Bio-Techne Corp (TECH) — Q2 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 relevant 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 Citi, Cowen, Barclays and KeyBank health care conferences in March. 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 second quarter conference call. In our second quarter of fiscal 2023, we delivered 4% organic growth on top of a challenging year-on-year comp, where we grew 17% in Q2 of last year. One year ago, the life sciences industry was in the midst of an incredibly strong biotech funding environment, spurred by COVID-related vaccine and therapeutic development that drove high equity valuations for smaller firms. It's been well documented that this funding environment has slowed in recent quarters, returning to pre-COVID levels. In Q2, we did experience a divergence in ordering patterns from our biotech end-market versus our larger pharma customer base, which is still very strong. This divergence was seen in certain large bulk reagent orders, which did not repeat this year, and the delay of instrument orders, as conservation of cash becomes more of a priority for our biotech customers. Encouragingly, the underlying research activity that accelerated during the past strong funding environment continues, which is evident in the strength of our biopharma research reagent run rate business, continued cell and gene therapy growth, and strong utilization trends within our proteomic and analytical tools. Also, the order funnel for our protein and analytical instruments remains full, and we continue to experience record uptake of our ExoDx Prostate test. I will provide additional details on each of these growth drivers later in the call. Before we discuss the results, I'd first like to welcome Shane Bohnen to the leadership team as our new Senior Vice President, General Counsel effective March 3. Shane will be transitioning into this new role from Brenda Furlow, who has served as Executive Vice President and General Counsel for the past nine years. The contributions Brenda has made to the company over the last nine years are immeasurable, including establishing Bio-Techne's legal and compliance functions and leading our corporate sustainability initiatives. I wish Brenda the very best in her retirement. Now let's get into the specifics of the quarter, starting with an overview of our performance by geography and end market. In Europe, we drove mid-single digit revenue growth in the quarter, recovering nicely sequentially from the growth rates experienced in Q1. As a reminder, Europe grew in the mid-teens last year on the wave of stronger biotech funding. We see more stability in European end markets as the year progresses and concerns around high energy prices and severe recession have tempered. The team is also nearly finished implementing a new Dublin warehouse to support Mainland Europe and a new ERP system that has been implemented with minimal disruption to our operation. North America is where we saw the biggest impact of lower biotech spend in Q2. However, North America was still able to grow low single digits on top of a prior year comp that experienced greater than 30% growth in biopharma and over 20% growth overall. The multiyear growth rates in North America are still double-digits and in line with our long-term goals. The consumable run rate business and instrument order book also suggests that underlying research activity is still robust, and this should become more evident as we pass the remainder of last fiscal year's high biotech comps. Moving on to China. I want to first acknowledge the tremendous dedication and resilience of our team there. Following multiple lockdowns, our team has continued to supply the Chinese research market with the proteomic research reagents, analytical tools, and spatial biology solutions to enable scientific discoveries in this geography. Now following a change in COVID management strategy by the Chinese government, COVID is spreading rapidly in the country, including within our China team, which is over 90% infected at one point. Thankfully, this does not appear to be a particularly virulent strain, and our impacted team members are typically back to the office within five to ten days. Despite the disruption caused by the rapid spread of COVID, our team in China was still able to produce mid-single digit growth in Q2. After the waves of COVID subside in China, most likely in our fiscal Q4, we believe a full reopening of our end markets will accelerate faster compared to the government's prior zero-COVID strategy. Positioning Bio-Techne for a sustainable return to our historic 20-plus percent growth rate in this region. Given the proven pent-up demand in past shutdowns in 2020 and the pending RMB1.7 trillion government stimulus, we see a strong Q4 looking ahead. Now let's discuss our growth platform, starting with our Protein Sciences segment, where organic revenue increased 2% for the quarter on top of a strong comp from last year when the segment grew 19%. During the quarter, we continued to gain traction with our portfolio of cell and gene therapy workflow solutions despite a challenging year-on-year comp where we grew our cell and gene therapy business over 80% organically in Q2 of last year, and within that, our GMP protein is over 185%. We still grew our cell and gene therapy portfolio almost 20% in the quarter. Specific to our GMP proteins business, the commercial team did an excellent job growing business with existing customers as well as adding additional accounts during the quarter, culminating in a record quarter for our GMP protein business. The roadmap to adding additional GMP proteins to the menu produced in our state-of-the-art St. Paul manufacturing facility remains on track with plans in place to almost double the number produced in this facility in the coming months. It's worth noting that GMP protein sales are driving cross-selling activity throughout our portfolio as this growing list of customers are also frequently purchasing additional items, including RUO media, proteins, and small molecules. Speaking of small molecules, our GMP small molecules remain key components in the regenerative medicine cell therapy fields as they enable the reprogramming, self-renewal, storage, and differentiation processes that are key to these workflows. Our leadership position in regenerative medicine workflow is driving substantial growth in our GMP small molecule business as well as specialty cell culture media, matrices in our portfolio of 19 GMP proteins that are focused on regenerative medicine, including 11 GMP proteins that are only available from Bio-Techne. The growth is so profound in our GMP small molecules that we are drastically expanding our manufacturing capacity in Bristol, UK. Now let's discuss our core portfolio of proteomic research reagents, including the RUO proteins, antibodies, and small molecules that are key components to enabling biopharma and academic scientific discoveries. Collectively, our RUO reagents grew in the low teens in Q2 of last year, driven in part by a strong contribution from bulk reagent orders from biotech customers, some of which did not repeat during the quarter. We are very encouraged that, excluding these large orders, the performance of our run rate research reagent business remains very healthy, especially in the US. We continue to expand our catalog of research reagents, which now includes over 6,000 proteins, 425,000 antibody variations in a growing small molecule portfolio. For example, during the quarter, we expanded the small molecule portfolio with the launch of our MitoBrilliant fluorescent dyes, enabling the fluorescent labeling and tracking of mitochondria in live and fixed cells. Initial reception to the launch was very strong, with the initial production lot of these dyes selling out in the quarter. These dyes, when used with our new RNAscope Plus small RNA for co-detection, give extremely high resolution at a single-cell level and high detects short base RNA. Moving on to the performance of our ProteinSimple branded analytical tools, where the team delivered low single-digit growth in the quarter. Here, we faced a particularly strong year-on-year comp of nearly 30% in the second quarter of the prior year, driven by strong adoption among vaccine and monoclonal antibody therapeutic manufacturers for Maurice in the prior period. The rapid installed base growth we delivered over the past few years is leading to a strong consumer growth, as our portfolio of biologics, fully automated Western blots and multiplex immunoassay solutions become ingrained in our biopharma and academic customers' processes. We are very encouraged that the order funnel across all three of our instrument platforms remains very full, including a record level for our Maurice Biologics instrument, although the biotech funding environment has lengthened the closing cycle. Simple Western lead instrument growth as the system's ability to automate the cumbersome and time-consuming Western blots process with a sample-in and answer-out solution continues to resonate with our biopharma and academic research end markets. Simple Western is turning out to be much more than an automated Western blot replacement, with the system's ability to identify and quantify proteins in complex samples like lysates, leading to its use as a quantitative immunoassay platform. This expanded application for the system is driving usage in targeted protein degradation, drug tolerance studies, and intracellular signaling applications, and is an alternative to customized development. We are actively implementing marketing strategies to educate the market on these additional applications. On January 24, we officially launched our next-generation biologics platform, Maurice Flex, at the WCBA Conference. As a reminder, we have seen tremendous adoption of Maurice since its launch in 2016, with the system's ability to provide protein purity, charge, and identity in five minutes in an easy-to-use cartridge-based instrument driving robust demand for the platform. Maurice Flex expands on these capabilities, adding icIEF fractionalization capabilities to the instrument. Fractionalization 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. Maurice Flex addresses the labor-intensive and time-consuming challenges of using legacy fractionation methods, including ion exchange chromatography. This new application allows us to expand Maurice into a new $300 million market. Now for an update on our SimplePlex branded multiplexing immunoassay system, Ella. Ella’s ease-of-use, sub-picogram sensitivity, smaller footprint, and cost advantages continue to draw increased attention from biopharma and academic researchers. As our installed base of Ella systems continues to grow, now nearing 1,000 placements, and utilization trends remain robust, we opened a new state-of-the-art product innovation and manufacturing facility to meet current and forecasted cartridge demand. This new facility adds laboratory, manufacturing, and clean room space, increasing cartridge capacity to 500,000 cartridges per year. We also successfully completed the initial ISO 1345 audit of our Wallingford, Connecticut facility as we prepare Ella to make inroads into the large and nascent clinical diagnostics opportunities that exist for the platform. ICL is possibly our largest instrument platform one day. No other tool works so well across both biomarker discovery and diagnostics. Rounding out our instrument platforms, let's now discuss Namocell, our single-cell separation and dispensing platform. Recall that we closed on the Namocell acquisition in July of 2022, and we are pleased with growing interest in this novel technology as well as the progress we have made integrating the team and the business. During the quarter, a single-cell cloning workflow publication using the Namocell single-cell isolation and dispensing platform was featured in Nature Protocols. The study outlines a robust and scalable workflow that maximizes cell viability for cloning Human Pluripotent Stem Cells, or HPSC, using Namocell’s low-pressure microfluidic technology, which ensures gentle and rapid dispensing of cells. We are in the early stages of realizing the potential of the Namocell platform and see a bright future for this technology, having shipped over 100 instruments to date. Now let's shift to Diagnostics and Genomics segment where we grew revenue by 7% organically in the quarter. Let's start with a discussion of our molecular diagnostics business and the continued adoption of our ExoDx prostate cancer test. During the quarter, the team delivered the fourth consecutive quarter of record test volume as the number of tests performed increased over 70%, and revenue grew over 110% in the quarter. The combination of a strengthened marketing message to the urology community that emphasizes ExoDx as a tool to identify not only the right patients for prostate biopsy but also drive patient adherence to biopsy recommendations, a four to five and expanded commercial team, as well as the favorable impact of our reconsidered local coverage decision, LCD, with our Medicare contractor has driven sustained momentum in the business. We are seeing strong trends across the key performance indicators we track for the ExoDx prostate test, including the number of ordering doctors, the average number of tests ordered per doctor, and the number of new doctors, all of which set records in the quarter. We also hired a veteran reimbursement executive with a redesigned game plan to drive favorable coverage decisions within the private payer community. With less than 20% penetration of urologists in the US who have used the test at least once, and the potential to expand the usage of our test among current doctors by 5x, we are positioned to continue the strong growth in this business for the remainder of fiscal 2023 and for the years beyond. Continuing with molecular diagnostics, Asuragen-branded genetic carrier screening and oncology kits continue to grow double digits. During the quarter, Asuragen announced a partnership with Oxford Nanopore Technologies to develop assays designed to deliver more accurate and reliable options for reproductive health and carrier screening. The collaboration combines Asuragen's long-range PCR and Oxford Nanopore's any-read length sequencing capabilities in a single workflow to identify genetic sequence variants in both hard-to-decipher genes and conventional genes using a single sequencing system. Our spatial biology business, branded ACD, grew mid-single digits in the quarter as a softer biotech market provided some headwinds similar to Protein Sciences. Our professional assay service business had a strong quarter as revenue increased nearly 20% year-on-year. Historically, accounts leveraging ACD's pharma assay services capabilities for biomarker discovery eventually transition into product customers, making strength in the service business a proxy for future product demand. We recently expanded our ACD portfolio with the launch of RNAscope Plus small RNA, enabling the simultaneous fluorescent detection of small regulatory RNA using our new Vivid dyes, including microRNA together with three target RNAs or RNA biomarkers in the same tissue section at single-cell and sub-cellular resolution. RNAscope Plus provides gene therapy researchers with a valuable new tool to quantify changes in gene expression and cellular function in response to the introduction of regulatory RNAs, which is essential for optimization efficiency and safety. I would note, RNAscope Plus was initially offered through spatial biology's professional assay services where it saw an overwhelmingly positive customer response. Lastly, we experienced low single-digit growth in our diagnostic reagents and controls business as order timing among a handful of customers impacted the quarter. Looking at this business on a trailing 12-month basis, growth remains in the mid-single digits. With patients returning to their physicians, demand for diagnostic testing is increasing. This favorable macro environment, plus a strong pipeline of additional products positions our diagnostic reagents and controls for future growth. In summary, despite the temporary challenges created by the current biotech funding environment and the COVID impact in China, our team continues to successfully navigate this dynamic environment and grow the business. The long-term tailwinds supporting proteomic scientific research, cell and gene therapies, spatial biology, and liquid biopsies remain firmly intact, and our portfolio is ideally suited to capitalize on these opportunities as they shape the future of life science research and health care. The team to execute our strategy is in place at full strength and we remain well-positioned and more optimistic than ever to deliver on our long-term targets. With that, I'll turn the call over to Jim.

Thanks, Chuck. I will provide an overview of our Q2 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. Before we get started, I'd like to remind everyone that Bio-Techne executed a four-for-one stock split on November 29, 2022. All references to share and per share amounts have been retroactively adjusted to reflect the effects of the stock split. Now let's start with the overall second quarter financial performance. Adjusted EPS was $0.47, consistent with the prior year quarter. Foreign exchange negatively impacted earnings per share by $0.02 or minus 4% in the quarter. GAAP EPS for the quarter was $0.31 compared to $0.49 in the prior year. The biggest driver for the decrease in GAAP EPS was a nonrecurring gain on our previously held ChemoCentryx investment in the prior year period. Q2 revenue was $271.6 million, an increase of 4% year-over-year on an organic basis and 1% on a reported basis. Foreign exchange translation had an unfavorable impact of 4% and acquisitions had a favorable impact of 1% on revenue growth. As Chuck mentioned, following a period of reduced biotech funding last year, we are seeing a normalization of purchasing trends from these customers. Additionally, COVID is now sweeping through China and slowing the amount of research activity in this region, temporarily impacting the growth of our proteomic research reagents, analytical tools, and spatial biology products. Adjusting our organic growth rate for large orders from a handful of biotech customers that did not repeat and normalizing for China, our organic growth would have been double digits in the quarter. Summarizing our organic growth by region and end market in Q2: North America grew low single digits, Europe grew mid-single digits, China grew mid-single digits, while APAC was flat due to prior year government stimulus in Japan not repeating this year. By end market, biopharma grew low single digits, while academic grew mid-single digits. We are encouraged by the revenue growth from our large pharma customers as well as the underlying health of the overall biopharma end market, as is reflected in the continued strong momentum in our run rate business. For academia, we are encouraged by the recent NIH outlay data, which showed a 13% year-over-year increase in our second quarter. We anticipate this strong NIH outlay to begin to flow through the system and benefit academic life science research spending in the near term. Additionally, the 5.6% NIH budget increase and 50% ARPA-H budget increase for the federal government's fiscal 2023 sets the stage for a healthy academic end market for the remainder of our fiscal year. Moving on to the details of the P&L, total company adjusted gross margin was 71.7% in the quarter compared to 72.3% in the prior year. The decrease was primarily driven by unfavorable foreign exchange. Adjusted SG&A in Q2 was 27.9% of revenue compared to 26.5% in the prior year, while R&D expense in Q2 was 8.3% of revenue compared to 7.5% in the prior year. The increase in SG&A and R&D was driven by wage inflation and the acquisition of Namocell. The business has implemented strategic price increases during the first half of fiscal year 2023 to offset the dollar impact of inflation and operating income. However, the dollar-for-dollar offset did have a negative impact on operating margin. Adjusted operating margin for Q2 was 35.5%, a decrease of 280 basis points from the prior year period. Negative FX impact decreased margin by 100 basis points, the pricing inflation dynamic decreased adjusted operating margin by another 50 basis points. While the acquisition of Namocell and timing of other fiscal year 2022 growth investments drove the remainder of the margin dilution for the quarter. For the remainder of the year, we expect adjusted operating margins to continue to expand sequentially, ending the fourth quarter of fiscal year 2023 up to 100 basis points higher than the fourth quarter of fiscal year 2022. Looking at our numbers below operating income, net interest expense in Q2 was $1.2 million, decreasing $1.3 million compared to the prior year period. Our bank debt on the balance sheet at the end of Q2 stood at $200 million, a decrease of $64.7 million compared to last quarter. Other adjusted net operating income was flat in the quarter, an increase of $1.2 million compared to the prior year, primarily reflecting the foreign exchange impact related to our cash pooling arrangements. Moving further down the P&L, our adjusted effective tax rate in Q2 was 21%. Turning to cash flow and return of capital: $64.3 million of cash was generated from operations in the quarter, and our net investment in capital expenditures was $6.1 million. Also, during Q2, we returned capital to shareholders by way of $12.5 million in dividends. Following our four-for-one stock split, we finished the quarter with 161.8 million average diluted shares outstanding. Our balance sheet finished Q2 in a very strong position with $196.8 million in cash and short-term available-for-sale investments, bringing our net debt position very close to zero. Going forward, M&A remains a top priority for capital allocation. Next, I'll discuss the performance of our reporting segments, starting with the Protein Sciences segment. Q2 reported sales were $203.9 million, with reported revenue decreasing 1%. Organic growth for the segment was 2%, with foreign exchange having an unfavorable impact of 4% and acquisitions contributing 1%. Despite the temporary headwinds and the tough year-over-year comps that Chuck pointed out for this segment, I will highlight that the longer-term five-year organic CAGR for this segment is approximately 11%. Operating margin for the Protein Sciences segment was 43.8%, a decrease of 170 basis points year-over-year, with operational productivity more than offset by foreign exchange, price inflation dynamics, and the impact of the Namocell acquisition. Turning to the Diagnostics and Genomics segment, Q2 reported sales were $68 million with reported revenue increasing 5%. Organic growth for the segment was 7%, with foreign exchange having a negative 2% impact. As you heard from Chuck earlier, our Exosome Diagnostics business remained incredibly strong in the quarter, as our fortified marketing message and strengthened commercial team continue to drive test volume and revenue growth. Our spatial biology business grew mid-single digits in the quarter, with strong performance in our professional assay services and microRNA businesses, partially offset by order timing from a few bio-pharma customers. Moving on to the Diagnostics and Genomics segment, operating margins at 12.2% showed a decrease of 470 basis points compared to the prior year. The segment's operating margin was unfavorably impacted by foreign exchange, price inflation dynamics, and the timing of strategic growth investments. As we think about the setup for the second half of our fiscal year, it is important to reflect on the drivers of our performance in the first half relative to our expectations at the beginning of the year. Our Q1 relative performance was muddled by the pent-up vacation activity we saw from our customers, as well as heightened inflationary and recessionary concerns, especially in Europe. In Q2, we saw the slowing of large orders from our biotech customers that possibly could have been foreshadowed by the slowdown in biotech funding earlier in the calendar year. However, the impact on our business was not realized until the December quarter that just ended. And throughout the entire first half of fiscal year 2023, the COVID situation in China has been on a roller coaster with rolling government-mandated shutdowns and now widespread infections. Despite all of this, as Chuck and I have expressed on this call, we believe our end markets are still very healthy, and our portfolio positioning is still very strong. Big pharma demand is high. Academic research budgets are on the rise, and most biotechs are not broke, just being more prudent. And finally, China appears to be closer to the end of the COVID roller coaster than ever before with pent-up demand and strong Chinese government stimulus setting up for what could be an incredible calendar year 2023. But we need to get through the March-ended quarter, our fiscal Q3 first, and right now, it appears as though our organic growth this quarter will be similar to that of Q2. People in China are still sick with COVID, and in Protein Sciences, we know of several large biotech orders that occurred last year in Q3 that are unlikely to repeat this year. Also in Q3, we will be lapping the large milestone payment realized in our Diagnostics and Genomics segment from the ExoTRU kidney transplant rejection assay licensing agreement made with Thermo Fisher last year. As we lap these difficult year-over-year comps, the normalization of biotech funding runs its course, and COVID headwinds alleviate in China, we anticipate organic growth to improve significantly in Q4, positioning the company for continued progress on delivering our long-term strategic and financial targets. That concludes my prepared comments. And with that, I'll turn the call back over to the operator to open the line for questions.

Hello Chuck, Jim, thank you for taking my question. Chuck, could you elaborate on the impact of emerging biotechs? Are these primarily smaller firms? Jim mentioned that they're not facing financial ruin, but there seems to be a decline in the number of their projects. Could you provide more details on this? Also, is this trend affecting larger biopharma companies, or are they relatively stable? Additionally, how much of this is related to COVID-related factors? If you could specify which segments or types of products have seen bulk orders, that would be helpful. I understand this is related to normalization of comparisons, but my question is about the duration of this situation. Given that funding issues are currently present, how long do you anticipate it will take for us to see a meaningful improvement?

I'll try to cover that in less than 20 minutes. Thanks, Puneet. As the quarter ended, we felt a bit disappointed. This marks my 40th quarter, and it's been a while since we've experienced a growth rate like this. However, reviewing the data revealed some impressive aspects. Our run rate business, especially in Europe, showed double-digit growth, indicating strong end markets, with academia remaining stable and no significant issues. We've also begun to explore how we're increasingly becoming a front-end research company supporting customers as we transition from academia to biopharma. Within biopharma, we're identifying how much is actually biotech and the extent to which we are supporting new biotech start-ups and cutting-edge research, which stands at about 30%. Approximately 20% of our business is in instruments, which accounts for about 40%, and this presents a current funding challenge. As we investigate further, we expect some shifts, but growth is still evident. Funding is solid but cautious, as companies aim to make their resources last. If a company is further along in clinical stages, they are likely in a better position due to committed funding; however, start-ups seeking their second round are facing challenges. This situation has been a major driver for potential growth in OEM and larger orders as clients begin their clinical trials and engage in unique projects with us. There are a few significant deals that have contributed to achieving double-digit growth, which is quite remarkable. Now, regarding biopharma, the pharmaceutical sector seems to be more conservative amid the ongoing influence of COVID—particularly for vaccine manufacturers, which reflects a normalization process rather than a long-term trend. Therefore, we are seeing some delays as we await new developments. Our funnel for instruments is larger than ever, but the conversion rate has slowed considerably due to tighter capital for teams looking to purchase instruments in our sectors. We anticipate significant growth in China during Q4; we surprisingly recorded mid-single-digit growth this quarter despite minimal workforce activity. I'm confident that China will rebound robustly, and with government stimulus expected to kick in by Q4, we are already seeing tenders being released. This should provide a strong boost for our performance in China come Q4. I believe that covers most of your questions. Did I miss anything?

Yes, I believe you explained it well, Chuck. Thank you for that. I'll keep it brief for Jim. Regarding the fourth quarter, I appreciate your insights about the third quarter being similar to the second. However, for the fourth quarter, even if I see double-digit increases, I'm still anticipating single-digit growth for the entire year in terms of total organic growth. I'm curious if the goal of achieving a 15% or mid-teens growth rate in the long term is still on track. If you could provide some details on that, I would appreciate it. Thank you.

Yes, they are still intact. The projections indicate that we are unlikely to achieve double-digit growth for the year, even if we do in Q4. However, when viewed from a multi-year compound annual growth rate, we're still in the low teens and should finish the year in that range as well. This aligns with our expectations at this stage of our five-year journey. While mid-teens is the average across the five years, the growth from cell and gene therapy, especially in GMP proteins and Exosomes, will play a significant role. As Chuck mentioned, we're still just beginning to tap into the potential there, which will drive us toward mid- to high-teen growth rates in the later stages of our five-year plan. Overall, we believe we are still on track.

Hey. Thanks. Good morning. Maybe kind of first question, kind of dovetailing Jim and Chuck on what Jim was just talking about. You're still targeting this $2 billion of revenue by FY 2026. I do think in your new deck, maybe you moderated some of your expected growth for instruments and on the spatial side. Can we just touch on kind of your latest thoughts on the path to $2 billion by FY 2026, once we get beyond some of these kind of near-term dynamics that you discussed? Thanks.

We're not backing off from that target at all. Our last analysis is still fresh, and we've made significant progress. While some aspects have normalized post-COVID, we believe we can still achieve the $2 billion target. There are a couple of areas driving this, including our entry into a $400 million market and a $300 million HPLC market focused on fractionization, which allows us to bypass lengthy processes in labs serving biopharma customers. Additionally, we're addressing a smaller $100 million protein characterization market where our new machine can significantly enhance peptide mapping. We're also seeing increased activity in cell and gene therapy, particularly in quality control for purity. ELA is experiencing tremendous growth; we currently produce around 90,000 cards annually and are scaling up to 500,000 cards, with more diagnostic research on the way along with biomarker discovery. This platform is expected to grow even beyond our $2 billion forecast. We are also seeing promising developments with exosomes, as demand is rising significantly. Our team is making strides in securing partnerships, and we are making headway with private payers. Overall, we are preparing for significant growth, especially in cell and gene therapy, which could expand from a $100 million portfolio to $2 billion over the next 8 to 10 years. We're committed to this growth trajectory and are addressing any challenges that arise. We've learned from our recent forecasts and are confident in our recovery. Our brand studies indicate R&D systems remains competitive, with Bio-Techne also gaining traction. Our continued investment in digital strategies is yielding positive results. While we may not feel as secure in hitting the $2 billion target as we once did, we still believe we can achieve it, with Namocell now joining our efforts.

Got it. Thanks for that, Chuck. And then just the other big picture question. I heard Jim mention that I think M&A is the number one priority on the capital allocation side. So, I think that speaks to appetite. But maybe just kind of any thoughts on where seller expectations are in the current environment and any areas of interest?

Well, time heals all here. So valuations have come down. They've come down all year, but there's still denial, but there's less denial. There's not a robust IPO market right now. So small companies have limited options. We talked about the funding issues, right? So that means a lot of small companies are going to be looking for ways out and help. So our phone is ringing more than it was. We're very active. We've been active, but we're definitely more active than usual. And I hope we can land a few more. We landed Namocell not too long ago, and we've got some more in the pipeline. And yes, it is our number one capital strategy. We're at net debt zero. We've got $1.5 billion in our chest to go with cash, and we'd love to put it to work. I don't think we'll go over four times leverage, but I'm going to get up near that. The board is very supportive of us getting much more aggressive in M&A. But it's like what your question is all about the price tags, right? And we've got to get real price tags to get to make to close some deals.

Good morning, guys. Thanks for the questions. Chuck, on GMP proteins. Can you just refresh your view on how you think growth shapes up there, when you guys are opening up the St. Paul facility, you talked about expecting a couple of years where revenue basically doubles. It sounds like you dipped a little bit below that, but maybe now you're accelerating again. So what do you think the trajectory there is relative to the overall capacity, which I think at the time of like $140 million to $200 million?

Yeah, there's a little bit of overlap, even in this – in the area we'd call OEMs. So we've got a lot of customers like 180 customers now for gene proteins, but only a handful that are really sizable and they're a little bit lumpy still. We have some year-on-year comps in the area, they are tough as well. Even there, we still had a pretty good quarter, I'd say. And going forward, I think it is going to accelerate. We added another product to the same St. Paul were its fixed. We'll more than double that in the coming year. We have the largest menu for regenerative medicine, and we're moving most of those over to the St. Paul facility in the coming year or two as well. And we're number one there. We're playing catch-up still in the CAR T area, but it's growing strong. It's still kind of, I think, going to be a double kind of year, maybe just a hair under this year, but it won't be too far off, we don't think. And next year should start lighting up as we land a few more larger accounts and we get some things further up in the clinicals to get more volume going. We call it turning minerals in the tunes and tunes in the whales. So we have a whole pipeline of how we move these customers forward. More of indication, we had a few of these customers who are fairly sizable, and they went to zero, because their funding is tight right now. So they're going to probably come back online next year, we think, as they get more funding, but they've had some stalls in some of their clinicals. These are small to mid-range biotechs that were kind of hot last year and not so hot this year. They're customers. We're also seeing that with Wilson Wolf as well. It's definitely slowed down, seeing the same thing. Area isn't anybody who has a business that's really in the CAR T, in the biotech side in clinical, I can't say the same thing. It's just honest to God, true. There are things have slowed down. There is less funding and there are less clinical starting, and that's just reality. I don't think it's long-term. I think it's just a blip for this year, but it's a reality.

Okay. Okay. That's helpful. And then I guess, I need to go back to the long-term targets here just because – in order to hit that 17% organic growth CAGR that you laid out for 2021 through 2026 and that gets you to the $2 billion at least by my math, you basically have to do a couple of years of 20% growth. And one of the things that we're talking about is how hard comps can be. So apologies for beating a dead horse here, but I guess I just have to ask explicitly if that's at all a decent way to think about out-year growth?

Well, the OEM side of things was bad enough and just on a handful of deals where it took our antibody and our protein business to near to about flat. And that's a short-term blip. We need mid-level, mid-digit growth in that category. We've had way higher than that for the last two years, and in fact, double-digit, so I'm not too worried about that. It's more an issue about the back end and making sure that both cell and gene therapy and exosome as a platform can get to 45% to 50% growth in that range. That's what's got to happen. Everything else is within the air bars easily to hit there, but we've got to get to that level. And then we've got a couple more years to get to that point. I don't think we're shook about it. Things can only grow so fast, and we're kind of growing pretty fast.

I'd say I'd just add that a little bit on. I mean, as I mentioned in the call earlier, in literally a handful of customers, biotech customers, smaller biotech customers was a difference between double-digit growth and mid-single-digit growth for us this past quarter. So that's how quickly it can flip the other direction as well when things come back online.

Hi. Thank you. Chuck, in the past, you've talked about hiring challenges as being a gating factor to your growth and wanting to hire more. Can you give us an update on trends there? Are you still planning aggressive hiring, or have you moderated your ambitions there?

No, that's a very insightful question. I didn't mention it during the call, but we have experienced turnover in our sales team in the biologic platform area. There was a significant amount of instrumentation that was not performing optimally, leading to a loss of several team members. While we have returned to full strength, this is still a factor to consider. In the spatial segment, we have nearly fully recovered. Overall, we are managing attrition to maintain a lean operation. Our margins have remained stable, and we are progressing as planned. Part of this stability comes from not fully replacing positions lost through attrition. We initially had a substantial spending plan for this year to achieve our double-digit targets, but we've scaled back as a wise decision. I expect our team size will increase by 100 to 200 individuals instead of the originally planned 300 to 400. The turnover in the sales team poses the most significant risk, and we likely experienced a decline in productivity in the past couple of quarters due to around 1,000 employees leaving last year, which accounted for a third of our workforce. This impact is not fully recognized, but it should stabilize moving forward. We are closely monitoring this situation and actively addressing it. We have implemented market upgrades as we face challenges from wage inflation. Despite these pressures, I believe we have achieved impressive results considering the wage inflation we've absorbed over the past year. We are competing like everyone else. Our portfolio remains strong, and we have exciting new products in development that attract talent to join us. Demographically, our workforce is much younger now compared to three to five years ago, which encourages more change. ESG is very important to us, and we are creating various new groups and clubs to address diversity at different levels. The company has never focused more on this aspect, with over 50% female representation in management and 25% of our team being Chinese. We received an award this year for our diversity efforts. So, managing youth and diversity is crucial to addressing attrition, in my view.

Appreciate all that color, Chuck. And my follow-up question on China, I'm not sure I know how to quantify the word explode, but when it comes to the RMB1.7 trillion loan package. What are you seeing on the leading indicators on that? Are you seeing quote activity tied to that spend? Are you seeing RFPs? Is there anything that gives you confidence that money is going to start flowing beginning that June quarter?

I had a meeting on that, just asking those very same questions with the leadership in Asia. And, yes, tenders are going out and there is discussion. So it looks like it's very real. It's about a two-month process so I don't think we'll see much of that here in Q3. It's a Q4 activity. We kind of have them at over 100% to plan in Q4. Of course, they're trying to negotiate that. But I think it's well over 100%. If there's a reality around this RMB1.7 trillion stimulus, which is really instrument driven, then it will be real. I think there's pent-up demand already. We had mid-single-digit growth the last quarter with nobody working. So I think it will be a quick comeback story. We have data on that, right? This happened two years ago as well after the COVID quarter, and I think it will be similar. And the government is very focused on prioritizing healthcare. I mean, that's what the stimulus is for. I don't think anything changes there. People just got to get back to work. Kind of tough to read right now, too, because they just come off a new year now, right? So they just come back to work, I think, this week even so. And we're coming back fast. I mean, we had the whole office. 90% of our people are sick at the same time, like within a two-week period, they all got hit, that was actually similar anywhere in Shanghai.

Customers the same way.

So in customers, too. So it's going to snap back pretty fast, we think, unless there's some new variant. But I asked questions about that too. About when do they expect the second wave and they don't really expect one for a while according to the people we talk to; everyone already got it.

Thank you for the questions. Jim, just to follow up, you mentioned that if we adjust for China and the RUO region, the organic growth from bulk ordering would have been in double digits. Could you clarify how much of that growth is attributed to bulk ordering? It seems like China might be contributing a two-point headwind in bulk orders, possibly around four points or slightly more. Is that an accurate estimate? Additionally, could you provide some details on any bulk purchasing activity from the third or fourth quarter of last year as we consider comparisons for the latter half of this year?

So yeah, your percentages are pretty close to what we show as well. And yes, that's why we said we expect Q3 to be very similar to Q2 in terms of organic growth because the number of one-time bulk orders from these small biotechs was similar to Q2, perhaps a little bit less, but also keep in mind that we had the very large ExoTRU licensing agreement with Thermo Fisher in our Q3. We knew – we didn't know all along that Q3 was going to be our most challenging growth quarter because of that very large ExoTRU agreement that occurred. So that's an additional headwind that we didn't have. But we think with the overall momentum of the business, we'll be able to cover some of that sequentially, so that sequentially our growth rates will be similar.

Okay. Got it. And then can you just talk to the rebound in Europe. On your last earnings call, you talked about September being up double digits and that strength continuing into October. So can you just walk through how things unfolded throughout the rest of the quarter?

Yes, Europe has performed better than the US compared to last quarter, with run rates exceeding 12% in Europe. Overall, the growth in Europe is in the mid- to high single-digit range, which shows a good recovery from being negative last quarter. We're also expecting new management to come on board soon. We've implemented a new ERP system without any issues, and our new warehousing system in Dublin is now operational without glitches as well. There are many positive developments in Europe. Looking ahead, the risks from the war and energy issues in Europe, especially during winter, have been largely managed. Our focus is on getting the teams trained, establishing new management, and completing our cross-selling and commercialization strategies that were interrupted by COVID. Funding in Europe appears solid on a country-by-country basis, though we still need to strengthen our position in Germany. Building on our efforts in Germany is crucial. There are concerns in the UK due to Brexit, but current conditions seem stable. Overall, Europe has moved on from the challenges faced last quarter, although we now need to address OEM issues in the US.

Hey guys. Good morning. Thanks for taking the questions. Jim, maybe kind of a follow-up on one of the earlier questions in terms of headcount. As you guys kind of see the growth slowing for a little bit, obviously talked about 3Q being in this area as well. How are you thinking about managing expenses? How are you thinking about the margin cadence? How nimble can you guys be in terms of protecting the bottom line? I guess the margin has held up pretty well this quarter relative to the topline. So, just curious how you're thinking about that piece and if you're changing any growth investments or any way you're thinking about the P&L?

Yes, as we've discussed in recent quarters, we lagged in our investments and hiring throughout most of fiscal year 2022 and even into fiscal year 2021. We made significant strides in addressing these investments and increasing our headcount in Q4, which has contributed to our margin decline in the first half of the year. We've been transparent about facing retention challenges over the past year and a half, and out of the approximately 3,000 employees we ended the year with, around 1,000 were hired in the last year to replace those who left or to fill new positions. This influx of new hires requires time to become acclimated and productive. Therefore, our main focus this year is on enhancing the productivity of last year's new hires, which is why we are not seeing much new hiring nor do we need it. However, we are making strategic investments, particularly in our Molecular Diagnostics division to support the impressive growth of our prostate test. While we are slightly slowing down a few other R&D programs to catch up from last year's hiring, there won't be any impact on our long-term growth strategy.

Let me add that our success over the past decade can largely be attributed to our prioritization process, which we have discussed frequently. Many of you have participated in our brief meetings offline. This process enables us to quickly adapt our priorities and the composition of our teams and programs. We conduct a zero-based review every year, and we are currently in the midst of making those adjustments. Since hiring the Namocell team, we have doubled its size. Additionally, our exosome teams have seen a 50% increase in headcount over the past year as we await critical triggers. As anticipated, these triggers have occurred, leading us to start investing accordingly. Urologists are now seeing patients again, and we are ramping up our efforts in that area. While we are bringing in many new team members, we are also strategically holding back on certain initiatives until there are reasons to shift our focus. It's important to note that all of our leaders, myself included, have extensive experience in managing large businesses, each overseeing billion-dollar-plus portfolios, so we know how to operate effectively.

No, that's a great point, Chuck. We are actively reallocating resources towards those higher growth platform. So it's our prioritization process at work real-time. And as that relates to margins and by holding our overall cost base, we're relatively neutral, maybe a slight uptick throughout the year, but relatively neutral for the remainder of the year. Anyone who follows our business knows that our second half is, from a revenue perspective, seasonality-wise, is much stronger than our first half simply because our customers are at the bench more days than they are in the first half of the year without all the vacation interruption. That additional revenue on top of that same cost base should allow our margins to continue to expand sequentially.

And by the way, people are coming back to work here.

Yeah. Got you, Chuck, and then maybe one on Wilson Wolf. Can you just refresh us in terms of the milestones and timing there? Has anything changed as your conviction and going forward with that change and all?

We're short on time, so I need to move quickly. They've slowed down as well. However, the targets are $92 million in revenue or $55 million in EBITDA for the first tranche, and they're very close to one of them. We might strike soon, or we might decide to wait. This decision is as much strategic as anything else. We have the cash and are ready, so we may lean towards acting sooner rather than later. We're not certain yet, but we are getting close to a decision. I believe that if things pick up for them at all, we'll reach our goal soon. If they don't improve, it might take a couple of quarters. But we have our sights set on this. Nothing has changed strategically or culturally, and the relationship remains strong. The teams are more aligned than ever, pushing to make this happen. It's an important question, and I'm looking forward to it.

Good morning, Chuck and everyone. I have a question regarding China. Can you break down how much of the slowdown was due to the consumables compared to the instrument business? Additionally, regarding the seamless funding, do we have an idea of how long that will last? Will it serve as a boost for the calendar year 2024 based on your discussions?

I think stimulus in the US, or anything related to that is here and gone. I think the OEM comments are more about consumables and the instruments are slow to basically of just prudent conservatism buying biotech and biopharma and funding in general. So it fits more funding on the instrument side and the conservatism and OEM is more on the consumable side. Well, in China, China is just they're not at work. They'll be screaming back here very soon. I'm not worried.

Yes, I'd say the slowdown from our, call it, 20% plus normalized growth to mid-single-digit growth was across the board in both instruments and consumables. And rains to be seen how long the stimulus impact last, but it's going to take more than a quarter to spend that much stimulus in our opinion. So I think for the one point, it will be a multi-quarter, if not a year in benefit.

It will be this whole calendar year. They're intending it for that. They're intending it for health care. They're intending it to be in hardware more than anything else. And we play big there. We're about productivity and hardware. So we've got more platforms than ever. So we're going to share in that as well. I mean just to put that into scope, it's 1.7, if that's the real number, that's way bigger than our entire NIH budget. So it's going to be good. It would be good for everybody.

All right. Well, thanks, everyone. We'll see at the end of next quarter. I think we were as transparent as we can be. We've been doing this a long time together as a team, and we'll always be transparent. Things still look really good here. We don't see any change in our thesis. And anyway, I see the future is bright, we think. So we'll talk to you soon. Thank you.