Go ahead and get started. Catherine Schulte, I cover life sciences and diagnostics here at Baird. Very excited to have Bio-Techne here with us today. From the company, we have CFO, Jim Hippel, and Head of IR, Dave Clair. So Dave, Jim, thanks so much for joining us.
Thank you.
Thanks for having us, and thanks for all of you. I can't believe the crowd we got, considering we're bumping into a happy hour here, so appreciate that.
I think we're gonna dive right into Q&A. If anyone from the audience has a question, you can send it to sessionone@rwbaird.com, and I will pass it along to the team. So maybe first starting off, coming off your investor day last week- Maybe just give us a high-level update of, you know, what were the big kind of positives or downward revisions versus your prior outlook?
Well, I think, you know, the main purpose for the investor day, and I think it was we were successful in doing so, was really just, you know, in this environment that we're coming out that we refer to lovingly as the COVID Hangover, to just remind everyone and reassert about the long-term opportunities in our space, and particularly within our company, and how we're positioned in our key growth platforms a s we go through this process, we do about every couple of years.
You know, it's as good for us internally, frankly, as it is hopefully for all of you as investors, 'cause it, you know, there's a lot of, you know, there's a lot of soul searching and challenging each other and challenging our assumptions that go through the process of putting this, the story together externally.
What's invigorating about it is we always come out of it feeling better, stronger and, you know, and more, you know, rallying the troops, than before. I thought, you know, I think it was important in this timeframe to kind of reassert, you know, the strength of our company and the, you know, amazing growth opportunities we have ahead of us, particularly in the key emerging areas of Cell and Gene Therapy, Liquid Biopsy, and Spatial Biology. So hopefully that resonated.
Yeah. And you laid out a path to over $2 billion in, in revenue in fiscal 2028. You know, I think most investors were expecting that the last target you laid out w hich was $2 billion fiscal 2026, you know, I think most expected that to get pushed. I think we're at $1.5 billion for fiscal 2026.
Yep.
Maybe we're a little surprised that Wilson Wolf was in your fiscal 28 number.
Yeah. Yeah.
Based on some work that our team did, trying to rebuild one of the charts in your deck, I think we were working out that fiscal 2028 could be closer to $2.3 billion for that. over $2 billion. You know, is that in the right ballpark? Any comments on that?
Well, it is right in the middle of the range, isn't it? So, you know, it's, it's definitely within the realm of possibility. I think, you know, the approach this time, you know, versus in when, when we made the targets two years ago for fiscal year 2026, there's a couple things l et's just start with the baseline and what the environment was like two years ago t hat we were at the peak of the COVID halo, as we referred to it.
There was really not an end in sight at that point in time. There wasn't even vaccines out at that point in time. And so we thought we were in a, you know, a multiyear, cycle with COVID, the way it was, of, you know, accelerated growth rates across all of our platforms, frankly, that were fueled by, by...
Also, the funding environment, too, in terms of very low interest rates, which, you know, lasted for another year beyond that, actually. Y ou know, not as an excuse, but clearly it was a very frothy time to start it from a baseline perspective. The other key point to make in terms of our forecast, our five-year view then versus now, was there were elements—we've even talked about it t here was inflection points that were within that five-year outlook that, frankly, were outside of our control.
A s we thought about making five-year targets going forward, let's de-risk those items that we can't necessarily control and only put in numbers that we feel like we can control from an execution perspective and leave those inflection points as potential upside. So that was kind of the philosophy going into this target setting session.
It's not that it's a weaker outlook, it's more of a de-risked outlook. I think we've left a lot of opportunity for upsides for the items we didn't include. Y ou know, I think also there's two aspects to it y eah, there's the Wilson Wolf that's now included versus not before, which we always say our outlooks don't include M&A, 'cause you can't predict what M&A is gonna happen in the future. But Wilson Wolf is very predictable t hat is inevitable w e will buy it, so it just made sense to include it.
On the other end of the spectrum, when you look at the very near term, we're clearly still in the midst of a COVID Hangover period, so the growth rates do need to pick up from 24 to 28 to compensate for that as well s o we took that into consideration, also. In terms of the items that were de-risked, you know, specifically, interestingly enough, Cell and Gene Therapy, which is our largest opportunity, our largest area of opportunity. It's also our biggest area of growth over the past three years, where we're four times bigger now than we were, three to four times bigger now than we were just three years ago.
We had, you know, even aspirations for faster growth than that, due to inflection points of potential therapies going commercial. And, you know, I think what we've learned, not just we as a company, but the industry has learned, is that it's taking longer for these trials to get through the different phases and then ultimately become commercialized.
Some of this is because of FDA bottleneck, but, I think also it's because, you know, it's not following the same path as the biologics did, where it was typically four to five years. W hat I've read is that it makes sense, that, you know, these cell, cell therapies are... You know, they're looking for cures, not just treatments a nd so it takes longer to prove that something's actually a cure, particularly something around cancer.
I n retrospect, it all, it all kind of makes sense. So we've taken all the commercialization aspect out of our current five-year view. It's in our 10 year view, but not in our five-year view. And it's not to say that, that there's not something that could get that far that quickly, but let's leave it as upside, where our growth, and we're gonna still have tremendous growth-.
.. in cell and gene therapy is going to come from winning new customers and those customers continuing to progress, both in preclinical and clinicals, just as Q4, this last Q4 is a great example, right? Our GMP proteins business grew 60% in this environment. 20% of that came from new customers, and the other 40% came from customers progressing. T hat gives you a sense of the leverage you get for every new customer.
That was probably the biggest area, you know, aside from the baseline kind of being different in the macro environment, that was the biggest difference t he second biggest would have been our, our exosomes, simply because we were yet another year delayed in getting the full reimbursement that mirrored the NCCN guidelines a s you may recall, if you follow us, that didn't occur until this past January, February. S ince that's happened, it's taken off like wildfire, and so, you know, again, we still, the long-term aspirations are as strong as they ever have been. It's just a year, a year delayed.
Yeah. And maybe taking a look at the nearer term outlook for fiscal 2024, you kind of talked about first half up mid-single digits, back half up high single digits on, you know, getting through the COVID hangover, as you guys have-
Yeah.
Called it. You know, customer destocking, China funding environment.
Yeah.
Have any of your assumptions around that changed since you talked through that, and specifically around, you know, the ramp that you should see in the back half?
No, there's been nothing that's changed, you know, from a macro perspective, no, from our own business-specific perspective, that would change that view. You know, we're definitely most confident in the destocking headwind going away just because the math would suggest, if nothing else, by tracking those customers, they, they will run out of inventory by that point in time.
T hat we feel like is, you know, as closely in the bag as you can get. China, we still feel like it will be better in the second half than what we'll see here in the first half. But it's still - that's still the big wild card as to how much better, and what that overall impact is to the company i think-
-You know, I think a worst case scenario is it doesn't get that much better, and therefore, the only upside we get is from the destocking going away, which was, which is still a 2-point headwind every, in the last couple of quarters. The best case scenario is it comes back full strength, with funding and, you know, that could get us knock on the door, double-digit growth. The likelihood is probably somewhere in the middle.
Yeah. So I guess, you know, what are your expectations for China in fiscal 2024, maybe first half versus back half, and what could it be if we saw a stimulus?
Yeah, we haven't given strategic guidance by region, and I won't do that here b ut what I'd say is that, you know, I think China, for the first half, will be, you know, worse for us than it has been any given quarter in fiscal year 2023, but not, knock on wood, not nearly as bad as what we're hearing from some of many of our peers.
I think part of that's not because we're so much better than our peers, it's more about how we're positioned in China versus our peers. A higher percentage of our revenue in China comes from the pure research side of China, which is more impacted by the government funding, as opposed to many of our peers have a higher concentration of their revenue, more downstream into bioprocessing CDMOs.
T hat's where there's a, I think, a bigger question mark with regards to a true realignment or restructuring of what's happening there. That impacts us to some degree, but not nearly as much as it does others a nd so that's why our, I think, our assessment of China is not as negatively severe as it is in, you know, some of our peer companies. So that's how we're thinking about it, you know, for the first half. In the second half, and it just, it is a bit of a wild card in terms of how much, how quickly that funding comes back. Y ou know, what we're focused on is still the long term, as we always are.
There's been blips in China before, and fundamentally, healthcare in China is still publicly of highest performance for their national interests. If you have spent any time in China, which I've been spending a lot of time there the past 20-plus years, and you walk through any of their particularly tier two, tier three hospitals, you will see they got a long ways to go.
T here's no reason to think that regardless of economic potential macroeconomic headwinds they're facing right now, or in government policy shifts and so forth, that that's going to change. And it's clearly essential to their... Really, it's even to their political livelihood, to make sure that their people, you know, continue to increase their, their access to good healthcare.
I think it's fundamentally going to be a long-term, strong growth region for us and for our industry. And the other even, you know, there's a lot of discussion around from a geopolitical perspective, and do they, you know, that if they start focusing on domestic versus international, and go even as far as banning international imports and things of that sort whether that-
-I just highly doubt that will happen anytime in the near future or even intermediate future in our space, simply because, not just with us, but in all of our peers, when it comes to the research side, because they just don't have nearly, the capacity to replace what we provide.
Yeah.
They're probably a decade or more away from even coming close to that.
You, you kind of echoed your conviction around, you know, this become-- still being a long-term growth driver, and I, I think we've heard other tools names in the space say the same thing-
Yeah
... of, you know, high conviction, that this will come back, will be a region of growth. Y ou know, we've now had several saying that they don't think it's gonna get back to the kind of growth that we saw, you know, in the 2010 to 2019 type time frame. I guess, what's your take on that, in terms of where that normalized growth rate is at?
Well, I guess I'd go back to, you know, the same reasons why we're not predicting as dire this year as others are, 'cause a lot of the growth from some of these other companies came from the bioprocessing and CDMO areas which did have fan, you know, we, we were kind of jealous and envious that we weren't in that space for the past three or four years because it was rapidly growing so fast.
T hose companies who depended on that for growth, you know, I think there, there could be a structural realignment there, and, and I can see why if now, if they're relying just on the academic side, where they had less exposure, perhaps, than we do, relatively speaking, that they won't see the growth rates.
You know, again, we feel like, you know, not only the government's emphasis on strong healthcare, but our positioning within the key growth markets of life sciences, that we will continue to have, you know, very strong growth in China. It will lead the world regionally in growth, we believe.
Okay. Europe, shifting to a different region, has been performing very nicely-
Yeah.
Low double-digit growth this past quarter.
Yeah.
Can you just talk to some of the investments or changes you've made in the commercial organization there over the last several years, and maybe what's driving that strong growth?
Well, we have continually upgraded the team over the past decade, when the opportunity presents itself and, you know, we've we've expanded the footprint within Europe so that there's much more home offices, so to speak, by country, so there's more of a local feel by, particularly in the key countries i think that's helped a lot.
We have strengthened our inventory position in Europe so that the turnaround times have improved. So that has definitely helped. We have a new leader there overall that, can't give him all the credit for it because he's relatively new, but he's gonna, he's, he's fantastic, and I think he's going to continue to knock it out of the park there. So I think we've done things over the years that have definitely taken a lot of the...
What used to China used to be extremely variable for us, you know, high beta, up and down, and that has definitely mellowed out. It's been more consistent, much more in line with what we've seen in the U.S. in terms of growth rates. So that's a general statement I'd make. I think from a more acute perspective with regards to the past two quarters, you know, what was interesting was that Europe kind of led us into the COVID hangover the first half of last year.
T he U.S. has kind of followed that in the last two quarters of fiscal year 2023. The fact that Europe kind of flipped, you know. I'm not saying it's a complete foreshadowing, but we're hopeful that that might be a sign that if they let us into it, they'll lead us out of it, perhaps, as well.
Yeah. And then from a customer standpoint, this past quarter, you guys talked about thinking that biotech funding has kind of stabilized- and you're starting to see stabilized activity levels. I guess, when do you think that becomes a tailwind for that business? And, you know, what are you seeing from some of your smaller biotech customers?
Well, our, you know, our growth rates in our smaller biotech customers have been fairly comparable to our larger pharma ones for the past two to three quarters. So when we say stabilized, I guess that's kind of what we mean by that t here's not a big divergence there. They're all relatively softer compared to growth rates we saw the prior two to three years. But when you think about the baseline that the growth rates are coming off of, it shouldn't really be a shock or a surprise.
So the resiliency of the revenue, I think, is very strong, and the resiliency of the overall space is relatively strong. Biotech is still annualized, much stronger revenues than it was three years ago before COVID. You know, and I think at the end of the day, there's still a lot of money out there sloshing around in the private equity arena and VC arena, and, you know, I think from a... Sitting out here, we focus on the public markets and what we see there, and that's definitely been, you know, slowed down dramatically.
I t's still quite active in the private markets, and there's still a lot of money there a nd I'd say it's not-- And when money does come back, it seems to always go to biotech first, versus other industries. W e're pretty-- We've seen these cycles in biotech funding before, and they tend to be rather short in duration and shallow in depth, and I think we're gonna t hat's the same.
That's the-- I think that will be the same case here. Because structurally, because again, fundamentally, we're not in a major recession. There's still a lot of money out there, and the innovation that's going on in biotech and life sciences has never been greater, so it's an exciting place to put money.
Yeah. Maybe focusing on your Protein Sciences segment, starting with your kind of core research reagent business. Your conviction in the growth outlook there, I think at your Analyst Day, you talked about 7% growth in that category, and maybe comment on some of the consolidation that we're seeing in the space a couple years ago and announced a couple weeks ago.
A gain, that growth rate was a bit less than what we had put in the last five-year forecast. I some conservatism built in. Keeping in mind that it actually, our core reagents and our instrumentation are the two categories that are actually ahead of where we thought we'd be at this point, because they benefited, you know, much more from the COVID hangover than was anticipated at the time.
T here's also a mixed component within that reagent s o there's, like, three major categories, actually, four major categories in that core area i t's our RUO proteins, our RUO antibodies, our ELISA kits, assays, and our diagnostic reagents.
I would say in that growth rate you mentioned, we expect our proteins and antibodies to be above that growth rate, and we expect our, our ELISAs that are much more established, and our diagnostics reagents, also very well established, to be somewhat below that run rate s o that's kind of where you get to the average. I'm sorry, Catherine, the second part of your question?
Consolidation in the space.
Yes. You think, oh, let's just put it out there, Danaher's acquisition of Waters, right? Yeah, so I mean, again, no disrespect at all to Abcam or Danaher or Thermo or anyone I mentioned, 'cause clearly they're great companies and robust competitors.
W e said this about Thermo when, or about PeproTech when it was bought by Thermo a little over a year ago, that we didn't expect there to be a material change in the competitive environment or nature. And here we are over a year later, and that's proven to be true. W ith Danaher, it's basically the same, the same message we had with regards to Abcam.
I think, you know, Abcam, I think Danaher will benefit by having Abcam, but I'm not so convinced, we're not convinced that Abcam will do much to make Abcam more competitive in the marketplace or against us specifically. You know, Danaher doesn't have an antibody play t hey don't necessarily know a lot about that, t hat's why they needed it as a to fill in their portfolio. Y ou know, and that was what we said about Thermo Fisher and ProteinTech, and that so far has played out.
Y ou know, we're not, we're not concerned about it, but we're not, you know, we're not necessarily cocky about it either w e'll keep a close eye on it, but Abcam's always been a very formidable competitor, and we think they will continue to be, but we don't expect it to be necessarily any stronger or weaker than it was before under Danaher's ownership. Y ou know, where Danaher will benefit Abcam, which in turn will benefit Danaher, is, you know, they'll DBS it, right? So they'll drive profitability for sure, but we're not necessarily worried about it fro a change in competitive-
Yeah.
-environment.
We had the opportunity to tour your new GMP facility a few weeks ago, which was great to see. Can you just give us an update, remind us where you are from a capacity standpoint? I think earlier you talked about, hey, there was 60% growth, 20% was from new customers 4 0 from further penetrating existing customers. You know, how do you think about that growth going forward? How much is wallet share or growth of existing programs versus new customer?
Well, so first of all, on the capacity question, or comment, yeah, I just can't wait until our actual rev... As fast as our revenue is growing, I can't wait till it's growing faster than our capacity is. Our scientists seem to be able to figure out every six months how to continue to increase the yield out of that, out of that factory a s a reminder, when we first built it, the estimates that our team was giving us was approximately $200 million max of capacity, and now it's north of $1 billion of max capacity.
Part of it's just the nature of their conservatism, but part of it's they truly are... they've never made it in this type of quantities before. Typically, it's made in a beaker for research, right? I think they're surprising themselves in terms of how they're being able to get so much greater yields when they, when you make this, these proteins to scale.
I t'll be a long ways off before we say we're out of capacity there, I think s o I think that's not an issue, but it's also a great selling point for our customers because that's, that was why we built the factory w e still believe it's the largest factory out there in the world for GMP proteins.
Cause our customers were telling us that was their number one concern about commercialization, was that proteins was a big choke point in terms of supply. So it's a build it, and they will come, you know, model. With regards to... Sorry, Catherine, I can only take-- it's late in the day. I can only take one question at a time. The second part of that question was?
Thinking about growth going forward, new customers- -versus-
Yeah, thank you.
your existing programs.
Yeah, thank you.
Essentially.
I kind of, I kinda iterated this already in terms of how we de-risked our five-year view by taking out the commercialization. R eally, it's more the same in terms of the next five years. It's. There's still a lot of customers. There'll be new customers along the way that don't even exist today, even though we're in this biotech funding, kind of, quote, unquote, "funk." That's where money will go back first.
You know, to put it in perspective, you know, Wilson Wolf and their G-Rex has 800 customers, and we're knocking on the door at 400. So there's still a lot more customers to win over, and what's really good about our story is almost all of our customers are in the very early stage of development. Most of them, almost all of them are in pre-clinicals, and so that volume per customer has an amazing opportunity to scale, even without any new customers, and we intend to get new customer, you know, clearly get new customers.
T he amount of scale per customer, even within the pre-clinicals, goes up dramatically from when they first start off to when they're ready to go IND. And then, again, dramatically goes up throughout the phases of clinical progression. T hen they get commercial, and that's a whole step function change b ut that's, you know, why we have a lot of confidence in our growth trajectory and projections going forward based on the figures we put out there, because it really is just a matter of these customers scaling.
M&A has become a bigger and bigger part of the story since Chuck joined the company. I guess, as you think about going forward from here, you have Wilson Wolf in the pipeline. How do you think about your appetite for M&A? Would you be open to a larger deal, or do you think you'll continue to kind of have these tuck-ins?
Yes, yes, and yes. Yeah, I mean, we've been saying this for a decade, and nothing changes that. You know, at the end of the day, we still are only a billion-dollar revenue company. Y ou know, compare that to the mammoth, you know, the, the mammoths that are out there, it's, it's still nothing i always joke with Dave, you know, all we need is, like, 0.5% market share steal, and we can double the size of the company, right? So that's, that's the awesome opportunity we have ahead of us.
You know, and a great. I think, and Chuck's mentioned this, that there's one fundamental change about our story now, even two years ago versus, say, 10 years ago, was that, you know, without M&A, we wouldn't have had our instrument platforms. We wouldn't have had our Spatial Biology platform. We wouldn't have had our Spatial... our Liquid Biopsy platform. N ow, without M&A, we don't need M&A to double the size of the company again.
Y ou know, we could have said, we could have said, "Hey," nine years ago, we could have said, "Hey, ProteinSimple by itself will double the company, so we can stop now." And then we could have stopped after we got w e didn't w e kept going, and that's what's so exciting about this space. There's always, there's always a new invention t here's always a new dynamic to our, you know. Nine years ago, Spatial Biology, the term didn't even exist, right? And Liquid Biopsy, almost the same way.
Cell and Gene Therapy did not hardly at all, right? I can't tell you what we'll own five years from now, because we probably don't even know. That's what's so cool and exciting about this space. Maybe a bit of a cop-out to the answer, but to talk about, you know, what we know today, where our focus is, will continue to be around that cell and gene therapy area.
It is still nascent i t's still evolving t here's still new tools being developed to continue y ou know, ultimately, what we want to be a part of is the ability to scale these therapies so they can be accessible to all patients. G-Rex is a big part of that o ur GMP protein is a big part of that, but there's constantly new inventions, and there will be more that we don't even know about that will, that will enable that, and we want to be part of that. You can't invent it all yourself. Even Thermo can't invent it all itself or Danaher t hat's why they got to buy stuff, and so we'll be doing the same.
Yeah. We've got a couple of minutes left. We have three questions we're asking every company, so we'll get Dave to chime in with his thoughts on these, too.
Good.
But Jim, you know, as you think about the next 12-18 months, you know, what are the two biggest opportunities that you see for the business?
Next 12-18 months, I'm extremely excited about spatial biology, now that we have Lunaphore. I mean, we talked about our spatial platform being a 20%+ grower, and in the early days, it was and then some, because keep in mind, that company, we bought it five years ago, it was $25 million revenue, now it's four times the size.
Y ou know, it's not... That's, you know, that's not necessarily chump change in terms of growth, but we expected it to maintain that 20%+ kind of growth, even at the size it is today, and it hasn't. It's been double digit, but not 20% a nd the key limiting growth factor, or limiting factor to growth and really taking that market expansion to the next level has been automation a nd now with Lunaphore platform, we got the perfect fit, and so I'm probably, I'm probably near, very near term, I'm the most excited about that, even in the environment we're in right now.
Well, he stole my answer. I'd say, I guess for me personally, you know, the second would be the traction we're getting in GMP proteins. I mean, you saw the facility. It's state-of-the-art. It's set up for very high volume, and we're seeing a lot of traction, so it's very exciting.
All right. Well, Dave, go first on this next one, then Jim can chime in.
Then you can say, then I can say he stole my answer.
Yeah, exactly. So think about the next 12-18 months. You know, what are the two biggest potential challenges that you see for the business?
Yeah, I think Jim addressed probably the biggest... I don't know if it's necessarily a challenge, but the biggest uncertainty is kind of how China is going to evolve throughout, you know, the next 12-18 months.
12-18 months. Yeah, I think, I'm less—I might—I mean, I know China is still a bit of an unknown, but I've—when you go out 12-18 months, I'm less concerned about China than I am perhaps about the other factor, which is how fast does the funding really flow back into biotech, and pharma have the confidence to, you know, continue to reinvest at the rate they have been? I don't mean have been, meaning COVID, but like even in 2019 and 2020.
Y ou know, again, these cycles tend to be short and shallow, but, you know, 12-18 months is time enough window, right? It could still be that short and shallow window t hat'd be probably my biggest macro thing I'm keeping my eye on.
Yeah. All right, and last one: What is something that investors and/or analysts don't ask you very often, but you wish that they would?
Investors or analysts don't ask me?
Oh, Catherine.
Or, Dave, you can, you can fill in here.
Wish they would...
Boy, wish they'd ask us more.
They ask me so many questions. I just wish they wouldn't ask some of them.
They've got it covered. Maybe that's the answer.
Yeah. Well, I tell you what I wish they'd ask me: "As CFO, what do you think is more important, growth or profitability?
What's your answer?
You didn't... No, that wasn't the idea. I had to answer your question.
All right.
No, I'll answer you. In fairness, I'll answer the question because I think I love, I love the answer, and that is both. I mean, I think that's that, to me, is a differentiator for our company, you know, you go back a decade ago, we were a profitable company, but slow to no growth.
I think we've broken the paradigm that you have to choose between one or the other, because we've become a growth company, and we've maintained, you know, still best-in-class profitability. And that's what I'm most proud of, of our company, frankly, is to be able to walk that fine, fine line and be able to say both t o me, that's rarefied air, and I intend to stay there.
All right, great. Well, Jim, Dave, thanks so much-
Thank you.
Thanks, everyone, for joining.
Thank you.