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spk03: Good morning and welcome to the Biotechnics Earnings Conference call for the third quarter of fiscal year 2024. At this time, all participants have been placed in listen-only mode, and the call will be open for questions following management's prepared remarks. During our Q&A session, please limit yourself to one question and one follow-up. I would now like to turn the call over to David Clare, Biotechnics Vice President, Investor Relations. Please go ahead.
spk10: Good morning and thank you for joining us. On the call with me this morning are Kim Kelderman, President and 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. The company's 10-K for fiscal year 2023 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 investor relations section of our Biotechni Corporation website at www.bio-techni.com. Separately, we will be presenting at the Bank of America Benchmark, Lyric, William Blair, Jefferies, and Scotiabank conferences in the coming weeks. We look forward to connecting with many of you at these upcoming events. I will now turn the call over to Kim. Thanks, Dave, and good morning, everyone.
spk07: Thank you for joining us for our third quarter conference call. I'm pleased to report that our third quarter outperformed our initial expectations as several of the green shoots we've discussed during our last earnings call continue to sprout and, combined with excellent execution by our biotechnology team, contributed to delivering 2% year-over-year organic revenue growth. We're looking forward to seeing these green shoots further develop as the headwinds we've faced, namely the biotech funding and the microeconomic challenges in China, continue to stabilize and eventually improve. Our team demonstrated that our product portfolio can show relative strong performance in these stabilizing but still challenging end markets. And therefore, we are confident that we can perform extremely well when our end markets fully recover. Additionally, we delivered this quarter's growth while we continue to focus on profitability. The recent initiatives to drive efficiencies across the organization while investing to position the business for future growth. are taking hold, and this shows by our adjusted operating margin increasing sequentially by 290 basis points to 33%. Our growth pillars within our portfolio continue to lead to our strong performance with a new quarterly record for our GMP reagents business, a continued increase in adoption of our XODX prostate test, robust utilization trends across our proteomic analytical tools portfolio, and Strong Demand for Comet, a fully automated spatial biology instrument. I will double-click on these highlights and encouraging trends later in the call. First, I'd like to bring to your attention the Biotechnics' recent recognition by SiteApp, a reagent, search, and data services company. Biotechnics did not receive just one, but two awards. The first award I would like to mention was received for being the ELISA kit supplier of the year. This important designation is awarded to the ELISA kit manufacturer that receives the most citations throughout the year. Citations are an important indicator of market adoption, particularly within academia. We are proud of our leading portfolio of ELISA kits stemming from a long history of innovation. TITAP also recognized Biotechni's RNA Scope Hyplex 12 with the Innovation Award. That is acknowledging its role in enabling spatial detection of RNA in tissue. Our overall spatial biology efforts were also recognized as Biotechni was highly commended for Educational Initiative of the Year, which is related to our ongoing work to enhance spatial biology research and education. This recognition is representative of our company's vision to work together with our customers to unlock the possibilities of science. A second topic I want to highlight is related to artificial intelligence. Given the significant potential that AI and machine learning bring to the advancing science, I want to describe an example of one of the many ways our team is proactively and safely leveraging these important tools. As you already know, Biotechni is the global leader in research-use-only proteins. Researchers from around the world rely on our portfolio of highly bioactive proteins for many important laboratory workflows. Some examples of these workflows include cell growth and differentiation, antibody production and screening, as well as biomarkers and disease monitoring. We are leveraging AI capabilities to create new, patentable, hyperactive designer proteins and other reagents with new functionalities. For over 40 years, biotechnia has been on the leading edge of protein development and bioactivity. Today, we are using the power of AI to increase that lead even further. Now let's get deeper into our quarterly results, starting with an overview of our end markets followed by our geographies. A biopharma end market performance led by our cell and gene therapy growth vertical improved sequentially with a low single-digit increase compared to the prior year quarter. Industry reports point to a recovery in biotech funding during the first calendar year of 2024 with estimates suggesting significantly higher funding levels compared to pre-COVID periods. However, this increase in funding comes after a December quarter that was at an eight-year low, so it may be too early to call this a new trend. But nonetheless, it's a green shoot that appears to be taking root, and if so, could blossom into meaningful revenue growth as we get into our fiscal year 2025. On the academic side, we delivered low single-digit revenue growth, even though we had a tough comparable from robust mid-teens performance in Europe last year. Within the U.S. and Europe, academic budgets remained stable, and our spatial biology and proteomic instrument growth pillars outperformed in these end markets. Now I will discuss the three geographies. North America improved sequentially with year-over-year growth in the low single digits. This improvement was led by a strong performance in cell and gene therapy. Europe declined mid-single digits as mid-teens growth in the prior year period created a challenging come for the geography. However, on a multi-year CAGR basis, Europe has performed well, mid-single digit growth. Last but not least, I will discuss China, which saw a revenue decline in the mid-single digits versus prior year. We mentioned in our last earnings call that we saw a stabilization of revenues in December and January, and we called for revenues in Q3 to be similar to Q2. And that was indeed in line with how the quarter played out, which is a confirmatory sign that the bottom may have been reached in China. With the deceleration of revenue in China seemingly behind us, We also saw some green shoots in the region with China's State Council's introduction of a broad economic stimulus plan. This plan is focused on upgrading equipment across several industries to support innovation. While the specifics of this $70 billion lending program remain fluid, we anticipate that this will be a multi-year program that will eventually have a positive impact on our instrument business. Improving healthcare remains a priority for the Chinese government, and our portfolios of bioactive reagents, proteomic analysis, and spatial biology technologies will remain important tools for the modernization of healthcare in China. Now let's discuss our segments and their growth pillars, starting with our protein sciences segment, where revenue declined 1% year-over-year on an organic basis. This is a sequential improvement from our second quarter and reflects the stabilizing of the biopharma and Chinese end markets. Our protein sciences segment is where we have the most exposure to these end markets and stands to benefit the most from the green shoots taking root. Utilization of our ProteinSimple branded portfolio of proteomic analytical tools remained very strong as consumables used on those instruments continued its long streak of double-digit growth. This growth was broad-based and was further enhanced by the growing installed base and expanding applications of these productivity tools. Examples of newer applications are fractionation on Maurice Flax, as well as QA and QC applications for gene therapies across our platforms, such as Maurice, Simple Western, and Simple Plex. Our Simple Western platform of automated Western blood solutions continues to gain share, as demonstrated by the low double-digit growth for this quarter. The platform performance, if it comes to ease of use, speed, and reproducibility, compares very well to manual methods, which resonates with both our biopharma and academic end users. Customers continue to expand the simple Western use case and workflows, as we can see from increased utilization in gene therapy potent CLEs and quantitative immunoassay applications. We are encouraged with the uptake of this novel instrument And given its low mid-teens market penetration and its expanded use cases, we see a long runway for adoption of this technology. Now let's discuss the promising opportunity for a multiplex ELISA instrument, branded ELA, as a clinical diagnostic platform. Following the recent ISO 13485 certification, we are now ready to pursue clinical diagnostic opportunities on the ELA platform. This opens up a large potential end market for this highly sensitive, fast, and easy-to-use multiplexing immunoassay instrument. The recently announced partnership with Novomol DX is a great example of this opportunity. Their biomarker pathfinder, or BMP kit, utilizes ELA, its consumables, as well as biotechnes reagents as the basis for their point-of-care ophthalmic tests. Novamol DX will initially launch the BMP kit in India, but has potential to deploy this test more globally in the future. Moving on to the performance of the next growth pillar within protein sciences, which is cell and gene therapy. This novel portfolio of reagents, media, analytical, and workflow solutions enables our customers to further their therapeutic development to progress through clinical trials, and to make continued inroads towards the commercialization of these next-generation therapies. Collectively, our portfolio of cell and gene therapy products and services increased over 30% in the quarter. GMP reagents, including GMP proteins and small molecules, remain a cornerstone of our cell therapy offering. We experienced continued traction during the quarter especially in regenerative medicine applications. In the current quarter, we will be strengthening our GMP reagent portfolio with the launch of GMP antibodies, which are designed for cell selection and activation in cell therapy workflows. Overall, our portfolio of GMP reagents grew over 40%, which resulted in a record revenue quarter. Now let's shift to our diagnostics and genomics segment, which reported 10% organic growth for the quarter. Starting with our spatial biology growth pillar, which includes both our ACD business as well as our Luna4 acquisition. The single molecule sensitivity, unrivaled specificity, and subcellular resolution offered by the RNAscope-ish technology is driving utilization in cancer, neuroscience, immunology, telling gene therapy, and regenerative medicine applications. This broad utilization has enabled RNAscope to become the most referenced spatial biology technology in the industry, as the number of our customers' publications recently surpassed 10,000. Importantly, over 50% of these publications were released in the last three years, as increasing global awareness and expanded market adoption further solidify ACD's leadership spatial biology applications. Jumping to our LunaFOR platform, demand for our fully automated high throughput hyperplex spatial biology platform called Comet once again outpaced our manufacturing capacity in the quarter. However, the cross-divisional project to rapidly scale up LunaFOR's instrument production capacity is on track to meet current and future platform demand. we also remain on track to launch ACD's RNAscope Hyplex Pro on the comet at the end of our current fiscal year. This will enable a novel, highly differentiated, multi-omic spatial biology platform capable of visualizing up to 12 RNA and 24 protein biomarkers simultaneously in one tissue sample. Moving on to our fourth and final growth pillar, which is the liquid biopsy-based molecular diagnostics business. Our XODX prostate test provides valuable information on whether a man with a gray zone PSA score should proceed with an invasive, potentially dangerous prostate biopsy or not. With over 25% volume growth in Q3, the value of this test continues to resonate with both patients and physicians. I'd also like to highlight the continued traction we are experiencing with our Asurgen carrier screening and oncology kit business. Asurgen's ability to solve complex molecular diagnostic challenges continues to resonate with our clinical laboratory partners as growth for this business approached 30% during Q3. Also, we continue to execute on technology synergies within our molecular diagnostics division. We are developing exosome-based single gene mutation tests for monitoring various cancer markers. These kits leverage our exosome DX technology and will be distributed through our surgeon laboratory channel. We expect this first monitoring test to be launched in the upcoming quarter. Before I hand the call over to Jim to walk you through the financials in more detail, I would summarize the key takeaways for Q3 as such. Biopharma end markets, as well as the China region, stabilized relative to the previous quarter, and there are early indications that these markets will improve in the back half of the calendar year. Our growth pillars, which are comprised of cell and gene therapy, proteomic analysis solutions, spatial biology technology, and our liquid biopsy platform, all continue to outperform the market with their superior portfolio positioning and by the excellent execution of our team. These growth pillars, enabled by our leading portfolio of proteomic reagents and assays, remain incredibly well positioned to enable our customers to improve the quality of life by catalyzing advances in science and medicine for years to come. With that, I'll turn the call over to Jim. Jim?
spk11: Thank you, Kim. I'll start with some additional detail on our Q3 financial performance and then give some thoughts on the financial outlook for the remainder of the fiscal year. Starting with the overall third quarter financial performance, adjusted EPS was 48 cents compared to 53 cents in the prior year quarter, with foreign exchange having an immaterial impact on EPS. Gap EPS for the quarter was 31 cents compared to 43 cents in the prior year. Q3 revenue was $303.4 million, an increase of 2% year-over-year on an organic basis and a 3% increase on a reported basis. Acquisitions contributed 1% to reported growth. Looking at our organic growth by region and end market in Q3, North America increased low single digits year-over-year, while Europe and China decreased mid-single digits. As Kim mentioned, we noticed an improvement in demand from our BioPharma customers, which benefited growth in both our North American and European regions. Overall, Europe had a challenging year-over-year comp as both academic and biopharma increased mid-teens last year. APAC, outside of China, decreased low single digits overall, with government funding and macro constraints in Japan and South Korea, partially offset by growth in India. For China, the soft government funding environment continued to impact the regions. although the stabilization we experienced in our run rate business in December continued in Q3. This stabilization led to year-over-year growth in our core reagents, as well as our spatial biology business in the region. It appears as though the worst of the China slowdown is behind us at this point, and over the long term, we remain confident that China will still be the fastest-growing major region in the world for life science tools. However, the path back to accelerated growth, we think, will take longer than previous down cycles. By end market in Q3 excluding China, BioPharma grew low single digits in the quarter, while Academic was relatively flat with the challenging double-digit growth comps in Europe. Below revenue on the P&L, Total Company Adjusted Gross Margin was 71.9% in the quarter, a significant improvement from Q2, but lower than the 72.6% in the same quarter of the prior year. The year-over-year decrease was primarily driven by the impact of the Luma4 acquisition in this fiscal year. Adjusted SG&A in Q3 was 30.3% of revenue compared to 27.9% in the prior year, while R&D expense in Q3 was 8.5% of revenue compared to 7.7% in the prior year. The increase in SG&A and R&D was driven primarily by the Luna 4 acquisition. Our strategic pricing strategy continues to offset the dollar impact of inflation to operating income, with pricing also largely offsetting the inflationary impact on our operating margin in Q3. Adjusted operating margin for Q3 was 33%, a decrease of 400 basis points from the prior year period, but an increase of 290 basis points sequentially. Excluding the Lunafor acquisition, which closed at the beginning of Q1, adjusted operating margin was 160 basis points lower than the prior year due to the impact of unfavorable volume leverage and, to a lesser extent, strategic investments to position the business for future growth. Looking at our numbers below operating income, net interest expense in Q3 was $3.1 million, increasing $2.9 million compared to the prior year period due to higher debt levels associated with our acquisition of Wumafor earlier this year. Our bank debt on the balance sheet as of the end of Q3 stood at $389 million, a decrease of $58 million compared to last quarter. Other adjusted net operating income was $1.6 million in the quarter, an increase of $1.5 million compared to the prior year, primarily reflecting our 20% share of Wilson-Wolfe adjusted net income and the afforded exchange impact related to our cash pooling arrangements. Moving further down the P&L, our adjusted effective tax rate in Q3 was 22%, flat sequentially but up 100 basis points compared to the prior year due to geographic mix. Turning to cash flow and return of capital, $81 million of cash was generated from operations in the quarter, and our net investment in capital expenditures was $16.4 million. Also during Q3, we returned capital to shareholders by way of $12.5 million in dividends. We finished the quarter with $160.5 million average diluted shares outstanding. Our balance sheet finished Q3 in a strong position with approximately $140 million cash on hand, and our total leverage ratio was below one times EBITDA. Going forward, M&A remains a top priority for capital allocation. Now I'll discuss the performance of our reporting segments, starting with protein sciences. Q3 reported sales were $214.6 million, with reported revenue decreasing 2% compared to the prior year period. As we discussed last quarter, following a strategic review of our portfolio, we have decided to divest the fetal bovine serum, or FBS, business. FBS is an approximately $10 million annual revenue business with an operating margin profile and long-term growth rate below the company average. The exclusion of FBS unfavorably impacted reported segment revenue growth by 1%. Thus, organic revenue decreased 1%. As a reminder, it is our protein sciences segment that has the most exposure to the China geographic region as well as to the biotech end market. Operating margin for the protein sciences segment was 44.2%. A decrease of 90 basis points compared to the prior year quarter as unfavorable volume and product mix were partially offset by cost management and structural alignment initiatives. Sequential basis protein sciences segment operating margin increased 390 basis points as a result of these cost initiatives and improved volume leverage. Turning to the diagnostics and genomics segment, Q3 sales were $87.5 million, with reported growth increasing 16% compared to the same quarter last year. Organic revenue growth of the segment was 10%, with the Lunafor acquisition having a 6% impact. Growth was solid across the entire segment, with our molecular diagnostics division leading the way. Moving on to the diagnostics and genomics segment operating margin, at 9.3%, the segment's operating margin decreased compared to the prior year's 15.2%, due primarily to the impact of the Lunar 4 acquisition. However, Q3 operating margins improved 330 basis points sequentially from Q2 due to improving volume leverage and favorable product mix. As we close out our fiscal year, we expect our Q4 to look similar to our Q3 that just ended, with markets remaining stable, namely the biotech end market in the China region. Our growth pillars should continue to drive outperformance relative to the overall market, with incremental sequential improvement in revenue. With the expectation of incremental revenue in Q4, together with our cost management actions, we should also see incremental improvement in our adjusted operating margins in Q4 relative to Q3. However, we are also facing tougher year-over-year revenue growth comps in Q4 than we did in Q3, especially in China, where we grew in the mid-teens in Q4 of last fiscal year. While these more difficult comps may be headwinds to our organic growth in Q4 relative to Q3, we are pleased that the trajectory of the business is improving. As we progress to the end of our fiscal year, we will be monitoring very closely what impact the recent increases in biotech funding, as well as the longer-term stimulus announced recently by the Chinese government, may have on our fiscal 25 outlook and operating plans. At our next earnings call, we look forward to updating you on the progress of these green shoots taking root. That concludes my prepared comments, and with that, I'll turn the call back over to the operator to open the line for questions.
spk03: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment, please, while we poll for questions. The first question comes from the line of Puneet Sodha with Learing Partners. Please go ahead.
spk05: Yeah, hi, Kim, Jim. Thanks for taking my questions. So, you know, first of all, look, congrats on the quarter. And, you know, it's really good to see some recovery here in the core business. But based on what you're seeing today, I know it's still a bit nascent, but wondering if, Jim, if we can start to get to potentially, you know, sort of high single digit, if not 10% plus organic growth in fiscal year 25. as you turn the chapter here for the next year. And, you know, comps do get easier as well. So just wondering, when you look at the accounts, what would you like to see in order to potentially see a line of sight to that high single digit or, you know, maybe 10% plus?
spk11: Yes, Puneet, thanks for the question. You know, like we said before, you look at our track record, both during, you know, the COVID era upswing, but also during the last, you know, almost a couple years of what we call the COVID hangover, you know, our organic growth rates have been consistently between 500 to 1,000 basis points there than the overall market when you combine it. And this quarter appears to be no different. And so, you know, that gives us confidence in our portfolio position, gives us confidence in our team's execution. And bottom line is that when the market returns back to its historical growth rates of mid-single digits, we expect that gap in our performance relative to the market to be at least the same, if not better. So, you know, the real question is when do the markets get back to mid-single-digit growth? And when they do, you know, we believe we'll be, you know, if not high single-digit, we'll be well in double-digit kind of growth territory. And, you know, that's an open question. And, you know, the analysts and our peers, we all debate that. But the good news is that there's green shoots ahead of us as opposed to perceived headwinds. And so that's exactly why we'll be monitoring that very closely here as we prepare our own operating plans to prepare for that. But I'm not going to sit here and try to predict exactly when the markets come back to their kind of normal rate. But the sentiment, it definitely seems to be improving. And at least from the analyst reports that are out there, the dollars seem to be behind it as well.
spk05: Okay, that's helpful. And then maybe, Kim, you know, when you look at the biopharma customers, just wondering, I mean, obviously there's some excitement with funding in the first quarter. As you look at the early stage customers, as you had the conversations, wondering how much of those dollars could potentially come to the, you know, discovery stage where you're more stronger versus the developmental stages of therapeutics? And then on the cell and gene therapy side, could you elaborate a bit more on the 40% growth that you're seeing in GMP? How sustainable is that, just given the sort of environment we're in currently?
spk07: Yeah, thank you, Puneet. Regarding pharma and the early funding, like you and I have discussed earlier this quarter, I do believe that funding would be seen to flow through earliest for the consumables part, right? So we do believe that CapEx larger investments will have a little bit longer of a lead time before the fundings flow through. We also do know, like we mentioned earlier, that there is a couple of months that we now have seen good funding for the pharma, biopharma areas. And we do know that there's usually two quarters or so of a delay before that funding flows into the business. I think that overall, this looks very good right now. But as I also mentioned, those are only trends for three months. And we had some disastrous months at the end of the calendar year. So, yeah, good indication. It looks like a green shoot, looks like things are going up, but it's early day, and therefore we want to be careful with that prognosis. The cell and gene therapy, it has been outpacing our overall company's growth for a long time. I think it's a very strong product line, as are all four of our verticals. And I think that we are having a great opportunity there. We have the best reagents to place in that space. And as you know, we have a real good opportunity to consolidate all our reagents into the G-Rex for the cell and gene therapy space. So we're very bullish on it. We do know that some of these quarters can be a little bit lumpy because of the larger orders from the from the companies that are further in their pipeline and that really can make a quarter swing. However, we saw really strong growth in the earlier stage companies, and that will give us a better foundation because if more of these 400 customers or so that we have start ordering earlier in their pipelines, that will give us a more stable foundation to continue to put up great numbers. But for now, we are, of course, very encouraged with our play in cell and gene therapy and are very glad to see that there's some momentum building in that end market.
spk04: Thank you.
spk03: Mr. Soda, please rejoin the queue for more questions. Next question comes from the line of Jacob Johnson with Stevening. Please go ahead. Thanks.
spk06: Good morning. This is Mack on for Jacob. Just a few quick ones for me. I appreciate the commentary around biopharma in China. There's been some muted commentary from most of your peers recently, but also the prospect around the stimulus that you mentioned earlier. So I'm curious as to what you're watching for to signal an improved backdrop in that country at this point in time.
spk07: Yeah, thanks, Mack. As you know, we are big believers of the situation in China improving over time and that this will be, as it used to be, a true growth driver for the business. As you know, we also had three real tough quarters in China right now, and that's mainly paced by the lack of funding. We do hear there also some green shoots of funding efforts, and... yeah, we are keeping an eye to the floor there that the momentum will continue to build. Specifically for instrumentation, we know that the $70 billion funding that's laid out or the loan that the government is laying out is aimed at improving and innovating the instrumentation base, and we think we can benefit from that funding. And in the meantime, we hear positivity from our sales force. They talk to their customers, and the customers are getting more interested about hearing the benefits our automation brings. And our automation brings consistency. It's very efficient, and it's got fast results. So that value proposition fits really, really well with the new funding potentially flowing through into China.
spk06: And then just quickly, is there anything that you think you need to change or could change to better capitalize on opportunities in the current environment or as it relates to your go-to-market strategy? Or do you think a reacceleration and growth largely depends on the macro environment?
spk07: Yeah, I think it's the latter. It's clear that we have – We have a very efficient sales force in China. We've always done really well in the region. We feel we have the right coverage, direct versus indirect, and I think that we've got the right product positioning. In addition to that, we are, as you know, investing in China for China GMP plans, which will also come in line over the coming quarters. And with that, I think we have the right portfolio, the right value proposition, as well as the right go-to-market channels. So I'm very happy with the situation that we currently have there.
spk04: Thank you.
spk03: Mr. Johnson, please rejoin the queue for more questions. Next question comes from the line of Patrick Tonelli with CTP. Please go ahead. Thank you.
spk02: Hey, guys. Thanks for taking the questions. Maybe just one for you, Jim, just on the guidance piece. Can you talk about the margin side? It sounds like up sequentially, maybe in that mid-30s range for 4Q. Is that the right number to build off of as we think about next year? And then I just wanted to clarify on the revenue side. Is it the dollars are up sequentially in 4Q and the growth rate is similar to this 2% organic? I just wanted to make sure I had that right.
spk11: Yeah, sure. Thanks, Patrick. So first on the margin question, you know, we talked about for a couple quarters now that our goal was to get back to mid-30s type e-mail margin by the time we exit this fiscal year. You know, it's not a slam dunk to do that. We still have got a ways to go to get from 33 to that point, but it's not out of reach at this point. So I think, you know, honestly, where the consensus has us right now feels about right for Q4. which gives us a nice launching pad, you know, into fiscal year 25. And it's really going to depend on, you know, on the revenue, where the markets are, and what, you know, I've already talked about our expectation of growth above and beyond the market growth. So as you saw, you know, from Q2 to Q3, the amount of margin expansion we had on the increased volume, and much of that is seasonal. You know, we have amazing pull-through, amazing gross margins in our products. So when you get that volume, it contributes tremendously to the bottom line. And, of course, we continue to invest because we're investing for the long term. We've got these amazing growth pillars that we have to continue to kind of feed those beasts so they can reach their full potential five years, ten years down the road. So we'll be balancing that as we go through our operating plan this year and look forward to providing you some more insight to that next call. With regard to the revenue question, to have clarity on that, as I mentioned, we do believe that revenues will be slightly higher in Q4 than Q3. but the organic growth percentage year-over-year might be a bit challenged, mainly because of the tough comp we have in China. If you think about China last year, we had mid-teens growth versus where it's running right now. Being 8% to 10% of our business, that's a point and a half of headwind just in itself. So that's kind of where we're at right now in terms of the range of organic growth.
spk02: Okay, understood. And then, Kim, maybe just on, I think it was last week you guys announced the expanded Fisher Agreement into Europe. Can you just talk about the opportunity there, how impactful that could be as we work our way into 2025 for you guys? Just trying to wrap my head around that agreement.
spk07: Yeah, thank you, Patrick. Thermo Fisher Scientific has a ton of capabilities, but one of the big ones is the Fisher Scientific Channels, and that channel provides great reach and ease of use for transactions for our customers. As you might know, we've had a distribution agreement, a very similar one, in the U.S. since 2014, so for about 10 years now. We're very comfortable and used to collaborating with the Fisher Channel. I can expect a similar trend and a similar setup in Europe where our European customers can benefit from the commercial footprint, the reach, and also the ease of transactions that come with dealing with the Fisher Scientific Channel. And of course, this convenience and this reach is very important for us as well. And therefore, we hope that we can serve our customers better. Nonetheless, of course, biotechnology will maintain and grow our direct channels, as we have done in the USA as well, and we will make sure that we fine-tune and work really well together with the Fisher Channel and collaborate to eventually optimize our customers' convenience and the reach we have as a company.
spk04: Thank you.
spk03: Mr. Donnelly, please rejoin the queue for more questions. Next question comes from the line of Justin Bowers with Deutsche Bank. Please go ahead.
spk13: Hi, good morning. I just want to pivot back to the selling GN market and the strength there. Can you talk about sort of what you're seeing in that customer cohort and is the durability of that growth over the next couple of quarters supported by existing programs and customers or do you need to see sort of new customer activity, or is that just sort of like greenfield for you on the go forward?
spk07: Thank you, Justin, for the question. You know, as I mentioned earlier, I think our cell and gene therapy play is just very strong because of the different products we sell into it, right? As you know, we have a 20% stake in in Wilson-Wolf, and Wilson-Wolf has this G-Rex, which is a container that makes it really easy and efficient to grow T-cells. To grow these T-cells, you would need our core products, so we have our GMP proteins, cytokines, chemokines, to make sure that you can fine-tune the growth of these T-cells, and these are all very high-value ingredients to the cell and gene therapy market, We do know that, for example, the G-Rex is in about half, let's say 45%, of all the clinical trials that are going on in this space. We know that we are obviously very keen on making sure that all our ingredients are being used in that setup just as well, so we create the pull-through. We've seen fantastic growth in our GMP proteins that are now on a you know, pacing at an annualized revenue of about $60 million. And yeah, we're very proud that we had a record quarter. As I mentioned earlier, it can be a little lumpy because they are the larger customers that are at the back end of their clinicals where volumes go higher. And that will create some variation of results quarter over quarter. But overall, we have seen consistent very high growth within this space. And we know that more and more companies are entering the race because the cell and gene therapy has been shown to be able to cure diseases we previously not have been able to find any solutions for. So we're very excited about this space.
spk13: Okay, so it sounds like increased pull-through and scaling up. And then on Wilson-Wolf, what are trends like there? Is that still stable or is it starting to grow again? Any commentary there would be helpful.
spk07: Yeah, Wilson-Wolf, as I mentioned, participate in 45% of all the clinicals. There are several of these companies that we collaborate with that have now reached the finish line and are commercializing, which is a very good indication, and we're over half of those. And then last but not least, overall, the company started growing again in double digits. It's sitting this quarter in around 14%, and it has a fantastic run rate. And as you can imagine, really, really high margins, north of 72%. And yeah, we're very, very happy to see that Wilson Wolf is having such traction in this important market. specifically because we know that biotechnology will definitely benefit from it with our reagents, but also over time we will own the company and we will then have the direct benefit as well.
spk04: Thank you.
spk03: Mr. Bowers, please rejoin the queue for more questions. Next question comes from the line of Dan Arias with Stiefel. Please go ahead.
spk12: Good morning, guys. Thanks. Kim, on the spatial business, what do you see as the timeline for getting production on Comet where it needs to be in order to meet demand? And then as you're firming up the manufacturing plan and you're getting ready to pair ACD and Lunafor, can you just maybe refresh the view on what you think the spatial portfolio should grow at going forward?
spk07: Yeah, thank you, Dan. The production constraints are really, really... Spacing the output right now, we are really happy, first and foremost, that we see the demand that we really like, right, and then actually exceeding expectations. So that's the most important fundamental. We do believe that during this quarter, the quarter we're currently in, that we will get very close to what our order book is. But the real status quo, where we can produce as many comments as that get ordered, will be in our first fiscal year quarter, so the third calendar quarter. And then we will continue to reel in the backlog in the first half of our fiscal year. You asked about my enthusiasm in spatial. It's huge. Obviously, it's a very fast-growing market, and you've gotten used to ACD being a real winner in the reagent space with all the benefits that we know about it. COMET, it's early days, but if we compare the system to other peer systems in the field, we know that COMET is the only instrument that has a full workflow automation. So there's no manual interference or manual steps in the workflow. The COMET, you can use any antibodies that you've used to utilize in your workflow. We have 50,000 RNA targets. It's a truly multiomic machine, so you can see your protein and your RNA targets simultaneously in the same slide. As you know, biotechnia has 400,000 antibodies, so there's plenty of choice to pick from in order to boost our pull-through on the instrument. And as you know, we can run four slides in parallel, and there we have the highest throughput in the market. So I'm extremely pleased with our positioning from a reagent as well as from an automation point of view, and we will continue to work to make our reagents, our antibodies, as well as the system seamlessly working together from sample preparation all the way to image analysis to eventually make it most convenient for our customers to perform their spatial biology tests.
spk12: Okay. And then, Jim, just maybe to round out your comments related to the finish of the fiscal year here, you touched on margins. I just wanted to ask about the top line. It sounds like you're expecting similar conditions, but you have the slightly tougher comp overall, China notably hard. Does that translate to some modest growth in 4Q? What's the outlook there?
spk11: Yeah, we absolutely are hell-bent on staying the black, for sure, in terms of growth.
spk04: Thank you.
spk03: Mr. Arias, please rejoin the queue for more questions. Next question comes from the line of Matt Leroux with Brilliant Player. Please go ahead.
spk08: Hi, good morning. I wanted to follow up on Lunafor. The investments you're making today to scale up manufacturing, would you say that generally they're within the bounds of what you expected to make it just perhaps they're pulled forward or, you know, I guess the flip side of that would be, do you have different or, you know, worse expectations of the long-term margin potential? So just trying to get a sense for whether this is scale up to meet accelerated demand or perhaps something you discovered once you did the deal.
spk07: That's a very good question, Matt. No, fortunately, it's not something we discovered. It's truly an outpacing of the orders versus our initial projections. And we had lofty projections, but the traction in the market is just overwhelming. And that means that we have to increase our in-house capacity, which of course is something that we're very used to do. We have a fantastic operations team in Switzerland that gets supported by operations teams from from the U.S. just as well and from across other businesses, such as the protein simple business, very much used to producing high-volume instrumentation. So I'm very confident we can increase that capacity. But as you can imagine, the pull-through also hits some of the vendors. So also there we have to make sure that we help out with – the upscaling of certain critical parts that the vendors are having to get used to these new volumes, right? So overall, we just have to beef up the capacity. It's a great thing. By now, it's a good problem to have, and we're very confident that we can resolve this and there's no other underlying constraint or issue that we are aware of. Okay.
spk08: Great to hear. The next question is about scale ready and the components of that. So your own GMP protein business partnership and Wilson Wolf. Just curious now that it's been out there for a little while, what kind of feedback you've been getting, if there's any way to talk about how that's translated to win rates. Is that a driver of some of the pickup in GMP proteins? And, you know, obviously Wilson Wolf has been the market leading technology. You know, I think there probably is some looming competition out there beyond just integration to offer more, you know, full and automated solution like you're trying to do with scale ready. Are there also additional areas for platform improvement, you know, with G-Rex or that broader suite as well?
spk07: Yeah, thank you for the question. I just have to say that when I talk to our customers in the cell and gene therapy space, Skilled Ready has a real good reputation. So it's truly a brand now in that particular space. And, of course, it has a full solution for cell and gene therapy customers, and that's why I believe that you see such traction in not only the volume of the G-Racks and the revenue associated with it, but also in the pull-through of our proteins, the cytokines and chemokines that customers end up using in that setup. It's a complete solution. It's scalable. And it's relatively easy to implement compared to some of the competitive workflows. And, yeah, I think that is a chicken and egg, right? Skill Ready is doing really well because that's a fantastic solution. And the other way around, the customers do get to enjoy the solution because the Skill Ready team is really efficient in bringing it to market and educating our customers about the benefit of the solution we have.
spk04: Thank you.
spk03: Mr. Leroux, please rejoin the queue for more questions. Next question comes from the line of Katherine Schulte with Baird. Please go ahead.
spk01: Hey, guys. Thanks for the questions. Organic growth came in about four points better than what you've guided. You talked about China stabilizing, but that sounded like it played out as you expected. So can you just talk through what drove that upside versus your expectations? Was it really broad-based, or was there a particular – product category or end market that surprised you?
spk11: Yeah. Hi, Catherine. This is Jim. Thanks for the question. Yeah, I mean, I think generally speaking, the broad-based market performed as we expected. As you mentioned, China overall was as we expected as well. I think if you look within the protein sciences, it gets back to our growth pillars and how resilient they are even in this down cycle we've been in. So two points I'll call out would be, one was cell and gene therapy. So we always said that when biotech funding came back, we believed that cell and gene therapy would be one of the first places you'd see it. And I'm not saying there's a direct correlation there, but definitely a positive sign. And it was a bit of a surprise for us how quickly cell and gene therapy rebounded for us here in the third quarter. And again, we saw the same thing over, as Kim mentioned, in Wilson-Wolf as well. So that was very encouraging. It was not necessarily in our outlook a quarter ago. The other growth pillar within protein sciences was within our proteomics instrument portfolio, and even more specifically, Simple Western. Simple Western performed extremely well and actually grew double-digit in instruments as well as consumables. So also a very good sign, because we always figured that when the instrument market came back, that would be the first part of our portfolio that we would see it, given its very broad base of applications. also used widely in cell and gene therapy, and it's the most under-penetrated of our three platforms. So that was not necessarily in our outlook a quarter ago, and it was very nice to see that come back so strong here this quarter. And then if I turn over to our diagnostics and genomics business, there I'd call out the surgeon business. As we talked about the growth rates there, we're pretty much nearing our epi test with exosome. So one of the highest growth rates we've seen with the surgeons since we've owned the company. And they got some new product launches out there. They're performing extremely well, and we think that momentum will continue. So that was also very nice to see.
spk01: All right, great. Thank you. And then was there any stocking contribution from the European Fisher deal in the quarter, or will there be any in the fiscal fourth quarter, just given the timing of when you signed? Just curious if there's any stocking related to that partnership.
spk07: Catherine, thank you for the question. No, there were no such influences in this past quarter, and don't expect them in the next quarter either, specifically because the setup is that Fisher will bring in the leads, and we will ship directly from our warehouse. So you will not see any of those dynamics, if that makes sense.
spk04: Thank you. Ms.
spk03: Schulte, please rejoin the queue for more questions. Next question comes from the line of with Scotiabank. Please go ahead.
spk00: Hi. Thanks for taking the questions, and congratulations on the quarter. Maybe just on the academic and market perspective at this juncture, just kind of curious if you guys have visibility into that market, especially in the US and Europe. Obviously, you're seeing continued stable growth there, but potentially more difficult comps ahead. So just kind of curious what your outlook might be for the coming quarters.
spk07: Yeah, I think that the academic markets have, you know, we've done pretty well in there. And overall, I must say, we see a relatively stable environment, right, with the Horizon funding in Europe as well as in the U.S., So it's a stable market. Of course, with the lull in the biotech industry, some of our innovative sales reps have found their way into some of the academic accounts as well and have started refocusing there. So there's a nice bump up for us by just having the right focus and the connections further developing between the customers and academic as well as the sales rep. So at the end of the day, I think this is not something that is just for one quarter or two quarters. I think as long as the academic funding stays as it is or gets better, we will continue to see a benefit from that end market, and we will continue to be good or even better at serving it. And that's what I expect for the coming quarters. Gotcha.
spk00: And then I also have a follow-up on Luna 4 and Spatial Bio. Just kind of curious, it may be early, but are you seeing competitive, you know, wins on Luna 4 currently? And just for the Spatial Bio addressable market in general, just kind of curious, you know, what's driving the, you know, other than your performance there, just from an end market standpoint, are there disproportional funding going towards your addressable markets in the current environment, do you think, or? just kind of any additional color would be great. Thank you.
spk07: Yeah, thanks for your question around spatial biology end markets. I do believe that end market is under less pressure than other end markets. It's just such an important tool into determining which biomarker you're going after. It's a It's just a new way of doing your research and validating your results. So it's here to stay, and that market will continue to grow significantly, and we believe that it will grow double digits for the foreseeable future. Yes, we see competitive wins. As I mentioned earlier, when Dan asked the question, there are tremendous benefits from a comet automation system over other systems that are in the market. Our reagents, our antibodies are also in the lead and very unique in that market. So that combination is just very strong. And if I look at some of the trends in the market, yes, we have been able to sell comets into accounts that have experience with other systems. But an even stronger signal is the moment we found that customers want a second comet, right? And then now we have several larger pharma companies that have ordered their third one. So that means... it's not only a good value proposition at the moment you buy it, but it's still a really good value proposition the moment you use it, and that gives them real first-hand experience, and that gives me confidence that that workflow is indeed a real strong value proposition compared to the other solutions in the market.
spk04: Thank you.
spk03: Please rejoin the queue for more questions. Next question comes from the line of Paul Knight with KeyBank Capital Markets. Please go ahead.
spk09: Hi, Ken. Thanks for the time, and Jim as well. The protein simple business, could you kind of highlight one of the fastest growing portions of the product line? How large is protein simple now as well? And just a refresh there would be great.
spk11: Yeah, Paul, this is Jim. Thanks for the question. Good to hear from you. You know, we're not giving sizes so much on the unbiked product line anymore. We try to avoid that from a competitive perspective, but as I highlighted in an earlier, as an answer to an earlier question, I think the simple Western platform specifically was a highlight of that portfolio this quarter with double-digit growth overall and double-digit growth in both instrument placements as well as consumables. That being said, our entire instrument portfolio It's been very resilient through this downturn. Despite struggles with the instrument placements the last several quarters, the consumables on all three platforms continue to offset that to keep those product lines in a very stable state overall. So we're very, very pleased with how our instrument portfolio has performed and gives us that kind of great confidence that when the markets normalize, as the markets normalize, we'll see accelerated growth in that portfolio once again.
spk09: And then you mentioned in the past potential revenue, the GMP facility, or maybe expressed it as capacity and dollar revenue. Where's your thinking now on capacity of your GMP business?
spk11: Capacity is no longer an issue. We're probably going to stop talking about it because I think we have capacity that could last us a decade or more, to be honest with you, at least as it pertains to As it pertains to our GMP proteins for the CAR-T for the immunotherapy market, we still have some capacity that we need to build out for our regenerative medicine side of our GMP protein business. But as it pertains to what that facility was specifically built for, which is the immunotherapy side of cell therapy market, capacity will not be an issue for a decade or more to come.
spk04: Thank you.
spk03: Ladies and gentlemen, we have reached the end of question and answer session. I would now like to turn the floor over to Kim Kelderman for closing comments.
spk07: Thank you, and thank you, everybody, for joining the call today and for the insightful questions. I'm extremely proud of the biotechnology team's accomplishments in this dynamic environment, and I'm also proud of the results we've been able to deliver in this quarter. Our differentiated portfolio addresses some of the highest growth markets in life sciences and is positioned to deliver best-in-class performance for all our stakeholders going forward. Thank you very much for joining the call.
spk04: Thank you.
spk03: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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