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spk02: 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.
spk09: 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.
spk11: 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.
spk10: Thanks, Chuck. I'll start with some additional detail on our Q4 and fiscal 2023 financial performance and then give some thoughts on the financial outlook for the year ahead. Starting with the overall fourth quarter financial performance, adjusted EPS was $0.55 compared to $0.51 in the prior year quarter, an increase of 8% over last year. Foreign exchange negatively impacted adjusted EPS by a penny or minus 2% in the quarter. Gap EPS for the quarter was 47 cents compared to 38 cents in the prior year. Q4 revenue was $301.3 million, an increase of 5% year-over-year on both an organic and reported basis. For the full fiscal year 2023, revenue was over $1.1 billion, an increase of 3% on a reported basis and 5% on an organic basis. Foreign exchange translation had an unfavorable impact of 2%, and acquisitions had an immaterial impact on our full fiscal year revenue growth. Moving on to our organic growth by region and end market in Q4, North America grew mid-single digits, Europe increased low double digits, and China grew mid-teens in the quarter. As Chuck already mentioned, the growth in North America and Europe was on top of very high comps from the prior year when they were experiencing what we now refer to as the COVID halo effect. China was more volatile, as it has been all year, with a very strong first half of the quarter followed by a rather weak half. Nonetheless, the mid-teens growth rate we delivered in China appears to be one of the best results along our life science tool company peers and speaks to the overall resiliency and value that our bioactive reagents, analytic tools, and spatial biology solutions deliver to our customers in the region. APAC outside of China declined low single digits overall with similar COVID hangover-induced challenges as China in several countries in the region. By end market in Q4, BioPharma grew mid-single digits on top of very tough comps in the prior year, while Academia grew upper single digits. Similar to our Q3, destocking by a handful of our protein sciences, OEM, licensing, and supply customers negatively impacted overall company revenue growth by approximately 2%. Below revenue on the P&L, total company adjusted gross margin was 71.6% in the quarter compared to 73.2% in the prior year. The decrease was primarily driven by unfavorable product mix. Adjusted SG&A in Q4 was 26.8% of revenue compared to 27.8% in the prior year, while R&D expense in Q4 was 7.8% of revenue compared to 8.1% in the prior year. The decrease in relative SG&A and R&D was driven by operational efficiencies and diligent expense management, which was partially offset by ongoing strategic growth investments. 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 also largely offsetting the inflation impact on our operating margin in Q4. Adjusted operating margin for Q4 was 37.1%, a decrease of 30 basis points from the prior year period, but a 10 basis point improvement sequentially. Excluding the NAMA cell acquisition from earlier this fiscal year, adjusted operating margin was 40 basis points higher than the prior year due to diligent cost management and prioritization. Looking at our numbers below operating income, net interest expense in Q4 was $2.5 million, increasing $0.3 million compared to the prior year, due to higher debt levels, partially offset by higher interest income earned on cash deposits. Our bank debt on the balance sheet as of the end of Q4 stood at $350 million, a decrease of $20 million compared to last quarter. I would note we closed the Lunafor acquisition at the beginning of this current fiscal year, which was partially funded by debt and cash on hand, and we anticipate our net interest expense to increase sequentially to approximately $4.5 million in the first quarter of fiscal year 24. Other adjusted non-operating expense was $0.1 million in the quarter, a decrease of $1.3 million compared to the prior year, primarily reflecting our 20% share of Wilson-Wolfe adjusted net income, which amounted to $1.7 million in the quarter, more than offset by the foreign exchange impact related to our cash pooling arrangements. Moving further down the P&L, our adjusted effective tax rate in Q4 was 19.2%. Turning to cash flow and return of capital, 83.4 million of cash was generated from operations in the quarter, and our net investment in capital expenditures was 10.8 million. Also during Q4, we returned capital to shareholders by way of 12.5 million in dividends. We finished the quarter with 161.9 million average diluted shares outstanding. Our balance sheet finished Q4 in a strong position, with 204.3 million in cash and short-term available for sale investments, and our total leverage ratio remained well below 1 times TTM EBITDA. Going forward, M&A remains a top priority for capital allocation. Next, I'll discuss the performance of our reporting segments, starting with the protein sciences segment. Q4 reported sales were $223 million, with reported revenue increasing 3% compared to the same period last year. Organic growth for this segment was 4%, with foreign exchange having an unfavorable impact of 1%. As a reminder, it is our Protein Sciences segment that has the most exposure to biotech funding considerations, the OEMD stocking that has occurred among our licensing and commercial supply customers, as well as to the China geographic region. Operating margin for the Protein Sciences segment was 44.7%, a decrease of 20 basis points year-over-year, driven by the impact of the NanoCell acquisition. Turning to the diagnostics and genomic segment, Q4 reported sales were 79 million, with reported and organic revenue both increasing 10%. Our exosome diagnostics business remained very strong in the quarter, as our fortified marketing message, strong clinical data, strength in commercial team, and the recently updated Medicare LCD drove test volume and revenue growth. Also, our spatial biology business delivered low double-digit growth in the quarter, with strong performances in our RNA scope, base scope, and microRNA product lines. As Chuck highlighted earlier, we are very excited about our recent acquisition of Luma4 and expect it will add at least 1.5% to the company's reported growth in fiscal year 24, with a standalone growth rate over 100%. Moving on to the diagnostics and genomics segment, operating margin at 18.5%. The segment's operating margin increased 280 basis points compared to the prior year. The segment's operating margin was favorably impacted by volume leverage. Before we get to Q&A, I will summarize our fiscal year 23 and how it shapes our view for the upcoming fiscal 24 as follows. We view fiscal 23 as the year of the COVID hangover, which followed two extremely strong years that we refer to as the COVID halo. This hangover included a more risk-off mentality for smaller biotech investing, government-induced shutdowns in our highest growth region, that being China, and destocking of excessive inventories that took place during the COVID-induced supply chain crunch. Through it all, and as Q4 demonstrated, our growth platforms are still winning with double-digit growth. Now, the question on everyone's mind is, will the COVID hangover last as long as the COVID halo did? Well, as with everyone else, we don't have a crystal ball that gives us that answer. What we do see is that biotech spending has stabilized. Therefore, we are hopeful that going into fiscal year 24, this headwind we faced in fiscal year 23 is diminished. However, we haven't noticed any meaningful increases in biotech funding that would suggest this becomes a tailwind anytime soon. We do estimate that destocking from our OEM licensing and commercial supply customers will unwind by the end of this calendar year and should become a tailwind in calendar year 24 as buying from these customers resumes. As Chuck described earlier, China took a surprising and sudden reversal in revenue trajectory halfway through the most recent fourth quarter, when the usual annual cycle of renewed government funding did not occur. Until funding of life sciences by the Chinese government returns, tools companies like us will see continued headwinds in this region. When will government funding of life sciences return in China is anyone's guess. But given China's history and publicly stated importance of life sciences to their sovereign strategy, we expect that the funding will return sooner rather than later. And when it does, it will be strong. So what does this all potentially mean for our fiscal year 24? Well, we believe it means that we will need to grow primarily by gaining wallet share in this cautionary financial environment, just as we did for the entirety of fiscal year 23. We will continue to do this by selectively investing and promoting our long-term growth platforms, namely cell and gene therapy, liquid biopsy, spatial biology, and our analytical instrument platforms. Thus, we expect our organic revenue growth in the first half of fiscal year 24 to be similar to our organic growth in fiscal year 23. With regard to the back half of our fiscal year, there is a path to accelerating growth rates and OEM purchasing returns and if China government funding of life sciences occurs before the next Chinese New Year. As we look to adjusted operating margins for the year ahead, we estimate they will be down approximately 300 basis points from fiscal year 23, mostly driven by our acquisition of Lunafor and to a lesser extent due to continued selective investment in our key growth platforms as well as our overall customer digital experience. These investments together with the acquisition of Lunafor will ensure that we stay on track of our long-term growth goals as macro conditions improve. Margins can improve slightly from the space case, depending on if and by how much revenue growth rates improve in the second half of the year. 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: We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question comes from Punisoda with Learing Partners.
spk05: Hey, Chuck, Jim, thanks for taking the questions. Jim, I really appreciate your thoughts on the guide versus all the uncertainties the sector is facing. But a few more questions there. You know, how should we think about expectations for North America and Europe, given the growth that you're seeing despite the, you know, comp that you have? How much of that is, you know, a strength that is sustainable? And then, you know, when we look at 24, as you mentioned, the first half being sort of mid-single digits, similar line to the full year of 23. Do we think we could improve in the second half to potentially get to at least maybe high single digits for fiscal year 24? I know it's really hard to look at that, but there's a number of moving parts and just want to understand how you're thinking about those different moving parts, including China, destocking, and what that all means. in numbers for 2024 and organic, if you could. Thank you.
spk11: Yeah, thanks, Puneet. Let me start off with some high-level comments around that, because your question is going to be repeated about 29 times today, probably. So, you know, I think, first of all, we were one of the first companies to kind of come out and talk about, you know, the hangover beginning, you know, about a year ago, next quarter. And we talked about we'll be coming on the front end a lot sooner, and we really are. In fact, this quarter, If China wouldn't have been a surprise, we would have been really ahead of where everyone expected us to be. So, you know, by a little bit anyway. So it's really all China. We'll get to that in a minute. North America, you know, stacked up okay about as expected. Europe actually came in stronger than expected and is turning the corner. But, you know, they went south before North America did, so we expected that as well. Behind the scenes, you guys don't know, is a lot of work we've done in this off year of, you know, doing homework and getting ready for the come out party, right? So we have hired three senior executives. We have a new leader in Europe. We have a new commercial leader for North America from El Taney. We have a new divisional senior vice president for RSD. We have We are fully done reorganizing Europe commercially. And with Peter's guidance, we're kind of relaunching it. We're probably already seeing a little bit of what's happening from that with a stronger finish here. North America even coming yet further now with the coming of Jim Snook. We're making a lot of changes, a lot of observations he's made. And those are going to start paying off. We've been at full strength in our other segment for a while. We're actually still short. It's very aggressive and spatial, as you know, very, very competitive. And we seem to always be down one rep, but we're only down one rep. We're not down five. We're increasing there. We're increasing inventories and efficiencies, especially in Europe. So this has been, you know, there's a lot to talk about on the digital side and ERPs and what we're doing on making our customer experience much better. We've made huge improvements there in the last quarter or two as well. All these are really coming, you know, are coming in place. So we're ready for, you know, the new wave of growth to hit and which is going to be starting, I think, this coming quarter. We have softened a little bit for this first half, as you noticed Jim's comments, but it's kind of unknown. And we need to wait and see what happens to China. I think China, you know, surprised us all a little bit this quarter. It started out really good, by the way. I mean, really good for us and just shut down the second half of the quarter. We do expect the government will come around and start funding again, but they haven't yet, so it's hard to get too ahead of things. If they don't, well, then it'll be more of the same for a while, and that's for everybody. And we had literally results that beat everybody in our field this quarter. So, you know, it's all about the forward, not what's happened, though, right? So we feel really good about where things ended up. As you notice, we met our bottom line. We're operational experts here. We all come from large companies. We know how to operate, and we nailed every target we had to nail But growth is growth, and we can't make markets do what markets won't do. And so we're ready for the coming back party when it's coming, and especially in China. But we're already seeing it in other areas, like we commented on. And let's hope Europe continues its progression back. And we're really only all talking about our core here. I mean, it's RSD, and it's in the instrument side, not the consumables, which are killing it, by the way, not all our instruments. And everything on the other segment, our three major investment platforms, spatial and cell and gene therapy and exosome, all had banner quarters and a banner year, really exceeding expectations on many fronts. And that's, by next year, doing more of the same, which it will, maybe even accelerating, will start becoming much more material and can offset any headwind we have in our core anymore. So with that, you know, maybe... Jim wants to comment on the numbers, but I think it's, we don't want to cover the same question with everybody. It's kind of just setting the stage for the day. We're really thrilled this quarter, to be honest, especially as we saw more and more of our peers come out with horrendous numbers. We feel really good. And, you know, we came out last quarter after a trip to China who were telling us it'd be a 50% quarter. We told you it'd probably be 40, hedging a bit, and it ended up around 20. Still better than everybody. But with the government shutting down, it just is what it is right now, and it'll be a soft quarter. But I think when they turn the lights back on, which will happen probably within a quarter or so, more than likely, it's China, for God's sake, we're going to be off like a terror, I think, quite simply. And we're ready. And we spent this last year working on our infrastructure. And sometime in the coming quarters, we've got to tell you more about our new expanded website, our one biotechnic, where we're getting everything and putting it in one place for customers to really, really improve their experience, and it's already starting to pay off for us.
spk05: Hey, no, that's super helpful, Chuck, and thanks for the great context there. I'll spare Jim and come back for more questions for him on the follow-up call, but just maybe one final one for me. Any updated thoughts on M&A? You talked about 18 acquisitions so far. How are you thinking about the life sciences side versus the diagnostic side? Obviously, exosome diagnostics is doing good. I didn't hear you much on the Shurigen. How are you thinking about M&A overall?
spk11: We feel really good. As you know, we just pulled off Lunafor. That was an asset. I can't even tell you how many people wanted that asset. We've been working a long time. As you know, we're very ubiquitous, working with everybody, you know, in spatial. And we have an open platform kind of a mentality here. And Luniform is no different. Other content will work in that platform. But that thing is going to be amazing. And it's going to allow us to actually go after much stronger, not only in research, but on the pathology side, without really getting, you know, crossing over into areas we don't want to create any conflict or partners, you know, like Laika and others, which are all okay with all this. But we need to figure out a way to automate and get more out of our discovery, our platform, translational, down in the under 10 plex without taking two weeks 24-7 running assays by hand. We can do all that now, so we need this platform, and it's ready to go. The synergies are amazing. Jim talked about the numbers. They're going to easily be those numbers, and we've got a couple points of dilution here in the coming year, as we always do with a bigger acquisition. But this thing is already growing and already heavy in the revenue. And we're not waiting a year or two for this thing to take off. It's already happening. And there's a strong future. So that is one area. Other M&A, I don't think we've ever been busier. We're busy on more than a few right now. And it should be a big M&A year. Everyone's saying the same. Smaller companies aren't being able to IPO right now. A lot of funding issues. It's a time for finding partners and new owners, and we're very busy. And there's a lot of areas we're still looking to address, you know, things like in cell and gene therapy and media and other areas that they're, you know, they're all coming. And there's a lot of proteomics companies. Some of them are starting to, you know, to look outside at being acquired, you know, even very public, even Abcams for sale, you know. And I wouldn't have thought that would have happened yet, but there's a lot of surprises out there in the market these days.
spk05: Super. All right. Thanks, guys.
spk02: The next question comes from Patrick Donnelly with CP.
spk13: Hey, guys. Thanks for taking the questions. Jim, maybe one on the margin outlook there, down 300 bps. I know you mentioned Lunafor dilution. Can you just talk about maybe a bridge of M&A dilution versus kind of the organic number? And I guess just that path, obviously you guys have the long-term target out there of the 40%. Yeah, what are the key levers you can pull to maybe get that margin going a little bit on the core side?
spk10: So I'd say over two-thirds of that dilution is driven strictly by the Lunafor acquisition. The rest has to do with our continued strategic investments in those growth areas that we've talked about during this call. We see it, if you exclude Luna 4 from our results, we see, similar to this past year, we see our organic margins being finished in the year better than we did this year. It was just the Luna 4 that brings it down below. I think with regards to triggers that could improve on those margins, it's largely a a revenue game. Like I mentioned in my comments, if revenue increases, the more revenue improvement, the growth improves in the back half of the year, the better it is to get more leverage off our cost base and increase margins. But we're already being very, very prudent on our, definitely on our discretionary spend and extremely selective in prioritizing our strategic spend. But we're not, you know, we're not going to not do those strategic investments to sacrifice our growth in the future. but I think the biggest lever for improving margins would be higher revenue growth in the back half of the year.
spk13: Yeah, understood. Okay. And, Chuck, maybe one for you just on the stocking comment, assuming it would be stocking maybe in six months or so. Can you just talk about the visibility into that? I guess any level of confidence at a six-month, obviously, has been a moving target, not only for you, but for the entire industry. Any metrics you have, any customer conversations would certainly be helpful.
spk11: Yeah, as we've mentioned in the past, in previous quarters, you know, we've talked about, you know, missing double-digit growth by literally a handful of OEM customers. And that's kind of more of the same. It's very lumpy for us. So a lot of our larger OEMs, and especially in antibodies areas, they were stocking a lot through the, you know, the COVID supply risk era. And it's already coming down. So it's moving the right direction. I think we have seen you know, through that pre-period, let's call it two or three quarters ago, we had very strong run rates still, and those have softened because the funding overall has softened. So we're seeing a bit of a barbell shift here, but not dramatic. So other data point is, you know, like Fisher. Fisher is very strong, has been strong all year. So a lot of our channels look good. So it's pretty lumpy. You know, it's very, very targeted. We kind of know by customer exactly where they're at. And as you know, we get... we had a lot of these guys are licensed in a lot of royalties and stuff. So we not only have decent metrics, but we have actual data from them on just how they're doing, what they're buying, what they expect, and their outlook. So a brighter year ahead. I think by the end of this calendar year and next year, things will be recovered there in a lot of the OEM areas. So that's the main difference, I think, still.
spk13: Yeah, OK. And if I could just sneak one last one in on China. Any way you could give kind of the exit rate? I know obviously it sounds like linearity, it was strong at the beginning, kind of eroded a little bit as the quarter went. Any way to just think about the exit rate, July, you know, how you think about this year, and were there different markets that kind of faded? Thank you.
spk11: Well, I'm not sure we can say any more than we know, and we've been very transparent. We always have been. This quarter started off great and China ended terribly, but it ended much worse for everybody else we know in our industry. I think we're all in this kind of waiting pattern for the government. I think they had their economy shut down so badly that I don't think they have any money. But we do know they're very public about what a priority health care is. So I think as they get back on track, and we're told that, you know, come October, it's the new school year and all the institutions reopening is when they expect things to start getting better and start seeing that outlay. There have been some initial targeted stimulus areas, but, you know, nothing dramatic. This is just really a downtime for China. It's very, very surprising to everybody. But, you know, where they are on the scale of 1 to 10 of getting health care, you know, across the country, their whole population to where the rest of the world is, you know, they're like a 2. So it's the big cities that are really in good shape, but you don't have to go too far out to see a lot of struggle. The government is certainly still on their plan, and health care is the number one priority, and I don't expect anything will change there. We've been here before wondering about China, and then it comes back like a roaring tiger. So I expect that to be sometime before end of the calendar year here. Our team there is very bullish. They didn't sound any alarm, so it surprised even them. So I think that's also a good sign is that the 200-plus employee strong team we have in China is really very positive and very, I guess, sees a very big future ahead.
spk03: Next question comes from Jacob Johnson with Stephens.
spk06: Hey, good morning, everybody. Chuck, I suppose I'll apologize for contributing to the 29 questions about 2024. But maybe on the instrument side of things, a strong quarter there. Just any thoughts about how we should be thinking about that business into 2024? I guess in particular, you talked about the Maurice Flex being a contributor this quarter. Sounds like Ella could move into the clinic maybe next year. That could be an opportunity. And then maybe on the bad guy side, China is something we should be looking out for, but just any kind of commentary around the outlook for instruments.
spk11: Well, you know, China is the area where we actually have our strongest ratio of instrument sales for business. So it's really 50-50 with our core. It's nowhere like that anywhere else. So with China being so soft, it takes a big hit on the overall instrument sales. We were in pretty good shape in Semmelwester, and across the board, not too bad, but mainly consumables. I mean, the instruments are being used, and they're really good productivity instruments. We're known for that, and that has gone great. Ella had a pretty good quarter overall, and yes, the 1345 is coming. It should have been here a month ago, the paperwork, but it's definitely coming. We have a big clinical launch with that application in India that's through their They would be like a 510K process or a predicate process here, but they're ready to go very soon. 2,000-person clinical on macrodeneration and different eye-related illnesses using tears as the analyte in the cartridge. So that's coming, and then we have a bunch more. But I'm going to let Will say a couple words here. I think the future, now we're getting more and more instruments, but we're getting more and more applications of the instruments we have. Simple Western isn't just about converting, you know, Western blots anymore. There's a bunch more stuff coming. Flex isn't just about, you know, protein purity on the line of manufacturing anymore. Now there's a lot more things coming. Will, maybe a couple words on where you see the future of our instruments and by application the growth actually improving what we see now.
spk01: Yeah, hey, thanks, Chuck, and thanks for the question, Jacob. You know, a couple things. Chuck already hit on some of the nice indicators for our future, right? As we look at consumables utilization, super strong this last quarter. We also look at service contracts. We know these instruments are being leveraged and used across the industry, so those are real positives. When we look to the future, you hit on one thing, and I'll come back to the ISO 1345 certification of our Ello platform in a second, but as we think of kind of these emerging growth applications areas like cell and gene therapy, We launched 35 new application notes across the Simple Western, excuse me, the Protein Simple portfolio. So those are for Simple Western, Maurice, and the other platforms. So things like AAV titer, empty full capsid ratios, potency assays, for example, on Simple Western. Even recently in an FDA-approved product, the potency release assay is run on Simple Western. For confidentiality, we can't share what that is, but it gives you an indicator there of how strong we are. If we look at our applications on ELA, in addition to the cell and gene therapy applications for potency, we've got five new neuro applications. We expect that space to take off for us as we fill out the rest of that portfolio. And then finally hitting on ELA with the ISO 1345 certification pending, what we've already seen is really strong adoption because the platform just lends itself so well. clinical applications. We've already seen nice adoption in laboratory-developed tests. We know that 1345 will enable our customers to kind of take their assays, put them on those boxes, and start driving broader clinical adoption.
spk06: Got it. Thanks for that, Will, and that's a good segue. Chuck, I wanted to go back to cell and gene therapy. You know, I think that's been in some ways a poster child for biotech funding concerns. I think the commentary around the end market has varied depending on the company, but you had a good quarter there. It seems like new customer wins may be helped on the GMP side. It seems like small molecules trending well. Maybe just talk about what's driving that growth. And then two, just kind of the potential for new products in that space. It sounded like you alluded to GMP antibodies, but curious what else you're thinking about on that side of things.
spk11: Yeah. Yeah. Yeah, the answer fully would take an hour. There's so much good news to cover there. We had an exceptional quarter. Beat everybody I've ever noticed in the space. Quite blew everybody away, really. But 60% growth, you know, is pretty good. Third percent for the year in proteins. We've gone from six products in our St. Paul facility. We'll be adding another eight this coming year. So we're getting way beyond just cell therapies and more on the regenerative side as well. Strength is in all cylinders. We were quoting roughly 250 to 300 customers up until this quarter. We're now over 400 customers. So a lot of that growth is coming from new customers. And yeah, there may be a dull room in the industry now, but when it comes to cell therapies, it's still very much a growing area. And we're growing and taking share and getting more visibility. We're becoming real after laying track here for five, six years. We are going to be one of the big guys. It's just going to happen. It's inevitable. And of course, our partnerships and our coming acquisition with Will Small is going to help. They've still got over 800 customers. It is probably the only de facto standard out there for bioreactor and cell therapy that's helping. The new sister company, CellReady, is being used as well. So we've got ScaleReady and CellReady Those platforms are working and it's driving more business our way for proteins and across our portfolio. Small molecule, not a bad number, 260% growth this quarter and for the year over 114. We've been waiting a long time for our small molecule platform to really take off and now it finally really is and there's no stopping it now.
spk12: Did I put you to sleep?
spk02: The next question comes from Ben Arias with STFL.
spk07: Good morning, guys. Thanks. Chuck, I guess I'm going to apologize too here just because I really don't think we're going to have a company that finishes their fiscal year and doesn't offer a full year outlook. And obviously, they're all dealing with a set of challenging circumstances. And Jim, it seems like you're offering a view on the harder portion of the year to forecast just given that China is a tough call right now. So I guess why wouldn't you be willing to commit to more meaningful acceleration in the second half of the year if you expect some of these issues to resolve themselves in the shorter term rather than the longer term, which is what I think Chuck said there. And the comps are basically the same first half versus second half.
spk10: Well, first of all, the peer companies out there that are giving guidance for the year through the rest of this calendar year 23, we're in a fortunate position where we have a fiscal year and that's six months further out. So we're putting our necks out there with regards to 24. And I don't think anyone can read the tea leaves as to exactly when this COVID hangover completely resolves itself. I mean, at the end of the day, we know that the one thing we feel the most confident about, of course, is the OEM destocking stopping and at some point have to start rebuying. I'd say the second thing we feel most confident about is China eventually coming back and coming back strong. But Timing that exactly when that will happen is very difficult to do, and you tell me someone who knows, who can pinpoint that answer. And then with regards to the overall, you know, rest of the markets, whether it's biopharma or whether it's academic, I think we're just being cautious in the view right now and kind of wait and see, because at the end of the day, the biotech funding headwoods we think are mostly behind us, they haven't yet turned the tailwinds. I mean, I'm not hearing or reading about major increases in biotech funding at this point. So I think it's just, and then same thing on the academic side, where if anything, the news is about, you know, cutting NIH budgets, not adding to them going forward. Now, I think we are well positioned to where there's mixed components within the academic funding where that could actually help us if the cuts happen in more of the COVID-related areas and funding gets redirected towards oncology and neurology and things of that sort, where we're very well positioned that could actually be an upside for us. But there's just a lot of dynamics and moving parts with the macro environment right now And I don't think it would be wise to give any firm guidance beyond the next six months where those variables will hopefully become more clear as we close out this calendar year.
spk11: Let me add a couple things, too. And let's just work backwards from what you guys would love to hear. What you'd like to hear is that we're back to our 15% or better growth plan coming next quarter. We have a couple things happening in our favor. Starting in Q1, we start getting really good comps away from these horrible comps. So that's going to help. By the back end of the fiscal year, and Jim is right, we'll be the only one talking about a full year from now. Everybody's talking about finishing this calendar year. We've got the beginning of the fiscal year starting now. And by the end of this fiscal year, I expect us to be in the run rates of double digit, if not mid-teens again. But how does that stack up for a year of averages? It's hard to acknowledge right now with this quarter and next quarter, especially with China. And China being 10% of our company and coming off 20%, 30% growth, that's two, three points of growth right there for the company. So we've got to factor that in. Maybe it's only another quarter of that. Maybe it's more. If it's more, it'll affect the number long term. So we're looking at all that. We don't officially give guidance. We give you a range for the coming year. And, you know, you're smarter than we are in knowing our numbers up and down and backwards and forwards. You can see. I think our run rates can be where we expect it a year from now, maybe even higher, because of our growth platforms seem to be accelerating, not decelerating. They become more material. As you know, on our five-year goal, we're two or three years into that now. We talk about these major growth platforms being at 50%. They're running much, much higher than that. If they continue that, it's going to pick up some of the slack here on the core. But we're getting better and better in the core, and I think all we need is just the markets to stabilize, and then we're back on track overall. But I do think we've got a bit longer in the hangover here in the quarter, at least. That's the way to think about it. And we're about the most transparent company you guys talk to. You know that. And we'll tell you more next quarter when we see what happens with one more this quarter. But at least we're going to have an easy comp this quarter, and things will start improving for us dramatically. We didn't have a bad quarter the way it was with everybody else being negative, negative, negative. You know, we did post-growth quite a bit compared to late. So, in fact, so stay tuned. We'll know more within a quarter, but end of the year run rate should be pretty damn good, we think.
spk07: Okay. Fair enough. I can work with that. Appreciate that color there. While I have you, can we just maybe touch on GMP proteins and just have you talk about what's driving the most growth there? Is it menu expansion? Is it larger orders from existing customers?
spk11: It's larger orders from existing customers and new customers. We've expanded the customer list, as we mentioned. So that's one component of growth. The other is that customers that have been with us for two, three years, they're getting further along in their clinicals and they're asking for more. We talk about in the past of turning the plankton into minnows and minnows into tuna and tuna into whales, you know, where We've only got a handful of tuna and whales, and we need, you know, we've got 400 customers. So just imagine a day in a couple, two, three, five years where we have, you know, dozens of whales.
spk12: It's going to be amazing to see.
spk03: The next question comes from Dan Leonard with Credit Suisse.
spk08: Hi, thank you. Could you talk a bit about your end market mix in China between academic and government, biopharma, any difference in trends you're seeing? And what growth rate for China is assumed in the first half of your year in that mid-single-digit view for the total company?
spk11: Yeah, sure. Well, China's a little different than most of our regions. We don't have a spell out, you know, pharma versus biotech versus academic. You know, it's all kind of government-sponsored, you know, well-funded, almost like academic. There are more and more institutions forming there. You know, biosimilars is kind of where things are going in pharma there. And we would call them industrial. But by far, it's really well-funded, government-sponsored, academic is most of the market for us. So it's research, research, research mainly, right? Wow. And it's very evenly split between our reagents and our instruments. And we've had a couple of really boom years instruments there, as we've talked about. So we're coming off a heavy comps there. And then with the COVID issues, their funding issues just dry things up for now. But as it comes back, it'll come back through the institutions. Now, it's roughly about 180 institutions in both Beijing and Shanghai. And then you have modest numbers in some other major cities, but nothing like the two major cities. And that's what drives everything. I think we're in a very interesting time with China because they've probably, as a government, I think they haven't seen this much consternation for many, many, many years. You've got Xi firmly in charge, but you've got a lot of people that are not used to seeing negative GDP. A whole generation of people have never seen this. You've got real estate tipping over. You've got a lot of issues that's got to kind of work its way through. But underneath all of it, You've got a high priority for the country, for the administration there on health care for their people. And that's got to begin with research. And at the end of the day, we're only $100 million of revenue in China. So, you know, it could be $500 million or a billion. I'd still say it's small compared to the opportunity. So we're getting back very strong. We have a lot of products. for the size of our business and our company there. We have a lot of businesses, so there's plenty of levers to pull and plenty of interest across the board.
spk03: The next question comes from Catherine Chute with Baird.
spk00: Hey, guys. Thanks for the questions. I guess first, just any commentary on how Wilson-Wolfe is performing in this environment and any change in thoughts on when a full acquisition could occur?
spk11: Yeah, I don't think we're moving the data up or anything yet. They don't have heavy growth right now either, but they're flat to, I'd say, mid-single-digit growth the last quarter or two. Given that the actual market there has imploded and funding is down, John X, this is a good sign. We're actually taking share. So he's actually getting... more business than he thought compared to what everyone else is dealing with. So it's a good time. So we're going to be able to lever off of this come next year. As you know, the profitability is way beyond our expectations, which allowed us to do the 20% trigger early. But, you know, we're probably on track for three to four years for the full acquisition, and that would be at the, you know, $225 or so million revenue or $136 in EBITDA. Probably the EBITDA one will happen first, again, if things continue the way they are. We're working more and more with John on investments and diversifying things to do. But, you know, right now he's, you know, running in a very, very profitable model. And it's probably more than it should be for the, probably should have more investment for growth. And we're helping with that. I don't know if you want to comment any more on that, Bill.
spk01: Yeah, I think the comment about taking share is great. I think the total number of customers has not declined, so they're not losing them. So as folks rationalize their spend, that's a good indicator. I think the other nice indicator, having some insight into the product mix, is that the uptake in development and kind of the developmental elements of their portfolio are really quite strong right now. And finally, you know, we expect to be closing off some of our joint development projects on closed system cytokine delivery products. And media, GMP media is in the platform too. So we'll start seeing more and more kind of synergies as that portfolio overlaps and we deliver a higher value proposition with our customers with that closed system.
spk11: Since we're talking about growth and growth in China and other places, we didn't talk much about EPI, but I don't want to leave this call as just shot off the team, our exosome platform is really killing it right now. We're getting record test days virtually weekly. We crossed 100,000 tests. We have a colorectal program that's making great progress. We have a multi-analyte screening component test coming that'll do many, many upstream pre-cancer type tests. It builds on top of methylation, so it'll be go well above and beyond what other competitors in the field are doing with cell-free DNA. The future for exosome, I think, is amazing. And you guys never focus on the great numbers, more where the damage is. But coming quarters, you're going to want to talk more about exosomes. You see the numbers. We're investing in more people. And we are very close. The list now of tipping over the large private payers is getting very close.
spk03: This concludes our question and answer session for today.
spk02: I'd like to turn the conference back over to Chuck for any closing remarks.
spk11: Well, I guess just thanks for everyone for attending the call. We always see the call count as we go and it's a very big list. We know there's a lot of competition for your time out there and we're glad there's all the interest in our company and we'll be back next quarter. Thank you.
spk02: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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