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

Let's get started. I'm Tycho Peterson from the life science team. It's my pleasure to introduce Bio-Techne.

Maybe just to kick it off to start with a little state of the union. And obviously, a lot of volatility around the macro. We were just talking on U.S. NIH academic funding. Maybe just talk a little bit about that, talk about pharma dynamics and then the evolving situation in China.

Yes, sure. Well, first of all, Tycho, thanks for having us at the conference. It's been a great conference. Always is. Yes, so it's very dynamic dynamics. That's for sure. A lot of uncertainty out there, some of the greatest uncertainty we've seen in our industry in a while. But as we talked about at the last earnings call in terms of our Q3, the -- up to that point, the year was more or less shaping up the way we had predicted 3 quarters before that in our -- end of our fiscal year '24 in terms of recovery in the overall life science tools space in our customer end markets and was progressing quite nicely. And pharma, in particular, did very, very well. We had double-digit growth in pharma, and it was very widespread across our portfolio and across the geographies, which was great to see. What had not been a topic of discussion up until April was academic because academic was kind of steady and doing well. In fact, it was even better than most of calendar 2024 to start our Q3. But then actually, it wasn't -- actually February, not April, sorry, when the cap reductions first started in discussion, indirect cap reductions. So -- and everyone here who has been following it, they know that the news has gotten progressively, I don't want to say worse or just more intense with regards to now NIH budget cuts and how much of the cut is going to be and how is that -- what's that going to look like? It's anyone's guess where it falls out. But what we've been -- what we've done is we've quantified what that impact would be for our company, and there were some worst-case scenarios. And let's just take a real drastic view of a 40% cut in NIH funding, which I don't think realistically that's plausible. And for us, it's very difficult to know exactly how much of our U.S. academic comes from NIH. And as a reminder, it's about -- U.S. academic is about 12% of our revenue. But because most of that revenue comes from our core reagents, our core reagents are kind of like an everyday need in the wet lab, whether it's for an NIH-specific project or whether it's for just teaching students in the lab. And so understanding how much of those relative low dollar purchases are actually within NIH grant is really hard to know. We believe it's not nearly as much as what's perceived out there. But if you take the worst-case scenario, not the most likely but worst case, which is that those customers who receive an NIH grants were to reduce their revenues to us by 40% and you look at our 5-year CAGR going forward, it would have about a negative 1% impact to our projected growth rate. Now it would be more steep, of course, in year 1, which will be fiscal year '26. But assuming after that, the growth rates return to kind of the 3% range, that's what the impact would be to the overall CAGR. And why that's the case is because, again, we're talking about 12% of our revenue overall and not all that 12%, by any means, comes from NIH, but also our growth -- our main growth vectors that get us a double-digit growth that allow us to overachieve the market by over 500 basis points of growth comes from cell therapy, largely our proteome analytical instrumentation and then also spatial. And at least 2 of those 3 are definitely highly more concentrated in the biopharma market than they are in the academic. And so with those growth factors intact, even with that extreme drag on NIH funding, it would still have a relatively immaterial impact to our long-term growth rate. So that's kind of the academic environment and how we phrase like the downside. Now again, that's not what we expect, not what we expect in terms of what the ultimate cuts will be. I think that's a draconian case. And even if it was the case, we don't think that's what the actual impact would be to our academic U.S. sales for the reasons I already stated in terms of other sources of revenue that actually fund the majority, we think the purchases of our reagents by those customers. If we look at the other 2 main end markets, that being pharma and then smaller biotech, smaller biotech in Q3 wasn't as strong as we would have liked, but we think they were somewhat impacted by all the noise that occurred with the Trump administration and the threat of tariffs and so forth in the capital markets in general. I think smaller biotechs are just being much more conservative of their money. It sounds that they raised a lot of money last year. They haven't spent a lot of it that we can see, and there's not a lot of new money coming in right now because of all the concerns in the external markets, the macro market right now. So they're just being very judicial with their spend. And then lastly is pharma. We talked about pharma being strong in Q4 -- or Q3, sorry. And there, in April, again, with the tariff discussions around pharma, then the discussions around possible MFM pricing, not a lot of clarity around it, but just tweets and discussions. We've seen, what I'd call, is a come off the accelerator a little bit in pharma. So the growth is still very good. Relatively speaking, just not as strong as it was in our Q3. And so that's why we've -- when we look into Q4, we see kind of academic being the same in Q4 as it was in Q3. Nothing has really changed there. Our growth rates have remained stable for about 3 months in a row there. Biotech, pretty much the same. But pharma, we have seen the growth rates come down from the high -- double -- or from the double digits down to the mid-single digits. So overall, the company, we think, will fall out somewhere in the low single digits this quarter. So it was a mouthful, but that's kind of...

No, that's helpful. Maybe a couple of things to follow up on. I guess, pharma, is any of what you saw this past quarter pull forward then with pharma getting ready for tariffs?

No, we don't believe that at all. First of all, our product portfolio is not one that you do much in terms of stocking or pull forward. Again, 70% of our business is run rate reagent business. It's not the type of material that you buy way in advance by any means and nor do we see that in our instruments. So no, we don't believe that. We believe that was the genuine kind of market growth. And we're still seeing relatively strong positive growth in pharma. It's just not at the same rate we saw in Q3.

And then you've obviously seen a lot of CapEx announcements really over the next 5 years, so maybe nothing that impacts this year. But how do you think about that for your pharma business?

First of all, our CapEx is -- our instruments and our CapEx. Remember, our instruments is about 10% of our revenue. And then another 10% of our consumable revenue is tied directly to those instruments. And our instruments are relatively low-cost instruments and so they're not impacted by fluctuations in CapEx budgets. And the amount of productivity they bring to our customers often offsets any constraints you might see in CapEx. So as an example, even though the CapEx environment has been very constrained this past year, our overall -- our ProteinSimple, which is the brand for our instrumentation in Protein Sciences, that franchise has continued to grow mid- to high single digits quarter after quarter even in this environment because of that very strong consumable pull-through.

And then, I guess, why couldn't academic be a little worse this quarter? I mean if you think about just the timing of the new administration coming in, you did have an initial kind of freeze on grants, but then you started grant reviews in March. But why couldn't it be worse this quarter versus last?

I think I guess anything is possible, but I believe that some of this is psychology, too. You got to remember that the folks making the purchases, especially in academic are the lab -- the individuals at the lab and their impact -- they act more like as much as a consumer than they do like a company or an institution. And so they're impacted by the noise they hear in the press and on TV is like just like any of us are on the consumer side, and they behave accordingly and in a lot of cases, distracted by it. And spending time out of their lab and asking their administrators what's going on, what their future might be, et cetera, as opposed to actually working on the -- with the money they have today. And we believe actually that the distraction we saw from that in Q3 was actually overexaggerated the actual impact with regards to the funding they currently have to work with. And so the fact that it is staying relatively stable now tells us that kind of noise is out of the system. And they're kind of operating more normal, although at a lower rate than they were probably because of the concerns of future funding. But all I can say, Tycho, is that for about 3 months -- we watched our daily sales of academic on a daily basis. And for 3 months in a row now, it's been relatively stable despite the increased rhetoric around deeper cuts.

And instruments 20% or so of the business. You did have upper single-digit growth last quarter, right? So maybe just talk a little bit about were there specific product lines, segments, geographic regions that stood out?

Yes. So yes, our instruments is second quarter in a row that we had growth in our actual instruments, which was great because it had been about 1.5 years prior since we've seen growth there. And it was growth across all the platforms, but it was definitely driven by our biologics platform, our Maurice instrument, which is the -- it's one product that we have that's used in bioprocessing as a QC tool. So I think we've heard from some of the other peer companies who are more heavily involved in bioprocessing that you're starting to see that come back. And we definitely saw that come back fairly strong for that particular product line of instrumentation. And we continue to see growth in our Lunaphore instrument as well in spatial, that grew double digit as well for the quarter.

I definitely want to hit on spatial in a minute, but just on bioprocess, so how big is that business for you? And maybe just talk a little bit about exposure to current market, biosimilars, GLPs? How do you think about portfolio mix?

I think our biologic solution with Maurice is extremely well positioned and is a very unique solution that it has been taking share since its launch almost a decade ago, and we've had new iterations of it, have expanded its capabilities and its applications. The market for it continues to grow as well in terms of its applications, very ease of use. Yes. So I mean -- I'm sorry, what was the second part of your question, it was...

Just like as we think about newer markets, whether it's biosimilars, whether it's GLPs, I mean what's your exposure to kind of some of them?

I think those are all opportunities for us for that instrument by far, for sure. Those are all opportunities for it to continue to grow.

Got it. Maybe just touching on tariffs quickly. Remind us of your exposure, direct and indirect, how is that impacting supply chain, cost structure, pricing? And what mitigation strategies are in place?

Yes. So as we talked about in our last earnings call, we're fortunate that our exposure to tariffs is relatively very low. And to the extent we have exposure, it can be very quickly mitigated. So from a sourcing perspective, almost none. We've done a deep dive in all of our supply chains. And the only place where there was a possibility for any potential tariff cost increases was on our instrumentation business, but we've done a deep dive there, and there's none to be had there. So that's great. So the real focus was more on the customer and where there might be potential tariffs on our products to our customers. And initially, the biggest concern was China when the very high tariffs were initially announced and both -- on both our reagents and our instruments. About a month into the initial tariff escalation, quietly the -- it was never announced, but it was sent down to the authorities that our specific reagents, in addition to other products, including airline parts, were exempt from the tariff increases. So we only end up experiencing about a month's worth of tariff costs with regards to our reagents. And going forward, that's not a case. With regards to our instruments, those are still -- we're still exposed to the tariffs, whether they're higher or lower, but we have -- we make instruments in different parts of the world, and they're very similar in terms of how they're produced. And so we can very quickly move the product lines that are not currently made in the -- that are currently made in the U.S. to these other countries that can then support the China market from there and be exempt from tariffs. And we can do all that within a quarter. And then not only that, but in terms of thinking about the future because it's still very uncertain state where this tariff situation ultimately lands, we have been stocking up our inventories on reagents in both Europe and in Asia to give us a very long lead time of supply that can enable us to move, call it, the final fit and finish of these products to China and to Europe should the escalation refer or go back to kind of where it was or where it was threatened to go. And in doing that, we can very much mitigate any future tariffs because the cost of the raw materials is very, very, very low, and that's the value that would be tariffed.

And where were you moving manufacturing to?

We haven't been too specific on that, but I will still mention this, we have a facility in Canada, for example, that currently makes some instruments, and that's one of the places that we're looking to move -- not looking to, we were actually already in the process of moving some instruments -- not moving, but duplicating the instrument line there.

Maybe we could spend a minute on China. It's 8% of your revenues. Just talk a little bit about what you're seeing on the ground there. How has customer demand evolved, any kind of notable trends in purchasing behavior or regulatory dynamics?

Yes. So we -- that was one area from our initial recovery plan that didn't play out exactly like we thought. We thought it would be -- China would start to be in a recovery mode in Q3, and it didn't. It was kind of more of the same. And maybe we're just a quarter off. I don't know. I don't want to get too ahead of our skis at this point. But -- we've been at China recently, talked to a lot of customers, obviously, talking to our team there and distributors there on a routine basis. And the tone there is very suddenly starting to change. For the last couple of years, it's been nothing but a pessimistic tone, and the tone has turned more optimistic here, not, I want to say, greatly optimistic, but at least it's turned more optimistic with regards to how they're thinking about access to funds in the back half of the year and going into calendar year '26. And we've also seen since this tariff escalation has died down here the last several weeks, we've seen a return to demand in China as well that's encouraging. So I don't want to get ahead of our skis because we've had some false starts in China before, but it does appear like it's -- in the near term, anyway, it's moderating and maybe even slightly improving in China. With regards to the "stimulus", for us, it's not that material of a deal for us. It's stimulus. It's -- in the past, stimulus in China was like a blank check to pretty much buy whatever you wanted. This "stimulus" is a very targeted program to replace old technology with newer technology and specifically around instrumentation. Most of our instruments in China are already relatively new technologies. So there's nothing to replace. But we do have some old Wes instruments in our Simple Western platform that are out in the field. And those are the ones that we are targeting to replace with our newer Jess instrument, and we should see some upside in that this quarter from those replacements.

And I guess, yes, maybe talk a little bit about portfolio mix within China. I mean you mentioned Western blots with ProteinSimple. But -- yes, where is your portfolio strongest in China? And obviously, there's been a lot of focus on substitution, local competition. Where are you seeing the most pressure within the portfolio?

Well, so in China -- China actually has our heaviest concentration, relatively speaking, of instrument and instrument-related consumable pull-through revenue. And within the instruments, biologics, the Maurice instrument is by far our strongest. It continues to do very well. And Simple Western is probably the second. And then with regards to -- from a competitive perspective, similar to globally, we don't have a lot of direct competition with our various instrument platforms. They're fairly unique in their application and their price point. And it's mostly platform's manual labor that we're competing against as opposed to any other platform. And there's some other -- just some minor other nuances, but that's a general observation on that. Where -- the most competition in our portfolio in China does reside in our reagents and our core portfolio of antibodies and proteins, but that's always been the case. And there are formidable companies in China that are doing well and are good competitors. But what's encouraging for us is whenever you have a situation like we've had in China back now in the last couple of years where the times were very tough economically, you think, "Oh, my gosh, we must be -- might be losing share to lower-cost China competitors." Well, it turns out, we spent time with customers there in December, both academic and biotech customers and asked them, "Hey, what's your top criteria for purchasing proteins and antibody reagents?" And almost consistently across the board, what we heard, #1 and #2 was quality, lot-to-lot consistency, availability. And then further down the line was price and almost last always was China for China. So at the end of the day, that's no different, by the way, than any customer you ask in the U.S. or ask in Europe or anywhere else. And so what it tells me is that scientists are scientists regardless of what region they work, where they work, and they want a product that's going to work the first time. So it's not to say that we don't have competition. There's plenty of it, but there always was, but hasn't necessarily gotten any worse because of the situation there.

And I guess last one on China, what do you think durable longer-term growth is for you guys in China?

We're still bullish on China long term. I know it's a really unpopular thing to say right now, maybe -- it might be even hard to believe. But at the end of the day, we're bullish on our whole space and life science tools because the mega trend, I think, is still snowballing with regards to our space. At the end of the day, I don't -- whether you're in China or the U.S., doesn't matter where you are in the world, populations are getting older. They want to live healthier. And I think as important or more importantly, science is -- the science behind it is evolving at a rapid rate. If there was a lack of innovation, I'd be more concerned. But the innovation is continuing to accelerate. It's like a snowball. And in China, that snowball is currently smaller and even that has a potential to get even bigger because of the population we're talking about there. And I think the fact that our products, our core reagents were exempt yet again from the tariff escalations that were announced, I think demonstrates the need for Western life science tools to support ultimately what's the key -- of strategic importance to China and the Chinese people and their government, and that's building sustained health care. So we're bullish on China long term. Don't ever count China out, they'll get through this, just like we'll get through this. And when they do, I think China will be the fastest-growing territory in the region for the next decade. We firmly believe that.

Maybe we can shift over to liquid biopsy. It's a U.S.-focused business, not yet profitable. Maybe talk about the plans to scale it sustainably. Are there specific strategies to expand geographically, improve margins and accelerate adoption in clinical workflows?

Sure. So that part -- that's part of the Exosome platform. So when we look at the Exo acquisition, I'd had, the lab test that you referenced and the sort of -- which is EPI and also the technology base around exosome. So the EPI test is a test to help risk stratify somebody that has an elevated PSA score, whether they can do watchful waiting or should undergo a biopsy for diagnostic purposes. And we've built a channel around that company before we acquired it, largely chose that as the way to validate the whole technology platform. And I think we've done that. We've grown well over the years, continue to grow, most recently north of 20%. And that particular business is one that needs to scale to get to profitability. We've done a lot on the cost basis side to reduce the COGS. It's still a couple of years from scaling into a profitable company, but it continues to grow well, right? In a competitive space, we have a differentiated offering. I think the other piece of it that's exciting around liquid biopsy is we've taken the platform itself around exosomes and have deployed that in a kitted model, which is more consistent with the balance of our business and where we've already got channel established calling on diagnostic labs. End of last calendar, we launched a test for ESR1, which is a target in breast cancer for a minimum residual disease monitoring. And so that's -- we have a couple of tests in that same space. And it's a great model for us because post diagnosis on treatment, it's multiple tests over time to follow for a recurrence of the disease. And the exosome as a base to that platform has sensitivity benefits that actually make it very applicable for that space. And so we've got a runway of menu, and that's actually seen very good interest and initial uptake in the field. We've got a menu of targets in that same model that we'll deploy the exosome technology for. So really, we've started to now not just have the laboratory piece, but interpolate the base technology into our kit business and the diagnostics side as well.

And any sense of how big the kit business can be over time?

Well, that -- so minimum residual disease is an area that -- it's existed in some -- like in chronic myeloid leukemia with BCR-ABL, which is another one of our tests. But right now, it's really expanding because of the therapeutic options that are being developed there. And so as they're -- like the one for ESR1, as those trials read out, I think it's a model for where and how treatment is going to be given. So I think there's -- we're not sure exactly how big because some of that will be dependent on the success of the drugs in the space. But given the early success that we've seen there, I think it's -- I think it will be probably our growth driver in the oncology segment of the kit business.

And is that more for a community setting or academic?

So it will be in both, and that's what we see actually, for instance, with our BCR-ABL testing in leukemia in that for the high-throughput labs, it's actually a great offering because most of our kits focus on a workflow problem or a technology problem for the lab, with already existing content that you don't have to validate new content. It's got demand, volume, reimbursement, but the labs have trouble doing it, and we'll switch a technology for them. And so that's for high-throughput labs, the savings that they get on workflow are tremendous. In the community setting, it's a different value proposition because the tests are easy to do and their quick turnaround time, that can keep the continuum of care in the community. So we've seen adoption by both not at a physician office, but at a large physician practice with their own lab from there up through, I think, the largest reference labs.

Maybe we can pivot to spatial. You've got the integration of the Lunaphore platform. You launched a combo assay for RNA and protein on the same sample. Obviously, you're pretty well positioned here in the mid-plex spatial market. Can you just talk about how you're differentiating in that 20 to 40 marker range and...

Sure. Yes. And so that is where we see that -- the sweet spot. So we play in the translational market in spatial, all the way up through clinical. And in fact, we have a position in clinical for the molecular reagents in the ACD business, about 10% of our business there is strictly clinical through our partners, partnerships with Leica and Ventana. And then going back into the translational side, the multiomic nature of the questions that researchers are asking, the questions that pharma are asking is, I think, a key driver there. And Lunaphore is sort of the centerpiece for that. And that COMET instrument integrates now our -- we had basically had 3 separate businesses that we're combining into one offering. So we can pull the molecular agents and the antibody reagents from the protein sciences side of our business, all into that same spatial application. And what the field team has really been excited about and I think what a lot of our customers like is that when we go in with that full offering, whereas before we'd be talking about one thing or -- typically, just talking about one thing and missing sort of a cross-sell opportunity and not being able to integrate the 2. Even without the platform, our reagents now will -- so we have multiomic workflows for even manual kits. And so we're really providing, I think, an end-to-end solution from an automated platform with reagent streams that you can still choose sort of a la carte. And it's a -- nobody else really offers that combination of molecular and antibody reagents with a platform if that's what you need. And really, we're seeing that pull from the translational space increasingly into the clinical space, not just from our strict diagnostic business, but the sort of pointing end of the wedge in, for instance, lymphoma, where labs are adopting the platform because they're looking at panels of both antibodies and now molecular targets, and they're actually seeing up workflows in the treatment of patients for a standard LDT model, where we're seeing that -- not just the instrument, but the whole system being pulled into clinical practice.

How about capacity constraints as demand grows, talk a little bit about expanding the production capacity?

Yes. We had a pinch point about this time last year where we did have capacity issues. And I think we've largely worked through those. The instrument has now been on the market for just under 2 years. And as we've worked through 2 things, the sort of mortality that you have with any kind of instrument platform as you harden it and do the small engineering tweaks to make it more reliable and easier to service. We've also added the multiomic capabilities, which is a whole another set of requirements on that instrument. I think we've worked through all of those and the production lines, I think, now are -- we have the capacity to meet demand even with the sort of new features on the platform.

And that's a space that's gotten pretty busy, fairly crowded. How do you think about competition? Who do you kind of typically go head-to-head with most?

Yes. So we have, I think, a very competitive platform, not just because of the integration, but the instrument itself is that on just about every head-to-head measure, we beat the competition. And mostly here, we're talking about for the instrument Akoya and Molteni are the main competitors. And we have a superior box with the complete reagent stream that you can offer. And so we have a very high win rate when we're going against the competition.

Great. I know we're almost out of time here. Just maybe 2 quick ones. Margins, this has been a debate on. You guys, ever since I've known you, you've got terrific margins. How do you feel about operating margins going forward? And is there a path to drive additional leverage?

Well, we had great margin performance in Q3, almost 200 basis points year-over-year of improvement. We took some restructuring cost actions earlier -- late last year, earlier this year to prepare for what could have been a softer year and that allowed for the margin expansion that we saw on 6% organic growth. As we look in the very near term here in Q4, we do see margins contracting by approximately 150 basis points. That's largely driven by the aforementioned tariff costs that we've already had to spend this quarter as well as the lower expected growth rate. That being said, as we think about going forward, I think we've demonstrated, like in this quarter alone, we've demonstrated how much -- how great the pull-through of our revenue is. And when you get that revenue growth, how quickly they can expand margins, which is why when we talk about a 5-year target of getting north of 35% operating margins, it may seem like a long way for most companies to get there if you're starting at 31% or 32%. But for us, it's not that far away with decent organic growth. And so with the great margin pull-through we have, we believe we get back to -- the markets get back to normal. We get back to first high single digits start there, but then ultimately double-digit growth, the margin expansion will rapidly follow on that, and we can still invest in growth for the future at the same time.

Great. Right. We're at time, so I think we'll leave it at that. I appreciate it.

All right. Thank you.