TECH - NASDAQ

Good morning, and welcome to the Bio-Techne Earnings Conference Call for the First Quarter of Fiscal Year 2026. [Operator Instructions] 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 Kim Kelderman, President and 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. The company's 10-K for fiscal year 2025 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 Investor Relations section of our Bio-Techne Corporation website at www.bio-techne.com. Separately, in the coming weeks, we will be participating in the UBS, Stifel, Stephens, Jefferies, Citi, Evercore and NASDAQ Healthcare Conferences. We look forward to connecting with many of you at these upcoming events. I will now turn the call over to Kim.

Thank you, Dave, and good morning, everyone. Welcome to Bio-Techne's First Quarter Earnings Call on fiscal 2026. We began the fiscal year with continued strong execution, navigating a dynamic environment with discipline and strategic focus. Despite these efforts, organic revenue declined 1% in the quarter, primarily due to clinical stage timing from a couple of large customers in our cell therapy business and the anticipated ongoing softness in biotech funding. The headwind in cell therapy reflects the inherent lumpiness of late-stage clinical programs, which is, in this case, driven by favorable FDA Fast Track designation that support accelerated therapy approval time lines, yet they reduce near-term reagent demand. Importantly, underlying market trends remain constructive as demand from our large pharma customers was once again robust, and we saw encouraging signs of stabilization in our U.S. academic end market, particularly as the quarter progressed. Our ProteinSimple instrument franchise continued to build momentum China delivered its second consecutive quarter of growth and our spatial biology business resumed sequential improvement. Operationally, the team delivered sector-leading profitability with adjusted operating margin expanding 90 basis points year-over-year to 29.9%, exceeding our initial expectations. This performance reflects our deliberate focus on productivity and cost management while continuing to invest in the strategic growth pillars that will shape Bio-Techne's future. Now let's turn to the performance of our end markets, beginning with our biopharma customers, excluding cell therapy. The divergence between large pharma and emerging biotech spending patterns persisted in the first quarter. Revenue from our large pharma customers remained strong, increasing low double digits, reflecting continued demand for our tools and technologies. In contrast, the challenging funding environment in our biotech end market continued to weigh on spending behavior and resulted in high single-digit declines in Q1. Encouragingly, we are seeing early signs of stabilization in biotech activity levels. These include an uptick in M&A activity, favorable pharma in-licensing trends and the potential for lower interest rates, all of which support a more constructive outlook for investment levels in emerging biotech companies. Global academic markets remained stable overall in Q1. A modest decline in U.S. academic business was offset by mid-single-digit growth in Europe, where demand trends remained healthy. Within the U.S., it was encouraging to see improvement in our run rate business as the quarter progressed. From a geographic standpoint, revenue declined mid-single digits in the Americas, while both EMEA and Asia delivered low single-digit growth. In China, we achieved our second consecutive quarter of growth, supported by improving CRO pipelines and increased CDMO activity. Growth in the region was primarily driven by strong performance in our ProteinSimple analytical instruments and our spatial biology portfolio. Importantly, unlike last quarter, the instrument growth does not appear to be driven by tariff-related dynamics. Instead, it reflects underlying demand strength, and we believe that the business is well positioned for a return to stable growth in the region. Let's now turn to our growth pillars, beginning with the Protein Sciences segment, where end market dynamics led to a 3% organic revenue decline. In our cell therapy business, we were pleased to see a couple of our largest customers receive FDA Fast Track designation. This recognition enables an accelerated clinical development time line and eligibility for priority review by the agency and there with potentially expediting both approval and commercialization of these next-generation therapies. As customers progress through the development project, they typically front-load purchases of the reagents needed for a full completion of a specific clinical phase in their program. We have seen this dynamic play out firsthand at Wilson Wolf, where customer ordering patterns moderated as their clients progress through Phase III clinical trials and shifted their focus to the regulatory filing necessary for FDA approval. This is typically followed by an inflection in demand and a revenue ramp as therapies gain commercial traction. It is this clinical stage timing dynamic that introduced greater lumpiness in our cell therapy business in this quarter. Continuing with cell therapy, I'd like to provide a brief update on Wilson Wolf. As a reminder, we currently own 20% of the company and expect to complete the acquisition of the remaining interest by the end of calendar 2027 or potentially sooner, contingent upon the achievement of certain milestones. Wilson Wolf is a developer and manufacturer of the market-leading G-Rex bioreactor line, which enables high-yield, cost-effective workflows for cell therapy manufacturing. The G-Rex also allows the scaling of production and therewith treat a greater number of patients efficiently. The G-Rex grant program has successfully seeded hundreds of early-stage cell therapy customers and over half of those also utilize Bio-Techne's GMP reagents. We are very excited about the upcoming acquisition as the combination of Wilson Wolf's bioreactors with Bio-Techne's GMP reagents, our media and the ProPak cytokine delivery system create a compelling, lower cost and scalable manufacturing solution for cell therapy developers. Let's now turn to a suite of easy-to-use fully automated proteomic analytical solutions collectively known as ProteinSimple. These platforms are the preferred choice for fast, precise and intuitive protein analysis. Utilization of our expanding installed base remains very strong as customers increasingly rely on these systems to automate both critical and routine laboratory workflows, driving higher productivity in both biopharma and academia. This growing reliance was reflected in the cartridge consumable pull-through, which resumed its double-digit growth trajectory in the quarter. We continue to advance innovation across all 3 of our ProteinSimple instrument platforms, enhancing functionality, productivity and broadening their application scope. A key highlight is the upcoming launch of an ultrasensitive cartridge for our fully automated Simple Plex immunoassay platform branded as Ella. These next-generation assays will deliver a two to fivefold improvement in sensitivity over our current Simple Plex cartridge offering, enabling femtogram level biomarker detection in plasma samples. This breakthrough holds significant promise for accelerating neurodegenerative disease research and positions Bio-Techne as a leader in this emerging and impactful field. Adoption of our high-throughput Simple Western platform called Leo continues to build momentum with large pharma customers who valuate speed, simplicity and sensitivity in protein quantification and detection. We are very pleased with Leo's commercialization as the platform has exceeded both revenue and placement expectations in its first 3 quarters in the market. Combine this initial momentum with a growing order funnel and Leo is well positioned to become a standout performer in our instrument portfolio. Lastly, I'd like to highlight the continued success of our Maurice biologics platform, which delivered its sixth consecutive quarter of growth. This QA/QC solution is benefiting from a current wave of increased bioprocessing activity. Looking ahead, we see recent U.S. manufacturing investment announcements by several large pharmaceutical companies as a potential catalyst for accelerating growth in this business. And finally, our core portfolio of research use-only reagents, including our industry-leading catalog of over 6,000 proteins and 400,000 antibody types continues to demonstrate its enduring value to customers even amid challenging end market conditions. In the first quarter, sales of our core reagents remained consistent with the prior year, underscoring the resilience and essential nature of these tools in supporting foundational research across disciplines. Now let's turn to our Diagnostics and Spatial Biology segment, beginning with our Spatial Biology portfolio. In Q1, we delivered low single-digit growth in our RNAscope product suite, which enables biopharma and academic researchers to detect and visualize RNA and short microRNA sequences at a single cell level within intact tissue samples. We will further strengthen our leadership in spatial biology with the launch of ProximityScope, the first product to enable researchers to interrogate functional protein-protein interactions. This novel assay adds a powerful new dimension to multiomic RNA and protein detection. By introducing this additional layer of information to spatial biology, ProximityScope enhances researchers' ability to unravel complex biology and its connections to disease. It also embeds Bio-Techne’s spatial chemistries more deeply into automated translational research workflows. Momentum also continued with our COMET instrument, which saw solid double-digit growth in bookings year-over-year. Its fully automated multi-omic capabilities are increasingly valued by academic and biopharma customers and enable the discovery of novel biological insights. Spatial Biology continues to be our most academically concentrated business with a meaningful presence in biotech as well. Given the funding uncertainties in both end markets, we are encouraged by the positive momentum in this franchise. Lastly, our Diagnostics business grew mid-single digits in Q1, supported by balanced performance across our core diagnostic controls and our diagnostic kits for laboratories. We continue to see rising interest in our ESR1 test, which monitors resistance to standard therapies in breast cancer patients. Recent clinical trial data reinforced the importance of testing for ESR1 mutations, showing that switching patients that show this mutation to an alternative therapy nearly doubled life expectancy compared to the standard treatment. We also launched the AmplideX PML-RARA kit, a multiplex qPCR assay designed to detect all 3 major fusion variants associated with APL, an aggressive form of leukemia. This assay runs on widely installed qPCR platforms and delivers results in approximately 4 hours. This launch broadens our hematology menu alongside the QuantideX BCR-ABL kit and positions us for continued menu expansion. We also announced an expanded agreement with Oxford Nanopore Technologies, building on last year's successful launch of the AmplideX Nanopore Carrier Plus kit. This comprehensive carrier scanning panel targets 11 hard-to-sequence genes in a single workflow, offering laboratories a streamlined and efficient solution for genetic testing. And before I wrap up my prepared remarks, I would like to briefly highlight our progress on sustainability. During fiscal 2025, we achieved an estimated 40% reduction in Scope 1 and 2 emissions driven by our transition to 100% renewable electricity at our largest site located in Minneapolis. I encourage everyone to review the report in the Corporate and Social Responsibility section of our website. I'm proud of the team's continued progress on this front. To summarize, the Bio-Techne team continues to execute at a high level despite ongoing volatility across some of our end markets. Our focus on productivity and disciplined cost management drove a significant year-over-year operating margin expansion, exceeding our expectations for profitability. And while clinical stage timing in cell therapy created a headwind, underlying market trends are constructive. Recent data points suggest improving visibility for academic and our biopharma customers, which we expect will translate in stabilizing and ultimately strengthening demand for life science tools and specifically Bio-Techne's product portfolio. One thing remains clear. Our customers continue to rely on Bio-Techne's innovative life science tools to drive biological discovery, advance next-generation therapies and deliver precise diagnostic solutions that improve the quality of life for the global population. With that, I'll turn the call over to Jim. Jim?

Thank you, Kim. I'll begin with additional detail on our Q1 financial performance, followed by thoughts on our forward outlook. Adjusted EPS for the quarter was $0.42, flat year-over-year with foreign exchange having an immaterial impact. GAAP EPS came in at $0.24, up from $0.21 in the prior year period. Total revenue for Q1 was $286.6 million, representing a 1% year-over-year decline on both an organic and reported basis. Foreign exchange contributed a 1% tailwind, while businesses held for sale created a 1% headwind. Excluding the timing impact from our largest cell therapy customers who received FDA Fast Track designation, organic growth was plus 1% for the quarter. From a geographic lens, North America declined mid-single digits as strength from large pharma was offset by order timing in cell therapy and continued funding pressure in biotech. Europe grew low single digits, led by consistent performance in academia, while Asia also posted low single-digit growth, marking its second consecutive quarter of sustained momentum. By end market, biopharma declined mid-single digits overall. However, excluding our largest cell therapy customers, biopharma grew low single digits, driven by strong pharma demand, but partially offset by biotech softness. Academia was flat with solid growth in Europe, balancing modest declines in the U.S. Below the revenue line, adjusted gross margin was 70.2%, up from 69.5% last year. The improvement was driven by the Exosome Diagnostics divestiture and ongoing productivity initiatives. Adjusted SG&A was 32.1% of revenue, nearly flat versus 32.2% last year. R&D expense was 8.2%, also stable compared to 8.3% in the prior year. This consistency reflects the benefits of structural streamlining and disciplined expense management, partially offset by targeted investments in strategic growth initiatives. Adjusted operating margin reached 29.9%, up 90 basis points year-over-year. This improvement was fueled by the Exosome Diagnostics divestiture and productivity gains, partially offset by volume deleverage. Our better-than-expected margin reflects deliberate management of productivity and cost containment measures aimed at maximizing operating leverage in a dynamic environment. Below operating income, net interest expense was $1.8 million, up $0.7 million year-over-year due to the expiration of interest rate hedges. Bank debt at quarter end stood at $300 million, down $46 million sequentially. Other adjusted nonoperating income was $2.7 million, down $1.3 million from the prior year, primarily due to foreign exchange gains last year related to overseas cash pooling arrangements that did not recur. Our adjusted effective tax rate was 22.3%, up 80 basis points year-over-year, driven by geographic mix. Turning to cash flow and capital deployment. We generated $27.6 million in operating cash flow during our Q1 with $5.4 million in net capital expenditures. The year-over-year decline in operating cash flow was due to the timing of cash tax payments. We returned $12.4 million to shareholders via dividends and ended the quarter with 156.4 million average diluted shares outstanding, down 3% year-over-year. Our balance sheet remains strong with $145 million in cash and a total leverage ratio well below 1x EBITDA. M&A continues to be a top priority for capital allocation. Now let's review our segment performance, beginning with Protein Sciences. Q1 reported sales were $202.2 million, down 1% year-over-year. Organic revenue declined 3% with a 2% benefit from foreign exchange. Excluding the cell therapy timing impact, organic growth was plus 1%. Growth was led by our proteomic analytical tools business with notable strength from large pharma customers. Protein Sciences operating margin was 38.4%, down 100 basis points year-over-year, primarily due to volume deleverage and promotional activity, partially offset by operational productivity. In our Diagnostics and Spatial Biology segment, Q1 sales were $79.5 million, down 4% year-over-year. The divestiture of Exosome Diagnostics negatively impacted reported growth by 7%, resulting in 3% organic growth for the segment. Diagnostics Products grew mid-single digits, while spatial biology was flat. It's worth noting that this segment grew mid-teens organically in the prior year, creating a challenging comparison. Segment operating margin improved to 11.2%, up from 5.1% last year, driven by the Exosome Diagnostics divestiture and productivity initiatives. We expect continued margin expansion as our COMET spatial biology platform scales. In summary, the team delivered strong execution in Q1 despite persistent market headwinds, including biotech funding pressures, NIH budget uncertainty and lingering tariff concerns. Encouragingly, recent data points suggest improving end market clarity. While biotech funding remains down approximately 19% year-to-date through October, industry reports show a 6% sequential increase in our Q1 and October making the strongest funding month of calendar 2025. Combined with recent large pharma pricing and onshoring agreements with the U.S. administration, we anticipate improving conditions for biopharma. On the NIH front, September outlays rose 8% year-over-year, closing the government's fiscal year on a strong note. While the current government shutdown clouds visibility into the fiscal year 2026 budget, both Senate and House appropriation bills suggest a flat NIH budget year-over-year. Encouragingly, we saw signs of stabilization in the U.S. academic market as the quarter progressed. As Kim noted, we're excited about the FDA Fast Track designation awarded to our largest cell therapy customers. These designations accelerate clinical time lines but reduce near-term reagent demand. Following strong ordering in early fiscal year 2025, these customers are now progressing through their Phase III trials, resulting in a temporary slowdown in reagent purchases. We expect this headwind to intensify in Q2, impacting growth by approximately 400 basis points year-over-year before moderating in the second half of the fiscal year. Despite these headwinds, we anticipate overall Q2 organic growth to be consistent with Q1. This outlook reflects continued strength in pharma, renewed growth in China, a rebound in spatial biology and gradual stabilization in U.S. academic and biotech end markets. As we lap prior year headwinds that began with the U.S. administration's policy changes in early calendar 2025, we expect to return to positive organic growth in the second half of the fiscal year. From a margin perspective, we remain focused on balancing growth investments with operational efficiency. We're pleased with the margin upside delivered in Q1 and remain on track to achieve at least 100 basis points of margin expansion for the full fiscal year. That concludes my prepared remarks. I'll turn the call now back over to the operator to open the line for questions.

[Operator Instructions] First question will come from Dan Leonard with UBS.

My first question, I appreciate all the quantification on the GMP protein timing dynamics. But what I'm curious about is how long might that air pocket persist? And how are you thinking about growth right now for GMP proteins in light of that greater than 30% growth in the prior year?

Dan, thank you for the question. Well, first of all, these 2 customers, in particular, we're very excited about the Fast Track designation. It's obviously a very positive sign for these 2 customers and the therapies they're working on. But as you understand, short term, this gives us a headwind. And to be precise, this Q1, we saw a headwind of about 200 basis points based upon this phenomenon. It's on top of a prior year of 60% organic growth. For Q2, that will be worse. So Jim already mentioned, 400 basis points, which would then lap a 90% prior year organic growth in cell therapy. And from there, the second half of the year, the headwinds will fade. In the meantime, what we will continue to do is to build the funnel, right? Right now, we're sitting at 700 customers, 85 in clinical phases, 16 of those in Phase II and 5 in Phase III. And we are also very positive about the underlying recovery in the biotech markets. So yes, that will then result in us having to manage through this valley. I think we've positioned the company really well to continue to protect the bottom line, and we're very positive about all the other underlying strengths. So that's basically how we see the year rolling out.

Understood. And my follow-up, Kim, are you still managing the business as a low single-digit grower in fiscal '26? Or have those plans changed given the Q1 result and the upcoming comp you're facing here in Q2?

No, not at all. No change there. As I mentioned, of course, the good news of these fast-track approvals was somewhat of a short-term surprise for us. But our commitment and our conviction of cell therapy markets doing great over time remains exactly the same. And with some positive signs from the other end markets that we serve, we feel that the low single digits for the year is still very, very feasible. And as you saw from the Q1 margins, we've managed to protect the bottom line even with a little bit of a headwind. We will always want to be on the safe side of that. But in the meantime, we're ready for higher volumes in all the other product lines and for accelerating results.

Our next question will come from Matt Larew with William Blair.

Maybe I'll just follow up on that point there. Kim, you referenced the headwind accelerating, I think, to 400 bps in the fiscal second quarter, but still targeting low single digits for the business for the year. So it sounds like you are seeing an improvement in the underlying core, and I think that would suggest sort of mid-single-digit growth in the back half of the fiscal year, which may be consistent with what some of your peers have said 3% to 6%. So can you maybe just speak to ex-CTX, how you see the balance of the year unfolding in light of the macro dynamics you referenced?

Yes, Matt, this is Jim. Thanks for the question. I'll jump in on this one. So you are correct. I mean we are -- in the underlying business, we're seeing, I'd say, a gradual improvement/acceleration of our end markets and our relative performance. So as I talked about, if you exclude just these 2 cell therapy customers, our organic growth would have been 1% for the company. Looking ahead to Q2, what really the guide implies is roughly a 3% growth, ex these 2 customers. And that's before we get into the back half of the year where we start to lap the U.S. administration policy changes that's impacted our entire industry, particularly academic as well as you may remember, we talked about this last quarter, our Diagnostics business, in particular, was -- it can be lumpy from quarter-to-quarter, had very -- last year was very, very strong in the first half, a little bit less so ordering in the second half, and that pattern is a bit flipped this year where we're expecting a stronger ordering pattern in the second half versus the first half. So both the markets gradually improving. Our specific product lines, namely our spatial, our ProteinSimple product line and even the region in Asia overall, but especially China, are all seeing some very nice positive momentum. Combine that with lapping easier comps in the second half of the year suggest a continued strength in underlying performance absent these 2 customers.

Okay. Great. That's really helpful, Jim. And then on the biotech side, you referenced sort of the variety of improving macro indicators and obviously, recently, some of the nice news on biotech funding. Historically, you've thought about kind of a 2- to 3-quarter lag there. I'm curious given how long we've sort of been in the doldrums, if you expect that to be the same time line or perhaps you've already started to see some signs of life from some of your biotech customers who might feel better about the interest rate environment and their ability to raise capital?

Yes, Matt, I'll take it. So we feel that biotech funding, as you referred to over the last couple of months has definitely increased, specifically the last month has been very, very positive. The lower interest rate environment also is helpful, increased levels of M&A much higher than prior year. And then we also see a very encouraging number of licensing deals into biopharma, making it a more investable space and there with -- we feel positive about the momentum in there. Yes, in the past, a couple of years ago, when we were looking at funding issues, we felt that the funding at that time came into companies that really had to start with brick-and-mortar, maybe with clean rooms and then work their way into starting their programs. Currently, in some occasions, that might still be the case, but we feel that overall infrastructure is in place and that many companies are fundraising to kick their programs off and/or to add some of the programs. And that will create an environment where the dollars probably will flow much quicker to us than the 2, 3 quarters we've mentioned in the past.

Our next question will come from Puneet Souda with Leerink Partners. .

Kim, I wanted to understand on the GMP protein side. Could you talk about just knowing the number of trials that you're involved with, the ones that have Fast Track designation and the ones that are program starts, can you maybe -- or clinical trial starts, maybe can you talk about -- are you continuing to see the momentum on new clinical trial adds? And for the same-store customers that have Fast Track designation, I mean, when do you think -- just given the timing, ordering pattern, the size of the trials, can you give us a view into when this business starts to recover again for GMP proteins? Because obviously, it's been a bright spot for you. But just given the challenges, I wanted to understand when can that start to recover?

Thank you for the question. Yes, the clinical starts have been relatively flat and steady. So we don't see a significant decline in the activity there. There's certainly some turnover. There are new companies that are starting new clinical trials, and there are companies that are actually adding to their number of clinical trials. We've also seen some exits and cancellations, basically a maturing of the market where 3, 4 years ago, basically any novel technology or any novel treatment was getting funded. And some of those were basically more about how exciting these possibilities in the cell and gene therapy were versus the true viability if it comes to scalability as well as well as the affordability. And we feel that all the new programs are much more in line with what cell and gene therapy is really, really fit for. And we actually, from a Watson Wolf as well as Bio-Techne point of view, have always wanting to enable a scalable as well as an affordable treatment coming out of the cell and gene therapy efforts. So we feel that we're really well positioned to continue to feed this end market.

Okay. That's helpful. And then if I could ask on the academic side, net-net, academic sentiment is improving. I appreciate that. But there is multiyear funding number of grants that are lower in '26 versus '25, more concentration, fewer grad students, fewer bodies in the lab, fewer post docs. So how does that impact your business into '26 and beyond? And then when we look at the guide overall, Jim, low single digit is lower than a large-diversified peer in the space in life science tools. Just wondering, historically, you've grown ahead of that peer by a few points. Is that still the assumption longer term? And by that, I mean '26 and '27 -- eventually into '27, I mean?

Yes, I'll take the first part then, Puneet. So yes, we have seen stabilization in the NIH markets and specifically in academic U.S. Academic Europe has continued to grow mid-single digits. In the U.S., it's been a little lower, but definitely stabilizing. And we can see it from the overall activity level from our run rate, our core products. And then we've always talked about how we feel that the number of NIH grants is important, but that they are aligned with our research areas, the ones that we serve as a company is more important. And we can clearly see a positive mix if it comes to these grants for us. And then at the end of the day, we are encouraged by the fact that there are still bipartisan support for a flat NIH budget for the coming year. So we feel overall that that this market is -- has bottomed down, that is now stabilizing and that it will be a positive driver for us going forward.

And then, Puneet, if I understood your question correctly, it's kind of like how do I think about our performance relative to the space overall. And we've always talked about our level of outperformance and do we expect that to continue going forward? And the answer is absolutely, yes. I think what we're seeing right now is a bit of a transition. As you would expect when there's kind of a turn in trajectory of the business, you look at the peer sets, those obviously that have a more portfolio that's diversified outside even life sciences, but applied markets are accelerating, recovering earlier. Those that have a higher bioprocessing presence are recovering earlier, which is actually a good sign downstream for eventually for discovery. We peel back the onion and look at our very specific areas of where we play versus our competition. We feel like we're either holding our own or doing better. So for example, in our core reagents, globally, basically, we're sitting at flat growth in our core reagents, which based off of our intel and our peer set, we're still doing as good, if not taking share there. Our ProteinSimple franchise continues to do better than the market at mid-single-digit growth. Our spatial biology franchise has been hampered by their academic presence, but we've seen a turn of momentum there this most recent quarter, and we're seeing that momentum continue here in the second quarter. So we believe that will get back to the trajectory. that we're used to seeing. And then cell therapy has been one of the reasons for our outperformance in the past, and that's going to be a bit of a headwind for us in the coming quarters. But once we lap those and particularly once we get into fiscal year '27, we'll be completely behind those tough comps with these 2 specific customers, and that will continue to be an accelerator of growth relative, we think, to our peers. So hopefully, that gives you enough detail to noodle on, but that's how we think about it.

Our next question comes from Patrick Donnelly with Citi.

Maybe one on the Wilson Wolf piece. I always try to keep tabs on that. Can you just give an update as to what the quarter looked like there, what the momentum looks like? Is there potential for anything to trigger before the end of that -- the time line, even if they don't hit some of those milestones? I would love just a little more color on how you're thinking about that piece.

Patrick, thank you for the question. Yes, Wilson Wolf had a flat quarter, also looking at some of the biotech headwinds from the past, the past couple of quarters from a funding perspective. We -- overall, the 12 months trailing sits at mid-teens -- low to mid-teens. And yes, we feel that overall, that business is also very well positioned to accelerate again to their numbers entitled growth rates. And yes, we feel that will be a great acquisition serving the cell therapy market. The question regarding the triggers, whether we would be able to own it earlier, I bet that John Wilson will still think that we -- he will be able to meet the EBITDA triggers. But we are supportive, of course. But with the current market conditions and some of the headwinds, it will be a little tougher, which for us basically doesn't make a huge difference because the deal is structured in a way and you know how it is structured that at the end of the day, we would pay 4.4x 12 months trailing revenues. And that then we'll calculate the purchase price. And we're rooting for the team, and we see that they have plenty of pipeline to be proud of.

Our next question will come from Dan Arias with Stifel.

Jim, apologies for going back on the same question that was asked about 2Q, but I just want to make sure I understand the cadence here because it sounds like you feel like demand has troughed and it's on its way back, and now it's really kind of just about rounding the corner on growth itself. So plus 1% organic this quarter, ex the GMP customers and you're expecting the same thing next quarter ex those accounts, 3% without them, so 1% with them presumably despite the comp being 5 points, more difficult. So like the underlying momentum that you guys are talking about basically feels like it can drive 500 basis points or so of sequential improvement in the context of the compares, excluding these 2 accounts, obviously.

Yes. So let me just -- I'll repeat some of my comments to make sure I'm clear. So yes, you're correct that in this current quarter, we just passed Q1, adjusted for these 2 customers of cell therapy out of our numbers, we would have grown 1% overall. And looking at Q2, the same 2 customers provide a 400 basis point headwind, but we're projecting the same overall growth that we had in Q1. So that would imply that the underlying business outside of these 2 customers accelerates to 3% organic growth from the 1% we had this quarter.

I see. Okay. Okay. And then can you just maybe refresh us on what kind of 80-20 type rule exists when it comes to these cell therapy accounts? I mean there's obviously a concentration here. So for instance, what portion of the GMP revenue base is coming from the 2 customers or, say, the 5 Phase III partners that I think you mentioned that you have?

Yes, Dan, we have not talked about exact numbers as to what account amounts to what portion of our pipeline. But overall, we do know that the later in the stages, the larger the orders become, right? The volumes become larger. And then at the end of the day, the size of each account is, of course, also predicated on how many clinical study subjects do one need to run and how much raw material do you need per treatment. So there's a big variability, and that's why it's really hard for me to answer it because an account with a big indication and a large amount of proteins in a Phase II could be ordering more than a Phase III for a specific disease, exotic disease. So therefore, it's hard to answer the question. Overall, we always look at the total pipeline. And we've really done some real -- we made some real progress in adding customers to our pipeline, and we're sitting at 700 now. So overall, we are very confident that we're driving the underlying growth and that we're participating in the market in a real significant way.

Our next question will come from Kyle Boucher with TD Cowen.

I wanted to ask on the spatial side of the business. It sounds like pretty decent sequential growth there and trends sort of improved. I know you had some headwinds in the fiscal fourth quarter. Was there any catch-up in fiscal Q1 from some of those disruptions you saw at the end of the last fiscal year?

No, we don't believe that there is a catch-up there. We truly see overall broad recovery in the ACD reagents, the RNAscope. We made it back into the black, which is really encouraging to see. And as I mentioned, real broad recovery. And then the instruments, yes, they had a little bit of a tougher time like other instruments in relation to the academic side of the market. But we have a real nice momentum that we saw in the order book. So overall, we know that the reagents have been improving sequentially, not based upon lumpiness or quarterly order timing, but more just by broad activity level. And the instrument funnel is growing really, really nicely knowing -- looking at our order book.

Got it. And then maybe on the margin side, it came in pretty good in the fiscal first quarter, even considering the minus 1% organic. But I guess next quarter, assuming the same level of growth, minus 1%, what does that sort of imply for the EBIT margin in the fiscal second quarter?

Well, we haven't given specific guidance on margin by quarter, but we've seen as the quarter progressed and we realized we were going to have these headwinds with these 2 specific customers, GMP proteins, of course, are a very profitable part of our business. So we've made sure we've taken even additional productivity actions to counter those, which allowed us to get the expansion we got this quarter, but more importantly, prepare us for the headwinds yet to come, especially in Q2. So it gives us even more confidence in our ability to achieve our 100 basis point expansion goal for the year and maybe even do a little bit better. But obviously, how the top line plays out will have a lot of determination as to whether there's upside or downside to that figure in any given quarter. But right now, we're feeling pretty good about margin overall each and every quarter.

Our next question will come from Catherine Schulte with Baird.

Maybe first for the fiscal second quarter outlook, what does that assume for a government shutdown impact? And can you maybe talk through the range of outcomes if we get a reopening tomorrow versus a month from now?

Catherine, this is Jim. I'll just start by saying that we're obviously in more record territory already with the government shutdown. And we haven't seen any noticeable major differences in our academic customer buying patterns like this month versus the prior month. So again, we're encouraged that academic has appeared to have stabilized over the past quarter, and we're seeing that continue thus far even with the academic shutdown or even with the government shutdown, sorry.

Okay. Helpful. And then on the GMP headwinds, what are your assumptions for the back half of the year? I know they should ease. Is the easing of those due to them annualizing? Or are you assuming some of that ordering resumes?

It's really more about how much they ordered in the first half of last year, these 2 customers versus the second half, and they ordered less in the second half than they did in the first. There still will be a headwind. It should be -- it will definitely be less than what we saw in Q2. And we'll give you more ideas as the quarter approaches in terms of what we're seeing from these 2 customers this time next quarter. But as of right now, we're not assuming much of any buying for these 2 programs, and it's still a headwind in the second half, but not as severe.

Yes, the comparables become easier, right? Comparables become easier, Catherine. And in the meantime, these companies also need to start validating processes and their manufacturing. So we feel that the second half will be less impacted by this phenomenon than the first.

Our next question will come from Justin Bowers with Deutsche Bank.

So in the prepared remarks, you talked about instruments that could benefit from the onshoring and reshoring dynamic. Can you point to which cohort of instruments across the portfolio that might be the beneficiary -- biggest beneficiaries of this and potential timing of when we might see some benefit from that?

Yes. Thanks for the question. In particular, we are thinking about our biologics instrument line. It's been growing really nicely compared to market, and we feel it's taking market share in several applications that it serves. And as you can imagine, with onshoring, with more locations, companies typically will utilize similar instrumentation and methods as they did in their primary locations. So we feel that we can copy our successes that we've booked in Europe and in the past in this particular end market in large pharma, and that will translate to some momentum going forward.

Our next question will come from Daniel Markowitz with Evercore ISI.

I have a couple of quick ones. So first, on cell therapy customer order timing, I just want to make sure I understand the driver here correctly. And sorry for asking another question on this. Have these customers who received FDA Fast Track already placed orders for their Phase III clinical trials and you've already recognized revenues for those Phase III projects and now you're just waiting for them to commercial. I just want to make sure I'm understanding that right.

Yes. Thanks for your question. Don't apologize. I mean it's obviously a real result driver for this quarter specifically. Now the Fast Track designation, yes, after your initial results in this case -- in these cases, while in Phase II, the Fast Track designation would give you a whole path to accelerate your clinical studies. And we feel that these customers, and of course, there's always a firewall, but we feel that these customers have ordered enough to finalize their clinical trials. And that's not uncommon. Typically, you buy your raw materials in quantities to make sure you don't have to deal with a new lot of raw materials during your clinical trials. So yes, the materials for their Phase III for what they have to do would already, in our assumptions, have ordered last year. And the materials that you would need for commercialization and for validation of your production lines, we feel is still to come.

Understood. That's helpful. And then the second one, you mentioned promotional activity in Protein Sciences when talking about the margins there. Can you talk about these activities? Where were they focused? And would you expect them to continue in the coming quarters? And then I just had one more quick question at the end.

Yes, I'll try to take that. This is Jim. So on the promotional activities, as you can imagine, we all know the academic environment is tough right now. Biotech environment has been tough. And so therefore, you want to make sure that you stick with your customers in good times and bad. And so that means perhaps a little bit heavier discounting, promoting certain product lines, helping with their solutions. So it's really more about supporting our academic and biotech customers as they as they go through a tough time right now. And so those additional promotional activities, I think, helps our absolute performance relative to those markets as well. So at the end of the day, it paid off.

Yes. And if I add to that, our grant as well as some promotions to get into projects early on even in tough times, especially from the story that we just went through, you could clearly identify that being in a project or -- and driving the funnel of companies and/or projects that are using your materials is very important. So in constrained markets, we want to make sure we build the funnel and actually double down on all the projects that are currently going on. They're obviously very viable and important because they're still getting invested in -- so being part of those is of the utmost importance to make sure that you can continue to accelerate and outperform the rest of the market, and that's exactly what we're doing.

Okay. And then my last one, it's impressive you're able to deliver on margins and EPS despite the customer timing in a very high-margin business. I'm curious if there was anything you wanted to call out that helped flex the business to make that happen. One thought that came to mind is maybe 1Q had less ExoDx reinvestments and you let more of it drop down to the bottom line. And then what's expected for the balance of the year? Anything you wanted to call out on that front?

I mean, yes, so as we talked about, we continue to want to balance our cost initiatives and productivity initiatives with reinvestment back into our growth drivers. And it's a lever we have to work with. And so it's a combination, I'd say, of the timing of some of those investments, perhaps pushing them out to later in the year in some cases, but also accelerating on the productivity front. So we initiated some new streamlining activities this quarter, which bolstered our efficiencies and will set us up to be able to continue that -- to deliver that margin performance even with these new headwinds that we're facing here with the cell therapy.