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

I'm joined by Kim Kelderman, Chief Executive Officer; and Jim Hippel, Chief Financial Officer. Gentlemen, thanks for being here.

Thanks for having us.

Format is going to be a fireside chat, and then we'll open up to the audience if there's any questions. Just raise your hand and we can squeeze you in as well. I guess just to kick things off, you reported fiscal 3Q results recently. Solid results, especially considering some of the macro headwinds and the macro uncertainty, you're going to spend a lot of time talking about that. But maybe you can just give us some highlights from the quarter, just sort of how it played out relative to expectations? Where -- were you a little bit able to exceed expectations where you saw a little bit more headwinds?

Yes. Thanks for the question, Michael. And first, thanks for acknowledging that it was a very solid quarter considering the volatility in the market. Yes, 6% growth. We're quite pleased with that. We have the largest part of the company in Protein Sciences segment, actually ran at 7% growth, and that's really what drove the result, top and bottom line, which was very broad-based, and we're very pleased to see that our core reagents, which is still over half of the company did very well. And our instrumentation related to detecting and analyzing proteins and ProteinSimple franchise. It also really nice versus second quarter back in the black, which we really applaud. And then last but not least, the cell and gene therapy has continued to be a driver and also boosted the results. We jumped to the other segment, the Diagnostics & Special segment there, growth was a little bit 2% boosted by the continued growth of the EPI, the prostate cancer tests as well as by the other diagnostics side. The more volatile corner where we saw some timing of orders, not really end market related, but timing of orders related was the diagnostic of reagent and controls. Having some timing issues as well as the assurance and kits that go into laboratory, also related timing issues. We did our homework there. So we're quite pleased that we know it's not a market-related issue and/or a competitive issue, but pure timing. And that put that segment at 2% growth and overall 6%. Something the team should be very proud of as well as the bottom line, 3 4.9% EBITDA margins in these conditions, I applaud the efficiencies because we've continued to show, of course, very deliberate in efficiencies around our operational footprint. And combine the top line growth with these efficiencies, we -- yes, we were quite pleased how that rolled out.

Okay. I want to -- next I want to touch on some of the specific headwinds we've all been focused on in the market. First, let's talk about U.S. academic, U.S. A&G. Can you remind us sort of what your exposure is here? What you've seen as calendar first quarter fiscal 3Q played out? Sort of how April has gone for you?

Yes. So academic globally for Bio-Techne, 21% of our revenues come from academic business. 12% is related to U.S. economic we believe that half of that or so is exposed to NIH funding, partially or fully. And then we do less than 1% of our revenue is direct business with NIH. So that scope kind of revenue exposure. Yes, February when this got announced, of course, these end markets specifically got very nervous and didn't fully understand what it all means. And I think they still don't fully understand what it all means. That's all to be sent. One thing is certain is that there will be more clarity around these uncertainties. But there's definitely a stalling for a little bit. Fortunately, we saw a more normalized activity a month later in March. And we are happy to see that things, at least as it comes to new brands, et cetera, are back up and rolling. We clearly saw that our consumables actually, which is fortunately the largest part of our company, right? 80% of our business is related consumables. It held relatively steady, and it was really the equipment that took the majority of the hit when it comes to activity. And that's fortunately not only related to us. We saw that also from our peers. And something that, obviously, if you hear that your budgets are not certain and your brands are not certain. That's the first thing that you hold back on. We are actually still very positive about the end markets. Maybe not short, short, but short, mid and long term, just because we, as I mentioned, our product portfolio mix with 80% of consumables, we feel is less volatile there. And then we also feel that the use of proceeds of the grants or the rhetoric has it that they are more focused away from the pandemic and sort related to pandemic, the vaccinations, et cetera. And going more into chronic diseases, neurology, immunology and oncology, which are actually research fields that are much better aligned with our product portfolio and our usage of our instrumentation. So we feel that the use of proceeds, even though they could come down, then going more into the fields that are aligned with our product portfolio. We feel that it could be a positive boost to our results. And we saw the opposite, by the way, over the last couple of years, where funding was obviously very focused on research in infectious diseases. And there were significant increases, and we were still growing mid-single digits because we were not the benefactor of it. And we feel that the other way around, we will definitely see a little bit.

Okay. What should we keep in mind as far as the forward indicators of how that end market is going to do? There's a lot of indirect funds and indirect cost caps. There's a question on fiscal year '26 budget. The President has put out his initial proposal. Now we have to wait for Congress. You talked about shifting funds priorities within U.S. A&G sort of -- how do we monitor that and try to get a forward indicator of how that can point out?

Not sure if you have an opinion.

Yes. I mean it's really just more and more certainty around how that does play out, right? I think our view is that we got asked the other day, when is the other shoe going to drop in academic? And my joke was there's no more shoes to wear, they've all dropped, right? So I think all the possible worst-case scenarios and bad news is out there. Just plays out anything like the tariff thing, that's kind of how the strategy has been with the administration is put the worst case scenario out there and then negotiate your way back. There's still a lot of uncertainty even around the 40% and 40% of what is just the indirect cost savings. We've heard that, that's the intention. It's not really meant to -- intended to impact direct spending. So I think you got to step back and say, rationally, what are the likely outcomes here. And we've heard from our own customers that the indirect cap is probably the biggest issue, although not as big as -- as the impact every university is different. We've heard some customers that they were shocked to hear that some universities got the cap rates they got because they never saw that. It was really -- it was kind of crazy how we've done historically, right? It was all just individually negotiated. And so whatever political cloud you had will depend on how much your university got. A lot of this money also goes to general funds, which general funds could be spent on anything. So at the same time, we've also heard from our customers that a 15% cap is probably on the [indiscernible] side and they probably willing to cut some direct funding to help cover for that. So like everything else, the truth is somewhere in the middle in terms of where a win-win would play out. And I think there's still a lot of opportunities for that win-win to happen. And Congress hasn't gotten their hands on this. And let's remember, it wasn't that long ago in the first Trump administration, he proposed 20% cuts and the Congress that was bipartisan, but it was still controlled by [indiscernible] party for both those years, 2 years, came back with very solid increases. So I think it's -- you got to try and look past [indiscernible]. I think at the end of the day, when the dust settles, it will be fine. But in the meantime, in the very near term, as Kim mentioned, it does cause distraction if nothing else from an academic customer base. And if they're distracted by work, thinking how they're going to write their next grant or where that may come from, they're not at the bench doing the current work. And so that's what we have to work through in the very near term.

Yes. You mentioned earlier when you talked about performance in the first quarter and A&G sort of the differentiation between consumables and instrumentation. When we think about the consumable side of things from a customer spending perspective, I think probably one of the better indicators is just absolute head count, scientists of the lab. If you're at the lab, you can't not be ordering reagent to consume, you got to do something. So what have you seen there in terms of hiring freezes, maybe actual reductions in force on some academic labs? Is there anything there that makes you concerned about forward momentum?

I mean I often -- I have seen reported and our customers are telling us, we all saw the headlines around this first hit -- first week of February around universities postponing any new students for PhD programs, et cetera. But that was right out of the gate in the very early stages of this. And we haven't heard any feedback that, that's continued or anything. So that's the short answer is that we haven't heard that, that's the case on that. And I definitely haven't heard about [indiscernible] lab like that laying off people academic at this point. And I think it would be very premature for them to do so because it's not like they don't have the money now. They're worried about maybe the money 12 months from now where the next grant comes from. And so to take those kind of drastic actions when there's still so much uncertainty of where this all plays out, I think for most academic customers, it wouldn't be wise to do that anyway.

Okay. I want to talk about the other big policy issue, which is tariffs. Give us an update on your tariff exposure mitigation efforts and especially in light of the news yesterday of China tariff production to 30% and 10%.

Yes. The new news is obviously welcome. But even before that, over the last couple of weeks, we've talked about our exposure. If we would do nothing, we would be exposed by $20 million or so as it comes to cost and tariffs. But fortunately, we had very -- the luxury of having a nice global footprint that we can utilize to some manufacturing from A to B and with that, reduce the number of cross-border shipments and with that reduce the tariffs. And we have line of sight to do those shifts within months. We have line of sight to do it in months. It might not be as necessary anymore, but we think it's still prudent to execute on some of those projects in case things go backwards. And with that, negate almost -- and I'm talking hundreds of thousands of dollars off from the -- negate almost all $20 million within the quarter, so that we would have a fresh start without that cloud of tariffs hanging over us for the fiscal year 2026. Now most of our products are being produced in the U.S. So our highest exposure was really instruments that we produce in the U.S. that would go into China. And for that reason, we have several locations that build our instruments, not all models but we would have swapped some of those models around and negated relatively easily. And that might now be less of a savior because things resolved itself already, which is welcome for the industry and we applaud. Yes. So for us, really, what we did over the last couple of months is assess it, make sure that we plan for the worst and be ready for if things get better. That's exactly what happened. And I'm really proud of the fact that management had really precisely dedicated certain groups of people with limited exposure for the whole company to this tariff stuff, right? Because the one risk you really have is that your whole company is suddenly working on the tariff. And I've certainly chatted with peers where that seems to be the case. Like I want to make sure that we have real clean teams that have all the authority and know-how to make a dent and mitigate these things, but ring-fence it so that the rest of the company is still innovating, still making sure that we launch products and send high-quality products and selling and helping our customers going through this nervousness. And I think we did a good job on it.

I mean you talked about the mitigating steps you're doing and potentially scaling back on them. Are any of them sort of -- we're going to move ahead, no matter what? Or are there areas where it's relatively quick and easy to say, you know what, at 30% versus 145%, it doesn't make as much sense to implement that. [indiscernible] 10 --

Yes. So we make that distinction. It will be 10% going into China. Yes. I mean the NPV of these projects goes down drastically. But then again, I was mentioning that the -- how big of a workload it is, is also very small, and that's why we could do it in such short term. And therefore, I think since we started lifting, we'll just finish the lift. And we internally didn't even look at how much it costs and how much distraction it is because it was just so limited that we figured those are -- we call them internally, what are the weakness, [indiscernible], we'll execute on those.

Okay. And then the other topic I want to touch on before we go into specific products is just biopharma overall, your biggest exposure there. What do you see in the third quarter? How do you expect the rest of the year to play out? Any changes there?

Yes. Biopharma is 50% of our revenues, right? So with large pharma 30% and biotech 20% of that. As you might remember, when we guided for the year, we did our soft guidance thinking that the first quarter would be relatively flat to the fourth quarter of last year. But then we would slowly see biotech stepping it up, and we would see China getting back into the black and we would see at the end of the year, our year, which is more or less right now, we would see pharma kicking in. And that was a good logical approach to the year and that almost came out like that. But a couple of changes when it comes to timing and which were the real drivers. I think pharma, large pharma really surprised us to the upside. It was stronger earlier than we thought. So it was already in our Q2, at the end of the calendar year last year. It was -- we saw some traction and then our Q3 and our Q4, I'm not talking about Q4 yet. We certainly saw a huge tailwind from pharma being in double digits, right? And so that was really good. The biotech though was relatively flattish and that's very much in line with how we all look at funding levels, and we saw that funding levels have not been extremely strong in biotech. Very much related to the capital markets, right, and appetite to invest in new ventures. So they struggled a little bit more, and we saw that in our results with kind of flattish results in that end market. But in aggregate, it was more or less how we expected it. We'll talk about our Q4 forecast a little bit later, so I won't go into that part. But obviously, those 2 dynamics will -- are going to play an important role in our Q4 results. The China component as well as the academic component, we just talked about China component was supposed to come back in the black, but basically was on track to do that in Q1, Q2. It took a step back to negative mid-single digits this last quarter and more or less in line with the overall sentiment. So we saw that -- there was a little bit of stimulus, but not a whole lot. We know that there's a housing or real estate market crisis. We know that there's unemployment is relatively high and that consumer sentiment in China is lower and I think that, that is not going to change significantly in the upcoming quarter. So that would be basically flattish in our assumption. However, this newer deal could spark activity levels, right? We don't know how fast and to what extent, but there could be a positive to the local company.

Okay. You're talking about the change in the escalation of the trade war.

Yes.

Okay. Let's talk a little bit about some of the various product segments. The core portfolio of research reagents, antibodies, assays, proteins. There's been a decent amount of consolidation in that space over the last couple of years, over the last 2, 3, 5 years. Has that changed the industry dynamic a little bit? And how do you feel like you're positioned relative to some of the -- more consolidated vendor?

Yes. It changed the dynamics probably because it used to be many, many small and some midsized players. And now obviously several of the very successful assets became part of a larger global companies. Obviously, well-run companies, and they will do really well. But we focus on what we are what we are famous for, and that's having a tremendous portfolio of choice after 49 years of being at it. And then combine that with very high quality and consistency of these reagents and there with a good reputation. Very important is also that we have a sales force that is highly technical and can help customers pick the right stuff very quickly. And that's how we've competed in the past. We have always outperformed by a couple of percent competition, and we have continued to do so. There is more visibility now for us in some of the disclosures as to how we do and how others are doing, and we're actually quite happy to see that we continue to outperform. So even though the dynamics might have changed, our formula is still effective.

Okay. We got about 10 minutes left. If there's any questions from the audience, feel free to jump in. Otherwise, we'll keep going. I want to ask about cell and gene therapy, especially GMP reagents, a big part of that business. So what's the split of your exposure there between cell and gene? And can you talk about how Q3 played out relative to your expectations, what you're seeing in that end market?

So the expectations for that market, we mentioned basically quarter-by-quarter just because the percentages were fluctuated so significantly. We have 40%, 60% and a 90%, I think. And we always went back and said, like this, we want to talk about trailing 12 months because it's just very volatile. And that's inherent to having some larger accounts. So if you think about it, we have 550 or so customers in the pipeline. Of that 85 are in clinical studies. And of that, 6 are in Phase III. And then Phase III obviously, the volumes are exponential compared to the other phases. So that means the orders related to those getting through those phases are much bigger. And that means timing becomes the influence. And this quarter was mid- to high single digits, and that puts us at a trailing 12 months of a little over 30%. And that's where we kind of expected it where we also guided throughout the year that people should -- we had guardrails of between 20% and 40%. Well, 30% sits nicely in the middle, and that's where we're currently sitting.

Okay. There's been a lot of noise from a policy perspective here in terms of new political appointments within FDA, HHS. Obviously still very recent, but has that changed in your conversations with your customers? Or has that changed their sentiment or their appetite to invest in those cell and gene therapies?

Yes, there are several of them. So I can go one by one. I think in cell and gene therapy, the nice side of the conversations are that nobody is questioning that the new therapies are groundbreaking. They are just going to enable to cure diseases that we've, in the past, not even been able to treat right? So there's no discussion on whether this is a very promising field. The discussion is how stringent you should be and how high the hurdle, the regulatory hurdle should be before you can go to market with them. And I think that's a good discussion because at the end of the day, yes, we make money in all the clinical stages. And of course, if a drug then goes commercial, we would make money there, too, probably larger volumes, so that's all good. But sometimes the drug doesn't make it. The most important part is that you don't want a great opportunity like cell and gene therapy enter the market too quickly and then have a negative low bank where the drug doesn't do what it's supposed to do or you have fallout or a recall and that would set the whole industry back. So we are actually much aligned with -- take it in a good pace, have a good pipeline, pick the right diseases, and we want to play in all of them. And we will make money along the line. And as long as there's no bigger equals and missteps as we saw 50 years ago with small molecules or things going horribly wrong, right? And at some point, people start doubting is that actually the right way to go. We don't want that in cell and gene therapy. So that's pretty much aligned. If you get an FDA appointment and you think about the drive towards using organoids more than animal model. That is very much aligned with our philosophy already, like you saw earlier this year, we separated a business from the fetal bovine serum because we didn't believe that animal-derived products are going to be long-term beneficial for us. And we have a fantastic portfolio of the whole menu of ingredients to help customers build their organoids. And this would just put wind in the sails of that bet we've made over the last 5 to 10 years to build a whole portfolio around big believers in it. And then last but not least, it was -- the third one, I think it might be the driver of NIH towards chronic diseases. Those were the 3 kind of announcements with new directions when it comes to regulations. So 3 of those we -- so far, we like.

Okay. Okay. I want to talk a little bit about the spatial business. Can you give us an update on how that's fared? Where are you most focused? And where do you see some of the opportunities going forward? Is that -- matures a little bit?

Yes, the spatial business, basically, you can separate it in a couple of components. At the end of the day, it's -- we're going to make this offering in a full workflow, but we have a very competitive instrument that is doing really well in the market. And still, we talked about in the earnings call still hit the double-digit growth in spite of the turbulence that we had last quarter -- that we saw last quarter. And so very competitive, fully automated multi-omics, HiPlex, it's just the state-of-the-art instrument in the industry. And we're very proud of that. Now what is really cool is that it uses different agents, right? So you want to look at RNA or mRNA, you want to look at your proteins and this system can do both in the same slide, and even protein-protein interactions. And that was very unique. But in the meantime, that means it pulls through all the RNA reagents we have, and we have 70,000 different drugs, and that's $110 million or so in run rate in reagents. So it's the largest reagent portfolio in the spatial industry. And then secondly, we have fantastic antibodies, and we now have completed more than 50 that would run on the spatial instrument. So we like that instrument is very competitive, and it will pull through all our reagents that -- and that's exactly the model that we were aiming for.

Okay. We've got a couple of minutes left. I want to hit on a couple of topics. You mentioned -- we got a question.

Can you hear me? Okay. You've made a lot of acquisitions over time, your last one being in spatial. Do you think you'll continue that trend? And what areas do you think it will be in to kind of add on?

Yes, M&A is definitely something that has our highest priority if it comes to allocating our capital. So yes, spatial was the last one. That was the instrument I just talked about. So that definitely had a symbiotic model that we tend to have where, yes, we buy an instrument or a disposable that pulls through our reagents because we have really high quality, high-margin reagents. So that makes the model very viable. It is high on the priority list. Expectations when it comes to value, we're somewhat out of whack in our minds. So we stay very disciplined. We wanted to make sure that there is a return on investment at a certain point and return on capital. And there is potential that whatever asset we acquire has potential to grow double digits and hit margins over 30%, so that eventually is not dilutive to the company, and that's what we hold in high regard, and we will continue to aim for that. Right now, even though the turbulence and inconsistency in the end markets are unsettling, but they are working towards a more reasonable expectation. So we've been really busy in the last 9 months or so. We've landscaped. We looked at all the specific targets. We, of course, maintain relationships. We've looked at several acquisitions that would have been nice, but out of whack from expectations. So now we feel that things are coming closer to being able to take place, and then it would be a good deal for both, right? So sometimes it's a good deal for a seller, but if a buyer overpays then it's painful for a while as well. And I think we're entering an environment where you could have win-win.

Got maybe 1 or 2 minutes left, I want to throw in a couple of last questions altogether. Maybe talk about fiscal 4Q earlier and sort of your expectations going for that. Could you walk us through that and then I'll bridge that to a fiscal year '26 question? Just -- how do you approach setting guidance in an environment like today, so much volatility, so much changes on a day-to-day basis? How is that going to impact your -- thinking ahead in the next 12 months?

At a very high level in terms of Q4, we're still in the midst of uncertainty, even though there's positive uncertainties and then followed by negatives, and then followed by [indiscernible] and when there's uncertainty, there's distraction regardless. That being said, we saw our academic run rates level out in March, and we kind of expect -- and we've seen that continue in April. So basically, the same kind of relative performance we are expecting in Q4. Same goes for biotech. And as Kim mentioned, we think biotech is -- we're now being psychologically, if nothing else impacted by the concerns around the greater capital markets. So the announcements the last couple of days around easing of China tariffs may help that, which would be welcome. But nonetheless, we basically have seen that level of flattish growth rate would continue for small biotech. Same for China, kind of the same there. I think China has also been influenced by the macroeconomic situation around tariffs. So who knows? There could be some upside there, maybe we'll turn the corner this quarter and next, we'll see. But for now, we've assumed the same kind of level of performance. So the only difference really is large pharma, right? So large pharma carried the day for us in Q3 at double-digit growth. And now with the most recent activity, here in April and May around still yet to come, we think, with regard to the large pharma and impacts of whether it be tariffs or state nation, no one really knows yet net neutral positive or negative, but it's definitely uncertain if nothing else. And so we still saw growth in our pharma in April, but it was definitely a lower growth rate, which makes sense to me. So we basically got that lower growth rate built into our -- into our Q4 forecast, which gets you down to a more single digit versus mid-single-digit overall growth rate. So that's kind of high level, the thinking behind the current quarter. All I can say about fiscal year '26 is I'm glad I have another quarter on that one yet because how is it different from where we were a year ago when we thought a year ago, we were sitting in rather uncertain times, but yet not nearly as -- the recovery and the pace of recovery was uncertain. But the here and now wasn't. It was more stable, right? We're already well into the thick of the biopharma revamping their pipeline in response to IRA. We were seeing uptrends in biotech funding. You heard about stimulus coming in China in the back half of our fiscal year. So we saw a pathway to recovery. And that pathway as Kim talked about more or less right on track up until the end of January when the bomb started to fall, but we didn't see it coming 9 months ago. And right now, we're not in any kind of stable at all. It is still very unknown how this all plays out. So I'm just hoping that 3 months from now, things are more stable. So now you can start building a constructive case or what the recovery looks like. And we can do something similar. It gives the kind of guidance we gave last year for next year.

Got it. Okay. That's fair. All right. With that, we're out of time. Thank you very for joining us.

Thank you.