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

Daniel Arias - Citigroup Global Markets, Inc. (Broker) Dan Leonard - Deutsche Bank Securities, Inc. Puneet Souda - Leerink Partners LLC Catherine Ramsey Schulte - Robert W. Baird & Co., Inc. Amanda Louise Murphy - William Blair & Co. LLC Matthew G. Hewitt - Craig-Hallum Capital Group LLC Carolina Ibanez-Ventoso - Janney Montgomery Scott LLC.

Good morning, and welcome to the Bio-Techne Earnings Conference Call for the Third 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..

Good morning, and thank you for joining us. On the call with me this morning is Chuck Kummeth, Chief Executive 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 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. Now, I'll turn the call over to Chuck..

Thanks, Jim, and good morning, everyone. Thank you for joining us for our third quarter conference call. The company delivered 4 % organic growth in the third quarter and we have many highlights to discuss beyond this headline number that speak to the progress of our long term growth strategy.

Let me remind you that our company provides tools to two distinct life science markets. The first and currently the largest market for our portfolio is the life science research market with customers in both academia and biopharma.

The majority of our products at service market are for research use only, but some products also support bioproduction at large pharma. The products within our Biotech division and Protein Platform divisions serve this market. The second life science market our company provides tools for is the diagnostic market.

Not at the patient level, at least not yet, but to the OEM customers that supply diagnostic instruments and kits to doctors' offices and central labs that provide this service for patients. The picks and shovels types tools we provide include the controls and calibrators for these instruments as well as reagents and assays for the kits.

Our long term growth plan for this part of our business are aligned with future diagnostic platforms and kits that are OEM customers are developing, and the pipeline for these new platforms is strong for years into the future.

But the short-term demand depends on the inventory management pattern of our OEM customers who buy our products in bulk for efficiency.

I'll remind you that these two different business models provide more clarity on the underlying strength of our performance and traction towards achieving our longer term strategic growth initiatives that we shared at our Investor Day last September.

In Q3, the two divisions that sell into the life science research market collectively grew 9% organically. Our Biotech division grew 6% organically, while our Protein Platforms division grew 20% organically. And although we can't count it as organic growth until the acquisition annualizes in August, ACD grew nearly 60% in Q3 on a standalone basis.

Our strong performance for the quarter was broad-based by region and end market. Europe's results were outstanding with organic growth over 20%. We experienced continued strength in our bio-pharma end markets there but academia also formed very well with organic growth in the high-single digits.

There is little doubt that we are executing extremely well in Europe. Our subsidiary model is the most advanced there with the divisional commercial teams working together to consult with customers and provide the right solution to fit their needs, whether in the form of an instrument or a reagent.

This creates revenue synergies across our portfolio and clearly is at least part of what is driving our success in Europe. Other factors we believe are contributing to our success there including our continued investment in expanding our direct model which gives us more intimacy with our customers.

And our focus on building relationships with the smaller Biotech firms, which are the fastest growing part of biopharma in Europe right now. Our strategies in Europe had been building in momentum over the past year and the result speaks for itself. As in Europe, our Asia region also performed very well.

In China, growth for our Western brands approached 30% in Q3. The CFDA crackdown and cell therapies administered by hospitals due to the Baidu scandal one year ago continues to be a drag on our locally produced PrimeGene brand in China results overall. We probably have another quarter or two of headwind here.

But for most of fiscal year 2018, the worst will be behind us and we should see gradual contribution again from this part of the China market as the CFDA gradually gets through its certifications. As for the rest of APAC, the overall region continues to perform well.

We experienced double digit growth in Korea in our reagents with our instruments placements throughout the region overall. And for the first time in many years, we experienced growth in Japan this quarter. As we said last quarter, a period we've reached the bottom there and we'll be looking for modest growth going forward.

Continuing the theme from last quarter, the U.S. is the one region that under perform compared to our expectations at the beginning of our fiscal year, with low single digit growth in both its biopharma and academia end markets.

There is little doubt in our minds that the political headlines and rhetoric over the past six months had caused some pause in the pace of funding the life science research project, whether it's a tweet on lowering drug prices or a tweet on reducing NIH funding, this would logically impact researcher decisions on when or which project to pursue until there is more clarity on the regulatory and funding environment.

Overtime, calmer heads usually prevail and we believe this period of uncertainty will pass, and the importance of life science research in America will continue for many years to come. Our U.S.

business had a particularly strong March and it appears congressional leaders have just reached a tentative budget agreement for the remainder of the government's fiscal year 2017 that includes a significant increase in NIH funding. So hopefully some of this uncertainty is already starting to wane.

Now for a little more color on our Q3 performance by division. With 6% organic growth in the quarter, Q3 mark the seventh out of the past eight quarters that Biotech division has had at least mid-single digit growth. By product, the growth was broad-based with mid-single digit growth in both our antibody and assay product categories.

Antibodies were again led by double digit growth in our Novus brand where our digital marketing campaigns and ongoing website enhancements continue to pay off. Our growth in assays for the quarter was driven by our Luminex products. Both in the assays, we sell ourselves, as well as the royalties we received from other Luminex and assay suppliers.

We use our content in the production of their assays. Advanced Cell Diagnostics, also part of the Biotech segment, continued in Q3 with fantastic growth of nearly 60% on a standalone basis. ACD's technology continues to garner fast acceptance from research with over 800 publications to date.

For example, as announced in a press release about a week ago, RNAscope in situ hybridization aided CDC researchers in advancing the understanding of Zika pathogenesis particularly as it relates to newborn children of infected mothers.

During this past year, scientists around the world have intensified their research to reduce the impact of the Zika epidemic. RNAscope has been an essential tool in nine Zika publications. So we are proud to provide solutions that can help explain this complex and devastating virus.

As a reminder, ACD products mostly fell into the RUL (07:27) market today where there is still plenty of new interest in applications that will allow for strong growth for years to come.

But ACD is also currently working on strategies with an in (07:37) with partners, Leica in particular, that will open up ACD's products to a much larger market opportunity as a diagnostic tool. The opportunity that's still in front of this business give us more enthusiasm about ACD's potential every day.

Moving on to Protein Platforms, this division also continued with its growth momentum, making the fifth quarter in a row of double-digit organic growth, four to five of those with growth at 20% or better. The growth is broad-based regionally with our Biologics product line continuing to lead away.

Our Simple Plex platform also is rapidly gaining momentum, growing over 75% from last year. This product line has been a prime example of how our divisions fit together strategically and can generate growth from revenue synergies.

We have organized a sales team for this platform of assay specialist from the Biotech division and instruments specials from the Protein Platforms division to work with our customers together and demonstrate the benefits of the highly accurate automated multiplex ELISA platform. I believe the growth rate speaks to how well it's working.

Finally, the Simple Western product line contributed to growth as well, with yet another record number of West instruments sold during the quarter.

As we've said before, Protein Platforms is plural, not singular, with a number of instrument platforms that's unique IP-protected technology, enabling high gross margins and the ability for this division to grow double digits for years to come.

Finally, similar to last quarter, our Diagnostics division reported revenue in the quarter that was lower than last year. As I mentioned in my opening comments, this part of our business has a very different customer base than our other two divisions.

As you have seen so far this fiscal year, quarterly revenue has been quite lumpy, with nearly 20% growth in Q1, revenue slightly down in Q2 and now lower by double-digits in Q3. Our OEM customers give us indications of up to 12 months in advance as to what their ordering patterns might look like.

These are often large orders; sometimes as much as a year's supply a time. Therefore, when they are released for delivery, they can create large swings in quarterly revenue recognition.

Based on our customer indications for deliveries at end of the last fiscal year, we planned for a much higher revenue growth in Q1 and Q4 of fiscal year 2017 and negative growth in Q2 and Q3.

What we didn't plan for is the degree by which some customers have moved out their delivery dates, some even into our fiscal 2018, largely to hit their inventory internal management metrics. We had validated this by reaching out to each of them confirming no orders have been canceled.

As a result, Q4 won't be as robust as a quarter for our Diagnostics division as we had initially planned, but we do expect to see a return to growth nonetheless.

The part of our Diagnostics business that had short shelf life and more frequently delivered – delivery schedules, hematology controls, had a record quarter in Q3 and continues to grow healthy in the mid-single digits.

This gives us insight into the end markets our OEM customer serve, and further validates what these customers are telling us regarding their internal inventory management practices. Over the long-term, the project pipeline for our Diagnostics division remains very strong with key markets to serve.

A recent example of this was the innovative parasitological system we announced two months ago, PARATEST. This product is an innovative biodegradable system that could become a new standard providing highly accurate results in less time than existing tests and can be easily performed in the veterinarian's office without special equipment or training.

It's opportunities like these and many more on the horizon that give us confidence that our Diagnostics division will be a solid contributor to the company's organic growth for years to come. Finally, I would like to highlight our adjusted operating margin performance in Q3.

We were very transparent over the past several quarters about what kind of immediate impact the ACD acquisition was going to have in our margins.

We were equally confident about how our adjusted operating margin would improve in the second half of fiscal 2017 as the ACD continued its revenue ramp and became less dilutive to the overall margin profile. True to our word, our adjusted operating margins increased sequentially over 200 basis points from Q2.

Many thanks to our employees worldwide for their wonderful execution, which manifested on both our top and bottom line in Q3. In closing, we head into the final quarter of our fiscal year 2017 well-positioned to meet our financial objectives for the year.

But more importantly, we should close fiscal year 2017 well-positioned to hit our long-term growth and profitability aspirations that we presented at our Investor Day last September. We just finished in presenting to our board our annual prioritization process.

We use this process to look at all projects across the company, both current and proposed, and evaluate them against one another on criteria such as risk-adjusted financial return, strategic fit and competitive differentiation, just to name a few.

These projects serve as the bottoms up building blocks of how we will achieve our long-term organic financial objectives. This year, we had over 200 projects to evaluate and compare, including a record number of cross divisional projects substantiating the strategic fit of all the acquisitions we have made to date which form these divisions.

The output of this prioritization process, which will form the basis of our fiscal year 2018 operating plan, gives us confidence that we have the innovation and right path forward to attain our long-term financial goals. With that, I will turn the call over to Jim, who will provide more details on our financial performance for the quarter.

Jim?.

Thanks Chuck. I will provide an overview of our Q3 financial performance for the total company and then provide some color on each of our three segments. Starting with the overall third quarter financial performance; adjusted EPS decreased 4% to $0.97. The impact of foreign exchange fluctuations represented a headwind to EPS of approximately $0.01.

GAAP EPS for the quarter was $0.57, compared to $0.81 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. Q3 reported revenue was $144 million, an increase of 10% year-over-year, with organic revenue increasing 4%.

Third quarter reported sales include an 8% 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 over 20% organically, with biopharma sales growth over 30% and high single digit growth in academia. As a reminder, the Easter holiday occurred in March of this year versus the month of April last year. We estimate this contribute approximately 3% to Europe's growth in Q3 due to the extra selling days there.

China's organic growth was in the low-teens in the third quarter, but as Chuck stated our Western brands grew nearly 30%, with similar contribution from both our instrument and reagent businesses.

What partially offset this growth was our local PrimeGene brand most impacted by the CFDA shutdown of immunotherapies until they can be certified at a local government agency. Japan continued to improve in Q3 with organic growth in the mid-single digits.

While the rest of the Asia-Pac region continue to perform very well, led by South Korea, with growth in the high teens. Note that all references made to growth rates by region and end market 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 70.8% in Q3, similar to last quarter but down approximately 80 basis points from the prior year due to unfavorable mix. Foreign exchange had a nominal impact on adjusted gross margins year-over-year.

Adjusted SG&A in Q3 was 23.9% of revenue, down nearly 200 basis points from prior quarter, but 325 basis points higher than last year. The SG&A increase was driven by the acquisitions made from the beginning of the fiscal year and strategic investments made in our core businesses to support growth.

R&D expense in Q3 was 9.6% of revenue, 50 basis points less than prior quarter and 100 basis points higher than last year, mostly due to the acquisition of ACD in Q1.

The resulting adjusted operating margin for Q3 was 37.3%, an increase of 210 basis points over the last quarter and a decrease of approximately 500 basis points in the prior year period.

Recent acquisitions contribute 300 points to the decrease, with the remainder largely attributed to unfavorable mix and strategic investments made throughout the past year. Looking at our numbers below operating income. Net interest expense in Q3 was nearly $2 million compared $0.4 million of net interest expense last year.

The higher interest expense is 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 from the acquisition of ACD last August.

Other non-operating expense for the quarter was $0.3 million compared to $0.7 million in the prior year quarter with less transactional FX expense this year driving the variance.

Our adjusted effective tax rate in Q3 was 29.2%, an improvement of 180 basis points from the third quarter of last year due to geographic mix with growth in Europe and Asia outpacing growth in the U.S. where tax rates are the highest. In terms of returning 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 and the balance sheet. $24.4 million of cash was generated from operations in the third quarter and our investment in capital expenditures was $4 million.

ACD had its first earn out milestone as of December 31, 2016 and its former shareholders earned their additional pay out of $25 million. For GAAP purposes, $8.8 million of this earn out is recorded as cash paid from operations.

Management uses earn out as part of the purchase price paid for ACD, thus an investment rather than an operational cash expense. Excluding the earn out, the company's adjusted cash flow from operations was $33.2 million.

As for other notable items on our balance sheet, we ended the quarter with $113.6 million of cash and short-term available-for-sale investments. Our long-term debt obligations at the end of Q3 stood at $343.6 million, relatively flat from the end of Q2.

Going forward, our capital deployment priorities remain opportunistic M&A, our dividend and debt pay down. Now I will discuss the performance of our three business segments, starting with the Biotechnology segment. Q3 reported sales were $94.5 million, with reported revenue increasing 16%. Acquisitions contributed 12% to revenue growth.

Foreign exchange negatively impacted growth by 2% and organic growth was 6%. Organic growth was broad-based in all major product lines, but particularly strong in antibodies and assays. Adjusted operating income for the Biotech segment was relatively flat in Q3 compared to the prior year.

Adjusted operating margin was 47.9%, a decrease of 760 basis points year-over-year, largely driven by the ACD acquisition, but also due to negative mix and strategic investments made throughout the past year. Excluding the ACD acquisition, adjusted operating margins was still a very healthy 53.3% for the division.

Turning to Protein Platforms segment, net sales in Q3 were $23.6 million, an organic increase of 20% from the prior year period, with recent acquisitions contributing 1% to growth; and unfavorable currency translation roughly offsetting the impact from acquisitions.

Growth for the segment was broad-based in most major regions and product lines, with particular contribution from our Biologics product line. Adjusted operating income in Q3 for the Protein Platforms segment was $3.3 million, representing an adjusted operating margin of 13.8%, an increase of 570 basis points from the prior year.

Strong volume leverage drove the year-over-year improvement, partially offset by the strategic growth investments made throughout the past year and unfavorable FX. Moving on to our Diagnostics segment. Reported revenue in Q3 was $26 million, which reported an organic growth decreasing 13% 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 lines. Our Diagnostics segment adjusted operating income decreased 37% in Q3 and adjusted operating margin was 23.1%, a decrease of 850 basis points from the prior year.

The lower adjusted operating margin was attributable to lower sales volume and unfavorable mix. In summary, we had solid revenue execution across our biopharma and academic end markets globally, and managed our cost to reflect the timing realities we faced with our OEM customers in Diagnostics.

We ended the third quarter year-to-date with a solid mid single-digit organic growth rate and we expect to finish fiscal year 2017 on that same trajectory.

Keep in mind the slight headwinds we faced in Q4 with the timing of Easter, particularly in our business in Europe, as well as more typical year-over-year comps for both our Biotech and Protein Platforms divisions and the comps we had in Q3.

With regards to profitability, we expect our adjusted operating margin to end the fiscal year at a rate similar to how we ended Q3, and our adjusted effective tax rate to revert back towards historical norms along with the geographic mix. That concludes my prepared comments.

And with that, I'll turn the call back over to Rebecca to open the line for some questions..

And your first question will come from Dan Arias with Citi..

Hi. Good morning, guys.

Chuck, on the timing issues in Diagnostics, can you just help us with how much of what you're seeing a delay on might fall into fiscal 2018 rather than 4Q? And then to that point, how do you think you finish the year in Diagnostics?.

Well, I think it's going to be probably low single digits, at best, for finish, it all depends. We're roughly about $3 million or so off. It's really all on a couple of very, very, very large accounts and they're not somebody we can have a lot of influence on, they'll do what they do.

But they have not – we've not lost them, they've just pushed them out, they're on a working capital crunch and it is what it is. Our pipeline, especially in where most of the pain is in our San Marcos is really, really strong.

And the reasons – some of the reasons we bought this company are coming to bear next year with some really nice diagnostics platforms coming out. So, probably, low single digit this year, and I do still think our thesis of mid to upper single digits next year on is still sound actually.

And if we get all of those orders back, I mean, they should be at top of that really. So hopefully, it will be a really good Q1 and Q2, so. From what they're telling us now..

Right. And within the biopharma segment, it sounds like Europe was the driver there, so, I guess, what are you expecting in terms of US customers from here? And then, overall, for pharma, are you still expecting a step up in your fiscal 4Q? I think that was the way you were thinking about things last time around..

Well, we're expecting Europe to continue. We'll see the French election and further Brexit stuff happening and all, but we are really executing well. We are firing on all cylinders there. And couple of years ago, we were in bit of a timing mishap with a lot of our biopharma, that's – we're still in a good timing cycle.

That could change going forward, at some point, I'm sure it will, but we don't see them in the short-term horizon, it's looking very, very strong. And I think in the U.S., I think given the news yesterday, I think we'll start seeing some improvements there too. We're still seeing growth.

It's just needs to be mid-single-digit and it was low this quarter, but looking forward, I think we're back to mid-single-digit. Again, we have some timing issues too, I talked about last quarter.

We've got a lot of large company OEM-type business and custom work we do and similar to what we faced in Germany and Europe two years ago, we were seeing this year. And that kind of corrects itself next year for biopharma here in the U.S.

And academia, we continue to further reduce our risk with academia, we've taken the company from 40% overall globally to roughly 25% in academia. In the U.S. component academia is only 15% of global results now. So, but we further reduce the risk there and that's going to also help although I think we see academia bouncing back a bit here too.

And given the NIH information yesterday should be hopefully a nice 6% or full pop on top of the budget increase before and – we have yet to see really a lot of that even flow through at all yet, so. (24:31).

Okay, great. Yeah, hopefully so. And then if I could sneak one more in for Jim. Jim on the operating margins they were down year-over-year, but as you said up sequentially.

So as you guys move to your next fiscal year, can you just touch on from an organic standpoint how you feel about 2017 sort of being the trough year at the EBIT margin line? I mean, I know deals can always influence that but ex any M&A, where's the confidence that from 2017 you begin to move higher as ACD scales et cetera?.

I mean really nothing has changed from what we've communicated for the past year in terms of the margin profile and I think this quarter proved it out. We do expect fiscal year 2017 to be the trough because of the recent acquisition of ACD.

We expected the first half and more specifically the second quarter to be the trough within the year and that has occurred. And therefore our thesis just going forward continues to be gradually expanding margins as ACD continue to ramp. We continue to ramp also in Protein Platforms and hold our solid margins in the Biotech segment.

The only thing that will keep it from accelerating faster than maybe what I did most recent quarter is again the offsetting mix, as Protein Platforms continue to grow faster than the overall company there'll be some offsetting mix there, but overall, gradual increase in operating margins going forward. And nothing has waned our confidence in that..

Yes. Okay. Thanks very much..

Next we'll hear from Dan Leonard with Deutsche Bank..

Thank you.

Appreciate dispersion in China between the Western products and PrimeGene, but can you give us the overall growth rate for the business in China incorporating both of those variables?.

It's low teens..

Okay..

It'll start reaccelerating back. We actually have acceleration in our core brands, we're near 30%. So as the other stuff comes back online here through PrimeGene, our local brands, and our China for China, we hope to be at a net over 20% or better maybe after next quarter.

This quarter it could still be teens or better but after that should be a solid 20 plus percent again, which we'll get it for 10 quarters in a row, so..

Okay. That's helpful.

And Chuck, are you contemplating any changes in your go-to-market strategy in the U.S., whether it would be distribution, more sales people or anything on that front after a couple of quarters where the growth rate has been a little bit lower than you'd like?.

Very insightful question. When you look at results like this and have been for a while, and we're not alone. I think others have been talking about the same kind of situation. We've got to figure out how much is related to funding and panic and things like that versus reality. We still are working with Fisher, of course.

We also work third-party with other distribution. We're looking at other potential partners as well. And we continue to expand our local direct sales force. So we've actually moved it up considerably.

We need to look at that because as we further – actually model – the model like we did in Europe is getting in commercial groups working together across divisions, it calls for more specialists and more assay specialists, as an example, more people that understand our immunotherapeutic contributions, our reagents.

And that's going to help us overall with growth. So it's a tuning towards the collaboration between divisions as where the investments will be. And it's kind of doubling down on working more with distributions as well just more on the – I would say, on how we promote and how our products are on their systems, et cetera.

And then on top of all that, we continue to further improve our website. So we're making that better and better and that's how we really still support academia primarily. So that's also been improving our, I guess, our levels of people being online are up over double-digit, low teens at this point year-on-year. So we like what we see there as well.

So I think as the funding issues kind of work through and some of the timing issues with OEM that kind of bleed into everything else in the U.S. business, I think we'll see a natural improvement come next year..

Okay. Thanks for all the color..

From Leerink Partners, we'll go to Puneet Souda..

Yeah. Hi, Chuck and Jim. Thanks for taking my questions.

So first on the ACD, could you update us on the progress towards the clinic? You highlighted a couple of examples but overall, are your products moving towards the clinics? So, 60% growth in the quarter, do you think that sort of level continues as you reach into the clinical markets? And can you give us a sense of spend there a bit also and how it's tracking? It seems like there's improvement in your operating margins, but could you give us specifically on ACD?.

Sure. Well, our thesis is when we bought it was 50% or better, and we think that will hold true. So they're well ahead now in terms of meeting their end of calendar year milestones for earn out. We paid off or we're going to be paying off the one from this last – end of calendar year. So they are doing really well.

Their commercial investments are on track. Really all of their marketing investments are on track. We're starting to integrate them into our commercial activities.

As an example, Europe this summer will include that team, we're already working on the groups in Europe and we have a team in Milan as well as their group is in Milan, so there's growth there. Asia is also starting to pick up, especially in China we're starting to add some people.

We're still leaving them a lot of freedom being there as an earn out, but the collaboration integration is actually well ahead of schedule, to be honest. Continuing at 60%, we want to play that down, it's just wonderful that they're at that level. We mentioned the publication count is over 800. It is very, very quickly being adopted.

I think the nice thing about that business, and unlike the instrument business, is we're doing well with Protein Platforms, that's, much more lumpy, much more end of the quarter. It is just a nice constant run rate business we're seeing.

We're seeing that almost mimic some of our other reagent businesses that are very safe and very, very well distributed across customer, a large customer base.

So Yuling who runs this business for us, who was the founder of the company, is still very excited and he hasn't taken his foot off the pedal at all at this point, so I think we got a strong year ahead there. And then I think we're proving, as they scale because this is a great – it is an 80% gross margin business.

And while although it's a higher cost commercial model than like our Protein, our antibody business, it's still very good. It will last into about (31:09) near 40% long-term. It will be a couple of years to get there, but we've about them being profitable next year some time, we'll probably moving that up a quarter or two so..

Okay great and great for that. Thanks for that. So in terms of Protein Simple, the segment came in, obviously, very strong compared to our estimates.

Could you to describe the growth you're seeing in the QA, QC platform end of the business versus the Ella and the West, if you could parse that out compared to the downstream products including iCE?.

Well, we don't give details in each category. We had strong growth in every platform we sell there. And there's roughly four major platforms, not counting the imaging legacy platforms, which is not growing, which is a stable, if not declining, probably still flat or better in China, but overall, it's a declining segment.

But everything else is flying, and it is led off by Biologics. I'll tell you Biologics is the lead. And Simple Plex, by percentage, is actually smaller base but it's really growing fast. And the cartridge adoption rate that we talked about is hitting all our models, so it's doing very well.

Simple Western, we're at roughly 75% or so versus (32:23) a quarter now and we see it continuing. Big box probably saturating, probably slowing down but being picked up by the West so the overall category is still growing very nicely.

And we talked about there was a 1% increase in there due to acquisitions, that's Zephyr's, (32:40) that's the Milo platform and it's starting to ramp but that's obviously a smaller platform and with the single cell Western Blot category, and we're seeing that start to pick up now too, it's starting to go over end of the near double-digit instrument placements per quarter, so we're getting there..

Okay. Thanks for the color, Chuck..

Next we'll hear from Catherine Schulte with Robert W. Baird..

Hey, guys. Thanks for the questions.

And back on Protein Platforms, can you remind us the split between academic, government on pharma and what you saw from each of those end markets?.

They're roughly equal. We serve both about the same and the growth is broad-based. I would say the Biologics is much more tuned towards the biopharma, obviously and that's where the biggest growth was.

As a split, we probably have more growth on biopharma over academia, whereas we have really good growth in the Simple Western on all fronts, especially academia. So they do serve a little bit different markets.

And we like the Biologics platform as a segment because it supports production, it's really the only category in our company that actually is all about production to biopharma and it's really lighting up, it's doing very, very well..

And just to reiterate a little more. The way I think about that, Catherine, is our Biologics product line is basically 100% biopharma. Our Simple Western product line is composed of 50-50 between the two, biopharma and academic..

Okay.

And can you give us some color on the M&A pipeline and environment and what kind of asset or vertical would be most attractive to you?.

Well, we're hunting on all fronts. We definitely suffered the risk of going an entire year without a deal here come August, we're always working on two, three or four at a time and we still are to this day. We had a couple in getaway recently – more work needed academically but we're still hunting.

I think we're still very interested in areas of leveraging Diagnostics, similar to what we did with our (34:48) investment recently or with ACD. We'll look at all the ACDs we can find. We're hunting in China, really in a lot of categories, even our core, just for scale, if nothing else.

We continue to be hunting in Europe for the same thing, there are some opportunities there we are seeing forming. In terms of new platform areas, I think additional areas around single cell, around flow, or any work stream that the scientists do and handle and use our reagents and understand our brands is fair gain for us, that's our model.

We picked off a few but there's a lot more to pick off, right, so..

Great. Thank you..

From William Blair, Amanda Murphy..

Hi, good morning. So I just had a few follow-ups here. So I guess, first, on the omnibus agreement. So, obviously, that's a good thing, I was just curious how quickly that you might see that flow into the P&L, just based on historical....

I'm sorry, Amanda.

We couldn't understand the first part of your question?.

Okay. Let me start over. So I just had a follow-up on the omnibus budget piece of the commentary. So obviously, it's a good thing if that actually goes through, but I just was curious how quickly we might see that come through the P&L, just based on your historical experience.

And then just another part of that, obviously, you've seen a lot of strength in Europe from an academic perspective at least recently is that – I guess, could we see or when will we see that same dynamic in the U.S.

(36:31) this increase?.

Well, I guess, that is the big question I was going to start wondering about starting from yesterday. I mean, the last real budget increase was a good one, 6.5% over a year ago and we were not sure we saw that flow through before we start seeing the panic, given the administration and tweets and such.

There was the Cures Act which really hasn't seen that extra bit flow through. Now we have this, which is really supposed to be just through the rest of this fiscal budget, which could be a pretty good pop if panic releases or if there is an assumption that it's a use it or lose it budget or something.

It's too soon I know, I guess, I haven't seen any real clarity on that. In sense it's the same kind of 6.5% or so from the previous budget a year or so ago, we have done the math and as you remember and we thought it flow-through to roughly 1% add to our organic growth in the U.S.

So we could say that's probably entitlement again, and maybe we haven't seen it all from before, so hopefully 1% to 2% of addition. So if we're mid-single digits or lower – it should give us a safe low to mid – high mid-single-digit area, that's what we're kind of hoping for.

We had seven quarters like in a row of 5% or 6% and we had last quarter at 2% and now we're back at 6%. Just to stay really safe, it is 6% or 7%, given this would really make me happy and that's kind of our goal.

And we're going after them from a number of different tactics and strategies we talked about distribution website, the assays we're doing, they're all kind of working. But this year, we're kind of offset by a lot of the OEM timing, so I think that's the bigger handle I think for next year.

We see OEM and custom kind of swinging back this projects come back online with some of our bigger accounts, I think we'll get back within our sale along with, hopefully, this budget influx. So it should be a good year..

I was also going to ask, just given your commentary on the distribution side, so (38:31) that agreement has really gotten some traction.

And is that – based on that, and maybe if you see some amplification in terms of the budget pulling through versus historical, am I kind of reaching there?.

Yeah, you're probably reaching. I'm not sure how any of that would influence any more productivity we got at Fisher. I think and we've talked about – Fisher had a great start with us and we definitely did some homework within the last couple of years.

I think since they've increased their bag, so to speak, with the Life Tech (39:04) and other products, it's been an issue there for us, but they continue to be loyal with us. We obviously know all them very well personally and we continue to work on programs together and we're still contractually obligated and nothing's changed there.

And you got to adjust with the market and the conditions and what's going on, and they continue to do so and we continue to push that as well. Nothing different in our other high-content partners like the BD (39:30) or other I'm sure are asking as well, so..

All right. Okay. And then just last one for me on – you talked about strands in antibodies and this maybe hard to tease out but maybe then qualitatively, could you help us understand, you, obviously, laid out the opportunity for revenue synergies across all of the business.

I was just curious if you can give us a context there how that's going there...?.

Yeah. We'll give you some, but we don't go to too much detail..

Yeah..

I would say all of the acquisitions we've done, Novus is certainly one of the ones performing the best. They're really back performing even better than they were before the acquisition. They're in solid teens for growth rates both here and in Europe. It's largely sourced and we have an amazing website driving the product as well.

I think in terms of allowing proof writing content online to better compete with our competitors who have been doing it longer than we have. I think we're also catching up and making ground. In terms of where it is a bit bimodal, as I mentioned, the retail kind of piece of it will drive, it's really growing extremely well, it's low teens.

The OEM side is soft this year because of the timing of projects, so that's just something that will fall in that bucket. And a lot of the R&D Systems branded antibodies also and the ability to create proteins from that competency we have that are in that area, we see that kind of rebounding here.

And I think we see no softness coming with Novus, so I think antibodies are looking very good going forward. And I will also mention, as we mentioned a couple of quarters ago, even three now, when we launched our ERP site, it was a bit of all hands on deck for a quarter or two.

From people who knew our systems and knew how things got done internally, and guess what, a lot of the people we had that were doing custom design work were actually called in the action to help with the ERP. So we were definitely softer a couple of quarters ago, and that pipeline is really now filled again for custom, so...

So that's why we think things pretty good going forward in the next year in that area. So all in, net-net, we have a great antibody number.

But it is in pieces and the thing to remember I think is Novus continues to accelerate and I think the way we promote and advertise and drive the digital marketing around our antibody platforms gets better and better and we are definitely, I think at this point taking some share in some categories..

Got it. Thank you..

Next we will hear from Matt Hewitt with Craig-Hallum Capital Group..

Good morning, gentlemen, and congratulations on the good quarter. Couple of questions. First, Q4 a year ago, you held a big sales meeting in Barcelona, and really were focused on driving some cross-selling opportunities between the Biotech and Protein Platforms segments.

I'm curious, looking back almost a year, how has that program aided those two divisions?.

Well, I think our results speak for themselves. We're in the 30% growth in Protein Platforms and solid double-digits in the core business for a net overall, above 20%. I've been doing business for 25-plus years and I've never had a quarter this good in Europe, to be honest in anything I have ever managed, here at Thermo or 3M.

I think the execution is amazing and we can actually point to a lot of things that are making it work. One is exactly what you said, the designs, the collaborations, the processes that we put in place at the European sales in the last summer are working.

The teams are working together across divisions and also in terms of a reagent selling versus FAS is for instruments. It is team selling. We don't rely on a Fisher partner or something similar here because it's completely a direct model and we've invested there.

So we are very good and a large enough sales force, and we've built it out by country, we've made some investments also in the past year in some countries or regions that we didn't have great strength for those call it some low-hanging fruit to pick-up.

And then the acquisition of space, our Italian distributor who had been with us for 20 years, 85% of what they sold was our stuff anyway. So that owner is our Southern European Managing Director, reporting in to our Head of Europe.

And he's been helping on getting things really going in Spain, in Eastern Europe, and so we're getting extra incremental growth there from just his leadership and his knowledge of the company and portfolio. It's just kind of working well that way. It's Europe it won't be forever, but right now things are going quite well.

And then we just happen to have the OEM – biopharma timing wind in our sail right now. We're 1.5 years into that and that will likely switch in a year or two from now as well I'm sure, but Brexit could have an impact. We have not really seen any real fallout from that yet.

If there ends up being sanctions and pulls (44:38) in the U.K., we are ready with strategies to really move and get more versatile in Greater Europe if we need to. We've got other reinventory sites and hubs to work with, including Southern Europe as an example. So I think we're in good shape.

The meeting this year is going to be in Dublin, and it's going to include the ACD team as well as, so we are getting ready to integrate all that. And that will just be more growth to pile on this coming year.

So we're really excited about ACD becoming part of the team in Europe and going after the growth that they've – really it's hard to get started on so far, so..

Great. Thank you very much for the color there. And then just one more, couple of different times you've mentioned some of the investments that you've made into the sales and marketing teams.

Do you have a head count number for your team, sales team this year versus maybe in the year-ago period, or just to give us a size – or how much that's grown maybe?.

Maybe a couple of examples and I only give you this because it speaks to how we've really worked on productivity and helped pay for these investments, as we've mentioned over the last four years. When I joined four years ago, we had zero sales people in the field in the U.S. We had seven inside sales. We now have 12 people in the U.S.

and we still have about 8 to 10 inside sales, that's in the core B-to-D. We had roughly 8 people in China in total we now have over 100, half of our PrimeGene in manufacturing, but we're at 15 to 20 people, because you have to cover China kind of province by province, city by city.

Europe has about doubled over all, and we're probably all in commercially probably in the 50s range between all divisions with marketing. We have roughly 200 people in Europe now overall, and we were about 80 four years ago.

And to sum it altogether, commercially, globally right now sales and marketing of all three divisions globally, we're roughly at about a 200-person head count, which is a metric we watch and I like to watch personally. So we've come a long way. We're investing huge and we're paying for it with productivity and growth, so..

Great. Thank you very much for that..

And your final question comes from Paul Knight with Janney Montgomery..

Hi. Good morning. This is Carolina Ibanez-Ventoso on for Paul Knight. Thank you for taking the question.

Could you comment a little bit more on the drivers of this trends you alluded to in antibodies on your Novus brand?.

Well, your question is about the strength in antibody with Novus..

Yes, so if you can allude to the drivers like – of that strength?.

When we kind of began this model four years ago, we had R&D Systems brand and the brand is pretty well-known brand but very narrow. And we had roughly 15,000 to 20,000 products, which may sound like a lot of products, but when you get to antibodies, it's not.

Our nearest competitor, Abcam was around 170,000 at that point, and I don't think they've changed much since then. When we picked up Novus, we added over 200,000 new antibodies, all from mostly from (47:44) and a couple of things that they made their own, so they made 4,000 or 5,000 antibodies themselves.

So we're well over 20,000 antibodies now that we actually make and manufacture ourselves. And we source well over 200,000-plus on top of that. S o that gives a very wide diverse set of products and supporting everything from Western Blot to iCE (48:08) to all of different work streams that use antibodies.

And from all the known makers of which we provide some of those brands, but we also use Novus brand as well as R&D Systems brand. This is a very much – this part is very much like an Abcam who actually source maybe the same (48:23) suppliers, to be honest.

And I think on top of having the convenience and choice of our portfolio of our customers, I think the website and the tools we put in place to help sell this to customers has really vastly improved. Novus had a great site, and together, we've really improved it over all in the R&D Systems websites in our overall company website and access models.

And that's also helped a lot. In addition, we picked up Protein Simple. We have the Simple Western platform, so we've actually went to the work of certifying a couple of thousand different antibodies doing the work ahead of time on the dilution levels and how to dial in these products so that you aren't wasting sample or antibody.

So customers know what they buy, they can get to work right away, it's very productive, that has helped drive some growth.

I mean there's a lot of tactics, but the overall, I think is Novus, Novus brand, the breadth, the better website, the better access, we follow customer metrics, we follow NPS, our NPS metrics have been going up continually, we have in R&D Systems well over 70% NPS, which is your Net Promoter Score.

All these things matter and you got to keep working to make customers happy. And especially in academia and as you know, it's a very, very distributed model, so it's hard to drive overall – but hey we'll take the results, it's kind of working well..

Thank you.

And then in the sense of end markets, you're seeing good response across pharma, academia or it's more weighted in one versus the other?.

Yes. Your question is about how we are now – our market – our end markets are weighted? And I made comments earlier (50:10).

...like staying on antibodies, you were commenting on different....

I would say antibodies are probably a little more towards the academia than the biopharma, where those sections are much more the other way, is, overall, we've definitely reduced the dependence on academia and we're down to roughly 25% globally, a lot of that shift the mix of the instrument business and things coming in. But the U.S.

component is down about 15%. And it is probably pretty much – it always has been roughly equal kind of split we think between now let's say the assays, the antibodies and proteins, so..

Okay. Thank you for all the color..

And at this time, I would like to turn the call back over to management for any additional of concluding remarks..

Okay. Well, thanks for all the great questions. We're very excited about this quarter and we look forward to speaking with all you again this coming quarter. Thanks. Bye..

And that does conclude today's presentation. We do thank everyone for your participation..