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 it's my pleasure to be hosting the Bio-Techne team, joined by Jim Hippel, CFO, and also David Clair, Head of Investor Relations. Thank you, guys, for being here in Miami.
Yeah, Puneet.
Thanks.
Always a pleasure to be here. Thank you.
Great. Maybe Jim, let's kick off at a high level, maybe at the end markets. What's the state of the 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 biotechs and emerging biotechs and academic end markets, respectively, maybe.
Sure. You know, as we came out of our December quarter, our Q2, we said we you know expected the end markets to be pretty much the same in Q3 as Q2 in terms of the you know in terms of the buying activity. As a reminder, in December, if you kind of go through our major end markets, you've mentioned several of them, you know, pharma being the largest, big pharma being the largest at roughly 30% of our revenue. We exited our December quarter with low double-digit growth.
It was the fifth quarter in a row, double-digit growth, which was a little bit of a pleasant surprise for us, frankly, because as we got into our Q1, you know, there was still a lot of rhetoric around the potential for MFN pricing on large pharma, threats of 100% tariffs, et cetera. We'd been doing well in large pharma and was concerned that growth might slow down just because of all the rhetoric. You know, 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 though as those clouds have dissipated, and we continue to do very well in pharma as a result.
We don't see that, you know, anticipate that changing unless there's some other monkey wrench that comes down, comes down the road. If you look then at biotech, you know, arguably the next largest market, roughly 20% of our revenues, either smaller biotechs. We exited our Q2 with mid-single-digit declines in biotech. If we recall, I know you know this well, Puneet, in the first half of calendar year 2025, biotech funding was down nearly 40%. The fact that we were only down mid-single- digit, you know, we actually saw it as a bit of a win. We all know there's a lag between funding, both from the upside and the downside.
When you actually see it in the spend and your results. It's something that was from the lag that we saw. We expected that to continue into the near term. The bright side there was, you know, definitely some green shoots coming out of both Q1 and Q2, where we saw out of the September quarter, we saw funding actually start to increase again, roughly in the high single- digits. Exiting December, it was, you know, like something like now over 90%.
or something like that growth. Very encouraging that we're seeing the money come back into biotech. If you step back and think about it kind of makes sense because so goes pharma or at least the concerns around pharma, sometimes so goes biotech. Biotech's much more volatile. If they're concerned about pharma, they're concerned about their potential exits, and they're gonna move their money somewhere else. Now that the clouds have cleared for pharma, it appears we're seeing that money now come back into biotech, which is nice. You're seeing a lot of M&A activity again now.
among large pharma acquiring biotechs, which is encouraging for new investors. You know, we saw that exiting Q2, but we know there's a lag. We know there's a 2-3 quarter lag on average in the bell curve to see that come into spending. We didn't necessarily anticipate much change here in Q3 as a result. You know, if anything, the outlook with regards to, as the year progresses in calendar 2026, and especially when you get into our fiscal year 2027, which is only four months away now. Biotech 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.
We're, you know, definitely looking forward to that eventually starting to turn to spend. Of course, there's academic. Academic is a little over 20% of our global revenues, roughly half that in Europe and roughly half that in the U.S. European academic has been fine, you know, low- to mid-single-digit growth, which is kind of what we expect out of academic in Europe. 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've seen academic stabilize to kind of low single- digit declines.
We, you know, 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 is where it ended up actually, of course. Until that actually all gets resolved, we understand why our shell-shocked academic customers are gonna be a bit reserved. Development since then, of course, is I think literally a day before or a day after our earnings release of Congress formally approved a 1% increase.
Yeah.
That's a nice, very nice step in the right direction. Not to mention they also basically did away with the indirect cost caps. As you know, also limited the number of multi-year grants. All positives in the right direction. At the end of the day, you still have to wait to see how the administration's gonna.
Yeah.
You know, actually, roll that out. I think we've been watching the data on NIH grants, and they've been slow to roll thus far, although, you know, it's one week in March, but at least we saw, based on the data that was published the other day, a nice pickup in grant releases starting in March. Again bodes well for that funding now needs to turn to spending that can take. You know, some time for that to happen. 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 gonna play out in terms of things settling down. Very encouraging when, again, when you get it into the back half of this calendar year.
Yeah.
You didn't mention it, but you know, the other k ind of end market that's important to us, of course, is Asia overall.
Yeah.
Roughly 16%-17% of our revenue, half of that being in China, the other half throughout the rest of Asia. We've had three quarters in a row now of growth in China two quarters in a row in the rest of Asia. In fact, the rest of Asia was double-digit growth this last quarter. 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 growth." 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. It's a nice steady progression. We see that continuing throughout calendar year 2026.
Is there any reason you're seeing an early pickup in China? I think a number of companies are still cautious, somewhat as 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.
Yeah.
Maybe just on that point, I don't know if you can help us investors understand sort of in 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. I mean, obviously very, very fresh and very new.
Yeah.
You know, no one even knows how long this is really. I mean, when oil can move 20% in one day.
Yeah.
Who knows, right? In terms of our, you know, our exposure, we're not overly concerned about it in the sense that , y ou know, shipping specifically, almost all of our products are shipped by air, not by ship. There's no issues there in terms of constraints in.
Yeah.
In the waters. Yeah. Yet air, of course, uses fuel. Fuel costs stay sustainably high. Shipping costs could go higher as well, and we'll, you know, have to figure out how we, you know, help build that into our pricing as well going forward if we need to. I think it's too early to talk about that. You know, hopefully this all settles down before we get to the end of our next quarter close, and we don't. Have to talk about it, and if we do, we'll talk about how we're handling it. That goes for China as well, by the way. It's too early to comment on that.
All right.
I'd say up until now, though, with regards to China, and we've told you this about a year ago when we had just visited, Kim Kelderman just finished a trip in China, and we were hearing for the very first time optimism from customers there about, you know, government funding starting to return in general back into biotechs. It was the first time in, like, three or four years that the conversation was about how much it might grow next year as opposed to how much it might shrink.
It was 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 fill up their 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. 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, exciting areas of our portfolio. When the money returns, that's where the money will go first. We're seeing that in China.
We've been seeing that the past two or three quarters. Even during the two or three bad years in China, our consumables on those instruments, the cartridges on those instruments, were still growing, in some quarters, double digit. We knew that there was likely a capacity constraint building there with regards to instrumentation, and as soon as there was money available, we'd start to see it flow into our instruments, and that's what we're seeing.
Got you. Okay. Maybe just touching on the 2026 guide, I mean, fiscal year 2026 guide, you know, you're expecting to exit fourth quarter and, you know, reach mid-single-digit growth for the full year. Looking at our model, we're modeling about 1% for you guys, but just, it appears to be a lot of prudence in there just given the backdrop that you have experienced.
Yep.
Just wondering any in the first few months, what if any part of the businesses end markets that are changing that give you a maybe a slight bit of optimism. Maybe you talked about grants improving, but that's just in the last week or so.
Yep. Yep.
Wondering if there are other factors that
Yeah. I mean, so at a high level, I'd say this, it's our concern is less about if, it's more about when, right?
Yeah.
I think, you know, 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. Now trying to time the exact pinpoint of a quarter of when that recovery starts is always difficult to do. So too, you know, that's the one where if there's any prudence or caution we have, is on the timing. I'm not talking about this year versus next year versus three years. I'm talking about this quarter versus next quarter versus the start of our fiscal year 2027. 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 in academic.
To actually get released, you know, get to work as with the budgets down to the lab level. In the case of academic, get the grants starting to roll again, actually start spending the money. Again, history tells us that can take anywhere from 2-3 quarters, depending on, you know, in aggregate. It's very customer specific as to when. 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. Put some minuses, you know, specifically to this, the back half of this fiscal year.
Especially, since you mentioned Q4. You know, one of the biggest company specific headwinds we've faced this year has been these two 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 through the clinical trials faster and ultimately hopefully get to commercialization faster. The NPV of these two customers has gone up dramatically for us. . The timing of when you would typically see a lull after you finish your clinical trial, then you have to go through the whole formal FDA approval process for commercialization.
Yeah.
The manufacturing, validation, all of that can take typically 18 months to three years. Fast track should definitely pull that into the near side. We anticipated 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. These are two, you know, these two customers made up nearly half of our GMP protein revenue, so very significant. Significant that they've been a headwind force each and every quarter that we've had a talk about, in the most recent Q2, a 400 basis point headwind. Well, we know it's gonna be about a 300 basis point headwind in the current quarter we're in today, you know, now, Q3.
As we talk about Q4. That headwind drops off somewhat significantly, about 150 basis points, so there's a you know, there's a tailwind there. We have the continued growth from China, which is a bit of a tailwind. 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 into spending. If it doesn't get going, it's gonna be on 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. That's really the swing factor in my mind.
Got it, okay. 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, you know, challenges in the market and whatnot, funding situations, how much is, you know, sort of the customer base growing, and maybe give us a view into the programs as they're progressing towards the clinic. Any metrics you can provide there?
Sure. You know, we're very pleased with how our cell therapy franchise has performed overall in this downturn, because this is the portion of our business that's the most heavily weighted, one of the most heavily weighted towards smaller biotech and academic. It's where a lot of early stage stuff happens. Despite all that, we've been able to grow each and every year, the last few years through this, 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.
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. Of the 700+ customers, over 80 of them are in clinical trials. A little over a dozen of those are in phase I, I believe phase II. Thank you. 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%.
Most of that growth has come within that customer base as they progressed, not just in the clinical trials, but even up to leading to the clinical trials. There's a progression. I think most important in how we think about it is that, you know, there's been a lot of churn within that customer base. 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 as a good thing because a lot of these customers got into it, you know, four or five years ago when. Anyone with an idea was getting funded.
Yeah.
Frankly, there was a lot less known about cell therapies and how, you know, what the challenges are.
Manufacturing.
Right. Five years ago than there are today. There's been a lot of learning, and there was a lot of money that was thrown arguably at kind of way out there ideas. Point being is that the hurdle to get funded now is so high, especially if you're in academic and biotech. It's got to be a pretty sound thesis or, you know, initial argument for what you're going after to even get the money. The quality, the new customers come in replacing the ones that are exiting, we believe is much higher, which means the overall percentage, you know, hits on goal of the whole portfolio should increase. Again, it increases the overall NPV of the business.
What's your, you know, is there a steady state sort of expectation for the GMP proteins business? Because it is becoming, you know, obviously with these two customers, it became a core topic, but more importantly this is an important, you know, this is becoming a larger line. It's still not as big as, you know, proteins overall and i t's still one of the fastest growing lines that you have. Just wondering, you know, how to think about that longer run, and would these exits and incomings into the early stages, how do you think about the, you know, air pockets or, you know, within that growth framework?
Yeah. Yeah, 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.
Yeah.
We kind of have a floor of 20% in a normal market going forward. To the extent these two customers we talked about, you know, get approved and go commercial that would be upside to that, you know, in the outer years of, say, a five-year LRP. You know, I can't sit here and tell you that there won't be lumpiness in the future, but I would beg to differ. 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 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 bases, 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 i f they are able to get going commercial, the amount of annual protein sales we expect to have from them on average has been what the clinical trials have been for these two customers. It gives you a sense of.
Yeah.
Why we think the lumpiness in the future won't be nearly as severe. The air pockets, they'll happen.
Yeah.
By the very nature of how the cycle works won't be as severe just because they're not the same magnitude as these two customers.
Got it. Okay, great. Maybe switching gears to, you know, a connected area to maybe cell therapy, one of some of the assets that you've acquired in the past, the TcBuster, the other capabilities that you have built, I mean, these have been all obviously applications. The question is really around capital deployment. I mean, the leverage ratio remains low.
Yep.
What's your appetite? As we think about these areas, obviously, you know, cell therapy have proven themselves in the market but still somewhat of a nascent market. 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?
Yeah.
You know?
Yep.
Maybe if you can talk about that.
Yeah, sure. You know, we get this question a lot lately because you know, "Hey, you did so many acquisitions, 19 acquisitions or whatever, you know, the first 10 years that I was here as CFO and of course with Chuck with most of those years, and now all of a sudden there hasn't been much since.
Yeah.
R eally since COVID. Now I think, you know, not since COVID, and a lot of it has to do with because especially during COVID and even after COVID, the valuation expectations. They were just, you know, kind of crazy. I'd say this. I'd say, first of all, you know, 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 haul, you know, we've been here 50 years and we want to be here another 50 years. It's got to come from a combination of organic, inorganic to stay relevant. It's an exciting space. There's always something new.
Yeah.
N ew out there. You know, 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 outpace the growth of the market. We took a lot of shots on goal on that as well with different. We did almost 20 acquisitions, but the reality is only two or three really became the core of our growth pillars going forward, which is, you know, you take those chances early on. They were relatively small acquisitions too, so not big chances, right?
In terms of capital outlay on each one. We've matured since then. We were a $300 million company, now we're $1.2 billion, right?
Yeah.
The beautiful thing is. Well, let me back up for a second. Kim has come in, and before Kim, sorry, talk about the funnel. Because we were in that process of kind of company building. You know, the conversation was around how large our funnel was, and we used to always talk, "Well, we have 100 companies in our funnel," you know? "The funnel's full," and all this. You're not gonna hear us talk about how many companies are in the funnel anymore.
It's much more about the quality and relevance of that funnel. That was one thing that one of the first things Kim did when he came in as new CEO is he goes, "Okay, I want some kind of outside validation on do we have the right strategies in place? Do we have the right portfolio that can grow this company organically, you know, and double the company organically in the next five to seven years?" Rather than hire a bunch of consultants to do it, he basically upgraded our entire Corp Dev Team. We got a superstar out of Danaher Corporation. We also brought in a top banker out of Wells Fargo, and between the two of them, largely, over the past 18 months, first of all, did a massive interrogation of us internally to say.
Is this the right strategy?" 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 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 gonna focus our time and energy. 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 in that we already have a $50 million business in organoids, and we think that's.
We could be talking as much about organoids five years from now as we've been talking about cell therapy. You know, antibodies, as you know, Puneet, is such a broad space. There's always opportunities to enhance. Our core antibody portfolio. 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 gonna become even more important, and that's what our entire ProteinSimple franchise as well as our Spatial franchise is all about. Finding other adjacencies to that is also of interest. This team is now really focused on those companies out there that would be very nice complementary strategic fits.
Starting to build those relationships. 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 lands into wet lab? Any early indications that you're seeing in terms of demand dynamics?
I'd be surprised if anyone's saying, really saying they're seeing any early indications of anything right now with regards to AI. It's still very early days.
Very early.
You know, I'll tell you what our thesis is on it. I don't think we're alone, 'cause we obviously bounce this off our customers, including large pharma that we had many conversations with about. We bounce 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, you know, where our heads were on this which is that AI is gonna be extremely important for every industry going forward. It's not necessarily gonna replace every industry going forward. Just like the internet didn't, even though there was concerns, for those who are old enough like us to remember.
Yeah.
Everyone thought it would, you know, basically completely destroy every industry, and it didn't. It enhanced it is what it did.
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 you know, phenomenal. It's gonna take time, and we've been using AI for two years, and we're just now, you know, been launching our first proteins in that space. More importantly, these models need data.
Yeah.
You know, they need data. We actually believe that AI will be a tailwind for our life science tools space for the next several years, 'cause it's gonna 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, 'cause you gotta do the wet lab in order to read, in order for the instruments to read it. After you get two or three 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.
Yes, maybe enable some of the skipping of very early discovery screening and so forth, but now the need for high complexity, you know, more complex proteins, more targeted proteins, is gonna become even more important, and that's our sweet spot. You know, the reality is the commodity based proteins that tend to be used more in the screening, 'cause they're good enough for that. Has kind of been a leaky bucket for us for years.
Yeah.
Where we've been always focusing is how do we make those next generation proteins.
Yeah.
That's really hard to make, that no one else can do to stay where the puck is moving. I think AI's gonna make that puck move even faster, and we are extremely well positioned for that. We actually see it as a tailwind overall for the industry, at least for the next three years, but we think how we're positioned, it's a tailwind really indefinitely for us. The last thing I'll say about it is that when you get into a more mature state of this, call it 5-10 years down the road. We don't believe R&D spending is gonna go down by pharma. We argue it'll stay where 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.
More of those drugs in the pipeline will be in that translational space, which is where we play.
Sure.
You know, and where our strength is.
Yeah. Just last question, since we're at the time. On margin side, 100 basis points margin expansion that you're expecting in 2026, maybe just tell us, you know, what takes you to that mid-30%?
Yep.
Plus margins that you have had historically?
Yep. You know, as you know, we've, you know, this past couple 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 margins steady in a very tough environment. This year we're actually growing margins in a very tough environment with those actions. Our expansion of 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.
Because our products are so differentiated, they have overall very high margins, and we get very high drop through. Very high level, Puneet, how we think about it, how we start 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 in 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, the double, low double-digit growth. We should be expanding margins by at least 100 basis points and still investing for growth. You do that over the course of several years and you get back to the mid-30s%.
Okay. All right. Well, look forward to that one.
Trust me, we do too.
Yes.
Yes.
Well, thank you for the time here.
You bet. Thank you. Appreciate it.