Q3 2022 Bio-Techne Corp Earnings Call
Good morning, and welcome to the biotech and the earnings conference call for the third quarter of fiscal year 2022. At this time all participants have been placed in listen only mode and the call will be opened for questions. Following managements prepared remarks during our Q&A session. Please limit yourself to one question.
And a follow up I would now like to turn the call over to David Clair Biotech Senior director Investor Relations and corporate development. Please go ahead Sir.
Good morning, and thank you for joining us on the call with me. This morning are Chuck <unk>, Chief Executive Officer, and Jim Hippel, Chief Financial Officer of 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 as well as the potential impact of the COVID-19 pandemic on our operations and financial results.
The company's 10-K for fiscal the fiscal year 2021 identifies certain factors that could cause the company's actual results to differ materially from those projected in the forward looking statements made during this call.
The company does not undertake to update any forward looking statements because of any new information or future events or developments.
The 10-K as well as the company's other SEC filings are available on the company's website within its Investor Relations section.
During the call non-GAAP financial measures may be used to provide information pertinent to ongoing business performance tables reconciling. These measures to most comparable GAAP measures are available in the company's press release issued earlier. This morning on the biotech Me Corporation website at Www Dot bio dash technique dotcom.
I will now turn the call over to Chuck.
Thanks, Dave and good morning, everyone. Thank you for joining us for our third quarter conference call. The biotech team once again delivered outstanding results across segments and geographies with 17% organic growth continuing the momentum from the first half of fiscal 2022 into our third quarter demand from our Biopharma end market remained strong, particularly in cell and gene.
Therapy, where our workflow solutions and GMP proteins continue their fantastic growth trajectory.
Other notable growth drivers in the corner quarter included our biologics instruments as well as our best in class portfolio of research reagents and assays.
Additionally, our prostate cancer test extra Dx prostate had a record volume quarter in the Urologist office has continued the reopening process and we gain increased mindshare on the benefits of this novel diagnostic offerings.
Once again this performance was delivered with a focus on profitability, leading to a 130 basis points sequential increase in our adjusted operating margin of 39, 6%.
On the human capital front biotech we received two important awards during the third quarter.
First biotech name was selected as one of 500 mid sized companies on the Forbes 2022 list of America's Best employers. Additionally, we were included on the Forbes 2022 list of best employers for diversity.
Awards are a testament to the epic culture and workplace, we built a biotech me and I am proud of the team for these achievements.
Awards and recognition like these as well as targeted employee recruitment and retention strategies are fortifying our efforts to build the team necessary to support our future growth plans.
I am pleased report that we filled several key positions in the company during the quarter.
Including key business technical operational and commercial roles, we are still behind our original hiring plan for the year, but I am encouraged with the progress we made in the quarter.
Given the state of the global supply chain, let me briefly discuss our operations.
Once again the team did an incredible job of effectively managing our supply chain I am pleased report that we have had not had any supply chain related issues that impact our ability to fulfill our customer orders.
Also we continue to leverage our strategic pricing model across your portfolio to come back to inflationary pressures on the business.
As you can see from our margin performance in the quarter. These strategies are bearing fruit and we are leveraging our value proposition to offset rising labor and other costs in the business.
Now, let's discuss specifics around our terrific performance this quarter, starting with our geographies and end markets.
China continued with its banner year delivering over 30% organic growth in the quarter. This is just tremendous execution by our China commercial team, especially considering the COVID-19 related lockdowns that took hold late in the quarter in Shanghai.
As these lockdowns are still currently being enforced it is difficult to predict what the temporary impact will be for Q4. The impact of these lockdowns to date are primarily on our recurring research reagent business is dependent on research as being at the bench to run experiments in.
In the end, our China team will persevere just as they did in the early days of the pandemic two years ago, when they outperformed all of their peers and there will likely be a spike in demand when the lockdowns are over and researchers are trying to catch up on their projects. It is also important to mention that we have minimal supply chain and manufacturing exposure in China. So we anticipate.
Any impacts on the shutdowns to be isolated to this geography.
Meanwhile, our growth across the rest of the growth continues to be strong we experienced robust growth in the U S where our business increased in the high teens as well as in Europe , where we experienced upper single digit organic growth.
From an end market perspective global sales to our Biopharma customers remains very strong increasing nearly 20% for the quarter. Meanwhile, academia markets started to improve growing mid single digit is the latest COVID-19 pandemic ways started to wane and there was more clarity on NIH funding with the federal budget in place now.
Now, let's discuss our growth platforms, starting with the protein Sciences segment, where we grew 16% organically in the quarter.
During the quarter, we continued to further our cell and gene therapy strategy as our portfolio of proteomics reagents technologies and analytical tools continued to deliver the cost effective solutions needed to push these therapies forward during the quarter. We increased the number of commercially available GMP proteins manufactured in our state of the art GMP protein manufacturing facility, adding two high quality.
But a lot to lot consistent GMP proteins with the scale and capacity to meet current and anticipated demand I.
I would also like to highlight the strong performance of our cell culture portfolio, particularly from our <unk> line of basement membrane extract b any matrix products, which act as scaffolds for the growth of Organised cell structures induced pluripotent stem cell expansion and other two D and three D cell culture applications, all in our portfolio of cell and gene therapy workflow solutions.
Increased over 40% in the quarter with both GMP proteins and cell culture, specifically growing well ahead of this rate.
Once again demand from our cell and gene therapy customers created a halo effect across our portfolio driving incremental demand of our proteomics analytical tools and spatial biology solutions.
We are incredibly well positioned to benefit across our portfolio as research continues in this area and the rich funnel of these next generation therapies progress through the regulatory approval process.
Next I want to provide an update on Wilson Wolf.
As a reminder, Wilson Wolf is the manufacturer of the <unk> line of single use devices, which are quickly becoming the industry standard for a fast easy and cost effective cell therapy scaling solution.
In our second fiscal quarter 2022, we entered into an agreement with Wilson Wolf, where biotech and you can make a 20% ownership investment followed by full acquisition of the company upon achievement of certain milestones.
I'm very pleased to report that Wilson Wolf made continued progress in achieving that the trailing 12 months $92 million revenue or $55 million EBITDA milestone, which would trigger our initial 20% investment.
Wilson Wolf exited the quarter at a 72 million dollar revenue run rate as they continued to execute on their growth plan and approach this important milestone.
Now, let's discuss our core research use only or are you all proteomics reagents, including our industry, leading portfolio of <unk> proteins and antibodies here. Our growth was also fantastic with these reagents growing at 20% in the quarter researchers continue to rely on our catalog of over 6000, R&D systems branded proteins for the highest quality bioactive and lots of <unk>.
Consistent proteins on the market.
Our R&D systems and Novus brand antibodies also continue to deliver the reliable and consistent performance needed by researchers globally and are increasingly being selected as a content to enable the emerging class of next generation proteomics technologies.
Moving on to our proteomics analytical tools, which includes our simple western simple plex and biologic instruments as well as our leading portfolio of immunoassay solutions, our protein simple brand instruments and consumables increased mid teens in the quarter. This growth is particularly impressive considering the prior year comparison, where protein simple increased over 50%.
Once again performance of our biologic instrument, namely Maurice led the way increasing over 30% for the sixth consecutive quarter of.
<unk> is easy to use cartridge based format simplifies protein characterization and charge analysis delivering the ideal tool for our biopharma customers.
Recent results reflect ongoing traction within Crow C. D M O as well as cell and gene therapy and markets. We believe we are taking share not only from competing systems that also converting accounts from high performance liquid chromatography, or HPLC or Maurice offers comparatively higher quality data as well as the labor and time savings.
Our simple western portfolio, our fully automated western blot solutions continues to penetrate the large manual western blot market opportunity as the reproduced civilian and time savings value proposition continues to resonate within our end markets. We are also seeing building interest in the platform for applications that go beyond traditional western blotting, including cell and gene therapy.
Protein degradation and even the support a dose response curve as a reminder, we introduced the stellar kits for are just simple western platform in January these kits enable the detection of low abundance proteins, while multiplexing multiple analytes within the same detection lane.
In the first partial quarter lines since launch stellar detection kits surpassed legacy fluorescent detection kits and contributed to a record quarter for simple western consumables.
We continue to develop new cell and gene therapy applications for the simple plex or Ela multiplexing Immunoassay system. For example, biotech me and Cigna technology as a part of <unk> Life Sciences recently announced the launch of the simple Plex Heck to 93, HCP three J assay for automated process impurity testing on the Ella immunoassay platform pure.
Vacation of viral particles to minimize wholesale protein contaminants is a crucial part of the <unk> production workflow and cell and gene therapy applications. The L. Assay development roadmap remains very full with additional neurological biomarker cell and gene therapy, bio processing and immuno oncology assays in the pipeline.
Later, the untapped clinical opportunity onto this rich has a pipeline and we believe <unk> remains in the early innings of reaching its potential.
Now, let's discuss the diagnostics and genomics segment, where organic growth increased 19% for the quarter.
Our spatial biology business branded ACD remains the largest spatial biology business globally is our highly sensitive biomarker identification technology with single cell detection resolution and quantification capabilities continues to enable the transition from discovery to translational research spatial biology increased upper single digits in the quarter as a soft academic market.
In a challenging year over year comp weighed on performance Encouragingly, we made progress fortifying, our north American commercial team with all of our <unk> sales territory now filled we augmented.
Our commercial efforts with a full slate of conferences, including a presentation at the U S and Canadian Catamenia of pathology or U S cap conference as well as the presentation of two posters at the American Association for cancer research or ACR meetings, and we have a full slate of upcoming conferences, including <unk> and a GBT.
With our sales territories largely occupied a growing presence on the conference circuit to build awareness and expectations for the academic market to improve following NIH budget clarity, we're expecting steady improvement in our spatial biology growth rates in the upcoming quarters.
Moving on to our molecular diagnostics division, let's start with the significant progress our exits on diagnostics business delivered in the quarter.
Exo Dx prostate or the <unk> test benefited from increasing traffic to the physician office for initial or follow up visits which in turn drove improving diagnostic testing volumes, including PSA test, which is a prerequisite for RV test.
This improving physician office environment, combined with our digital and traditional marketing initiatives drove over 50% year over year for extra Dx prostate test volume growth as testing levels represented a quarterly record.
We have several initiatives in place to build on this momentum, including renewal of our fight like Hell marketing campaign with Baseball Hall of Famer Cal Ripken Junior as a reminder, Cal Ripken Junior took the <unk> test and opted for a biopsy based on this result, enabling the discovery of his aggressive prostate cancer in its early stages.
Mr. <unk> will be an active component of our live presentations at the upcoming American Urology Association conference and our ongoing digital marketing initiatives.
During the quarter, we continued to published data supporting the value extra Dx prostate deliveries to men in their prostate cancer journey.
Publication in the World Journal of Urology demonstrated the utility of the Exo Dx prostate tests to address limitations related to prostate biopsy sampling error prostate biopsy bias as well as multifocal <unk> of the disease, where the study is suggesting that the test can be used in a despite decision for active surveillance of knee, enabling meant to avoid unnecessary radical prostatectomy.
Tech demand.
Separately, we announced an agreement with Thermo Fisher scientific to exclusively complete the development of and commercialize the extra true kidney transplant rejection assay <unk> is a noninvasive multi gene urine based liquid biopsy assay that provides critical allografts information to assess clinical decision, making in managing kidney transplant patients and <unk>.
<unk> care for these patients.
Financial terms of the agreement were not disclosed.
But include payments for achieving various milestones as well as an ongoing royalty the first milestone payment related to a successful technology transfer to thermo Fisher scientific was achieved in the quarter.
The legacy assured and portfolio of leading carrier screening in oncology diagnostic kits continue to gain market traction, including several evaluations of the recently launched <unk> FTR kit, enabling broad coverage of the gene variance linked to cystic fibrosis.
Additionally, we have positioned the business to increase its penetration of the largely untapped European markets, adding to and leveraging our commercial presence in this geography. In addition to the geographic expansion of <unk> pipeline remains full and is positioned for strong growth in the quarters and years to come.
Finally, our diagnostic reagents business continued its trend of steady growth in the quarter. The return of patients to the doctors office is sparking demand for hematology coagulation and clinical chemistry tests.
Which is driving demand for our clinical controls and reagents, improving patient office visit trends, a full pipeline and opportunities to additional share gains within our OEM partners set the stage for sustainable growth in our diagnostic reagents business going forward.
In conclusion, we are incredibly well positioned for the proteomics Revolution that is in the initial stages of unfolding with high demand for our content Rich research reagents and highly sensitive yet is simple to use analytical tool that move our customers discoveries forward.
<unk> therapy initiatives continue to resonate with our biopharma customers with increasing demand for our GMP proteins cell culture media products translating into growth across our entire portfolio.
Given Wilson Wolf current growth trajectory the pathway to our initial 20% investment stake and eventual acquisition is accelerating.
Our diagnostic strategy is gaining momentum as testing volumes continued to improve with a proven ability to find partners that can help drive our next disruptive exome based test forward I am proud of the team's Q3 accomplishments and look forward to continued execution against our long term strategic goals with that I will hand over to Jim.
Thanks, Chuck starting with the overall third quarter financial performance adjusted EPS was a record $2 14 versus $1 81 year ago, an increase of 19% over last year.
Foreign exchange negatively impacted EPS by <unk> <unk>.
GAAP EPS for the quarter was $1 48 compared to $1 12 in the prior year.
Q3 revenue was $290 4 million, an increase of 19% year over year on a reported basis and 17% on an organic basis acquisitions at a favorable 3% year over year impact and foreign exchange translation had an unfavorable impact of 1% to revenue growth.
From a geographic perspective, China, let all geographies growing over 30% followed by the U S increasing in the upper teens and EMEA, increasing in the upper single digits for the quarter. The rest of the world grew in the mid single digits.
By end market Biopharma remained very strong growing nearly 20%, while academia increased mid single digits year over year.
Moving on to the details of the P&L total company adjusted gross margin was 73, 2% in the quarter compared to 73% in the prior year. The increase was primarily driven by favorable business mix, partially offset by the impact of foreign exchange.
Adjusted SG&A in Q3 was 26, 1% of revenue compared to 25, 6% in the prior year, while R&D expense in Q3 was seven 5% of revenue compared to 7.0% in the prior year.
The increase in SG&A and R&D was due to the acquisition of a surge in in the fourth quarter of last year as well as investments made to support our long term strategic growth.
The resulting adjusted operating margin for Q3 was 39, 6% a decrease of 80 basis points from the prior year period, but an increase of 130 basis points over Q2 <unk>.
Excluding the impact of the surge in acquisition made last April and the impact of foreign exchange adjusted operating margin was in line with the prior year.
Looking at our numbers below operating income net interest expense in Q3 was $2 2 million decreasing $2 million compared to the prior year period. The decrease was due to a continued reduction of our bank debt or bank debt in the balance sheet as of the end of Q3 stood at $259 million.
Other adjusted net operating expense was $1 1 million for the quarter compared to $4 3 million expense for the prior year, primarily reflecting the foreign exchange impact related to our cash pooling arrangements.
For GAAP reporting other nonoperating income includes unrealized losses from our investment in chemo centric.
Moving further down the P&L, our adjusted effective tax rate in Q3 was 21, 2%.
Turning to cash flow and return of capital $73 1 million of cash was generated from operations in the quarter and our net investment in capital expenditures was $15 1 million.
Also during Q3, we returned capital to shareholders by way of $60 8 million in stock buybacks and $12 5 million in dividends. We finished the quarter with 41 million average diluted shares outstanding.
Our balance sheet finished Q3, and a very strong position with $231 2 million in cash and short term available for sale investments keeping our net debt position negligible.
Next I'll discuss the performance of our reporting segments, starting with the protein Sciences segment Q3 reported sales were $213 2 million with reported revenue increasing 15% organic growth with segment was 16% with foreign exchange, having an unfavorable impact of 1%.
Within this segment the growth was very broad based and nearly all reagent assay and instrument platforms as Chuck mentioned in cell and gene therapy increased over 40% or are you. All proteomics research reagents grew nearly 20% and our protein simple Brennan instruments and consumables increased in the mid teens on very tough comps.
Operating margin for the protein Sciences segment was 45, 4% a decrease of 250 basis points year over year with favorable volume leverage more than offset by strategic investments to support future growth and to a lesser extent the impact of foreign exchange.
Turning to the diagnostics and genomics segment Q3 reported sales were $77 7 million with reported revenue increasing 34% organic growth for this segment was 19% and the surgeon acquisition from last year contributed 15% of growth.
Within this segment the diagnostics reagents business increased mid single digits and the ACD branded spatial biology portfolio delivered upper single digit growth in the quarter.
With increased clarity on the academic funding in our sales force. It is approaching fully staffed we anticipate improved growth rates in our spatial biology segment going forward.
For <unk> diagnostics revenue growth accelerated as prostate cancer test counts as prostate cancer test counts increased over 50% compared to the prior year period, representing a quarterly test volume record.
We are encouraged with the volume trend and anticipate continued improvement as our marketing strategy and value proposition resonates with physicians and patients.
As Chuck mentioned, we earned an initial milestone payment related to the extra true kidney rejection test track.
Test technology transfer to Thermo Fisher scientific of which the financial details of our agreement were not disclosed.
Moving onto the diagnostics and genomics segment operating margin at 25%, 25.0%. The segment's operating margin increased 710 basis points compared to the prior year.
The increase reflects the favorable impact of volume leverage and product mix, including the milestone payment for extra true.
In summary, the growth momentum across our business remains consistently strong.
Using fiscal year 19, as a pre COVID-19 baseline the company's revenue growth CAGR, excluding the impact of acquisitions FX and milestone payments has been in the low to mid teens every quarter for the past seven.
As Chuck stated in his closing comments, we believe that we are still in the early stages. The initial stages of our proteomics Revolution and is ahead of us in the life Sciences industry.
And our best in class research tools and cell and gene therapy enablers are positioned to be leaders in this revolution for years to come.
They are under this and emerging diagnostics and genomics portfolio that remains in the early stages of realizing its true potential and we are incredibly well positioned to deliver long term strategic growth objectives.
That concludes my prepared comments and with that I'll turn the call back over to Maria to open the line for questions.
Thank you at this time, we'll be conducting a question and answer session. We are asking that all analysts to please limit yourself to one question and one follow up if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys one.
One moment, please while I pull for questions.
Our first question comes from Dan Arias with Stifel. Please proceed with your question.
Good morning, guys. Thanks for the questions. Chuck can you just talk a little bit more about the scale up and GMP proteins, whereas demand highest how is it evolving and then what you need to do.
On year end at the end of the year into the end of the year and then to the outlook there you've talked pretty consistently about that piece of the business being on a trajectory where revenues could double.
Few years Youre tracking ahead of the initial revenue expectations. There. So does the outlook for the doubling still hold on what it what looks like it'll be just a higher base for 2022.
Sure well, we launched two new proteins, which is totally too, but we only had two or three before that so it's a big percentage increase these of course are.
It's an issue it's a short catalog for doing proteins for GMP as you know.
We have 40 ish or so on a market total and most most companies our comerica had less than a dozen so very different argue all the difference of course is we can make them and you know at the Gram level, even so lots and lots of at a very very high quality stack state and very lot to lot consistent.
The growth rate.
While under 100% ish. This quarter were <unk> 40 for the category and were just under 100% for proteins is where we've been above 100 every quarter before we will end the year over 100% probably is the way it looks and are right around 100 at the very least I think that's pretty safe and we told you would be about that and it should be about that all year and next year should be the same again.
From that point on we hope to accelerate as we get into more and more down the road with more clinical's.
We get more and more a pull through with <unk> with the Wilson Wolf, who has a lot more customers than we do and have been involved in a lot more clinical.
And as we work towards what we call the Holy Grail here is when we can we'll be doing media at some point here and along with it.
Very very.
High quality version of our proteins that can be <unk>.
Applied within GE Rex to the customer in a sterile environment. So consider at all like yourself and closed a closed loop, which should be the only one in the market that can do that we think.
That's a year or so away, but that's what we're after and that should help accelerate even more growth.
On top of all that this is all cell and gene therapy, but we're also seeing explosive growth for our GMP proteins and regenerative medicine as well. So we've got a lot of customers that are scaling up around regenerative.
That's equally exciting to us and some other large area, we don't talk much about but it's growing so much now and we've got we've got so much more activity, we're probably going to need to start talking about it.
So we've got additional growth levers and it might help explain why we have been well north of 100% growth all year and for the last couple of years to be honest.
Sure.
That addresses most you said.
Yes. It does thank you and then maybe just on ACD. It looks like there was some sequential deceleration in that business from Q2 levels and you're averaging something and I guess like the high singles for the year and that's down from at least in my model like 30% plus.
In 2021, so it was the hiring that you did really the key there and once now that you have the sales reps in and presumably functional in the market what do you think that.
The run rate growth can be like going forward there.
While the other two.
Two components around from head count of course are the comp Super high comp from last year.
As well as the academic reopening so everything's coming together at once along with a full sales force again, we're only we're only down one.
Even ones important this is not a huge sales force.
We're back to boots say full strength and it will be it will come on strong now we should be back to.
Our double digit or higher here I think this quarter, we were pretty close to double digits this quarter anyway, but we're getting there.
It's really key that would it then we got funding kind of out there and open now for academia that comeback is going to happen the comps get much easier going forward. That's also a given.
And while we are pretty strong the U S. It was softer in Europe , and Europe is kind of lumpy back and Fortunately, we see that picking up as well. We're also positioning some more support in some more help in Europe to help them and.
All in all bodes well for we still see this as a 15% to 20% growth platform going forward and we're in the early innings. So.
We have a new team to high level new team so all the way to the.
The VP running the division.
Our head of.
Of R&D is fairly new and they are just hitting their stride now already so that's also going to help.
Our next question comes from Puneet <unk> with SBB Securities. Please proceed with your question.
Yes, Hi, Chuck Thanks for taking the question and congrats on the solid printing <unk>.
First one.
Maybe for you and Jim both.
When we look at the top line here, you're obviously seeing incredible growth here in the U S.
So some diagnostics with the recovery protein segments continues to do well you mentioned are you a protein and cell and gene therapy more easy simple plex and I mean, just across the board portfolio seems to be working I mean, I hear you on the comments, but just to help us understand how should we be thinking about the sort of the top line as we go into fiscal year 2023.
Is mid teens is still the right way to sort of think about this given the acceleration here and potential pick up from cell and gene therapy as well.
Yeah, all year as you know, we don't give quarterly guidance, we give our annual targets and we've given targets all year that we should be in the mid teens for the year and I think we're close enough for you guys can see we're going to be in that range for sure.
The real question is can it be 17 to 19 I think we have to wait in a couple of things in our China might have.
Minor impact in Q4 could care Q4, but it wouldn't hurt anymore after that.
Going to next year.
It's mid teens and up and I think.
It comes off first a strong layer momentum off our agents I mean, we're at 20% growth in our proteins and antibodies were taking share everywhere.
We're in double digit growth in our assays were at over 30% growth in our aluminum line. We're number two in luminaire personnel, who would ever thought that would've happened.
So we're not going out of the park on there on the core and as long as that core stays.
With the momentum, we're seeing which we do.
Then, it's a mid teens and up and then the accelerated from there of course is how do these these the smaller segments. How do this is a scale and they've got the higher growth rates that will impact. The overall portfolio. So number one again cell and gene therapy on an island on the $70 million run rate growing at.
30, 40% next year is a category thats going to start having a bigger impact.
<unk> is getting really interesting now so we had a record quarter on tests.
We're already seeing a big impact with the Cal Ripken campaign, we didn't really get a fair shake and that being we went into that rate at that rate in the mouth of the pandemic.
And it's been amazing the interest I can't wait to get the au myself and meet calendar going to do some things together there and.
We're expecting a big year going forward.
And in <unk>, we are working on the next thing now because we've got a great partner. We worked hard this partner is actually blown our socks off thermo is doing a great job. They are ahead of our schedule pushing us they've got the tech transfer done quicker than we thought they would they paid us.
It was it was it was a good number we didn't lay it out we've got more deals to do so we do what we didn't want to talk about those numbers, but we had solid we had solid results without the extra payment to be honest.
Anyway.
So I think thats the future I think it's all about staying with the momentum in our core.
Solid execution, which we're doing.
What's also helping this whole baseline momentum in our core is our digital.
Backbone and it just keeps getting better and better we have got our one biotech needs.
Site up and running we had.
Something like 80, 90% attraction rate to that website as we start migrating a lot of smaller sites into the ones, where we can have a one in one stop shopping experience for customers, which we've been asking for years.
That's all coming together great.
We are doing a great job measuring our our customers online and helping them with their purchasing decisions in real time and that's working.
Our adwords spend continues to grow and continues to give us a fabulous payback so.
So you're already all parts of running the company along with the innovation side are really really doing well as you know we have a tech council that we've we put all these top scientists of all our divisions together are virtually every month and working on new platforms together and there is an incredible pipeline.
You know that we do have an extensive prioritization process here. We just concluded that process takes us three or four months. It helps us roll into our budget plan for next year.
And we analyzed 400 different work streams in this company of which we knew figured out where to draw the line and we've never had a bigger pipeline of new to the world innovation in this past year things are we're going now we're reaching the size of a company, where we're really getting a good a good collaborate collaborative impact across the company. So we're.
A pretty we're pretty jazzed here.
That's super helpful. Chuck.
Jim on the op margin, obviously really strong in the quarter.
<unk>.
Almost 40%.
Just wanted to understand in terms of near term, China hiring and other initiatives sort of ongoing sort of how should we think about the sustainability of this op margin.
And just maybe take us through the puts and takes there in the near term and sort of if you could provide anything on.
Slide 23, and how should we think about op margin sort of longer term I. Appreciate it. Thank you.
Yes, so on the real narrowed in the near term I mean, one that I don't think we're coming off of.
Our our guidance and target that we started the year with which is that we would end the year at the same roughly the same adjusted operating margin that we ended fiscal year 'twenty. One we are still on track to do that now I understand that that would mean from Q3, a sequential decline in operating margin.
But however, we are making improvements vast improvements in our hiring which we talked about.
And the extra true.
That piece of it.
They have a margin lift that won't reoccur next quarter. So we're basically right on track to do as we said we would do in terms of how we expect to finish this year from a margin perspective.
FX will be a bit more of a headwind in Q4 than even it was in Q3, but I think we'll overcome that to still hit our year over year.
Roughly flat operating margin for Q4.
Looking ahead, obviously, you wont give more clarity next quarter as we finish up our operating plans for next year, but yeah. It's the same message we've been saying all along which is that we expect to be there to be incremental slight but incremental margin improvement over the course of the next four or five years of our strategic plan and we expect that to start next year.
To continue next year.
Our next question is from Jacob Johnson with Stephens. Please proceed with your question.
Hey, good morning, Congrats on a nice quarter, maybe just Chuck I think you've touched on a little bit, but just flush out the point just on the academic end market.
Sounds like it picked up a little bit this quarter.
And ni H funding finalized kind of hopeful it improves from here and maybe I'm answering the question for you.
What's your outlook for that end market as we think about the next couple of quarters.
Yeah.
Well.
The clarity around NIH funding didn't happen quite in time to really boost U S. A whole lot and we were ending up.
And low single digits Europe was in teens actually so the net net was mid overall, so that's why I say looking forward, we're going to see the bigger lift and in the U S going forward this quarter and if Europe stays in the mid teens, we'd be we'd be thrilled so and I think it's a good story going for it's finally starting to break loose.
And again the momentum is there overall.
We've got great.
Platforms that are that have a lot of interest from academia. So that's just.
That's always a fundamentally you've got to have you've got to have new to the world stuff that.
It gets them excited to do it to do.
That's a new academic frontier, which we continually do in this company. So we have now we have no doubt we'll be fine.
Yes.
Okay, and then maybe as a follow up I appreciate the details.
On the Wilson Wolf performance in the quarter.
If my math right it sounds like if they keep going the way, they're going the kind of phase 120% ownership, maybe that can happen in the next year can you just talk about the timing of owning a piece of that and then owning the entire company.
Yes, the original plan was to be kind of.
Really Q3 next year, but we're ahead of schedule Theres, a theres a theres a possibly it could be at this calendar year I mean, they are on a $72 million run rate now and they are literally getting record breaking sales days like every week. So it's hard to say.
Two of them trying to pin down John Wilson, when it will be and.
It's hard to pin down, but there is nothing but good news here and they are moving towards.
Putting together strong financial execution. So we're seeing all their numbers were helping out operationally so.
Really the integrations kind of already occurred to be honest tender. The teams have worked well together for a couple of years from now with scale ready anyway. So it's so we have a good viewpoint and now it's coming in.
I don't think it'll be a year I think it will be under a year from now.
Our next question comes from Alex Nowak with Craig Hallum. Please proceed with your question Greg.
Greg Good morning, everyone, and we talked a little bit about this on the diagnostics business, but I'd say diagnostics had a pretty big step up in growth and profit.
Consistent with my expectations.
<unk> be a bit more granular on what drove good benefit ACD sounds good but consistent excess of diagnostics is doing very well, but the base is smaller there so and there are quite a bit of one time items from thermo Fisher, if I heard you correctly. So just.
What's a good revenue run rate here and a good operating margin to assume going forward.
Yes, we arent, we arent breaking out the revenue of that division at highly competitive we've got two or three competitors I'm sure even listening right now so we don't get into that but we have talked about the test rates the 50% up is real.
It is still largely we're being paid via Medicare we're still working on the private payer, but we're getting we're getting better.
We're very close to going from cash to accrual. That's also going to help probably next quarter as our goal maybe but were fee.
But you know.
We're getting there and we know we have a whole new team from surgeon, taking the helm, there, especially commercially it's really worked wonders.
We are seeing record test days again, this area too or pre pandemic every week so.
Got it understood and then Chuck can you just it sounds like in the prepared remarks, you mentioned inflation, but also the ability to push through pricing. So did I hear you correctly that you are in fact, pushing some price increases through on the court kits and reagents business and this is how much headroom do you have there.
Worried about competition.
Well net net.
Always been big on price, it's just in my DNA and we've put in place processes and structure here years ago and.
One after kind of an annual one 1% net year kind of target and we're well above that this year.
And <unk>.
Had to be focused on obviously costs are going up but we've got wage inflation to cover.
And as Jim pointed out in his numbers you know, we more than covered but we need to cover with price to give us a strong margins.
I don't think there is an upside beyond the steady state we're at right now but.
If inflation continues to happen well then we will continue to raise prices like everybody else.
We've also had allowed us to have efficiencies and productivity as well it just can't be we can't pass everything on but there has been a good mix and we've been we've.
We've been we've been doing really well with it.
Well north of the 1%, probably probably two ish or better so.
I appreciate the update thanks.
Okay.
Our next question comes from Catherine Schulte with Baird. Please proceed with your question.
Hey, guys congrats on the quarter and thanks for the questions I guess first on China any way to help us think about the magnitude of that impact.
With Lockdowns for your fiscal fourth quarter, what are you seeing now from customers and how do you expect that to unfold over the next couple of months.
Yeah.
We've had a few meetings with our team obviously and they are actually very bullish about this quarter yet.
You know they were the same way when we look at the pandemic remember China was first to kind of stare into the jaws of that and we're all very concerned and then they came roaring back the next quarter beyond any of our belief and we were we were.
We outpaced all of our peers I believe back then.
We expect the same there there'll be they may be shut down right now and a lot of sites, but the demand will be pent up it doesn't affect anything but run rate reached.
Reagents instruments and stuff and there's no issue with the orders are there. The bookings are there we're stacking up bookings right now and we've got a lot of orders to fulfill once they unlock I know theres petitions to the government to be in the first wave of companies that can come out of Lockdown I know were on that list along with many of our peers in our industry because we're all.
Consider highly valuable to the economy, there and to the into binding by the government.
They are literally can't do research there if they don't have R&D systems based proteins. So we'll be we'll be right ready to go and.
I can't imagine us being more than a one quarter blip and I can't imagine it being more than you know, it's hard even say what the material impact will be maybe nothing or maybe a couple of points. We don't know enough yet know if the lockdown continues and then go with another quarter or two and then I think we will have to have more discussion, but right now we're not seeing any of that no. One is predicting any of that the government there seems to be working very hard.
Trying to unlock even sections of the city institution by institution Unity, if it comes to that so they really are.
Are engaged with.
The private and public sectors together, there it appears to us but from our team's point of view.
So I think everyone's going to have an impact but in terms of looking at who has the least amount of impact of that will be near the top of that list like usual.
Okay got it and then on the Thermo exits your partnership.
They are doing from a development standpoint for that test and you have a sense for when we could see Medicare coverage.
Yeah, well they will take us through their Mac they'll finish and do another study we have one out there we've got a great paper, we get data, but they'll they'll want to beef it up with another another outcome dataset and they'll they'll use that to try and get there their approval through with with their with their Mac.
We have kind of a rough that that obviously there we've got you've got a precedent out there in their jurisdiction already so it can be a lot easier process to get qualified and it would be for us going through Ngls. So we think it shaves a year off commercialization, if we were going to do it ourselves.
Along with that they've got it you know they've got a juggernaut of a business unit.
With that that division of Thermo Fisher with channel and sales force and technical team and our regulatory army everybody. They're all raring to go in there like I said they are pushing us. So this is fantastic.
I think it's roughly a year from now maybe for guessing I don't know.
They'll go they'll go as fast as they can in whatever they do it will beat us by along I'm still long ways I'm sure and allows us to you know.
Work on the next one so we're already working on a couple more in.
Whether we partner with them or.
Somebody else or do it ourselves remains to be seen I know that thermo has two other ordinary injection tests' they'd like us to work on for them. So the pipeline is growing we have more projects than we have people to work on.
Sure.
Okay.
Our next question comes from Patrick Donnelly with Citi. Please proceed with your question.
Hey, Thanks for taking my questions.
Chuck maybe just on Europe , you put up another kind of nice high single digit there any.
Any change in demand from what's happening there on the geopolitical side any shift in funding or anything that youre seeing on the academic side, just wondering kind of what the outlook is on the Europe piece.
No. It's been Europe's Europe , you get you get one bad year for be two good ones no matter what goes on in and is country by country. It sets to Europe as well.
I think on the shift coming out of Brexit, we're working on opening a another warehouse site and export site out of out of Ireland, which is going to help us with the mainland.
We have pushed employees out of the UK because of Brexit back into their home countries. So we have now operating offices and in Germany, Italy, and France, and we're beefing up all those sites.
We're probably the strongest out of Italy, because as you know we did an acquisition here with our largest distributor in Europe at the time, a few years ago.
The leadership is solid.
Bringing in more.
We have probably tripled in size since I've been here and get into a bit of a tipping point there in general.
Funding is pretty stable execution, I think is the issue for us, especially in things like spatial biology and.
No issue I don't think on our core reagents and assays I think is just steady as she goes thats. Another reason we've been so strong overall as a company Europe has been very stable there.
I'd say instrumentation, we probably are a little behind there compare to the U S and.
And Theres, probably some upside there as you know that selling proposition is highly technical and.
There is one place we're beefing up because you have to have Fas is out in the field along with the with your sales reps in and work it that way longer sales cycle to of course and.
But that's kind of where we're focused on it and what we're trying to improve the situation. It's been double digit. This year has been more mid to high single digits. I think the next year hopefully get back to good solid double digit we'll see it'll it'll come down to execution more than it is the markets I think the markets are there.
Okay. That's helpful.
And maybe on the capital allocation side, obviously, we will keep an eye on but can you just talk about general capacity outside of that appetite pipeline looks like for you guys.
Priorities on that front.
Well you know.
Hang tight we're always working deals.
And they range from small to mid size, we don't really have any monstrous things going on I think the whole world is kind of.
Waiting on a new valuation level before things are going to process. The IP things that are helping with the IPO front is kind of dead. So theres, probably more interest at the private level and smaller company founders trying to exit. So so we're hopeful we're a we're still looking at the same kinds of things things in cell and gene therapy cell.
Sorting other areas like that.
There are four or five categories. We're very interested in we have Asia as Jim pointed out we're about net debt zero. So we've got capacity.
And then some we have an LLC, that's still a pretty rich for us to go into should we want to and.
It comes down to finding the targets and getting them at the right prices. So we have a decent ROIC with them so but it has not.
It's as good as it is not it has not gotten any worse I mean, our pipelines as full as ever and we're pretty active right now so we'll see.
Our next question is Paul Knight from Keybanc. Please proceed with your question.
Chuck how are you.
You get pricing put through in Q1 or do we see more pricing hit in the subsequent quarters.
Well like everybody you know you've got you've got pricing on a catalog of RMB you can do what you want and then you've got a lot of OEM business and supply agreements you've got hit certain calendar datacenters, usually usually in <unk> and.
An annual event, we hit a lot of those in January one and took advantage of the best we could both be able to do some more come July one and in the meantime on the run rate side of our business, we were always pricing and repricing as we go as you know we've got a lot of.
A lot of products were the.
Only ones in the world and so we can do we want and so we have a little more flexibility there than some of the some of the areas, where we're more of a commodity where we have to we have to compete and we have to fight because we have to be a full catalog. So.
It's always a complicated balanced portfolio kind of thing and like I said in the past, we've kind of shot for a 1% net kind of year on year and this year. It's it's probably double that we're shooting for and so.
So far so good we're doing the team is doing pretty well.
Got to pay for all these mid year wage increases and higher annual merit rates.
Future, that's coming our way.
Areas like <unk> and others are.
We're not talking about 10% to 20% pricing wage increases it can be as much as 50. So it's an interesting time for the war on talent and so on.
Proud of the team and the finance team in particular and the marketing teams they've really done well at this and you can see by our by our results we're covering it and then some.
And then Chuck a common discussion right now in the market is of course of all early stage biotechnology funding DSC that or do you see that rolling out as a risk.
In the future here.
Yeah.
We get asked that a lot in.
Quite frankly, we're baffled.
See if anything it's a strong area for us so.
No issue.
I don't know where it's coming from.
Ladies and gentlemen, we have reached the end of the question and answer session and I would now like to turn the call back over to Chuck <unk> for closing remarks.
Well.
Thanks, everybody participating it was a great quarter to quarter different role for us at 17% we have.
A good quarter, yet to come here and finishing off an outstanding year, and we think we're on track with our strategic plan.
Look forward to telling you more about that next quarter.
Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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