Bio-Techne Corp

Good morning, and welcome to the Biotechni earnings conference call for the first quarter of fiscal year 2020. At this time, all participants have been placed in listen-only mode, and the call will be open for questions following management's prepared remarks. I would now like to turn the call over to Mr. David Clare, Biotechni's Senior Director, Corporate Development. Please go ahead.

Good morning, and thank you for joining us. On the call with me this morning are Chuck Cometh, Chief Executive Officer, and Jim Hippel, Chief Financial Officer of Biotechni. 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 2019 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 as a result of any new information or future events or developments. The 10-K, as well as the company's other SEC filings, are available on the company's website within its investor relations section. During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to most comparable gap measures are available in the company's press release issued earlier this morning on the Biotechni Corporation website at www.bio-techni.com. I'll now turn the call over to Chuck.

Thanks, Dave, and good morning, everyone. Thank you for joining us for our first quarter conference call. We started fiscal 2020 on a strong note with our first quarter organic revenue increasing 13% year over year. continuing the double-digit organic growth rate we delivered in fiscal 2019. The double-digit growth was brought across our product segments and geographies with proteins, antibodies, Simple Western, and RNAscope platforms performing exceptionally well. Also rebounding from last quarter, our OEM diagnostics tools business contributed to double-digit growth. As we look at our performance by geography, I will start with Europe. In Q1, organic revenue increased over 10% for the quarter. As expected, the headwinds we faced last quarter normalized and contributed to the strong performance in the quarter. Recall that the timing of a large order from a European customer was one of the headwinds we experienced in this region last quarter. During Q1, we received this order. Excluding this large order, our European growth was in the high single digits, and this is our expectation for the remainder of fiscal 2020. The initiatives the European team have put in place over the past several years continue to positively impact the business, creating synergies across divisions and implementing creative ways to make it easier for our customers to do business with us. We believe these efforts create the foundation for continued European growth ahead of our industry periods and quarters to come. That said, the popular view regarding Europe is fairly bleak about an economic slowdown there, so we will continue to monitor Europe closely for any signs of weakness. With regards to North America, organic growth was also north of 10%, driven by particular strength in biopharma. There's been a lot of effort dedicated to our digital market strategies, including the continual enhancements we make to our website, which allow customers to do complex product searches and find solutions for their research needs. However, our digital marketing efforts go well beyond our website, with our search engine optimization efforts increasing brand visibility and driving traffic to our website. These efforts are translating into double-digit increases in our biotechnology web traffic, which correlate very strongly with the double-digit revenue growth we have been seeing, especially in our antibody and protein portfolios. We view these digital market initiatives as a key component of our forward growth strategy and are very pleased with the continued progress through this important channel. For China, organic growth was nearly 20% for the quarter, with continued strong performance in both our reagent and instant products. The life sciences industry is still a high priority in China's five-year plan, And we continue to be well-positioned in spite of any local competition and still very underpenetrated in our key growth platforms. Now let's dive a little deeper into the performance of our growth platforms, starting with those within the protein sciences segment, which grew 13 percent organically for the quarter. As I've already indicated, antibodies and proteins performed extremely well for us in Q1, with both product categories growing in the mid-teens in the quarter. In addition to our digital marketing efforts, we recently began the process of validating a growing number of our immunohistochemistry antibodies, using the ACD-branded in situ hybridization and gene editing platforms, leveraging a transcriptomics approach to providing high-quality, validated IHC antibodies for researchers. This initiative leverages a cross and organizational synergy between our reagents solutions division, our genomics division, and our recently acquired Bemagen technologies. For background, as the number of antibody suppliers has increased over the years, the process of validating the quality of numerous antibodies from various suppliers has become increasingly more challenging for customers. There are no rules or quality standards that an antibody reseller must abide by before selling an antibody. Customers are increasingly asking for assurance that an antibody has been tested and shown to be specific for cells known to express the protein in question and not bind to cells where the gene editing, excuse me, where the gene encoding a specific protein has been knocked out. We anticipate this mulctomic approach to antibody validation to distinguish the quality of R&D systems and Novus Biological brand antibodies from our competitors provide superior service to our customers and ultimately benefit our antibody sales. We also continue to position ourselves as a tool provider for the coming wave of cell and gene therapies. While still a relatively small portion of our business today, cell and gene therapy will be a very important growth driver for our company in the years to come. With our GMP proteins, polymer B technology, non-viral vectors, and instrumentation to automate process and product monitoring, we can now supply a significant portion of the cell and gene therapy workflow. This potential is already evident in our GMP proteins business, where we experience growth over 100% in Q1. We broke ground in our new GMP-dedicated protein factory in a quarter, and we will be ready to provide GMP proteins in larger scale to our cell and gene therapy customers by the second half of fiscal 2021. Moving on to our instruments portfolio within Protein Sciences, where the Simple Western platform continues to be the star of the show. With an installed base of over 1,600 worldwide and growing double-digit, we saw consumable growth from these instruments that was over 40% higher than last year. Further evidence that these instruments are quickly achieving market acceptance. They are not just getting installed, they are getting used. As I mentioned in my opening comments, our growth in Q1 was balanced between both of our operating segments, with the diagnostics and genomics segment also growing double-digit in the quarter with 16 percent organic growth. Here, the OEM diagnostics tool business returned to double-digit increases in nearly all of its major product categories, including clinical controls and specialized reagents. As expected, the OEM order timing was more positive in Q1 than it was in the last quarter, Q4. Also, our glucose controls business stabilized in the first quarter of our fiscal year with sales relatively flat year over year. Going forward, we expect this division to be at least a mid-single-digit grower for all of fiscal 2020, with possibly higher growth in future years as new diagnostic instrument platforms and assays by our OEM customers come online. Also, within the diagnostics and genomics segment, RNAscope continued with its growth recovery, with sales increasing over 20 percent in Q1. During the quarter, we released the RNAscope HyPlex assay, which enabled researchers to gain greater insights into cellular mechanisms and functions by combining a simple workflow with the capability of simultaneously detecting up to 12 RNA targets. The HyPlex assay is particularly well-suited for spatial genomic studies, with the assay requiring minimal sample preparation while delivering high performance and preserving the morphology of precious tissue samples. It is still early in the RNA scope HyPLEX assay launch, but we believe this will be another growth driver for our genomics portfolio. Now, let's discuss our liquid biopsy business, exosome diagnostics. Of course, the big news here in Q1 is that NGS, our Medicare administrative contractor, issued a final local coverage decision, or LCD, covering epi for men who are being considered for an initial prostate biopsy. This major reimbursement milestone is effective for epi tests administered for Medicare beneficiaries on or after December 1, 2019. Importantly, with this final SLD-LCD, more than 60 million Medicare beneficiaries will now be covered for the EPPI test. During the quarter, we also made progress with private payer coverage of EPPI. We currently have nearly 30 commercial plans contracted for EPPI as well as 38 states covered under Medicaid. We expect a recent Medicare coverage decision to drive increased awareness of EPPI within the private payer community and look forward to updating everyone on additional contract wins going forward. Following these reimbursement and regulatory milestones, we are positioned for an acceleration in epi volume. While test counts in the most recent quarters were 34% higher than last year, we used the seasonally slower summer months to revitalize our marketing message and strengthen our sales leadership so that we are well-positioned to garner doctor-patient acceptance of the epi test as a viable alternative to potentially unnecessary prostate biopsies. With over a million unnecessary prostate biopsies performed every year just in the U.S., we couldn't be more excited about serving what has been until now a very unmet need. In summary, we are off to a great start in our fiscal 2020, the second fiscal year of what we intend to be many years of double-digit growth. Our core reagent portfolio is performing at its best in over a decade, while our adjacent proteomic and genomic analytical tools are still ramping in very under-penetrated markets. Meanwhile, our liquid biopsy and cell and gene therapy platforms are still in the pregame show of what we believe will be a long nine innings with many home runs. That's the strategy we are marching to, and I'm very proud of the biotechnology team and their accomplishments to date. With that, I will turn the call over to Jim.

Thanks, Chuck. I will provide an overview of our Q1 financial performance for the total company, as well as provide some color on each of our segments. Starting with the overall first quarter financial performance, adjusted EPS was $1.06 versus 98 cents one year ago, with foreign exchange negatively impacting EPS by 2 cents. Gap EPS for the quarter was 37 cents compared to 45 cents in the prior year. The biggest driver for the decrease in gap EPS was the change in fair value or investment in chemocentrics, which negatively impacted the gap reported number by 26 cents. Q1 reported revenue was $183.2 million, an increase of 12% year-over-year, with organic revenue increasing 13%. First quarter reported sales included a less than 1% growth contribution from acquisitions and a 1% unfavorable impact from foreign exchange translation. By geography, the U.S. and Europe both grew north of 10%, while China grew nearly 20%. As for the rest of Asia, organic growth was in the mid-teens. By end market, which excludes Asia and our diagnostics division, biopharma increased in the low teens while academia increased in the mid-single digits. Moving on to the details of the P&L, total company adjusted gross margin was 69.5% in the quarter, compared to 72% in the prior year. The decrease was due to unfavorable product mix, some factory absorption timing, and to a lesser extent, the impact of recent acquisitions and foreign currency headwinds. Going forward, we expect adjusted gross margins to be comparable to fiscal 19. Adjusted SG&A in Q1 was 29% of revenue, relatively flat compared to the prior year, where volume leverage was offset by additional SG&A expense from acquisitions, as well as investments in our core business to support growth. R&D expense in Q1 was 8.8% of revenue, 30 basis points lower than the prior year, primarily due to volume leverage. Recall that the exosome diagnostics acquisition closed at the beginning of August 2019, so our Q1 2019 included only two months of related exosome diagnostic expenses, whereas Q1 2020 included three months of their expenses. The resulting adjusted operating margin for Q1 was 31.8 percent, a decrease of 210 basis points from the prior year period. However, excluding the extra month that exosome was included in our results this year, as well as a negative impact of foreign exchange, adjusted operating margin was flat to last year. Looking at our numbers below operating income, net interest expense in Q1 was $5 million, relatively flat with the prior year period. Our bank debt on the balance sheet as of the end of Q1 stood at $486.1 million, down from $505.2 million at the end of Q4 2019. Other adjusted non-operating income was essentially zero for the quarter compared to 0.8 million of other expense from the prior year quarter, primarily due to differences in transactional foreign exchange. For GAAP reporting, other non-operating includes unrealized losses from our investment in chemocentrics. Moving on down to P&L, our adjusted effective tax rate in Q1 was 21.9%, and we expect the adjusted effective tax rate to remain in the range between 21% and 22% for the remainder of the year. Turning to cash flow and return of capital, 40.5 million of cash was generated from operations in the first quarter, and our net investment in capital expenditures was 10.5 million. 12.2 million of dividends were paid out in the quarter, and average diluted shares to 39.3 million shares outstanding. Next, I'll discuss the performance of our reporting segment, starting with the protein sciences segment. Q1 reported sales were 141 million, with reported revenue increasing 12%. Organic growth was also 12 percent, with foreign exchange having an unfavorable impact of 1 percent on revenue growth and acquisitions contributing 1 percent to revenue growth. As Chuck previously described, the growth in this segment was very broad across almost every major product category and geographic region. Operating margin for the protein sciences segment was 42.2 percent, a decrease of 100 basis points year-over-year due to unfavorable mix and factory absorption, and to a lesser extent, unfavorable foreign exchange, and the recent gene acquisition. Turning to the diagnostics and genomics segment, Q1 reported sales were 42.6 million, an increase of 16 percent from the prior year. Organically, revenues also grew 16 percent, with a 1 percent growth contribution from the extra month we owned exosome diagnostics this year, offset by a 1 percent unstable impact from foreign exchange translation. As Chuck mentioned, the contribution to growth in the segment was fairly balanced in the with OEM diagnostic orders swimming quite favorably compared to last quarter, our more run-rate hematology controls business growing double digits, and our genomics division continuing on its track back to consistent double-digit growth. Going forward, we anticipate less volatility from our OEM diagnostics business and anticipate mid-single-digit growth in this division for both next quarter and the full fiscal year. With regards to exosome diagnostics, and as I stated in prior calls, Revenue from epi tests performed is being recognized on a cash basis. This is the correct accounting treatment given its recent commercial launch and relatively low penetration of contracted payers. For patients insured by non-contracted private payers, the appeals process for payment by either the insurer or the patient can be quite long. Thus, the revenue from epi recorded in our Q1 results was rather minimal. As Chuck mentioned, we received the final favorable local coverage decision from Exosome Diagnostics Medicare Administrative Contractor, NGS. After December 1st, we anticipate submitting claims to Medicare for tests on covered patients. We do expect there will be a 30-day lag between our submission of claims and the receipt of Medicare cash payments, implying a minimal Medicare contribution to our fiscal second quarter epi revenue. Despite the favorable final LCD, we will continue to recognize Medicare revenue on a cash collection basis until we have a sufficient history of claims paid. We currently expect a switch from cash to accrual revenue recognition for Medicare claims to occur sometime in early fiscal year 21. Moving on to operating margin for diagnostics and genomic segment, at 2.1 percent, the segment's operating margin was down from 6.9 percent reported in the prior year. The decrease reflects the extra month of exosome diagnostics expenses compared to the previous year, partially mitigated by strong volume leverage from the rest of the segment. Excluding the dilution from the extra month of exosome diagnostics, Q1 operating margin for the segment was 9%. In summary, Q1 has played out consistent to the full-year guidance we gave at the end of last fiscal year. As a reminder, we discussed on last quarter's call that our plan was to grow organically this year in the 10% to 12% range and hold adjusted operating margins relatively flat while investing in our cell and gene therapy strategy. We also explained the impact that the extra one-month ownership of exosome was likely to have on our year-over-year margin in Q1, followed by sequentially improving margin in the quarters that follow. And finally, we pointed out the unfavorable impact that foreign exchange was likely to have on the year exchange rates. We were very pleased with the strong start we had to the fiscal year. However, we were helped by some of the timing of the large annual European order that Chuck talked about in our protein science segment as well as the favorable OEM order timing in our diagnostics tools business. Thus, even though we started the year with 13% organic growth, we are still anticipating the four-year 10% to 12% range. We also still expect our adjusted operating margins for fiscal year 20 to be relatively flat to fiscal year 19. Going forward from Q1, the impact of excess on diagnostic expenses not being included in our baseline is behind us. At current exchange rates, we expect the unfavorable impact from FX that we realized in Q1 to continue for the remainder of the fiscal year. And even though much of our planned cell and gene therapy investment is still ahead of us, we expect to sequentially improve adjusted operating margins the remainder of the year. That concludes my prepared comments. And with that, I'll turn the call back over to Nicole to open the line for questions.

Thank you. Ladies and gentlemen, if you'd like to ask a question at this time, please press star and then 1 on your touchtone phone. If you are using a speakerphone today, it may be necessary to pick up your handset or depress your mute function before making your selection. Again, that is star and then one. We'll take our first question from Puneet Sudha with SVP Lyrinc.

Thank you. Hi, Chuck, Jim. A strong quarter here. Just wanted to get a view from you and what are you hearing from your biopharma customers overall? As we head into the end of the calendar year, just give us a sense of what the demand flow is looking like and overall, what's the expectation here? You commented a little bit about Europe. I would love to get more of a longer-term trajectory, how you're thinking about Europe and overall the business in North America, and then I have a few follow-ups.

Sure. Sure. Well, I'll start with the worst of the packs, probably Europe. And it's kind of a wait and see. So even though, you know, we started seeing some softness last quarter, we had a really, really good quarter with Europe. But it was – there were a couple anomalies, as we pointed out. I think high single digits for the full year is probably still the expectation. We could do a little better. We'll see. The instrument side of our platforms there is the biggest suspect. I think we're very strong on the reagent side and overall looking good. Asia is looking really strong for instruments, and I think it's probably part of the buying cycles there as well, that we see really no shift or anything coming down off, especially in China. Things are looking really good. And the U.S. is kind of steady as she goes. So we've been pretty stable in the U.S., and with the good news from NIH funding that just came out last week, I expect that next year should be okay as well. But on the academic side, helping out the biopharma side, but pretty steady. I think, and we try to put some commentary in around our search engines and our web, and I think, you know, we just came off of a very, very strong neuroscience show. We had more leads the first day than we had the entire show last year. So, you know, our booth has really come a long way. We've got all our platforms, our brands all showing up together now. It's creating an awful lot of interest, and the web keeps providing more. So I think that is That is helping fuel the way for a continued strength in the U.S., which has been double digits here for a while. So that's kind of the way the three regions shake out for the instrument side of things as well as everything else. So pretty good. I think Jim was right on. I think 10 to 12 is where we kind of peg the year. If we get a really good EXO launch here, we'll see. It could be better, but that's probably the range we're looking at to be safe.

Okay, great. On the facility build-out, it's great to see that kicking off. But what's the expectation here for gene and cell therapy workflow products two to three years from now? And I wanted to get a view from you on what are some of the pieces that you would still like to add into this gene and cell therapy workflow to enhance the product offering to the customers?

Sure. So as you know, we're looking forward with our cell and gene therapy workflow to be the non-viral methodology. What's specced in now to almost everything in clinicals is a viral method. We'll be supplying GMP proteins for that method. So we'll be getting business right out of the chute as we are today. And we had 100% growth in Q1 with our proteins. So we're looking good there. The factory by itself for GMP proteins is we're building it to $140 million plus. in five years of productivity. It probably has expansion capabilities very easily to $200 million of proteins. We probably will take more than five years to get to that level of just proteins. So from that respect, we kind of look like a mini CDMO. But there's the rest of the workflow, you know, with the beads, you know, and with the Beamogen technology, you know, for gene editing. We have more than one, you know, instrumentation platform for analysis, both in cell imaging with the AC technology as well as our simpleplex amino assay for call it QC testing, if you will. So all told, it's a pretty strong workflow. We still are looking for more areas to fill it out. I think we don't have a leukophoresis instrument to tie it all together. We have certainly relationships that we're working on to try and collaborate to get that part pulled into the workflow. That's probably the most critical piece, I think, the box, so to speak, the sterile box that ties it all together. The bioreactors, of course, are important. We have a very strong relationship locally with that, and we have more than one. And we have a bit of a secret weapon for that whole part of the workflow. We have a product we've had for four or five years called ProDots. We're able to actually lyophilize our proteins into small, dry components, and they can be shipped within the bioreactor or positioned with that workflow for reconstitution in a sterile environment with no loss of bioactivity. So this is really unique to us. We have IP in this area as well. And we are getting eyes wide open when our customers in preclinicals have seen this approach and they want it. So we think we have a lot of things to offer that nobody else will have for the whole workflow. I think like you kind of implied, it's going to take two or three years to get to that point. We're in a bunch of preclinicals now, which will then lead to clinicals, and it'll grow from there. But this is a five- to ten-year kind of strategy, and it's going to take a while to get to that level. But, hey, whoever thought, we're going to be able to more than double our protein business, and we've been 30 years at it. So I don't mind taking five years to double it.

That's great. Thanks. And if I could just squeeze one more in. I wasn't sure if you already provided it. What's the revenue expectation around Exosome for the fiscal year and now that you have Medicare? And could you talk about the plans for FDA or next steps now that you have breakthrough designation for EPI?

Yeah, we've done the first submission, and they've come back with a long laundry list of questions, as expected. So we were not even able to give a date when it will be finalized for FDA, but under a year for sure, but it's going to be a few months at least. for that. But we're in process, and the FDA breakthrough staff gets us that help from them directly that they promised. So they are helping. So we'll see what happens with that. In terms of revenue, right now we're trying to figure out where to reach back to for our first submissions for tests previously done. We're trying to figure out what that date will be. It'll be in months and no longer than a year worth, so we're not prepared to give a number on that. But it'll be millions of dollars worth of potential, but there's no guarantee. Going forward, it's 40% to 50% of the tests, and you kind of had that number and that ramp, so you can't kind of guesstimate of what we're going to be submitting. And those, once we get everything greased here with CMS, which I promise will be December 1, that's a 30 days to pay kind of future, and then we'll go to accrual next summer probably at that, so after that amount of time frame. Revenue, you've seen the numbers. I mean, we need a full year to get to a $30 million total and a run rate to about $50 million. And at that point, we're probably a break-even. That's going to be a 12 to 18-month kind of timeframe, we think. But it's early, Puneet. We don't really know yet. We've got to see how this does ramp. We've got to see how we execute. We've taken a long time here in the last few months to upgrade our marketing and our sales groups. And we're still hiring. It takes six to nine months for the new people to really get in the groove. We just hired out in New York, so we won't be getting a whole lot of traction in New York for probably another three to six months. You know, it all takes longer than you want. But, you know, we're nearly the only game in town. It works the best of anything out there. You know, we got this thing from start to finish through NGS in two years or so, which they tell us is a record. It felt like a long time for us, but, you know, we'll see how it ramps. But... I think getting to a level of revenue that we've talked about is certainly more than just plausible, so we're excited to try and feed this beast as we go forward from December 1st.

Okay, thanks, Chuck.

And we'll take our next question from Catherine Schulte with Baird.

Hey, guys. Thanks for the question, and congrats on the quarter. First, on that epi-Medicare look-back topic, how have your discussions with NGS gone, and when do you think you'll find out if you'll get those retrospective payments or not?

You just don't know. There's no precedent, as you know. There's no real rule or law around it. It really is up to them what they feel is appropriate and fair, and we have to decide also what date to go back to, and we can make it more problematic for us to get anything by the farther back we reach. So we're trying to pick a fair position where there's no dispute, no doubt. And you've got to remember, when you start out, this kind of thing. You're starting out with salespeople with unclear practices and processes and data. And we don't want anything nebulous about what we're asking for. So we're going to pick a safe date where we have from a point where our processes are really clean and perfect and we have great data and great outcomes. And so there's no dispute. We're trying to figure that out, but it's going to be, you know, we think at least six months' worth, and that should be, you know, that should be a few thousand tests, so we'll see. And I hope they're generous.

Okay, and then for the upcoming quarter, you have a pretty tough stacked comp in protein sciences. What's your view on that segment next quarter, and what are you assuming in terms of a calendar year-end budget flush there?

Yeah, we're not hearing much right now of a budget flush. I mean, the news that just came out for looking forward of NIH funding is kind of a record. It looks really good. So we're excited about this coming year coming forward for academia. As I mentioned in my previous answer, I think things are pretty steady as she goes with the rest of the business. We'll see how all our processes drive execution, but like you said, it's a tough quarter. We're coming into a quarter with a really good one for us last year, and we don't think we're going to let anyone down horribly here, but, you know, it's going to be a tough quarter. We've got to execute, and that's the way this business is, right? When you're staying, you want to be sustainable and be double-digit every quarter going forward. They're never easy anymore, so.

All right, and then last one from me. Can you just give us an update on the general environment that you're seeing in China, and what are you expecting for growth there for the full year?

Yeah, north of 20% for sure. And we're trying to figure out ways to really be at 25. So I think we'll be between 20 and 25. Things look pretty good. The fifth year is kind of concluding there. There will be a bit of a budget flush there. I think all the pull forwards and all the trauma, drama around tariff, I think is behind us, even though we don't have a lot of tariff impact anyway. And, you know, I think it's steady as she goes. We still aren't that big in China. So it's just, We're very under-penetrated and it's led by institutions, hundreds of them that are more or less led by U.S. Chinese citizens that know our brands and went to school here and grew up with R&D systems in the lab. So we're all over it. And it's been just very stable and very solid since the day I got here over six years ago, really. We're up to now 150 people plus in China. It was a dozen when I joined. So, you know, we're becoming, you know, a real company there. I made a comment to some groups last week. When I joined, our MD and our head of HR were the only ones that spoke English, two. And trying to hire people for a company that's a dozen people and $10-ish million, it's hard. The multinationals grab all the great local talent that are bilingual. And we're now past that. We've crossed that hurdle. Most of our people who we're hiring these days are and they not only speak English, they're coming from the multinationals. They've grown up and they've been trained by somebody else and are wanting to come on board because of our underpenetration, our growth, our great platforms, the synergies they see, and the epic culture we're trying to instill in every subsidiary we have around the world.

Great. Thank you.

We'll take our next question from Alex Nowak with Craig Hallam Capital Group.

Great. Good morning, Chuck and Jim. Thanks for taking our questions. This is actually Will on for Alex today. You know, Chuck, biotechnology has built a huge catalog of products and resources for life science researchers. You know, as you move into the GMP-grade protein production, how can you leverage these existing products and resources to make you successful in the emerging cell and gene therapy area? You know, to ask the question another way, Is this another leg to the stool that needs to be added, or can you leverage pieces of the existing businesses in this new growth area? Thanks.

Well, we don't need a very big catalog because we're talking probably about 10 products. As you know, our problem right now, even though we're experiencing 100% growth in our GMP protein business, we're set up here for research. We're the research leader in the world. We have thousands and thousands of products and thousands of just proteins. And so we're spread a mile wide and an inch deep, and that's the fundamental issue. We have amazing quality and we have amazing processes here, but it's not really GMP qualified because we can't make big enough batches to really operate for a production-type environment for a CDMO. So they've all been through. They love us. They love what they see, but you've got to be able to make more of it is what we hear. And so we bought this factory. We're building it out. And we'll be making what the world's looking for for the next generation GMP proteins, which is the food that these cell therapies are eating, basically, and using to improve their yields. You look backwards, the spec is kind of IL-2. Everybody can make IL-2. It's not a difficult protein to make. It's one of the first ones discovered and discovered by this company. Looking forward, we're looking at much more complicated proteins as the science gets stronger. And we're looking at IL-7, 10, 15, and others that we think will position us as the supplier of choice. As you start moving towards more complicated proteins, we're the ones that are going to be able to make the best and make the highest quality with the best yields, with the highest bioactivity. So we think the future kind of comes straight at us. It's kind of ours to lose as the number one protein producer. you know, science manufacturer in the world. And that's what we're building this factory. It won't be a large catalog because it really, that's not the way GMP proteins work for cell therapies. It's more of a select set. So it's going to be much more about what flavor of an IL-10 do you provide, what kind of quality, what kind of bioactivity, what kind of yield your customers get with their cell therapies with your protein. That's the name of the game.

Got it. Thanks. Appreciate the call there. That's interesting. And then, you know, just what's the update on the ACD partnerships with Leica? And if you could just talk on the next ACD tests and the pipeline and, you know, timing for some launches there. Thanks.

Yeah, so we used to talk more about the pipeline, and they've kind of guided us against that. So they have a good half a dozen things they're working on. There's a lot of things. A lot of them are smaller, orphan-like, but they're very big unmet needs. The current business, the HPD test, is growing quite well. I mean, it's strong double-digit growth. We're very happy with... with how they're really, you know, prioritizing it. So I think our new management team, led by Kim Kelderman, I think has helped a lot. You know, he comes from running genomics for Thermo Fisher, has strong relationships in the industry. So he's helped a lot with moving up the food chain, so you speak, in the Danner organization to try and, you know, get more priority on us. And that's worked very well. So I think we're looking forward to be hopefully working with them on a number of things. They're not the only game in town. Ventana, you know, Roche is also more and more interested in working on things with us. And we're, you know, we're a ubiquitous platform. It's a kit technology that can work on multiple instrumentation platforms. So, you know, we're out, you know, working all the issues there. And it's so far so good. It's still largely an RNA, you know, scope game. RUO-based business right now. And the diagnostic side is still less than 10% of it. But if you give us five years, it'll be much more than that.

OK, great. Thanks. And then congrats on the final LCD for epi. I just have one more question. Do you have any updated plans to kit this product, as well as roll out other exosome DX-based tests in either a lab or a kit format? Thanks.

Well, we'll get the FDA breakthrough status, and that'll help us. That'll give us more freedom to do a lot of things, plus create a lot more credibility with the private payers and such, but we don't see any real need to kit it out at this point. It could be that someday, but there's plenty of uncharted territory for us right now to not worry about that. And you've got to remember, we're also working now on taking in patients and starting studies around the bladder indication and And we've got kidney rejection ready to go. And we have validated tests ready to go to clinicals with somebody who wants to work with us on the blood side for lung and for breast. So we've got a strong pipeline with this platform that we don't have to address any kiddable version of it right now. There's enough to do. Great. Thank you.

And we'll take our next question from Paul Knight from Janie. We're unable to hear you. Please check your mute function.

Hey, Chuck. Paul Knight.

Hey, Paul.

How are you doing? Good. Could you talk about your GMP production facility expansion, specifically timing, but also will this be a footprint where you can add additional capacity around it once the initial investment is made?

Yeah, and as I mentioned earlier, some of that answer, but to expand on it, it's a 50,000 square foot facility. We bought a building so we could save a year from doing a greenfield somewhere else. That was the main reason we bought one. We bought it in St. Paul proper. It was an absolute awesome facility for the way it's laid out for us. So we really just got to fill it with our stuff, which is most of the money. As you know, this stuff's expensive to put in there with the large reactors, all the sterile piping, the in and out rooms, the clean rooms. It looks like a small pharma factory, right? It's a bioprocessing factory is what it is. It is ready to go on phase one to roughly $140 million of the capacity at today's kind of pricing goals. And with expansion, easily to 200 million if we need to. There's plenty of room still in that 50,000 that we've not utilized. We'll be able to even do other things there too. There's possibly other reagents we could work on there, some antibodies possibly. There's stuff we're looking at. But there's also some room on the site land-wise that we can build out if we need to. So this thing could be really big for us, and we don't have to worry about buying another one for quite some time.

And then regarding Protein Simple, your 1,600 placements, is your pull-through going up? Could you talk about where you think you are in market penetration as well?

Well, we're 10% or less in penetration, we feel. We seem to, no matter what's going on with instruments or whatever, being Simple Western has just been knocking on the park quarter after quarter. I think it's because we have more than crossed that chasm. and it's still very under-penetrated. We are bringing back into the fold a lot of big pharma customers that have walked away from a Western blot as a process, and going back to this again, because this works so well, it's so fast, it's so reliable. So we're actually expanding the market again, I think. 1,600 is a good number, but it's roughly, if you look at it as compared to what imagers are out there, it's less than 10% of installed imagers in the world. So we think there's a long way to go. We still have a good split between biopharm and academia. I think we're not done until we really see people leaving college with this is how they learned how to do Western blot. When this is the methodology that's taught in schools and becomes a standard, we'll know that our job is done. And we're a few years off from that. OK. Thank you. We have no competition with this, Paul. It's the only automated Western blot platform out there. And we see nothing on the horizon.

Do you have to keep adding to the library with your antibody probes?

You mean in terms of Westerns?

Your reagent kit?

Yeah. So we're always adding, right? So we add roughly 1,500 new products a year. It's split out between antibodies, assays, and proteins each and every year. So we're the company people look to for the newest, hardest to make bioactive proteins We've always been the ELISA leader, and we still crank out new ELISAs every year. We are pushing the envelope on other assays, especially multiplexing. So we're trying to extend that category as multiplexing becomes more and more of a standard. And antibodies, we supply a lot through Novus. We have in our catalog over 300,000. We make over 20,000, our cells. But as you know, antibodies come in all different applications, Westerns, to Flow, to whatever. We're the largest catalog game in the world. We're not the largest provider, but we're in the top five. We've seen double-digit growth for quite a few quarters now, and we're enjoying it, and we think it's going to continue. Thank you.

We have no further questions at this time. I would like to turn the conference back over to Chuck Cummins for any concluding remarks.

Well, As our analysts move around to different companies, we're expecting a few more analysts coming back online in the next quarter or two, so that'll be good. But we've enjoyed all your questions, and we're here today and the rest of the day and tomorrow for other calls and one-on-ones. And reach out to David Clare if you have other questions you have. But other than that, we'll check in with all of you again next quarter. Thank you.

And once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.