Bio-Techne Corp

Good morning and welcome to the Biotechnics Conference call for the second quarter of fiscal year 2020. At this time, all participants have been placed in a 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, Biotechnics Senior Director, Corporate Development.

Good morning and thanks for joining us. On the call with me this morning are Chuck Cummins, Chief Executive Officer, and Jim Hippel, Chief Financial Officer of Biotechnics. 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 per performance. Tables reconciling these measures to most comparable GAAP measures are available in the company's press release issued earlier this morning on the Biotechnic Corporation website. at www.bio-technique.com. I will now turn the call over to Chuck. Thanks, Dave, and good morning, everyone. Our organic revenue growth in the second quarter increased 6% year-over-year, although adjusting for the impact of certain timing headwinds, our underlying organic growth was closer to our year-to-date growth of approximately 10%. In Q2 of FY19, we experienced some large favorable growth ordered from a handful of BioPharm customers who were launching clinical and or preclinical drug trials. These large orders mostly impacted our protein sciences segment in Europe, and were for reagents, assays, big box instruments, and related royalties that did not repeat again in Q2 of this year. However, our end markets remain strong, with our day-to-day retail reagent Munrate business growing north of 10%. Our genomics RNA reagent Munrate business growing north of 10%. Our genomics R&A school business still growing north of 20%, and China also continues to grow over 20%. Also, our team performed operationally very well in Q2, with adjusted operating margins expanding year-over-year ahead of schedule, and we reported record operating cash flow. I will cover the details for the quarter. Be healthy with organic growth in the mid-single digits. All-time growth in the region was low double-digit, while academia grew mid-single digits. What brought the region's overall growth rate down was the timing of royalties from our few OEM customers. Including a one-time catch-up of royalty payments that benefited the prior year quarter. Excluding the royalties that had an impact, growth in the region was over 10% Q2. Our digital marketing efforts continue to bear fruit, especially for our retail antibody and protein portfolios, with websites driving a double impact across our brands, including over 20% increased traffic to our Novus website year-to-date. We're implementing several initiatives to get customers to spend more time on our website and add items to their shopping carts once they visit us online. Search engine optimization and continual refinement of our website and digital marketing strategy remain a strong lever for growth for the company going forward. Separately, we continue to strengthen our presence at industry trade shows, showcasing our products and technologies at our expanded and redesigned biotechnic booth. We have strong customer interest in our reagents and instrument solutions offerings at the 12 trade shows we attended in Q2. And we have eight additional industry trade shows on the calendar for Q3, including AECR and AEI conferences, taking place in April and May, respectively. These trade shows represent a key part of our marketing strategy and generate significant marketing. In fact, our leads have increased 75% upon the new investment this past year. Moving on to Europe, which was the largest drag on our growth in Q2, down approximately 1% organically from the prior year. Excluding the timing headwinds that impacted Europe, The underlying organic growth in the region was in the mid-single digits, which is the same organic growth rate for the first half of FY20. Not bad, but even lower than what our company has been accustomed to performing during the past couple of years. The team in Europe will be redoubling its efforts in the second half of FY20 on the cross-selling activities of double-digit growth for the better part of the last two years. Our key growth platform is such as Simple Western, Simple Flex, and R&E School in the European market. In addition, we will be supporting the sales effort in Europe with more of the digital solutions practices that have driven the success of double-digit growth we've seen in our North American retail reagent businesses. Thus, we are expecting Europe's sales to go faster in the second half of FY20, with growth rates at the target of a high single-digit level. Finally, we have another good quarter in Asia. China especially continues to perform very well with another quarter of more than 20% growth. The growth was broad-based across our reagent and instrument products. The life sciences industry remains a high priority in China's cyber plan, and we continue to be well-positioned and very under-penetrated in our key global platforms. In the near term, the coronavirus situation will cause some disruption in Q3 with extended days for the Lunar New Year holiday and virtual quarantines in some Chinese cities. Obviously, the longer this virus disrupts their life throughout much of China, the more negative impact it will have on our growth rates for China. In the long term, it is unfortunate that instances such as this outbreak that will likely strengthen China's already firm resolve to promote heavy local investment in the life sciences space for years to come. Now, let's dive a little deeper into the performance of our growth platform, starting with those within the protein sciences segment, which was 4% organically for the quarter. As I've already indicated in my opening comments, protein sciences growth was particularly impacted by a large amount of and only in customer orders in the second quarter of FY19, as well as a significant realtor payment, none of which repeated in the most recent quarter. Depending on the customer and the application, these prior year orders were headed to our reagent instrument and role for revenue streams in Q2. Absent in specific situations, the segments are going to grow from high single digits in Q2, led by our one-rate reagent instrument consumables products growing in the low double digits of quarters. Within Protein Sciences, we recently made a very important influence in biotechnology as a leading tools and solution provider for the production of cell and gene therapies. In January, we announced the creation of a joint venture between Biotechnes, Fresenius-Cabi, and Wilson-Wolf, a consortium that can offer a complete and simplified cell and gene therapy workflow solution. We believe the combination of our collective sales and marketing efforts, enormous depth of talent, technical know-how, and industry knowledge create the potential for significant commercial synergies. By combining the novel engineering solutions offered by Fresenius-Cabi and Wilson-Wolf, With our GMP proteins, polymer B T cell activation, non-viral vectors, and acid technologies, the joint venture is positioned to disrupt the cell and gene therapy products and markets. We are very excited to get this initiative off the ground, and there's already been great interest in the cell and gene therapy community. Over the next year, while this new commercial consortium continues to draw the awareness of our cell and gene therapy solutions and placements of our products in increased clinical trials, we continue to work on our new dedicated GMP protein factory. Construction remains on track to provide GMP proteins in large scale to our cell and gene therapy customers by the second half of fiscal 2021. Now shifting to our diagnostics and genomics segment, which grew 12% organically during the quarter. Here, the OEM diagnostics tool controls business through mid-single digits overall, with growth in most of its major product categories. As expected, following double-digit growth in Q1, the OEM order timing was less favorable in Q2 than it was last quarter, although new customer wins and product launches are starting to smooth the large-quality swings in this business. Also, our genomics RNA scope continued with its 20%-plus growth trajectory in Q2. The initial Q1 launch of the RNA scope high-flex assay which enables a simultaneous detection of up to 12 RNA targets, and that's nicely in Q2. We are currently developing additional high-flex capabilities to address spatial genomic studies, targeting significant increases from our current fall-flex capabilities. Stay tuned for more product announcements. Now an update on exosome diagnostics and the XODX prostate test. There were several positive developments in Q2, and there is still much to do to make this Make sure this non-invasive prostate cancer test becomes available to all patients over 50 with elevated PSA levels who are contemplating a more expensive, risky, painful, and invasive tissue biopsy. To begin, the final LCD from NGS went into effect December 1. Since then, we have been billing Medicare for applicable patient tests since and are already seeing payments come in. However, the LCD language administered by NGS did not mirror the coverage recommended by the NCFIM guidelines. For example, the final LCD does not allow for Medicare reimbursement for ongoing monitoring, nor does it allow reimbursement for certain ethnicities and men with certain family medical issues. Of course, these populations were included in our clinical studies with outcomes consistent with the overall study. The NCCN recognized these population sets could benefit from the X of the X prostate test, and we are working to make sure NGS does too. Thus, we are currently in the reconsideration process with NGS to mirror the Medicare coverage with the recommendations of the NCCN guidelines. In the meantime, the early rate that tests meet the Medicare criteria is encouraging, and we will continue to work to expand the indication over the coming months. For X or the X profit tests administered to applicable patients, we've been billing Medicare and getting paid. We started receiving Medicare payments on submitted claims as early as late December, and the pace of payment has increased rapidly throughout January. We also made progress on the private payer front in Q2 with four more region-insured special DX profit tests on covered patients. Although the base is still relatively small, our collections from private payers increased by more than 40% sequentially in Q1. However, we still have work to do to get the large national private payer signed up for reimbursement. The national payers are taking our meetings with great interest. They are becoming more aware of the health benefit to our customers and plausible financial benefits to their bottom line by avoiding more costly biases, as well as the unintended infections that can result from them. However, they are being very careful and methodical with regards to green to reimbursed from tests. Before considering reimbursement, many large private payers want to see the results from a clinical utility study published in a peer-reviewed journal. Astrozone Diagnostics performed such a study before our purchase of the company. that was conducted in collaboration with CARES First Blue Cross Blue Shield of Maryland. This study has been submitted for publication with a peer-reviewed journal and should be released before the end of our fiscal year. Separately, we are in the process of submitting our pre-market approval, or P&A filing, to the FDA. Recall that the XODX prostate test received breakthrough device designation from the FDA at the start of the current fiscal year. It is difficult to predict the exact timing of a potential FDA approval, but achievement of this status will decent our competitive mood and allow us to have a higher priority for reimbursement from private payers who classify team-made products as higher quality. Equally important is getting paid for the XODX Profit Test is expanding the awareness of the benefits of XODX and rapidly increasing test counts performed on that location. Since the start of this fiscal year, and while we have waited for Medicare coverage, we have slowed any new commercial investment into sales marketing. Instead, we have focused on retooling our go-to-market strategy and ensuring we have the best commercial talent to execute on that strategy. Even without much new commercial investment, the number of excellent diagnostic prostate tests perform a key to the double-digit sequential Q1 as well as double-digit year-over-year. Going forward, our commercial strategy will include marketing to the patient directly in addition to urology. We want to make sure patients are fully aware of our non-invasive options available to them to assist in the determination of their risk of prostate cancer before deciding whether to proceed with a painful biopsy. We believe the best and most cost-efficient channel for awareness is biopsy. We believe the best and most cost-efficient channel for awareness is via digital marketing and the web. In Q2, we launched a redesigned exosome diagnostics website. The new website features portals for patients and physicians, scientific literature, and information on the benefits of our ExoDx prostate tests. We will be coupling this enhanced website with digital marketing efforts by leveraging the proven effectiveness of our digital solutions team's expertise to increase awareness of patient demand for XOBX. These search engine optimization and digital marketing efforts are in the early innings. We anticipate this campaign, combined with the recent regulatory reimbursement milestones, will favorably impact XOBX test volumes by creating patient demand. We remain on the pathway for growing XOBX volumes and are excited to enable men with ambiguous PSA scores to avoid unnecessary prostate biopsies. With a pipeline of additional tests, companion diagnostic applications and partnership opportunities. There are several different avenues to create value with exosome diagnostics. We have a few partnerships in place and are in discussions with several biopharmaceutical companies for potential companion diagnostic applications of exosome diagnostics technology. We also believe our proprietary exosome-based technology has broader diagnostic applications, including improving the performance of existing and pipeline tests from other diagnostic companies. In summary, fiscal 2020 remains in good shape, We delivered year-to-date organic growth of nearly 10% and are still aiming for double-digit growth for the fiscal year. Our co-reagent portfolio continues to perform very well, while our adjacent proteomic and genomic analytical tools are still ramping in very underpenetrated markets. Meanwhile, our liquid biopsy and cell and gene therapy offerings remain in the very early stages of realizing the potential, with each representing truly transformational opportunities for biotechnics. Our competitive position has never been stronger, and the team is driving toward even better execution in the second half of our fiscal 20. With that, I will turn the call to Jim. Thanks, Chuck. I will provide an overview of our Q2 financial performance for the total company and provide some additional color in the performance of each of our segments. Starting with the overall second quarter financial performance, adjusted EPS was $1.08 versus $1.06 one year ago, with foreign exchange negatively impacting EPS by 8 cents. Most of the foreign exchange impact was due to transactional effects for invoices and operations headquarters. GAAP EPS for the quarter was $3.02 compared to $0.45 in the prior year. The biggest driver for the increase in GAAP EPS was the $120.5 million combined realized and unrealized gains on our investment in chemocentrics. Q2 revenue was $184.9 million, an increase of 6% year-over-year on a reported and organic basis. Second quarter reported sales includes a 1% growth contribution from acquisitions and a 1% unfavorable impact from foreign exchange translation. By geography, the U.S. grew in the mid-similar digits, while Europe declined low-similar digits, and China grew over 20%. As for the rest of Asia, organic growth was in the low-similar digits. By end market, which excludes Asia, our diagnostics division, and other OEM customers, biopharma growth was in the upper single digits, while academic growth was in the mid-single digits. Moving on to details of the P&L, total company adjusted gross margin was 70.6% in the quarter compared to 70.9% in the prior year. The decrease was due to unfavorable product mix, foreign currency headwinds, and to a lesser extent, recent acquisitions partially offset by productivity gains. For the remainder of fiscal 20, we expect gross margin and fairly consistent with these levels. Adjusted SG&A in Q2 was 28.6% of revenues, a 70 basis point improvement compared to the prior year, with volume leverage and productivity gains partially offset by investments in our core business to drive near and long-term growth. R&D expense in Q2 was 8.9% of revenue, 20 basis points lower than the prior year primarily due to volume leverage. The resulting adjusted operating margin for Q2 was 33.4%, an increase of 90 basis points in the prior year period and 150 basis points higher than our first fiscal quarter result. Looking at our numbers below operating income, net interest expense in Q1 was $4.5 million, decreasing $1 million compared to the prior year period. The decrease was due to a substantial reduction of our bank debt during the quarter. A bank debt on the balance sheet at the end of Q2 stood at $383 million, down from $486 million at the end of Q1 fiscal year 20. Recall that Biotechne has been a long-term shareholder of Chemocentrics, a biotechnology company with a portfolio of novel therapeutics targeting a variety of orphan diseases. In our Q2, Chemocentrics reported several top-line data from its Phase III trial of the Vodka Coupon in Antibody-Associated Vasculitis, or AAV. This favorable data release drew a significant appreciation in our chemo-centric investment, and we monetized approximately $50 million of this gain. During the quarter, we applied these proceeds, as well as a portion of our strong free cash flow, to pay down $103 million of our long-term debt. Other adjusted non-operating expense was $2.5 million for the quarter, compared to $1 million of other income in the prior year quarter, primarily due to the impact in transactional foreign exchange. For JAP reporting, other non-operating expense includes realized and unrealized gains for investment in KinoCentric. Moving further down the P&L, our adjusted effective tax rate in Q2 was 22%, but we expect it to have been fairly consistent the remainder of the year. Turning to cash flow and internal capital, a record $72.5 million of cash was generated from operations in the quarter, driven by strong customer account collections and favorable premium tax payments associated with our realized gain on team of funders. Our Q2 net investment in capital expenditures was $14.6 million, mostly driven by construction of our new JMP protein factory, which is on schedule for completion by the end of the calendar year. $12.2 million of dividends were paid out in the quarter, and average diluted shares to the 39.6 million shares outstanding. Next, I'll discuss the performance of our reporting segments, starting with the protein sciences segment. Q2 reported sales were $141.5 million, with reported revenue increasing 4%. Organic growth was also 4%, with foreign exchange having an unstable impact of 1% on revenue and acquisitions contributing 1% to revenue growth. As Chuck previously described, growth in this segment was negatively impacted by last year's timing of a few large biopharma orders and OEM royalties that did not reoccur in Q2 of the current year. Absent these items, revenue from the thousands of other customers that Protein Science served increased nearly 10%. Operating margin for the Protein Science segment was 43%, a decrease of 50 basis points year-over-year due to unfavorable foreign exchange and the recent demogen acquisition. Turning to diagnostics and genomics segment, Q2 reported sales were $43.8 million, an increase of 12% from the prior year. Organically, revenues also grew 12% from the prior year. Organically, revenues also grew 12%, with foreign exchange translation having a minimal impact on revenue. As Chuck mentioned, our O&M diagnostic tools business increased mid-single digits, and our genomics RNA scope business grew north of 20%. With regards to exosome diagnostics, and I stated in prior calls, revenue from exoDx prostate tests performed continuously recognized on a cash basis. As Chuck mentioned, our favorable local coverage decision from exosome diagnostics Medicare administrative contractor, MGS, became effective for tests performed on or after December 1st. Despite the effect of LCB, we will continue to recognize Medicare revenue on a cash collection basis until we have a sufficient history of claims paid. Chuck provided a thorough update on the progress we have made on EXO-DX test ramp, public and private reimbursement, as well as the continued actions we have taken to accelerate both. While still on a relatively small base, revenues from Exosome were up nearly 60% from last year, and we expect the growth rate to improve from here. Moving on to the operating margin for the diagnostics and genomics segment, at 2.2%, the segment's operating margin improved from a negative 2.7% report in the prior year. The increase reflects favorable volume leverage and productivity gains from both our diagnostics and genomics divisions, as well as slightly less dilution from next-zone diagnostics. In summary, we believe our year-to-date performance on the top line is most representative of how the majority of our business performed in the second quarter. The commercial focus we are taking in Europe could set us up for even better organic growth in the second half of fiscal year 20. However, the situation in China with the coronavirus is a risk factor that we are unable to quantify at this time. That being said, our teams throughout the rest of the world are motivated to maximize their potential in order to achieve double-digit growth for the company's overall fiscal year. On the bottom line, our culture of success-based investing and operational prowess drove our adjusted operating margin in Q2 higher over a prior year ahead of schedule, and it drove a strong quality of earnings with record operating cash flow. We expect our operating margin to continue to increase sequentially from here just as we guided at the beginning of the year. That concludes my prepared comments, and with that, I'll turn the call back over to the operator to open the line for questions.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad, and if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that's star 1 to ask a question. We'll now take our first question from Puneet Suda with SBB Leerink. Please go ahead.