Tag: Bio-Techne

A stylized illustration showing how earning revenue is discrete from creating, delivering or even selling products

Today we will talk about revenue.

Revenue seems like a pretty obvious concept: the dollar value of the products and services a company provided to its customers during a given period of time (remember the ‘Matching Principle’ we talked about in the last post?).

There are some subtleties here, because in order to record something as revenue, it must have been ‘earned.’ If you are selling a reagent, then you must have shipped it to your customer. If you are performing a service, say running a diagnostic test, then you should have performed the work. Easy enough? Sure, but consider:

Say BioTechne allows a customer to order reagents ahead of when they will need them (for instance, maybe the customer is looking to control the number of lots they have), but because this is a particularly important, high volume account, BioTechne is willing to hold those particular lots of reagents until the customer needs them (i.e., you haven’t shipped them yet). When can they recognize that revenue?

Or let’s say the diagnostics side of the business, ExosomeDx, signs a multi-year pharma contract for processing and analysis of clinical samples. When do they get to recognize the revenue from that deal? When the samples are run? Or when the complete analysis is delivered to the client?

Let’s keep these points in mind as we look through the numbers.

Below is the screenshot of the income statement for BioTechne:

You have Net Sales, i.e., Revenue, listed at the very top. Yet another place where different terms are used for the same concept. If we look at the income statement of another company in the space, Beckton Dickenson, their top line is called out as Revenue.

Finance for Scientists

When revenue reporting isn’t black and white

As we saw in the examples at the top of this post, there can be a fair amount of nuance in when and how to recognize sales, and tremendous pressure to make this figure look strong. And because of this, the place where the most accounting shenanigans happen is in revenue recognition. In fact, most accounting fraud occurs in the top line, but even non-criminal bias can land a company in hot water.

A quick example of how (non-criminal) bias can creep in could be around service contracts when an instrument is sold. Let’s say customers purchase a 5-year service contract alongside an instrument. When do you recognize that income? The service at year 0 has not been rendered, so you can’t recognize all the revenue, but you can claim that most of the cost of that service contract has been in making the initial sale, so 75% of the revenue should be recognized up front. Equally legitimate would be to say that only a small percentage of the revenue should be recognized up front, because most of the cost is associated with servicing that machine down the line. It’s really a judgment call that depends on the particularities of the business.

What’s interesting is that you can even change your revenue recognition strategy, although generally it’s fairly suspicious to be doing this often (remember “consistently applied” from the last post?). If there is a change in revenue recognition strategy, it would be called out in the footnotes— another reason why it’s not a bad idea to look through them.

Another example of bias and uncertainty in revenue is the quality of the customer. Will the revenue shipped actually be paid for? Have you given special consideration to the customer (6 months to pay for example)? Have you made promises (warranty) that the product will perform down the road (a product warranty)? All of these factors can contribute to revenue uncertainty.

Depending on where in an organization you sit, scientific and technical decisions you make may impact revenue and its recognition. Are you developing a stand-alone product? Is it part of an ongoing delivery schedule? Are other services attached to it? These questions might color the response your work gets from other stakeholders in your company if they’re targeting a particular revenue goal.

Those are the highlights for revenue. In the next two posts, we’ll get into the murky realm of costs and expenses. Make sure you’re on the mailing list so you don’t miss it!

A first look at income statements: revenue, costs and profits

By Kristin Gleitsman

On August 23, 2023

In Finance for Scientists

Today we talk about the income statement, possibly the most discussed financial statement.

The income statement attempts to measure whether the products or services that a company provides are profitable when everything gets added up. In other words, how many sales did a company make during a period of time, how much did it cost to make those sales, and what profit is left over.

The income statement can help answer the following questions about a company’s financial health:

How much is revenue growing?
What is the gross profit margin for sales?
What percentage of revenue results in net profit after all expenses?
How much does the business repay shareholders versus reinvesting (and what that might mean for how the company sees its future)?

As a quick aside, there’s a fundamental accounting rule called ‘The Matching Principle’ at play in the income statement that is worth mentioning here. Briefly, the matching principle seeks to match the cost with its associated revenue to determine profits in a given time period. This principle will come up throughout the sections about the income statement.

There are always 3 main categories on an income statements:

Sales or revenue is at the top (fun fact: when fancy people say ‘top-line growth’ they mean sales growth, because sales is always at the top of the income statement)
Costs and expenses are in the middle
Profit is at the bottom

Today, we will focus on just identifying how to read these statements.

Parsing the Income Statement

To do that, let’s go back to Bio-Techne and take a look at their annual income statement for 2022 by pulling up the most recent 10-K filing again.

First thing to notice is that it doesn’t say ‘Income Statement.’ Instead, it has this:

It can also be called the ‘profit and loss statement’ or ‘P&L statement’ or ‘operating statement’ or ‘statement of operations’ or ‘statement of earnings’ or ‘earnings statement’ or some combination therein, like we have here for our example. Sometimes it feels like those crafty finance people intentionally obfuscate things. 😉

The other things to notice here are that

we are looking at the income statement for the Bio-Techne Corporation and Subsidiaries, i.e., the whole company, not one division, and
numbers are listed in thousands- sometimes this can be millions, so best to pay attention.

So here it is for Bio-Techne. The Income Statement. Remember, sales or revenue is at the top, costs and expenses are in the middle, profit is at the bottom. We’ll take these each separately in the upcoming posts.

A note on footnotes

Before we wrap up today, I want to draw your attention to the ‘See Notes to Consolidated Financial Statements’ at the bottom of the Income Statement.

Finance for Scientists

These footnotes are required per the rules of accounting to explain how the totals were arrived at. Remember that the rules of accounting are meant to be applied consistently, so that one can readily compare trends over time. However, it can be perfectly legitimate to modify the approach, and that modification will be called out in the footnotes. So, every now and again there are very interesting nuggets in the footnotes, however, there are usually quite a lot of them.

Here’s an example footnote about inventory basically explaining that they make more than the sales demand due to ‘economies of scale through a highly controlled manufacturing process.’ Those of you who have worked in regulated manufacturing environments on these types of products will know that manufacturing runs or batch sizes are validated at particular amounts/volumes- you can’t just manufacture to whatever volume you want, and that impacts the financial statements:

That covers the basics. In the next post, we’ll talk about revenue! As always, you can sign up to the mailing list to be updated when the next installment is out.

Stylized illustration of a scientist looking through financial documents and reports

How to learn the financial basics about a new (to you) business

By Kristin Gleitsman

On August 11, 2023

In Finance for Scientists

Before we start exploring financial statements, let’s start with the basics on where to find information about a life sciences company with which we’re unfamiliar.

Let’s take the example of Bio-Techne Corporation.

Maybe you’re already familiar with Bio-Techne Corporation. Maybe not. Either way I bet you will learn something from digging through their financial statements.

Our first step is to go to the Electronic Data Gathering, Analysis and Retrieval (EDGAR) tool from the US Securities and Exchange Commission (SEC):

https://www.sec.gov/edgar/searchedgar/companysearch

You can type “Bio-Techne” in the “Company and Person Lookup” field. As you type, automatic suggestions will be displayed below the search field. Once you see Bio-Techne, click that suggestion. If you simply click the gray “search” button on the right, you will be taken to a much broader page of search results instead of the page specifically for Bio-Techne.

: The EDGAR search interface

: Click the matching suggestions that appear instead of the Search button

Alternatively, you can search Google for “Bio-Techne stock”, find that its stock ticker is “TECH”, and put “TECH” in the “Company and Person Lookup” field instead.

On the right, you’ll see “10-K (annual reports) and 10-Q (quarterly reports)”, click the “+” sign, then open the most recent 10-K, which was filed on August 24, 2022.

Screenshot of the EDGAR listing for Bio-Techne, with the 10-K and 10-Q section highlighted

Look for the 10-K and 10-Q section on the right

10-K Overview

You’ll see a table of contents, where you can click on “Item 1. Business”. The very first section there is titled “Overview”

Here’s a summarized version of what we find

Bio-Techne Corporation is a global life sciences company that provides products and services for research and clinical diagnostics.
The company operates in two segments: Protein Sciences and Diagnostics & Genomics.
The Protein Sciences segment offers proteins, antibodies, immunoassays, cell and gene therapy solutions, and instruments for biotechnology and pharmaceutical customers.
The Diagnostics and Genomics segment offers molecular diagnostic products, cytogenetics media, and clinical controls for clinical laboratories and hospitals.

Fantastic!

Even after this little bit of reading, we have a good sense of what Bio-Techne Corporation does. It’s a products and services company in protein sciences and diagnostics/genomics. In other words, they provide reagents and instrumentation to researchers for both research and diagnostic test development and deployment.

Finance for Scientists

Business Risk Factors

Now let’s move to “Item 1A. Risk Factors”.

This is where management lists the risks to business success.

Even beyond risk management, it gives us a good understanding of how the business runs.

For example, Bio-Techne lists 6 fairly generic categories of risk, with each section having more detailed risks listed:

Economic and Industry Risks
Acquisition and Investment Risks
Strategic and Operational Risks
Intellectual Property Risks
Financial and Tax Risks
Legal, Regulatory, Compliance and Reputational Risks

These are my learnings from the risk factors (see if you agree or have others to add):

There are a good number of risks related to supply chain and manufacturing concerns: getting raw materials, forecasting and scaling manufacturing appropriately, being able to get finished goods to customers.
- Many of these risks were realized during the pandemic, and you can see this reflected in the numerous references to COVID-19 throughout the risk section.
- Most of these risks would impact any business in this space to a large extent.
There are also a good number of risks around operating in the highly regulated healthcare space, which are shared with other players in the industry.
- One particularly interesting note here is the privacy and security regulatory risk due to the acquisition of a diagnostics company, “a risk that has been elevated with the acquisition of Exosome Diagnostics, whose laboratory testing service is a healthcare provider that obtains and uses protected health information.”
- i.e., they didn’t use to be directly in the diagnostics services business and now they are and it carries a different level of risk.
You can also tell that this business is fueled by innovation through references to risks around hiring and retaining highly skilled workers and protecting intellectual property.
- Risks may not be uniformly shared across the healthcare sector, but these are fairly standard fare for the life sciences.
You can also see specific financial risks related to Bio-Techne, in particular around their Credit Agreement that bears interest at a variable rate and the fact that they are subject to risk from exchange rates due to their international presence.

Even if you’re familiar with a business, it’s worth going back through “Item 1. Business” and “Item 1A. Risk Factors” in its most recent annual report.

Start here, and you’ll have a foundation for the analytical work to come. Along the way, we’ll also dig into what some of the financial terms in the risk factors mean and how they impact the business. To keep up with this series, consider joining my mailing list to be updated when the next installment comes out.

Leadership in Biotech

Tag: Bio-Techne

What scientists need to understand about revenue and its recognition

When revenue reporting isn’t black and white

A first look at income statements: revenue, costs and profits

Parsing the Income Statement

A note on footnotes

How to learn the financial basics about a new (to you) business

10-K Overview

Business Risk Factors