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

Our next session here is the management team from Bio-Techne. We're lucky to be joined by Kim Kelderman, Jim Hippel and Dave Clair. I'll kick things off.

I believe this is your first public venue since earnings a week ago. And I'd like to reflect back. What were the highlights, what points do you think needed clarification?

Well, first of all, we are honored for being with you, and thanks for inviting us to your great conference, Dan. It's always an honor. And I don't think anything needed clarification. It was a fantastically done earnings call. But I think the question is the highlights of the quarter. Yes, the quarter had a negative 1% organic growth in the top line, which was mainly a result of larger orders in the GMP proteins, not repeating year-over-year. And it was a negative $7 million impact, and there, we are kind of driving that red number. However, not really reflective of what we feel the overall performance of the business was and not reflective of the trends in the markets. And I'll start with these end markets. We feel that in pharma, we had 3 or -- 2 or so quarters in the double digits. We were a little worried earlier this year, calendar year about that may be slowing down with the MFN kind of rhetoric. However, we were very pleased to see that pharma continue to be in the double digits. Biotech continued to show some strengthening. And we feel that the rhetoric around number of deals and the funding levels were improving. Academic, we found a flat quarter. Our core was actually doing well there. Europe was mid-single digits as we expect it to be. And in the U.S., negative low singles, which was definitely a quarter-over-quarter -- throughout several quarters ever since February, an improvement, and we saw strengthening during the quarter in that end market as well. China, we always look separately, I know it's a region, not a market, but we look at it as one market, 2 quarters in the black, and that is also an encouraging result. We'll probably double-click on China later on. But if you then look at our, let's say, five businesses, the core and four growth verticals, that's a different lens of looking at it. The core was flat, which had been in the red over the last couple of quarters. So we saw it strengthening again, throughout the quarter, strengthening and within October, same thing. So very positive there. And then the four growth verticals, gene therapy, we added a bunch of customers -- in cell therapy, I should say, sorry. And we have tremendous new product introductions and mid-single-digit growth in the protein analytics. We have spatial back in flat, so -- but not declining anymore. And a real strong instrument funnel. And then last but not least, molecular diagnostic, low -- mid-single-digit growth, but over a 34% growth quarter last year, also finding real nice traction. So those are the dynamics of the end markets as well as the growth verticals. And then bottom line at 29.9% EBITDA margins was also very strong, and that's also broadly driven by three different buckets that we managed relatively well. And with that, we actually were quite happy with how we came out of the quarter, knowing that we had this big headwind and with our outlook going forward.

Okay. That was very thorough. The GMP proteins part of your business certainly was a story of the quarter. And I'd like to talk a bit about that. So first off, the $7 million headwind, that's the lesser revenue from those two customers you called out, correct?

Correct.

Can you talk about what was the growth rate in GMP proteins, excluding those customers? Or is that a not meaningful metric?

It is meaningful because it will talk about the overall activity level in biotech. And biotech markets, even though including you, have indicated like listen, there is some improvement, right? So we were sitting at negative 30% levels for biotech market before this quarter and now it has improved with a couple of strong months to negative 19%, so there is improvement, but it doesn't -- it still doesn't sound like it's in a great spot, right? So we're really happy with the indicators going in the right direction, but it's not in a great spot. What we really focused on is adding customers. So you heard us a year ago around 500, 550 customers, now 700. We want to seed the market. It's an investment that we are willing to make because it's not very expensive. And being early on in these development programs will kind of integrate your reagents for Wilson Wolf, their G-Rex, into these workflows. And with that, help these customers to scale, help these customers to have an affordable therapy and then be locked in. Overall, I think we were -- I have to look at Jim, but I think we were low -- no, mid-single digits negative for the rest of the portfolio.

Okay. Can you talk about customer concentration then in GMP proteins? Or I guess you've talked about it, but could you elaborate on that? Are these two customers, half of the business? Or are they some different number?

Last year, our cell therapy business grew 60% to 90%, and it was in Q1, Q2. So that's the comparables that will indicate that -- like at that time, we said, listen, don't extrapolate the 60% to 90% growth numbers because it's lumpy. And unfortunately, we were right. The concentration is in a way very much based upon what kind of indication does a company work on, meaning how many patients do they have to get through their clinical trials. And they will typically order enough material to complete one clinical trial. That, of course, gives then the Phase I, Phase II, Phase III, each time, relatively large step-ups. And of course, in commercial, these customers will be -- if successful, will be even larger if it comes to revenue volume. Now the nice thing, though, is that in commercial, it's much more -- much less lumpy, right, because it's a normal growth trajectory versus a clinical-over-clinical type of dynamic. The customer concentration. So I mentioned $60 million in total, GMP proteins, $7 million year-over-year hiatus, that will give you the concentration because those were the two largest customers we have. And then for the next quarter, it will be $12 million in absolute dollars. That's 400 basis points headwind for the company. And that was their max quarter. That was the highest order quarter for those two large companies. So that gives you the dynamics and the absolute quantitation -- quantification of the impact.

Okay. Can you talk a bit how your GMP protein revenue split looks like between commercial? I assume commercial isn't part of the business yet, but we can just clarify versus Phase III versus earlier phases in clinical development versus preclinical. Just what does that pie chart look like?

Yes, 700 customers in total, of which 85 are in clinical trials, you can do the math because I'll go to Phase II is 16 and Phase III are 5 and 0 commercial customers. So commercial is indeed then 0 revenue. And then we have not broken out revenue by clinical, not because we want to keep it a secret, but also because to protect our customers, first of all, because there's only a handful in there. But secondly, because we don't always know where the material gets used, if it's in a I or II or III, right? So we have not broken it out that way. But you do know now the absolute number and the breakout between clinicals.

Okay. And how do you risk adjust your forecasting in cell therapy? Because the gamut of companies that have active programs in the area range from large pharma, large biotech to publicly traded biotech companies that are sub-$100 million in market cap. So what is your process for trying to better risk-adjust the forecasting there?

Yes. We do, of course, internally look at order patterns, try to stay connected with customers and we know what orders get placed in the short term. So we look at the internal order book. But overall, and that shouldn't be a secret, last year, we were always talking about this -- it will be lumpy, but you should expect a 12-month trailing of 20% or north of 20%, between, let's say, 20% and 30% growth. And that is kind of the line that we manage against.

Okay. And to think about the long-term opportunity here, I think you said a moment ago, GMP proteins were a $60 million revenue line item. Can you put that in context of what your capacity is? I think when you opened the St. Paul facility a few years ago, there was discussion around a few hundred million dollars of revenue-generating capacity, but I'd like to revisit that if we can.

Yes, indeed, I think at that time, we were saying $250-or-so million in revenue capacity. The real interesting dynamic, which is not atypical, but it was -- the scale of it was unexpected is that how much better your yield gets, the moment you start documenting and validating the processes, which you need to do to become GMP validated. And we also have a relatively large setup. And that meant with the yield improvement of anywhere between 50 to 100x, combine that with much bigger reaction vessels, we are not worried about capacity for the coming one, two lustrums, 5, 10 years. We are totally in the green if it comes to capital invested. Even if these guys go commercial. So that will be good for the facility.

Okay. Great. Well, with that out of the way, let's talk about some of those growth pillars you mentioned? Protein in -- Protein Sciences first. We'll start off with ProteinSimple. You mentioned a mid-single-digit growth rate there. What's your degree of confidence that, that returns to a double-digit growth rate? And what would be the drivers to get you there?

Yes. Confidence is very high. We have 10 out of 12 quarters where we had consumable pull-through of more than double digits, really indicates the utilization of the instrument base. Under a suppressed environment, the instrument placements themselves have been negative -- mid-single digits negative. But we know that under normalized conditions, especially where we're heading right now and in the last month and with the indicators that we talked about for these end markets, we do believe that instruments themselves will go back in the black, deep into the black. And then continue to expect a similar behavior on the consumables, maybe even slightly improve. Then the sum of that will be in the teens, maybe mid-teens where we expect it. And that's also the dynamic that we are seeing underlying.

Okay. So right now, double-digit consumables growth, mid-single-digit equipment decline blends into a mid-single-digit growth rate.

Correct.

And you turn that instrument growth rate that will bring the full fleet up to that mid-teens level?

Exactly.

Do you have any new product cycles that could help drive that turn in the instrument revenue trajectory, independent of end market improvement?

Yes, absolutely. So every product line, actually very inspiring new product introductions. Start with Ella, right, which is a very small near-to-patient ELISA capability that -- we just launched an ultra-sensitive cartridge, which really allows it to compete with entrenched customers where we believe -- sorry, competitors, where we believe now with the simple and affordable setup in the ELISA space that we can start nibbling away in the space of neurology and inflammation and that we now have a solution that is sensitive enough and has all kinds of other advantages that definitely will now be on the radar of these competitors. So we believe we can take market share in a newly addressable market. It was already a very healthy product line in ELISA itself by automating it in a simple and affordable way. But now we'll have more promise. In Western blot, we have launched the Leo instrument, which has automated Western blot with 4x the capacity of the previous instrument with 100 samples at the same time. Very, very high sensitivity and quantitative results. So an absolute differentiator. For 3 quarters, this product launch has exceeded our expectations that we had set for ourselves even in subdued markets. So we're really enthusiastic about that product launch. And then we have our Maurice and MauriceFlex. MauriceFlex is somewhat newer, not absolutely new, so it's already on the market for a little bit. But the fractionation capabilities where you can take a specific part of your sample and inject it on mass spec, definitely a differentiator, and we're taking share there as well. If I jump back to Ella, we are also really seeing this instrument being adopted in different LDT spaces. So customers that run lab-developed tests for near-patient results, and it's holding up really nicely because of the consistency and easy to use. We have announced a year ago that there is a Novomol-Dx, a diagnostic company for testing around your eye, your tears. And they are going to go to market and chose Ella as their platform. And we have a relatively nice pipeline of diagnostic companies that chose Ella as their platform. And we also have IVD capability, so we can support these customers going into the U.S. as well as in the European markets to have a registered box, and that will definitely be an additional driver for Ella adoption and sticky revenue and pull-through.

Okay. So it sounds like you have a pipeline of serial innovation across each one of your protein...

Yes. In the application side as well as the capability of the instrument. Yes.

Got it. And could you then talk a bit more -- we spent time on GMP proteins, but you have a bigger cell therapy opportunity. Can you talk more about your efforts to grab wallet share across the entire cell therapy workflow?

Yes. Cell therapy workflow, of course, we have there are different dynamics as you're well aware of. The Wilson Wolf asset that we do not own yet, we own 20%, but we will own the rest of it in 2027. This is this bioreactor where you can grow cells very efficiently, scalable and fast, affordable. So all kinds of real good benefits. That is a product that sits in 45% of the clinicals globally, and we feel there's a real stronghold in the cell therapy, really enables some cell therapies. And specifically helps them jump the hurdles of scalability as well as affordability. Of course, our reagents in order to manipulate the cells and make them happy and grow fast, have been a core focus for us to make sure that we have the portfolio that you would need in cell therapy. We have added some hypersensitive and hyperactive proteins that we designed through AI. We have a good portfolio of media, which is obviously food for the cells -- cell therapy. And then we also have small molecules that make the cell stable, et cetera. So a whole portfolio of reagents that go into the cell therapy. And then last but not least, we also worked on the form factor because people worry about contamination and the form factor you will hear us talk about ProPaks, basically gives you a little hose that goes into the reactor with a pouch that has the right amount, the right concentration of a certain protein or whichever ingredient you will need, and then you can feed it into the system in a closed way. And therefore, easy to use, not human failure with pipetting and concentrations and amounts of it as well as contamination reduction. So an increase of efficiency there, too. So those are a portfolio of cell therapy reagents.

Is it too early to talk about a ProPak attachment rate to the Wilson Wolf bioreactor?

Yes, the attachment rate, I wouldn't really know yet. So it is indeed too early. But what we do look at is that we feel that when customers use our reagents and then you change the form factor is not a big deal. So we know we can swap our own customers. But what we hope and what we've seen evidence of is that we can actually use the ProPak and its benefits I just talked about to then have a customer swap from enemy protein to a Bio-Techne protein. And that's really where we were using it, want to use it for even more so. And we have evidence of a later stage -- later in clinical, a customer that has now swapped the protein they use based upon that form factor. So we're quite happy to see that we have some customer wins through the ProPak.

Is that one of the five clinical -- five Phase III customers you mentioned earlier on GMP proteins?

Yes.

Okay. Versus the enemy proteins. I haven't heard that before. I like it.

I couldn't find the right word, but you know what I mean.

I like it. Why -- you mentioned on the conference call that Wilson Wolf had a flat quarter as well. Why would their quarter have been flat? I would have thought their revenue mix would lean a little bit more commercial. There'd be a bit -- they wouldn't have the same exposure to lumpiness that you would have.

No, absolutely. That's true. So Wilson Wolf had a flat quarter, 12-month trailing of low teens. And yes, they have more than a handful of commercial customers, and they should be seeing less lumpiness. However, the customers do not order every month or every quarter. So there's still some lumpiness with two orders this year and one order this year. And so there's still some lumpiness -- and I think there's two dimensions really. One was -- is that the biotech market is improving, but it's certainly not healthy yet. So they are also selling into a tough market. And then the other dynamic is some lumpiness because their upcoming quarter forecast is mid-20s inorganic growth. So you'll see it equilibrating back to -- we always think a 20%-plus growth in healthy conditions. So mid-teens in somewhat subdued conditions is not unimaginable.

Okay. Makes sense. Circling back to that ProPak comment from a moment ago, winning a Phase III customer sounds pretty meaningful because otherwise, the time to face progression from someone in preclinical to Phase I, Phase II, Phase III could take quite a while. So if you're able to just pick off Phase III clinical trials, that seems to be the more nearer-term bigger opportunity.

Right. Very meaningful. And...

What does the [ funnel ] of those look like?

Yes. very meaningful because even if it's a Phase I or II or III, you salvage your customer that you would otherwise never see again, right, from that protein perspective. And that's why we are really -- are excited about the ProPak and talked about it so much because, yes, again, it's a definite improvement for our customer if it comes to pipetting their own reagents and our proteins and other materials. But -- so it is definitely a benefit for those customers. But for us to being able to convert and it will be more likely clinical Is and IIs than IIIs typically, right? But nonetheless, converting somebody that is in a clinical stage is a definite win. And we have not talked about the pipeline there yet, and I don't know we have -- that I would know these numbers right now.

Okay. Understood. Well, a final question on Protein Sciences before we pivot to Diagnostics and Genomics. Every now and then, depending on different FDA announcements, the organoid business within Bio-Techne enters the talk track. Can you tell us how big is that business for you? And how do you view that opportunity over the mid- to long term?

Yes. So I think organoids as a market, right, in Europe, it was already pretty much an important trend. With the recent rhetoric around, we should get more out of animal and more into human representative samples -- sampling and testing, the organoid also became a true driver in the U.S. end markets. And in the past, I guess that pharmaceuticals always liked the organoid because it's much more representative of human testing than an animal would be. However, the FDA would not really accept any of that data and would not have experience with the organoid model. And therefore, you then always have to go back and just as well start in animal models. But that obviously changed recently, which is really near and dear to our happiness, not only for all the poor animals but also for the quality of the clinical results, but also for the -- for our business because organoids are obviously made out of cells, for that, you need to make it a pluripotent stem cell. You then need to grow it, and you need to have it in a certain setup. So cell manipulation with our portfolio of reagents and cytokines and proteins is exactly what we do. And therefore, the organoids business, maybe even without focusing on it, when we started counting what we sell into organoid companies is around $50 million already. And it was not a real targeted approach. So we figured last year, let's start being much more targeted around it on the commercial side as well as on the R&D side. And yes, we see real nice traction in there, and it had a CAGR over the last couple of years of 20%. We think we can accelerate it, especially since there's such drive into -- for good reasons, into organoids, into human models. In the meantime, we've not talked about a product that we've licensed from a university that gives us the ability to create synthetic membrane. So a membrane is basically the base that you grow your organoid on. And there's obviously food in there. Most of the membranes in the current markets are still animal-based and animal-derived. So now you have organoid growing on animal-derived product. But if you really want an animal-free product, then you would need a human -- an organoid -- human organoid growing on synthetic base. And we've licensed this from a university. We've launched it quietly, but that's yet another stimulant to be in the forefront in organoids.

Okay. Well, with that, let's pivot to Diagnostics and Genomics and start off on spatial biology. How would you describe your confidence that spatial biology returns to double-digit growth from -- I think you mentioned it was a flat growth rate in the quarter.

Yes, a flat growth rate in the quarter, but -- and again, that business has the most exposure of all our businesses to the biotech funding -- biotech markets, which have seen constrained funding as well as academic, which have seen constrained funding. So not surprisingly, that business dipped into the red. But quarter-over-quarter continued to improve for the last couple of quarters and is now back in the black, which is nice, especially knowing that last year, they still cranked out double digits. So it's -- Q1, Q2 are tough comparables. And being back in the black is a good sign. The -- it was low single digits, actually flat, I should say. Low single digits on the reagent side, flat overall, and that's because the instrument had a negative quarter. However, very inspirational is that the book order -- the bookings have double-digit growth in them. So we see that part of the business improving as well. So we think that, that will continue to accelerate to where it belongs, which is in the mid-teens, in line with market recovery. But we are definitely taking share underneath, right? So that will help the growth to accelerate faster like it did last year.

Okay. Well, before I run off the clock here, I wanted to make sure we spoke about your 2026 framework. And Jim, I wasn't sure, on the conference call, I thought that in Q&A, you underwrote mid-single-digit growth for the second half of the year. Did I hear that correctly? And what would be the drivers of that mid-single-digit growth performance in the back half?

Yes. So I didn't specifically call out the second half, but I did say we still have confidence that we can get to low single-digit growth for the year. Now you can run some numbers and say, what does that mean you have to get to in terms of growth in the second half. If we do, call it, [ minus 1% ] or so the first half. And is it high end of low single digits or low end of mid-single digits? It's somewhere in that range that can get you there. And keeping in mind, too, our second half revenues are just numerically larger than the first half, so they have a higher weighting on the year as well, okay? And so in terms of the growth being there in the second half even more so than the first half, we're already talking about how the underlying growth is -- we are expecting to accelerate from adjusting for just these two customers, going from 1% growth in Q1 to 3% growth in Q2 when you take these two customers out. When you look ahead to the back half of the year, a couple of things. One is -- or a few things. One is that the headwinds from these two specific customers are still there, but they start to diminish. So they're not as severe as they are in the first half. We also start to lap the academic and biotech headwinds that we -- it started with the administration change in January, February. So that will be less of a headwind, maybe even a slight tailwind in academic as we get into the second half. So that combined with just the fact that -- and we also still see China improving. So China should also be a tailwind relative to last year in the second half, China and frankly, Asia overall. So with the China end market gradually improving, pharma remaining strong, academic and biotech, not even having to really return to growth, but just stabilizing, we start to lap some easier comps. And then that together with the momentum that we're seeing in our portfolio, particularly around our growth pillars, around ProteinSimple and around spatial. We've seen this before in other downturns. And even a year ago, when we were coming out of what I call the COVID hangover before the administration change and create yet another headwind for our industry, we were seeing our end markets start to turn or stabilize. And it was being led by our -- in our company, it was being led by our growth verticals, it was being led by ProteinSimple and spatial and of course, cell therapy. And as we've talked about already today, we're seeing that strength recur in ProteinSimple and spatial start to turn, and we're seeing that momentum continue in October. So again, a combination of, I think, we'll lead with our growth verticals, the market is stabilizing and passing some -- lapping some very tougher -- or some easier comps, I guess, I should say. All that combines to say we should be able to get to that kind of growth rate in the second half to support a low single-digit growth for the year.

What's your conviction that the improvement in China is durable?

I mean First of all, it's been a very long downturn for China. So I mean, at some point, you start to hit bottom there. But I think, generally speaking, we've -- Kim and I go there once or twice a year. And our last couple of visits, we've seen, first, stabilization; and in our most recent visit, it's just a different in -- the tone, the tone of when you talk to government officials, when you talk to biotech companies, CROs, there's a sense of -- more sense of optimism in the future than we've seen in the past 2 or 3 years there. And at the end of the day, we're projecting growth again this quarter in Q3 for China. That will make 3 quarters in a row of growth. And even though our growth rates for the last 2 quarters, they were low double digit in Q4, low single digit in Q1, we were pretty transparent in our Q4 earnings call saying that growth had a lot of tariff pull-ins for the concern of tariffs, but still probably grew marginally. With those large pull-ins from Q1 into Q4 to avoid tariffs or at least perceived tariffs, we still grew low single digit in Q1. So the momentum in China continues to not explode but gradually increase.

Probably a final question before I run off the clock here, the divestiture of Exosome was a margin tailwind for you guys. Can you talk a bit more about the pipeline of other margin expansion opportunities you have now?

Yes, certainly, from a portfolio fit as well as from a margin profile, great divestiture. But yes, underlying in the margin improvements, we have the portfolio optimization, Exo and we've also exited the Fetal Bovine Serum business. That was also -- first of all, animal animal-derived. And secondly, it was a low-margin business. So that definitely helped bottom line. But then underlying, we have, as you know, a company that came together out of 19 acquisitions over the last 10 years. So there's definitely footprint optimization triggers that we have where certain companies that we acquired make instrumentation, some of them make cartridges, some of them make reagents. And over time, we are having these centers of excellence where we move these manufacturing capabilities to, certain area -- certain spots where we have a center of excellence for instruments and a center of excellence for reagents in Minneapolis and the same for cartridges, that way you can scale. So there is the footprint and the operational efficiencies driving benefits as well. And then last but not least, also maybe inherent to having various product lines and brands as well as acquisitions, there were some vertical businesses with leadership that we feel could work together better. Think about having various businesses within spatial. We now created, for example, a spatial business unit with one spatial management that manage the different units underneath. So we have collapsed businesses with the customer lens, and with that increased collaboration internally, but also decrease cost. And definitely another driver over the last couple of quarters of good that will trickle -- that will continue to trickle through in our margin profile. And that's why we're very confident about being able to do good things with the bottom line while we're increasing our efficiencies. And while we're investing in organoids and other new technologies.

Okay. Well, it sounds like there's a lot to do.

There is.

And we're out of time. Kim, Jim, thank you so much for joining us today.

Thank you.

Thank you.