Bio-Techne Corp (TECH) — Q1 2017 Earnings Call Transcript

Good morning, and thank you for joining us. On the call with me this morning is Chuck Kummeth, Chief Executive 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. The Company's 10-K for fiscal year 2016 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 as a result 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 pertinent to ongoing business performance. Tables reconciling these measures to the most comparable GAAP measures are available in the Company's press release issued early this morning on the Bio-Techne Corporation website. And with that, I'll turn the call over to Chuck.

Thank you, Jim. Good morning, everyone. Thank you for joining us for our first quarter conference call. You'll recall from our last quarterly earnings conference call that we finished our fiscal year 2016 on a strong note. I'm happy to report that our momentum has carried into our first quarter and we have started fiscal year 2017 also on a strong note. The company delivered 10% organic growth in the quarter with solid growth in all three of our divisions and in all three of our major geographic regions. This top-line performance also flowed down to our bottom line with strong operational performance, increasing adjusted operating margins in our core businesses and adjusted EPS growing 11% after excluding the negative impact from foreign exchange. The Biotech division completed its sixth quarter in a row in mid-to-high single-digit organic growth. All three of the division's main product categories: protein, antibodies, and assays performed well. Antibodies performed particularly well, growing double-digit growth in the quarter with our strategy becoming the customary agent supplier for pharma and others continues to bear fruit. Our focus on being a lead supplier of multiplex assays has also demonstrated in the quarter with double-digit growth in sales and royalties for this product line. I should also add that our Minneapolis site, which manufactures the majority of products for the Biotech division, launched a completely new ERP system in July for the first quarter. While the implementation of our new ERP system often has issues that cause business disruptions, we experienced a few as well. The team here in Minneapolis did a tremendous job pulling together to ensure our customers are served as they have come to expect from our new systems, our gold standard brand and quality reagents service. I'm pleased to report that the system is fully functional as we head into Q2, and the effort by the team is now focused on gains and internal efficiencies we expect to receive from replacing a 30-year-old technology with a modern 21st-century ERP platform. In the Biotech segment, we also closed on the Advanced Cell Diagnostics acquisition, or ACD, in August. As a reminder, ACD marks Bio-Techne's entry into the genomics field and market. Second, and more importantly, its innovative and versatile technology has the potential to change pathology practices. RNA-ISH is a transformative technology facilitating and improving the monitoring of gene expression patterns at the single-cell level while retaining the morphological context of the tissue being analyzed. ACD's technology serves both research and diagnostic markets, expanding Bio-Techne's presence in the clinical lab setting. In just the past couple of months, the commercial teams of both ACD and the Bio-Techne division have been meeting in Europe, Asia, and here in the U.S. for identifying ways to leverage Bio-Techne's marketing and sales channels to further accelerate adoption of ACD's technology. In addition, ACD continues to leverage its core technology into new products. In Q1, two new innovative products were launched—first the BaseScope, which is a breakthrough next-gen technology capable of splice junction and mutation detection, and second, its first fully automated multiplex fluorescent RNAscope assay for the LDS platform. These are just examples of both the innovation and collaboration that contribute to over 50% sales growth for ACD this quarter on a standalone basis. Moving on to Protein Platforms, this division also continued with its momentum from the second half of fiscal year 2016, growing organically by 20% in the third quarter. This marks the third quarter in a row of over 20% organic growth. Our recently launched new iCE instrument, Maurice, continues to be well received by customers, leading the biologics product line to strong, double-digit growth. Meanwhile, placements of Ella, our automated multi ELISA instrument, also accelerated Simple Plex revenue nearly 150% in the quarter, and while not counted in our organic growth, Protein Platforms launched its first automated single-cell western blot instrument, Milo, in July. You will recall the technology of this instrument was acquired as part of the Zephyrus acquisition we made back in March. The initial interest of customers in this product has exceeded our expectations and we've already sold a number of these instruments in the quarter. The Simple Western product line, led by the West instruments, continues to be adopted as the new standard for the way western blots are performed in the lab. We continue to see double-digit percentage increases in the usage of existing instrument placements and momentum for additional placements worldwide. In Q1, we combined the US sales force structure of our Biotech and Protein Platforms divisions to further enhance our solution-based offerings we provide to our core customers. With a unified sales approach, we can better demonstrate to our customers that we provide the instruments to simplify and enhance the researchers' workload that, together with our reagents, ensure the best results for their experiments. We are already seeing another upswing in lead generation from this new approach with physicians and product lines overall for the rest of the year. When we acquired ProteinSimple, the business was positioned as a one product platform company based on the Simple Western technology. Now the Protein Platforms division has four with upgrades in biological with Maurice, and single-cell with Milo, and the Ella platform acquired with CyVek has demonstrated in Q1. Protein Platforms has a diversified product offering that will continue commercial penetration and product innovation, promising consistency in growth for years to come. Finally, our Diagnostics division achieved fantastic growth of 19% in the quarter. We experienced strong growth with our OEM customers in both glucose and blood gas control. Much of the price pressure we saw last year in the glucose market has now annualized, so we are past that headwind. As for blood gas, CLIA has increased by 4% end users to use these controls on their instruments, which of course is beneficial to our business. On the assay development side of the Diagnostics business, growth was also strong, particularly for the point-of-care market where there continue to be many new projects that result in development opportunities for custom reagents and controls. However, as we have said before, due to the OEM nature of this business, customer requests for deliveries can be lumpy, and Q1 benefited from this lumpiness. We do expect fiscal year 2017 to be a great year for the Diagnostics division with growth averaging mid to high single digits for the year. Moving on to some commentary regarding our regional and end market performance, in short, growth in all of our major regions and end markets was very similar to what we have seen in the past several quarters. Both Europe and the US saw mid-single-digit growth in the academia market and high single-digit growth in biopharma. In Europe, we completed and fully integrated the acquisition of SPACE, our key distributor for Italy and southern Europe. I spent some time in Milan this quarter with our Bio-Techne team there and was very pleased with the leadership and collaboration already taking place with our existing sales reps in the area from another division. This fine addition to Bio-Techne as well as the support of our new leader for the overall EMEA region will make this a full Bio-Techne subsidiary for southern Europe that will drive growth in the region for the entire company. Moving onto Asia, the themes we saw for most of fiscal year 2015 continued into the first quarter of fiscal year 2017. In China, most of our brands grew well north of 20% in Q1. The one exception continued to be PrimeGene, which is heavily impacted by the CFDA crackdown on cell therapies administered by hospitals due to the PrimeGene scandal earlier this year. PrimeGene is a key supplier of reagents to hospitals using these therapies. We believe the CFDA will provide regulations for hospitals using cell therapies which will stimulate growth in this treatment again, and PrimeGene is well-positioned to fully participate in this growth. As for the rest of APAC, overall, the region continues to perform well. We've continued to see areas of strength with our great distributor partners in Korea and India. Japan continues to lag due to local funding pressure, although the rate of decline appears to be bottoming out. In closing, we started our fiscal 2017 in much the way we ended our fiscal 2016. Our organic growth is strong and broad-based. The integration of our businesses and new ways of innovating science synergies is ongoing. We continue to increase the margins of our core business. We closed on three more great acquisitions that will accelerate our organic growth and profits for years to come. Our capital allocation strategy remains focused on mergers and acquisitions. Our pipeline of potential M&A targets remains strong and we plan to continue to augment our organic business with acquisitions that strengthen our positions in existing businesses and geographies or to leverage our reagents expertise to take to market. I want to thank our customers who continue to choose Bio-Techne's tools for their lifetime's research and our employees for their dedication and determination to serve those customers well. Jim, I'll pass the call over to you for more detailed review of the first quarter financials before we open it up the lines to Q&A.

Great. Thanks, Chuck. I will provide an overview of our Q1 financial performance for the total company and then provide some color on each of our three segments. Starting with the overall first quarter financial performance, adjusted earnings increased 8% year-over-year to $31.6 million, while adjusted EPS was $0.84 a share versus $0.79 in the prior year. The impact of foreign exchange fluctuations represented a headwind to EPS of approximately $0.03. Most of this FX impact was a result of short-term exchange rate volatility in Q1 of fiscal year '16. This volatility produced transactional FX last year. The quarter below adjusted operating margin did not repeat again in Q1 of this fiscal year. GAAP EPS for the quarter was $0.43 compared to $0.61 in the prior year. The biggest driver for the lower GAAP earnings was non-cash purchase accounting costs associated with the recent acquisitions. Q1 reported revenue was $130.6 million, an increase of 16% year-over-year, with organic revenue increasing 10%. First-quarter reported sales included a 7% growth contribution from acquisitions, partially offset by a 1% unfavorable foreign exchange headwind. By geography, both the US and Europe grew in the high single digits with upper single digit biopharma sales growth and mid-single-digit academia results. China experienced organic growth nearly 20% during the fourth quarter with higher growth in our western brand being slightly offset by the impact of the bribery scandal on our local PrimeGene brand. That brand continued to be a drag on growth, given the challenging government funding conditions with organic growth declining in the mid-single digits. Excluding Japan and China, the rest of APAC were in the high teens organic in the first quarter. Note that all references made to growth rates by region and end markets exclude our own end sales, which mostly occur in our Diagnostics segment. Moving onto the details of the P&L, total Company adjusted gross margin was an even 71% in Q1, increasing 40 basis points from the prior year. With the Protein Platforms and Diagnostics segments growing at a faster rate than the Biotech segment, the unfavorable mix results were more than offset by productivity gains as well as positive gross margin contributions from recent acquisitions. ACD in particular contributed gross margins exceeding 80%. FX had a nominal impact on adjusted gross margins throughout the year. Adjusted SG&A in Q4 was 24.9% of revenue, 160 basis points higher than last year. The SG&A increase was driven by the acquisitions made since the beginning of the first quarter of last year and strategic investments made in our core businesses to support growth. R&D expense in Q1 was 9.8% of revenue, 30 basis points lower than last year, reflecting the volume leverage achieved from our Protein Platforms and Biotech divisions. The resulting adjusted operating margin for Q1 was 36.3%, a decrease of 100 basis points from the prior-year period. The recent acquisitions contributed 140 points of the improvement. Looking at our numbers below operating income, net interest expense in Q1 was $1.3 million compared to $0.4 million of net interest expense last year. The higher interest expense was due to a $400 million line of credit opened in Q1 to replace our existing $150 million line of credit, as well as fund the acquisition of ACD in August. Other non-operating expenses for the quarter was essentially nil compared to $1.2 million of non-operating income in the prior-year quarter. This favorable transactional FX in the prior year did not repeat this year. Our adjusted effective tax rate in Q1 was 31.4%, an increase of 30 basis points from the fourth quarter of last year due to a greater percentage of taxable income being generated in the U.S. In terms of returning capital, we continue to pay our dividend and paid out $11.9 million in the quarter. Average diluted shares were up less than 1% over the year-ago period at 37.5 million shares outstanding. Turning to cash flow and the balance sheet, $26.1 million of cash was generated from operations in the first quarter, and our investment in capital expenditures was $2.4 million. The new ERP system we implemented in July delayed some customer invoices until late in the quarter, driving our quarter-end Accounts Receivable balance approximately $10 million higher. We expect these outstanding receivables to be fully collected in Q2. We ended the quarter with $122 million of cash and short-term available-for-sale investments. Our long-term debt obligations at the end of Q1 stood at $375.9 million, an increase of $245.9 million from the end of Q4, reflecting the additional line of credit used to purchase ACD. Going forward, our capital deployment priorities remain opportunistic M&A, our dividend, and debt paydown. Now, I'll discuss the performance of our three business segments, starting with the Biotech segment. Q1 reported sales were $86.8 million with reported revenue increasing 15%. Acquisitions contributed 10% to revenue growth. Foreign exchange negatively impacted growth by 1%, and organic growth was 6%. Organic growth was broad-based in all major product line divisions. Adjusted operating income for the Biotech segment increased 8% in Q1 compared to the prior year. Adjusted operating margin was 48.9%, a decrease of 300 basis points year-over-year due entirely to the mix of recent acquisitions. Excluding acquisitions, adjusted operating margins were essentially flat to prior year. Turning now to the Diagnostics segment, reported revenues in Q1 was $24.2 million, which reported an organic growth of 19% over last year. Strong growth in glucose and blood gas control, as well as continued strength in diagnostic assay reagent sales drove the growth. As in past quarters, timing of OEM orders also impacted growth, this time favorably in Q1. Due to the fluctuations of OEM ordering patterns from quarter to quarter, management also monitors trailing 12-month revenue growth to smooth out these timing impacts. For the end of Q1, trailing 12 months revenue growth for the Diagnostics segment was 11%. Diagnostics segment adjusted operating income increased 34% in Q1, and adjusted operating margin was 21%, an increase of 290 basis points from the prior year. The higher adjusted operating margin is primarily attributable to higher volume leverage. Moving on to our Protein Platforms segment, net sales in Q1 were $19.6 million, an organic increase of 20% from the prior-year period, with recent acquisitions contributing 1% to growth and favorable currency translations impacting revenues by approximately 1%. Growth in this segment was broad-based with most major regions in product lines growing by double digits, with particular contribution from our next generation iCE instrument, Maurice. Adjusted operating income in Q1 for the Protein Platforms segment was $0.2 million, representing an adjusted operating margin of 1.1%, compared to a $1.2 million adjusted operating loss from a year ago. Strong volume leverage drove the year-over-year improvement, partially offset by the operating trials associated with the Zephyrus acquisition and favorable FX. Without these headwinds, the adjusted operating margin in Q1 for Protein Platforms would have been mid-single digits. We continue to expect additional improvement in Protein Platforms' profitability with top-line growth and productivity gains driving operating leverage for the remainder of this year and beyond. In summary, Q1 was a great start for the fiscal year for Bio-Techne with solid commercial and operational execution driving record organic growth for the quarter. Looking ahead to the full-year fiscal year 2017, we still expect overall Company organic growth to be similar, if not slightly ahead of the fiscal year 2016. For those who pay particular attention to the calendarization of our results, there are a few items to be mindful about our fiscal Q2 that could be different from Q1. First, I'll remind everyone that the purchase of ACD occurred August 1 in Q1. ACD's monthly sales profile is weighted more to the last half of the quarter versus the beginning, similar to Protein Platforms. Thus, in Q1, Bio-Techne benefited from reporting most of ACD's revenue in our results, but did not record roughly a third of its operating costs, which occurred in July. ACD will be under Bio-Techne's ownership for the entire second quarter. Thus, all of ACD's quarterly operating costs will be included in Bio-Techne's Q2 results, creating a larger drag on operating margins. This also holds true below the line for interest costs. In Q1, we incurred higher interest expense as a result of the additional line of credit taken to perform the transaction. In Q2, there will be three months of higher interest expense rather than just the two months incurred in Q1. The second item that could be different in Q2 versus Q1 is OEM delivery time. As both Chuck and I have stated in our previous commentary, the OEM nature of our Diagnostics segment can cause lumpy revenue results for the quarter. This lumpiness was favorable in Q1 but will be less so in Q2. Right now, based on the schedule of OEM shipments, we expect Q2 revenues for Diagnostics to be relatively flat to the prior year. And third, you will recall that the British pound took another significant drop in valuation in the first two weeks of October. As you may know, our commercial headquarters for Europe is based in the UK and the functional currency is the British pound. Approximately 20% of our European revenue is derived from customers in the UK. As we are experiencing a negative impact from the transaction effect, just as we had in Q4 when the British pound took its first drop in valuation in the last week of June, we are also expecting slightly more headwind from translational FX in the second quarter as a result of the devaluation. That said, as we stated in our last Q4 earnings call, we still expect our adjusted operating margins to improve in the second half of the fiscal year as ACD's revenue continues to ramp, producing more volume leverage for our biotech segment. That concludes my prepared comments. And with that, I'll turn the call back over to Janice to open the lines for your questions.

Good morning guys. I just had a quick question on the academic markets. Obviously, they were quite strong for you, and it sounded like, in Europe and the US, that was the case. Others have seen it as a little bit of a different dynamic in this quarter. So have you seen anything at all, any weakness sort of coming into the quarter or maybe the end of the quarter that would suggest that there is something going on in academia? I think a lot of companies have stated issues in the U.S. in particular. I don't know if it's just because they have more CapEx versus less recurring revenue, but as you guys have added more CapEx type platforms, I am wondering if you are seeing anything at all on that side either.

Thanks for the question, Amanda. For the quarter, we saw results pretty similar to last quarter, which were also pretty good results. I would say that, for September, things were soft, and there have been a lot of people reporting before us in support of similar things. October looks pretty good again now. So I think it's down a little bit; there is a lot of speculation by some of our peers on whether this is due to funding, etc. Our results— we think we must have had a little bit of impact, but only marginally. Europe had a very strong quarter in academia, and we see it kind of somewhat continuing, albeit Brexit and other news events could change that. But as it stands right now, it's pretty steady. A lot of it I think is coming from our great execution. Our teams are larger now. We have the SPACE acquisition. We are doing a lot of cross-selling, so that’s also possibly helping a lot. Asia looks pretty much the same. Now, the part which would be funded academia that may be due to therapeutics cell therapeutics is certainly still in a rut. Everything around that purchase is doing fine, yes. We even see a potential bottoming in Japan. So things are looking the best they have for us in over a year in Japan, although I wouldn't say it's a victory lap yet or anything. But it certainly is a negativity reflected that is finally waning. I guess that's kind of initial comments. I guess one more thing—our partnerships with Fisher certainly help; that’s a key strategic area for us for academia, and Fisher results are more or less very similar, low single digits, so keeping us out of that negative area years ago.

Okay, that makes sense. And then a quick clarification question on the organic growth. Did you say that you still expect the growth for this year to be in line with last year from an organic perspective or did you say for this quarter?

For the year, we expect the organic growth to be similar to the rate of growth we had in fiscal year 2016 if not slightly higher.

Okay. That was kind of what you had said last quarter, correct?

Right.

Okay. And then just the last one from me on EBIT margin. So recognizing all your comments around the dynamics of ACD in Q2, do you think that—the EBIT margin this quarter I think came in a bit better than we were all looking for, again realizing that will probably take a step down in the quarter following. So just wanted to check in there, is there anything there that— is it performing in line with your expectations? And then are you still expecting the full year to be—I think you said around the mid-30s for the full year.

Excuse me, what market? EBIT…

EBIT margin.

In short, Amanda, we had our fiscal year '17 at the end of Q4 where we have not changed after this quarter. So you're correct that margins will be more negatively impacted in Q2 because of the full quarter inclusion of ACD, but we expect to come back in the second half a bit. Overall, we expect for the year to be somewhere in the mid-40s.

Okay.

We're going to expect this acquisition to get really breakeven within the year. We were in great shape in the first quarter since Jim pointed out that's because we didn't have very much of their costs in the first month of the quarter—it’s not leveled. Looking forward, the growth pace we're at is fantastic; so it’s 50% plus and with the 80% plus gross margin business, it should do very well, and we look forward to the year for now while our analysis is annualized.

Okay, thanks very much.

Hi guys, thanks for the questions and congrats on a great quarter. I first wanted to dig into that antibody double-digit growth. How much of that is market growth versus you taking share there? And if it is taking share, how much of that do you think is from Santa Cruz?

First, I'll take them in reverse order. Santa Cruz is probably still not impacted because most customers are actually, I think, ordering as much as they can from Santa Cruz to get ready for the end of the year decision. They are not impacted; they don't release until December going forward. So I don't know if we've seen too much yet. We are certainly advertising and out there trying to solicit as much of that potential growth as we can. I think there has been some just from the fact we are advertising and going after it aggressively. But Santa Cruz is still in the game, so I think those impacts are probably more likely next year, we think. The other points I think, we're really strong in Europe on antibodies. I think we’re about maybe the same here in the U.S. high single digits. In Asia, we have probably decent growth, although in China, we are probably a little soft due to factors we've discussed. I think it’s probably more about our execution and operational excellence. I don't think it’s purely taking a whole lot of share. The market is expanding as well; you think mid to high, lower to high single digits side. So I think we’re hanging in there. We don't have quite the numbers of growth that TTM has, so we're probably in that range. We're looking pretty good using—we're still generating 100 new products a year. We’re still focused on all types and many species and more of the same. We're certainly in the top five, and we think we would like to be even higher.

Okay, great. And then looking at Protein Platforms' continued strength there, how much of that is from biopharma versus academic customers? And then looking at the margin, a big improvement year-over-year, but quarter-to-quarter, credit stepped down. Any dynamics to call out there and what should we expect from an operating margin perspective for the rest of the year?

Jim is scrambling for references here, but I was going to think it’s about 50/50, and these confirmed. We're pretty even. I always have liked the Protein Platform business model. It’s very balanced in how we go after the markets, both pharma as well as academia, and it really has given us a good balance from one quarter to the next. This was a number going back to the fees system while we bought ProteinSimple. The big thing here looking forward, it wasn't just about biopharma acquisition; we want to ensure academia wanted the instruments for something that’s being done, mainly with hand lever western blot techniques. That continues to be the case, and we're forging ahead inventing for labs and academic labs that these instruments are worth buying and that it’s worth stepping up and stepping up their game in western blots.

And then the margin commentary?

The margin commentary? Well, it's not single-digit negative. We are low single-digit positive. I think, as we scale the business dramatically as we're going forward, I think it will happen. I still think this is a 30% to low 30% margin business long-term. I think we are still a few quarters away from that. There needs to be more scale. The decision now is to have four major platforms, so it is larger, but it is still composed of still relatively small segment businesses in that division. They each have got to get their own critical mass, so to say. We are also a little bit more leveraged on cost synergies on the commercial side, as we discussed, doing a lot of cross-selling and combining our sales group within the biotech division and CPD; that's going to allow us to spend less on commercial to CPD, which is also going to help margins long-term. But it was a good move this quarter, I think, about where we were focused internally with our plan. So, internally, we are kind of on our plan here. And I think you'll see the growth going forward. The improvements will be kind of in line which you expect for continued accelerate growth. I think remaining at 20% growth results was our goal. We're hoping to always remain mid-single teens or so, but at 20% or so going forward, there should be moderate improvements in margin every quarter. That's our plan. You'd expect that 20% is a big move.

Okay, great. Thank you.

Good morning gentlemen. Congratulations on the quarter. I wanted to pick up on one of the comments you made earlier regarding one. I think you just touched on it here briefly as well. As far as combining the sales forces are concerned between the Protein Platforms and the Biotech, when were those changes implemented? How quickly do you anticipate seeing some of the fruits of that integration?

We are seeing some fruits already. They were already beginning to be implemented, I would say, last quarter, not this quarter. We did, as an example, a big sales conference in Barcelona, and we had all our segments people together with roughly 100 people there; a lot of training sessions during the week, a lot of networking, understanding each other's customers so they would understand the needs and wishes of the one customer to another within these salespeople because they are all pretty technical. They know enough about each other's areas to be dangerous. So they know when they have customers to work with. If we're in the reagents area and we’re looking at antibodies, they know they do enough work and what they may need for western blot systems. So that kind of activity was happening. We formalized more and more of it. We have since then begun this follow-up and more along the West Coast, headquarter over CPD, and I think you’ll see more of it. Our head of Commercial North America for the biotech area, Gerry Andros, has been spending a lot of time working with Andrea, who is commercial for CPD, and they’re becoming more and more one team. This always was the thesis. This is the subsidiary model I’m trying to generate here. I think we’re going to continue to buy things and have acquisitions of things to align hardware to reagents, and as long as we do there will be synergies. Short answer is you’re seeing some already. I don’t think we’re at the knee of the curve yet at all. I think it will only get better.

Okay, great. Can you just touch on it a little bit there as well from an M&A perspective, given some of the lumpiness we've seen from some of your peers here this past quarter? Has that created any incremental opportunities on the M&A front? Are there specific areas that now maybe are a little more appealing than they were even at your analyst day here not too long ago? Thank you.

We continue to have a strong pipeline and we've officially completed two this quarter. We won’t complete two every quarter, I can assure you. But we’re hunting and we’re in the game on some right now. We will continue to be though. Far more won’t happen; that will happen, that’s the way it goes. In terms of the climate out there, things got cheaper or easier or our peers getting solid on it and staying out of the games because we didn’t have a great quarter, I doubt it. I don’t see any difference in terms of competition for great assets. Great assets out there will always generate great competition. I feel really good about our team, our strategy, and hiring ACD. We worked on it for about 18 months. We were able to keep it very quiet in private throughout the process. Who knows what would happen if it hadn't been; but the synergies are obvious and apparent, and the team—I actually never seen such great synergy between two teams for early, and we're really pumped about ACD. I wish we could find more of those. They're out there. We’re hunting and expect a couple more this year hopefully.

Great, thank you very much.

Hello, good morning. I'm filling in for Paul Knight. On your new RNA products for advanced diagnostics. Can you provide some comments on your initial commercialization plans and also future business in some pathologies and biopharma?

Sure. High-level, we are really excited because this is an area—the work frame we want to go after, ISH, and it's work frame in the laboratory, especially in biology. These pathologists already know our product; they know our brand, they know our company. They want to go after it very similar to how the western blot process moved forward. This company hits that, and it really is a movement from a standard antibody approach to a molecular approach. We feel that there's a lot to offer with that. We have reagents that work with us already. We're working together with them. It is a business model very similar to our own. It's supporting content in little vials and vials can tip, going out to customers. We understand how to do that. We've been doing it for 40 years. The gross margins are wonderful. The whole process of generating a probe for pathologists, so they can go to work with a slide, even with their office microscope, is quick. It takes two weeks to generate a probe. We now have over 11,000 probes, so it's a very, very fast-moving business. You talked about commercialization. We now have over 600 publications on this technology, so it's well ahead of the Western blot technology platform in terms of visibility and awareness within its market. What's the game going to be? It's going to be how fast pathologists take it up. How fast will they move from pot shooting with antibodies and using their art and their experience to find what they're looking for versus this approach, which is much more specific? We like both, though. I mean we sell antibodies for the irregular approach of validation, and you need both really in some degrees because you may find what you're looking for in RNA, but the protein may not have expressed it. You may still want to go back and prove that out with an antibody once you know what you're looking at from an RNA point of view. So, all these are commercially being driven right now. We have a pretty extensive sales force, which is one reason, even at high gross margins, why this business is not yet breakeven. It's because they do have a complete commercial model in place. Over time, we'll be aligning that with our commercial organizations to operate synergies. But at the end of the day, it is heavier commercial model than selling proteins. You actually need technical salespeople working in the field with pathologists, and that's the mission. It's a large, large market, well over $1 billion, some say as much as a $2 billion market. And then the gravy on top of all this is that you can use the same approach and technology as a companion diagnostic, and that's what we care about. This is a technology diagnostic that everybody wants on their platforms, like Ventana. So we expect, if you take out along all of these positions, all these different instruments that our primary partner right now for a full solution for the pathologist with all the automation is like that. And that's the commercial sense right now. And at 50-plus percent growth, we’re just kind of staying out of their way.

Good, thank you. And then you also mentioned the integration in Japan continues to lag, but then that it looked like maybe Europe. Did I hear correctly? If that's the case, what is driving the change there?

You know, we've been saying for a few quarters, all of us in this industry, that pretty soon they should be running out of stuff. It's been shrinking for a couple of years. We've been waiting on their funding to be released as they integrated their funding organizations to the one they call AMED. We have been told that the funding is released, but we are not seeing a whole lot of it. Last quarter, this previous quarter, or this quarter starting out, things are looking better, and we are hoping it's bottoming. But we are not claiming victory yet. It's still very tentative in Japan. But we have focused on it. We are not that large there. I mean we have people on the ground there, and we are actually focused on trying to work with our distributors and be more heavily promotional, and all the typical things you do to try and spur business, So more to come—hopefully, next quarter we can provide you with some positive information on Japan. But I haven't heard anything yet out of anybody, our peers, and I doubt I will this quarter, but maybe next quarter we all know.

Okay. It was a great quarter. It was better than our last quarter, just being slightly above 10% organic growth. So we remain committed to focusing on growth, focusing on our margins, and investing correctly and wisely. We think we are doing a good job here, but our customers in the end tell us whether we are not. We're focused on them as well. So thank you all for tuning in, and we’ll talk to you next quarter. Thank you.