Great. Welcome, everybody. Good morning. My name is Matt Sykes, the life science tools and diagnostics analyst at Goldman Sachs, and I have the pleasure of welcoming Kim Kelderman, the President and CEO of Bio-Techne. Kim, thank you very much for joining me this morning.
Thank you, Matt. It's always a pleasure coming over..
Great. So maybe just to start out, maybe just a brief description of Bio-Techne for people in the audience, and then maybe just kind of touch on the performance last quarter relative to peers. It was a pretty strong quarter, and just sort of what were the drivers of that? Have you seen any continuing momentum of that in as we sit here today in June?
Yeah, thank you. I think Bio-Techne is one of the unicorns in life sciences. It's a company that has innovation as well as M&A at its core, very innovative. We're one of the last mid-sized companies with great agility and a great product offering. A combination of core products that have been around for 47 years, that we go to market with. These are like proteins and antibodies and many other building blocks for research. Then, we have built 4 growth verticals that we utilize these core products in, and that we feel are positioned in very fast-growing end markets, where we have very defensible positions.
At the end of the calendar year 2023, we were talking about three headwinds that influenced or could influence our quarter. And we were talking about destocking, which had been bugging us over the calendar year 2023, but we also mentioned that we thought at the beginning of calendar 2024, that would be behind us, and fortunately, that was the case. Two other headwinds we had mentioned was the China funding malaise, as well as the clouds that have been hanging over the pharma, biopharma industry. And we had hoped and mentioned that in the very first calendar quarter for this year, that these headwinds would stabilize. And fortunately, that came true. And with that, we ended up with 2% growth in the company.
That was the best 2% growth we ever had, right? It was basically a combination of these four businesses, the core business and the four growth businesses. We have two segments that we report in. One is Protein Sciences segment that had a -1% growth. It's most exposed to the general research and the biopharma, so it was under some pressure. But the Diagnostics and Genomics segment, which is the other segment, that one grew by 10% and reported 16%. The difference in there is an acquisition, Lunaphore. So overall, that resulted then in a 2% growth.
Yeah, if you think about how we pushed it into the black, it was really based upon some of the growth verticals that I just mentioned. To begin with, cell and gene therapy, it grew 30%, primarily based on GMP and GMP proteins. Those grew 40%. So that vertical is now about $80 million for us in run rate. It's becoming bigger. And, you know, we invested heavily in there. We'll talk more about it later, and a beautiful play we have with Wilson Wolf in there, but that for later in the talk. The second growth vertical is basically Protein Sciences, protein analytics.
The instrumentation is under pressure and has been under pressure, but we are very pleased to see that the utilization of these, the installed base in the market, is good because, for six consecutive quarters, we've now seen double-digit growth in the consumables that go on these instruments. So there's a green shoot there as well. Spatial biology, there, we've done an acquisition last year of Lunaphore, and we see strong demand for these instruments. And then last but not least, our molecular diagnostics division, where we have the first product that we came to market with was the prostate test, and that has been growing nicely, around 25% in volumes.
Yeah, so those four growth verticals, just like our theses, have continued to outperform the market, and that really created the difference between our peer group and us, in which we ended up in the black. Jumping to the bottom line, 33% in operating margins, a consecutive improvement of 290 basis points. And then I would say in that is a 230 basis points headwinds from the new acquisition, Lunaphore. So overall, we would be sitting just north of 35% if you take that acquisition out, and that's also where we want to be. Thirty-five, anywhere between 35% and 40% is our usual range that we're targeting.
Got it. Just staying high level again, your focus on consumables differentiates you a bit. Certainly gives you a little bit more high recurring revenue, more defensiveness. The inventory issues obviously threw a bit of a monkey wrench into that, but maybe just talk about how that business positions you to be more resilient, more defensive in these kind of environments.
Yeah, you're right. 81% of our revenues come from consumables, 10% from instrumentation, and then some royalties and service revenues for another 10%, more or less. And therefore, the majority of the portfolio sits in consumables. We feel that consumables are a little bit more resilient because obviously they're not dependent on CapEx budgets. But, you know, it is still important that you have an installed base, and that's what we are really happy with, the installed base and more or less the resilience in pull-through. For me, that means that the instrumentation, even in the, you know, with the headwinds that I just mentioned, is still being utilized. And that means that you can still pull through your consumables.
I also feel that the moment funding in China, as well as in biopharma, would improve, that the first things that you usually spend your money on, with the least hurdles of approvals and scrutiny, are your consumables to further ramp, you know, the number of results that you create, within your budget. The nice thing that I feel is that, with the increased utilization of our instruments, more capacity of the installed base gets used, and that would mean that, you know, our customers would increase their capacity as well over time, and that we would then see pull-through of instruments again, into the market.
Got it. There's been a lot of focus on the strong funding quarter for biotech in Q1, and there are some expectations that continues. I know there's a lag period of a few quarters for that to come through, but just given what we saw in the first quarter, are you starting to see any signs of increased business activity in that space from those customers?
Yeah. So we're now 5 months into the year, and we follow it closely, and I bet most of you do, too. We look at the funding and the funds raised in biopharma, and that data looks strong, right? It looks at an increase of 78% or so year-over-year. But take into consideration that last year was a extraordinary year to the negative side. So therefore, we often look at funding levels against the pre-COVID period, and we're still positive against those. The 5 months doesn't make it a trend yet, right? So we definitely, when we had our earnings call, was only a couple of months, so we were very careful.
And now there's 2 more added to that sequence of good funding months, which is definitely encouraging. But certainly, we want to be careful in mentioning and assuming that this then cures all wounds. I think that we need to see a continuation of this type of levels of funding, and that will certainly continue our thesis. You're right, we typically assume 2-3 quarters of delay between funding cycles and it flowing through to the life science tools industry. And of course, that depends on a little bit on the type of product. Consumables come a little earlier. As I mentioned, less scrutiny around spend, and the moment you switch on programs or you accelerate programs, it immediately demands more results, and therefore, you pull through more consumables. And then a little bit later in that same funding cycle, you would, you would see pull-through of instrumentation.
Got it. Just sticking with biopharma, but focusing on the large pharma side, stability, are there any signs of kind of reduced hesitation there? And what would it take you to really kind of call an inflection in demand from the large pharma side?
It's been stable for us, whereas we would like it to see on the normalized conditions. There are certainly... In large pharma, we see of larger layoffs in pharma industry. The budgets were made for most of these companies at the end of the calendar year last year, which were also months and quarters of where there were some clouds hanging over the industry in general. There's been a repositioning of the pipeline, the R&D pipeline, in regards to IRA, Inflation Reduction Act. Therefore, I think it's a little bit in turbulence.
As I mentioned, we've been happy that for us it's more or less stable, but it doesn't provide the pool as we would see on the normalized conditions. No doubt that, you know, with the stabilization of interest rates, stabilization of end markets, that we feel towards the end of this calendar year, there are R&D budgets we assume will be stronger and in line with the stabilization. Therefore, we think that 2026 will be a pharma will be instead of stable, might become a driver again of the results.
Got it. You touched on China too briefly in your, in your opening comments, and you've called out stabilization in China over the last few quarters. Now, we've got the potential impact of stimulus, which has become a major topic for investors. Another company in the sector kind of pointed to some friction in starting out without spending, just due to the complexity of the program. Our feeling is kind of it's not only a lending program, so the transmission mechanism might take a little bit longer, but it's also a three-year program, so maybe the urgency isn't quite there yet. But what are you kind of seeing in China? What are your expectations for the stimulus program in terms of impact and potential timing?
Yeah, that's a very good question. I think, first and foremost, our install base has been pulling through double-digit consumables for six quarters in a row. So capacity is being used. And therefore, I believe that if funding comes through, there will be a demand for instrumentation. Our instrumentation is all focused around automating manual and/or clunky processes, very fundamental processes. So just to optimize your efficiencies, your consistent overhead, and or the number of people in your manning your instruments , and therefore, I feel that they would be on the top of your wish list if the moment you get some funding in.
You know, and we have some data on that, because in calendar 2022, there was a similar funding pulse in China, and two quarters later, we saw our income very close to 20%. And that's also the reason that we highlighted that we feel there's one more tough comparable in China for us, which is, again, in the quarter we're in right now. And then we'll lap that. Our comparables going forward will be easier, but we also feel that the stimulus would come our way, and is definitely a mechanism that we feel has been effective for us in the past.
Got it. You've, you've talked in the past about you still view China as one of the faster-growing regions longer term. You've been able to grow in that region due to some of the services and products you're offering. What gives you confidence in sort of the structural growth within China? Because there's a lot of debate of cyclical versus structural and how China might be changing. What is your view on China, looking at the portfolio that you're serving to that market?
Thanks, Matt. China, overall, it's heavily debated.
Yeah.
But our fundamental thoughts are that we're looking at a region that has 1.4 billion people, right? That's an aging population, and those people all would like to have proper health care. The government has the responsibility to provide this to their population, and has been very keen on being somewhat independent from the West, coming up with their own vaccines and their own treatments. So that in research and development, and that you want to, you know, push these life sciences forward, and that's right up our alley, right? As I mentioned, our instrumentation is all around efficiencies and getting the right data points.
Cell and gene therapy is, is a very, very lucrative, investment area for China, to kind of leapfrog the small molecule, efforts over the last couple of decades that we went through in the West, and come up with cures for diseases that were previously not, not really, treatable. So I think that, overall, that picture would just, would just scream that, it would be a, the fastest-growing region in, in our portfolio compared to the U.S. and, and Europe. And therefore, we, we are very bullish on China long term.
Got it. Just kind of switching some of your growth drivers. You talked about the cell and gene therapy, very strong quarter, 30% growth. I think you mentioned it's about $80 million business for you today. How significant of a growth driver do you expect that business to be? It sounds like you're putting a lot of investment into it. And what are you most excited about, and what's differentiated about your approach to that market for customers?
Excellent. Yeah, we are very bullish on cell and gene therapy. If you see the initial results and initial approvals, as I mentioned, these approaches are curing diseases that we, in the past, didn't dream of treating very well. Quality of life is very important and is, you know, obviously boosted by the overall industry and the opportunities they're in. We have long-standing capabilities of producing and designing antibodies, but mainly proteins that go into the processes to push forward cell and gene therapy. We have created a GMP portfolio of reagents because it's near patient and/or inpatient.
Therefore, we made sure that our RUO products are also able to migrate into a GMP environment, which is a requirement from a regulatory point of view, obviously. And we've added different ingredients that you would need to grow cells, right? So we have GMP media, GMP cytokines, chemokines, proteins, obviously, and small molecules. So we have a real nice portfolio of GMP consumables. And, you know, the one that brings it all together is the G-Rex. And the G-Rex is a kind of an incubator or a small container that is being produced by Wilson Wolf. Wilson Wolf is a company that we currently own 20% of. This container is to grow immune cells.
As I said, it's a disposable, but then again, it's a unique patented solution, which pulls through all these core reagents that we have in our portfolio. And therefore, we are, we are thinking that, that this, this solution, which is scalable, very competitive, and is in almost half of all the clinical studies in the world right now, it's being used. So we, yeah, we are thinking that we are having a very defensible position, that is scalable and very efficient, cost efficient as well, and that will pull through a lot of our very high margin, core reagents.
Got it. Maybe talk a little bit about the spatial segment. You talked a little bit about in your opening comments. Certainly a lot of growth potential there, also increased competition. But could you maybe talk about how you fit into that market, how COMET is really differentiated in the space, and then any updates on the production front in that business?
Yeah. The spatial, spatial industry for us is, you know, we, we, we started investing in, in this space seven years ago or so, and we're very bullish on it. At that time, seven years ago, people were still wondering whether spatial was going to be a, an industry, in the first place or at all. But, you know, we were pretty convinced that this was going to be an important tool in, in furthering, science and furthering, you know, treatments and or diagnostics, into pipeline. Overall, what you usually see in this space is that there is a discovery phase where people would like to see, many hundreds, if not thousands, of markers, and, the, the bigger providers in that space for that solution are NanoString as well as, 10x.
Those customers then get from this discovery phase, a hypothesis as to which of these markers are of importance. At that point, you will have to start looking at more samples, different patients, and/or different tissues. You will have to have really repeatable results with spatial context, and that's where our solution comes into play. We have $120 million or so in run rate, spatial reagents from the ACD acquisition we did 7 years ago. Then 1 year ago, we added an instrumentation solution, a solution that can run 4 slides at the same time and, very efficiently, fully automated, meaning there's no manual steps in between. You can run it overnight, so you do that in just 5 work days.
You're sitting around 20 slides a week, which is a very high number compared to other solutions. And the interesting thing is that it is very easy to set up your instrument. You would usually wanna see your RNA markers, what happens in, you know, when a DNA translates into RNA, so you can see all your RNA markers. And we happen to have 50,000 probes in our catalog and can design any custom probe for you if you'd need one. And then in addition, in the same run, you can look at your proteins, and that's eventually where everything translates to. It's very important. And for that, you would need antibodies, right?
The real cool thing about this instrument is that you can continue to use the antibodies that you're used to on, you know, manually or in your initial experiments, and you can continue to use it, so that way you don't have to toss your old data. But if you're just starting or if you're willing to change, we happen to have 400,000 antibodies in our catalog, and are continuously screening antibodies that could go on the COMET instrumentation. So with easy setup, multi-omics, fully automated, and then having the tremendous portfolio of antibodies, as well as 50,000 RNAscope probes, we feel that we have the most rounded portfolio and automation that will be a force to be reckoned with in this space. Yeah, that's why we're so excited about spatial biology.
Good. I know we've talked a lot about consumables. You do have an instrument portfolio and mentioned the percentage of it. But just given the debates around instrumentation and sort of the weaker capital budgets and things like that that we've experienced, are you seeing any incrementally positive trends there? And just kinda remind us of what your expectations are for instrument growth over the course of this year, and how you see kind of the puts and takes over the course of this year playing out for instrumentation and capital equipment demand.
Yeah. Yeah, so, our ProteinSimple franchise is basically the core of these, of this instrumentation. There are four different instrumentation pipelines. As I mentioned earlier, the fundamental value proposition of that, of that, those product lines are to make processes, clunky processes or manual processes, more automated and simple to do. And, and we do believe that that is a value proposition that holds at any time, but, but specifically under constrained budgets. Maybe the constrained CapEx budgets do not help, but, the value proposition is, is there nonetheless. The moment things normalize, I think this, this will be a strong tailwind for, for the product lines.
In the meantime, while we have the headwinds from China, as well as the headwinds from the biotech and biopharma, we have made sure that our sales force gets more savvy and went to their customers in academic. And we're very happy to see that, even though in the past, academic customers would say, "Hey, automation is not that important for us, our overhead is not very expensive, and our students need to learn how to do these manual processes," we start seeing that there's traction in the academic markets as well. Just because, you know, efficiency as well as consistency of results, fewer people in the laboratory are becoming, you know, requirements or desires in that industry as well.
And we're very, very positive about the traction that we now are seeing in this academic markets, which certainly help leveling out some of the pain if we wouldn't have been able to flex over there. So kudos to the sales team for flexing into the academic space. Yeah, I think that overall, the green shoots we have seen some of the product lines, this namely Western Blot, starting to grow again. And that's a green shoot we'll be very happy with. And that was mainly in academic markets. But we are certain that the value proposition holds in the biopharma markets, and that the increased funding levels that we have seen eventually become a tailwind for our instrumentation portfolio.
Got it. You touched on the prostate cancer test and the early success you're having there in liquid biopsy. How long is the runway for growth there? Who are you competing against? How are you differentiated, and how are you planning to leverage the strength in liquid biopsy, maybe across the portfolio, just given what you've seen in the prostate test?
So we have done two acquisitions in this liquid biopsy vertical, and that's basically 7 years ago, it was ExosomeDx, right? Which came with this prostate test. And then we've also acquired, 3 years ago, Asuragen, which is a company that like used to be a CLIA lab, but then ended up making kitted products out of these tests, and then making sure that they clear regulatory hurdles and make sure that it becomes a global product that you could sell to laboratories. Both of those we like very much. The exosomes, because we feel it's the best biological component to look at data. Exosomes are little bubbles that come out of cells and then travel to other cells, and they bring high-quality DNA, RNA, and protein information with them.
You can fish them out because they have the same fingerprint as the originating cell. And with that, you can get a real strong signal, which is a high, you know, strong competitive advantage. And because it happens, these exosomes come out of living cells, you also have a really early in disease signal. And we know that early detection, as well as being able to be very, have high sensitivity, high specificity, are very important aspects to, to liquid biopsy. So the exosomes give us a sustainable, significant advantage compared to cell-free DNA, circulating tumor cells. And then being able to get those products is the Asuragen benefit that we really got. The very first test we came to market with was CLIA-based or is CLIA-based, and it's the prostate test you mentioned.
We have been growing very rapidly if it comes to the volumes coming with these tests. Last couple of quarters, we're sitting around 25% growth, and that results in probably a coverage of the market in the low single digits. So that means we still have plenty of space to grow into, and that's true for all four verticals for us. And yeah, that's why we are very confident that we can keep this pace if it comes to growth going forward.
Got it. Shifting now to kind of M&A. You guys have been active, over the years in M&A, most recently with the Lunaphore acquisition. How are you thinking about capital deployment M&A moving forward, gaps in the portfolio, and areas that you're looking into?
Yeah, M&A will continue to be a priority for us for capital deployment. You're right, we did 19 acquisitions over 10 years. Last couple of years, we did more or less 1 per year, and that was, of course, there was some trickiness during the pandemic, and then there were also inflated price expectations. From a portfolio point of view, we love our core. 56% of the revenues are in core products, these building blocks I talked about in antibodies and proteins, et cetera. We wouldn't mind strengthening it. There are companies that come up with novel antibodies and different approaches that we would be keen on adding to our portfolio. It's the foundation of our company.
Then again, we also have these four growth verticals, and we started off cell and gene therapy, for example. There, I talked about the G-Rex and how important those, it is to us to enter the market and get a strong foothold pulling through the reagents. But there are other reagents that could go in there, or there are some processes before and after this, the, the G-Rex usage, that we feel we could add some, some other companies, too, as well. The nice thing is that, you know, a couple of years ago, you, we, I would have said, "Listen, we definitely need all instrumentation in, in, in spatial biology. We definitely need ability to kit and deal with regulations in liquid biopsy." But we don't...
I can't say at this moment that, oh, we have this need and this huge gap that we have to plug, and we are with our back against the wall. Quite the opposite. We can be very disciplined. We have the gunpowder to do something. We're really good at evaluating technologies in the earlier stage and with that be efficient, whether it is public or private, in acquiring companies that fit nicely in our growth verticals and or in our core.
How are you seeing valuations, kind of bid-ask spread, expectations from sellers? Has that, I mean, it seems like we've kind of had fits and starts. We've seen multiples compress over the last couple of years, but it's not the same for everyone. So as you look at sort of your pipeline of potential opportunities, how do you see valuations and expectations of sellers matching sort of where your focus is?
Yeah, surprisingly, that, you know, even under the circumstances with reduced funding as well as, you know, interest rates going up, et cetera, we were hoping that we would get a, you know, a phase in which we can deploy our capital rapidly and many things would be, you know, for a much better price. But maybe also good for the industry is that some of the assets that were very risky and or long shots, indeed, we got a little cheaper, but those are not really the ones that we were going after. Maybe not the best companies, if you would be honest.
However, the ones with lots of promise and the ones that are having real good assets and great pipelines are at a very similar level as they were before, still very expensive. And as I said, like, if I would be under the gun for having to fill a gap, maybe I would have a extraordinary urgency to get something done. Right now, you know, we are still digesting the two acquisitions of ExoDX as well as Lunaphore to make sure that they become a tailwind on the bottom line rather than a headwind. And, you know, we are in a good position. Now, as I said, we're still very eager to strengthen our portfolio, so we're still very keen on getting something done, but for the right price and for the right asset.
Got it. You talked about, and you said earlier about sort of the getting to mid-30% EBITDA margin as you exit the year, and sort of getting in that 35%-40% range over the longer term. What are the drivers of that margin expansion outside of a revenue recovery? What other levers are there to drive that margin expansion this year and then into next year to get to that goal of yours?
Yeah. Volume is, of course, the-
Yeah
the one that cures all wounds, but,
Maybe things that are more in your control.
Yes. No, I get it. Now, well, currently, as I mentioned, the previous quarter, we were sitting at 33%, 230 basis points headwind from Lunaphore. You take that out, so you already see that the normal under constraint volume is the normal EBITDA that we come to expect, it's north of 35%. Fortunately, the two businesses that are holding our EBITDA back a little bit are the ones that are growing very fast. So that's obviously an indication of future health. We also have done, even though Bio-Techne is already very efficient, we've done some activities over the last couple of quarters to make us even more efficient. So we had some duplication in supply chains, so two warehouses in Europe, going into Europe.
So we created one, a very efficient one, and we divested some product lines that are below our expectations. And therefore make sure that on our own power, we already make, we already have the entitlement to hit the 35%-40% EBITDA margins. Now, if you think about our future, you know, we'll get a huge boost from the Wilson Wolf acquisition. I've not talked about it a lot yet. We own 20%. It does not sit in our numbers currently, other than in some line outside of the P&L. And you know, it runs at 70% operating margins, and the latest we will own this business, which is fast-growing, is in 2027, December 2027. And by then, we will own 100% of it.
If you don't think maybe that margin goes, operating margin comes down a little bit because we're a public company and there will be some more scrutiny and probably some more ERP costs, et cetera, that goes into the entity, but it'd still be 60% or so and immediately accretive. Now, at the end of the day, whether we're gonna sit more at the 35 or more at the 40% level, it will also depend on how many acquisitions we do, right? So as I mentioned, we are very good in acquiring technologies just when they go to market or just after they enter the market. And those are typically a negative EBITDA, and the how many doses of M&A we take is basically going to pace that. But at the end of the day, bar those M&A acquisitions, we typically drift to 40% EBITDA margins.
Great. With that, we're out of time. Kim, thank you so much for joining. I really appreciate your time.
Thank you so much.
Thank you.
Cheers.