Bio-Techne Corp (TECH) — Q2 2020 Earnings Call Transcript

Good morning and thank you for joining us. On the call with me this morning are Chuck Kummeth, Chief Executive Officer, and Jim Hippel, Chief Financial 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 2019 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 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, Dave, and good morning, everyone. Thank you for joining us for our second quarter conference call. Our organic revenue growth in the second quarter increased 6% year-over-year, although adjusting for the impact of certain timing headwinds, our underlying organic growth was closer to our year-to-date growth of approximately 10%. In Q2 of FY'19, we experienced some large favorable orders from a handful of biopharma customers who were launching clinical and/or preclinical trials. These large orders mostly impacted our Protein Sciences segment in Europe and were for Reagent big box instruments and related royalties that did not repeat again in Q2 of this year. However, our end markets remain strong with our day-to-day retail business growing north of 10%, our Genomics RNAscope business still growing north of 20%, and China also continuing to grow over 20%. Also, our team performed operationally very well in Q2 with adjusted operating margins expanding year-to-year ahead of schedule, and we reported record operating cash flow. Now, let’s cover details for the quarter. Starting with our performance by geography, the North American market continues to be healthy with organic growth in the mid-single digits. Our growth in the region was low-double digits while academia grew mid-single digits. The region's overall growth was down with the timing of the royalties from our key customers. Including a one-time catch-up of royalty payments that benefited the prior year quarter, excluding the royalty impact growth in the region was over 10% in Q2. Our digital marketing efforts continue to bear fruit, especially for our retail antibody and protein portfolios, with our website driving a double-digit increase in website traffic across our brands, including over 20% increased traffic for our Novus website year-to-date. We are implementing several initiatives to get customers to spend more time on our website and add items to their shopping carts once they visit us online. Search engine optimization and continual refinement of our website and digital marketing strategy remain a strong order for growth for the company going forward. Separately, we continue to strengthen our presence at industry trade shows, showcasing our products and technologies that are expanding Bio-Techne's growth. With strong customer interest in our Reagent and insulin solutions offerings at the 12 trade shows we attended in Q2, and the eight additional industry trade shows on the calendar for Q3, including ACR and ADI conferences taking place in April and May, respectively. These trade shows represent a key part of our marketing strategy and generate significant marketing for the company. In fact, our leads have increased 75% upon the new investment this past year. Moving on to Europe, which was the largest drag on our growth in Q2, down approximately 1% organically from the prior year. Excluding the timing headwinds that impacted Europe, the underlying organic growth in that region was in the mid-single digits, which is the same organic growth rate for the first half of FY20. Not bad, but certainly lower than what our company has been accustomed to performing during the past couple of years. Latino Europe will be redoubling its efforts in the second half of FY20 on the cross-selling of double-digit growth the better part of the last two years. Our key growth platforms such as Simple Western, Simple Plex, and RNAscope are still relatively underpenetrated in the European market. In addition, we will be supporting a sales effort in Europe with more of the Digital Solutions practices that have driven the successful double-digit growth we've seen in our North American retail region businesses. Thus, we are expecting sales in Europe to accelerate in the second half of FY20 with growth rates targeted at the high-single-digit level. Finally, we had another good quarter in Asia. China especially continued to perform very well with another quarter of more than 20% growth. The growth was broad-based across our Reagent and Instrument products. The Life Sciences industry remains a high priority in China's five-year plan, and we continue to be well-positioned and very underpenetrated in our key growth platform. In the near term, the coronavirus situation will cause some disruption in Q3 with extended days for the Lunar New Year holiday and virtual quarantines in some Chinese cities. Obviously, the longer this virus disrupts their life throughout much of China, the more negative impact it will have on our growth rate for China. Long-term, it is unfortunate that an incident such as this outbreak will likely strengthen China's already firm resolve to promote heavy local investment in the Life Sciences phase for years to come. Now, let’s dive a little deeper into the performance of our growth platform, starting with those within the Protein Sciences segment, which grew 4% organically for the quarter. As I’ve already indicated in my opening comments, Protein Sciences growth was materially impacted by a handful of large biopharma customer orders in the second quarter of FY'19, as well as a significant royalty payment, none of which repeated in the most recent quarter. Depending on the customer and the application, these prior-year orders were a headwind to our Reagent instrument and royalty revenue streams in Q2. Absent these specific situations, the segment’s organic growth was in the high-single digits in Q2, led by our run rate Reagent instrument consumables products in the low-double digits in the quarter. Within Protein Sciences, we recently made a very important leap forward in positioning Bio-Techne as a leading tool and solution provider for the production of therapies. In January, we announced the creation of a joint venture between Bio-Techne, Fresenius Kabi, and Wolfe & Wolfe, a consortium that can offer a complete and simplified sale of gene therapy solutions. We believe the combination of our collective sales and marketing efforts, enormous count, technical know-how and knowledge create the potential for significant commercial synergies. By combining the novel engineering solutions offered by Fresenius Kabi and Wolfe & Wolfe with our GMP proteins, polymer T-cell activation, non-viral vectors and assay technologies, the joint venture is positioned as a sell in the gene therapy production market. We are very excited to get this initiative off the ground and there has already been great interest in the gene therapy community. Over the next year, while this new commercial consortium continues to drive awareness of our gene therapy solutions and placement of our products in increased clinical trials, we continue to work on our new dedicated GMP protein factory. Construction remains on track to provide GMP proteins in large scale for our gene therapy customers by the second half of fiscal 2021. Now shifting to our Diagnostics and Genomics segment, which grew 12% organically during the quarter. Here, the OEM Diagnostics tools and control business grew mid-single digits overall, with growth in most of its major product categories. As expected, following double-digit growth in Q1, the OEM order time was less favorable in Q2 than it was last quarter, although new customer wins and product launches are starting to smooth the large quarterly fluctuations in this business. Also, our genomic RNAscope continued with its 20%-plus growth trajectory in Q2. The initial Q1 launch of the RNAscope HiPlex assay, which enables the simultaneous detection of up to 12 RNA targets, ramped nicely in Q2. We are currently developing additional HiPlex capabilities to address additional Genomics studies, targeting significant increases from our current 12-plex capabilities. Stay tuned for more product announcements. Now an update on Exosome Diagnostics and the ExosomeDx prostate test. There were several positive developments in Q2, and there is still much to do to make sure this noninvasive prostate cancer test becomes available to all patients over 50 with elevated PSA levels who are contemplating a more expensive, risky, painful, and invasive tissue biopsy. To begin, the final decision from NGS went into effect December 1. Since then, we have been billing Medicare for applicable patient tests and are already seeing payments come in. However, the LCD language administered by NGS did not mirror the coverage recommended by guidelines. For example, the final LCD does not allow for Medicare reimbursement more than once per patient for ongoing monitoring, nor does it allow reimbursement for certain ethnicities with certain family medical histories. Of course, these calculations were included in our clinical studies, with outcomes consistent with the overall study. The NCCN recognized these population sets can benefit from the ExoDx Prostate Test, and we are working to make sure NGS does too. Thus, we are currently in the reconsideration process with NGS to mirror the Medicare coverage with the recommendations of the NCCN guidelines. In the meantime, early rates that tests meet the Medicare criteria are encouraging, and we will continue to work to expand the indication over the coming months. For ExoDx Prostate Test administered to applicable patients, we have been billing Medicare and getting paid. We're starting to see Medicare payments on submitted claims as early as late December and the pace of payment has increased rapidly throughout January. We also made progress on the private care front in Q2 with four more regional insurers contracted to reimburse ExoDx Prostate Test uncovered patients. Although the base is still relatively small, our collections from target payers increased by more than 40% sequentially since Q1. While we still have work to do to get the large national private payers signed up for reimbursements, the national payers are taking our meetings with great interest. They are becoming more aware of the health benefit to our customers and plausible financial benefits to their bottom line by avoiding more costly biopsies as well as the unintended infections that can result from them. However, they are being very careful and methodical regarding reimbursement for our test. Before considering reimbursement, many large private payers want to see the results from a clinical utility study published in a peer-reviewed journal. Exosome Diagnostics performed such a study before our purchase of the company. It was conducted in collaboration with CareFirst Blue Cross Blue Shield of Maryland. This study has been submitted for publication with a peer-reviewed journal and should be released before the end of our fiscal year. Separately, we are in the process of submitting our premarket approval of PMA filing to the FDA. We call it the ExoDx Prostate Test with the breakthrough device designation from FDA at the start of the current fiscal year. It is difficult to predict the exact timing of the potential FDA approval, but achievement of this status will deepen our competitive mode and allow us to have higher priority for reimbursement from private payers who classify made products with higher quality. Equally important as getting paid for the ExoDx Prostate Test is expanding awareness of the benefits of ExoDx and rapidly increasing tests performed on applicable patients. Since the start of this fiscal year and while we have waited for Medicare coverage, we have slowed any new commercial investment into sales and marketing. Instead, we have focused on retooling our go-to-market strategy and ensuring we have the best commercial talent to execute on that strategy. Even without much new commercial investment, the number of Exo Diagnostic Prostate Tests performed in Q2 grew double-digits sequentially through Q1, as well as double-digit year-over-year. Going forward, our commercial strategy will include marketing to the patient directly, in addition to urologists. We want to make sure patients are fully aware of our non-invasive options available to them, to assist in the determination of their risk of prostate cancer before deciding whether to proceed with a painful biopsy. We believe the best and most cost-efficient channel for awareness is digital marketing and events. In Q2, we launched a redesigned Exosome Diagnostics website. The new website features portals for patients and physicians, scientific literature, and information on the benefits of our ExoDx Prostate Test. We will be coupling this enhanced website with digital marketing efforts by leveraging the proven effectiveness of our digital solution team’s expertise to increase awareness of patient demand for ExoDx. These search engine optimizations and digital marketing efforts aren’t yielding immediate results, but we anticipate this campaign, combined with the recent regulatory reimbursement milestones, will favorably impact ExoDx Test lines by creating patient demand. We remain on the pathway for growing ExoDx buy-ins and are excited to enable men with ambiguous PSA scores to avoid unnecessary prostate biopsies. With a pipeline of additional tests, companion diagnostic applications, and partnership opportunities, there are several different avenues to create value with Exosome Diagnostics. We have a few partnerships in place and are in discussions with several pharmaceutical companies for potential companion diagnostic applications of Exosome’s diagnostics technology. We also believe our proprietary Exosome-based technology has broader diagnostic applications, including improving the performance of existing pipeline tests from other diagnostic companies. In summary, fiscal 2020 remains in good shape. We delivered year-to-date organic growth of nearly 10% and are still aiming for double-digit growth for the fiscal year. Our core agent portfolio continues to perform very well, while our adjacent proteomic and genomic analytical tools are still ramping in very underpenetrated markets. Meanwhile, our liquid biopsy and cell and gene therapy offerings remain in the very early stages of realizing their potential, with each representing true transformational opportunities for Bio-Techne. Our competitive position has never been stronger, and the team is driving toward even better execution in the second half of fiscal 2020. With that, I will turn the call over to Jim.

Thanks, Chuck. I'll provide an overview of our Q2 financial performance for the total company and provide some additional color on performance of each of our segments. Starting with the overall second quarter financial performance, adjusted EPS was $1.08 versus $1.06 one year ago, with foreign exchange negatively impacting EPS by $0.08. Most of the foreign exchange impact was due to transactional effects for invoices collected in Euros by our U.K. entity, which serves as our European commercial operations headquarters. GAAP EPS for the quarter was $2.02 compared to $0.45 in the prior year. The biggest driver for the increase in GAAP EPS was $120.5 million combined realized and unrealized gains on our investment in ChemoCentryx. Q2 revenue was $184.9 million, an increase of 6% year-over-year on a reported and organic basis. Second quarter reported sales include a 1% growth contribution from acquisitions and a 1% unfavorable impact from foreign exchange translation. By geography, the U.S. grew in the mid-double digits while Europe declined low single digits and China grew over 20%. As for the rest of Asia, organic growth was in the low single digits. By end market, which excludes Asia, our diagnostics division and other OEM customers, biopharma growth was in the upper single digits, while academic growth was in the mid-single digits. Moving on to details of the P&L, total company adjusted gross margin was 70.6% in the quarter, compared to 70.9% in the prior year. The decrease was due to unfavorable product mix, foreign currency headwinds, and to a lesser extent, recent acquisitions, partially offset by productivity gains. For the remainder of fiscal 2020, we expect gross margin to remain fairly consistent with these levels. Adjusted SG&A in Q2 was 28.6% of revenue, a 70-basis-point improvement compared to the prior year. This volume leverage and productivity gain, partially offset by investments in our core business to drive near and long-term growth. R&D expense in Q2 was 8.9% of revenue, 20 basis points lower than the prior year, primarily due to volume leverage. The resulting adjusted operating margin for Q2 was 33.4%, an increase of 90 basis points in the prior-year period and 160 basis points higher than our first fiscal quarter results. Looking at our numbers below operating income, net interest expense in Q1 was $4.5 million, decreasing $1 million compared to the prior-year period. The decrease was due to a substantial reduction of bank debt during the quarter. Our bank debt on the balance sheet in Q2 stood at $383 million, down from $486 million at the end of Q1 fiscal year ‘20. Recall that Bio-Techne has been a long-term shareholder of ChemoCentryx, a biotechnology company with a portfolio of novel therapeutics targeting a variety of orphan diseases. In our Q2, ChemoCentryx reported favorable top-line data from a stage III trial of avacopan in antibody-associated vasculitis, or AAV. This favorable data release drove significant appreciation in our ChemoCentryx investment and monetized approximately $50 million of its gains. During the quarter, we applied these proceeds, as well as a portion of our strong free cash flow, to pay down $103 million of our long-term debt. Other adjusted non-operating expense was $2.5 million for the quarter, compared to $1 million of other income in the prior-year quarter, primarily due to the impact of transactional foreign exchange. The GAAP reporting of other non-operating income includes realized and unrealized gains for our investment in ChemoCentryx. Moving further down the P&L, our adjusted effective tax rate in Q2 was 22%, which we expect to remain fairly consistent for the remainder of the year. Turning to cash flow and return of capital, a record $72.5 million of cash was generated from operations in the quarter, driven by strong customer account collections and favorable timing of tax payments associated with our realized gain on ChemoCentryx. Our Q2 net investment in capital expenditures was $14.6 million mostly driven by construction of our new GMP protein factory, which is on schedule for completion by the end of the calendar year. $12.2 million of dividends were paid out in the quarter, and average diluted shares to the 39.6 million shares outstanding. Next, I'll discuss the performance of our reporting segments, starting with the Protein Sciences segment. Q2 reported sales were $141.5 million with reported revenue increasing 4%. Organic growth was also 4% with foreign exchange having an unfavorable impact of 1% on revenue and acquisitions contributing 1% to revenue growth. As Chuck previously described, growth in this segment was negatively impacted by last year's timing of a few large biopharma orders and OEM royalties that did not reoccur in Q2 of the current year. Absent these items, revenue from the thousands of other customers that Protein Science served increased nearly 10%. Operating margin for the Protein Science segment was 43%, a decrease of 50 basis points year-over-year due to unfavorable foreign exchange and the recent B-MoGen acquisition. Turning to Diagnostics and Genomics segment, Q2 reported sales were $43.8 million, an increase of 12% from the prior year. Organically, revenues also grew 12% with foreign exchange translation having a minimal impact on revenue. As Chuck mentioned, our OEM Diagnostic Tools business increased mid-single digits and our Genomics RNAscope business grew north of 20%. With regard to Diagnostics, as I stated in prior calls, revenue from ExoDx prostate tests performed continues to be recognized on a cash basis. As Chuck mentioned, our favorable local coverage decision from Exosome Diagnostics Medicare administrative contractor NGS became effective for tests performed on or after December 1. Despite the effect of LCD, we will continue to recognize Medicare revenue on a cash collection basis until we have a sufficient history of claims paid. Chuck provided a thorough update on the progress we made on ExoDx test ramp, public and private reimbursement, as well as the continued actions we are taking to accelerate both. While still on a relatively small base, revenues from Exosome were up nearly 60% from last year and we expect the growth rates to improve from here. Moving on to the operating margin for the Diagnostics and Genomics segment, at 2.2%, the segment's operating margin improved from a negative 2.7% reported in the prior year. The increase reflects favorable volume leverage and productivity gains from both our Diagnostics and Genomics divisions, as well as slightly less dilution from Exosome Diagnostics. In summary, we believe our year-to-date performance in the top line is most representative of how the majority of our business performed in the second quarter. The commercial focus we are taking in Europe can set us up for even better organic growth in the second half of fiscal year 2020. However, the situation in China with the coronavirus is a risk factor that we are unable to quantify at this time. That being said, our teams throughout the rest of the world are motivated to maximize the potential in order to achieve double-digit growth for the company's overall fiscal year. On the bottom line, our culture of success-based investing and operational prowess drove our adjusted operating margin in Q2 higher over prior years ahead of schedule, and it drove a strong quality of earnings of selected operating cash flow. We expect our operating margin to continue to increase sequentially from here, just as we guided at the beginning of the year. That concludes my prepared comments. And with that, I'll turn the call back over to the operator to open the line for questions.

It’s Chuck. Thanks. So, my first question, I mean look, I appreciate the biopharma comparisons that were tough in Europe, but you commented about some recovery here in the quarter. And could you elaborate a little bit on that? And what's your expectation for continued improvement here for in Europe? And what's your outlook, given the last sort of two-plus years of the strong growth in that geography?

Sure. I’ll provide a detailed response since everyone is interested in the European analysis. As we mentioned last quarter, conditions in the region are softening, and that remains true. However, the situation is quite inconsistent. There's not a single cause for the decline; rather, some areas are performing well while others are not. Germany is our largest market, and it’s experiencing significant downturns. The U.K. is stable, but Germany is facing challenges heavily influenced by timing and biopharma factors, along with a major order timing issue related to Genomics that we previously noted. In the instruments category, which is among our largest segments, we faced a tough comparison due to past performance from Austrian Simple Western, resulting in flatter results overall. Consequently, without that growth, it has been difficult to see an increase. We anticipated fluctuations in biologics, which had a mediocre quarter but is showing signs of recovery this quarter. Simple Western faces tough comparisons moving forward, but given our underweight position, we remain optimistic about its future. Simple Plex also faced timing challenges this quarter tied to a significant order, yet we see promising growth rates, particularly in instruments, and we’re focused on increasing consumables to support these instruments. Overall, we expect an improvement following a weak quarter for instruments. On the Reagent side, the dynamics in academia and biopharma are varied, with some areas performing well while others are struggling. We’re managing reasonably well in terms of our Reagents, despite past fluctuations with our assays. Currently, ELISA sales are down in Europe, and biopharma projects are experiencing a slump, contributing to a weaker performance overall. We have some competition in this space, including ABKIN and Bio, which has its product lines. The market isn't expanding significantly since multiplexing is capturing most of the new growth. While the overall performance might be mediocre right now, we don’t expect a significant negative impact. Each player has their share of the market, and it collectively adds up to a challenging phase for us, particularly affecting our Reagent sales and overall division numbers. However, I anticipate a rebound. We experienced significant one-time events affecting our royalty income this past year, which are not repeating this year, impacting our returns. This context helps clarify the state in Europe and the instruments recovery we are currently witnessing. December was an excellent month in Europe, with performance more on par with October and November. We hope to maintain that momentum.

Okay. Then if I could ask on ExosomeDx, I didn't catch the contribution in the quarter, if you provided that. When do you think you'll have an answer on the reconsideration for the first one-time use of the test? And, Chuck, I was hoping if you could maybe take a step back and give us a view of what your priorities are now, given this acquisition? Now two years into this acquisition. And, Jim, if you could remind me what you are baking in terms of operating margin impact, if any, from Exosome this year?

We're currently focused on getting everything organized. We've been enhancing our sales team, updating our website, generating patient interest, and managing dilution effectively. We've made significant progress, especially with Medicare payments starting to come in, even in December, despite the LCD change that took place on the 1st. This was a crucial development for us. We've implemented the PRF policy requiring doctor's signatures, and that process has been very successful. Medicare has been consistent in their payments, which are increasing rapidly. We anticipate that our Medicare revenues this quarter could reach up to $1 million, a substantial increase from last quarter. It aligns with our expectations. Moving forward, our main focus is to invest as we grow and to drive patient demand, which is essential since the reconsideration process will take some time. We're currently dealing with NGS, which isn't the most supportive of the MACs, and this reconsideration effort will extend into next summer. We need to prepare for the meeting agenda and other related activities. While we're optimistic about our progress, communication from them isn't proactive. We've submitted our materials, but they've only indicated that we should have submitted utility study data along with the guideline study, which we were previously informed was sufficient. The utility study is complete, and we are working on getting it published. This will help us with both the reconsideration process and gaining national insurer coverage.

And what the margin front needed as pertains to Diagnostics, as we see the cash collection start to ramp here, as Chuck mentioned, we’re already seeing it ramp here in January, the costs will not be ramping at the same rate that revenue is. But we should see less and less dilution going forward, although not profitable yet, we expect to see less and less dilution going forward from assays on Diagnostics. And that’s why we have confidence in our operating margin continuing to increase sequentially from here over all the company.

Okay. And then if I could ask you, Jim, you provided a long-term view at the last Investor Day back in late 2018. You were expecting 1.2 billion in revenue by fiscal year 2023, mid-teens organic growth, 40% operating margin. Is that still in the line of sight, given some of the near-term challenges of Exosome and the European shortfall that you're seeing largely because of compares? So, just help us understand any changes in the sort of long-term outlook here.

There is no change in the long-term outlook. We recently completed our annual update of our five-year outlook strategy and it has actually reinforced our confidence in those future numbers. One quarter doesn't define a trend, but we have identified specific issues that contributed to some challenges in Q2. Overall, we believe the underlying markets are very strong. Our performance and the demand for our reagents from the approximately 100,000 customers we serve remain robust and positive. Additionally, there is significant upside potential with Exosome and cell and gene therapy, especially in the longer term, looking two, three, or eight years ahead.

Let me address this specifically. We will be back in New York this fall giving another update, which we do every other year. The new five-year plan will project a figure of $4.5 billion, not $1.2 billion. Looking back a year, the $1.2 billion included Exosome Diagnostics, but we didn't account for any cell and gene therapy in that figure. However, by 2023, we expect to have some cell and gene therapy in our plans. For 2024, five years out, we're expecting $1.5 billion due to a strong component of cell and gene therapy. We anticipate that the figure from Exosome Diagnostics will be $150 million or more. Both of these growth drivers remain strong. Additionally, we've consistently communicated that we have never promised more than mid-single-digit growth in our core, and we have been performing significantly better than that. There is some caution in the $4.5 billion figure, but we still feel very optimistic about that projection as we look four to five years ahead.

And remember, there's no acquisitions in that. That's organic, and it's likely we're going to do more stuff, so.

Morning, guys, thank you. Chuck, just to clarify on the timing-related items, I think I got you four points or so, is that a revenue bullish that you fully expect to capture in the second half of the year?

The one-off, the timing issues you're talking about or what?

Yeah.

One major factor was the royalty adjustments that won't occur again. We're maintaining our regular royalty payments and likely improving as our licensees expand, leading to increased revenue. Another significant factor is the OEM orders we've discussed, which will soon be behind us. I also believe that some timing aspects will resolve themselves.

Okay.

But all in, those one-offs around the order of being roughly $6 million. So it’s like Jim said, it's over 3% all by itself.

Yeah. Maybe just to that point, I’m just thinking about the instrument performance during the quarter but then also what you think you might have in terms of improvement in the back half for Europe. How does that translate to the 15% to 20% growth rate that you've talked about and that you've been in for the protein simple business that's embedded in protein sciences? Do you still think you can finish the year in that range?

I do believe we can achieve around 15%, and we've been guiding towards that for the last three to four years. We've seen improvements, possibly doing around 20%. There’s definitely an aspect of us pursuing direct sales in Europe, addressing those accounts more directly, which should lead to additional business over the next couple of years. Our focus needs to shift significantly towards effective commercial execution, enhancing cross-selling, expanding our subsidiaries, and resolving the challenges in Germany. The situation in Germany is uneven; it’s a smaller market compared to the U.K., and we need to build more critical mass there. Currently, we operate more like a sales office with insufficient scale. We have various initiatives underway. I have spent years in Europe, and they're now receiving much more support. Despite the hurdles, there are many positive developments as well. We have successfully redirected our Genomics efforts in Europe, and that is progressing well. While ELISAs can be unpredictable, I am optimistic about them. Our Simple Plex and other assay technologies are performing reasonably well and should contribute additional growth in Europe. For instance, the 32x8 assay is a promising technology with advanced multiplexing capabilities that can effectively compete with other multiplexing products. This is just beginning to launch and gain traction. Overall, we remain confident about our entire portfolio. Southern Europe, particularly France, is thriving. Since taking over our distributor there and establishing our own subsidiary, we've experienced nearly double-digit growth. The main challenges are in the U.K. and Germany, but I believe we can manage those. Did I address all of your questions?

You did. A couple of quarters ago, you were talking about how you were looking forward to getting more analytics on the call, so maybe I'll take the opportunity to ask one more for you if I can. Just on the OEM business overall, how do you think visibility changes there, if at all, or is that just the nature of the beast for the foreseeable future? And then maybe just a big picture question on that point. Obviously, you're moving the Bio-Techne portfolio into new directions. So as you do that, how important are these OEM components to the overall business? And do you think there's a potential for some strategic actions if you thought that any of it was becoming less core or non-core?

We have looked at that situation. First of all, keep in mind we experienced a 15% growth in that sector last quarter. Typically, following such a quarter, we tend to see a dip, which has always been the trend. Yet here we are again with positive growth. We mentioned that things are improving, and they are. Our pipeline is strengthening, and we have significant new accounts like Sysmex that are generating increasing business for us. We are undertaking some very strategic initiatives with them and remain optimistic about our outlook. Overall, things appear to be quite favorable. The challenges we faced with glucose are mostly behind us, although it is expected to remain stable moving forward, primarily driven by price increases. However, this segment is becoming a smaller part of our overall business and we feel good about it. Ultimately, this is a business with around a 30% operating margin. In the market, if we were to sell, we would see a 12 to 15 times EBITDA multiple. We have explored this, and it’s difficult to exceed that multiple. Currently, we are evaluated at a higher multiple, reflecting the value of this business in our portfolio. Simply spinning it off and selling it wouldn’t yield the desired benefits unless it significantly hampers opportunity costs or becomes a strategic burden, which it isn't. This business operates smoothly with just one salesperson, and the leaders within it manage effectively. It's a crucial product and process. Our customer base is substantial, comprising a limited number of key clients. Thus, it does not extract much cognitive effort from the company. Moreover, it maintains a 30% operating margin and is growing steadily, with further potential identified. We benefit from synergies through our diagnostic tools. The San Marco unit of this business is involved in over 185 10-K filings and is consistently specified. The main challenge we face is that orders are often large and inconsistent, primarily from major clients. We are working to capture a greater share of that market, and the outlook has never been better. One of the highlights of this quarter has been the performance of this business.

Okay. Okay. Appreciate that. Thanks for the comments, Chuck.

Hi, guys. This is Ty on for Catherine. Just wondering if you could provide any update on how quad's doing relative to the deal model and maybe some comments on how many clinical trials it's in and what has been the customer feedback so far.

The entire consortium and joint venture have already achieved significant success. At the recent trade shows where we showcased our work, we received tremendous demand and interest. We’re currently engaged in over a dozen preclinical trials and are being approached daily by more parties. One of our partners has participated in over a hundred prequalifications, indicating that we are moving forward. However, this process will take some time. The accepted method in the field is the viral vector process, but ours is based on a non-viral approach. We are progressing in this direction and will have a stake in it. The market is set to benefit everyone, as demonstrated by the valuations of companies like Al Deveron. We're very excited about our trajectory. Quad is on track, and we have a product in the market, along with new products in development. We can adjust the size while maintaining consistency using our bead technology. We're also discovering innovative applications for this technology. Our company promotes a collaborative approach among scientists from all divisions, which fosters the generation of diverse ideas around various arrays and assays. This is all very promising, and we believe that our ambitions in cell and gene therapy will yield significant returns in the future, initially projecting around 40 to 50 million dollars within five years, with the potential for much greater results if we identify additional applications.

Great. And I know that you guys have said you're not really able to quantify the coronavirus at this point, but are you seeing any sort of early disruption thus far, any sort of qualitative comments on what parts of the business could or could not be impacted by a more significant slowdown or something that's more prolonged?

This is my 28th quarter as CEO, and I don't think we've had a quarter under 20% in China. The next quarter might change that if everyone continues to stay home. The incidence rate is currently following a more linear trend rather than an exponential one, likely due to people being quarantined, so we will have to see how that unfolds. However, it's premature to say that the situation is under control, as there are still many risks involved. I expect that everyone will be excused from the next quarter in China. There could be a potential benefit for us; such unexpected events often lead to increased research interest. We are already noticing growth in some areas that typically don't see much activity due to this situation. While it's an unfortunate circumstance, it's probably not as advantageous as being in the respirator mask business at the moment, but there will be a positive spillover effect for everyone involved in combating disease. This upcoming quarter is likely to be challenging, but it’s too soon to be certain. I believe our instrument business will probably remain stable. We also experienced a strong start to the quarter in China, which might provide some buffer. Instruments might face some challenges since they don't follow a regular usage pattern. However, our businesses that rely on proteins and antibodies at the bench will likely struggle this quarter because people are working from home. But we see this as a short-term issue, and we're not overly concerned about it.

Got it. Thanks, guys.

Hey, thanks for taking the question. On the recently announced JV with Wilson Wolf and Fresenius Kabi, can you outline or give us some more details on how this partnership will work? I don't know if you’ve disclosed what your ownership interest in that is and then if you'd like to just order any potential financial impact from it as we look out over the next couple of years.

This has been in the works for nearly two years. Negotiating a three-way joint venture is quite complex, particularly with these major companies involved. Fresenius is a significant player, and working with them has presented both challenges and benefits. The Kabi group within Fresenius has made considerable strides over the past five to six years with their Lobos platform. Their glucose instrument is already becoming a potential industry standard, having been tested in over a hundred accounts. They are ahead of us in this partnership, which is why we wanted to collaborate with them. While we have many aspects of our workflow covered, connecting everything together is a crucial step, and there are only a few solutions available. We believe this one is the best on the market. It builds on the early leader with significant enhancements that have been tested and validated. Wolf and Wilson has a strong history as an innovator in cell factories and bioprocessing and is a respected leader in the industry. I've had the pleasure of knowing John Wilson for years, and our teams have a close relationship, which bodes well for this collaboration. This joint venture isn't a trial; it doesn't mean we're losing revenue. Instead, it's more of a marketing collaboration where we all contribute equally in funding while retaining our revenue streams. We each drive our parts of the business, and this partnership will complement our efforts. The contract includes various provisions to ensure a long-term collaboration with clear milestones and exit scenarios, and it's structured to address any potential concerns. Thankfully, everything has been going smoothly and the leaders get along very well. This initiative has been largely driven by Dave Eansor, one of our presidents, with significant attention on this. The CEO of the joint venture, a talented young man from Fresenius Kabi, has earned our trust. We plan to invest about $3 million annually to support our involvement, which may be adjusted based on business performance. However, it's not intended to be a financial burden. Sales are already ramping up, and currently, others are performing better than us, but this could shift significantly over the next few years as scalable solutions like GMP proteins gain traction. We are actively involved in both the front-end and back-end aspects of the business and are positioned to provide GMP proteins across the board, including to those using viral vector approaches. We have considerable interest in our facility and are ready to engage with the market.

Got it. That's helpful. And then, just the last question from me, you paid down some debt in the quarter, the balance sheet seems like it's in a really great spot, I'm interested in what you’re seeing in your M&A pipeline right now.

Well, I sure wish I could take credit for being so insightful on ChemoCentryx, but the investment was made here about 20 years ago. We have a lot of faith in Tom Shaw, and they've had a lot of success recently, and I don't think we're done with it yet. So, we did monetize some, but on top of that, we almost matched that monetization with great collections and cash flow, and we took a hundred million off. We've been averaging around $20 or so million a quarter, and we're at $120 for halfway into the year already, so we're essentially a year ahead of our schedule. We're now right around 1 1/4 for leverage, so we have a lot of very good balance sheets and liquidity for doing more deals should we find them. We're going to stay on path with that kind of level of drawdowns that we indicated earlier. Jim, you want to comment further?

Yeah, no, you spoke well on it. In terms of the M&A pipeline, it's as robust as it's always been, it's more about finding the right deals at the right price. And, you know, the ones that are of greater interest tend to be smaller in nature, like they have been more recently. But as you point out, our balance sheet is in the best shape it's been in a long time, so should a bigger deal make itself available, we'd be happy to participate.

We are actively searching and engaged in opportunities. Although the overtures are likely smaller at the moment, our approach remains unchanged. We are consistently on the lookout, and given our extensive experience in acquisitions, we receive numerous notifications about potential opportunities. However, our focus is sharp right now, as we have significant tasks ahead. We are optimistic about Genomics returning to its previous trajectory after some setbacks in the past years. The HiPlex roadmap is impressive, and we expect to launch a DNA probe product soon. I have never felt more optimistic about our ACD technology platform in the Genomics division than I do now. It's been challenging, but we anticipated the difficulties in entering diagnostics and liquid biopsies. Currently, we are in a stronger position than ever, and there's considerable interest in partnerships. We don't intend to manage everything ourselves, so we are pursuing partnerships and opportunities for companion diagnostics, as well as other liquid biopsy solutions. There's a lot of interest, and we plan to expand this area. We will reassess and create a new strategy to continue growing our pipeline of innovations, which can be costly, requiring us to maintain our focus rather than simply looking for large acquisitions.

Got it. Thanks for taking the question.

Thank you. So, you're coming up here against your toughest comp in the prior-year period of 15% growth in March ‘19, is there anything you’d flag that was maybe one time or lumpy in that prior-year number that we should be cognizant of as we are modeling the forward period here?

I've been waiting for you, John, and I apologize for you coming back online now this quarter. That was an insightful question. I mentioned in my comments that we do have one more timing issue coming up in the Genomics space, as well as possibly another one in the Simple Plex. These clinicals related to Simple Plex involve large cartridge orders that can be inconsistent. We do have some of that included in our numbers, but nothing like the 6 million. So, we can probably estimate around 2 million to 3 million that we need to consider. It's going to be a challenging quarter. Last year, we saw a 14% increase during this quarter, so it’s a tough comparison. We’re not going to receive much support from China, obviously. You can tally up all those factors. However, we are seeing a nice recovery in instruments in Europe, and we're actively providing more support in areas like Germany. I believe that will improve. Genomics is getting better; we are in a strong position looking forward, but we need to find more one-off opportunities. You need to communicate that to your team. There are reasons for our current state, but they are poor excuses for not showing growth. We need to secure more large deals and OEMs, and identify key partnerships, like with Sysmex, which is an excellent example. Our Sysmex business is small but is becoming significantly stronger for us.

Okay, that's helpful color. And then my follow-up for Jim. Jim, it sounds like from your comments around gross margin that you're expecting full-year gross margin might decline about a hundred basis points year-on-year. If that’s so, what's the driver of that? Secondly, do you still expect that EBIT margins could be about flat year-on-year?

Yeah, so in terms of gross margin, yeah, it's a combination of mix and FX, that's the two biggest drivers in that order, having the overall year-over-year gross margin slightly down. But, you know, as the guide at the start of the year, we thought we’d be roughly flat operating margins for the full fiscal year. And given our first half performance here, we’re actually ahead of that plan. I won’t go as far as guarantee that we’ll be increasing margins year-over-year, but still flat year-over-year is definitely looking much more easily obtainable, and hopefully there’s upside.

I want to add one more point. Although it hasn't been discussed much, the revenue situation looks promising, and if we account for the transactional SF, we are essentially in line with consensus. The operational strength of our business is reflected in our ability to evaluate our performance midway through this quarter and take appropriate actions, as effective operational leaders should. We have a very skilled team managing these divisions and units, who have performed exceptionally well, contributing to our margin results. I am confident that we are on track to meet our goals and the guidance we provided for annual margins by year-end. I believe that managing revenue can be more challenging than managing the bottom line. While predicting revenue can be uncertain, we have a solid plan for ending the year well in terms of profitability, and I think we are effectively controlling our costs.

Great, thanks, guys. Chuck, maybe just a follow up on the M&A questions. What areas make the most sense to add to inorganically? I know you guys obviously talked a lot about areas like cell and gene therapy. And how far down should we go on that front? Just curious what areas you think are acceptable?

There's that famous da Vinci caricature that everyone references in cell and gene therapy and all the components of that workflow, which number over a dozen. With our joint venture consortium, we have most of the critical elements covered. However, there are some areas where we could enhance our differentiation that the market is interested in. I believe spatial-based genomics and single-cell genomics in a spatial context are significant opportunities, with a lot of ongoing innovation. Numerous smaller companies are making substantial advancements in this area, and we are exploring various ideas. Reporter systems represent another area of interest. While the main aspects of the workflow are addressed, there are additional elements that could help us stand out. Also, we do not have a viral vector approach currently, but we could consider aligning ourselves more with current mainstream trends if a suitable opportunity arises. We will also be partnering with several contract research organizations, which could present additional opportunities. Regarding M&A, I do not foresee us expanding our focus beyond our current podium into areas like NAFTAC, HPFC, or NMR, as the competition is intense and achieving the desired margins would be challenging. However, we are closely monitoring spatial measurements, single-cell analysis, and next-generation flow technologies. These solutions that incorporate antibodies and their synergies are logical directions for us to pursue. We are always looking to expand our portfolio. While many of these opportunities are smaller-scale, we are positioning ourselves for a notable presence. We now have whole cell applications and are exploring significant ELISA areas to broaden our assay portfolio. These opportunities make sense, and we are interested in smaller antibody companies that fit within our price range. There are a few in Europe that we find particularly appealing.

That's helpful. And then just a quick one on ACB. I think Jim mentioned it got right sized. What’s the right growth number here? Is it kind of 20%? And what are the key drivers there? I know you have things like DNA probes coming out. But just talk to the drivers and that growth level.

Yeah, the right number is 20%. Of course, we're going to push them for more. But the number for you is 20%. And I feel really bullish, because RNA scope is still way underpenetrated. We are still building our relationship with LICA, and the numbers are being dramatically better. We are working with Ventana, as well, at this point. We are looking at other lower-end instant partnerships, or a way to do things to try and go after that lower-level, mid-level hospital or pathologist that really wants to move from IAC antibody world to molecular pathology. I think there's a big opportunity there. So, we have a lot of interest in that. Our new design basecoat application is finding growth. The DNA scope will come out at the end of this fiscal year, which we know there’s a ton of interest in. This HiPlex is just getting off the ground and we just filed, as we’ve been talking about for a quarter or so. A new extension to that HiPlex technology that’s going to get us into the multiples of 12 into targets. You start looking at an assay kit-based approach that can give you single-cell revolution for 40 to a hundred different targets at a time, that becomes really, really interesting to a lot of big companies out there in this space. So, that's all coming. So, I feel very good about 20%-plus going forward for years.

Appreciate it, Chuck.

Great. Good morning, everyone. Just a follow-up to a couple of questions on here. Just taking into account the European weakness here, the one-time order time and the Corona Virus in China, is double-digit organic growth here possible over the next two quarters? Or should we be expecting something more on the lines of a high-single-digit number?

As you know, we don’t provide guidance. We are still aiming for at least a 10% growth this year. Over the years, we have targeted an 8 to 12% range, and this year we adjusted that to 10 to 12%. However, considering the current challenges, your suggestion of an 8 to 12% range for this quarter might be sensible. The situation in China, especially with the virus, could potentially impact our performance by about a percentage point this quarter. We're all facing similar challenges, and this is our toughest comparison to date. Overall, though, the business remains solid in most areas. Europe is recovering well, and we see a notable increase in our instant business. North America is performing strongly with a 75% year-over-year increase in leads. Our marketing efforts have significantly improved, and we are investing more in advertising. We are achieving a $10 return for every dollar spent on SEO. I’m encouraging the team to keep investing until we find a solution. We are experiencing double-digit growth in proteins and antibodies, particularly in North America, and aim to replicate that success in Europe this quarter. Asia is performing well, Japan is in a good position, and India is seeing high-double-digit growth. China may face short-term challenges, but I expect those to be temporary.

Okay, understood. Just to revisit the situation in Europe, I recognize the challenges faced this quarter were one-time events, but you've indicated that the environment in Europe has been softer for a couple of quarters now. I'm curious why you expect the next quarter to improve and become a more favorable region for you.

Some of the current situation is due to one-time factors, some is coincidental, and some relates to the timing of various projects. We're noticing an increase in these platforms, but I still see risks remaining, particularly in Germany and with ELISA in Europe. Our other areas, like dual sets, are performing fairly well. We are selling a significant amount of bulk products, which tends to fluctuate. However, the main priority is to return to fundamentals with our sales teams on a country-by-country basis, leveraging the acquisitions we made. We need to work on collaboration, training, and educating our teams about Bio-Techne, and improve our cross-selling efforts. I'm not satisfied yet with our progress; much of the growth has come from capitalizing on easier opportunities rather than genuine cross-selling. Additionally, we seem to be underperforming in our inside sales compared to the US. Strengthening our inside sales team is crucial, especially since our model relies heavily on a large catalog of over a quarter million SKUs. We also need to enhance that aspect in Europe. There are numerous strategies we are implementing, but we plan to add more and intensify our efforts, which gives me renewed confidence in reviving growth in Europe. This quarter has been challenging, as we've mentioned over the past couple of quarters. Considering our previous growth of 15% to 20%, I think reaching that level again will be difficult. However, returning to high single-digit growth, which I believe is appropriate for Europe, is very feasible and should happen. It might take a quarter to achieve this, but I think we have a good chance this time around.

Okay, understood, that's helpful. Just real quick, you mentioned progress around partnerships Exosome. If any of these projects are successful, when should we expect a second Exosome Diagnostics test and then, any update on plans to kit the EPI test?

Yeah. We’re already focused on kitting this, per se, right now. We are going after FDA approval, but not as a stand-alone non-doctor associated kit. We won't be on TV anytime in the future, okay? Is the one thing. The demand we're creating around direct marketing and web and SEO is going to be pretty dramatic. I think it's going to help a lot. We are moving on getting patients and starting the studies for both bladder as well as kidney rejection, and of course, they’re off urine, so it's not that hard for us to do. And we're working on partnership ideas to get going on the plasma side. So, both the lung and the breast indications which are validated, we think they work and are ready for clinicals. So, I think we're looking at a couple of years, maybe under two years, for the urine-based one, depending how they go. Again, we have to get studies written and get them included and it would depend on the timing of that. Probably picking a bigger Mac wouldn't hurt. A little quicker Mac. So, there’s some decisions to make. But one half to two years is the short answer for you, but if you look at five years, we're going to have a half a dozen things and hopefully a half a dozen partnerships as well so...

Understood, thank you.

Mr. Knight, your line is open. Mr. Knight, if you'd like to ask a question, your line is open. That seems to be all the questions we have. I'd now like to turn it back to our speakers for any additional or closing remarks.

Well, thanks. We appreciate all the interest. Overall a decent quarter, not as we had hoped but I think we have our hand in all the right levers and I think it's just fine for our year end. So all good going forward. Our team is pretty energized. There is a lot of great stuff happening here a lot of great finds and we're excited about it. So forward to talking to you more next quarter.