TECH - NASDAQ

Good morning and welcome to the Bio-Techne earnings conference call for the first quarter of fiscal year 2023. At this time, all participants have been placed in listen-only mode. The call will be open for questions following management’s prepared remarks. During our Q&A session, please limit yourself to one question and a follow-up. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to David Clair, Bio-Techne’s Vice President, Investor Relations. Please go ahead, sir.

Good morning and thank you for joining us. On the call with me this morning are Chuck Kummeth, Chief Executive Officer, and Jim Hippel, Chief Financial Officer of Bio-Techne. Before we begin, let me briefly cover our Safe Harbor statement. Some of the comments made during this conference call may be considered forward-looking statements, including beliefs and expectations about the company’s future results 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. 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 Bio-Techne Corporation website at www.bio-techne.com. Separately, we will be presenting at the Credit Suisse, Stifel, Stephens, and Evercore ISI healthcare conferences in November. 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 first quarter conference call. I am pleased to report that we started our fiscal ’23 with a respectable 7% organic revenue growth on top of what was our most challenging year-on-year comp of over 21% organic growth in Q1 of last year. We achieved this growth despite a slower summer for our business in Europe and continued, although improving, COVID-related shutdowns in China. With the tough comps and, we believe, temporary regional challenges that our protein sciences segment faced, this was the quarter for our diagnostics and genomics segments to shine, and shine it did with 17% organic growth. In our first quarter, we accelerated our spatial biology business to upper teens growth. We continue to drive incredible uptake in doctor and patient usage of our ExomeDx prostate test, and we delivered double-digit growth in our genetic Dx and diagnostic reagents businesses. I will dig into the traction and encouraging trends we are seeing across the segment in our broader portfolio later in the call. But first, I’d like to highlight the corporate sustainability report we recently issued, which details the significant progress we continue to make advancing our environmental, social and governance initiatives. The 64-page report provides insights into Bio-Techne’s commitment to growing the organization in a responsible manner while we deliver the products necessary to advance science and ultimately improve healthcare. Our advancements on the ESG front also led to Bio-Techne’s inclusion in the 2022 Forbes list of Best in State Employers, with this latest achievement representing the third recognition from Forbes so far in calendar 2022. I’d also like to briefly touch on how we are navigating the current global inflationary environment. The team has done an extraordinary job strategically implementing price increases across the portfolio to offset the impact of inflation. We will continue to leverage our pricing power to offset rising costs, particularly labor, going forward. It should also be noted that our operations team has delivered consistently with no supply chain issues this quarter or any in the past days. Now let’s discuss the specifics of our quarter, starting with an overview of our performance by geography and end markets. In North America, consistent execution across the portfolio drove low double digit revenue growth for the quarter, driven by a continued strong bio-pharma end market. In Europe, our revenue decreased mid single digits year-over-year. Here, we experienced an exceptionally slower seasonal summer dip in our consumable run rate business. It seemed like everyone was on vacation in July and August, perhaps making up for the prior two COVID years when travel was more restricted. In any case, our run rates in Europe picked up considerably in September as researchers seemingly returned to the labs; however, the strong double-digit growth in September, which by the way is continuing in October, wasn’t enough to overcome the tough Q1 growth comp year last year when they grew a record 20%. While there are potential macro challenges in the current European environment, our portfolio of proteomic research reagents, analytical tools and spatial biology solutions remain core components to the scientific discovery process and position us to effectively navigate any near term regional instability. Moving on to China, despite the lingering impact of ongoing COVID-related lockdowns and academic institutions not returning to the labs, we delivered mid single digit organic growth. On top of the COVID challenges, I’d also note that China faced a particularly challenging year-over-year comparison where we grew revenue by over 50% in the region last year. We see China rapidly returning to its historical growth rates as prior year comps normalize, customers continue to better navigate the sporadic COVID-related government restrictions, and the Chinese government continues to emphasize investing in healthcare. Our bio-pharma end market remains healthy, growing upper single digits globally for the quarter and especially stronger in North America, with growth in the mid teens. Sales to our academic end markets increased low single digits year-over-year but again were stronger in North America. Now let’s discuss our growth platforms, starting with our protein sciences segment where organic revenue increased 3% for the quarter on a very strong comp from last year, when the segment grew over 26%. Let’s begin with our cell and gene therapy business, where our portfolio of reagents, instruments, media and technologies streamlined workflows, increased efficiencies, and ultimately expanded access to these next generation therapies at lower costs to the healthcare system. We haven’t discussed TcBuster for a while, so I will update you on the significant progress we are experiencing with our non-viral gene editing technology. TcBuster has several advantages over legacy gene editing methods, including its ability to deliver larger gene editing cargo as well as a more predictable gene insertion location, all at a lower cost compared to viral base gene insertion methods. We continue to educate the market on the advantages of TcBuster, and it’s worth noting that we have signed a handful of commercial licenses to support a growing pipeline of cell therapies, primarily for T-cell and NK cell therapies. In addition to customers testing TcBuster for therapeutic candidates, we also see growing interest in discovery research to take advantage of the technology’s lower cost and increased speed, enabling the acceleration of candidate selection. TcBuster is currently being trialed in dozens of unique therapies, and we believe the future is very bright for this technology. We continue to penetrate the burgeoning cell therapy opportunity with our portfolio of GMP proteins and are seeing continued momentum in the regenerative medicine, or regen med market. As a reminder, regen med is a form of cell therapy that leverages stem cells or their derivatives to promote the repair response of diseased, dysfunctional or injured tissues. Our GMP capabilities expand beyond proteins and include a portfolio of GMP small molecules. These small molecules are key components in the reprogramming, self renewal, storage and differentiation processes that are key to regen med workflows. While our GMP small molecules business is relatively small today, it is growing rapidly, including over 100% for our first quarter, and has the potential to become a significant contributor to our overall cell and gene therapy business. Now let’s talk about our core portfolio of proteomic research reagents, including the RUO proteins, antibodies and small molecules that are key components to enabling bio-pharma and academic scientific discoveries. Collectively, our RUO reagents grew nearly 30% in Q1 last year, again highlighting how difficult this quarter’s comp was. Despite the high hurdle, our RUO reagents were able to grow mid single digits in Q1 for this year, driven by our digital marketing capabilities. Moving onto the performance of our proteomic analytical tools, where we also faced a challenging year-over-year comparison as the business grew over 25% in the same quarter last fiscal year. Overall, the team delivered double-digit growth in North America and China, which was partially offset by much lower performance in Europe leading to low single digit growth for the quarter. Once again, our biologics platform, Maurice, led the growth. We continued to see demand from protein therapeutics, gene therapy, and CRO CDMO customers particularly in North America and China, with a combined growth of over 20%. Innovation remains a key factor in the growth of our biologics business; for example, we recently unveiled data demonstrating icIEF fractionation on the soon to be launched Maurice Flex instrument. Fractionation is a front-end step in mass spectrometry where the sample to be analyzed is separated into mixture components based on differences in their size, charge, or other characteristics. The data showed how Maurice Flex addresses the labor intensive and time consuming challenges of using legacy methods, including ion exchange chromatography for fractionation. Maurice Flex is scheduled for release in early 2023. In addition to the expanding Maurice capabilities and applications, the platform is also gaining recognition for its environmentally friendly attributes. A recent study in the Green Analytical Chemistry Journal highlighted Maurice as an environmentally friendly method for evaluating the identity and stability of adeno-associated virus, or AAV samples for gene therapy development. The study highlights Maurice’s low sample and reagent volume requirements and built-in waster reservoir as environmentally attributes of the system. We continue to expand the capabilities of our ProteinSimple line of instruments in cell and gene therapy applications. During the quarter, we added three new viral titer assays for the expanding menu of our automated multiplexing ELISA instrument, Ella, for intact AAV captive quantification and gene therapy research and development. Ella’s wide dynamic range and high precision ensures users get the high quality data required to meet regulatory standards for AA titration throughout bio-protection workflows. Now let’s shift to the diagnostics and genomics segment, where we grew revenue by 17% organically in the quarter. Our spatial biology business, branded ACD, accelerated to upper teens growth in the quarter as strong commercial execution and an enhanced marketing strategy generated well-balanced growth in both our bio-pharma and academic end markets. In addition to a strong performance from the core RNAscope product line, we are seeing increased traction from our BaseScope and miRNAscope offerings in cell and gene therapy applications, which grew almost 50% and over 70% respectively. BaseScope and miRNAscope are rapidly becoming material contributors to our spatial biology franchise. We recently expanded our RNAscope portfolio with the launch of new automated co-detection assays specifically designed for the Roche Discovery Ultra platform, enabling simultaneous detection of RNA and protein on the same tissue section. These new automated multiomic assays utilize both RNAscope and BaseScope signal applications to deliver best-in-class RNA sensitivity and specificity. When combined with protein detection on Roche’s automated platform, researchers will be uniquely enabled to power translational and clinical research studies. We are also unlocking the cross-segment synergies inherent in the broad Bio-Techne product portfolio. As an example, we recently launched the TSA Vivid flourophores for highly sensitive fluorescent detection of RNAs and proteins in cells and tissues. Pairing these key fluorescent dye reagents from our small molecules business with ACD’s RNAscope sets a new standard for illuminating RNA biomarkers with industry-leading sensitivity and clarity. Rounding out spatial biology, we also recently filed a patent infringement lawsuit in the United Kingdom to halt infringement of our patented RNAscope ISH technology by a Molecular Instrument Incorporated. We have made significant investments over the years to build our catalog of over 40,000 RNAscope ISH probes available in over 400 species and remain committed to protecting these investments and defending our intellectual property rights in our spatial biology business and more broadly throughout the portfolio. Now let’s discuss our molecular diagnostics business, starting with the significant progress in our exosome diagnostics business. Test volume in our ExoDx Prostate, or EPI test increased over 70% while associated revenue grew over 100% in the quarter. Importantly, a favorable doctor retention trend and steady increases in the ordering physician base sets the stage for continued robust ExoDx Prostate growth going forward. I am extremely pleased with the traction we are seeing in ExoDx Prostate and believe our fiscal 2023 will be the breakout year for this test. Exosome diagnostics also announced initial data on a novel non-invasive saliva-based profiling assay leveraging exosomes to diagnose and monitor individuals with Sjögren's syndrome. Sjögren's syndrome is an autoimmune disease that is often undiagnosed and misdiagnosed with an estimated 4 million Americans currently living with the condition, but 2.5 million undiagnosed. Symptoms of Sjögren's syndrome can mimic other autoimmune diseases, allergies, drug side effects, and menopause, making diagnosis particularly challenging, leading to an average diagnosis time of three years and creating the need for a non-invasive accurate molecular test. We are looking forward to providing future updates for this exciting pipeline assay. A recent proof of concept study for a novel exosome-based platform capable of monitoring space flight associated neuro-ocular syndrome, or SANS, in astronauts was published in npj Microgravity, or Nature publication. In addition to potentially providing a needed tool to assist SANS in astronauts that are going on longer missions, as well as commercial space passengers, the study showcases the potential power of exosomes for the diagnosis of neurological conditions. Continuing with molecular diagnostics, Asuragen had another great quarter as demand for its portfolio of genetic carrier screening kits and expansion into Europe drove growth of almost 25% for the quarter. In addition to the ongoing geographic expansion, Asuragen has a rich product pipeline positioning the business for continued growth going forward. Finally, our diagnostics reagents business continued its streak of consistent growth quarters. The return of patients to the doctor’s office is driving demand for hematology, coagulation, and clinical chemistry tests which is driving demand for our clinical controls and reagents. These improving underlying diagnostic trends combined with market share gains and increased wallet share at existing customers led to a low double-digit growth in the quarter and sets the stage for sustainable growth in our diagnostic reagents business going forward. In summary, we continue to execute our growth strategy and remain on track to deliver our long term financial targets. Our portfolio of proteomic research reagents and analytical tools are critical components of scientific research, are key to unlocking the full promise of the proteomic revolution currently underway, and are positioned to enable the oncoming bio-wave of cell and gene therapies. Layer on to this a portfolio of diagnostics and genomic solutions that include our leading platforms in spatial biology and liquid biopsy and I believe we are just getting started unlocking the full potential value of this business. With that, I’ll turn it over to Jim.

Thanks Chuck. I will provide an overview of our Q1 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. Starting with the overall first quarter financial performance, adjusted EPS was $1.78 versus $1.83 one year ago, a decrease of 3% over last year. Foreign exchange negatively impacted EPS by $0.12, or minus-7% in the quarter. GAAP EPS for the quarter was $2.21 compared to $1.69 in the prior year. The biggest driver for the increase in GAAP EPS was realized gains on the sale of our investments in ChemoCentryx and Eminence during the quarter. Q1 revenue was $269.7 million, an increase of 5% year-over-year on a reported basis and 7% on an organic basis. Foreign exchange translation had an unfavorable impact of 3% and acquisitions had a favorable impact of 1% to revenue growth. Given the tough comp we faced this quarter versus prior year, I will point out that our two-year organic growth CAGR for Q1 was approximately 13%, right in line with the early part of the five-year plan our leadership team presented at our investor day in New York City a little over a year ago. Moving onto the details of the P&L, total company adjusted gross margin was 70.9% in the quarter compared to 71.2% in the prior year. The decrease was primarily driven by unfavorable foreign exchange impact partially offset by productivity gains. Adjusted SG&A in Q4 was 27.3% of revenue compared to 25.1% in the prior year, while R&D expense in Q1 was 8.9%. The increase in SG&A and R&D was driven by wage inflation and progress made in the second half of fiscal year ’22 in building the team to support ongoing strategic growth investments. Speaking of inflation, the businesses implemented strategic price increases during the quarter to offset the dollar impact of inflation on operating income; however, the dollar-for-dollar offset did have a negative impact on operating margin. Adjusted operating margin for Q1 was 34.8%, a decrease of 300 basis points from the prior year period. The pricing inflation dynamic decreased adjusted operating margin by 120 basis points. Negative foreign exchange decreased margin by another 110 basis points, while carryover of second half fiscal year ’22 investments drove the remainder of the margin dilution for the quarter. As stated in the fourth quarter fiscal year ’22 earnings call, we expect Q1 to be the low point for adjusted operating margins for the year. Going forward, we expect adjusted operating margins to expand sequentially, ending the fourth quarter of fiscal year ’23 approximately 100 basis points higher than the fourth quarter of fiscal year ’22. For the full year fiscal year ’23, our expectation for adjusted operating margin to be approximately 150 basis points lower than the full year of fiscal year ’22 remains unchanged. Looking at our numbers below operating income, net interest expense in Q1 was $3 million, decreasing $0.1 million compared to the prior year period. Our bank debt on the balance sheet as at the end of Q1 stood at $264.7 million, an increase of $8.8 million compared to where we finished last fiscal year. During the quarter, we drew down approximately $100 million on our line of credit to fund the Namocell acquisition, which was partially offset by applying the proceeds of our ChemoCentryx investment sale to our debt balance. Other adjusted non-operating income was $1.2 million for the quarter, unchanged from the prior year, primarily reflecting the foreign exchange impact related to our cash pooling arrangements. For GAAP reporting, other non-operating income includes realized gains from the sale of our investments in ChemoCentryx and Eminence. Moving even further down the P&L, our adjusted effective tax rate in Q1 was 21%. Turning to cash flow and return of capital, $56.1 million of cash was generated from operations in the quarter and our net investment in capital expenditures was $9.6 million. Also during Q1, we returned capital to shareholders by way of $19.6 million in stock buybacks and $12.5 million in dividends. We finished the quarter with 40.5 million average daily shares outstanding. Our balance sheet finished Q1 in a very strong position with $203.1 million in cash and short term, available-for-sale investments. Our net leverage ratio remains well below one times TTM EBITDA. During the quarter, we replaced our previous debt financing with a new $1 billion line of credit facility with a five-year term. Our corp dev team has been very active investigating external investment opportunities and this new increased debt facility emphasizes the continued importance M&A will have in our capital allocation strategy. Next, I’ll discuss the performance of our reporting segments, starting with the protein sciences segment. Q1 reported sales were $199.9 million with reported revenue increasing 1%. Organic growth for this segment was 3% with foreign exchange having an unfavorable impact of 3% and acquisitions contributing 1%. Given the tough year-over-year comps that Chuck pointed out for this segment, I will highlight that the two-year organic growth CAGR for this segment is greater than 14%, and the longer term historical five-year CAGR is approximately 12%. Operating margin for the protein sciences segment was 43.0%, a decrease of 270 basis points year-over-year with productivity gains more than offset by the impact of foreign exchange, price versus inflation dynamics, the fiscal year ’22 carryover of strategic investments to support future growth, and the Namocell acquisition. Turning to the diagnostics and genomics segment, Q1 reported sales were $69.9 million with reported revenue increasing 15%. Organic growth for this segment was 17% with foreign exchange having an unfavorable 2% impact. As you heard from Chuck earlier, the double-digit growth was broad-based throughout this segment with spatial biology accelerating at high teens organic growth and our exosome diagnostic prostate test really now in hyper growth mode, with a Medicare reimbursement and COVID headwinds behind it. Moving onto the diagnostics and genomic segment operating margin at 12.4%, this segment’s operating margin increased 20 basis points compared to the prior year. The increase reflects the favorable impact of volume leverage partially offset by the impact of foreign exchange and price versus inflation dynamics. Looking ahead, our end markets remain healthy and our momentum in capturing share in these markets is in line with our five-year plan. As we get past the recent regional challenges in Europe and in China, we are keeping a watchful eye on any potential short-term macro challenges that could impact our trajectory to our long term goals. We have confidence in our nimble and experienced team, who has a track record of successfully navigating dynamic environments. With the toughest comp of the year now in our rear view mirror, we anticipate a return to double-digit organic growth for the remainder of the fiscal year. That concludes my prepared comments, and with that I’ll turn the call back over to the Operator to open the line for questions.

[Operator instructions] We have our first question from the line of Puneet Souda with SVB Securities. Please go ahead.

Yes, hi Jim, Chuck. Thanks for taking the questions. First one is really-- I mean, I appreciate that you had tough comps in the quarter for protein sciences, but it was still meaningfully below our number and the street number. I think the key question that we’re getting here is how should we think about protein sciences in the second quarter here, how much of this was really sort of pull forward of demand versus actual weakening of demand, as you talked about Europe and China, and--because I can’t recall a time when you had 3% organic growth in this segment, so maybe just walk us through what you see now and how should we think about the next quarter and for the full year.

Sure, thanks Puneet. I’ll give some comments, but I do remember when I joined it was negative, so I remember plenty of quarters below mid single digits, by the way. It’s just been a while. We are totally on our plan for five years and we had been ahead of schedule, and our models are mid single digit in our core anyway, so don’t forget that. I will cut to the chase right now about September was strong, October is remaining strong. We’re basically double-digit across the board, if not high teens, so things look good. You are exactly correct - we were really hot Q4, coming in at 14 versus consensus of 11. Definitely had some pull forwards there. We’ve done some studying and we had probably--you know, we had a lot of price increases July 1, there was definitely some of that. I think also to point out on the instruments side, we’re not too far off, it’s just more of weakness in Europe, cautiousness around purchasing. But we’ve also dug into what’s going on because our bookings and our funnel is very strong. It’s actually the strongest funnel we’ve ever had, but it’s taken longer to get through the booking cycle and signatures are coming more cautious, this last quarter especially. We were a bit robbed, we think. You know, we have not had any supply chain issues the last couple years and we’ve been pretty steady-eddy and very good growth, and a lot of other instrument makers and a lot of other higher capital or higher signature purchases have been--have had more supply issues, and we think there’s been a little bit of a bubble of pent-up demand in some areas, and I think we just maybe lost out a little bit on priority in some of the purchases this quarter, is what we’re coming to. We don’t see a lot of issues against price and we don’t see any issues, really, from September on. We definitely had a softer quarter in Europe and some of it was vacation for us. We do live in a little different world - we don’t have direct competitors, it’s kind of pieces here and there, and we have a large segment in biotech as well and there is definitely some on the midrange biotech, there’s definitely been softness, especially in Europe on signatures and conservatism overall. Going forward looks pretty strong. You heard the news from Jim there - we’re more concerned about that, we’re more concerned about our long term outlook, which we don’t think has changed a bit, and that’s some highlights there. We’ll let you dig in deeper now.

Okay, great. So on the small biotech side, I’m wondering if you’re seeing anything there, any sort of weakening of demand. I appreciate your comments about the current--I mean, the September and October. Jim, if I could ask you about the low to mid teens that you had talked about in the prior quarter, about fiscal year ’23, what could keep that on the lower end versus the higher end? Maybe just walk us through potential upsides and potential things that we need to watch out on, where it could be lower.

Yes, so I guess the first thing, to address the biotech, we’re seeing performance in our smaller biotechs relative to our larger pharma. We’re not seeing much differentiation. For us, when you look at the smaller purchase, what we call a run rate business which is lower dollar value, which is probably 80% of the purchases coming through, the growth in Q2 and continuing here in October continues to be mid-teens growth, particularly here in the U.S. Back to Chuck’s earlier point, it’s really the larger bulk purchases that had tougher comps and were more, call it soft this quarter and probably faced more competition with some of the supply chain breaks that were occurring in the larger dollar instrument purchases in terms of competing for dollars. With regards to looking forward, I think Europe is still the biggest question mark. We’re seeing strong performance here early in October, but obviously the macro picture there is a bit cloudy for everyone, and that’s something we’re keeping our eyes on that could--you know, that would be the one flag that could deter us from achieving double digit, if anything.

Okay, that’s great, and then last one, if I could squeeze in, on Wilson Wolf, I didn’t hear an update. Just if you could provide an update, and when do you think that options agreement could materialize?

I think we’re still looking at near the end of Q3, in that range, so. I would say overall, I know our cell and gene therapy and our gene proteins, we didn’t have a 50%-plus quarter like we’d been doing. Things have leveled out. It is very lumpy still - we don’t have a lot of large, large customers, and there was some timing in some of that, and Wilson Wolf has seen some of that as well, as well as issues around clinical and finding patients, so things have softened a little but still more or less on track for what our schedule was for them. Although the improvement is in their EBITDA, their EBITDA is north of 70%, so they’re doing really well and as there’s volume, they’re getting good scale, so. So a lot of good news there too, but we’re investing into more sales reps - we’re calling it our surge team. They are helping more out, the whole scale ready team, from a proteins point of view because we’re going to be adding more and more proteins to our factory. The factory the remainder of this year, the fiscal year, we’re going to add six more products, which by far will be the largest menu out there in GMP proteins for both regen and cell and gene therapy, so that’s all a really good story. We just wanted to focus on what we thought you guys really wanted to focus on this quarter, so no issues there.

Got it, thanks guys.

Thank you. We have the next question from the line of Dan Arias with Stifel. Please go ahead.

Hi, good morning guys. Chuck, how do you see ACD growth tracking across the quarters this year, and what should we pencil in for the impact of the partnership that you have with Akoya? Then on the hiring side, do you feel like the commercial team will be fully staffed out and sort of in the position that you wanted to be to start calendar ’23?

More or less, yes. We’re down two heads, which is about normal. There’s still attrition in our business, along with everybody else’s, but we’re pretty much at 95% full strength and have been for this quarter. We promised a succession of improving quarters since we kind of turned this around three, four quarters ago, and they didn’t come off that at all. They had a tremendous quarter at 17% growth. I would say Akoya is still more in the future. We’re kind of waiting on them at this point, but we’re ready to go. You saw our other announcements. We’re really going after this front end for mass spec. It’s a big TAM out there and we talk about--you know, LC mass spec and GS mass spec, you know, it’s one term out there, but there are different ways to be a front end on mass spec, which is a massive opportunity and we’re taking more and more share all the time, so we’re focused on that as well. But you know, SPD is good, and we’re going after it eventually, more pathology with automation, and they’re not the only game in town at Akoya. We’re working with more than just them, but we are solidified with them on a deal and the partnership is going very well, and we’re kind of waiting on them to get to the point where we can start making revenue together and getting something out of it, so.

Okay, and then maybe on SimplePlex, as we think about this post-COVID phase that hopefully we stay in here, how are you thinking about average pull through for the installed base and how that might look this year? I mean, you guys obviously placed a ton of those systems during COVID, so when it just comes to this overall comp issue that we’re talking about here, I’m curious how you think utilization and recurring revenue streams compare as we come off the peak.

Yes, well overall in consumables for ASD, we were mid-20s for growth in the U.S., just so you know, so a very strong consumables and similar double-digit growth overall with SimplePlex in the U.S. It’s more of an issue around Europe and just some of the normal lumpiness we see with the instruments on the large orders around these big clinical with SimplePlex, but very solid. We’re knocking on the door of getting near 2,000 machines in the field, and those things chew cartridges like crazy, right, so we see a big, bright future and get ready, clinical stuff is right around the corner. We have very little in clinical yet - it’s all coming, a lot of interest. Still one of the biggest [indiscernible].

Do you see utilization as a headwind this year? Is that one of the areas where you think there’s a headwind when you just think about how much those systems might have been run last year and potentially running less this year?

Maybe in Europe potentially, and there is certainly one large customer in Europe that we’re waiting to turn on again for the next set of clinicals. If that doesn’t develop, there might be a bit of a headwind, but in general North America is steady-eddy. It’s more about Europe in your question. Overall, that is still--it’s okay, I think.

Thanks Chuck.

Thank you. We have the next question from the line of Dan Leonard with Credit Suisse. Please go ahead.

Thank you. I wanted to start off, Jim, can I confirm that you said you believe you’ll deliver double-digit growth for the balance of the year, and if that’s the case, that would imply a bigger sequential step-up in Q2 than you typically achieve, so can you talk through the drivers?

Yes, if you look at our year-over-year comps, first of all, the comps become less of a hurdle year over year as we progress through the year, including next quarter. We’re hopeful that the regional headwinds we faced, mainly in China as well as in Europe for the first two months of the quarter, this quarter will continue to improve. We have a lot of confidence in that with China and so far here in October, we’re seeing more confidence in that with regards to Europe. Had those two regions not underperformed relative to the U.S. and to their historical performance, relative performance, we probably would be talking about double-digit growth in Q1 as opposed to something below that, even with the tough comp.

Yes, especially with the pull forwards.

Can you elaborate further on how you’re thinking about European macro headwinds? That does seem to be a point of confusion with folks I speak to, given your end market mix.

Yes, sure. Well, we’re seeing cautiousness and we do see some lumpiness, as I mentioned already anyway. We definitely had a weaker than normal July and August across the board - I mean everywhere, so it’s not a systemic issue. September came back gangbusters, but not enough to cover what we saw in July and August, and I would say, well, that’s great, but then October better be hot. October is also looking okay so far, but there is definitely cautiousness. Our teams over there are having issues. We’ve sent over some more help in the field. We were, I would say, in the seventh of so inning of correcting Europe anyway - if you remember, we weren’t that happy with Europe before all this, so I don’t think we’re through that, and we’re focused a lot on our new platforms over there and things like SPD, which had really gone soft in the previous year and now are coming back alive, so we’ll see. Instruments, where I talked about time for signature, it’s delayed longer than usual in our funnel, and we’re trying to get to that. I think it really has been an issue of competing for dollars with other suppliers having finally enough inventory to support things, and I think we were maybe pushed down a little bit this quarter. Our funnel is massive. It’s the best it’s ever been both here and the U.S., and our teams--and believe me, we’ve had some very detailed, we call QBRs, our quarterly business reviews, and they’re adamant that the funnel and the pipeline looks great and demand is solid. It’s just taking longer to get the capital signatures.

Appreciate that color, Chuck. Thank you.

There is also, as I mentioned too, we definitely had some SimplePlex--you know, a lot of our clinicals are very large cartridge buys, and there was some timing issues in there. Like I said, if these bounce back like we think - you know, they come on and they come off and they come back on, [indiscernible] more or less, that will help as well, so.

Understood, thank you.

Thank you. We have the next question from the line of Jacob Johnson with Stephens. Please go ahead.

Hi, it’s Anna on for Jacob. Good morning. Can you just update us on the EPI test? I think you’re close to getting reimbursement for annual testing and use of the surveillance [indiscernible]. Where do you stand on the business development effort around this?

Yes, we got it. More or less, it was a long laundry list of reconsideration items over the last two years. We got everything we wanted back to match the NCCN guidelines about one issue, and that’s the negative biopsy, so we’re really good to go and that more or less doubles the TAM. The numbers are going up dramatically. Jim pointed out the numbers - we’re seeing hyper growth now, so we’re adding reps, we’ve added--I’m not giving numbers, but we added 25% more reps this last two quarters, so we’re on fire. The new leadership team there over the last six months or so has been amazing. We’ve done everything. We’re changing our message to lining up with Cal Ripken Jr. again, a lot of shows, but we are just ready to publish the next--the 2.5 year outcome study, which is like 1,000 patients. That’s the big event waiting for the rest of the big guys out there in insurance. We’ve got Humana but we’re after United and the rest of Blues and all these, and we’re knocking on the door. It’s coming.

You talk about exosome as a platform that could be a billion revenue unicorn. Now that you’ve partnered off ExoTru, what are you working on next there?

About six things: multi-variable, there’s a bunch of things I won’t get into, but we can one-on-one, so we’ve got a strong hopper. One reason we did license off the ExoTru was because we have a strong hopper of things also to work on. We can’t work on them all and launch them all ourselves, so, but we have strong interest and a good channel partner that has strength in their area, like Thermo does, with ExoTru--you know, we’re going to do that. But we have a lot of stuff coming, so Sjögren's is just the tip of the iceberg. It’s a great example of things we can launch and get out there. The statements about a billion dollar platform is about five to 10 years out when there’s at least a dozen different indications out there, which we think we’ll have. They won’t all be done by us. There will be a mix of partnerships and some driven by us. It’s the future of liquid biopsy, so write it down. You can look back 10 years and say we said so.

Thanks Chuck.

Thank you. We have the next question from the lien of Alex Nowak with Craig Hallum. Please go ahead.

Great, good morning everyone. I wanted to expand on that softness in bulk purchasing that you mentioned, Chuck. I know you just spoke to Dan about the European summer vacations, but do you think any of the weakness there in the bulk purchase side is just related to just being less dollars out there for biotech projects? I know one of your peers this morning in biotech manufacturing reported--they cited some short term cash sensitivity decisions by biotech customers, so just more detail what you’re hearing out there in the field around dollars.

Yes, well we separate our run rate into, we call larger orders and smaller orders, and our large orders are something over $10,000, and those are either pharma-related larger orders or larger biotech orders, or bulks. The bulks are on a special volume curve, so not a pricing impact so that doesn’t explain that, but on everything else but the bulks, I think what you just said is very possible, an issue that’s happened. We are seeing slowness to purchase and some push-outs on a lot of these orders, and being told such, that the demand is not going away but they’re watching their dollars. There’s kind of a cash crunch right now, and I think we have--probably it’s uncomfortable to tell us that maybe we were de-prioritized versus getting in with an instrument that they couldn’t get for the last nine months because of supply chain issues from somebody else or whatever. We’ve had no issues and everybody knows we’re steady and we can deliver, and our on-time delivery records are at record levels and we’re unique out there. We’ve never had one supply chain issue through this whole COVID mess to speak of, so of anything material, we sell. The team’s been outstanding.

I’ll just add, Chuck, we’re hearing from our commercial teams, it’s not so much--it’s not that we’re losing any kind of bulk orders or instrument orders, it’s more about delay in getting them through the system.

Okay, understood. That’s helpful. Then maybe just thinking--taking that commentary and then applying it to the expense growth that you’re expecting for the year, how are you thinking about hiring, and then also has the employment market eased up here a bit or is it still pretty tight for talent?

Yes, great question. I had a long career at 3M which had a lot of operations management in a low growth company, so I know how to pull triggers on and off, and I know how to deal with things when they slow down or whatever. Attrition has been more or less a nightmare for us and everybody, and so we are still full steam ahead. Part of our margin impact has been the catch-up in hiring, and so we’re still looking at doing that, so we’re really hiring hard in SVD, hiring still in China. China is lighting it up again. Namocell, our new acquisition, we’ve almost doubled their headcount in the six months we’ve owned them, but in other areas that we’re maybe looking softer to antibodies [indiscernible] we talked about this quarter, we’re looking at mission critical needs and replacements and looking at as we expand. As businesses grow, they need people. If they’re not growing, they’re going to need less people. We are still on a track--we added 300 people net last year, I’d be shocked if we didn’t add 300 net this year, to be honest, so. We’ve got a cautious outlook in some areas. We’re looking at all the areas that we manage - we have five divisions and we have roughly a dozen or so business units. As you know, a couple are super important to us - cell and gene therapy, exosomes, and so those are kind of what they need is what they get. Even Asuragen, growing near 25%, lighting it up in Europe, needing people, we’re adding people. I’m more concerned about losing great people and getting behind all this attrition. It is getting better, as you commented and you asked about, much better. People are coming back to work, too, so people are wanting to come back to work finally.

That is good. Thanks.

Thank you. We have the next question from the line of Catherine Schulte with Baird. Please go ahead.

Hey guys, thanks for the questions. First maybe on China, how much of an impact did lockdowns have in the quarter? Are you seeing any impact from the recent lockdowns that have happened, and how do you view that outlook for this upcoming quarter and for the full year?

Yes, well, we were roughly 12 or more full points ahead of last quarter in growth, so we’re on our trek back. We expect mid teens, in that range for this quarter, and on our way back to 25 end of the year as a run rate level. Kind of expecting the year to be roughly 20-ish or so, even with the soft dig-out here from the China lockdowns. It’s still sporadic; in fact, we’ve got meetings this week where I was trying to get my head of Asia in. He was in Shanghai and he couldn’t get out because he couldn’t get through Canada, through visa issues, so. We just heard Disney locked people in their resort and they won’t let them go because there’s an outbreak or something, so it’s going to be almost building by building, block by block is the way it’s been described to us. It’s not city-wide and it’s not over yet, but I would say it’s drifting slowly towards opening overall. We don’t see Shanghai locking down again, which would hurt our warehouse, so we think we’re still open for business across China. We talked about the steady improvement in China and we’re on track, if not better than on track for this quarter and beyond.

Got it, and then on GMP reagents, you talked about adding some additional proteins by the end of the year. Can you just give us a status update on customers signing on and filling that capacity?

We have not enough whales, a few tunas, and way too many plankton in our customer list, so we’ve got 150 customers that only a handful are really large ones, and obviously the there’s a timing issue, they’re spotty in their orders for their clinicals and such. We are adding people and driving the pipeline and just getting out there, doing more with Wilson Wolfe and our scale ready team to try and get our stuff pulled in, focusing as much on regenerative medicine as we are in cell and gene therapy, because we are the leader in regen medicine for reagents whereas we aren’t in cell and gene therapy, and we have a lot of buy-in there. A lot of the new products going out are for regen med, so we’ll have the largest portfolio. We do now, but we’ll have the largest in St. Paul as well by the end of the year, we think, of menu items. We’re sampling a lot. People are astounded at the lot to lot consistency in what we have, but end of the day, it’s not the big ticket item for doing a clinical. The reagents are important, they’re critical, but you’re going to have to show more than just price and things to work your way in, and whereas we’re in the pole position in regen but we’re not in cell and gene therapy, so we’re still fighting some big competitors out there with Celgene, [indiscernible] and others, but we’re holding our own and growing nicely and it’s coming, so.

Great, thank you.

Thank you. We have our next question from the line of Patrick Donnelly with Citi. Please go ahead.

Hey guys, thank you for taking the questions. Chuck, maybe one for you, another one for you, I should say, on kind of the quarterly cadence. I think you flagged October, I think I heard a high teens in there. Was that specific to protein sciences, and I guess what do you see in there in terms of that sharp recovery? Was it just some push-out? I know you mentioned the vacation issue in Europe. Was it Europe kind of coming back? Maybe just talk about that, that kind of high teens comment in terms of October, where you saw--

Some was high teens. I think I said double digit to mid teens, maybe there was a high teen or two. Primarily it is around all the different platforms we have in PSS. They are having a good October and still focused more on the U.S. We’re still collecting data here for Europe. Europe is improving, but how could it not improve, so. So yes, strong, proteins for sure, antibodies for sure, assays for sure.

Okay, that’s helpful. Then Jim, maybe on the margin side, in spite of the top line being a little softer, you guys managed expenses pretty well. It sounds like you passed a little bit of price to offset. Can you just talk about the margin cadence as we work our way through the year here? Obviously the guidance is holding, but maybe just the levers you have and what you pulled there in the quarter, and how we should think about the go-forward.

Yes, and it’s really going to be volume leverage that will allow us to continue to expand our margin on a go-forward basis. I think we’ll still have the same headwinds around FX and around that price inflation dynamic, even though we’re covering inflation dollar for dollar. But the investments--you know, as Chuck mentioned earlier, we caught up in a big way in the second half of fiscal year ’22, particularly in Q4 with our growth investments, and so it’s much more surgical in terms of the investments going forward as opposed to hire everyone you can kind of mentality, as it was the past couple years. With the growth investments moderating and the volume ramping as we sequentially go through the year, you can expect that leverage to drop to the bottom line and margins to expand.

Helpful, thank you guys.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I’d like to turn the call back over to Chuck Kummeth, CEO for closing remarks. Over to you, sir.

Okay, well thank you. It is interesting that we have a double-digit quarter in our diagnostic reagents division but there are no questions. We had so many quarters and years of negative growth, and this thing is lighting it up as well and small molecule is just on fire, especially in the GMP format for us. The only thing we didn’t cover too much, but more good news there. With that, I’ll end the call and look forward to the one-on-ones the rest of the day, and talk to you next quarter. We’re looking forward to it. Thank you.