TECH - NASDAQ

Good morning, and welcome to the Bio-Techne Earnings Conference Call for the Fourth Quarter of Fiscal Year 2023. At this time all participants have been placed in listen-only mode and the call will be opened for questions following management's 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-Techne's Vice President, Investor Relations.

Good morning and thank you for joining us. On the call with me this morning are Chuck Kummeth, Bio-Techne's Chief Executive Officer; Jim Hippel, Chief Financial Officer; Kim Kelderman, Diagnostic and Genomics Segment President; and Will Geist, Protein Sciences Segment President. 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. 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 hosting an Investor Day on September 8 in New York City and also participating in the UBS, Baird and Morgan Stanley conferences in August and September. We look forward to connecting with many of you at these upcoming events. I will now turn the call over to Chuck.

Thanks, Dave, and good morning, everyone. Thank you for joining us for our fourth quarter conference call. We finished our fiscal 2023 largely as expected with 5% fourth quarter organic growth nearing the growth we delivered for full fiscal 2023 and capped a year where we successfully navigated a transitory macroeconomic environment. I'm extremely proud of the team's ability to deliver this growth in the face of transitory headwinds, which we refer to as the COVID hangover that we faced for the majority of this past fiscal year. These post-COVID induced headwinds included a softer biotech funding environment, inventory destocking from a subset of our OEM customers and macroeconomic challenges in China. Despite these challenges, the endurance of our key growth platforms was demonstrated yet again in Q4 and double-digit growth in our ProteinSimple branded instrument portfolio, spatial biology ACD platform, cell and gene therapy workflow solutions, and our liquid biopsy exosome platform. Now let's get into the details a bit, starting with an overview of our performance by geography and end market. In North America, we grew mid-single digits for both the quarter and the fiscal year. This may appear underwhelming. However, keep in mind that North America grew over 20% for the quarter and full year in fiscal 2022 driven by our biopharma end markets that was on fire with over 30% growth. With that kind of comp, as you can imagine, North America faced the greatest headwind from lower biotech funding this year. Europe had a great quarter to end the year with low double-digit growth in Q4, finishing the year with growth in the high single digits. This was on top of a comp from last year that was also incredibly strong with growth in the mid-teens for both Q4 and full year fiscal 2022. Now for the region that is on everyone's minds China. China is a region that has faced the most volatility throughout COVID and even now during the COVID hangover, you will recall during our third quarter conference call, we talked about how we saw our business in China come roaring back once everyone there was recovered from the COVID illness and back to work after the Chinese New Year. That strength continued through the first half of Q4 then abruptly stalled when the annual funding of new programs from the Chinese government did not occur as it usually does during the April-May timeframe. Despite this delay in funding, our team in China was still able to execute extremely well and delivered growth in the mid-teens for Q4. However, at this moment, it is still unclear when government funding of new programs in life sciences will resume. History suggests however, they won't be long. And when it returned, we expect the growth to be robust. While COVID and its aftermath have been extremely disruptive to business in China, it has only strengthened the long-term thesis that the pursuit of better healthcare in China will continue to be a top national priority. We are positioned extremely well with our differentiated portfolio to enable China in their pursuit. In the meantime, we will continue to serve our customers in China by providing them the tools to make their research as productive as possible with the funds they have. Now let's discuss our growth platform, starting with our Protein Sciences segment, where we grew 4% in both the quarter and the fiscal year. This growth was delivered on a particularly challenging comparison for both the quarter and fiscal year, where we grew 16% and 19% in the prior year periods, respectively. During the quarter, we advanced our cell and gene therapy initiatives as our reagents, media and analytical workflow solutions continue to aid our customers' progress on therapy, development and clinical trials. Collectively, our portfolio of cell and gene therapy products grew almost 30% in Q4 and are positioned to remain a key growth driver going forward. This strong performance puts an exclamation point on a year where despite a soft biotech funding environment, our cell and gene therapy business increased over 20% for the full year. For GMP proteins, we continue to offer the broadest menu in the market, including GMP proteins for immuno-oncology therapies as well as an industry-leading portfolio for regenerative medicine applications. These proteins are manufactured with a high level of bioactivity, lot-to-lot consistency and purity has become synonymous with our R&D Systems brand of reagents. This unique offering and our reputation as the highest quality producer drove Q4 growth of almost 60% and our third consecutive quarter of record GMP protein revenue. It's worth noting that over 400 cell therapy accounts have used our GMP proteins to date, over 20% more accounts than in the prior year. Additionally, we are in the very early stages of realizing the large cross-selling opportunities that exist within our GMP protein customer base and the broader Bio-Techne portfolio and has strategies in place to drive adoption of RUO reagents, immunoassays, cell culture products, analytical tools and spatial biology solutions throughout these accounts. Factoring in our pending Wilson Wolf acquisition and their roster of approximately 800 customers that we have access to via ScaleReady, this immense cross-selling opportunity becomes even larger. Our GMP portfolio is not unique [indiscernible] proteins as we also offer GMP versions of several reagents within our small molecule portfolio. As a reminder, our small molecules are critical ingredients for cell reprogramming, expansion and differentiation, which represent critical stages in regenerative medicine workflows. High demand for our portfolio of GMP small molecules drove growth of over 250% in the quarter, and we are adding capacity to meet current and anticipated demand for these key bioactive reagents. There are other areas of our vast portfolio of reagents and media that are ripe for GMP offerings, including antibodies, and we will continue to develop and commercialize products to meet growing demand for these key products going forward. Moving on to our catalog of RUO, or research use only reagents, which includes over 6,000 proteins and 400,000 antibody types. As a reminder, researchers rely on these reagents as key inputs for their experiments as these consumable products enable critical functions within the lab, including cell growth and differentiation, disease monitoring, cell imaging, immunoassays, immunohistochemistry, Western blots and other foundational research functions. The majority of our RUO reagent business is a run rate, where researchers order proteins, antibodies and small molecules as needed for their ongoing research. These reagents also serve as content for a handful of OEM customers where they purchase our reagents frequently, antibodies as a key component of their end products, which in turn generate royalties for Bio-Techne. As predicted, we expect that a destocking effect again in Q4 with a handful of these OEM customers as they work their way through excess inventory, stocked out of caution during the COVID induced industry supply chain crunch. We expect this destocking dynamic to gradually wind down over the next six months before normal ordering patterns resume for these customers in the back half of our fiscal 2024. During the quarter, we announced that we prevailed on a claim that one of our competitors, Miltenyi Biosciences, commercialized antibodies that is obtained by reverse engineering two of Bio-Techne's proprietary R&D Systems branded antibodies. Bio-Techne takes great pride in the fact that our proprietary products are the result of our own internally developed intellectual property. We have a long history of selectively sharing our intellectual property with academic and biopharma partners through licensing arrangements, but will vigorously defend our position against any unlawful use of our proprietary discoveries. Continuing with the Protein Sciences segment, let's discuss the performance of our ProteinSimple branded portfolio of instruments and consumables where we delivered low double-digit growth in the quarter. The Q4 performance was led by nearly 20% growth in our fully automated Western blot solution branded as Simple Western. The platform's ability to reduce the two-day long manual messy Western blotting process into a three-hour push button, highly reproducible solution continues to drive demand within our biopharma and academic customer bases. We are also seeing robust adoption of Simple Western and gene therapy applications with the system increasingly being utilized to measure protein expression potency, empty versus full capsid ratio and to detect process impurities. Our biologics business increased upper single digits for the quarter on top of a comp of nearly 40% growth last year as we experienced strong demand and initial sales of our MauriceFlex instrument. As a reminder, MauriceFlex as protein charge variant fractionation capabilities to Maurice's legacy protein identity, charge and purity capabilities, fractionation of the frontend step to mass spectrometry and MauriceFlex resolves the labor-intensive and time-consuming challenges of using legacy fractionation methods, including ion-exchange chromatography. This new application enters Maurice into a new $300 million market, approximately doubling the addressable market opportunity for the instrument. We are very encouraged by the strong initial response to this exciting new instrument. For our Simple Plex automated multiplexing ELISA instrument branded as Ella, we continue to build the menu of assays launching 36 validated Simple Plex assays on the platform during fiscal 2023 including four AAV titer assays for gene therapy and five neuroscience markers. Going forward, neuroscience and cell and gene therapy represent large opportunities for Ella and both remain a focus of application development and menu expansion initiatives. During the quarter, we also made significant progress positioning Ella as a clinical diagnostics platform as we successfully completed the ISO 1345 audit of our Wallingford facility and are waiting to hear back on the results. With this certification in hand, we will be ready to pursue clinical diagnostic opportunities opening a large potential end market for this highly sensitive, easy-to-use and fast multiplexing immunoassay instruments. Now let's discuss our Diagnostics and Genomics segment, where organic revenue increased 10% for the quarter and 8% for the fiscal year. I'll start with our Molecular Diagnostics business, where we once again drove significant growth in our ExoDx prostate test as the valuable information on whether a man with an indeterminate PSA score should proceed with an invasive and potentially dangerous prostate biopsy continues to resonate with both patients and physicians. ExoDx prostate volume and associated revenue both increased nearly 70% compared to the prior year quarter capping a breakout year for the test where volume increased by over 70%, revenue increased over 90%, and we surpassed 100,000 ExoDx tests performed to date. The value of our ExoDx prostate test was further solidified with the recent publication in the Prostate Cancer and Prostatic Diseases Journal of interim results from a randomized study of over 1,000 patients designed to show the clinical utility of the test. In the study, patients identified as low risk by the ExoDx prostate test received fewer biopsies, significantly deferred the time to their first biopsy, and we're significantly less likely to be diagnosed in the future with high-grade prostate cancer. The growing acceptance of the test, strong clinical utility data, a Medicare local coverage decision is now reflective of the NCCN guidelines and includes reimbursement for repeat annual testing as well as a fortified sales force and market access team positioned fiscal 2024 to be another record year for our ExoDx prostate test. Now let's discuss our Spatial Biology franchise, which includes our ACD branded portfolio of more than 45,000 probes in over 400 species that enable biomarker imaging at single molecule sensitivity in single cell resolution. Our spatial biology business increased low double digits in both Q4 and the fiscal year. The growing interest and utilization of our ACD technology as the go-to technology for translational spatial biology research applications is apparent in the growing number of publications citing the technology, which increased over 10% during the first half of calendar 2023 and now totaled over 8,000. Within the portfolio, we are experiencing continued momentum in BaseScope, which enables the detection of short RNA target sequences and microRNA scope, which allows for the visualization of ASO, microRNA and siRNA, and other nucleic acid targets as these highly sensitive and specific assays increased over 20% and 30% respectively in Q4. Following the robust growth for both the quarter and the fiscal year, BaseScope and microRNA scope are both becoming increasingly more spatial to our overall spatial biology franchise. Separately, we furthered the partnering strategy for our gold standard RNAscope technology with the release of our of an RNAscope multiomic workflow for the standard Biotools Hyperion Imaging System. We also expanded our growing arsenal of ASR probes with the launch of RNAscope probes for Kappa and Lambda and as analyte specific reagents or ASRs. Kappa and Lambda are important oncology biomarkers for B-cell lymphomas and these ASRs will enable CLIA labs to develop customized tests while maintaining high standards of analytical and clinical performance. Finally, I’d like to officially welcome the Lunaphore team to Bio-Techne. As a reminder, we recently closed the Lunaphore acquisition, which is the 18th acquisition our team is closed during my tenure as CEO. This acquisition strengthens our spatial biology franchise while adding a talented group of innovators to the company. Our strong track record of identifying state-of-the-art platforms and technologies on the cusp of significant market uptake in growth like Lunaphore has been a key driver of our double-digit revenue in total stock return CAGR over the last 10 years. This acquisition builds off of partnership we announced with Lunaphore earlier this year. The two companies partnered to develop the first fully automated multiomics spatial biology platform. This novel offering will be capable of simultaneously interrogating protein and RNA expression at a single cell revolution using a fully automated same slide workflow pairing Lunaphore’s COMET instrument inspire antibody panels with our legacy RNAscope high-plex technology. COMET is early in its initial commercialization, but the system’s end-to-end capabilities that fully automate staining imaging and image pre-processing steps. Use of conjugated antibodies and high throughput design is generating significant interest, market traction and placements. In summary, Q4 concludes the fiscal year where the team successfully navigated several challenges facing the company and the broader life sciences tool industry. While the short-term macro challenges are not over, we are encouraged that they will gradually diminish in the year ahead. Starting with the less challenging comps from the COVID halo [ph] days, less destocking by our OEM customers from the COVID hangover days, and a more stable biotech funding environment going forward. While Q4 was a good quarter for us in China, the funding environment in China will likely be a big challenge for at least the first half of the year. But don’t doubt [ph] China’s resolved for better healthcare and we believe when the funding returns, it will come back strong. As this past year has proven, our stable of growth platforms can persevere in good times as well as challenging ones. We’ll continue to prioritize and focus our execution on these growth platforms which propel this company to accelerated growth and profitability in the years to come. With that, I’ll turn it over to Jim.

Thanks, Chuck. I’ll start with some additional detail on our Q4 and fiscal 2023 financial performance and then give some thoughts on the financial outlook for the year ahead. Starting with the overall fourth quarter financial performance, adjusted EPS was $0.55, compared to $0.51 in the prior year quarter, an increase of 8% over last year. Foreign exchange negatively impacted adjusted EPS by a $0.01 or minus 2% in the quarter. GAAP EPS for the quarter was $0.47, compared to $0.38 in the prior year. Q4 revenue was $301.3 million, an increase of 5% year-over-year on both an organic and reported basis. For the full fiscal year 2023, revenue was over $1.1 billion, an increase of 3% on a reported basis and 5% on an organic basis. Foreign exchange translation had an unfavorable impact of 2% and acquisitions had an immaterial impact on our full fiscal year revenue growth. Moving on to our organic growth by region and end market in Q4, North America grew mid-single digits. Europe increased low-double digits and China grew mid-teens in the quarter. As Chuck already mentioned, the growth in North America and Europe was on top of very high comps from the prior year when they were experiencing what we now refer to as the COVID halo effect. China was more volatile as it has been all year. It’s a very strong first half of the quarter followed by a rather weak half. Nonetheless, the mid-teens growth rate we delivered in China appears to be one of the best results along our life science tool company peers, and speaks to the overall resiliency and value that our bioactive reagents, analytic tools and spatial biology solutions delivered to our customers in the region. APAC outside of China declined low-single digits overall with similar COVID hangover induced challenges as China in several countries in the region. By end market in Q4, biopharma grew mid-single digits on top of very tough comps in the prior year. While academia grew upper single digits. Similar to our Q3 destocking by a handful of our Protein Sciences, OEM licensing and supply customers negatively impacted overall company revenue growth by approximately 2%. [Indiscernible] revenue on the P&L, total company adjusted gross margin was 71.6% in the quarter compared to 73.2% in the prior year. The decreased was primarily driven by unfavorable product mix. Adjusted SG&A in Q4 was 26.8% of revenue, compared to 27.8% in the prior year. While R&D expense in Q4 was 7.8% of revenue compared to 8.1% in the prior year. The decrease in relative SG&A and R&D was driven by operational efficiencies and diligent expense management, which was partially offset by ongoing strategic growth investments. The businesses implemented strategic price increases during the first half of fiscal year 2023 to offset the dollar impact of inflation to operating income with pricing also largely offsetting the inflation impact on our operating margin in Q4. Adjusted operating margin for Q4 was 37.1%, a decrease of 30 basis points from the prior year period, a 10 basis point improvement sequentially. Excluding Namocell acquisition from earlier this fiscal year, adjusted operating margin was 40 basis points higher than the prior year due diligent cost management and prioritization. Looking at our numbers below operating income, net interest expense in Q4 was $2.5 million, increasing $0.3 million compared to the prior year due to higher debt levels partially offset by higher interest income earned on cash deposits. Our bank debt on the balance sheet as of the end of Q4 stood at $350 million, a decrease to $20 million compared to last quarter. I would note we closed the Lunaphore acquisition at the beginning of this current fiscal year, which was partially funded by debt and cash on hand and we anticipate our net interest expense to increase sequentially to approximately $4.5 million in the first quarter of fiscal year 2024. Other adjusted not operating expense was $0.1 million in the quarter, a decrease of $1.3 million compared to the prior year, primarily reflecting our 20% share of Wilson Wolf adjusted net income, which amounted to $1.7 million a quarter more than offset by the foreign exchange impact related to our cash pooling arrangements. Moving further down the P&L, our adjusted effective tax rate in Q4 was 19.2%. Turning to cash flow and return of capital, $83.4 million of cash was generated from operations in the quarter and our net investment in capital expenditures was $10.8 million. Also during Q4, we returned capital to shareholders by way of $12.5 million in dividends. We finished the quarter with 161.9 million average diluted shares outstanding. Our balance sheet finished Q4 in a strong position with $204.3 million in cash and short term available for sale investments. And our total leverage ratio remained well below one times TTM EBITDA. 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. Q4 reported sales were $223 million with reported revenue increasing 3% compared to the same period last year. Organic growth for this segment was 4% with foreign exchange having unfavorable impact of 1%. As a reminder, our Protein Sciences segment that has the most exposure to biotech funding considerations, the OEM destocking that has occurred among our licensing and commercial supply customers, as well as to the China geographic region. Operating margin for the Protein Sciences segment was 44.7%, a decrease of 20 basis points year-over-year driven by the impact of the Namocell acquisition. Turning to the Diagnostics and Genomics segment. Q4 reported sales were $79 million with reported and organic revenue both increasing 10%. Our Exosome Diagnostics business remain very strong in the quarter as our fortified marketing message, strong clinical data strength in commercial team and the recently updated Medicare LCD drove test volume and revenue growth. Also, our spatial biology business delivered low-double digit growth in the quarter with strong performances in our RNAscope, BaseScope, and microRNA product line. As Chuck highlighted earlier, we are very excited about our recent acquisition of Lunaphore and expect it’ll add at least 1.5% to the company’s reported growth in fiscal year 2024 with a standalone growth rate over a 100%. Moving on to the Diagnostics and Genomics segment, operating margin at 18.5%, the segment’s operating margin increased 280 basis points, compared to the prior year. The segment’s operating margin was favorably impacted by volume leverage. Before we get to Q&A, I will summarize our fiscal year 2023 and how it shapes our view for the upcoming fiscal 2024 as follows. We view fiscal 2023 as the year of the COVID hangover, which followed two extremely strong years that we refer to as the COVID halo. This hangover included a more risk off mentality for smaller biotech investing, government induced shutdowns in our highest growth region that be in China and destocking of excessive inventories that took place during the COVID induced supply chain crunch. Through it all and as Q4 demonstrated, our growth platforms are still winning with double-digit growth. Now the question on everyone’s mind is, will a COVID hangover last as long as the COVID halo did? Well, as with everyone else, we don’t have a crystal ball that gives us that answer. We do see is that biotech spending has stabilized. Therefore, we are hopeful that going into fiscal year 2024, this headwind we faced in fiscal year 2023 is diminished. However, we haven’t noticed any meaningful increases in biotech funding that would suggest this becomes a tailwind anytime soon. We do estimate that destocking from our OEM licensing and commercial supply customers will unwind by the end of this calendar year and should become a tailwind in calendar year 2024 as buying from these customers resumed. As Chuck described earlier, China took its surprising and sudden reversal and revenue trajectory halfway through the most recent fourth quarter when the usual annual cycle of renewed government funding did not occur. Until funding of life sciences by the Chinese government returns, tools companies like us will see continued headwinds in this region. When will government funding of life sciences return in China is anyone’s guess. The given China’s history and publicly stated importance of life sciences to their sovereign strategy, we expect that the funding will return sooner rather than later, and when it does, it will be strong. So what does this all potentially mean for our fiscal year 2024? Well, we believe it means that we will need to grow primarily by gaining wallet share in this cautionary financial environment just as we did for the entirety of fiscal year 2023. We’ll continue to do this by selectively investing and promoting our long-term growth platforms, namely cell and gene therapy, liquid biopsy, spatial biology, and our analytical instrument platforms. Thus, we expect our organic revenue growth in the first half of fiscal year 2024 to be similar to our organic growth in fiscal year 2023. With regards to the back half of our fiscal year, there is a path to accelerating growth rates and OEM purchasing returns and if China government funding of life sciences occurs before the next Chinese New Year. As we look to adjusted operating margins for the year ahead, we estimate they will be down approximately 300 basis points from fiscal year 2023, mostly driven by our acquisition of Lunaphore and to a lesser extent due to continued selective investment in our key growth platforms as well as our overall customer digital experience. These investments together with the acquisition of Lunaphore will ensure that we stay on track of our long-term growth goals as macro conditions improve. Margins can improve slightly from this base case depending on if and by how much revenue growth rates improve in the second half of the year. That concludes my prepared comments. And with that, I will turn the call back over the operator to open the line for questions.

[Operator Instructions] Our first question comes from Puneet Souda with Leerink Partners.

Hey, Chuck, Jim. Thanks for taking the questions. Jim, I really appreciate your thoughts on the guide versus all the uncertainties that the sector is facing. But a few more questions there. How should we think about expectations for North America and Europe, given the growth that you're seeing despite the comp that you have – how much of that is a strength that is sustainable? And then when we look at 2024, as you mentioned, in the first half being sort of mid-single digits similar line to the full year of 2023, do we think we could improve in the second half to potentially get to at least maybe high single-digits for fiscal year 2024? I know it's really hard to look at that, but there is a number of moving parts and just want to understand how you're thinking about those different moving parts, including China destocking and what that all means in numbers for 2024 and organic, if you could? Thank you.

Yes. Thanks, Puneet. Let me start off with some high-level comments around that because your question is going to be repeated about 29 time today, probably. So I think, first of all, we're one of the first companies to kind of come out and talk about the hangover beginning about a year ago, next quarter. And we talked about we'll be coming on the front end a lot sooner and we really are. In fact, this quarter, if China wouldn't have been a surprise, we would have been really ahead of where everyone expected us to be so – by a little bit anyway. So it's really all China. We'll get to that in a minute. North America, stacked up okay about as expected. Europe has actually came in stronger than expected and is turning the corner, but they went south before North America did, so we expected that as well. Behind the scenes, you guys don't know is a lot of work we've done in this off year of doing the homework and getting ready for the come out party, right? So we have hired three senior executives. We have a new leader in Europe. We have a new commercial leader for North America from [indiscernible]. We have a new divisional Senior Vice President for RSD. We have – we are fully done reorganizing Europe commercially and we're – with Peter's guidance, we're kind of relaunching and we're probably already seeing a little bit of what's happening from that with a stronger finish here. North America even coming yet further now with the coming of James Snook we're making a lot of changes, a lot of observations he's made, and those are going to start paying off. We've been at full strength in our other segment for a while. We're actually still short of – it's very aggressive and spatial, as you know, very, very competitive. And we're – we seem like to always be down one rep, but we're only down one rep, we're not down five. We're increasing there. We're increasing inventories and efficiencies, especially in Europe. So this has been – there's lot to talk about on digital side and ERPs and what we're doing on making our customer experience much better. We've made huge improvements there in the last quarter or two as well. All these are really coming – are coming in place, so we're ready for the new wave of growth they hit, which is going to be starting, I think, this coming quarter. We have softened a little bit for this first half, as you noticed Jim's comments, but it's kind of unknown. And we need to wait and see what happens at China. I think China surprised us all a little bit this quarter. It started out really good, by the way. I mean, really good for us and just shut down the second half of the quarter. We do expect government will come around and start funding again, but they haven't yet, so it's hard to get too ahead of things. If they don't, well then it will be more of the same for a while, and that's for everybody. And we had literally results that beat everybody in our field this quarter. So it's all about the forward not what's happened though, right? So we feel really good about where things ended up. As you notice, we met our bottom line. We're operational experts here. We all come from large companies. We know how to operate, and we nailed every, every target we had to nail. But growth is growth, and we can't make markets do what markets won't do. And so we're ready for the coming back party when it's coming and – especially in China, but we're already seeing it in other areas like we commented on. And let's hope Europe continues its progression back. And we're really only all talking about our core here. I mean it's RSD and it's in the instrument side, not the consumables, which are killing it, by the way, not all our instruments, and everything on the other segment, our three major investment platforms, spatial and cell and gene therapy and exosome, all had banner quarters and a banner year, really exceeding expectations on many fronts. So – and that's – by next year, doing more of the same, which it will, maybe even accelerating will start becoming much more material and can offset any headwind we have in our core anymore. So with that, maybe Jim wants to comment on the numbers, but I think it's -- we don't want to cover the same question with everybody. It's kind of just setting the stage for the day. We're really thrilled this quarter, to be honest, especially as we saw more and more of our peers come out with horrendous numbers, we feel really good – and we are – we came out last quarter after a trip to China, who were telling us they'd be a 50% quarter. We told you'd probably be 40% hedging a bit and we ended up around 20%, still better than everybody. But with the government shutting everything down, it just is what it is right now, and it will be a soft quarter, but I think when they turn the lights back on, which will happen probably within a quarter or so more than likely, it's China for God's sake, we're going to be off like a terror, I think, quite simply, and we're ready. And we spent this last year working on our infrastructure. And sometime in the coming quarters, we've got to tell you more about our new expanded website, our one Bio-Techne, where we're getting everything and put in one place for customers to really, really improve their experience and it's already starting to pay off for us. So...

No, that's very – that's super helpful, Chuck, and thanks for the great context there. I'll spare Jim and Co come back to – for more questions for him on the follow-up call, but just maybe one final one for me. Any updated thoughts on M&A? You talked about 18 acquisitions so far. How do you think – how are you thinking about the life sciences side versus the diagnostics side, obviously, Exosome Diagnostics is doing good. You didn't – I didn't hear you much on Asuragen. How are you thinking about M&A overall?

We feel really good. As you know, we just pulled off Lunaphore. That was an asset. I came and tell you how many people wanted that asset. We've been working on a long time. As you know, we're very ubiquitous, working with everybody in spatial and we have an open platform kind of a mentality here and Lunaphore is no different, other [indiscernible] work in that platform. But that thing is going to be amazing. And it's going to allow us to actually go after much stronger, not only in research, but on the pathology side without really getting crossing over into areas we don't want to create any conflicts or partners like – and others, so – which are all okay with all this. But we need to figure out a way to automate and get more out of our discovery, our platform, translational down in the under 10 Plex without taking two weeks, 24/7 running assays by hand. We can do all that now, so we need this platform, and it's ready to go. The synergies are amazing. Jim talked about the numbers. They're going to easily be those numbers and we've got a couple of points of dilution here in the coming year as we always do with a bigger acquisition. But this thing is already growing and already heavy in the revenue, and we're not waiting a year or two for this going to take off. It's already happening, and there's a strong future. So that is one area. Other M&A, we're – I don't think we've ever been busier. We're busy on more than a few right now. And as we already said it should be a big M&A year, everyone is staying the same. Smaller companies aren't being able to IPO right now, a lot of funding issues. It's the time for finding partners and new owners, and we're very busy and there's a lot of areas we're still looking to address things like in cell and gene therapy and media and other areas that they're all coming. And there is a lot of proteomics companies. They're all starting to look outside at being acquired, even it's very public, even Abcam is for sale, and I wouldn't have thought that would have happened yet, but there is a lot of surprises out there in the market these days.

Super. All right. Thanks guys.

The next question comes from Patrick Donnelly with Citi.

Hi, guys. Thanks for taking the questions. Jim, maybe one on the margin outlook there down 300 bps. I know you mentioned Lunaphore dilution. Can you just talk about maybe a bridge of M&A dilution versus kind of the organic number? And I guess just that path obviously you guys have the long-term target out there of the 40%. What are the key levers you can pull to maybe get that margin going a little bit on the core side?

So I'd say over two third of that dilution is driven strictly by the Lunaphore acquisition. The rest has to do with like our continued strategic investments in those growth areas that we've talked about during this call. We see it – if you exclude Lunaphore from our results, we see – similar to this past year, we see our organic margin being – finishing the year better than we did this year. We – it be just the Lunaphore that brings it down below. I think with regards to triggers that could improve on those margins, it's largely a revenue gain. I mean like I mentioned in my opening – in my comments, if revenue increases, the more revenue improvement, the growth improves in the back half of the year, the better there is to get more leverage of our cost base and increase margins. But we're already being very, very prudent on our – definitely on our discretionary spend and extremely selective in prioritizing our strategic spend. But we're not going to not do those strategic investments to sacrifice our growth in the future. But I think the biggest lever for improving margins would be higher revenue growth in the back half of the year.

Yes. Understood. Okay. And Chuck, maybe one for you just on the stocking comment, assuming the destocking maybe ends in six months or so. Can you just talk about the visibility into that? I guess any level of confidence out of six months obviously has been a moving target, not only for you but for the entire industry. Can you mention do you have any customer conversations, would certainly be helpful.

Yes. As we've mentioned in the past, in previous quarters, we've talked about missing double-digit growth by literally a handful of OEM customers. And that's kind of more of the same. It's very lumpy for us. So a lot of our larger OEMs and especially in antibodies areas they were stocking a lot through the COVID supply risk era. And it's already coming down. So that's moving in the right direction. I think we have seen through that period – period, let's call it, two or three quarters ago, we had very strong run rate still and those have softened because of funding overall softened. So we're seeing a bit of a barbell shift here, but not dramatic. So other data point is like Fisher, Fisher is very strong, has been strong all year. So a lot of our channels look good. So it's pretty lumpy. It's very, very targeted. We kind of know by customer exactly where they're at. And as you know, we get – we got a lot of these guys are licensed in a lot of royalties and stuff. So we not only have decent metrics, but we have actual data from them on just how they're doing, what they're buying, what they expect and their outlook. So a brighter year ahead and I think by end of this calendar year, certainly next year, the things will be recovered there in a lot of the OEM areas. So that's the main difference, I think, still.

Yes. Okay. And if I could just sneak one last one in on China. Anybody could give kind of the exit rate? I know obviously, it sounds like linearity, it was strong at beginning, kind of eroded a little bit as the quarter ends. Anyway to just think about the exit rate July, how do you think about this year and were there different markets that kind of faded quickly? Thank you.

Well, I'm not sure we can say any more than we know and we've been very transparent. We always have been. This quarter started off great in China, ended terribly and it ended much worse for everybody else we know in our industry. I think we're all in this kind of waiting pattern for the government. I think they have their economy shutdown so badly that I don't think they have any money. So – but we do know they're very public about how – what a priority healthcare is. And so I think as they get back on track, and we're told that come October, it's the new school year and all the institutions reopening is when they expect things to start getting better and start seeing an outlay. There have been some initial targeted stimulus areas, but nothing dramatic. This is just really a downtime for China. It's very, very surprising to everybody, but where they are on the scale of 1 to 10 of getting health care across the country, their whole population to where the rest of the world is. They're like a two. So it's the big cities that are really in good shape, but you don't have to go too far out to see a lot of struggle and the government is certainly still on their plan and healthcare is the number one priority, and I don't expect anything will change there. So – we've been here before, wondering about China, and then it comes back like a roaring tiger. So I expect that to be sometime before end of the calendar year here, but –

Next question…

Our team there is very bullish just by the – they didn't sound any alarm. So it's surprised even them. So I think that's also a good sign is that the 200-plus employees, strong team we have in China is really very positive and very, I guess, very – sees a very big future ahead. So…

Next question comes from Jacob Johnson with Stephens.

Hi. Good morning, everybody. Chuck, I suppose I apologize for attributing to the 29 questions about 2024. But maybe on the instrument side of things, a strong quarter there. Just any thoughts about how we should be thinking about that business into 2024. I guess in particular, you talked about the MauriceFlex being a contributor this quarter, sounds like Ella could move into the clinic maybe next year that could be an opportunity. And then maybe on the bad guy side, China is something we should be looking out for, but just any kind of commentary around the outlook for instruments.

Yes. Well, China is the area we actually have our strongest ratio of instrument sales for business. So it's really 50:50 with our core. It's nowhere like that anywhere else. So with China being so soft, it takes a big hit on the overall instrument. We are in pretty good shape in Simple Western and across the board, not too bad, but mainly from consumables. I mean the instruments are being used, and they're really good productivity instruments were known for that and that has gone great. Ella had a pretty good quarter overall. And yes, the 1345 is coming. It should have been here a month ago, the paperwork, but it's definitely coming. We have a big clinical launch with that application in India that's through their there – they would be like a 510(k) process or a predicate process here, but they're ready to go very soon. 2,000 person clinical on macro degeneration and eye – different eye-related illnesses using tears [ph] as the analyte in the cartridge. So that's coming. And then we have a bunch more. But I'm going to let Will say a couple of words here. I think the future – now we have – we're getting more and more instruments, but we're getting more and more applications of the instruments we have. Simple Western isn't just about converting Western blots anymore. There's a bunch more stuff coming. Flex isn't just about protein purity in the line of manufacturing anymore. Now there's a lot more things come. But Will, maybe a couple of words on where you see the future of our instruments and buy application, and the growth actually improving what we see now.

Yes. Thanks, Chuck, and thanks for the question, Jacob. A couple of things. Chuck already hit on some of the nice indicators for our future, right? As we look at consumables utilization, super strong this last quarter. We also look at service contracts. We know these instruments are being leveraged and used across the industry. So those are real positives. When we look to the future, you hit on one thing, and I'll come back to the ISO 1345 certification of our Ella platform in a second, but as we think kind of these emerging growth applications areas like cell and gene therapy, we launched 35 new application nodes across the Simple Western, excuse me, the ProteinSimple portfolio, so those are for Simple Western more recent platforms. So things like AAV titer, empty-full capsid ratios, potency assays, for example, on Simple Western. Even recently in an FDA approved product, the potency assay – release assay is run on Simple Western. For confidentiality, we can’t share what that is, but it gives you an indicator there of how strong we are. If we look at our applications on Ella, in addition to the cell and gene therapy applications for potency, we’ve got five new neuro applications. We expect that space to take off for us as we fill out the rest of that portfolio. And then finally hitting on Ello with the ISO 1345 certification pending, what we’ve already seen is really strong adoption because the platform just lends itself so well to clinical applications. We’ve already seen nice adoption in laboratory developed tests. We know that 1345 will enable our customers to kind of take their assays, put them on those boxes, and start driving broader clinical adoption.

Got it. And thanks for that Will, and that’s a good segue. Chuck, I wanted to go back to cell and gene therapy. I think that’s been in some ways a poster child for biotech funding concerns. I think the commentary around the end markets has varied depending on the company. But you had a good quarter there. It seems like new customer wins may be helped on the GMP side, it seems like small molecules trending well, maybe just talk about what’s driving that growth? And then two, just kind of the potential for new products in that space. It sounded like you alluded to GMP antibodies, but curious what else you’re thinking about on that side of things?

Yes. Yes. The answer fully would take an hour. There’s so much to good news to cover there. We had an exceptional quarter beat everybody I’ve ever noticed in the space quite blow and blew everybody away really. But 60% [ph] growth is pretty good. 30% for the year in proteins. We’ve gone from six products in our St. Paul facility, we’ll be to – we’ll be adding another eight this coming year. So we’re getting way beyond just cell therapies, more on the regenerative side as well. Strength is on all cylinders. We were quoting roughly 250 customers to 300 customers up until this quarter. We’re now over 400 customers. So a lot of that growth is coming from new customers. And yes, there may be a doldrum in the industry now, but when it comes to cell therapies, it’s still much a growing area and we’re growing and taking share and getting more visibility. We’re becoming real after laying track here for five, six years. We are going to be one of the big guys. It’s just going to happen. It’s inevitable. And of course, our partnerships and our coming acquisition will smoke’s [ph] going to help. They’ve still got 100 customers. It is probably the only de facto standard out there for bioreactor and cell therapy that’s helping the new sister company CellReady is being used as well. So we’ve got ScaleReady and CellReady that those platforms are working and it’s driving more business our way for proteins and across our portfolio, a small molecule, not a bad number, 260% growth this quarter. And for the year over 114, we’ve been waiting a long time for our small molecule platform to really take off, and now it finally really is and it’s – there’s no stopping it now. Did that put you to sleep?

The next question comes from Dan Arias from Stifel.

Good morning guys. Thanks. Chuck, I guess I’m going to apologize too here, just because I really don’t think we’re going to have a company that finishes their fiscal year and doesn’t offer a full year outlook. And obviously, they’re all dealing with a set of challenging circumstances. And Jim, it seems like you’re offering a view on the harder portion of the year to forecast, just given that China is a tough call right now. So I guess, why wouldn’t you be willing to commit to more meaningful acceleration in the second half of the year if you expect some of these issues to resolve themselves in the shorter term rather than the longer term, which is what I think Chuck said there. And the comps are basically the same first half versus second half.

Well, first of all, the peer companies out there that are giving guidance for the year through the rest of this calendar year 2023, we’re in a fortunate position where we’re – have a fiscal year and that’s six months further out. So we’re putting our necks out there with regards to 2024. And I don’t think anyone has, can read the tea leaves as to exactly when this code hangover completely resolves itself. I mean, at the end of the day, we know that the one thing we feel the most confident about, of course, is the OEM destocking stopping, and at some point have to start rebuying. I’d say the second thing we feel most confident about is China eventually coming back and coming back strong, but timing that exactly when that will happen is very difficult to do. And you tell me someone who knows who can pinpoint that answer. And then with regards to the overall rest of the markets, whether it’s biopharma or whether it’s academic, I think we’re just being cautious in the view right now and kind of wait and see, because at the end of the day, the biotech funding headwinds, we think are mostly behind us. They haven’t yet turned into tailwinds. I mean, I’m not hearing or reading about major increases in biotech funding at this point. So I think it’s this. And then same thing on the academic side where if anything, the news is about cutting NIH budgets not adding to them going forward. Now, I think we are well positioned to where there’s mixed components within the academic funding where that could actually help us if the cuts happen in more of the call it the COVID-related areas and funding gets redirected towards oncology and neurology and things of that sort, where we’re very well positioned, that could actually be an upside for us. But there’s just a lot of dynamics and moving parts with the macro environment right now. And I don’t think it’s, it’d be wise to give any guidance – firm guidance beyond the next six months where those variables come into – will be hoping to come more clear as we close out this calendar year.

Let me add a couple things too. And it’s just work backwards from what you guys would love to hear. What would you, you’d like to hear is that we’re back to our 15% or better growth plan coming next quarter. We have a couple things happening in our favor starting in Q1. We start getting really good comps away from these horrible comps. So that’s going to help. By the back end of the fiscal year and Jim is right. We’ll be the only one talking about a full year from now. Everybody’s talking about finishing this calendar year. And we’ve got a beginning of a fiscal year starting now. And by the end of this fiscal year, I expect us to be in the run rates of double digit, if not mid-teens again. But how does that stack up for a year averages? It’s hard to acknowledge right now with this quarter next quarter with especially with China. And China being 10% of our company and coming off 20%, 30% growth, that’s two, three points of growth rate there for the company. So we got to factor that in. Maybe it’s only another quarter of that. Maybe it’s more. If it’s more, it’ll affect the number long term. So we’re looking at all that. We don’t officially give guidance. We give you a range for the coming year and you’re smarter than we are and knowing our numbers up and down and backwards and forwards, you can see. I think our run rates can be where we expect it a year from now, maybe even higher because of our growth platforms seem to be accelerating, not decelerating to become more material. As you know on our five-year goal, we’re two, three years into that now. We talk about these major growth that should be at 50%, they’re running much, much higher than that. If they continue that, it’s going to pick up some of the slack here on the core. But we’re getting better and better in the core. And I think all we need is just the markets to stabilize and then we’re back on track overall. But I do think we’ve got a bit longer in the hangover here in the quarter at least that’s the way to think about it. And we’ll get – we’re about the most transparent company you guys talk to that. And we’ll tell you more next quarter when we see what happens with the one more this quarter. But at least we’re going to have an easy comp this quarter and things will start improving for us dramatically. And we didn’t have a bad quarter the way it was with everybody else being negative, negative, negative, we did post growth quite a bit comparatively, so in fact. So stay tuned. We’ll know more within a quarter, but end of the year run rate should be pretty good we think.

Okay, fair enough. I can work with that. Appreciate that color there. While I have you, can we just maybe touch on GMP proteins. And just have you talk about what’s driving the most growth there? Is it menu expansion? Is it larger orders from existing customers or is it…

It’s larger orders for existing customers and new customers. We’ve expanded the customer list as you – as we mentioned. So that’s one part component growth. The other is that customers that have been with us for two, three years, they’re getting further along in their clinicals and they’re asking for more. We talk about in the past of turning the plankton into minnows and minnows into tuna and tuna into whales. We’re – we’ve only got a handful of tuna and whales and we need, we’ve got 400 customers. So just imagine a day in a couple, two, three, five years where we have dozens of whales. It’s going to be amazing to see.

The next question comes from Dan Leonard from Credit Suisse.

Hi. Thank you. Could you talk a bit about your end market mix in China between academic and government, biopharma, any difference in trends you’re seeing and what growth rate for China is assumed in the first half of the year in that mid-single digit view for the total company?

Yes, sure. Well, China’s a little different than most of our regions. We don’t have a spell out pharma versus a biotech versus academic. It’s all kind of government sponsored, well-funded, almost like academic. There are more and more institutions forming there, biosimilars is kind of where things are going in pharma there. And we’d call them industrial. But by far it’s really well-funded government, sponsored academic is most of the market for us. So it’s research, research, research mainly, right? And it’s very evenly split between our reagents and our instruments. And we had – we’ve had a couple really boom years instruments there, as we’ve talked about. So we’re coming off a heavy comps there. And then with the COVID issues, their funding issues just dry things up for now. But as it comes back, it’ll come back through the institutions. Now it’s roughly about 180 institutions in both Beijing and Shanghai. And then you have modest numbers in some other than major cities, but nothing like the two major cities and that’s what drives everything. I think we’re in a very interesting time with China because they’ve probably as a government, I think they’ve never – they haven’t seen this much consternation for many, many, many years. You’ve got [indiscernible] in charge, but you’ve got a lot of people that are not used to seeing negative GDP, a whole generation of people that have never seen this. You’ve got real estate tipping over, you’ve got a lot of issues, it’s got to kind of work its way through. But underneath all of it, you’ve got a high priority for the country, for the administration there on healthcare for their people. And that’s got to begin with research. And at the end of the day, we’re only a $100 million of revenue in China, so it could be $500 million or $1 billion. I’d still say it’s small compared to the opportunity. So we’re getting back very strong. We have a lot of products for the size of our business and our company there. We have a lot of businesses, so there’s plenty of levers to pull and plenty of interest across the board.

The next question comes from Catherine Schulte with Baird.

Hey guys, thanks for the questions. I guess first, just any commentary on how Wilson Wolf is performing in this environment and any change in thoughts on when a full acquisition could occur?

Yes, I don’t think we’re moving the game, the data for anything yet. They’re not – they don’t have heavy growth right now either, but they’re flat to I’d say mid-single digit growth last quarter or two. Given that the actual market there has imploded in funding us down. John, actually, this is a good sign. We’re actually taking share. So he’s actually getting more business than he thought compared to what everyone else is dealing with. So there – it’s a good time. So we’re going to get – we’re going to be a lever off of this come next year. As you know, the profitability is way beyond our expectations, which allowed us to do the 20% trigger early. But we’re probably on track for three to four years for the full acquisition, and that would be at 225 or so million dollars revenue or $136 million in EBITDA. Probably the EBITDA one will happen first, again, if things continue the way they are. We’re working more and more with John [ph] on investments and diversifying things to do. But right now he is running at a very, very profitable model. And it’s probably more than it should be for the –probably should have more investment for growth and we’re helping with that. [indiscernible] if you want to comment any more on that as well.

Yes, I think comment about taking share is great. I think the total number of customers has not declined. So they’re not losing them. So as folks rationalize their spend, that’s a good indicator. I think the other nice indicator having some insight into the product mix is that the uptake in development and kind of the developmental elements of their portfolio are really quite strong right now. And finally, we expect to be closing off some of our joint development projects on closed system, cytokine delivery and media and GMP. Media is in the platform too. So we’ll start seeing more and more kind of synergies as that portfolio overlaps and we deliver a higher value proposition with our customers with that closed system.

Since we’re talking about growth and then in growth in China, other places, we didn’t talk much about EPI, but I don’t want to leave this call, I just maybe shout off the team that our Exosome platform is really killing it right now. We’re getting record test days, virtually weekly. We crossed a 100,000 tests. We have a colorectal program that’s making great progress. We have a multi analyte screening component tests coming that’ll do many, many upstream pre-cancer type tests. And it’s – it builds on top of methylation, so it’ll be – go well above and beyond what other competitors in the field are doing with cell-free DNA. The future for Exosome I think is amazing. And you guys never focus on the great numbers more than where the damage is, but coming quarters, you’re going to be want to talk more about Exosome as you see the numbers. We’re investing more people and we are very close. The list now of tipping over the large private payers is getting very close.

This concludes our question-and-answer session for today. I would like to turn the conference back over to Chuck for any closing remarks.

Well, I guess just thanks for everyone for attending the call. We always see the call count as we go, and it’s a very big list. We know there’s a lot of competition for your time out there. And we’re glad there’s all the interest in our company and we’ll be back next quarter. Thank you.