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

Okay. We'll go ahead and get started. Happy to kick off the 2025 Stifel Healthcare Conference. I am Dan Arias. I'm the Life Sciences and Diagnostics analyst here at the firm. We're happy to have Bio-Techne with us here this morning. We have Kim and Jim from the company. Dave sitting out front here. Guys, thanks very much for joining us today.

Thank you. Thanks for having us.

My pleasure. Kim, maybe just an obvious place to start would just be talking about the quarter, you reported 1 week, 1.5 weeks ago. Maybe thinking about the top line first, 1% overall organic, Protein Sciences was down, Spatial was up -- I think Spatial and Diagnostics was up. And there's a lot of crosswinds going on in life sciences land today. So maybe we can just talk a little bit about that and we can naturally move our way into GMP, which was a meaningful part of the conversation on the quarter.

That's correct, Dan. Yes, a quick flyby on the market -- sorry, on the company's results for the first quarter. We had a organic revenue decline of 1% and that was really based by 2 larger customers that had ordered GMP proteins in quite high volumes a year earlier, Q1 and Q2. You might remember that in those quarters, the GMP proteins were growing 60% and 90%, and we were saying, listen, don't extrapolate that because there's definitely some tailwind there. These companies had some additional tailwind in that they got fast-track approval from the FDA designation, and with that, could shorten their clinical studies, and with that, they had enough materials, and therefore, didn't order new materials this quarter. That gave us a 200 basis point headwind, and therefore, the underlying growth is really low single digits in the 1% range. Now overall, we were more optimistic in our call than usual, and that was more based upon fly through the 3 to 4 end markets and our verticals. The end markets, academic, really tough end market, but we saw some positive outlays and we clearly see some of the grants more aligning with our research market. So we had some positive feeling about academics, especially as the quarter progressed. So definitely, in the last month, we saw some momentum building. We had biotech, obviously, very constrained funding market. However, there were some positive outlays and a little bit of positive momentum maybe based by increased M&A and licensing activity. And then we had our pharma markets, large pharma, where we had already a couple of quarters of double-digit growth, but just before our earnings call a quarter ago for Q4, we were, of course, a little worried that the MFN discussions and the letters from the President going to the CEOs in pharma talking about tariffs, we were worried that they would slow down, but they didn't. So all those end markets and then we're kind of stabilizing, right? And then on top of that, we pushed to second -- achieved a second positive growth quarter in China. So those are the 4 kind of end markets that looked more stable than they usually looked. And then from the 4 growth verticals point of view, spatial is building momentum; cell therapy, yes, taking those 2 customers out, we had a real successful quarter in adding customers. The ProteinSimple franchise doing really well, and again, with double-digit growth for the 10th time out of 12 quarters in the consumables, building some momentum in the order book. And in molecular diagnostics, also lapping a 34% quarter a year ago, still mid-single digits. So we felt in every of our verticals also some momentum. So therefore, yes, the negative 1% was, in our feeling, not representing the official momentum in the quarter because we saw these trends, and we were therefore, for the first time, in quite a while, more optimistic than usual.

Okay. How has visibility changed over time with the GMP business? You have a greater number of customers, obviously, than you used to, but there is a concentration at the top. To your point, these were 2 of your largest, if not your largest customers. So how has visibility changed? And how do you think your forecasting abilities change over time? Do you see this becoming less of a lumpy business for you?

Over time, with more customers and also, of course, more customers progressing through the phases and then even more so -- more important is customers progressing into commercial stages that will -- the law of numbers will, of course, make the ramp more stable over time. I think the most important part there is going commercial, and we have 0 commercial customers currently, 5 in Phase III. But in the early phases, customers typically buy enough material to finish a whole clinical study. So by definition, that becomes very lumpy. They will not order like every month or every quarter. But once you go commercial, they will have supply agreements, they typically go for rolling forecasts, and then things become much more manageable. It might still not be super smooth, but yes, at least you know what's coming from an order perspective. But over time, we saw it in DRD for many years, it was a very lumpy business and it continued to grow the diagnostic reagents and controls, and it's now also been much more stable for all of us over the years.

Yes. So Jim, the way that it will work for the next couple of quarters is 200 basis points headwind that we just experienced that steps up to 400 this quarter and then down to 200 again in the third quarter. Is that based on discrete forecast on that part? How confident are you in that trajectory there?

Yes. I mean, hopefully, it's a, I'd say, a base case in terms of not getting much worse that because we essentially took most of the revenues out from those 2 customers in that view. They really have -- these 2 specific customers haven't given us any specifics beyond -- really beyond December in terms of what they'll mean and when they'll need it. Based on the fast-track designation, we're assuming they're not going to need anything for a while. But if they do order in the second half, there will be some upside to what we talked about.

What do you think is the right growth rate for this business? It's been an above-average grower. I mean, I would certainly put it in the bucket of some of your most important products in the franchise. So how do you see long-term growth for GMP?

I think that in recovering markets, I wouldn't say at full speed, but also not when it's totally subdued and in distress. But in recovering markets, we feel that 20%-plus is a good rate. We have a real nice coverage from the GMP proteins, launched the ProPak, which is a form factor where human mistakes as well as contamination is highly reduced. And then small molecules, we have made investment there for GMP production in the U.K. So we have a real broadening portfolio with some good innovations. So we feel that, that should be 20%-plus. But if you then think about a further recovery in the markets and especially if you would add Wilson Wolf to the equation later, that should be north of 20%.

I'll add there as well because that's -- if your time horizon in the next 3 to 4 years, I think I agree with Kim completely 20%-plus is kind of what we expect as we add new customers and customers progress through clinical trials. But you get beyond that and hopefully, many of these customers start to become commercialized, it could actually be significantly higher than 20%.

Yes, we have the 2 that are now working on their clinicals and going into their filing that by themselves could drive significantly higher than 20%.

Yes. Okay. Okay. We may come back to that. There's lots of stuff I want to cover here. Maybe just moving to academic. We've talked a lot about the sluggish demand that exists in the U.S. You actually sounded a little bit encouraging on the call. Can you maybe just elaborate on where things were getting a little better? Does that translate to equipment purchases maybe over the next couple of quarters being a little bit better for you guys and then couch it in terms of your overall NIH exposure, which you guys have kind of said is on the lower end?

Yes. Yes, I'll start high level. So 22% of our revenues for the company come from academic, 10% is related to Europe academic and that has been nicely stable in the mid-single digits; 12% comes from the U.S. academic, and there, as of February last year, everything was going swimmingly. But then I think the turbulence that was created is definitely put a lot of pressure on our results. The good thing, though, is that the last couple of months, you saw that the NIH outlays were actually improving and maybe even positive year-over-year. And one important factor that we clearly see and follow is that the number of grants that are getting enacted on are definitely much more aligned with our research areas in oncology and neurology, et cetera, versus in infectious diseases and in vaccination. So in a way, the shift towards those areas is an additional benefit for us. And why we were enthusiastic is because the core, which is usually very sensitive to overall activity level and the core products are all the proteins and antibodies that you would use in basic research, that core was, for the first time, flat coming from declines and indicates the overall activity level, and that was true in this specific academic market as well. So we feel that, that market is finding its activity levels again. And then one thing is for sure, we will be lapping February pretty soon, so comparables will get easier as well.

When we were talking earlier in the year, the way in which you were thinking about the situation in the U.S. was very much that it was the uncertainty around the budget rather than the actual numbers that was causing the biggest problem in the mind of the academic scientists. Do you still feel like that uncertainty removal will drive better spending? Or is the reality of what the dollars and cents might be looking more important in your mind over the next, call it, 2 to 3 quarters?

I mean I think the answer is, yes. I think what we've seen in the past 3 quarters in our academic end market, particularly our reagents, which kind of show the day-to-day mentality of our customers points to exactly that where in the sense that as the proposals that were coming out of the 2 of the houses for a flattish budget year-over-year became more public and pronounced, we saw the run rates continually improve towards that flat growth that we saw this most recent quarter. So said another way, the customers are starting to behave now more like what the expectation is, which is for more of a flat budget versus 2 quarters or 3 quarters ago when the hammer first came down around threats of 40%, 20%, that range of cuts, not so much with us, but we believe the end markets, we were hearing customers talk about voluntarily slashing their budgets by 15%, 20% in preparation of what was to come. We're not hearing that -- we have not heard that this most recent quarter, and our results would suggest they're behaving more like how they're expecting more of a flattish budget going forward.

Okay. And then maybe just on the core reagents business. It was flat in the quarter. As you guys have pointed out, it's pretty resilient given what we're talking about here. What do you think about the prospects for acceleration in reagent demand going forward, if, in fact, some of this uncertainty, academic or pharma, is starting to subside?

Yes. I think if the markets normalize and you would see more research activity in pharma, biotech, getting normalized funding levels and academic returning to their normalized activity level, we certainly think that the entitlement of this portfolio is in line with market or slightly better. So that would be, in our mind, mid-single digits or high-mid or low-high single digits, but that in that range.

And by the way, I think right now, one of our key end markets, that being pharma, is behaving, what we call normal because for us, we expect double-digit growth in pharma, even though their budgets are probably growing mid-single digit on average, year-over-year their R&D budgets are. And in our core reagents, we are seeing at least mid-single-digit growth in pharma, so it corelates.

So do you feel comfortable that pharma can continue to be double digit from here?

Well, pharma won't be, but we will be in pharma.

You would in pharma.

Yes.

And the reason is that -- I mean everything I've been reading and hearing is that pharma budgets continue to be up mid-single digits and are expected to be again next year. As long as they're up mid-single digits and they're not doing any massive reshifts of their portfolio, which they went for that major shift in calendar year 2024, it should continue to be a normal market. And for us, normal, our expectation is to grow essentially 2x that in pharma.

Okay. Maybe a little bit on spatial. Spatial is a business where there is academic sensitivity, and I think that's impacted you. But Lunaphore is a clinical translational tool as much as it is a research tool. It doesn't really compete with the 10xes of the world, et cetera. Can you maybe just talk a little bit about the puts and takes there in terms of drivers versus headwinds? Do you think that, that business can continue to stay up and grow, maybe accelerate to our point, some of these things are starting to peel off?

Your view is correct. Spatial, in general, has a little bit of a disproportional read on the biotech as well as on academic, especially if it's being used as a research, let's say, translational tool, and therefore, has seen some pressure. However, quarter-over-quarter, we've seen this business also improving. And we talked in the call about it being back to flat for the reagents that meant for the ACD RNA scope that went back in the low single digits. And instruments still had some headwinds with a decline of low-teens. However, in total, they were flat, building momentum. And in Lunaphore, we saw a double-digit order growth, which is a very good indicator for us. Overall, the instrument is definitely, from a performance point of view, a winner. We see a great win-loss rates for the accounts where we compete, and we feel that we've got quite some momentum in taking market share in down and up-markets, we will be able to do so. And of course, from a pull-through point of view, this instrument is very interesting for our company because we have our 85,000 RNA coprobes. We have over 100 antibodies now validated for the instrument. And most recently, we launched the protein-protein interactions, which gives you a true multiomic view as to what's going on and those will take 2 antibodies to run. So we feel this is going to be a very, very good pull-through growth driver for the company.

Jim, are you able to separate out ACD growth from Lunaphore growth within the spatial bucket?

Absolutely.

Could you do that for us?

No.

Okay.

But I just did.

But yes, we actually, I mean...

I just did. I said like ACD was low single digits and Lunaphore was low-teens negative, and in aggregate, they were flat.

But importantly, and you may have said this, Kim, I missed it, but the bookings for the instruments were up double digit. And it's the one instrument we have where we do look at the bookings because it's a larger instrument, it can often spread to 2 quarters to build and ship versus our ProteinSimple typically book and ship in the same quarter. So it was very, very encouraging to see double-digit growth in bookings.

And do you think that pull-through when we were talking was in the 40,000, 50,000 per instrument per year. Do you see that as stable going forward or is there the potential for acceleration just given that it does sound like it has the momentum?

I think there's definitely potential for acceleration because we haven't even gotten started really with the antibody pull-through yet in any of our RNA scope, and that's kind of a -- that's a low bar, I think, we put out there. But between the RNA scope pull-through, the antibody pull-through and then just the chip pull-through on the instrument itself, 40,000 is a starting point.

Yes, we think over time that in our models, Dan, this is going to double.

It's going to be a double as far as overall revenues for the Lunaphore business?

It's going to double -- the pull-through per box per year is going to go from, let's say, 45 to 90.

Can you put a time frame on that for modeling purposes or is there...

Yes. I've not thought about how we say that externally with the appropriate buffer in there. So of course, I know my internal models, but let me think about that.

Maybe Simple Western. I do want to make sure that I hit a couple of the important product categories, at least in my mind, anyway. Simple Western has been this really great business for you. It's been 15% to 20% growth over time, but it's been 20-plus in certain periods. Probably more than it's been below 15%. Is that still a range that you think is appropriate there? Can you touch on Leo, the new instruments? And how does what you're doing in cell and gene therapy play into the Simple Western growth rate because my understanding is that there is some demand coming from those customers for that product?

Yes. No, it's very broadly applicable. Of course, Western blot is a process that gets used everywhere. And our simple way of automating it and then having quantitative results instead of visual results is a huge differentiator. We have very good success with our original offering. And now we recently added -- 3 quarters ago, we added a Leo instrument, which is basically more specific, but also 4x higher throughput, meaning you can run 100 samples instead of 25. You can run different samples in the same run doing different experiments. So very flexible, high throughput if it comes to the consumables as well, so definitely a benefit, higher ASP box and has met all our expectations from a launch point of view, if you look at the quantities of boxes we've placed. And those launch targets were set in more normalized markets. So in a way, this is outperforming our targets in a subdued market. So we're very optimistic about it. And yes, of course, people are going to find different applications for it because Western blot was just such a messy process. Now you can, first of all, automate it; and secondly, you can bring it back in the lab for other applications. And you asked about the cell and gene therapy applications, the AAV potency, the gene potency application is one that is really driving some of the adoption at the moment.

Okay. Jim, maybe just thinking a little bit about the course of growth over the year, so down 1% in 1Q. It sounds like something similar in 2Q and then low single-digit growth in the back half, especially as the comps ease, to our point here, presumably some easier or better end market conditions. So 1% growth feels like a good starting point for the year, but it also feels like there's ambitions for something higher. Leaving aside the obvious, which is that a bunch of academic customers decide to spend more or pharma ends up being better, where do you see the upside in the model when you really look, primarily, I guess, at the back half of the year, which is where things seem like they have the most variability, but tell me if I'm wrong there?

Yes. So let me tell you how we think about our forecast from a buildup perspective and then it might become more obvious where the upside is. So as we think about from going from Q1 to Q2, we've called for essentially the same amount of overall organic growth, which is, call it, minus 1% roughly. But the reality is you take out these 2 customers we spoke of, the underlying -- the whole -- the business in its entirety is actually gradually stepping up its growth rate. So if you backed out these 2 customers, as Kim talked about in Q1, we were plus 1, not minus 1. If we do the same for our forecast for Q2, the headwind is even greater. It's about a 400 basis point headwind as opposed to a 200 basis point. We grew 90% in cell therapy a year ago in Q2. So you back those 2 out, that means the minus 1% actually is more like plus 3% for the entirety of the company. So we're seeing -- predicting a gradual ramp-up in our overall growth rate. And really, what's behind that is, I'd say, from a portfolio perspective, now that we're seeing stabilized -- more stabilized markets in academic, we believe biotech will start to stabilize now that funding appears to have come back 4 months in a row with growth year-over-year. We've always said, Dan, and we've seen this before, we saw it a year ago when we were starting to come out of the COVID halo or COVID hangover that our growth pillars, our growth verticals kind of lead us out of -- back into growth. They're the kind of early indicators for us. And sure enough, we saw momentum pick up -- we've seen momentum pick up in ProteinSimple for a few quarters now, but particularly in the back half of Q1, and that's starting so far in October, some very solid momentum across our entire ProteinSimple franchise, not just 1 or 2 of the platforms. And then, of course, spatial, we talked about the turn we saw in spatial in Q1, and we've seen that momentum continue into October, which is encouraging. So that's where we'd expect to see kind of for us, the leading indicators of market stabilizing and us outperforming the market, and that's exactly what we're seeing right now. So those 2 things we think will lead us to better growth in Q2, combined with, to a lesser extent, but nonetheless, China and Asia overall. We are expecting yet a third quarter in a row of growth in China and Asia overall in Q2. So we do feel like this is the start of a new recovery process, not just lumpiness like we saw for the better part of 2.5 years prior to calendar 2025. So that's what gets us from the plus 1% to the plus 3% adjusting for these 2 customers. As we think about the back half, we're not really predicting any -- at this point, any changes in the market trajectories of any of our key end markets. It's more about lapping easier comps as you talked about, the academic comp, has been a tough comp ever since February, but we'll lap that in February. And even the biotech comps, they become easier as well. So it's more of a comp story in the second half, not to mention these 2 customers, as you kicked off early in the conversation, they do have headwinds in the second half, but less so than the first half. So the upside here is that the markets go from being stable to actually recovering, namely academic and biotech. If there's any true recovery there in terms of growth from end market, then we have upside, I think, in our second half.

Okay. So the take-home message is that your assumption, the 2% to 3% that we might model for the back half, that you don't seem to be disagreeing with, doesn't require any improvement in the end market conditions, what's in place today can get you there and so then it's about what kind of improvement we see from here?

Correct.

You are a victim of your own calendar when it comes to comparing Bio-Techne to other tools players. And so the beginning of calendar 2026 would have you being 2% to 3%. And then if something were to be higher in the back half of calendar '26, it could feel like the 3% to 4% that we're kind of looking at for other life sciences companies. So the question is, because there is a question embedded there, is 2027 the year when you think you resume above-peer growth? Because that kind of has been your calling guard for a long time. I think that's why people invest in Bio-Techne in a lot of situations.

And the above peer growth is -- we believe becomes much more -- the spread becomes larger when the markets are stable and improving, and so the answer is yes. And if you actually think about even the first half of calendar 2026, at low single-digit growth, you said 2% to 3%, I think you can easily tack on a couple more points on top of that because of the headwinds of these 2 customers that will still linger. So I think we already are talking about potentially being in the mid-single-digit growth in the early part of 2026. Absent these 2 customers, I do believe that's still ahead of what most of the peers are saying. And if the markets continue to recover, and we believe they will, history shows when these markets turn, they turn relatively quickly. We saw that exactly a year ago as we were predicting to come out of the COVID hangover as well as the IRA situation that was impacting large pharma. We had a stick -- as you remember, Dan, we did stick our neck out early and say, "Hey, we think we're in the midst of a recovery here. And it played out exactly how we -- not exactly, but in aggregate, it played out how we thought it would in our first and our second quarter, and it really wasn't until February when the hammer came down with the administration on academic and then followed by biotech everything else that, that a whole new set of headwinds came up. But it did turn really quickly. We went from flattish growth to end calendar -- fiscal 2024 in June, and then we went to mid-single-digit growth, high single-digit growth, and we were predicting -- internally, we didn't mention it, we were predicting and we were on the path to double-digit growth in our Q3, Q4 February. So that just gives you a sense -- we've seen this before, admittedly more shallow and less enduring downturns that the market has seen. We've seen very quick snapbacks, but I think it could happen again. I'm not calling -- making a call for it, but I'm saying it wouldn't surprise me because we've seen that movie before.

So you still see there being a path back to double-digit organic growth for the company?

Absolutely. Absolutely. I mean that's -- anything short of that, we're not -- then we got to change our strategy.

Op margins. All of the op margin expansion is -- you will expand margins this year. Let's start with positive.

I told you we would.

You did. But when we were talking about it, I certainly wasn't expecting it to all come from a divestiture. So there's not a lot of organic growth. It's tough to get leverage on 1%, 2% growth. But you are lapping some comp expenses from last year, if I remember correctly. So why is there not more of an organic op margin expansion opportunity this year?

So you talk about the mechanics, I'll quickly talk about the philosophy.

Sure.

So overall, Dan, we -- yes, could we have further optimized our op margin? The answer is probably yes. The -- in fact, though, we went into the year thinking that listen, these are tough conditions, and then you can always take your benefits and your savings to the bank and have them flow through the P&L. But you also have to make sure that you do continue to be a -- position yourself as a double-digit grower and as a grower that outpaces the others in the market. And for that, you have to invest. And of course, we had a certain level of R&D investment already. But we also, with this hard work that gives us this strong bottom line, wanted to make sure that some of that benefit goes into specific investments. And we want to make sure that we have a next-generation Lunaphore platform in the making, we want to make sure that there's new detectors and new applications coming for the ASD for analytical business in proteins. We have seen how powerful those new introductions, new product introductions are and how differentiated the setup is, especially once we continue driving it. And then in the meantime, we also want to make sure that in a subdued market where customers have less funding available, the programs that do start are typically of high quality. Those are the ones that they're really committed after and that maybe people still would invest behind, but they have constrained funding. So what you want to do is make sure that you're part of a program. For that, we have -- you often see these press releases around grants where you could get a grant where you get a certain number of protein reagents, a certain number of G-Rexs. And we wanted to make sure we seed the market because at the end of the day, you know how sticky revenue will be once you seed it and once you're part of a certain treatment, and we want to be in the forefront of it. So we use some of these monies that we could have trickled through for investment in new product development, AI capabilities as well as seeding the funnel.

Yes. And I'll take it one more step further. The way I look at it is, yes, it was -- technically we exited -- chose to exit the exosome lab business through a divestiture. But I see it simply as we prioritize what we invest in all day long, every month, every quarter, we're prioritizing what we're going to invest in. And there are certain things we choose not to invest in that kind of gradually go away and no one even notices. My point being is that it wasn't necessarily -- to me, it was less of a divestiture and more of a prioritization choice on where we want to invest for growth going forward -- profitable growth going forward. So it may be a bit of a nuance, but it wasn't about, hey, we're just going to sell this business and that everything else is going to be normal. It was a purposeful choice so that we can invest more in the areas I think will give us more profitable growth faster in the future. So anyways, that's a philosophical thing. In terms of the mechanics, yes, we talk about 1% growth. But remember, we still were minus 1% with these 2 customers, and they're very profitable accounts. So still a pretty big significant headwind in terms of that mix. Secondly, yes, there's still -- 70% of our costs are people costs, and there's still wage inflation. We're in a 3% to 3.5% minimum. So you still have that headwind. So we're doing a lot of productivity initiatives just to counter that. And then you mentioned comp tailwinds. I just want to clarify that. We don't necessarily have any comp tailwinds. We had comp headwinds last year because we essentially had comp targets for the company that were in line with where we grew. We grew, as a reminder, mid-single digit in fiscal year '25. And so the comp was mostly paid out on target, maybe slightly above in certain areas, including our sales force. The year before that, we've massively missed our internal comp targets, and therefore, got paid out significantly less. So last year was more about getting a true-up and that hopefully, knock on wood, we'll hit our internal targets this year and pay out about the same. So it's not a headwind or a tailwind at this point.

Last question in the speed around here. Just to that point and to Kim's point on there, there are things that need to be invested in, in any one year, especially for a company trying to develop the types of products that you are. When you look at the next 12 to 18 months, do you see your -- do you see the investment levels that will be -- investment and compensation and expense levels that will be required for the business as on the way down, on the way up or something on par with where we've been?

I think we are in a healthy investment level. So we're not starving the company at all. I think that one of the things I forgot to mention earlier, we have accelerated and taken dollars to assign to a relatively new opportunity, at least for the U.S. in organoids. It's right over alley if it comes to being able to grow cells and to manipulate cells into a certain state. So it's an opportunity that was already, let's say, 5 years in the making in Europe, but we're definitely now accelerating in the U.S. as well with these organoids being accepted for generating data by the FDA. So definitely another opportunity to invest in. Now I think the moment markets will normalize and our growth would go back into double digits, as we mentioned, you could be more aggressive on the investment levels. And fortunately, we're in a company that has plenty of ideas or projects that we could kick off. And we would do so in normalized conditions and always make sure that we end up somewhere around 35% on EBITDA margin and manage the company around. If we keep the belt somewhat tightened, then we would run to 40% unless we do M&A, unless we do some heightened R&D investments. So that's how we always manage the company to be a best-in-market EBITDA company as well as the top line growth.

Okay. It's a good session when your last question involves organoids. So I'm going to leave it there and say thank you both for attending. Appreciate it.

Yes. Thank you, Dan.

Thank you, Dan.