Q2 2020 Earnings Call

Welcome to the biotech <unk> earnings conference call for the second quarter fiscal year 2020.

At this time, all participants had been placed in listen only mode.

Well be open for questions following management's prepared remarks.

I would now let's turn the call over to Mr., David Claire biotech knees senior director of corporate development.

Good morning, and thank you for joining us on the call with me. This morning are Chuck Kummeth, Chief Executive Officer, Jim Keppel, Chief Financial Officer Biotech me.

Before we begin let me briefly cover our safe Harbor statement. Some of the comments made during this conference call maybe considered forward looking statements.

Including beliefs and expectations about the company's future results.

I think kincaid for fiscal year 2019 identifies certain factors that could cause the company's actual results could differ materially from those projected in the forward looking statements made during this call.

The company does not undertake update any forward looking statements as a result was any new information or future events or developments.

The 10-K as was the company's other I can see filings are available on the company's website within its investor Relations section.

During the call non-GAAP financial measures may be used <unk> provide information pertinent ongoing business performance.

Well its reconciling these measures to most comparable GAAP measures are available in the company's press release issued earlier. This morning on the bio Techne Corporation website at Www Dot fired dashed Hackney Dotcom I'll now turn to Chuck.

Thanks, David Good morning, everyone. Thank you for joining us for second quarter Conference call.

Organic revenue growth for the second quarter increased 6% year over year, all adjusting for the impact of certain timing headwind underlying organic local poker tour year to date growth of approximately 10%.

In Q2 of them why 19 weeks during some large favorable order from a handful of alpha customers, who are watching clinical and preclinical got caught all these large order mostly impacted our cooking classes segment in Europe and north for reasons that has been talking with them and then related royalties that did not repeat again in Q2 this year.

However, our end markets remained strong with our day to day, we tell the agent one right. This is going up 10% our genomics on a go business School board north of 20% and trying to all continue to grow up over 10%.

Also working performed operationally very want you to what adjusted operating margin expansion year over year ahead of schedule.

<unk> record operating cash flow.

It's kind of detailed quarter.

Starting with some of our geography, the North American market continues to be helping other than a walk in the mid single digit.

Ballpark broken a reasonable for double digit while I couldn't agree mid single digits.

But the regions overall volcker down with having a royalties from a few of them comfortable.

Including the onetime catch up of royalty payments the benefit of the prior year quarter.

According to walk people in the type of impact milk in a reasonable to temper sense you too.

Digital marketing efforts continue to bear for especially for our retail antibody and hoping portfolio.

Driving a double digit increase it looks like traffic across our brands, including over 20% increase traffic for noble website.

Good.

Well done several unless you have to get Kosmos to spend more time, it looks like monetize their shopping herc once they didnt have someone.

Search engine optimization and continue to Simon will apply to digital marketing.

Turning a strong order for both of the company going forward.

Separately, we continue to strengthen our programs that you need to trade show showcasing our products and technologies that are expanded loses on budget.

With one customer interest in our agents and that's been solutions offerings at the 12 trade show through kind of in Q2.

Additional industry trade shows on the calendar Q3, including a CR.

Okay.

Taking place on April may respectively.

Great shows up again, a key part of a marketing strategy and generate significant mark on the company.

Our lead seven Creek second Pakistan upon the new investments so she this past year.

Moving on to Europe, which was the largest drag on our growth in Q2 down probably 1% again.

Sure.

Excluding the timing headwinds that impacted Europe, the underlying organic walk in other regions within the mid single digit which are the same are gonna girlfriends will hurt popping up all 20, not bad lower than what our company of the accustomed to the Poland.

A couple of years.

Even Europe will be redoubling, our efforts in the second half a whole 20 on the cross selling activities that drove double digit growth the better part of the last two years.

Okay real platforms, such as simple western simple Clarkson Arnie wolfowitz still relatively under kind of heard in European market.

And we'll be supporting the sales effort in Europe, but more of a digital business practices that have driven a successful double digit walking soon or North America retail banking business.

Yeah, that's in your Crystal ball factor in the second half of the whole 24 cooperate with a part of the high single digit level.

Finally, we have no in the quarter in Asia, China, especially compared to perform very well with another quarter of more than 20% growth. The goal is broad based across every isn't much on.

Well I can because in the three main go high priority and trying to stagger plan and we continued to be walking vision and very underpenetrated in our keep your platform.

In the near term that's one of our situation what caused some disruption in Q3 with extended days for the lunar new year holidays, and virtual corn teams and Sunshine.

Obviously, the longer to Sars disrupts their life throughout much trying to the more negative impact will happen our girlfriend for.

Long term it is unfortunately, such as an outbreak that we're lucky strike and trying to have already from involved more heavy local investment in the life Sciences thing for years to come.

Now, let's dive a little deeper in other parts of our growth platform, starting with old within the protein snack segment, which grew 4% organically for the quarter.

Yeah that already indicated in my opening comments poking signs of growth doesn't really impact the back half of large biopharma and Olympus orders in the second quarter for 19. It was a significant royalty payment none of which repeated in the March quarter, depending on the customer and application. This part of your older. We're heading into our you can enroll.

Food from Q2 absent these specific situation the segment for dental brokers in the high single digits.

Led by our run rate reagent instrument consumable products going into low double digits for them.

Then cooking classes, we recently made a very importantly forward and positioning by what's happening to the leading tool can solution provider for the production of cell and gene therapy.

In January we know the creation of a joint venture between button.

Kabi Wolf and wall, that's unfortunate soccer, so you can simplify cell and gene therapy workable solution.

We believe the combination of arc, what the sales and marketing effort not much depth of talent technical know how industry knowledge create potential for significant commercial synergies.

Our combined the novel Engineering solutions offering biker cabazon walking the walk with our GMP coking calmer B T cell activation non viral vector conoco technology, the joint ventures position to disrupt the cell and gene therapy product products and markets.

We are very hard to get this initiative off the ground then there's already been grignon [laughter] cell and gene therapy.

Over the next year, while this new commercial consortium continues to drive awareness of our cell and gene therapy solution and placement for the product and crews clinical trials. We continue to work in our new dedicated GMP coking factory construction remains on track provide GMP proteins in large scale work on gene therapy coffins by the second half of fiscal 2000.

[laughter] now shifting toward diagnostics and genomics Openedge grew 12% again during the quarter.

Here are the only diagnostic tools and controls business grew mid single digits overall with growth in most major part category. It looks that could fall in double digit growth in Q1, William order timing of was favorable to than it was last quarter, although new customer wins like product watches are starting with a large quarterly swings and that's it.

All forward another County school continued with its 20% plus growth trajectory in Q2 initial Q1 launch of the Arnie high capacity, which enables a simultaneous detection of up to 12 aren't a target that makes sense.

We're currently developed developing additional hypothesis capabilities to address their children Nomics garden targeting significant increases from our current 12 Bucks capability they tune for more park enough.

Now on up to the next is on diagnostics and there could be up across it though.

There are several positive developments in Q2, and there's still much to do it to make the.

Make sure that Noninvasive caucus Africa becomes available for all patients over 50 elevated level Gore kind of playing a more expensive risky painful and they could tissue biopsy.

Because again the final LCD from LNG that went into effect December one concern we have been billing Medicare for applicable patients huh [laughter] and are already seen pretty payments.

Oh already off to the language administered by India, but not nearly coverage recommended by the NCCN guidelines. For example, the final LCD does not allow for Medicare reimbursement more than one for patient for ongoing monitoring nor does it allow reimbursement for certain ethnic Kristen.

Men with certain found in medical history.

Of course. These populations were included in our clinical studies outcomes consistent with the overall.

Yes.

And I <unk> population could benefit from the equity of capacity and we are working to make sure ngs stuff too.

That's fair currently in the reconsideration process with NGL near the Medicare coverage.

With the recommendations of young feeling better.

In the meantime, really right.

Early read that tough to meet the Medicare part here is encouraging and we will continue to work to expand the indication over time.

Correct for the ex prophetess administered to patients we've been billing Medicare and getting paid we started receiving medical Medicare payments on the medical lines at the earliest late December and the pace of payment has increased rapidly to working on where.

We also made progress on the private here in Q2 with four more regional I'm sure contracted to reimburse that could be a profit to uncovered patient.

Although the base is still relatively small our collections compared to peers increased by more than 40% sequentially from Q1, although still work to do to get the large national public peers signed up for reimbursement.

The national payer kicking are being sigrid intra, they're becoming more aware of the health benefit to our customer implausible financial benefits to their bottom line by building more costly biopsy that wall. The Olympic infections that can result from them.

What are they are being very careful methodical with regard to grant Greenberg.

Core considering reimbursement and the large cottered paired wants to see results from a clinical utility study published in the peer reviewed journal.

That was on diagnostic before such a study before purchase of the company.

Conducted in collaboration with care for Crocker Sheila, Maryland. This study has been submitted for publication would appear review journal and should be released before the end of our fiscal year.

Separately, we're in the process of submitting our premarket approval you may file to the after you recall that the ACO Dx profits. After he breakthrough device designation from yes, you have to starting to current fiscal year.

There are difficult to predict exact having other potential lucky approval, but she whenever status will do for how competitive mode. There will always have a higher priority hold reimbursement from private payer classifies team they products with higher quality.

Equally important is getting paid for the I forget the classic.

It is expanding you weren't the benefits of equity I can rapidly increasing peskov performed on application.

Thus far this fiscal year and while we have waited for Medicare coverage, we have slowed and in commercial investment into sales and marketing. Instead, we are focused on these two when I go to market strategies and ensuring we have the death commercial health to execute on that fragile.

Even without much new commercial investment the number that whole diagnostic prostate test performance you to double digit country from Q1, as well double digit year over year.

Going forward our commercial gradual include marketing for patient directly in addition to Alger, we want to make sure patients are fully aware of our non invasive option available to them to assist in a determination of their risk the property taxes before deciding work that seem to the painful biopsy we.

We believe that Baskin, most cost efficient travel for awareness is the digital marketing in the Brett.

Q2, we launched a redesign that because on diagnostics website, a new website creatures portal for patient and physician scientific literature and information on the benefits of our exit the Uh huh.

We will be coping with enhanced website with digital marketing efforts by leveraging the proven effectiveness or do go through something expertise increased awareness subscription demand correct could be a.

The search engine optimization of digital marketing efforts on the early innings, but we anticipate this campaign combined with the recent regulatory and reimbursement milestone will favorably impact there could be access lines that creating picture that.

We remain on the pathway for drawing eklavya volumes, and our credit and middle men, who can bigger PSC score the void unnecessary costs are going up.

Well the pipeline of additional tests companion diagnostic applications and partnership opportunities. There are several different avenues to create value with excellent diagnostics. We have a few partnerships in place and earn discussions with several biopharmaceutical company.

Petrochem companion diagnostic applications of Exosome diagnostics technology as.

We also believe Echopark is on based technology has a broader diagnostic applications, including improving the performance of existing a pipeline tough and other diagnostic company.

In summary, physical foreign country remains in good shape, we delivered year to date organic growth of nearly 10%.

And our fill any for double digit growth for the fiscal year.

Our core reagent portfolio continues to perform very well, while our adjacent proteomics and genomics analytical tools are still ramping in very underpenetrated market.

Meanwhile, our liquid biopsy and cell and gene therapy offering for men are very early stage to a realizing the potential.

Each representing truly transformational opportunities for that I.

Our competitive position has never been stronger and the team is driving toward even better execution or second half of our fiscal 20.

With that I will turn the call the job.

Thanks, Chuck I'll provide an overview of our Q2 financial performance for a total company and provide some additional color and performance of each of our segment.

Starting with the overall second quarter financial performance.

Adjusted EPS was a dollar awake versus the dollar of six one year ago.

Foreign exchange negatively impacting P.S. paid.

Most of the foreign exchange impact because you could transactional FX for invoices collected in euros. Prior UK Committee, which serves as our European commercial operations headquarters.

GAAP EPS for the quarter with $3 in Tucson, compared to 45 cents from the prior year. The biggest driver for the increase some gap bps was 120.5 million dollar combined realized and unrealized gains.

On our investment in Chemocentryx.

Q2 revenue was 184.9 million, an increase of 6% year over year on a reported and organic basis.

Second quarter reported sales includes a 1% growth contribution from acquisitions and a 1% unfavorable impact from foreign exchange translation.

By geography, the U.S.

Grew into mid single digits, while Europe declined low single digits in China grew over 20%.

That's for the rest of Asia organic growth was in the low single digits.

Hi end market, which excludes Asia, our diagnostic division and other OEM customers.

Biopharma growth was in the upper single digits, well academic growth within the mid single digits.

Moving on the details the piano total company adjusted gross margin was 70.6% in the quarter compared to 7.9% in the prior year.

The decrease was due to unfavorable product mix foreign currency headwind and to a lesser extent recent acquisition, partially offset by productivity gains.

For remainder of fiscal 20, we expect gross margin remained fairly consistent at these levels.

Adjusted left you know in Q2 was 28.6% of revenue a 70 basis point improvement compared to the prior year volume leverage and productivity gains partially offset by investments in our core business to drive near and long term growth.

R&D expense in Q2 was 8.9% of revenue 20 basis points lower than the prior year, primarily due to volume leverage.

Resulting adjusted operating margin for Q2 was 33.4% increase at 90 basis points from the prior year period, and 160 basis points higher than our first fiscal quarter result.

Looking at our numbers below operating income net interest expense in Q1 was 4.5 million decreasing 1 million compared to the prior year period. The decrease was due to a substantial reduction of our bank debt during the quarter a bank debt on the balance sheet as at the end of Q2 to 383 million down from 486 million.

At the end of Q1 fiscal year 2000.

Recall that biotech has been a long term shareholder Chemocentryx biotechnology company with a portfolio of novel Therapeutics talking a variety of orphan diseases.

During our Q2 Chemocentryx reported favorable topline data.

Free trial of about a coupon and actually body associated vasculitis or Avi.

That's favorable data really drove significant appreciation in our chemocentryx investment, we monetize approximately $50 million at this game.

During the quarter, we apply these proceeds as well the portion of our strong free cash flow to pay down $103 million of our long term debt.

Well, they're just not operating expense was 2.5 million for the quarter compared to 1 million of other income the prior year quarter, primarily due to the impact in transactional foreign exchange.

For GAAP reporting other nonoperating income includes realized and unrealized gains one button chemocentryx.

Moving further down the PML, our adjusted effective tax rate in Q2 was 22% we expect third been fairly consistent during into the year.

Turning to cash flow and return of capital a record 72.5 million a cash was generated from operations quarter, driven by strong customer account collections and favorable kind of tax payment associated with our realized gain on chemocentryx.

Our Q2 net investment and capital expenditures with 14.6 million, mostly driven by construction of our new GMP protein factory, but you're not scheduled for completion by the end of the calendar year.

$12.2 million of dividends were paid out in the quarter, an average diluted shares stood at 300.6 million shares outstanding.

Next I'll discuss the performance of all reporting segments, starting with the protein finance segment.

Q2 reported sales were 141.5 million reported revenue increasing 4%.

Organic growth was also 4% with foreign exchange, having an unfavorable impact of 1% on revenue and acquisitions contributed 1% for them.

As Chuck previously described growth in the federal was negatively impacted by last year's time with a few large biopharma orders and OEM royalties and not reoccur in Q2 of the current year.

Absent these items revenue from the thousands of other customer that Brooks insights or increased nearly 10%.

Operating margin for protein size segment was 43% a decrease of 50 basis points year over year due to unfavorable foreign exchange and the recent beams and acquisition.

Turning to the diagnostics and genomics segment future reported sales were 43.8 billion an increase of 12% from the prior year organic organically revenues also grew 12% with foreign exchange translation have a minimal impact on revenue.

As Chuck mentioned are only in diagnostic tools business increased mid single digits, our genomics earn a scope business grew north of 20%.

With regard to Exgen diagnostics and I'd say in prior calls revenue from Exco Dx prostate tests performed continue to be recognized on a cash basis as Chuck mentioned are favorable local coverage decision from Epizyme diagnostics Medicare administrative ministry of contractor Mds became effective for test performed on or after this.

The first.

Like the effect of LTV, we will continue to recognize Medicare revenue on a cash collection basis until we have sufficient history of claims paid.

Chuck provided a thorough update on the progress we have made on exit the EPS test ramp public and private reimbursement as well to compute actions, we're taking to accelerate bull.

Well, it's doing a relatively small base revenue from actions on were up nearly 60% from last year and expected growth rates improve from here.

Moving on to the operating margin for diagnostics and genomics segment at 2.2% the segment operating margin improved from a negative 2.7% reported in the prior year.

The increase reflects favorable volume leverage and productivity gains from both our diagnostics and genomics divisions as well, it's probably less dilution from next is on diagnostics.

In summary, we believe our your day performance in the topline if most what percent of how the majority of up isn't performing a second quarter.

The commercial focus we are taking in Europe could set us up or even better organic growth in the second half of fiscal year 2000.

However, the situation and try it out with the current a virus is there risk factor that we are unable to quantify this time.

That being said a team throughout the rest of world and motivated to maximize the potential in order to achieve double digit growth of the company's overall fiscal year.

On the bottom line, our cultural success based investing and operational prowess drove over drill our drove our adjusted operating margin in Q2 higher over prior year ahead of schedule.

And I drove a strong quality of earnings with record operating cash flow.

We expect our operating margins to continue to increase sequentially from here just as we guided up again here.

That concludes my prepared comments and with that I'll turn the call that will be operator to open the lines for questions.

Thank you.

Question. Please.

On your telephone keypad.

Thanks.

Turned off to a liar signals Richardson.

Let's start asking questions well now take our first question.

I see the Leerink. Please go ahead.

Yes, Hi, Chuck Thanks.

So my first question is that I mean, it look I appreciate the byproduct comparisons that were tough and in Europe, but you commented about them recovery here in the quarter and.

You know could you elaborate a little bit on that and what's your expectation for continued improvement here for in Europe and.

What's your what's your outlook given the last.

Two plus years.

Strong growth in that.

Sure.

Well I'll give kind of a long answer, but I'm sure loss hear more about your pending else's is that we kind of message last quarter things are thought that it didn't disappoint on that for sure but it wasn't really kind of a lumpiness. There was never know there's not really any one this thing thing. That's that's kinda off when things are often come and go down our biggest issue by country of Germany, UK is kind of flattish.

For Germany is pretty hard down is if a lot of timing a lot of bio pharma or big comp.

Often on genomics because of off of a big order timing issue there we mentioned.

And the instrument, which are the biggest areas, we had a huge comp from last year and simple western for what came in kind of flattish so without that grow goes hard to pick up we already knew we were kind of up and down in biologics.

A lot biologics didn't have a horrible quarter, but not great and this is probably the ever seen the most come back already this quarter and biologics, it's pretty good already.

For Western Scott, you know tough comps going forward, but I think as Underpenetrated. We are we're pretty pretty bullish on its still can should going going forward.

And simple plex with all four big timing issue with a major order we had another timing should this quarters, while with simple plex, but.

I think the growth rate, especially instruments is very encouraging and we're really focusing now getting more more consumable for dry behind those instruments. So all in all there's definitely a snap back coming there and a lack of pretty pretty weak quarter for their from inside.

I'm not gonna raging side is really kind of a difference in academia and bio pharma and a one off come down.

We're we're relatively okay really in terms of every agency everything everywhere its finer, but but this is another area we've been in the past up and down or on our our rave assays.

And our lives is definitely down in Europe right now full academies biopharm projects are kinda are gonna slump right now and for US. That's just kind of a weaker period. We have focused a lot understand we had real competition here or not and I'm sure. You know we have a abcam coming out after sunbelt be viable fairly has a line of products and others are talking with it.

And if not ready, which includes a growing market and you have multiplexing you know really taking all the new growth. So that's kind of up and down but we don't see a huge impact to be honest they've got their piece. We got RP. So it's just kind of overall kinda mediocre for right now for the timing on that and it's a big chunk of our overall, our you know fails in regions for thought that matters.

That's actually and that if the right now the this division, but it also took down that division number but that too I think we'll we'll recover.

And again, we had a huge out onetimers on royalties and you know we have we start putting these royalties situation in place so.

Q3 years ago, you know, we hadn't via the ability to do a third party audits in last year. We went through all these audit cycles and they were from big Mrs and some big paintings and they'll have off of course heart recur in the shortfall that that add back as a big number all by itself. So.

All in all that kind of explains your explains the.

The recovery, we're saying you know.

Are you know and in instruments and we'll see it happens I December was a fantastic month, you know in Europe. It was really more of a October November and we'll see if we can continue.

Okay.

A mask on excess.

I didn't catch the contribution in the quarter, if you provided that.

When do you think you'll have an answer on the reconsideration for the first the onetime use of the past and and Chuck I was hoping if you could maybe take a step back and give US a view of what are your priorities now given this acquisition.

No no two years and into this acquisition and and and Jim If you could remind me what what are you baking in terms of operating margin impact if any for mixes on this year.

Yeah, Okay, well start work as mentioned, where we're using the time to really get are kinda ship, an order feldman upgrading our commercial for getting our website ready, creating patient demand and staying in our guardrails really for dilution. Then we are really head of the game there to be honest, we had some payments for Medicare come and even in this.

Remember, even though we had the LTV on December one for levels are going to be precedent.

We have put in place the you know the tariff policy to pay it with the Doctor refining and that that signature passes and very positive and of course with that Medicare typically pay from they've been paying and it's going to ramping very quickly. We are expecting revenue this quarter in Medicare to be maybe as high as even a million dollars from nothing.

Last quarter fall. So we're seeing a great rabbit cotton is expected so we'll see what happens.

Going for the prior to the court heard we ramp will invest we want to we what do you want to drive this patient demand, it's really important because you know it's just.

It's going to take a law for reconsideration of we're gonna meetings at a lever.

Reconsideration Prosigna, we're talking Ngs. This isn't the most friendly of all the Max and it's a it's a next summer activity.

And then and we have to make the object media 10, you agenda for the meeting and everything else.

We feel pretty good about it but you know again they don't help you. They don't tell you anything.

We submitted all the Gol they've given us is that they did they wish we'd have the utility study there along with the NCCN guidelines, though you know two studies, which we were told with <unk> with an awful.

Utility studies done it's been done and we are now are getting at published and with that will lock will not to Berg from the Bush with one stone one being the reconsideration process in the second being the national insurers.

And what all out in the margin front need is that.

I think definitely diagnostics and see the current cash collection start to ramp here as Chuck mentioned, where we've seen that ramp here in January.

Well the cost lobby wrapping up the same rental revenue. It so we should see less and less dilution going forward, although not profitable yet see less and less dilution going forward from boxes on diagnostics and that's probably why we have confidence in our.

Operating margin continuing to increase sequentially from here overall the company.

Okay, and if I could ask Jim on you provided a long term view at the last Investor day back in late in 2018.

You were expecting 1.2 billion revenue by fiscal year 2003, a mid teens organic growth 40% off margin.

Is that still in the line of sight, given some of the near term challenges indexes and and the European shortfall that you're seeing largely because of compares so just help us understand any changes in the sort of long term outlook here.

There's no change as long term outlook that it's got through with our annual refresh of our five year outlook strategy or internal strategy plan and anything else that gave us even more confidence in those numbers out you know looking out a word so one core doesn't make a trend that very specific.

Identified items items that caused some bumps in the ROE we saw in Q2, but in terms of underlying markets. We feel like we're very strong our run rate in our reagents and like I said for the other heart literally thousands of customers. We serve are still very very found and I'm going the right way So and then.

Yeah, the upside potential with it with will actually go and cell and gene therapy is still very large, particularly in the out years roughly eight years outside the lower let me address it specifically around that fall, we'll be back in New York. This fall, giving a you know another update which we do every other year and the new five year plan will have a number like Warner halfway.

And that 1.2.

If you look back a year to 1.2 weeks sort of last year. He talked about excellent diagnostic from that wasn't the number for the 1.2, but we didn't have any cell and gene therapy in those numbers and there'll be some felling gene therapy by 2023, as well, but all in for 2024 or five years out we're at one a half because there's a strong.

Strong cell and gene therapy component and we still are that message at 150 million or more hopefully the taxes on diagnostic.

Although as adults to girlfriend are still intact.

According RSV has to be as well I mean, we we have never promise more than mid single digit growth in our core and we've been doing materially better than that so there is.

There is some hedging that for but we still feel very bullish about football that kind of number looking all four of them five years.

Okay got it great. Thank you.

Remember there is no acquisitions in that that's organic Linda it's likely we're going to do more stuff.

Okay. Thanks.

And your question has been answered you may remember yourself from the Q by pressing star to once again, if you'd like to ask a question. Please press star one.

Next question from Dan.

Please go ahead.

Morning, guys. Thank you Chuck just to clarify on the timing related items that I think value for four point or so is that a revenue bolus you fully expect a fully capture in the second half of the year.

The ability of one off the timing issues, you're talking about or what yeah.

Yeah, well 101 was a big Paula royalty true ups that aren't going to happen again, we're we're on track with hurts our regular steady state kinda royalty.

Payments and and probably improving as our you know as are our licensees businesses girl, we get more.

Other big component of course as the OEM.

Orders and stuff, we talked about and those doubletree behind us and I think some of those timing as well and I think that will correct itself.

Okay that all around one all goes one offer on the order being roughly $6 million itself.

It's it's like Jim said is no over 3% all by itself.

Yeah, well, maybe just to that point interest thinking about the instrument performance during the quarter. But then also what do you think you might have in terms of improvement in the back half for Europe, how does that translate to the 15% to 20% growth rate that you've talked about that you've been in for the protein simple business that's embedded in protein sciences.

Still thinking and finished the year in that range.

I do 15 anyway, I mean, we've been promising soon talking guiding to 15 for the last three or four years. We've been pools are you doing about 20.

So this is certainly a I think there is some component of possible in more direct in Europe.

And and going after those cost directly and probably having a couple of years of more business now we have to focus much more on on commercial execution cross selling expanding our subsidiaries.

Fixing Germany, Germany is definitely too lumpy, we've got to get more critical mass or it's smaller than the UK inside the business and that shouldn't be we essentially have the sales office, there and not enough critical mass. So there are things we're working on as you remember I lived in Europe for years with my career and.

They're getting a lot more help these point.

But you know there are lot of great things too I mean, we worked hard to get genomics back on track in Europe, and it is and.

As one example lies is lumpy and level it'll be fine I think our simple plex than our other assay technologies are really are really doing okay. I think they'll continue to provide extra growth in Europe and in Europe.

The 32 by eight assays as an example is a great you know aspect of it das multiplexing. They can we take on the other multiplexing competitors and that's that's an early days are getting launched or getting going if another example fall in all in all we still feel pretty good about the whole portfolio.

Southern Europe, France, France is just doing great and since the acquisition of a distributor in France, and creating real subsidiary, we've had near double digit growth no no loss. There. The issue is it really had been around the UK and Germany, which I think we can deal with fall.

They get all your questions.

A couple of quarters go you were talking about how you were looking forward to getting more analysts on the call. So maybe I'll take the opportunity to ask one more for you if I can.

Just on Oh, your OEM business overall, how do you think visibility changes there if at all I or is that just the nature of the base for the foreseeable future.

And then maybe just a big picture question on that point.

Obviously, you're moving the biotech me portfolio into new directions.

So as you as you do that how important are these OEM components to the overall business have you think there's the potential for some strategic actions. If you thought that any of it was becoming less core or or non core.

Yeah, we started from another full first of all remember we had.

Got a 15% growth quarter last quarter to imagine that business and usually you guys are expecting like a negative quarter. After one like that which has always been the case and here. We are with positive growth again, so we talked about things moving out.

And they are the pipeline is getting better we have a big new account Lexisnexis. An example that as that is giving us more and more business.

We're doing some very strategic things with them and we're very bullish.

And across the board I think it looks pretty good glucose you know the pain is largely behind us and fairly well contained although it you know it's roughly flattish for the future has mainly been even price increases holding things, okay, but it's becoming as far as part of the overall.

But you know we feel okay, but and then this is a you know roughly a 30% op margin business.

And.

On the market should be salads.

It's a 12 to 15 kind of EBITDA kind of multiple and we've tested this and it's hard to get beyond that and here. We are with our multiple sold being paid to being paid that business in our portfolio 30 times plus.

It's hard to make it up I, just spinning it off and selling it unless it becomes a drain on opportunity cost or strategic or something and it just isn't it if not a hard business. We have we have one sales.

These different figures can do their own thing, it's a very key ICANN driven product.

A processing business.

Customers are all mammoth.

They are literally on two hands.

The count so it's just not not that big of a brain drain here at the company and yet it's a 30% not margin business and now it's growing fairly well and we see more things we can do with it and there are synergies because we are providing diagnostic tool. It's extremely sticky you know the fab the San Marcos unit of that business, you know have Uh huh.

Pardon participates in over 180 510 Kate.

It's specked in so the worst thing about it is the orders are all lumpy in large and to the big guys out there and we're working on skewing that out and getting more of their wallet share and.

It's probably never been better it's one of its one of the good good things of this quarter was that business actually.

Okay. Okay, I appreciate that actually kind of show.

Your next question from shop in shops with Baird. Please go ahead.

Hi, guys, it's actually Utah on for Catherine I'm, just wondering if you could provide any update on how quad doing relative to the deal model and maybe some comments on how many clinical trials.

And what it's been a customer feedback so far.

Yeah, well the whole the whole consortium whole JV has been already a really big success, we had.

At the latest trade shows been shown this off we've had in men.

Demand in interest we're involved in an awful lot or you know over a dozen preclinical we're being looked at everyday by more.

One of our partners has been involving over 100 Prequalification. So you know this this stuff is going to happen problem that shift it's going to take awhile.

The the viral vector process is the process of record and ours is non viral and we're moving that direction and we're we're gonna have a piece of it.

As you know it's going to begin everybody wins market is as these valuations of the these they'll never onto the world of Sean but could allow for were pretty pumped.

Quad is on track and Oh, we have.

We have are these product we have new product you know on the drawing board, we can modify the size and hold consistent size, which are you know with our are being technology, and we're coming up with a new new ways to this technology, we have a technical approach and the company. We have the scientists have all divisions, a meeting hurdle often and were.

Coming up that whole a whole different new ideas that ideas around different a raise assets et cetera as well.

It's cool stuff what interests you know.

It was never going to be.

But the big winter in cell and gene therapy is it possible division someday, we've always talked about a being in the 50 or $4 million range from the five years out and we see that.

Very very doable and possibly a lot morphy find other application support so.

Okay, and I know that you get to said.

You're not really able to quantify the current a virus at this late but are you seeing any sort of early disruption, thus far or any sort of qualitative comments on you know.

What parts of the business could or could not be impacted by more significant slowdown or something that's more prolonged yeah.

No. This is my 28th quarter CEO here and I don't think we've had a quarter under 20% China I'm sure. This next quarter, probably will Fairbreeze continues to stay home.

Nobody knows what isn't going all the.

The incidence rate is moving to more of a linear trajectory than as an exponential unless probably to a large effect that they people are quarantine. So that's going to right its way out.

Right I think we're a long way from anyone claiming victory Thats is under control, there's a lot of risk fall I.

Hi, I'm pretty sure everyone get all past next quarter in China, I think there is a benefit to us. These kinds of events. These ex factory as UGI create a stimulus to research and we're already seeing.

Interest in and growth in some areas that we typically don't because of the.

Just one of those unfortunate thing.

You know probably that probably not as good as being in the respirator Nasscom business right now, but but you know there there's going to be a halo effect.

For all our everybody in the fighting disease business.

But this quarter is gonna be a tough I'm, probably more than likely too early to say, but oh.

Our recent business I think we'll probably that's copper and I should say also we had a we had an exceptional start to the quarter.

In China in general so that's going to give us a little bit of hedge there, but couldn't increments probably will suffer because you know that's not a run rate business, but but our run rate businesses. You know if you're using proteins antibodies that the bench, but you're not at the bench your home of kicking the kitchen in all those businesses are going to suffer for this quarter, but.

It's a short term thing we're not worried about it.

Got it thanks.

Well now take our next question John Stephens. Please go ahead.

Hey, Thanks for taking my question on the recently announced a JV with looking Wilson Fresenius Kabi can you outline or give us some more details on how this partnership will work.

I'm not to disclose what what are your ownership interest in it is and then if he'd like to just kind of any potential financial impact from the edge. We look at over the next couple of years.

Yeah sure.

This is Ben nearly two years and the making as you can imagine a three way JV is not easy to negotiate and these are from powerhouse companies I mean for Fannie and of course, as though it's a big one and a dealing with.

Them, it's been a it's been challenging but the good.

The kabi grew in that group within for finances.

Five six years into this their their logos.

I phone there a local freaks instrument is becoming a suitable.

Potential standard already I guess I mentioned, that's already been tested and I think over 100 of Tom So they're they're they're ahead of the rest of the really in the consortium. So we really wanted to link up with them.

And one of the big gaps of our of our total workflow we have a lot of boxes checked off networks will that happen that box. It ties of altogether, if it really important step in there aren't too many out there and there is that there's only a few.

So we think this is the best one in the market. The design came off of the and all the early leader with Multani and I think major improvements to the solutions have been design and proven.

So we think Thats great Court fulsome, most around a long time.

Early innovator and sell factories, and and ER and a fall Bothwell processing.

A brand in a company and a leader that punches well above as weight I spent time that thermal we all know John Wilson industry and he's regular Minneapolis. Our teams are very close we've been friends for many years.

And this is going to go great.

It's not it's it's not a textbook JV that you know in anyway. So it isn't like we're losing the revenues is all going to be it kinda often are in their own garage somewhere working away. This is really more of a marketing kind of a consortium a collaboration on the France. We we all put an equal funding can drive the entity and we all.

We all keep our revenue we all wheel drive our part of the business. When it comes back home on there are a lot of things in the contract of how we stay married and long time frames and milestones ahead and there are certainly scenarios of possible exits and kind to cover all your basis for all this work or not happy and how did remediation.

It's a very complicated contract for that but that's where these contracts and I always away. They are for JV is it's all about the.

Solving the what S and the and a small percentage outcomes that are negative so nothing's been negative it's been fantastic. The leaders all get along really great. This has been driven and is the brainchild really have a day vendor I know one of our president's.

And a lot of focus and that's.

See all the anstey is as a person from for funniest Kabi.

And then excuse me bright young man, who we have a lot of faith in.

I think we have our we are prepared to talk about what we're going to important I think it around $3 million.

And that's an annual number to put in for investment to drive our piece. It could change next year. The after you hope to see how the businesses.

It's by no means intended to be any kind of a sinkhole for cost or anything. So it's very containable, we already selling of course and and its when things are ramping and I would say.

I would say you know the other twentys or selling more than enough right now and it'll get it could dramatically shifted to where 345 years out of its things like GMP proteins and such become scalable, which we we think that mill.

There are kind of front end versus backend parts to the business and a you know even though we're driving the full work flow of being up on non viral approach and we are going to sell GNP proteins to everybody, including the viral vector approach and we have a ton of interest in our factory and and getting allocation et cetera.

You know we're open for business phone.

Okay. That's helpful. And then just last question for me you paid down debt in the quarter.

She change really great spot I'd just be interested in what you're seeing in your M&A pipeline right now.

Yeah, well I'm sure wish I could take credit for being so insightful around chemocentryx, but the indefinitely major about 20 years ago, and Oh, we have a lot of faith and Tom Shaw and they've had a lot of success recently and I don't think we're done with it yet.

So we did monetize some but you know on top of that we almost matched that monetization with or without great collections and the cash alone. We you know we took a 100 million off on we've been averaging around 24 million a quarter and.

We're at a 120 for you know halfway into the year already so we're we're essentially your head of our schedule.

We're now rigor around one in the quarter for leverage on.

With a lot very good.

Balance sheet and liquidity for doing more deal shoot, which we find none that we're gonna stay on on path with that kind of the.

The level of of all drawdowns that we've indicated earlier, Jim you want to comment further.

Audiences that well under terms with the M&A pipeline. It's is it says robots and it's always that it's more about more about finding the right deals with the right price and right now the ones that are more although a greater interest tend to be smaller in nature like they have been more recently so.

But as you quite out our balance sheet isn't that she has done a long time, so she'll bigger deal.

Make itself available, we obviously have been participate.

And we are hunting and we're involved in the over probably smaller right now, but nothing's changed there are always in the hunton is because it's prolific as we've been in acquisitions believe me everybody loves to smell, what's coming up and whats the potentially in the game for us to take a look at so.

But we're pretty focused right now we've got a lot. We got a lot of Homer could do I think we we definitely see genomics kinda back on track from a couple of years ago. When I went a little bit sideways on us we're feeling really good about it the high Plex, a roadmap is phenomenal and we're going to have a DNA of pro product coming out soon so I've never been more bullish about the CD technology.

That form in the genomics division as I am now.

And of course, it's been it's been tough, but everyone told to be tough to get into the diagnostics and liquid dyed liquid biopsy is no different than the.

We've never been better shape than we are now and there's an awful lot of partnership interest as well, where we are definitely not going to try to own. This whole thing. So we are we are developing oh pardon shifts in companion diagnostic applications as well other other out liquid biopsy.

Solutions that maybe we can help.

There again and all recipe so to speak so.

A lot of interest and we're going to grow this thing and.

We will get reconsideration all we'll go to another Mac will do something to keep growing on the pipeline of new stuff is expensive. So we've got to stay focused on that and more than trying to find a you know another leg in the store them the big acquisition so to speak so.

Got it thanks for taking the question.

Thanks, Good luck to ask a question. Please press star one.

Thank you please press star.

Your next question.

Please go ahead.

Thank you.

We're coming up here against your your toughest comp in the prior year period, a 15% growth in March 19 is there anything good flagged. It was maybe one time are lumpy in that prior year number that we should be cognizant all of his work we're modeling forward period here.

Yeah, Hi, there waiting for you down and I'm really sorry about you coming back online now this quarter, but [laughter] insightful question and I mentioned in my comments that we do have one more timing issue coming up in the in that genomic space.

As well as maybe potential another one in though in a simple plex. We as you noted that these clinicals a bull run so it's like a large cartridge orders and they're kind of lumpy. So we do have something that in that number nothing like that 6 million also probably about half of that two to 3 million is probably something we have to overcome so yeah. It's gonna be tough quarter I think we're like 14.

Perfect last year this quarter. So it's tough comp and then with we're not gonna get much help out of China, obviously so.

I think you can you can add up all the.

Results of all that but but nice recovery so far in instruments in Europe, we're all over giving them more help on areas like Germany, I think thats going improve genomics is.

Nothing if anything getting better I think we're in great shape looking forward. There. So we just got a we gotta you know there's always one off you've got to find more one off that's [laughter]. That's what you kind of tell your team you know.

It's it's not an it's not a it is a reason, but it's a poor excuse for not showing growth right. So we've got to find more big deals are going to find more Oems, we got to find a more more key kind options laying a lexisnexis you know it is a great example, we have very little sits next business, but it's coming on strong for US as an example from.

Okay. That's helpful color and then my follow up for Jim.

Jim It it sounds like from your comments around gross margin that you're expecting full year gross margin might decline about 100 bips year on year. Instead, so what's the driver of that and then secondarily do you still expect that EBIT margins could be about flat year on year.

Yeah, so into the gross margin yet to be its combination of mix and FX left to go the two biggest drivers in that order that's having the overall year over year gross margin to be slightly down.

But you know as a guide in early part as the 30 every guy that we'd probably be roughly flat operating margins for full fiscal year and given our are happier for first half performance here. We're actually ahead of that plan. So yeah I mile goes far this sit here and guarantee that will be a increasing margins w. ended the year over year, but the flat year over years.

Definitely looking much more easily attainable and hopefully there's upside I want to say one more thing on that to me it hasn't come up much but.

No.

The revenue looking like it is you had that that transactional FX you know were essentially on consensus I mean does the operating excellence of our businesses and our ability to.

Look midway in this quarter and starting to the right things a good operational leaders do because we had a very experienced team running is divisions and run. These units I did we either to introduce exceptional job.

That's why we have the margin result that we did and I feel confident we're going to be right on track as Jim says to our to our goals and our you know the guidance. We gave for annual for our margins year end I think the revenues harder than the bottom line cannot predict the topline, but you can predict how you're going to finish bottom line, we're doing a pretty good job I think of managing our costs.

Okay appreciate that thank you.

Next question from Patrick Donnelly with Citi. Please go ahead.

Great. Thanks, guys.

A follow up on the M&A questions I guess, what areas makes most sense to add to Inorganically. I know you guys. Most you've talked a lot about areas like cell and gene therapy, and how far down. She will you know on that Sean I'm just curious.

As you think except the bolt on valued other.

There is that famous davinci caricature of everybody tries to use and cell and gene therapy and all the different pieces that work flow, which are a good doesn't or more and you know with our with our our JV conversion. We've got most of boxes check, but but there are some <unk>. There are some areas you had we could do I think we could do more to help differentiate that the world's searching for.

I think.

I think spatial base genomics single cell genomics and spatial capacity is a big area, it's going to in that Theres still lot of innovation happening there.

A lot of a lot of small companies, making a lot of progress we're looking at a lot of ideas there.

I think importers have reporter systems. Another area. There's the major parts of the worked Whiting are covered but there are some things that could help us differentiate as well and of course, we and we don't have a viral vector approach I mean, we could always go more towards where the mainstream as right now to of should we should we find that opportunity made sense.

And memory and I'm wondering if we're going to be partnering with a lot of these euros to the animals and lot of from so it can be done at opportunities.

Think that covers the M&A that direction I think.

You know I don't I still see us expanding into proteome, our president <unk> beyond where we are going to like say mastec rates, you can see or.

You know and Im are things like that that's not off but lot of competition. You know, it's hard to really be the kind of margins, what we'd like to be in to go that direction, but again.

Both the spatial.

Measurement, you know single cell analysis next generation flow.

Solutions that use antibodies that are synergies with us all makes sense. So we're we're always hunting those directions.

It was in the hunt for expanding our portfolios you know, they're smaller but you know we have the uranium from NFL we have.

We have wholesale applications now there are new Nichey lies the areas are out there that you know that they're chunky in nature to expand our assay portfolio those all makes sense.

Smaller antibody companies should they be either for sale to write price with a few in Europe. We like as an example are always interesting to us.

You know.

That's helpful. On it and then just quick one on ACB, because I'm actually got not rightsize, what's what growth number going forward is kind of 20% and what are the key drivers there to get things like DNA probes coming out, but just talk through the drivers in the right level there.

Yeah, the right number 20% court for pushing for more but the number for the was 20%.

I I feel really bullish because ornate scope of still way under penetrated.

We are still building our relationship with like got down the numbers are getting dramatically better.

We are working with Ventana as well at this point, we are looking at other lower end you know instant partnership for a way to do things to try and go after that.

Lower level mid level hospital or pathologist, you know that where he wants to move from the IC antibody world to molecular pathology think there's a big opportunity there.

So weve a lot interest in that.

Our new design Basecoat application is finding growth the DNA scope will come out end of this fiscal year, which we know there's a lot a ton of interest in this high Tech flex is just getting off the ground and we just filed highlight p. as we've been talking about it for a quarter. So on a new extensions that high touch technology that is going to get us.

Into the multiples of 12.

Into targets you started looking out and acetate kit based approach that can give you single cell Revolution for you know 40 to 100 different targets at a time.

That becomes really really interesting too a lot of big companies out there in the space. So that's all coming so I feel very good about 20% plus going forward.

For years.

Research and if we end and if we flipped will make changes because it just should meet it should be that.

Yeah.

Your next question from.

Hi column partners capital.

Hey, Scott.

Hey, good morning, everyone I'm, just a follow up to a couple of questions on here and just taking into account the European weakness here. The one time order time into krona buyers in China is double digit organic growth here possible over the next two quarters or should we be expecting something more in the lines of all of a high single digit number.

Well you know Alex.

We don't give guidance, we were still on track for 10% or better for the year.

We have been guiding.

Over the year thing and eight to 12 kind of range, we're going to be in and we kind of move that guiding Fisher to maybe 10 to 12.

But you know your comments may be prudent that it may be an eight to 12 for this quarter given these headwinds we're looking at I mean the.

China alone it for 2025, moving to say 10 or 15 because of the virus you can do your own math.

But I'm sure it's going to shave. The point you know I would think off of a potential we can do this quarter everyone's in the same boat but.

But you know, it's a tough comp from the toughest where I've ever had.

So, but I like you know the overall the business looks pretty good in most categories in Europe coming back pretty well or Instron business is a good uptick.

We mentioned North America is pretty strong Hell, we've got 75% year over year lead increases are our marketing our commercial engine is just so much better than it was a couple of years ago, and we're spending and it we're spending a more AD words were getting a 10 dollar to one on investment on on that feel.

So I am telling his team keeps spending until you get an AFE and don't and we haven't found yet. So one reason, we're seeing double digit growth symbol proteins antibodies.

Across the board, especially in North America, we get to get more that going in the core in Europe, which we will.

Asia is doing great Japan's and the good spot.

India is accelerating you know high double digit.

In China will take a blip here, but you know it'll just be a blip for a quarter I'm sure.

Okay understood and then on just to go back on your up here and you know I understand the issues in the quarter under one time, but you have mentioned to software environment in Europe now for a couple of quarters I'm. Just curious why next quarter here why should that turn and started to become actually had better geography for.

Well some of these one off from a serendipity some of it you know there the way. These timing on these projects are we're just seeing an uptick you know and these platforms again.

I think they're still risk now there was I don't think in Germany. Overall, I don't think rather would get analyzer in Europe or other areas like do affects and those products are doing pretty well, we are definitely selling a an awful lot of bulk and that usually kind of comes and goes in cycles.

I think the biggest thing as we have to get down to basic with our sales force country by country going off of building off of the acquisitions. We did and then we started working getting people to work together and train them and teach them with Biotechnica's and do any cross selling.

I'm not happy yet I think there wasn't there was more growth around picking off low hanging fruit from going direct from the from depending and distributors and it was about true cross selling.

Good growth and and we're also I think weaken our inside sales weaker than we are a U.S. and we were going to give you need to be set up inside sales for our model is very important you know you can depend on your web and thats, great, but when you're selling you know over a quarter million different skews and it's a catalog business you really got to have a strong inside sales group as well.

We need to work on that often when you're so there's a lot of levers we're pulling but there's lot of levers, we're going to add and pull harder on and that's why have a little more renewed fate that we can get your of going getting all you know in Europe for the bad quarter and Weve method for the first quarter two as you mentioned I think.

The couple of years, you were at 15% to 20% growth I think thats going to be a rich, but I'm getting back to this package and said to high single digit growth will Europe should be.

As I think very very.

You know.

Possible and should they should happen.

May take a quarter to get there, but I think this quarter given the good shot.

Okay understood. That's helpful. And then just real quick you mention progress around partnerships with actions you know if any of these programs are successful when should we expect to see the second actions on diagnostics test launch onto the market and then just any update or implant the kit the happy test.

Yeah, we're already were well could think I'm kidding per se right. Now we are going after you have to approvals and not as not as a standalone not non dr. associated kit.

We won't be in TV anytime in the future Okay for one thing.

The the demand, we're creating around direct marketing and the web and then feel what's going to be pretty dramatic I think it's going to help a lot.

We are we're moving on getting patients and starting to studies for both bladder as well can rejection annual per if they're off urine.

Very if not that hard for us to do and were try and we're working on partnership ideas to get going into on the plasma sites. So with both of along.

And the breath indications, which are validated we think they work and they're looking for clinical so I think you're looking at a couple of years, maybe under two years for for for the year. The urine based one depending how they go again, we have to get studies written them get included in there and then the timing of that.

Probably picking a better Mac wouldn't hurt a little quicker Mac celebration decisions to make but one after two years or is the short answer for you.

But if you look out five years, we're going to have a half a dozen things and hopefully half a dozen partnership as well so.

Okay understood. Thank you.

Well now take our next question from Paul Knight with Janney. Please go ahead.

All you there.

Tonight.

Okay.

Mr Night, if you'd like to ask a question your line is open.

All we get it won't call later to fight.

That seems to be all the questions I'd now like to turn.

For any additional my closing remarks.

Well thanks.

We're going over our first ever done that so we appreciate all the interest overall, a decent quarter not as good as we'd hoped, but but I think we have our hands and all the right levers and I think things that are fine for our year end. So.

Oh, good going forward a team has a pretty energized.

This a lot of great stuff happening here a lot of great fights and we're excited about it. So let's first talk anymore. This next quarter, so see them.

This concludes today's call. Thank you for your participation you may now disconnect.

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