Bio-Techne Corp

Good morning, and welcome to the Biotechni Earnings Conference call for the second quarter of fiscal year 2025. At this time, all participants have been placed in a 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, Biotechni's Vice President and Best of Relations.

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 2024 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 gap 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, in the coming weeks, we will be participating in the Cowan, Learink, and Barclays healthcare conferences. 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. Thank you for joining our second quarter conference call. I'm pleased to report that we delivered yet another strong fiscal quarter that exceeded the initial projections that we made at the beginning of our fiscal year. Improving biopharma and markets, particularly on the large pharma side, benefited our GMP reagents and their protein analytical instrumentation. This, combined with continued traction in our exosome DX and spatial biology franchises, drove our 9% organic revenue growth for the quarter. We are also seeing the benefits of the organizational and operational efficiency improvements that we have implemented over the last year and a half. During the second quarter, our adjusted operating margin increased 110 basis points sequentially to 30.1%, and I'm confident that we are well positioned for ongoing improvement in our peer-leading operating margin profile as our end markets continue to recover. Jim will provide more details on these results later in the call. I hope that many of you had the chance to see the latest corporate presentation we provided last month during the J.P. Morgan Healthcare Conference. For those that have not seen it, I would encourage you to visit the Investor Relations section of Biotechnics' website. We presented the company's strategy through a slightly different lens this year by outlining three major challenges we help our customers solve. We enable the discovery of novel biological insights. We support the development and manufacturing of advanced therapeutics. And we enable precision diagnostics. Our product portfolio and solutions are uniquely positioned to reliably and efficiently support our customers in advancing science across these factors. Now let's review our Q2 results, beginning with an overview across our end markets and geographies. Sales to our biopharma end markets increased mid-teens in the quarter as we experienced strength in both the US and European regions. This strong performance included a notable improvement from large pharma customers with particular strength in bulk GMP and reagent orders, as well as in our protein analysis instrument portfolio. For our academic end market, the team delivered mid-single-digit revenue growth. As a reminder, our academic end markets grew upper single digits in the prior year period, and we achieved this quarter's mid-single-digit revenue growth despite the challenging comp as well as the reduced number of selling days related to the mid-week holidays in December. Now for our regions. In the Americas, we grew low double digits for the quarter. This performance was primarily driven by the aforementioned strong demand from our cell therapy customers as well as the strength in our automated protein analysis portfolio. Our EMEA region grew low double digits as well, which was also driven by our automated protein analysis portfolio, which grew more than 20%. In addition, we expanded our geographic reach through two new distribution agreements. First, we announced a partnership with Leader Life Sciences to fortify access to our portfolio across the Gulf cooperating countries. We followed this with a distribution agreement with MedSantec to expand access to our portfolio in Turkey and Azerbaijan. In China, sales declined low single digits as the challenging economic environment remained a headwind to growth in the geography. It's worth noting that the Q2 performance is in line with our expectations that the negative growth would ease and will shift to modest positive growth in our fiscal Q3, due to the expectation that a targeted stimulus program and a modest improvement in government funding will slowly materialize. As a side note, Jim and I were just in China to visit our team and, of course, to meet a variety of our customers. it was clear that our team remains extremely motivated and committed to our mission, and our customers continue to value the consistent quality across the breadth of our portfolio. In the long term, the modernization of healthcare will remain a high priority for the Chinese government, and Biotechni is looking forward to playing a key role in enabling the evolution of healthcare for its citizens and the world. Now let's discuss our growth pillars, starting with our portfolio of cell therapy workflow solutions. During the quarter, we experienced robust growth within our GMP reagent portfolio as customers that are progressing their advanced therapeutics through later stage clinical trials require materially more GMP reagents. We now have over 500 customers relying on our GMP reagents for their cell therapy across all stages of development, Within this expanding customer base, 85 are in various phases of clinical trials, including six currently in phase three. For Q2, our GMP reagents revenue increased over 90%. As a reminder, our GMP reagents business can be lumpy, as orders from customers further along their clinical trials can be much larger. Therefore, order timing can make quarterly growth volatile. so we view trailing 12-month revenue as a better performance indicator. Our current TTM for our GMP reagents sits just over 40% organically. Now let's discuss our protein analysis growth pillar, where we experienced strong sales momentum across our portfolio of automated workflow solutions. Once again, the ease of use precision and reproducibility offered by our simple Western automated Western blot instrument, our simple Plex automated multiplexing immunoassay system, and our Maurice Biologics platform drove strong consumable utilization on our installed base. Customers continue to appreciate the labor and cost savings these innovative platforms bring to their laboratories. Overall, instrument-specific consumables increased high teens in the quarter. This marks eight out of the last nine quarters where we delivered at least double-digit consumable growth across our growing installed base. It was not just consumables that showed strength, though. We also experienced growth in new instrument placements. Globally, our instruments increased low single digits for the quarter and grew mid-single digits, excluding China. This marks the first quarter in the last two years in which we delivered positive instrument growth. Separately, I'd like to congratulate the team on the successful early access launch of our next-generation high-throughput simple Western platform called LEO. The team capitalized on our growing order funnel and shipped several of these high-end LEO instruments at the end of the quarter. Wrapping up our platform discussion, I'd like to give an update on Maurice Flex. Our biopharma customers are increasingly utilizing Maurice Flex for protein analysis in a rapidly growing number of gene therapy applications, as well as sample fractionation methods for mass spectrometry sample preparation. During the quarter, we announced a co-marketing agreement with Waters Corporation, aiming to expand the market awareness of the biotherapeutic characterization capabilities of the Maurice Flax. Now let's turn to our core portfolio of research use only, or RUO, proteomic reagents. Let me highlight that over the last 48 years, we've amassed a catalog of over 6,000 proteins and 400,000 antibody types. This biological content is relied upon by customers across the globe to gain novel insights into biological pathways, to develop and manufacture advanced therapeutics, and to enable precision diagnostics. Our everyday run rate business continued to modestly improve sequentially while larger bulk orders of our RUO reagents to biopharma customers also picked up in the quarter. We view this as an indicator that our end markets are gradually starting to improve. All in, our core portfolio of RUL reagents grew low single digits in the quarter. Sticking with our core reagent portfolio, I wanted to give an update on our AI initiatives within biotechnology. As we have mentioned in the past, we see tremendous potential leveraging AI to develop proteins and antibodies with enhanced functionality. During the quarter, we continue to utilize our internal know-how and our vast data set, which we generated over the last several decades, to train our generative AI models and develop designer proteins. These patentable proteins are engineered to exhibit hyperactive properties, enhanced heat stability, and other novel features. These attributes are relevant for many applications, including cell therapies. We added four new designer proteins to our catalog in Q2, bringing the total portfolio to six. You can expect a steady cadence of new designer protein launches going forward. Overall, I'm very excited for the Protein Sciences team as they delivered 8% organic revenue growth. This is the best performance of this segment since the market headwinds that were related to the aftermath of the pandemic, began in the first quarter of our fiscal 2023. Now we will move to the growth pillars within our diagnostics and spatial biology segment, which delivered 12% organic growth in the quarter. Let's start with our spatial biology business, where we continue to make significant progress with the launch of the COMET system, a fully automated multi-omic spatial biology instrument, As a reminder, we recently enabled RNA scope capabilities on the Comet to allow for visualization of up to 24 proteins and 12 RNA targets simultaneously. We are actively upgrading Comet's install base to enable researchers to fully leverage the multi-omic capabilities of the platform. Additionally, we continue to launch Biotechnis R&D Systems branded antibodies for use on the comet system. The RNA scope capabilities, paired with a growing portfolio of validated antibodies, will support a consumable stream that is expected to be the highest pull-through of any instrument under the biotechnology umbrella. During the quarter, our spatial biology revenue increased mid-teens and we are positioned for continued leadership in this fast-evolving space. I'd like to give an update on our precision diagnostic tools business, previously referred to as the molecular diagnostics business. We believe the new name is a better reflection of the focus of this team, which is to provide clinical laboratories with precise diagnostic tools that leverage our exosome-based diagnostic technology combined with our surgeons' proprietary chemistries. During the quarter, we announced the launch of a test for ESR1 mutations in breast cancer. This is the first kitted test to utilize our exosome-based technology and Asurgen's chemistries. We commercialized this test through a laboratory channel, which we also obtained through the acquisition of Asurgen. Meanwhile, our XODX prostate cancer test continues to enjoy rapid adoption as unit volume grew more than 30% in the quarter. In summary, I'm extremely pleased with the execution by the biotechnology team across all our businesses globally. We believe that the strength of our growth pillars in cell and gene therapy and proteomic analysis, combined with the momentum that we saw in our core products, are indicative of an early stage recovery in key biopharma end markets. If you then add to that the performance of our best-in-class spatial biology franchise and our high-value precision diagnostic tools platform, you will understand why I'm confident that we have positioned Biotechni for continued differentiated growth going forward. With that, I will turn the call over to Jim.

Jim? Thank you, Kim. I'll start with some additional details on our Q2 financial performance and then give some thoughts on the financial outlook for the remainder of the fiscal year. Starting with the overall second quarter financial performance, adjusted EPS was 42 cents compared to 40 cents in the prior year, with foreign exchange having an unfavorable 2 cent impact. Gap EPS for the quarter was 22 cents compared to 17 cents in the prior year. Q2 revenue was $297 million, an increase of 9% year-over-year on both a reported and organic basis. Recapping our organic growth by region and end market in Q2 that you previously heard from Kim, North America and Europe increased low double digits year-over-year, driven by strength from our biopharma customers, particularly in our cell therapy and proteomic analysis portfolios, while China and APAC decreased low single digits. By end market in Q2, excluding China, biopharma increased mid-teens, and academia increased mid-single digits in the quarter. Our biopharma business benefited from larger reagent and instrument orders in our pharma and cell therapy end markets, while our run rate business in biopharma showed modest improvement year over year. Below revenue on the P&L, total company adjusted gross margin was 70.5% in the quarter, compared to 69.7% last year, driven by the impact of favorable product mix and productivity initiatives. Adjusted SG&A in Q2 was 32% of revenue, compared to 31.2% in the prior year, while R&D expense in Q2 was 8.5% of revenue, compared to 8.4% in the prior year. The increase in SG&A was driven primarily by the reinstatement of incentive compensation accruals, partially offset by the benefit of structural streamlining and diligent expense control. Adjusted operating margin for Q2 was 30.1%, up 110 basis points sequentially and flat compared to the prior year due to the impact of favorable volume leverage and cost controls offset by the reinstatement of incentive compensation accruals. We continue to execute cost containment measures and prioritize our growth initiatives to drive efficiencies throughout the organization, with the goal of optimizing operating leverage during the ensuing market recovery. Looking at our numbers below operating income, net interest expense in Q2 was $0.7 million, decreasing $2.7 million compared to the prior year due to lower net debt levels. Our bank debt on the balance sheet as of the end of Q2 stood at $300 million unchanged from last quarter. Other adjusted non-operating expense was $1.3 million in the quarter an increase of $4.4 million compared to the prior year. The increase was driven by the foreign exchange impact related to our overseas cash pooling arrangements. Moving further down the P&L, our adjusted effective tax rate in Q2 was 21.5%, down 50 basis points compared to the prior year due to geographic mix. Turning to cash flow and return of capital, $84.3 million of cash was generated from operations in the quarter and our net investment in capital expenditures was 6.8 million. Also during Q2, we returned capital to shareholders by way of 12.7 million in dividends and 75.6 million through a 1.1 million share stock buyback. We finished the quarter with 160.6 million average diluted shares outstanding. Our balance sheet finished Q2 in a strong position with 177.5 million in cash, and our total leverage ratio remains well below one times 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. Q2 reported sales were $211.6 million, with reported revenue increasing 7% compared to the prior year. The exclusion of the fetal bovine serum business, which was classified as a hell-for-sell business and subsequently divested in the quarter, unfairly impacted reported segment revenue growth by 1%. Thus, organic revenue for the segment increased 8%. As Kim previously mentioned, the strength in the segment's organic growth was driven by our protein analysis portfolio as well as our GMP protein business, where several large orders that we initially expected to be placed in our third quarter were requested by our cell therapy customers in Q2. Operating margin for the protein sciences segment was 41.2%, an increase of 90 basis points compared to prior year, as the impact of favorable volume leverage, cost management, and structural alignment initiatives were partially offset by the reinstatement of incentive compensation accruals. Turning to the diagnostics and spatial biology segment, Q2 sales were 84.1 million, with both reported and organic growth increasing 12% compared to the same quarter last year. All three businesses within the segment, our core diagnostics reagents, spatial biology, and precision diagnostic tools, all contributed nicely to growth. Moving on to the diagnostics and spatial biology segment operating margin, at 3.9%, the segment's operating margin decreased compared to the prior year's 6%. Excluding the impact of incentive compensation accrual reinstatement, operating margins would have expanded approximately 200 basis points year-over-year due to the impact of favorable volume leverage. We anticipate improvement in the diagnostics and spatial biology operating margin as Luna 4 continues to scale. In summary, Q2 was a very solid quarter. Earlier than expected in the fiscal year, we saw improvements in all types of order activity from our larger pharma customers. including capex spend for instruments, bulk order reagent requests, and increased daily run rate purchases. We view this as a positive sign that much of the R&D pipeline repositioning by our large pharma customers is behind us, and that a more broad-based increase in R&D funding from discovery through the clinic is more likely in calendar year 2025. We also saw continued outperformance in our GMP protein business in Q2, although much of this unexpected upside came from the timing of large orders by several cell therapy customers who are progressing their programs through clinical trials. Thus, the organic growth outlook for the second half of fiscal year 25 that we've provided the past two quarters is still intact. For Q3 specifically, this means the upper range of mid-single-digit organic growth. As you think about our expected organic growth performance in Q3 relative to Q2, there are a couple of headwinds to consider. First, the year-over-year comp in Q3 is more difficult by four percentage points than it was in Q2, as our revenue declined 2% in Q2 of last year and then grew 2% the following Q3. Also, the previously mentioned timing of several large GMP protein orders that we had in our recent Q2 are not expected to reoccur in Q3. However, on a more positive note, The earlier-than-expected momentum we are seeing from our larger pharma customers, as well as an expected return to growth in China in Q3, allows us to hold the organic revenue outlook that we shared since the beginning of our fiscal year. The early improvement in large pharma activity also strengthens our confidence that we can exit our Q4 with organic growth in the high single digits as we have predicted all year. As it pertains to reported revenue growth, with the recent strengthening of the US dollar at current foreign exchange rates, we do expect a headwind of approximately 1% of sales in the back half of our fiscal year. As much of the top line foreign exchange falls directly to the bottom line of our P&L, we do expect a negative impact to adjusted operating margins by approximately 50 basis points. Thus, we are now forecasting adjusted operating margins in the second half of fiscal year 25 to be between 50 and 150 basis points higher than the prior year. This still represents a significant step up in margin from the first half of the fiscal year due to higher volume leverage, continued improving product mix, and the full impact from productivity initiatives. That concludes my prepared comments, and with that, I'll turn the call back over to the operator to open the line for questions.

Thank you. We will now be conducting a question and answer session. We ask that all callers limit themselves to one question and one follow-up. If you have additional questions, you may re-queue and those questions will be addressed, time permitting. 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 question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Puneet Sado with Lerink Partners. Please proceed with your question.

Hi, guys. Thanks for taking my questions. First of all, congrats on the quarter here. Really strong But can you talk a little bit about the pull forward that you saw from 3Q to 2Q in cell and gene therapy, GMP products? You seem to be talking about essentially the biopharma side. momentum continuing, China also improving. So that is offsetting. But can you elaborate a bit on where you have more confidence in recovery among those sort of three vectors that you talked about, where you think you will have, you know, recovery in the third quarter, whereas where things could be a little bit softer, just given the backdrop of the market right now and, you know, sort of the concerns around NIH as well?

Yeah, Puneet, thank you very much for your question. You know, first of all, I think, let me talk about the cell and gene therapy orders you mentioned. Fortunately, we're very happy to see that there's tremendous traction there, right? We grew about 90% on the GMP proteins. And some of these larger orders, right, from customers that are further down in their clinical studies, We have anticipated for the second half of the fiscal year, and upon customer's demand, these were pulled into Q2 and were delivered earlier than we originally anticipated. This, of course, drew several points of growth, and we feel confident that this is also a very positive sign for the overall markets, and we're quite happy with the traction we have there. Going to China, We did see that the replacement funding, some early effects in our Q2, and a handful of instruments were sold related to this replacement funding. We know it's a three-year plan, so we expect continued traction related to the funding. And then the interesting thing is that the China National Science Funding, which you can apply for during the calendar Q1, and the deadline is March 20th, That should also provide some additional lift in China that eventually our forecast or our original projection that we anticipated for China where we would go from slight negative to positive growth in Q3, we're still very confident with that view. And maybe, Jim, you want to add something?

Yeah, sure. So, Penny, I think the other thing I'd add is that it gives us confidence with regards to holding our forecast in Q3 despite the timing of the cell and gene therapy large orders. It's really the broad-based strength we saw across pharma. As I mentioned in my comments, it wasn't just cell and gene therapy. We saw it, of course, in our instrument portfolio. Our Protein Simple franchise did phenomenally well, especially in large pharma, and even our run rate business. within the large pharma also improved from our prior quarter. So that's what gives us some confidence that it's a broad-based large pharma start of recovery. It's not back to normal yet. Our run rates aren't back to normal, but it was a noticeable improvement from the prior quarter. And you mentioned NIH and concern around that, so I'll kind of hit that head on as well. You know, it is very early days and all the kind of noise and chatter and A lot of what's happening, what we're reading, is that it's not all that unusual in terms of what happens in administrative change with regards to kind of freezing or holding certain department funds as the new administration comes in and assesses. All I can tell you is that so far in January, we've actually seen improvement in our academic overall growth rates and improvement in our run rates. as well, so we're not overly concerned about the noise you're hearing out of Washington right now regarding NIH.

Got it. Thanks for touching on all those. Just quickly, if I could ask on your updated thoughts on M&A Your ability to lever, just given the backdrop of the market and some of the challenges that some of the small cap tools companies are seeing, how does that shape your opportunity base when looking at M&A? Thank you.

Yeah, M&A will continue to be a priority for capital deployment. During the JP Morgan Healthcare Conference, we've been relatively clear as to our strategy and where we feel we would like to add to our portfolio. Fortunately, we don't really have any huge gaps, so it's not that we have to move, but we do like the area of discovery of novel biological insights, right? There are various analytical platforms that we would be interested in. And we would love to continue to support the development and manufacturing of advanced therapeutics. And you ought to think about any processes that are sitting before and or after the G-REX and any other analytical tools that would support the cell and gene therapy workflows. So those are really the areas that we are very interested in. And we do have a nice timeframe here between the acquisition of Wilson Wolf at the end of 2027 and right now with a very strong balance sheet and a very, very precise strategy and capable management to integrate a new M&A activity.

That's good. Helpful, guys. Thank you. Thank you.

Our next question comes from the line of Dan Leonard with UBS. Please proceed with your question.

Thank you. I want to circle back on a couple of Puneet's points. I guess first off, when you think about your current run rate business, where do you think you're currently trending? Is it that upper mid single digit figure you talked about for Q3 and then you need progressive market improvement to hit the high single digit for Q4? Is that the right way to normalize what you called out as being positive lumps in the December quarter?

And I'll try to answer your question, if I understand it correctly, about our run rate. So our day-to-day run rate business is going to perform closer to the overall market. And it's our growth factors, our growth pillars that we talk about that really cause us to have this differentiation and acceleration versus the market. And so the way to think about that is that our run rate is performing closer to market, but the market is gradually improving, and thus so are our run rates. So our run rate growth is lagging the overall company growth. In a normalized market of mid-single-digit growth, we do expect our run rate business to be at least mid-single-digit growth. And when it is, we expect to be a double-digit growth company because of our growth vectors and the acceleration that provides. Hopefully that helps.

Okay. And just a quick follow-up, Jim. That comment you made on January run rates, was that a U.S. academic and government comment specifically, or were you more commenting broadly on your run rate business in the month of January?

That was a specific comment regarding the U.S. academic market.

Great.

Thanks for the help. This is Kim. I'd like to help you quantify the NIH exposure. You know, Jim was talking about the overall academic market globally, which represents about 21% of our revenues. And then if you think about the U.S. portion of that, it's about half of that, which is 11%. And then if you think about NIH exposure, it would sit about more or less half of that. So that would be mid-single digits. And then you know, revenue directly related to NIH itself would be less than 1% of our revenue. So that really kind of scopes for you the exposure there.

Sure. Thank you. But the January comment was specific to that 10-ish percent of revenue that's U.S. academic and government, correct?

Yes, that is correct, Dan. Okay.

All right, perfect. Thank you.

Our next question comes from the line of Jacob Johnson with Stevens. Please proceed with your question.

Hi, this is actually Hannah on for Jacob. Thanks for taking the question. How much of a benefit from larger cell therapy customers do you think there was in the quarter? Is there any way you could quantify this for us?

Yeah, I can give it an initial shot, and then Jim can follow up. So I don't think we really quantified a mix there, but we did see a very nice traction of our customers in general. So overall order rate from our, by now, 500 customers in this field is doing really well. But in the meantime, several of these customers are moving up the chain if it comes to their clinical studies. And we used to talk about 57 of those being in clinicals rather than in preclinicals. And by now, those are 85 customers that are in the clinical stages. of which 13 or so in phase two, and then a little bit more than a handful, six to eight, that are sitting in the phase three clinical stages. And of course, the customers that are sitting in these later stage clinical trials, those orders are also relatively larger, and that creates some of the lumpiness that we've talked about in the past. Nonetheless, we are growing 40% organically if you look at the 12-month trailing, which is very encouraging, and that's also where we hoped or expect to be.

And I'll just add a little bit to an answer Kim gave to Puneet around the same topic around the larger cell and gene therapy customers and what got accelerated in the Q2 that was originally forecast in Q3. It was about two points of overall growth that was attributed to that. for cell and gene therapy. I think Kim mentioned three, but that's because there was probably another point of revenue that also moved within our core diagnostics reagent division. So we talk about that for years. It's a very lumpy business, and it's not always easy to predict exactly when those orders will come through from our large customers there. And we saw some orders there come in earlier than expected as well, and that won't necessarily repeat either. So I'd say about two points of that's coming from cell and gene therapy. large customers, and about one point is from our diagnostic reagents to visit core division.

Thanks. And then you also mentioned that instruments grew in 2Q. Could you just talk about, is this comment around placements growing again versus consumables?

Yes, it is. We're very proud that we, on the consumable side, have had eight out of the last nine quarters in which we grew double digits on the consumable side. And we always anticipated that such growth in consumables kind of indicates a capacity constraint eventually in the market. And therefore, we anticipated that at some point, placements of our instruments would be growing again. And this quarter, we indeed went back into the black when it comes to growth in our instrument base.

All right, thanks. I'll leave it there. Our next question comes from a line of Matt LaRue with William Blair.

Please proceed with your question.

Good morning. You referenced the academic market and mentioned that within biopharma, mid-teens. I'm wondering if you could break that out. It still sounds like it's mainly large pharma where most of the recovery is. What, if any, recovery are you seeing in terms of the smaller customers or the biotech customers? Or if not, are you seeing any signs of green shoots?

I can answer high level and have Jim double-click on it. The overall, the biotech portion of our end markets, which is around 30% of our revenues, was more or less recovering in line with our expectations. And you might remember how we laid out the the year and our expectations in the different markets. And we certainly expected some of the good biotech funding to trickle through into that market. And that is happening in line with our expectations. A little bit better than expected is large pharma. And, you know, that's driving some additional momentum in our Q2, the last quarter of the fiscal year. So of the calendar year, sorry. And we're quite happy to see that momentum. It gives us confidence that our second half will also roll out in line with our expectations.

Yeah, the only thing I would add, Kim, is that we're not claiming full recovery mode yet in either one of those markets, but we did continue to see the smaller biotechs gradually progress. And as Kim alluded to, what was a nice surprise was with the the beginning of the recovery in larger pharma that we weren't really expecting until April-May timeframe. We started to see that already here in our Q2, which was nice.

Okay, thanks. And then flipping to the diagnostics and spatial side, I want to focus on Lunafor. Obviously, there's been a couple of mergers in the space in the past six months. You now are about a year or so into launching the multi-omic solution with RNAscope. You know, what is your assessment of the competitive landscape at this point? And then, you know, what's key to, you know, flipping that from really a significant operating margin headwind into more of a tailwind? Is it just a function of consumable pull-through, or are you having any issues on the manufacturing side with the instruments? It'd be good to get a sense for how that will progress throughout the year.

Yeah, thanks for the question. So, there has been activity in the market which we deem positive. a positive sign overall that spatial biology is a market to be in. Yes, a year ago we launched a comet. We have been very happy with the uptake and the capabilities of the instrument. I do want to correct you a little bit that the RNA scope capabilities, at least in the multi-omic setting, have been launched last quarter. So those are rolling out as we speak. And then we've also been able to launch 45 R&D systems branded antibodies on the instrument. And with that, we expect the pull-through of consumables on the comet to be one of the higher pull-through instruments in our portfolio. We do not have any manufacturing constraints anymore on this product line, which is good to know. And I forgot the third leg of your question, but Do you mind repeating that part?

You've obviously called it out as a headwind to operating margins on that segment. Correct.

Yeah, so the two components there, of course, will help. And one is continued uptake of selling the instrument, right? And then the pull-through if it comes to the reagents. And both will be very important. going forward to us. So we are measuring us against hitting certain milestones. And we see positive traction in both these aspects as well. So our profitability will increase as a result of those finding the traction.

Our next question comes from the line of Catherine Schulte with Baird. Please proceed with your question.

Hey guys, thanks for the questions. Maybe first on China, what was reagent performance versus instrumentation in the quarter and how do you expect that to trend in 3Q as that region returns to growth?

I would say that the growth was relatively comparable for the two. Again, it was very stable at low single-digit declines in China. And we see it gradually improving and turning to the black in our Q3. And I think it will be very comparable, again, both on the instrument side as well as the reagents. So not a notable difference there.

Okay, great. And then maybe for REO reagents, you set up low single digits in the quarter. What was academic versus pharma performance there? And what's your expectation for that as we get into the back half of the year?

I'm sorry, Catherine, academic versus pharma performance with regards to what?

Within RUO reagents.

Within RUO reagents. Actually, it was, again, relatively comparable, but slightly stronger in Europe with respect to the RUO run rate reagents, both in biopharma and in academic. But again, both are... European and U.S. growth totals were like within a point or two of each other. So we're not talking about a massive difference.

Great. Thank you.

Our next question comes from the line of Dan Arias with Stiefel. Please proceed with your question.

Morning, guys. Thanks for the questions. Jim, two for you on GMP reagents, if I could. Number one is What kind of growth expectations do you have for that piece next quarter? Obviously, you have the pull forward that you mentioned, but it does sound like you like the overall direction that that business is headed in. So, you know, just given how wide the range has been for that piece, it will be helpful if you could kind of put some guardrails just on what we might see there. And then the second question is, can you comment on where the margin profile for that business is? I mean, I know you don't get too specific on individual parts of the portfolio, but it is It's a piece that's moving the needle, and so it would just be helpful to understand the mix impact that that business has as it accelerates. Thanks a bunch.

Sure. I appreciate the question, Dan. And as you know, we don't give, you know, guides down to that level of fidelity. What I'd say is that it is, as we talk about with these large orders, it can be very lumpy. If you back out the larger orders, the underlying growth of our customers continues to increase every quarter in cell and gene therapy. and the revenues do as well. We talked about the TTM being roughly 40%. I cannot necessarily say it's gonna be that next quarter, but it will definitely not be the large contributor to growth that it was this quarter, which, again, I think says a lot about the underlying strength of the rest of the business and markets improving, the fact that we can still hold our forecast for Q3 that we've been saying all year. With regards to the margin profile, It is a very nice profitable business for us and not quite as profitable as our core RUL reagents, but very, very close. It's probably the second most profitable product line within our business. But again, we're not necessarily calling that out as any kind of margin issue for Q3, even though that mix will change just because we do see continued improvement within our RUL business that will compensate for that.

Okay, just to maybe get you on the grill. So it sounds like for GMP reagents, we can model that up, decently up, but not anywhere near where it's been for the first half of the year.

Is that fair? That's fair. Okay, thank you.

Our next question comes from the line of Connor McNamara with RBC. Please proceed with your question.

Hey, guys. Thanks for the time, and congrats on a really strong quarter. First off, on RBC, on the handful of programs in solid gene therapy that are in late stage, phase two or phase three, is there any way you could quantify or give us color on those programs and the incremental opportunity as those advance either from phase two to phase three or as they come to market?

That's really hard, Conor. So in general, you would see roughly double the size and orders each time there is a clinical progress to the next stage. But then again, you know, it really varies with how often the customer orders and how large the clinical study really is. So it's really hard to give you a standard template there. It really depends on each customer.

Okay, that two Xs, that's helpful. Thanks for that. And then just On cell and gene therapy strength, how did Wilson and Wolf do in the quarter? And can you remind us if there's any opportunity to consolidate that prior to 2027, given this rebound you're seeing in that end market? Thanks for that.

Yeah, I'll take that.

So with regards to Wilson and Wolf, I would say that their core growth business, meaning their non-commercialized businesses, was consistent with our earlier stage So we're seeing consistency across the cell and gene therapy market there. I will remind you that they have five customers now that are commercialized. And just the preliminary forecast from three of those alone will be enough to put them into very, very, very solid double-digit growth for calendar year 2025.

So the future is very bright there.

Our next question comes from the line of Patrick Donnelly with Citi.

Please proceed with your question.

Hey, guys. Thanks for taking the questions. Maybe a follow-up on China. I know you guys mentioned you were over there last month. Can you just talk about, I guess, what you saw in terms of the environment, confidence level in terms of the recovery? I see a lot of noise over there. Just curious from the ground what you guys saw and the expectations there.

Yeah, I think a couple of aspects. The drive to continue the research in life sciences continues to be there. I am certain the country would love to make big steps forward in designing treatments and helping the Chinese citizens as well as the world getting access to better treatments. On the other hand, we are encouraged that there are some more activities on the funding, government funding level, which historically has been elevated compared to the last couple of years. So we do see some increased activity there again, and that's also why our expectations are that China is going to be back into the positive growth slightly. But on the other hand, there's no doubt that that there is a tough economic environment in China and that things are not all in the green just yet. And we just continue to hope that things will improve and that biotechnology will be ready to support all the science activities in order to get to a better situation there.

Okay, thank you. And then, Jim, maybe one for you.

It sounds like the margins in 2H, FX a little bit of an offset there. Can you just talk about the moving pieces, the expansion opportunity, and, again, anything else under the hood other than FX in terms of the shift for 2H? Thank you, guys.

Yeah, sure. So nothing's changed with regards to our outlook in the second half margin. We initially got it to 100 or 200 basis points higher in the beginning of the year. Now with the changes in FX, as you heard me say in this question, call earlier, there's about 50 point headwind of that, but still significant margin improvement year over year at 50 to 150 basis points in that range. And even more significant step up when you think about it sequentially from the first half of the second half. And it just shows the power of our contribution margin that comes from our products. So with both the seasonality and the continued acceleration of our growth year over year, but also sequentially seasonality-wise, that step up in revenue has very nice pull through and we've done a lot to make organizational efficiencies over the past year and a half to be more ready than ever for margin expansion when the growth returns. So that's been the story all year and hasn't changed and that coupled with not just the volume leverage but also the mix improvement as we saw this quarter when PSS returns to solid growth you can see the great pull-through that we get from that. And we expect that to continue in the second half.

Thank you, guys.

Our next question comes from the line of Sunji Nam with Scotiabank. Please proceed with your question.

Hi. Thanks for taking the questions. Maybe on the AI capabilities and the new designer proteins, would you be able to comment on kind of how biotechnology stacks up against competitors on that front? How game-changing is this capability in this industry right now, and what the competitive advantages are moving forward?

Thank you for the question. We do believe that the AI-engineered antibodies as well as proteins are truly a stepwise change in innovation. We do believe there are sustainable advantages because these products are patentable and we have combined our tremendous internal know-how and the fast database that we've built over the last couple of decades and invested very early in the AI capabilities. And you really need all three to be successful there. And I know that we were uniquely positioned to grab this opportunity and and run with it. And if you think about the benefits of having these AI-engineered proteins, the hyperactivity, temperature stable, so you can really boost your cell-based work, and then the enhanced receptor binding are all very differentiated features and really things that were not possible in the past. Yeah, we think we will create a real nice stepping ladder for customers where you would normally be constrained to only RUO versions of these proteins. But now you can get enhanced activities by picking the AI-designed proteins. And then, of course, you can step up to the GMP. versions of our proteins, and eventually we will launch the GMP AI-engineered protein. So we will have a real nice continuum for customers to lean on.

Great. That's super helpful. And then just on the spatial bio side, the RNA scope assays on the comet that you just launched, just curious, how quickly do you expect the customers to adopt the multi-ome capabilities whether that would require further market development, and then also how, for the clinical market, I think you're gaining good traction there as well, whether the multi-omic capabilities also will be a competitive advantage. Thank you.

Thanks for that question as well. Yeah, I think that having the multi-omic capability, and we're truly the only provider of multi-omics in the spatial market where our customers can look at 12 RNA targets and 24 protein targets, all in parallel on the same slide. And then having the comet with the features of very high throughput, you can use off-the-shelf antibodies that you've been using in the past, so you don't have to change your experiments. Four slides simultaneously that will give you 20 slides throughput in a week. Those are all market-leading performances, and And I think that we're really set up to continue to do really well in the spatial markets. Currently, we have key opinion leaders really working with the multiomic capabilities, and we envision this rolling out throughout the market. the instrument is very stable, easy to use, and so are our reagents. So I don't feel that there's a lot of market development to be done. It was truly the rollout of the product and the solution. And then last but not least, you're right, our footprinting clinical has continued to outpace the growth of this overall spatial biology market. So we're really happy that our RNAscope product line, for example, is stable enough and relevant enough to to perform in the clinical markets. And also there we feel that we're one of the few spatial biology solutions that have been successful in the clinical space. So I think we're very, very confident that we're really well positioned to continue to outperform there.

Thank you. Our final question comes from the line of Paul Knight with KeyBank. Please proceed with your question.

Hi, this is Lucas on for Paul Knight. Just kind of sticking with the theme of the previous question, in the press release, you called out signs of improvement for some of your instrumentation businesses. Was the comet one of those instruments you saw an uptick in interest for, and how are placements for that trending generally? Thanks.

Yeah, when we talk about our instruments, we really talk mostly about our protein analytical instrumentation portfolio, which we were very encouraged about getting back into the black. And this is excluding the spatial biology comet platform. That still sits and gets reported in the spatial biology vertical, if that answers your question.

I'll just follow on to say that the interest in that still remains very, very high, and the growth rates are still very, very, very strong.

And then just one final question. I believe you were expecting China's stimulus to primarily benefit your automated Western blot equipment. Is that still what you are seeing, or has interest broadened out to other product groups?

I think you're correct. That will be the primary product line that we will see traction. But then again, we have really good traction in the biological platform as well. So we feel that all three of our platforms will be in a much better position in China going forward.

Excellent. That's all I had.

Thank you. Mr. Kelderman, I would now like to turn the floor back over to you for closing comments.

Yeah, thank you. And thanks, everybody, for joining the call today and, of course, for your insightful questions. I'm extremely proud of the accomplishments and the results the biotechnology team has been able to deliver this quarter. And our differentiated portfolio addresses some of the highest growth markets in Lyme sciences and is positioned to deliver best-in-class performance for all our stakeholders going forward. So with that, I want to thank you and have a great day.

Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.