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

Okay. Great. We're going to kick it off. I'm Tycho Peterson from the Life Science team. We're pleased to have Bio-Techne with us today. Welcome.

Maybe kick off with a little just a quick look back on the fiscal first quarter, some gives and takes, but you did talk about kind of core growth up 1%, maybe setting aside the cell therapy kind of noise here. We'll unpack that in a minute, but just talk a little bit about what you saw in the quarter.

Tycho, thanks for having us. Yes, the overall growth for the quarter was negative 1%, a little bit -- a result that doesn't really reflect our underlying performance because you already mentioned we were 1% positive if you take 2 larger companies that received their Fast Track designation and therefore, didn't order this year compared to last year, and that really drove a negative 200 basis points on the top line. But underlying, if you think about the end markets as well as our 4 growth verticals, the end markets that did do a little bit better than we had expected was definitely large pharma, 30% of our revenues, and we continue to be in the double digits performance there. And last year, we -- or last quarter, we were actually a little worried about the rhetoric with some of the tariffs and most people were pricing that we were worried that they would tap the brakes, but they didn't. And that was a positive for a quarter. Overall, we saw some stabilization in the academic and the biotech markets as well. And then from our 4 growth verticals in cell therapy, other than dynamics we just mentioned, we had a very nice number of customers we added to the pipeline. We had stabilization in China, and we saw some real nice results in our spatial biology business. And that really was on the positive side for the quarter.

And maybe we could just unpack the pharma strength geographically, anything to kind of call out there? And how is the kind of the -- how have the discussions evolved on the back of some of the onshoring announcements?

For large pharma?

Yes.

Yes. Well, as I said, large pharma was continued to be in double digits, broad strength. We could see even our core consumables, which are usually growing with market were back in mid-single digits. So that indicates a healthy overall activity level across the board. And then our -- as I mentioned, our 4 growth verticals, very nicely aligned with the projects that are being pushed forward right now in large pharma. And specifically our proteomic analysis tools, all 3 of the platforms are taking share and are definitely benefiting from the investment dollars that flow back into the R&D activities for large pharma, and that's certainly a tailwind for us.

And any geographic color? I mean, obviously, you've had kind of this out-licensing trend from China. So how about pharma globally? Where are you seeing the strength?

Yes, it is actually on both sides of the ocean in Europe and U.S., very healthy. We will see what the deglobalization and/or the investments in the U.S. particularly will bring that might shift this dynamic a little bit. But for now, we saw a healthy growth in the U.S. as well as in Europe. And then on the biotech side, it was definitely a return to solid growth in China.

And biotech funding obviously picked up a lot in October. I think you've made some comments about maybe faster conversion than a typical 2 to 3 quarters. What's kind of behind that?

Yes. Over the last year, the tougher times in biotech, you clearly could see that there was a rotation in the companies, even though, let's say, in the prior years, when there are new companies getting funding, they might have to start with getting buildings, building clean rooms and building out their facilities. Right now, we've seen over the last year, definitely several of the earlier-stage companies having to close their doors, some of the mid well-funded companies certainly being careful with their spend to make sure that they don't have to close their doors and some very well-funded larger ones that made nice progress. With a recapitalization of the industry, we believe that the ones in the mid that have been kind of kind of worried about spending, those are the ones that get funded. And therefore, there will not be spend in buildings and clean rooms, but more immediately into accelerating programs and/or switching on new programs, which then definitely translates to instruments and consumable growth.

Got it. Obviously, a lot of talk on reshoring here. That's maybe a little bit further out and a little more large pharma than biotech. But just talk a little bit about how you think you're positioned over the next couple of years as maybe more capacity comes back to the U.S.

Yes. The reshoring will certainly be of influence. I mean, I call it deglobalization because it's not only coming to the U.S., but overall, you see that region for region manufacturing is becoming more common. And knowing that there will be more manufacturing coming to the U.S. is obviously a good thing. We have good sales coverage. We are -- we have a good brand name in the U.S. And we have been taking share in Europe and Asia. So no reason to not also do that in the U.S. Overall, I look at it as the deglobalization. If you have one large manufacturing plant that you obviously run it really, really efficiently. And your inefficiency sits in the fact that you will have to ship globally and through different borders and more paperwork. And that is not revenue or spend that comes into the life science tools direction. However, if you manufacture locally, now your shipping lines are shorter, but you have several manufacturing plants, and that will have some inefficiencies and that you will have duplication of instrumentation, that you will have more QA, QC as well as validation runs. And that inefficiency will sit more in the life science tools spend. So overall, I think it's a positive for the industry.

You mentioned share gains a couple of times. Maybe we could just jump to innovation and talk about some of the drivers behind that. I know you've got the new proximity scope in spatial, the automated cartridge for Simplex. Maybe talk on some of the recent developments. And then as we think ahead to '26, are there big new product launches?

Yes. I think we certainly always have made sure that we want to drive our growth basically based on innovation and staying ahead of our competition. In our 4 growth verticals, we've really made very nice progress when it comes to innovation, and we should because 8% of our revenues get reinvested into R&D activities. And if I go vertical by vertical, we have the cell and gene therapy where you know all about the upcoming acquisition of Wilson Wolf. But to make sure that we strengthen our offering, we certainly have looked at offering more and designing more AI-generated proteins that have ultra specificity or are more heat stable than others, and they're patentable and they can command a price premium. So we're very excited about that. In the meantime, in that same business, we've launched the POPEX, which is basically a different packaging for your proteins that you then directly inject into, for example, a bioreactor like the G-Rex. And that form factor makes human error less likely. It also decreases the risk of contamination. And that's a value proposition so high that even companies in later-stage clinicals are now considering changing the usage of their GMP proteins based upon that form factor. So we have one real nice case in point where a third company in a Phase III clinical swapped to our GMP proteins because of the POPEX form factor. So that's an innovation we're very proud of. If I look at the protein analysis, we have announced or will launch in our second half of the year, the Ella cartridge for ultra sensitivity. That will -- Ella ALA was always very preferred for the small, small form factor, ease of use, speed, consistency but the sensitivity had a certain ceiling, and that would make it less likely to be used in neuro diseases as well as in inflammation. With this new cartridge, which will enable it to be 2 to 5x more sensitive, that is a market we can now go after with the other value propositions that gives it a very interesting future. And that's just the Ultra -- the Ella. On the LEO side, the Wilson Wolf side, we launched this instrument LEO, which has 4x higher capacity than our previous generation, but also more precision and more detection abilities, absolutely a throughput machine for larger pharma and lived up to all the expectations. And I might have mentioned in the past that we -- the expectations and the rollout commercialization was done in a much more how do you call it, stable end market situation. And now we are -- have seen some more turmoil in our markets in the past couple of quarters. And we still have been hitting for the last 3 quarters, all our targets as they were set in better times. So that's really a test to this instrument. In the spatial, you mentioned proximity scope. It's a new lounge that basically allows you to look at protein-protein interaction and very important lens for researchers. So with the COMET instrument and our RNA detection as well as the protein detection. And our antibodies and our protein-protein detection, we are really ahead of the pack if it comes to fully automated full multi-omic capabilities in spatial. And I feel -- we feel -- I feel that we are really well set to continue to outcompete in the translational section of the spatial biology market. And then last but not least, molecular diagnostics. There, we launched exosome-based ESR1. ESR1 breast cancer marker, resistance breast cancer marker. So it will tell you when to change therapies. And with that, doing that on the right time, you can double life expectancy of the patients, very important innovation. And then last but not least, we have an Oxford Nanopore-based genetic testing kit that made it to the market, which is also a combination of very hard to sequence genes. So NGS is having a tough time with those genes. And we have an elegant solution to really quickly read those difficult but important genetic diseases genes. So that's just a small grab of all the substantial innovations we've brought to market.

And maybe we could segue into inorganic too. You did Lunaphore, I think, 2.5 years ago. Just talk a little bit about. You've said M&A remains a priority. You obviously mentioned Wilson Wolf. Talk a little bit about current backdrop for M&A, how you're thinking about kind of valuations, other target areas? And then what are the gives and takes on whether Wilson Wolf gets done? Yes.

Yes. Overall, our highest priority for capital deployment is M&A. We had a year or 2 in which we did not see high-quality targets coming to market. Right now, that has improved. So there's a better high-quality targets that are available and pricing expectations are elevated, but not observed anymore. So they're improving. We are 0.6x leverage. So we have -- we definitely have appetite and capacity to do -- to be active in the market. We would love to do so, but we will be, of course, disciplined in not doing anything we would regret. We are very good in evaluating targets from a technology point of view and integration capabilities are very, very good. Good process and a good M&A team. So ready if we have the right opportunity. We like strengthening our portfolio in, for example, cell therapy. Organoids is a real dimension that's really taking off across Europe and the U.S. There are some nifty things we could add to that portfolio. And then our protein analysis instrumentation, there's always some room for additional technologies in there, too. Those will really be our focus. The core, other antibody types, protein types, there are some new entrants there, too, new capabilities that we could add to our portfolio very nicely. Spatial, I think we are really well off right now. We have a very good offering, and that's true for our molecular diagnostics business as well. So if there's M&A activity, you should probably think core and the 2 that I just mentioned.

And I guess does the optionality around Wilson Wolf kind of limit your ability to do bigger deals? Just how do you think about that?

Yes. To the contrary, actually, it's obviously -- latest, it would be December of 2027 that the asset become ours unless there are milestones hit, and then it will be earlier. Nonetheless, we, of course, did our homework in what would be our capacity quarter-to-quarter and in between. Fortunately, with the leverage I just mentioned as well as our debt capacity, we could easily do a deal or 2 typical for our -- in the size that is very typical for us in between. And the interesting thing is that with the top line as well as the bottom line for Wilson Wolf, is that you would think our capacity would go down for temporarily, but it actually increases our capacity to do deals. So it won't be to the detriment of our overall deal activity.

Maybe we could just touch on GMP proteins. You've had some headwinds tied to a small number of customers there. Just talk about the size of that GMP business today. What headwinds are kind of baked in for the year? And how is the business growing outside of those few customers?

Yes. So last year, we talked about the overall cell therapy business for us being $80 million run rate. The GMP protein section of that is $60 million. Q1, Q2 last year, we grew 60% and 90% in cell therapy, and that was pretty much driven by large orders for obviously, companies in clinical studies that have larger indications, so large populations for their clinical studies. Not by coincidence, those companies have received Fast Track designation. That means typically that, of course, the FDA will prioritize your review and you can submit your documents while you're progressing through your program rather than at the end of it. And in the meantime, you typically get -- you get allowed to have a little bit higher risk by reducing the number of clinical studies or the number of clinical patients you do because there's such a health benefit at the end of it. So therefore, very much aligned with the large indications, also aligned with the rhetoric in trying to make America's -- Americans healthy in the big indications. So this is really good news for these companies. For us, we will, therefore, have a little hiatus in -- during a period where these companies will not order proteins because they have enough to finalize the clinical studies. And that will give us headwinds. We had 200 basis point headwinds in Q1 and 400 basis points in Q2. The second half of our year, we will still have some tailwinds. They will be abating quarter-by-quarter, and they will be fully out of our comparables after our Q4.

And any change on the competitive front with new entrants coming into the market?

In cell therapy? No. It's pretty much the same. There are 2 European players that were ahead of us in this market, and we've competed with successfully. We have really carved out a stronger position in the regen med area where the more complex proteins are of importance. And we have 49 years of experience in designing, but also manufacturing very complex proteins in very consistent ways. So that's really where we carved out our strength, and we are market leaders there. And I see that with -- especially with the new efforts in AI designs enabled further design of proteins that we can continue to have that advantage. And that's also where the market is heading. So we feel very comfortable with the competitive landscape.

Maybe can you just dive into that a little bit, how AI is helping on the protein design front?

Yes. Of course, we have a -- after 49 years being in this space, vast databases on different characteristics of the proteins that we have designed and produced. And we always -- we're proud of being able to characterize them and make sure that there's lotto lot consistency and that we know how to make and design more complex proteins. And with those databases, combine that with public databases, you can start looking at what are -- how do you design certain characteristics of proteins in there. And we all know that stability and heat stability is a very important aspect. Specificity is always an important aspect. And utilizing AI, you can increase your specificity, you can also design in more heat stable characteristics. And therefore, you get higher performance proteins that actually do not exist in nature, and therefore, they are patentable. So having the database and the know-how, having the ability to design them, but also the know-how how to produce them really gives us a competitive advantage that we then can translate into better performance for the customers and therefore, also being able to command a price premium.

Interesting. Maybe on pricing, you did notice or call out some promotion activity on the protein science side of the business in the recent quarter. Can you maybe just talk, was this to take share, protect share? And how broad across the portfolio was this?

Yes. It was in the protein sciences where we did promotions. And you can see them in the different websites and LinkedIn. You can see our promotions. They are typically grants. So a company would start a new program or a academic institution, they start a new program, and we could -- we assign a 10k grant or so in which they get to use our proteins. For us, with these proteins being super high margin, it's not very expensive. It's better than just lowering your prices across the board. That's not very specific. We believe that in constrained funding environments, fewer programs get started, but the programs that do get started are usually of high quality because they obviously have something special to them. And that could be the clinical indication or application or scalability or -- but they can also just be -- that it's something that has a high NPV. And therefore, we want to be part of those programs. And as you know, the moment you start generating data utilizing certain ingredients like proteins or the G-Rex, right, the moment you start generating data utilizing those, the further you get into those clinicals, the stickier it becomes, right? The customer usually wouldn't want to swap any ingredients anymore once they have clinical data. So we feel that it is seeding the market more so than just dumping price. And you can see that last quarter, we had 550 cell and gene therapy customers for our GMP proteins, and it's now bumped up to 700. And much of that is through those grants. And we hope to seed these high-value programs right now so that when the funding gets better, these companies will continue utilizing our ingredients.

And is that mostly for biotech or academic or both?

Yes, both. Both sides, we've done these grants. And again, there's a little review board in the company that looks at which of these programs make -- really make a lot of sense and have a certain promise. And then we collaborate with these customers to, even in tough times, start exciting programs.

And maybe just on that, just touch on the academic backdrop. I mean, grants have been flowing despite the shutdown, more consumables than instruments, obviously. But just talk a little bit about what you've seen in the current environment and how you're thinking about the calendar year ahead?

The shutdown, government shutdown...

Yes, more like the NIH outlook, right, on a flat backdrop presumably.

Yes. So as of February this calendar year, it was relatively messy in the U.S. academic. Fortunately, European academic was mid-single digits and stable and is doing well. And I think that might even improve over time. U.S. academic was relatively messy, and we went from negative high single digits to negative low single digits. So there's sequential improvement. We see that our core reagents, which usually indicate overall activity level were more stable this quarter in academic. We saw August, September having finally some positive year-over-year numbers when it comes to the outlays of the grants. And we definitely keep real close -- a close eye on the -- not only the number of grants, but the type of grants, right? So from grants very much focused on infectious diseases and immunization, you can see that there is definitely a swing towards the oncology and neurological diseases, which is way more -- much more aligned with our portfolio which is good. So then the proceeds are coming back into the market. The use of proceeds are coming our way. And then if you look within the grants, what technology usually money gets spent on, which used to be very NGS heavy is now much more in proteins and proteomics based. So also within the grants, the money is flowing a little bit more in our direction. So we see very positive signs in the NIH markets -- the academic markets. And then the close down of the government was very much noticeable in like institutions like CDC and NIH, but those are definitely small endpoints for us on the overall company perspective. And that's less than 1% exposure, and we've really not changed our forecast or our feelings about the balance of the year based upon that.

And does the push toward more multiyear grants make things better? I mean you talked about better funded research and maybe better projects getting funded. So if labs have visibility for a couple of years now, fewer grants, but maybe better visibility?

Yes, I would agree. I think that when you can plan out your grant and you know that there is a continuation of the program definitely helps you with scheduling your purchases and when you get to certain needs and when you need new instrumentation. So I think that's a benefit.

And we've got just over a month left in the year. Any thoughts on kind of budget flush in the biopharma side in the year-end?

Yes. Well, it's likely -- it could be -- it could definitely happen. We don't talk a lot about it because at the end of the day, only 10% of our revenues are related to instrumentation. 80% is consumables, 10% is service. So the service and the consumables, so 90% of the company are not influenced by budget flush. So therefore, it's not a big theme for us.

Great. We'll leave it at that. Thanks.

Thank you, Tycho.