Bio-Techne Corporation (NASDAQ:TECH) Q2 2023 Earnings Call Transcript

Bio-Techne Corporation (NASDAQ:TECH) Q2 2023 Earnings Call Transcript February 2, 2023

Operator: Good morning, and welcome to the Bio-Techne Earnings Conference Call for the Second Quarter of Fiscal Year 2023. At this time, all participants have been placed in a listen-only mode, and the call will be open for questions following management’s prepared remarks. During our Q&A session, please limit yourself to one question and a follow-up. I would now like to turn the call over to David Clair, Bio-Techne’s Vice President, Investor Relations.

David Clair: Good morning and thank you for joining us. On the call with me this morning are Chuck Kummeth, Chief Executive Officer; and Jim Hippel, Chief Financial Officer of Bio-Techne. Before we begin, let me briefly cover our safe harbor statement. Some of the comments made during this conference call may be considered forward-looking statements, including beliefs and expectations about the company’s future results, as well as the potential impact of the COVID-19 pandemic on our operations and financial results. The company’s 10-K for fiscal year 2022 identifies certain factors that could cause the company’s actual results to differ materially from those projected in the forward-looking statements made during this call. The company does not undertake to update any forward-looking statements because of any new information or future events or developments.

The 10-K, as well as the company’s other SEC filings, are available on the company’s website within its Investor Relations section. During the call, non-GAAP financial measures may be used to provide information relevant to ongoing business performance. Tables reconciling these measures to most comparable GAAP measures are available in the company’s press release issued earlier this morning on the Bio-Techne Corporation website at www.bio-techne.com. Separately, we will be presenting at the Citi, Cowen, Barclays and KeyBank health care conferences in March. We look forward to connecting with many of you at these upcoming conferences. I will now turn the call over to Chuck.

Chuck Kummeth: Thanks, Dave, and good morning, everyone. Thank you for joining us for our second quarter conference call. In our second quarter of fiscal 2023, we delivered 4% organic growth on top of a challenging year-on-year comp, where we grew 17% in Q2 of last year. One year ago, the life sciences industry was in the midst of an incredibly strong biotech funding environment, spurred by COVID-related vaccine and therapeutic development that drove high equity valuations for smaller firms. It’s been well documented that this funding environment has slowed in recent quarters, returning to pre-COVID levels. In Q2, we did experience a divergence in ordering patterns from our biotech end-market versus our larger pharma customer base, which is still very strong.

This divergence was seen in certain large bulk reagent orders, which did not repeat this year, and the delay of instrument orders, as conservation of cash becomes more of a priority for our biotech customers. Encouragingly, the underlying research activity that accelerated during the past strong funding environment continues, which is evident in the strength of our bio-pharma research reagent run rate business, continued cell and gene therapy growth and strong utilization trends within our proteomic and analytical tools. Also, the order funnel for our protein and analytical instruments remains full, and we continue to experience record uptake of our ExoDx Prostate test. I will provide additional details on each of these growth drivers later in the call.

Before we discuss the results, I’d first like to welcome Shane Bohnen to the leadership team of our new Senior Vice President, General Counsel effective March 3. Shane will be transitioning into this new role from Brenda Furlow who has served as Executive Vice President and General Counsel for the past nine years. The contributions Brenda has made to the company over the last nine years are immeasurable, including establishing Bio-Techne’s legal and compliance functions and leading our corporate sustainability initiatives. I wish Brenda the very best in her retirement. Now let’s get into the specifics of the quarter, starting with an overview of our performance by geography and end market. In Europe, we drove mid-single digit revenue growth in the quarter, recovering nicely sequentially from the growth rates experienced in Q1.

As a reminder, Europe grew in the mid-teens last year on the wave of stronger biotech funding. We see more stability in European end markets as the year progresses and concerns around high energy prices and severe recession have tempered. The team is also nearly finished implementing a new Dublin warehouse to support Mainland Europe and a new ERP system that has been implemented with minimal disruption to our operation. North America is where we saw the biggest impact of lower biotech spend in Q2. However, North America was still able to grow low single digits on top of a prior year comp that experienced greater than 30% growth in bio-pharma and over 20% growth overall. The multiyear growth rates in North America are still double digit and in line with our long-term goals.

The consumable run rate business and instrument order book also suggests that underlying research activity is still robust, and this should become more evident as we pass the remainder of last fiscal year’s high biotech comps. Moving on to China. I want to first acknowledge the tremendous dedication and resilience of our team there. Following multiple lockdowns, our team has continued to supply the Chinese research market with the proteomic research reagents, analytical tools and spatial biology solutions to enable scientific discoveries in this geography. Now following a change in COVID management strategy by the Chinese government, COVID is spreading rapidly in the country, including within our China team, which is over 90% infected at one point.

Thankfully, this does not appear to be a particularly virulent strain and our impacted team members are typically back to the office within five to 10 days. Despite the disruption caused by the rapid spread of COVID, our team in China was still able to produce mid-single digit growth in Q2. After the waves of COVID subside in China, most likely in our fiscal Q4, we believe a full re-opening of our end markets will accelerate faster compared to the government’s prior zero-COVID strategy. Positioning Bio-Techne for a sustainable return to our historic 20-plus percent growth rate in this region. Given the proven pent-up demand in past shutdowns in 2020 and the pending RMB1.7 trillion government stimulus, we see a strong Q4 looking ahead. Now let’s discuss our growth platform, starting with our Protein Sciences segment, where organic revenue increased 2% for the quarter on top of a strong comp from last year when the segment grew 19%.

During the quarter, we continued to gain traction with our portfolio of cell and gene therapy workflow solutions despite a challenging year-on-year comp where we grew our cell and gene therapy business over 80% organically in Q2 of last year and within that, our GMP protein is over 185%. We still grew our cell and gene therapy portfolio over almost 20% in the quarter. Specific to our GMP proteins business, the commercial team did an excellent job growing business with existing customers as well as adding additional accounts during the quarter, culminating in a record quarter for our GMP protein business. The roadmap to adding additional GMP proteins to the menu produced in our state-of-the-art St. Paul manufacturing facility remains on track with plans in place to almost double in the number produced in this facility in the coming months.

It’s worth noting that GMP protein sales are driving cross-selling activity throughout our portfolio as this growing list of customers are also frequently purchasing additional items, including RUO media, proteins and small molecules. Speaking of small molecules, our GMP small molecules remain key components in the regenerative medicine cell therapy fields as they enable the reprogramming, self-renewal, storage and differentiation processes that are key to these workflows. Our leadership position in regenerative medicine workflow is driving substantial growth in our GMP small molecule business as well as specialty cell culture media, matrices in our portfolio of 19 GMP proteins that are focused to regenerative medicine, including 11 GMP proteins that are only available from Bio-Techne.

The growth is so profound in our GMP small molecules that we are drastically expanding our manufacturing capacity in Bristol, UK. Now let’s discuss our core portfolio of proteomic research reagents, including the RUO proteins, antibodies and small molecules that are key components to enabling biopharma and academic scientific discoveries. Collectively, our RUO reagents grew in the low teens in Q2 of last year, driven in part by a strong contribution from bulk reagent orders from biotech customers, some of which did not repeat during the quarter. We are very encouraged that excluding these large orders, the performance of our run rate research reagent business remains very healthy, especially in the US. We continue to expand our catalog of research reagents, which now includes over 6,000 proteins, 425,000 antibody variations in a growing small molecule portfolio.

For example, during the quarter, we expanded the small molecule portfolio with the launch of our MitoBrilliant fluorescent dyes, enabling the fluorescent labeling and tracking of mitochondria in live and fixed cells. Initial reception to the launch was very strong with the initial production lot of these dyes selling out in the quarter. These dyes, when used with our new RNAscope Plus, small RNA for co-detection gives extremely high resolution at a single cell level and high detects short base RNA. Moving on to the performance of our ProteinSimple branded analytical tools, where the team delivered low single-digit growth in the quarter. Here, we faced a particularly strong year-on-year comp of nearly 30% in the second quarter of prior year, driven by strong adoption among vaccine and monoclonal antibody therapeutic manufacturers for Maurice in the prior period.

The rapid installed base growth we delivered over the past few years is leading to a strong consumer growth, as our portfolio of biologics, fully automated Western blots and multiplex immunoassay solutions become fully ingrained in our biopharma and academic customers processes. We are very encouraged that the order funnel across all three of our instrument platforms remains very full, including a record level for our Maurice Biologics instrument, although the biotech funding environment has a length in the closing cycle. Simple Western lead instrument growth as the system’s ability to automate the cumbersome and time-consuming Western blots process with a sample in and anther out solution continues to resonate with our biopharma and academic research end markets.

Simple Western is turning out to be much more than an automated Western blot replacement with the system’s ability to identify and quantify proteins in complex samples like lysates, leading to its use of the quantitative immunoassay platform. This expanded application for the system is driving usage in targeted protein degradation in drug tolerant studies, intracellular signaling the applications and is an alternative to customerized development. We are actively implementing marketing strategies to educate the market on these additional applications. On January 24, we officially launched our next-generation biologics platform, Maurice Flex at the WCBA Conference. As a reminder, we have seen tremendous adoption of the Maurice, since its launch in 2016.

With the system’s ability to provide protein purity charge and identity in five minutes in an easy-to-use cartridge-based instrument driving robust demand for the platform. Maurice Flex expands on these capabilities, adding icIEF fractionalization capabilities to instrument. Fractionalization is a front-end step in mass spectrometry, where the sample to be analyzed is separated into mixture components based on differences in their size, charge or other characteristics. MauriceFlex addresses the labor-intensive and time-consuming challenges of using legacy fractionation methods, including ion exchange chromatography. This new application allows us to expand Maurice into a new $300 million market. Now for an update on our SimplePlex branded multiplexing immunoassay system Ella.

Ella’s ease-of-use sub-picogram sensitivity, smaller footprint and cost advantages continue to draw increased attention from bio-pharma and academic researchers. As our installed base of Ella systems continues to grow, now nearing 1,000 placements and utilization trends remain robust, we opened a new state-of-the-art product innovation and manufacturing facility to meet current and forecasted cartridge demand. This new facility adds laboratory, manufacturing and clean room space and increases cartridge capacity to 500,000 cartridges per year. We also successfully completed the initial ISO 1345 audit of our Wallingford, Connecticut facility as we prepare Ella to make inroads into the large and nascent clinical diagnostics opportunities that exist for the platform.

ICL is possibly our largest instrument platform someday. No other tool works so well across both biomarker discovery and diagnostics. Rounding out our instrument platforms, let’s now discuss Namocell, our single cell separation and dispensing platform. Recall that we closed on the Namocell acquisition in July of 2022, and we are pleased with growing interest in this novel technology as well as the progress we have made integrating the team and the business. During the quarter, a single-cell cloning workflow publication using the Namocell single-cell isolation and dispensing platform was featured in nature protocols. The study outlines a robust and scale workflow that maximize cell viability for cloning Human Pluripotent Stem Cells, or HPSC using Namocell’s low-pressure microfluidic technology, which ensures gentle and rapid dispensing of cells.

We are in the early stages of realizing the potential of the Namocell platform and see a bright future for this technology, having shipped over 100 instruments to-date. Now let’s shift to Diagnostics and Genomics segment where we grew revenue by 7% organically in the quarter. Let’s start with a discussion of our molecular diagnostics business and the continued adoption of our ExoDx prostate cancer test. During the quarter, the team delivered the fourth consecutive quarter of record test volume as the number of tests reformed increased over 70% and revenue grew over 110% in the quarter. The combination of a strengthened marketing message to the urology community that emphasizes ExoDx is a tool to identify not only the right patients for prostate biopsy, but also drive patient adherence to biopsy recommendations, a four to five and expanded commercial team as well as the favorable impact of our reconsidered local coverage decision, LCD, with our Medicare contractor has driven sustained momentum in the business.

We are seeing strong trends across the key performance indicators we track for the ExoDx prostate test, including the number of ordering doctors, the average number of tests ordered per doctor and the number of new doctors over in which all set records in the quarter. We also hired a veteran reimbursement executive with a redesigned game plan to drive favorable coverage decisions within the private payer community. With less than 20% penetration of urologists in the US, who have used the test at least once and the potential to expand the usage of our test among current doctors by 5x, we are positioned to continue the strong growth in this business for the remainder of fiscal 2023 and for the years beyond. Continuing with molecular diagnostics.

Asuragen branded genetic carrier screening and oncology kits continue to grow double-digit. During the quarter, Asuragen announced a partnership with Oxford Nanopore Technologies to develop assays designed to deliver more accurate and reliable options for reproductive health and carrier screening. The collaboration combines Asuragen’s long-range PCR and Oxford Nanopore’s any-read length sequencing capabilities in a single workflow to identify genetic sequence variance in both hard to decipher genes and conventional genes using a single sequencing system. Our spatial biology business, branded ACD, grew mid-single digits in the quarter as a softer biotech market provided some headwinds similar to Protein Sciences. Our professional assay service business had a strong quarter as revenue increased nearly 20% year-on-year.

Historically, accounts leveraging ACD’s pharma assay services capabilities for biomarker discovery eventually transition into product customers, making strength in the service business a proxy for future product demand. We recently expanded our ACD portfolio with the launch of RNAscope Plus small RNA, enabling the simultaneous fluorescent detection of small regulatory RNA using our new Vivid dyes, including microRNA together with three target RNAs or RNA biomarkers in the same tissue section at single cell and sub-cellular resolution. RNAscope Plus provides gene therapy researchers with a valuable new tool to quantify changes in gene expression and cellular function in response to the introduction of regulatory RNAs, which is essential for optimization efficiency and safety.

I would note, RNAscope Plus was initially offered through spatial biology’s professional assay services where it saw an overwhelmingly positive customer response. Lastly, we experienced low single-digit growth in our diagnostic reagents and controls business as order timing among a handful of customers impacted the quarter. Looking at this business on a trailing 12-month basis, growth remains in the mid-single digits. With patients returning to their physicians, demand for diagnostic testing is increasing. This favorable macro environment, plus a strong pipeline of additional products positions our diagnostic reagents and controls for future growth. In summary, despite the temporary challenges created by the current biotech funding environment and the COVID impact in China, our team continues to successfully navigate this dynamic environment and grow the business.

The long-term tailwinds supporting proteomic scientific research, cell and gene therapies, spatial biology and liquid biopsies remain firmly intact, and our portfolio is ideally suited to capitalize on these opportunities as they shape the future of life science research and health care. The team to execute our strategy is in place at full strength, and we remain well-positioned and more optimistic than ever to deliver on our long-term targets. With that, I’ll turn the call over to Jim.

Jim Hippel: Thanks, Chuck. I will provide an overview of our Q2 financial performance for the total company, provide some additional details on the performance of each of our segments and give some thoughts on the remainder of the fiscal year. Before we get started, I’d like to remind everyone that Bio-Techne executed a four-for-one stock split on November 29, 2022. All references to share and per share amounts have been retroactively adjusted to reflect the effects of the stock split. Now let’s start with the overall second quarter financial performance. Adjusted EPS was $0.47, consistent with the prior year quarter. Foreign exchange negatively impacted earnings per share by $0.02 or minus 4% in the quarter. GAAP EPS for the quarter was $0.31 compared to $0.49 in the prior year.

The biggest driver for the decrease in GAAP EPS was a nonrecurring gain on our previously held ChemoCentryx investment in the prior year period. Q2 revenue was $271.6 million, an increase of 4% year-over-year on an organic basis and 1% on a reported basis. Foreign exchange translation had an unfavorable impact of 4% and acquisitions had a favorable impact of 1% to revenue growth. As Chuck mentioned, following a period of RedHawk biotech funding last year, we are seeing a normalization of purchasing trends from these customers. Additionally, COVID is now sweeping through China and slowing the amount of research activity in this region, temporarily impacting the growth of our proteomic research reagents, analytical tools and spatial biology products.

Adjusting our organic growth rate for large orders from a handful of biotech customers that did not repeat and normalizing for China, our organic growth would have been double digits in the quarter. Summarizing our organic growth by region and end market in Q2. North America grew low single digits, Europe grew mid single-digits, China grew mid single-digits, while APAC was flat due to prior year government stimulus in Japan not repeating this year. By end market, biopharma grew low single-digits, while academic grew mid single-digits. We are encouraged by the revenue growth from our large pharma customers as well as the underlying health of the overall bio-pharma end market as is reflected in the continued strong momentum in our run rate business.

For academia, we are encouraged by the recent NIH outlay data, which showed a 13% year-over-year increase in our second quarter. We anticipate this strong NIH allay begin to work its way through the system and benefit academic life science research spending in the near term. Additionally, the 5.6% NIH budget increase and 50% ARPA-H budget increase for the federal government’s fiscal 2023, sets the stage for a healthy academic end market for the remainder of our fiscal year. Moving on to the details of the P&L. Total company adjusted gross margin was 71.7% in the quarter compared to 72.3% in the prior year. The decrease was primarily driven by unfavorable foreign exchange. Adjusted SG&A in Q2 was 27.9% of revenue compared to 26.5% in the prior year, while R&D expense in Q2 was 8.3% of revenue compared to 7.5% in the prior year.

The increase in SG&A and R&D was driven by wage inflation and the acquisition of Namocell. The business has implemented strategic price increases during the first half of fiscal year 2023 to offset the dollar impact of inflation and operating income. However, the dollar for dollar offset did have a negative impact on operating margin. Adjusted operating margin for Q2 was 35.5%, a decrease of 280 basis points from the prior year period. Negative FX impact decreased margin by 100 basis points, the pricing inflation dynamic decreased adjusted operating margin by another 50 basis points. While the acquisition of Namocell and timing of other fiscal year 2022 growth investments drove the remainder of the margin dilution for the quarter. For the remainder of the year, we expect adjusted operating margins to continue to expand sequentially, ending the fourth quarter of fiscal year 2023, up to 100 basis points higher than the fourth quarter of fiscal year 2022.

Looking at our numbers below operating income. Net interest expense in Q2 was $1.2 million, decreasing $1.3 million compared to the prior year period. Our bank debt on the balance sheet at the end of Q2 stood at $200 million, a decrease of $64.7 million compared to last quarter. Other adjusted net operating income was flat in the quarter, an increase of $1.2 million compared to the prior year, primarily reflecting the foreign exchange impact related to our cash pooling arrangements. Moving further down the P&L, our adjusted effective tax rate in Q2 was 21%. Turning to cash flow and return of capital. $64.3 million of cash was generated from operations in the quarter and our net investment and capital expenditures was $6.1 million. Also during Q2, we returned capital to shareholders by way of 12.5 million in dividend.

Following our four-for-one stock split, we finished the quarter with 161.8 million average diluted shares outstanding. Our balance sheet finished Q2 in a very strong position with $196.8 million in cash and short-term available-for-sale investments bringing our net debt position very close to zero. Going forward, M&A remains a top priority for capital allocation. Next, I’ll discuss the performance of our reporting segments, starting with the Protein Sciences segment. Q2 reported sales were $203.9 million, with reported revenue decreasing 1%. Organic growth for the segment was 2% with foreign exchange having an unfavorable impact of 4% and acquisitions contributing 1%. Despite the temporary headwinds and the tough year-over-year comps that Chuck pointed out for this segment, I will highlight that the longer term five-year organic CAGR for this segment is approximately 11%.

Operating margin for the Protein Sciences segment was 43.8%, a decrease of 170 basis points year-over-year with operational productivity more than offset by foreign exchange, price inflation dynamics and the impact of Namocell acquisition. Turning to the Diagnostics and Genomics segment, Q2 reported sales were $68 million with reported revenue increasing 5%. Organic growth for the segment was 7% with foreign exchange having unfavorable 2% impact. As you heard from Chuck earlier, our Exosome Diagnostics business remained incredibly strong in the quarter, as our fortified marketing message and strengthened commercial team continue to drive test volume and revenue growth. Our spatial biology business grew mid-single digits in the quarter, with strong performance in our professional assay services and microRNA businesses, partially offset by order timing from a few bio-pharma customers.

Moving on to the Diagnostics and Genomics segment operating margin at 12.2%, the segment operating margin decreased 470 basis points compared to the prior year. The segment’s operating margin was unfavorably impacted by foreign exchange, price inflation dynamics and the timing of strategic growth investments. As we think about the setup for the second half of our fiscal year, it is important to reflect on the drivers of our performance in the first half relative to our expectations at the beginning of the year. Our Q1 relative performance was muddled by the pent-up vacation activity we saw from our customers, as well as heightened inflationary and recessionary concerns, especially in Europe. In Q2, we saw the slowing of large orders from our biotech customers that possibly could have been foreshadowed by the slowdown in biotech funding earlier in the calendar year.

However, the impact to our business was not realized until the December quarter just ended. And throughout the entire first half of our fiscal year 2023, the COVID situation in China has been on a roller coaster with rolling government-mandated shutdown and now widespread infections. Despite all of this, as Chuck and I have expressed on this call, we believe our end markets are still very healthy, and our portfolio positioning is still very strong. Big pharma demand is high. Academic research budgets are on the rise, and most biotechs are not broke, just being more prudent. And finally, China appears to be closer to the end of the COVID roller coaster than ever before with pent-up demand and strong Chinese government stimulus setting up for what could be an incredible calendar year 2023.

But we need to get through the March ended quarter, our fiscal Q3 first, and right now, it appears as though our organic growth this quarter will be similar to that of Q2. People in China are still sick with COVID and in Protein Sciences, we know of several large biotech orders that occurred last year in Q3 that are unlikely to repeat this year. Also in Q3, we will be lapping the large milestone payment realized in our Diagnostics and Genomics segment from the ExoTRU kidney transplant rejection assay licensing agreement made with Thermo Fisher last year. As we lap these difficult year-over-year comps, the normalization of biotech funding runs its course and COVID headwinds alleviate in China, we anticipate organic growth to improve significantly in Q4, positioning the company for continued progress on delivering our long-term strategic and financial targets.

That concludes my prepared comments. And with that, I’ll turn the call back over to the operator to open the line for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. Our first question is from Puneet Souda with SVB Securities. Please proceed with your question.

Puneet Souda: Yes, hi Chuck, Jim, thanks for taking the question. So, first one, Chuck, I think it would be helpful if you could parse out a little bit more on the impact from the emerging biotechs. Are these smaller emerging biotechs, I think Jim said they’re not going broke, but the number of projects are lower. But could you — if you could describe a little bit more into that? And then is this a spreading to larger bio-pharma — or the bio-pharma remains largely intact? And then how much of this is sort of COVID adjacencies. And if you could parse out what were — what segments or what type of products were these sort of bulk orders and then, again, I appreciate that this is comp-related normalization that you’re expecting.

But I think the question is sort of how long do you think this can last in duration because obviously, funding concerns were — they’re here now. But just wondering how long will it be before — sort of we see improvement here in a meaningful way?

Chuck Kummeth: Okay. I’ll try to cover that in less than 20 minutes. Thanks, Puneet. As the quarter finished, we are a little ejected. It’s my 40th quarter, and it’s been a few years since we’ve seen a growth rate like this. But as we look back into the data, man, we saw some amazing things. One, our run rate business, most of our business, both — here in Europe was double-digit. Very strong end markets there, academia about the same, no real issues there. Biotech funding, we’ve — as I mentioned last, we started digging in more and more about just how much are we becoming more of a front-end research company supporting our customers as we mitigated from academia to bio-pharma. But within that bio-pharma, how much is really biotech.

And with that biotech, how much are really new biotech and start-ups and fresh research and leading-edge stuff. And it’s about 30% is the number. About 20-some of most of our businesses has been in instruments, it’s about 40%. And then — and I think that’s it’s a funding issue right now. And as we dig in more, it’s going to wash through, but there is definitely a growth being prudent. Their funding is solid right now, but they’re trying to make things last. If you’re further along in clinical, as you’re probably okay, because it’s committed. And if you’re doing — if you’re a startup, there’s actually funding. If you’re kind of out there, but looking for your second round, it’s tough right now, and it’s just the way it is. So that long — that’s driven a lot of potential growth in OEM and a lot of larger orders as people are — were starting these clinicals and doing special things with us.

And there are a lot of one-off comps. Literally, it’s a handful of deals that bring us back to like double-digit growth. It’s kind of incredible. Now, talking about bio-pharma, the pharma side with you, that’s just more about overall conservatism in general and the overhang of COVID, like vaccine makers, just the gravies over here, right? So it’s just kind of a normalization, not long term, just kind of renormalizing and just, again, a little longer out for things and waiting things. And we get that vindicated to by looking at our funnel instruments. It’s larger than it’s ever been. Our instrument funnel is tremendous. It’s just the conversion rate has slowed down a lot, as getting capital has been — has gotten tighter for teams looking to buy instruments in our segments.