All right. Good morning, everybody. I'm Luke Sergott. I cover life science tools and diagnostics here at Barclays. With me, it's my pleasure, I have CEO Kim Kelderman and CFO Jim Hippel of Bio-Techne. Kim, this is our first time meeting. Jim, longtime listener, first-time caller between us. So, Kim, I think we'll just start off the overall macro and what you're seeing, and any changes in the trends that you were kind of looking, you know, the outlook for the overall calendar 2024. So let's start with the, you know, obviously, the biotech funding environment. We're starting to see some green shoots, seeing some secondaries. Just, you know, what was embedded in your guide? What were you guys seeing for, and how that would ultimately play through to hitting your P&L?
Yeah, a really good question. But before I go there, thank you, Barclays, for having us, and always a pleasure to present. Biotech funding, I think, has been an interesting trend. Arguably, we've seen that funding slow down in Q1 of 2023, where numbers came down. They were mid-twenties for four or five quarters, and then became low single digits at that time, and then have decelerated over the quarters to come. We did see some sort of stabilization in the back end of the calendar year, which was our Q2.
From there, we follow the news like you guys do, and we see different analyst reports that funding, in general, has, in the last couple of months, seen some green shoots. It's getting better. So that gives us hope that that segment, at some point, is gonna recover. My feel is that we have kind of touched and seen the bottom. We don't think it's going to be a super fast recovery, we have more like a walk recovery. Especially because even the moment smaller pharmas get their money in, it will take a certain time before they deploy it, right? So you, especially companies that start from scratch, you'll start looking at getting a building, getting your labs built out. That's not the space we play in.
But the moment you start filling your lab with equipment, and start running your machines for validation, that's when we start trickling in.
Mm-hmm.
So with a delay of a quarter or two, you could, we could certainly see, and hope to see new life there, right? In the meantime, we are very certain that that market will recuperate for us pretty rapidly. And we say that because, the current machines in the markets are running on high volumes, meaning, the consumables are getting pulled through at high speed. And, we see still 20%+ growth in their consumables, which really indicates the machines are getting used a lot. Now, if you then would add a project, or if you would add a new laboratory, I am very confident that people will, again, buy yet another of our wonderful instrumentation, which obviously is good for different reasons, right?
They're price effective, but they're also pieces of equipment that make clunk, clunky processes automated, and then by doing so, the results are more accurate and more reproducible. And therefore, I think we will definitely benefit and possibly outperform competition if it comes to enjoying the exit of the lull that we have seen.
And you know, biotech is like 15% of your business, but you have a much larger pharma exposure. And I guess... Yeah, I mean, we see the data that the funding is good, but just from conversations with customers and across your, you know, pharma complex, between large pharma, small biotech, you know, mid-sized guys, like, what are the conversations you're having now versus, you know... Are they talking about, "Oh, yes, we're actually going to start investing versus what we were doing last year?" Just like a set of the-
Yeah
... stable on the comps and how this is kind of flowing, like improving.
Yeah. It's also a good question. So for clarity, 50% of our revenues are related to pharma, biopharma. 20% of that 50%... No, 20% out of the 50% is actually small biopharma, right? There's just a different discussion. Both of them have to look at their wallets in different levels of severity. Let me start with the small ones. They are probably struggling to be alive or thinking, "How long—how much funding do I have before I have to do more severe things?" So there's really a complete halt when it comes to buying capital equipment, et cetera. Now, they might still be running their main and most important project, and that's where they run the consumables.
And the moment they get stimulus or new funding in, they will highly likely boost the volume of that one project or speed it up, if you will, and/or add some new programs. In large pharma, it has been clearly the, you know, being frugal, right? "Can we, can we do this project also on the same automation? Can we, you know, stop a couple of programs?" And it's not so much about closing, but about, you know, being, being very careful where, where and if you spend your money. So it's two little different trends, but the bottom line, both of those bode well for us the moment there's a little bit more funding coming into that market.
Yeah. And on the large pharma, you talked about the. So I guess the sales cycle has been elongating. Have you seen that? You know, stabilize and maybe start to shrink? Or, like, what's the kind of leading indicator on the large pharma side?
Well, we've seen them getting longer at the beginning, right?
Mm-hmm.
We always notice that there's a certain amount of time needed to get all your signatures for people to spend the money for a fantastic Bio-Techne instrumentation. Yeah, over the last half year, nine months, I should say, there's additional signatures, and now-
Yep
... instead of the director of finance, the CFO has to sign off, and, you know, there's obviously some internal controls, and I bet it is on purpose, right? To not spend money that is absolutely necessary, and put the livelihood of your company at risk. So of course, there have been the internal controls cranked up to protect our money outflow. And that's fine with us. It basically just means that there's a delay in purchase rather than a cancel of an order.
Mm-hmm.
That there is a high desire to have these solutions from Bio-Techne in your laboratory, and that is just depending on when is money rolling back. And we already mentioned, it looks like in the January, February statistics, that PE funding as well as third round funding, even some IPOs, have been executed, and which gives us hope for the coming quarters to improve if it comes to the situation.
Great. Let's pivot to China, another kind of major growth driver for the business and the-
Yeah
... industry for the last 10 years plus, now all of a sudden it's kind of the bad guy. So talk about the declines that you've been seeing, but really also the stabilization you talked about on the quarter, where you're seeing that when we think about the recovery or any type of industry or project or customer class that's actually more insulated versus not. Just give us kind of the state of the union there.
Yeah. I think China is probably the headwind that will be around the longest. Overall, however, China, we see, is still a country with over 1 billion citizens, with healthcare on their top priorities of their agenda. It is and will be a country that outperforms the Western world in growth, for sure. So that means we want to be positioned there. Well, at the time being, government funding has been going elsewhere, right? The pandemic has slobbered up most old funds related to healthcare, and now there's a little bit of a drought and a hesitation in continued funding. And that is definitely a period that hurts us, right?
In the meantime, if I look at our positioning, do we have the right products? Cell and gene therapy is extremely important in the country. You know, all the ingredients that we have been building in our core, such as antibodies and proteins to participate in the cell and gene therapy is super important. Healthcare for the country is super important. So we feel that we are well positioned to also recover there. Now, once there is the recovery, and we've seen some news that the government is thinking of stimulating life sciences again. Once there is this money, I think we're well positioned there to also pick up some of the business. We have a feel that China might go a little bit more towards buying in China.
So the good old phrase, China in China, I think is finally becoming something of importance. And, for that reason, we are in the process of building a protein GMP facility in China, and it's now halfway, and it's well on its way to be operational in September. As of September, the validations begin. So think about the end of the calendar year, where we could start producing there, and then we'll have a separate brand as well as separate price point.
Mm-hmm
... specifically to play in China, the way that the country likes to do business. So we will have a very nice combo of high-tech products that are very hard to get anywhere else than in Bio-Techne, that we would export, and then the more common products with the higher volumes that we would create in China for China with the specific price points. So that's kinda the strategy there. A date for when it exactly turns around, we can't give you. It-
Yeah
... I mean, it's China, right? They're gonna at some point announce a funding, and we will all applaud, but we will not know what Xi Jinping has in his mind until then. And we, the only thing we know for certain is that it is more a when rather than an if.
Yeah, I think that's fair. On the, you mentioned the GMP portfolio over there and building out from the capacity. Like, any type of guidance or framework that we can think about as that, you know, would that raise your China exposure one or two points? So as we... You know, just help us size what kind of volumes or revenue we can expect from that GMP facility.
I think at the moment, China is around 10% of our revenues.
Mm-hmm.
It's dipped a tiny little bit. If this facility starts cranking in, we wanna go to our normal entitlement, and it really depends on pickup of these protein GMP proteins in-
Mm
... in the recovery of the cell and gene therapy on how it unfolds, but I think it will certainly have a positive effect on the growth. And therewith, I would hope that we will come back to historic growth levels. We feel that historically the growth levels have been great, but that they would not recover exactly to there. And we are trying to make a situation where it would be just one step down, but serve the market a little bit better, so that we can get close to what we're used to. Now, we might be a couple of percent points off-
Mm-hmm.
But it will be our fastest growing region for the portfolio again.
Yeah, and I guess in the LRP, before we get back to the GMP, think about the—in the LRP, is there any type of update? You just talked about, like, how it was historically, but when you think about your LRP, how does China fit in over the next three to five years within that contract?
Do you want me to-
Long-range plan?
Oh, I'm sorry, yeah, long-range plan.
That's okay. No, I mean, I think like Kim said, I mean, we believe in China long term.
Yeah.
You know, they're right now the government's in a funding drought. You know, they spent the last 3 years giving COVID tests to 1 billion people every day and giving, handing out vaccines, and meanwhile, those people weren't working. They were locked up in their apartments, so there was no tax revenue coming in. So once that money, you know, people... We were there recently in December, the local Chinese activity is bustling again, despite what you hear in the news and so forth. It's the foreign investment that's weak, so it's gonna take longer in past economic downturns for, I think, the Chinese funding to come back. But when it does, healthcare will be prioritized. We firmly believe that. We're not the only ones. I think many in our industry are saying the same thing.
Yeah.
Who have even bigger exposure dollar-wise than we do. And, and we're well positioned to reap the rewards of that, you know, when it does come back. And so it's a very important part of our long-range plan, and it may not be the twenty percent plus grower that it has been the last 10 years for reasons Kim said, but I think by investing there, continuing to invest there, particularly in our GMP factory, it gives us a better odds of getting much closer to that than we otherwise would be. So we feel very confident about China in our long-range plan, but it might be a year or two before we get back to those levels that we were used to seeing.
Yeah, it makes sense. I want to go back to the GMP, the on the proteins. You continue to invest in the portfolio there. Just where are we in that portfolio expansion? Are we at the critical mass, where you're like: Oh, we don't need to add as much, or just kind of the CapEx or the investment that you guys look at going forward and over the next, you know, three to five years again?
I think that the portfolio right now is a good basis portfolio, but as you noticed, there's always reasons to add flavors of ice cream, right, to the ice cream store. So there is, in a different speed, but we will continue to add specific GMP molecules that the people would like in the different different type of Wnt signals and other pathways where there are specific proteins necessary. I think the bigger investment really comes in three things. One is we are building out a GMP facility in the U.K. for small molecules.
Mm-hmm.
So you can also offer up small molecules for the cell and gene therapy solution. That is a completely new step for us. That's also in the build, in construction, and it will take another nine months or so for it to be operable, but that'd be a real GMP win. I just talked about the China facilities, so that you get a real protein, GMP proteins for cell and gene therapy solutions in China, for China. And then, the last one is that in our portfolio, GMP antibodies would also be important. So to your question, are you gonna build out a bigger portfolio of proteins? Yes, but we will also build out a portfolio of small molecules, a portfolio of GMP antibodies, and then China, for China, the proteins as well.
On the media expansion, the media formulation, the gene expression, is that the U.K. facility? Is that how I think about that? And then the GMP antibodies, just kind of dig in there about where the use case is and kind of the type of volumes. I imagine that this is a lot of the bioprocessing material and, you know, how you get that out from the chromatography purification.
Yeah. Now, the GMP antibodies obviously are used for identification and activation of the cell, right?
Mm-hmm.
They have a very similar use case, or in a very similar setup with our G-Rex in the middle-
Mm-hmm
And our cells that we're growing with all our proteins and small molecules, and you could use the exact same chamber to really add our antibodies and use them for the specific results you want the cells to end up in. And that's, you know, that's a tool we're missing right now, and that's we're definitely filling.
And with that... So when I think about it, it's like just an addition to your cell and gene therapy portfolio, the holistic approach that you guys go through that...
Correct.
Yeah, on that whole workflow.
Yeah. Basically, to make the G-Rex, which we will own over time, the G-Rex, this container where you grow your cells and where you need to add all these different ingredients to do so. Optimally, you know, those ingredients, that list of ingredients is what we're building out.
Yeah, okay. Jim, I want to talk a little bit about margins here in the last minute, 45 seconds. So you had a pretty big step down in the last quarter or so. Talk about the puts and takes there, the kind of drivers, and then, you know, what's embedded in guide and how you can bridge us to that, to that step up? Sure.
...Well, I mean, you know, as I talked on the last earnings call, about half that step down was attributable to our acquisition of Lunaphore, which we knew and we expected. That typically happens when we do a new acquisition. And as that business gets ramping up, we expect that dilution to be less and less going forward. But this year, it's definitely a hit to margins. You know, the other half was a combination of investments we knew we were going to make because, you know, we still have these growth pillars that are going to carry us, and they've been carrying us even through this downturn.
Whether it's our instrumentation portfolio, or whether it's our cell and gene therapy or spatial biology, those pieces of our portfolio have been still performing very well, and we continue to invest there. And, you know, inflation hasn't gone away, and especially on the wage front, you know, still 4% or so plus. So if you're not growing more than 4%, you're automatically going to have some contraction there. I've been very much more prudent in our investment, as everyone is in this type of downturn. But between the investments we're making and then just the deleveraging, you know, we obviously have very, particularly on the reagent side, we have a very, very high margin product.
And so you reap the benefits of that when you're growing, but you suffer when you're not growing, and that's been the case here the last quarter or two. So, you know, as the growth comes back and just pure volume comes back, which is why we're feeling better about the second half of the year, because our volumes in general are seasonally higher in the second half of the year. So we'll have more pull-through and better margins because of that. But we've also been using this, you know, call it this lull in growth to, you know, even sharpen the ax a little further with regards to under—you know, looking whether it's... When the water levels recede, you see little boulders, right?
Yeah.
And so it allows you to clean house a little bit. We've been doing that and focusing on some productivity actions to make ourselves leaner and meaner when the money does come back and the growth comes back. And some of the benefits of that, those productivity actions we'll also start to see here in the back half of this fiscal year and into the remainder of calendar 2024.
Yeah, and as, I mean, you're talking about the reagents coming back. What it—like, give us a sense of... I know you have a massive reagent portfolio, but just overall incremental margin when that, on, on those reagents, when you're at 75 or 80?
Well, I mean, you know, so, you know, our core proteins and antibodies, some of those contribution margins are north of 90%.
Oh, my God!
It gives you a sense of what the pull-through can be.
That's why you guys are 30%-35% operating margin.
Correct.
Fantastic.
That's why, you know, we actually feel pretty good about staying above 30% when you have a quarter that you actually weren't able to grow your reagents.
Yeah.
You know, we feel pretty good about that in terms of how we're managing our costs because it stings when the growth's not there, but it's beautiful when the growth comes back. It will come back.
Great. That's all the time we have.
All right.
Thank you again.
Yeah, thank you.