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spk02: 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.
spk01: 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.
spk06: 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.
spk05: Thanks, Chuck. I will provide an overview of our Q2 financial performance for the total company, provide some additional details on the performance of each of our segments, and give some thoughts on the remainder of the fiscal year. Before we get started, I'd like to remind everyone that Biotechni executed a four-for-one stock split on November 29, 2022. All references to share and per share amounts have been retroactively adjusted to reflect the effects of the stock split. Now let's start with the overall second quarter financial performance. Adjusted EPS was 47 cents consistent with the prior year quarter. Foreign exchange negatively impacted earnings per share by two cents or minus 4% in the quarter. Gap EPS for the quarter was 31 cents compared to 49 cents in the prior year. The biggest driver for the decrease in GAAP EPS was a non-recurring gain on our previously held chemocentrics investment in the prior year period. Q2 revenue was $271.6 million, an increase of 4% year-over-year on an organic basis and 1% on a reported basis. Foreign exchange translation had an unfavorable impact of 4%, and acquisitions had a favorable impact of 1% to revenue growth. As Chuck mentioned, following a period of red-hot biotech funding last year, we are seeing a normalization of purchasing trends from these customers. Additionally, COVID is now sweeping through China and slowing the amount of research activity in this region, temporarily impacting the growth of our proteomic research reagents, analytical tools, and spatial biology products. Adjusting our organic growth rate for large orders from a handful of biotech customers that did not repeat and normalizing for China our organic growth would have been double digits in the quarter. Summarizing our organic growth by region and end market in Q2, North America grew low single digits, Europe grew mid-single digits, China grew mid-single digits, while APAC was flat due to prior year government stimulus in Japan not repeating this year. By end market, BioPharma grew low single digits, while Academic grew mid-single digits. We are encouraged by the revenue growth from our large pharma customers, as well as the underlying health of the overall biopharma end market as reflected in the continued strong momentum in our run rate business. For academia, we are encouraged by the recent NIH outlay data, which showed a 13% year-over-year increase in our second quarter. We anticipate this strong NIH outlay to begin to work its way through the system and benefit academic life science research spending in the near term. Additionally, the 5.6% NIH budget increase and 50% ARPA-H budget increase for the federal government's fiscal 2023 sets the stage for a healthy academic end market for the remainder of our fiscal year. Moving on to the details of the P&L, total company adjusted gross margin was 71.7% in the quarter compared to 72.3% in the prior year. The decrease was primarily driven by unfavorable foreign exchange. Adjusted SG&A in Q2 was 27.9% of revenue compared to 26.5% in the prior year, while R&D expense in Q2 was 8.3% of revenue compared to 7.5% in the prior year. The increase in SG&A and R&D was driven by wage inflation and the acquisition of Namasel. The businesses implemented strategic price increases during the first half of fiscal year 23 to offset the dollar impact of inflation in operating income. However, the dollar-for-dollar offset did have a negative impact on operating margin. Adjusted operating margin for Q2 was 35.5%, a decrease of 280 basis points from the prior year period. Negative FX impact decreased margin by 100 basis points. The price and inflation dynamic decreased adjusted operating margin by another 50 basis points. While the acquisition of Namasel and timing of other fiscal year 22 growth investments drove the remainder of the margin dilution for the quarter. For the remainder of the year, we expect adjusted operating margins to continue to expand sequentially, ending the fourth quarter of fiscal year 23 up to 100 basis points higher than the fourth quarter of fiscal year 22. Looking at our numbers below operating income, net interest expense in Q2 was $1.2 million, decreasing $1.3 million compared to the prior year period. Our bank debt on the balance sheet as the end of Q2 stood at $200 million, a decrease of $64.7 million compared to last quarter. Other adjusted not operating income was flat in the quarter, an increase of $1.2 million compared to the prior year, primarily reflecting the foreign exchange impact related to our cash pooling arrangements. Moving further down the P&L, our adjusted effective tax rate in Q2 was 21%. Turning to cash flow and return of capital, $64.3 million of cash was generated from operations in the quarter, and our net investment in capital expenditures was $6.1 million. Also during Q2, we returned capital to shareholders by way of $12.5 million in dividends. Following our 4-for-1 stock split, we finished the quarter with 161.8 million average dilute shares outstanding. Our balance sheet finished Q2 in a very strong position with $196.8 million in cash and short-term available for sale investments, bringing our net debt position very close to zero. Going forward, M&A remains a top priority for capital allocation. Next, I'll discuss the performance of our reporting segments, starting with the Protein Sciences segment. Q2 reported sales were $203.9 million, with reported revenue decreasing 1%. Organic growth for this segment was 2%, with foreign exchange having an unfavorable impact of 4% and acquisitions contributing 1%. Despite the temporary headwinds and the tough year-over-year comps that Chuck pointed out for this segment, I will highlight that the longer-term five-year organic CAGR for this segment is approximately 11%. Operating margin for the Protein Sciences segment was 43.8%, a decrease of 170 basis points year-over-year, with operational productivity more than offset by foreign exchange, price inflation dynamics, and the impact of an MSL acquisition. Turning to the Diagnostics and Genomics segment, Q2 reported sales were 68 million, with reported revenue increasing 5%. Organic growth for this segment was 7%, with foreign exchange having an unfavorable 2% impact. As you heard from Chuck earlier, our exosome diagnostics business remained incredibly strong in the quarter, as our fortified marketing message and strengthened commercial team continued to drive test volume and revenue growth. Our spatial biology business grew mid-single digits in the quarter, with strong performance in our professional assay services and micro-RNA businesses. partially offset by order timing from a few biopharma customers. Moving on to the diagnostics and genomics of an operating margin, at 12.2%, the segment's operating margin decreased 470 basis points compared to the prior year. The segment's operating margin was unfavorably impacted by foreign exchange, price inflation dynamics, and the timing of strategic growth investments. As we think about this setup for the second half of our fiscal year, It is important to reflect on the drivers of our performance in the first half relative to our expectations at the beginning of the year. Our Q1 relative performance was muddled by the pent-up vacation activity we saw from our customers, as well as heightened inflationary and recessionary concerns, especially in Europe. In Q2, we saw the slowing of large orders from our biotech customers that possibly could have been foreshadowed by the slowdown in biotech funding earlier in the calendar year. However, the impact to our business was not realized until the December quarter just ended. And throughout the entire first half of our fiscal year 23, the COVID situation in China has been on a roller coaster with rolling government mandated shutdown and now widespread infections. Despite all of this, as Chuck and I have expressed on this call, we believe our end markets are still very healthy and our portfolio positioning is still very strong. Big pharma demand is high. Academic research budgets are on the rise, and most biotechs are not broke, just being more prudent. And finally, China appears to be closer to the end of the COVID roller coaster than ever before, with pent-up demand and strong Chinese government stimulus, setting up for what could be an incredible calendar year 2023. But we need to get through the March-ended quarter, our fiscal Q3, first. And right now, it appears as though our organic growth this quarter will be similar to that of Q2. People in China are still sick with COVID, and in protein sciences, we know of several large biotech orders that occurred last year in Q3 that are unlikely to repeat this year. Also in Q3, we will be lapping the large milestone payment realized in our diagnostics and genomics segment from the ExoTrue kidney transplant rejection assay licensing agreement made with Thermo Fisher last year. As we lap these difficult year-over-year comps, the normalization of biotech funding runs its course, and COVID headwinds alleviate in China, we anticipate organic growth to improve significantly in Q4, positioning the company for continued progress on delivering our long-term strategic and financial targets. That concludes my prepared comments, and with that, I'll turn the call back over to the operator to open the line for questions.
spk02: Thank you. We will now be conducting a 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 press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We are asking all analysts to limit themselves to one question and a follow up. One moment please while we poll for questions. Our first question is from Sunit Sudha with SVB Securities. Please proceed with your question.
spk08: Yeah. Hi, Chuck, Jim. Thanks for taking the questions. So, first one, Chuck, you know, I think it would be helpful if you could parse out a little bit more on the impact from the emerging biotechs or the smaller emerging biotechs. I think Jim said they're not going broke, but the number of projects are lower. Um, but could you, if you could describe a little bit more into that and then, you know, is this is spreading to larger biopharma or the biopharma remains, you know, largely intact. And then, you know, how much of this is sort of COVID adjacencies. And if you could parse out, you know, what were, what segments or what type of products were these sort of bulk orders? Um, and then again, you know, I appreciate that this is, you know, comp related normalization that you're expecting. But I think, you know, the question is sort of, you know, how long do you think this can last in duration? Because obviously funding concerns were there, they're here now. But just wondering, you know, how long will it be before sort of we see improvement here in a meaningful way?
spk06: Okay, I'll try to cover that in less than 20 minutes. Thanks, Vineet. You know, as the quarter finished, you know, We were a little dejected. It was my 40th quarter, and it's been a few years since we've seen a growth rate like this. But as we look back into the data, man, we saw some amazing things. One, our run rate business, most of our business, both here and Europe, was double-digit. Very strong in markets there. Academia, about the same. No real issues there. Biotech funding, as I mentioned last, we started digging into more and more about just how much are we becoming more of a front-end research company, supporting research. you know, our customers as we mitigate it from academia to biopharma. But within that biopharma, how much is really biotech? And within that biotech, how much are really new biotech and startups and, you know, fresh research and leading-edge stuff? And it's about 30% is the number. About 20-some of most of our business has been in instruments. It's about 40. And I think it's a funding issue right now, and as we dig in more, it's going to wash through. But there is definitely a growth of being prudent. Their funding is solid right now, but they're trying to make things last. If you're farther along in clinicals, you're probably okay because it's committed. And if you're a startup, there's actually funding. If you're kind of out there but looking for your second round, it's tough right now, and it's just the way it is. So that's driven a lot of – potential growth in OEM and a lot of larger orders as people are starting these clinicals and doing special things with us. And there are a lot of one-off comps. Literally, it's a handful of deals that bring us back to like double-digit growth. It's kind of incredible. Now, talking about biopharma, the pharma side with you, that's just more about overall conservatism in general and the overhang of COVID, like vaccine makers, just the gravy's over here, right? So it's just kind of a normalization. Not long-term, just kind of renormalizing and just, again, a little longer out for things and waiting things. And we get that vindicated, too, by looking at our funnel instruments. It's larger than it's ever been. Our instrument funnel is tremendous. It's just the conversion rate has slowed down a lot as getting capital has gotten tighter for teams looking to buy instruments in our segments. And we see that flowing through as well. China will explode in Q4. I think it may be a little better this quarter. We actually had mid-single-digit growth. I don't know how. There wasn't anybody working the whole quarter, practically. But we still had growth. It'll come back with a roar, I think. And we've seen that before. And we also have big government stimulus hitting and should be kicking in by Q4. The tenders are going out now. We've had that vindicated, so it should be a one-two punch there for China by Q4. I think that may cover most of your questions.
spk08: Did I miss any of it? I think you covered it well, Chuck. Thanks for that. I'll keep it very simple for Jim. Just on 4Q, I appreciate your comments on Q3 and being similar to Q, but 4Q, even if I have double-digit increases there, I'm landing for the full year in single digits for total organic growth. I'm just wondering, does the aspiration for 15% or 15% growth rate
spk05: um longer term still intact um if you could elaborate a bit on that thank you so much yes they are still intact and yeah the math would suggest that we will you know likely not hit double digit growth for the year this year even if we hit double digit growth for q4 but as i mentioned uh in my in my opening comments if you look at it from multi-year kegger we're still in the low teens and would probably end of the year still in the low teens on a multi-year basis. And that's essentially on track to where we said we'd be at this point in our five-year journey. So, you know, the mid-teens is the average over five years. But, again, it's the cell and gene therapy can use the ramp and become more material for our business, particularly the GMP proteins, as well as the exosome, you know, becomes more material to our business and continues at those kind of growth rates. And as Chuck alluded to, the We're still barely scratching the surface of the potential there. That's what kicks us into the, you know, mid to higher teen growth rates later on in our five-year plan. So as far as we see it, we're still on track.
spk02: Our next question comes from Jacob Johnson with Stevens. Please proceed with your question.
spk11: Hey, thanks. Good morning. Maybe kind of first question, kind of dovetailing Jim and Chuck on what Jim was just talking about. you're still targeting this $2 billion of revenue by FY26. I do think in your new deck, maybe you moderated some of your expected growth for instruments and on the spatial side. Can we just touch on kind of your latest thoughts on the path to $2 billion by FY26 once we get beyond some of these kind of new term dynamics that you discussed? Thanks.
spk06: Yeah, we're We're not coming off at all. I think the ink is even dry on our latest analysis. I mean, the bottom line is we got way ahead of the curve and ahead of forecast last couple years right in COVID. And some of that's renormalized, but we're still safely in the $2 billion number, we think. You know, a couple reasons. Look at this Maurice Flex coming out. We're going to be now attacking $400 million more of market, $300 million in the HPLC market. for fractionalization, just skipping whole LC and going right to mass spec, which can save weeks and months of work in an analytical lab at biopharma customers. And also the protein characterization market. It's a smaller market, $100 million or so, but peptide mapping is a very important process, and this machine can do that. And so it's going to grow in that category along with everything else it's been doing, and things are picking up in cell and gene therapy for being specced in for just good old-fashioned QC for purity, et cetera. Ella is just going to be on fire. You know, we're doing about 90,000 carts a year now. We just finished the factory for 500,000 carts. We've got 1345 coming. It's just almost done. And we're going to have diagnostic research, you know, coming out our ears, we think, on top of biomarker discovery. So this is going to be a platform that's going to get bigger than I think we have in our $2 billion model. I can go up and down this, but, you know, we're also, I think, possibly light on exosome. Exosome is screaming now, 100% plus a quarter. I see no end in sight. We have a nice portfolio of new diagnostics, new tests coming out where we've got partners calling. The team's doing great. We've got a great new team in with a new executive for the payer strategy, someone who's actually connected. And we've made more progress with private payers the last quarter than we've made the last two years, to be honest. So hopefully more on that coming soon as we put some numbers to it. So the answer for you is all the stuff That we're waiting to start growing. And by the way, cell and gene therapy, you know, proteins on top of 185% comp still grew almost 20% this quarter. Nothing's slowing down here. All this new stuff started to pick up. But our core, which is the biggest part, hit a speed bump because of these OEM and biotech funding issues, which is going to recover quickly. We need this new stuff because that's how we get the, you know, high double-digit growth, as Jim alluded to. But it's picking up. But it's going to happen. And, you know, cell and gene therapy, $100 million, you know, portfolio for us right now, you know, growing to $2 billion in the next 8 to 10 years. So we're not letting up. I don't see any issue right now at all. The things we put in place years ago are starting to happen. And, you know, we're going to have some bumps here and there with the kind of growth rates we have. I do think we kind of muffed the forecast for sure. I mean, we did not appreciate, fully appreciate the comps and the strong growth we had the last couple years due to COVID. But We try to level it out by averaging over a couple years, as Jim pointed out, and I think the recovery will be good. Our brands, we've just done brand studies. R&D systems, still number one. Biotechnics is actually moving right up the ladder, too, after 10 years of being out there. We've got great associations. We keep investing digitally, and that's continued to pay back. There's no issue to back off the $2 billion. It's just that we probably aren't as safely in the black of hitting it as we were, but I think we're still there. Enamel cell is going to be in the Linux now too.
spk11: Got it. Thanks for that, Chuck. And then just the other big picture question. I heard Jim mention that I think M&A is the number one priority on the capital allocation side. I think that speaks to appetite, but maybe just kind of any thoughts on where seller expectations are in the current environment and any areas of interest.
spk06: Well, you know, time is, time heals all here. So, you know, valuations have come down, they've come down all year, but there's still denial, but there's less denial, you know. There's not a robust IPO market right now, so small companies have limited options. We talked about the funding issues, right? So that means a lot of small companies are going to be looking for ways out and help. So our phone is ringing more than it was. You know, we're very active. We've been active, but we're definitely more active than usual, and I hope we can land a few more. We landed an ammo sale not too long ago, and we've got some more in the pipeline. And, yes, it is our number one capital strategy. We're at net debt zero. We've got a $1.5 billion war chest ready to go with cash, and we'd love to put it to work. I don't think we'll go over four times leverage, but I'm willing to get up near that. Board is all very supportive of us getting much more aggressive in M&A. But, you know, it's like whatever, what you're, the pertinent, you know, the... Your question is all about the price tags, right? And we've got to get real price tags to get to make to close some deals.
spk02: Our next question comes from Dan Arias with Stiefel. Please proceed with your question.
spk10: Good morning, guys. Thanks for the questions. Chuck on GMP Proteins. Can you just refresh your view on how you think growth shapes up there? You know, when you guys were opening up the St. Paul facility, you talked about expecting a couple of years where revenue basically doubles. It sounds like you dipped a little bit below that, but maybe now you're accelerating again. So what do you think the trajectory there is relative to the overall capacity, which I think at the time was like 140 to 200 million?
spk06: Yeah, there's a little bit overlap, even in this area we'd call OEM. So we've got a lot of customers, like 180 customers now for GMA proteins, but only a handful that are really sizable. And it's a little bit lumpy still. We have some year-on-year comps in the area that are tough as well. Even there, we still had a pretty good quarter, I'd say. And going forward, I think it is going to accelerate. We added another product to the St. Paul site. We're at six. We'll more than double that in the coming year. We have the largest menu for regenerative medicine, and we're moving most of those over to the St. Paul facility in the coming year or two as well. And, you know, we're number one there. We're playing catch-up still in the CAR-T area, but it's growing strong. It's still kind of, I think, going to be a double kind of year, maybe just a hair under this year, but it won't be too far off, we don't think. And next year should start lighting up as we land a few more larger accounts and we get some things, you know, further up in the clinicals to get more volume going. We call it turning minnows into tunas and tunas into whales. So we have a whole pipeline of how we move these customers forward. More vindication, we had a few of these customers are fairly sizable and they went to zero. you know, because their funding is tight right now. So they're going to probably come back online next year, we think, as they get more funding. But, you know, they've had some stalls in some of their clinicals. You know, these are small to mid-range biotechs that were kind of hot last year and not so hot this year. They're customers. We're also seeing that, you know, with Wilson Wolf as well. It's definitely slowed down. We've seen the same thing. There isn't anybody who has a business that's really in In the CAR-T and the biotech side and clinicals, it can't say the same thing. It's just the honest-to-God truth. There are things that slow down. There is less funding, and there are less clinicals starting, and that's just reality. I don't think it's long-term. I think it's just a blip for this year, but, you know, it's reality.
spk10: Okay. Okay, that's helpful. And then I guess I need to go back to the long-term targets here. just because in order to hit that 17% organic growth CAGR that you laid out for 21 through 26, and that gets you to the 2 billion, at least by my math, you basically have to do a couple of years of 20% growth. And one of the things that we're talking about is how hard comps can be. So apologies for beating a dead horse here, but I guess I just have to ask explicitly if that's at all a decent way to think about out-year growth.
spk06: Well, the OEM side of things, was bad enough and just on a handful of deals where it took our antibody and our protein business to about flat. And that's a short-term blip. We need mid-level, you know, mid-digit growth in that category. We've had way higher than that the last two years, in fact, double-digit. So I'm not too worried about that. It's more an issue about the back end. and making sure that both cell and gene therapy and exosome as a platform can get to 45% to 50% growth in that range. That's what's got to happen. Everything else is within the error bars easily to hit there, but we've got to get to that level. And we've got a couple more years to get to that point. I don't think we're shook about it. Things can only grow so fast, and we're kind of growing pretty fast.
spk05: I just added a little bit, Dan, as we mentioned in the call earlier, literally a handful of customers, biotech customers, smaller biotech customers, with a difference between double-digit growth and mid-single-digit growth for us this past quarter. So that's how quickly you can flip the other direction as well when things come back online.
spk02: Our next question comes from Dan Leonard with Credit Suite. Please proceed with your question.
spk07: Hi, thank you. Chuck, in the past, you've talked about hiring challenges as being a gating factor to your growth and wanting to hire more. Can you give us an update on trends there? Are you still planning aggressive hiring or have you moderated your ambitions there?
spk06: No, it's a very insightful question. And I didn't bring it up on the call, but it is more late breaking news. But we definitely had turnover in our sales force in the biologic platform area. As you know, a lot of instrumentation, things that we're not in, pretty hot still, larger metal things, and there's been a lot of attrition, and we lost a fair number of people. We're at full strength again, but there's definitely a component there. On spatial, we've come all the way back. I think we're only down one. Overall, we're riding our attrition to kind of stay leaner here as we ride through it. You saw our margins are held pretty well. We're on track. Part of that is that we've just not replace everything through attrition. We had a pretty big spend plan for this year for this plan to hit these double-digit targets, and they're not there, so we pulled back like any good operator would. I think we'll end up the year up, 1 to 200 people, but not the 3 to 400. I think the salespeople are the biggest risk. I think there's a productivity hit we probably took in the last quarter or two off of 1,000 people turning over last year, a full third of the company. That is probably unappreciated. And that will also level out going forward. But we're watching that very carefully. We're working it hard. We're changing. We've done a lot of market upgrades. Wage inflation is a big hit. I mean, I think we've done a remarkable bottom line considering all the wage inflation we've actually had to absorb this past year. And we're fighting it like everybody else. But we have a great portfolio, a lot of great, sexy new products and a roadmap. And we're still in the business of helping people and helping people develop drugs. And that interests a lot of people to come on board. Demographically, we're a much younger company now than we were three, four, five years ago. And that makes you want to have more changes too. ESG is very important to us here. We have a lot of A lot of different new groups and clubs and dealing with different levels of diversity. The company's never been more focused on that. We're over 50% female in our management. We're 25% Chinese, so we've got a big Forbes Award this year for our diversity and stuff, so we're focused on all that. But youth and diversity are key, and managing that is key to attrition, I think.
spk07: Appreciate all that color, Chuck. And my follow up question on China, I'm not sure I know how to quantify the word explode, but when it comes to the $1.7 trillion RMB loan package, what are you seeing on the leading indicators on that? Are you seeing quote activity tied to that spend? Are you seeing RFPs? Is there anything that gives you confidence that money is going to start flowing beginning that June quarter?
spk06: Yep, I had a meeting on that just asking those very same questions with leadership in Asia. And yes, tenders are going out and there is discussion, so it looks like it's very real. It's about a two-month process, so I don't think we'll see much of that here in Q3. It's a Q4 activity. We kind of have them at over 100% to plan in Q4. Of course, they're trying to negotiate that, but I think it's well over 100%. If there's reality around this $1.7 trillion RMB stimulus, which is really instrument-driven, then it'll be real. I think there's pent-up demand already. We had mid-single-digit growth the last quarter with nobody working. So I think it'll be a quick comeback story. We have data on that, right? This happened two years ago as well after the COVID quarter, and I think it'll be similar. The government is very focused on prioritizing health care. I mean, that's what the stimulus is for. I don't think anything changes here. So people just got to get back to work. Kind of tough to read right now, too, because they're just coming off a new year now, right? So they're just come back to work, I think, this week even. And we're coming back fast. I mean, we had the whole office, 90% of our people were sick at the same time. Like within a two-week period, they all got hit. That was actually... Similar anywhere in Shanghai. Customers are the same way. So in customers, too. So it's going to snap back pretty fast, we think, unless there's some new variant. But I asked questions about that, too, about when do they expect a second wave, and they don't really expect one for a while, according to the people we talked to. Everyone's already got it.
spk02: Our next question comes from Catherine Schultz with Baird. Please proceed with your question.
spk00: Hey guys, thanks for the questions. I guess first, Jim, just circling back, you said adjusted for China and RUO region, bulk ordering, organic growth would have been double digits. Can you just quantify the bulk ordering portion? It seems like China is maybe a two-point headwind and bulk orders four points or maybe a little bit more. Is that about the right ballpark? And then can you just quantify any bulk purchasing activity in the third or fourth quarter of last year, just as we think about comps heading into the back half of the year?
spk05: So yeah, your percentages are pretty close to what we show as well. And yeah, that's kind of why we said we expect Q3 to be very similar to Q2 in terms of organic growth, because the number of one-time kind of bulk orders from these small biotechs was similar to Q2, perhaps a little bit less, but also keep in mind that we had the very large actual true licensing agreement with Semo Fisher in our Q3. We did know all along that Q3 was going to be our most challenging growth quarter because of that very large XO2 agreement that occurred. So that's an additional headwind that we didn't have, but we think with the overall momentum of the business, we'll be able to cover some of that sequentially so that sequentially our growth rates will be similar.
spk00: Okay, got it. And then can you just talk to the rebound in Europe? I think on your last earnings call, you talked about September being up double digits and that strength continuing into October. So can you just walk through how things unfolded throughout the rest of the quarter?
spk06: Yeah, it was definitely a story of Europe doing better than the U.S. from last quarter. We had run rates 12% plus in Europe. Overall, it was about a mid to high single-digit kind of level in Europe. So a good recovery, not all the way back where we want, but you remember they were negative last quarter, so that was good. We have new management hopefully going into place soon. They're as well working on that. You know, we didn't talk about it. We put in a whole new ERP system. and without a glitch. So that's all coming on live. We have a whole new warehousing system in Dublin now supporting mainland Europe, and that's coming on live with no glitches. So there have been a lot of good things in Europe as well. Going forward, I think the risk of the war and energy in Europe in the winter and stuff has been mitigated pretty well. So we're kind of focused on really getting the teams up to speed, new management in place, completing the mission on cross-selling and the commercialization strategies and tactics that we were in the middle of doing before COVID hit and all that. And funding seems reasonable in Europe, country by country. We're still weaker in Germany than we want to be. We always have been. So we're really focused on trying to build out Germany more going forward. I think that's key. I think there's a risk in the UK given Brexit still. But so far, so good. But I guess I'd answer it that way for now. Europe's out of the hot seat from last quarter. Now we've got OEM issues in the U.S. to deal with.
spk02: Our next question comes from Patrick Donnelly with Citi. Please proceed with your question.
spk09: Hey, guys. Good morning. Thanks for taking the questions. Jim, maybe kind of follow up on one of the earlier questions in terms of headcount. As you guys kind of see this growth slowing for a little bit, obviously talked about 3Q being in this area as well. How are you thinking about managing expenses? How are you thinking about the margin cadence? How nimble can you guys be in terms of protecting the bottom line and get the margins held up pretty well this quarter relative to the top line? So just curious how you're thinking about that piece and if you're changing any growth investments or any way you're thinking about the P&L.
spk05: Yeah, I mean, as we've talked about the last couple quarters, we were behind in our investments. investments in hiring for the most of fiscal year 22 and even arguably fiscal year 21. And we made great progress in catching up in those investments and catching up in that headcount in Q4 in particular. And that's been a reason for our margin drag, one of the reasons for our margin drag the first half of the year. And I think we've also been fairly public about this in the past where, you know, not just us, but everyone was dealing with retention issues the last year and a half. And When you talk about 3,000 employees that we ended the year at and are relatively still at today, roughly 1,000 of those employees have been hired in the last year because of both new hires but also replacements of lost folks. So that's a huge, huge influx of new people in the organization that need to get up to speed and, frankly, get productive. And so we're really focusing on getting the productivity out of those folks we hired last year. and so that's really the focus of this year, which is why there's not a lot of new hiring happening nor needed. That being said, there are strategic investments we're making, particularly around our molecular diagnostics division to support the amazing growth we're seeing in our prostate tests there, and there's a few other R&D programs that we're slowing down just a bit just to kind of catch up from all the hiring we did last year, but nothing that's going to you know, have any issue with our long-term growth plans.
spk06: Well, let me interject, too, here. Remember, one of our reasons for being successful the last 10 years, I think, is our prioritization process. We've talked about it a lot. A lot of you have had the short course meeting with us offline, and it allows us to change priorities and change mix of people and programs very quickly. We do a zero-based every year. And we're already in the middle of that and making those changes. So, you know, we've doubled the size of our enamel cell teams since we hired them. We are adding people. We're up 50% in head count in our exosome teams, you know, in the last years because we're waiting for trigger points to happen. They happen. We told you we'd start investing when we saw that. You know, the reconsiderations went through. Urologists are seeing patients again, and we're lighting it up. So we're adding a lot of people there, but we're changing the mix and some other things. We're holding off on some things that are just prudent to do right now until we see a reason to change. Remember, myself and all of our leaders all come from working in large companies. I'll run billion-dollar-plus P&Ls, every one of them. They know how to operate.
spk05: That's a great point, Chuck, and we are actively reallocating resources towards those higher growth platforms. So it's our prioritization process at work real time. And as that relates to margins, then, by holding our overall cost base relatively neutral, maybe with a slight uptick throughout the year, but relatively neutral through the remainder of the year. Anyone who follows our business knows that our second half is, from a revenue perspective, seasonality-wise, is much stronger than our first half, simply because our customers are at the bench more days than they are in the first half of the year without all the vacation interruption. That additional revenue on top of that same cost base should allow our margins to continue to expand sequentially.
spk06: And by the way, people are coming back to work here. Yes. We're a lab. We're a lab.
spk09: Yeah, gotcha. Chuck, and maybe one on Wilson Wolf. Can you just refresh us in terms of kind of the milestones and timing there? Has anything changed in your conviction in kind of moving forward with that change at all? Yeah, go ahead.
spk06: We're running out of time, so I've got to move fast here. They've slowed down too, but as you know, the targets are $92 million in revenue or $55 in EBITDA for the first tranche. They're very close on one of them, and we may strike soon. We may choose to wait. It's as much strategic as it is in anything else. We've got the cash. We're ready to go. So we might choose just to weigh in and go sooner than later. We're not sure yet, but we're getting close to trigger. I've got to believe in the next. If things pick up at all for them, we're going to hit it soon. If they don't pick up, it might be another couple quarters, but We're within our sights here. Nothing's changed strategically. Nothing's changed culturally. Nothing's changed in the relationship. The teams are tighter than ever. If anything, they're pushing to get closer and get this to happen. So a great, great question. It's looming, and I can't wait.
spk02: Our next question comes from Justin Bowers with Deutsche Bank. Please proceed with your question.
spk04: Hey, good morning, Chuck and everyone. Just one here on China. Is there a way to parse out how much of the slowdown was between the consumables versus the instrument business? The second part to that would be in terms of the stimulus funding coming on, do we have a sense of the duration of that? Will that be a tailwind to calendar year 2024 as well based on some of your conversations?
spk06: I think Stimulus in the U.S. or anything related to that is here and gone. I think the OEM comments are more about consumables, and the instruments are slow, too, with basing off just prudent conservatism in biotech and biopharma and funding in general. So it's more funding on the instrument side and then conservatism and OEM is more on the consumable side. Specifically China. It's just, they're not at work. They'll be screaming back here very soon. I'm not worried.
spk05: Yeah, I'd say, you know, the slowdowns from our call it 20% plus normalized growth to mid single digit growth was across the board in both instruments and consumables. And, you know, it remains to be seen how long the stimulus impact lasts, but it's going to take more than a quarter to spend that much stimulus, in our opinion. So I think it'll be a multi-quarter, if not year, benefit.
spk06: It'll be this whole calendar year. They're intending it for that. They're intending it for health care. They're intending it to be in hardware more than anything else. And we play big there. We're about productivity and hardware. So we've got more platforms than ever. So we're going to share in that as well. I mean, just to put that in the scope, it's 1.7. If that's the real number, that's way bigger than our entire NIH budget. So it's going to be good.
spk03: It's going to be good for everybody.
spk02: We have reached the end of our question and answer session. I would now like to turn the floor back over to management for concluding comments.
spk06: All right. Well, thanks, everyone. We'll see you at the end of next quarter. I think we were as transparent as we can be. We've been doing this a long time together as a team, and we'll always be transparent. Things still look really good here. We don't see any change in our thesis. And anyway, the future is bright, we think. So we'll talk to you soon. Thank you.
spk02: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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