Bio-Techne Corp

Good morning, and welcome to the Biotechnique earnings conference call for the second quarter of fiscal year 2023. 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 a follow-up. I would now like to turn the call over to David Clare, Biotechnique's Vice President, Investor Relations.

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 2022 identifies certain factors that could cause the company's actual results to differ materially from those projected in the forward-looking statements made during this call. 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 relevant 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. Separately, we will be presenting at the Citi, Cowan, Barclays, and KeyBank healthcare conferences in March. We look forward to connecting with many of you at these upcoming conferences. I will now turn the call over to Chuck.

Thanks, Dave, and good morning, everyone. Thank you for joining us for our second quarter conference call. In our second quarter of fiscal 23, we delivered 4% organic growth on top of a challenging year in your comp where we grew 17% in Q2 of last year. One year ago, the life sciences industry was in the midst of an incredibly strong biotech funding environment spurred by COVID related vaccine and therapeutic development that drove high equity valuations for smaller firms. It's been well documented that this funding environment has slowed in recent quarters, returning to pre-COVID levels. In Q2, we did experience a divergence in ordering patterns from our biotech and market versus our larger pharma customer base, which is still very strong. This divergence was seen in certain large bulk reagent orders, which did not repeat this year, and in the delay of instrument orders as conservation of cash becomes more of a priority for our biotech customers. Encouragingly, the underlying research activity that accelerated during the past strong funding environment continues, which is evident in the strength of our biopharma research reagent run rate business, continued cell and gene therapy growth, and strong utilization trends within our proteomic and analytical tools. Also, the order funnel for our protein and analytical instruments remains full, and we continue to experience record uptake of our XODX prostate tests. I will provide additional details on each of these growth drivers later in the call. Before we discuss the results, I'd first like to welcome Shane Bonham to the leadership team of our new Senior Vice President General Counsel effective March 3rd. Shane will be transitioning into this new role from Brenda Furlow, who has served as Executive Vice President and General Counsel for the past nine years. The contributions Brenda has made to the company over the last nine years are immeasurable, including establishing biotechnics legal and compliance functions and leading our corporate sustainability initiatives. I wish Brenda the very best in her retirement. Now let's get into the specifics of the quarter, starting with an overview of our performance by geography and end market. In Europe, we drove mid-single-digit revenue growth in the quarter, recovering nicely sequentially from the growth rates experienced in Q1. As a reminder, Europe grew in the mid-teens last year on the wave of stronger biotech funding. We've seen more stability in European end markets as the year progresses, and concerns around high energy prices and severe recession have tempered. The team is also nearly finished implementing a new Dublin warehouse to support mainland Europe and a new ERP system that has been implemented with minimal disruption to our operations. North America is where we saw the biggest impact of lower biotech spend in Q2. However, North America was still able to grow low single digits on top of a prior year comp that experienced greater than 30% growth in biopharma and over 20% growth overall. The multi-year growth rates in North America are still double digit and in line with our long-term goals. The consumable run rate business and instrument order book also suggests that underlying research activity is still robust And this should become more evidence as we pass the remainder of last fiscal year's high biotech comps. Moving on to China, I want to first acknowledge the tremendous dedication and resilience of our team there. Following multiple lockdowns, our team has continued to supply the Chinese research market with the proteomic research reagents, analytical tools, and spatial biology solutions to enable scientific discoveries in this geography. Now, following a change in COVID management strategy by the Chinese government, COVID is spreading rapidly in the country, including within our China team, which is over 90% infected at one point. Thankfully, this does not appear to be a particularly virulent strain, and our impacted team members are typically back to the office within five to 10 days. Despite the disruption caused by the rapid spread of COVID, our team in China was still able to produce mid-single-digit growth in Q2. After the waves of COVID subside in China, most likely in our fiscal Q4, we believe a full reopening of our end markets will accelerate faster compared to the government's prior zero COVID strategy, positioning biotechnology for a sustainable return to our historic 20 plus percent growth rate in this region. Given proven pent-up demand and past shutdowns in 2020, and the pending 1.7 trillion RMB government stimulus, we see a strong Q4 looking ahead. Now let's discuss our growth platform, starting with our protein sciences segment, where organic revenue increased 2% for the quarter on top of a strong comp from last year when the segment grew 19%. During the quarter, we continued to gain traction with our portfolio of cell and gene therapy workflow solutions. Despite a challenging year in your comp where we grew our cell and gene therapy business over 80% organically in Q2 of last year, and within that, our GMP proteins over 185%. we still grew our cell and gene therapy portfolio over almost 20% in the quarter. Specific to our GMP proteins business, the commercial team did an excellent job growing business with existing customers, as well as adding additional accounts during the quarter, culminating in a record quarter for our GMP protein business. The roadmap to adding additional GMP proteins to the menu produced in our state-of-the-art St. Paul manufacturing facility remains on track, with plans in place to almost double in the number produced in this facility in the coming months. It's worth noting that GMP protein sales are driving cross-selling activity throughout our portfolio, as this growing list of customers are also frequently purchasing additional items, including RUO media, proteins, and small molecules. Speaking of small molecules, our GMP small molecules remain key components in the regenerative medicine cell therapy fields, as they enable the reprogramming, self-renewal, storage, and differentiation processes that are key to these workflows. Our leadership position in regenerative medicine workflow is driving substantial growth in our GMP small molecule business, as well as specialty cell culture media, matrices, and our portfolio of 19 GMP proteins that are focused to regenerative medicine, including 11 GMP proteins that are only available from Biotechni. The growth is so profound in our GMP small molecules that we are drastically expanding our manufacturing capacity in Bristol, UK. Now let's discuss our core portfolio proteomic research reagents, including the RUL proteins, antibodies, and small molecules that are key components to enabling biopharma and academic scientific discoveries. Collectively, our RUL reagents grew in the low teens in Q2 of last year, driven in part by a strong contribution from bulk reagent orders from biotech customers, some of which did not repeat during the quarter. We are very encouraged that, excluding these large orders, the performance of our run-rate research reagent business remains very healthy, especially in the U.S. We continue to expand our catalog of research reagents, which now includes over 6,000 proteins, 425,000 antibody variations, and a growing small molecule portfolio. For example, during the quarter, we expanded the small molecule portfolio with the launch of our MitoBrilliant fluorescent dyes enabling the fluorescent labeling and tracking of mitochondria in live and fixed cells. Initial reception to the launch was very strong, with the initial production lots of these dyes selling out in the quarter. These dyes, when used with our new RNAscope Plus small RNA for co-detection, gives extremely high resolution at a single cell level on a hard-to-detect short base RNA. Moving on to the performance of our Protein Simple branded analytical tools, where the team delivered low single-digit growth in the quarter. Here we faced a particularly strong year-on-year comp of nearly 30% in the second quarter of prior year, driven by strong adoption among vaccine and monoclonal antibody therapeutic manufacturers for Maurice in the prior period. The rapid install-based growth we delivered over the past few years is leading to a strong consumable growth. As our portfolio biologics, fully automated Western blot and multiplexing amino assay solutions become fully ingrained in our biopharma and academic customers processes. We are very encouraged that the order funnel across all three of our instrument platforms remains very full, including a record level for our Maurice biologics instrument, although the biotech funding environment has a length in the closing cycle. Simple Western lead instrument growth, as the system's ability to automate the cumbersome and time-consuming Western blot process with a sample-in, answer-out solution, continues to resonate with our biopharma and academic research end markets. Simple Western is turning out to be much more than an automated Western blot replacement, with the system's ability to identify and quantify proteins in complex samples, like lysates, leading to its use as a quantitative immunoassay platform. This expanded application for the system is driving usage and targeted protein degradation and drug-tolerant studies, intracellular signaling applications, and is an alternative to customized development. We are actively implementing marketing strategies to educate the market on these additional applications. On January 24th, we officially launched our next-generation biologics platform, Maurice Flex, at the WCBA conference. As a reminder, we have seen tremendous adoption of the MERICE since its launch in 2016, with the system's ability to provide protein purity, charge, and identity in five minutes in an easy-to-use cartridge-based instrument, driving robust demand for the platform. MERICEflex expands on these capabilities, adding ICIF fractionalization capabilities to the instrument. Fractionalization is a front-end step in mass spectrometry, where the sample to be analyzed is separated into mixture components based on differences in their size, charge, or other characteristics. Merese Flex addresses the labor-intensive and time-consuming challenges of using legacy fractionation methods, including ion exchange chromatography. This new application allows us to expand Merese into a new $300 million market. Now, for an update on our SimplePlex-branded multiplexing immunoassay system, ELA. ELLA's ease of use, sub-pecogram sensitivity, smaller footprint, and cost advantages continue to draw increased attention from biopharma and academic researchers. As our installed base of ELLA systems continues to grow, now nearing 1,000 placements, and utilization trends remain robust, we opened a new state-of-the-art product innovation and manufacturing facility to meet current and forecasted cartridge demand. This new facility adds laboratory, manufacturing, and cleanroom space and increases cartridge capacity to 500,000 cartridges per year. We also successfully completed the initial ISO 1345 audit of our Wallingford, Connecticut facility as we prepare Ella to make inroads into the large and nascent clinical diagnostics opportunities that exist for the platform. I see Ella as possibly our largest instant platform someday. No other tool works so well across both biomarker discovery and diagnostics. Rounding out our instrument platforms, let's now discuss Namacel, our single-cell separation and dispensing platform. Recall that we closed on the Namacel acquisition in July of 2022, and we are pleased with growing interest in this novel technology, as well as the progress we have made integrating the team and the business. During the quarter, a single-cell cloning workflow publication using the Namacel single-cell isolation and dispensing platform was featured in Nature Protocols. The study outlines a robust and scalable workflow that maximizes cell viability for cloning human pluripotent stem cells, or HPSCs, using NammaCell's low-pressure microfluidic technology, which ensures gentle and rapid dispensing of cells. We are in the early stages of realizing the potential of the NammaCell platform and see a bright future for this technology, having shipped over 100 instruments to date. Now let's shift to diagnostics and genomics segment where we grew revenue by 7% organically in the quarter. Let's start with a discussion of our molecular diagnostics business and the continued adoption of our XODX prostate cancer test. During the quarter, the team delivered the fourth consecutive quarter of record test volume as the number of tests performed increased over 70% and revenue grew over 110% in the quarter. The combination of a strengthened marketing message to the urology community that emphasizes XODX is a tool to identify not only the right patients for prostate biopsies, but also drive patient adherence to biopsy recommendations, a four to five index and expanded commercial team, as well as the favorable impact of our reconsidered local coverage decision, LCD, with our Medicare contractor has driven sustained momentum in the business. We are seeing strong trends across the key performance indicators we track for the XODX prostate test, including the number of ordering doctors, the average number of tests ordered per doctor, and the number of new doctors ordering which all set records in the quarter. We also hired a veteran reimbursement executive with a redesigned game plan to derive favorable coverage decisions within the private payer community. With less than 20% penetration of urologists in the U.S. who have used the test at least once and the potential to expand the usage of our test among current doctors by 5X, we are positioned to continue the strong growth in this business for the remainder of fiscal 2023 and for the years beyond. Continuous molecular diagnostics. Our Assuragen-branded genetic carrier screening and oncology kits continue to grow double-digit. During the quarter, Assuragen announced a partnership with Oxford Nanopore Technologies to develop assays designed to deliver more accurate and reliable options for reproductive health and carrier screening. The collaboration combines Assuragen's long-range PCR and Oxford Nanopore's any-read length sequencing capabilities in a single workflow to identify genetic sequence variants in both hard-to-decipher genes and conventional genes using a single sequencing system. Our spatial biology business, branded ACD, grew mid-single digits in the quarter as a softer biotech market provided some headwinds similar to protein sciences. Our professional assay service business had a strong quarter as revenue increased nearly 20% year-on-year. Historically, accounts leveraging ACD's pharma assay services capabilities for biomarker discovery eventually transitioned into product customers. making strength in the service business a proxy for future product demand. We recently expanded our ACD portfolio with the launch of RNAscope plus smallRNA, enabling the simultaneous fluorescent detection of small regulatory RNA using our new vivid dyes, including microRNA together with three target RNAs or RNA biomarkers in the same tissue section at single-cell and subcellular resolution. RNAscope Plus provides gene therapy researchers with a valuable new tool to quantify changes in gene expression and cellular function in response to the introduction of regulatory RNAs, which is essential for optimization, efficiency, and safety. I would note RNAscope Plus was initially offered through Spatial Biology's professional assay services, where it saw an overwhelmingly positive customer response. Lastly, we experienced low single-digit growth in our diagnostic reagents and controls business. as order timing among a handful of customers impacted the quarter. Looking at this business on a trailing 12-month basis, growth remains in the mid-single digits. With patients returning to their positions, demand for diagnostic testing is increasing. This favorable macro environment plus a strong pipeline of additional products positions our diagnostic reagents and controls for future growth. In summary, despite the temporary challenges created by the current biotech funding environment, and the COVID impact in China, our team continues to successfully navigate this dynamic environment and grow the business. The long-term tailwind supporting proteomic scientific research, cell and gene therapies, spatial biology, and liquid biopsies remain firmly intact, and our portfolio is ideally suited to capitalize on these opportunities as they shape the future of life science research and healthcare. The team to execute our strategy is in place. At full strength, and we remain well-positioned and more optimistic than ever to deliver on our long-term targets. With that, I'll turn the call over to Jim.