Bio-Techne Corp

Q3 2022 Earnings Conference Call

5/4/2022

spk01: Good morning and welcome to the Biotechni Earnings Conference Call for the third quarter of fiscal year 2022. 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. During our Q&A session, please limit yourself to one question and a follow-up. I would now like to turn the call over to David Clare, Biotechni's Senior Director, Investor Relations and Corporate Development. Please go ahead, sir.
spk02: 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 2021 identifies certain factors that could cause the company's actual results to differ materially from those projected in the forward-looking statements made during this call. The company does not undertake to update any forward-looking statements because of any new information or future events or developments. The 10-K, as well as the company's other SEC filings, are available on the company's website within its investor relations section. During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to 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.
spk03: Thanks, Dave, and good morning, everyone. Thank you for joining us for our third quarter conference call. The biotechnology team, once again, delivered outstanding results across segments and geographies with 17% organic growth, continuing the momentum from the first half of fiscal 2022 into our third quarter. Demand from our biopharma end market remains strong, particularly in cell and gene therapy, where our workflow solutions and GMP proteins continue their fantastic growth trajectory. Other notable growth drivers in the quarter included our biologics instruments, as well as our best-in-class portfolio of research, reagents, and assays. Additionally, our prostate cancer test, XODX prostate, had a record volume quarter as the urologist offices continued the reopening process, and we gained increased mind share on the benefits of this novel diagnostic offering. Once again, this performance was delivered with a focus on profitability, leading to a 130 basis point sequential increase in our adjusted operating margin of 39.6%. On the human capital front, Biotechni received two important awards during the third quarter. First, Biotechni was selected as one of 500 mid-sized companies on the Forbes 2022 list of America's best employers. Additionally, we were included on the Forbes 2022 list of best employers for diversity. These awards are a testament to the epic culture and workplace we built at Biotechni, and I am proud of the team for these achievements. Awards and recognition like these, as well as targeted employee recruitment and retention strategies, are fortifying our efforts to build the team necessary to support our future growth plans. I am pleased to report that we filled several key positions in the company during the quarter, including key business, technical, operational, and commercial roles. We are still behind our original hiring plan for the year, but I am encouraged with the progress we made in the quarter. Given the state of the global supply chain, let me briefly discuss our operations. Once again, the team did an incredible job effectively managing our supply chain. I am pleased to report that we have not had any supply chain related issues impact our ability to fulfill our customer orders. Also, we continue to leverage our strategic pricing model across our portfolio to combat inflationary pressures on the business. As you can see from our margin performance in the quarter, these strategies are bearing fruit, and we are leveraging our value proposition to offset rising labor and other costs in the business. Now let's discuss specifics around our terrific performance this quarter, starting with our geographies and end markets. China continued with its banner year, delivering over 30% organic growth in the quarter. This is just tremendous execution by our China commercial team, especially considering the COVID-related lockdowns that took hold late in the quarter in Shanghai. As these lockdowns are still currently being enforced, it is difficult to predict what the temporary impact will be for Q4. The impact of these lockdowns to date are primarily on our recurring research reagent business that is dependent on researchers being at the bench to run experiments. In the end, our China team will persevere just as they did in the early days of the pandemic two years ago when they outperformed all their peers. And there will likely be a spike of demand when the lockdowns are over and researchers are trying to catch up on their projects. It is also important to mention that we have minimal supply chain and manufacturing exposure in China, so we anticipate any impact from the shutdowns to be isolated to this geography. Meanwhile, our growth across the rest of the globe continues to be strong. We experienced robust growth in the US, where our business increased in the high teens, as well as in Europe, where we experienced upper single-digit organic growth. From an end market perspective, Global sales to our biopharma customers remains very strong, increasing nearly 20% for the quarter. Meanwhile, academia markets started to improve, growing mid-single digit as the latest COVID pandemic wave started to wane and there was more clarity on NIH funding with the federal budget in place. Now let's discuss our growth platforms, starting with the Protein Sciences segment, where we grew 16% organically in the quarter. During the quarter, we continued to further our cell and gene therapy strategy as our portfolio of proteomic reagents, technologies, and analytical tools continued to deliver the cost-effective solutions needed to push these therapies forward. During the quarter, we increased the number of commercially available GMP proteins manufactured in our state-of-the-art GMP protein manufacturing facility, adding two high-quality, lot-to-lot consistent GMP proteins with the scale and capacity to meet current and anticipated demand. I would also like to highlight the strong performance of our cell culture portfolio, particularly from our Cultrix line of basement membrane extract, BME, matrix products which act as scaffolds for the growth of organoid cell structures, induced pluripotent stem cell expansion, and other 2D and 3D cell culture applications. All in, our portfolio of cell and gene therapy workflow solutions increased over 40% in the quarter, with both GMP proteins and cell cultures specifically growing well ahead of this rate. Once again, demand from our cell and gene therapy customers created a halo effect across our portfolio, driving incremental demand of our proteomic analytical tools and spatial biology solutions. We are incredibly well-positioned to benefit across our portfolio as research continues in this area, and the rich funnel of these next-generation therapies progress through the regulatory approval process. Next, I want to provide an update on wolves and wolves. As a reminder, Wilson-Wolf is the manufacturer of the G-Rex line of single-use devices, which are quickly becoming the industry standard for a fast, easy, and cost-effective cell therapy scaling solution. In our second fiscal quarter of 2022, we entered into an agreement with Wilson-Wolf where Biotechni can make a 20% ownership investment, followed by full acquisition of the company upon achievement of certain milestones. I'm very pleased to report that Wilson-Wolf made continued progress in achieving the trailing 12-month $92 million revenue or $55 million EBITDA milestone, which will trigger our initial 20% investment. Wolf and Wolf exited the quarter at a $72 million revenue run rate as they continue to execute on their growth plan and approach this important milestone. Now let's discuss our core research use only or RUO proteomic reagents, including our industry leading portfolio of RUO proteins and antibodies. Here our growth was also fantastic with these reagents growing to 20% in the quarter. Researchers continue to rely on our catalog of over 6,000 R&D Systems-branded proteins for the highest quality, bioactive, and lot-to-lot consistent proteins on the market. Our R&D Systems and Novus-branded antibodies also continue to deliver the reliable and consistent performance needed by researchers globally and are increasingly being selected as a content to enable the emerging class of next-generation proteomic technologies. Moving on to our proteomic analytical tools, which includes our SimpleWestern, SimplePlex, and Biologic instruments, as well as our leading portfolio of amino assay solutions. Our ProteinSimple® brand instruments and consumables increased mid-teens in the quarter. This growth is particularly impressive considering the prior year comparison where ProteinSimple® increased over 50%. Once again, performance of our biological instrument, namely Maurice®, led the way, increasing over 30% for the sixth consecutive quarter. Maurice® is easy to use, cartridge-based format, simplifies protein characterization, and charge analysis delivering the ideal tool for our biopharma customers. The MARISA results reflect ongoing traction within CRO, CDMO, as well as cell and gene therapy end markets. We believe we are taking share not only from competing systems but also converting accounts from high-performance liquid chromatography, or HPLC, where MARISA offers comparatively higher quality data as well as labor and time savings. Our simple Western portfolio or fully automated Western blot solutions continues to penetrate the large manual Western blot market opportunity as the reproduced civilian and time savings value proposition continues to resonate within our end markets. We are also seeing building interest in the platform for applications that go beyond traditional Western blotting, including cell and gene therapy, protein degradation, and even the support of dose response curves. As a reminder, we introduced the Stellar kits, for our Just Simple Western platform in January. These kits enable the detection of low-abundance proteins while multiplexing multiple analytes within the same detection lane. In the first partial quarter since launch, stellar detection kits surpassed legacy fluorescent detection kits and contributed to a record quarter for Simple Western consumables. We continue to develop new cell and gene therapy applications for the SimpliPlex or ELAM multiplexing immunoassay system. For example, Biotechnology and Cygnus Technologies, a part of Maravai Life Sciences, recently announced the launch of the SimplePlex HEC293-HCP3J assay for automated process and purity testing on the ELLA immunoassay platform. Purification of viral particles to minimize host cell protein contaminants is a crucial part of the viral production workflow in cell and gene therapy applications. The ELLA assay development roadmap remains very full with additional neurological biomarker, cell and gene therapy, bioprocessing, and immuno-oncology assays in the pipeline. Layer the untapped clinical opportunity onto this rich assay pipeline, and we believe Ella remains in the early innings of reaching its potential. Now let's discuss the diagnostics and genomic segments, where organic growth increased 19% for the quarter. Our spatial biology business, branded ACD, remains the largest spatial biology business globally as our highly sensitive biomarker identification technology with single-cell detection, resolution, and quantification capabilities continues to enable the transition from discovery to translational research. Spatial biology increased upper single digits in the quarter as a soft academic market and a challenging year-over-year comp weighed on performance. Encouragingly, we made progress fortifying our North American commercial team, with all but one key sales territory now filled. We augmented our commercial efforts with a full slate of conferences, including a presentation at the U.S. and Canadian Academy of Pathology, or U.S. CAP Conference, as well as a presentation of two posters at the American Association for Cancer Research, or AACR, meeting. And we have a full slate of upcoming conferences, including ASGCT and AGBT. With our sales territories largely occupied, a growing presence on the conference circuit to build awareness, and expectations for the academic market to improve following NIH budget clarity, we are expecting steady improvement in our spatial biology growth rates in the upcoming quarters. Moving on to our molecular diagnostics division, Let's start with the significant progress our exosome diagnostics business delivered in the quarter. ExoDx prostate, or the epi test, benefited from increasing traffic to the physician office for initial or follow-up visits, which in turn drove improving diagnostic testing volumes, including PSA tests, which is a prerequisite for our epi test. This improving physician office environment combined with our digital and traditional marketing initiatives drove over 50% year-over-year exoDx prostate test volume growth, as testing levels represented a quarterly record. We have several initiatives in place to build on this momentum, including renewal of our Fight Like Cal marketing campaign with baseball Hall of Famer Cal Ripken Jr. As a reminder, Cal Ripken Jr. took the epi test and opted for a biopsy based on his results, enabling the discovery of his aggressive prostate cancer in its early stages. Mr. Ripken will be an active component of our live presentations at the upcoming American Urology Association Conference and our ongoing digital marketing initiatives. During the quarter, we continue to publish data supporting the value XODX prostate delivers to men in their prostate cancer journey. A publication in the World Journal of Urology demonstrated the utility of the XODX prostate test to address limitations related to prostate biopsy sampling error, prostate biopsy bias, as well as multifocality of the disease, with a study suggesting that the test can be used in the decision for active surveillance, enabling men to avoid unnecessary radical prostatectomies. Separately, we announced an agreement with Thermo Fisher Scientific to exclusively complete the development of and commercialize the ExoTrue Kidney Transplant Rejection Assay. ExoTrue is a non-invasive, multi-gene, urine-based, liquid biopsy assay that provides critical allograft information to assist clinical decision making in managing kidney transplant patients and optimizing care for these patients. Financial terms of the agreement were not disclosed. but include payments for achieving various milestones as well as an ongoing royalty. The first milestone payment related to the successful technology transfer to Thermo Fisher Scientific was achieved in the quarter. The legacy of Shuriken portfolio, leading carrier screening and oncology diagnostic kits, continue to gain market traction, including several evaluations of the recently launched Amplidex CFTR kit, enabling broad coverage of the gene variants linked to cystic fibrosis. Additionally, we have positioned the business to increase its penetration of the largely untapped European markets, adding to and leveraging our commercial presence in its geography. In addition to the geographic expansion, the Shurigen's pipeline remains full and is positioned for strong growth in the quarters and years to come. Finally, our diagnostic reagents business continues its trend of steady growth in the quarter. The return of patients to the doctor's office is sparking demand for hematology, coagulation, and clinical chemistry tests. which is driving demand for our clinical controls and reagents. Improving patient office visit trends, a full pipeline, and opportunities to additional share gains within our OEM partners set the stage for sustainable growth in our diagnostic reagents business going forward. In conclusion, we are incredibly well positioned for the proteomics revolution that is in the initial stages of unfolding, with high demand for our content-rich research reagents and highly sensitive, yet easy, simple to use analytical tools that move our customers' discoveries forward. Our cell and gene therapy initiatives continue to resonate with our biopharma customers with increasing demand for our GMP proteins, cell culture media products translating into growth across our entire portfolio. Given WilsonWolf's current growth trajectory, the pathway to our initial 20% investment stake and eventual acquisition is accelerating. Our diagnostic strategy is gaining momentum as testing volumes continue to improve with the proven ability to find partners that can help drive our next disruptive exosome-based test forward. I am proud of the team's Q3 accomplishments and look forward to continuing execution against our long-term strategic goals. With that, I'll hand over to Jim.
spk04: Thanks, Chuck. Starting with the overall third quarter financial performance, adjusted EPS was a record $2.14 versus $1.80 one year ago, an increase of 19% over last year. Foreign exchange negatively impacted EPS by 3 cents. Gap EPS for the quarter was $1.48 compared to $1.12 in the prior year. Q3 revenue was $290.4 million, an increase of 19% year-over-year on a reported basis and 17% on an organic basis. Acquisitions at a favorable 3% year-over-year impact and foreign exchange translation had an unfavorable impact of 1% to revenue growth. From a geographic perspective, China led all geographies, growing over 30%, followed by the US increasing in the upper teens and EMEA increasing in the upper single digits for the quarter. The rest of the world grew in the mid-single digits. By end market, BioPharma remained very strong, growing nearly 20%, while Academia increased mid-single digits year over year. Moving on to the details of the P&L, total company adjusted gross margin was 73.2% in the quarter, compared to 73% in the prior year. The increase was primarily driven by favorable business mix, partially offset by the impact of foreign exchange. Adjusted SG&A in Q3 was 26.1% of revenue, compared to 25.6% in the prior year, while R&D expense in Q3 was 7.5% of revenue compared to 7.0% in the prior year. The increase in SG&A and R&D was due to the acquisition of a surgeon in the fourth quarter of last year, as well as investments made to support our long-term strategic growth. The resulting adjusted operating margin for Q3 was 39.6%, a decrease of 80 basis points from the prior year period, but an increase of 130 basis points over Q2. Excluding the impact of the estrogen acquisition made last April and the impact of foreign exchange, adjusted operating margin was in line with the prior year. Looking at our numbers below operating income, net interest expense in Q3 was $2.2 million, decreasing $0.2 million compared to the prior year period. The decrease was due to a continued reduction of our bank debt. Our bank debt in the balance sheet as of the end of Q3 stood at $259 million. Other adjusted non-operating expense was $1.1 million for the quarter, compared to $4.3 million in expense for the prior year, primarily reflecting the foreign exchange impact related to our cash-polling arrangements. For gap reporting, other non-operating income includes unrealized losses from our investment in chemocentrics. Moving further down the P&L, our adjusted effective tax rate in Q3 was 21.2%. Turning to cash flow and return of capital, 73.1 million of cash was generated from operations in the quarter, and our net investment in capital expenditures was 15.1 million. Also during Q3, we returned capital to shareholders by way of 60.8 million in stock buybacks and 12.5 million in dividends. We finished the quarter with 41 million average diluted shares outstanding. Our balance sheet finished Q3 in a very strong position with 231.2 million in cash, and short-term available for sale investments, keeping our net debt position negligible. Next, we'll discuss the performance of our reporting segments, starting with the protein sciences segment. Q3 reported sales were $213.2 million, with reported revenue increasing 15%. Organic growth for this segment was 16%, with foreign exchange having an unfavorable impact of 1%. Within this segment, the growth was very broad-based in nearly all reagent, assay, and instrument platforms. As Chuck mentioned, cell and gene therapy increased over 40%, our RUO proteomic research reagents grew nearly 20%, and our protein simple branded instruments and consumables increased in the mid-teens on very tough comps. Operating margin for the protein sciences segment was 45.4%, a decrease of 250 basis points year over year, with favorable volume leverage more than offset by strategic investments to support future growth, and to a lesser extent, the impact of foreign exchange. Turning to the diagnostics and genomics segment, Q3 reported sales were $77.7 million, with reported revenue increasing 34%. Organic growth for this segment was 19%, and the insurgent acquisition from last year contributed 15% to growth. Within this segment, the diagnostics reagents business increased mid-single digits, and the ACD-branded spatial biology portfolio delivered upper single-digit growth in the quarter. With increased clarity on academic funding and a sales force that is approaching fully staffed, We anticipate improved growth rates in our spatial biology segment going forward. For exosome diagnostics, revenue growth accelerated as prostate cancer test counts increased over 50% compared to the prior year period, representing a quarterly test volume record. We are encouraged with the volume trend and anticipate continued improvement as our marketing strategy and value proposition resonates with physicians and patients. As Chuck mentioned, we earned an initial milestone payment related to the ExoTrue kidney rejection test technology transfer to Thermo Fisher Scientific, of which the financial details of our agreement were not disclosed. Moving on to the diagnostics and genomic segment operating margin, at 25.0%, the segment's operating margin increased 710 basis points compared to the prior year. The increase reflects the favorable impact of volume leverage and product mix including the milestone payment for ExoTrue. In summary, the growth momentum across our business remains consistently strong. Using fiscal year 19 as a pre-COVID baseline, the company's revenue growth CAGR, excluding the impact of acquisitions, FX, and milestone payments, has been in the low to mid teens every quarter for the past seven. As Chuck stated in his closing comments, we believe that we are still in the early stages, or the initial stages, of a proteomics revolution, that is ahead of us in the life sciences industry. And our best-in-class research tools and cell and gene therapy enablers are positioned to be leaders in this revolution for years to come. Layer under this, an emerging diagnostics and genomics portfolio that remains in the early stages of realizing its true potential, and we are incredibly well-positioned to deliver long-term strategic growth objectives. That concludes my prepared comments, and with that, I'll turn the call back over to Maria to open the line for questions.
spk01: Thank you. At this time, we will be conducting a question and answer session. We are asking that all analysts please limit yourself to one question and one follow-up. 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 press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handphone before pressing the star keys. One moment, please, while I poll for questions. Our first question comes from Dan Aris with Stifel. Please proceed with your question.
spk10: Morning, guys. Thanks for the questions. Chuck, can you just talk a little bit more about the scale-up in GMP proteins? Where's demand highest? How's it evolving? And then what you need to do on your end at the end of the year and to the end of the year? And then for the outlook there, you've talked pretty consistently about that piece of the business being on this trajectory where revenues can double for a few years, you're tracking ahead of the initial revenue expectations there. So does the outlook for the doubling still hold on what looks like it'll be just a higher base for 2022?
spk03: Sure. Well, we launched two new proteins, which it's only two, but we only had two or three before that. So it's a big percentage increase. These, of course, are, it's a short catalog for doing proteins for GMP, as you know. We have a 40-ish or so on the market total, and most companies are compared to have less than a dozen. So very different than RUO. The difference, of course, is we can make them at the gram level even. So lots and lots at a very, very high-quality state and very lot-to-lot consistent. The growth rate, while under 100% this quarter, we were over 40 for the category. We were just under 100% for proteins this quarter. We've been above 100 every quarter before. We'll end the year over 100%, probably, the way it looks. And, or right around 100 at the very least, I think that's pretty safe. And we told you it'd be about that, and it should be about that all year. And next year should be the same again. From that point on, we hope to accelerate as we get, you know, into more and more down the road with more clinicals. We get more and more pull through with G-Rex, you know, with Wilson Wolf, who has a lot more customers than we do and is involved in a lot more clinicals. And as we work towards what we call the holy grail here, we'll be doing media at some point here, and along with a very, very high-quality version of our proteins that can be supplied within G-Rex to the customer in a sterile environment. So consider it all like self-enclosed, a closed loop, which should be the only one on the market that can do that, we think. That's a year or so away, but that's what we're after, and that should help accelerate even more growth. On top of all that, this is all sound gene therapy, but we're also seeing explosive growth for our GMP proteins in regenerative medicine as well. So we've got a lot of customers that are scaling up around regenerative, and that's equally exciting to us. It's another large area we don't talk much about, but it's growing so much now, and we've got so much more activity, we're probably going to need to start talking about it. So we've got additional growth levers, and it might help explain why we've been well north of 100% growth all year and for the last couple years, to be honest. I think that addresses most of what you said.
spk10: Yeah, it does. Thank you. And then maybe just on ACD, it looks like there was some sequential deceleration in that business from two Q levels, and you're averaging something in, I guess, like the high singles for the year, and that's down from, at least in my model, like 30% plus. in 2021. So is the hiring that you did really the key there? And now that you have the sales reps in and presumably functional in the market, what do you think the run rate growth can be like going forward there?
spk03: Well, the other two components from headcount, of course, are the super high comp from last year, as well as the academic reopening. So everything's coming together at once, along with a full sales force again. We're only down one, but you know, Even one's important. This is not a huge sales force. But, you know, we're back to, say, full strength. And it'll come on strong now. We should be back to, oh, double-digit or higher here, I think, this quarter. We were pretty close to double-digit this quarter anyway. But, you know, we're getting there. It's pretty key now that we've got funding kind of out there and open now for academia. That comeback's got to happen. You know, the comps get much easier going forward. That's also a given. And while we were pretty strong in the U.S., it was softer in Europe. And Europe is kind of lumpy back and forth, and we see that picking up as well. We're also positioning some more support and some more help in Europe to help them. And all bodes well for we still see this as a 15% to 20% growth platform going forward, and we're in the early innings. We have a new team, too, a high-level new team. So all the way to the VP running the division, A head of R&D is fairly new, and they're just hitting their stride now already, so that's also going to help.
spk01: Our next question comes from Puneet Sudha with SBB Securities. Please proceed with your question.
spk06: Hi, Chuck. Thanks for taking the question, and congrats on the solid print here. The first one, you know, maybe for you and Jim both, you know, when we look at the top line here, you're obviously seeing incredible growth here in the, you know, exosome diagnostics with the recovery, protein segments continues to do well. You mentioned are you a protein, cell and gene therapy, Mori, SimplePlex, and I mean, just across the board portfolio seems to be working. I mean, I hear you on the comms, but just to help us understand how should we be You know, thinking about the sort of the top line as we go into fiscal year 2023, is mid-teens still the right way to sort of think about this, given the acceleration here and, you know, potential pickup from cell and gene therapy as well?
spk03: Yeah, all year, you know, we don't give quarterly guidance. We give annual targets, and we've given targets all year that we should be in the mid-teens for the year, and I think we're close enough where you guys can see we're going to be in that range for sure. Your real question is, can it be 17 to 19? I think we have to wait on a couple things. You know, China might have a minor impact in Q4, could cure Q4, but it wouldn't hurt anymore after that. Going to next year, you know, it's mid-teens and up. And I think it comes off first a strong layer of momentum off our reagents. I mean, we're at 20%, you know, growth in our proteins and antibodies. We're taking share everywhere. We're in double-digit growth in our assays. We're at over 30% growth in our Luminex line. We're number two in Luminex now. Who would have ever thought that would have happened? So we're knocking out of the park on the core. And as long as that core stays with the momentum we're seeing, which we do, then it's a mid-teens and up. And then the accelerator from there, of course, is how do these smaller segments, how do they scale? And they've got the higher growth rates. They'll impact the overall portfolio. So number one, again, cell and gene therapy. On a $70 million run rate growing at 30%, 40% next year as a category, that's going to start having a bigger impact. XODX is getting really interesting now. So we had a record quarter on tests. We're already seeing a big impact with the Cal Ripken campaign. We didn't really get a fair shake on that being we went into that right in the mouth of the pandemic. And it's been amazing, the interest. I can't wait to get to AU myself and meet Cal, and we're going to do some things together there. And we're expecting a big year going forward. And at ExpoTrue, we're working on the next thing now because we've got a great partner. We worked hard. This partner is actually blowing our socks off. They're almost doing a great job. They're ahead of our schedule. They're pushing us. They got the track transfer done quicker than we thought they would. They paid us. It was a good number. We didn't lay it out. We've got more deals to do, so we didn't want to talk about those numbers. But we had solid results without the extra payment, to be honest. Anyway, so I think that's the future. I think it's all about staying with the momentum in the core, solid execution, which we're doing. What's also helping this whole baseline momentum in our core is our digital. Backbone, and it just keeps getting better and better. We've got our OneBiotechni site up and running. We had something like 80%, 90% attraction rate to that website as we start migrating a lot of smaller sites into the one, so we can have a one-stop shopping experience for customers, which has been asking for years. That's all coming together great. We are doing a great job measuring our customers online and helping them with their purchasing decisions in real time, and that's working. Our AdWords spend continues to grow and continues to give us fabulous payback. So already all parts of running the company along with the innovation side are really doing well. As you know, we have a tech council. We put all these top scientists of all our divisions together virtually every month and working on new platforms together. And there is an incredible pipeline. You know that we do an extensive prioritization process here. concluded that process. It takes us three or four months. It helps us roll into our budget plan for next year. And we've analyzed 400 different work streams in this company, of which we figured out where to draw the line. And we've never had a bigger pipeline of new-to-the-world innovation than this past year. We're reaching the size of a company where we're really getting a good collaborative impact across the company. So we're pretty jazzed here.
spk06: That's the super helpful check. Jim, on the op margin, obviously really strong in the quarter, you know, almost 40%. You know, just wanted to understand in terms of, you know, near term China hiring, and other initiatives sort of ongoing sort of how should we think about the sustainability of this op margin, and just maybe take us to the puts and takes there. in the near term and sort of if you could provide anything on, you know, FY23 and how should we think about op margins or longer term. Appreciate it. Thank you.
spk04: Yeah, so in the real near term, I mean, on that, I don't think we're coming off of our guidance and target that we started the year with, which is that we'd end the year at the same, roughly the same adjusted operating margin that we ended fiscal year 21. We're still on track to do that. Now, I understand that That would mean from Q3 a sequential decline in operating margin. But however, we are making improvements, vast improvements in our hiring, which we talked about. And the extra true, that piece of it was a bit of a margin lift that won't reoccur next quarter. So we're basically right on track to do as we said we would do in terms of how we expect to finish this year from a margin perspective. FX will be a bit more of a headwind in Q4. than even it was in Q3, but I think we'll overcome that to still hit our year-over-year roughly flat operating margin for Q4. You know, looking ahead, you know, obviously we'll give more clarity next quarter as we finish up our operating plans for next year, but, you know, it's the same message we've been saying all along, which is that we expect there to be incremental, slight but incremental margin improvement over the course of the next four or five years of our strategic plan, and we expect that to start next year, you know, to continue next year.
spk01: Our next question is from Jacob Johnson with Stevens. Please proceed with your question.
spk05: Hey, good morning. Congrats on this quarter. Maybe just, Chuck, I think you touched on it a little bit, but just to flush out the point, just on the academic end market, it sounds like it picked up a little bit this quarter. And with NIH funding finalized, kind of hopeful it improves from here. And maybe I'm answering the question for you. But what's your outlook for that end market as we think about the next couple quarters?
spk03: Yeah. Well, the clarity around NIH funding didn't happen quite in time to really boost U.S. a whole lot. We were ending up, you know, in low single digits. Europe was in teens, actually, so the net was mid overall. So that's why I say looking forward, we're going to see the bigger lift in the U.S. going forward this quarter. And if Europe stays in the mid-teens, we'd be thrilled. So I think it's a good story going forward. It's finally starting to break loose. And again, the momentum's there overall. We've got great platforms that have a lot of interest from academia. So that's just, you know, that's always a fundamental. You've got to have new to the world stuff that gets them excited to do, you know, go after new academic frontiers, which we continually do in this company. So we have no doubts we'll be fine.
spk05: Okay, and then maybe as a follow-up, appreciate the details on the Wilson-Wolf performance in the quarter. If my math's right, it sounds like if they keep going the way they're going, the kind of phase one 20% ownership, maybe that could happen in the next year. Can you just talk about the timing of owning a piece of that and then owning the entire company?
spk03: Yeah, the original plan was to be kind of really Q3 next year, but we're ahead of schedule. There's a possibility it could be at this calendar year. I mean, they're on a $72 million run right now, and they're literally getting record-breaking sales days like every week. So it's hard to say. I, too, am trying to pin down John Wilson when it will be, and he's hard to pin down. But there's nothing but good news here, and, you know, they're moving towards putting together strong financial execution, so we're seeing all their numbers. We're helping out operationally, so really the integration has kind of already occurred, to be honest, and the teams have worked well together for a couple years and some now with scale ready anyway. So we have a good viewport into how it's coming, and... I don't think it'll be a year. I think it'll be under a year from now.
spk01: Our next question comes from Alex with Craig Hellam. Please proceed with your question.
spk07: Craig, good morning, everyone. We talked a little bit about this on the diagnostics business, but I'd say diagnostics had a pretty big step up in growth and profitability, at least consistent with my expectations. Could you just be a bit more granular on what drove the benefit? ACD sounds good, but consistent. Exosome diagnostics is doing very well. So it's at the basis small there. And there might have been a one-time item from Thermo Fisher, if I heard you correctly. So just what's a good revenue run right here and a good operating margin to assume going forward? Thanks.
spk03: Yeah, we aren't breaking out the revenue of that division. It's highly competitive. We've got two or three competitors, I'm sure, even listening right now, so we don't get into that. But we have talked about the test rates. The 50% up is real. It's still, you know, largely we're being paid via Medicare. We're still working the private payer, but we're getting better. We're very close to going from cash to accrual. That's also going to help. Probably next quarter is our goal, maybe, but we're seeing. But, you know, you We're getting there. We have a whole new team from Surgent taking the helm there, especially commercially. It's really worked wonders. We are seeing record test days, again, this area too, over pre-pandemic every week.
spk07: Got it. Understood. And then, Chuck, it sounds like in the prepared remarks you mentioned inflation, but also the ability to push through price increases. So did I hear you correctly that you are, in fact, pushing some price increases through? on the core kits and reagent business, and just how much headroom do you have there before you have to worry about competition?
spk03: Well, net, you know, I've always been big on price. It's just in my DNA, and we've put in place processes and structure here years ago, and went after kind of an annual 1% net year kind of target, and we're well above that this year. And we had to be focused on it. Obviously, costs are going up, but we've got wage inflation to cover. And as Jim pointed out in his numbers, we more than covered what we need to cover with price to give us a strong margin. I don't think there's an upside beyond the steady state we're at right now. But if inflation continues to happen, well, then we'll continue to raise prices like everybody else. We've offset a lot of this, too, with efficiencies and productivity as well. We can't pass everything on. But there's been a good mix, and we've been doing really well with it. well north of the 1%, probably 2-ish or better.
spk07: I appreciate the update, thanks.
spk01: Our next question comes from Catherine Schultz with FAIR. Please proceed with your question.
spk00: Hey guys, congrats on the quarter and thanks for the questions. I guess first on China, any way to help us think about the magnitude of the impact of lockdowns for your fiscal fourth quarter? you know, what are you seeing now from customers and how do you expect that to unfold over the next couple months?
spk03: Yeah, we've had a few meetings with our team, obviously, and they're actually very bullish about this quarter yet. You know, they were the same way when we look at the pandemic. Remember, China was first to kind of stare into the jaws of that, and we were all very concerned, and then they came roaring back the next quarter beyond any of our belief, and we were, you know, We outpaced all of our peers, I believe, back then. We expect to do the same. They may be shut down right now in a lot of sites, but the demand will be pent up. It doesn't affect anything but run rate reagents. I mean, the instruments and stuff, there's no issue. The orders are there. The bookings are there. We're stacking up bookings right now, and we've got a lot of orders to fulfill once they unlock. I know there's petitions. to the government to be in the first wave of companies that can come out of lockdown. I know we're on that list, along with many of our peers in our industry, because we're all considered highly valuable to the economy there and by the government. They literally can't do research there if they don't have R&D systems-based proteins. So we'll be ready to go. And I can't imagine this being more than a one-quarter blip. And I can't imagine it being more than, you know, it's hard to even say what the material impact would be. It may be nothing. It may be a couple points. We don't know enough yet. Now, if the lockdown continues and goes another quarter or two, then I think we'll have to have more discussion. But right now, we're not seeing any of that. No one's predicting any of that. The government there seems to be working very hard at trying to unlock even sections of the city, institution by institution, even, if it comes to that. So they really are engaged with the private and the public sectors together there. It appears to us, from our team's point of view. So I think everyone's going to have an impact. But in terms of looking at who has the least amount of impact, I bet we'll be near the top of that list like usual.
spk00: Okay. Got it. And then on the Thermo ExoTrue partnership, you know, what are they doing from a development standpoint for that test? And do you have a sense for when we could see Medicare coverage?
spk03: Yeah, well, they'll take it through their MAC. They'll finish and do another study. We have one out there. We've got a great paper. We've got data. But they'll want to beef it up with another outcome data set. And they'll use that to try and get their approval through with their MAC. We have kind of roughed that. that, you know, obviously there, you know, we've got, you've got a present out there in their jurisdiction already. So it's gonna be a lot easier process to get qualified than it would be for us going through NGS. So we think it shaves a year off commercialization if we were going to do it ourselves. Along with that, they've got, you know, they've got a juggernaut of a business unit with that division and Thermo Fisher with, you know, a channel and Salesforce and technical team and regulatory army, everybody, you know, they're all raring to go. And they're, like I said, they're pushing us. So this is fantastic. So I think it's roughly a year from now, maybe, if you're guessing. I don't know. They'll go as fast as they can. And whatever they do, it'll beat us by a long ways, I'm sure. It allows us to work on the next one. So we're already working on a couple more. And whether we partner with them or somebody else or do it ourselves remains to be seen. I know that Thermo has two other organ rejection tests they'd like us to work on for them. So the pipeline's growing. We have more. projects than we have people to work on.
spk01: Our next question comes from Patrick Donnelly with Citi. Please proceed with your question.
spk09: Hey, thanks for taking the questions. Chuck, maybe just on Europe, you know, you put up another kind of nice high single digits there. You know, any change in demand from what's happening there on the geopolitical side, any shift in funding or anything that you're seeing on the academic side? Just wondering kind of what the outlook is on the Europe piece.
spk03: No, it's been, you know, Europe's Europe, you know. You get one bad year for every two good ones, no matter what goes on. And it is country by country, you know. That's Europe as well. I think on the shift coming out of Brexit, you know, we're working on opening another warehouse site, an export site out of Ireland, which is going to help us with the mainland. We have pushed employees out of the UK because of Brexit back into their home countries. So we have now operating offices in Germany, Italy, and France. and we're beefing up all those sites. We're probably the strongest out of Italy because, as you know, we did an acquisition with our largest distributor in Europe at the time a few years ago. The leadership is solid. We're bringing in more. We have probably tripled in size since I've been here and getting to a bit of a tipping point there in general. Funding is pretty stable. Execution, I think, is the issue for us, especially in things like spatial biology No issue, I don't think, on our core reagents and assays. I think it's just steady as she goes. It's another reason we've been so strong overall as a company. Europe's been very stable there. I'd say instrumentation, we probably are a little behind there compared to the U.S., and there's probably some upside there. As you know, that selling proposition is highly technical, and there's one place we're beefing up because you have to have FASs out in the field along with your sales reps and work it that way. longer fail cycle, too, of course. But that's kind of what we're focused on and what we're trying to improve the situation. It's been double-digit this year. It's been more mid to high single-digit. I think the next year, hopefully, we'll get back to a good solid double-digit. We'll see. It'll come down to execution more than it is the markets, I think. I think the markets are there.
spk09: Okay. That's helpful. And maybe on the capital allocation side, obviously, Wilson Wolf will keep an eye on, but Can you just talk about general capacity outside of that, appetite, what the pipeline looks like for you guys, priorities on that front?
spk03: Well, you know, hang tight. We're always working deals, and they range from small to midsize. We don't really have any monstrous things going on. I think the whole world's kind of waiting on a new valuation level before things are going to process. The IP, things that are helping, the IPO front is kind of dead, so There's probably more interest at the private level and smaller company founders trying to exit. So we're hopeful. We're still looking at the same kinds of things, things in cell and gene therapy, cell sorting, other areas like that. There's four or five categories we're very interested in. We have, as Jim pointed out, we're about net debt zero. So we've got capacity and then some. We have an LLC that's still pretty rich for us to go into should we want to. It comes down to finding the targets and getting them at the right prices so we have a decent ROIC with them. But it has not, it's as good as, it's not gotten any worse. I mean, our pipeline's as full as ever and we're pretty active right now, so we'll see.
spk01: Our next question is with Paul Knight from KeyBank. Please proceed with your question.
spk08: Chuck, did you get pricing put through in Q1, or does we see more pricing hit in these subsequent quarters?
spk03: Well, like everybody, you've got pricing on a catalog of where you can do what you want, and you've got a lot of OEM business and supply agreements you've got to hit certain calendar dates, and there's usually an annual event. We hit a lot of those in January 1 and took advantage as best we could. We'll probably be able to do some more come July 1 and In the meantime, on the run rate side of our business, we're always pricing and repricing as we go. As you know, we've got a lot of products. We're the only ones in the world. And so we can do what we want. And so we have a little more flexibility there than some of the areas where we're more of a commodity, where we have to compete and we have to fight because we have to be a full catalog. So it's always a complicated balanced portfolio kind of thing. And like I said in the past, we've kind of shot for a 1% net kind of year. on year. And this year, it's probably double that we're shooting for. And so far, so good. The team's doing pretty well. Got to pay for all these mid-year wage increases and a higher annual merit raise future that's coming our way. Areas like IT and others, we're not talking about 10%, 20% pricing wage increases. It can be as much as 50%. So it's an interesting time for the war on talent. proud of the team and the finance team in particular and the marketing teams. They've really done well with this and you can see by our results, you know, we're covering it and then some.
spk08: And then Chuck, a common discussion right now in the market is, of course, around early stage biotechnology funding. Do you see that or do you see that rolling out as a risk in the future here?
spk03: We get asked that a lot and quite frankly, we're baffled. We're not seeing If anything, it's a strong area for us, so no issue. I don't know where it's coming from.
spk01: Ladies and gentlemen, we have reached the end of the question and answer session, and I would now like to turn the call back over to Chuck for closing remarks.
spk03: Well, thanks, everybody, for participating. It was a great quarter, two quarters in a row for us at 17%. We've got a, you know, A good quarter yet to come here and finishing off an outstanding year and we think we're on track with our strategic plan and look forward to telling you more about that next quarter. Thank you.
spk01: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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