Bio-Techne Corporation ($TECH)

My name is Mike Ryskin. I'm one the Bank of America Life Science Tools and Diagnostics team. And we're excited to be joined by Bio-Techne. We're pleased to host Kim Kelderman, Chief Executive Officer; and Jim Hippel, Chief Financial Officer. Kim, Jim, thanks for being here.

Great. Thanks for having us. .

Format will be a fireside chat, but raise your hand if you've got a burning question. I mean maybe just to kick things off, you recently reported. Any highlights from the quarter. You talk through sort of how it played out relative to expectations? What was a little bit better? What was a little bit worse?

Yes. So yes, we reported and printed negative 2% growth for the quarter, and that was over a year quarter of about 6% growth. A couple of dynamics in there that will definitely double click on. But in a quarter like that, you always want to look back and ask yourself, do you have the right strategy and is it rolling out in the right pace. And there, I've been pleased to see that, as you know, our strategy is around having a really broad core that reads on many different end markets, and that gives us the leverage to a big specific fast-growing vertical markets where we can build out full solutions in a specific application basis. And for us, that's cell therapy, it's boating analytics and its spatial biology. So if I then walk through what happened in the quarter, negative midgets, but we have talked about a timing issue with a specific large order that moved from Q2. Taking that into consideration, we saw that most important product lines in the core, proteins and antibodies were actually growing low single digits. And with that, our holding actually grow a little bit faster than market. So that's a good sign. There we have the first growth vertical cell and gene therapy where we have some dynamics from large customers that got a fast track approval and are not ordering this year. However, underlying that was growing 50% and that's also what we like to see in that vertical market. Then the boating analysis, mid-single-digit growth, again, positive growth for the instrumentation as well. This market has, of course, one strong read on biotech markets where I will get to in a minute. And then last but not least, our spatial biology franchise that grew mid-teens. And that's also where we'd like to see this business. So overall, the strategic aspects of our business, we're rolling out as we like them to see. Now there's no question, however, that every one of those product lines saw a suppressed biotech -- early-stage biotech demand. And the nice thing is that we saw that across the board. So we know that it's a very specific dynamic to the early-stage biotech end markets. And yes, that was not how we expected it because if you think about large pharma has been very strong for us, which is usually an early indicator for health in biotech as well. That wasn't the case. And in the meantime, we have seen 2 really strong funding quarters for biotech, and that would also give us the indication that things would slowly go better. We had to mid-single digits, negative quarters in Q1, Q2 in biotech, indicating a sort of stabilization. So it was not unreasonable for us to think that a continued stabilization and then possibly followed by some improvement would be the right direction and trajectory for that end market. That's not how it played out, unfortunately. But Fortunately, all the indicators for the end market are still very positive. Now if you go to the academic end markets there, it exactly played out as we thought, where we had 2 stabilization quarters of negative low single digits. We had some positive news. And there, we flipped into the positive growth led by instrumentation. And then the last end market that we called and talk about is China, where over a year ago, we were -- we saw stabilization and then we called that we would be back into the positive growth territory, and that also happened. And this last quarter, we printed for the fourth time a positive quarter. Last but not least, our bottom line, 34.2% on EBITDA, exactly in line with how we saw that and called it and probably a little bit ahead of where the Street had us. So that's the dynamics for the quarter.

Okay. That's great. I want to follow up on each of those in turn. Maybe let's start with emerging biotech. You talked about it a little bit surprisingly weaker in fiscal 3Q. Why do you think that happened, given you saw stabilization in the last couple of quarters, given funding has been better, given the indicators are still strong? Is this a timing dynamic? Is there some sort of disconnect between funding and spending? Just sort of why was it so disappointing?

Yes, it's a very good question. It is really the underlying dynamics of the funding. And it has been clear that IPOs, M&A, lots of activity in the biotech end market, but very much skewed to the later-stage projects and companies that have assets that are closer to commercialization. And that eventually, of course, trickles into other programs earlier stage where these companies would have -- would broaden their portfolio. But initially, the funding is really focused on boosting the late-stage programs. And we can clearly see that in, for example, our biologics instrumentation where you are supporting manufacturing and commercialization of these later-stage therapies, you see double-digit growth for us there. But the overall research activity has been actually lagging in recovery. And there was a nice a nice write-up from Evercore this morning where there was more dynamics underneath being studied and very much in line with how we experienced the quarter and the recovery. Nonetheless, as I mentioned, you already said the funding has been very strong. I mentioned the licensing deals and the M&A activity, all of it very strong indicators for improved dynamics and therefore, we're very confident that this sets us up really nicely for fiscal 2027.

Okay. So I think it's just a matter of time. You just need more and more quarters of consistent stability and then those biotechs will work to replenish the pipeline.

Exactly. Yes, it will flow into earlier stage. It will stabilize for us and then it will highly likely improve significantly, specifically based upon those indicators I just mentioned. .

Okay. And then maybe let's talk about large pharma for a second. That's been doing a lot better. Is that a normalization post MFN, is that more confidence in policy and regulatory that maybe portfolio-specific and technology specific sort of like what's driving the strength there?

Yes. You mentioned the important dynamics. The budgets in R&D for the large pharma companies is in the mid-single digits. And that's where we would like it to be. It's actually increased a little bit year-over-year. But that's all we need from a funding level point of view. And then as I mentioned earlier, our strategy of having broad access from a core portfolio, but also having these growth verticals that are very applicable in large pharma driving our growth and creating pull-through of our high-margin core reagents, that is the setup that we've seen now for 6 quarters in a row, giving us double-digit performance in that end market. . Now you layer on in the future additional traction from onshoring as well as from AI, where the initial steps are all about getting more instrumentation and with that more digital information for AI models, and you would like to have highly characterized high-quality reagents to have reproducible results as well. And therefore, we feel that our whole portfolio is very nicely aligned with the trends within large pharma.

Okay. Most compose the end markets, on academic government, you kind of talked through that's more or less as expected as you thought. Can you parse out maybe U.S. versus OUS, the trends you're seeing there? We've seen really varying results from a number of your tools, Pierre. So see Murky there. Has visibility improved?

Yes. Overall, we have 22% of our revenues coming out of pharma globally, 10% coming out of Academic. 10% of that comes out of Europe, academic, Europe, academic has been very stable, and there's definitely signs of improvement that we hear from the funding level but has been stable for us. It's been a 12% that comes from the U.S. that has been challenged under the last couple of quarters, definitely improved picture though. We can clearly see an improvement in the type of grants that are being released very much in line with our research portfolio and our verticals. So the grants are more in chronic disease versus the infectious diseases. And on top of that, we see that there are -- that there is more tracking in certain grants where if customers get these brands, you will start with buying equipment that will help you in the methods that you will need to utilize during the grant. So you see traction in our protein analysis, you see traction in our spatial biology and cell therapy verticals, exactly in line with our strategy. So we can see a nice initiation of heightened activity. And that's in line with our expectations. As I said, we had stabilization for 2 quarters, and now we flipped into the positive growth for the academic U.S. market.

Yes. And so the grants being -- are the grants already being dispersed or signed to spending the money? Is there still any caution because we've got mixed signals there, maybe there's still a little bit of worry that you could have another round of fewer disbursements or fewer brands being granted?

Yes. Overall, there's been quite some dynamics in that end market, right? So we had a government shutdown for a while. Combine that with -- yes, we had an approved budget, which was great news with a slight increase on it. but then there were grants being held back. And all these dynamics made it a little bit merck here. But on the bottom line, we can now see that brands are being released we've seen that the right grants are being released, if you talk from a Bio-Techne point of view. And then we can also see that there is traction in the growth verticals or the base technologies that are on the forefront of research that academics would be interested in the moment you get funding. So all of that actually makes a lot of sense if you take all the noise.

Okay. You touched on China has given you broadly positive indicators moving in the right direction. Is there anything -- I think you could expand on that? Is it more on the local biotech? Is it multinationals there, more generics brand is sort of like CDMOs, CROs, or likes of China are you seeing better trends from?

We're very excited about the fact that it's a very broad-based recovery, right? We see, of course, government funding is important, and they have approved their 15th 5-year budget. And that creates a certain foundational health. Also, life science tools is still very high on the agenda to be funded and supported aspects of the Chinese economy. So those are fundamentally good things. But in the meantime, you can also clearly see a heightened activity level on biotech and pharma, if you look at the novel therapies being developed. And the model there is interesting because many of these companies create novel therapeutics that they then take the rights for the China market, right? And they can create a model where they serve the Chinese market but out-license for the Western world. And that created a dynamic where that end market became much more fundable and could attract local as well as international money and you see definitely a heightened activity level and quite some successes over the last 2 quarters when it comes to licensing to Western companies. So a very broad-based recovery. Four quarters ago, we said it would be back in the black. But we also said it wouldn't be a V-shape that it would be very foundationally coming up from a core strength rather than a jolt of funding, which happen to be the case over the last couple of years, a more foundational strength, and we're really happy to see that.

Is there any talk of government stimulus or government support or does this feel more organic and actual sort of driven by demand?

Right. So there is, as I mentioned, the broad support from the government with a 5-year plan of funding, and that's foundational and financially important, but the activity level comes from several corners private as well as government institutions and very broad-based. So from pharma to biotech, early-stage biotech and academics. So very healthy rebound.

All right. Let's dive into some of the segments and subsegment results. You talked about cell and gene therapy some of the moving pieces there in the quarter. More broadly, can you talk about your solutions in cell and gene therapy and sort of how that's been received by the market, what the uptake of that has been?

Yes. The cell therapy is an important strategic pillar for us. We are really focused on having very efficient, scalable and affordable cell therapy solutions. And that's what we're working towards. And we had a real nice traction. If you look at our overall portfolio of customers, we've seen a low single-digit growth in the customers. Over the last year, we saw some turnover with companies moving out of cell therapy and some others moving in and coming up with better solutions, better therapy. So we see a healthening of the pipeline and while it's still growing. And Yes, we've talked over the last 4 quarters or so about the dynamics of 2 large customers that received FDA Fast Track designation. That's great news because that will shorten their time to approval. However, it created an air pocket for us if it comes to the revenue throughout fiscal 2027. In 2028 will be -- sorry, 2026, in 2027, we will be past that. And that created a dynamic that influence the top line results. But if you look underneath those 2 accounts, we can see clearly that there is a mid-single digit, high single digit growth underneath, which is definitely where we expect it to be. And with a recovery in biotech, we definitely believe that the underlying growth should be above 20% on a 12 trailing month basis. And we have, this quarter, seen 50% growth, and that's definitely something that we continue to expect from the underlying business.

Are there any other sort of implications or ramifications of those fast track designations? Is there -- have you seen a pickup in interest from other customers? Is there more investment in the space? Maybe some others see the opportunity here and the easier path to commercialization?

It's a very interesting question because, yes, of course, this is a very positive aspect for the 2 companies that will -- that have received this designation. If it comes to working together with the FDA and shortening their time lines for approval. And with that, of course, plowing some snow for others to follow a similar path, especially since several of these therapies are relatively novel for the FDA and the viewers. So that is a good aspect and will bolster the confidence of others to answer. Now in general, also people see that, hey, there is a definite interest by the administration for specific therapies. And we have seen let's call them fast followers, other companies that feel that, hey, this is very investable. We should do something similar, maybe slightly different. But at the end of the day, enter the same space and develop similar therapies for these very prevalent diseases. And therefore, there is a little bit of a common daily effect.

Okay. But you still have that air pocket, just written core being pulled forward.

It was a 300 basis points air pocket for Q3 and will be 150 basis points for our upcoming Q4 and from there, it will be out of our comparables.

Okay. Okay. Maybe on that point, let's dive into the numbers a little bit. Jim, maybe you could talk us through sort of the implied 4Q or the 4Q guide, what are the moving pieces there? And then jumping off into next fiscal year, any points we just touched on the air pocket, but any other dynamics should Keep in mind as we look to next year.

Sure. Yes. So as we think about Q4, the guidance we gave on the earnings call was essentially a flat quarter year-over-year, which, again, taking the 150 basis points headwind in account for these 2 Fast Track customers implies underlying growth or a jump-off point for fiscal year '27 of a positive 2% or so, which is very similar to what our Q3 performance was if you take the 400 basis points, 300 from these 2 Fast Track, 100 from this OEM timing and put that into play, it's basically saying the same kind of underlying growth. At the end of the day, pharma is already performing very, very well. We still don't see any reason why that doesn't continue in both the near and intermediate and longer term. Academic is stabilizing and for us, gradually improving. We think that, as Kim outlined, it will be a gradual process, but nonetheless going in the right direction, so we kind of see that continuing. And then, of course, biotech is really the big swing factor. It has been as to when this funding turns into spending. As Kim alluded to, there's all kinds of you dive deeper into the funding detail. It points to a 1-quarter lag for emerging versus the overall biotech in terms of when the funding really started to come in. And so whether it's the very end of Q4 or whether that's the start of our fiscal year '27 as trying to for a needle, but nonetheless, it does appear like it's on the horizon sooner -- more sooner than later, it's not a matter of if, it's a matter of when. As long as the funding continues in the right direction. So we've said that, hey, we're trying to for this needle anymore by quarter. We're assuming that our Q4 is very similar to our Q3 even for biotech. But either way, it sets us up for a very nice jump-off point as we think about fiscal year '27 because if you think about plus 2 as being the jump-off point, biotech going from high single-digit declines just to flat gives you a couple of extra points, It's over 20% of our revenue. So just that dynamic alone would suggest a I step up. And of course, you got the dynamic of easier comps in general, definitely in biotech as well as academic and generally improving markets for both academic and in Asia. So it's setting up for a nice, I think, recovery or start to recovery in fiscal year '27. I think we're very pleased with our relative positioning going into our fiscal year '27.

Means generally more constructive on most of these factors, but still some uncertainty in some of evenness. Is visibility broadly getting better? Or is it still a little bit challenged in some of these swing factors like biotech...

I always say in a very highly consumable-based business as we are. It's a blunt occurs sometimes, right? It's a blessing because of great reoccurring nature of it. It occurs from a forecasting perspective sometimes because the book and ship all happens within a day or 2. So you really got to look at momentum and external factors and try to calibrate all that. I'd say where it is encouraging in terms of the biotech funding starting to trend spending sooner than later, is where we're seeing some increased activity with our customers that require longer funnel building and longer lead times, and that would be in our instrument portfolios, both in our Proteome instruments, but also our spatial. And we're hearing from the field that for the first time in quite a while, the interest level from biotech customers are starting to pick up there. The funnel is actually starting to build. So again, that bodes well, maybe not for Q4. But as we start to fiscal year '27, it's a very good sign that we're seeing actually on the field -- in the field right now with regards to our biotech customers. And we saw that dynamic, by the way, play out in U.S. academic. So yes, we grew low single digit in academic that growth was actually driven, believe it or not by our proteomic instrumentation and our spatial instrumentation. And we've always said that when we see markets start to turn, we often see it in those 2 areas first because it's -- they're high-growth areas, their tools that are in high demand by our customers. You can tell that by the consumables usage. And for example, proteomic analytics has the cartridges we have not had a down quarter in consumables since COVID for our instruments. So they're using the heck over instruments, and it makes sense that when the money starts to become available, that's one of the first places we'll start to spend it.

Okay. Kim, something you touched on earlier, AI and sort of how that's factoring into conversations, I have to touch on that. Just how prominent is that in your conversations with your pharma and biotech customers in terms of AI applications in research and discovery to that narrative?

Yes. It's certainly on the forefront of many of the discussions. We believe that eventually, it will increase the efficiency of development work and therewith allows for a broader portfolio and more projects that can efficiently move forward to a commercial drug. So increase of the pipeline, bottom line. But short term, you can clearly see that customers would like to make sure that they can use their data for building their models. And therefore, automation is on the forefront of their minds. And of course, our protein analytics platforms, all 3 of them help you creating digital information on your biological instruments -- sorry, biological experiments. And our common instrument very much aligned with doing large experiments as well. And then if you think about the data you generate, you would like to have reproducible data using high-quality reagents where there are many publications as well as a good capitalization data around those reagents. And that's exactly what we've built over the last 50 years, taking every agent that we launched very serious highly characterized and over the many decades published from all angles. So we do believe that we have a very strong competitive advantage in that environment. To validate it all, we've done a survey of over 100 of our customers, 40 or so to see how and where they are in their adoption cycles, what their needs will be and very much validated the storyline I just elaborated on. So we are very confident that we're in the right spot with the right sense of urgency with the right direction.

Okay. I mean trends you're talking about in terms of reproducible data, high-quality data, high-quality reagents, automation, more high-content screening, high throughput screening. that's stuff that Pharma has been doing for 10, 20, 30 years, right, has been a trend, a move in this direction. Has there been a real step function change in the last like 6 months, 12 months where it's taken another leg higher where you can see sort of like, okay, this is when pharma started using AI and boom, they're doing a lot more high throughput screening. They're doing a lot more automation. Or is it still more gradual is still to come? Is it -- are they still experimenting with these workflows, these protocols? Or is it already kind of being implemented?

[indiscernible] with the rhetoric and the drive top-down in a company to be in the forefront -- so you -- with that, you can conclude that not everybody is at the same stage, right? And you'll see a bell curve. You have the fast movers where they're already building models and starting uniting the data and others are right on time and started putting it in gear over the last year, and you'll see laggers. And overall, though, the trend is undeniable that we will see this bill curve moving through our customers and their demand and the type of products they would like to have.

And the pharma that's already adopting this and that's sort of further along on the curve. What are you seeing from them in terms of like spend levels overall? Are they spending more money total? Or are they spending the same amount of money but shifting around in terms of baskets how they're doing R&D, so like what are the early earnings in terms of how they're implementing it because there's a lot of debate of you can make an argument that Bio-Techne and tools in general are beneficiaries here. You could argue that it's a detriment of the space sort of like start to tell where the overall dollar amount will go.

Overall view is that it will be beneficial, right? And I think there is now enough data where you don't have to do the exact same volume. [Audio Gap] Can distract investors, but underlying is a very strong and a tone that is even in software and markets holding up in my opening statement. We have strengthened our core businesses and definitely grow in the verticals we talk about, we have a solution generate disproportionate growth by putting through, of course, as high margin as on the set of work in 2019 and are so that we can be able to further demonstrate a step great.

We're going to leave it there. Thanks everyone, for joining. Kim, Jim, thank you so much for being here. Appreciate it.