This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Good day and welcome to the BiotechniCorp third quarter fiscal 2023 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask your question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to David Clare. Please go ahead.
spk05: 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 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-techni.com. Separately, we will be participating in the B of A, RBC Capital Markets, Benchmark, Craig Hallam, and Jefferies Healthcare Conferences in May and June. We look forward to connecting with many of you at these upcoming conferences. I will now turn the call over to Chuck.
spk10: Thank you for joining us for our third quarter conference call. As we expected, message in last quarter's call, our Q3 top line year-on-year revenue growth was similar to the growth we reported in Q2. While the year-on-year growth rate and tough comps from last year were similar in both quarters, the underlying performance of the business improved quarter-in-quarter when considering the large ExaTrue kidney milestone payment received from Thermo Fisher last year in Q3. The team did a great job this quarter, furthering several of our key growth drivers as Physician uptake and utilization of our XODX prostate test accelerated. Demand for our cell therapy workflow solutions, including GMP proteins, remain strong. And our spatial biology business returned to double-digit growth. These growth drivers are partially offset by the continued challenges of COVID in China, lower biotech funding, and OEM destocking from supply chain disruption concerns last year. Encouragingly, as we look ahead to finishing this fiscal year and kicking off fiscal year 24, we see China coming back strong, with COVID now in the rearview mirror, destocking by our OEM customers eventually with unwinding, and moving beyond the tough prior year comps from our smaller biotech customers. Before I get into the specifics of the quarter, I'd like to take this opportunity to welcome Peter Schusser as the new leader of our European organization in business. Peter has over 20 years of experience leading commercial organizations, including very relevant experience successfully growing businesses and leading European-based teams in large life science tools companies. Under Peter's leadership, we are looking forward to continuing to grow our European presence and delivering the tools the region relies on to enable scientific discoveries. Now, an overview of our performance by geography and end market. Starting with Europe, where the team delivered high single-digit growth order growth in the quarter, the macro environment continued to stabilize and overall research activity increased sequentially within our core biopharma and academic end markets. Our new Dublin warehouse to support mainland Europe is now fully functional and fulfilling customer orders. With a new leader in place, a new distribution center, and an improved ERP system, we are positioned to serve our customers even better in the region. In North America, we also saw sequential improvement with order growth increasing mid-single digits in the quarter. Here, the impact of a lower biotech spend is the greatest, and the year-on-year comp is the toughest, with over 25% growth in biofarm last year. And finally, there is China, which was a tale of two chapters this quarter. Prior to the Lunar New Year, most people in China were still recovering from COVID, and its citizens were directed by the government to essentially stay home until after the New Year holiday. Up until this point in the quarter, sales were practically nonexistent in China. But after everyone... everyone was well and came back from holiday, sales accelerated dramatically, and our China team was able to finish the quarter with revenue growth in low single digits. This was on top of a comp where China grew over 30% last year, just a remarkable effort by our team in China. With COVID now in the rearview mirror for China, we hope for good, we see China's growth continuing to accelerate from here perhaps to more than 40% growth next quarter. Now, Let's discuss our growth platform, starting with our Protein Sciences segment, where organic revenue increased 5% for the quarter on top of a strong calm from last year when the segment grew 16%. During the quarter, we continue to make progress with our portfolio of cell therapy workflow solutions, including our GMP reagents, specialty cell culture media, along with cell culture matrices and BME, which collectively grew over 20% in our Q3. Our GMP proteins remain in high demand across the cell therapy spectrum as biopharma customers developing products for the regenerative medicine and immune cell therapy markets continue to rely on our portfolio of over 40 GMP-grade cytokines and growth factors, including several that are only available from Biotechni to effectively scale their therapies. Our GMP protein business had its second consecutive record-breaking quarter, and given our industry-leading menu of highly bioactive, lot-to-lot consistent, and tiered GMP proteins, we are positioned to remain a leader in this rapidly growing market. In addition to the ongoing progress of expanding the GMP proteins menu, we are manufacturing in our state-of-the-art St. Paul facility. We are also experiencing significant yield improvements as we scale production at this facility. Recall, we originally estimated GMP protein capacity at the facility was $140 million annually, which we increased to over $200 million as we manufactured initial protein batches from this new facility. As the team continues to launch additional GMP proteins, We have been able to achieve product yields as much as 50 times higher compared to legacy methods used to manufacture smaller batches in our headquarters. In fact, these productivity and yield gains have been so significant that we now estimate the capacity of this facility is at least $500 million and potentially higher than $1 billion, depending on the mix of GMP proteins ultimately manufactured from the facility. We also reached a significant milestone in our cell therapy strategy in Q3 with our initial investment into Wolf & Wolf. As a reminder, Wilson-Wolf is a manufacturer of the proprietary line of cell production bioreactors called G-REX, which provide an ideal amount of oxygen and nutrients to effectively scale immune cell therapies. Wilson-Wolf and Fresenius-Cabi have both been key partners of our biotechniques through the scale-ready commercial joint venture since 2020, with the three companies collectively offering tools and technologies for cell culture, cell activation, gene editing, and cell processing. During the quarter, Wilson-Wolf reached its trailing 12-month EBITDA milestone, triggering Biotechnics' $257 million investment for a 20% ownership stake into Wilson-Wolf. We see tremendous synergies with the eventual ownership of Wilson-Wolf and are already developing a one-of-a-kind standardized closed-cell gene therapy manufacturing system that integrates G-Rex, Biotechnics' GMC proteins, and T-cell culture media into an FDA-compliant, patient-ready, off-the-shelf production process. that will save end users significant time and money as they pursue meaningful clinical data and eventual commercialization of these novel cell therapies. Following this initial investment, Biotechnology has the right to acquire the remainder of WilsonWolf for $1 billion upon its achievement of additional milestones or for 4.4 times trailing 12-month revenue if these milestones are not achieved by December 31, 2027. We look forward to continuing near-term pipeline development work with Wilson-Wolf and eventually having this rapidly growing, highly profitable, industry standard, fully under biotechnics growing umbrella of cell therapy products. Now let's discuss our portfolio proteomic research reagents, including our RUO proteins, antibodies, and small molecules, which collectively grew low single digits in the quarter, coming off of a challenging year-over-year comp, where we grew about 20% in Q3 of last year. I'd like to elaborate on the OEM phenomenon we've experienced in our year-over-year comps for the past couple of quarters. Recall that a year ago, supply chains were constrained, and several companies, including Biotechni, stocked up on certain components that were critical to meeting customer demand. Biotechni has an industry-leading catalog of over 6,000 proteins and over 425,000 different antibody types that researchers around the globe rely on as a basis for their research, enabling scientific discoveries enabling new therapeutic and diagnostic discoveries to further healthcare. This same catalog of bioactive reagents also serves as the enabling content for several products from other diagnostic and life science tools companies. Without this content, a number of their assays will not work. Last fiscal year, a handful of these OEM customers stocked our reagents to ensure their ability to continue to meet demand for their products. Best we can tell right now, it will take another quarter or two before this new stocking to unwind. After that, these headwinds should become tailwinds as these OM customers resume their normal ordering patterns of RE agents in fiscal 24. Moving on to the performance of our ProteinSimple branded portfolio of analytical solutions, we delivered low double-digit growth in the quarter as all three of our primary instant platforms increased in the quarter. The rapid installed base growth we experienced over the last two years continues to drive increased consumable utilization across our ProteinSimple instant platform as our simple Western, simple Plex, and Maurice instruments become more ingrained in research workflows. The ease of use and flexibility offered by our proteomechanical tools are leading to expanding applications across three platforms. These expanding applications, particularly for cell and gene therapy, QA and QC, is translating into higher total addressable market opportunities for these platforms. As our legacy proteomechanical tools CAM expands from $2 to $3 billion to firmly above $3 billion. Order funnels remain very strong across these three instant platforms, although budget conservatism from a subset of biotech end users has led to an overall lengthening of the order closing cycle. Our SimplePlex-branded multiplexing immunoassay platform, ELA, led instrument growth, increasing over 25% in the quarter. The sub-pecogram sensitivity and cost advantages offered by this fully automated ELISA platform combined with an expanding menu of over 250 analytes to support therapeutic areas across neuroscience, cell and gene therapy, immunology, and cancer, continues to resonate with both biopharma and academic customers. This traction and acceptance in both industry and academia is apparent in the growing number of instruments in the field as Ella crossed an important milestone in the quarter with over 1,000 instruments now in the field. In neuroscience, Ella's high level of sensitivity positions it is an ideal instrument for biomarker detection and discovery, making this a prime area for future menu expansion. We also continue to make progress preparing Ella to penetrate the clinical diagnostic market as our ISO 1345 audit of our Wallingford facility continues to progress. With a growing installed base, a rapidly expanding menu, and an untapped clinical diagnostic market opportunity, we continue to see an incredibly bright future for Ella. Now let's discuss our biologics platform, Marese, which enables protein purity charge and identity analysis in five minutes in an easy-to-use cartridge-based instrument. Recall that we recently expanded on Maurice's capabilities with the launch of Maurice Flex, which adds imaged capillary isoelectric focusing fractionization capabilities to the instrument. Fractionation is a front-end step in mass photometry, and Maurice Flex addresses the labor-intensive and time-consuming challenges of using legacy fractionation methods, including ion exchange chromatography. This new application enters Maryse into a new $300 million market. Initial biopharma interest in Maryse Flex has been strong, and we had multiple initial instant placements in the quarter. Our Simple Western platform continues to penetrate the Western blot market, as its ability to automate the time-consuming and cumbersome Western blot process with a sample and an answer-out solution resonates within our biopharma and academic research end markets. Similar to our other platforms, applications for Simple Western are expanding. including quantitative immunoassays for both cell signaling and rare protein detection in complex lysates and rare tissues. Additionally, our biopharma customers are increasingly relying on Simple Western in their gene therapy workflows, as its ability to detect protein-related impurities, viral titer, and identity information, and empty versus full capsid information provide critical QAQC information for these workflows. Gene therapy remains a nascent but rapidly growing application for Simple Western, And we experienced 30% growth in this area during Q3. We also partnered with Cell Signaling Technology, or CST, to expand the number of simple Western validated antibodies for various targets and across multiple disciplines. CST is a leader in the development of antibodies and other related Western blotting reagents used to elucidate cell signaling pathways that dictate cellular behavior and impact human health. We are excited about the addition of these new antibodies to the biotechnic catalog of validated antibodies and are encouraged with the market response following the announcement. Now, let's shift to our diagnostics and genomics segment, where organic revenue declined by 2%. Adjusting for the exit-through milestone payment from Thermal Fisher Scientific that we received in the comparable quarter last year, but did not repeat in the current quarter segment growth, was up for single digits. Starting with our molecular diagnostics business, where we continue to experience increased physician adoption and utilization of our XODX prostate test, leading to over 70% test volume growth for the fifth consecutive quarter, and an associated revenue increase of over 85% in a quarter. We continue to see positive momentum on the key performance indicators we track for our exoDx prostate test, including year-over-year and sequential growth in the number of physicians ordering the test, record test volume from physicians new to exoDx prostate, as well as a record number of doctors ordering more than 25 tests in a quarter. We are pairing this volume momentum with continued progress in strengthening our coverage with private payers, as our recently bolstered market access group continues to improve access to the large national payers, positioning XODX Prostate for expanded future coverage. The team is doing an excellent job managing a rapid growth in XODX Prostate test volume, and we continue to experience record volumes in our Q4 to date. Here in the quarter, an expanded local coverage determination from National Government Services who is our Medicare administrative contractor, covering our Massachusetts-based exosome diagnostic CLIA-certified laboratory went into effect. This updated policy now covers the exoDx prostate test for men with a prior negative biopsy but who are thought to be at high risk for prostate cancer and are considering a repeat biopsy. Following this update, the LTD now mirrors the National Comprehensive Cancer Network, or NCCN, guidelines and enables reimbursement 4XODX prostate is a monitoring tool in populations with and without a prior prostate biopsy, effectively increasing the total addressable marks opportunity by approximately 50% for the test. Our spatial biology business, branded ACD, increased low double digits in the quarter, with adoption in our flagship RNA scope assay remaining strong. This gold standard RNA in situ hybridization assay enables industry leading sensitivity and specificity transcriptome analysis while retaining tissue morphology. We furthered this industry-leading capability with the recent introduction of our new, exceptionally bright, vivid fluorophores, enabling customers to easily detect and visualize both abundant RNAs as well as RNAs of very low abundance in a tissue sample. More recent additions to the ACD portfolio are also getting traction, including BaseScope and Micro and RNAscope. as these novel solutions enable visualization and evaluation of therapeutic biodistribution, safety and efficacy of gene therapy delivery vectors, and oligonucleotide therapies. BaseScope and microRNAscope are both relatively small contributors to our spatial biology business today, but are growing rapidly and becoming progressively more accretive to the growth of this business. Continuing with spatial biology, we recently announced an important strategic partnership with Lunafor, to develop the first fully automated spatial multiomics workflow with same-slide hyperplex detection of protein and RNA biomarkers on Lunafor's COMET instrument. This solution will enable users to easily visualize both cell types and their activation states in tissue. Combining COMET's highly flexible custom antibody panel design with RNAscope's library of 45,000 catalog probes, and our in-house custom probe design capabilities will give customers the ultimate flexibility in achieving their set of goals. In summary, our CO3 performance was in line with our expectations. As China growth snaps back and the temporary headwinds created by reagent destocking from a handful of OEM partners subside, we believe we are well positioned to accelerate growth next quarter and beyond. One thing is certain, our portfolio of cell and gene therapy workflow solutions, a best-in-class liquid biopsy platform, novel proteomic analytical tools, spatial biology capabilities, all coupled with an industry-leading catalog of bioactive content, positions biotechnics to remain a leader in some of the most rapidly growing life science tools markets. We look forward to continue to execute our strategic growth plan and deliver on the vast opportunity in front of us. With that, I'll turn it over to Jim.
spk09: Thanks, Chuck. I'll start with recapping the overall third quarter financial performance. Adjusted EPS was 53 cents, consistent with the prior year quarter. Foreign exchange negatively impacted EPS by a penny, or minus 2% in the quarter. GAAP EPS in Q3 was $0.43 compared to $0.37 in the prior year. The biggest driver for the increase in GAAP EPS was a non-recurring loss on our previously held chemocentrics investment in the prior year period. Q3 revenue was $294.1 million, an increase of 3% year over year on an organic basis, and 1% on a reported basis. Foreign exchange translation had an unfavorable impact of 2%, and acquisitions had an immaterial impact on revenue growth. Chuck called out the temporary headwinds we faced in Q3, and I will quantify their impact to overall company growth. Starting with prior year's ExoTrue milestone payment, the impact of this one-time revenue recognition last year in Q3 was approximately a 3.5% headwind to our overall growth this year. The COVID infections and corresponding shutdowns in China this quarter was an additional headwind to overall company growth of approximately 2.5%. The OEM destocking of REO reagents we estimate to be another 1.5% headwind to our overall company growth rate. The accumulation of these specific and temporary headwinds is approximately 7.5%, which, when added back to our reported organic growth, brings us to an adjusted organic growth rate of over 10%. The normalization of smaller biotech customer spend following a red-hot funding environment the past couple years is more difficult to quantify, but it is also a headwind that may take more time to work through. But biotech research is not going away. It is often the important innovative bridge between academic discovery and big pharma therapy commercialization. In the meantime, biotechnology will continue to serve all these customers in the life science change that ultimately brings quality of life to patients, with innovative products that improves their likelihood of success and in the most productive way possible. The double-digit growth we see in our key growth platforms, melangein therapy, exosome diagnostics, spatial biology, and protein-simple branded automated assays, demonstrate this is already the case. Moving on to our organic growth by region and market in Q3, North America grew mid-single digits Year of demand increased upper single digits. China grew low single digits, while APAC declined low single digits due to prior year government stimulus in Japan not repeating this year. By end market, BioPharma grew high single digits, while Academia grew mid-single digits. Both were partially offset by the impact of destocking by a handful of OEM customers. Further down the P&L, total company adjusted gross margin with 72.6% in the quarter, compared to 73.2% in the prior year. The decrease was primarily driven by unfavorable foreign exchange and product mix. Adjusted SG&A in Q3 was 27.9% of revenue compared to 26.1% in the prior year, while R&D expense in Q3 was 7.7% of revenue compared to 7.5% in the prior year. The increase in SG&A and R&D was driven by strategic growth investments made in Q4 of fiscal year 22 and the acquisition of Namosel. The business has implemented strategic price increases during the first half of fiscal year 23 to offset the dollar impact of inflation to operating income, with pricing largely offsetting the inflation impact on our operating margin as well in Q3. Adjusted operating margin for Q3 was 37 percent, a decrease of 260 basis points from the prior year, but 150 basis point improvements sequentially. The impact of the non-recurring extra-true milestone payment in the prior year period decreased margin by 130 basis points. Foreign exchange decreased adjusted operating margin by another 50 basis points, while the acquisition of NanoCell and other strategic growth investments drove the remainder of the margin dilution for the quarter. As our top-line headwinds start to subside, we will continue to make strategic investments in our key growth platforms to ensure their long-term momentum. By doing so, we expect operating margins in Q4 to be comparable to Q3. Looking at our numbers below operating income, net interest expense in Q3 was 0.2 million, decreasing 2 million compared to the prior year period due to lower debt levels and higher interest income earned on cash deposits. Our bank debt on the balance sheet as of the end of Q2 stood at 370 million, an increase of 170 million compared to last quarter, with the increase reflecting our investment in Wilson-Wolf, which was funded partially with debt and cash on hand. I would note, given the timing of the Wilson-Wolf investment, which took place at the very end of our fiscal Q3, we anticipate our net interest expense to increase sequentially to approximately 2.7 million in Q4. Other adjusted non-operating income was 0.1 million 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 arrangement. Moving further down to P&L, our adjusted effective tax rate in Q3 was 21%. Turning to cash flow and return of capital, $50.5 million of cash was generated from operations in the quarter, and our net investment in capital expenditures was $11.7 million. Also during Q3, we returned capital to shareholders by way of $12.6 million in dividends, We finished the quarter with 161.6 million average deluge shares outstanding. Our balance sheet finished 2-3 in a strong position with 157.2 million in cash and short-term available for sale investments. Our total leverage ratio remains below one turn, and 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 segments. Q3 reported sales were $218.9 million, with reported revenue increasing 3% compared to the same period last year. Organic growth for this segment was 5%, with foreign exchange having an unfavorable impact of 2%. Despite the temporary headwinds and the tough year-over-year comps, I will highlight that the longer-term five-year CAGR for this segment is approximately 12%. Operating margin for the protein sciences segment was 45.1%, a decrease of 30 basis points year-over-year with operational productivity more than offset by foreign exchange and the impact of the nanocell acquisition. Turning to the diagnostics and genomics segment, Q3 reported sales were $75.7 million, with reported revenue decreasing 3%. Organic revenue decreased 2%, with foreign exchange having an unfavorable 1% impact. As Chuck mentioned earlier, adjusting for the extra two-milestone payment we received in Q3 of last year, which did not repeat again this year, organic growth was upper single digit for the segment. Our exosome diagnostics business remained incredibly strong in the quarter, as our fortified marketing message, strength in commercial team, and the recently updated Medicare LCD drove record test volume and revenue growth. Our spatial biology business returned a double-digit growth in the quarter, with strong performances in our RNA scope, base scope, and microRNA product lines. partially offset by relative softness from a few biotech customers. Moving on to diagnostics and genomics segment operating margin, at 15.2 percent, the segment's operating margin decreased 980 basis points compared to the prior year. The segment's operating margin was unfavorably impacted primarily by prior year revenue related to the ExoTrue milestone payment, and to a lesser extent, net inflation and strategic growth investment. Before we get to Q&A, we would summarize our fiscal year up to this point, our most recently completed quarter, and our view looking forward as follows. For much of the first half of our fiscal year, how customers were going to behave in a post-COVID pandemic world was rather murky. This included behaviors such as customers taking pent-up vacations last summer and fall, a more risk-off mentality for smaller biotech investing, government-induced shutdowns in our highest-growth region, China, and a realization of the stocking that took place during the COVID-induced supply chain crunch that is now unwinding. These behavioral outcomes became clearer as we exited Q2 and gave us more visibility going forward. Through it all, and as Q3 demonstrated, our growth platforms are still winning with double-digit growth. As we enter Q4, some of the headwinds should diminish, especially in China. but some are likely to remain, namely the OEM destocking and smaller biotech rationalized spending. Looking further ahead into fiscal year 24, these remaining headwoods should further diminish. The double-digit revenue increases we see in our strategic growth platforms should once again be reflected in our headline numbers. In the meantime, we expect Q4 overall momentum to continue to improve from Q2 and Q3, with an overall growth rate likely similar to how we started the fiscal year in Q1. 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 very much. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up the handset before pressing the keys. If your question has been answered and you wish to withdraw your question, please press star then 2. We will pause for one moment to assemble our roster. And our first question today comes from Panit Souda of SVB Securities. Please proceed with your question.
spk03: Yeah. Hi, Chuck, Jim. Thanks for the question. First one on biotech funding. Obviously, you know, there have been quite a bit of noise out there from bioprocessing. You highlighted a number of things and trends that you're seeing as well as the headwinds. But, you know, if the headwinds were to prolong, where do you think the business is more defensible and where you think where the pressures could be felt more? And then I think what Jim was implying is the first quarter is about 7% growth that you delivered. So I assume that's what you're expecting for the fourth quarter. What does this mean for, you know, could you get back to sort of the mid-teens levels as we head into the sort of the first and the second quarter of 2024? I would really appreciate sort of a color on that because I think that's sort of the key question given these biotech questions and emerging biotech headwinds.
spk10: Sure, Vinit. Thanks. Well, I think first and foremost, I think we're kind of talking about the comeback a little more quickly than others are talking about it. We bridge for you the stocking component. And a lot of the stock, and we know the customers, and we know what they're at, and they've been very clear with us. So we know when they're coming back for more. And it really is the cute one. So there will still be funding pressures for sure. I mean, the public information out there on the amount of biotech funding reductions are, you know, double-digit and beyond. So it's impactful. But we're, you know, we're kind of circumventing a lot of that with, you know, surgical work here within our own OEM sector, which is coming back. And let's not forget that we were in the mid-teens in our run-rate business supporting Bough Farm and our academic last quarter. This quarter, we were low-teens still in our run-rate business for our consumers. So that all speaks very positively to the current department. Going forward, we just think it starts getting better. As you pointed out, we've got one more tough quarter, a really tough Q4 comp. We had a blowout last couple weeks, last year at Q4. Kind of wish that would have been in Q1 now. And you're right, it's in that seven high single-digit number is kind of our range. China's a big factor, too. We see China roaring back. We were just over there first time in three and a half years. The team is in great spirit, full strength. uh seeing all their customers and things are ramping extremely fast so i wasn't kidding with 40 or better that should be kind of in the range for us for china and uh you know that gives us a good base across the company to start building on an overall growth rate and jim uh you know in terms of uh recovery back to sort of you know mid-teens i just wanted to clarify you meant a fourth quarter
spk03: should be in line with first quarter or for the full year?
spk09: In line with the first quarter.
spk03: Okay. And then just if I could, you know, ask a little bit on the closed-loop system that you highlighted, you know, what's the timeline on that? What's the sort of investment needed there? And sort of how it differentiates from the rest of the platforms of the market, Cocoon and other ones? And do you have enough pieces already in terms of the consumables products to sort of fulfill the entire closed-loop system there?
spk10: Yeah, so we actually have made great progress there. As you know, we've got a factory that we're putting new programs into every month. We have the G-Rex platform, which is already, in fact, standard out there. The last real misconception is the integration of media. We have a couple different formulations of media that we're going out with. We've been in media forever, but in more regenerative medicine-type approaches. So this is a little more different. So we're looking at kind of the make versus buy. It's all about time and scale. So we think within a year here, we're out with the coolest system. So roughly about a year, and it's probably a little mushy right now. It could be sooner. It could be a little later. It depends on how much we want to go with ourselves, with our own capital and assets versus partnering.
spk03: Okay, great.
spk10: Okay. We have IP, and we have solutions for how to actually integrate with G-REX already. So some real novel solutions. And some of them, John Wilson himself has been involved in.
spk03: Got it. OK. All right. Thank you.
spk02: Our next question comes from Jacob Johnson from Stevens. Please proceed with your question.
spk12: Hey, thanks. Good morning. Chuck, maybe following up on that last question, now that you own 20% of WilsonWolfe, does this change anything about that relationship? Does it allow for more collaboration between the two of you? Does it create additional opportunities? Just curious, if anything. changes from that standpoint?
spk10: Well, that's a great question. We have a great relationship. We talk every week. The teams have been totally together. As I pointed out, one of the keys to the deal was the fact that he wanted us to take over and do more operations as he's exploding in growth because he kind of is more of a KOL out there with all the docs and therapeutics and institutions. That's where he wants to more or less live. As you know, he just put out a big press release last week here of CellReady. So he's building a new company, a CDMO-type model, working with assets from Marker to try and build all that more quickly, get to customers more quickly, save a lot of time, a lot of money with startups and with professors with their cell ideas, et cetera. And guess what the workflow is that's going to drive that whole mechanism? It's our ScaleReadyJV workflow. So that means our proteins, T-Rex, It will, of course, use Arsenion's hardware as well, and we'll use all our instance for QC. We'll have our media. We'll have a whole workflow will come in. So that makes us tighter even yet because he wants to make sure that we're integrating for the future too as he builds out these new ideas because he's already kind of understanding that we're at 20%. This deal is going to happen. So he's starting to really focus on what else can go and wrap around you know, the Wilson Wolf franchise to make it even bigger and better, which is all good for us together long term. So if anything, we're talking more and we have more ideas for the future together. So build the next multi-billion dollar, you know, adventure.
spk12: Got it. Thanks for that, Chuck. Maybe just stick on the cell and gene therapy front. Yeah, I think there's been kind of varying commentary about that end market, but it sounded like you had a pretty good quarter there on the GMP protein side. Can you just talk about how much of that is new customer wins, you know, any of these customers kind of scaling up? And maybe if you could kind of remind us where that customer base stands in the clinical trial process right now.
spk10: Yeah, we had a 45% quarter, and that's off of another strong comp last year, 21% or 22% overall for the category, so really strong. it's still growing it's becoming you know close to material by next year for sure and I think overall we just keep accelerating I think we're roughly around 200 customers now and the large ones about with them got a couple more I'd say larger they're all kind of scaling a little more we're trying to keep filling the funnel and it's about you know turning these minnows into tuna and then into whales right so In a couple years, we hope to have a couple dozen whales, and it won't take many to really get this factory humming, so they're coming.
spk12: Perfect. I'll leave it there. Thanks, Chuck.
spk02: Our next question comes from Dan Arias with Stiefel. Please proceed with your question.
spk07: Morning, guys. Thanks for the questions. Chuck, maybe on ACD, what's the growth outlook there, and how has that evolved as we digest it? the biotech spending environments. And then in spatial overall, you've now got these two partnerships here with Akoya and Liverpool. What, if anything, does the incremental revenue contribution potential look like for you guys on those?
spk10: Yeah. Well, we're thrilled that it's come back to double digits. It should stay there. We'll see. There's a lot of opportunity. And you realize also this is not a category that's like only biotech or only pharma. There's a lot of academia with that franchise. And our academia has been, you know, kind of mid-single-digit area, so it's one of the hurdles to get over is to keep raising academia. We also have a service component with that business, and that's been up and down, and it was better this quarter. We've got to make sure we keep pounding away on that service. That service element is how we find a lot of new customers. We'll start with a service contract, and then we blow them away with the data, and then they come on board and they start ordering pros and go from there. So it all works together. You know, Akoya is very different, you know, than the Lunafor – model, the Luniform model, that program is for co-detection protein and RNA together on a single slide, you know, a single morphology where the E. coli is all RNA only. So they're a little bit different. We've been pretty clear about being ubiquitous from the high level, you know, Ventana, Leica, all the way down to the lower automation with these guys. And we even play with, you know, with NanoSpring and others in the middle trying to support them. The more they do in discovery, the more roles are away in translational later. So it's all good. I just came from the ALDA conference, and the theme was spatial. And it was a record turnout by about 40% more people. Spatial is hot. And there's more coming. There's a lot more innovation. There's more companies coming. There's more ideas. And we're thrilled to be one of the leaders. And we're working with all the leaders in hardware automation. As you know, we've got some multiplexing capability coming, and now with co-detection as well, that's going to fill a big gap out there for what people are looking for for identifying what they're really after in their tissue.
spk07: Okay. Do you have a view on just long-term growth there and what you might end up looking like as we head towards the longer-term targets? Because that is one of the businesses that I think is sort of – kind of like a wild card in terms of whether or not $2 billion or something below that is a reasonable target going forward.
spk10: Yeah, as you know, it's a little $100 million kind of run-right business right now. We've always talked about it being a $300 million-plus business, but that's with discovery but also with pathology. Having Lunafor and having these other relationships allows us to really – give pathologists more of what they're looking for. They're not working on a single slide under a scope with one analyzer at a time here. It's difficult. And let's not forget, we've launched a whole set of new dyes, fluorescents, fluorophores, we call Vivid, and they are really lighting up the slides, and they're getting a lot of great acceptance as well. You start adding where we're going with translational, riding the heels of all the discovery guys, and with these new players helping us automation-wise, getting into pathology, five to ten years out, this is well beyond $300 million. This is a double-digit growth rate. It needs to be. It's got to be. When it isn't, we make changes here. It's been as high as 30-plus percent on some quarters, and we hope to be in double digits going forward. There's academics. There's funding issues this year. It's been a little bit lumpy. We're double-digit this quarter. I think it looks pretty solid. We're excited about the relationship. I think we're quite a few months away here yet from actually having revenue on a platform like that, but it's all coming, so.
spk07: Okay. Just a follow-up for me, if I could. Chuck, I have to admit, as I was listening to you welcome Peter in Europe, it occurs to me that as we're pushing towards June here, we're unfortunately coming up on you being a year away from moving on to the next endeavor. The speculation on the street is that you're starting a band. I don't know if you want to comment on that, but if not, can you just maybe update us on what, if anything, The conversation at the board level sounds like in terms of just an executive search, internal versus external candidates, timing on announcement, that sort of thing. Anything for us to think about there?
spk10: Yeah, it's still 14 months away. If you stuck with me for three or four more quarters, it's done. And I will not be joining a band. You've not heard me sing. But obviously, I've done my job with grooming, I think, three excellent internal candidates. All could carry the water here for quite a while, I think. The board is looking outside as well. They have a fiduciary responsibility. And the fundamental reason of taking the time and looking broad is that, you know, we're, under my watch for 10 years, we've, I guess we've increased the sales here four or 500%, something like that. The next 10 years, we want another four or 500%. We're up 6, 7, 8x in valuation in 10 years, and in another 10 years we want to be up another 5, 6, 7, 8 times in valuation. That puts us at needing somebody to run a $60 billion market cap company at $5, $6 billion in revenue. That's the goal, that's the plan, and that's what we're operating for. And I will remain on the board, hopefully, board-willing. I'm not totally missing myself.
spk02: Our next question comes from Dan Leonard from Credit Suisse. Please proceed with your question.
spk11: Good morning. Thank you for the time. Chuck, can you elaborate further on the visibility you have into the OEM destocking dynamic?
spk10: Well, I think we did a pretty good job bridging it. It's about 1.5%. The best thing about this destocking OEM component, and we're not talking about across the board problem. We're talking about half a dozen or so different customers that are all in the millions of dollars of purchases last year, and this year are at zero. And they won't remain at zero. Some won't come back. A lot are going to come back hard and heavy, and then we're really building the funnel with new ones. You know, the beautiful thing about biotech is every year there's a whole new, you know, a slate of new people's ideas that want to buy new juice from leaders like us to try things out. It's building. It's coming back. It's identifiable. And I guess if there's more numbers, I'll let Jim comment, but I think 1.5% is pretty clear.
spk11: And then a follow-up question for Jim. I want to make sure I understood your summary comments appropriately. Did you say that biotechnology would return to double-digit growth in fiscal 24th?
spk09: Well, we're in the process of building our plan right now for next year, right? What I was trying to indicate in my closing remarks was that if you take out these very isolated events, OEMD stocking, China as an example, the ExoTrue deal, and the rest of our business collectively is at double digits already. And our key growth programs, which are going to carry us to $2 billion and beyond, are also all growing well in the double digits. And so, you know, it suggests that we get past these headwinds during fiscal year 2024 this underlying double-digit growth we're seeing not only in our core but definitely in our growth programs, growth platforms, will start to once again resonate and you'll see it in the overall company results. And that's our goal.
spk10: Let me put a little ribbon on that. So I mentioned our run rate. We watch our run rate and how we're doing digitally with our catalogs. We're funded first and foremost to catalog business for life sciences across the board, biopharma down through academia. And that remaining in teams, It tells us that, you know, things are okay. Then you look for the other holes and we bridge it for you. This OEM thing is going to come and go. You pull that back, we're back to normality. And on top of that, you have these growth programs. Our three top growth areas all had spectacular quarters. Facial had double digits, 45% gene procreation, 20-plus percent in cell and gene therapy overall, and exosome at 87%. They're not material enough right now to carry the average. But by next year, they're going to be a lot more material. They're going to carry the average. So with all this stuff fundamental coming back on top of these growth programs, we don't give guidance. But we won't be very happy here if we're not at double-digit growth and then some stuff.
spk02: Our next question comes from Patrick Donnelly with Citi. Please proceed with your question.
spk08: Hey, guys. Thanks for taking the questions. Chuck, maybe dive a little deeper on China It's encouraging to hear that 40% number thrown around for this quarter. Can you just talk a little bit about the trends you saw maybe in March and then into April? It's definitely a really nice recovery kind of post the loaner new year. And then what, how do you kind of think about the go forward there? You're looking back to maybe the last time this happened with the COVID lockdown. Is there this big pent up demand and it's one quarter of really good growth or do you see real durability as we work our way into fiscal 24 here where it should be a nice stretch in China?
spk10: Yeah, we were just there, and that was absolutely one of the questions, almost per word, what we asked the team in our reviews there. I don't think we're seeing the extreme kickback that came off that COVID quarter roughly three years ago now. It's just coming back strong and hard. Now, again, this is an easy comp from last year for China. But, you know, this last quarter, two months of the quarter, nobody was at work, like zero. We had 90-plus percent people sick with COVID. So we had a very strong march because they all came back, and there was pent-up demand. People wanted to get back to work and restart. We're a run-rate business, so people aren't at work in their labs. They're not burning experiments. They're not running experiments. They're not using our juice. So now they're all back, and they want more, and they're hungry, and they're trying to catch up. So some level of that we saw a few years ago will happen. But I think it's more steady. It's more steady, too, because the instrument component of that. It's also coming back and resurging well. We see really good, strong growth going forward. We were, you know, one reason we did have some growth is a lot of it is an instrument side effect there, and that's obviously a longer sell cycle. But, you know, that's one of our business regions where we have stronger percentage of the portfolio is in instruments, and we see that continuing. So, you know, going forward, we're 200-plus people strong there. The leader, Lee Nguyen, worked with us at, worked with me at Thermo Fisher. He's solid. He's got many years left to go. He's a well-respected industry. He's built businesses in his past that are five, ten times bigger than this is still right now. So we've got a long way to go. The salespeople are great. Our leader in instruments is still the original leader that came with Protein Simple way back when. and is more energetic and engaged than ever. We love this guy. He knows the market. He knows every customer. The relationships are fantastic. He's been able to build a big team under him from when he was in a much smaller company. So it's all looking pretty good. We also had a very large reception. We got to really meet and talk to literally most of the folks there. We weren't there many days, so we wanted to really maximize our time and get to know everybody again. China's an area you want to get there and touch them once every year if you can. Three years is too long not to be there. Businesses can drift, and in places like China, they can drift, and you can find surprises. We didn't find any surprises. The morale of this team has been fantastic. The engagement's been good. A lot of new people, but only about 25% in the last couple years are new there. I was asked that. I asked for a show of hands. Who was in the last year, and who was before that? So attrition's been very good. And we're just holding the port down. And at the end of the day, it's a $100 million business. 10% or a little more, a little less of our company. Back to growing 20-plus percent next year, we think, is a no-brainer. We won't stay at 40-plus. This quarter is an anomaly. But next year, you know, we're going to probably work with them on a plan that's 20-plus percent for sure. I see no reason why not. And maybe more. We'll get back to you as we get a plan.
spk08: Okay. That sounds good. And then, Jim, maybe on the margin, I think you kind of framed up 4Q looking similar to 3Q. As we work our way into 24, is that exit rate kind of the right number to think about building off of? And can you just remind us of any moving pieces as we work our way into next year? Obviously, some of the headwinds hit margins as well as we work our way, hopefully, back to that double-digit growth number Chuck talked about. Should be some nice leverage in the model. But, yeah, maybe just frame up the margin piece exiting out of 4Q here. Yeah.
spk09: Again, I'll be able to provide more clarity on our margin and margin profile for next year as we get through our plan and our next earnings call. But I guess at a high level, I would say, I would expect is, you know, if you look at our margin profile, historically, it tends to dip in Q1 and then gradually increase throughout the rest of the year just due to seasonality. Q1 is typically a lower revenue quarter for us, and the cost base is usually higher coming off our Q4 fiscal year the prior year. So... In terms of that 37 increasing sequentially into Q1, I would say probably not, but if you look at the full year of where we finished fiscal year 23, looking ahead to fiscal year 24, at this point in time, I don't see any material headwinds to margin as to why we wouldn't at least expect some incremental margin improvement year over year for the year.
spk02: Our next question comes from Catherine Schulte with Baird. Please proceed with your question.
spk00: Hey, guys. Thanks for the questions. I asked first on exosome. Sounds like you're seeing impressive uptake on your exoDx prostate test. Any comments you can give just on the path to profitability or margin profile for that business?
spk10: Sure. Well, as you know, we've taken a, you know, I wouldn't say a conservative, but, you know, careful approach to their expansion and growth. We've had a dilution level that we've been able to live with, you know, the last four or five years, whatever it's been now. And I would say that dilution level is down by 30%, 40% when it was, because we're investing. We're at full strength or near to it. There was almost double that sales force. We've added a new team for the experienced team to really go after the five of the larger private payers. We had to get big enough to attract the right players and people and talent to do this. But I would say the size of the business is up headcount-wise roughly 30%, 40%, maybe even a little more from a year or two ago. And, you know, we used to talk about where's the break-even point, and we talked in the past, you know, finding records, that's what we can call it. We bought it thinking it'd be $30 million in revenue, and then, found out quickly and talked to all you people, like $60 or $70 million in revenue would be a break-even point. This team and under Lynn thinks it's much better than that. So, you know, it's another year or so, year and a half, I think we're at a break-even point in profitability. And then, you know, maybe we will or maybe we won't. Maybe we'll decide to invest harder and stay at the solution levels we're at. I mean, I'm not saying we'll put ads on TV for the prostate test yet, but, you know, I think this team is starting to accelerate even more and, you know, we're... We hit 11,000 tests last quarter, which is pretty remarkable. As you know, we've got the full answer to the guidelines now into our reimbursement equation. That means we can go back after patients that have had their first test done or had a biopsy and can have it again and use it for surveillance. In the entire period before last quarter, I think we had 15 tests done that were a repeat. In the last quarter, we had over 240. So we're going back after the surveillance patient, which is an added, which really is an added champ, right? So that's one thing that you're seeing, I think, growth even accelerate. And I don't even think there's a tipping point yet. I tell the team, I'm looking for something north of 100% growth. And I think that day will come.
spk00: All right, great. And then can you quantify what you expect the OEM destocking headwind to be in the fourth quarter? I guess if adjusted third quarter growth was 10% and then you have in fourth quarter, you know, China's turning into a tailwind, you know, why shouldn't organic growth be a little bit better than that 7% number you talked about, even if you see similar levels of destocking?
spk09: So I would say that, Jim, I'd say the OEM headwinds is almost exactly the same for Q4 as it is for Q3. At least that's what we're predicting as of right now. as are the general biotech softness headwinds still are with us until we get past the last year of very tough comps. As Chuck pointed out, the comp for protein sciences was the same in Q4 as it was in Q3 last year. So they're both equally difficult comps. And so, yeah, China will be better. You won't have the exotrue. But at the end of the day, I think the overall headwinds-facing protein sciences segment are the same in Q4 as they were in Q3, with the exception of China. And we expect Dynoptics and Zomix to be better because they don't have the ExoTrue in it next year, but again, that's only in total about 25% of our business. So the incremental China and the lack of ExoTrue is what gets us from the overall company growth rate from 3% to hopefully north of 7%.
spk02: Our next question comes from Justin Bowers with Deutsche Bank. Please proceed with your question.
spk06: Hey, good morning. I just want to follow up on some of the last couple of questions. One, on the OEM, is that headwind that you're talking about in the back half, is that sort of like the full-year headwind as well? And then just taking a step back, if we go – You know, if we go to pre-COVID, is the business and the sales cycle to that similar to the runway business, or is there some seasonality and lumpiness to that business?
spk10: In which area?
spk06: Sorry, for the OEM channel. For the OEM channel.
spk10: Well, I think COVID has had an effect on everything OEM. I think it's affecting the environment, it's affecting funding, and it's affecting conservatism and all the above. So people have been stalking and being careful through the supply chain risk environment we were in last year. You call the back half, it would be the front half of our next fiscal year. We see it improving for us, starting in Q1. Others have been online here recently saying it's an all-year event. I don't know their business as well as I know ours. So I think... We've got some large OEMs that are running out of stuff, and they're not insolvent, they're just been, they were conservative and they've stocked up. We have a few that are new and coming and growing, and we have a few that are shrinking and going away and being bought and whatever. So I think the net of it all, we see an improving OEM, you know, first half of our fiscal year. From what we know right now, we're just being transparent with what we see right now. next quarter, or maybe it'll all change. I don't know. Maybe something else will happen, but that's what we see right now. And we're pushing on these customers to start buying again.
spk09: I mean, obviously, at some point, they start to run out of inventory, and so we're trying to model as best we can when we think that will happen, and we do think at some point in the first half of fiscal 24, you know, as long as their sales continue, as long as they continue to have sales, they're going to need to restock on some more inventory.
spk06: Got it. And then just...
spk10: Don't forget that. We're not happy with a handful of large customers. We've got hundreds of customers. We want all hundreds to be large.
spk02: Our next question comes from Alex Novak with Craig Hallam. Please proceed with your question.
spk01: Okay, great. Good morning, everyone. So I was just curious if there's any product lines out there that are just not working in the portfolio. Because to a prior question, and in the prepared remarks, you talked about cell and gene therapy, GP proteins, simple spatial ecosystem, all these being very massively in the quarter, but just not enough to drive the average. So I'm just trying to understand, is there a product line that is just struggling from competition and change in pure demand by your customers, or is really the only thing that's struggling is really just macro China, macro OEMs, these stockings?
spk10: It's mostly macro, but I'd say, you know, we've not been happy with academia the last year. It's more or less low to mid-single digit. Europe's been up and down a little bit, but, you know, China was like a big zero, practically, so that's a big impact. APAC wasn't strong either, you know, so that's this quarter, which is timing and missing stimulus in Korea and Japan, so... Those things kind of weigh into that. When you add all that back in, I think things are fine. There's no real issue there. I would say in product categories, what I'm most worried about is kind of what I've always been most worried about. It's Eliza. It's Asset. So that's why we bought SimpleFlex. We're big in Luminex. We've got an Asset portfolio that is together. It's high single-digit growth and hopefully back to double-digit here soon when it all comes. But Eliza is up and down. Low, mid, high single digits. That's kind of where it lives, and it's still a big part of our business.
spk01: So it's kind of that. Okay, makes sense. And then the path to $2 billion of sales from the analyst day, I mean, it looks like we're going to need about 22% annualized growth to get us there. It sounds like maybe teens for next year. So that really weighs on Wilson-Wolf GMP protein spatial to be massive accelerators in fiscal 2025, 2026. Is that right, or does the full $2 billion number need to be updated?
spk10: We're not ready to update that yet because we were ahead of the game here less than a year ago from the accelerated growth that we had. We were more or less ahead of everybody expected. Yes, this year we've given some back. And yes, we've still got a few years to go. We need the cell and gene therapy to light it up. We need spatial to keep going in double digits. And we need exosome to remain in this high growth accelerated level it is so they become material enough to help us get there. But we're growing faster than we need over the aggregate. The aggregate number in both exosome as well as cell and gene therapy to hit that number is 50% growth and growth in that area. We're about there in the protein stuff and we're well exceeding that in exosome. Spatial needs to be solid double digit as well. I'd say we're a little behind where we need to be there. But we have new things coming as well. So, you know, it's too soon to say it's going to be 1.9 or 1.95. It could easily right now still be 2.1. And in Wolf and Wolf, that whole area is a big kicker in icing on the cake, right? And a lot of stuff takes 10 years. We're just in a lot of things that are going to take a while to develop because they really hit their stride three, four years out. Yeah.
spk02: Thank you very much. This concludes our question and answer session. I would now like to turn the conference back over to Chuck Comet for any closing remarks.
spk10: Well, great. Thanks, everyone, for attending. I'm glad that we kind of fit the expectations set last quarter and a little better on the bottom line. And I can say we're in great shape looking forward to this quarter. The team's in great shape. We're raring to go, and the energy's high, and we'll talk to you then. Thank you.
spk02: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer