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

Daniel Arias - Citigroup Global Markets, Inc. Puneet Souda - Leerink Partners LLC Catherine Ramsey Schulte - Robert W. Baird & Co. Dan Leonard - Deutsche Bank Securities, Inc. Amanda L. Murphy - William Blair & Co. LLC Matthew G. Hewitt - Craig-Hallum Capital Group LLC.

Good morning, and welcome to the Bio-Techne Earnings Conference Call for the Fourth Quarter of Fiscal Year 2018. At this time, all participants have been placed in listen-only mode and the call will be opened for questions following management's prepared remarks. Today's call is being recorded. 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 2017 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 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. I'll now turn the call over to Chuck..

Thanks, Jim, and good morning, everyone. Thank you for joining us for our fourth quarter conference call. As you saw in our press release, we ended the year in a strong note, and I am very pleased with our fourth quarter results, as well as the execution of our strategic plan all year.

The company delivered 9% organic growth in the quarter and for the full-year of fiscal 2018 as well. Our two divisions have primarily served the life science research market, Biotechnology, and Protein Platforms collectively grew organically 12% in Q4 and 11% for the full year.

It was a great year where we capitalized on the synergies from our acquisitions and a more unified selling model between our divisions. Our performance was strong and the bottom line as well with Q4 adjusted operating margins expanding 80 basis points over last year and a record adjusted EPS of $1.34 per share.

By geography, Europe is first along with its unified selling model that combines reagents with instruments to sell full solutions to our academic and BioPharma customers. The results there have been terrific. And just as they did last year, Europe reported double-digit growth for the quarter and for the full fiscal year 2018.

We are reaching critical mass on the continent with the team now 275 strong in full subsidiaries in the UK, France, Germany, and Italy. As in Europe, our Asia region also broadly delivered great results in Q4 and for the full year.

In China, growth of our products was approximate 20% for both the quarter and the full year, just short of our long-term expectations. Meanwhile, the rest of Asia led by Korea and Japan grew in the mid-teens in both the fourth quarter and for the full year.

India is now a legal entity for the company, and we are hiring fast to capitalize on the growing opportunity there. Asia seeks to be a leader in bioprocessing and biosimilars, and we have thousands of products designed for these markets.

All this growth in Asia couldn't have happened without excellent collaboration and execution by our operations in the divisions and our commercial teams in the region. Here in the U.S., we finished with around 10% organic growth for both the quarter and the year.

The academia end-market was strong for us all year with the macro NIH funding environment and tailwind right now. The BioPharma market rebounded from its brief blip in Q3 growing high-single digits in Q4 and for the full year.

We've been capitalizing on the strength of our end-markets by continuing to reinvest in our people and our digital capabilities. About six months ago, we reorganized our IT, digital marketing, and Web design into a new support organization called Digital Solutions.

This has put new emphasis and strategic significance around all things digital for the company. We hired a new world-class leader to run the organization and have embarked on a journey to view all digital information as mission critical to serving our customers. It has worked well.

We've completed the Minneapolis phase of the ERP project, redesigned many of our websites including search engine optimization, and began projects such as single-order point processing for our products, no matter where they are produced, as well as consolidation of our many CRM tools.

The idea is to better serve the customer with single-order shopping online and deploy a sales force that is trained to offer the whole catalog of Bio-Techne. Specialist maybe needed to close the deal, but we will reach the customer from a single point of contact and not from a group of disassociated reps from multiple divisions in the company.

The U.S. commercial organization has now over 100 people. Five years ago, it was eight. Now, for some color on our Q4 performance by divisions. It was a fantastic year for our Biotech division which grew 11% organically in Q4 and finished the full year with 9% organic growth.

Biotech's core products continue to perform very well with collective growth in the high-single digits for the year and accelerated 10% organic growth in Q4. The growth for the quarter and the year was broad across all major product lines including proteins, antibodies, and assays.

We are now seeing the appearance of revolutionary new medicines that utilize living cells into therapeutic. These include cell therapies designed to target cancer. For example, recent FDA approval of the first CAR-T cell therapy as well as stem-cell based therapeutics.

The manufacturer's cell-based treatment is complex and requires high-quality raw materials for cell culture. To meet demand in this exciting and rapidly expanding area, we offer the highest quality and the widest selection of GMP proteins including many exclusive to Bio-Techne, and large-scale manufacturing capability for bioprocessing.

The recent acquisition of Quad Technologies and their unique system for immune cell activation adds to our rapidly growing portfolio. With regard to antibodies, we've been validating an extensive and growing number of antibodies using recent advances in gene-editing technology.

The specificity and power of the CRISPR gene editing system is now being utilized by Bio-Techne for the validation of antibodies in knockout cell lines. This methodology is one of the proposed and currently most effective negative control identified by the International Working Group for Antibody Validation.

Bio-Techne now has validated R&D Systems and Novus Biologics branded antibodies for over 110 different targets and a wide range of CRISPR knockout-modified cell lines and partnered with two gene-editing companies to produce biologically relevant data for nearly 1,000 antibody products.

Bio-Techne gene knockouts are produced in over 10 different cell line models, all of which have been carefully selected to include those frequently used by scientists in their daily research, making these lines the most relevant in vitro model.

Bio-Techne performs antibody validation for various applications using knockout cell lines, including Western blot, immunocytochemistry, and flow cytometry.

Bio-Techne's knockout validation initiative meets the need for the life science research community for antibodies with enhanced specificity testing and is just one example of how we differentiate our antibodies to be a market leader.

In assays, our recent success has in part been attributed to our commercial cross platform immunoassay workflow campaign. Bio-Techne has the broadest and highest quality assay platform to give our customers choice in selecting a solution they need.

These include DuoSet that are used in basic research, our gold-standard single analyte ELISA kits that are used as the performance benchmark for all other assays and high-quality multiplex assays.

SimplePlex are automated high sensitivity and reproducibility assay produced in conjunction with the Protein Platforms division is becoming a big success growing at 80% for this fiscal year.

We saw a great success this year from our Luminex high-performance product offering with the launch of the Human XL Cytokine Discovery Luminex high-performance assay. This assay offers a broad choice of 45 analytes with superior accuracy when compared to other leading Luminex assay suppliers.

Our customers who performed biomarker discovery and profiling will appreciate the flexibility of choosing only the analytes they need in our easy order option which will allow analyte selection online.

Rounding up the Biotechnology segment, ACD finished the year with well over 30% Q4 growth in the research use only market, its current primary market, and over 30% for the full year overall. In addition to academic research, RNAscope and BaseScope assays are invaluable research tool for pharma and biotech companies.

We wanted to make access to our technology even easier which is why ACD created an assay services offering some years back. This enables us to run and develop assays for our customers significantly reducing the discovery times and costs.

We have listened to customer needs, expanding our tissue bank and creating regularly available datasets to enhance this offering further.

Our goal is to facilitate drug discovery and development as much as possible by always being responsive to customer feedback and requests and by developing tools and services that really help to achieve research goals as quickly and as easily as possible. Today the assays services team is working on more than 100 custom projects per quarter.

Following strong uptake in the research market, the focus in fiscal 2019 will be more rapid penetration of our RNAscope in the Diagnostics in markets that could be even bigger for ACD than research.

Deepening our relationship with the key diagnostic instrument providers and expanding our Diagnostic offerings on the ACD platform will be key to our success in this market. Moving on to Protein Platforms which came roaring back in Q4 with nearly 20% organic growth in the quarter and the full year.

This was tremendous growth, especially considering the very tough comp biologics faced this quarter as it did last quarter with 50% growth in the prior year.

The accelerated growth last year was driven by customer replacements of old iCE280 instruments which were spurred by our discontinuing from future servicing of those systems in the second half of last year. Excluding customer placements, new customer placements of iCE instruments increased 25% in Q4 over the prior year.

But the biggest story for Protein Platforms this year has been the Simple Western platform with well over 30% growth for the quarter and over 25% growth for the full year.

With over 1,100 instrument (10:12) in the field and over 450 citations and publications, it appears that our automated Western blot platform has crossed the chasm from early adopters to more mainstream in our customers' workflows.

Getting there has not been easy, our teams have put tremendous effort into marketing, demos, customer consultations to raise the awareness for ELISA's capabilities and efficiency. Just this past month, we announced an extension of our – of the Simple Western platform with a new instrument we call Jess.

Jess builds on current Wes technology by using chemiluminescent detection which gives picogram-level sensitivity, enabling researchers to maximize the data they obtain from their samples.

New fluorescent modes enable the detection of multiple wavelengths in the infrared and near-infrared spectrum, bringing definitive multiplexing capabilities to the Simple Western platform for the first time. Additional features include an in-capillary protein normalization reagent and a Western blot imaging system for traditional blotting membranes.

Jess expands the applications that Simple Western technology can be used for and together with Wes, automates both the protein separation and immuno detection elements characteristic of traditional protein analysis techniques, eliminating many of the tedious, error-prone steps.

With momentum we have with Wes and the market expansion opportunity we have with Jess, we are very excited about their prospects for the Simple Western platform as we head into fiscal 2019 and beyond.

Next, moving onto Diagnostics division where timing of OEM orders resulted in a 2% decline of organic revenue in the fourth quarter and full-year organic revenue ended up 1%.

This was a tough year for the division with large OEMs re-leveling their inventory needs as well as an industry trend towards continuous glucose monitoring, which is reducing the need for glucose controls. However, we did see strength in our hematology controls and point-of-care diagnostics kit and reagents manufacturing in fiscal 2018.

We expect the strength of these product lines to continue in fiscal 2019 eventually overtaking the declines we have seen in glucose. In fact, the demand in these two key areas of our Diagnostic business have never been better as we will be expanding our facilities to accommodate the growth.

Also, I would like to comment on our strong operational income and EPS performance in Q4. We outperformed our expectations for adjusted operating margin due to solid productivity from our teams and a more favorable mix of robust high-margin biotech product sales.

Adjusted EPS reflects this strong operational performance that also includes continuing nice tailwinds from tax reform and foreign exchange. Finally, we announced in the fourth quarter and closed this past month on two very strategic deals.

In the past, we have discussed our strategy of moving further into clinical markets expanding from research tools into diagnostics and therapeutic tools. With the purchases of Quad Technologies and Exosome Diagnostics, we have accomplished both.

Cell-based immunotherapies continue to make progress as acceptable alternative therapies for challenging diseases where conventional first-line therapies have failed.

This has created the need to find efficiencies in the manufacturing processes of these therapies, especially in the key steps of cell isolation and enrichment along with cell activation.

Quad Technologies addresses both of these manufacturing steps by providing a biocompatible dissolvable polymer called QuickGel, which when functionalized with the correct antibodies can capture the cells of interest, primarily T-cells and then activate them for large scale expansion.

The benefits of the QuickGel technology is the ability to manufacture them in sizes that mimic the size of accessory (13:34) cells associated with the normal-cell activation process, as well as the ability to dissolve them and reduce the risk of contaminating the final cell product to be infused into the patient.

In the field of Diagnostics, liquid biopsy is an approach to bypass the traditional invasive tissue sampling conducted to confirm disease or assess disease progression. Three key targets have been used in liquid biopsy analysis, circulating tumor cells, cell-free DNA and exosomes.

Exosome Diagnostics has pioneered the use of exosomes as a diagnostic tool because it offers a number of advantages. For one, exosomes are typically abundant in most bodily fluids unlike CTCs, and relatively easy to isolate during all stages of the disease.

Second, the cell surface immunophenotypic properties of exosomes provide insights into their tissue of origin, unlike cell-free DNA. Also, the quality of the nucleic acids, exosomes contain is very good, unlike cell-free DNA typically exposed to circulating enzymes.

Given these advantages, Exosome Diagnostics has developed and commercialized an exosome-derived diagnostic test, which is called EPI, that is based on the expression signature of three genes. The test results use gene expressions to determine whether men who have an ambiguous PSA score would benefit from having a prostate biopsy.

The EPI test is a rule out test with a sensitivity of 92% that attempts to reduce the number of unnecessary biopsies done yearly, biopsies which can lead to serious complications for patients. This is an exciting and game-changing technology with 180 patents filed so far and more to come.

Historically, we have been a company focused on research tools primarily in proteomics.

The future is bright for us with our strong brand and science presence as we have moved closer to the clinician by diagnose and disease conditions (15:22) cancer with Exosome Diagnostics acquisition, SimplePlex platform, Luminex assays, and ACD with RNAscope as a technology platform.

We are quickly becoming a company that can provide tools for cancer research, diagnosis, and therapeutics in the likes of CAR-T workflow.

It's an exciting time for a company as the past 40 years of innovating over 40,000 products have positioned us to leverage the field of cytokines and growth factors, we pioneered as research tools to now becoming the tool for diagnosis and therapies, too.

Fiscal 2018 was our best year in the past five and we have strong momentum going into fiscal year 2019. I feel very fortunate to be leading this wonderful team of now 2,100 strong worldwide. I want to thank all of them for the energy, passion and commitment to our company and the ongoing battle to rid the world of diseases. It's a wonderful endeavor.

Jim and I will now turn the call over to you to provide more details on our financial performance for the quarter..

Thanks, Chuck. I will provide an overview of our Q4 financial performance for the total company, and then provide some color on each of our three segments. Starting with the overall fourth quarter financial performance, adjusted EPS increased 23% to a $1.34. Our GAAP EPS for the quarter was a $1.07 compared to $0.74 in the prior year.

Q4 reported revenue was $180.3 million, an increase of 15% year-over-year with organic revenue increasing 9%. Fourth quarter reported sales include a 4% growth contribution from acquisitions and a 2% contribution from favorable foreign exchange translation.

Organic growth for the full fiscal year 2018 was 9%, the best full-year organic growth since this management team joined Bio-Techne. By geography, the U.S. grew in the low teens with BioPharma growth in the high-single digits and academia growing in the low teens.

As in the U.S., Europe's organic growth continue to be strong in the low teens overall with the BioPharma end-market growing in the high-single digits and academia growing in the mid-teens. In Asia, China's organic growth was nearly 20% in the fourth quarter. Japan grew in the high teens and the rest of the Asia-Pacific region grew in the mid-teens.

Note that all references made the growth rates by region and end-market exclude our OEM sales, which mostly occur in our Diagnostic segment and to a lesser extent in our Biotech segment.

Moving on with the details of the P&L, total company adjusted gross margin was essentially flat for the prior year at 71.8% in Q4, with volume leverage negated by the mix from recent acquisitions. Adjusted SG&A in Q4 was 24.5% of revenue, approximately 20 basis points higher than the prior year.

Strategic commercial investments to drive growth, the inclusion of recent acquisitions, and the impact of foreign exchange all contributed to the year-over-year increase in SG&A. R&D expense in Q4 was 7.8% of revenue, down 100 basis points from prior year due to volume leverage and timing of projects.

The resulted adjusted operating margin for Q4 was 39.5%, an increase of approximately 80 basis points from the prior-year period. For GAAP reporting, SG&A in Q4 reflects an $11.2 million increase for stock option expense over the prior year.

A new retirement policy was implemented in the fourth quarter that permits retirees to continue investing in certain time-based stock options granted during employment. This new policy resulted in accelerated stock compensation expense for those employees meeting the definition of retirement.

Looking at our numbers below operating income, net interest expense in Q4 was $2.9 million compared to $1.8 million of net interest expense last year. The higher interest expense is driven by multiple rate increases in the past year on our outstanding line of credit.

Other adjusted net operating expense for the quarter was $0.3 million, essentially the same as the prior-year quarter. For GAAP reporting, other non-operating includes a $16.1 million gain from a partial sale of our investment in ChemoCentryx.

We monetized a little over one-third of this investment in the quarter to diversify our portfolio and raise cash funds for the pending acquisition that we made in July and early August. Our adjusted effective tax rate in Q3 was approximately 24.5%, nearly a 5-percentage point improvement from the prior year due to tax reform.

For fiscal year 2019, we still expect this adjusted effective tax rate to stay consistent plus or minus 100 basis points. In terms of returning capital, we continue to pay our dividend and paid out $12 million in the quarter.

Average diluted shares for the fourth quarter increased approximately 2% over the year-ago period at 38.3 million shares outstanding and a full-year increased approximately 1.5% at 38.1 million shares.

Turning to cash flow and the balance sheet, $64.4 million of cash was generated from operations in the fourth quarter and our net investment in capital expenditures was $5.1 million.

Excluding the acquisition earn-out payments which, for GAAP purposes, are deducted from operating cash flow, our adjusted cash flow from operations for the quarter was $64.8 million and $196.5 million for the total year. Both new records for the company. The management views these earn-outs as part of the purchase price paid for acquisitions.

That's an investment rather than an operational cash expense. Both the Q4 and full-year adjusted operating cash flow demonstrates the strong quality of our earnings and management of net working capital. As for other notable items in our balance sheet, we ended the quarter with $181.8 million of cash and short-term available for sale investment.

Our long-term debt obligations at the end of Q4 stood at $339 million. That's down $53.5 million from the end of Q3. Going forward, our capital deployment priorities are debt pay down, opportunistic M&A, and paying our dividend. Now I'll discuss the performance of our three business segments, starting with the Biotechnology segment.

Q4 reported sales were $115 million, with reported revenue increasing 18%. Acquisitions contributed 5% to revenue growth. Foreign exchange contributed 2% and organic growth was 11% with solid growth across all major product categories. For the full year, organic growth for the segment was 9%.

Operating margin for the Biotech segment was 48.1% comparable to Q3 and a decrease of 100 basis points year-over-year due to unfavorable product mix. Core Biotech operating margin for the quarter was a very healthy 54% while operating margin contribution from ACD products was in the mid-teens compared to the low-single digits in the prior year.

Turning to the Protein Platform segment, net sales in Q4 was $32.3 million, a total increase of 21% from the prior-year period. Organic growth for the segment was 19% with currency translation having a favorable impact of 2%.

Double-digit growth continued in all major product categories which stand out this quarter being a Simple Western platform, which grew more than 30% and a SimplePlex platform which grew nearly 60%. For the full year, organic growth for the segment was 20%.

Operating margins for the Protein Platform segment was 19.7%, an increase of 350 basis points from last year. Strong volume leverage and operational productivity drove a year-over-year improvement, partially offset by strategic growth investments made throughout the past year.

Protein Platforms entered the full year with adjusted operating margin of 16.1%, an increase of 550 basis points over the prior year, a significant milestone as it continues to march towards even higher double-digit profitability. Moving on to our Diagnostic segment, reported revenue in Q4 was $33.1 million with reported growth of 2%.

Organic revenue decreased 2% from the prior year, while acquisitions contributed 4%. As Chuck explained in his comments, the timing of OEM shipments was less favorable this quarter while the segment's more run rate-based hematology controlled product category experienced steady growth in the high-single digits.

Full-year organic growth for this segment was 1%. At 32.2%, the Diagnostic segment operating margin was essentially flat for the prior year with favorable OEM mix offsetting lower variable volume contribution. The margin improvement was due to volume leverage and favorable OEM product mix.

In summary, our breadth of growth continues to be solid both in terms of end-markets and product categories. Our operational profitability was in line with our expectations, even slightly ahead due to the stable mix of Biotech segment revenue growth this quarter and all year.

And our very strong cash flow performance demonstrated the quality of our earnings. On the bottom line, tax reform was a real positive for Bio-Techne as it was for most U.S.-based companies. As we look to the year ahead, we expect our existing business to continue to execute through a strategic plan as it has in the past several years.

For fiscal 2019, this means at least high-single-digit organic revenue growth. Executing this plan also means holding the strong operating margins we've maintained in our legacy core Biotech portfolio and Diagnostics division while rapidly expanding operating margins in our fast-growing ACD platform and Protein Platforms division.

Depending on how the relative mix of our business turns out, adjusted operating margins for the legacy total company could be anywhere between flat to 100 basis points improvement in fiscal year 2019 compared to fiscal year 2018, with somewhere near the middle being the most likely scenario in our models currently.

The two very strategic acquisitions that Chuck discussed and that we just completed this past month significantly bolstered the financials of our long-term strategic plan. The details of which we will share at our upcoming Investor Day this September 7 in New York City.

Both of these companies just began commercialization of their products in January, and we believe are near their inflection point of rapid revenue growth. However, knowing when that precise inflection point will occur within the year is difficult to predict.

Thus, the financial impact of this acquisitions, especially Exosome Diagnostics, will have on Bio-Techne's financial result for fiscal year 2019 could vary widely.

Although, Exosome Diagnostics does have some revenue from companion diagnostic programs with pharma partners in clinical trials, the near-term ramp of revenue for the business will likely come from a wider adoption of their EPI prostate cancer test. The list price for this test is $795 and the Medicare approved price is $760.

Actual realized price could be lower based on private payer contracts and claim collectability for certain patients. Exosome is currently processing over 1,000 tests per month in-spite of the pending NCCN endorsement and Medicare reimbursement decision.

Although this volume has been generated from a sales force of only six people six months ago, their sales force is now over two dozen people and expected to grow to 60 people by the end of the year, positioning Exosome Diagnostics to capitalize on the increased demand that should come with NCCN endorsement filed by Medicare reimbursement.

We expect both of these to occur in the first half of fiscal year 2019. And if it happens, we believe $30 million of revenue is achievable in the first year. We also expected at approximately 6,500 tests per month, Exosome Diagnostics will turn profitable.

How quickly this will happen is difficult to determine, but we believe it could be by end of our fiscal year. In the meantime, we expect the acquisition of Exosome Diagnostics and Quad Technologies to unfavorably impact overall Bio-Techne adjusted operating margins by somewhere between 200 basis points and 400 basis points in fiscal year 2019.

Our model showed continued rapid adoption of the EPI test beyond fiscal year 2019 with the business breaking even and even turning profitable in fiscal year 2020. However, the leaders of Exosome Diagnostics have signed up for a larger earn-out in calendar year 2020 that is tied to a very large profit number that same year.

They're much more optimistic regarding the speed and magnitude of adoption of the EPI prostate cancer test. If there's a team that could execute in these earnout targets, it is this one. So, don't count them out. That concludes my prepared comments. And with that, I'll turn the call back over to Rachel to open the line for questions..

Thank you. And we'll take our first question from Dan Arias with Citigroup..

Hey. Good morning, guys. Thank you. Maybe just to start on the outlook for the year.

Chuck or Jim, can you just talk to the way that you're looking at segment performance to get to the high single-digit organic guide for the year? Should we still expect PPD to be in that 15% to 20% range? And then what are your expectations for ACD next year in order to get to the full year outlook?.

Pretty much expected this to be the first question, yes. Yeah, we're actually very bullish still on PPD. There is a roaring comeback, which we said would probably be likely a bit of a blip in Biologic last quarter was insignificant after all. We had just stellar results this quarter, and we're just as bullish, if not more.

The 15% or better is very highly likely. Meaning, we're tracking closer to 20% for the last year or more. So, we're hopeful we get that even. But 15% should be a safer number. ACD, we were ecstatic to really stay in (29:22) the core areas of 30%.

A little bit of lumpiness in the Diagnostics side, but overall our thesis is coming near as we plan to be 30% or better for this next year and we're holding our line on that. I think the team is integrating a little harder in Europe than U.S. But it's coming along very well.

We know we have new leadership overall on the segment with Kim Kelderman and that's helping as well. So, we're actually kind of – we're feeling pretty good about 30% for this coming year in ACD..

Okay. And then maybe on the Exosome and Quad dilution for next year.

It looks like 300 bps or so is probably where we should start to think about the impact for 2019, is that based on $30 million of revenue by the end of the year and just the ramp that you're assuming for commercial activity and then also just Medicaid, Medicare coverage, etcetera? I guess maybe just a little bit more color on what the assumptions are underneath the Op margin guide for the year..

Yeah. We've been preparing well for these questions and I understand the significance of this acquisition in going forward. We've been here before with other bigger acquisitions of – and we waited for these to kind of come in line and then hit that inflection point and take off. This one is no different.

We are definitely near a nice inflection with this technology. I'll talk about NCCN guidelines in a minute, but the $30 million we think is very doable. Their forecasts are even much higher. We think it's in the range of being a strong possibility. They're ramping quickly.

The 1,000 tests that Jim commented on was already a month or two ago and they're ramping higher than that now as they're bringing on more reps. It is very much – reps going after urology clinics and then getting the business.

And with the guidelines coming with NCCN and getting NGS, which is Medicare, we would expect those rates will increase significantly at that point, which is pretty – we think is imminent. How to figure out where we're going to be on the burn rate, the cost of growing this entity, it's difficult.

If they stay at the level they were in Q2, we're going to be out over $10 million and over that 200 basis points. If they stay on track with the ramping they're doing, it's going to be significantly under that.

As Jim said, by the end of the year, we could be at a run rate of $50 million or $30 million for the year and be in positive territory for income. But it's anyone's guess right now as they're ramping. The good news is we're not waiting three years like we did with ProteinSimple. We're talking about a year here this thing hopefully skyrockets.

And we've got a big earn-out with this team, and they've got a great team. We don't expect to lose any people. We have not. We're hiring quickly. And we're going to let them do their thing. They're the experts in this area. They're experts of the FDA and Medicare reimbursement. They know what they're doing.

It's been a real pleasure having that team on board. We're going out next week to actually welcome them all, have our first business review, and kind of introduce them to the rigor that we do as operators in this company, and they're all excited for that, and the tools will help them with it.

But it's in that 300-basis point probably, around that $30 million. And I think it could be better, but things could happen. So, I'm not too far off the guidance we gave you in terms of after the acquisition call. Nothing's changed since then. Actually, it's only improved. Information has all improved.

And I will mention, as of this morning, we do have verbal acceptance from the NCCN that the second paper is going to be accepted and it's with the European Urology, which is a very important vehicle out there.

So, we're hoping that off of that, once it gets in, including online and that will pave the way for the NGS decision, which is Medicare, which we think will be imminent. Of course, we can't tell you when. All I can tell you is that we do have news this morning is that the paper has been accepted.

So, that's really great news for NCCN guidelines, and from here, it's hopefully going to be tracking as we stated. We gave guidance before end of the calendar year for all this. I'd be shocked if we can't make that at this point, but we'll see..

Yeah. Okay. Thanks very much for that. Maybe just one more, quick one, and then I'll hop back in the queue.

Jim the stock-based comp spike in the quarter, I guess, isn't really surprising, but could you just help us with the assumption for next year if we're looking to get a sense for Op margins that are inclusive of that expense?.

Yeah. It should come back down to a more normalized stock comp expense. Maybe a little bit higher year-over-year due to the fact we have more people onboard. We have Exosome personnel now included as well.

But again, the spike we had in Q4 was kind of a onetime catch-up due to the folks that are at/or approaching retirement age and, therefore, the GAAP rules require us to accelerate that expense..

Got it..

And then going forward it will be lumpy. Q1 is where the hit will be every year so..

Right..

Okay. Thanks very much..

And next, we'll move on to Puneet Souda with Leerink Partners..

Yeah. Hi, Chuck and Jim. Congrats on the quarter. First, on PPD and Simple Western, I mean you've had the Simple Western product for some time. And obviously, as you pointed out, this has gone mainstream.

Maybe, first, could you give us a view of how much of this was academic versus BioPharma this time and sort of how should we think about Simple Western and the growth of the new hybrid products that just came out sort of longer term?.

Well, okay. So first off, it's been around for three years now and it's taken some time to get accepted, and we've talked a lot about it in the past. It is such a big change from doing them by hand that it has to be sold into a different laboratory.

Our goal is to still make it a standard and to make it the way students started doing Westerns in the future eventually, and no different than moving to calculators was 30 years ago. That's our goal. I think it's a balanced level of growth between academia and pharma. The growth is strong in both categories.

We had – I'm not going to tell you the number of instruments we had – we sold, it was a record number. It was fantastic. It puts us well over 1,100 total in the field and the publications are actually growing even at a faster clip ever as well. So, we know we are crossing that chasm.

They're becoming broad-based acceptance quite simply because it works and it saves a ton of time. It's very productive, and we're now going to be able to go a little more upstream with Jess and with more capability of doing our multiplexing samples at the same time which is something we've been asking for forever.

And then that gives us more flexibility with Wes probably at the academic level, clearly having the ability to promote that further to get more acceptance in smaller labs, smaller universities with budgets maybe tighter. So, I will also state that the consumables growth has been astounding.

We are well on track to a combined consumables and service to being north of 50% of the revenue. So, the attach rate of cartridges has been really, really good. That means that people aren't just using these things thinking they'll get around to them and figure out how to use them.

They're using them and they're using a lot and they're liking what they see..

Okay. Thanks for that. And another one on – let me touch on China if I could. Obviously, a strong growth as some of the peers have reported to a similar growth numbers. Helps us just understand.

I mean, how are you looking at tariffs and any potential impact there in fiscal year 2019?.

Yeah. Well, currently, there's almost no impact. We're at less than a 1% level, and that's because most of our products aren't in these chemicals classifications. But if the $200 billion plus next Phase goes into effect, we're going to be hit on many fronts like everybody else. All the instruments for sure and many of our assays will also be implicated.

What's the impact going to be, I think it's mixed. We'll do it product line by product line. Obviously, a lot of our products were – we're the only game in town and so we'll be passing on the prices, obviously.

But where there is local competition and there probably is some antibodies area (37:51) for sure, there will be some that could be a different story. But I think the mix will be okay. We're still not overly concerned. Our teams aren't too concerned. We're just aware of it and starting to get ready just in case.

And we can do something, moving something directly from the UK that are made there and also from Canada. So, there's some things we can do. But for the most part, most of our reagents and our products come out of the U.S.

so there could be an impact if the Phase 2 and 3 $200 billion-plus plans go into place, which it's anyone's guess whether they will or not..

Okay. Thanks.

Last one on Exosome, I was hoping if you could elaborate on your approach to commercial payers after Medicare here? Do you think you can hold this price, sort of longer term to help us just understand the strategy you're taking with commercials?.

Well, all I can go with historical data. I mean, we did all these original models that are $500 million number and we were all ecstatic when the CMS came out with a $760 million price, that gives us lots of room. We're pretty much sure we can hold over $600 million, but I think $700 million initially, it's going to be in that range.

They're getting the number where they are getting paid, it's coming in where it needs to be. But it's always very different payer groups come in and they do their contracts, it's probably move around a little bit. But definitely north of $500 million, but hopefully closer to $700 million..

Okay. All right. Thank you..

And one final comment, too, is that, we – the Blue Cross Blue Shield network is a big proponent and supporter and early supporter and adopter of this technology. So, we expect them to be really compliant with all that pricing as well.

So, they've been really good to work with, and we're hoping that they – eventually this becomes more of a mandated screening. And so, that's the idea. But it's going to be out there a ways..

And next we move to Catherine Schulte with Baird..

Hey, guys, congrats on a really nice quarter, and thanks for the questions. Obviously, a nice return to double-digit growth on the Protein Platforms segment.

Can you just talk us through your outlook on the competitive environment in that business on the Biologics side, and any specific changes you made during the quarter to get back on that strong trajectory?.

Well, I can say is the stories of the Biologics' demise have greatly exaggerated last quarter. We don't have an awful lot of competition in this category. In the Simple Western, we have virtually none. And now we see SimplePlex becoming more material, and if it continues growing at 60%, it's going to have a bigger overall basis.

And single-cell is finally starting to take off. It's taken a while to get that going. These chasm, I guess, are deep, and some of these moves the world instruments. So, we're feeling pretty bullish. I will mention also that we have a big project in place with the Biologics platform to get it working under Empower.

Empower (40:59) is one of the standards out there, used now in most laboratories, and without that, that definitely probably costs us some sales.

But even now just being able to talk about that we're in the middle of integrating that system, and we'll have that commercialized within the next year or so, that's helping with a lot of decisions going forward with funding to go with this platform or expand in this platform beyond iCE. So, all good.

I think of all our numbers, we've been steady around 15% or better is probably one of the safest ones I think we have right now, so..

All right. Great.

And then, appreciate the color on Exosome, but can you walk us through what your assumptions are for Quad in terms of revenue contribution next year, and then what that long-term margin outlook looks like?.

Yeah. Jim and I talked about this that might come up. It's so small really compared to Exosome that we didn't want to bring it the too much rhetoric in the transcript for, but it's a great platform for us because we have all these cytokines kinds of resellers tools. We're involved in all of this CAR-T type workflow already.

So, we really want to get bigger in this – on the tool side of it – tools for therapy. And this QuickGel technology is in the midst of three very large clinicals – large pharma companies right now and it's being looked at and qualified by at least a half a dozen others. It is going to be a wonderful platform.

This year, most of the revenue is really around just revenue for the clinicals. So, it's not much this year. But it expands greatly – virtually explodes next year and the year after, everybody, if these clinicals all hit. So, we'll give more guidance as we get beyond $1 million in revenue and become something.

But, again, this tool is only a year away from nearly being in a profitable state, maybe even less. It's a small team who is actually doing some of the work here as well because there's a lot of good synergy science-wise with our teams in Core Biotech, so it's good that way. The team has all come onboard.

The founder-leader is onboard as the leader of this small business unit right now and loving it. And it's so far, so good. I got to mention to you one thing about that both of these platforms that – they need salespeople. And ever since the acquisition has been announced, the phones have been ringing off the hook.

It appears that a lot of great salespeople like to come onboard once they know that you can make payroll, so..

All right then. And last one for me just on Exosome.

How should we be thinking about the revenue trajectory over the next several years? Where do you view peak margins, and what level of revenue will it take to reach those steady state margins?.

Well. It's an LDT, right. So, we have to feed it and we have to build, we have to build regionally, we have to build and shift, and that's the model. We're capable right now of actually doing as many as 500 tests a day. Obviously, we're well under that. So, we're good for a while. We have world-class operations. People are ready to really ramp this up.

We have world-class reimbursement people online with ExosomeDx. I mean, this team has been at this for a while and they've really done their homework. And they've been around a while, right. So, they seem to know what they're doing. The $30 million this year is our number. And it's – I would say on the north side of conservative really.

We think it's a range of $20 million to $35 million probably. And I'd be really happy with $20 million or better, to be honest, coming from nothing in January. But the ramp from next year on, they are big numbers. We'll give you more color on that in New York.

Right now, we're still trying to figure out what we're going to even say because they are too big. They're big..

And, Catherine, what I will just add is the agreement with Exosome Diagnostics is public information. It's out there on our website. And detail to the earn-outs are out there as well, and you can see the earnouts are based off of operating profit numbers or EBITDA numbers both in calendar year 2020 and calendar year 2022.

And they are very big numbers, which gives you a sense of what the Exosome Diagnostics teams and internal expectations on what they think they could hit. So, we're downplaying that a bit, just to be conservative. But that's what really the potential is.

And that would suggest, a very, very large revenue, a couple of hundred million dollars or more, just in as little two to three years. And then operating margins that are at least 30% and higher. So, that's what they think they can do. We're being somewhat conservative in our viewpoint in terms of valuation, but that's what the potential is.

We've learned through ProteinSimple and others, so we're not going to get ahead of our skis too soon, but it's a good story so far. And the ramp is happening, so we're very happy to see the growth happening..

Great. Thank you..

And this was all without Medicare yet. So, get ready..

And next we move to Dan Leonard with Deutsche Bank..

Thank you.

First question, can you talk about the sustainability or the strength you're seeing in Europe?.

I'm sorry.

Could you say it again?.

Yeah. Yeah.

Can you talk about the sustainability of the strengths you're seeing in Europe and maybe what you're doing to try to support that?.

Yeah. We're letting them hire a lot more people than we originally thought. They're growth has been astounding. We've brought in a great leader that ran health care for 3M. We put in place a subsidiary model. We put in place what we call EOCs, it's an operating committee from all the regions.

So, we have a matrix in place with the divisions running – who run the global P&Ls from here, and it's just working. That scenario allows synergies being created for selling. So, the divisions can work together, the teams work together. It's all under a unique kind of management style that just wasn't there a year before. We just had nothing.

So, call it a catch up. I mean, how long will it go? I think another year or two or at least until geopolitical events in Europe change greatly or Brexit becomes a real truly negative reality or something, but it's been double-digit, and I don't see it stopping in the next few quarters anyway..

Okay. And then just a clean-up question for the model, did you give the organic growth rate for ACD in Q4? I might have missed it..

Oh, we didn't give it in total. We mentioned that the research-use-only market, which is the primary market for that business right now, was over 30% growth for the quarter.

Their companion diagnostic piece, which is much smaller but much more lumpier, was up and down, and service business, but the core part of that business right now, which is their products in the research space was up over 30%..

To be transparent, Dan, they have a service component that was – it's very lumpy, and they had a huge comp from a year ago. When you put that all in there, it's under 30% for the whole company. But it's kind of a one-time blip there. As long as RNAscope and what it's being used for growing at 30%-plus, that's kind of what we focus on.

It was actually like 36%, and we had a really strong launch to this quarter. July is really strong as well. So, to the question earlier, that's the big question. Can we stay above 30% with this business unit, and we think we can..

Appreciate the clarification. Thank you..

And next we'll move to Amanda Murphy with William Blair..

Thanks. I actually just had a follow-up to the question that Puneet was asking around private payers for Exosome.

So just curious, is there – I guess I'm just trying to get a sense of what if anything you guys need to do to – is there any more data that you need to build up in order to move forward with the private payer side?.

To be honest, we're trying to learn this ourselves..

Right..

We're – as you know, as a company core – we're not reimbursement experts. We've been a tools company, and we're going this direction. They're helping us. We'll be out there next week and learn more.

And I hear numbers from them to be anywhere from 100 to 200 heads covered, and there are different metrics and algorithms people use, and I think it's all baloney. So, I think we have tens of millions of people on the East Coast covered through Blue Cross Blue Shield. The deals are in place.

We've hit roughly 30% of the market are these urology centers, these labs, and that's where the salespeople are focused and that's been where the great take-up is. And that will lead to more leverage.

So we're going to be trying to put together for New York just exactly what is the addressable market, being all these payers, being the urology centers, etcetera. Certainly, right now, it's more than we can handle and we need the NCCN guidelines in place so that there'll be even more conformance through the major payers, right, the systems out there.

There's quite a bit acceptance, even people through the urology centers themselves, even people on their own that it works so well. But we need Medicare, we need the NGS decision, and then we'll start seeing the major payer systems lining up, and then we'll have more metrics off of that..

And just to be clear the $30 million that you were talking about, that assumes that you've got Medicare coverage, is that right?.

That assumes, yes. Before and by end of this calendar year this year, which we think as of news this morning, we feel very good about that now..

Yes. Okay..

Never can tell though..

Yeah. All right. And I had a question on the kind of legacy business, antibodies and ELISA. It feels like for a few quarters now, those businesses have been pretty strong. I know like at one point, there was some price competition there when you first started.

I was just was curious if you could give us an update on what you're seeing from a competitive standpoint in two cases (51:16)?.

I'm really glad you asked this or somebody did because this is the best stories of this quarter and this year. I mean if you'd asked me four years ago, how long is it going to take you to get to 10% organic growth again in your core? I'd have said, well probably never. So, we've had not only a good quarter, we had a great year. And we just pounded it.

And that's why, one reason you see, it's kind of, I would say ahead of schedule getting back to 40% Op margins, because the mix has been so good with the core, which is highly profitable, right. 54% Op margins in Core Biotech division, that's the number it was when I came into the company.

So, we've just been doing all the expansion and having the productivity to cover it, it's been great. And it's across all lines. I've done the math myself this morning while ELISA is low-single-digit growth, at least it's growth.

When – and because of ELISA's depicted demise a decade ago, we started looking at different technology platforms, Luminex and SimplePlex and such, they're all doing great. You put together the entire number for this quarter for our, call it, assays and we're mid-teens, practically, just under mid-teens for growth.

So, that was one of the biggest areas we were trying to protect. Proteins as always, we thought, will stay just under mid-single digit and we've been nearly high-single-digit growth. I think all this oncology, all this CAR-T, all this research in the biosimilar in fact (52:43), it's spurring a lot of protein and we've had great pricing along with it.

And that's also something to mention, that five years ago, we weren't a company focused on dealing with price ever. And now we have the analytics in place to deal with price and we have some price in place where it needs to be, where we have the ability to do so.

And lastly, antibodies, it's been a little bit lumpier this year than the year before, but ended strong. And we're really excited about what we see with antibodies. We still think we're holding our own, if not taking share. We're not digging the rabbit monoclonal, of course, but everything outside of that we're right up there.

I would also say that the drive from BigPharma to CROs and the whole CAR-T all the stuff happening, it's helping the antibody business. But it's helping in a way where the big guys are going to win.

The little mom and pop antibodies players are not going to win as well right now because you need to be GMP, you need to have high quality to be in these areas now. And that's going to help us and Thermo, and Abcam the most probably. And that's what we see. And I think that's why we're doing so well..

Got it. Okay. Thanks very much..

And next we'll move to Matt Hewitt with Craig-Hallum Capital Group..

Good morning, gentlemen. A couple, I guess, bigger picture questions. Regarding the investment that you're making into India.

How quickly do you anticipate that market ramping up and what should we be thinking about that over the next couple of years?.

Yeah. We do nearly $4 million of revenue in India right now and it's growing. Our plan is to try and keep that north of 50% growth. And personally, I like it bigger. But my regional heads says there's only so much you can do so fast. So, we're hiring people and you're really dealing with two maybe three of the major city areas right.

That's how you deal with India and you know the customers is there they – the infrastructure is not good for – the customers all clustered into life science center sort of space. So that's a good thing. You can get to all of them at one place kind of. So, you don't need a lot of head count.

So, we're moving with four people, I would say two years from now, we'll have maybe a dozen, it would be my guess and I assure, I hope for between $10 million and $20 million of revenue by then, we'll see. But it depends. And that's about any really infusion of ACD at or our Exosome. So, all those things could also add some impact.

But in the core, it's growing nicely, but it only has so much of an addressable market size right now. Instruments probably had the better possibilities in the short term..

Okay. Great. And then one follow-up question here. Thinking back five years ago, you came onboard. You kind of laid out a roadmap, targets of getting the company to double-digit revenue growth, at the time, at the expense of margins, but you had intimated over time you expected those to bounce back.

And not to steal any thunder from the New York day coming up.

But as you look out over the next five years, how do you think – what are your targets? And I know that you laid them out last year, but maybe an update on your call it five-year plan?.

Yeah. I'll give you a little bit of a preview. So, come this fall with the first strategic call we had, we laid our first strategic plan, and I laid out there the vision to get to $1 billion in 5 years.

So, we didn't make that, okay? Two years ago this fall, we had our first Investors Conference, and we laid out a plan that would get us to $850 million and 40%, all right? We're well on track for that, probably exceeding it. But this fall, we'll lay out a new five-year outlook.

We'll give you the update on what we are doing in for last, and we'll give you a new outlook as well including how the – if the stars align slide, and you see what happens. The last time we showed that slide two years ago, we had a $1.3 billion number on there with the acquisitions, everything in, using capital at a modest decent leverage level.

I think we're on track with that recipe, and we'll see what Jim comes up with the new slide. He hasn't made it yet. So, I'm assuming it'll be bigger than $1.3 billion. I hope so. My goal right now is still to – counting the core things we have, how fast can we get to $1 billion and can we get to the 40% or not.

Probably, you're going to see a number lower than the 40% now with these new high growth, high volume park areas. We see a 30% Op margin future with ExosomeDx, not 40% at this point. So – but we'll see. It's early. We don't really know yet where the leverages and synergies could be. So, that's we're on track with that.

So, that's as much as we can give you. All I can say is don't miss New York. It should be a good meeting..

That's great. Thank you very much..

And at this time, I'd like to turn the call back over to Mr. Kummeth for any additional or closing remarks..

Well, we've run an entire hour. That's first time ever, I think. So, I'm really happy about that. Thank you, all, for attending and look forward to speaking to you again next quarter. Thank you..

And that will conclude today's call. We thank you for your participation..