perspective, it's played out very well. In fact, we're ahead of schedule, right? We grew mid-single digit in Q1 when we were expecting to grow low single digit. We grew 9% in Q2. Now we -- admittedly, we talked about the fact that we had some large customers, particularly in cell therapy, but also in our Diagnostics Reagent OEM business that we had forecasted for us to deliver that in our third quarter, but call this up in mid-November and said we're ahead of schedule, we want to take delivery now. I don't see that as a bad thing. I see that as a good thing. But when you adjust for that, we still grew in the high range of the mid-single digits in our second quarter, which is more or less where we guided to. If you ask what's changed from -- or what's different from our assumptions, it's a little bit of the mix of it. So biotech, in fact, a smaller biotech has gradually improved, that we started to see that in September -- as early as September and continued into October. But what surprised us was that the large pharma started to show a momentum shift, call it, mid-November, and it actually outpaced our biotech. And that surprises a bit. And what we were hearing from our customers is that all year long, they had these purchases for whether it was large bulk purchases for reagents for a new project they want to start or even instrumentation. It was in their budget, but they were told all year, they couldn't spend it. It was never got approved. And they made 1 last 1 of it in November, and their evil CFOs, let it go through. And the good news is we saw that kind of continue all the way in through January to where we're at today. So I give you that detail because how I think about that is that we get questions around, well, is this a big -- a budget flush? Spend it or lose it kind of thing. But that's not what our customers were saying. We've heard that in the past before as well, whether it's this heat that's coming down from middle management that says, "Hey, there's rumors that we're not going to get budget next year, so spend everything you got. That was not the message. The message was -- we had this in our budget all year long. We went ahead and set up -- we set it up to chain and they got approved. Now I can just tell you, evil CFO myself, sitting in my customer shoes, if I was really concerned about what the budget spend is going to be for discovery and other projects next year, I wouldn't be giving these false pretenses to my team that they can spend now. So we saw it as an early indicator that our thesis is it's hopefully correct. And again, the momentum we've seen in the early part of calendar 2025, hasn't deterred us from that thesis.

And so it's not really -- that was the fear is what you're saying. It's like essentially a pull forward of budget flush. We're not going to get it next year. And...

Well, and I think our -- I think the reaffirming of our guidance for the back half of the year says just that, Luke, because I think what was also missed is that this was -- it wasn't just a reaffirmation. It was actually a beat and a raise because if we thought it was going to continue at the pace that we thought back in August, we would have actually guided Q3 to be lower, low single digits perhaps. Because of these orders, large orders that were originally in our forecast that came out of it. But that's not what we guided to. We guided to mid-single-digit growth, which is more or less consistent with what our guidance has been from the get-go. So we actually messaged strength and momentum improving as opposed to the other way around.

And now the order book is kind of -- has shaken out over the quarter. That momentum as you said, is just continuing and building on each other. So like that back half, you feel a lot more confident then.

Yes. I mean, we'll see how it -- but at the end of the day, what we're seeing right now is consistent with what we've been messaging, frankly, all year and definitely consistent with what we messaged at the end of January, right? And of course, the only thing we did know at the end of January was that 2 days later, [indiscernible] and NIH were going to come down, but we've already discussed that, and I think a lot of that is behind us now. And it's a relatively small part of our business and for the most part, can be mitigated.

Sounds good. On the -- a little bit of a competitive landscape on the antibody side. You're 1 of big 4, I was described as a big 4, big 5. Talk about pricing and competitive dynamics there. where you guys are seeing your share gains, particular customer set? Or is it from a particular modality and then how that leads into the GMP side on your protein -- how those 2 play out.

Yes. I mean, as you've mentioned, antibodies is probably one of the most competitive pieces of our business. And the good thing for us is not any 1 product category that makes up such a huge majority of our portfolio that if it ever became a problem, it's going to bring -- it's going to bring our company down in like that. But obviously, antibody is an important part of our portfolio. the most competitive. And I would say the competitive dynamics aren't no different now than they've been 11 years now, I've been with Bio-Techne. We have very formal competitors, but I think we hold our ground -- more than hold our ground very well. And it's becoming harder to track admittedly because a lot of former public companies that were antibody companies are now no longer visible from an external perspective in terms of how they're really doing. But while they were public, we know we were taking share. We know that we were incrementally taking share from those companies. And based on whatever intelligence we have today, both from fellow investors, analysts, peers, customers, there's nothing to suggest that has changed. And when it comes to different by region to some extent. But in the Western markets like the U.S. and Europe, we're very competitive from a price perspective for what I'd call the high-quality premium antibodies we're not the price leader by any means. And where our antibodies are kind of specialized, which is around those that are used to detect cytokines, which is our [indiscernible] protein. We are extremely strong there and absolutely known for our quality. And it was very reassuring. I'll use an example. We were just in China in December and visited customers like we always do. And in China, in particular, when the economy is down and things are tough there from a budget perspective, you become even more hypersensitive to competition and even local competition, right? And so we asked the customers, every customer went to we asked towards the end of the conversation, if you don't mind sharing what your -- what drives your purchasing behavior? What are your top 3 or 4 or 5 things. And almost forbade them consistently across the customer base. And this is in China. Number one, quality, right? Number two, availability, being it is China. That can be a problem sometimes. Number three, the broadness of your portfolio. Then #4, price. And then #5 is it locally made or not. And so that was almost hands down the criteria in order. And at the end of the day, what you guys step after to remember is scientists or scientists in meter where they reside in the world, and they want their experiments to work and work the first time. So it gave us some reassurance that even in a tough time that China is facing right now, we're still very competitive in the antibody world.

On China. A lot of -- on the diagnostic side, we see increasing competition from local players there. Give us the landscape there from you just kind of walked through it a little bit, but are you seeing increased competition from local Chinese players in some of your pieces of your business? Like where do you think that your portfolio would be at most at risk there? And where you kind of have your moat.

Honestly, it's similar for China as it is everywhere globally. I mean the most competitive part of our portfolio is antibody globally and as well as it is in China. It's arguably nothing is easy in our portfolio to make, but it's arguably the easiest thing to make. And so there's a lot of small antibody companies in China. There's still hardly any that are nearly close to the breadth of what we can offer and some of our larger peer companies can offer. But that's probably the more competitive space. And proteins will probably be second, but even there, there's maybe 1 or 2 notable players that are even -- have business in the West as well. But we see them more as global players and China-specific players. When it comes to our instrument portfolio, which, by the way, in China, we have our heaviest concentration of instruments. It's more like 50% of our business as opposed to 10% globally everywhere else. And for most part, our platforms don't have much in the way of competition, globally much less than China. And so they've -- the CapEx environment has been tough globally everywhere as it has been for us, but the consumables that are unique to our instruments that are needed to run our instruments have grown double digit, 8 out of 9 last quarters. They grew high teens last quarter. And by the way, the -- this is true for China as well, even though China overall has been depressed. It shows that the value of our instruments bring to our customers even in China. And so we're very excited that when the markets come back, and we think that's starting to turn now, we'll see some pent-up demand for some instruments the capacity, I was think is starting to run pretty low.

Yes. And on the stimulus side with China, we've heard from peers that they're starting to see a lot of those bookings and orders start coming through for the higher-end CapEx equipment, and you guys kind of fit in that mid- to small range of that CapEx side. So are you -- talk about the order book from the stimulus? And how you see this time playing out differently than you're seeing that?

Yes. So 1 thing is I hate to even call it really stimulus because traditionally, in China, when there were stimulus, it was almost like a blank check. And then every life science tools company would see a 30% or 40% [indiscernible] we see only a 10% or 15% growth. But we see a 30%, 40% top, and then it would settle back down again, right? . We definitely validated this when we were there in December. This is a very, very targeted program to upgrade technological equipment across many industries across China. And as it pertains to life sciences, it's very specific that you basically have to demonstrate that you're decommissioning an instrument and replacing it with 1 with higher technology and you got to prove essentially to the government, its technological merit, right? So it is very nichey and very narrow. And yes, the higher-end instrumentation is going to be more applicable to them. And for us, we have our 3 instrument lines, where we've got Maurice. For biologics, we have Simple Western and then we have our Simple Plex. Well, Simple Plex is still relatively new. So there's nothing really there to upgrade. Maurice did replace iCE instruments, but China loves our biologics instrumentation and they replaced all their iCEs right away. So there's not a whole lot there to replace. But our Simple Western, there's still some Chinese customers that have the old West instrument box that we decommissioned. And so that's where we're actively working with our customers to upgrade them to [ cIEF ] And we've been asked the question, how do you know so much about the industries about what's going on with stimulus because it seems like certain companies saying all, but have been more kind of ambiguous about it. And it's really because, at least in our case, we actually have to go with our customers and help them fill up the applications. So we can say, here's what's different. Here's why it's technically better, et cetera. That all being said, it's not a big needle mover. This is not going to be a big spike, but it does provide a nice base as we head into 2024 to work from. And we are see -- we actually saw a couple of those orders to come through in Q2. We're going to see a few more come here in Q3. The bolus will probably happen in our Q4, but what's more important is when we were in China in December, we were hearing not only from our team but also from our customers, that the National Academy of Sciences, which is kind of the equivalent of NIH for China, for the first time in probably a couple of years was starting to message that they're encouraging the submission of grants. They haven't heard this for a long time. So it's an early indication that finally, China might start be getting back to a more normalized funding pattern of grants throughout their country. We haven't seen it yet, and we were told not to expect to see it until sometime after the Chinese New Year, that month-long celebration. So we're kind of there now, and we'll see if that starts to materialize. But our teams there definitely feel as though China has bottomed. We're hoping to get into the black here in our Q3. And it'll be probably a mid-single-digit growth year in calendar 2025, but a nice gradual steady improvement. And long term, we still have a lot of faith in China, never count China out. At the end of the day, they have 1.2 billion people. They're still well behind in health care relative to the rest of the world. And they've been very public about their statements that they want to be a leader globally much less than Asia. And they got a long ways to go, and they need Western tools company to help them get there.

Great. Thank you. It's all the time we have. Seems like the momentum is kind of coming back and building.

It is in this room. I'll tell you that. All right. Thanks so much. Appreciate it.