Written by the Mackenzie Growth Team
In early September we attended some healthcare conferences as well as the Bio-Techne investor day. Bio-Techne is a mid-cap company involved in the life sciences instruments and consumables markets, where we have several investments.
This industry is currently very unpopular in the equity markets as there are several headwinds in effect right now. After a burst of funding in the biotech and pharma markets in 2020 and 2021 there has been a pause. For many companies in the space China has been a growth market and that geography has slowed markedly. In addition to some economic weakness in China, there has been a regulatory push to reduce drug prices and an anti-corruption drive to look at how some drugs (especially local generic drugs) are sold to hospitals.
Beyond these near-term headwinds we see a market that has good long-term growth ahead. There continues to be growth in the discovery and production of new small molecule (chemical-based) and large molecule (biological-based) drugs. We have seen many cycles of growth and retrenchment in this industry, and we see no reason to think that conventional drug research is done. There are also new innovative approaches to therapeutics using cell and gene therapies where there are some promising approvals happening. At the conferences we attended we saw a broad array of both small and large companies doing research in the cell and gene therapy area. We also heard that although the headwinds in China are real and it is hard to know the timing of any change, there is still a high strategic importance in China placed on building an innovative pharmaceutical industry, which will require the most advanced tools.
In the life sciences industry Bio-Techne has a reputation for high quality consumables, with a long history of providing purified proteins and antibodies to researchers and diagnostic reagents and controls to diagnostic companies. Under the current management team (whom we have known for a long time) the company has added higher growth businesses like proteomic analytical instruments (which use the consumables), spatial biology tools, molecular diagnostics, and liquid biopsy products. The company has recently completed a highest quality “GMP” facility for consumables that can be used in the cell and gene therapy area.
One example among the many interesting areas Bio-Techne is involved in is in liquid biopsy. The company has a product in this market based on exosomes, unlike other products that use cell-free DNA (cfDNA) or circulating tumor cells (CTCs). Two great properties of exosomes are that they are secreted in much greater abundance than cfDNA or CTC and show up earlier in a disease process. The first product in this area is an ExoDx prostate test using at-home sample collection that does a much better job than PSA scores at identifying patients who need further intervention. The product was launched in 2020 and was recently approved for annual testing. Future Exosome products may target colorectal cancer, kidney transplant companion diagnostics and Parkinson’s disease.
When we look at Bio-Techne we see a company that should return to double digit revenue growth in the years ahead along with high margins and free cash flows. We see the shares as undervalued in the markets today.
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