Bio-Techne Corp

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.

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.

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.