Bio-Techne Corp

Good morning, and welcome to the Biotechni earnings conference call for the fourth 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. During our Q&A session, please limit yourself to one question and one follow-up. I would now like to turn the call over to David Clare, Biotechni's Senior Director, Investor Relations and Corporate Development.

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, as well as the potential impact of the COVID-19 pandemic on our operations and financial results. The company's 10-K for fiscal year 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 GAAP measures are available in the company's press release issued earlier this morning on the Biotechnique Corporation website at www.bio-technique.com. I will now turn the call over to Chuck.

Thanks, Dave, and good morning, everyone. Thank you for joining us for our fourth quarter conference call. With the COVID-19 pandemic in full swing, we just finished the most challenging quarter in my tenure at Biotechni and perhaps the most challenging in the history of the company. Despite the challenges that COVID-19 has brought to all our stakeholders, namely our customers and employees, we persevered through the last quarter of our fiscal 2020 year by outperforming the expectations we set one quarter ago and maintaining a high level of profitability and positive cash flow. all while pivoting a large number of our technical resources toward developing products that will help our customers and society at large eventually defeat this virus. I'll cover the highlights of these initiatives in a moment, but first a high-level review of our overall results for the quarter and the fiscal year. In Q4, our organic revenue decreased by 8%, outperforming our initial expectations for a decline of somewhere between 10% and 20%. We estimate COVID-related products provided a 5% tailwind during the quarter, This tailwind came from products produced by every division in the company, which play a key role in enabling researchers to better understand COVID-19, develop therapies and vaccines to combat the virus, as well as screen and diagnose infected patients. Overall, business trends improved as Q4 progressed, with sales declines in the low to mid-teens for the month of April and May, and then improving quite significantly in June to low single-digit declines. However, the swings by end markets and regions were more pronounced. For example, academic end markets experienced a much more severe trough early in the quarter and have been slower to come back to normal. While from a regional perspective, Europe bounced back towards the end of the quarter ahead of the U.S., this makes sense given that Europe experienced the worst of the economic shutdown before the U.S. and so far seems to have more effectively contained the virus spread. As we all know, the spread of the virus and the containment tactics that go along with it is a very fluid situation. So we are not out of the woods yet. But I'm encouraged by the improving business trends we experienced exiting the quarter and into July. Given these challenging and uncertain business conditions, we kept our expenses in check, balancing our spending on growth initiatives and our commitment to keeping the biotechnology team intact with strict attention to discretionary spending. This financial discipline enabled us to finish the quarter with an adjusted operating margin of 31.1%, clearly not what we expect long-term, but respectable given the current environment. We view the virus impact on our business as transitory and remain confident in our ability to return to at least 40% adjusted operating margins as COVID-related headwinds subside and we execute in our long-term strategic plan. Prior to the pandemic, we were on track to deliver another year of double-digit organic growth in fiscal 2020. But with COVID, we finished the year with 4% organic growth. However, when our customers all eventually return to their labs and clinics, our growth pillars, namely cell and gene therapy, exosome diagnostics, genomics, RNA scope, and our portfolio of protein-simple branded instruments position Biotechni to return quickly to a double-digit organic growth profile. And now layering in the potentially long-term tailwinds from our new COVID portfolio gives us incremental confidence in our ability to return to our targeted growth trajectory. Before we update you on our key strategic growth and COVID-related activities, I do want to highlight our performance in China, As you know, COVID impacted China most severely back in February and March when government-mandated lockdowns were enforced. You will remember from our last earnings call that our China business still managed to grow in the mid-single digits during that very difficult environment. Well, I couldn't be happier to report that in Q4, organic growth in China was back over 20%. Our China team has done a phenomenal job adopting to the new normal, leveraging webinars and online meeting tools to stay in front of their customers and drive the business forward as the country emerges from the pandemic. As we start fiscal 21, we could see growth slow a bit from its Q4 pace, as resurgence of the virus has flared up in places like Beijing and Hong Kong. But over the long term, our China business remains in the early innings of its growth trajectory, and there is runway for many more years of 20% annual growth ahead. Now an update on our growth in COVID-19 initiatives, starting with the protein sciences segment and our core reagents. Our team quickly recognized the need to help our customers conduct their research in all aspects of COVID-19 and responded by ramping production of related proteins, antibodies, small molecules, and assays already found in our catalog. They also developed dozens of new products to support research of this novel virus and are continuing to do so. Within our instrument portfolio, production of our SimplePlex platform was also ramped to meet the soaring demand for other instruments, and its highly sensitive automated immunoassays that are being used to manage patient care associated with the cytokine storm syndrome often found in severely infected patients. With year-on-year growth approaching 100% for this platform in Q4, our operating teams did an outstanding job keeping up with the demand. Also, our biologics platform continued to grow exceedingly well with solid double-digit growth both in Q4 and the full year. We have high growth expectations for this platform as it continues to expand its application base from traditional biological drug production quality and control into cell and gene therapy applications. Our biologics portfolio with its sub-visible particle characterization analytical capabilities is also seeing strong interest from vaccine developers, enabling them to better understand their manufacturing and product stability processes. Speaking of cell and gene therapy, we continue to make progress on the construction of our newly dedicated GMP protein factory Construction of the facility remains on track to provide GMP proteins in large scale to our cell and gene therapy customers by the second half of fiscal 2021. In the meantime, our GMP protein portfolio continues to expand at a rapid pace, nearly 100% in Q4, which now includes a number of immune cytokines typically used to grow cells for clinical trials. During the quarter, we also launched GMP ProDots. This disruptive product allows sterile addition of our renowned R&D Systems GMP proteins to culture vessels in cell and gene therapies. As a reminder, earlier this year we entered into a commercial consortium with Wilson-Wolf and Fresenius-Kabi that offers easier access to a complete and simplified cell and gene therapy workflow solution using products from all three parties. This workflow includes Fresenius-Kabi's LOGO instrument for leukophoresis, Wilson-Wolf's G-REX bioreactor, and Biotechnics Cloud cell activation. TC-Buster gene editing, and GMP proteins. During Q4, the JV made additional progress establishing a unified sales structure, a customer-facing website and point of sale, and creating impactful marketing collateral featuring all three parents' offerings. We believe the JV is well-positioned to take share in this emerging therapeutic market. Moving on to our diagnostics and genomics segment, where I'm happy to report that we managed not to decline in revenue this past quarter, despite the COVID shutdown headwinds. I'm even more pleased to report that this segment actually expanded operating margins over last year by more than 200 basis points and increased operating profit by 20%. While our genomics products were severely impacted by the closure of academic labs, our team was able to partially mitigate this shortfall by producing and selling hundreds of RNA-scope probes for COVID-19 virus detection in tissue, allowing researchers to confirm the organs that are susceptible to this virus. Our diagnostics research division was able to deliver solid mid-single-digit growth in the quarter despite customer delays in urban controls and calibrators used for routine diagnostic tests used by clinicians. Our team was able to more than offset this shortfall by supplying specialty diagnostic antibodies and other raw materials to COVID-19 testing manufacturers. And in exosome diagnostics, we validated and launched a COVID-19 real-time qPCR test in our labs, both in Waltham, Massachusetts, and Munich, Germany. Following the implementation of processes and instruments to automate the test, we will be capable of scaling testing capacity to several hundred samples per day. This lab-developed test will provide rapid and reliable detection of patients with active COVID-19 infections, especially in the Boston area. However, exosome diagnostics also experienced headwinds related to COVID-19, as XODX prostate test volume was severely impacted by the near-complete shutdown of urologist offices. As we announced last quarter, the team responded by launching an at-home collection kit in Q4 for our XODX prostate test, enabling men unable to visit their urologist office to have access to the test and the knowledge of whether a biopsy should be prioritized. The at-home collection kit was launched with a patient-targeted marketing strategy, including search engine optimization, a Facebook campaign, and webinars to drive awareness that patients do not need to go into the urologist office to have access to this valuable test. We believe the flexibility of providing a urine sample at the convenience of the patient will be yet another key differentiator of the XODX prostate test from the competition. The response to our at-home collection kit has been very positive with both patients and urologists and already consists of more than 10% of our current test volume. The impact of the at-home test collection kit, our push-pull marketing strategy, and the gradual reopening of urologist offices has had a positive impact on our epi test volume since it bottomed in April. with June daily test counts approximately 75% of pre-COVID test monthly run rate and continue to show improvement in July. Before I turn the call over to Jim for his financial review, I want to provide an update on what could be our biggest COVID-19-related initiative to date, our co-branded R&D Systems Mount Sinai COVID Serology Assay Test. During the quarter, we announced a collaboration with Cantero Biosciences, a Mount Sinai-led joint venture, to manufacture and commercialize a serology assay based on Mount Sinai's test. This was a tremendous effort by both the biotechnology and Mount Sinai teams, condensing the typical 18-month ELISA kit development timeframe to just six weeks. This two-step serology test is a truly differentiated offering, going beyond the qualitative information provided by other COVID serology assays on the market, with the second step providing a tighter or measurement of the antibodies present to neutralize the virus. This second step completely eliminates false positives, with Mount Sinai's assay having a 100% positive predictive value, or PPV, and 99.6% negative predictive value, or NPV. To date, diagnostic activity is focused on PCR or antigen-based tests to detect active COVID-19 infections. We believe serology test volumes will increase as the second wave of testing emerges, focusing on the surveillance activities necessary to reopen the economy and to help better manage vaccination programs once available. Yesterday, Cantero Biosciences submitted a request to the FDA for an Emergency Use Authorization, or EUA, for quantitative use of our serological assay. We anticipate the EUA process to be complete in mid to late August. Cantero and Biotechni have joined forces to develop marketing materials, a branding and go-to-market strategy for the assay, highlighting the unique quantitative information provided, as well as the best-in-class performance of the assay. We are ready to launch this assay upon receipt of the EUA and have the capacity to produce millions of tests per month as needed. Also yesterday, we announced the launch of a COVID seroindex, a research use only or RUO version of the two-step serology assay. This assay is designed to meet the current vaccine developer needs for an objective measurement of immune response to a vaccine, making the test ideal for identifying the most potent vaccine candidates, determining optimal dosing, identifying the appropriate vaccine schedule, and when boosters may be needed. In summary, I'm extremely proud of the way the team responded to a challenging business environment in the fourth quarter. Our end market showed steady improvement as the quarter progressed and has continued to improve in July, with our academic and biopharma end markets reopening and our COVID-related products seeing continued traction. We are on the cusp of launching the first commercial quantitative IgG COVID-19 serology assay which has potential to answer many of the important questions necessary to reopen our economies further and push the best vaccines forward. We are entering fiscal 2021 in a position of financial strength with a portfolio of best-in-class products targeting high growth and underpenetrated market opportunities. We are ready to continue to execute in our long-term strategic plan. With that, I will turn the call over to Jim.

Thanks, Chuck. I'll provide an overview of our Q4 fiscal 2020 financial performance for the total company, provide some additional color on the performance of each of our segments, and give some initial thoughts on the pace of business recovery from the pandemic in the near term. Starting with the overall fourth quarter financial performance, adjusted EPS was $1 versus $1.25 one year ago, with foreign exchange notably impacting EPS by one cent. Gap EPS for the quarter was $1.48 compared to 42 cents in the prior year. The biggest driver for the increase in gap EPS was unrealized gains on our investment in chemocentrics this year compared to unrealized chemocentric losses in the prior year. Q4 revenue was $175.8 million, a decrease of 8% year-over-year on a reported and organic basis. Foreign exchange translation and acquisitions had an immaterial impact on our revenue. For the full year fiscal 2020, revenue was $738.7 million, an increase of 4% on a reported and organic basis. By geography in Q4, the U.S. declined approximately 20%, while Europe declined approximately 4%, as European customers shut down their labs earlier in the U.S. and then reopened them faster later in the quarter. As Chuck mentioned, China had a remarkable quarter with organic growth increasing 24%. As for the rest of Asia, organic growth declined mid-single digits, with almost all countries in some way being negatively impacted by the pandemic. By end market, biopharma declined mid-single digits, while academic sales decreased by nearly 30%. Moving on to the details of the P&L, total company adjusted gross margin was 69.5% in the quarter, compared to 71.9% in the prior year. The decrease was due to unfavorable volume leverage and mix. Adjusted SG&A in Q4 was 28.9% of revenue, a 60 basis point increase compared to the prior year due to unfavorable volume leverage. I do want to point out that our adjusted SG&A spend was down nearly $3.5 million from the prior year, highlighting our discipline on discretionary spend while keeping our teams intact with no furloughs or reductions in force. For gap reporting, SG&A expense in the current period also reflects an approximately $7 million gain on settlement of the escrow balance associated with the exosome acquisition. This is accounted for as a reduction in SG&A in Q4 of fiscal year 20. R&D expense in Q4 was 9.5% of revenue, 100 basis points higher than the prior year, due to unfavorable volume leverage and investments in COVID-19-related product development. Here, our adjusted spend was about a half million higher than the prior year, emphasizing our conviction to continue to invest in the business for the long term. The resulting adjusted operating margin for Q4 was 31.1%, a decrease of 400 basis points from the prior year period. Looking at our numbers below operating income, net interest expense in Q4 was $4.4 million, decreasing $0.8 million compared to the prior year period. The decrease was due to a substantial reduction of our bank debt during fiscal 2020. Our bank debt on the balance sheet as of the end of Q4 stood at $357 million. Our other adjusted non-operating income was $0.5 million for the quarter, compared to $0.1 million from Q4 last year, primarily affecting the foreign exchange impact related to our cash pooling arrangements. For gap reporting, other non-operating income includes unrealized gains from our investment in chemocentrics. Moving further down the P&L, our adjusted effective tax rate in Q4 was 21.4%, similar to the prior year and what we expect for the foreseeable future. Turning to cash flow and return of capital, $44.8 million of cash was generated from operations in the quarter, down 20% over Q4 of last year, and consistent with our adjusted earnings. In Q4, our net investment in capital expenditures was $17.3 million, primarily driven by construction of our new GMP protein factory, which remains on schedule for completion by the end of the calendar year. During Q4, we returned capital to shareholders with $12.3 million of dividends. We finished the fiscal year with $39.7 million average diluted shares outstanding. For the full fiscal year, cash flow from operations was $205.2 million, up 13% from our fiscal 2019 result. Our net investment in capital expenditures was $51.7 million, consisting of $24.1 million in baseline CapEx, and a $27.6 million investment in our GMP protein facility. Our balance sheet remains very strong, with $270.9 million in cash and short-term available for sale investments, and a total leverage ratio of well under one times EBITDA. Our total leverage is at the lowest level since before the 2014 acquisition of Protein Simple. Next, I'll discuss the performance of our reporting segments, starting with Protein Sciences. Q4 reported sales were $127.3 million, with reported revenue decreasing 11%. Organic growth also decreased 11%, with foreign exchange and acquisitions having a negligible impact on revenue growth. Within this segment, product lines with higher academic exposure, namely our reagent solutions portfolio, experienced significant headwinds. As Chuck mentioned, we had an exceptional quarter in both our biologics and simpleplex instrument platforms, which partially offset the impact of lab closures due to the pandemic. Operating margin for the protein sciences segment was 38.9%, a decrease of 650 basis points year over year due primarily to the unfavorable volume leverage and, to a lesser extent, unfavorable product mix. Turning to the diagnostics and genomics segment, Q4 reported sales were $48.7 million, relatively flat with the prior year result. Organically, revenues grew 1%, with foreign exchange translation having an unfavorable 1% impact on revenue. Within the segment, our diagnostic reagent division increased mid-single digits with strong COVID-19-related raw material tailwinds benefiting the business. Meanwhile, our genetics division, which, like our research solutions division in protein sciences, has a large exposure to the academic market and took the biggest COVID-related hit in the segment with a double-digit percentage decline in sales in Q4. However, as labs gradually started to open throughout the quarter and into July, we've also seen genomics performance dramatically improve. Additionally, we anticipate the launch of microRNA scope, increased penetration of HyPlex, and continued adoption of RNA scope for COVID-19 applications to positively contribute to growth going forward. Finally, exosome diagnostics Q4 revenue increased over 80% from last year, with higher collections from Medicare, private payers, and patients, as well as progress with our pharma partnerships driving the year-over-year increase. Keep in mind that Exxon is still on a cash basis for revenue recognition, so collections from pre-pandemic tests helped recorded sales in the quarter. Moving on to operating margin for the diagnostics and genomics segment, at 12.4%, the segment's operating margin improved from 10.3% reported in the prior year. The increase reflects favorable volume leverage in our diagnostics reagents division, less dilution from exosome diagnostics, as well as strong cost management. Before we turn the call over to Q&A, I will share our current perspective of the view ahead. First and most importantly, our strategic financial goals for the next three to five years remain unchanged. Our novel automated protein analytical capabilities, our cutting-edge tissue and liquid biopsy technologies, our toolkit of cell and gene therapy manufacturing solutions, together with our core world-class protein reagents, are as well positioned as ever to help our customers advance the study of life sciences. And we believe in a post-COVID world, the need to advance the study of life sciences will be greater than ever before. This gives us even greater confidence in achieving our long-term financial goals. But first, our customers, namely life science researchers and diagnostic practitioners, need to all get back to work. This is starting to happen as our monthly pacing of sales recovery within Q4 made clear. However, there are still too many unknowns about what the impact of the pandemic and any potential vaccines will have on our lives this fall and winter. This uncertainty prevents us from giving a view on our full fiscal year 21 financial performance with any sort of confidence intervals. So we are managing our outlook month by month, quarter by quarter, staying nimble to deploy resources for the needs of our customers as they arise. As a reminder, our first quarter of fiscal year 20 was very strong and will likely be the toughest comparable for the upcoming year. Thus, holding flat year-over-year in Q1 on both the top and bottom line, we see as the right trajectory to keep us on track to our long-term plan. The downside risk to this trajectory would be a pause or reversal in our customers going back to work due to a worsening of the pandemic. An upside to this trajectory would be regulatory approval of our quantitative COVID serology assay test coupled with an early, successful commercial launch. That concludes my prepared comments. And with that, I'll turn the call back over to the operator to open the line for questions.

Ladies and gentlemen, we will now have our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may also press star 2 to remove your question from the queue. For any of those using speaker equipment, it may be necessary for you to pick up your headset before pressing the star key. One moment, please, while we now pull for questions. Our first question comes from Puneet Suda with SVB Lyric. Please proceed with your question.

Thanks, Chuck. So the first question is on audio. if you can just elaborate a little bit on the first quarter scenario here that you're presenting, FLAT, just trying to get a better understanding of what sort of trends are you seeing in July that give you this view, or is there one would have expected the academic labs to continue to improve, and if we do so slightly better than FLAT, is that not something that is doable despite the tough comps here. That's my first question. I have a few follow-ups.

Sure. Well, first and foremost, you know, we finished this last quarter still down eight, and it could have been worse than that. We did have a tailwind. The tailwind's improving. We're seeing a resurgence in July, not so similar to what we saw with China coming back on. So July numbers are a very good start, as Jim alluded to. You know, but there's two months to go, and we have a a 13% comp from last year to cover. So that's the big one. So coming back from negative, coming in this quarter in a tough comp, we think flat. We could give a range. We were 9 of 10, minus 20 last quarter. We talked about saying something from 0 to 10 or something, or minus 5 to plus 5. But I think the best thing is to keep it as tight as we can. We think flat's the right trajectory for us. And, you know, there are upsides. Now, if we stay with... What we see in July continuing to the whole quarter, I think, will be upside. We didn't see it in China. We saw things level off, and I expect we'll see things level off here, too. I mean, we're seeing a really strong start in the quarter, and, you know, it's just probably not plausible. Not to mention there are hot spots and resurgence going on, and it's just very unpredictable what's going to happen. I know I looked at numbers this morning, and it looks very encouraging in the U.S. for the numbers this week. But, you know, who's to say? So I think on top of the comp, I think Vlad is right. Europe continues to progress, be a little bit ahead of us. The U.K. is the only real outlier here, and we'll have to watch and see what happens there. And China is actually a little bit going the wrong direction right now, right? So if that gets worse, we'll see. India and others are not as bad as I would have thought, given their population and their ability to actually – you know, deal with this. But that's a good thing. And then on top of all this, there's upside on our COVID, right? So if we get our EUA in two to four weeks and we get a good solid month of coming out with this product, that's really not our numbers, you know, in this forecast. So there's upside. And we have other COVID products as well. SimplePlex we talked about had just an amazing quarter, and it's looking like it's going to continue to Maybe not quite at 100% growth, but darn good growth, I guarantee you. We need academia to come back. We need urologists to come back. The progression has started, but they're not all the way back even at the end of this quarter, we don't think. We're going to stay cautious. We don't officially give guidance. This is the closest we've ever come. We're talking about staying flat against a strong comp. That gives you something, Puneet.

Thanks. I appreciate the details there and My next question is serology. I think, you know, this is a question that we've been getting from investors as well. What is your expectation here for contribution from serology in fiscal year 21? And I'm asking that because, you know, COVID serology market has lagged significantly behind the PCR market given the PCR has essentially more diagnostic capabilities. Obviously, serology is only giving you a snapshot in time. And some of the peer companies have also lowered their expectations on serology significantly going into the next quarter. So I'm wondering what are you baking in for serology and what gives you confidence that you can grow sort of above the market here in serology?

Sure. Well, I want to give you some comments here and they're really meant for everybody, not just you. So we don't have to cover the same ground here and then questions later and then we get this out, you know, kind of to all of you at once just to be really careful. We've invested a lot in our test. We have submitted one hell of a dossier to the FDA, let me tell you. And it is an incredible data package. We have gone far and beyond, you know, really what the FDA required for something like this. As you know, it's a two-step When we decided to go fully quantitative a couple months ago and take a step back and take some extra time, you know, the FDA, first of all, was starting to get clogged up with an awful lot of requests. Two, being we're talking about asking for a fully quantitative EUA, nobody else has done that. And they really, really asked for an awful lot of extra stuff, extra data, extra testing. We have complete sensitivity data done. We did cross-reactivity tests against 14 major diseases. We have stats on all this that are phenomenal. We know of nothing out there that compares, but we don't maybe know everything that's coming out either. So we're only talking about what's out there now. We do also know, and the FDA, regrettably so, knows that they've issued a lot of preliminary EUAs that they probably regret. And a lot of these initial qualitative tests have become a tarnish to the whole serology potential And we have to overcome that. But we're very sure and we're very clear on the fact there's a need for a quantitative serology test that really can identify the level of immunity in a patient. And this is going to be important, more and more important as these vaccines come on the market and patients want to know, are they having a response or not? And so we see a surveillance side of this that's going to only grow, and it's not going away in a year. So, you know, will it match the are you sick now testing environment of PCR? Maybe not. But it's going to be a very large market, and we're not a very big company. And we're going to have the best test, at least for a while. So we're very confident that we're going to be treated very fairly by the FDA, and we'll be out there before this quarter end, hopefully. But there's no guarantee. This is the FDA, and, you know, there are, you know, hundreds of tests out there trying to get in, in all different forms. We know of nothing else out there that can match us. We had incredible partners with Cantero and Mount Sinai. They are managing most of the bureaucracy here. We're not that experienced at it. And we've got great consultants on the staff through Cantero as well who have really taken control of our dossier and our package, our data, everything. Our team here at Biotechni has worked around the clock for months now, And has already fulfilled their mission, we feel. And we're ready to go. And we're not kidding. We're ready to go at millions per month, if not millions per week. But you're right. Right now it's kind of a 10% kind of market demand compared to PCR, but we think it'll improve. And it'll improve with tests getting better, with vaccines coming on the market. And the economy is opening up and people want to go back to work and knowing they're safe to go back to work. So we're ready. So we've been waiting for this and we're ready.

Thanks. That's very helpful. And my last one is on cell and gene therapy. This is obviously an important growth driver and new market opening for you here for the next few years. So When is the earliest we can see the revenue in that? And maybe Jim can provide some, you know, details on anything we should be modeling and how should we be looking for that in 2021. And if you could also provide any updated thoughts on the level of interest you're seeing and early commitments for the capacity that you are building out in the first year, if you could provide some color, that would be helpful. Thank you.

Well, as you know, we're selling GMP proteins now. We're just not selling them in larger batches. So our GMP protein business is growing and growing near 100%. So we'll be moving all of that over to the facility once we are able to. So we're on schedule, on budget. We'll be opening the facility in late September, qualifying for the rest of this calendar year, and be open for business for scaled-up production revenue probably January something. We have... one completed signed-up large customer, and we are in negotiations with half a dozen others. And behind that are a lot more others on preclinicals and testing and people getting ready to check us out. So it's hard to guess right now what that first-year revenue will be coming out of that factory, but it's certainly going to be significant. We will not fill out capacity in the first year. We've never said we would. We'd probably say it could take as long as five years to a full $140 million We don't think it will take that long, but it could. Our models don't go beyond that, so it would only be upside. So we're ready to expand it to a $200 million model, and it would take about a six-month to a one-year window to do that. So we think we have ample time. We've got ample room in the building. We've got ample green space, so no issues there. Equipment's all here. The site looks phenomenal. We're going to have a fantastic viewing corridor for the processes. Our local Minnesota Science Museum, who is the world or the country leader in exhibition design, they do this for sale. They're going to help us design how to exhibit and how to show the processes. So it'll be a great venue for customers to come in and see what they can expect. And, you know, it's going to be fun. So everything's on track. The numbers haven't changed since we've told you before, really. Okay.

The other thing I'll add with regards to the GMP factory itself in terms of the revenue generated from it, aside from just the growth in our normal clinical business that Chuck mentioned where it's grown at 100% for GMP proteins, these large customer deals that we've either signed or are in negotiations with right now, they're all in various phases of clinicals right now. They're not commercialized in the cells yet. reality is until they get through their phase three and become commercialized, we really won't have a good view of the timing of when we'll see that major step up in revenue from those customers.

And these are ones that aren't really out there now or coming out. As you know, there's an awful lot of viral vector-based cell therapies coming out the other end of next year or two, and we're not in those clinicals, but Being we're not part of the drug, it would take just equivalency testing to actually move over to our protein if it's deemed to be a better value, a better quality, et cetera. So we expect as we open, we'll get more and more interest from the dozens and dozens of cell therapies that will be coming over the next two to three years. So that's our angle anyway.

That's great. Thanks for the detail. Thanks, Jeff.

Thank you. Our next question comes from Catherine Schultz with Baird. Please proceed with your question.

Hey, guys. Thanks for the questions. I guess first, just on China, great to see that strong return to growth in the quarter. You talked about seeing that reverse to some extent. I guess what's implied for China in the flat overall guide for the first quarter?

We don't see anything below double-digit forever in China, to be honest, so... You know, we almost got to that last quarter. So we were at 24% this quarter. The resurgence is a big part of that. I think we'd probably be north of 20 if we didn't see the new shutdowns in Beijing and other things. But, you know, with that in case, it's kind of unknown. But I think we still see a strong, you know, 15-ish kind of number at least. We're hoping for better. You know, you never know with China. It's not going to be below double digit, but it could still be over 20 as well.

Okay, that's helpful. And with everything you have going on on the diagnostic side and also in vaccine and therapeutic development, is it possible to quantify, you know, what kind of COVID-related tailwinds you saw in the quarter and how you expect those to trend going forward?

Yeah, well, we had 5% this last quarter. All right. And that's going to improve modestly with the current products. So like Ella in our RNA scope continues to see some traction. We're selling reagents. We're even selling antibodies into other test manufacturers, antibodies that we're not using in our test, of course. So we're a full-service bolt supplier to everybody, right? That's what we do. I think the big upside, of course, is the serology traction. If we get the EUA, you know, these aren't going to be small orders. If we get this, they'll be all large orders, and we're talking with – you know, a lot of large institutions. I will make a comment now, too. I mean, the commercial channel, and as I mentioned before, it's one thing to be able to make, you know, 5 to 10 million tests a week. It's another to get in the engine of doing 5 to 10 million blood draws a week. And that's the mission here. So we've got to be working with governments, with the large reference labs, the vaccine makers, the hospital management departments, systems out there that are really managing all these labs and working all these blood draws for all these automated testing that goes on every day in the hospitals and clinics around the world. So that's what we're really working on now, have been for a couple months already. We're definitely beyond term sheets with some, and there's a lot of interest, as you can imagine. But that's what's going to drive the speed of traction and the level of traction, not only this quarter, but come Q2 and beyond.

Great. And then maybe just one model cleanup question for Jim. I recognize you don't want to give specific guidance, but how should we think about sequential OPEX changes in the coming quarter and how quickly you're planning on bringing back some of that SG&A spend?

Yeah, I'd say from a sequential perspective, there'll be perhaps a little bit of uplift, if nothing else, because the first quarter is when our annual merit increases, for example, can kick in. but it's going to be fairly minimal. We're obviously still in a mode of being very tight on our discretionary spend, really not investing in any, much in the way of any new hires at this point. So we're still being very, very careful with regards to our investment. So I would just say nominal, sequential spend, you know, from Q4 to Q1.

We're really on a kind of flat, you know, kind of a keeping things as it goes. You know, as you remember, Catherine, we We spent a lot of time, and we're in Minneapolis, so finding top talent from the Bay Area or Boston to come here for biotech research and work, it's difficult. So we've done acquisitions in these better locations, and we really worked hard at building a world-class team over the last six, seven years. We don't see this pandemic as more than a one- to two-year bubble of the real pain, and the last thing we wanted to do was to ruin our team. So we decided to suck it up and not do any furloughing. We didn't do any restructuring. So we could have delivered more to the bottom line, yet you saw our tremendous results. So that speaks to the tight processes we have here as an operating team. We run a very, very good template of processes both weekly, monthly, and quarterly. We know what we're spending and why. We prioritize continually. We were able to pivot a large percentage of the company towards our pandemic-related, COVID-related activities, and yet we still had almost near typical year-on-year NPI for products. So we've done a great job there. And a lot of that came from taking the pressure off our team, them not worrying about going on furloughs or being restructured. So it's steady as she goes here. That said, they're all watching what we spend. And, you know, if we do have any attrition, we're – We replace if needed, and we certainly aren't doing expansion in the areas other than these mission-critical areas. We are, of course, adding in operations for the expected ramp-up for our serology test is one example. We are certainly ramping up around Ella with 100% growth in SimpliPlex. We're going to have to have resources. We've told China, you know, you're back to 24% growth. You know what? You can hire. But, you know, to hire, you have to grow. And where we're not growing, we're not hiring.

Great. Thank you.

Thank you. Our next question comes from Dan Arias with CIFL. Please proceed with your question.

Morning, guys. Thanks. I wanted to ask a couple of reimbursement questions, if I could. First, Chuck, on serology, you had talked mid-quarter about the potential for a reimbursement rate that involved, I think, secondary pricing was the way that you phrased it, which might have sort of a a greater level of incentivization that's attached to it for the labs. Is that something that you still think is in the picture? And then on Exosome, specific to the commercial side of that business, I'm curious whether, A, the clinical utility study is helping negotiations there. And then if I go back to some of the things that you were talking about this time last year, it sounded like you guys were having some good success in just keeping the private payer rates from being too far, not too far from the CMS rates. Is that what you expect going forward, or do you think there's some discounting that comes into the picture in order to sort of bag some of those bigger payers?

Well, let's work in reverse order. So the payer situation is still improving at the acceptable levels. The utility study is being acknowledged and being well-received, and it's helping us, you know, line up bigger payers. The Medicare is still coming back and growing. I think we're on track. And then NGS, of course, is very excited about getting – back to us on reconsideration. They actually love the utility study, and we're going to be following up with some other data here soon, but of course they don't meet every month, so we've got plenty of time here until this fall to get the package really in good place for reconsideration. That said, the TRF process has really helped us get around that big potential shortfall with the limited definition to the to the LCD, but we're okay, I think, for now. So it's kind of steady as she goes. We had great growth, and we continue to see it, and the at-home test, I think, is really a sleeper. I mean, that thing is going to allow us to retake off and stay tuned. We've got some new coming advertising campaigns that are also going to be, I think, well-received. So we're moving well along there. What was your question before that? That was...

Just on serology and the way in which reimbursement might work there and whether or not labs have more of an incentive to use it.

Yeah, so we did submit to CMS for a CPT code, a special, and we got it. We have a new code, but we don't have pricing yet, and we can't get the pricing until the EUA is out, and so it all works together. Okay. Clearly, we will do a crosswalk at some point with CMS when it's appropriate, and that may follow the EUA, but, you know, I don't think there's any issue, any worries about that. And it is significantly higher, you know, than the $42 charge for a one-step test out there currently. I think when people see the, you know, the extra difficulty, the technical, you know, hurdles are here, the more information, the better results, you know, we're, you know, Cantero, Monsanto for sure are very confident that we're going to be, you know, dealt with fairly. And, you know, we need all this because, you know, for the channel to accept this and drive it and prioritize it, there has to be a little more because, you know, it costs more.

Okay, that's helpful. Thanks, Chuck. And then just maybe on the ELA business, It sounds like you had the strong core that you were expecting there. Can you kind of just talk about demand by customer class? I'm curious about pharma usage and then maybe on the clinical side, how likely are you thinking that it is that that becomes sort of a go-to platform for day-to-day patient testing and management when it comes to running these ELISA assays if that time does come?

Well, you know, I've often spoke about it being the big sleeper in our stable. And, you know, the The micropoint opportunity in China is just one indication. That's a $100 million opportunity all by itself. So I'd love to have some of those over here. We're having a lot more interest. This is the event that that platform really has been waiting for. We basically sold all we could make this last quarter, and I don't know if that will continue because we're ramping our production now. But we certainly saw an insurgence for hospital use and for testing use and testing. And I think there's interest now for people to take that application and take it through different clinical regulatory needs, and we'll see. But it's good for regulatory. It's good for clinicians. It's good in research. It's a high-speed, multiplexed amino assay, one-hour sample of the data. It's wonderful. And we keep building the panel library for it, and we're able to make panels that will for anybody. We have an open cartridge panel for people to do their own work, and this is important for BioPharma because they want to work a little more secretive, so they've taken it and they're working on their own products without us really being involved, and later they'll come back and tell us what to make for them, and it'll be buttoned up. So we see a big, strong future for Ella and SimplePlex platform in general, and there's more cartridges coming. We have a We have varieties coming out and going smaller and smaller too, so it could be a point of care as well. You know, four by eight is an example.

Yep, okay. And then just maybe one more, if I could stick one in here on Europe. You usually have some pretty good views on just high-level funding. I'm curious what you think about the European funding situation with the rise in Europe. The budget seems like it's coming in a little bit lower than maybe they were hoping for. Is that something that you think is impactful going forward or? You know, is it really about the portfolio over there and just being positioned right?

I think it's more about positioning, and, you know, we're not that big a player, so we really haven't seen any impact. Simple Flex L is a good example that was just off the charts over there for us, especially in places like Italy. Right now, no concerns on funding for our products or budgets in Europe. It's more about getting the U.K. back online and full there. the rest of the country to be really coming along just fine. Yeah, okay. If anything, we need to get back to where we were before COVID, and that was the reorganization, the restructuring, the new commercial designs that we had for Europe in general. We made most of those changes, and we're kind of waiting for Europe to come back to normal so we can actually measure how we did. So, you know, places like Germany, there should be a lot more upside. So we're We're looking at investing and expanding in places like Germany where we should have more business, to be honest.

I am 100% on board with getting back to where we were before COVID, so good luck to all of us on that.

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

Thanks. Chuck, maybe just on the academic market, I'm just kind of wondering how that trended throughout the quarter. I know you've given in the past some metrics like percentage of labs that were open versus closed in areas like the U.S. Anything you can kind of help us think about the exit rate and then as we kind of trend through this quarter when you think about the flattish guidance, what your expectations are for that market?

Yeah. Well, we've read all the published stuff just like you guys have or are writing. And, you know, I think roughly 50%, 60% are partially open and roughly a quarter are open. And, you know, the rest are kind of in the middle and unknown. But we were hoping for better than that. We all were, right? So I think it's just a slow slog forward. I think there's two camps for academic labs. There's ones that are well-funded through grants, and there's ones that are funded through their universities. And with students not coming back or international students not coming back, I think you're going to see some constrained budgets in some university labs, probably. I think the grant-related labs are probably going to be fine, and probably it'll be a great season next year, because we see nothing but improvements in funding to that end. So we just have to kind of go work with it. You know, by definition, you know, labs are kind of socially distant. They aren't really on top of one another. And I think labs will come back on board before really students are back at full strength. And I've read that in more than one place. But it varies by institution. So they're just not all the same. And if you're asking for an answer of what's the mean of all this, you know, they're coming back, but they're coming back slower than we'd like. And I expect that the budget situation going forward, it may be a washer. I think you're going to see some things better than usual and some things less netting out. That's my guess. But, you know, I don't know any more than you do on that. So we may be better off in a lot of companies. We have a lot of products that are really kind of, you know, unique and only ones in the world. And you've got to get it from us. Yeah. And so, you know, they're coming back fast. We've had, as I mentioned, a very strong start to the quarter. I don't think we're alone there, and I think it's somewhat similar to what we saw in China. People are coming back to labs. They remember what they did when they turned the lights off two or three months ago, and they're reordering quickly to get their stuff back going again. And that will level off probably, you know, after the first month or two, we think, just like it did in China. But, you know, research isn't going away, and we're just going to have to work with them as best as they are coming back online. But, you know, for academic labs to be healthy, we need students, and we need all kinds of students, including international students, and that's a big question mark right now.

Yeah, I appreciate that. And then maybe on the serology test, you know, I know one of the angles you guys have that makes your test more unique is You can kind of play in the vaccine development and see if vaccines are effective, if the antibodies were generated. I guess, how do you see that opportunity playing out again, whether it's over the next year? Are you already in conversations with, you know, whether it's pharma companies or whatever the end user could be there? Can you just talk through that opportunity? Obviously, it seems like it would be pretty significant as the vaccine... Yeah, you know, serology...

in high volumes for the masses is different than serology for the supporting vaccine manufacturers. Now, they would be probably a few million dollars at least per account to be really in their clinicals, per se, and be part of it. But, you know, a lot of those ships have left their docks, right? They're in Phase IIs and Phase IIIs, so a lot of them have done their own tests. Now, they're not scaling up something for the world, so they're probably not as focused on a monoclonal like we were. They can use other other ways, it means that they've got something to test with. It's something they can't really release to the world. So we're in the middle of all those kinds of discussions. And I think as we get out there with the data and the, you know, the accuracy of our test, I think we're going to get more and more support and interest from the vaccine makers. And yes, we are working with some already, but not all of them. And we've asked pretty much all of them. And that's the answer we've gotten at the They would like to take a look, but they're in the middle of stuff, obviously, and they've got big deadlines to hit with their phase two or phase three in some cases, and it's not the time to be changing how they're testing. So there's some of that. But it was mentioned in our transcript here that surveillance going forward is going to become more and more important, and we see a lot of that going well beyond just vaccine manufacturers. Yeah. But we've got to get around the carnage first of all the poor tests that came out in the last six months, right? Absolutely.

Jim, maybe just a quick one on the capital allocation side. Obviously, uncertain times here. How conservative do you guys want to be, or is this a time to be a little more opportunistic on areas like M&A? Just wondering your view here.

Yeah, I think we definitely took a more conservative approach last quarter. last quarter and a half as the pandemic started to become more of a reality and understand how deep it was. And we took actions to build up cash, pay down debt. So we are extremely well positioned right now from a balance sheet perspective and a cash flow perspective going forward. And as we've mentioned in past calls, we're always involved in M&A discussions and looking at targets and fielding targets. And we are currently as well. And just a matter of the right target, the right price, the right time. So it's not a matter of financial wherewithal or conservatism that's holding us back.

Great. Thanks, guys.

Thank you. Our next question comes from Jacob Johnson with Stevens. Please proceed with your question.

Hey, thanks, Chuck. You touched on it, but maybe expanding on this. Just on the GMP proteins, will the initial demand here be for relatively early-stage therapies, or can these GMP proteins be implemented in later-stage trials or even a commercially-approved therapy? And then how does the demand for these proteins ramp as these therapies move through clinical trials, and maybe what would a commercial approval mean for you in terms of GMP protein revenues?

Well, we have one large signed customer now. As I mentioned, we're in negotiation with a half dozen others, and that one would be millions and millions of dollars of proteins, just that one. We have had inquiries for orders as large as annually of $10 million or more expected. That's why there was so much almost pressure on us to get in the game and get going on large capacity available proteins at GMP because They were scared to death where they were going to get them. And it's going to probably drive, be one of the big drivers of just how fast the cell and gene therapy market in general grows is going to be the safety of these reagents. So we plan to be not only in the game but the leader. To the first part of your question, where and what kind, it will be all of the above. So, yes, we have our own complete workflow. It's non-negative. non-viral vector-related, and we're in pre-clinicals with a lot of companies working in that direction. And we think five to ten years out here, the world will probably be non-viral vector. But there are a thousand clinicals right now that are viral vector-related, and some are coming out the other end here, you know, very soon, and a couple have already. And for them to use, you know, our proteins, they have to do an inclusivity test, which they'll be doing, I'm sure. And it's very possible. And then it's going to come down to how well our product works and what's the price, et cetera. So we're going to get pieces of all these markets. And I think the biggest first big upside would be equivalency. So if we can land some of these accounts that are coming out and going into production through an equivalency test, that would be the biggest short-term upside. Otherwise, we've really got to wait for our stuff to kind of get through equivalency. their clinicals with our partners and now at the other end, which is going to be in two to three years, which we've talked about at length. We see a J curve with this factory in terms of revenue ramp, and I'm sure we'll have significant revenue next year, but it's hard to say. It'll certainly be probably north of $10 million, but will it be north of $50? It's hard to say for year one.

Got it. That's helpful. And maybe just one other question on cell and gene therapy. You've talked about a lot of the opportunities here, but can you talk about the application of the ACD technology for cell and gene therapy? It seems like this technology can be used in the viral vector and CAR-T workflow.

Yeah, it's in the workflow. I mean, it's spatial imaging, right? So we have a single cell analysis. So at some point, you do got to look at the cells and see how things are working. And RNAscope is fantastic for that. So We're going to have plexed versions of this as well. We have HyPlex out now. We see a big future for the RNAscope platform being used in cell and gene therapy as an analysis tool.

Got it. Thanks for taking the questions.

Thank you. Our next question comes from Alex Nowak with Craig Hallam Capital Group. Please proceed with your question.

Great. Good morning, everyone. A lot has been asked on the serology test, but I just want to ask a couple of clarifications. Who's going to be marketing and actually selling that serology test into the clinical side of the market? Are you going to be using traditional diagnostic distributors for this? And can you just give us any sort of the economics of the test back to biotechnology after paying out for Mount Sinai and the distributors and such?

Well, a lot's going to depend on what kind of real demand will happen. So as an example, you know, you have to convince this channel, you know, the LabCorp's Quest, all these different CLIA labs to use the test. Now, they're in the middle of using high automated systems right now from other manufacturers, but on a, you know, a less desirable test. The reimbursement on that is 42 on that single-step test. We'll be asking for more, and to get more is going to help prioritize with them. So we're in discussion with the entire channel there, everyone you mentioned and more. So there are companies that manage the hospital labs. There is LabCorp and Quest, of course. There's a second-tier level of LabCorp and Quest out there. There's the Mayo. And then there's the vaccine manufacturers in general. There's biotech as well as a channel for a lot of this stuff. So we're talking to all of them. Then there's governments. I mean, there are governments that are talking to us about how to, that are more or less social medicine type of models that want to buy big, and they want to get in on it. So we're discussing that with some as well. And we're getting help. Mount Sinai is very influential. The Cantero Group has got people on board that have a lot of experience working in these areas and these channels and dealing with the FDA. But it will be commercialized by us. That's what we're going to do with this. The branding on the product will have R&D, you know, powered by R&D systems branded on the product. And what we get out of it, I've mentioned before, we're going to certainly be in the $5 to $10 range, we think, in us and Mount Sinai. But, you know, the test prices will go much higher than that, and they are now even in a single step. So we'll get more than that. So that should create you know, strong interest from this, I'll call it the channel, so to speak. The people who are managing all those blood draws, right? That won't be us. And again, Alex, you know, we're not trying to take out Roche here. We're not very big. So, I mean, the traction we expect here should be very material to us.

No, I understood. I appreciate the commentary there. Just any update on morphing exosome diagnostics into more of a picks and shovels business, as you've mentioned in the past, or partnerships, and just where do you stand in the pipeline with the bladder cancer test and the kidney transplant test?

Well, we're pretty far along in the kidney rejection test. We have the first paper under review, and data is there, and we're working towards that through that process. I mean, I think another year or so we'll probably be into the guidelines and work in the same kind of process we did with the epi test. Bladder is probably following that. It's just a matter of bandwidth. There are partnership ideas for that one as well. And we're pretty far along in partnerships, you know, discussions both with epi as well as the blood-based versions of this test of which need clinicals done, et cetera. And there's a global perspective, too. There are different other, you know, partners that want to really help in Europe and also others that want to help in Asia for us. I would say some things have slowed down due to the pandemic, for sure. We definitely have taken a hit, but we're recovering faster than expected with our own urology offices in the U.S., and I think the at-home is going to be very instrumental in this coming back and coming back strong this year and continuing the trajectory that we expect. This is a big platform. It's got a lot of aspects to it. It's going to take years to really get it to mainstream, but there's nothing that can beat it, we don't think so. We're on our way.

Okay. And then just a follow-up question to the GMP side and the whole focus on non-viral vector. What do you need to do to win over pharma that the non-viral vector approach is the right way that they should do this? I mean, essentially you said five, ten years, everyone's going to be going your way. Is it you convincing pharma, or is it pharma essentially playing trial and error, finding out that your method is the most optimal? What really convinces pharma to switch over?

It's data, cost, productivity. There is no doubt in anyone's mind that's tested with our platform that it's more efficient, it's less costly, it's much more predictable and reproducible. Vital vectors are hard to work with. It's just become a standard over the last decade because that's all there was. But like everything, a lot of things in the world, the first isn't always the best. The world comes around and dreams of something better. This is better. But we're going to have to get there with data. The preclinicals and the work we're doing have been very successful. We're selling a fair amount of this stuff already, to be honest, and we see a bright future. But, you know, this is, as you are well aware, this is not an overnight kind of market, right? There has to be a methodical approach towards clinicals, and I think it's doing just fine. It'll get there.

All right, understood.

Thank you. Appreciate it. Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for any closing remarks.

Well, again, it was a tough quarter for us and for everyone else in the industry. I think we came out better than expected, and we're very happy with what we see so far. And going forward, we see nothing but a bright future. So we'll look forward to telling you more next quarter. Thank you.

Ladies and gentlemen, this concludes today's web conference. You may now disconnect your lines at this time. Thank you for your participation, and have a great day.