A "trickle down" article -- reagents, not equipment -- I recommended TECH in an article for Microsoft Investor, at a split-adjusted $15, 9/15/97......
Friday September 1, 3:17 pm Eastern Time
worldlyinvestor.com Sector of the Day
Techne Muscles Up on Protein Diet
Robert Cyran, Correspondent
This producer of proteins for research is profitable, surging in growth and doesn't
answer to the FDA.
Biotech researchers are finally getting more protein.
After years of focusing on genes and their function, attention is shifting to proteomics, or the study of proteins, for drug
development. It's a huge area because there are many more proteins than genes and comparatively little is known about
proteins.
Techne (Nasdaq:TECH - news) is already profiting by making and selling proteins that researchers need to conduct
experiments. What's more, even though it has great growth prospects, it doesn't have the uncertainty of drug makers because
FDA approval isn't needed to produce proteins for research.
Over the past 10 years, Techne's earnings grew over 36% annually and they are now accelerating rapidly. In the fiscal fourth
quarter ended June 30, earnings increased 70% from a year ago to $8.5 million, or 40 cents a share. Analysts expect the
company to earn $1.51 per share in fiscal 2001, which means that at 95 1/2, the stock is trading at about 63 times estimated
earnings.
Unlike many biotechs, the company's financial base is extremely sturdy. Techne has about $60 million in cash and short-term
investments on the books; it earned over 26 million in the financial year ending in June. The only debt it has is a $19 million
mortgage incurred when the company purchased a factory it had been renting.
Produce the Messenger
Techne produces proteins called cytokines for researchers in academe, non-profits and private industry. These proteins act as
messengers between cells and stimulate or suppress cell functions.
A typical example of something Techne produces is one of several proteins called Tumor Necrosis Factor. Researchers are
interested in these proteins because they kill certain tumors and are linked to autoimmune diseases like arthritis.
What typically happens is that a researcher discovers a new protein and then licenses it to Techne to produce. Because Techne
has a lot of experience, it can produce the proteins far more cheaply and easily than the discoverer. This allows scientists in
academe and industry to focus on discovering a protein's function.
In addition to the protein, Techne produces higher-margin products, such as kits that measure proteins in blood and tissue
samples.
Choked-Up Pipeline
There's some serious money to be made producing these proteins. Gross margins approach 80% because the raw materials are
extremely cheap, shipping costs are low and researchers care more about quality than cost.
``When you look at all these genes researchers are sequencing and all the proteins these genes code for, we're going to see
growth so strong that anything they can produce will be consumed,'' says Matt Arens, an analyst at large shareholder Kopp
Funds.
One way to look at the opportunity for Techne is to look at their pipeline. Techne expects to introduce about 500 new
products this year and the pace of introductions is expected to grow sharply in the next few years. Revenue usually peaks in the
second or third year and then declines over the next few years.
Loose Gene Count
They aren't anywhere close to exhausting the opportunity in front of them. Each gene that Techne investigates generates 10 to
40 products, because genes produce multiple proteins. Currently, Techne investigates several hundred genes.
Researchers estimate there are from 80,000 to 140,000 genes in humans, though many of these may be of little interest to
scientists.
``Whatever the number of genes, they can generate a huge number of products for years and years,'' says Chad Simmer, an
analyst at regional investment bank John G. Kinnard.
Out of Sight, Cytokine
What's more, Techne dominates the cytokine market. Analysts estimate it controls about half the market, with the rest split
between much smaller competitors such as BioSource (Nasdaq:BIOI - news), which controls 10% of the market, and
universities.
Despite the growth in the market, analysts are skeptical there will be much competition in the future.
``It would take a huge amount of investment and effort to match [Techne], since it requires lots of knowledge and expertise to
produce these proteins efficiently,'' says Simmer. He also notes that Techne has an excellent reputation among researchers.
The other potential big roadblock to growth may be hiring enough qualified scientists given that Techne spends an amount equal
to about 13% of revenue on R&D. Again, people following the company seem unconcerned.
``There are lots of smart and extremely qualified scientists who graduate from the University of Minnesota, but only a few
bio-tech companies in Minneapolis. It seems like they have a harder time finding janitors,'' says Arens.
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