Bio-Techne Corp (TECH) — Q2 2019 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 2018 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 earlier this morning on the Bio-Techne Corporation website at www.bio-techne.com. I'll now turn the call over to Chuck.

Thanks, Jim and good morning everyone. Thanks for joining us for our second quarter conference call. I'm happy to report that the strength in our core businesses that we experienced back in Q1 of our fiscal year '19 continued in the second quarter. The company delivered an 11% organic growth in the quarter, led again by our Protein Sciences segment with stellar 14% organic growth for the second quarter in a row. What makes Q2 more impressive than Q1 however, is the much stronger comparison we faced this quarter. You may recall last year the overall company organically grew 14% in Q2 while the Protein Sciences segment grew 15%. This quarter marks the first time Bio-Techne has organically lapped double-digit growth with double-digit growth. Our strategic plan first rolled out five years ago had a long-term goal for the company to be a perennial double-digit grower. It is satisfying for my team and for all the employees of Bio-Techne to have reached this important milestone and by continuing to execute our strategy, we believe we are still at the beginning of our growth journey. If you look at our performance by geography, all major regions continued to perform exceedingly well. The only regions with less than double-digit growth were Europe and Japan with growth of nearly 20% in Q2 of last year for Europe and over 10% growth last year in Japan, single-digit growth in Q2 of this year. These regions were still respectable. Meanwhile, the US and the rest of Asia executed exceptionally well, especially considering the challenges in nature for this year-over-year comparison. In Q2, the US grew in the low teens over the prior year quarter, which also saw growth in the teens. China grew at 30% this quarter versus the second quarter of last year, which also saw growth of nearly 30%. In fact, China grew 30% for the first half of our current fiscal year marking the first time China has experienced over 30% organic growth in two consecutive quarters. Having such growth in all regions while facing very strong comparisons from the prior year is great, but I'm more pleased with the consistency of our growth rates as a company over the past several quarters. I believe it speaks to the strength of our product portfolio, the scale of markets these products address and the momentum behind the fine execution of our strategic plan. So now let's talk a bit about performance per products starting with the Protein Sciences segment. We experienced growth in nearly every single major product category and double-digit growth in most. Our instant-based solutions continued to receive great acceptance in the market with our automated western blot solutions growing nearly 30% in Q2 as it also did in Q1. The Biologics iCE platform grew 20% in the quarter and our automated ELISA solution, Ella, grew nearly 50%. Despite the tremendous momentum we currently have in these platforms, we never rest on our laurels and continually seek to meet or exceed our customer's needs through innovation. For example, we recently announced the launch of a capillary electrophoresis SDS PLUS system for the Maurice instrument with novel cartridges, buffers, and software for further enhancement of size-based protein characterization and purity analysis. Also, we launched a new customizable cartridge format, the SimplePlex. SimplePlex collects Ella amino acid platform, enabling researchers who are studying unique biomarker finishes to leverage their own reagents to build custom immunoassays on the Ella platform. Both of these new launches are examples of how we continue to develop robust tools that simplify applications and remove complexity, enabling researchers to focus on their science. Growth in the Protein Sciences segment also benefited from continued strength in our core reagents, especially antibodies and cell and gene therapy applications, both of which grew more than 20% in the quarter. Bio-Techne's solutions for the cell therapy workflow span across our product portfolio and include GMP cytokines and growth factors, GMP small molecules, GMP media, and high-quality antibodies for flow cytometry and immunocytochemical characterization. The use of GMP agents early in the manufacturing process is highly advantageous as it eases the cell therapy workflow transition from bench to clinic by preventing the need to switch to GMP at a later stage when the cost and risk of change is higher and the freedom of change is lower. In addition, Bio-Techne is focused on developing innovative and technologically pioneering solutions that optimize and simplify cell therapy manufacturing, Cloudz, trademarked Cell Activation Kits, and the SimplePlex immunoassays. These technologies are designed to expedite cell expansion and improve product quality control respectively. We in Bio-Techne are excited to lead the way in the production of innovative GMP reagents and highly technical solutions for cell therapy development and manufacturing worldwide. Moving on to our Diagnostics and Genomic segment where we returned to growth in Q2 albeit modestly. The ramp of OEM orders in our Diagnostics division continues to build, and we foresee year-over-year revenue growth rates continuing to improve in the back half of the fiscal year. As for the Genomics division, Q2 of last year was the biggest all quarter for the prior management team where they aggressively sold RNAscope assays and pharmaceutical services to achieve nearly 50% growth, making it an almost insurmountable comparison to beat this quarter. Despite the challenge, the division still delivered year-over-year growth in both RUO and diagnostic product revenue. Going forward with leadership in place, executing on more long-term customer retention strategies, the team has reinvigorated to get the division to solid double-digit growth with an addressable market size over $1 billion in superior RNA ISH technology in situ hybridization. Nothing less is acceptable. Finally, an update on ExosomeDx, last week we announced the National Comprehensive Cancer Network or NCCN decision to include EPI as a recommended test in its clinical practice guidelines in oncology for prostate cancer early detection. The updated treatment algorithm includes EPI testing prior to a first prostate biopsy or after a negative biopsy to assist patients, neurologist, and further define the probability of high-grade cancer and in reaching a joint decision to either proceed with a prostate biopsy or continue monitoring. The NCCN guidelines are recognized clinical standards for cancer care by clinicians and payers in the United States. The guidelines are developed and revised by a panel of expert physicians from 28 leading US cancer centers, who revise recommended practice guidelines according to current clinical evidence and advances in cancer care. When we acquired ExosomeDx, we knew it could be a platform that could transform a rapidly growing field of liquid biopsy. We also felt the synergies of ExosomeDx molded remarkably well with our ACD team, the tissue biopsy platform, and our immunotherapeutic tools like cell culture. The ExosomeDx team has worked extremely hard these past few years to get to this point of adoption and professional recognition of its EPI test and the value it brings to both patients and payers. These new guidelines are critical in our efforts to broaden insurance coverage, including Medicare coverage, which we are pursuing with professional rigor. Inclusion in the guidelines will also broaden patient access to the EPI test by affirming its value for men evaluating whether to proceed with a prostate biopsy. Men over 50 with an inconclusive PSA level between two and ten now have another course of diagnosis before yielding to a painful and risky prostate biopsy. Even before NCCN guidelines or without Medicare reimbursement approval, EPI is rapidly gaining acceptance among urologists throughout the country. Over 4,000 patient tests were performed in Q2, and more than 1,100 physicians have requested over 12,000 kits for future use on their patients, double what we received in Q1. This level of enthusiasm from the urology community and now with NCCN guideline inclusion gives us added confidence that EPI will be expeditiously added to the NGS local coverage determination for Medicare reimbursement. With regard to non-Medicare payers, the Exosome team continues to make great progress with payer coverage. They have contracts with 25 regional, commercial, and PPO networks nationwide and have Medicaid enrolled in 25 states. Going forward, the team has an aggressive pipeline and timeline to continue and expand the coverage of both private and public payers. Of course, the biggest payer of all, given the demographics of those most likely to benefit from an EPI test, is Medicare, which means that we won't start seeing meaningful revenue in the near term until we have Medicare reimbursement approval. EPI is the first diagnostic test of many using both urine and blood-derived exosomes that we will seek approval for over the coming years. Our Exosome-driven diagnostics platform is unique in the liquid biopsy field and is positioned to become a true standard of care for diagnosing, treating, and monitoring cancers as well as other diseases. Our diagnostic products will enable physicians to take a more targeted and precise approach in their treatment strategies, which improves patient outcomes while lowering overall healthcare costs. Before turning the call over to Jim, as I often do, I would like to conclude my prepared remarks to comment about our adjusted operating margin performance. While we did indeed experience a 250 basis points year-over-year decline in adjusted operating margin in Q2 due to the acquisitions we've made over the past year, namely ExosomeDx, I'm very pleased to report that excluding these acquisitions, our adjusted operating margins for the quarter grew 260 basis points year-over-year. I believe this demonstrates our commitment to holding our historically strong core margins while ramping profitability in the businesses we have acquired over the past five years. The team has done a fantastic job executing on productivity and focused investment to overdrive revenue and margin performance, helping mitigate the short-term impact from delayed reimbursement and deferred revenue recognition that we are experiencing in ExosomeDx. But with the first half of fiscal '19 now behind us, the overall core business is executing better than ever, and the predicted outcome of the strategy we first outlined five years ago is becoming a reality. With that, I'll turn the call over to Jim.

Great, thanks Chuck. I'll provide an overview of our Q2 financial performance for the total company as well as provide some color on each of our segments. Starting with the overall second quarter financial performance, adjusted EPS increased 4% to $1.06, while GAAP EPS for the quarter was $0.45 compared to $1.29 in the prior year. Q2 reported revenue was $174.5 million, an increase of 13% year-over-year with organic revenue increasing 11%. Second quarter reported sales include a 3% growth contribution from acquisitions and a 1% unfavorable impact from foreign exchange translation. By geography, the US grew in the low teens. Europe, organic growth was in the high single digits, while China grew over 30%. As for the rest of Asia, organic growth was in the mid-teens led by South Korea and India. By end market, biopharma growth was approximately 10%, while academic sales growth was in the mid-single digits. Moving on to the details of the P&L, total company adjusted gross margin was up 60 basis points compared to the prior year at 70.8% in Q2. Favorable product mix and operational productivity partially offset the mix from recent acquisitions. Adjusted SG&A in Q2 was 29.2% of revenue, flat to Q1 and 300 basis points higher than the prior year, while volume leverage was more than offset by the additional SG&A added as a result of acquisitions. R&D expense in Q2 was 9.1% of revenue, also flat to Q1 and the prior year. The resulting adjusted operating margin for Q2 was 32.5%, a decrease of 250 basis points from the prior year period. However, as Chuck already mentioned, excluding the impact from recent acquisitions, core adjusted operating margins expanded 260 basis points year-over-year. This was driven by strong volume leverage, favorable product mix, and solid operational productivity. For GAAP reporting, SG&A in Q2 of last year reflects a $12.4 million charge for the fair market value adjustment of the ACD earn out. The management views this charge as part of the acquisition price paid for ACD and thus it was excluded for adjusted earnings in the prior year. Looking at our numbers below operating income, net interest expense in Q2 was $5.6 million compared to $2.2 million of net interest expense last year. The higher interest expense is driven by a higher debt level that resulted from our acquisition of Exosome Diagnostics in Q1 as well as multiple LIBOR rate increases in the past year on our outstanding line of credit. Our bank debt on the balance sheet as of the end of Q2 stood at $545.4 million, down from $561.5 million at the end of Q1. Other adjusted non-operating income for the quarter was approximately $1 million, up $1.1 million from the prior year quarter due to favorable transactional foreign exchange. For GAAP reporting, other non-operating includes a $7.2 million unrealized loss from our investment in ChemoCentryx. This is due to the adoption of accounting standard updates 2016-1 recognition and measurement of financial assets and financial liabilities, which requires equity investments with readily available fair market values recorded as an asset on the balance sheet and any changes in fair market value recorded on the income statement. The prior standard and as reported last year required changes in fair market value recorded in the equity section of the balance sheet. Moving on down the P&L, our adjusted effective tax rate in Q2 was 21%, a 350 basis point improvement from the prior year due to tax reform. For the remainder of fiscal year '19, we expect the adjusted effective tax rate to be approximately 100 basis points higher than Q2 due to some favorable timing in the current quarter that does not likely to repeat. For GAAP purposes, income tax expense in the prior year includes a very large one-time benefit due to revaluation in deferred tax liabilities that resulted from tax reform. Turning to cash flow and return of capital, $46.6 million of cash was generated from operations in the second quarter, and our net investment in capital expenditures was $4.6 million. $12.1 million of dividends were paid out in the quarter and average diluted shares stood at 38.7 million shares outstanding. Also during Q2, we bought back $15.3 million worth of our own stock using most of the net proceeds from stock options that were exercised during fiscal year '18. Now, I'll discuss the performance of our reporting segments, starting with the Protein Sciences segment. Q2 reported sales were $135.5 million, with reported revenue increasing 16%. Organic growth was 14% with acquisitions contributing 3% of revenue growth and foreign exchange unfavorably impacting growth by 1%. As Chuck has already described, the growth in this segment was very broad and included every product category and geographic region. The operating margin for the Protein Sciences segment was 43.5%, an increase of 60 basis points year-over-year due to strong volume leverage in operational productivity partially offset by the mix of lower-margin acquisitions. I'd like to reiterate Chuck's earlier comment regarding our commitment to improving the profitability from our acquisitions. As an example, this quarter, protein simple branded products achieved a new profitability record with 25% operating margin, which was approximately 400 basis points greater than the prior year. Turning to the Diagnostics and Genomic segment, Q2 reported sales were $39.3 million, an increase of 6% from the prior year. Organically revenues grew 2%, working in a very tough comparison due to last year being an earn-out quarter for the Genomics business. Acquisitions contributed 4% of revenue, including those from Eurocell and Exosome Diagnostics. Chuck has already commented on the test ramp of EPI. Here I'll provide some additional color on revenue recognition as it pertains to EPI. As a reminder, Exosome Diagnostics has been recognizing EPI revenue on a cash basis. This is the correct accounting treatment given its recent commercial launch in 2018. For patients insured by private payers, the cycle from test report date to payment can be quite long. This is especially true for patients covered by PPOs. For patients insured by Medicare, the bill is put on hold until a decision has been made by CMS on reimbursement. With Medicare approval still pending and given that the majority of our private payer contracts are currently PPOs, very little of the tests performed during the past five months of ownership were collected before the end of December. Thus minimal revenue from EPI was recorded in our Q2 results. Furthermore, cash collections on tests performed before the August 1 acquisition date are not recorded as revenue but rather accounted for in the balance sheet under purchase accounting. In order to record revenue at the time EPI tests were delivered, there needs to be enough cash collection history and detailed analysis performed at the payroll level to substantiate an accrual for likely payment. Given how recently EPI has been commercially launched, it's our current view that there will not be enough cash collection history and substantial analysis completed to allow for accrual-based revenue recognition until we get into fiscal year '20. Thus as it pertains to EPI's issue, we continue to focus our dialogue on current test trends, private payer contract coverage, and public reimbursement decisions knowing that revenue recognition will lag. As Chuck has stated, the test ramp is impressive and now with NCCN guideline support it should accelerate even faster in the coming quarters. Moving on to operating margin for the Diagnostics and Genomics segment, at minus 2.7%, the segment's operating margin was substantially lower than the prior year. However, excluding the dilution from the Exosome Diagnostics acquisition, operating margins were 17.7% or 180 basis points better than last year; the organic margin improvement was largely due to favorable product mix. In summary, for the quarter, our breadth of growth continues to be solid both in terms of end markets and product categories. Having a sequential quarter of double-digit organic growth on top of the second quarter last year, which was our toughest comparison ever, bodes well for the momentum of our portfolio as we head into the second half of our fiscal year. On the bottom line, our adjusted operating margin performance was in line with what we expected at the beginning of the fiscal year, but achieved a bit differently. Obviously, the delay of NCCN guidelines and follow-on Medicare reimbursement has increased the impact of Exosome Diagnostics dilution to our earnings from what we anticipated at the beginning of the fiscal year. However, the stellar operational performance in our core business is mitigating most of this additional dilution, and we expect this trend to continue for the remainder of the fiscal year. That concludes my prepared comments and we'd like to turn the call back over to the operator to open the line for questions.

Good morning guys, thanks. Chuck on the segment performance, can you just touch on reagents solutions? It sounds like things were a bit above trend there for the core biotech business and then on the analytical solution side I'm wondering about a little color there on the business this quarter and then what that says about the outlook in the context of the 15% to 20% target that you've had there?

Okay, great. Well, we were just chatting about this before the call. We should have probably brought out antibodies a little more than we did in the discussion or the press release or anything else, but we had a record quarter for antibodies, we were over 20%, way over 20% growth. We’re strong across the board. The comp on proteins from last year was like a 16% growth, so we're near flat there, but it's holding us, it's going to ramp as the GMP goes up. So we had a stellar performance in RSD, assays also really good across the board, royalties are strong and Luminex is still doing really well. If you look at our entire assay line from Ella all the way through multiplex, we're still double-digit growth, so those strategies are still working flawlessly. It was an exceptional quarter for that division. On ASD, we probably got to stop saying 15% because we keep doing 20% or better. So I'd say the outlook is definitely leading towards 20% more than 15% that we expand, a minimum of pretty strong still. What I can say about - the western blot solution, near 30% a few quarters in a row now. It really outclassed the competition and it's just lighting it up. We know it's a big market, we always said so. How many quarters did I spend speaking about it? It will be a 10-year slog of 10% to 15%, and then all of a sudden about a year ago, it just kind of hit and it's continuing. So the adoption is happening finally for making this automated western blot the new standard out there for doing westerns in the laboratory, so we're already very happy. Biologics has bounced back nicely from about a year ago, I think. We had some pain there, but it's been pretty good. Ella is just starting to knock it out of the park with another quarter of 50% growth. And we don't see any end in sight. The new cartridge platform we announced here is a big deal because this is the first cartridges—it's an open platform. So all those big guys that don't want to let their stuff out of their site can give it to us to pick a closed cartridge system. Now, they can take this system and do it themselves, validate, and give it to us; we need to know what's in it and make the cautious one. So we're going to see even more uptick, I think on clinical support as this thing is still asleep, right? I think in terms of platform, which is about the very first acquisition we did. It's taken a few years, but it really is now moving fast and is very material now in the size of the company. So that addresses both those divisions for you I think.

Yeah, it does. Thank you. And then maybe on Exosome, now that EPI is in the guidelines, do you feel like the pieces are in place for the LCD? I mean, obviously, the algorithm now reflects EPI as an option. But there are other parts of the document that look like they're still being updated. So I'm just curious whether you think the table is now sufficiently set for the reimbursement policy and then what's your assumption on timing at this point, if you have one?

Yeah, so I want to make a few careful comments here. I know I do this for everyone's on the line, so that we don't have the same sets of questions coming one time afterwards. And just to make it very apparent, this is a really highly competitive space as you guys know; there's a lot going on liquid biopsy. Everyone thinks they're better, and there's a new company every day, and it's very aggressive. I can only imagine what these committees between NCCN and NGS are going through trying to see who really has what it takes here to do with the real data. We know our science is undeniable. We know our results are undeniable. We do what we said we'd do; we got to the NCCN a couple of months later than we thought it would be. We know why, we can't even tell you why. I can just say it's extremely competitive and those are the reasons. With regards to NGS, we have to go under what's called reconsideration now for the LCD—that's in process. We all know what the rules state; it's a one to six month process, we have no inside information on the NGS. So we don't know. It's highly competitive. If we knew stuff, we probably couldn't tell you anyway. But we feel very comfortable that our science and our results will prevail, and we'll get through this. It is a great test. It really works. Patients need it, and it's going to happen. So whether it's next month or June, I don't know. But I’m sure you guys are all going to ask again, one-on-one anyway, but that's what we know right now, and this is a huge first step. We do think that we'll see some level of uptick, even though the test rates have been improving drastically, even though we haven't added any salespeople in three months. This should even impact even more. We'll see or know more in a month or two, but we're getting ready. As Jim stated, we have thousands and thousands of kits being requested, and we're logging now 4,000-plus a quarter in terms of tests, and we're going at a 40% to 50% growth clip right now before NCC. So I don't know what all it will move to, but a year from now, I'm sure it'll be a big, big number.

Yeah, okay, thanks. Appreciate that color. If I could just maybe sneak one more in for Jim, Jim on the margins, the expansion of the core business was pretty significant. It sounds like leverage and cost discipline were pretty good there. Was there anything related to the timing of hiring that maybe we should consider when we're modeling the back half? And then I guess along those lines, can you just maybe elaborate on what that means for the year if we just think about the outlook for the legacy business and then how that comes together with whatever Exosome dilution you're expecting at this point?

Yeah, I mean, I think the hiring plays a little bit of part of it in the sense that it's a pretty tough labor market right now in terms of finding the right people that you need. The businesses are a little bit behind on hiring. I wouldn't say it was the biggest contributor to margin expansion; the bigger contribution was the strong volume leverage and some good product mix. But nonetheless, there is a bit of that going on, and we anticipate some of those plans have to be filled here in the second half of the year. So having said all that, as we think about the back half of the year, we still expect strong operating margin expansion in our core business, perhaps not at the same rate that we saw in the first half, and that will do a lot to help offset the dilution we're seeing in Exosome. So our total view for the year hasn't come off what our initial kind of guidance was six months ago.

We still think it's a 200 to 400 basis point dilution, but how we get there may move around a little bit. We had such great over delivery on the core business. If that continues, we can either choose to have less dilution or invest harder. Personally, there are so many products in this Exosome platform; I would love to do more things in parallel if we could afford to. We're ready to go with clinical assays on both the bladder as well as the kidney rejection signatures right now. So we're actively working on getting those clinically started with partners.

Okay. Thanks, guys. Appreciate it.

Yeah, thanks. Chuck, first on Exosome, just wanted to get a sense of now having spent some time with Exosome team knowing products more there and the pipeline. I mean, what's your confidence longer term about the estimates that you had laid out earlier for fiscal year 2022 in the 8-K? And maybe for Jim, I just wanted to ask you, on your comments around Exosome, I just wanted to make sure how are we looking at the next two fiscal quarters? Should we not be assuming any revenue there because I know Exosome actually has some RUO revenue, so I just want to make sure I have that correct.

Yeah, so there’s not much revenue. Jim went through pretty carefully those whole costs and cash to accrual basis, so it's going to take us probably into Q1 of next year to start really getting revenue recognized. The RUO and CDX side, there's some stuff happening there of course. We've got a lot of potential with the blood side as a platform which there's different ways to recognize revenue we're working on. But in general, in terms of us following our model and what's in the 8-K, I think we have no reason to move away from any numbers; if anything we've said is conservative, and I think it's still conservative to be honest.

Yeah, and I'll just add to that. We went to our annual strategic plan update with all the teams, and the Exosome team still feels very, very comfortable and upbeat about hitting that kind of number five years out. With regards to revenue in Exosome, I mean, definitely in the very near term, we expect revenue recognitions to be fairly minimal. The wild card in this fiscal year is still Q4. If we were able to get more earlier acceptance of Medicare reimbursement approval, that could bode well for Q4, but if it's delayed – and honestly, we know it will continue for recognition until we get into early part of fiscal year '20.

Okay, got it. On ACD, I just wanted to make sure I had the number right. Can you remind me again what was ACD in the quarter? And are you – you made some comments about customer retention strategy? So I just wanted to make sure, are you seeing more increasing competition in the market or is there the market dynamics or anything that's changing in the market that's leading you to take that approach?

No, quite the opposite actually; we're at this point now saying integration is probably complete. A year ago, they finished their earn-out milestone quarter, and we found out this like always; they sell the desks and the chairs and everything they can and became a very tough comp. So it was - you can tell with the numbers over often segment and the lumpiness is pretty predictable in the diagnostics portion, so it was low single digits for the quarter coming off that comp we kind warned you about that. Looking forward, it’s a double-digit this quarter, hoping even 20% or better. We're back in place with the full team for the services part of the business. Our new leader Kim Kelderman has done a great job of really building out a strategy and going after what we call customer retention strategies. There has been a lot of focus on getting in, but staying in is important as well with these big customers, and that's starting to improve a lot. It is a big market and it is no less that big market than like the western blot was for protein simple. It just takes a while to get some traction going here, but I feel actually better about the long-term growth for the Genomics division and it probably was around the western blot solution two, three years ago to be honest. We got a pipeline of products coming we haven't talked about yet; we’ve got BasePlex and HighPlex coming, DNAscope is coming and RNAscope is really just starting to get rolling to be honest. So we've got partnerships with all the automation players out there, formerly with Leica, but we have relationships forming and beginning with the others as well; that's going to bode well also. So this too is a technology that is incredible science and really works, and there's a lot we can do with it, so we intend to.

Okay, that's very helpful. And this last one if I could squeeze in, in China obviously a strong quarter, just wanted to get a sense of what's exactly driving the growth there and maybe if you can give us some update on PrimeGene if that's part of the growth?

That's part of it, so we're kind of through the melee we had with them a couple of years ago, and they're feeding cell therapy accounts; they're back in the hospitals with different systems. The growth rates are very large there actually and help contribute to that 30% overall. RUO there—our R&D Systems brand continues to be a 25% or better grower, hasn't stopped and never did. The instruments had a north of 50% kind of growth rate, so we had a very, very good quarter in China, but all our instrument peers out there also had pretty good quarters in China. Probably a bit of it is – could be buy-forwards, off tariff scare, although all the others have commented there isn’t a lot of tariff issues with the life sciences segments in China, but there could be some of that. We’ve always said kind of 30% or better for the instruments there, and this was an exceptionally strong quarter. I’d like to thank for the execution. We have built our team bigger. We have an applications lab, demo lab now there performing, so we have new people now in different cities. It's just expanding and I think we're starting to get more of an accelerating stride, rather than still – we're still overall the company a $50 million kind of business in China. So there's a lot of room for growth at this level in my opinion still. We've always said kind of 25-ish as our goal; we had two quarters at 30% or better; I'd like 30 better; and I’d like to think we can continue there, but we'll see.

Hey guys, congrats on the quarter. And thanks for the questions. You previously guided to at least high single-digit organic growth for fiscal '19, any change to that now that you've finished the first half of the year with double-digit growth? Just how should we be thinking about the back half?

Well, maybe I’ll put in my comments about employees all being effective in hitting two quarters in a row and being the perennial double-digit grower, which was our goal. We're probably still going to speak in terms of range. We've been saying 8 to 12; let’s say 9.5 to 12. So it’s hard to promise 10. 10’s a big number to promise, but we're certainly seem to be doing it and doing it quite easily here right now. So we'll see.

Great, and then can you just give us some thoughts on your outlook in Europe given there are some macro uncertainties out there? How long do you think that strength continues?

Yeah, we've had a nice two-year run of double-digit growth in Europe. And we kind of guided last quarter that we probably see ourselves in the high single digits going forward, safely as we get bigger; and we're kind of there this quarter, although it's more mix reasons that I’ll say I think. I don't think we're seeing any real issues with Brexit or economies faltering or funding going away in Europe. Our execution is still doing really well there. And our harmonization strategy within our divisions is building out full subsidiaries in these new countries that we’re in and still building growth and the share we’re taking. So I think high single digits is very safe for the short term, and I’m still hoping we can do better, but there are certainly risks in the air; people are talking about fast in Europe; a lot of them seem to be; so we haven't seen as much as most, but we saw a little bit through this quarter for obvious reasons.

Okay, and then if I can sneak one more in on ACD, how should we think about the timeline and path forward for potential clinical tests using ACD's platform?

Well, that's a hard one. We need partners for that and we're working with some. There's a lot of opportunity. If I had to focus on what we're going to put our regulatory and clinical strength in probably ExosomeDx, to be honest right now. But we are focused on partners that have a lot of interest. There are a lot of people wanting to work with us. There’s some I can't talk about; they want to stay hidden right now, but we have some newsworthy partnerships established already. This is a great platform, and it’s a very different kind of biopsy. End of day, you still need tissue, and there are a lot of tissue banks out there. There’s a lot of work to be done with tissue, and solid tumors are still an area of great concern for oncology, so we see a great future for this as a platform. And maybe we’ll take more partnerships. We are not going to do all this on our own, obviously.

Hey guys, good morning. This is Charlie on for Patrick. If I could just touch back on China, on the core agent side, I think you guys had talked in the past about picking up share for maybe some of the smaller players who don't really have the ability to scale that business. So can you kind of just help us tease out the runway for those share gains and maybe what you kind of use the market rate versus what share you are gaining?

Yeah, it's a great question. I'm glad someone asked it. Lately we aren't talking enough about our boom butter, and our core is not going to the park lately, allowing us to do all these great acquisitions and fund the way we're funding them. But with antibodies over 20% growth, we're clearly taking share. We think as a market, antibodies sit somewhere in the six to eight. It's a broad category and it depends on what area you want to talk about antibodies, but as a holistic kind of market it’s about that range. We're sitting here at over 20%, and we've been double digits for a while, so we know we are. On why are we – I think there are two reasons. One, I think the flight to quality; validated antibodies, GMP reagents, GMP proteins are driving up a little guys a lot, and as major players in the market are benefiting from this, certainly, and it’s only going to get better. When you look at what's going to happen with GMP, needed to be in everything just two to three years out, we actually think we can move fast enough to scale up more and more GMP equipment and getting beyond just our evolve because we think the world with the whole Car-T, Biosimilar, everything happening in immuno therapeutics—the demand is going to throttle point for all these therapies, and being the reagents they seed this self. The other thing is our website. I mean, we have invested heavily in our website. We had a good model. I mean, Abcam was 10 years ahead of us; they had an exceptional website, and they still do. But ours is pretty darn good now, and we have a broad portfolio; we can do near single point ordering in a lot of areas, we're working on that as well; we can have a one basket approach. The amount of content we put it on online; you've got to have lots of pictures and lots of citations and a lot of data that have got to go online to actually move vendor buyers because there are tens of thousands of them. Researchers are always in a quandary of what they need, what they're looking for. So you’ve got to have that content online, and we've been going after that for good five years now. It helps, so we have a very big program on monitoring our digital metrics and our traffic on our website has been going up double digits, quarter on quarter for – it's been three years now this July when we launched the first new website. So it’s had a huge impact for us to increase our share, we think, so those are two main issues I think. By the way, we are – and the other part I guess would be great products. We are able to make products in a lot of cases no others can make. This is hard science. We have the best portfolio; we have the tough stuff, so when researchers want to get the best quality and in some cases we’re the only skew that they know it can work, they come to us, so that hasn't gone away either.

Got it, thanks. And then on the core diagnostic side, I think last quarter there was some lumpiness around timing there. Did that come back in the quarter, and just trying to figure out how we should marry that with the back half of the year?

Yeah, always lumpy, and it will be for a while. But yeah, it did recover pretty well. It had a tough comp for moisture too, yeah, I realized that, but it was modest, decent growth, and again, we see a better second half. We are seeing often these new programs—the pipeline I’ve been talking about these last few quarters are starting to hit, and that will only get better.

Thanks.

Thanks. Chuck, you just talked about the favorable backdrop for your reagent business on the demand side. Can you talk a little bit about the pricing trends and whether the increased demand for GMP and validated products maybe gives you a little more leeway on price there?

In fact, it does. GMP-related products are roughly 30% higher in price, and we're not the lowest cost of products in town anyway. So researchers will pay for quality. When you're talking about GMP grades for production and for finishing out clinical and whatever, they're okay with paying it. In terms of price overall, we've had a decent price here, about 1% or so better on price. So we have the metrics, the systems in place and actually know how to monitor price. We didn't have that two, three years ago. And so we're able to now build it into our strategies. All of us in this team come from large companies that were used to having very strict pricing strategies and tools to work on price, and we're finally in a place where we can now do what we know how to do, and that's part of the game. So if you see us at 10% in our reagent business, you can count on 1% being on price, whereas four or five years ago we would have been 8% or 9% because we wouldn't have known anything well about price and probably wouldn't have had any price; so that’s part of it. Now market conditions change all this, of course, but that's the current state of affairs, and with decent funding in our industry, I think everyone's probably prescribing to that kind of goal, I think.

Got it, and then jumping over to EPI, I just want to make sure I heard that right. Physician uptick doubled sequentially. Is that right? And if so, where was the incremental domain coming from? Was it existing practices, Greenfield docs, just a little bit of color on that?

The double uptick was on the kit request. And we're at about - we're public on about 1,100 or so urologists, which we think is roughly 10%. So we're just starting to get calm, really. In terms of the test uptick, it's more like 40% and we're going to be – we hopefully – that’s without NCCN guidelines. So how that goes forward, hopefully up, but this is step one for an increase. And then step two, of course, is Medicare. So for a good growth rate, probably all we can really assume right now is all the other issues we got to deal with.

Thanks, guys.

Remember, this is an LDP model. So if we're growing 40%, 50% a quarter, we got to do 40% to 50% more tests in our lab. So it’s a lot of scaling up you got to do in this model. It isn’t just selling.

Thank you, just a few perhaps quick ones here. First off, on the reagents business or the protein sciences business overall, are you taking any of the performance and upside and investing triggering any investment to support future growth or upside there really going to fund the diagnostics business—that's my first question.

Well, we are a company and not a set of companies, so it all goes in a strategic pool. Those that need to fund, but I will make a comment in terms of investments for the core business and for Protein Sciences—it’s all about GMP my friends. And we are investing at about double the rate in capital we have been in terms of overall, which isn’t a lot by the way for this company, but in terms of a business, it is going up because we see the potential in GMP gain proteins and reagents to be really, really big going forward, mainly to support our cell therapy business, and we’re going to have news coming out soon. We’re building more and more around this model on large cell therapy abilities, and it’s going to be no less as exciting as ACD and ExosomeDx has been in my opinion, so another quarter or two, and then hopefully we'll be talking about that more. We’re getting ready, I’m not kidding, and you look at the numbers of what Car-T and cell therapies are going to be in terms of a market. It’s unbelievable, and there’s – no one is ready for it. There are so many clinical trials going on, and how they're going to get the stuff they need to actually be in production for these therapies. We all got to get going now, so there’s a lot to go after. Lead times in some of these big pieces of equipment for mentors, lyophilizers can be a year to two years because they're almost all custom a little bit, and I can tell you we're on it.

That's helpful color. And then my second question on ACD. So the path of getting back to double-digit growth is that more of a fiscal 2020 event, given that the comparisons in the second half of '19 are still not easy, or you could get there after the year?

No, this quarter. This quarter is going to happen. We're finishing up integration. We didn’t really start integration until this milestone, and now single is over. There's one thing I learned in this; we gave these guys an 18-month turnout because of only 18 months we left them largely alone. We didn’t start integrating as soon as we should have, and we spent the whole year integrating, so a few of them left with their money. Of course, the leader we knew was going to leave. We brought in a fantastic new team and a leadership team, and we're working on stuff and a lot of Q1 comments are still there as well, of course. The head of commercial is still a fabulous person and it's just about getting back on it. I can't tell you; acquisitions are acquisitions, and they're all different, and they all hit a one-year bump. I think when you start integrating; we're finishing—we're getting to the end of that bump; and I'm hoping that will be a double-digit growth starting this quarter going forward here safely and then ramp from there.

And final clarification on EPI, have you already submitted your request for reconsideration to NGS for their LCD or is that something you expect to do in the coming weeks or months?

I think we submitted, resubmitted, and resubmitted. I think to delay off the NCCN, and I got to find out from Tom just what version we're at with the NGS. They’re well aware of it; I know that. So the process is ongoing. We're in the process for that to happen. So I kind of believe that we have anything waiting around to be filed or what?

There's communication with NGS that day.

Okay, thank you.

Great, good morning everyone, so Chuck, just staying on the cell and gene therapy side of the business do you need to make any additional acquisitions there to round out that prior portfolio? Or do you think you have everything you need? And now you just need to build everything out internally there?

It's a good question and very insightful. We've been public about –we're probably not looking for any new platform like an ExosomeDx or an ACD, but we are still rounding out. We think it's a fantastic potential workflow that collectively together could be just as big or bigger than an ExosomeDx as a platform. I think we're probably one or two small acquisitions away of filling out that workflow. As you know, we've got the Ella platform; we've got GMP proteins; we've got the Cloudz; these—we don't have bioreactors. We have a partnership in place. We don't have gene editing, but we have a partnership in place, so there's some things we're still looking at to do that, and I would—I can't promise you acquisitions, but that is certainly where we're hunting, and given our history, it’s probably likely we're going to get something.

Okay. I understand, and then maybe just outside of the cell and gene therapy side, how do you think about M&A going back into calendar 2019 year, and do you think you've reached a point where you'd like to go back out and acquire maybe some larger businesses or you're still going to stay more in the bolt-on side?

We're in the bolt-on site, especially for now. I think given that we're a year later on finishing integration on ACD, which I just explained, and I want to get that really off and running safely. And then we're right in the middle on ExosomeDx, so these are some big nuts that we paid a lot of money for, and we got to get right. Our board wants to make sure we get them right. We can strap on these little bolt-ons, no problem without a lot of work like black Cloudz was in Atlanta and things; it’s not an issue, and we'll continue that and be optimistic. Frank Mortari is a busy guy here, looking to deals for us, and we still have a pipeline well over a hundred; we're participating in a couple right now, and we'll see what happens, but probably nothing large. We're at two times leverage ending date, Jim, right? So we've got some powder if we need it, but something that came to a process that we really want to see—and if they even though we're not really ready and we wouldn't like seen a process, they came to a process, would we participate? But we don't— you don't do well on in public processes anyway. So I never say never, but it’s largely going to be small bolt-ons this year, I think, and hopefully a few; we'll see.

Okay, that's helpful, and then I know few others have touched on this, but just on the protein platforms business, this thing just continues to be on fire. So Chuck, what inning are we at right now with that business? I'm just trying to figure out how much longer can we grow at this sort of rate?

If you're going back to the 15% number for sure people are trying to squeeze us to say 20. We've been at 20; I think it's going to be 15% to 20% for years. Western blot, we're still at 10% market share while growing 10%, we're finally hitting stride. There's a long way to go. Biologics is safe. In SimplePlex, I don't even know what to tell you. This thing can go to so many markets. It could even be in point of care; this micropoint deal alone in China could be a $100 million deal. We got to wait two years for clinical to be done, but can you imagine the size of doing patient monitoring across all of China for cytokine storms during all their stem cell therapies? This is the company led by a guy who did Mindray over there. So we're really impressed with him and his team. He’s extremely well connected. He knows he's doing; his panels were great; he's already wanting more panels for more things going on with us, and this is just one area in a different country. We've just started doing stuff here, so we have a lot of different cartridge stripes on the drawing board here around the Ella platform, and I think it’s going to be amazing if you look out five, ten years.

Hi guys, this is actually Casey on for Paul. We want to know what were the standout instruments in the protein simple part of your business?

Almost all of them, everything, but—so we have the jess, those two were okay, but not as strong as the other bigger ones. The biggest standout has been the western blot and western jess, and jess was two-thirds that after the sale. So we're letting up probably right now because there's such demand for this new instrument jess, which is the big brother to west. This allows us also to do things the west to go more academic where there's more pricing pressure and stuff, so it’s always tries; strategies work very well. And then biologics has really come back pretty well and that's also been a 20% grower. So, and then Ella has been growing between 50% and 100% every quarter for the last couple of years. So I just mentioned enough on that.

Okay, great. And then one final question. In Q3 coming up, will you guys see any effect from the government shutdown as far as government spending?

Yeah, I asked that. I got questions out to my teams and commercial have no one thinks so. I was a little more concerned about the cold weather last week and all the schools and array shutting down, but not hearing anything yet.

Okay. Well, thanks everybody for listening. We had a record number of people online too for this, so really happy for that. It was a great quarter and we hope to deliver another one next quarter. So talk to you then. Thank you.