Bio-Techne Corp (TECH) — Q2 2024 Earnings Call Transcript

Good morning, and thank you for joining us. On the call with me this morning are Kim Kelderman, Bio-Techne's Chief Executive Officer; Chuck Kummeth, Bio-Techne's former Chief Executive Officer and current Senior Advisor to the company, and Jim Hippel, Chief Financial Officer. Before we begin, let me briefly cover our safe harbor statement. Some of the comments made during this conference call may be considered forward-looking statements, including beliefs and expectations about the company's future results. The company's 10-K for fiscal year 2023 identifies certain factors that could cause the company's actual results to differ materially from those projected in the forward-looking statements made during this call. The company does not undertake to update any forward-looking statements because of any new information or future events or developments. The 10-K, as well as the company's other SEC filings, are available on the company's website within its Investor Relations section. During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to the most comparable GAAP measures are available in the company's press release issued earlier this morning on the Bio-Techne Corporation website at www.bio-techne.com. Separately, we will be participating in the Barclays and KeyBanc Healthcare conferences during the next three months. We look forward to connecting with many of you at these upcoming events. 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. As many of you know, my official tenure as Bio-Techne's Chief Executive Officer ended yesterday, and Kim Kelderman is now in this leadership role. He's taking over a company that is incredibly well-positioned in several of the highest growth life science and diagnostic end markets. I hired Kim to lead our diagnostic and genomic segment in 2018. In November of 2023, he was appointed Chief Operating Officer, assuming all operational responsibilities for the company. Prior to Bio-Techne, I worked with Kim for four years at Dental Fisher Scientific. I'm excited for the future of Bio-Techne as it continues to flourish under Kim's leadership. When I joined Bio-Techne in 2013, we were a much smaller organization with approximately $300 million in revenue at the time. The business was a leader in its legacy $3 billion total addressable market. However, growth had largely stalled at the company. This legacy business of research reagents, immune-supply, and diagnostic controls and calibrators, which we refer to as our core, accounted for almost $650 million in revenue in fiscal 2023 and grew at a 7% rate over that period. Through a combination of 19 acquisitions, prioritized organic investments, and execution from our top-notch leadership team, we leveraged these core products and capabilities and grew the business to over $1.1 billion in fiscal 2023 while expanding our total addressable market to an estimated $27 billion. Under the Bio-Techne umbrella, we now augment this core with high-growth market-leading franchises including proteomic analytical tools, well-engineered therapies, spatial biology, and liquid biopsies. Our team of over 3,000 global employees has accomplished this magnificent growth while maintaining one of the most attractive profitability profiles in our industry. It's been a pleasure getting to know many of you on this call today and leading this talented team over the last 11 years. I've never been more confident in the long-term growth potential of this business and look forward to its continued evolution in the market. With that, I'll turn the call over to Kim.

Thank you for your kind words, Chuck. And please know that all of us here at Bio-Techne wish you the very best going forward. Now to our Q2 results, the Bio-Techne team continued to execute well in a dynamic and constrained market environment. Our industry has faced several headwinds for over a year now, and those also impacted our second quarter, which resulted in an organic revenue decline of about 2%. The sources of these headwinds continue to be a very soft biotech funding environment, destocking by our large OEM and pharma customers, as well as a broad economic challenge in China, which has historically been our high-growth geography. Despite the negative impact from these headwinds, the long-term growth potential of our company remains intact. Our strategic growth pillars, such as the protein-simple branded portfolio of analytical tools for protein, our spatial biology franchise, and our ExoDx liquid biopsy business, all delivered solid growth during the past quarter. In the years ahead, we will continue to bolster these high-growth businesses with market-leading, high-quality content from our core portfolio of research reagents. By the way, our core portfolio with over 6,000 proteins and more than 400,000 antibodies has been a solid growth business by itself, delivering an average growth rate of about 7% over the past decade. We will continue to drive growth in this core portfolio and leverage our unique catalog as well as our expertise to enable industry discoveries, fortify existing growth pillars, and ultimately improve global healthcare. During my transition period to become CEO, I also spent time understanding the efficiencies of our global operational footprint. We evaluated resource needs across all the businesses and analyzed the relative strategic importance as well as profitability of various product categories across our overall portfolio. As our operating margins show, Bio-Techne is already a very efficient organization, but with that said, we have been able to identify opportunities to increase efficiencies throughout the global Bio-Techne operational model. In the face of the current environment, we will remain focused on driving our growth pillars while executing on those aforementioned efficiency increase opportunities. Before I proceed with the specifics of the quarter, I'd like to officially welcome Matt McMannis to Bio-Techne as the president of the Diagnostics and Genomics segment. Matt might be a familiar name to several of you, as he was formerly Executive Vice President and Chief Operating Officer for Azenta. Prior to that role, he was leading Bio-Techne's molecular diagnostics business following our acquisition of Asuragen where he was the CEO. We are excited to have Matt back at the Bio-Techne family, given his existing knowledge of the business, strong cultural fit, and breadth of life science leadership experience. He is the ideal leader to take our diagnostics and genomics business to the next stage of growth. Matt runs a Bio-Techne leadership team that has deep experience and a proven track record of driving growth through market cycles, and I'm excited to lead this talented team moving forward. Now let's start with a discussion on our end markets and geographies. In biopharma, growth declined low single digits in the quarter. As we noted at last call, the trajectory for the global biotech sales stepped down at the end of our first quarter and continued into the early part of our second quarter. This trend persisted throughout the remaining part of the second quarter. The biopharma customers remained very engaged with their sales force, but given the overall funding environment, they adopted a much more cautious stance on spending in front of their 2024 budget cycles. In the academic market, demand remains consistent and healthier across the geographies. We experienced a single-digit growth in the quarter, and even though we saw a challenging biopharma market, the team has done an excellent job pursuing and converting opportunities in the academic market. From a geographic perspective, we grew mid-single digits. Our strengthened European leadership team continues the positive momentum which we have experienced over the last four quarters. The team executed well, despite the aforementioned spending behavior from our former customers. In North America, we experienced flat year-over-year performance. It's worth noting that this is the region where we continue to experience the most significant impact from the soft biotech funding environment. Now moving on to China, you might recall that while discussing our first quarter of the fiscal year, China was highlighted as a geography where we experienced deceleration, impacting our portfolio within the protein science segment. These headwinds led to a year-over-year decrease of over 20% in the geography for the quarter. The good news is that following particularly challenging months in October and November, the run rate stabilized as we closed the calendar year, and this trend has continued at the start of calendar 2024. While it's difficult to precisely predict the bottom based on two months of performance, we are encouraged by the current stabilization trend. Access to improved healthcare remains the top priority for the Chinese government, and we remain very optimistic about the long-term prospects of our product portfolio serving researchers in this region. Now let's discuss our growth pillars, starting with those within our protein science segment. The protein-simple branded portfolio of novel, productivity-driven analytical tools faced challenges regarding new instrument placement. This is attributed to budget constraints across biopharma and an unfavorable environment in China. However, there were a number of positive developments within that portfolio, specifically the consumables utilized on the protein-simple platforms. For the fourth consecutive quarter, these consumables have grown by at least 20%, which indicates our customers are utilizing our instruments at record levels even amid budget constraints. Another promising development was our Simple Plex platform, an automated multiplexing ELISA instrument branded Ella. Overall, this platform experienced double-digit growth in Q2 as Ella is becoming the preferred platform in high-volume accounts, such as CROs and Cell Therapy QC Labs. These accounts conduct large translational studies that increasingly rely on the high sensitivity and user-friendly nature of the platform for their multiplexing ELISA necessities. As a reminder, we recently obtained ISO 13485 certification for our Wallingford, Connecticut facility. With this important certification obtained, we are now well-positioned to pursue clinical diagnostic opportunities on this instrumentation platform. This will open up a significant potential end market for this fast, highly sensitive, and easy-to-use multiplex immunoassay instrument. We are encouraged by the number of discussions we are having with potential diagnostic partners and are taking measures to further position Ella as the platform of choice for high-value diagnostic applications. The third positive development within our protein science segment has been our biologics platform, branded Maurice. Excluding China, this platform grew over 20% in Q2. We are observing significant traction with the recent launch of Maurice's flex, particularly in biological drug development and drug production. This aligns well with the capabilities regarding protein charge, size, and identity, as this next-generation platform also serves as an easy-to-use alternative to legacy mass spectrometry fractionation methods, including Ion Exchange Chromatography. Since Maurice's flex launch in March of last year, we are noticing an increasing number of publications which are driving awareness and demand for this instrument. I will now turn to our other major growth pillars within the protein science segment: cell and gene therapy. This business vertical encompasses our portfolio of proteomic reagents as well as scalable workflow solutions that enable our customers to expedite commercialization of their next-generation cell and gene therapies. The customers for these solutions are primarily biotech companies, and our Q2 results were equally impacted by the same funding constraints I mentioned earlier. However, short-term funding constraints do not alter our conviction that cell and gene therapy is here to stay. In fact, we believe these technologies will play a significant role in treating and curing serious diseases, and we will continue to invest in this strategic growth pillar. During the quarter, we filed the first Drug Master File (DMF) for an animal-free, accelerated GMP expansion medium. This filing adds to a growing list of nearly three filings spanning our GMP product portfolio. These DMFs enable our cell therapy customers to cross-reference that filing when submitting to the FDA, streamlining their IND process. Our products effectively integrate with our customers' workflows. We are also expanding our market-leading GMP portfolio to include additional media formulations, gene engineering capabilities, and GMP antibodies. These activities will enhance Bio-Techne's market position in this rapidly growing industry. Overall, the protein science segment experienced a full percent organic revenue decrease in the quarter. It was impacted by the current biotech funding landscape, the order timing among a handful of large biopharma customers, and the constrained macro environment in China. However, as the positive developments I discussed indicate, this segment is positioned for accelerated growth once the macro funding challenges ease. Now let's discuss the growth pillars within our diagnostics and genomics segment, starting with our spatial biology franchise. This division encompasses our ACD-branded products as well as the Lunaphore branded spatial biology automated solution. ACD's RNA scope continues to play a critical role in advancing gene therapy, neuroscience, and cancer research. Despite the challenging macro environment, this portfolio remains in high demand, growing in the mid-teens globally during the quarter. We are also excited about the traction we are seeing with the recently acquired Lunaphore platform. As a reminder, we are currently commercializing the Comet instrument, a fully automated, high-throughput platform that does not require the use of conjugated primary antibodies. Comet's high value proposition resonates with the translational research community, driving significant interest and rapid growth in our installed base. In fact, the demand for the Comet instrument exceeded our manufacturing capacity, creating a backlog during this quarter. We are currently working to scale our Comet production capacity to meet this strong demand. A final note regarding our spatial biology business is that we recently announced the upcoming launch of a fully automated spatial multiomics workflow, which detects RNA and protein markers on the same tissue section. This workflow combines ACD's RNA scoping technologies with Lunaphore's fully automated Comet platform, and we will showcase this complete solution at the upcoming HBT next week in Orlando. Now, let's delve into our other growth pillar within Diagnostics and Genomics: the Molecular Diagnostics business. Our ExoDx prostate test provides valuable information on whether a man with a gray-zone PSA score should proceed with an invasive and potentially dangerous prostate biopsy. With 30% volume growth in our second quarter, the value of this test continues to resonate with both patients and physicians. Our Exosome-based development pipeline includes single-gene mutation tests for monitoring various cancer markers, as well as a colorectal cancer screening test designed for early detection of both colorectal cancer and pre-cancerous polyps. We look forward to sharing additional data on this exciting pipeline in the coming quarters. Overall, the diagnostics and genomics segments grew by 5% organically during the quarter but were muted by the de-stocking and strict inventory management from our core diagnostics OEM customers. As these OEM customers return to normalized buying patterns, the results from our spatial biology and molecular diagnostic growth pillars will become more visible at the segment level. In summary, I'm extremely proud of the team's ability to navigate the transitory challenges impacting both Bio-Techne and the broader life sciences tool industry. Our portfolio of core agents, combined with our growth pillars in proteomic analytical tools, cell and gene therapies, spatial biology, and molecular diagnostics, are well-positioned to improve quality of life by catalyzing advances in sciences and medicine. Thank you very much, and with that, I'll turn it over to Jim.

Thank you, Kim. I'll start with some additional detail on our Q2 financial performance, then provide some insights on the financial outlook. Starting with the overall second quarter financial performance, adjusted EPS was $0.40, compared to $0.47 in the prior year quarter. Foreign exchange benefited EPS by $0.02. GAAP EPS for the quarter was $0.17, compared to $0.31 in the prior year. Q2 revenue was $272.6 million, a decrease of 2% year-over-year on an organic basis, and was flat on a reported basis. Foreign exchange translation had a favorable 1% impact, while acquisitions contributed 1% to reported growth. When looking at our organic growth by region and end market in Q2, North America declined slightly year-over-year. Europe increased in the mid-single digits, while China declined over 20% during the quarter. As Kim mentioned, the soft biotech funding environment, combined with overall conservatism from our biopharma customers, were both a drag on our North American business and, to a lesser extent, represented a headwind to our European performance relative to more recent quarters. In APAC, outside of China, we experienced low single-digit growth overall, with government funding constraints in South Korea partially offset by growth in Japan and India. For China, the soft government funding environment continues to impact the region. After many months of decelerating run rates, we saw stability in our run rate business in December. Encouragingly, the stabilization has persisted as we started calendar 2024. It's difficult to ascertain the bottom in this dynamic geography, but we are optimistic that headwinds going forward will be less severe. While it might take some time to return to the growth rates we achieved historically in China, we remain confident that it will be the fastest growing major region for life science tools in the long term. By end market in Q2, excluding China, biopharma declined low single digits, while academia grew in the upper single digits. Our total company adjusted gross margin was 69.7% in the quarter, down from 71.7% in the prior year. The decrease was driven primarily by lower volume leverage, an unfavorable product mix, and the impact of the Lunaphore acquisition. Adjusted SG&A expense in Q2 was 31.2% of revenue, compared to 27.9% in the prior year, while R&D expense in Q2 was 8.4% of revenue, compared to 8.3% in the prior year. The increase in SG&A was driven primarily by the Lunaphore acquisition, partially offset by diligent cost management across the business. The price increases implemented during fiscal year '23 continue to mitigate the dollar impact of inflation on operating income, and pricing largely offset the inflationary impact on our operating margin in Q2. Adjusted operating margin for Q2 was 30.1%, a decrease of 540 basis points from the prior year period. Excluding the Lunaphore acquisition, which closed at the beginning of Q1, the adjusted operating margin was 300 basis points lower than the prior year, due to the impact of unfavorable volume leverage and product mix. Looking at our numbers below operating income, net interest expense in Q2 was $3.4 million, increasing $1.2 million compared to the prior year period due to higher debt levels. Our bank debt and balance sheet as we ended Q2 stood at $447 million, an increase of $7 million compared to last quarter. Other adjusted non-operating income was $3.1 million for the quarter, an increase of $3.1 million compared to the prior year, primarily reflecting our 20% share of Wilson-Wolf's adjusted income and foreign exchange impacts related to our cash pooling arrangement. Moving further down the P&L, our adjusted effective tax rate in Q2 was 22%, flat sequentially, but up 100 basis points compared to the prior year due to geographic mix. Turning to cash flow and return of capital, we generated $83.1 million from operations in the quarter, and our net investment in capital expenditures was $14.9 million. Additionally, during Q2, we returned capital to shareholders through $12.5 million in dividends and completed an $80 million buyback of 1.4 million shares. We finished the quarter with 160.1 million average diluted shares outstanding. Our balance sheet concluded Q2 in strong shape with $135.6 million in cash, and our total leverage stood below one time due to that. Going forward, M&A remains our top priority for capital allocation. Now I'll discuss the performance of our reporting segment, starting with the protein science segment. Q2 reported sales were $107.7 million, representing a reported revenue decrease of 3% compared to the prior year period. Organic revenue decreased 4%, though foreign exchange had a favorable 1% impact. As a reminder, our protein science segment has significant exposure to the China geographic region as well as the biotech market. The operating margin for the protein science segment was 40.3%, a decrease of 350 basis points compared to the prior year quarter, due to unfavorable volume and product mix, though this was partially offset by cost management initiatives. Turning to the diagnostics and genomics segment, Q2 reported sales were $75.4 million, showing reported growth of 11% compared to the same quarter last year. Organic revenue growth for the segment was 5%, with acquisitions having a 5% impact, while foreign exchange had a favorable impact of 1%. As Kim previously mentioned, organic growth was driven by our spatial biology and molecular diagnostic growth pillars but partially muted by de-stocking and order timing of our core diagnostic OEM customers. Our diagnostics and genomics segment operating margin for Q2 was 6%, which decreased compared to the prior year's 12.2% primarily due to the impact of the Lunaphore acquisition. However, Q2 operating margin improved by 530 basis points sequentially from Q1 due to improving volume leverage and favorable mix. As we transition from Q2 to the second half of our fiscal year, there are still reasons to be cautious, but also reasons or green shoots, as Kim mentioned, for optimism in the near term. On the macro front, biotech funding has yet to dramatically recover, nor has the Chinese economy and funding of life science research returned to its pre-COVID strength. However, inflation and interest rates are becoming more stable, and reports from some analysts indicate that biotech funding has decreased to a level not seen since 2016. During our visit to China in Q2, Kim, Chuck, and I all observed signs of a re-energized local economy with busy streets, bustling restaurants, and crowded regional airports. After several years of COVID shutdown, the local economy is beginning to flourish again, which should generate tax revenue for the government. Regarding biotech, our growth pillars continue to shine even within these challenging macro conditions. We carefully monitor sequential run rates in our reagents business to help determine where we are in this bottoming process. It's early in the new quarter, but so far, we are encouraged that the worst might be behind us. This does not mean we expect a swift growth acceleration, but we do foresee that the trend of decelerating growth that has persisted throughout this macroeconomic cycle might have subsided. Down cycles like we have experienced over the past 18 months are never pleasant, but the resilience of our growth pillars throughout this cycle has strengthened our confidence that our company will achieve double-digit growth when markets normalize in the long term. As our markets begin to normalize and gear up for the inevitable return to growth, we will continue to diligently manage our cost structure and invest in the business for future success. As Kim noted in his opening remarks, we persist in identifying opportunities for efficiencies, and by acting on those opportunities, we will safeguard and even expand our adjusted operating margins sequentially for the rest of the fiscal year. That concludes my prepared commentary. I will now turn the call back over to the operator to open the line for questions.

Yeah, hi, guys. Thanks for taking the question. And Chuck, it was really great working with you and good luck ahead. Kim, welcome on board again. It's good to have you leading the company. And Matt, really glad to have you back at Bio-Techne as well. So maybe let me ask my question. It's really around the headwinds that have existed for the last few quarters. You have known them. We have seen that across the industry, China, Biopharma. I think the question really here is what changed in the quarter within your assumptions? You were expecting a flat result in this quarter, but you ended up down 2%. So maybe just walk us through, is there something in the portfolio? Is it specific to customer orders? Or is there something in the forecasting process that’s not working well that yielded this result versus what you were expecting? And then I have a follow-up.

Thank you, Puneet. Good morning. And thanks for your kind words towards our team. A great question. I, of course, have an opinion on which headwinds are going to be most significant going forward. But in that area of view, we certainly have a good understanding of which ones are most significant. So I'll let Jim talk about that.

Yeah, got it Puneet. Good morning. I was the one that made that forecast, so I need to address it. As we closed the last quarter, we were pretty transparent on the call that in the last couple of weeks as we closed Q1 and the first few weeks as we opened Q2, we observed a step-down in deceleration in our biotech segment, especially, but even a bit in pharma. The reality is, and we've discussed this in various conferences, that that trend has persisted. At the time of the call, a few weeks doesn't necessarily make a trend. So we anticipated our growth rates to decelerate from where they were in Q1. However, that trend ended up being longer and deeper than we had anticipated. So that explains our current results. That being said, as we look forward, we have a more optimistic view coming out of last quarter and into this quarter, as run rates have stabilized in China. Overall, we are observing stabilization in our business as we enter this quarter relative to how we started Q2. But I will temper that a bit by saying that just like last quarter, a few weeks or even a month doesn’t necessarily constitute a trend either. However, we have noted some momentum shift or at least stabilization at this point in the quarter.

Okay, that's helpful. Maybe on the guidance, Jim, I just wanted to clarify that you expect this quarter to be a low point based on the comments you mentioned about China’s early signs and stabilization there and Biopharma maintaining a status quo. Could you help us think about the next two quarters or for the full year in terms of where models are? If you could walk us through your assumptions for growth rate, I appreciate any context on that.

Sure. Well, I would say this: we see a sense that the deceleration is slowing and perhaps stopping. So what I mean is I think you've heard many of our peers expect that our Q3 would be somewhat similar in organic growth to what we experienced in Q2. Beyond that, it's difficult to call. The overall bottoming process has been challenging to predict. But I agree with what other larger companies have stated—that it seems the first half of the year, '24 will be more difficult than the second half. However, we will go into our planning process here in about three or four months and have further insights on our fiscal year 2025 at that time. Our view is consistent with what we are hearing from our peer companies.

Hey, thanks. Good morning. Maybe just first to unpack the biopharma commentary. The release suggests those headwinds increased in December. Can you just talk about what you observed then? What caused that or what you think caused that? And then as we look ahead, what are you seeing from that end market to start the year? Have you noticed any changes in customer behavior as we transition into the new calendar year?

I'll start and then I might ask Kim to comment as well. From my perspective, I think there is some truth in the idea that CFOs have taken a more cautious approach. In speaking with our customers, we’ve found that while interest remains strong in our products, getting larger purchases approved through their internal purchasing departments or finance teams has been challenging, with a sense of holding off until the next calendar year when budgets are set. We will see if this trend holds in this quarter, but those conversations have definitely been evident. Moreover, there's been reporting from analysts closely monitoring biotech funding who indicate that funding decreased over 20% in the December quarter and was down sequentially in the mid-teens as well. Thus, there was certainly a pullback in biotech funding, which is a significant driver for our business.

Yeah, let me add to that. The biopharma market has indeed faced constraints due to lower funding than usual. If I’m not mistaken, we have probably hit the lowest point of funding since 2016. However, our portfolio is well-positioned; we offer high-quality products that produce reliable results, which are essential in a constrained environment. Secondly, our implementation portfolio is focused on optimizing efficiency, allowing labs to operate with fewer personnel and automating cumbersome processes. In summary, our portfolio is tailored to thrive even in challenging environments like this, and therefore, I believe we will emerge strong once funding normalizes.

I would just reiterate what Kim mentioned in his opening comments. The consumables used on our instrument platforms were up again this quarter, nearly 20%, and they’ve consistently grown at that rate for the past four quarters, despite the overall declining market during the past year. This clearly demonstrates how our tools deliver the productivity needed in challenging times, as well as potential pent-up demand for new instruments once funding becomes more available.

Got it. Thanks for all that. And then my follow-up: Kim, you mentioned earlier this year and on this call again that given the current environment, you can look internally at your footprint and efficiencies. I believe there was a restructuring charge in the quarter as well. Can you elaborate on that statement and what efforts are being undertaken right now? And maybe for Jim, how should we consider the impact of those efforts on margins?

Yeah, thanks, Jacob. In a constrained environment, it is paramount to tailor your organization for the highest efficiency. This not only safeguards our bottom line but also positions us optimally for recovery once conditions improve. We have indeed adjusted the workload of our employees across various businesses, ensuring we optimize our human resources where volumes and revenues have declined. Furthermore, this is a suitable time to evaluate which businesses are core and strategic to us. We identified certain businesses where growth or bottom-line expectations do not align with our long-term strategy. In these cases, we may consider divesting those businesses.

In terms of the effect on margins, the actions we are taking provide us greater confidence that the margins reported this quarter will represent the low point for the year. We are targeting to return to the mid-30% range by the end of the year for Q4.

Good morning, guys. Thanks for the questions. Kim or Chuck, can you talk a little bit about the antibodies business and the antibodies market? Given the various moving parts in the environment, it would be great to get some color on what you feel is relevant in terms of portfolio, pricing, share changes, etc.?

Yeah, Dan, thank you for your question. Our antibody business has performed admirably, maintaining low single-digit growth despite the headwinds in biopharma. To adapt, we directed some of our salesforce to focus on academic markets, ensuring we close deals there, thus maximizing growth in that space. Our antibody quality is world-renowned, and we are confident we can continue competing even at higher prices. Although we faced headwinds from de-stocking, we believe that phenomenon is nearing its end.

Okay, helpful. And then Jim, I know it’s a stretch to discuss fiscal 2025, given that the second half of this year itself is uncertain, but revisiting the analyst day, several growth platforms had double-digit market growth rates attached to them. Do you believe that in 6 to 12 months, your growth verticals will ramp enough and have favorable comps so that returning to a double-digit growth rate becomes plausible?

What I can say is that we have a strong belief, given the resilience of our growth pillars even in this environment, that once the overall market returns to its historical mid-single-digit growth trajectory, we will be positioned to achieve double-digit growth once our core rebounds to that level. The timing for that return aligns with the overall normalization of market conditions, which I cannot predict precisely. However, I would hope that we reach that point around the end of calendar year 2025.

Hey, guys, good morning. Thanks for taking the question and Chuck, congratulations on your retirement. Jim, in the near term, just to clarify, a lot of questions are circulating regarding how to think about growth near-term. Are you suggesting organic growth could be flat? Is that the right organic trajectory to consider for Q3? It would be helpful to frame what you're pointing to on the organic front.

As it stands now, our base case anticipates that the growth rate we experience in Q3 will align with the growth rate we saw in Q2. So I believe that the deceleration we’ve been experiencing recently is behind us.

Yes, I understand. Okay. And then regarding China, it sounds like, Jim, you were over there recently. Can you share your expectations for recovery in that region?

I know in the past you’ve seen sharp recoveries quarter over quarter, but last time we spoke, it seemed less likely, perhaps a more gradual recovery going forward. Can you discuss what you observed there and your expectations moving forward relative to past cycles we've witnessed?

Yeah, Patrick. Thanks for the question. China is a fundamental market for us—10% of our revenues come from there. We’ve been able to outgrow most peers over the last half-decade; however, this also poses challenges, particularly over the last couple of quarters where activity came to a near standstill. We feel that activity in China is stabilizing. We don’t see an immediate light at the end of the tunnel. Our comparisons will improve in the coming quarters, albeit not for instruments. We believe that China will regain its status as the fastest-growing market in the future and will prioritize healthcare investments. We are optimistic long-term. However, predicting a V-shaped recovery is challenging, as we anticipate a slower recovery than usual.

Hi, thank you. I want to confirm the decline in the protein sciences business. You discussed the antibody trends with Dan Arias, noting low single-digit growth. However, can you discuss the growth rate of core reagents, like your antibodies, proteins, ELISA, and how significant the decline in instrument revenue was?

I'll take this one. Thanks for the question, Dan. We won’t provide specifics at that level of detail, but generally, our reagents experienced a year-over-year decline, even though antibodies showed slight growth. Our instrument revenues were also down, influenced significantly by capital constraints from our clients. However, on a positive note, consumables utilized specifically with those instruments increased nearly 20%. Cell and gene therapy represents a large portion of our reagent usage and is notably concentrated in our biotech clientele, affecting our reagent sales within the quarter temporarily.

Overall, it was down year-over-year, but worth noting is that the order volume—number of orders and invoices sold—remained at an all-time high. This indicates customers are exercising more caution in their purchases but remain active in their research efforts within cell and gene therapy.

Just to add, as Jim mentioned, while the number of orders increased, we did have a few larger orders that were postponed. What we can do is ensure timely product development; our team is set to introduce five new GMP proteins in the upcoming quarters, expanding our portfolio and enhancing share wallet opportunities.

Hi, good morning. I want to revisit the biopharma remarks, as you referenced further deterioration in the quarter. The press release mentioned conservatism from a subset of biotech customers. How do you view the factors contributing to the headwind? Are funding-related challenges more significant, or is it predominantly budget-related issues at biopharma companies with commercial assets that are going through their budget processes right now?

From our perspective, citing our weighted customer base, biotech funding issues dominate, with conservatism from pharma as a secondary but hopefully transient matter. What we see as a clear driver is related to the biotech funding situation, which has indeed shown softness in the recent quarter. Kim?

I concur with that assessment.

Hi, good morning, everyone. I wanted to ask about the other recent M&A activity. Kim, is Bio-Techne seeing attractive opportunities that you would be willing to pursue based on the current macro conditions?

Thank you for the question. We are more than thrilled with the recent acquisition of Lunaphore. The assets and team are incredible, and integration is progressing very well. This positions us wonderfully within the lucrative and rapidly growing spatial biology market. The Comet instrument will provide us with exceptional automated multi-omics capabilities, allowing simultaneous analysis of proteins and RNA on the same tissue slide while integrating the ACD portfolio and our antibody systems. Moving forward, we are eager to explore further acquisition opportunities. We aim to strengthen our sub-engine therapy portfolios, ensuring we make thoughtful acquisitions to reinforce our strategically important growth verticals, enhance our core offerings, and maintain a focused pursuit of transactions capable of meeting our financial expectations. Whether through small or large-scale acquisitions, public or private structures, our criteria remain to identify opportunities aligning with our long-term goals.

Hey guys, thanks for the questions, and congrats to Chuck on his retirement. Regarding pharma and biotech, you mentioned your revenue was down low single digits in this sector outside of China. Could you elaborate on the differences in activity between emerging biotech and mid-sized or larger customers? What distinctions do you see between the two groups, and how do you envision their trajectories going forward?

Hi Catherine. Thank you for your question. While it can be difficult to accurately classify smaller biotech companies due to the prevalence of private firms, in general terms, the smaller a biotech company is, the more challenging the funding situation appears. However, we did notice a positive signal at the recent JPMorgan conference, indicating an increase in activity from VC firms and private equity firms exploring investment opportunities across various sectors, from tools to biotech. This is encouraging because it may mean funding pressures on smaller biotech players, which has affected our appetite in this segment, could be easing.

To add, smaller and newer biopharma companies are typically in various stages of lab set-up, process definition, and validation of measuring capabilities. Our automation platforms are crucial in this phase. Meanwhile, mid-sized companies tend to run multiple projects in parallel and are likely to already be using our instruments, leading them to engage more with consumables as they scale operations. Large pharmaceutical companies have also gone through portfolio repositioning, resulting in mixed effects. There are both capacity expansions through instrument purchases and consumables resulting from ongoing projects. This is our perspective on the smaller vs. larger customer categorizations.

Got it. So as you anticipate these decelerating trends to be behind you, with Q3 organic growth aligning with Q2, do you expect to see a return to positive organic growth in Q4, or do you think that will be more of a fiscal 2025 event?

Anything is possible, Catherine. Sure, I wouldn't rule it out on the potential calendar. There is a possibility for some momentum to build, especially if China stabilizes. However, I'd keep expectations modest, suggesting that any growth we may experience is likely to be minimal. We are observing sequential improvements within our business, which is encouraging.

Good morning, everyone. I wanted to inquire about Wilson Wolf's performance since you made that investment there. Could you clarify how they deployed the cash infusion and how they are navigating in the biotech funding landscape?

Wilson Wolf has made significant progress over the past year. Admittedly, calendar year 2023 has been challenging, as many early-stage projects faced delays; however, there has been a noteworthy rebound, particularly in their last quarter. We see improving development in their clinical studies, and our G-REX product is nearing approvals. Overall, we remain optimistic and well aware that John Wilson is investing resources to bolster the adoption of our G-REX offering at Wilson Wolf. The agreement is structured favorably for us, with full integration expected by the end of calendar year 2027.

Thank you, and thanks everyone for joining the call. Of course, one last time, thank you to Chuck for your leadership over the last decade plus. As you can hear, I'm excited about our long-term positioning and prospects as a company. We have a strong strategy in place. I am also proud of the Bio-Techne team for executing so effectively in this constrained environment. I look forward to facing these challenges head-on and speaking again at our next earnings release.