Bio-Techne Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to the Bio Techne Corp. 3rd Quarter Fiscal 2023 Earnings Call. All participants will be in a listen only mode. After today's presentation, There will be an opportunity to ask Please note today's event is being recorded. I would now like to turn the conference over to David Clare.

Operator

Please go ahead.

Speaker 1

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-nineteen pandemic on our operations and financial results. The company's 10 ks for fiscal year 2022 identifies certain factors that could cause the company's actual results to differ materially from those projected in the forward looking statements made during this call.

Speaker 1

The company does not undertake to update any are available on the company's website within its Investor Relations section. During the call, non GAAP financial 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 BofA, RBC Capital Markets, Benchmark, Craig Hallum And Jefferies Healthcare Conferences in May June. We look forward to connecting with many of you at these upcoming conferences. I will now turn the call over to Chuck.

Speaker 2

Thank you for joining us for our Q3 conference call. As we expected message in last quarter's call, our Q3 top line year on year revenue The underlying performance of the business improved quarter on quarter when considering the large EXO TRU 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, physician uptake and utilization of our EksoDx Prostate test accelerated, demand for our cell therapy workflow solutions including GMP proteins remained strong and our Spatial Biology business returned to double digit growth. These growth drivers are partially offset by the continued challenges of COVID in China, lower biotech funding and OEM destocking from Fiscal year 2024, we see China coming back strong with COVID now in the rearview mirror, destocking by our OEM customers eventually unwinding and moving 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 Shuster as the new leader of our European organization and business.

Speaker 2

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 regional lies 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, the macro environment Our new Dublin warehouse And an improved ERP system, we are positioned to serve our customers even better in the region. In North America, we also saw improvement with order growth increasing mid single digits in the quarter.

Speaker 2

Here the impact of a lower biotech spend is the greatest and the year on year comp is the toughest over 25% growth in Biofron last year. And finally, there is China, which was a tale of 2 chapters this quarter. Prior to the Lunar New Year, Most people in China were still recovering from COVID and its citizens were directed by the government to essentially stay home until after the New Year holiday. Up until this point in the quarter, sales were practically non existent in China. But after everyone was well and came back from holiday sales accelerated dramatically and our China team was able to finish the quarter with revenue growth in low single digits.

Speaker 2

This was on top of a comp where China grew with 30% last year. Just a remarkable effort by our team in China. With COVID now in the rearview mirror for China, we hope for good. We see China's growth continuing to accelerate Our organic revenue increased 5% for the quarter on top of a strong comp from last year when the segment grew 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 along with cell culture matrices and DME, which collectively grew over 20% in our Q3.

Speaker 2

Our GMP proteins remain in high demand across cell therapy spectrum as biopharma customers developing products for the 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 2nd consecutive record breaking quarter and given our industry leading menu of highly bioactive, lot to lot consistent In peer 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 menu, We are manufacturing in our state of the art St. Paul facility. We are also experiencing significant yield improvements as we scale production at this facility.

Speaker 2

Recall, we originally estimated GMP protein capacity at the facility was $140,000,000 annually, which we increased to over $200,000,000 As we manufactured initial protein batches from this new facility. As the team continues to launch additional GMP proteins, In fact, these productivity and yield gains have been so significant that we now estimate the capacity of this facility is at least $500,000,000 and potentially higher than $1,000,000,000 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 into Wolfson Wolf. As a reminder, Wolfson Wolf is a manufacturer of the line of cell production 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 our Bio Techne through the scale ready commercial joint venture since 2020.

Speaker 2

With the 3 companies collectively offering tools and technologies for cell culture, cell activation, gene editing and cell processing, during the quarter, Wilson Wolf reached Trailing 12 months EBITDA milestone, Turing and Biotech Inc. $257,000,000 investment for a 20 percent ownership stake into Wilson Wolf. We see tremendous synergies with the eventual ownership of Wolf and Wolf and are already developing a one of a kind standardized closed Cell and gene therapy manufacturing system that integrates Grec, Biotechnics G and P 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 Wolf and Wolf for $1,000,000,000 upon its We look forward to continuing near term pipeline development work for Wolf and Wolf and eventually having this rapidly growing highly profitable industry standard including our RUO proteins, antibodies and small molecules, which collectively grew single digit low single digit in the quarter coming off of a challenging year over year comp We grew about 20% in Q3 of last year.

Speaker 2

I'd like to elaborate on the OEM phenomenon we've experienced in our year over year comps for the

Speaker 3

past couple of quarters.

Speaker 2

Recall that a year ago supply chains were constrained and several companies including Bio Techne stocked up on certain components that were 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 It is a basis for the research, enabling scientific discoveries, enabling new therapeutic and diagnostic discoveries to further healthcare. This same catalog of bioactive reagents also serves as 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 Zolium customers stocked our reagents to ensure their ability to continue to meet Best we can tell right now, it will take another quarter or 2 before this destocking to unwind.

Speaker 2

After that, these headwinds should become tailwinds as these OEM customers assume their normal ordering patterns

Speaker 3

of our reagents in fiscal 2024.

Speaker 2

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 instant Instant platform as our Simple Western, SimplePlex and Maurice instruments become more ingrained in research workflows. The ease of use and flexibility offered by our proteomic and analytical tools are leading to expanding applications across the three platforms. These expanding applications, particularly for cell and gene therapy, QA and QC, is translating into higher total addressable market opportunities for these platforms. As our legacy proteomechanical tools, TAM expands from $2,000,000,000 to $3,000,000,000 to firmly above $3,000,000,000 Order funnels remain very strong across these three instrument platforms. All the budget conservatism from a subset of biotech end users has led to an overall lengthening of the order Our SimplePlex branded multiplexing immunoassay platform, Ella, led instrument growth increasing over 25% in the quarter.

Speaker 2

The subtequigram 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 apparent in a growing number of instruments in the field as Ella Cross an important milestone in the quarter Over 1,000 instruments now in the field. In neuroscience, Ella's high level of sensitivity positions it as an ideal instrument for biomarker detection and discovery making us a We also continue to make progress preparing 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 incredibly bright future for Ella. Now let's discuss our biologics platform, Marie's, which enables protein purity, charge and identity analysis in 5 minutes in an easy to use cartridge based instrument. Recall that we recently expanded on capabilities with the launch of Marix FLX, which adds image capillary isoelectric focusing, fractionization capabilities to the instrument.

Speaker 2

Fractionation is a front end step in mass photometry and Marie Select addresses the labor intensive and time consuming challenges of using legacy Fractionation methods including ion exchange chromatography. This new application enters Maurice into a new $300,000,000 market. Initial biopharma interest in Marie's Flex has been strong and we had multiple initial instant 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 Western blot process With a sample in answer out solution resonates within 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 in rare tissues.

Speaker 2

Additionally, our biopharma customers are increasingly relying on Simple Western in their gene therapy workflows as its ability to detect protein related impurities, Viral TIDR and identity information and empty versus full capsid information provide critical QAQC 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 Signaling 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 We are excited about the addition of these new antibodies to the Bio Techne catalog validated antibodies and are encouraged with the market response following the announcement. Now let's shift to our Diagnostics and Genomics segment, where organic Revenue declined by 2%.

Speaker 2

Adjusting for the extra two milestone payments 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, where we continue to experience increased physician adoption and utilization of our EksoDx prostate test, leading to over 70% test volume growth for the 5th consecutive quarter And an associated revenue increase of 85% in the quarter. We continue to see positive momentum on the key Our next question comes from the line of David. Please go ahead. Record test volume from physicians new to ex ODX prostate as well as a record number of doctors are ordering more than 25 tests in a quarter.

Speaker 2

We are pairing this volume momentum with continued progress in strengthening our coverage with private payers as our recently bolstered market access group The team is doing an excellent job managing a 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 Following this update, the LCD now mirrors the National Comprehensive Cancer Network or NCCN guidelines and enables reimbursement ORexaDx prostate is a monitoring tool in populations with and without a prior prostate biopsy, effectively increasing its total addressable market opportunity by 50% for the test. Our spatial biology business branded ACD increased low double digits in the quarter With adoption in our flagship RNAscope 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 fluorophores enabling customers to easily detect and visualize both abundant RNAs as well as RNAs Are also getting traction, including BaseScope and Micro and RNAscope.

Speaker 2

As these novel solutions enable visualization and evaluation of therapeutic biodistribution, Safety and efficacy of gene therapy delivery vectors and oligonucleotide therapies. Base scope 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 Lunafor to develop the first fully automated This solution will enable users to easily visualize both cell types and their activation space in tissue. Combining Komet'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 steady goals. In summary, our Q3 performance was in line with our expectations.

Speaker 2

As China growth snaps back and the temporary headwinds created by reagent destocking from a handful of OEM partners 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, spatial biology capabilities, all coupled with an industry leading catalog of bioactive content, Physicians Bioteching to remain a leader in some of the most rapidly growing life science tools market. We look forward to continue to execute our strategic growth With that, I'll turn it over to Jim.

Speaker 3

Thanks, Chuck. I'll start with recapping the overall Q3 financial performance. Adjusted EPS was $0.53 consistent with the prior year quarter. Foreign exchange negatively impacted EPS by 0 point 0 $0.01 or Minus 2% in the quarter. GAAP EPS in Q3 was $0.43 compared to $0.37 in the prior year.

Speaker 3

The biggest driver for the increase in GAAP EPS was a non recurring loss on our previously held ChemoCentryx investment in the prior year period. Q3 revenue was $294,100,000 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 called out the temporary headwinds we faced in Q3 and I will quantify their impact to overall company growth. Starting with prior year's XO True 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.

Speaker 3

The COVID infections and corresponding shutdowns in China this quarter was an additional headwind to overall company growth of approximately 2.5%. The OEM destocking of REO reagents, we estimate to be another 1.5% headwind to our overall company growth rate. The accumulation of e specific and temporary headwinds is approximately 7.5%, which when added back to our reported organic growth 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 It is more difficult to quantify. It is also a headwind that may take more time to work through.

Speaker 3

The biotech research is not going away. It is often the important innovative bridge between academic discovery and big pharma therapy commercialization. In the meantime, Bio Techne will continue to serve all these customers The life science change that ultimately brings quality of life to patients with innovative products that improve their likelihood of success and in the most productive way possible. The double digit growth we see in our key growth platform, Mel and Gene Therapy, Exosome Diagnostics, facial biology and protein simple branded automated assays demonstrate this is already the case. Moving on to our organic growth by region and market in Q3, North America grew mid single digits, Europe demand increased upper single digits.

Speaker 3

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 and L, total company adjusted 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.

Speaker 3

Adjusted SG and A in Q3 was 27.9 percent of revenue compared to 26.1% in the prior year, While R and D expense in Q3 was 7.7 percent of revenue compared to 7.5% in the prior year. The increase in SG and A and R and 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 twenty twenty three to offset the dollar impact of inflation to operating income, With pricing largely offsetting the inflation impact on our operating margin as well in Q3. Adjusted operating margin for Q3 was 37%, a decrease of 2 60 basis points from the prior year, 150 basis point improvement sequentially. The impact of the non recurring extra true milestone payment in the prior year period decreased margin by 130 basis points.

Speaker 3

Foreign exchange decreased adjusted operating margin by another 50 basis points, While the acquisition of Namastell 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 $200,000 decreasing $2,000,000 compared to 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 $370,000,000 an increase of $170,000,000 compared to last quarter with the increase reflecting our investment in Wilson Wolf, which was funded partially with debt and cash on hand.

Speaker 3

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 $2,700,000 in Q4. Other adjusted non operating income was $100,000 in the quarter, an increase of $1,200,000 compared to the prior year, primarily reflecting the foreign exchange impact related to our cash flowing arrangement. Moving further down the P and L, our adjusted effective tax rate in Q3 was 21%. Turning to cash flow and return of capital, dollars 50,500,000 of cash was generated from operations in the quarter Our net investment in capital expenditures was $11,700,000 Also during Q3, we returned capital to shareholders by way of $12,600,000 dividend. We finished the quarter with 161,600,000 average diluted shares outstanding.

Speaker 3

Our balance sheet finished Q3 in a strong position with $157,200,000 in cash and short term available for sale investments. And our total leverage ratio Remains below one turn and going forward M and A remains a top priority for capital allocation. Next, I'll discuss the performance of our reporting segment, starting with the Protein Sciences segment. Q3 reported sales were $218,900,000 This reported revenue increasing 3% compared to the same period last year. Organic Growth List segment was 5% With foreign exchange having an unfavorable impact of 2%.

Speaker 3

Despite the temporary headwinds and the tough year over year comps, I will highlight that the longer term 5 year CAGR for this segment is approximately 12%. Operating margin for the Protein Sciences segment was 40 5.1%, a decrease of 30 basis points year over year with operational productivity more than offset by foreign exchange and the impact of the NanoCell acquisition. Turning to the Diagnostics and Genomics segment, Q3 reported sales were $75,700,000 With reported revenue decreasing 3%. Organic revenue decreased 2% with foreign exchange having an unfavorable 1% impact. As Chuck mentioned earlier, adjusting for the extra milestone payment we received in Q3 of last year, which did not repeat again this year, Organic growth was upper single digit for the segment.

Speaker 3

Our Exosome Diagnostics business remained incredibly strong in the quarter as our fortified marketing message, strength 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 EksoTrue milestone payment and to a lesser extent net inflation and strategic growth investments. Before we get to Q and A, we would summarize our fiscal year up to this point, How customers were going to behave in a post COVID pandemic world was rather murky.

Speaker 3

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, 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 this double digit growth. As we enter Q4, PEMSA headwinds should diminish, especially in China, but some are likely to remain, namely the OEM Looking further ahead into fiscal year 'twenty four, these remaining headwinds should further diminish. The double digit revenue increases we see in our strategic growth platforms will once again be reflected in our headline numbers.

Speaker 3

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 That concludes my prepared comments. And with that, I'll turn the call back over to the operator to open the line for questions.

Operator

Thank you very much. We will now begin the question and answer session. And our first question today comes from Puneet Souda of SVB Securities. Please proceed with your question.

Speaker 4

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.

Speaker 4

And then I think what Jim was implying is The Q1 is about 7% growth that you delivered. So I assume that's what you're expecting for the Q4. 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? 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 headwinds.

Speaker 2

Sure, Puneet. Thanks. Well, I think first and foremost, I think we're kind of talking about Come back a little more quickly than others are talking about it. We bridge for you the destocking component and We know the customers and we know what they're at and they've been very clear with us. So we know when they're coming back for more and it really is in Q1.

Speaker 2

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 digit and beyond, it's always impactful. But we're kind of circumventing a lot of that with Surgical work here within our own OEM sector, which is really coming back. And let's not forget that we were in the mid teens in our run rate business supporting biopharma and our academic last quarter. This quarter, we were low teens still in our run rate business for our consumables.

Speaker 2

So That all speaks very positively to current departments going forward. We just think it starts getting better. As you pointed out, we got one more tough quarter, really tough Q4 Comp, we had a blowout last couple of weeks last year in Q4, kind of wish that would have been in Q1 now. And you're right, it's in that 7 high Single digit number is kind of our range. China is a big factor too.

Speaker 2

I mean, we've got to we see China roaring back. We were just over there, first time in 3.5 years. The team is in Great spirit, full strength, seeing all their customers and things are ramping extremely fast. So I wasn't kidding with 40

Speaker 4

And Jim, in terms of recovery back to sort of mid teens, I just wanted to clarify, you meant 4th quarter should be in line with Q1 or for the full year?

Speaker 3

In line with the Q1.

Speaker 4

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 sort of how it differentiates from the rest of the platforms of the market, Cocoon and other ones? And do you have enough pieces already in terms of the consumables products to sort of fulfill the entire Closed loop system there.

Speaker 2

Yes. So we actually made great progress there. As you know, we've got a factory that we're We have the G. Rex platform, which is already in the back of standard out there. The last I'm calling the integration of media.

Speaker 2

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 approaches, so this is a little more different. So we're looking at kind of the make versus buy, how to it's all about time and scale. So we think within a year here, we're out with the So roughly about a year and it's probably a little mushy right now. It could be sooner.

Speaker 2

It could be a later. It depends on how much we want to go with ourselves with our own We have IP and we Solutions for how to actually integrate Vendi with G Rec already. So some real novel solutions that and some of them John Wilson himself has been

Speaker 4

Got it. Okay. All right. Thank you.

Operator

Our next question comes from Jacob Johnson from Stephens. Please proceed with your question.

Speaker 5

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 2 of you?

Speaker 5

Does it create additional opportunities?

Speaker 2

Well, it's a great question. We have a great relationship. We talk every week. The teams have been totally together. As I pointed out, one of the keys to the deal was the fact that he wanted us to take over and do more operations As he's exploding in growth, because he kind of is more of a KOL out there with all the docs and therapeutics and institutions, that's where he wants to more or less live.

Speaker 2

As you know, he just put out a big press release last week here of CellReady. So he's building a new company, a CDMO type model, Working with assets from Marker to try and build all that more quickly, get to customers more quickly, save a lot of time, a lot of money with startups With professors with their cell ideas, etcetera. And guess what the workflow is going to drive that whole mechanism. It's our scale ready JV Workflows, that means our protein, G Rex, it will of course use Ascendiant's hardware as well and work will use all Our instance for Q3 will have our media, will have more workflow will come in. So that Makes us tighter even yet because he wants to make sure that we're integrating for the future too as he builds out these new ideas.

Speaker 2

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. So if anything, we're talking more and we have more ideas for

Speaker 3

the future together then. You'll build

Speaker 2

the next multi $1,000,000,000 adventure.

Speaker 5

Got it. Thanks for that. Maybe just stick on the cell and gene therapy front. Yes. I think there's been kind of bearing commentary about that end market, but it sounded like you had a pretty good quarter there on the GMP protein side.

Speaker 5

So can you just talk 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?

Speaker 2

Yes. We had a 45% quarter and that's off 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.

Speaker 2

And I think overall, we just keep accelerating. I think we're roughly around 200 customers now. And The large ones about the same, we've got 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 minnows into tuna And then into whales, right?

Speaker 2

So in a couple of years, we hope to have a couple dozen whales. And it won't take many to get really get this factory humming. So they're coming.

Speaker 5

Perfect. I'll leave it there. Thanks, Chuck.

Operator

Our next question comes from Dan Arias with Stifel. Please proceed with your question.

Speaker 6

Good morning, guys. Thanks for the questions. Chuck, maybe on ACD, what's the growth outlook there and how is that evolving as we digest the biotech spending environment? And then in spatial overall, you've now got these 2 partnerships here with Acoya and Lufthor. What if anything does the incremental revenue contribution potential look like

Speaker 2

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 opportunity and you You realize also this is not a category that's like only biotech or only pharma.

Speaker 2

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 the hurdles to get over is to keep raising academia. We also have a service component With that business and that's been up and down as 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.

Speaker 2

We will start with a service contract and then we blow them away with the data and then they come on board and they start ordering probes and go from there. So it all works together. You know, COIA is very different than the Lunafore model. The Lunafore model that program is for Code detection protein and RNA together on a single slide, still single morphology, whereas the echoea is all RNA only. So they're a little bit different.

Speaker 2

We've been pretty clear about being ubiquitous from the high level, the antenna like 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 roles are 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 coming.

Speaker 2

There's a lot more innovation. There's more companies coming. There's more ideas. And we're thrilled to be one of the leaders and we're working with all the leaders in hardware automation. And As you know, we've got some multiplexing capability coming.

Speaker 2

And now with co detection as well, that's going to be it's going to fill a big Out there for what people are looking for, for identifying what they're really after in this issue.

Speaker 6

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?

Speaker 2

Dollars kind of run rate business right now. We've always talked about it being a $300,000,000 plus business, but that's with discovery, but also with Having Lunafor and having these other relationships allows us to really Give pathologists more they're looking for. They're not working on a single slide under a scope with one analyte at a time here. It's And let's not forget, we've launched a whole set of new dyes, fluorescence, fluorophores, we call Vivid. And they are really lighting up the And they're getting a lot of great acceptance as well.

Speaker 2

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 this into pathology, 5 to 10 years out, this is well beyond $300,000,000 This is a double digit growth rate, Needs to be, got to be, when it isn't, we make changes here. It's been as high as 30 plus percent on some quarters And we hope to be in double digits going forward. So it's there's academia, there's funding issues this year. It's been a little bit lumpy. We're double This quarter, I think it looks pretty solid.

Speaker 2

We're excited about the relationship. I think we're quite a few months away or yet from actually Revenue on a platform like that, but it's all coming.

Speaker 6

Okay. Just a follow-up for me, if I could. Chuck, I have to admit as I was listening to you, welcome Peter, in It occurs to me that as we're pushing towards June here, 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.

Speaker 6

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?

Speaker 2

Yes, it's still 14 months away. If you're stuck with me for 3 or 4 more quarters, it's ongoing and I will not be joining a band. You've You've not heard me sing, but there is obviously, I've done my job with grooming, I think, 3 excellent internal candidates. All could carry the water here for quite a while, I think. The Board is looking outside as well.

Speaker 2

They have a fiduciary responsibility. And the fundamental reason of taking the time and looking broad is that we're under my watch for 10 years, we've I guess we've increased the sales here 400%, 500%, something like that. The next 10 years, we want another 400%, 500%. We're up 6, 7, 8x in And valuation in 10 years and another 10 years,

Speaker 3

if you want

Speaker 2

to be up another 5, 6, 7, 8 times in valuation that puts us at Needing somebody to run a $60,000,000,000 market cap company at $5,000,000,000 $6,000,000,000 in revenue. That's the goal, that's the plan and that's where we're operating for it. And I will remain in the Board hopefully, Board willing. So I'm not totally.

Operator

Our next question comes from Dan Leonard from Credit Suisse. Please proceed with your question.

Speaker 5

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

Speaker 2

I think a pretty good job bridging it. It's about 1.5%. The best thing about this Destocking O and M component, we're not talking about a cost of work profit. We're talking about a half a dozen or so different customers that All in the 1,000,000 of dollars of purchases last year and this year are at 0. Good stuff.

Speaker 2

And they won't remain at 0. Some won't come back. A lot are going to come back hard and heavy. And then we're really building the funnel with new ones. The beautiful thing about biotech is every year there's a whole new slate of new people's ideas that want to buy new juice from Some leaders like us to try things out.

Speaker 2

So it's building, it's coming back, it's identifiable. And I guess If there's more numbers, I'll let Jim comment. But I think 1.5% is pretty clear.

Speaker 5

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

Speaker 3

Well, we're in the process of building our plan right now for next year, right? What I was trying to indicate in my Closing remarks was that you take out these very isolated events OEM destocking China as an example of the ExoTrue deal And the rest of our business collectively is at double digit already. And our key growth programs, which are going to carry us to $2,000,000,000 and beyond are also all growing well in the double digits. And so it would suggest that we get past these headwinds during fiscal year 2024. This Underlying double digit growth we're seeing not only in our core, but definitely in our growth programs, growth platform will start to once again resonate and you'll see it The overall company results,

Speaker 2

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 And that remaining in teams tells us that things are okay. Then you look for the other holes and we bridge it for you.

Speaker 2

This OEM thing is going to come and go. You pull that back, we're back to normality. And on top of that, you have these growth programs. Our 3 top growth areas all had spectacular quarters. Facial had double digits, 45% gene pre protein, 20 plus percent in cell and gene therapy overall and exosome at 7%.

Speaker 2

They're not material enough right now to carry the average. But by next year, they're going to be a lot more material and they're going to carry the average. So With all this stuff fundamental coming back on top of these growth programs, we don't give guidance, but we won't be very happy here for not a double digit growth momentum.

Operator

Our next question comes from Patrick Donnelly with Citi. Please proceed with your question.

Speaker 6

Hey, guys. Thanks for taking the questions. Chuck, maybe dive a little deeper on China. It's encouraging to hear that 40% number thrown around for this quarter.

Speaker 2

Can you just talk a

Speaker 6

little bit about the trend you saw maybe in March and then into April? It sounded like a really nice recovery, kind of 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 lockdowns, is there this big pent up demand and it's 1 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?

Speaker 2

Yes, we were just there and that was absolutely one of the questions, almost per word. What we asked the team in our reviews there. I don't think we're seeing the extreme kickback that came off that COVID quarter roughly 3 years ago now. It's just coming back strong and hard now. Again, this is an easy comp from last year for China.

Speaker 2

And but this last quarter, 2 months of the quarter, nobody was at work, like 0. We had 90 plus percent people stick with COVID. So we had a very strong March because they all came back and there was pent up demand. People want to Back to work and restart. We're a run rate business.

Speaker 2

So people aren't at work in their labs. They're not burning experiments. They're not running experiments. They're not using our juice. So now they're all back And they want more and they're hungry and they're trying to catch up.

Speaker 2

So some level of that we saw a few years ago will happen. But I think it's more steady. It's more steady too because the instrument It's also coming back and researching well. We see really good strong growth going forward. We were one reason we did have some growth is a lot of it It's an instrument side effect there and that's obviously a longer sell cycle.

Speaker 2

But that's one of our business regions Where we have 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, Lee Wen, worked with us that worked with me in Thermo Fisher. He's solid. He's Got many years left to go.

Speaker 2

He's well respected industry. He's built businesses in his past that are 5, 10 times He's still the original leader that came with ProteinSimple way back when and is more energetic and engaged than ever. And we love this guy. He knows the market, knows every customer. The relationships are fantastic.

Speaker 2

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 pretty neat and talked to like literally most of the folks We weren't there many days. We want to really maximize our time and get to know everybody again.

Speaker 2

In China, you want to get there and touch them once every 3 years is too long not to be there. Businesses can drift and in places like China, they can drift and you can find surprises. We can find any surprises. The morale of this team has been fantastic. The engagement has been good.

Speaker 2

A lot of new people, but only about 25% in the last couple of years are new there.

Speaker 3

I always I said I'd ask for

Speaker 2

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 the fort down. And today, it's a $100,000,000 business, 10% or a little more or a little less of our company. Factor growing 20% -plus next year, we think, is a no brainer.

Speaker 2

We won't say 40 plus. This quarter is an anomaly, but next year, we're going to probably work with them on a plan that's 20 plus percent for sure. I see no reason why not. And maybe more. We'll get back to you as we get a plan.

Speaker 6

Okay. That sounds good. And then Jim, maybe on the margin, I think you kind of framed 4Q looking similar to 3Q. As we work our way into 'twenty four, is that exit rate kind of the right number to think about building off of? And can you just remind Moving pieces as we work our way into next year.

Speaker 6

Obviously, some of the headwinds hit margins as well as we work our way hopefully back to that double digit growth number you talked about should be some nice leverage in the model, but yes, maybe just frame up the margin piece exiting out of 4Q here.

Speaker 3

Yes. Again, I'll be able to provide more clarity

Speaker 2

on our margin and margin profile for next year

Speaker 3

as we get through our plan in our next earnings call. But I guess at a high level, I would say I would expect is, 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 usually higher coming off our Q4 fiscal year the prior year. So 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.

Operator

Our next question comes from Catherine Schulte with Baird. Please proceed with your question.

Speaker 7

Hey guys, thanks for the questions. I guess first on Exosome, it sounds like you're 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?

Speaker 2

Sure. Well, as you know, we've taken a I wouldn't say a conservative, but a careful approach to their expansion and growth. We've had a dilution level that we've been able to live with the last 4 or 5 years, whatever it's been now. And 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.

Speaker 2

So we've almost doubled that sales force. We've added a new team for really Experience team really go after the larger private payers. We had to get big enough to attract the right players and people and talent I would say the size of the business is up headcount wise roughly 30%, 40%, maybe even a little more from a A year or 2 ago. And we've talked about where's the breakeven point. We talked in past through finding records that We bought it thinking to be $30,000,000 in revenue and then found out that we talked to all you at the end of the call like 60 $70,000,000 of revenue be a breakeven point.

Speaker 2

This team in under Lynn thinks it's much better than that. So it's another year or so, year and a half, I think we're at And then maybe we will or maybe we won't. Maybe we'll decide to invest harder and stay at the dilution levels we're I'm not saying we'll put ads on TV for the prospects just yet. But I think this team is starting To accelerate even more and we hit 11,000 tests last quarter, which is pretty remarkable. As you know, we've got the full entity guidelines now into our reimbursement equation.

Speaker 2

That means we can go back after patients that have had their first test done or had a biopsy can have it again and use this for surveillance. In the entire period before last quarter, I think we had 15 tests done that were repeat. In the

Speaker 3

last quarter, we had over 240.

Speaker 2

So we're going back after the surveillance patients, which is an added which really is an added sham, right? So That's one thing we've seen, I think, growth even accelerate. And I don't even think there's a tipping point yet. I tell the team, I'm looking for something north of And I think that day will come.

Speaker 7

All right. Great. And then can you quantify what you expect OEM destocking headwind to be in the 4th quarter. I guess, if adjusted third quarter growth was 10% and then you have In Q4, 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.

Speaker 3

So I would say this is Jim. I'd say the OEM headwinds is almost exactly the same for Q4 as it is for Q3. At least 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 than it was in Q3 last year. So they're both equally difficult comps.

Speaker 3

And so, yes, China will be better. You won't have the absolute true, 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 and with the exception of China. But and we expect Diagnostics and Somix to be better because they don't have the EXO true Next year, but again, that's only in total about 25%

Speaker 2

of our business.

Speaker 3

So the incremental China And the lack of extra true is what this gets to the overall company growth rate from, call it, 3% to hopefully north of 7%.

Operator

Our next question comes from Justin Boers with Deutsche Bank. Please proceed with your question.

Speaker 2

Hey, good morning. Just want to follow-up on some of the last couple of questions. 1, on the OEM, Is that a headwind that you're talking about in the back half? 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 And the sales cycle to that similar to the run rate business?

Speaker 2

Or is there some seasonality and lumpiness to that business? In what area? Sorry, for the OEM channel. For the OEM. Well, I think COVID is out in effect on everything OEM.

Speaker 2

I think it's affecting environment, it's affecting funding and it's affecting conservatism and all the above. So people have been Next fiscal year, we see improving services 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 are. So I think we've got some large OEMs that are running out of stock and they're not in solvents.

Speaker 2

They're just been they're 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 and being bought or whatever. So I think the net net of it all, we see an improving OEM first half of our fiscal year. From what we know right now, we're just being transparent what we see Next quarter, maybe it will all change. I don't know, maybe something else will happen, but that's what we see right now.

Speaker 2

And we're pushing on these customers to start buying again.

Speaker 3

I mean, obviously, at some point, they start to run out of inventory. So we're trying to model as best we can when we think that will happen. And we do think at some point in the first half of fiscal 24, as long as their sales continue

Speaker 2

as long as

Speaker 3

they continue to have sales, they're going to need to restock in some more inventory.

Speaker 2

Got it. And then just Don't forget that. We're not happy with a handful of large customers. We've got hundreds of customers. We want all 100 of the large.

Operator

Our next question comes from Alex Nowak with Craig Hallum.

Speaker 2

The portfolio because to a prior question and in the prepared remarks you talked about cell and gene therapy, GP proteins, post potential facial ectoderm, all these being up 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 pure demand by your customers? Or is really the only that's struggling is really just macro China, macro OEM destocking. It's mostly macro, but I'd say we've not been happy with academia Last year, it's more or less low to mid single digits. Europe's been up and down a little bit, but China It was like a big zero practically, so that's a big impact.

Speaker 2

APAC wasn't strong either. So that's this quarter, which is timing and Missing stimulus in Korea and Japan. So those things kind of weigh into that. When you add all that back in, I think things are fine. There's no real issue there.

Speaker 2

I would say in product categories, what I'm most worried about, kind of what I'm always most worried about is Hawaii's assay. So that's why we bought SimplePlex for big and Luminex. We've got An assay portfolio that is together, it's high single digit growth and hopefully back to back to double digit here soon when it all comes. But ELISA It's up and down low, mid, high single digits. That's kind of where it lives and it's still a big part of our business.

Speaker 2

So it's kind of that. Okay, makes sense. And then the path to $2,000,000,000 of sales from the Analyst Day, I mean, it looks like we're going to need about 22% annualized To get us there, it sounds like maybe teens for next year. So that really weighs on Wilson Wolf GMP protein facial to be massive accelerators in fiscal 20 25, 2026. Is that right or the full $2,000,000,000 number need

Speaker 3

to be

Speaker 2

updated? We're not ready to update that yet because we were We've got a game here less than a year ago from the accelerated growth that we had, as we are more or less ahead everybody expected. Yes, this year we've given some back. And yes, we still got a few years to go. We need cell and gene therapy to light it up.

Speaker 2

We need Facially keeps going in double digit and we need Exosome to remain in 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 sound gene therapy to hit that number is 50% growth We're about there in the protein stuff and we're well exceeding that in exosome. Spatial needs to be solid double digit as well. I'd say we're a little behind, we need to be there.

Speaker 2

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 in Wolf and Wolf, that whole area is a big kicker and icing on And a lot of stuff takes 10 years. We're just A lot of things are going to take a while to develop, but they really hit their stride 3, 4 years out.

Operator

Thank you very much. This concludes our question and answer session. I would now like to turn the conference Back over to Chuck Kometh for any closing remarks.

Speaker 2

Well, great. Thanks everyone for attending. I'm glad that we kind of Expectations set last quarter and a little better on the bottom line. And I can say we're in great shape looking forward in this quarter. The team is in great shape.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Bio-Techne Q3 2023
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