Bio-Techne Corp (TECH) — Q3 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 identify 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 the most comparable GAAP measures are available in the company’s press release issued earlier this morning on the Bio-Techne Corporation website. Separately, we will be participating in the BofA, RBC Capital Markets, Benchmark, Craig-Hallum and Jefferies Healthcare Conferences in May and June. We look forward to connecting with many of you at these upcoming conferences. I will now turn the call over to Chuck.

Thank you for joining us for our third quarter conference call. As we expected, as mentioned in last quarter’s call, our Q3 top-line year-on-year revenue growth was similar to the growth we reported in Q2. While the year-on-year growth rate and tough comps from last year were similar in both quarters, the underlying performance of the business improved quarter-on-quarter when considering the large ExoTRU kidney milestone payment received from Thermo Fisher last year in Q3. The team did a great job this quarter, furthering several of our key growth drivers as physician uptake and utilization of our ExoDx Prostate test accelerated demand for our cell therapy workflow solutions, and our spatial biology business returned to double-digit growth. These growth drivers were partially offset by the continued challenges of COVID in China, lower biotech funding, and OEM destocking from supply chain disruption concerns last year. Encouragingly, as we look ahead to finishing this fiscal year and kicking off fiscal year 2024, we see China coming back strong. With COVID now in the rearview mirror, destocking by our OEM customers will eventually unwind and we will move beyond the tough prior year comps from our smaller biotech customers. Before I get into the specifics of the quarter, I’d like to take this opportunity to welcome Peter Schuster as the new leader of our European organization and business. Peter has over 20 years of experience leading commercial organizations, including very relevant experience successfully growing businesses and leading European-based teams in large life science tools companies. Under Peter’s leadership, we are looking forward to continuing to grow our European presence and delivering the tools the region relies on to enable scientific discoveries. Now an overview of our performance by geography and end market. Starting with Europe, where the team delivered high single-digit order growth in the quarter as the macro environment continued to stabilize and overall research activity increased sequentially within our core biopharma and academic end markets. Our new Dublin warehouse to support Mainland Europe is now fully functional and fulfilling customer orders. With a new leader in place, a new distribution center, and an improved ERP system, we are positioned to serve our customers even better in the region. In North America, we also saw sequential improvement with order growth increasing mid-single digits in the quarter. Here, the impact of a lower biotech spend is the greatest and the year-on-year comp is the toughest with over 25% growth in biopharma last year. And finally, there is China, which was a tale of two chapters this quarter. Prior to the Lunar New Year, most people in China were still recovering from COVID and were directed by their government to essentially stay home until after the New Year holiday. Up until this point in the quarter, sales were practically nonexistent in China. But after everyone returned from holiday, sales accelerated dramatically, and our China team was able to finish the quarter with revenue growth in low single digits. This was on top of a comp where China grew 30% last year, facilitated by a remarkable effort by our team in China. With COVID now in the rearview mirror for China, we anticipate that this growth will continue to accelerate, potentially reaching more than 40% growth next quarter. Now let’s discuss our growth platform, starting with our Protein Sciences segment, where organic revenue increased by 5% for the quarter on top of a strong comp from last year when the segment grew by 16%. During the quarter, we continued to make progress with our portfolio of cell therapy workflow solutions, including our GMP reagents, specialty cell culture media, as well as cell culture matrices, which collectively grew over 20% in Q3. Our GMP proteins remain in high demand across the cell therapy spectrum as biopharma customers developing products for regenerative medicine and immune cell therapy markets continue to rely on our portfolio of over 40 GMP-grade cytokines and growth factors, including several that are only available from Bio-Techne to effectively scale their therapies. Our GMP protein business had its second consecutive record-breaking quarter, and given our industry-leading menu of highly bioactive, lot-to-lot consistent GMP proteins, we are positioned to remain a leader in this rapidly growing market. In addition to the ongoing progress of expanding the GMP proteins venue, we are manufacturing in our state-of-the-art facility. We are also experiencing significant yield improvements to scale production at this facility. Recall, we originally estimated GMP protein capacity at the facility was $140 million annually, which we increased to over $200 million as we manufactured initial protein batches from this new facility. As the team continues to launch additional GMP proteins, we have been able to achieve product yields as much as 50 times higher compared to legacy methods used to manufacture smaller batches in our headquarters. In fact, these productivity and yield gains have been so significant that we now estimate the capacity of this facility is at least $500 million and potentially higher than $1 billion, depending on the mix of GMP proteins ultimately manufactured from the facility. We also reached a significant milestone in our cell therapy strategy in Q3 with our initial investment in Wilson Wolf. As a reminder, Wilson Wolf is a manufacturer of proprietary bioreactors called G-Rex, which provide an ideal amount of oxygen and nutrients to effectively scale immune cell therapies. Wilson Wolf and Fresenius Kabi have both been key partners of Bio-Techne through the ScaleReady commercial joint venture since 2020. With the three companies collectively offering tools and technologies for cell culture, cell activation, gene editing, and cell processing, during the quarter, Wilson Wolf reached its trailing 12-month EBITDA milestone, triggering Bio-Techne’s $257 million investment for a 20% ownership stake in Wilson Wolf. We see tremendous synergies with the eventual ownership of Wilson Wolf and are already developing a one-of-a-kind standardized, closed cell and gene therapy manufacturing system that integrates G-Rex, Bio-Techne’s GMP proteins, and T cell culture media into an FDA-compliant patient-ready off-the-shelf production process that will save end users significant time and money as they pursue meaningful clinical data and eventual commercialization of these novel cell therapies. Following this initial investment, Bio-Techne has the right to acquire the remainder of Wilson Wolf for $1 billion upon its achievement of additional milestones or for 4.4 times trailing 12-month revenue if these milestones are not achieved by December 31, 2027. We look forward to continuing near-term pipeline development work for Wilson Wolf and eventually having this rapidly growing, highly profitable industry standard under Bio-Techne's umbrella of cell therapy products. Now let’s discuss our portfolio of proteomic research reagents, including our RUO proteins, antibodies, and small molecules, which collectively grew low single digits in the quarter coming off of a challenging year-over-year comp, where we grew about 20% in Q3 of last year. I’d like to elaborate on the OEM phenomenon we’ve experienced in our year-over-year comps for the past couple of quarters. Recall that a year ago, supply chains were constrained and several companies, including Bio-Techne, stocked up on certain components critical to meeting customer demand. Bio-Techne has an industry-leading catalog of over 6,000 proteins and over 425,000 different antibody types that researchers around the globe rely on as the basis of their research, facilitating new therapeutic and diagnostic discoveries to further health care. This same catalog of bioactive reagents also serves as the enabling content for several products from other diagnostic and life science tools companies. Without this content, a number of their assays will not work. Last fiscal year, a handful of these OEM customers stocked our reagents to ensure their ability to continue to meet the demand for their products. The best we can tell right now, it will take another quarter or two before this destocking unwinds. After that, these headwinds should become tailwinds as these OEM customers return to their normal ordering patterns of our reagents in fiscal 2024. Moving on to the performance of our ProteinSimple branded portfolio of analytical solutions – we delivered low double-digit growth in the quarter as all three of our primary instrument platforms increased in the quarter. The rapid installed base growth we experienced over the last two years continues to drive increased consumable utilization across our ProteinSimple instrument platform, while our Simple Western, Simple Plex, and Maurice instruments become more ingrained in research workflows. The ease of use and flexibility offered by our proteomic and analytical tools is leading to expanding applications across the three platforms. These expanding applications, particularly for cell and gene therapy and QA/QC, is translating into higher total addressable market opportunities for these platforms as our legacy proteomic analytical tools' TAM expands from $2 billion to over $3 billion. Order funnels remain very strong across these three instrument platforms, although budget conservatism from a subset of biotech end users has led to an overall lengthening of the order closing cycle. Our Simple Plex branded multiplexing immunoassay system, Ella, led instrument growth increasing by 25% in the quarter. The subpicogram sensitivity and cost advantages offered by this fully automated ELISA platform combined with an expanding menu of over 250 analytes to support therapeutic areas across neuroscience, cell and gene therapy, immunology, and cancer continues to resonate with both biopharma and academic customers. This traction and acceptance in both industry and academia is evident from the growing number of instruments in the field as Ella crosses an important milestone in the quarter with over 1,000 instruments now in the field. In neuroscience, Ella’s high level of sensitivity positions it as an ideal intent for biomarker detection and discovery, making it the prime area for future menu expansion. We also continue to make progress comparing Ella to penetrate the clinical diagnostic market as our ISO 1345 audit of our Wallingford facility continues to progress. With a growing installed base, a rapidly expanding menu, and an untapped clinical diagnostic market opportunity, we continue to see an incredibly bright future for Ella. Now let’s discuss our biologics platform, Maurice, which enables protein purity, charge and identity analysis in five minutes in an easy-to-use cartridge-based instrument. Recall that we recently expanded on Maurice’s capabilities with the launch of Maurice Flex, which adds image capillary isoelectric focusing fractionization capabilities to the instrument. Fractionation is a front-end step in mass spectrometry, and Maurice Flex addresses the labor-intensive and time-consuming challenges of using legacy fractionation methods, including ion exchange chromatography. This new application positions Maurice into a new $300 million market. Initial biopharma interest in Maurice Flex has been strong, and we had multiple initial instrument placements in the quarter. Our Simple Western platform continues to penetrate the Western blot market as its ability to automate the time-consuming and cumbersome Simple Western blot process with a sample in physical solution resonates with our biopharma and academic research end markets. Similar to our other platforms, applications for Simple Western are expanding, including quantitative immunoassays for both cell signaling and rare protein detection in complex lysates and rare tissues. Additionally, our biopharma customers are increasingly relying on Simple Western in their gene therapy workflows, as its ability to detect protein-related impurities, viral titer, identity information, and empty versus full capsid information provide critical QA/QC information for these workflows. Gene therapy remains a nascent but rapidly growing application for Simple Western, and we experienced 30% growth in this area during Q3. We also partnered with Cell Signalling Technology, or CST, to expand the number of Simple Western validated antibodies for various targets and across multiple disciplines. CST is a leader in the development of antibodies and other related Western blotting reagents used to elucidate cell signaling pathways that dictate cellular behavior and impact human health. We are excited about the addition of these new antibodies to the Bio-Techne catalog of validated antibodies and are encouraged by the market response following the announcement. Now let’s shift to our Diagnostics and Genomics segment, where organic revenue declined by 2%. Adjusting for the ExoTRU milestone payment from Thermo Fisher Scientific that we received in the comparable quarter last year, but did not repeat in the current quarter, segment growth was upper single digits. Starting with our molecular diagnostics business, we continue to experience increased physician adoption and utilization of our ExoDx prostate test, leading to over 70% test volume growth for the fifth consecutive quarter and associated revenue increase of 85% in the quarter. We continue to see positive momentum on the key performance indicators we track for the ExoDx prostate test, including year-over-year and sequential growth in the number of physicians ordering the test, record test volume from physicians new to the ExoDx prostate, as well as a record number of doctors ordering more than 25 tests in a quarter. We are pairing this volume momentum with continued progress in strengthening our coverage with private payers, as our recently bolstered market access group continues to improve access to the large national payers, positioning ExoDx prostate for expanded future coverage. The team is doing an excellent job managing rapid growth in ExoDx prostate test volume, and we continue to experience record volumes in our Q4 to date. During the quarter, an expanded local coverage determination from National Government Services, who is our Medicare administrative contractor, covering our Massachusetts-based Exosome Diagnostics CLIA-certified laboratory went into effect. This updated policy now covers the ExoDx Prostate test for men with a prior negative biopsy but who are thought to be at high risk for prostate cancer and are considering a repeat biopsy. Following this update, the LCD now mirrors the National Comprehensive Cancer Network (NCCN) guidelines and enables reimbursement for ExoDx Prostate as a monitoring tool in populations with and without a prior prostate biopsy, effectively increasing the total addressable market opportunity by approximately 50% for the test. Our spatial biology business, branded ACD, increased low double digits in the quarter with adoption in our flagship RNA scope assay remaining strong. This gold standard RNA in situ hybridization assay enables industry-leading sensitivity and specificity transcriptome analysis while retaining tissue morphology. We furthered this industry-leading capability with the recent introduction of our new exceptionally bright Vivid Fluorophore, enabling customers to easily detect and visualize both abundant RNAs as well as RNAs of very low abundance in a tissue sample. More recent additions to the ACD portfolio are also gaining traction, including BaseScope and microRNA scope. As these novel solutions enable visualization and evaluation of therapeutic biodistribution, safety, and efficacy of gene therapy delivery vectors and oligonucleotide therapies. BaseScope and microRNA scope are both relatively small contributors to our spatial biology business today but are growing rapidly and becoming progressively more accretive to the growth of this business. Continuing with spatial biology, we recently announced an important strategic partnership with Lunaphore, which developed the first fully automated spatial multiomic workflow with same slide HyperFlex detection of protein and RNA biomarkers on Lunaphore’s COMET instrument. This solution will enable users to easily visualize both cell type and their activation space in tissue. Combining COMET’s highly flexible custom antibody panel design with RNAscope’s library of 45,000 catalog probes and our in-house custom probe design capabilities will give customers the ultimate flexibility in achieving their study goals. In summary, our Q3 performance was in line with our expectations. As China growth snapped back and the temporary headwinds created by reagent destocking from a handful of OEM partners subside, we believe we are well-positioned to accelerate growth next quarter and beyond. One thing is certain, our portfolio of cell and gene therapy workflow solutions, a best-in-class liquid biopsy platform, novel proteomic analytical tools, and spatial biology capabilities, all coupled with an industry-leading catalog of bioactive content positions Bio-Techne to remain a leader in some of the most rapidly growing life science tools markets. We look forward to continuing to execute our strategic growth plan and deliver on the vast opportunity in front of us. With that, I’ll turn it over to Jim.

Thanks, Chuck. Let’s start with recapping the overall third quarter financial performance. Adjusted EPS was $0.53, consistent with the prior year quarter. Foreign exchange negatively impacted EPS by $0.01 or 2% in the quarter. GAAP EPS in Q3 was $0.43 compared to $0.37 in the prior year. The biggest driver for the increase in GAAP EPS was a nonrecurring loss on our previously held ChemoCentryx investment in the prior year period. Q3 revenue was $294.1 million, an increase of 3% year-over-year on an organic basis and 1% on a reported basis. Foreign exchange translation had an unfavorable impact of 2% and acquisitions had an immaterial impact on revenue growth. Chuck has pointed out the temporary headwinds we faced in Q3, and I will quantify their impact on overall company growth. Starting with the prior year’s ExoTRU milestone payment, the impact of this one-time revenue recognition last year in Q3 was approximately a 3.5% headwind to our overall growth this year. The COVID infections and corresponding shutdowns in China this quarter were an additional headwind to overall company growth of approximately 2.5%. The OEM destocking of reagents is estimated to be another 1.5% headwind to our overall company growth rate. The accumulation of these specific and temporary headwinds is approximately 7.5%, which when added back to our reported organic growth, brings us to an adjusted organic growth rate of over 10%. The normalization of smaller biotech customer spend following a red-hot funding environment the past couple of years is more difficult to quantify, but it is also a headwind that may take more time to work through. The biotech research is not going away. It is often the important innovative bridge between epidemic discovery and big pharma therapy commercialization. In the meantime, Bio-Techne will continue to serve all these customers in the life science chain that ultimately brings quality of life to patients with innovative products that improve their likelihood of success in the most productive way possible. The double-digit growth we see in our key growth platforms, cell and gene therapy, Exosome Diagnostics, spatial biology, and ProteinSimple branded automated assays demonstrate this is already the case. Moving on to our organic growth by region and end market in Q3. North America grew mid-single digits. Europe demand increased upper single digits. China grew low-single digits, while APAC declined low-single digits due to prior year government stimulus in Japan not repeating this year. By end market, biopharma grew high single digits while academia grew mid-single digits. Both were partially offset by the impact of destocking by a handful of OEM customers. Further down the P&L, total company adjusted gross margin was 72.6% in the quarter compared to 73.2% in the prior year. The decrease was primarily driven by unfavorable foreign exchange and product mix. Adjusted SG&A in Q3 was 27.9% of revenue compared to 26.1% in the prior year, while R&D expense in Q3 was 7.7% of revenue compared to 7.5% in the prior year. The increase in SG&A and R&D was driven by strategic growth investments made in Q4 of fiscal year 2022 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 to operating income, with pricing largely offsetting the inflation impact on our operating margin in Q3. Adjusted operating margin for Q3 was 37%, a decrease of 260 basis points from the prior year, but a 150 basis point improvement sequentially. The impact of the nonrecurring ExoTRU milestone payment in the prior year period decreased margin by 130 basis points. Foreign exchange decreased adjusted operating margin by another 50 basis points, while the acquisition of Namocell and other strategic growth investments drove the remainder of the margin dilution for the quarter. As our top-line headwinds start to subside, we will continue to make strategic investments in our key growth platforms to ensure their long-term momentum. By doing so, we expect operating margins in Q4 to be comparable to Q3. Looking at our numbers below operating income, net interest expense in Q3 was $0.2 million, decreasing $2 million compared to the prior year period due to lower debt levels and higher interest income earned on cash deposits. Our bank debt on the balance sheet as of the end of Q2 stood at $370 million, an increase of $170 million compared to last quarter, with the increase reflecting our investment in Wilson Wolf, which was funded partially with debt and cash on hand. I would note, given the timing of the Wilson Wolf investment, which took place at the very end of our fiscal Q3, we anticipate our net interest expense to increase sequentially to approximately $2.7 million in Q4. Other adjusted non-operating income was $0.1 million in the quarter, an increase of $1.2 million compared to the prior year, primarily reflecting the foreign exchange impact related to our cash point arrangement. Moving further down the P&L, our adjusted effective tax rate in Q3 was 21%. Turning to cash flow and return of capital, $50.5 million of cash was generated from operations in the quarter, and our net investment in capital expenditures was $11.7 million. Also during Q3, we returned capital to shareholders by way of a $12.6 million dividend, and we finished the quarter with $161.6 million average diluted shares outstanding. Our balance sheet finished Q3 in a strong position with $157.2 million in cash and short-term available for sale investments. Our total leverage ratio remains below one turn. 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. Q3 reported sales were $218.9 million with reported revenue increasing 3% compared to the same period last year. Organic growth for this segment was 5%, with foreign exchange having an unfavorable impact of 2%. Despite the temporary headwinds and the tough year-over-year comp, I will highlight that the longer-term fighter CAGR for this segment is approximately 12%. Operating margin for the Protein Sciences segment was 45.1%, a decrease of 30 basis points year-over-year with operational productivity more than offset by foreign exchange and the impact of the Namocell acquisition. Turning to the Diagnostics and Genomics segment. Q3 reported sales were $75.7 million, with reported revenue decreasing 3%. Organic revenue decreased by 2% with foreign exchange having an unfavorable 1% impact. As Chuck mentioned earlier, adjusting for the ExoTRU milestone payment we received in Q3 of last year, which did not repeat again this year, organic growth was upper single digits for the segment. Our Exosome Diagnostics business remained incredibly strong in the quarter as our fortified marketing message, strengthened commercial team, and the recently updated Medicare LCD drove record test volume and revenue growth. Our spatial biology business returned to double-digit growth in the quarter with strong performances in our RNAscope, BaseScope, and microRNA product line, partially offset by relative softness from a few biotech customers. Moving on to Diagnostics and Genomics segment operating margin at 15.2%, the segment’s operating margin decreased 980 basis points compared to the prior year. The segment’s operating margin was unfavorably impacted primarily by prior year revenue related to the ExoTRU milestone payment and, to a lesser extent, net inflation and strategic growth investments. Before we get to Q&A, we would summarize our fiscal year up to this point, our most recently completed quarter, and our view looking forward as follows: For much of the first half of our fiscal year, how our customers were going to behave in a post-COVID pandemic world was rather murky. This included behaviors such as customers taking pent-up vacations last summer and fall, a more risk-off mentality for smaller biotech investing, government-induced shutdowns in our highest growth region in China, and a realization of the stocking that took place during the COVID-induced supply chain crunch that is now unwinding. These behavioral outcomes became clearer as we exited Q2 and gave us more visibility going forward. Through it all, and as Q3 demonstrated, our growth platforms are still winning with double-digit growth. As we enter Q4, some of the headwinds should diminish, especially in China, but some are likely to remain, namely the OEM destocking and smaller biotech rationalized spending. Looking further ahead into fiscal year 2024, these remaining headwinds should further diminish, allowing double-digit revenue increases we see in our strategic growth platforms to once again be reflected in our headline numbers. In the meantime, we expect Q4 overall momentum to continue to improve from Q2 and Q3 with an overall growth rate likely similar to how we started the fiscal year in Q1. That concludes my prepared comments. And with that, I’ll turn the call back over to the operator to open the line for questions.

Hi Chuck, Jim, thanks for the question. So first one on biotech funding, obviously, there have been quite a bit of noise out there from bioprocessing. You highlighted a number of things and trends that you’re seeing as well as the headwinds – but if the headwinds were to prolong, where do you think the business is more defensible and where you think where the pressures could be felt more? And then I think what Jim was implying at the first quarter is about 7% growth that you delivered. So, I assume that’s what you’re expecting for the fourth quarter. What does this mean for – could you get back to sort of the mid-teens levels as we head into the sort of the first and the second quarter of 2024? Would really appreciate sort of a color on that because I think that’s sort of the key question given these biotech questions and emerging biotech headwind.

Sure, Puneet. Thanks. Well, I think first and foremost, I think we’re kind of talking about coming back a little more quickly than others are talking about it. We bridge for you the destocking component. And a lot of these stocks, and we know the customers, and we have been very clear with us. So we know when they’re coming back or more, and it really is in Q1. So there will still be funding pressures for sure. I mean the public information out there on the amount of biotech funding reductions are double digits and beyond so it is impactful. But we’re kind of certain about a lot of that with surgical work here within our own OEM sector, which was coming back. Let’s not forget that we were in the mid-teens in our run rate supporting biopharma end-to-end academia last quarter. This quarter, we were low teens still in our run rate business, so for our consumables. So that speaks very positively for the current department going forward. We just think it starts getting better. I mean, as you pointed out, we got one more tough quarter, a really tough Q4 comp. We had a blowout last couple of weeks last year Q4, which would have been in Q1 now. And you’re right in that seven high single-digit number is kind of our range. China is a big factor too. I mean we see China is going back. We were just over there for the first time in three and a half years. The team is in great spirits, fully engaged, and things are ramping extremely fast. So, I wasn’t kidding with 40% or better. That should be kind of in the range for us for China. And that gives us a good base across the company to start building on an overall growth rate.

And Jim, in terms of recovery back to sort of mid-teens, I just want to clarify, you meant fourth quarter should be in line with first quarter or for the full year?

In line with the first quarter.

Okay. And then just if I could ask a little bit on the closed loop system that you highlighted, what’s the timeline on that? What’s the sort of investment needed there? And how it differentiates from the rest of the platforms to the market, Cocoon and other ones, and do you have enough pieces already in terms of the consumables product to sort of fulfill the entire closed loop system there?

Yes. So we actually made great progress there. As you know, we’ve got a factory that we’re pushing to co-brand every month. We have the G-Rex platform, which is already the standard out there. The last real missing integration of media, we have a couple of different formulations of media that we’re going out with. We’ve been in media forever, but in more regenerative medicine-type approaches this is a little more different. So we’re looking at kind of the make versus buy, how to cut it. It’s all about time and scale. So we think within a year here is going to be a cool system. So roughly about a year, it’s probably a little too much right now, it could be sooner. It could be a later sense of how much we want to go it ourselves with our own capital and assets or those partnering.

Okay. Great.

Hey, thanks. Good morning. Chuck, maybe following up on that last question. Just now that you own 20% of Wilson Wolf, does this change anything about that relationship? Does it allow for kind of more collaboration between the two of you? Does it create additional opportunities? Just curious if anything changes from that standpoint.

Well, it’s a great question. We have a great relationship. We talk every week. The teams are being put together. As I pointed out, one of the key things was the fact that you want us to take over and do more operations as it’s exploding in growth; he kind of is more of a KOL, I’ll say with all the doctors and institutions that’s where you want to more or less live. We just put out a big press release last week here of CellReady, so he is building a new company, a CDMO type model, working with assets for marker to trying and build all that more quickly and get your customers more quickly to save a lot of time and money with start-ups and with professors with their cell ideas, etc. And guess what the workflow is? It’s going to drive that whole mechanism. It’s scale; it’s our ScaleReady JV workflow. That means our protein, G-Rex of course will be integrated alongside in the future. So that makes us tighter even yes because he wants to make sure that we’re integrating for the future as we build out these new ideas because he’s already kind of understanding that we’re at 20%. This deal is going to happen. So, we’re starting to really focus on what else can go and wrap around the Wilson Wolf franchise to make it even bigger and better, which is all good for us together long term.

Got it. Thanks for that Chuck. And maybe just stick on the cell and gene therapy front. I think there’s been kind of a bearing commentary about that end market, but it sounded like you had a pretty good quarter there on the GMP protein side. Can you just talk about how much of that is new customer wins? Any of these customers kind of scaling up? And maybe if you could kind of remind us where that customer base stands in the clinical trial process right now?

Yes, we had a 45% quarter, and I thought of another strong comp last year, 21% or 22% overall for the category. So really strong – it’s still growing. It’s becoming close to material by next year for sure. I think overall, we just keep accelerating. I think we’re roughly around 200 customers now, and the large ones about a couple more, I’d say, larger, they’re all kind of scaling a little more. We’re trying to keep filling the funnel and it’s about turning these minerals into tuna and then into whales, right? So in a couple of years, we hope to have a couple of dozen whales and it won’t take many to really get this factory norm and so they’re coming.

Good morning guys. Thanks for the question. Chuck, maybe on ACD, what’s the growth outlook there? And how has that evolved as we digest the biotech spending environment – and then in spatial overall, you’ve now got these two partnerships here with Akoya and Lunaphore. What, if anything, does the incremental revenue contribution potential look like for you guys on those?

Yes. Well, we’re thrilled that it’s come back to double digits. It should stay there. We’ll see. There’s a lot of opportunities. And you realize also this is not a category that’s like only biotech or only pharma. There’s a lot of academia with that franchise. So – and our academia has been kind of mid-single-digit area. So it’s one of our hurdles to get over, it’s keep raising actually being hit. We also have a service component with that business. And that’s been up and down. And it was better this quarter. We got to make sure we keep pounding away on that service. That service element is how we find a lot of new customers. We will start with a service contract, and then we blow them away with the data, making then they come on board and they start ordering probes and go from there. So it all works together. Akoya is very different than the Lunaphore model. The Lunaphore model, that program is for co-detection protein and RNA together on a single slide, still single morphology whereas the Akoya is all RNA only. So they’re a little bit different. We’ve been pretty clear about being a bit foot from a high level than Ventana, Leica all the way down to the lower automation with these guys. And we even play with NanoString and others in the middle trying to support them. The more they do in discovery, the more roll our way in translational later. So it’s all good. I just came from the ALDA conference and the theme was spatial and it was a record turnout by about 40% more people, spatial is hot. And there’s more common. There’s a lot more innovation. More companies are coming, there are more ideas, and we’re thrilled to be one of the leaders, and we’re working with all the leaders in hardware and automation. We’ve got some multiplexing capability coming and now with co-detection as well that, that’s going to fill a big gap out there for what people are looking for identifying what they’re really after in their tissues.

Okay. Do you have a view on just long-term growth there and what you might end up looking like as we head towards the longer-term targets? Because that is one of the businesses that I think is sort of the wildcard in terms of whether or not $2 billion or something below that is a reasonable target going forward?

Yes. You should know it’s a $100 million kind of run rate business right now. We’ve always talked about it being a $300 million-plus business, but that’s with discovery, but also with pathology. Having Lunaphore and having other relationships allows us to really give pathologists more of what they’re looking for. So they’re not working on a single slide under a microscope with one analyze at a time here is difficult. And let’s not forget, we’ve launched a whole set of new fluorescence, called Vivid, and they are really lighting up the slides and they’re getting a lot of great acceptance as well. You start adding where we’re going with translational riding the heels of all the discovery guys and with these new players helping us automation-wise, getting into pathology, five to ten years out, this is well beyond $300 million. This is a double-digit growth rate needs to be, and it has to be when it isn’t. We make changes here. It’s been as high as 30-plus percent in some quarters, and we hope to be in double digits going forward. So there’s academic. There’s funding issues this year. It’s been a little bit lumpy. We’re double digits this quarter. I think it looks pretty solid. We’re excited about the relationship. I think we’re quite a few months away here yet I’m actually having revenue on a platform like that, but it’s all coming, so.

Okay. Just a follow-up for me, if I could. Chuck, I have to admit that I was listening to you welcome Peter in Europe. It occurs to me that we’re pushing towards June here, and we’re unfortunately coming up on you being a year away from moving on to the next endeavor. The speculation on the Street is that you’re starting a band. I don’t know if you want to comment on that. But if not, can you just maybe update us on what, if anything, a conversation at the Board level sounds like in terms of just an executive search internal versus external candidates, timing on announcement, that sort of thing, anything for us to think about there?

Yes. It’s still 14 months away. You're stuck with me for three or four more quarters, and I will not be joining a band. We’ve not heard me saying that. But there is – obviously, I’ve done my job with grooming, I think three excellent internal candidates. All could carry the water here for quite a while, I think. The Board is looking outside as well. We have a fiduciary responsibility. The fundamental reason of taking the time and looking broadly is that we’re – under my watch for 10 years, we’ve increased sales here by 400% or 500%, something like that in the next 10 years. We want another 400%, 500%. We’re up 6x, 7x, 8x in valuation in 10 years, and another 10 years; if you want to be up another five times, six times, seven times, eight times in valuation. That puts us at needing somebody to run a $60 billion market cap company at $5 billion, $6 billion in revenue. That’s the goal. That’s the plan, and that’s where we’re operating for. I will remain on the Board hopefully. Board willing, so I’m not totally missing.

Hi, good morning. Thank you for the time. Chuck, can you elaborate further on the visibility you have into the OEM destocking dynamic?

Well, I hope we did a pretty good job bridging it. It’s about 1.5%. It would have been the best thing about this destocking OEM component. We’re not talking about a across-the-board problem. We’re talking about half a dozen or so different customers that are all in the millions of dollars of purchases last year and this year are at zero. And they won’t remain at zero. Some won’t come back, but a lot are going to come back hard and heavy, and we’re really building the funnel with new ones. The beautiful thing about biotech is that every year there’s a whole new play, new people, and ideas that want to buy new solutions from leaders like us to try things out. So it’s building, it’s coming back, and it’s identifiable. If there are more numbers, I’ll let Jim comment. But I think 1.5% is pretty clear.

And then a follow-up question for Jim. I want to make sure I understood your summary comments appropriately. Did you say that Bio-Techne would return to double-digit growth in fiscal 2024?

Well, we’re in the process of building our plan right now for next year. What I was trying to indicate in my closing remarks was that if you take out the very isolated events of OEM destocking and China, as an example, the rest of our business collectively is at double digits already. And our key growth programs, which are going to carry us to $2 billion and beyond, are also all growing well in the double digits. And so it suggests that we get past these headwinds in fiscal year 2023, during fiscal year 2024, this underlying double-digit growth was seen not only in our core but definitely in our growth programs and growth platforms will start to once again resonate, and you’ll see it in the overall company results. And that’s our goal.

Let me put a little ribbon on that. So, I mentioned our run rate – we watch our run rate and how we’re doing digitally with our catalogs. We are funded first and foremost, the catalog business for life sciences across the board, biopharma down through academia. And that’s remaining in teen tells us that things are okay. Then you look for other holes and we bridge it for you. This OEM thing is going to come and go; you pull that back, and we’re back to normality. And on top of that, you have these growth programs. Our three top growth areas all hedged spectacular quarters. Spatial had double-digit; 45% GMP protein; and 20%-plus in cell and gene therapy overall and Exosome at 87%. They’re not material enough right now to carry the average. But by next year, they are going to be a lot more material and they’re going to carry the average. All the stuff fundamental coming back on top of these growth programs; we don’t give guidance, but we won’t be very happy here if we’re not double-digit growth.

Hey guys. Thanks for taking the questions. Chuck, maybe dive a little deeper on China. I guess encouraging to hear that 40% number thrown around for this quarter. Can you just talk a little bit about the trends you saw maybe in March and then into April, it’s not only a really nice recovery post the Lunar New Year. And then what – how do you kind of think about the go forward there? Looking back to maybe the last time this happened with the COVID lockdown, is there this big pent-up demand, and is it one quarter of really good growth? Or do you see real durability as we work our way into fiscal 2024 here, where it should be a nice stretch in China.

Yes, we are just there, and that was absolutely one of the questions. It’s almost per word when we asked the team in our reviews there. I don’t think we’re seeing the extreme kickback we come off that COVID quarter, roughly three years ago now. It’s just coming back strong and hard – now again, this is an easy comp from last year for China. But this last quarter, the two months of the quarter, nobody was at work, like zero. We had 90%-plus of people stick with COVID. So we had a very strong market because they all came back, and they want more and they’re hungry and they’re trying to catch up. We’re a run rate business. So people aren’t at work in their labs, they’re not running experiments, not running experiences. They’re not using our solutions. Now they’re all back and want more. So some level of that we saw a few years ago will happen. But I think it’s more steady. The instant component of that is coming back and resurging well. We see really good strong growth going forward. We weren’t – one reason we did have some growth is a lot of it is on the instrument side effect there, and that’s obviously a longer sales cycle. But that’s one of our business regions where we have a stronger percentage of the portfolio is an instrument, and we see that continuing. So going forward, we’re 200-plus people strong there. The leader worked with me in Thermo Fisher. He is solid. We’ve got many years left to go, it’s a well-respected industry. He’s built businesses in this past that are five times, 10 times bigger than what this is still right now. So we’ve got a long way to go. The salespeople are great; our leader in instruments is still the original leader that came with ProteinSimple, way back when, and he is more energetic and engaged than ever. We love this guy. He knows the market, he knows every customer. The relationships are fantastic. He’s been able to build a big team under him from when he was in a smaller company. So it’s all looking pretty good. We also had a very large reception, we got to pretty neat and talk to like literally most of the folks there. We weren’t there many days. We want to really maximize our timing and get to know everybody again. China is an area; you want to get there and touch them once every year if you can. Three years is too long not to be there. Businesses can drift. In places like China, they can drift, maybe you can find surprises. We didn’t find any surprises. The morale of this team has been fantastic. The engagement has been good. A lot of new people, but only about 25% in the last couple of years are new there. I always ask that. I have asked for a show of hands, who’s in the last year and who’s before that. So attrition has been very good, and we’re just holding for done.

Okay. That sounds good. And then, Jim, maybe on the margins, I think you kind of framed up Q4 looking similar to Q3. As we work our way into 2024, is that kind of the right number to think about building off of? And can you just remind us any moving pieces that work our way into next year? Obviously, some of the headwinds hit margins as we work our way hopefully back to that double-digit growth number you Chuck talked about, should be some nice leverage in the model, but maybe just frame up the margin piece exiting out of Q4 here.

Yes. Again, I’ll be able to provide more clarity on our margin and margin profile for next year as we get through our plan in our next earnings call. But I guess at a high level, I would say, if you look at our margin profile historically, it tends to dip in Q1 and then gradually increase throughout the rest of the year just due to seasonality. Q1 is typically a lower revenue quarter for us, and the cost base is higher coming off of Q4 of the prior year. In terms of that 37% increasing sequentially into Q1, I would say probably not. But if you look at the full year of where we finished fiscal year 2023, looking ahead to fiscal year 2024, at this point in time, I don’t see any material headwinds to margin as to why we wouldn’t at least expect some incremental margin improvement year-over-year for the year.

Hey guys. Thanks for the questions. I ask first on Exosome; sounds like you are seeing impressive uptake on your ExoDx prostate test. Any comments you can give just on the path to profitability or margin profile for that business?

Sure. Well, as we've taken on. I wouldn’t say conservative, but a careful approach to their expansion and growth. We’ve had a dilution level that we’ve been able to live with over the last four or five years, whatever it’s been now. I would say that dilution level is down by 30%-40% when it was because we’re investing. We’re at full strength or near to it, so we’ve almost doubled that sales force. We’ve added a new team with experienced personnel to really go after five of the larger private payers. We had to get big enough to attract the right players and people and talent to do this. But I would say the size of the business is up headcount-wise, roughly 30%-40%, maybe even a little more from a year or two ago. And we talked about we’re at the breakeven point. We talked about finding some records relating to what we called when we bought it thinking it would be $30 million in revenue and then found it would be more like $60 million or $70 million to be a breakeven point. This team and under Lynn think it’s much better than that. So we got another year or so, 1.5 years. I think we’re adding to a breakeven point of profitability. And then maybe we will or maybe we won’t. We will decide to invest harder and stay at the levels we’re at dilution levels we’re at. I don’t even think we’ll put ads on TV for the prostate test yet. But I think this team is starting to accelerate even more. We hit 11,000 tests last quarter, which is pretty remarkable. As you know, we’ve gotten the full into the guidelines now into our reimbursement equation. That means we can go back after patients that had their first test done or had a biopsy and have it again and use it for surveillance – in the entire period before last quarter, I think we had 15 tests done, that were a repeat. In the last quarter, we had over 240. So we’re going back after the surveillance patients, which is an added – which really is an added TAM, right? So that’s one thing you’re seeing, I think the growth is even accelerating. I don’t even think we’re at a tipping point yet. I told the team, I’m looking for something north of 100% growth, and I think that day will come.

All right. Great. And then can you quantify what you expect the OEM destocking headwind to be in the fourth quarter? I guess the adjusted third quarter growth was 10%, and then you have in the fourth quarter; China is turning into a tailwind. Why shouldn’t organic growth be a little bit better than that 7% number you talked about even if you see similar levels of destocking?

So I would say that. This is Jim, and I’d say the OEM headwind is almost exactly the same for Q4 as it is for Q3 that’s what we’re predicting as of right now. As are the general biotech softness headwinds still are with us until we get past the last year, very tough comps. As Chuck pointed out, the comp for Protein Sciences was the same in Q4 as it was in Q3 last year. So they’re both equally difficult comps. And yes, China will be better. You won’t have the ExoTRU, but at the end of the day, I think the overall headwinds facing Protein Sciences segment are the same in Q4 as they were in Q3, with the exception of China. But – and we expect Diagnostics and Genomics to be better because they don’t have the ExoTRU in it next year. But again, it’s only in total about 25% of our business. So the incremental China and the lack of ExoTRU is what, gets to the overall company growth rate from, call it, 3% to hopefully north of 7%.

Hey, good morning. Just want to follow up on some of the last couple of questions. One, on the OEM, is that headwind that you’re talking about in the back half? Is that – is that sort of like the full year headwind as well? And then just taking a step back, if we go to pre-COVID, is the business in the sales cycle to that similar to the run rate business? Or is there some seasonality and lumpiness to that business?

For the OEM. Well, I think COVID has had an effect on everything OEM, it’s affecting funding and expecting conservatism and all the above. So people have been stocking, and we’ve been careful through the supply chain risk environment we were in last year. You called the back half, and it will be the front half of our next fiscal year. We see improving first starting in Q1. Others have been online here recently saying it’s an all-year event. I don’t know their business as well as I know ours. We think we’ve got some large OEMs that are running out of stock. And they’re not insolvent. They’ve just been conservative and they’ve stocked up. We have a few that are new coming and growing, and we have a few that are shrinking and going away, it’s being bought or whatever. So I think the net-net we see is improving OEM first half of our fiscal year. From what we know right now, and we’re just being transparent on what we see right now. The next quarter, maybe it will all change. I don’t know; maybe something else will happen, but that’s what we see right now. We’re pushing these customers to start buying again.

I mean obviously at some point, they start to run out of inventory. So we’re trying to model that again when we think that will happen, and we do think at some point in the first half of fiscal 2024, along with their sales continuing – as long as they continue to have sales, they’re going to need to restock.

Okay, great. Good morning everyone. So I was just curious if there’s any product lines out there that are just not working in the portfolio? Because to a prior question and in the prepared remarks, you talked about cell and gene therapy, GMP protein, spatial, and Exosome all these being very massively in the quarter, but just not enough to drive the average. So I’m just trying to understand, is there a product line that is just struggling from competition and change in mature demand by your customers? Or is it really the only thing that’s going on is really just macro China and macro OEM destocking?

It’s mostly macro, but I’d say we’ve not been happy with academia for the last year. It’s more or less low to mid-single digits. Europe is up and down a little bit, but China was like a big zero practically. So that's a big impact. APAC wasn’t strong either. So this quarter, which is timing and then missing stimulus in Korea and Japan. So when you add all that back in, I think things are fine Alex. No real issues there. I would say on product categories, what I’m most worried about kind of what I’ve always been most worried about. It’s alliances. So that’s why we bought SimplePlex. We’re big in Luminex. We’ve got an assay portfolio that is together. It’s high single-digit growth and hopefully you’ve acted back to double digits here soon when it all comes, but allies up and down low, mid, high single digits. That’s kind of where it lies, and it’s still a big part of our business. I wouldn't update that yet because we were ahead of the game less than a year ago from the accelerated growth that we had, we are more or less ahead of everybody expected. Yes, this year, we’ve given some back. Yes, we’ve still got a few years to go. We need cell and gene therapy to light it up. We need spatial to keep going in double digits. We need Exosome to remain at this high growth accelerated level it is. So they become material enough to help us get there. But we are growing faster than we need over the aggregate. The aggregate number in both Exosome as well as cell and gene therapy to hit that number, it’s 50% growth in roughly that area, and we’re about there in the protein stuff, and we’re well exceeding that in cell and gene therapy or in Exosome. Spatial needs to be solid double digits as well. I’d say we’re a little behind; we need to be there. But we have new things coming as well. So it’s too soon to say it’s going to be 1.9 or 1.95; it could easily right now still be 2.1. And Wilson Wolf that whole area is a big kicker, icing on the cake, right? A lot of this stuff takes 10 years out. We’re doing a lot of things that are going to take a while to develop, but they really hit their stride three, four years out.

Well, great. Thanks, everyone, for attending. I’m glad that we kind of put the expectation set last quarter and a little better on the bottom line. I think they were in great shape looking forward this quarter. The team is in great shape. We were to go in the energy side, and we’ll talk to you then. Thank you.