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

Catherine Schulte. I cover Life Sciences and Diagnostics here at Baird. Very excited to have Bio-Techne joining us from the company, we have CFO, Jim Hippel and Dave Clair from IR. So Dave, Jim, thanks for joining us.

Yes, thanks for having us.

Maybe just to kick things off, give us the state of the union on the fourth quarter, you delivered 3% organic growth. Maybe just talk a little bit about what you're seeing from your end markets and then we can dive into each of those.

Sure. So I mean our key 3 end markets, of course, would be starting large to small, would be our pharma end markets, roughly 30% of our revenue, followed by smaller biotech, which is roughly 20%. And then academia, which is also around 20%, although like roughly a little -- just slightly over half of that's U.S. based and the rest of it is mostly U.S.-based. And when we think about those 3 end markets, starting with pharma, we had predicted a year ago that a lot of the pipeline reshuffling, so to speak, pharma was down as a result of the IRA legislation was going to be occurring throughout 2024, which it was, and that it would be mostly behind us by the time we got the calendar 2025 and that the R&D funded would be allocated, maybe more pro rata across the portfolio as opposed to leaning towards more early-stage stuff. And we were happy to see us exactly kind of how it played out even earlier than we thought, starting even in late November, December and definitely throughout our Q3 and Q4, which gets us into the summertime, pharma returned to what we call normal kind of growth, which for us is double-digit growth. And it was great because it was -- we watched it carefully to see how real it was. The fact that it was over 2 quarters, made it feel real, but also the breadth of the strength. It was strong in almost all of our product categories and especially on instrumentation, which I know we'll talk about that a little bit later. But even within our reagents, it was healthy, right? So pharma was back to normal and we'll come back to where -- I'll come full circle to where we are now when we ended the year. But for the quarter, it was back to normal. Let's go to biotech. So biotech the second largest. Biotech for us, did relatively well, very low single-digit growth, but anyone who reads all the stats around funding right now, how is that funding is down quite dramatically this year. Unfortunately, back down to almost 8-year lows last time I looked. And so the fact that we were able to squeak out growth in that environment was we thought was -- we're proud of that. But we'll talk about that in the future, too, that's a headwind concern we have going forward. And then last is the academic market and particularly the U.S. academic market. And I don't have to belabor that. I think everyone is painfully aware of all the noise that's occurred in that market since the beginning of February. And we saw, like I mean most peers in our class saw declines in our U.S. academic market overall, really for the last 2 quarters of the year. But it was really concentrated towards kind of larger purchases and instrumentation, our spatial kind of fill in that too in terms of large purchases. But our core reagents continue to do the kind of hold their own and hold steady, which considering the dramatic reductions in funding and the behavior of our customers anticipating major drops in funding, we were also proud of that result. So that was kind of the mix of how it worked from a, call it, an end market perspective, from a geographic perspective. Europe has been doing well for us for quite a while, continue to do well. It's very solid mid-single-digit growth, I believe, in our fourth quarter, and we expect that kind of momentum to continue here. So Europe has been so far kind of unphased by all the political dynamics that have gone on here in the U.S. And with regards to Asia, I think we're encouraged there as well. We had a very strong quarter in China. We had the first double-digit growth in China in a very long time. But admittedly, it was somewhat induced by, we believe, pull-ins, particularly on the instrument side in China, where that was when the real tariff war was heating up, and we believe some of our buyers were concerned about what would ultimately stick there and so they pulled ahead there. And when you back that out, though, we still believe China performed relatively flat for the quarter, which is -- we'll take it because it's not a decline. And we see that being kind of steady going forward and steadily building from here. We can get some of the dynamics of why we think that, but I don't think we're well in saying that either. And then for the rest of Asia, kind of very similar to China, kind of follows China in a lot of ways and relatively flattish, slight low single-digit growth in our Q4, but we see momentum building there as well. So it gives you a sense of where some of the maybe the tailwinds are geographically, but also where the headwinds are from an end market perspective. And back to kind of where we ended the quarter, and our thinking in the current state is, first of all, I don't have any updates to give. I have no different view than what I did a couple of months ago. And that's also partly because the first 2 months of the year fall right in the dead middle of the summer for us. And it's by far the lowest volume month of the year. So trying to depict the trend is very difficult. Really, it's September and October, by the time we get to our next earnings call, where we can kind of set the stage of how it's really looking. But that all being said, our view going into fiscal year 2026 was that really until there's all these unknowns that are floating around out there, both on the U.S. academic side, but frankly, now on the pharma side, which is another potential headwind we have, and we're not seeing calling it for a severe drop off. Pharma tends to be a lot more pragmatic and don't get to emotional they're buying based off of new suites and so forth. But it was hard for us to imagine that pharma could continue. And it's -- for us, it's normal double-digit growth in an environment where in the month of July, it was a target big time for the administration on all different fronts, whether it be tariffs or MFN pricing. And there's been -- like everything right now, it's very dynamic, and there's been a little bit better news on that when some of the details of the EU agreement came out, but not much public comments from the U.S. administration on that. And I think there's still there's a lot of uncertainty there, and I can say put myself in my customer shoes, I'd be a little more cautious as well. So that's -- we're taking a little more cautious stance on pharma in the near term. Academic, we've seen 2 quarters have been relatively the same for us. So the momentum hasn't gotten any worse, but we still -- we've performed very well in that U.S. academic the first half of last year. So those are some headwinds that we have at least for the first half of the year. Once we lap that, assuming things don't get worse, and I personally don't think they will. I think our customers are already behaving in that segment as if the worst has already happened, then that should start to get a little easier with regards to lease to comps. And then lastly, biotech. And I think biotech is really the hardest one to predict, and it's the one that may take the longest to recover just because as we just talked about, the funding has been down dramatically, frankly, for this year. There are some green shoots. I think you publish it, I've seen in other places over the last couple of months, it's returned to growth again. But that's still coming off of the first 6 months of some really, really tough months. So it's encouraging, but there's also a lag of when you know this is when the funding comes in the door and when it actually gets spent. And so there could be a maybe a little of an air pocket in the future for that. We didn't see it yet, but we're also being cautious about that.

Yes. So as we think about that and a low single-digit outlook going forward. You just did 3% in the fourth quarter. But as you noted, Pharma grew double digits. You had some pull forward in China. I know low single digit isn't necessarily a guide, but should we think about that as at least a floor for the first half?

Yes. I mean, how I would think about it. I think the analysts. We're in line with the analyst view they have us pretty much at low single-digit growth for the year. And we believe that is very possible, very doable, even in this dynamic environment. And we've positioned the company for that rate of growth from a cost perspective to make sure we can hold and even grow our margins. But the dynamics within the quarters can be a bit noisy. We already talked about the headwinds that are more near term than perhaps in the back -- the first part of 2026 calendar year. I think the noise will settle down by then and that's what we're looking for. It's for a baseline where our customers can now know what to work from. But also, frankly, a little bit of -- suffered a little bit from our own success from last year, right? I don't think there's any other company out there that reported 9% growth in the December quarter and very few that reported mid-single-digit growth in the September quarter. So we've got some pretty tough internal comps to overcome as well. So it might be a bit bumpy along the way, but we still overall -- we've planned for low single-digit growth for the year and from a cost base perspective and investment perspective, with the hopes that there's upside in the back half that we can see some even stronger margin pull-through.

Yes. And maybe on the academic side, it seems like NIH award activity has picked up quite a bit in recent months. There's kind of this fiscal year-end from a government standpoint to get those awards out the door, which is encouraging. Have you seen any improved sentiment in July or August from researchers if that's being unlocked?

Yes. I mean, like I said, I won't even comment on July and August because every year, whether it's good years or bad years, July and August drive me crazy because it's off such low baseline. But to answer your question, I mean, we obviously still are having conversations with customers and so forth. And we haven't seen or do any notable change in behavior yet. I mean, they've all been a bit shell-shocked and you have some money has been released, and that's great. I think it's also -- you've heard me say this for years, Catherine, we've been trying to figure out the algorithm between NIH funding and our growth in U.S. academic since I've been there for 11 years plus, 11 years plus and still haven't figured it out. And I think it's for a number of reasons. One of them being that NIH still as a group funds roughly 30%, 33% of the overall university budget. It's obviously a big chunk, but it's not, by any means, the only chunk nor the majority of the chunk. So that's part of the reason. And the other one is you remember Frank, one of the old PhDs been for us for 40 years. He used to tell me the analogy he would use is you think of NIH funding as the river. And yes, when the water level goes up and when it goes down, it's always better when it goes up. But what's more important is what the current is. Water level could be up, but you could be stuck in the back water and you don't notice anything much difference, which by the way, happened during the COVID years when there was double-digit increases in NIH and our budgets were -- I mean, our results in academic U.S. was still roughly mid-single digit. We weren't necessarily in the current of COVID research vaccines. That's not where our products play. So even if the water levels come down, where the current is we could actually grow in that environment. And we'll see where the rhetoric -- if they put their money with their mouth is from a rhetoric perspective, but what we are hearing from administration that is a positive, at least for us as it pertains to NIH funding is that they want to double down efforts on both prevention and treatment of chronic type diseases, whether it be in cancer, diabetes. And those are the exactly the type of applications that are the sweet spot for all of our products and our applications. So we'll see.

As we think about this kind of low single-digit near-term outlook versus the mid-teens CAGR that you guys expect long term. How would you rank these headwinds of pharma uncertainty with MFN and tariffs? Biotech, China, academic, what do you think is -- how would you rank order those in terms of the biggest -- driving the biggest delta between what you're seeing today versus your long-term expectations?

Well, it may sound like a bit of cop-out answer, but the biggest delta is just getting the markets healthy again. I mean I believe that our -- what's kept us in the black throughout this entire call it, COVID hangover period, much less the first 2 quarters of this, I call the new disease, which is the Trump effect in our industry, at least. But what's kept us afloat has been those growth pillars, many that you just mentioned, cell therapy, our proteomic analytics instrument or protein simple franchise. Our spatial franchise even although academic recently still didn't end up mid-single-digit growth for the year. So our growth pillars of what had been carrying us. And if anything, the performance in this down market has given us added confidence of their ability to lead with very solid double-digit growth when the markets normalize. And when the markets normalize, then the 55% that's our core, will no longer be a drag and the growth will actually help contribute to the growth. When you add those 2 together, it makes for -- I hate to say simplistic, but actually a pretty logical rationale as to how we get to double digit, and I'll add one more to that from a quantitative perspective. If you go back 5 years ago right before COVID hit. These growth pillars we talk about made up roughly 30% of our revenue, and our core made up roughly 70%. Fast forward 5 years later, and those growth pillars now make up 45% of our revenue, and the core makes up a 55%. They are not good numbers. And it's not because of our core shrink during that time period. Our core is still significantly bigger than it was 5 years ago. It just gives you a sense of how much now that those growth pillars have made an impact on our company. And by the way, they're all still very well underpenetrated in their markets. And if anything, to keep on expanding their applications and growing their market potential. So I think it was a snowball that just -- in that next term of the snowball can be even more accelerated growth. You just got to get the markets to cooperate a little bit here.

Yes. Maybe on one of those growth pillars. And in an environment where research instruments are having a tougher time. Your analytical instruments grew at mid-teens in the quarter. So can you just talk through what's driving that strength and how you expect the instrumentation portfolio to trend going forward?

Yes. I mean the simplest answer is it was driven by pharma. Pharma is -- big pharma is the biggest end market for our instrumentation. And the return of pharma -- 2 quarters in a row, getting back to health in terms of their allocation of spend across the portfolio. And they always spent the same out that was all -- in 2024, it was all about near-term stuff. Now they've rebalanced it. And we saw that come back in spades in our instrumentation. And I've been saying for quite a while now, which sounds a little bit counterintuitive because kind of the main thesis out there, which is usually true is that when -- in a recovery of markets, you usually see it in your consumables first and your instruments later. But I actually believe at least for us, we would actually see it in our instruments first and the reason I say that a couple of reasons, but one of the main reasons is that throughout the COVID hangover and downturn that we had, the utilization of our instruments continue to grow at a double-digit rate, placements, new placements were low, but the consumables, and we know exactly because they have to buy the cartridges from us to use the instrument every time they use it. And we had in some quarters 20% growth even during the downturn. And at the rate of utilization, we knew what the capacity instruments were. First of all, it validated to us that these instruments are used as productivity tools in a down market. But at some point, they start to run out of capacity. And so my thesis is once they have some available dollars, especially for CapEx, we're going to see it. And I think that's what happened.

Okay. And maybe GMP reagents that was up over 30% in fiscal '25. How is -- I mean, what's driving that strength? We've talked about biotech is a bit weaker. And then what's your expectations for that part of the portfolio and your kind of low single-digit outlook?

I mean what's driving the strength is it's just -- it's a great end market. I mean cell therapy specifically is here to stay. There's 9 approved cell therapies today. So it's truly not just treating disease but carrying it. So it's truly is next generation for treatment. And so it's not like money has gone to zero. There's still money out there. So I think it just shows that -- how important that is and how exciting it is because what money there is, that gets prioritized, I think, by many of our customers. So that's kind of market view of the strength. For us specifically, we've continued to add new customers. We're now up over 550 customers that are using our GMP proteins for cell therapy. We have roughly 80 or so in the clinic, and we have half a dozen or so that are kind of very far along in the clinic. And so we've had -- it's been a win-win-win in terms of the market, in terms of our growth of customers, in terms of our customers progressing to the clinic. But to be completely transparent. What drove the dollar growth was these handful or so of customers that are very far into the clinic. And it validates again our thesis that the farther you get in the clinic exponentially the sales grow. So it's a good thing, but it also -- when you buy for a late-stage study, you might buy once every year, once every 18 months. So therefore, it becomes very choppy for a while. And I think it will continue to be choppy until there's enough critical mass within these clinical trials and/or to become commercial to where it starts to smooth out again. So it's just part of the life cycle of being in the space in the early days when we had no GMP revenue and got up to around, call it, $30 million, $40 million of GMP revenue. It was like a straight line because it was just adding customers, adding customers, and they were slowly getting to the early stages of their clinicals. But now we're in that lumpy phase where big customers, big purchases, but not every quarter and sometimes not even every year. And so that's what we're facing in the near term. But it's all for good reason and long term, it's going to be fantastic. And we're seeing that -- we got a preview of that with. Our investment in Wilson Wolf, right? So Wilson Wolf. They make a G-Rex, which is a bioreactor that's specific for cell therapies. It's truly revolutionary in the sense it's the size of a laptop. It's the plastic item, but it's got IP that allows for amazing cell growth in a very small space. And it's a company we bought 20% of with the intent -- the full intent to buy 100% of. And we will because it's basically contractually -- we're obligated by them. They're obligated to sell to us by no later than the end of 2027, there are some milestones in between that where we could purchase it and hopefully do purchase it sooner. But I mentioned them because they've been at this a lot longer than we have, and they have over 800 customers. They're in roughly 45% or so of all CAR-T cell therapy clinical trials, and they have of the 9 that are commercial, they're in 5 of them. And so we see their kind of evolution ahead of us. It was interesting because in calendar year 2024, they had relatively flat growth, even though we were still growing north of 20%. Like what's going on here? Well, they had these 5 customers that had gotten through Phase III, but now we're on a pause, waiting to get the full FDA approval for the manufacturing processes and all that. So there was about a year, 1.5 years slump they didn't buy anything. Well, now they're through that. They're starting to actually ship to customers and patients and so we're expecting that to take off again to 20%, 30% growth starting now essentially. So that's kind of the preview of the path that we're on with our GMP.

. Got it. And so should we still expect strong 20%-plus growth for GMP for you in '26?

We don't -- I'm not going to comment on any specific product lines. And -- and to be frank, I can't commit to that one way or the other, even internally because of the lumpiness of the nature. And they still don't always -- it's frustrating that they don't always tell us where they're at in their trial and when they're going to need more. It's kind of a cent of we've made it very available to them, which it's good, but it also lessens our visibility a little bit.

Yes. And on Wilson Wolf, you've been working with them for years. But to your point, you're getting closer and closer to when that's a part of Bio-Techne. Maybe just remind us what that will do from a margin standpoint and financial profile scale.

I actually still think it's one of the most underappreciated part of our company that's not built in, I think to most people's models or thinking about our future. And why I say that is -- and thanks for teeing it up is because, we already talked about the growth rates that they're now ramping up to again with the commercialized products, and they're running currently to over 70% EBITDA. Now we model and we own the company for it to be only 60% EBITDA. That's because we know that there's investments we're going to make there to make it a public worthy addition to our company. But nonetheless, very, very. It's very rare you can find acquisitions accretive to our margins. So it'll be very accretive. And we think by the time we purchase it, it will be right in the sweet spot of its growth curve. And to give you a sense of that growth curve, they are roughly $80 million, $85 million run rate today on revenue. The provisions to buy them out early is if they hit either $236 million of revenue on an annualized basis, TTM or $136 million of EBITDA, which if they hit either one, it's going to be the EBITDA first because their margins are tracking way ahead of their goal. But that's still a massive step up from where we are today. Publicly, we've been saying we're modeling into 2027 at 4.4x revenue because that's the other part of the contract with them is that if they don't hit these milestones, then we're obligated to buy the company from that 4.4x TTM revenue, which is obviously still a smoking deal. John Wilson still thinks it can happen up to a year sooner. And the reality is he could very well be right. But that gives you a sense of the kind of ramp that these commercialized products can provide.

Yes. Okay. Very interesting. And then maybe for your own margins, maybe talk about the levers for fiscal '26. You have the Exosome divestment. You've got some productivity initiatives, volume leverage. Just maybe talk through what's embedded in your outlook there and how you're managing the business for this potentially low single-digit environment.

Yes. So I actually have a higher level of confidence, but I felt like I tried not to give real guidance here because it was like it says, "Hey, we need low single digit growth, that's what we're managing to. But yet, I did give a fairly strong guidance on the margin, maybe 100 basis points. And the reason for that because we are managing to that day-to-day basis to make sure we achieve that margin expansion. And starting with, okay, I already told you we are preparing kind of for the worse in the sense of a low-growth environment for at least the next 6 to 12 months. So we're managing our cost base that way. So our commitment is to be able to at least hold our margins in a very low growth environment, which is still difficult to do. You still have to take productivity actions to get there because wage inflation is still very much with us. So that's kind of the starting point. And then, of course, we talk about it, but Exosome no longer in the portfolio that does provide about a 200 basis point lift tailwind and we see it less as a divestiture and more as a true portfolio decision to not invest there, but rather invest in our other growth pillars, namely our cell therapy, our proteomic next-generation instrumentation for both proteomic analysis and for spatial and as well as organoids, which is another exciting area of application for our proteins. It's been growing very fast. So we want to take some of the savings that we're getting from no longer investing in exosome Diagnostics and pile that back into the growth vectors have really been driving our growth for our company. But still leaving some left over for margin expansion, and that's where the 100 basis points come in. And in terms of the cadence throughout the year, as these productivity actions kick in, it will be relatively flat early on because we haven't fully disposed of exosome yet and these productivity actions have been fully kicked in yet. So we'll get some natural lift as those things occur. But then we also any who follow our company, it's just a seasonality thing. We have much higher revenues in the back half of the year than we always do in the first half of the year. So we always get a margin lift from that as well in the back half.

Yes. And as we think about capital deployment, -- you've been highly acquisitive in the past. I think now you're pretty happy with your portfolio as it stands today. But what are your priorities from an M&A perspective? And you've been ramping up buybacks as well. So it's not something you intend to continue pursuing?

Well, yes. So I mean on the buyback front, we did formally put out a 10b5-1 plan they call it. So that we can systematically buy back stock at certain levels, and we clearly think our stock as our actions have shown in the past 2 quarters or more, or less the last year or so, we've been buying back stock. But not because that's become a priority over M&A. It's just M&A is -- our target set tend to be private companies and it's like a private owner who owns their house. They always think their house is worth more than it is even in a down market, and it's the last thing they want to that go, right? And so it's taken much longer for the private market to kind of realize that the go-go days of COVID valuations are behind us. But we're seeing that start to change here more recently. So a combination of I think the reality setting in and normalizing from a valuation perspective, combined with the fact that when Kim came in over a year ago, one of the first things he did was essentially built a very, what I call, professionalized corp dev team, still a very small team, but professionals come with Danaher, come from the outside banking world. And their first task was to actually drill us internally and challenge us on our strategy, challenges on our product lines, what our assumptions were around market sizes and our ability to penetrate and they rate us over the calls. I'm telling me that for M&A targets, I would be one of those targets. But it was also a very healthy exercise because it just reinvigorated our commitment and our belief in our strategy and our portfolios. And those that fell out of that, Kim is taking swift action to remove and exosome was one of those. But I mentioned all this because this team now is turning its gears externally for this year going forward with now that we have our strategy honed down to who we want to be and what we are when we grow up. Really focusing our M&A strategy on targets that we'll never have a doubt to anyone the outside, why did you buy this company? We're very clear the synergies, the connection to our core reagents and we have a very -- we always talk about 100 targets, yes, well, there's always 100 targets. But now we've got a select few that we know we'd love to have, and we're working towards trying to make at least one of those happen. So I think it will be a good year for M&A this year.

All right. We've got a minute left, maybe a closing question. As you think about the next 12 to 18 months, what do you think the 2 biggest opportunities for your business are? And maybe the 2 biggest potential challenges?

Lets see, end markets and end markets, That's kind of I would say. I mean, I mean in all fairness, I mean, that's what it is. When you think about the opportunities, I do feel like we are in the mindset of our academic U.S. customers and our biotech customers is that the settlement for them is at an all-time low. So I'm very encouraged that when you start -- when you look 12 months out, the academic threat that we've been facing in the last 6 months, maybe even for a year before we're out of it, but we'll be behind us I think pharma, again, I think that noise will settle down relatively quickly, and this will be more of a blip for them as opposed to a whole pipeline review like they had to do with IRA. I feel pretty comfortable about that. The biotech is one, it still gives me the most pause about the next 12 months, and that would be the -- that would be more of the downside challenge. But just even getting those 2 pharma back to make sure that stays healthy, getting academic healthy again. I always kind of joke a little bit, Catherine, that either of those end markets get a sniff, biotech gets a cold. And if anyone else get a cold, biotech gets pneumonia and that's kind of how I feel right now. So I mean, very, very upbeat about the next 12 to 18 months. And our internal market work that I just talked about, suggested that. And it was nice to hear for some of the call the big boys out there talked about '26, '27 and kind of validated our view on that.

Yes. All right. Great. Well, with that, we're out of time. Thanks, everyone, for joining. And Jim, Dave, thanks for being here.

Thank you, appreciate it.