Q2 2023 Bio-Techne Corp Earnings Call
Good morning, and welcome to the Biotech Me earnings conference call for the second quarter of fiscal year 2023 at this time all participants have been placed in a 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 Bio Tech, who is vice President Investor Relations.
Good morning, and thank you for joining us on the call with me. This morning are Chuck comment 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 year 2022 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.
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 relevant 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 knee Corporation website at Www Dot bio dash technique dotcom.
Separately, we will be presenting at the Citi Cowen Barclays and Keybanc healthcare conferences in March we look forward to connecting with many of you at these upcoming conferences I will now turn the call over to Chuck.
Thanks, Dave and good morning, everyone. Thank you for joining us for our second quarter Conference call.
In our second quarter of fiscal 'twenty, three we delivered 4% organic growth on top of a challenging year on year comp, where we grew 17% in Q2 of last year, one year ago. The life Sciences industry was in the midst of an incredibly strong biotech funding environment spurred by Covid related vaccine and therapeutic development that drove high equity valuations for smaller.
Firms, it's been well documented that this funding environment has slowed in recent quarters, returning to pre COVID-19 levels in.
In Q2, we did experience a divergence in the ordering patterns from our biotech end market versus our larger pharma customer base, which is still very strong.
This divergence we're seeing in certain large bulk reagent orders, which did not repeat this year and then there's a delay of instrument orders.
As conservation of cash becomes more of a priority for our biotech customers.
Encouragingly the underlying research activities accelerated during the past strong funding environment continues which is evident in the strength of our Biopharma research reagent run rate business continued cell and gene therapy growth and strong utilization trends within our proteomics analytical tools.
Also the order funnel for our protein analytical instruments remains full and we continue to experience record uptake of our excellent.
Dx prostate test.
I'll provide additional details on each of these growth drivers later on the call.
Before we discuss results I'd first like to welcome Shane bone them to the leadership team of our new Senior Vice President General Counsel.
March 3rd Shane will be transitioning into this new role from Brenda Furlough, who has served as executive Vice President and General counsel for the past nine years. The contributions Brenda has made to the company over the last nine years are immeasurable, including establishing biotech these legal and compliance functions and leading our corporate sustainability initiatives I always bring to the very big.
First in her retirement.
Now, let's get into the specifics of the quarter, starting with an overview of our performance by geography and end market.
In Europe , we drove mid single digit revenue growth in the quarter recovering nicely sequentially from the growth rates experienced in Q1 as a reminder, Europe grew in the mid teens last year on the wave of stronger biotech funding.
We've seen more stability in European end markets as the year progresses and concern around high energy prices and severe recession have temporary.
The team is also nearly finished implementing our new Dublin warehouse to support in mainland Europe , and a new ERP system that has been implemented with minimal disruption to our operations.
North America is where we saw the biggest impact of lower biotech spend in Q2.
However, North America was still able to grow low single digits on top of a prior year comp that experienced greater than 30% growth in biopharma and over 20% growth overall, the multi year growth rates in North America are still double digit and in line with our long term goals.
The consumable run rate business and instrument order book also suggests that underlying research activity is still robust and this should become more evident as we passed the remainder of last fiscal year's high biotech hubs.
Moving on to China.
First acknowledge the tremendous dedication and resilience of our team there following multiple lockdown. Our team has continued to supply the Chinese research market with the proteomics research reagents analytical tools and spatial biology solutions to enable scientific discoveries in this geography.
Now following a change in Covid management strategy by the Chinese government code is spreading rapidly in the country, including within our China team, which is over 90% effected at one point.
Thankfully this does not appear to be a particularly virulent strain and are impacted team members are typically back to the office within five to 10 days.
Bite the disruption caused by the rapid spread of Covid our team in China was still able to produce mid single digit growth in Q2 <unk>.
After the waves of Covid subside in China, most likely in our fiscal Q4, we believe a full reopening of our end markets will accelerate faster compared to the governments. Prior zero Kobe strategy positioning biotech means for a sustainable return to our historic 20 plus percent growth rate in this region.
Given proven pent up demand in past shutdowns in 2020.
And the pending one seven trillion RMB government stimulus, we see a strong Q4 looking ahead.
Now, let's discuss our growth platforms, starting with our protein Sciences segment, where organic revenue increased 2% for the quarter on top of a strong comp from last year when the segment grew 19%.
During the quarter, we continued to gain traction with our portfolio of cell and gene therapy workflow solutions.
Quite a challenging year on year comp, where we grew our cell and gene therapy business over 80% organically in Q2 of last year and within that our GMP proteins over 185%, we still grew our cell and gene therapy portfolio over almost 20% in the quarter.
Specific to our GMP proteins business. The commercial team did an excellent job growing business with existing customers as well as adding additional accounts during the quarter, culminating in a record quarter for our GMP protein business.
The roadmap to adding additional GMP proteins to the menu produced in our state of the art St. Paul manufacturing facility remains on track with plans in place to almost double the number produced in this facility in the coming months, it's worth noting that GMP protein sales and driving cross selling activity throughout our portfolio as its growing list of customers are also frequently purchasing additional ita.
Including our U a media proteins and small molecules.
Speaking of small molecules are GMP small molecules remain key components in the regenerative medicine cell therapy field as they enable the reprogramming self renewal storage and differentiation processes that are key to these workflows.
Our leadership position in regenerative medicine workflow is driving substantial growth in our GMP small molecule business as well, especially cell culture media matrices and our portfolio of 19 GMP proteins that are focused in regenerative medicine, including 11 GMP proteins that are only available from biotech me.
The growth is so profound in our GMP small molecules that we are drastically and expanding our manufacturing capacity in Bristol UK.
Now, let's discuss our core portfolio of proteomics research reagents, including the <unk> proteins antibodies and small molecules that are key components to enabling biopharma and academic scientific discoveries.
<unk> or are you all regions grew in the low teens in Q2 of last year driven in part by a strong contribution from bulk reagent orders from biotech customers some of which did not repeat during the quarter.
We are very encouraged I think excluding these large orders the performance of our run rate research reagent business remains very healthy, especially in the U S.
We continue to expand our catalog of research reagents, which now includes over 6000 proteins 425000 antibody variations and a growing small molecule portfolio. For example, during the quarter, we expanded the small molecule portfolio with the launch of our micro brilliant in Florida for F&I is enabling the fluorescent labeling and tracking of.
Mitochondria in live in fixed self initial reception to the launch was very strong with the initial production lots of these die is selling out in the quarter. These dyes when used with our new RNA scope plus small RNA for co detection.
Extremely high resolution at a single cell level in a on a heart attack short base RNA.
Moving on to the performance of our protein protein simple branded analytical tools, where the team delivered low single digit growth in the quarter here, we faced a particularly strong year on year comp of nearly 30% in second quarter of prior year, driven by strong adoption among vaccine and monoclonal antibody therapeutic manufacturers for Maurice and the prior period the <unk>.
<unk> installed base growth, we delivered over the past few years is leading to a strong consumer growth as our portfolio about biologics fully automated western blot and multiplexing immunoassay solutions become fully engrained in our biopharma and academic customers processes.
We are very encouraged that the order funnel across all three of our instrument platforms remains very full including a record level for our Maurice biologics instrument, although the biotech funding environment has a lengthened the closing cycle.
Simple western let instrument growth as the system's ability to automate the cumbersome and time consuming western blot process with a sample in answer out solution continues to resonate with our Biopharma and academic research and markets simple western is turning out to be much more than an automated western blot replacement with the system's ability to identify and quantify proteins.
<unk> complex samples like lysate, leading to assure uses a quantitative immunoassay platform.
This expanded application for the system is driving usage and targeted protein degradation and drug tolerance studies intracellular signaling the applications and as an alternative to customer Liza development.
We are actively implementing marketing strategy is to educate the market on these additional applications.
On January 24th we officially launched our next generation Biologics platform Maurice Flex at the WC be a conference.
As a reminder, we are seeing tremendous adoption of the Maurice since its launch in 2016.
With the system's ability to provide protein purity charge an identity in five minutes in an easy to use cartridge based instrument driving robust demand for the platform.
But reflects expands on these capabilities, adding IC I F fractional nation capability instrument fractional ovation is a front end step in mass spectrometry, where the sample to be analyzed the separated into mixture components based on differences in their size charge or other characteristics.
Maurice Flex addresses the labor intensive and time consuming challenges of using legacy fractionation methods, including ion exchange chromatography.
This new application allows us to expand <unk> into a new $300 million market.
Now for an update on our simple plex branded multiplexing immunoassay system L. O L is ease of use sub picogram sensitivities smaller footprint and cost advantages.
Continue to draw increased attention from Biopharma and academic researchers as our install base of Ela systems continues to grow now nearing 1000 placements and utilization trends remain robust we opened a new state of the art product innovation and manufacturing facility to meet current and forecasted cartridge demand.
New facility adds laboratory manufacturing and clean room space and increases cartridge capacity to 500000 cartridges per year.
We also successfully completed the initial ISO $13 45 audit of our Wallingford, Connecticut facility as we prepare ela to make inroads into the large and nascent clinical diagnostics opportunities that exist for the platform.
ICL is possibly our largest gypsum platform someday no other tool works, so well across both biomarker discovery and diagnostics.
Rounding out our instrument platforms, let's now discuss now Marcel or single cell separation in dispensing platform recall that we closed them in MSL acquisition in July of 2022, and we are pleased with growing interest in this novel technology as well as the progress we have made integrating the team in the business.
During the quarter as single cell cloning workflow publication, using an MSL single cell isolation and dispensing platform was featured in nature protocols.
Study outlines a robust and scale a workflow that maximizes cell viability for cloning human pluripotent stem cells or <unk> using them ourselves or low pressure, microfluidic technology, which insurers gentle and rapid dispensing ourselves we.
We're in the early stages of realizing the potential and MSL platform and see a bright future for this technology, having shipped over 100 instruments to date.
Now, let's shift to the diagnostics and genomics segment, where we grew revenue by 7% organically in the quarter.
Let's start with a discussion of our molecular diagnostics business and the continued adoption of our exo Dx prostate cancer test during the quarter. The team delivered the fourth consecutive quarter of record test volume as the number of tests performed increased over 70% and revenue grew over 110% in the quarter. The combination of a strengthened marketing message to the urology community.
That emphasizes extra dx as a tool to identify not only the right patients for prostate biopsy, but also drive patient adherence to biopsy recommendations a four to five in inks and expanded commercial team as well as the favorable impact of our reconsidered local coverage decision LCD with our Medicare contractor has driven such.
<unk> momentum in the business.
We are seeing strong trends across the key performance indicators, we track for the extra Dx prostate tests, including the number of ordering doctors. The average number of tests ordered per doctor and the number of new doctors ordering which all set records in the quarter. We also hired a veteran reimbursement executive with a redesigned game plan to drive favorable coverage decisions within the private payer community.
With less than 20% penetration of urologists in the U S who have used the test at least once and the potential to expand the usage of our test among current doctors by five X. We are positioned to continue the strong growth in this business for the remainder of fiscal 2023 and for the years beyond.
Continue with molecular diagnostics, our surge in branded genetic carrier screening in oncology kits continued to grow double digits during the quarter assured and announced a partnership with Oxford data poor technologies to develop assays designed to deliver more accurate and reliable options for reproductive health in carrier screening.
The collaboration combines Assuredness long range, PCR and Oxford and of course any read length sequencing capabilities.
In a single workflow to identify genetic sequence variance in both hard to decipher genes and conventional genes using a single sequencing system.
Our spatial biology business branded ACD grew mid single digits in the quarter as a softer biotech market provided some headwinds so much protein sciences.
Our professional assay service business had a strong quarter as revenue increased nearly 20% year on year, historically accounts, leveraging acd's pharma assay services capabilities for biomarker discovery eventually transition into product customers, making strengthen our service business a proxy for future product demand.
We recently expanded our ACD portfolio with the launch of RNA scope, plus small RNA <unk>.
Enabling the simultaneous fluorescent detection, a small regulatory Corey RNA, using our new vivid dyes, including.
Micro RNA together with three target Rnas or RNA Biomarkers and the same tissue section at single cell and sub cellular resolution.
<unk> plus provides gene therapy, researchers with a valuable new tool to quantify changes in gene expression and cellular function in response to the introduction of regulatory Rnas, which is essential for optimization efficiency and safety.
I would note RNA scope plus was initially offered through spatial biology professional asset services, where it saw an overwhelmingly positive customer response.
Lastly, we experienced low single digit growth in our diagnostic reagents and controls business is order timing among a handful of customers impacted the quarter looking at this business on a trailing 12 month basis growth remains in the mid single digits with patients who are returning to their physician demand for diagnostic testing is increasing this favorable macro.
Environment, plus a strong pipeline of additional products positions, our diagnostic reagents and controls for future growth.
In summary, despite the temporary challenges created by the current biotech funding environment and the Covid impact in China. Our team continues to successfully navigate this dynamic environment and grow the business.
The long term tailwind supporting proteomics scientific research cell and gene therapies spatial biology, and liquid biopsies remains firmly intact and our portfolio is ideally suited to capitalize on these opportunities as a shape the future of life Science research and health care.
The team to execute our strategy is in place at full strength, and we remain well positioned and more optimistic than ever to deliver on our long term target.
With that I'll turn the call over to Jim.
Thanks, Chuck I will provide an overview of our Q2 financial performance for the total company provide some additional details on the performance of each of our segments and give some thoughts on the remainder of the fiscal year.
Before we get started I'd like to remind everyone that biotech knee executed a four for one stock split on November 29 2022.
All references to share and per share amounts have been retroactively adjusted to reflect the effects of this stock split.
Now, let's start with the overall second quarter financial performance adjusted EPS was <unk> 47.
Consistent with the prior year quarter.
Foreign exchange negatively impacted earnings per share by <unk>, <unk> or minus 4% in the quarter.
GAAP EPS for the quarter was 31 <unk> compared to 49 in the prior year.
The biggest driver for the decrease in GAAP EPS was a nonrecurring gain on our previously held chemo <unk> investment in the prior year period.
Q2 revenue was $271 6 million, an increase of 4% year over year on an organic basis and 1% on a reported basis.
Foreign exchange translation had an unfavorable impact of 4% and acquisitions had a favorable impact of 1% to revenue growth.
As Chuck mentioned following a period of Red Hot biotech funding last year, we have seen a normalization of purchasing trends from these customers.
Additionally, COVID-19 is now sweeping through China and slowing the amount of research activity in this region temporarily impacting the growth of our proteomics research reagents analytical tools and spatial biology products.
Adjusted organic growth rate for large orders from a handful of biotech customers that did not repeat and normalizing for China, our organic growth would have been double digits in the quarter.
Summarizing our organic growth by region and end market in Q2.
North America grew low single digits Europe grew mid single digits.
China grew mid single digits, while APAC was flat due to prior year government stimulus in Japan, not repeating this year.
By end market Biopharma grew low single digits, while academic grew mid single digits.
We are encouraged by the revenue growth from our large pharma customers as well as the underlying health of the overall biopharma end market and what's reflected in the continued strong momentum in our run rate business.
For Academia, we are encouraged by the recent NIH outweigh data, which showed a 13% year over year increase in our second quarter.
We anticipate this strong NIH outlay to begin to work its way through the system and benefit academic life Science research spending in the near term.
Additionally, the five 6% NIH budget increase and 50% ARPA Dash H budget increase for the federal government's fiscal 2023.
Sets the stage for a healthy academic end market for the remainder of our fiscal year.
Moving on to the details of the P&L total company adjusted gross margin was 71, 7% in the quarter compared to 72, 3% in the prior year. The decrease was primarily driven by unfavorable foreign exchange.
Adjusted SG&A in Q2 was 27, 9% of revenue compared to 26, 5% in the prior year.
While R&D expense in Q2 was eight 3% of revenue compared to seven 5% in the prior year.
The increase in SG&A, and R&D was driven by wage inflation and the acquisition of <unk>.
The businesses implemented strategic price increases during the first half of fiscal year 'twenty three to offset the dollar impact of inflation and operating income. However, the dollar for dollar offset did have a negative impact on operating margin.
Adjusted operating margin for Q2 was 35, 5% a decrease of 280 basis points from the prior year period.
Negative FX impact decreased margin by 100 basis points, the pricing inflation dynamic decreased adjusted operating margin by another 50 basis points.
While the acquisition of <unk> and timing of other fiscal year 'twenty two growth investments drove the remainder of the margin dilution for the quarter.
For the remainder of the year, we expect adjusted operating margins to continue to expand sequentially and in the fourth quarter of fiscal year 'twenty three up to 100 basis points higher than the fourth quarter and fiscal year 'twenty two.
Looking at our numbers below operating income net interest expense in Q2 was $1 2 million decreasing $1 3 million compared to the prior year period, our bank debt on the balance sheet at the end of Q2 stood at $200 million, a decrease of $64 7 million compared to last quarter.
Okay.
Other adjusted net operating income was flat in the quarter, an increase of $1 2 million compared to the prior year <unk>.
Primarily reflecting a foreign exchange impact related to a cash pooling arrangements.
Moving further down the P&L, our adjusted effective tax rate in Q2 was 21%.
Turning to cash flow and return of capital $64 3 million of cash was generated from operations in the quarter and our net investment in capital expenditures was $6 1 million.
Also during Q2, we returned capital to shareholders by way of $12 5 million in dividends.
Following our four for one stock split we finished the quarter with $161 8 million average diluted shares outstanding.
Our balance sheet finished Q2, and a very strong position with $196 8 million in cash and short term available for sale investments, bringing our net debt position very close to zero.
Going forward M&A remains a top priority for capital allocation.
Next I'll discuss the performance of our reporting segments, starting with the protein Sciences segment.
Q2 reported sales were $203 9 million with reported revenue decreasing 1%.
Organic growth for the segment was 2% with foreign exchange, having a favorable impact of 4% and acquisitions contributing 1%.
Despite the temporary headwinds and a tough year over year comps that Chuck pointed out for this segment I will highlight that the longer term five year organic CAGR for this segment is approximately 11%.
Operating margin for the protein Sciences segment was 43, 8% a decrease of 170 basis points year over year with operational productivity more than offset by foreign exchange price inflation dynamics and the impact of the <unk> acquisition.
Turning to the diagnostics and genomics segment Q2 reported sales were $68 million with reported revenue increasing 5%.
Organic growth for this segment was 7% with foreign exchange, having an unfavorable 2% impact.
As you heard from Chuck earlier, or extra home diagnostics business remains incredibly strong in the quarter as our fortified marketing message and strengthen commercial team continued to drive test volume and revenue growth.
Our spatial biology business grew mid single digits in the quarter with strong performance in our professional assay surfaces and micro RNA businesses, partially offset by order timing from a few biopharma customers.
Moving onto the diagnostics and genomics segment operating margin at 12, 2% the segment's operating margin decreased 470 basis points compared to the prior year.
Segments operating margin was unfavorably impacted by foreign exchange price inflation dynamics, and the timing of strategic growth investments.
As we think about the setup for the second half of our fiscal year is important to reflect on the drivers of our performance in the first half relative to our expectations at the beginning of the year.
Our Q1 relative performance was muddled by the pent up vacation activity, we saw from our customers as well as heightened inflationary in recessionary concerns.
<unk> in Europe .
In Q2, we saw a slowing of large orders from our biotech customers that possibly could been foreshadowed by the slowdown in biotech funding earlier in the calendar year.
However, the impact to our business was not realized until the December quarter just ended.
And throughout the entire first half of our fiscal year 'twenty three the COVID-19 situation in China has been on a roller coaster with rolling government mandated shutdown and now widespread infections.
Despite all of this is Chuck and I have expressed on this call. We believe our end markets are still very healthy and our portfolio positioning is still very strong.
Big pharma demand is high.
Academic research budgets are on the rise and most biotechs are not broke just being more prudent.
And finally, China appears to be closer to the end of the Kobe roller coaster than ever before with pent up demand and strong Chinese government stimulus setting up for what could be an incredible calendar year 2023.
But we need to get through the March ended quarter, our fiscal Q3 first and.
And right now it appears as though our organic growth this quarter will be similar to that of Q2.
People in China are still stick with Covid and in protein Sciences. We know several large biotech orders that occurred last year in Q3 that are unlikely to repeat this year.
Also in Q3, we will be lapping the large milestone payment realizing our diagnostics and genomics segment from the XO true kidney transplant rejection rejection assay licensing agreement made with Thermo Fisher last year.
As we lap these difficult year over year comps the normalization of biotech funding runs its course and COVID-19 headwinds alleviate in China, we anticipate organic growth to improve significantly in Q4 positioning the company for continued progress on delivering our long term strategic and financial targets.
That concludes my prepared comments and with that I'll turn the call back over to the operator to open the line for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.
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We are asking all analysts to limit themselves to one question and a follow up.
One moment, please Molly poll for questions.
Okay.
Our first question is from Puneet <unk> with SBB Securities. Please proceed with your question.
Yeah, Hi, Chuck Jim Thanks for taking the questions. So.
First one Chuck.
I think it would be helpful. If you could parse out a little bit more on the impact from the emerging biotechs are these smaller emerging biotechs I think Jim said, they're not going broke but the number of projects or are lower.
But could you if you could describe a little bit more into that and then.
As this is spreading to larger biopharma.
The Biopharma remains.
Largely intact.
Then how much of this is sort of Covid adjacencies and if you could parse out what works what segments or what type of products were these sort of bulk orders and then again you know I appreciate that.
Comp related normalization that you were expecting.
But I think the question that sort of how long do you think.
This can last in duration, because obviously funding concerns were there they're here now, but just wondering you know how how long it'll be before sort of we see improvement here in a meaningful way.
Okay, I'll try to cover that in less than 20 minutes.
<unk>.
As of quarter finish you know we are a little dejected knows my 40th quarter and it's been a few years since we've seen a growth rate like this but as we look back into the data and we saw some amazing things one our run rate business.
Most of our business both here in Europe was double digit.
Very strong end markets there academia about the same no real issues there.
Biotech funding is as I mentioned last we started digging into more and more about just how much are we becoming more of a front end research company supporting our customers as we as we mitigated from academia to biopharma, but within that Biopharma, how much is really biotech and when that biotech how much you're really new biotech startups and and you know fresh research and <unk>.
Leading edge stuff in it so it's about 30% is the number about 20, some or most of our business has been in instruments, it's about 40.
And then and I think that's a it's a concern it's a funding issue right now and as we as we dig in more its gonna washed through but there is definitely you know I'll be.
Uh huh.
A growth of about being prudent they're they're they're funding as is solid right now, but they're trying to make things last.
If you are further along in clinical as you probably are okay, because it's committed.
And if you're doing if you're a startup theres actually funding if youre, if youre kind of out there, but looking for your second round, it's tough right now and it's just the way. It is so that elong, that's driven a lot of them are potential growth in OEM and a lot of larger orders as people are we're starting with clinical and doing special things with us and there are a lot of one off comps.
Literally it's a handful of deals that bring us back to like double digit growth. It's on it's kind of a incredible.
Now talking about Biopharma, the pharma side with you that that's just more about overall conservatism in general and and the overhang of course COVID-19 like like vaccine makers. Just you know all the gravy is over here right. So it's just kind of a normalization not long term just kind of re normalizing and just again, a little a little longer out for.
Things in waiting things and then we get that vindicated two by looking at our funnel instruments, it's larger than it's ever been our instrument funnel is tremendous.
Just the conversion rate has slowed down a lot is getting capital has been has gotten tighter for teams looking state by insurance in our segments.
And we see that flowing through as well.
China will explode in Q4, I think it may be a little better this quarter, we actually had mid mid single digit growth I dunno, how there wasn't anybody working the whole quarter practically but we still had growth it'll be it'll come back with a roar I think and when we've seen that before.
And we also have.
The government stimulus hitting and should be kicking in by by Q4. The tenders are going out now we've had that we've had that have indicated so that should be should be a one two punch there for China by Q4.
I think that May cover most of your questions.
Yes.
No I think you covered it well Chuck thanks for that and just I'll keep it very simple for Jim just on for Q.
I appreciate your comments on Q3 being similar to Q, but <unk>, just even if I had double digit increases their lending for the full year and single.
You know in single digits. So for a total organic growth. So just wondering you know does that aspiration for a 15% or mid teens sort of growth rate.
Longer term is still intact.
If you could elaborate a bit on that thanks, so much.
Yes, they are still intact and you have the math would suggest that we.
Likely not hit double digit growth for the year. This year, even if we hit double digit growth for Q4.
As I mentioned in my in my opening comments.
You look at it from a multiyear CAGR, we're still in the low teens and we'd probably end of the year is still in the low teens on a multiyear basis and that's essentially on track to where we said we'd be at this point in our five year journey. So you know the mid year at the mid teens is the is the average over five years, but again at the cell and gene therapy.
The ramp and become more material for our business, particularly that the GMP proteins as well as the <unk> zone.
It becomes more material to our business and continues at those kind of growth rates and as Chuck alluded to the that we're still barely scratching the surface of the potential there.
That's what kicks us into the mid to higher teen growth rates are later on in our five year five year plan, so as far as we see it we're still on track.
Our next question comes from Jacob Johnson with Stephens. Please proceed with your question.
Hey, Thanks, good morning.
Maybe first question kind of Dovetailing.
Jim and Chuck on what Jim was just talking about.
And Youre still targeting this 2 billion in revenue by FY 'twenty six or do you think in your need back may be moderated some of your expected growth for instruments and on the spatial side can you can we just touch on kind of your latest thoughts on the path.
To 2 billion by FY 'twenty six once you get beyond some of these kind of near term dynamics that you discussed.
Yeah, we're we're not coming off at all I think the ink is even dry on our latest analysis I mean, the bottom line is we got way ahead of the curve and ahead of forecast last couple of years riding Covid and some of that three normalize, but we're still safely in a $2 billion number we think a couple of reasons look at this and <unk> flex coming out we're going to be now attacking 400 a month.
More and more you know a market $300 million in the in the in the HPLC market.
For Fractionization, just skipping whole L seeing on rates of mass spec, which can save weeks and months of work in an analytical lab at Biopharma customers and also the protein characterization market. It's small mark 100 million $1 million, so but peptide mapping is very important process and weak. This machine can do that and so it's going to grow in that category along with every.
Else has been doing it's been and things are picking up in cell and gene therapy for being specced in for just good old fashion QC for PRT et cetera.
L. A is just going to be on fire. You know we're doing about 90000 cards a year now we just finished the factory for 500000 cards, we got $13 45, coming it's just almost done and we're gonna have diagnostic research coming out our ears, we think on top of biomarker discovery. So this this is going to be a platform that's going to get bigger than I think we have in our two.
Our model.
I can go up and down this but you know we're also I think possibly light on Exosomes Xoma's Scream and now 100% plus a quarter I see no end in sight, we have a nice portfolio of new diagnostics, new tests coming out where we've got partners calling.
The team is doing great. We got a great new team in with the new executive for the payer a strategy on someone who is actually connected and we've made more progress with private payers last quarter that we've made the last two years to be honest, so hopefully more on that coming soon as we put some numbers to it.
So the and the answer for you is all the stuff that we are waiting to start growing and then by the way of cell and gene therapy proteins on top of a 185% comps still grew almost 20% this quarter nothing slowing down here. All this new stuff start to pick up but our core which is the biggest part hit or hit a speed bump because of these OEM and then.
Biotech funding issues, which is going to recover quickly.
We need this new stuff because that's how we get the high double digit growth as Jim alluded to but the kids picking up but it's going to happen and LNG.
LNG and therapy $100 million portfolio force right now growing to $2 billion in the next eight to 10 years. So.
We're not letting up I don't see any issue right now at all it's the.
The things we put in place years ago are starting to happen.
And we're going to have some bumps here and there with the with the kind of growth rates. We have I do think we kind of must have the forecast for sure. I mean, we did not depreciate fully appreciate the comps and the strong growth. We had last couple of years due to COVID-19 that we try to level it out by averaging over in a couple of years as Jim pointed out and you.
You know I think the recovery will be good our brands. We just on brand studies, you know R&D systems still number one biotech and he is actually moving right up the ladder to after 10 years of being out there. We've got we've got Great Association.
We keep investing digitally.
And that is thats continuing to payback.
There's no issue to back off the $2 billion. It's just that we probably aren't as safely and the black of hitting as we were but I think we're still there and then we'll sell it's going to be an Olympics not too so.
Got it thanks for that Jack and then just.
The other big picture question.
I heard Jim mentioned that I think M&A is the number one priority on the capital allocation side I think that speaks the appetite and maybe just kind of any thoughts on where seller expectations are in the current environment and any areas of interest.
Well you know time time heals all here so you know.
<unk> have come down that come down all year, but theres still denial, but theres less denial you know there's not a there's not a robust IPO market right now so small companies have limited options.
We talked about the funding issues right. So I mean is a lot of small companies are going to be looking for ways out and help.
So our phone is ringing more than it was you know we're very active where we've been active but we are definitely more active than usual and I hope we can land a few more we landed an MSL not too long ago and he has got some more in the pipeline and yes. It is in our number one.
Capital strategy, where we're at net debt zero and we've got a we've got a 115 billion dollar a war chest ready to go with cash to it and we'd love to put it to work I don't think we'll go over four times leverage on but I'm willing to get up near that board and board is all very supportive of us getting much more aggressive in M&A, but you know it's like whatever what you.
The burden of the your question is all about the price tags right and we've got to get real price takes to get to make to close some deals. So.
Yes.
Our next question comes from Dan Arias with Stifel. Please proceed with your question.
Good morning, guys. Thanks for the questions Chuck on GMP proteins can you just refresh your view on how you think growth shapes up there.
You know when you guys are opening up to St. Paul facility, you talked about expecting a couple of years, where revenue basically doubles, it sounds like you'd get a little bit below that but maybe now you're accelerating again. So what do you think the trajectory there is relative to.
The overall capacity, which I think at the time was like a 140 to 200 million, yes, theres a little bit overlap even in this care in the area of what we'd call OEM. So we've got you know we've got a lot of customers out of 180 customers now for gene proteins, but only a handful that are really sizable in there. So it's a little bit lumpy still.
We have some year on year comps in that area. There are tough as well even there we still can we still had a pretty good quarter I'd say I think going forward I think it is going to accelerate we added another product to the St. Paul say, where it's six will more than double that in the coming year.
We have the largest menu for regenerative medicine, and we moving moving with most of those over the St. Paul facility in the coming year or two as well and we're number one there were playing catch up still in the in the car T area, but it's growing strong.
It's still kind of I think going to be a double kind of year, maybe just maybe just a hair under this year, but it won't be too far off we don't think in next year should start lighting up as Atlanta, a few more larger accounts when we get some things you know further up in the Clinical's to get more volume going we call. It turning minerals in the tuners and tuners and the wheels. So we have a whole pipeline of how we move these customer.
Forward.
More of a indication we had a few of these customers are fairly sizable and they went to zero.
Because they are funding is tight right now so they're going to probably come back online next year, we think as they get more funding, but you know.
They've had some installs in some of their some of their clinical as you know these these are.
Small to mid range biotechs that were kind of hot last year and not so hot this year their customers.
We're also seeing that you know with Wilson Wolf as well, it's definitely slowed down and seeing the same thing there isn't anybody who has a business. It's really in the car T and in the biotech side of inland and clinical it can't say the same thing. It is just honest to God truth, there things have slowed down there.
There is less funding and there are less clinical starting and Thats just reality I don't think it's long term I think it's just a blip for this year, but but it's reality.
Okay. Okay. That's helpful. And then I guess I need to go back to the long term targets here just because in order to hit that 17% organic growth CAGR that you'd laid out for 'twenty, one through 26 and that gets you to the $2 billion.
Yes at least by my math, you basically have to do a couple of years of 20% growth.
And one of the things that we're talking about is how hard comps can be so apologize for beating a dead horse here, but I guess I'll just have to ask explicitly if that's at all a decent way to think about out year growth.
Well the OEM side of things.
It was bad enough and just on a handful of deals where it took our antibody and R. R.
<unk> business to near to about flat.
And that's a short term blip, we need mid we need mid level mid mid mid digit growth in that category, we've had way higher than that the last two years and in fact double digit so I'm not too worried about that it's more an issue about the backend and making sure that both cell and gene therapy and <unk> is a platform can we can get to four.
<unk>, 5% to 50% growth in that range that that that's what's got to happen everything else has or is is within the error bars easily to hit there, but we've got to get to that level and I know, we've got a couple more years to get to that point I don't I don't think we're shook about it it's things or things can only grow so fast and we're we're kind of growing pretty fast.
So.
I'd say just to add to that a little bit down and as I mentioned, we mentioned in the call earlier, I mean literally a handful of customers.
Biotech customers smaller biotech customers with a difference between double digit growth in mid single digit growth for us. This past quarter. So that is how quickly it can flip the other direction as well when things come back online.
Our next question comes from Dan Leonard with Credit Suisse. Please proceed with your question.
Hi, Thank you Chuck in the past you've talked about hiring challenges as being a gating factor to your growth and wanting to hire more can you give us an update on trends. There are you still planning aggressive hiring or have you moderated your ambitions there.
It's a very insightful question and I didn't bring it up on the call but.
And it is more late breaking news, but we definitely had turnover in our sales force in the biologic platform area.
As you know a lot of a lot of instrumentation things that were not in pretty hot steel larger metal things and there's definitely there's been a lot of attrition and we lost a fair amount of number of people were at full strength again, but there is definitely a component there on spatial you know we've come all the way back I think we're only one down down one.
Overall, we're riding our attrition to kind of stay leaner here as we ride through a CNR you saw our margins are held pretty well. We're on track part of that is that we just we've just now replace everything through attrition, we had a pretty big spend plan for this year for this for this for this plan to hit these double digit targets and that Theyre not there. So we pulled back like any good operator.
Wood.
I think we will end up the year up one to 200 people, but not the $3 to 400.
I think I think the salespeople the biggest risk I think there is a productivity hit we probably took in the last quarter or two off of a 1000 people turning over last year, a full third of the company that is probably going to appreciate it and that will also level out going forward, but we're watching that very carefully we're working it hard we're changing we've done a lot of market upgrade.
As the agent at wage inflation is a big hit I mean, I think we've done a remarkable bottom line considering all the wage inflation, we've actually had to absorb this past year.
And we don't we're fighting like everybody else, but we have a great portfolio a lot of great sexy new products in our in our roadmap and we're still in the business of helping people and helping people develop drugs in that that you know that interest a lot of people to come on board.
Demographically were much younger company now than we were 345 years ago and that that debt.
Makes you want to have more changes to you know ESG is very important to us here, we have a lot of.
A lot of different new groups and clubs in dealing with different levels of diversity that the company has never been more focused on that we know where over 50% female over 50% female in our management.
Where 25% Chinese so you know we've got a big storms award this year for our diversity and stuff. So so we're focused on all of that but.
Youth and diversity are key in managing that is a key to attrition I think so.
I appreciate all that color Chuck and my follow up question on China, I'm not sure I know how to how to quantify the word explode, but when it comes to the $1 seven trillion dollar RMB loan package. What are you seeing on the leading indicators on that or are you seeing Kodak.
<unk> tied to that spend are you seeing rfps is there anything that gives you confidence that money is going to start flowing beginning that June quarter Yep.
I had a meeting on that just asking those very same questions with leadership in Asia, and yes tenders are going out and there is discussion. So it looks like it's very real it's about a two month process. So I don't think we'll see much of that here in Q3, it's a Q4 activity.
We kind of have them at over 100% to plan in Q4 of course, they are trying to negotiate that and but I think it's a well over 100%. If if there is a reality around this one seven trillion RMB stimulus, which is really instrument driven then it'll be a real.
I think there's pent up demand already.
We're already seeing.
We had mid single digit growth for last quarter with with nobody working.
<unk>.
I think it'll be a quick comeback story.
Now we have data on that Raven has happened two years ago as well after the COVID-19 quarter, and I think it'll be similar.
And if the government account government is very focused on prioritizing health care I mean, that's what the stimulus is for I don't think anything changes here. So people just got to get back to work.
To read right now too because they're just coming off a new year now right. So its that Theyre just come back to work I think this week even so.
And we're you know we're coming back fast I mean, we had the whole office.
90% of our people are sick at the same time like within a two week period of elevated hit that was that was actually similar anywhere in Shanghai customers. The same way so in customers too. So it's going to snap back pretty fast we think unless there's some new variance, but I ask questions about that too about when do we expect a second wave and they don't really expect.
One for awhile so.
According to the people who talk to everyone's already got it.
Our next question comes from Catherine Schulte with Baird. Please proceed with your question.
Yeah.
Hey, guys. Thanks for the questions I guess first Jim just circling back you said adjusted for China and are you all reagent bulk ordering organic growth would have been double digits can you just quantify the bulk ordering portion. It seems like China is maybe a two point headwind in bulk orders four points or maybe a little bit more is that right about the right ballpark and.
And can you just quantify any bulk purchasing activity in the third or fourth quarter of last year, just as we think about comps heading into the back half of the year.
So yes, your percentages are pretty close to what we show as well and and yeah. That's kind of why we said, we expect Q3 to be very similar to Q2 in terms of organic growth because the number of one time kind of bulk orders from these small biotechs with was similar to Q2.
Perhaps a little bit less but also keep in mind that we had the very large so true licensing agreement with Thermo Fisher and our Q3, we knew what we didn't know all along that Q3 was going to be our most challenging growth quarter because of that very large X, which we agreement that occurred. So that's an additional headwind we didn't have.
But we think through overall momentum of the business will be able to cover some of that sequentially. So that sequentially our growth rates will be somewhere.
Okay got it and then can you just talk to the rebound in Europe .
Earnings call, you talked about September being up double digits and that strength continuing into October . So can you just walk through how things unfolded throughout the rest of the quarter.
Yes, It was definitely a story of a Europe doing better than the U S and from last quarter, we had run rates, 12% plus in Europe overall it was about it.
Mid to high single digit kind of kind of level in Europe . So a good recovery not Bert alloy backward want but you remember they were negative last quarter. So that was good we have new management hopefully going into place soon.
There as well we are working on that we didn't talk about.
We put in a whole new ERP system.
And without a glitch. So that's all coming on live we have a whole new warehousing system and Dublin now to supporting mainland Europe , and that's coming on live with no glitches. So been a lot of good things in Europe as well.
Going forward I E.
Think the risk of the war and energy in your in the winter and stuff has been mitigated pretty well. So we're kind of focused on really getting the teams up to speed new management in place complete.
Completing the mission on cross selling and the commercialization strategies and tactics that we were in the middle of doing before Covid hit and all that and funding seems you know reasonable.
Reasonable in Europe on a country by country.
Weaker in Germany, and we want to be we always have been so a really good focused on trying to build out Germany more going forward I think that's key I think there is a risk in the UK, given Brexit still but so far so good.
You know I guess I'd answer it that way for now.
Europe Europe's out of the hot seat from last quarter now, we got you know OEM issues in the U S to deal with.
Our next question comes from Patrick Donnelly with Citi. Please proceed with your question.
Hey, guys. Good morning, Thanks for taking the questions.
Jim maybe you can follow up on one of the earlier questions in terms of head count you guys could see the.
Gross slowing for a little bit I can talk about <unk> being in this area as well how are you thinking about managing expenses. How are you thinking about the margin cadence.
How nimble can you guys be in terms of protecting the bottom line against margins held up pretty well this quarter relative to the top line. So just curious how youre thinking about that piece and then if you're changing any any growth investments or any way you're thinking about that.
The P&L.
Yeah, I mean, as we've talked about the last couple of quarters, we were behind in our investment.
<unk> and hiring for most of fiscal year, 'twenty, two and even arguably fiscal year 'twenty one.
And we made great progress in catching up in those investments and catching up on that head count in Q4 in particular and Thats been a reason for our margin our margin drag and one of the reasons for a margin drag in the first half of the year.
And I think we've also been fairly public about this in the past where are you now not just us, but everyone was dealing with retention issues for last year and a half and you need to about 3000 employees that we ended the year at relatively still at today roughly a thousand of them. Although those employees have been hired in the last year because of both new hires but also replacement of.
Of our loss folks so that's a huge huge.
Influx of new people in the organization that need to get up to speed and frankly get productive and so we're really focusing on getting the productivity out of those although for those folks we hired last year.
And so that's really the focus of this year, which is why there's not a lot of new hiring happening.
Happening nor needed.
That being said there are strategic investments, we're making particularly around our molecular diagnostic division to support the amazing growth, we're seeing in our prostate test there.
And there's a few other R&D programs that were slowing down just a bit just to kind of catch up from all the hiring we did last year, but nothing that's going on you know having any issue with our long term growth plans well, let me interject too here remember.
One of our reasons for being successful over the last 10 years I think is our prioritization process, we've talked about it a lot a lot of you have had the short course meeting with us offline.
And it allows us to change priorities and change mix of people and programs very quickly we do it we do a zero based every year and we've already in the middle of that and making those changes. So you know we've doubled the size of our enamel sell teams, which we hired them, we're adding people we're up 50% in head count in our Exosomes teams you know in the last year because.
We are waiting for trigger points to happen. They happen. We told you we start investing when we saw that or reconsideration went through.
I'll just start seeing patients again, and we're lining it up so we're adding a lot of people there, but we're changing the mix and some other things we're holding off on some things.
Theyre just prudent to do right now until we see you know.
A reason to change I remember all myself and all of our leaders all come from working in large companies are all run billion dollar plus p&l's every one of them they.
They know how to operate so now that's a great point, Chuck and we are actively reallocating resources towards those higher growth higher growth platforms. So it's a prioritization process at work real time, and whether that relates to margins NB by holding our overall cost base were relatively neutral maybe a slight uptick throughout the year, but relatively new.
For the remainder of the year.
Anyone who follows our business knows that our second half as of from a revenue perspective seasonality wise is much stronger than our first half simply because our customers are at the bench more days than they are in the first half of the year without all the vacation interruption.
That additional revenue on top of that same cost base should allow our margins to continue to expand sequentially.
And by the way people are coming back to work here.
Yes, we are.
That's helpful.
Yeah Gotcha, Chuck and then maybe one on Wilson Wolf can you just refresh us in terms of kind of the milestones and timing there has anything changed your conviction.
Does that change at all.
We're running out of time, so I got to move fast here.
They've slowed down too, but as you know the targets are 92 million in revenue of 55 and EBITDA for the first tranche theyre very close on on one of them and we may we may strikes when we made the choose to wait.
It's as much strategic because it isn't anything else. We've got the cash we were ready to go so.
So we might we might choose us to weigh in and go sooner than later, we're not sure yet, but its very where we're getting close to trigger I got to believe in the next if things pick up at all for them, we're going to hit it sooner if they don't pick up but it might be another couple of quarters, but where are we within our sights here nothing's changed strategically nothing's changed culturally nothing has changed in a relationship that teams are tighter than ever.
If anything they are pushing to get closer and we get this to happen. So so great. Great question, it's looming and I can't wait.
Our next question comes from Justin Bowers with Deutsche Bank. Please proceed with your question.
Hey, good morning, Chuck and everyone. Just just one here on China.
Just is there a way to parse out.
How much of the.
The slowdown was between the consumables versus the instrument business and.
The second part to that would be in terms of the stimulus funding coming on do we have a sense of.
Sort of the duration of that he will that be a tailwind into calendar year 2024 as well.
Based on some of your conversations.
Stimulus in the U S or anything related to that as Kieran gone I think.
The OEM comments are more bulk consumables and the instruments are slow to basic off or just prudent conservatism in buy in biotech and biopharma.
And funding in general so it fits more funding on the instrument side and then conservatism in an OEM is more on the on the consumable side.
China when China China's.
It's just they're not at work.
There'll be screaming back here very soon I don't I'm not worried yeah, I'd say you know the slowdown from our call. It call it 20% plus normalized growth to mid single digit growth was across the board in both instruments and competitive and it remains to be seen how long the stimulus impact last but it's going to take more than a quarter to spend that much that much stimulus in our opinion, so I think for the one.
Yeah, it'll be a multi quarter, if not year benefit it'll be this whole calendar year theyre, intending it for that Theyre, intending it for health care, they're intending it to be in hardware more than anything else and we play big there you know we're about productivity in hardware. So I only got more platforms than ever so we're going to share in that as well.
I mean, just to put that in the scope. It's one seven if that's if that's the real number that's.
That's a that's a way bigger than our entire NIH budget.
You know so it's going to be good it should be good for everybody.
We have reached the end of our question and answer session I would now like to turn the floor back over to management, including.
Alright, well thanks, everyone.
We will see you at the end of next quarter I think we were as transparent as we can be we've been doing this a long time together as a team and we will always be transparent.
Things still look really good here or we don't see any change in our thesis.
And anyway, the future's bright we think so we will talk to you soon thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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