James T. Hippel - Bio-Techne Corp. Charles R. Kummeth - Bio-Techne Corp..

Dan Leonard - Deutsche Bank Puneet Souda - Leerink Partners LLC Katherine Schoen - Robert W. Baird Aurko Joshi - William Blair & Co. LLC Charles Edward Haff - Craig-Hallum Capital Group LLC Carolina Ibanez-Ventoso - Janney Montgomery Scott.

Good morning, and welcome to the Bio-Techne Earnings Conference Call for the Second Quarter of Fiscal Year 2017. At this time, all participants have been placed in a listen-only mode, and the call will be opened for questions following management's prepared remarks. I would now like to turn the call over to Mr.

Jim Hippel, Bio-Techne's Chief Financial Officer. Please go ahead, sir..

Thank you and good morning. Thanks for joining us this morning. On the call with me is Chuck Kummeth, our Chief Executive Officer for 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 2016 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 as a result 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 the 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. With that, I'll turn the call over to Chuck..

Thank you, Jim, and good morning, everyone. Thank you for joining us for our second quarter conference call. I'm happy to report that we are tracking to our fiscal 2017 performance goals. The company delivered 2% organic growth in the second quarter and so far has delivered 6% organic growth year-to-date.

Our second quarter results were negatively impacted by the timing of OEM shipments within our Diagnostics division. Year-to-date, this division has grown 5%, and has growth and spread evenly throughout the first two quarters, Bio-Techne reporting 4% organic growth in Q2.

Looking at our performance by our major regions and end markets, I would sum it as follows.

Consistent with prior quarters, Europe and APAC continued to perform very well, while China continued to experience shipment delays to immuno-cell therapy customers as the local CFDA continues to work through regulations pertinent of the Baidu scandal in the country. Meanwhile, the US saw a bit of a slowdown with biopharma's growth cooling.

Now some details on each of the regions. In Europe, high-single-digit growth was broad-based throughout the region but was focused on the biopharma end markets.

The research activity cycle with our biopharma customers has been high for a number of quarters now and we are positioned to benefit by supplying them the top-quality reagents and innovative instruments that make their experiments successful and productive.

To capture more of the growth opportunities in Europe, we continue to expand our geographical penetration by converting distribution to a direct sales model, just as we did with the acquisition of Space in Italy which gave us a direct sales model in Southern Europe.

In the second half of fiscal 2017, we'll be looking to expand our direct sales model in Iberia and parts of Eastern Europe. As with Europe, many of the themes we saw in the Asia region for the past several quarters continued in the second quarter.

In China, our Western reagent brands continued to grow well north of 20% in Q2 and our instruments grew north of 15%. However, a major exception continues to be our PrimeGene brand, which is heavily impacted by the CFDA crackdown and cell therapies administered by hospitals due to the Baidu scandal earlier this year.

PrimeGene is a key supplier of reagents to hospitals who use these therapies and is our go-to brand in our China-for-China strategy.

We understand that the CFDA is making progress on these regulations for hospitals using cell therapies, which will stimulate growth in this treatment again, and PrimeGene is well-positioned to fully participate in this growth given its GMP quality, but we probably have a couple more tough quarters ahead before the regulation process is complete and the therapies resume as they did before the scandal.

As for the rest of APAC, overall, the region continued to perform well. We experienced double-digit growth in Korea for our reagents with our instrument placements throughout the region overall. Japan growth was flat, the first quarter in many years that had a decline.

So it appears they've reached the bottom there and we'll be looking for modest growth going forward. The biggest change in the market we saw in Q2 compared to the past several quarters was a slowdown in growth we experienced in the US markets, especially in the biopharma end markets.

Interestingly, our order activity was actually strong, but the average size of the orders was down. The reasons for lower order sizes varied from customer to customer, but the major theme centered around timing of various research projects.

We continue to monitor this end market carefully, but have no reason at this point to believe there is a longer-term shift from research activity by our biopharma customers. Now, for a little color on our Q2 performance by division.

The Biotech division grew 2% organically in the second quarter, with proteins growing in the low-single-digits, while antibodies and assays grew in the mid-single-digits. Growth in antibodies was led by our Novus brand, where our digital marketing campaigns and continued enhancements to our website continued to pay off.

Our growth in assays for the quarter was driven by our Luminex products, where we now offer the instrument as well as the consumables, a total customer solution package that is also paying dividends in terms of growth and in royalties for the content we provide for these assays sold by other providers.

Offsetting some of the growth from our three main product categories already mentioned was the headwinds we faced with our PrimeGene brand in China, which I've already discussed, as well as a decrease in the large custom projects by our biopharma customers in the U.S.

As I mentioned in my regional commentary, we believe this pause in large purchases by our biopharma customers in the U.S. to be temporary, but it's something we are monitoring closely.

Also part of the Biotech segment and our newest business unit as a result of the acquisition we made last August, Advanced Cell Diagnostics continued in Q2 with a fantastic growth of over 50% on a standalone basis. As a reminder, ACD marks Bio-Techne's entry into the genomics field and market.

Second, and more importantly, its innovative and versatile technology has the potential to change traditional pathology practices.

RNA in-situ hybridization is a transformative technology facilitating and improving the monitoring of gene expression patterns at the single-cell level, while retaining the morphological context of the tissue being analyzed. ACD's technology serves both research and diagnostic markets, expanding Bio-Techne's presence in the clinical lab setting.

Each and every day, we become more enthusiastic about the opportunities that lie ahead for this business unit and the great team we have in Newark, California to seize them. Moving on to Protein Platforms. This division also continued with its growth momentum, marking its fourth quarter in a row of double-digit organic growth.

Our newest iCE instrument, Maurice, continues to be well received by our customers, leading the biologics product line to strong double-digit growth. Simple Plex, our automated multi-ELISA platform, also continued to win new customers.

Meanwhile, existing Simple Plex customers increased their usage of the instrument, which resulted in a 50% increase in revenue from cartridges used in this platform. Finally, the Simple Western product line, led by the Wes instrument, continues to be adopted as the new standard for the way Western blots are done in the lab.

In Q2, we saw a strong double-digit growth in instrument placements with a record 72 Wes sold during the quarter, making a total of over 600 Wes now in the field. Finally, our Diagnostics division reported revenue in the quarter that was lower than last year.

As we've discussed many times before, this division is the lumpiest of our businesses due to delivery patterns of Trillium (7:28) Diagnostics customers. This has been especially true since our acquisition of Cliniqa over a-year-and-a-half ago.

This business develops controls and assays with shelf life much longer than other product lines within the Diagnostics division. Over the long-term, we expect this business to be solid mid-single-digit grower. To give some further evidence of that, the shorter shelf life product lines within the division did achieve mid-single-digit growth in Q2.

Also, you may recall that Q1 was very strong for the division with nearly 20% growth. When you average the two quarters together, year-to-date growth was over 5%, right in line with its historic trajectory.

The long-term project pipeline for our Diagnostics division remains very strong and we believe this will allow it to maintain at least mid-single-digit growth trajectory for years to come.

As we've increased our picks and shovels capability in serving our Diagnostics customers over the past several years, in the second quarter we dipped our toe deeper into the Diagnostics market with an investment we made in Astute Medical, Incorporated, a diagnostics company devoted to improving patient healthcare outcome through the identification and validation of novel biomarkers.

Astute Medical has launched a diagnostic assay for acute kidney injury using key biomarkers and other products from Bio-Techne's large menu of reagents, with a strong pipeline of additional diagnostic solutions under development.

This transaction allows Astute access to our reagents for further assay development, while providing Bio-Techne an ongoing revenue stream, based on this assay's success in the Diagnostics end market.

We are very excited about the strategic partnership we have with Astute Medical and believe this investment will give Bio-Techne an avenue to yet another market where the company can leverage its large portfolio of reagents and accelerate revenue in years to come.

In closing, we finished the first half of fiscal 2017 in a trajectory that is in line with our long-term financial goals. These goals include achieving annual growth of mid-single digits in our Biotech division, at least mid-single-digit growth in our Diagnostics division and double-digit growth in our Protein Platforms division.

These growth rates, together with ACD's strong double-digit growth, will propel Bio-Techne forward as a leader in the life science tools space.

We just finished a refresh of the company's five-year strategic plan, a process we go through every year with our executive team and our board of directors to fine-tune our strategies and ensure that they are still the right ones to provide strong returns for our shareholders and other stakeholders for years to come.

I am pleased to report that although there were no major changes to our key strategies that we have been pursuing over the past several years, we are more energized by the opportunities ahead of us in each of our businesses, as we continue to build out our own life sciences business portfolio.

With that, I will turn the call over to Jim who will provide more details on our financial performance for the quarter..

Thanks, Chuck. I will provide an overview of our Q2 financial performance for the total company and then provide some color on each of our three segments. Starting with the overall second quarter financial performance, adjusted EPS decreased 8% to $0.81. The impact of foreign exchange fluctuations represented a headwind to EPS of approximately $0.03.

GAAP EPS for the quarter was $0.17, compared to $0.69 in the prior year. The biggest driver for the lower GAAP earnings are non-cash purchase accounting costs and contingent consideration revaluation associated with recent acquisitions. Q2 revenue reported was $131.8 million, an increase of 9% year-over-year, with organic revenue increasing 2%.

Second quarter reported sales include the 9% growth contribution from acquisitions, partially offset by a 2% unfavorable foreign exchange headwind. By geography, the U.S. grew low-single digits, with growth comparable in both biopharma and academia.

Europe grew in the high-single digits, with biopharma sales growth in the mid-teens and low-single-digit growth in academia. China's organic growth was in the mid-single digits in the second quarter, with double-digit growth in our Western brand, being offset by the impact of the Baidu scandal on our local China-for-China PrimeGene brand.

After many quarters of decline, Japan appears to have bottomed out in Q2 with flat organic growth. Excluding Japan and China, the rest of APAC grew in the mid-teens organically in the second quarter. Note that all references made to growth rate by region and end markets exclude our OEM sales, which mostly occur in our Diagnostics segment.

Moving on to the details of the P&L. Total company adjusted gross margin was an even 71% in Q2, increasing approximately 20 basis points from the prior year due to favorable mix. Foreign exchange had a nominal impact on adjusted gross margins year-over-year. Adjusted SG&A in Q2 was 25.7% of revenue, 335 basis points higher than last year.

The SG&A increase was driven by the acquisition made since the beginning of the fiscal year and strategic investments made in our core businesses to support growth. R&D expense in Q2 was 10.1% of revenue, 100 basis points higher than last year, mostly due to the acquisition of ACD in Q1.

The resulting adjusted operating margin for Q2 was 35.2%., a decrease of approximately 420 basis points from the prior-year period. Recent acquisitions contributed 340 basis points of decrease, with the remainder largely attributable to strategic investments made throughput the past year.

Looking at our numbers below operating income, net interest expense in Q2 was $1.7 million, compared to $0.4 million of net interest expense last year. The higher interest expense was due to a $400 million line of credit which was opened in Q1 to replace our previous $150 million line of credit as well as fund the acquisition of ACD last August.

Other non-operating expense for the quarter was $0.9 million, compared to $0.3 million in the prior-year quarter, with unfavorable transactional FX in the current quarter driving the variance.

Our adjusted effective tax rate in Q1 was 30.6%, an increase of 50 basis points from the second quarter of last year due to a greater percentage of taxable income being generated in the U.S. In terms of return on capital, we continue to pay our dividend and paid out $11.9 million in the quarter.

Average diluted shares were up less than 1% over the year-ago period at 37.5 million shares outstanding. Turning to cash flow on the balance sheet. $41.6 million of cash was generated from operations in the second quarter and our investment in capital expenditures was $2.9 million.

We ended the quarter with $115.5 million of cash and short-term available-for-sale investments. And our long-term debt obligations at the end of Q2 stood at $343.7 million, relatively flat from the end of Q1. Going forward, our capital deployment priorities remain opportunistic M&A, our dividend and paying down the debt.

Now, I'll discuss the performance of our three business segments, starting with the Biotechnology segment. Q2 reported sales were $86 million, with reported revenue increasing 13%. Acquisitions contributed 13% to revenue growth. Foreign exchange negatively impacted growth by 2% and organic growth was 2%.

Organic growth was broad-based in all major product lines, but partially offset by lower PrimeGene revenue in China and timing of larger biopharma custom projects in the U.S. Adjusted operating income for the Biotech segment decreased 1% in Q2 compared to the prior year.

Adjusted operating margin was 45.9%, a decrease of 600 basis points year-over-year, due entirely to the ACD acquisition. Excluding the ACD acquisition, adjusted operating margins were essentially flat to the prior year. Turning now to the Diagnostics segment.

Reported revenue in Q2 was $24.3 million, which reported an organic growth decreasing 5% from the prior year. Solid growth in blood- and glucose-based controls was more than offset by the timing of OEM shipments from the diagnostic assay and reagent product line.

Due to the fluctuations of OEM ordering patterns from quarter-to-quarter, management also monitors trailing 12-month revenue growth to smooth out these timing impacts. For the end of Q2, TTM revenue growth for the Diagnostics segment was 12%.

Diagnostics segment adjusted operating income decreased 21% in Q2 and adjusted operating margin was 23.8%, a decrease of 460 basis points from the prior year. The lower adjusted operating margin was primarily attributable to lower sales volume. Moving on to our Protein Platforms segment.

Net sales in Q2 were $21.5 million, an organic increase of 12% from the prior-year period, with recent acquisitions contributing 1% to growth and unfavorable currency translation impacting revenue by approximately 2%.

Growth for this segment was broad-based in most major regions and product lines, with particular contribution from our biologics product line. Adjusted operating income in Q2 for the Protein Platforms segment was $1.8 million, representing adjusted operating margin of 8.6%, an increase of 70 basis points from the prior year.

Strong volume leverage drove the year-over-year improvement, partially offset by the operating costs associated with the Zephyrus acquisition and unfavorable FX.

In summary, we had solid revenue execution across all of our businesses and managed our cost to reflect the timing realities we faced with our OEM customers in Diagnostics and with our larger biopharma customers in the U.S.

We ended the first half of our fiscal year 2017 on a trajectory we expected with year-to-date organic growth of 6% and year-to-date adjusted operating margin at approximately 35%. Looking ahead to the full-year fiscal year 2017, we still expect overall company organic growth to be similar to fiscal year 2016.

For those who pay particular attention to the calendarization of our results, we do expect Q3 to be similar to Q2 with regards to organic growth and profitability for both our Protein Platforms and Diagnostics divisions. For the Biotech division, we expect improved organic growth in Q3 versus Q2, assuming biopharma research spend picks up in the U.S.

We also expect overall adjusted operating margin to improve due to a larger mix of revenue coming from the Biotech division. That concludes my prepared comments. And with that, I'll turn the call back over to Amelia to open the line for some questions..

Thank you. And we'll take our first question from Dan Leonard from Deutsche Bank. Sir, your line is open. Please go ahead..

Thank you. I was hoping you could elaborate a little bit more on what you call the cooling in biopharma. Was it broad-based? Were there a couple – it sounds like you might be flagging a couple of specific projects, but anything further you could offer would be helpful..

I think it's a combination of two things. One is, we definitely have some timing issues on some projects, some bigger things, affecting our numbers as we thought..

Sure..

The second thing is, we talked about our lower order sizes. Usually, we don't see them go down. In fact we usually see (19:01), call it, the usually end-of-year budget flush or whatever. But we didn't see that end-of-year budget spending that we usually see, and orders going down is something very atypical.

And it was broad-based, so it's definitely something kind of marketing in the market more or less, so. We've done a very detailed thorough analysis of all our key accounts and bio (19:22) in particular, and we can definitely point to a lot of project timing, so knock on wood..

Okay.

And then the improvement you're expecting in biopharma in Q3 and then presumably in Q4 as well, can you – like, how much of a bounce-back are you really expecting and do you have any leading indicators which would support that?.

No. I think it'll happen when it happens. We talked about the same thing a couple of years ago with Germany, if you remember, and we had a similar kind of situation and it bounced back very strong. It's been strong ever since.

I will point out too, you'll notice our numbers were a good solid mid-single-digit growth in our antibodies and decent numbers in our proteins, a little bit lower due to things we just talked about. But a lot of projects are worked around our ELISA kits.

Our ELISA kits are a little bit off and that's one of the bigger reasons where you can speak of project timing..

Okay. Thank you..

So they're a little more lumpier than the run rate buying of antibodies and proteins, so it's more evident..

Okay. Thanks, Chuck..

Okay. And we'll take our next question from Puneet Souda from Leerink Partners. Your line is open. Please go ahead..

Yeah. Hi, Chuck, Jim. Thanks for taking my question.

Just, overall, if you could elaborate a bit on the PrimeGene situation? How long do you think that will take to turn around? What's the regulatory requirements? Could you educate us a little bit there? It seems like a number of other players have benefited from this, given their regulatory products that they already had approved in the market, but seems to be hurting you a little bit.

So, just educate us a little bit when this can recover back..

Yeah. In terms of companies like us in China, we're pretty narrow compared to most, right? We don't have much in the instrument business growing there. It's very small. We're just getting off the ground there with all that, getting off the ground with ACD.

So we're left to our reagents, our core business, which is seeing a 20-plus percent growth going on for a year or two years now. PrimeGene, as you know, we bought as an asset with our China-for-China strategy with a brand outside of R&D Systems.

We do sell R&D Systems brand into this segment as well, but to the large degree mostly it's hospitals, it's clinical setting in China, which do a lot of their own research and sell a lot of their own therapies, okay, buy from PrimeGene, they buy locally.

And there are other local competitors other than us that also would be seeing this (21:55) but there's nothing public, nothing you would really see. So, that's kind of gist of it. We're probably two quarters in with two quarters to go. It's definitely material to PrimeGene and it's big enough where it affects our numbers overall for China.

We still had growth, but without that if you go back and normalize what we are doing with PrimeGene, in some cases a couple of years ago growing as much as 50% in growth. You'll see a much different situation at this point right now for our overall numbers. So it will come back.

We'll wait and watch and we'll see where we're at and we'll see checking in hospital-by-hospital, which are lots of and which we're doing. And some of them are getting their certification. Clearly, people are looking for and there's demand for these solutions, and so there's pressure I think to get things done.

It won't be like the other crackdowns they've done that are a little longer-term in China. So we're expecting another two quarters or so in which we hope you'll see kind of back to normal. And we're expecting a 20%-plus growth again with PrimeGene and, obviously, a year from now a couple of easy comps..

Got it. Okay. Thanks for that. And just on the Diagnostics segment, one quick one on that.

Just trying to understand, as you've done work with Astute and as you're trying to grow further into that segment, help us understand a little bit the regulatory risk and the reimbursement risk and how you're thinking about those? It seems to me that strategy-wise you're thinking a little bit more aggressively in the Diagnostics segment..

Well, the strategy is simple dealing with the risk, we're not doing it, they are, so. They're our strategic partner and they've done it before. This is the team that was the core of Biosite (23:39) years ago. So they've done this before. They've created the hockey-stick growth that we're predicting with this company.

They have screened hundreds of our reagents. They've worked with us for actually a long time. They've been a really good customer for a few years now. And so we just got very close, and given what we want to do with immunotherapeutics and with our reagents and our global strategy, it just made sense to get closer. They found success.

They are buying multiple reagents from us that have turned into biomarkers, but there's IP around and it's a big issue. I mean, acute kidney injury is a massive problem for cost in the U.S. and we haven't looked outside yet. And it's already approved. And so it's selling and ramping quickly.

And then we're not talking yet about what's left in the pipeline. They're busy already on new things that they've found in our freezers and we have other indications coming out over the coming years.

So we hope this is a great foray for us to get in a profitable area of diagnostics, not the low-end side of things, where there are good reimbursements well-covered under the DRG and we expect the new things that we do will be out as well. And then we'll hopefully go outside the U.S. at some point as well. But it's actually very good.

And again, we're really leaning on their regulatory experience, their clinical and their overall cash position to drive this, which we think is very strong, so..

Okay, guys. Thanks so much for the questions..

And we'll take our next question from Katherine Schoen from Robert W. Baird. Please go ahead..

Hey, guys. Thanks for the questions. Curious how the quarter came in relative to your expectations as you kind of look segment-by-segment.

Was there a big surprise there or was it pretty much in line with what you guys have been thinking?.

Well, it's certainly a little more disappointing than we'd like. That's why you see us making all the comments. Well, if we normalize Diagnostics that's forever lumpy and 20% quarter last quarter which put us over 10% organic growth, well, it's 5% to 6% grower.

So, if we put that in and say it was a level run rate business, which is not, where it would be at? It'd only be a mid-single-digit growth as a company, kind of where we need to be as a minimum. I think some of the softness in biopharma due to the timing and mainly due to projects around ELISA kits in particular, it was unfortunate.

It will bounce back. I think we're okay there. Antibodies, I mean, I'd be more worried if we saw antibodies crumbling or something. But antibodies are strong, stronger than ever. We're doing great. So the website is working. We're growing in every region. And then also Europe, Europe is just kind of steady as she go.

It's been as good as last quarter and we see better looking forward and with an acceleration in our instrument businesses, which are getting bigger and bigger and getting more critical mass over in these areas where we've staffed up a little bit, we have some great leadership now in Europe around Protein Platforms division and doing the same now in Asia.

And then lastly, Japan, I mean, it's been over two years since I can tell you we were at a flat in Japan. We've been negative and strong negatives. So we're hoping that's coming back strong. So, overall, a kind of a mix bag. Would have likely seen a 4%, 5% overall net, but we didn't get that.

But I think, as Jim commented on earlier, year-to-date we're right where we said we'd be, as we were so strong last quarter and maybe that's still a little bit in this quarter, we had some of that. But we probably said that this year we hope to end somewhat a little bit better than last year and that we're on our thesis, so.

So, again, lastly I'll say is we're not in a quarter-to-quarter gain here. We've made massive changes in this company. We have more than doubled in head count. We have almost doubled in size. We're quadrupled in sites globally. That's a lot of change. And it's change you're not going to see in any one or two year, we're investing for the long-term.

And if you're in this for a five-year ride with us or so, you're going to see the results coming and coming and coming. And then don't forget, it's just August. It's just five, six months away. We had a 50% grower and which would add 2 full points of organic growth. ACD is doing absolutely fantastic for us.

And hopefully, a year after or two years after that, we'll see Astute coming online. If things keep going the way they do with the contracts we have in place, we'll be able to capitalize on that arrangement. So, any way, it's not a one quarter gain and we're okay..

Yes. That makes sense. And then one follow-up. For academic customers here in the U.S., low-single digit seems about in line with what you guys usually do.

Have you seen any changes in spending or sentiment since the election, or does it seem like it's still business as usual?.

It's kind of business as usual. I would say there's a little bit of a softness (28:35) on biopharma for the end of the year. We'll call it Trump policy, I guess, whatever. But for the most part, I mean, we expected maybe a little worse there. It's kind of steady as she goes. I attribute that to really our strong teams.

We've got a great commercial engine going out. The website is really good. Fisher had a better quarter than the previous one. So those all play to, I think, a better ending on the academic side..

Great. Thank you..

And we'll take our next question from Amanda Murphy from William Blair. Your line is open. Please go ahead..

Hi. It's Aurko in for Amanda. Just a quick follow-up question on ACD. Now that you're about two quarters in, you certainly are happy with it.

I guess what are some of the things that you would think need to improve? And how do you expect the table of dilution to look over the next couple of quarters? And the second question is, can you walk us through a bit more on how pricing pressure for growth (29:31) would impact your business?.

Well, the first question, and you're not coming in real clear, but I'm hearing you asked about ACD, if we see things that we can improve or the dilution going forward?.

Yes, both of those..

Well, I think we have an earn-out with them and it goes this calendar year. And at over 50% growth, our strategy in the short term is to stay out of their way. They're doing fantastic. We are working on commercially working together both in Asia as well as Europe.

The teams are getting closer to starting a cross-sell, starting to do things that are really a no risk to the earn-out potential fee. But for the most part, they're doing great. They actually were ahead of plan on top and bottom line this quarter. And we're involved, obviously, since we bought them.

But we're commercially trying to stay out of their way more or less in terms of how they want to run their business for the next project (30:29) while they're working on their earn-out. On the dilution now, I'll pass it off to Jim here..

Yeah. Well, I'd say on the dilution aspect of it is that we would expect kind of same level of dilution at least in the near-term that we saw most recently this quarter. But as we start to close out the fiscal year, that dilution will become less and less, and we believe in fiscal year 2018 that we still have a trajectory to be profitable.

You got to keep in mind that despite – with their fast growth, where some of that new growth is coming from now is in the diagnostics space. Up until now they've been really focused on the research-only. But with them now expanding that market in the diagnostic pathology, we continue to invest in the commercial resources to capture that market..

Got it..

And remember, those solutions that are already approved and right done (31:14), they're moving forward and selling. It's going very, very well, so. I also mentioned the publication count for ACD technology, this RNA in-situ hybridization, is now well over 600. It's screening.

So the adoption pickup, which is something you want to watch, and this is so far looking very, very favorable. So the open question is, how long can they last at 50% growth and we're thinking for many, many quarters yet. So, that's the goal..

Got it.

And then the other question, which is a quick follow-up from an earlier comment, is how would you talk about how pricing pressure would impact your business in the drug space?.

Well, we're pretty far down the food chain in terms of pricing on drugs. I guess, overall, I'm pretty hopeful. I think this administration I think is going to be the right thing hopefully.

And I think corporate tax rates and tax holidays and things that are going to help overall, investment and spending I think, all of the things that everyone else kind of believes I think in our industry. So I don't foresee any real reaction or issue with us in terms of drug pricing. We're very much still heavily on the research side as a company..

Got it. Thank you..

And we'll take our next question from Matt Hewitt of Craig-Hallum Capital Group. Your line is open. Please go ahead..

Hi. This is Charlie on for Matt. Thanks for taking our questions. First, can you discuss how the cross-selling efforts are going? We talked a lot about it last quarter. I don't know if we talked about it too much here..

Yeah. I think it's still going to be lopsided more towards instruments and a little towards consumables. It just so happens that you have highly trained professionals selling assays, consumables, so that maybe Masters or Ph.D.

people, they know a lot how the solutions work, how to use the instruments, so they really can hand-off leads that will actually work. It isn't quite the same in this side when you've got FAS as your instrument experts that I think it's in the field (33:20) understanding a lot about assays and the reagents. So it's a little bit lopsided.

That's why you really focus on this. I think it's still early. But we're seeing really good benefits, especially in Europe. I think some of the strong results in Europe is coming from just exactly that. The teams are smaller and more closer together, in some cases sharing in leadership. And it's working quite well.

So we're not, like, trying to merge divisions like within like a Danaher or (33:44) company. This is still a pretty little company. We're not talking large teams. We have probably 150 or so people globally commercially now, about 50 or so in Europe, less than that in U.S. because of the Fisher situation.

And it's not hard to get them working together and playing together. So I'm very bullish on it actually. I think we have yet to see big benefits in Asia. I think that's still coming. And as we build out teams in more and more cities in China, we build out the assets there, it's going to be really good. And I wouldn't even count ACD out of that.

There's going to be a lot of ACD to come too in the coming years, so..

Okay. Thank you. That's helpful.

And then the 21st Century Cures Act, are we seeing any dollars starting to flow out of that or is that still kind of in the works?.

I hear it's still in the works, so. I would say we've not seen anything yet..

Okay. Thank you. That's it for me..

And we'll take our final question from Paul Knight with Janney Montgomery Scott. Your line is open. Please go ahead..

Hello. Good morning. This is actually Carolina Ibanez-Ventoso on for Paul Knight. I was wondering if you could be a little bit more specific on the initial activities that can be attributed to the outstanding performance of ACD..

The performance of ACD but what kind of performance?.

The initial activities in this franchise that has led to the outstanding performance of them..

Okay. As I mentioned earlier, 600 publications is an awful lot for a young technology company. It's really growing. It's virtually a little bit everywhere. It's in a lot of clinical settings as well. There is a research side as well as a diagnostics side, right? And so with like all signed up and selling solutions, that leverages their large sales force.

This group also has a fairly decent size sales force, 20 reps, 30 reps, in that range, and we're just starting to build it out in Europe, as I mentioned.

So there is a commercial model to this where, even though it's a reagent type of solution, it won't get to the 50-plus-percent op margins we see with our protein business because there is commercial sales that are needed. You need to sell the solutions.

It is all about the take-up of pathologists moving from an IHC solution to just more of a genomic version, okay? And it's going really well. So we test it. We talk about it. We're measuring. And what is that to addressable market? We think it's a $1 billion-plus. There is a lot of pathology out there.

The take-up is pretty fast and the results are outstanding. Another thing I'll let you know is there's a lot of smaller labs, a lot of places doing IHC, and doctors and pathologists, and they're adding a leverage and outsource a lot of the current research or the experiments or the tests that they want done.

They may, in many cases, be waiting a week or two weeks for results. That's without automation. With automation, it could be even worse. This is a solution that works on current automation. You get the results very quickly. You as a pathologist can even work on a scope, on a slide in your office, and get results. It works that well.

So, that is also helping pick things real quickly. There's a lot of adoption because it's just based after solutions that are very accurate. And there is roughly 30% of all I would say IHC solutions are missing the antibodies they need to be fully specific. So you don't know for sure what you're finding, what you're looking for..

Yeah..

So there's just this gap in the antibody portfolio that fills in, at least we're starting, right, a good 30% of gas still is (37:22) part of the market..

Okay. Thanks. That was helpful. And could you also elaborate more on your partnership with Astute Medical? They have NephroCheck, which is already a commercial product, but what additional products do they have under development and which are some areas that they are focused on? Just curious on that..

There's a second solution that's very closely tied to the NephroCheck, it's called Nephroclear which is in clinical right now. But it's working. We're looking at different solutions for different, I guess, reagents we have. We have a pipeline we can't talk about..

Okay. I understand. Thank you..

There's more than one. There's at least two we're looking at right now..

Thank you..

And I should point out too that it took – it was 150-plus different reagent screenings that this team, which is really good at this stuff and done it before, that they found what they are looking for with really good specificity..

Great..

And with no further questions in the queue, I'd like to turn it back over to Mr. Kummeth for any additional or closing remarks..

All right. Well, thanks everyone for attending. And definitely we're on our path this year, and we look forward to next quarter and with even hopefully terrific results. So, talk to you then. Thank you..

Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation and have a wonderful day..