Q4 2020 Bio-Techne Corp Earnings Call

So your 2020.

At this time, all participants up in place and they listen only mode.

Oh will be open for questions following management's prepared remarks.

During our Q and a session. Please limit yourself to one question and one follow up.

I'd now like to turn the call over to David Blair declare bio Technes senior director Investor Relations in 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 about technique.

We began let me briefly cover our safe Harbor statement.

Comments made during this conference call, maybe considered forward looking statements, including beliefs and expectations about the company's future results as well the potential impact to the Kobin 19 pandemic on our operations and financial results.

The companys, Okay for fiscal year 2019 identifies certain factors that could cause the company's actual results.

For materially from those projected in the poured looking statements made during this call.

The company does not undertake to update any forward looking statements as result 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 to me is to provide information perks ongoing business performance.

Tables reconciling these measures to most comparable GAAP measures are available in the company's press release issued earlier. This morning on the biotech Me Corporation website at Www Dot bio dashed technique dotcom I'll now turn the call over to Chuck.

Thanks, Dave and good morning, everyone. Thank you for joining us for our fourth quarter conference call.

With the covert 19 pandemic in full swing. We just finished the most challenging quarter in my tenure at biotech me and perhaps most challenging in the history of the company.

Despite the challenges at Cobot 19 has brought to all our stakeholders, namely our customers and employees.

We persevered through the last quarter of our fiscal 2020 year by outperforming the expectations, we set one quarter ago, and maintaining a high level of profitability and positive cash flow.

I'll walk pivoting, a large number of our technical resources toward developing products that will help our customers.

And society at large eventually defeat the virus.

I'll cover the highlights on these initiatives in a moment, but first a high level review of our overall result for the quarter and the fiscal year.

In Q4 organic revenue decreased by 8% outperforming our initial expectations for a decline of somewhere between 10 and 20%.

We estimate cobiz related products provide a 5% tailwind during the quarter. This tailwind came from products produced by every division and the company, which play a key role in enabling researchers to better understand covert 19 developed therapies and vaccines to combat the virus as well as screening diagnosed patients.

Overall business trends improved as Q4 progressed with sales decline in the low to mid teens for the month of April May and then improving quite significantly in June to low single digit decline.

However, the swings by end markets and regions were more pronounced for example, academic end markets experienced a much more severe trough early in the quarter and haven't slower to come back to normal [laughter] well from a regional perspective, you're a bounce back towards the end of the quarter head of the U.S. This makes sense given the Europe experienced the worst of the economic shutdown.

Before the U.S. and so far it seems to have more effectively contained the virus bread.

As we all know to spread the virus and the containment tactics that go along with it it's a very fluid situation.

We're not of the woods, yet, but I'm encouraged by the improving business trends, we experienced exiting the quarter it into July.

Given these challenging a an uncertain business conditions, we kept our expenses and Chuck balancing our spending on growth initiatives and our commitment to keeping the biotech me team intact with strict attention to discretionary spending.

Financial discipline enabled us to finished the quarter with an adjusted operating margin of 31.1% clearly not will we expect long term a respectable given the current environment. We view the virus impact on our business is transitory and remain confident in our ability to return to at least 40% adjusted operating margins, it's cold winter related headwinds subside and we have.

Given our long term strategic plan.

Prior to the pandemic, we were on track to deliver another year of double digit organic growth in fiscal 2020.

But were called made we finished the year before person organic growth. However, when our customers. All eventually returns are labs, and chronic our growth pillars, namely cell and gene therapy axes on diagnostic genomics are nice scope and our portfolio proteins simple branded instruments position biotech me to return quickly to a double digit organic growth profile.

Now layering into potentially long term tailwinds from our new cobot portfolio gives an incremental confident in our ability to return to our targeted targeted growth trajectory.

Before we update you on our key strategic growth and Kobin related activities I do want to highlight our performance in China.

As you know covert impacted trying to more severely back in February March when government mandated lockdowns we're in for.

You will remember from our last earnings call that our China business still managed to grow in the mid single digits during that very difficult environment.

Well I couldn't be happier to report that in Q4 organic growth in China with back over 20%, our China team has done a phenomenal job adopting to the new normal leveraging webinars and online meeting tools to stay in front of their customers and drive the business forward as a country emerges from the if a pandemic.

As we start fiscal 21, we could see growth slow basements Q4 pace as research and for the virus flared up in places like Beijing in Hong Kong.

But over the long term, our China business remains in the early innings of its growth trajectory and there is runway for many more years, 20% annual growth ahead.

Now an update on our growth in cobot 19 initiatives, starting with the protein Sciences segment in our core reagent.

Our team quickly recognize the need to help our customers conductor research in all aspects of cold in 19 and responded by ramping production of related proteins antibodies small molecules and assays already found in our catalog.

They also developed dozens of new products to support researcher this novel virus and are continuing to do so.

Within our instance portfolio production of our simple plex platform with off a ramp to meet the housing demand for L. instrument.

And it's highly sensitive automated immuno assay that are being used to manage patient care associated with the cytokine storm syndrome, often found in severely in fact the patient.

With year on year growth approaching 100% for this platform in Q4, our operating team did an outstanding job keeping up with the demand.

Also our biologics platform continue to grow extremely well with solid double digit growth both in Q4 and the full year.

We have high growth expectations for this platform as it continues to expand its application base from traditional biological drug production quality and control into cell and gene therapy applications.

Our biologics portfolio with a sub visible particle characterization analytical capabilities is also seeing strong interest from vaccine developer, enabling them to better understand their manufacturing and profitability processes.

Speaking of cell and gene therapy, we continued to make progress on the construction of our newly dedicated GMP protein factory construction that facility remains on track provide GMP proteins in large scale to our cell and gene therapy customer by the second half of fiscal 2021.

In the meantime, our GMP protein portfolio continues to expand it a rip rapid pace nearly 100% of Q4, which now includes a number of immune cytokine typically used to grow fell for clinical trials.

During the quarter. We also launched GMP pro Dot. This disruptive product allows still edition of our renowned R&D systems GMP proteins to culture vessels in cell and gene therapies.

As a reminder, earlier this year, we entered into a commercial consortium with Wilson Wolf intra funniest kabi that offered easier access to a complete and simplified cell and gene therapy workflow solution using products from all three parties. This work flow includes Fresenius kabi, the Lobo instrument for Luca freezes.

Well from Wolfe GE racks buyer reactor and biotech these cloud cell activation Tc Buster gene editing and GMP proteins Dearing Chief during Q4, the JV made additional progress establishing a unified sales structure a customer facing website.

And point of sale and created creating more impactful marketing collateral deep featuring all three parents offerings.

We believe the JV is well positioned to take share in this emerging therapeutic market.

Moving onto our diagnostics and genomics segment, where im happy to report that we may not to decline in revenue this past quarter. Despite the cobot shutdown headwinds.

Even more pleased report the segment actually expanded operating margins over last year by more than 200 basis points and increased operating profit by 20%.

While our genomics product for severely impacted by the closure of academic labs.

Our team was able to partially mitigate the shortfall by producing and selling hundreds of Arnie ASCO probes for cobot, 19 virus detection and tissue, allowing researchers to confirm the organs that are susceptible to this virus.

Our diagnostics research division was able to deliver solid mid single digit growth in the quarter. Despite customer delays in ordering controls and calibrators used for routine diagnostic tests use by clinicians our team was able to more than offset this shortfall by supplying specialty diagnostic antibodies and other raw material to covert 19 testing manufactured.

[noise] and indexes on diagnostics, we validated and launched Colgate 19, real time, Q PCR test in our lab, both in Waltham, Massachusetts, and Munich, Germany. Following the implementation of processes and instruments to automate the test we will be able we will be capable scaling testing capacity to several hundred samples per day. This lab developed test will provide wrap.

I didn't reliable detection of pay a patients with active cobot 19 infections, especially on the Boston area.

However, xome diagnostic also experienced headwinds related to cobot 19, as Exco Dx prostate test volume was severely impacted by the near complete shutdown of your I'll just offices.

As we announced last quarter and the team responded by launching an at home collection kit in Q4 for EXFO Dx prostate test, enabling men unable to visit their urologist office to have access to the test and the knowledge of whether a biopsy should be prioritize the at home collection kit with launch with a patient targeted marketing strategy, including search engine optimization.

Facebook campaign, and Webinars to drive awareness of patients do not need to go into urologist office to have access to this valuable test.

We believe the flexibility of providing urine sample at the convenience of the patient will be at another key differentiator of the Ekso Dx prostate test from the competition.

In response to our at home collection Kit has been very positive both patients urologist and already consists of more than 10% of our current test volume.

The impact of the at home Test collection kit, our push pull cart marketing strategy and the gradual reopening of urologists offices, that's had an positive impact an RFP test volume since it bottomed in April with June Daily Test counts approximately 75% of pre Kobin test monthly run rate and continue to show improvement in July.

Before I turn the call over to Jim for his financial review I want to provide an update on what could be our biggest cobot 19 related initiative to date, our cobranded R&D systems, Mount Sinai Cobiz virology assay test.

During the quarter, we announced the collaboration with can terabyte of Sciences, a Mount Sinai OLED joint venture to manufacture and commercialize a serology assay based on Mount Sinai Test. This was a tremendous effort by both about technique and Mount Sinai teams convincing the typical 18 month to life, the kit develop and timeframe to just six weeks.

This two step serology test is a truly differentiated offering going beyond the qualitative information provided by other coded through algae assays in the market with the second step, providing a tighter or measurement of the antibodies present to neutralize the virus.

The second step completely eliminate false positive with Monsanto is assay, having a 100% positive predictive value, where PPV and 99.6% negative predictive value or NPV.

To date diagnostic activity is focused on PCR antigen based test to detect active cobot 19 infections. We believe through allergy test volumes will increase as a second wave of testing emerges focusing on the surveillance activities necessary to reopen the economy and to help better manage vaccination program once available.

Yesterday can Tyrol biosciences submitted a request to the FDA for an emergency use authorization or anyway for quantitative use of our fair logical assay, we anticipate the way process to be complete in mid to late August can taro and biotech me have joined forces to develop marketing materials, a branding and go to market strategy for the assay highlighting.

The unique quantitative information provided as well as the best in class performance I'll be assay, we are ready to launch its assay upon receipt of the you wait and have the capacity to produce millions of test per month as needed.

Also yesterday, we announced the launch of coated Cerro Index, a research use only or are you will version of the two steps serology assay. This assay is designed to meet the current vaccine developer needs for object for an objective measurement of immune response to a vaccine, making the test ideal for identifying the most potent vaccine candidates determining optimal dose.

Thing identifying the appropriate vaccine schedule and when boosters maybe needed.

In summary, I'm extremely proud of the way the team responded to a challenging business environment in the fourth quarter. Our end markets showed steady improvement as the quarter progressed and have continued to improve in July with our academic and Biopharma end markets Preopening and our cold winter related products seen continued traction we are in the cost of launch in the first commercial quantitative.

Hi, Gigi Cobot 19 through algae assay, which has potential to answer many of the important questions necessary to reopen our economy's further and push the best vaccines forward, we're entering fiscal 2021 and a positive story in a position of financial strength, where the portfolio a best in class products targeting high growth in other.

Penetrated market opportunities, we're ready to continue to excreted executing our long term strategic plan without I will turn the call over to Jim.

Thanks, Chuck I'll provide an overview of our Q4 fiscal 2020 financial performance for the total company provide some additional color on the performance of each of our segments and get some initial thoughts from the pace of business recovery from a pandemic in the near term.

Starting with the overall fourth quarter financial performance adjusted EPS was one dollar versus the dollar 25, one year ago.

With foreign exchange negatively impacted EPS by one cents.

GAAP EPS for the quarter was $1.48 compared to 42 cents in the prior year.

Biggest driver for the increase in GAAP EPS was unrealized gains our investment in Chemocentryx this year compared to unrealized chemocentryx losses in the prior year.

Q4 revenue was 175.8 million a decrease of 8% year over year on a reported and organic basis.

Foreign exchange translation and acquisitions at an immaterial impact on our revenue.

For the full year fiscal 2020 revenue was 738.7 billion, an increase of 4% on reported and organic basis.

By geography in Q4 of the U.S. declined approximately 20%, while Europe declined approximately 4% as European customers shutdown or labs earlier in the U.S. and then reopen then a faster later in the quarter.

As Chuck mentioned, China had a remarkable quarter with organic growth increasing 24%.

As for the rest of Asia organic growth declined mid single digits with almost all countries in some way being negatively impacted by the pandemic.

By end market Biopharma declined mid single digits, well academic sales decreased by nearly 30%.

Moving onto the detailed the piano tiles.

Total company adjusted gross margin was 69.5% in the quarter compared to 71.9% in the prior year. The decrease was due to unfavorable volume leverage and mix.

Adjusted SG in a in Q4 was 28.9% of revenue 60 basis point increase compared the prior year due to unfavorable volume leverage I.

I do want to point out that our adjusted SGN Ace Ben was down nearly three and a half million from the prior year, highlighting our discipline on discretionary spend while keeping our teams intact with no for loads or reductions in force.

For GAAP reporting SG Nay expense and the current period also reflects an approximately $7 million gain on settlement of the escrow balances associated with the exit dome acquisition.

This is accounted for as a reduction in SG in a in Q4 of fiscal year 20.

R&D expense in Q4 was 9.5% of revenue 100 basis points higher than the prior year due to unfavorable volume leverage and investments in cobot 19 related product development.

Here are adjusted spend was about a half million higher than the prior year, emphasizing our conviction to continue to invest in the business for the long term.

The resulting adjusted operating margin for Q4 was 31.1% I think a decrease of 400 basis points from a prior year period.

Looking hard numbers below operating income net interest expense in Q4 was 4.4 million decreasing point 8 million compared to the prior year period.

The decrease was due to a substantial reduction of our bank debt during fiscal 2020.

Our bank debt on the balance sheet as of the into Q4 to 357 million.

Other adjusted non operating income was point 5 million for the quarter compared to point 1 million from Q4 last year, primarily reflecting the foreign exchange impact related to our cash pooling arrangement.

For GAAP reporting other non operating income includes unrealized gain from our investment in Chemocentryx.

Moving further down the BNL, our adjusted effective tax rate in Q4 was 21.4% similar to the prior year and what we expect for the foreseeable future.

Turning to cash flow and return of capital 44.8 million of cash was generated from operations in the quarter down 20% over Q4 of last year and consistent with our adjusted earnings.

In Q4, our net investment and capital expenditures was 17.3 million, primarily driven by construction of our new GMP protein factory, which remains on schedule for for completion by the end of the calendar year.

During Q4, we returned capital to shareholders with 12.3 million of dividends.

We finished the fiscal year with 39.7 million average diluted shares outstanding.

For the full fiscal year cash flow from operations was 205.2 million up 13% from our fiscal 2019 result.

Our net investment and capital expenditures was 51.7 million consisting of 24.1 million and baseline capex.

27.6 million investment in our GMP protein facility.

Our balance sheet remains very strong with 270.9 million in cash and short term available for sale investments at total leverage ratio of well under one times EBITDA.

Our total leverage is at the lowest level since before the 2014 acquisition of protein simple.

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

Q4 reported sales were 127.3 million with reported revenue decreasing 11%.

Organic growth also decreased 11% with foreign exchange and acquisitions, having a negligible impact on revenue growth.

Within this segment product lines with higher academic study exposure, namely our reagent solutions portfolio experienced significant headwinds.

As Chuck mentioned, we had an exceptional quarter in both our biologics and simple plex instrument platform, which partially offset the impact of Bob closures due to the pandemic.

Operating margin for the protein Sciences segment was 38.9% a decrease of 650 basis points year over year year, due primarily to the unfavorable volume leverage and to a lesser extent unfavorable product mix.

Turning to the diagnostics and genomics segment Q4 reported sales were 48.7 million relatively flat with the prior year result.

Organically revenues grew 1% with foreign exchange translation have an unfavorable 1% impact on revenue.

Within the segment, our diagnostic reagent division increased mid single digits with strong cobot 19 related raw material tailwinds benefiting the business.

Meanwhile, our genomics division, which like our research solutions Division in protein Sciences has a large exposure to the academic market into the biggest cobot related hit in the segment with a double digit percentage decline in sales in Q4.

However, as labs gradually starting to open throughout the quarter and into July we've also seen genomics performance dramatically improve.

Additionally, we anticipate the launch of micro aren't a scope increased penetration of high Plex and continued adoption of arent a scope for coated 19 applications to put that positively contribute to growth going forward.

Finally actions on diagnostics Q4 revenue increased over 80% from last year with higher collections from Medicare private payers and patients as well as progress with Biopharma partnerships driving the year over year increase.

Keep in mind that XOMA still on a cash basis for revenue recognition. So collections from pre pandemic test helped recorded sales in the quarter.

Moving on to operating margin for diagnostics and genomics segment at 12.4% segment operating margin improved from 10.3% reported in the prior year.

The increase reflects favorable volume leverage in our diagnostics reagents division less dilution from actions on diagnostics as well as strong cost management.

Before we turn the call over to keep today I will share our current perspective those of you ahead.

First and most importantly, our strategic financial goals for the next three to five years remain unchanged.

Our novel automated protein analytical capabilities are cutting edge tissue and liquid biopsy technologies, our tool kit of cell and gene therapy manufacturing solutions together with our core core World class protein reagents are as well position as ever to help our customers advance. The study of life Sciences, and we believe in a post Kobin world.

The need to advance the study of licenses will be greater than ever before.

This does this gives us even greater confidence in achieving our long term financial goals.

But first our customers, namely life science, researchers and diagnostic practitioners need all get back to work.

This is starting to happen as our monthly pacing of sales recovery within Q4 made clear.

However, there are still too many unknowns about what the impact of the pandemic and any potential vaccines, we'll have in our lives this fall and winter.

Certainly prevents us from giving our view on our full for full fiscal year 21 financial performance with any sort of confidence intervals.

So we are managing our outlook month by month quarter by quarter stand nimble to deploy resources the needs of our customers as they arise.

As a reminder, our first quarter of fiscal year, 20 was very strong and will likely be the toughest comparable for the upcoming year.

Thus holding flat year over year in Q1 on both the top and bottom line. We see is the right trajectory to keep us on track to our long term plan.

The downside risk to district directory would be a pause or reversal in our customers going back to work due to a worsening of the pandemic.

An upside to this trajectory would be regulatory approval of our quantity of covance or algae assay test coupled with an early successful commercial launch.

That concludes my prepared comments and with that I'll turn the call back all the operated open the line for questions.

Ladies and gentlemen, we will now have our question and answer session. If you would like to ask your question. Please press star one on your telephone keypad, a confirmation hone will indicate that your line is in the question Q.

We also costar two to remove your question from the Q.

For any of those using speaker equipment that may be necessary for you to pick up your headset before proceeds start Q.

One moment, please while we now poll for questions.

Our first question comes from Puneet Souda with SVB Leerink. Please proceed with your question.

Hi, Thanks.

Thanks, Chuck So first question those on.

Right.

If you can just elaborate a little bit on.

The first quarter.

Scenario here this year presenting slot just trying to get a better understanding of what sort of trends are you seeing in July that give you.

This view or is there.

One would have expected academic labs to continue to improve next we do so.

Slightly better than flat is that not something that is doable. Despite.

The tough comps here. That's my first question, we follow ups.

Sure.

Well first and foremost we finish this last quarter still down eight and it could have been a worst from that we did have a tailwind the tailwinds improving.

We're seeing a resurgence in July not so December we saw with China coming back on so July numbers are very are very good start as Jim alluded to.

But.

There's two months ago, and we have we have a 13% comp from last year to cover so not the big one so coming back from negative come in this quarter in a tough comp we think flat we could give a range. We're minus 10 minus 20 last quarter, we talked about saying something from zero to might into 10 or something or minus 5% plus five but I think the best thing.

As keep as tight as we can we think flats the right trajectory for us.

And if there are up sites now if we stay with what we see in July continued to the whole quarter I think there'll be upside.

I had we didnt see in China, we saw things level off and expect to see things level out here to me. We're we're seeing a really strong start in the quarter and it's just probably not plausible not dimensions, there are hot spots and resurgence going on and they're just very unpredictable it's going to happen.

I know what I looked at numbers this morning, and looks very encouraging on on the in the us for the numbers this week, but.

To fake.

So I think on top of the the comp I think flat is right Europe continues to progress be little bit ahead of us UK as the only real outlier here and we'll have to watch and see what happens there.

And in China is actually a little bit going the wrong direction right now right. So if if if that gets worse, we'll see.

India and others are not as bad as I would've thought you know given their population and their ability to actually.

On deal with this but.

That's a good thing.

And then on top of all this there is upside on our coal dead right. So if our if we get our you weigh in two to four weeks and we got a good solid month of coming out with this product that 30, not our numbers in this and this forecast so.

So there's upside time, we have other colby products as well as simple Plex, we talked about had just an amazing quarter and it's looking like it's going to continue maybe not quite at 100% growth, but darn good growth I guarantee you saw.

We need academically to come back we need urologist to come back and then on the progression has started but.

But it's not you know they're not all the way back even at the end this quarter, we don't think so.

We're going to stay cautious we don't know officially give guidance is a close as we've ever come and we're talking about staying flat against a strong comparable.

That gives you something funny.

Yeah. Thanks appreciate the detail clearance.

My next question Serology.

I think.

Yeah. This is a question that we've been getting from investors as well.

Well what is your expectation Europe or contribution consumer ology and so what are you at 21, and I'm asking because you know covitz or roll GE market has lagged significantly.

Behind the PCR market, given the PCR as more potentially more diagnostic capabilities.

Obviously serology is only giving you a snapshot in time.

So and some of the peer companies have also lowered their expectations answer all of GE significantly.

And going into the next quarter. So I'm wondering what are you baking in for serology and what gives you confidence.

You can grow sort of above the market here in serology.

Sure well.

I want to give you some comments here and they are ready men for everybody not just us enough to cover the same ground here and then questions layer and that we get this out kind of to all if you will one just to be really careful.

We've been we've invested a lot in our test we we have submitted a one hell of a dossiers to the FDA, Let me tell you.

And it is an incredible.

Data package, we have gone far and beyond already with the FDA required for something like this.

As you know it's a two step when we when we decided to go fully quantitative a couple of months ago and take a step back and take some extra time.

The FDA first of all we're starting to get clogged up an awful lot of requests to being we're talking about asking for a fully quantitative.

He away and nobody else has done that and they really really asked for an awful lot of extra stuff extra data extra testing, we have complete sensitivity data done.

We did cross reactivity test against 14 major diseases, we have a stats on all this that are phenomenal we know of nothing out of that compares but we don't maybe know everything it's coming out either so we're only talking what's out there now we.

We do also knowing the FDA regrettably saw and know that they've issued a lot of preliminary you ways that they probably regret and allow these initial qualitative tests.

We have become.

Tarnish to the whole serology potential and we have to overcome that.

Well, we're very sure and were very clear on the factors a need for a quantitative serology Tessa that really can identify the level of immunity and a patient and this is going to be important more and more important as these vaccines coming to market and patients will know are they having or a response or not.

And so we see a surveillance side of this it's going only grow and it's not going away in a year.

So how will it match, our USEC now testing environment, PCR, maybe not but it's going to be a very large market and we're not a very big company and we're going to have the best test at least for awhile.

So we're very confident that we're going to be treated very fairly by the FDA and we'll we'll be out there before this quarter and hopefully.

But there's no guarantee this is the FDA and there there are no.

100 is a test out there trying to get in and all different forms.

We know if nothing else out there that can match us we had incredible partners with the with Cantera on Mount Sinai. They are managing most of the bureaucracy here being you know we're not we're not that we experienced at it.

And we've got great consultants on the staff through Cantera as well as really taken control of our dossier and our package our data everything.

Our our team here at Biotechnica's worked round the clock for months now.

And as we fulfilled their mission, we feel and we're ready to go and we're not getting we're ready to go at millions per month, if not millions per week. So.

But you're right.

Right now, it's a kind of a 10% kind of market demand comparatively PCR, but we think it will improve.

And it'll improve with test getting better with vaccines coming on the market.

And.

And economies opening up in people want to go back to work and knowing their safe to go back to work. So we're ready so we've been waiting for this and we're ready.

That's a thanks, that's very helpful.

And my last one of the cell and gene therapy.

Obviously, an important growth driver new market opening for you here for the next few years. So when does the earliest we can see the revenue in that and maybe Jim getting.

Provides details on any anything we should be modeling and how should we be looking at 4020 21.

And if you could also provide any updated thoughts on the level of interest you are seeing.

In early commitments to move forward the capacity that you are building out in the first year. If you could provide some color that that'd be helpful. Thank you.

Well as you know we're selling GMP proteins now, we're just not selling larger batches. So our our GMP protein business is growing and growing near 100%. So we'll be moving all of that over to the facility. Once we are able to so we're on schedule on budget will be opening the facility in late September qualifying for the rest of this calendar year and be open for.

Business for scaled up production revenue probably January something.

We have.

One completed signed up a large customer and we're in negotiations and with half a dozen others anda and behind that or a lot more others.

Preclinical and testing and and people getting ready to the check us out so.

It's hard to guess right now what that first year revenue will be coming out of that factory, but it's certainly going to be significant.

We will not fill our capacity Hersha. We've never said, we would be probably say could take as long as five years to a full 140 million.

We don't think it'll take that long, but it could.

Our models don't go beyond that so it won't be upside so we're ready to expand it to a 200 million dollar model and it would it take about a six month to one year window to do that so we think with ample time, we've got ample room in the built building, we that ample green space. So no issues there.

Equipments all here.

The site looks phenomenal.

We're going to have a fantastic viewing corridor further processes.

Our local Minnesota Science Museum, who is the world or the country leader in in exhibition design as they do this into the for sale, they're going to help us design, how to how to exhibit in how to show.

The processes, so it'll be it'll be a great.

Great venue for customers come in and see what they can expect.

And.

It's going to be fun, so everything's on track the numbers don't haven't changed since we told you before really so ideally I'll add with regards to that GMP factory itself in terms of the revenue.

Unrated from it aside from just as growth in our normal clinical business that Chuck mentioned, where it's going to 100% for GMP protein. These large customer deals that we've either signed or are in negotiations with right now they're all in various phases of Clint Clinicals right now theyre not commercialized themselves yet so.

Yes, we reality is until they get through their phase III and become commercialize we really won't have a good deal the timing of when we'll see that major step up and in revenue from from those customers.

And these are these are ones and aren't that already out there now are coming out there as you know there's an awful lot of.

Viral vector based.

Cell therapies coming out either end of next year too and there were not ready in we're not in those those clinicals, but being were not part of the drug it would take just equivalency testing to actually move over to our protein if its deemed to be a better value better quality et cetera. So we expect as we open we'll get more and more interest from the.

Dozens and dozens of cell therapies that will be coming over the next two to three years.

That's our that's our angle anyway.

That's great. Thanks, Thanks for the detail. Thanks you.

Thank you.

Our next question comes from Catherine show with Baird. Please proceed with your question.

Hey, guys. Thanks for the questions I guess first just on China and great to see that strong return to growth in the quarter, you talked about seeing that reverse to some extent, what's implied for China and flat overall.

This quarter.

We don't see any anything below double digit forever in China to be honest Phil.

Almost got to that last quarter. So we were 24% this quarter the resurgence of big part of that.

We probably be north of 20, if we didnt see the the new shutdowns of Beijing, other things, but with but with that in case is kind of unknown, but I think we still see a strong.

15 ish kind of number at least.

We're hoping for better.

You never know at China, it's not going to be below double digit, but it could still be over 20 as well.

Okay. That's helpful and was everything you have going on on the diagnostic side and also in vaccine and therapeutic development.

Possible to quantify what kind of Copel correlated tailwind you saw in the quarter and how you expect us to trend going forward.

Yes, well, we had 5% last quarter alright.

And that's going to improve modestly with the current products select Ella and R&D scope continues to see some traction we're selling reagents region selling antibodies and other other test manufacturers antibiotics that we're not using.

And our test of course.

So were in our but what we're full service bold supplier to everybody right and so we do.

I think the big upside of course is the serology traction if we get the way in L.D. These these aren't going to be small orders will we get this will be all large orders and we're talking with.

In a lot of large institutions.

I will make a comment now to mean, the commercial channel and as mentioned before it's one thing to be able to make.

Five to 10 million tests, a week, it's another to to get in the engine of doing 510 million blood draws a week and that's that's the mission here. So we've got to we working with.

Governments with large reference labs, the vaccine makers.

The hospital management systems out there that are that are really managing all these labs and anda and working all these blood draws for all these automated testing that goes on everyday in the hospitals and clinics around the world. So that's what we're really working on now have been for a couple of months already.

We are definitely beyond term sheets with some and.

There's a lot of interest as you can imagine so.

But that's that's what's going to drive the speed of traction in the level of traction not only this quarter, but after.

Q2 and beyond.

Okay, Great and then maybe just one model cleanup question for Gen and recognize yellen against specific guidance, but how should we think about sequential opex changes in the coming quarter and how quickly you're planning on bringing back some of that.

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Yes, I'd say from a sequential perspective, they'll be perhaps a little bit of uplift if nothing else because we like the first quarter as when our annual.

Merit increases for example kick in.

But it's going be fairly fairly minimal, we're obviously still automotive being very tight our discretionary spend.

Really not investing in any much innovating new hires at this point.

So we're still being very very careful with regards to our investments so I'll just say.

Nominal.

A sequential spend from Q4 to Q1.

We're really were really on a kind of flat you know kind of keeping things that go as you know issue as you remember Catherine we.

We spent a lot time and were Minneapolis, So finding top talent from the bay area in our or Boston the come here for biotech research and work. It's it's difficult. So we've done acquisitions in these these better locations and we really worked hard to building a world class team over the last six seven years, we don't.

See this pandemic is.

More than a one to two year in on bubble of the real pain and the last thing we wanted to do as to ruin our team. So we decided to suck it up and not doing furloughing, we didn't do any restructuring.

So we could have delivered more to the bottom line yet you saw our tremendous results. So I mean that speaks to the tight processes. We have your it as an operating team we run a very very good template of.

Of processes both.

Weekly monthly and quarterly week, we know, we're spending and why we prioritize continually.

We were able to pivot.

Large percentage of the company towards our pandemic related Colby related activities and yet we still had almost near typical year on year end pie for products. So we've done a great job there.

And the law that came from taken the pressure off our team not worrying about going on furloughs are being restructured so its steady as she goes here that said, they're all watching what we spent and.

We PEO, if we do have any attrition, where we replace if needed and we certainly aren't doing expansion in areas. Other than these mission critical areas. We are of course, adding and operations for the expected ramp up for for our Surajit test as one example.

We are certainly ramping up around Ela with 100% growth and simple plex, we're going have to have resources.

We've told China, you know you're back to 24% growth you know what you can hire.

But you know.

The higher you have to grow and where we're not growing we're not hiring so.

Great. Thank you.

Thank you.

Our next question comes from Dan arise with Stifel. Please proceed with your question.

Morning, guys. Thanks, one desk couple of reimbursement questions. If I could first Chuck on Serology, you had talked mid quarter about the potential for.

Our reimbursement rate that involve I think secondary pricing was the way that you phrased it which might have.

Sort of the.

Greater level of Incentivization, that's attached to it for the labs is that something that you still think isn't the picture.

And then on X his own specific to the commercial side of that business I'm curious, whether hey, the clinical utility study, it's helping negotiations there.

And then if I go back to some of the things that you were talking about this time last year. It sounded like you guys were having some good success, we just keeping the private payer rates from being too far not too far from the CMS rate is that what you expect going forward do you think there's some discounting that comes into the picture in order to sort of bag some of those bigger payers.

Well, let's work in reverse order so.

The the payer situation is still improving at the excess overhead levels on the utility study is being acknowledged in being well received in its helping us signal lineup bigger payers.

The Medicare still coming back and growing I think we're on track and then Ngs of course is very excited about getting back to us on reconsideration. They actually love utility study and we're going to be following up with some other data here soon but.

Of course, they don't meet every month. So we've got we've got plenty of time until this fall and to get the the package rating. Good place for reconsideration that said you know the Trs process has money is pretty helped us get around that big potential shortfall with the limited definition today to the.

Today off to the LCD to the LCD, but but we're okay. I think for now so it's kind of station goals, we had great growth.

And we can you just see it in the at home test I think is really a sleeper I mean that.

That thing is going to last three take off and then stay tuned we got some new coming a advertising campaigns that are also going to be I think well received so we're we're moving well along there.

What was your question before that that was.

Just on serology, and the way in which the reimbursement might work better and vote and whether or not labs.

More of a public unit.

Yes, so we did submit to CMS for a CPT code us a second especial and we got it we avenue cold, but we don't have pricing, yet and we can't get the pricing until the EU is out and so it all you know it all works together.

Clearly, what we'll do a cross walk at some point with CMS phone when it's appropriate and that may follow the way, but I don't think has any issue any worries about that.

And is significantly higher than the 42 dollar.

Charge for a one step test out there currently.

I think when people see the.

Ill de de in the U.S the extra difficulty the the technical.

Hurdle the here the more information the better results were.

Antero months on it for sure are very confident that we're going to be.

Delis fairly annually, we need all this because for the for the the channel to accept this and drive it and prioritize that there has to be a little more because it costs it costs more so.

Okay. That's helpful. Thanks.

Okay, and then just maybe on the Ela business. It sounds like you had the strong quarter that you're expecting there can you comment just talk about demand by.

Customer class.

Serious about pharma usage and then maybe on the clinical side, how likely are you thinking that it is that that becomes sort of the go to platform for day to day patient testing and management values comes to running these ally's assay.

Time does.

Well, you know I've I've, often spoke about it being the big sleeper and our stable.

And the Inova.

The micro point opportunity in China is just one indication that's a $100 million 13, all by itself. So loved to have some of those over here, we're having a lot more interest. This is the event that that platform really has been waiting for.

We had a lot we basically sold all we can make this last quarter end I don't know if that'll continue because we're ramping our production now, but we certainly saw and in surgeons for hospital use and for testing use and.

And I think there is interest nominated for people to take that application and take it through different clinical regulatory ill.

Needs and we'll see but it's good for regulatory it's good. It's good it's good and for clinicians is good in research Betsy. It's it's a high speed multiplex immuno assay a one our family of the data, it's it's wonderful and.

We keep building.

In other panel.

Library for it and we're able to make panels that will for anybody we have an open cartridge panel for people to their own work on this is important for biopharma because they want to work a little more secretive philly they've taken it and they're working on their own.

They are on products without a pretty being involved in later, we'll come back and tell us what to make and for them and then.

The buttoned up so we see a big strong future for for Ella and simple Plex platform in general and entered more conscious coming we have.

We have a variety is coming out in going smaller and smaller too so it could be a point of care as well.

For by eight as an example.

Yes, Okay, and then just maybe one more if I could stick one in here on Europe, you're usually have some pretty good views on just high level funding I'm curious what do you think about the European funding situation with the rise in Europe. The budget seems like it's coming a little bit lower than maybe they were hoping for do you thats something that you figured impactful going forward or.

Is it really about the portfolio over there and just being positioned right.

I think it's more about positioning and we're not that big a player. So we really havent seen any impact.

It could be simply a simple plex lots of good example that there was just off the charts over there for us than these especially in places like Italy.

Right now no concerns on on funding for our product for or budgets in Europe, it's more about getting UK back on line unfold throughout.

The rest a contributor becoming launches just fine.

Yes, Okay, if anything based artful if anything we used to get back to where we were before covidien that was the.

The reorganization that restructuring the new commercial designs that we had for Europe in general we made most of those changes in their kind of waiting for Europe to come back to normal. So we can actually measure how we did so ill places like Germany, there should be a lot more upside. So we're we're looking at good investing expanding in places like Germany, where we should have more business.

Beyond that.

I am 100% onboard was getting back to where we were foreclosure so they're going to all of us on that.

Thank you.

Our next question comes from Patrick Donnelly with Citi. Please proceed with your question.

Thanks, So let me just on the academic market.

It's going to wondering how that trended throughout the quarter I know you've given in the past some metrics like percentage of Globs open loop is closed.

The U.S. and even kind of help us think about.

Okay, Great and then as we come trend through this quarter. When you think about flattish guidance, what your expectations are for that market yeah.

Well, we've read all the pelvic stuff just like you guys have where our writing and I think roughly 50, 60% or partially open in a roughly a quarter or open and you know the rest are kind of in the middle and unknown, but we're hoping for better than that we all were right. So I think I think it's just a slow flawed forward.

I think there's two camps for academic labs is ones that are well funded through grants and there's ones that are funded through the universities and with students not coming back or international students not coming back I think you're going to see some constrained budgets and some.

Some University lab, probably.

I think the grant related labs are probably going to be fine and probably probably.

It'll be a great season next year, because and we see nothing but improvements in funding to that end.

We just got to kind of go work of it.

You know by definition labs are kind of socially distant Derek money on topline another and I think labs will come on back back on board before really students are back at full strength and I've read that are more than one place. So.

But it varies by institution, so they're just not all of the same and if you're going to if you're asking for an answer of what's the meaning of all this they're coming back, but the come back slower than we'd like.

And I expect that the budget situation going forward. It may be awash with I think you're going to see some.

Something better than usual and some things less netting out to be that's my guess, but I don't know any more than you do on that so we have.

We may be better off in a lot of lot of companies. We have a lot of products that are really kind of.

Unique and only one is in the world and you got to get it from us and.

And so you know there they're coming back fast we had as I mentioned to a very strong start to the quarter. I don't think were alone. There I think it's somewhat similar to what we saw in China people come back or labs, they remember with a dividend turn the lights off two three months ago and their reordering quickly to get their stuff back going again and that will level off probably after.

The first month or two we think just like it did in China.

And.

But you know research isn't going away and we'll just have to work with them.

As best as they are coming back online.

But you know for academic labs to to be healthy, we need students and we need all kinds of students, including international students and Thats. Its a big question Mark right now.

Yes, I appreciate that and then maybe on the Surajit us.

No one of the angles, you guys had to be successful unique ins.

You can kind of play and the vaccine development. So you actually get affected will be antibodies with generated I guess, how do you see that opportunity playing out again, whether it's over the next year you already in conversations with whether its pharma companies or wherever the end user could be there can you just talk to you got opportunity obviously, it seems like it would be pretty significant.

Yeah, you know I should point Surajit in high volume for the math is different than surajit for the foreign vaccine manufacturers nowadays they would be probably a few million dollars at least per account to be really in their their clinicals per se and be part of it but you know allow those ships have left there dock freight there and phase twos and.

Phase three so they love it was done there on test now, they're not scaling up something for the world. So they're probably not a focused on a on a monoclonal like we were it it can use other other ways that means that they've got something the test with its something they can't really released to the world.

So we're in the middle of all those kinds of discussions and I think as we get out there with.

The data in the you know.

The accuracy of our test I think we're going to get more and more.

Support and the interest from the vaccine makers and yes, we are working with some already but not all of them and we'd ask pretty much all of them and then that's the answer had gotten that.

They would like to take a look but they're in the middle of stuff, obviously and they've got big deadlines to hit with their phase two or phase three in some cases in the it's not the time to be changing how they're testing so.

So there is some of that.

But it was mentioned in the in our risk in our transcript here that.

Surveillance going forward is going to become more and more important and we see a lot of that going well beyond just vaccine manufacturers. So.

Sure well, we got to get around the targeted first of all the all the poor tests that came out in the last six months right. So.

Absolutely.

Jim maybe just a quick one on the capital allocation side.

Obviously uncertain times here, how conservative you guys want to be or use of time to be a little more opportunistic on areas like M&A Schlumberger easier.

Yes, I think we were definitely took a more conservative approach.

Last quarter.

Last quarter and a half as dependent makes started become more of a re reality understand how deep it was.

We took actions to build up cash pay down debt. So we are extremely well position right now from a balance sheet perspective in a cash flow perspective going forward and.

As we've mentioned in past calls were always involved in M&A discussions and looking at targets and fielding targets and and we are currently as well and just a matter of.

The right target at the right price the right time, so it's not a matter of financial wherewithal or conservatism thats holding us back.

Great. Thanks again.

Thank you.

Our next question comes from Jacob Johnson with Stephens. Please proceed with your question.

Hey, Thanks, Chuck you touched on it but maybe expanding on then just on the GMP protein well the initial demand here before relatively early stage.

Therapies or can these GMP proteins be implemented and later stage trials or even a commercially approved therapy and then how does the demand for these proteins ramp as these therapies major clinical trials and maybe what would a commercial approval means for you in terms of protein GMP protein revenue.

While we have one large signed customer now we're as I mentioned, we're in negotiation half dozen other than that that one.

On would be.

Millions and millions of dollars proteins, just that one we have had inquiries for orders as large as annually of $10 million are more expected why there was some so much almost pressure on us to getting the game and good going on on large.

Capacity available proteins that GMP, because they were scared to death, where they were going to get them.

And it's going to probably drive being one of the big drivers of just how fast the cell and gene therapy market in general growth is going to be the safety of these reagents. So we plan to be not only in the game, but the leader.

During the first for your question, where where and what kind it'll be all the ball and so yes. We were we have are all complete workflows non non viral vector related and were in preclinical with a lot of companies working right direction, we and we think Fivea 10 years out here the world would probably be non viral vector.

There are a thousand clinicals right now that our viral vector related and some are coming out. The other end here you know very soon in a couple of have already and for them to use our proteins. They have to do it includes the test of which there will be doing I'm sure.

And it's very possible and then it's going to come down to how well our product works and what's the price et cetera. So.

So we're going to get pieces of all all of these markets and I think the I think the biggest first big upside with bead will be equivalency. So if we can land. Some of these accounts that are coming out and going into production through and includes the test that'd be the biggest short term upside otherwise, we really got to wait for our stuff to kind of get through there.

Clinicals with our partners and out the other ran which is going to be another two to three years, which we've talked about at length, but then we see a J curve with this.

With this factory in terms of revenue ramp and.

Im sure we will have significant revenue next year, but it's hard to say it'll certainly be probably more north of $10 million, but we'll be north of 50, it's it's hard to say for year one but.

Got it that's helpful and maybe just one other question on cell and gene therapy, you've talked about a lot of the opportunities here, but can you talk about the application of the HCD technology for cell and gene therapy. It seems like this technology can be is the in the viral vector and car T workflow.

Yes, it's in the it's in the workflow I mean, it's that spatial imaging right. So we have a single cell analysis. So at some point you do that a look at the at the cells and see how things are are working and Arnie scope is fantastic for that so we're going to have flexed versions of this as well we have our hyperflex out analysis.

We see a we see a big future for for yarn, a scope platform being used in cell and gene therapy as an analysis tool.

Got it thanks for taking the questions.

Thank you.

Our next question comes from Alex Nowak with Craig Hallum Capital Group. Please proceed with your question.

Great. Good morning, everyone. A lot has been asked on the serology tests, but I just want to couple of clarifications whos going to be marketing and actually selling that serology testing for the clinical side of the market are you going to be using traditional diagnostic distributors for this.

Can you just give us any sort of the economics of the test back to biotech may after paying out for Mt Sinai the distributors and such.

I will lots going to depend on what kind to real demand will happen. So as an example, you have to convince this channel in all the the Labcorp class. All these different CLIA lab into two to use a test now they are in the middle of using high automated systems right now from other manufacturers, but on a.

A less desirable test.

The reimbursement on that at 42 on a single step test will be asking for more.

And to get more is going to help prioritize with them. So we're in discussion to all the entire channel there everyone you'd you'd mentioned in more so there are companies that managed a hospital labs. There's labcorps inquest of course, there is a second tier level of Labcorp inquests out there there's the mail.

And then there's a vaccine manufacturers in general to there's biotech and as well as the channel for for law. This stuff. So we're talking all and then there then there's governments I mean, there are there are governments that are talking to us about how that are more or less social medicine.

Type of model that want to buy big and they want to get in on it. So we're discussing that with some as well so and we're getting help.

Mount Sinai is very influential on the Cantera group is got people onboard that have a lot of experience working in this area and this does channels and dealing with the FDA, but it will be commercialized by us that's what we're going to with this some the branding on on the product will will have R&D powered by R&D systems branded on the product.

And what we get out of it I've mentioned before that we're going to be certainly be in the five to 10 dollar range we think.

And offend end and non Sinai.

But you know the test prices will go how much higher than that in your already are they are now even as single step. So we'll get more than that should that should create.

Strong interest from the this I'll call. It the channel so to speak the people who are managing all those blood draws rate that won't be us Phil.

Okay and again.

And again allocation all were.

We're not trying to take out Roche here, we're not very big so in any traction we expect here should be very material to us.

No I understood appreciate the commentary there.

Just any update on morphing zone diagnostics into more of a picks and shovels business I did mentioned in the past or partnerships and just where do you stand in the pipeline with bladder cancer test and we can you track.

Well, we're pretty far along there and the kidney rejection test we have the first paper under review and data is there and we're working towards that through that process. I mean, I think another year, so we'll probably be.

Into the guidelines and work in the same kind of process. We did with the test bladders, probably following that just a matter of bandwidth.

We are partnership ideas for that one as well and there were pretty far along in partnerships initial discussions both with Abbvie as well as the blood based versions of this test of which need need clinicals done et cetera, and there's a global perspective too there are different other.

Partners I want to really help in Europe for years, and also as I want to help in Asia for us So.

I would say some things have slowed down due to the pandemic for sure.

We definitely have taken a hip a recovering faster than expected with our own urology offices in the U.S. and I think the at home, it's going to be very infill instrumental in this coming back and coming back strong this year.

And continuing the trajectory that we expect so.

This is a big platform, it's got a lot aspects to it is going to take years to really get it to mainstream but.

Theres nothing that can beat it we don't think Phil.

We're on our way.

Okay, and then just a follow up questions to the GMP side and the whole focus on non viral vector what do you need to do to to win over pharma that denied enviropact or approach is the right way that they should do this I mean, essentially you said 510 years everyone's going to be going your way it you convincing pharma or.

As a pharma essentially playing trial and error finding out that Youre method is the most optimal what really pharma switch over.

Its data cost productivity.

There's no doubt in anyone's mind, just has tested with our platform that that some more efficient. It's it's less costly it's much more predictable and reproducible.

Viral vectors are hard to work with that should become a standard over the last decade, because it's all there was.

But like everything offerings and in the world The first different Elizabeth the world comes around and.

In terms of something better this is better, but it's going to we'd have to get there with data the preclinical than the work. We're doing have been very successful home, we're selling a fair amount of stuff already to be honest anda.

We see a bright future, but this is as you are well aware this is not.

And overnight kind of market right now there has to be methodical approach towards Clinicals and.

I think it's doing just fine it will get there.

All right understood. Thank you appreciate it.

Thank you.

There are no further questions at this time I would like to turn the floor back over to management for any closing remarks.

Well again, it was a tough quarter by.

For us than for everyone else Ministry on we I think we came out we came out better than expected and we're very we're very up you know, we're very happy what we see so far and going forward, we see nothing but a bright future. So we'll look forward tiny more next quarter. Thank you.

Ladies and gentlemen. This concludes todays conference you may now disconnect. Your lines at this time. Thank you for your participation and have a great day.