Bio-Techne Corporation ($TECH)

Okay. All right. Welcome, everyone. Just running a minute behind here, but let me get started. I'm Puneet Souda. I cover life science tools and diagnostics here at Leerink. And my pleasure to be hosting Bio-Techne team joined by Jim Hippel, CFO; and also David Claire, Head of Investor Relations. Thank you guys for being here in Miami.

Always a pleasure to be here. Thank you.

Great. So maybe, Jim, let's kick off at a high level, maybe at the end markets. What are you -- what's the state of union in terms of the end markets? Maybe give us the latest what you're seeing in demand from the pharma, your large customers as well as the biotech and emerging biotechs and academic end markets, respectively, maybe?

Sure. So as we came out of our December quarter, our Q2, we said we expected the end markets to be pretty much the same in Q3 as Q2 in terms of the buying activity. And as a reminder, in December, if you kind of go through our major end markets, you've mentioned several of them, pharma being the largest large -- big pharma being the largest or roughly 30% of our revenue. We exited our December quarter with low double-digit growth. That was the fifth quarter in a row double-digit growth, which was little bit of a pleasant surprise for us, frankly, because as we exited, as we got into our Q1, there was still a lot of rhetoric around the potential for MFM pricing on large pharma threats of 100% tariffs, et cetera. And so we've been doing well and in large pharma and was concerned that growth might slow down just because of all the rhetoric. And luckily, large pharma, as we all know, kind of got that under control relatively quickly, signed some agreements to appease the administration, and it appears as those clouds have dissipated, and we continue to do very well in Pharma as a result. And we don't see that -- anticipate that changing unless there is some other monkey wrench that comes down comes down the road. If you look then at biotech, arguably, one of our in the next largest market, roughly 20% of our revenue. These are smaller biotechs. We had -- we exited our Q2 with mid-single-digit declines in biotech. But if you recall, I know you know this well, Puneet, in the first half of calendar year 2025, biotech funding was down nearly 40%. So the fact that we were only down mid-single digit, we actually saw that as a bit of a win. And we all know there's a lag between funding both from the upside and the downside and when you actually see it in the spend in your results. And so we think that was some the lag that we saw. And we expected that to continue into the near term. The bright side there was there was definitely some green shoots coming out of both Q1 and Q2 where we saw the October -- or the September quarter. We saw funding actually start to increase again, roughly in the high single digits. And then exiting December, it was something like over 90% or something like that growth. So very encouraging that we're seeing the money come back in into biotech. And if you step back and think about it, kind of it makes sense because so goes pharma or at least the concerns around pharma, sometimes so goes biotech. Biotech is much more volatile. And if they're concerned about pharma, they are concerned about their potential exits and they're going to move their money somewhere else. And now that they had -- the clouds have cleared for pharma it appears, we're seeing that money now come back into biotech, which is nice. And you're seeing a lot of M&A activity again now. Among large pharma, acquiring biotech, which is encouraging for new investors. So we saw that exiting Q2, but we know there's a lag. We know there's a 2- to 3-quarter lag on average in the bell curve. To see that come into spending. So we didn't necessarily anticipate much change here in Q3 as a result. And if anything, the outlook with regards to -- as the year progresses in calendar 2026 and especially when you get into our fiscal year '27, which is only 4 months away now, biotechs still continue to look very encouraging in the sense that the latest numbers out of January and February, that growth in funding has only accelerated across all levels of funding, whether it's IPO all the way down to venture capital. So we're definitely looking forward to that eventually starting to turn to spend. And then, of course, there's academic. Academic is a little over 20% of our global revenue, is roughly half of that in Europe and roughly half of that in the U.S. Europe academic has been fine mid- to high -- sorry, low to mid-single-digit growth, which is kind of what we expect out of academic in Europe. But of course, U.S. academic, we sat here exactly a year ago, literally like the week, the hammer came down from the Trump administration around potential 40% cuts in NIH. We've been dealing with that kind of that cloud, that threat now for over a year, our customers have. We saw -- we've seen academic stabilize to kind of low single-digit declines. And we didn't anticipate coming out of last quarter that to change immediately despite the fact that Congress at that time was definitely going down a path towards more like flattish to 1% growth as we're ended up actually, of course, but until that actually all gets resolved, we understand why our shell shock academic customers are going to be a bit reserved. Development sensing, of course, is, I think, literally as the day before, a day after our earnings release Congress formally approved a 1% increase. So that's a nice -- a very nice step in the right direction, not to mention they also basically did away with the indirect cost -- indirect cost caps. And as you know, also limited the number of multiyear grants. So all positives in the right direction. But at the end of the day, you still have to wait to see how the administration is going to actually roll that out. And I think we've been watching the data on NIH grants, and they've been slow to roll thus far, although it's 1 week in March, but at least we saw based on the data that was published during the day, so a nice pickup in grant releases starting in March. So again, bodes well for that funding now needs to turn to spending that can take some time for that to happen. But we didn't anticipate academic starting to go into growth mode probably into the back half of our calendar year, which is the first half of our fiscal year, and it's still looking like that's how it's going to play out in terms of things settling down. But very encouraging, again, when you get into the back half of this calendar year. And then you didn't mention it, but the other kind of end market that's important to us, of course, is Asia overall. Roughly 16%, 17% of our revenue, half of that being in China, the other half throughout the rest of Asia. And we've had 3 quarters in a row now of growth in China and 2 quarters in a row in the rest of Asia. In fact, the rest of Asia was double-digit growth this last quarter. So also very encouraging. We were one of the first companies to say, hey, we think China might be turning the corner here with regards to gradually getting back to the growth. And we've been seeing that and it's been nice momentum in China. It's not a hockey stick. It's not a stimulus-driven ramp-up, but it's a nice, steady progression. And we see that continuing throughout calendar 2026.

Is there any reason you're seeing an early pickup in China. I think a number of companies are still cautious, somewhat still waiting for stimulus funding macro news in China, not exactly. And now we have got a conflict, which can impact inflation prices of oil in that. And maybe just on that point, I don't know if you can help us investors understand sort of when your shipping cost, obviously, these are smaller products that you're shipping. Is there any consideration that you're thinking about in terms of inflation prices of oil and whatnot?

Yes. I'll start the latter point first. So I mean, obviously very, very fresh and very new, and you didn't know and even knows how long this really has been. An oil can move 20% in 1 day, who knows, right? But in terms of our exposure, we're not overly concerned about it in the sense that shipping specifically, almost all of our products were shipped by air, not by ships. So there's no issues there in terms of constraints in the waters. But yet air, of course, uses fuel. So fuel costs sustainably high shipping costs could go higher as well, and we'll have to figure out how we help build that into our pricing as well going forward if we need to. But I think it's too, too early to talk about that. Hopefully, this all settles down before we get to the end of next quarter close, and we want to talk about it. If we do, we'll talk about how we're handling that. And that goes for China as well, by the way. So it's too early to comment on that. I'd say up until now, though, with regards to China. And we've told you about this about a year ago when we were -- had just visited -- just finished a trip in China, and we were hearing for the very first time optimism about -- from customers there about government funding starting to return, funding starting to return in general back into biotechs. And it was the first time in like 3 or 4 years that the conversation was about how much it might grow next year as opposed to how much it might shrink. So it's very encouraging, and that's more or less played out. We've seen some incremental increase in the government on the government side, but also on the, call it, the industrial side, biotech in particular, where you hear about Pharma now doing a lot of licensing to filter pipelines and using China to do that, and we're seeing that activity as well. Cell therapy is also very strong in China, and we, of course, are positioned there. And then from another differentiator for us, of course, is our instrumentation portfolio and our spatial portfolio, we've always said that those two growth pillars for us would likely be the area we'd see growth first because they're the hottest areas. They're the most -- arguably the most exciting areas of our portfolio and the money return, that's where the money will go first. And we're seeing that in China. We've been seeing that in the past 2 or 3 quarters. And even during the 2 or 3 bad years in China, our consumables on those instruments, the cartridges on those instruments were still growing in some quarters, double digit. So we knew that there was likely a capacity constraint building there with regards to instrumentation. And as soon as there was money available we start to see it flow into our instruments, and that is what we're seeing.

Got you. Okay. Then maybe just touching on the 2026 guide. I mean fiscal year 2016 guide, you're expecting to exit fourth quarter and reach mid-single-digit growth for the full year, look at our model, we're modeling about 1% for you guys. But just there -- it appears to be a lot of prudence in there, just given the backdrop that you have experienced. But just wondering any -- in the first few months, what's what if any part of the business is end markets that are changing that give you maybe a slight bit of optimism. Maybe you talked about grants improving, but that's just in the last week or so -- but wondering if there are other factors that?

Yes. I mean so at a high level, I'd say this, our concern is less about if, it's more about when, right? I think all the macro signs are turning much more positive with regards to a true recovery. Again, barring something else that comes out of left field. And so now trying to time the exact pinpoint of a quarter of when that recovery starts is always difficult to do. So that's the one where if there's any prudence or caution we have is in the timing, and I'm not talking about this year versus next year versus 3 years, I'm talking about this quarter versus next quarter versus the start of our fiscal year '27. It is difficult to pinpoint that exactly because for the most part, what we're waiting for is for these -- for the funding that we know is there, both in biotech, as well as now an academic to actually get released get down to the -- work the budgets down to the lab level in the case of academic get the grants starting to roll again and then actually start spending the money. And again, history tells that, that can take anywhere from 2 to 3 quarters, depending in aggregate, it's very customer specific as to win. So trying to pinpoint that exactly is very difficult, but we're very encouraged by the fact that all the signs are pointing to, indeed, a recovery in the near -- very near term. Puts and minuses specifically to this, the back half of this fiscal year, especially since you mentioned Q4. One of the biggest company-specific headwinds we face this year has been the GMP customers, very, very large customers for us, very, very exciting that they've gotten Fast Track by the FDA which will enable them to get to the clinical trials faster and ultimately hopefully get to commercialization faster. So the NPV of these two customers has gone up dramatically for us. But the timing of when you would typically see a lull after you finish your clinical trial, then you had to go through the whole formal FDA approval process for commercialization and then the manufacturing validation, all that, that can take typically can take 18 months to 3 years, Fast Track should definitely pull that into the near side, but we anticipate that happening being a conversation a year or two down the road from now. And instead we're having that this year because they were essentially able to skip a step. And the -- these two customers made up nearly half of our GMP protein revenue, so very significant. So significant that they've been a headwind for us each and every quarter that we had to talk about in our most recent Q2, a 400 basis point headwind. And we're anticipating -- well, we know it's going to be about a 300 basis point headwind in the current quarter we're in now Q3. But as we talk about Q4, that headwind drops off somewhat significantly, about 150 basis points. So there's a tailwind there. We had the continued growth from China, which is a bit of a tailwind. And then I think after that, it's really back to our opening comments on this. It's really a matter of how quickly the academic funding and the biotech funding translates in the spending. And if it doesn't get going, it's going to be in the low end of that, probably the low end of that range. If it starts to happen earlier than later in that bell curve, then it could be in the upper end of the range. But that's really the swing factor in my mind.

Got it. Okay. Then maybe just staying on the GMP reagent side. Can you give us a view into excluding those two large customers what's been the growth despite some of the challenges in the market and whatnot funding situations? How much is the sort of the customer base growing and maybe give us a view into the programs progressing towards the clinic. Any metrics you can provide there?

Sure. So we're very pleased with how our cell therapy franchise has performed overall in this downturn because this is a portion of our business that's more -- the most heavily weighted , one of the most heavily weighted towards smaller biotech and academic. It's about the early-stage stuff happens. And despite all that, we've been able to grow each and every year in the last few years through these down cycles. Most recently, this current quarter, if you exclude these two customers, the remaining 700-plus customers that we have, grew 30%. Now it can be a bit lumpy even there among those. And on a TTM basis, it was closer to the high teens, but still pretty respectable considering the past year that we've had. How much of that growth was from -- let's talk about the clinical phases. So of the 700-plus customers, over 80 of them are in clinical trials, a little over a dozen of those are in Phase I, I believe -- Phase II, sorry. Phase II. Thank you. And then roughly half a dozen or so are in Phase III. That's kind of how it's spread. I'd say the customer base itself on a net basis has grown, call it, low single digits. So most of that growth has come within that customer base as they progress not just in the clinical trials but even up to leading to the clinical trials. There's a progression. But I think most important and how we think about it is that there's been a lot of churn within that customer base. So net-net, we've continued to grow the customer base each and every quarter, but there's been a lot of churn. We actually see that churn is a good thing because a lot of these customers got into it 5 years ago when anyone with an idea was getting funded. And frankly, there was a lot less known about cell therapies and how -- what the challenges are, what the right, 5 years ago, there are today. So there's been a lot of learning, and there was a lot of money that was strong at kind of weigh out their ideas. Point being is that the hurdle to get funded now is so high, especially in academic and biotech, it's got to pretty be a pretty sound thesis or initial argument for what you're going after to even get the money. So the quality that the new customers come in and replacing the ones that are exiting, we believe is much, much higher, which means the overall percentage hits on goal of the whole portfolio should increase. So again, it increases the overall NPV of the business.

And what's your -- is there a steady state sort of expectation for proteins business because it is becoming obviously, two customers became a core topic, but more importantly this is important -- this is becoming a larger line, still not as big as proteins overall. And -- but it's still -- it's one of the fastest growing lines that you have. So just wondering how to think about that longer run. And with these exits -- and then coming into the early stages, how do you think about air pockets or within that growth framework?

Yes. Yes. So I'd say in terms of the underlying growth rate of these remaining 700 and some customers, given that they've been able to grow high teens in a very, very tough environment, we kind of have a floor of 20% on a normal market going forward. To the extent these two customers we talked about, get approved and go commercial, that would be upside to that in the outer years, say, a 5-year LRP. I can't sit here and tell you that there won't be lumpiness in the future, but I would bet, the different based on what we know today, the lumpiness will be much less severe than what we're seeing from these two customers simply because these two customers are very much outliers when you look at when you look at the various diseases that the mostly 700 ones are going after, these two happen to be going after diseases that are very prevalent. So very large patient basis and therefore, very large clinical trials, which consumes a lot of our proteins and the type of indications that they are happen to use a higher proportion of our proteins than the typical cell therapy does. I mean, to put it in perspective, Puneet, most of our other customers, when they -- if they are able to get go commercial, the amount of annual protein cells, we expect to have them on average has been what the clinical trials have been for these two customers. So it gives you a sense of why we think the lumpiness in the future won't be nearly as severe in the air pockets, they'll happen by the very nature of how the cycle works. Won't be as severe just because they're not the same magnitude of these two customers.

Got it. Okay. Great. Maybe switching gears to connected area, just maybe cell therapy, one of some of the assets that you've acquired in the past, the TC busters, the other capabilities that you've built I mean these have been all obviously application. The question is really around capital deployment. I mean the leverage ratio remains low what's your appetite? And as we think about these areas, obviously, cell therapy have proven themselves in the market over there, but still somewhat of a nascent market. But broadly speaking, across tools, how are you thinking about areas that still remain very key and sort of -- maybe just going back to what you used to describe as a funnel. So maybe if you can talk about that.

Yes, sure. So I get this question a lot lately because hey, you did so many acquisitions, 19 acquisitions or whatever, the first 10 years that I was here as CFO, of course, with Chuck with most of those years. And now all of a sudden, there hasn't been much since COVID. Now I think not since COVID, a lot of has to do it because, especially during COVID and even after COVID the valuation expectations were just kind of were crazy. But I'd say this, I'd say, first of all, we still believe that capital deployment towards M&A is a top priority for our capital, our excess capital. We still believe that life science is such a dynamic area that in the long -- in the long haul, we've been here 50 years. We won't be here in another 50 years. It's got to come from a combination of organic, inorganic to stay relevant. And it's an exciting space. There's always something new out there. And then there was a lot of initial building that we did first 10 years of my tenure with Chuck, where we were trying to take this kind of sleepy core and build around it, a portfolio that could really outpaced the growth for the market. And so we took a lot of shots on goal on that as well as different. We did almost 20 acquisitions, but the reality is only 2 or 3 really became the core of our growth pillars going forward, which is you take those chances early on. And they were relatively small acquisitions, too, so not big chances, right, in terms of capital outlay on H1. So we've matured since then. We were a $300 million company, now we're on $1.2 billion, right? And the beautiful thing is Well, let me back up for a second. Kim has come in. And before Kim, sorry, top of the funnel, because that we were in that process of kind of company building, the conversation was around how large our funnel was a least always talk about, we have 100 companies in our funnel. The funnel is full and all that. You're not going to hear us talk about how many companies are in the funnel anymore. It's much more about the quality and relevance of that funnel. And that was one thing that one of the first things Kim did when he came in as new CEO, he go, hey, I want some outside validation on do we have the right strategies in place? Do we have the right portfolio that can grow this company organically and double the company organically in the next 5 to 7 years. And rather than hire a bunch of consultants to do it, you basically upgrade our entire Corp Dev team. So we got a super star out of Danaher Corp Dev. We also brought in a top banker out of Wells Fargo and between the two of them largely the past 18 months massive interrogation of us internally to say, is this the right strategy? And the good news was that they confirmed it was that we're very well positioned. But they also, in conjunction with that, did a really nice job of saying, and we don't need to do 20 more acquisitions over the next 10 years. But for all the reasons I said earlier, we still need to prioritize M&A. And here's where we need to do it, and here's where we're going to focus our time and energy. And cell therapy is one of those areas of continued interest and we think tons of adjacencies to our current portfolio. Organoids is also a very close adjacency, and we already have a $50 million business in organized. And we think that's going to be -- we could be talking as much about ordering 5 years now as we've been talking about cell therapy. Antibodies, as you know, Puneet, is such a broad space. There's always opportunities to enhance our core antibody portfolio. And then I'm sure there'll be a question here on AI at some point. But now more than ever, especially with AI and AI models, data quantification and automation and characterization of proteins is going to be even more important, and that's where our entire protein simple franchise as well as our spatial franchise is all about. And so finding other adjacencies to that is also of interest. So this team is now really focused on those companies out there that would be very nice complementary strategic fits and starting to build those relationships. But it's not about the fact that M&A is tough right now or valuations are crazy right now. It's more about being much more pragmatic about what we want.

Got it. On that point of AI, a lot of discussion, obviously, dry lab versus wet lab. Obviously, you're serving the wet lab. How much of the dry lab action lends into what lab any early indications that you're seeing in terms of demand dynamics?

I'd be surprised if anyone saying really there seeing any early indications of anything right now with regards to AI, it's still very early days. And I'll tell you what our thesis is on it. I don't think we're alone because we obviously bounce this off our customers, including large pharma that we've had many conversations with about. We've bounced this off peer companies when we meet with their fellow CEOs and CFOs. And then, some of your peer analysts have written some reports on this, which is all very consistent with where our heads were on this, which is that AI is going to be extremely important for every industry going forward. And it's going to replace every industry going forward just like the Internet did. And even though there was concerns for those who are old enough like us to remember, everyone thought it would basically completely destroy every industry and enhanced it is what it did. I think AI will do the same. AI is enhancing our own business internally. We are actively using it to develop next-generation proteins that don't exist in the world, which is phenomenal. But it's going to take time. And we've been doing -- we've been using AI for 2 years, and we're just now launching our first -- been launching our first proteins in that space. And more importantly, these models need data. They need data. So we actually believe that AI will be a tailwind for our life science tools space for the next several years because it's going to take several years to build up all the data that's needed on the characterization of proteins, and that's both on the instrument side. But also on the wet lab side because you've got to do the wet lab in order to read -- in order for the instruments to read it. After you get 2 or 3 years of good, solid enough data to actually build out these models at that point, I would argue these models start to become more commoditized. And yes, maybe enable some of the skipping of very early discovery screening and so forth. But now the need for high -- more complex proteins, more targeted proteins is going to become even more important. And that's our sweet spot. The reality is the commodity-based proteins that tend to be used more on the screen because they're good enough for that. It's kind of been a bucket for us for years where we've been always focusing on how do we make those next-generation proteins is really hard to make that no one else can do, to stay where the puck is moving. And I think AI is going to make that puck move even faster, and we are extremely well positioned for that. So we actually see it as a tailwind overall for the industry, at least for the next 3 years, But we think how we're positioned as a tailwind really indefinitely for us. And the last thing I'll say about it is that when you get into a more mature state of this, call it, 5 to 10 years down the road, we don't believe R&D spending is going to go down by pharma. We argue I think it'll stay that it has been historically in that mid-single-digit kind of growth range. It just means they'll have more drugs in the pipeline because there's no shortage of disease, as we all know. And more of those drugs in the pipeline will be in that translational space, which is where we play and where our strength is.

Yes. Just last question since we're at the time. On margin side, 100 bps margin expansion that you're expecting in -- maybe just tell us what takes you to that mid-30% plus margins that you've had historically?

So as you know, we've -- this past couple of years, we've done a lot of internal restructuring, taking out some layers in the company, pruning some of our portfolio that were less profitable just to kind of keep our margin steady in a very tough environment. And this year, we're actually growing margins in a very tough environment with those actions. But our expansion imagine of the margins going forward is not predicated on some operating system that takes x amount of cost out every year. It's really predicated on growth. And because our companies are -- because our products are so differentiated, they have overall very high margins. We get very high drop-through. So at a very high level, Puneet. How we think about it, how we struck the planning season every year is that if we are able to grow mid-single digits to high single digits, we should expect at least 50 basis points of margin expansion as a minimum in addition to investing for growth. We get back to our -- what we believe is our entitlement in a normal market of double -- low double-digit growth then we should be expanding margins by at least 100 basis points and still investing for growth. So you do that over the course of several years and you get back to the mid-30s.

Okay. All right. Well, I look forward to that. Yes, thank you for the time here.

Appreciate it.