Bio-Techne Corp (TECH) — Q1 2023 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 as well as the potential impact of the COVID-19 pandemic on our operations and financial results. The company’s 10-K for fiscal year 2022 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 because 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. Separately, we will be presenting at the Credit Suisse, Stifel, Stephens, and Evercore ISI healthcare conferences in November. We look forward to connecting with many of you at these upcoming conferences. I will now turn the call over to Chuck.

Thanks Dave and good morning everyone. Thank you for joining us for our first quarter conference call. I am pleased to report that we started our fiscal ’23 with a respectable 7% organic revenue growth on top of what was our most challenging year-on-year comp of over 21% organic growth in Q1 of last year. We achieved this growth despite a slower summer for our business in Europe and continued, although improving, COVID-related shutdowns in China. With the tough comps and, we believe, temporary regional challenges that our protein sciences segment faced, this was the quarter for our diagnostics and genomics segments to shine, and shine it did with 17% organic growth. In our first quarter, we accelerated our spatial biology business to upper teens growth. We continue to drive incredible uptake in doctor and patient usage of our ExomeDx prostate test, and we delivered double-digit growth in our genetic Dx and diagnostic reagents businesses. I will dig into the traction and encouraging trends we are seeing across the segment in our broader portfolio later in the call. But first, I’d like to highlight the corporate sustainability report we recently issued, which details the significant progress we continue to make advancing our environmental, social and governance initiatives. The 64-page report provides insights into Bio-Techne’s commitment to growing the organization in a responsible manner while we deliver the products necessary to advance science and ultimately improve healthcare. Our advancements on the ESG front also led to Bio-Techne’s inclusion in the 2022 Forbes list of Best in State Employers, with this latest achievement representing the third recognition from Forbes so far in calendar 2022. I’d also like to briefly touch on how we are navigating the current global inflationary environment. The team has done an extraordinary job strategically implementing price increases across the portfolio to offset the impact of inflation. We will continue to leverage our pricing power to offset rising costs, particularly labor, going forward. It should also be noted that our operations team has delivered consistently with no supply chain issues this quarter or any in the past days. Now let’s discuss the specifics of our quarter, starting with an overview of our performance by geography and end markets. In North America, consistent execution across the portfolio drove low double digit revenue growth for the quarter, driven by a continued strong bio-pharma end market. In Europe, our revenue decreased mid single digits year-over-year. Here, we experienced an exceptionally slower seasonal summer dip in our consumable run rate business. It seemed like everyone was on vacation in July and August, perhaps making up for the prior two COVID years when travel was more restricted. In any case, our run rates in Europe picked up considerably in September as researchers seemingly returned to the labs; however, the strong double-digit growth in September, which by the way is continuing in October, wasn’t enough to overcome the tough Q1 growth comp year last year when they grew a record 20%. While there are potential macro challenges in the current European environment, our portfolio of proteomic research reagents, analytical tools and spatial biology solutions remain core components to the scientific discovery process and position us to effectively navigate any near term regional instability. Moving on to China, despite the lingering impact of ongoing COVID-related lockdowns and academic institutions not returning to the labs, we delivered mid single digit organic growth. On top of the COVID challenges, I’d also note that China faced a particularly challenging year-over-year comparison where we grew revenue by over 50% in the region last year. We see China rapidly returning to its historical growth rates as prior year comps normalize, customers continue to better navigate the sporadic COVID-related government restrictions, and the Chinese government continues to emphasize investing in healthcare. Our bio-pharma end market remains healthy, growing upper single digits globally for the quarter and especially stronger in North America, with growth in the mid teens. Sales to our academic end markets increased low single digits year-over-year but again were stronger in North America. Now let’s discuss our growth platforms, starting with our protein sciences segment where organic revenue increased 3% for the quarter on a very strong comp from last year, when the segment grew over 26%. Let’s begin with our cell and gene therapy business, where our portfolio of reagents, instruments, media and technologies streamlined workflows, increased efficiencies, and ultimately expanded access to these next generation therapies at lower costs to the healthcare system. We haven’t discussed TcBuster for a while, so I will update you on the significant progress we are experiencing with our non-viral gene editing technology. TcBuster has several advantages over legacy gene editing methods, including its ability to deliver larger gene editing cargo as well as a more predictable gene insertion location, all at a lower cost compared to viral base gene insertion methods. We continue to educate the market on the advantages of TcBuster, and it’s worth noting that we have signed a handful of commercial licenses to support a growing pipeline of cell therapies, primarily for T-cell and NK cell therapies. In addition to customers testing TcBuster for therapeutic candidates, we also see growing interest in discovery research to take advantage of the technology’s lower cost and increased speed, enabling the acceleration of candidate selection. TcBuster is currently being trialed in dozens of unique therapies, and we believe the future is very bright for this technology. We continue to penetrate the burgeoning cell therapy opportunity with our portfolio of GMP proteins and are seeing continued momentum in the regenerative medicine, or regen med market. As a reminder, regen med is a form of cell therapy that leverages stem cells or their derivatives to promote the repair response of diseased, dysfunctional or injured tissues. Our GMP capabilities expand beyond proteins and include a portfolio of GMP small molecules. These small molecules are key components in the reprogramming, self renewal, storage and differentiation processes that are key to regen med workflows. While our GMP small molecules business is relatively small today, it is growing rapidly, including over 100% for our first quarter, and has the potential to become a significant contributor to our overall cell and gene therapy business. Now let’s talk about our core portfolio of proteomic research reagents, including the RUO proteins, antibodies and small molecules that are key components to enabling bio-pharma and academic scientific discoveries. Collectively, our RUO reagents grew nearly 30% in Q1 last year, again highlighting how difficult this quarter’s comp was. Despite the high hurdle, our RUO reagents were able to grow mid single digits in Q1 for this year, driven by our digital marketing capabilities. Moving onto the performance of our proteomic analytical tools, where we also faced a challenging year-over-year comparison as the business grew over 25% in the same quarter last fiscal year. Overall, the team delivered double-digit growth in North America and China, which was partially offset by much lower performance in Europe leading to low single digit growth for the quarter. Once again, our biologics platform, Maurice, led the growth. We continued to see demand from protein therapeutics, gene therapy, and CRO CDMO customers particularly in North America and China, with a combined growth of over 20%. Innovation remains a key factor in the growth of our biologics business; for example, we recently unveiled data demonstrating icIEF fractionation on the soon to be launched Maurice Flex instrument. Fractionation is a front-end step in mass spectrometry where the sample to be analyzed is separated into mixture components based on differences in their size, charge, or other characteristics. The data showed how Maurice Flex addresses the labor intensive and time-consuming challenges of using legacy methods, including ion exchange chromatography for fractionation. Maurice Flex is scheduled for release in early 2023. In addition to the expanding Maurice capabilities and applications, the platform is also gaining recognition for its environmentally friendly attributes. A recent study in the Green Analytical Chemistry Journal highlighted Maurice as an environmentally friendly method for evaluating the identity and stability of adeno-associated virus, or AAV samples for gene therapy development. The study highlights Maurice’s low sample and reagent volume requirements and built-in waste reservoir as environmentally responsible attributes of the system. We continue to expand the capabilities of our ProteinSimple line of instruments in cell and gene therapy applications. During the quarter, we added three new viral titer assays for the expanding menu of our automated multiplexing ELISA instrument, Ella, for intact AAV captive quantification and gene therapy research and development. Ella’s wide dynamic range and high precision ensure users get the high-quality data required to meet regulatory standards for AA titration throughout bio-protection workflows. Now let’s shift to the diagnostics and genomics segment, where we grew revenue by 17% organically in the quarter. Our spatial biology business, branded ACD, accelerated to upper teens growth in the quarter as strong commercial execution and an enhanced marketing strategy generated well-balanced growth in both our bio-pharma and academic end markets. In addition to a strong performance from the core RNAscope product line, we are seeing increased traction from our BaseScope and miRNAscope offerings in cell and gene therapy applications, which grew almost 50% and over 70% respectively. BaseScope and miRNAscope are rapidly becoming material contributors to our spatial biology franchise. We recently expanded our RNAscope portfolio with the launch of new automated co-detection assays specifically designed for the Roche Discovery Ultra platform, enabling simultaneous detection of RNA and protein on the same tissue section. These new automated multiomic assays utilize both RNAscope and BaseScope signal applications to deliver best-in-class RNA sensitivity and specificity. When combined with protein detection on Roche’s automated platform, researchers will be uniquely enabled to power translational and clinical research studies. We are also unlocking the cross-segment synergies inherent in the broad Bio-Techne product portfolio. As an example, we recently launched the TSA Vivid fluorophores for highly sensitive fluorescent detection of RNAs and proteins in cells and tissues. Pairing these key fluorescent dye reagents from our small molecules business with ACD’s RNAscope sets a new standard for illuminating RNA biomarkers with industry-leading sensitivity and clarity. Rounding out spatial biology, we also recently filed a patent infringement lawsuit in the United Kingdom to halt infringement of our patented RNAscope ISH technology by a Molecular Instrument Incorporated. We have made significant investments over the years to build our catalog of over 40,000 RNAscope ISH probes available in over 400 species and remain committed to protecting these investments and defending our intellectual property rights in our spatial biology business and more broadly throughout the portfolio. Now let’s discuss our molecular diagnostics business, starting with the significant progress in our exosome diagnostics business. Test volume in our ExoDx Prostate, or EPI test increased over 70% while associated revenue grew over 100% in the quarter. Importantly, a favorable doctor retention trend and steady increases in the ordering physician base sets the stage for continued robust ExoDx Prostate growth going forward. I am extremely pleased with the traction we are seeing in ExoDx Prostate and believe our fiscal 2023 will be the breakout year for this test. Exosome diagnostics also announced initial data on a novel non-invasive saliva-based profiling assay leveraging exosomes to diagnose and monitor individuals with Sjögren's syndrome. Sjögren's syndrome is an autoimmune disease that is often undiagnosed and misdiagnosed, with an estimated 4 million Americans currently living with the condition, but 2.5 million are undiagnosed. Symptoms of Sjögren's syndrome can mimic other autoimmune diseases, allergies, drug side effects, and menopause, making diagnosis particularly challenging, leading to an average diagnosis time of three years and creating the need for a non-invasive accurate molecular test. We are looking forward to providing future updates for this exciting pipeline assay. A recent proof-of-concept study for a novel exosome-based platform capable of monitoring space flight-associated neuro-ocular syndrome, or SANS, in astronauts was published in Npj Microgravity, or Nature publication. In addition to potentially providing a needed tool to assist SANS in astronauts that are going on longer missions, as well as commercial space passengers, the study showcases the potential power of exosomes for the diagnosis of neurological conditions. Continuing with molecular diagnostics, Asuragen had another great quarter as demand for its portfolio of genetic carrier screening kits and expansion into Europe drove growth of almost 25% for the quarter. In addition to the ongoing geographic expansion, Asuragen has a rich product pipeline positioning the business for continued growth going forward. Finally, our diagnostics reagents business continued its streak of consistent growth quarters. The return of patients to the doctor’s office is driving demand for hematology, coagulation, and clinical chemistry tests, which is driving demand for our clinical controls and reagents. These improving underlying diagnostic trends combined with market share gains and increased wallet share at existing customers led to a low double-digit growth in the quarter and sets the stage for sustainable growth in our diagnostic reagents business going forward. In summary, we continue to execute our growth strategy and remain on track to deliver our long-term financial targets. Our portfolio of proteomic research reagents and analytical tools are critical components of scientific research, are key to unlocking the full promise of the proteomic revolution currently underway, and are positioned to enable the oncoming bio-wave of cell and gene therapies. Layer on to this a portfolio of diagnostics and genomic solutions that include our leading platforms in spatial biology and liquid biopsy and I believe we are just getting started unlocking the full potential value of this business. With that, I’ll turn it over to Jim.

Thanks Chuck. I will provide an overview of our Q1 financial performance for the total company, provide some additional details on the performance of each of our segments, and give some thoughts on the remainder of the fiscal year. Starting with the overall first quarter financial performance, adjusted EPS was $1.78 versus $1.83 one year ago, a decrease of 3% over last year. Foreign exchange negatively impacted EPS by $0.12, or minus-7% in the quarter. GAAP EPS for the quarter was $2.21 compared to $1.69 in the prior year. The biggest driver for the increase in GAAP EPS was realized gains on the sale of our investments in ChemoCentryx and Eminence during the quarter. Q1 revenue was $269.7 million, an increase of 5% year-over-year on a reported basis and 7% on an organic basis. Foreign exchange translation had an unfavorable impact of 3% and acquisitions had a favorable impact of 1% to revenue growth. Given the tough comp we faced this quarter versus prior year, I will point out that our two-year organic growth CAGR for Q1 was approximately 13%, right in line with the early part of the five-year plan our leadership team presented at our investor day in New York City a little over a year ago. Moving onto the details of the P&L, total company adjusted gross margin was 70.9% in the quarter compared to 71.2% in the prior year. The decrease was primarily driven by unfavorable foreign exchange impact partially offset by productivity gains. Adjusted SG&A in Q4 was 27.3% of revenue compared to 25.1% in the prior year, while R&D expense in Q1 was 8.9%. The increase in SG&A and R&D was driven by wage inflation and progress made in the second half of fiscal year ’22 in building the team to support ongoing strategic growth investments. Speaking of inflation, the businesses implemented strategic price increases during the quarter to offset the dollar impact of inflation on operating income; however, the dollar-for-dollar offset did have a negative impact on operating margin. Adjusted operating margin for Q1 was 34.8%, a decrease of 300 basis points from the prior year period. The pricing inflation dynamic decreased adjusted operating margin by 120 basis points. Negative foreign exchange decreased margin by another 110 basis points, while carryover of second half fiscal year ’22 investments drove the remainder of the margin dilution for the quarter. As stated in the fourth quarter fiscal year ’22 earnings call, we expect Q1 to be the low point for adjusted operating margins for the year. Going forward, we expect adjusted operating margins to expand sequentially, ending the fourth quarter of fiscal year ’23 approximately 100 basis points higher than the fourth quarter of fiscal year ’22. For the full year fiscal year ’23, our expectation for adjusted operating margin to be approximately 150 basis points lower than the full year of fiscal year ’22 remains unchanged. Looking at our numbers below operating income, net interest expense in Q1 was $3 million, decreasing $0.1 million compared to the prior year period. Our bank debt on the balance sheet as at the end of Q1 stood at $264.7 million, an increase of $8.8 million compared to where we finished last fiscal year. During the quarter, we drew down approximately $100 million on our line of credit to fund the Namocell acquisition, which was partially offset by applying the proceeds of our ChemoCentryx investment sale to our debt balance. Other adjusted non-operating income was $1.2 million for the quarter, unchanged from the prior year, primarily reflecting the foreign exchange impact related to our cash pooling arrangements. For GAAP reporting, other non-operating income includes realized gains from the sale of our investments in ChemoCentryx and Eminence. Moving even further down the P&L, our adjusted effective tax rate in Q1 was 21%. Turning to cash flow and return of capital, $56.1 million of cash was generated from operations in the quarter and our net investment in capital expenditures was $9.6 million. Also during Q1, we returned capital to shareholders by way of $19.6 million in stock buybacks and $12.5 million in dividends. We finished the quarter with 40.5 million average daily shares outstanding. Our balance sheet finished Q1 in a very strong position with $203.1 million in cash and short term, available-for-sale investments. Our net leverage ratio remains well below one times TTM EBITDA. During the quarter, we replaced our previous debt financing with a new $1 billion line of credit facility with a five-year term. Our corp dev team has been very active investigating external investment opportunities and this new increased debt facility emphasizes the continued importance M&A will have in our capital allocation strategy. Next, I’ll discuss the performance of our reporting segments, starting with the protein sciences segment. Q1 reported sales were $199.9 million with reported revenue increasing 1%. Organic growth for this segment was 3% with foreign exchange having an unfavorable impact of 3% and acquisitions contributing 1%. Given the tough year-over-year comps that Chuck pointed out for this segment, I will highlight that the two-year organic growth CAGR for this segment is greater than 14%, and the longer term historical five-year CAGR is approximately 12%. Operating margin for the protein sciences segment was 43.0%, a decrease of 270 basis points year-over-year with productivity gains more than offset by the impact of foreign exchange, price versus inflation dynamics, the fiscal year ’22 carryover of strategic investments to support future growth, and the Namocell acquisition. Turning to the diagnostics and genomics segment, Q1 reported sales were $69.9 million with reported revenue increasing 15%. Organic growth for this segment was 17% with foreign exchange having an unfavorable 2% impact. As you heard from Chuck earlier, the double-digit growth was broad-based throughout this segment with spatial biology accelerating at high teens organic growth and our exosome diagnostic prostate test really now in hyper growth mode, with a Medicare reimbursement and COVID headwinds behind it. Moving onto the diagnostics and genomic segment operating margin at 12.4%, this segment’s operating margin increased 20 basis points compared to the prior year. The increase reflects the favorable impact of volume leverage partially offset by the impact of foreign exchange and price versus inflation dynamics. Looking ahead, our end markets remain healthy and our momentum in capturing share in these markets is in line with our five-year plan. As we get past the recent regional challenges in Europe and in China, we are keeping a watchful eye on any potential short-term macro challenges that could impact our trajectory towards our long-term goals. We have confidence in our nimble and experienced team, who has a track record of successfully navigating dynamic environments. With the toughest comp of the year now in our rear view mirror, we anticipate a return to double-digit organic growth for the remainder of the fiscal 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.

Yes, hi Jim, Chuck. Thanks for taking the questions. My first inquiry relates to the tough comparisons we faced this quarter in protein sciences, as it fell significantly short of our expectations and those of the market. The main concern is how we should view protein sciences in the second quarter—specifically, how much of the performance was due to demand being pulled forward versus a genuine decline in demand, particularly in Europe and China. I can't recall a time when this segment experienced just 3% organic growth, so it would be helpful if you could explain your current perspective and how we should approach the next quarter and the full year.

Thanks, Puneet. I appreciate the opportunity to share some insights. I recall when I joined, we had several quarters with negative growth, much below mid single digits, which seems like a long time ago now. We are currently on track with our five-year plan and have been ahead of schedule, maintaining mid single-digit growth in our core areas. I want to highlight that September showed strong performance, and October has continued this trend with double-digit growth, possibly reaching high teens. In the fourth quarter, we performed well, achieving 14 compared to the 11 consensus, although we did experience some pull forwards. We conducted some analysis and noted that the price increases from July 1 contributed to our performance. On the instruments side, while we aren’t seeing significant issues, there’s some weakness in Europe and a cautious approach to purchasing. However, our bookings and sales funnel remain robust, the strongest we’ve ever experienced, although the booking cycle is taking longer, with signatures being approached more carefully this past quarter. We believe we faced some challenges this time around. We’ve not encountered any supply chain problems over the last couple of years, and our growth has been steady. In contrast, other instrument manufacturers and those dealing with larger capital or signature purchases have faced more supply disruptions. We think there's been some pent-up demand in certain sectors, and we may have missed out on priority on some purchases this quarter. Pricing doesn’t seem to be an issue, particularly from September onwards. We did observe a softer quarter in Europe, partly due to vacations. We operate somewhat differently in our market, with no direct competitors and various segments, including a significant presence in biotech. There has been noticeable softness, especially in the midrange biotech sector in Europe, affecting signatures and overall investment caution. Moving forward appears promising. As Jim mentioned, our primary concern is about our long-term outlook, which remains unchanged. Those are some key points, and now I’ll let you explore further.

I’m curious about the small biotech sector and whether you're noticing any decline in demand. I appreciate your insights regarding September and October. Jim, could you elaborate on the low to mid teens you mentioned last quarter for fiscal year ’23? What factors could keep that figure on the lower end instead of the higher end? Please share potential upsides and any concerns we should monitor that could lead to a lower outcome.

Yes, so I guess the first thing, to address the biotech, we’re seeing performance in our smaller biotechs relative to our larger pharma. We’re not seeing much differentiation. For us, when you look at the smaller purchase, what we call a run rate business which is lower dollar value, which is probably 80% of the purchases coming through, the growth in Q2 and continuing here in October continues to be mid-teens growth, particularly here in the U.S. Back to Chuck’s earlier point, it’s really the larger bulk purchases that had tougher comps and were more, call it soft this quarter and probably faced more competition with some of the supply chain breaks that were occurring in the larger dollar instrument purchases in terms of competing for dollars.

Okay, that’s great, and then last one, if I could squeeze in, on Wilson Wolf, I didn’t hear an update. Just if you could provide an update, and when do you think that options agreement could materialize?

I think we’re still looking at near the end of Q3, in that range, so. I would say overall, I know our cell and gene therapy and our gene proteins, we didn’t have a 50%-plus quarter like we’d been doing. Things have leveled out. It is very lumpy still - we don’t have a lot of large, large customers, and there was some timing in some of that, and Wilson Wolf has seen some of that as well, as well as issues around clinical and finding patients, so things have softened a little but still more or less on track for what our schedule was for them. Although the improvement is in their EBITDA, their EBITDA is north of 70%, so they’re doing really well and as there’s volume, they’re getting good scale, so. A lot of good news there too, but we’re investing into more sales reps - we’re calling it our surge team. They are helping more out, the whole scale-ready team from a protein’s point of view because we’re going to be adding more and more proteins to our factory. The factory the remainder of this year, the fiscal year, we’re going to add six more products, which by far will be the largest menu out there in GMP proteins for both regen and cell and gene therapy, so that’s all a really good story. We just wanted to focus on what we thought you guys really wanted to focus on this quarter, so no issues there.

Got it, thanks guys.

Hi, good morning guys. Chuck, how do you see ACD growth tracking across the quarters this year, and what should we pencil in for the impact of the partnership that you have with Akoya? Then on the hiring side, do you feel like the commercial team will be fully staffed out and sort of in the position that you wanted to be to start calendar ’23?

Yes, we’re down two employees, which is typical for us. Attrition is still present in our business, similar to the industry at large, but we are operating at around 95% capacity this quarter. We forecasted a series of improving quarters since we started turning things around about three or four quarters ago, and that has been successful. We experienced significant growth of 17%. I believe our work with Akoya is more focused on future developments; we are ready to engage with them, but we are currently awaiting their progress. As you’ve seen from our recent announcements, we are actively pursuing opportunities in the mass spectrometry front end. This market has substantial potential, and while there are overlapping terms like LC mass spec and GS mass spec, there are various ways to approach the mass spec front end, which offers a considerable opportunity. We are steadily increasing our market share there. Additionally, while SPD is performing well, we plan to expand into more automated pathology services. Akoya is not our only partner, but we have established a solid deal with them, and the partnership is developing positively. We are looking forward to the moment when we can start generating revenue together.

Okay, and then maybe on SimplePlex, as we think about this post-COVID phase that hopefully we stay in here, how are you thinking about average pull-through for the installed base and how that might look this year? I mean, you guys obviously placed a ton of those systems during COVID, so when it just comes to this overall comp issue that we’re talking about here, I’m curious how you think utilization and recurring revenue streams compare as we come off the peak.

Overall, in consumables for ASD, we experienced mid-20s growth in the U.S., indicating very strong performance in consumables, with similar double-digit growth in SimplePlex in the U.S. The situation is more challenging in Europe, with some typical fluctuations observed in large orders for instruments related to significant clinical projects involving SimplePlex, but overall performance remains solid. We are approaching 2,000 machines deployed in the field, and they consume cartridges at a rapid pace, presenting a promising future ahead. Clinical developments are imminent, and although we currently have minimal involvement in clinical, there is substantial interest building.

Do you see utilization as a headwind this year? Is that one of the areas where you think there’s a headwind when you just think about how much those systems might have been run last year and potentially running less this year?

There is a significant customer in Europe that we are waiting to activate for the next round of clinicals. If that doesn't happen, it could pose a challenge, but generally, North America is stable. Your question focuses more on Europe, which is still in an acceptable state, I believe.

Thanks Chuck.

Thank you. I wanted to start off, Jim, can I confirm that you said you believe you’ll deliver double-digit growth for the balance of the year, and if that’s the case, that would imply a bigger sequential step-up in Q2 than you typically achieve, so can you talk through the drivers?

Yes, if you look at our year-over-year comps, first of all, the comps become less of a hurdle year over year as we progress through the year, including next quarter. We’re hopeful that the regional headwinds we faced, mainly in China as well as in Europe for the first two months of the quarter, this quarter will continue to improve. We have a lot of confidence in that with China and so far here in October, we’re seeing more confidence in that with regards to Europe. Had those two regions not underperformed relative to the U.S. and to their historical performance, relative performance, we probably would be talking about double-digit growth in Q1 as opposed to something below that, even with the tough comp.

Yes, especially with the pull forwards.

Can you elaborate further on how you’re thinking about European macro headwinds? That does seem to be a point of confusion with folks I speak to, given your end market mix.

Yes, we are observing some cautiousness and variability in our performance. July and August were weaker than usual across all regions, though it is not a widespread issue. September showed a strong rebound, but it wasn’t enough to offset the earlier decline, so we need October to perform well. So far, October looks decent, but there’s still caution in the air. Our teams are facing some challenges, and we have deployed additional support in the field. We are in the process of addressing issues in Europe, which has been a concern for us for some time. We’re concentrating on new platforms there, and products like SPD, which had seen a downturn last year, are now reviving. Regarding instruments, the time required for signatures has been longer than typical, and we are working to expedite this process. It seems we are competing for funding with other suppliers who finally have sufficient inventory, which may have pushed us back a bit this quarter. However, our sales funnel is larger than it’s ever been in both this market and the U.S. Our quarterly business reviews indicate that the pipeline is strong and demand is solid; it's just taking more time to secure the necessary capital approvals.

Appreciate that color, Chuck. Thank you.

We experienced some challenges with SimplePlex, particularly because many of our clinical purchases involve large cartridge quantities, and there were some timing issues involved. If we see a recovery as anticipated, where demand fluctuates but ultimately returns, that should also contribute positively.

Hi, it’s Anna standing in for Jacob. Good morning. Can you provide us with an update on the EPI test? I believe you are close to securing reimbursement for annual testing and its use in surveillance. What is the current status of your business development efforts regarding this?

Yes, we understand. Over the past two years, we've reevaluated many items and successfully aligned with the NCCN guidelines concerning negative biopsies, which significantly expands our total addressable market. The numbers are increasing rapidly. Jim mentioned that we are experiencing substantial growth, and we've added approximately 25% more sales representatives in the last two quarters, so the momentum is strong. The new leadership team has performed excellently over the past six months. We are adjusting our messaging to align with Cal Ripken Jr. again and are preparing to publish the 2.5-year outcome study involving around 1,000 patients. This is a significant development as we engage with major insurance players. We have secured Humana, and we are targeting United and other Blue Cross plans, actively pursuing these opportunities. It's on the way.

You talk about exosome as a platform that could be a billion revenue unicorn. Now that you’ve partnered off ExoTru, what are you working on next there?

We have a lot going on, and while there are many aspects I won't dive into right now, we are well-prepared. One of the reasons we licensed off ExoTru is that we have a robust pipeline of initiatives to pursue. We can’t handle everything ourselves, but we have significant interest and a strong channel partner, like Thermo, with ExoTru. We have many upcoming developments, and Sjögren's is just the beginning. It exemplifies our ability to launch new products. The projection of a billion-dollar platform is aimed for five to ten years out when we expect to have at least a dozen different applications. We don’t anticipate doing all of them ourselves; there will be a combination of partnerships and initiatives led by us. This represents the future of liquid biopsy, so remember this. In ten years, you can reflect back and see that we predicted this.

Thanks Chuck.

Good morning everyone. I wanted to elaborate on the decline in bulk purchasing that you mentioned, Chuck. While you just discussed the impact of European summer vacations with Dan, do you believe that some of the weakness in bulk purchasing is related to reduced funding for biotech projects? One of your peers in biotech manufacturing mentioned short-term cash sensitivity decisions made by biotech customers. Can you provide more insights on what you’re hearing in the field regarding available funding?

We categorize our run rate into larger and smaller orders. Larger orders are those exceeding $10,000, which include pharmaceutical-related larger orders, larger biotech orders, or bulks. The bulks follow a specific volume curve and do not impact pricing, so that doesn’t explain the situation. However, I believe your observation is valid; we are experiencing a slowdown in purchases and some delays on many of these orders. We've been informed that while demand hasn't diminished, customers are being cautious with their spending. There's currently a cash crunch, and it may be uncomfortable to admit that we might have been deprioritized in favor of securing instruments that they have been unable to obtain for the past nine months due to someone else's supply chain issues. We've faced no supply chain problems ourselves and our reliable delivery capabilities are well recognized. Our on-time delivery records are at historic highs, and we stand out in the market. Throughout the entire COVID situation, we haven't encountered any significant supply chain issues, so we continue to sell what we have. The team's performance has been exceptional.

I'll just add, Chuck, we’re hearing from our commercial teams that it’s not about losing any bulk orders or instrument orders, it’s more about delays in getting them through the system.

Okay, understood. That’s helpful. Maybe thinking about the commentary and applying it to the expense growth you’re expecting for the year, how do you view hiring, and has the employment market eased up a bit or is it still tight for talent?

Yes, that's a great question. I have a long history in operations management at 3M, which has been in a low-growth environment, so I understand how to navigate fluctuations. Attrition has been quite challenging for us and others, but we are pushing forward. A part of our impact on margins has come from our efforts to catch up on hiring, and we are actively seeking new talent, particularly in SVD and China, where performance is strong again. With Namocell, our recent acquisition, we've nearly doubled their workforce in the past six months. However, in certain areas like antibodies, we see some softness. We're focusing on mission-critical positions and replacements as we expand. As businesses grow, their staffing needs increase; conversely, slow growth means fewer personnel are needed. We added a net 300 employees last year, and I would be surprised if we don’t match that this year. While we maintain a cautious outlook in some sectors, we are examining all areas we oversee through our five divisions and about a dozen business units. Certain sectors like cell and gene therapy and exosomes are very important to us, and they receive appropriate resources. Asuragen is experiencing nearly 25% growth, particularly in Europe, and we're hiring to support that growth. My bigger concern lies with retaining talented employees amid the ongoing attrition challenges. The situation is improving, and as you pointed out, more people are returning to work, which is encouraging.

That is good. Thanks.

Hey guys, thanks for the questions. First maybe on China, how much of an impact did lockdowns have in the quarter? Are you seeing any impact from the recent lockdowns that have happened, and how do you view that outlook for this upcoming quarter and for the full year?

Yes, well, we were roughly 12 or more full points ahead of last quarter in growth, so we’re on our trek back. We expect mid teens, in that range for this quarter, and on our way back to 25 end of the year as a run rate level. Kind of expecting the year to be roughly 20-ish or so, even with the soft dig-out here from the China lockdowns. It’s still sporadic; in fact, we’ve got meetings this week where I was trying to get my head of Asia in. He was in Shanghai and he couldn’t get out because he couldn’t get through Canada, through visa issues, so. We just heard Disney locked people in their resort and they won’t let them go because there’s an outbreak or something, so it’s going to be almost building by building, block by block is the way it’s been described to us. It’s not city-wide and it’s not over yet, but I would say it’s drifting slowly towards opening overall. We don’t see Shanghai locking down again, which would hurt our warehouse, so we think we’re still open for business across China. We talked about the steady improvement in China and we’re on track, if not better than on track for this quarter and beyond.

Got it, and then on GMP reagents, you talked about adding some additional proteins by the end of the year. Can you just give us a status update on customers signing on and filling that capacity?

We have not enough whales, a few tunas, and way too many plankton in our customer list, so we’ve got 150 customers that only a handful are really large ones, and obviously there’s a timing issue, they’re spotty in their orders for their clinicals and such. We are adding people and driving the pipeline and just getting out there, doing more with Wilson Wolfe and our scale-ready team to try and get our stuff pulled in, focusing as much on regenerative medicine as we are in cell and gene therapy, because we are the leader in regen medicine for reagents whereas we aren’t in cell and gene therapy, and we have a lot of buy-in there. A lot of the new products going out are for regen med, so we’ll have the largest portfolio. We do now, but we’ll have the largest in St. Paul as well by the end of the year, we think, of menu items. We’re sampling a lot. People are astounded at the lot-to-lot consistency in what we have, but end of the day, it’s not the big ticket item for doing a clinical. The reagents are important, they’re critical, but you’re going to have to show more than just price and things to work your way in, and whereas we’re in the pole position in regen but we’re not in cell and gene therapy, so we’re still fighting some big competitors out there with Celgene and others, but we’re holding our own and growing nicely and it’s coming, so.

Great, thank you.

Thank you for taking the questions. Chuck, I have another one for you regarding the quarterly cadence. You mentioned October, and I believe I heard a reference to a high teens figure. Was that specific to protein sciences? What do you attribute to that sharp recovery? Was it just some delays? I know you talked about the vacation issue in Europe. Is Europe coming back? Could you elaborate on that high teens comment for October and what you observed?

Some was high teens. I think I said double-digit to mid teens, maybe there was a high teen or two. Primarily it is around all the different platforms we have in PSS. They are having a good October and still focused more on the U.S. We’re still collecting data here for Europe. Europe is improving, but how could it not improve, so. So yes, strong proteins for sure, antibodies for sure, assays for sure.

Thanks Chuck.

Okay, well thank you. It is interesting that we have a double-digit quarter in our diagnostic reagents division but there are no questions. We had so many quarters and years of negative growth, and this thing is lighting it up as well and small molecules are just on fire, especially in the GMP format for us. The only thing we didn’t cover too much, but more good news there. With that, I’ll end the call and look forward to the one-on-ones the rest of the day, and talk to you next quarter. We’re looking forward to it. Thank you.