Bio-Techne Corp

Good morning, and welcome to the Biotech Learning Conference call for the first quarter of fiscal year 2023. At this time, all participants have been placed in instant-lonely mode, and the call will be opened 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 Claire, Biotechnics Vice President, Investor Relations.

Good morning, and thank you for joining us. On the call with me this morning are Chuck Cometh, Biotechnics Chief Executive Officer, Jim Hippel, Chief Financial Officer, Kim Kelderman, Diagnostics and Genomics Segment President, and Will Geist, Protein Sciences Segment President. 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. 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 Biotechni Corporation website at www.bio-techni.com. Separately, we will be hosting an investor day on September 8th in New York City and also participating in the UBS, Baird, and Morgan Stanley conferences in August and September. We look forward to connecting with many of you at these upcoming events. I will now turn the call over to Chuck.

Thanks, Dave, and good morning, everyone. Thank you for joining us for our fourth quarter conference call. We finished our fiscal 2023 largely as expected. with 5% fourth quarter organic growth mirroring the growth we delivered for full fiscal 2023, and capped a year where we successfully navigated a transitory macroeconomic environment. I'm extremely proud of the team's ability to deliver this growth in the face of transitory headwinds, which we refer to as the COVID hangover, that we faced for the majority of this past fiscal year. These post-COVID induced headwinds included a softer biotech funding environment, inventory destocking from a subset of our OEM customers, and macroeconomic challenges in China. Despite these challenges, the endurance of our key growth platforms was demonstrated, yet again in Q4, in double-digit growth in our Protein Simple branded instrument portfolio, spatial biology ACD platform, cell and gene therapy workflow solutions, and our liquid biopsy exosome platform. Now, let's get into the details a bit, starting with an overview of our performance by geography and end markets. In North America, we grew mid-single digits for both the quarter and the fiscal year. This may appear underwhelming. However, keep in mind that North America grew over 20% for the quarter and full year in fiscal 22, driven by a biopharma end market that was on fire with over 30% growth. With that kind of comp, as you can imagine, North America faced the greatest headwind from lower biotech funding this year. Europe had a great quarter to end the year with low double-digit growth in Q4. finishing the year with growth in the high single digits. This was on top of a comp from last year that was also incredibly strong, with growth in the mid-teens for both Q4 and full-year fiscal 22. Now, for the region that is on everyone's minds, China. China is the region that has faced the most volatility throughout COVID, and even now during the COVID hangover, you will recall during our third quarter conference call, We talked about how we saw our business in China come roaring back once everyone there was recovered from the COVID illness and back to work after the Chinese New Year. That strength continued through the first half of Q4, then abruptly stalled when the annual funding of new programs from the Chinese government did not occur as it usually does during the April-May timeframe. Despite this delay in funding, our team in China was still able to execute extremely well and deliver growth in the mid-teens for Q4. However, At this moment, it is still unclear when government funding of new programs in life sciences will resume. History suggests, however, it won't be long. And when it returns, we expect the growth to be robust. While COVID and its aftermath have been extremely disruptive to business in China, it has only strengthened the long-term thesis that the pursuit of better healthcare in China will continue to be a top national priority. We are positioned extremely well with our differentiated portfolio to enable China in their pursuit. In the meantime, we will continue to serve our customers in China by providing them the tools to make their research as productive as possible with the funds they have. Now, let's discuss our growth platform, starting with our protein sciences segment, where we grew 4% in both the quarter and the fiscal year. This growth was delivered on a particularly challenging comparison for both the quarter and fiscal year, where we grew 16% and 19% in the prior year periods, respectively. During the quarter, we advanced our cell and gene therapy initiatives as our reagents, media, and analytical workflow solutions continue to aid our customers' progress on therapy, development, and clinical trials. Collectively, our portfolio of cell and gene therapy products grew almost 30% at Q4 and are positioned to remain a key growth driver going forward. This strong performance puts an exclamation point on a year where, despite a soft biotech funding environment, our cell and gene therapy business increased over 20% for the full year. For GMP proteins, we continue to offer the broadest menu on the market, including GMP proteins for immuno-oncology therapies, as well as an industry-leading portfolio for regenerative medicine applications. These proteins are manufactured with a high level of bioactivity, lot-to-lot consistency, and purity that has become synonymous with our R&D Systems brand of reagents. This unique offering and our reputation as the highest quality producer drove Q4 growth of almost 60%. and our third consecutive quarter of record GMP protein revenue. It's worth noting that over 400 cell therapy accounts have used our GMP proteins to date, over 20% more accounts than in the prior year. Additionally, we are in the very early stages of realizing the large cross-selling opportunities that exist within our GMP protein customer base and the broader biotechnology portfolio and have strategies in place to drive adoption of RUL reagents, amino assays, cell culture products, analytical tools, and spatial biology solutions throughout these accounts. Factoring in our pending WilsonWolf acquisition and their roster of approximately 800 customers that we have access to via ScaleReady, this immense cross-selling opportunity becomes even larger. Our GMP portfolio is not unique to just proteins, as we also offer GMP versions of several reagents within our small molecule portfolio. As a reminder, our small molecules are critical ingredients for cell reprogramming expansion and differentiation, which represent critical stages in regenerative medicine workflows. High demand for our portfolio of GMP small molecules drove growth of over 250% in the quarter, and we are adding capacity to meet current and anticipated demand for these key bioactive reagents. There are other areas of our vast portfolio of reagents and media that are ripe for GMP offerings, including antibodies, and we will continue to develop and commercialize products to meet growing demand for these key products going forward. Moving on to our catalog of RUO, or research use only reagents, which includes over 6,000 proteins and 400,000 antibody types. As a reminder, researchers rely on these reagents as key inputs for their experiments, as these consumable products enable critical functions within the lab, including cell growth and differentiation, disease monitoring, cell imaging, immunoassays, immunohistochemistry, Western blots, and other foundational research functions. The majority of our RUL reagent business is run rate, where researchers order proteins, antibodies, and small molecules as needed for their ongoing research. These reagents also serve as content for a handful of OEM customers, where they purchase our reagents, frequently antibodies as a key component of their end product, which in turn generate royalties for biotechny. As predicted, we expected a destocking effect again in Q4 with a handful of these OEM customers as they worked their way through excess inventory stocked out of caution during the COVID-induced industry supply chain crunch. We expect this destocking dynamic to gradually wind down over the next six months before normal ordering patterns resume for these customers in the back half of our fiscal 24. During the quarter, we announced that we prevailed on a claim that one of our competitors, Multenia Biosciences, commercialized antibodies that it obtained by reverse engineering two of Biotechnics' proprietary R&D systems-branded antibodies. Biotech may take great pride in the fact that our proprietary products are the result of our own internally developed intellectual property. We have a long history of selectively sharing our intellectual property with academic and biopharma partners through licensing arrangements, but will vigorously defend our position against any unlawful use of our proprietary discoveries. Continuing with the protein sciences segment, let's discuss the performance of our protein simple branded portfolio of instruments and consumables where we delivered low double-digit growth in the quarter. The Q4 performance was led by nearly 20% growth in our fully automated Western blot solution, branded as Simple Western. The platform's ability to reduce the two-day-long, manual, messy Western blotting process into a three-hour, push-button, highly reproducible solution continues to drive demand within our biopharma and academic customer bases. We are also seeing robust adoption of Simple Western in gene therapy applications with the system increasingly being utilized to measure protein expression, potency, empty versus full capsid ratio, and to detect process impurities. Our biologics business increased upper single digits for the quarter, on top of a comp of nearly 40% growth last year, as we experienced strong demand in initial sales of our Merese Flex instrument. As a reminder, Merese Flex adds protein charge variant fractionation capabilities to Merese's legacy protein identity charge and purity capabilities. Fractionation is a front-end step to mass spectrometry, and Maurice Flex resolves the labor-intensive and time-consuming challenges of using legacy fractionation methods, including ion exchange chromatography. This new application enters Maurice into a new $300 million market, approximately doubling the addressable market opportunity for the instrument. We are very encouraged by the strong initial response to this exciting new instrument. For our simpleplex automated multiplexing alive instrument branded as ELA, we continue to build the menu of assays, launching 36 validated simpleplex assays on the platform during fiscal 2023, including four AAV titer assays for gene therapy and five neuroscience markers. Going forward, neuroscience and cell and gene therapy represent large opportunities for ELA and both remain a focus of application development and menu expansion initiatives. During the quarter, we also made significant progress positioning ELA as a clinical diagnostics platform as we successfully completed the ISO 1345 audit of our Longford facility and are waiting to hear back on the results. With this certification in hand, we will be ready to pursue clinical diagnostic opportunities, opening a large potential and market for this highly sensitive, easy to use, and fast multiplexing immunoassay instrument. Now let's discuss our diagnostics and genomic segment. where organic revenue increased 10% for the quarter and 8% for the fiscal year. I'll start with our molecular diagnostics business, where we once again drove significant growth in our XODX prostate test as the valuable information on whether a man with an indeterminate PSA score should proceed with an invasive and potentially dangerous prostate biopsy continues to resonate with both patients and physicians. XODX prostate volume and associated revenue both increased nearly 70% compared to the prior year quarter, capping a breakout year for the test where volume increased by over 70%, revenue increased over 90%, and we surpassed 100,000 XODX tests performed to date. The value of our XODX prostate test was further solidified with the recent publication in the Prostate Cancer and Prostatic Diseases Journal of interim results from a randomized study of over 1,000 patients designed to show the clinical utility of the test. In the study, patients identified as low risk by the XODX prostate test received fewer biopsies, significantly deferred the time to their first biopsy, and were significantly less likely to be diagnosed in the future with high-grade prostate cancer. The growing acceptance of the test, strong clinical utility data, a Medicare local coverage decision is now reflective of the NCCN guidelines and includes reimbursement for repeat annual testing, as well as a fortified sales force and market access team positioned fiscal 24 to be another record year for our XODX prostate test. Now let's discuss our spatial biology franchise, which includes our ACD branded portfolio of more than 45,000 probes in over 400 species that enable biomarker imaging at single molecule sensitivity in single cell resolution. Our spatial biology business increased low double digits in both Q4 and the fiscal year. The growing interest and utilization of our ACD technology as the go-to technology for translational spatial biology research applications is apparent in the growing number of publications citing the technology, which increased over 10 percent during the first half of calendar 2023 and now total over 8,000. Within the portfolio, we are experiencing continued momentum in Bayescope, which enables the detection of short RNA target sequences, and microRNAscope, which allows for the visualization of ASO microRNA and siRNA and other nucleic acid targets as these highly sensitive and specific assays increased over 20% and 30% respectively in Q4. Following the robust growth for both the quarter and the fiscal year, Base Scope and microRNA Scope are both becoming increasingly more spatial to our overall spatial biology franchise. Separately, we furthered the partnering strategy for our gold standard RNA Scope technology with the release of an RNAscope multi-omic workflow for the standard BioTools Hyperion imaging system. We also expanded our growing arsenal of ASR probes with the launch of RNAscope probes for Kappa and Lambda as analyte-specific reagents or ASRs. Kappa and Lambda are important oncology biomarkers for B-cell lymphomas, and these ASRs will enable CLIA labs to develop customized tests while maintaining high standards of analytical and clinical performance. Finally, I'd like to officially welcome the Lunafor team to Biotechni. As a reminder, we recently closed the Lunafor acquisition, which is the 18th acquisition our team has closed during my tenure as CEO. This acquisition strengthens our spatial biology franchise while adding a talented group of innovators to the company. Our strong track record of identifying state-of-the-art platforms and technologies on the cusp of significant market uptake and growth like Lunafor has been a key driver of our double-digit revenue and total stock return CAGR, over the last 10 years. This acquisition builds off a partnership we announced with Lunafor earlier this year where the two companies partnered to develop the first fully automated multi-omic spatial biology platform. This novel offering will be capable of simultaneously interrogating protein and RNA expression at a single cell resolution using a fully automated same-slide workflow, pairing Lunafor's common instrument INSPIRE antibody panels with our legacy RNAscope HyPlex technology. Common is early in its initial commercialization, but the system's end-to-end capabilities that fully automate staining, imaging, and image preprocessing steps, use of conjugated antibodies, and high throughput design is generating significant interest, market traction, and placements. In summary, Q4 concludes a fiscal year where the team successfully navigated several challenges facing the company and the broader life sciences tool industry. While the short-term macro challenges are not over, we are encouraged that they will gradually diminish in the year ahead, starting with the less challenging comps from the COVID halo days, less destocking by our OEM customers from the COVID hangover days, and a more stable biotech funding environment going forward. While Q4 was a good quarter for us in China, the funding environment in China will likely be a big challenge for at least the first half of the year. But don't doubt China's resolve for better health care, and we believe when the funding returns, it will come back strong. As this past year has proven, our stable of growth platforms can persevere in good times as well as challenging ones. We will continue to prioritize and focus our execution on these growth platforms, which propel this company to accelerated growth and profitability in the years to come. With that, I'll turn it over to Jim.