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

All right. Good morning, everyone. Day 2 of the 46th Annual TD Cowen Healthcare Conference. I'm Kyle Boucher, an analyst on the life science and diagnostic tools team here. And I'm pleased to be joined by Kim Kelderman and Jim Hippel, CEO and CFO of Bio-Techne. Kim and Jim, welcome to the conference.

Thank you.

So today, I'd like to go through a number of questions, including the company's recent performance, the healthier end markets and then maybe get over to some of your growth pillars. But before we get into that, this year marks Bio-Techne's 50th anniversary. That's a big milestone. So I guess, Kim, maybe can you take a moment and just reflect on Techne's success to date and give a brief overview of your priorities going forward?

Sure. Well, first of all, thanks for having us. Good to see you, Kyle. Yes, 50th year, we're quite excited about that milestone. Started in 1976 in Minneapolis and the team at that time was really focused on creating hematology controls for that, obviously got very, very acquainted and worked a lot with blood and very successful in creating those controls. But at some point, also looking at all the other components you find in there, and obviously, there are plenty of proteins. So we learned a lot about these proteins over the years and how to characterize them and how to create a fantastic portfolio, which we now have about 6,000 or so on the market, complex molecules. And those proteins and know-how really helped us to be extremely good at also creating the antibodies that fit the proteins. And so it gave us a competitive advantage that kept rolling into eventually a broad portfolio of core reagents. That gives us broad market access. We go directly to market with those -- with that portfolio, gives us broad access and there with good connection with customers, and we continually get the input as to what customers want to research and what kind of tools they would need to do so properly. And from that, we basically branched into 4 growth verticals because we knew where the market was heading, but we also had the tools to evaluate certain M&A opportunities really well with the know-how we have. And therefore, we ended up building a very nice franchise around protein characteristics through several acquisitions and organic efforts. We created a cell therapy business unit, same mixture, spatial biology, also same mixture, some acquisitions and organic work. And then last but not least, the molecular diagnostic business, which is probably the smallest of those 4 verticals. It creates a fantastic setup where you have high-margin core portfolio, basically finding pull-through by our plays in those 4 growth vertical markets through very differentiated offerings. And that's the setup for the whole company.

All right. Got it. Well, maybe moving over to some more nearer-term stuff. You reported fiscal 2Q not too long ago. Total organic growth came in around flat for the overall company, but you had a pretty notable headwind from your GMP reagents business, which we'll get to shortly. But total underlying organic growth was around 3%, so low single digits. Middle of last year, you gave an outlook for fiscal '26 of plus low single digits. I think the Street currently reflects somewhere around 1% for the full fiscal year. And I think that reflects Techne exiting the fiscal year around mid-single-digit underlying growth, so that would be the June quarter. So I guess relative to your initial outlook back in late summer of 2025, I mean, how have your views of your end markets changed or progressed? And what's your confidence in Techne being able to exit fiscal '26 at that sort of mid-single-digit organic underlying growth?

Yes. The confidence is relatively high because most of the thesis that we had at the beginning of the fiscal year, when we don't guide, but we give some soft guidance in that we kind of talk through what we believe the markets -- end markets will do. And that's holding very nicely together. Our base assumptions were that we had a healthy market in large pharma, 30% of our revenues. And fortunately, we've now printed a fifth quarter consecutively double-digit growth, so double-digit growth over double-digit growth, which is -- shows important momentum for us because it is our largest market. That was also the base assumption. Then we have biotech where the first half of the calendar year last year was really abysmal funding. And it started to stabilize, get a little bit into positive territory in the calendar Q3 and then accelerated in the back end of the calendar year and continue accelerating in January with the funding being up 90%, basically over those last 4 months. So we do believe we see some green shoots there if it comes to capitalization of that end market. And we do believe that, that eventually will trickle through to life science tools. So a good setup, and for now, stable with the potential to improve, and that was our setup. The third market, obviously, is academic. 22% of our revenue is related to that end market. 8% though in Europe and 12% in the U.S. We -- in the U.S., we obviously had a very turbulent year that everybody knows about. And it started more or less in February last year. So there's some progress there. We were relatively certain that there would be bipartisan support to, of course, continue the very important aspect of education and research. The budget get passed. We did assume and know that there's some sand in the engine if it comes to what gets approved and how does the money get handed out. And there's quite some details underneath. But overall, our assumption that, that market will be stable and improve over time is also still holding true in our minds. And then last but not least, we assumed a relatively stable and positive growth performance in Asia as well as in China. And that also became a true aspect of our budget. Long story short, all the ingredients that we typically talk about with the assumptions are so far holding nicely, and therefore, the projections for the coming quarters, we're still comfortable with as well.

Got it. I'd like to dig into the end markets a little bit in a second. But maybe before then, you've previously mentioned that in times of weak market conditions that Bio-Techne should outperform peers. But as underlying market conditions improve, the gap sort of between Bio-Techne and peers should ultimately widen and lead to even greater outperformance. So I think other large tools companies are calling for a gradual recovery in the underlying end market. Many of the calendar '26 guides call for somewhere around low single-digit growth. So in that context, as that end market recovers, should Techne be able to meaningfully accelerate underlying growth as the market marches back towards those historical levels?

Yes, assuming that recovery happens in that pace, we feel very comfortable with the outperformance. Obviously, the setup of having the core, which is 52% of our revenues being broad-based applied will make it very dependent on the overall activity level in the end markets. However, our investments and our play in the faster-growing verticals definitely make sure that these nascent, very applicable new markets are going to continue the outperformance like they have shown over the last couple of years. But if anything, the 3, 4 markets that I mentioned are going to get boosted by all kinds of different aspects. I think the type of data and the type of processes we address are going to be important for new modalities. But on top of that, we always talk about automation, we talk about reproducible results, high quality reagents, and if you think about an extra drive of generation of data that you could use for -- through AI to better design or better progress your projects through your funnel, that's right up of our alley, and that's also what we always propagated. So we are very enthusiastic about the tailwinds and the positioning we have in those 4 growth verticals, and there we've achieved our outperformance as you've come used to, yes.

Got it, got it. Okay. So maybe on the end markets then, just moving on a little bit, large pharma, starting with large pharma. You just mentioned you had a number of quarters of double-digit growth here and large pharma makes up around 30% of your sales. It doesn't seem like strength is really waning here. Would you agree with that? And I guess the question is, if you think about over the next 12, 18, 24 months, are there any sort of speed bumps that you see? Are there any lingering fears over tariffs, MFN, patent cliffs? I mean do you foresee anything over that time frame that anything could change that would get in the way of this strong growth that large pharma has seen?

Yes. I think that, of course, being in the double digits 5 quarters, you'd think that that's real, but if we look at the overall spirit in that particular end market, the budget has been set mid-single digits more or less for R&D. We feel that's very healthy, and we feel that, therefore, we can grow to double digits. And again, that's just because the 4 growth verticals we have are very nicely tailored to whatever research as well as translational work needs to be done in large pharma. If you then layer on top the drive to generate reproducible data, especially as AI becomes a stronger storyline and a more evident storyline in the development of new drugs, I do believe that there will be actually extra push to get from manual clunky processes into what we always talked about, simple, automated reproducible setup. So I think even without the AI drive that we belong in the double digits for large pharma. But with that additional drive to get more usable data, I am even more certain that we can perform really well in that end market.

So then maybe for the pre-commercial smaller biotech, which I think you said is just under about 20% of sales now, they've been under pressure for a number of years, but the funding environment you've called out a number of times getting a lot better. I think there's been probably 3 or 4 months now positive of funding data out there. I guess, maybe to start, how long does it really take for that spending to flow through to Bio-Techne? And I guess how are you guys positioned as that money sort of flows back?

Historically, it takes about 3 quarters plus/minus 1, and it's typically different for reagents where -- which are easier or faster to order. And then CapEx is usually a little later in that bell curve. In general, I wouldn't be surprised if we're going to do a little bit better than that if it comes to the time frame, and that's based on the fact that historically, if there would be a bump in funding, people would have to start building infrastructure, clean rooms, fume hoods and what have you, to then start ordering their equipment and their reagents. Right now, there is obviously, over the last couple of years, tremendous capacity build in the market that, I believe, the funding will not be used as much to first build infrastructure, but can may be find on average faster into new projects and/or acceleration of projects and, therefore, come quicker to the life science tools. And we're not counting on it, but because our assumption is the historical 3 quarters, I wouldn't be surprised if it's going to be a little bit better than that.

Got it. Okay. Maybe moving on to your growth pillars then, starting with cell and gene therapy, a big area of focus for you guys. And you've talked about this business being roughly $80 million. I believe, from your disclosure, that's around $60 million for your GMP reagents business and around $20 million from the ProteinSimple business, which I think is mostly Maurice. Is that right?

No, it's -- the breakout is a little bit different. It is $80 million run rate last year. $60 million of that was GMP proteins. But the other $20 million is in small molecules and in media, so other reagents you put in there. The -- yes, you do use Maurice and other instrument platforms to analyze and support cell and gene therapy, but we do not count that in that business unit. We count that back in the protein analytics business unit. So that's the difference in breakout.

Got it. Okay. And so that GMP reagents business, maybe to talk about that for a moment. You've been a victim of your own success here creating some really difficult comps back in fiscal '25. But I guess can you walk through sort of the comp dynamic that you've discussed from these 2 major customers? And then I've got a second question on them.

Yes, you're right. We've always been driving to add customers to the funnel, and we now have over 700 customers in the funnel to use our GMP proteins. But at the end of the day, we have 2 large customers that have big projects addressing real broad indications, and those customers have dominated, I should say, from a dollar point of view, the ramp in GMP revenues. Last year, Q2, we grew 9%, but on the call, we said, listen, underlying it's 6% because there's a couple of big orders in there that we might not see repeat on the short term because once these customers are still in clinical trials, their orders are very lumpy, right? And then fortunately, and for good reasons, 2 of those large companies -- customers have received fast track approval. That means that the FDA will work together with them to optimize the time to market. And that's great news. But that does mean that we have a year of tough comparables, and that will influence the overall company's organic growth, and the headwind was 200 basis points in Q1, accelerating to 400 basis points this last quarter. And then it weans off to 300 and 150 basis points for the upcoming 2 quarters. And from there, it will be out of our comparables. So great news that they received this fast track approval. It creates a little bit of a lull. They will start reordering the moment they get confidence that they have to start validating manufacturing and processes, and they will start using our ingredients again. But we've not built our assumptions around that. We are just very, very supportive of them getting their approvals. And if so, these companies will ramp in a much more steady way. And I wouldn't say steady as in slow growing, steady as in a more predictable way. And we do feel that these customers could be $40 million, $50 million or so each at 4, 5 years in, rolling out their therapies and double that a couple of years later at their peak revenue. So we are very, very exciting that it is -- excited that there is this future. Underlying, though, and that's most important, you take those 2 customers and that dynamic out of the equation for a minute, you can see that we still grew 30% or so, and that's for me, very important, because you don't want to have a business that only is healthy if those 2 customers do well. We do have a healthy business underneath as well.

Right. Okay. And maybe another piece of the future cell and gene therapy portfolio, Wilson Wolf, which you'll be acquiring by the end of calendar 2027. I guess, can you maybe just speak for a second on Wilson Wolf's recent performance? I think they had sort of a tough quarter last quarter similar to you guys. But I guess, ultimately, how does that technology really fit into your portfolio? And I guess, what are the attractive pieces there you see?

Yes. So Wilson Wolf mainly built around a product called the G-Rex. And the G-Rex is basically a small bioreactor, typical size is 1 liter. The real nifty part of it is that you put the cells you want to grow, typically CAR-T, but you can put other cells in there in this bioreactor. And then the nifty part is that oxygen can get relatively quickly to the cells because there's a permeable bottom on this G-Rex and then you can basically add all the necessary reagents to make these cells happy and make them grow in the right speed. And for that, you would have to inject small molecules, GMP proteins and cytokines and what have you, which are all ingredients that we are, a, very good at. We have a large portfolio of and they're extremely high margins. So the G-Rex being scalable and affordable and therefore, has a 45% of all clinicals in the world position, with us being able to connect towards this G-Rex, if it comes to adding our reagents at very high margins, is almost a dream scenario. And it will come true. We own 20% right now. We will own the balance of the company December 2027, which is a little less than 8 quarters from now. And yes, we feel that, that is a fantastic combo, very similar to all our other verticals where instruments pull through our reagents. In this case, it's a disposable that will pull through our reagents, but a fantastic setup, and it truly enables the cell and gene therapy customers to scale and to make the treatment affordable, which has been some of the higher hurdles for companies to cross. So we enable it. To growth is very interesting. We do see the parallels between our GMP portfolio, which is mainly looking at regen med and the Wilson Wolf portfolio, which is more in the CAR-T space. Nonetheless, they both have very similar growth rates. They kind of read on the same markets. So we see a good validation of our numbers. Last quarter, they run -- grew 20%, 12-month trailing, which is something we look rather at because of the lumpiness of the larger orders, and that's been mid-teens, in very depressed, suppressed markets, I should say. And that's actually what we've seen, too, underlaying on -- in cell therapy.

Got it. So maybe another pillar of yours, the proteomic analytical tools, the ProteinSimple franchise. I think more broadly, your analytical tools franchise, including reagents, the consumables portion are over 20%, just over 20% of sales from our math, I guess. ProteinSimple specifically has grown, I think, at least high single digits for a number of quarters with consumables growing well into the double digits for many quarters. I guess can you discuss some of the drivers behind the strength that, that business has seen sustained for so long?

Yes. Obviously, a fantastic platform, proteomic analytics. We knew it was always coming and going to be important, and it certainly feels over the last years that, that moment has arrived. In total, the business is more than $300 million for us, so it's 25% or so of the company. So it's increased a little bit. And you're right, that's because the instrumentation also in tougher end markets has continued to be able to perform nicely and increased installed base, and the pull-through of our reagents/cartridges for consumables really has done extremely well in -- under those market conditions as well. 10 out of the 13 last quarters has been in double digits. And that speaks to the utilization. That means that these technologies are actually very relevant and being used. And it doesn't surprise me because if you think about some fundamental processes like ELISAs or Western blots, and biologic analysis, all of those are very essential in the upcoming waves of projects. In the meantime, we always pushed forward our automation because, a, it's simple, but it also creates reproducible results and it's actually the actual data. So having actual data, which we label so that AI models can make use of it compared to manual. So we have mainly competed with manual solutions, right? And in the past, there were some drivers like fewer people in the lab because of pandemic or, hey, are people getting more expensive, we should go to automation, or more so in pharma, our data needs to be of higher quality and reproducible. So those were already drivers. But now with the drive to being able to utilize your data for bigger large language models is actually we feel even more a value proposition we can benefit from. So all 3 platforms are really well positioned. They're very unique, and they have still plenty of market share to grow into because they are all sub 20% or so market share in these end markets, and have plenty of head space. So we feel that we're well positioned to see continuing that product line, do as well, if not better, in the coming years.

Got it. Actually, I got a question for Jim. Maybe moving on to margins a little bit. I guess on the margins, Jim, Techne has got a pretty big opportunity to materially expand margins over the next few years as the end market recovers, as M&A scales. That is just pretty evident by the 250 bps of margin improvement before reinvestment that you've seen post the divestiture of ExoDx, I guess. So I guess maybe what are the building blocks that could materially raise Techne's adjusted EBIT margins over the next couple of years? And I guess on that, how does your core reagents business play into this improvement as the market improves?

Before I talk about the expanding margins going forward, talk a little bit about what we've been doing here and now in the past 7 to 8 quarters, has been a lot of internal productivity and product line rationalization, like you talked about ExoDx, for example, to really position the company to weather the end market situation that we've been in for the past couple of years, keeping our margins at way above peer average. And so that we're very well positioned for the next leg of growth in terms of future margin expansion. So I think we've done a really good job of doing all of that to preserve our margins north of 30% in this environment. And it will, I think, parlay into kind of our thesis in general, which is that over a longer-term period, whether it's 3 years, 5 years, what have you, our margin expansion plans aren't centered around a productivity system or something like that. It's really centered around growth. And what allows for that is we have such great margin pull-through on such a large vast of our portfolio that we just get -- and then just drop through the bottom line. And so how we think about it from a starting point every planning season is it's sub 5% growth, we want to still invest for growth while maintaining our margins. So I don't expect a lot of margin improvement in that environment, although we've done years like this past year, we've been able to expand margin despite that. But that's a starting point. You get to growth that's in the 5% to 10% range. We believe because of the drop through, we can still invest for growth and have at least 50 basis points of margin expansion as a starting point. And then we get back to double-digit growth across all of our end markets, which is our aspiration, and we believe our entitlement, then you're talking about 100 basis points of margin expansion while still investing for growth. So it allows for a path to get back well into the mid-30s, if not higher, in relatively short order with markets returning back to normal.

Got it. So maybe going back to Wilson Wolf a little bit. You've called out a number of times the margin profile of that business. So I guess maybe can you discuss that a little bit and how it would be accretive to the overall portfolio?

Yes. It's one of those magical once-in-a-career type opportunities where an acquisition at least for us is both accretive on the top line growth as well as the margin profile. So their EBITDA margins right now are running around 70%. It is a very, very lean organization, very entrepreneurial in how they go about running their business, which we don't want to get away with that. But we also are realistic and when that business becomes part of our portfolio, there will be investments we'll need to make from a systems perspective, even from a leadership and people perspective to, if nothing else, make a public company caliber for SOX and things of that sort, but also just from pure sustainability and to prepare it for its next leg of growth beyond that. So we've modeled in -- we've basically taken a 10% haircut on that margin, assuming that we'll operate at a closer to 60% EBITDA margin, but still not too shabby and still definitely accretive to our 30% plus.

Got it. And maybe moving over a little bit to just M&A and capital deployment. Clearly, M&A has been paramount to the Techne story for the last 15-plus years -- 50 years of Bio-Techne, right? So I guess with that being said, you've got Wilson Wolf on the horizon here, but how important is M&A to the strategy going forward? Are there areas of the portfolio that you'd like to add to? And I guess the last question would be, would you seek to do something ahead of Wilson Wolf? Or is that something that's sort of pending in the background, you'd sort of wait to see once that's integrated into the business?

I'd like to set up on the Chessboard. You're right, 50 years of Bio-Techne and the last 10, actually, we did these 18 acquisitions or so. And obviously, it makes a ton of sense that if you have this broad exposure to market and you know where the markets are heading, where the pain points are, that you would build out growth verticals where you can differentiate and where you can pull through your reagents and where you can be a meaningful differentiator with your customer base. So that setup, we really, really like. In the meantime, we have the right abilities to evaluate certain targets and we know how to integrate. And then we always have the setup of you go play in a market, you will win in the market with your handpicked solutions. And as long as it pulls through reagents, the margins will follow as well. So therefore, as a company, we will always be able to drive top line growth faster than anybody else, but also maintain margin profile that people have come to love. So that's a fantastic setup. Yes, we have Wilson Wolf on the docket for sure. So that's a good thing. But in the meantime, and that will even increase our buying power. But in the meantime, we are ready to do another deal or 2. But we want to be disciplined. We won't do anything that we would regret. And we have certain areas that we really like. Fortunately, we're not in the position where we have to move because in spatial a couple of years ago, I really needed and wanted an instrument. So that was a kind of a have to move situation, but we're not having that currently. But we are interested in building out further cell therapy workflows. Our proteomic analysis instrument setup is really, really good. And as I might have mentioned cell therapy workflows and then combine that with building out the core portfolio with other nifty antibodies or protein companies. So those are the 2 verticals as well as the core that we will always continue to maintain.

All right. Great. Well, with that, we're out of time. And Kim and Jim, thank you very much for being here.

Thank you, Kyle.

Thank you for having us.