Daniel Cheng, Research Analyst
Sunil Thakor, Sr. Portfolio Manager, Research Analyst
Listen as we discuss the fascinating growth story of Bio-Techne, a life sciences company that supplies over 500,0000 tools that power new scientific breakthroughs. Sands Capital’s Daniel Cheng and Sunil Thakor detail how Bio-Techne's diversified exposure to one of the most dynamic secular growth trends sets it apart, and why it's a high-conviction business for Sands Capital.
00:27 Life sciences revolution and Bio-Techne’s place in it
06:12 What makes Bio-Techne a compelling investment?
07:51 Evolution of life sciences industry
09:31 Why Bio-Techne stands out
11:53 Cross-sector collaboration for identifying long-term secular trends
14:25 Bio-Techne and ESG considerations
16:06 Growth potential of life sciences, especially in the tools space
19:04 The attractions of long-term growth investing for Sunil and Daniel
21:09 Advice for someone considering a career in investment management
26:00 What Daniel and Sunil are reading
Kevin: Welcome to What Matters Most, Sands Capital’s podcast series, in which we explore some of the trends and businesses that are propelling the pace of global innovation and changing the way we live and work today and into the future. Today, we will speak with Research Analyst Daniel Cheng and Sr. Portfolio Manager Sunil Thakor about BioTechne, a company that supplies high-quality and innovative tools for life sciences research, therapeutic manufacturing, and clinical diagnostics.
Life sciences is said to be in the midst of a revolution, powered by advancements in technology that have enabled a better understanding of diseases and their causes. The development of coronavirus vaccines in record time is perhaps the premier example of this transformation, which ultimately has the potential to improve patient outcomes and healthcare economics globally. I want to thank both Daniel and Suni for joining us today to talk about BioTechne. Daniel, I’ll start with you: Can you set the stage for us and talk about this life sciences revolution?
Daniel Cheng: Sure, Kevin. Over the last five years, life sciences researchers have made significant advancements in terms of the ability to understand the underlying drivers of disease. A key enabling technology has been genomic sequencing, where the cost has fallen significantly over the last five, 10, and 15 years.
For context, the first human genome was fully mapped in 1990 at the cost of $2.7 billion. And it took 13 years to accomplish this feat. By 2007, the cost of genomic sequencing had fallen to $1 million. And today, that same genome can be sequenced for just a few hundred dollars. And, like you said, Kevin, the COVID-19 vaccines are one example of significant advances in life sciences, where the sequence for the virus was executed in just a few weeks, and vaccines were developed and available to the general public in about a year. And this is truly unprecedented, when considering that many vaccines take 10 to 40 years to develop, and there are many infectious diseases where no vaccines are available.
So with declining sequencing costs, better tools and technologies, and a strong funding environment, this has resulted in a rise of new therapies and developments against different types of intractable diseases, like cancer, autoimmune disease, neurology, and other types of pathologies. One data point is that, according to clinicaltrials.gov, which is an FDA website, since 2010 the number of clinical trials has consistently been rising at about a 16% compound annual growth rate.
And the number of biologic drugs or protein-based drugs in pipelines today is about 40% of R&D pipelines versus 25% 10 years ago. So we see a continued rise in new biologic therapies to address various types of diseases. What does this mean for the life sciences community? What it means is the ability to define disease, uncover new aspects of biology, diagnose disease, identify diseases earlier and more accurately, and ultimately to treat disease by providing more targeted precision medicines going after the underlying cause of a disease rather than merely just symptoms.
Kevin: That’s an astounding rate of growth, thanks for that. So, tell us now, specifically, how does BioTechne fit into this revolution?
Daniel Cheng: So BioTechne is a leading provider of high-quality purified proteins used to run scientific experiments and develop drugs, as well as instruments used for protein analysis and diagnostics for biomedical researchers and clinical research labs. Essentially, scientists used their reagents, instruments, and kits to run experiments and analyze biological pathways in order to develop new therapies and diagnostics, particularly in cell and gene therapy and liquid biopsies. And their products are used across multiple disease categories like cancer, inflammatory disease, neurological disease, and other types of immune dysregulation.
Their products are cited in over 64,000 research publications. Which means that, once a product gets published, most of the follow-on research actually needs to use that same input in order to have the same kind of reproducibility. So this company is essentially providing the content that enables researchers, drug developers, and manufacturers to discover new scientific breakthroughs.
In terms of the financial profile, this is a business where revenues are comprised of over 80% consumables, and they’re positioned in several high-growth markets like spatial biology, cell and gene therapy, liquid biopsy, and molecular diagnostics. That puts them in good position to deliver high-teens revenue growth for the next five years, with healthy margins and cash flow.1 Just real quickly on the history of the company: When the current CEO took over in 2013, BioTechne was a no-growth business with high margins. The commission of the CEO was to reinvigorate growth. And the CEO and the rest of his management team all came from much larger companies, having experience running billion-dollar-plus businesses.
Over the past seven or eight years, they’ve embarked on a series of acquisitions, both to strengthen the core business and also to diversify into adjacent categories. In doing so, they’ve expanded the addressable market from about $3 billion in fiscal 2013 to $14 billion to $20 billion in fiscal ’21, by entering new areas like proteomic analysis tools, cell and gene therapy, spatial biology, and liquid biopsy.
And just in terms of assessing their impacts on the COVID pandemic, they provided multiple products supporting COVID research, like recombinant proteins and antibodies to understand the biology of the virus and also to enable new development of vaccines and therapeutics. Lastly, they also have a novel COVID serology test or blood test in collaboration with Mount Sinai.
Kevin: Excellent. So let me switch over to Suni. Suni, put your portfolio manager’s hat on. What did you find compelling about this investment case Daniel and the research team built out for BioTechne? Why is this a business you wanted to own?
Sunil Thakor: Well, the life sciences tools and services space is broadly interesting, because it carries with it a number of the growth attributes that you find in pharmaceuticals broadly but allows you to sidestep the binary risk that’s inherent in clinical development, and that creates quite an attractive risk-reward profile from a business perspective, that then becomes an interesting portfolio building block. If we think about the way these kinds of companies fit into a portfolio, particularly a portfolio that might put a premium on reduced volatility and an emphasis on stability of the individual businesses, you get a lot of that when you invest in the life sciences tools space. And I like to think of it as the picks and shovels that are serving a broader industry.
Another interesting characteristic of these types of businesses is that they tend to be less correlated as businesses with other areas within the broader growth opportunity set. So as growth investors, you tend to see a lot of opportunity in technology, enterprise software, cloud computing, and the like. And owning things in the life sciences that have very secular growth that is driven by a different set of factors is quite attractive.
Kevin: That seems to be a constant characteristic of the life sciences space. So Suni, how has your assessment of the life sciences industry evolved over the past 10 years? And what areas of life sciences are exciting to you now?
Sunil Thakor: If we step back to the 1990s, that was really the era of the blockbuster small molecule pharmaceutical. And then we come forward a decade or so to the first 10 or 15 years of the current century, and biotechnology, that long-held promise, really came of age and began to be commercialized, in a big way. Combining much of that with the genomics revolution that Daniel has highlighted has led us to a new era of more drug candidates individually targeting smaller patient populations because the therapies are more targeted.
This type of innovation is tending to happen within smaller businesses, and oftentimes the manufacturing is requiring new and more complex manufacturing techniques. And so, the combination of all of that is leading to an almost de-verticalization, if you will, within the pharmaceutical industry, such that the component parts of value creation are being broken down into innovation, manufacturing, clinical trials, clinical development, and then all of the tools to support that. And those last few categories are where we’re increasingly finding opportunities that carry with it the growth of those underlying areas of innovation, but without much of the clinical development binary risk.
Kevin: And that plays right into BioTechne. Daniel, you can give us some of the specifics on the company as it relates to what Suni just described.
Daniel Cheng: Sure, maybe I’ll just provide a little bit of data and context to elaborate on what Suni was talking about.
If you look back 15 years ago in the biopharmaceutical industry, there were about three to four drug modalities available. Today, that number is about eight, with the proliferation of new types of drugs, like cell and gene therapy, that are much more targeted and personalized: next-generation antibodies, like bispecific antibodies, antibody drug conjugates, and different types of new drugs. And we think over the next five-plus years, that will evolve to over a dozen. So going from three to four to eight to over a dozen, we’re seeing a rise in complexity, a rise in personalization, and a rise in precision medicine, like Suni said, really targeting smaller patient populations.
And as it relates to BioTechne, this is a company with over 500,000 products that are components used in research, across drug discovery, academia, drug development, and manufacturing. And no one product really moves the needle for them. They actually have several products that are 10 to 15 years old that are continuing to grow, but it’s really about the overall volume growth and enabling new research insights across the life sciences industry. And that’s what we find really special about the company: just this diversified exposure to one of the most secular growing industries in the economy.
Kevin: So, Daniel, how did you identify BioTechne among all the life sciences companies that you were looking at?
Daniel Cheng: I’ve seen some IQVIA data that something like two-thirds to 70% of new innovations are coming from smaller companies and virtual companies. That observation as a growth investor really led me to study these pick-and-shovel businesses. And BioTechne really stood out from the pack in looking at these tools companies, for its strong growth and margins, the moats around the business, and its execution and improving growth profile, combined with a strong management team who we’ve gotten to know through various interactions.
Kevin: How did your experience analyzing other nonbiotech or biopharmaceutical companies inform your thinking on BioTechne?
Daniel Cheng: I felt like I had to wear multiple hats in studying BioTechne and analyzing the industry. Both for my biopharmaceutical side, but also for applying an industrial mindset. And this is where I think a good example of where our cross-sector collaboration came in useful, in terms of working with our industrials analyst to think about how do you analyze a company with several hundred thousand products where no single product really matters. But the way I went about it was understanding underlying industry structure, the secular demand trends and supply trends driving the industry, and what are really the structural barriers to entry for a company like BioTechne.
And the collaboration was really useful across sectors, and ultimately in building conviction in the management team, the execution, and the long-term vision. So it was an exciting project with multiple touchpoints, both internally and externally, and understanding the supply chain that led to a lot of conviction building in the company.
Kevin: Maybe we can go to a little more detail on that because that’s a cornerstone of our process in identifying long-term secular trends. You talked about a few there; maybe, discuss some of the other trends you’ve been seeing in the life sciences space through your research over the last few years and what those implications might be for BioTechne.
Daniel Cheng: Sure. So, in terms of broad themes and broad shifts, we’ve already discussed a couple of them in terms of the rise of precision medicine targeting the underlying molecular drivers of disease. Another one I’d point to is the shift toward proteomics, or the large-scale study of protein structure and protein interactions, which is enabling many different scientific breakthroughs. New advances in diagnostics, especially liquid biopsy, which has the promise to identify and detect diseases earlier—particularly blood-based cancers and other types of diseases like that. And also, over the past five years, we’ve seen advances in immunotherapy. And cell and gene therapy, which is really this interplay between the body’s complex immune system and also cancer. And how do those two areas of the body’s systems interact?
Also, the rise of China in life sciences is another interesting trend that we’ve witnessed over the past five years. For context, about 15% to 20% of BioTechne’s revenues come from China.2 And a significant part of their workforce is actually Chinese. So the company is really at the intersection of a number of key secular trends that we think will drive growth for a number of years.
Kevin: Excellent. So the last question about the company specifically. What kind of ESG considerations do you have about BioTechne and tools companies in general?
Daniel Cheng: I would point to three different areas where we took a look at BioTechne and came away comfortable that they are addressing some significant areas of ESG.
First, around environment. Tools companies in general typically have an above-average carbon footprint. BioTechne is very upfront about taking steps to make a positive impact in that area. For example, they’re taking steps to reduce their hazardous waste material, to reduce what they call volatile organic compounds. And as a result of some of these steps, like diverting waste to incineration rather than disposal, they’ve been reclassified from a large-quantity hazardous waste generator to a small-quantity generator, and they’ve reduced significant amounts of waste.
From an employee engagement perspective, they’ve grown their employee base from about 800 in fiscal 2013 to 2,700 this fiscal year. And they really manage their culture and their employee base with some significant tools—what they call “epic tools for epic science,” meaning empowerment, passion, innovation, collaboration to measure employee engagement and collaboration. And they run annual culture surveys to really understand and improve retention.
And then lastly, on governance, they’ve replaced about half of their independent board of directors. Currently about eight of nine of their directors are independent, and building a racially diverse and gender-diverse workforce is something that they’ve focused on in recent years, with representation across business and science.
Kevin: Suni, Sands Capital is in the insight business, always looking for differentiated opinions or thinking on companies. What do you think investors underappreciate about the growth potential in life sciences in general and in the tools space in particular?
Sunil Thakor: If we look at the life sciences space over the last many years, I think the first things investors mostly point to are some of the challenges investing in the biologic space and a number of high-profile setbacks there. That’s cast a bit of a shadow, in my view, across the sector.
But the reality underneath the surface, in terms of just the sheer level of activity and level of innovation, is quite the opposite, as Daniel alluded to. So with clinical trials at an all-time high and continuing to grow at quite a robust rate, R&D budgets are still expanding.
This is a sector that comprises one of the single biggest segments of GDP, not just in the United States, but globally as well.3 So it’s a space rich with activity and innovation and sustained growth, despite some of the challenges in the clinical trial space and clinical development for individual products here and there. And I think that is probably the most underappreciated aspect of the sector: it is still very much a growth sector, and there’s a lot of growth opportunity.
Another attractive characteristic of the tools space and life sciences broadly is that the growth drivers tend to be less correlated with the growth drivers that are driving many of the other innovative growth segments within equities. And bringing that kind of diversification of growth drivers to the portfolio can be extremely useful building blocks from a portfolio construction perspective.
Kevin: Suni, it’s been a while since you’ve been on the road. How do you see things changing? What stays the same when we get back on the road? And I’m sure it’ll be an interesting answer as one of Sands Capital’s most traveled professionals.
Sunil Thakor: Well, I think first, the biggest thing we learned is the value and importance of networks. And building those networks before you need those networks.
I think we will get back to travel. On-the-ground, in-person, roll-our-sleeves-up type of research is a hallmark of what we do. And I don’t see that going away. I think the technology that we’ve used to bridge the gap over the last 18 months we will continue to use. We will be able to do more meetings, more people will be able to participate. But at the end of the day, I think if you go back to basic principles, this is an area where there is no true substitute for getting on an airplane, going, seeing, touching, meeting face to face, and doing the work firsthand.
Kevin: Well, we covered a lot of ground on this podcast, and hopefully, everybody listening learned a little bit more about BioTechne and why it’s a high-conviction business for Sands Capital. But before we close, Daniel and Suni, I’m sure listeners would be curious to know a little bit more about what drives each of you. So Suni, what attracted you to the profession of long-term growth investing?
Sunil Thakor: Great question. This is an awesome job. I feel like I’m a kid in the candy store every day I come to work. If I go way back to when I was young, my father was the CFO of an auto parts manufacturer in Indiana, where I grew up. So I learned at a pretty early age how to think about a business from the perspective of an owner or an operator, and that’s very different in many respects than maybe the stereotype of thinking about a business through the lens of a security analyst. So when I learned about stocks, I learned about them as pieces of ownership and underlying businesses, and not pieces of paper to be traded.
So if I combine that with just my personality, I’ve always been curious about how things work. And in this career, you have the opportunity to learn a little bit about a lot of things. I’m always fond of something that our late founder, Frank Sands Sr., would say, which is: the idea that literally anything, anywhere in the world happening could matter to our work. And that’s a pretty cool worldview to be able to take to your work. So you put all that together, that’s where my passion and interest in investing come from.
Kevin: Daniel, why long-term growth investing? What attracted you to this style?
Daniel Cheng: So I’m an optimist by nature, and growth investing really allows me to combine my imagination with empirical facts, with scrutiny on the business to understand how a business might evolve into the future. And I think that’s one of the most exciting, dynamic aspects of investing and particularly growth investing — really applying intellectual rigor with just the ever-changing world, and the dynamism, and envisioning how the world might evolve to the future. I like to always say that we’re investing at the intersection of growth and change. And for someone who I like to think has a growth mindset, it’s a great place to be in a great place to work, and it’s a privilege to be able to allocate capital on behalf of our clients.
Kevin: Suni, what piece of advice would you give to someone considering a career in investment management today?
Sunil Thakor: To embrace uncertainty and ambiguity. The world we live in isn’t black and white, and I think that is such an important lesson for investing. So much of what can be measured just doesn’t matter, and so much of what matters is really hard to measure. In some respects, you can almost argue that the invention of the spreadsheet is one of the worst things that ever could have happened to the depth and quality of equity research in the last 40 years. Because it introduces so much false precision into the work. And I think learning to be comfortable in shades of gray and learning to be comfortable in the uncertainty that exists in the world is absolutely critical in this industry.
And then related to that is a corollary that being right a hundred percent of the time is not the goal. You have to embrace and get comfortable with the idea that you’re going to be wrong an uncomfortably high percentage of the time. That’s an occupational hazard. And that’s not actually a problem, because if you were seeking to be right a hundred percent of the time, you would be paralyzed from prudent risk-taking. So ours is not an activity in getting every single call right. Ours is an activity where we prudently take calculated risks. We think we are taking risks on coins that are weighted in our favor. And we want to focus on coins that are heavily weighted in our favor, in our view. But the reality is: not everything goes our way, and it’s the net of all of our decisions made—and not made—that add up to the track record, not the individual decisions themselves. And that is a very different way of thinking than in many other industries. But I think it’s critical to success in investments.
Kevin: So Daniel, same question to you.
Daniel Cheng: I would say: Read broadly and read deeply. I think of our job almost as being professional learners and professional risk-takers. And for that you can find insights almost anywhere you can look across industries. Look across history; they say history rhymes but doesn’t repeat. And I think for someone who is just intellectually curious, really excited about business and really excited about investing and allocating capital, requires a lot of diligence and drive and motivation and proactiveness. And it’s hard to do unless you’re really passionate and excited about this field. So, I think just demonstrating that drive and being able to communicate that clearly is something that typically will set apart candidates.
Kevin: Suni, tell us about a professional or life experience that influenced you most as an investor.
Sunil Thakor: I think of two experiences that happened to me, both very early in my tenure at Sands Capital. First was as an intern, I did research work on a business and I was the youngest person in the room, had the least experience of anybody in the room. I was working with more senior members of the investment team. And I pitched the idea, and Frank Sands Sr. ended up initiating a position in the portfolio. And at that time in my career, that was a big wow. Here I was a young intern, and an idea I’d put on the table was going to be owned in the portfolio!
And another memory comes in a meeting with Frank Sands Sr., our founder. I was pitching to him the idea of a few businesses that I thought could potentially be interesting. I realize now they were all terrible ideas, and he said nothing critical—he just listened. He asked me a few questions; maybe a couple of those questions were leading questions. But what was really interesting is I realized that, here were Frank and Frank4 taking a risk on a new young person in the industry, investing in that person’s growth and development, and building them up, not pushing them down.
And that’s always stuck with me as a portfolio manager, realizing that when you construct a portfolio, you’re really managing two portfolios. One is a portfolio of investments that you hold on behalf of your clients. The other is a portfolio of people that are coming together to engage in the practice of research and then ultimately risk-taking as a group, and you have to manage both of those portfolios, and they’re both equally critical. The second is what facilitates success in the first place, and so never forgetting about the team and investing in that team. And that’s something that Frank Sands has always done for a long time. And it’s a lesson that I think is not lost on those of us who are fortunate enough to be portfolio managers.
Kevin: All right. So finally, this is the payoff for people that listened to the entire podcast here. Daniel and Suni, I’m sure everybody would be interested in knowing what you’re currently reading or listening to or learning about these days. Start with you, Daniel.
Daniel Cheng: Sure. So a book that I’ve really enjoyed is called “Being Mortal: Medicine and What Matters in the End,” by a healthcare leader named Atul Gawande. And the fundamental question that the book addresses is: What does it mean to be human? The context is really around end-of-life care and how society has evolved in a way to address late-stage care for people with terminal diseases. But I think the broader question is really, what does it mean to live a meaningful life, to have purpose? And from a personal basis, what constitutes meaning and purpose to you? And I think that’s something that many of us will have to grapple with during our lives. And I would just say that that’s something that I like to grapple with and really align my energy and focus and time around that, and realize that all our activities as investors, as professionals, as people impact other people, and that’s something that can be very purposeful and meaningful in the end.
Kevin: Excellent. How about you, Suni?
Sunil Thakor: Well, a book I just finished reading is called “A World Without Email,” and prior to that, a few years ago, I read a book by the same author called “Deep Work.” And both of them were quite interesting in the sense that we all spend a lot of time working, but we don’t tend to step back and think through how we’re working and how we use the various tools at our disposal to make us more efficient.
So, we all know that we get buried in email and then sometimes instead of Outlook being a tool to increase our efficiency, Outlook becomes a tool that inhibits our efficiency, because we have to maintain it so much. So just the idea of stepping back and thinking about the importance of uninterrupted blocks of time to immerse yourself into a topic, immerse yourself very deeply, not working on too many things at once, because our brains are single processing devices that don’t know how to multitask and the efficiency drain that comes when you try and juggle too many balls all at once. And if we step back to what our objective is as investors, particularly as long-term investors, we’re really trying to get a small number of really important things right rather than analyze every single data point that comes our way. So those types of books I’ve always found quite interesting in terms of refining how we do our work.
Kevin: It’s funny. I just realized I downloaded that book on my Kindle, but never got to it. So that’s…
Sunil Thakor: Probably too many emails to check.
Kevin: Exactly right.
Well, thanks again, Daniel and Suni, and thanks to our listeners for joining us today. We hope you enjoyed learning more about this fascinating growth story with us.
1 High teens revenue growth is the SCM forecast, stripping out base effects and one-offs from the pandemic.
4 Frank Sands Sr., Sands Capital’s Founder, and Frank Sands Jr., current CEO and CIO of Sands Capital
The views expressed are the opinion of Sands Capital Management and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed are current as of November 1st, 2021, and are subject to change. This material may contain forward-looking statements, which are subject to uncertainties outside of Sands Capital’s control. The securities identified do not represent all of the securities purchased or recommended for advisory clients. There is no assurance that any securities discussed will remain in the portfolio. You should not assume that any investment is or will be profitable. A company’s fundamentals or earnings growth is no guarantee that its share price will increase.
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The views expressed are the opinion of Sands Capital and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed were current as of the date indicated and are subject to change. This material may contain forward-looking statements, which are subject to uncertainty and contingencies outside of Sands Capital’s control. Readers should not place undue reliance upon these forward-looking statements. There is no guarantee that Sands Capital will meet its stated goals. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. Forward earnings projections are not predictors of stock price or investment performance, and do not represent past performance. References to companies provided for illustrative purposes only. The portfolio companies identified do not represent all of the securities purchased or recommended for advisory clients. There is no assurance that any securities discussed will remain in the portfolio or that securities sold have not been repurchased. You should not assume that any investment is or will be profitable. GIPS® Reports and additional disclosures for the related composites may be found in the Sands Capital GIPS Report.
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An independent, staff-owned firm founded in 1992 and headquartered in the Washington, D.C. area with offices in London and Singapore, Sands Capital managed more than $66.7 billion in client assets as of March 31, 2022.