Good morning and welcome to the Bio-Techne Earnings Conference Call for the Second Quarter of Fiscal Year 2020. At this time, all participants have been placed in a listen-only mode and the call will be open for questions following management's prepared remarks. I would now like to turn the call over to Mr.

David Clair, Bio-Techne's Senior Director, Corporate Development..

Good morning and thank you for joining us. On the call with me this morning are Chuck Kummeth, Chief Executive Officer and Jim Hippel, Chief Financial Officer of Bio-Techne. Before we begin, let me briefly cover our Safe Harbor statement.

Some of the comments made during this conference call may be considered forward-looking statements, including beliefs and expectations about the company's future results.

The company's 10-K for fiscal year 2019 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, Dave, and good morning, everyone. Thank you for joining us for our second quarter conference call. Our organic revenue growth in the second quarter increased 6% year-over-year, although adjusting for the impact of certain timing headwinds, our underlying organic growth was closer to our year-to-date growth of approximately 10%.

In Q2 of FY'19, we experienced some large favorable orders from a handful of biopharma customers who were launching clinical and/or preclinical trials. These large orders mostly impacted our Protein Sciences segment in Europe and were for Reagent big box instruments and related royalties that did not repeat again, in Q2 of this year.

However, our end markets remain strong with our day-to-day retail business growing north of 10%, our Genomics RNAscope business still growing north of 20% and China also continuing to grow over 20%.

Also, our team performed operationally very well in Q2 with adjusted operating margins expanding year-to-year ahead of schedule and we reported record operating cash flow. Now, let’s cover details for the quarter. Starting with our performance by geography, the North American market continues to be healthy with organic growth in the mid-single digits.

Our growth in the region was low-double digit while academia grew mid-single digits. The region's overall growth was down with the timing of the royalties from our [indiscernible] customers. Including a one-time catch-up of royalty payments that benefitted the prior year quarter, excluding the royalty impact growth in the region was over 10% in Q2.

Our digital marketing efforts continue to bear fruit, especially for our retail antibody and protein portfolios, with our website driving a double-digit increase in website traffic across our brands, including over 20% increased traffic for our including Novus website year-to-date.

We are implementing several initiatives to get customers to spend more time on our website and add items to their shopping carts once they visit us online. Search engine optimization and continual refinement of our website and digital marketing strategy remain a strong order for growth for the company going forward.

Separately, we continue to strengthen our presence at industry trade shows, showcasing our products and technologies that are expanding on Bio-Techne growth.

With strong customer interest in our Reagent and insulin solutions offerings at the 12 trade shows we attended in Q2, and the eight additional industry trade shows on the calendar for Q3, including ACR and ADI conferences taking place in April and May, respectively.

These trade shows represent a key part of our marketing strategy and generate significant marketing for the company. In fact, our leads have increased 75% upon the new investment this past year. Moving on to Europe, which was the largest drag on our growth in Q2, down approximately 1% organically from the prior year.

Excluding the timing headwinds that impacted Europe, the underlying organic growth in that region was in the mid-single digits, which is the same organic growth rate for the first half of FY20. Not bad, but certainly lower than what our company has be accustomed to performing during the past couple of years.

Latino Europe will be redoubling its efforts in the second half of FY20 on the cross-selling of double-digit growth the better part of the last two years. Our key growth platform such as Simple Western, Simple Plex and RNAscope are still relatively underpenetrated in the European market.

In addition, we will be supporting a sales effort in Europe with more of the Digital Solutions practices that have driven the successful double-digit growth we've seen in our North American retail region businesses.

Thus, we are expecting Europe sales to go faster in the second half of FY20 with growth rates at the target of the high-single digit level. Finally, we had another good quarter in Asia. China especially continued to perform very well with another quarter of more than 20% growth. The growth was broad-based across our Reagent and Instrument products.

The Life Sciences industry remains a high priority in China's five-year plan and we continue to be well-positioned and very underpenetrated in our key growth platform. In the near term, the coronavirus situation will cause some disruption in Q3 with extended days for the Lunar New Year holiday and virtual quarantines in some Chinese cities.

Obviously, the longer this virus disrupts their life throughout much of China, the more negative impact it will have on our growth rate for China. Long-term, it is unfortunate an incident such as this outbreak that will likely strengthen China's already firm resolve to promote heavy local investment in the Life Sciences phase for years to come.

Now, let’s dive a little deeper into the performance of our growth platform, starting with those within the Protein Sciences segment, which grew 4% organically for the quarter.

As I’ve already indicated in my opening comments, Protein Sciences growth was materially impacted by a handful of large biopharma customer orders in the second quarter of FY'19, as well as a significant royalty payment, none of which repeated in the most recent quarter.

Depending on the customer and the application, these prior-year orders were a headwind to our Reagent instrument and royalty revenue streams in Q2. Absent these specific situations, the segment’s organic growth was in the high-single digits in Q2, led by our run rate Reagent instrument consumables products in the low-double digits in the quarter.

Within Protein Sciences, we recently made a very important leap forward in position in Bio-Techne as a leading tool and solution provider for the production of therapies.

In January, we announced the creation of a joint venture between Bio-Techne, Fresenius Kabi, and Wolfe & Wolfe, a consortium that can offer a complete and simplified sell of gene therapy solutions.

We believe the combination of our collective sales and marketing efforts, enormous count, technical know-how and knowledge create the potential for significant commercial synergies.

By combining the novel engineering solutions offered by Fresenius Kabi and Wolfe & Wolfe with our GMP proteins, polymer T-cell activation, non-viral vectors and assay technologies, the joint venture is positioned as a sell in gene therapy production market.

We are very excited to get this initiative off the ground and there has already been great interest in the gene therapy community.

Over the next year, while this new commercial consortium continues to drive awareness of our gene therapy solutions and placement of our products in increased clinical trials, we continue to work on our new dedicated GMP protein factor.

Construction remains on track to provide GMP proteins in large scale for our gene therapy customers by the second half of fiscal 2021. Now shifting to our Diagnostics and Genomics segment, which grew 12% organically during the quarter.

Here, the OEM Diagnostics tools and control business grew mid-single digits overall, with growth in most of its major product categories.

As expected, following double-digit growth in Q1, the OEM order time was less favorable in Q2 than it was last quarter, although new customer wins and product launches are starting to smooth the large quarterly flames in this business. Also, our genomic RNAscope continued with its 20%-plus growth trajectory in Q2.

The initial Q1 launch of the RNAscope HiPlex assay, which enables the simultaneously detection of up to 12 RNA targets, ramped nicely in Q2. We are currently developing additional HiPlex capabilities to address additional Genomics studies, targeting significant increases from our current 12-plex capabilities. Stay tuned for more product announcements.

Now an update on Exosome Diagnostics and the ExosomeDx prostate test.

There were several positive developments in Q2, and there is still much to do to make this -- make sure this noninvasive prostate cancer test becomes available to all patients over 50 with elevated PSA levels who are contemplating a more expensive, risky, painful and invasive tissue biopsy.

To begin, the final [indiscernible] from NGS went into effect December 1. Since then, we have been billing Medicare for applicable patient tests since, and are already seeing payments come in. However, the LCD language administered by NGS did not near the coverage recommended by guidelines.

For example, the final LCD does not allow for Medicare reimbursement more than once per patient for ongoing monitoring, nor does it allow reimbursement, for certain ethnicity with -- and then with certain family medical histories. Of course, these calculations were included in our clinical studies, with outcomes consistent with the overall study.

The NCCN recognized these population sets can benefit from the ExoDx Prostate Test, and we are working to make sure NGS does too. Thus, we are currently in the reconsideration process with NGS to near the Medicare coverage with the recommendations of the NCCN guidelines.

In the meantime, early rate -- the early rate that tests meet the Medicare criteria is encouraging and we will continue to work to expand the indication over the coming months. For ExoDx Prostate Test administered to applicable patients, we have been billing Medicare and getting paid.

We're starting to see Medicare payments on submitted claims as early as late December and the pace of payment has increased rapidly throughout January. We also made progress on the private care front in Q2 with four more regional insurers, contracted to reimburse ExoDx Prostate Test uncovered patients.

Although the base is still relatively small, our collections from target payers increased by more than 40% sequentially since Q1. While we still have work to do to get the large national private payers signed up for reimbursements. The national payers are taking our meetings with great interest.

They are becoming more aware of the health benefit to our customers and plausible financial benefits to their bottom line by avoiding more costly biopsies as well as the unintended infections that can result from them. However, they are being very careful and methodical with regards to reimbursement for our test.

Before considering reimbursement, many large private payers want to see the results from a clinical utility study published in a peer-reviewed journal. Exosome Diagnostics performed such a study before our purchase of the company. It was conducted in collaboration with CareFirst Blue Cross Blue Shield of Maryland.

This study has been submitted for publication with a peer-reviewed journal and should be released before the end of our fiscal year. Separately, we are in the process of submitting our premarket approval of PMA filing to the FDA.

We call it the ExoDx Prostate Test with the breakthrough device designation from FDA at the start of the current fiscal year.

It is difficult to predict the exact timing of the potential FDA approval, but achievement of this status will deepen our competitive mode and allow us to have higher priority for reimbursement from private payers who classify few made products with higher quality.

Equally important as getting paid for the ExoDx Prostate test is expanding awareness of the benefits of ExoDx and rapidly increasing test performed on applicable patients. Since the start of this fiscal year, and while we have waited for Medicare coverage, we have slowed any new commercial investment into sales and marketing.

Instead, we have focused on retooling our go to market strategy and ensuring we have the best commercial talent to execute on that strategy. Even without much new commercial investment, the number of Exo Diagnostic Prostate Tests performed in Q2 grew double-digits sequentially through Q1, as well as double-digit year-over-year.

Going forward, our commercial strategy will include marketing to the patient directly, in addition to urologists. We want to make sure patients are fully aware of our non-invasive options available to them, to assist in the determination of their risk of prostate cancer before deciding whether to proceed with a painful biopsy.

We believe the best and most cost-efficient channel for awareness is digital marketing and events. In Q2, we launched a redesigned Exosome Diagnostics website. The new website features portals for patients and physicians, scientific literature, and information on the benefits of our ExoDx Prostate Test.

We will be coupling this enhanced website with digital marketing efforts by leveraging the proven effectiveness of our digital solution team’s expertise to increase awareness of patient demand for ExoDx.

These search engine optimizations and digital marketing efforts aren’t yielding earnings, but we anticipate this campaign, combined with the recent regulatory reimbursement milestones, will favorably impact ExoDx Test lines by creating patient demand.

We remain on the pathway for growing ExoDx buy-ins and are excited to enable men with ambiguous PSA scores to avoid unnecessary prostate biopsies. With a pipeline of additional tests, companion diagnostic applications, and partnership opportunities, there are several different avenues to create value with Exosome Diagnostics.

We have a few partnerships in place and are in discussions with several pharmaceutical companies, of potential companion diagnostic applications of Exosome’s diagnostics technology.

We also believe our proprietary Exosome-based technology has broader diagnostic applications, including improving performance of existing pipeline tests from other diagnostic companies. In summary, fiscal 2020 remains in good shape. We delivered year-to-date organic growth of nearly 10% and are still aiming for double-digit growth for the fiscal year.

Our coreagent portfolio continues to perform very well, while our adjacent proteomic and genomic analytical tools are still ramping in very underpenetrated markets.

Meanwhile, our liquid biopsy and cell and gene therapy offerings remain in the very early stages of realizing their potential, with each representing true transformational opportunities for Bio-Techne. Our competitive position has never been stronger, and the team is driving toward even better execution of the second half of fiscal 2020.

With that, I will turn the call over to Jim..

Thanks, Chuck. I'll provide an overview of our Q2 financial performance for the total company and provide some additional color on performance of each of our segments. Starting with the overall second quarter financial performance, adjusted EPS was $1.08 versus $1.06 one year ago. With foreign exchange negatively impacting EPS by $0.08.

Most of the foreign exchange impact was due to transactional effects for invoices collected in Euros by our U.K. entity, which serves as our European commercial operations headquarters. GAAP EPS for the quarter was $2.02, compared to $0.45 in the prior-year.

The biggest driver for the increase in GAAP EPS was $120.5 million combined realized and unrealized gains on our investment in ChemoCentryx. Q2 revenue was 184.9 million, an increase of 6% year-over-year on reported and organic basis.

Second quarter reported sales include a 1% growth contribution from acquisitions and a 1% unfavorable impact from foreign exchange translation. By geography, the U.S. grew into mid-double digits while Europe declined low single digits and China grew over 20%. As for the rest of Asia, organic growth was in the low single digits.

By end market, which excludes Asia, our diagnostics division and other OEM customers, biopharma growth was in the upper single digits, while academic growth was in the mid-single digits. Moving on to details of the P&L, total company adjusted gross margin was 70.6% in the quarter, compared to 70.9% in the prior-year.

The decrease was due to unfavorable product mix, foreign currency headwinds, and to a lesser extent, recent acquisitions partially offset by productivity gains. For the remainder of fiscal 2020, we expect gross margin to remain fairly consistent with these levels.

Adjusted SG&A in Q2 was 28.6% of revenue, a 70-basis-point improvement compared to the prior-year. This volume leverage and productivity gain, partially offset by investments in our core business to drive near and long-term growth. R&D expense in Q2 was 8.9% of revenue, 20 basis points lower than the prior-year, primarily due to volume leverage.

The resulting adjusted operating margin for Q2 was 33.4%, an increase of 90 basis points in the prior-year period and 160 basis points higher than our first fiscal quarter results. Looking at our numbers below operating income, net interest expense in Q1 was 4.5 million, decreasing 1 million compared to the prior-year period.

The decrease was due to a substantial reduction of bank debt during the quarter. Our bank debt on the balance sheet Q2 stood at 383 million, down from 486 million at the end of Q1 fiscal year ‘20.

Recall that Bio-Techne has been a long-term shareholder of ChemoCentryx, a biotechnology company with a portfolio of novel therapeutics, targeting a variety of orphan diseases. In our Q2, ChemoCentryx reported favorable top-line data from a stage III trial of avacopan in antibody-associated vasculitis, or AAV.

This favorable data release drove significant appreciation in our ChemoCentryx investment, and monetized approximately $50 million of its gains. During the quarter, we applied these proceeds, as well as a portion of our strong free cash flow, to pay down $103 million of our long-term debt.

Other adjusted non-operating expense was 2.5 million for the quarter, compared to 1 million of other income in the prior-year quarter, primarily due to the impact in transactional foreign exchange. The GAAP reporting other non-operating income includes realized and unrealized gains for our investment in ChemoCentryx.

Moving further down the P&L, our adjusted effective tax rate in Q2 was 22%, which we expect to remain fairly consistent for the remainder of the year.

Turning to cash flow and return of capital, a record 72.5 million of cash was generated from operations in the quarter, driven by strong customer account collections and favorable timing of tax payments associated with our realized gain on ChemoCentryx.

Our Q2 net investment in capital expenditures was 14.6 million mostly driven by construction of our new GMP protein factory, which is on schedule for completion by the end of the calendar year. $12.2 million of dividends were paid out in the quarter, and average diluted shares to the 39.6 million shares outstanding.

Next, I'll discuss the performance of our reporting segments, starting with the Protein Sciences segment. Q2 reported sales were $141.5 million with reported revenue increasing 4%. Organic growth was also 4% with foreign exchange having an unfavorable impact of 1% on revenue and acquisitions contributing 1% to revenue growth.

As Chuck previously described, growth in this segment was negatively impacted by last year's timing of a few large biopharma orders and OEM royalties that did not reoccur in Q2 of the current year. Absent these items, revenue from the thousands of other customers that Protein Science served increased nearly 10%.

Operating margin for the Protein Science segment was 43%, a decrease of 50 basis points year-over-year due to unfavorable foreign exchange and the recent B-MoGen acquisition Turning to Diagnostics and Genomics segment, Q2 reported sales were 43.8 million, an increase of 12% from the prior year.

Organically, revenues also grew 12% with foreign exchange translation having a minimal impact on revenue. As Chuck mentioned, our OEM Diagnostic Tools business increased mid-single digits and our Genomics RNAscope business grew north of 20%.

With regard to Diagnostics, as I stated in prior calls, revenue from ExoDx prostate tests performed continue to be recognized on a cash basis. As Chuck mentioned, our favorable local coverage decision from Exosome Diagnostics Medicare administrative contractor NGS became effective for tests performed on or after December 1.

Despite the effect of LCD, we will continue to recognize Medicare revenue on a cash collection basis until we have a sufficient history of claims paid. Chuck provided a thorough update on the process we made on ExoDx test ramp, public and private reimbursement as well as the continued actions we are taking to accelerate both.

While still on a relatively small base, revenues from Exosome were up nearly 60% from last year and we expect the growth rates to improve from here. Moving on to the operating margin for the Diagnostics and Genomics segment, at 2.2%, the segment's operating margin improved from a negative 2.7% reported in the prior-year.

The increase reflects favorable volume leverage and productivity gains from both our Diagnostics and Genomics divisions, as well as slightly less dilution from Exosome Diagnostics. In summary, we believe our year-to-date performance in the top line is most representative of how the majority of our business performed in the second quarter.

The commercial focus we are taking in Europe can set us up for even better organic growth in the second half of fiscal year 2020. However, the situation in China with the coronavirus is a risk factor that we are unable to quantify at this time.

That being said, our teams throughout the rest of the world are motivated to maximize the potential in order to achieve double-digit growth for the company's overall fiscal year.

On the bottom line, our culture of success-based investing and operational prowess drove our adjusted operating margin in Q2 higher over prior years ahead of schedule, and it drove a strong quality of earnings of selected operating cash flow.

We expect our operating margin to continue to increase sequentially from here, just as we guided at the beginning of the year. That concludes my prepared comments. And with that, I'll turn the call back over to the operator to open the line for questions..

Thank you. Our first question with Puneet Souda with SVB Leerink. Please go ahead..

It’s Chuck. Thanks. So, my first question, I mean look, I appreciate the biopharma comparisons that were tough in Europe, but you commented about some recovery here in the quarter.

And could you elaborate a little bit on that? And what's your expectation for continued improvement here for -- in Europe? And what's your outlook, given the last sort of two-plus years of the strong growth in that geography?.

Sure. I'll give kind of a long answer here because I'm sure everyone wants to hear about European analysis. As we kind of messaged last quarter, things are softening, and it didn't disappoint on that, for sure. But it was really kind of a lumpy mess. There's not really any one distinct thing that’s kind of off.

Some things are up and some things are down. Our biggest by country is Germany. U.K. is kind of flat, but Germany is pretty hard down. It’s a lot of timing, a lot of biopharma, a big comp off on Genomics because of a big order timing issue there we mentioned.

In the instrument, which are the biggest areas, we had a huge comp from Austrian Simple Western, so it came in kind of flattish. So, without that growth, it was hard to pick up. We already knew we were kind of up and down on biologics.

Biologics didn't have a horrible quarter, but not great and this is probably the area we’ve seen the most comeback already this quarter in biologics. It’s pretty good already. Simple Western has got tough camps going forward, but I think as underpenetrated as we are, we’re pretty bullish on it still going forward.

And Simple Plex is also a big timing issue with a major order. We had another timing issue this quarter, as well, with Simple Plex, but I think the growth rate, especially instruments, is very encouraging and we’re really focusing now on getting more consumables to drive behind those instruments.

So, all-in-all, there is definitely a snapback coming there and off a pretty weak quarter for the instrument side. On the Reagent side, it’s really kind of a different academia in biopharma, and one up, one down. We're relatively okay, really, in terms of our Reagents. This is another area we've been in the past up and down on our assays.

And Elisa is definitely down in Europe right now. So again, these biopharma projects are kind of in a slump right now, and for us, that’s just kind of a weaker period. We ever focused a lot on this. We have a little competition here. And as you know, we have ABKIN coming out after and the bio has a line of products. And others are twined with the two.

And it’s not really what you’d say is a growing market. And you have multiplexing really taking all the new growth. So, that's kind of up and down, but we don't see a huge impact, to be honest. They've got their piece, we've got our piece. So, it’s just kind of overall kind of mediocre for right now for the timing in that.

And that’s a big chunk of our overall sales in Reagents and its selected matters. It’s actually in that ASD right now for their division, but it also took down our division numbers. But that, too, I think will recover. And again, we had huge one-timers on royalties.

And we have -- when we started putting these royalty situations in place two, three years ago, we had the ability to do third-party audits. And last year, we went through all these audit cycles and there were from big misses and some big payments. And those are not recurring this year, so that add back is a big number all by itself.

So, all-in-all that kind of explains Europe, explains the recovery we're seeing so far in instruments. And we'll see it happen. So, December was a fantastic month in Europe. It was really more of an October-November. And we'll see if we can continue..

Okay. Then if I could ask on ExosomeDx, I didn't catch the contribution in the quarter, if you provided that.

When do you think you'll have an answer on the reconsideration for the first one-time use of the test? And, Chuck, I was hoping if you could maybe take a step back and give us a view of what are your priorities now, given this acquisition? Now two years into this acquisition.

And, Jim, if you could remind me, what are you baking in terms of operating margin impact, if any, from Exosome this year?.

Yeah, okay. Well, as mentioned, we're using this time to really get our kind of ship in order. So, we've been upgrading our commercial force, getting our website ready, creating patient demand and staying in our guide rails, really, for dilution. And we are really ahead of the game there, to be honest.

We had some payments from Medicare come in, even in December, even though we had LCD in December 1. So, that was a really big precedent. We have put in place the PRF policy with the doctor signing, and that signature process has been very positive. And, of course, the fact Medicare took these pays and they’ve been paying.

And it's been ramping very quickly. We are expecting revenues this quarter in Medicare to be maybe as high as even $1 million from nothing last quarter. So, we're seeing a great ramp. It kind of is expected. So, we'll see what happens. Going forward, the priorities, of course, are as we ramp, we'll invest.

We want to -- we really want to drive this patient demand. It's really important because it's just -- it's going to take a while for reconsideration and we're going to be needing for the levers. That reconsideration process, now we’re talking NGS. This isn't the most friendly of all the macs and it's a next summer activity.

And then we have to make the agenda for the meeting and everything else. We feel pretty good about it but again, they don't help you, they don't tell you anything. We've submitted. All they've given us is that they wish we'd had the utility study data along with the guidelines to study, which we were told was enough.

So, the utility study is done, it's been done. And we're now getting it published. And with that, we'll knock two birds in a bush with one stone, one being the reconsideration process and the second being the national insured’s..

And what the margin front needed as pertains to Diagnostics, as we see the cash collection start to ramp here, as Chuck mentioned, we’re already seeing it ramp here in January, the cost will not be ramping at the same rate that revenue is.

But we should see less and less dilution going forward, although not profitable yet, see less and less dilution going forward from assays on Diagnostics. And that’s why we have confidence in our operating margin continuing to increase sequentially from here over all the company..

Okay. And then if I could ask you, Jim, you provided a long-term view at the last Investor Day back in -- late in 2018. You were expecting 1.2 billion in revenue by fiscal year 2023, mid-teens organic growth, 40% op margin.

Is that still in the line of sight, given some of the near-term challenges of Exosome and the European shortfall that you're seeing largely because of compares? So, just help us understand any changes in the sort of long-term outlook here..

There is no change in the long-term outlook. We just got through with our annual refresh of our five-year outlook strategy, internal strategy plan, and if anything, out the gate it gave us even more confidence in those numbers, looking outward. So, one quarter doesn't make a trend.

But very specific identified items that cause some of the bumps in the road we saw in Q2. But in terms of the underlying markets, we feel like they're very strong. Our run rate and our reagents, like I said, from the other -- literally 100,000 customers we serve are still very, very sound and going the right way, so.

And then you get the upside potential with Exosome and cell and gene therapy. It's still very large, particularly in the out years, two, three, eight years..

Let me address this specifically around that. So we’ll be back in New York this fall giving another update, which we do every other year. And the new five-year plan, we'll have a number like 4.5 billion not 1.2. If we look back a year, the 1.2, we sort of lost a year if you talk about Exosome Diagnostics. And that was in the numbers for this 1.2.

But we didn't have any cell and gene therapy in those numbers. And there will be some cell and gene therapy by 2023 as well. But all in for 2024 five years out we're at 1.5 because there's a strong cell and gene therapy component. And we still are -- that message is 150 million or more hopefully with Exosome Diagnostics.

So those two growth drivers are still intact. And of course, everything honest, it has to be as well. I mean, we have never promised more than mid-single digit growth in our core and we've been doing materially better than that.

So there is some hedge in that 4.5, so we still feel very bullish about that kind of number looking our four and then five years..

Okay. Got it. Great. Thank you..

And remember, there's no acquisitions in that. That's organic, and it's likely we're going to do more stuff, so..

We’ll now take our next question from Dan Arias with Stifel. Please go ahead..

Morning, guys, thank you.

Chuck, just to clarify on the timing-related items, I think I got you four points or so, is that a revenue bullish that you fully expect fully to capture in the second half of the year?.

The one-off, the timing issues you're talking about or what?.

Yeah..

Yeah, well, one is-- one was a big component with royalty true ups that aren't going to happen again. We’re on track with our steady state kind of royalty payments and probably improving as our licensees’ distances grow, we get more. Another big component, of course, is the OEM orders and stuff we talked about, and those will be behind us.

And I think some of this timing as well and I think that will correct itself, so --.

Okay..

But all in, those one-offs around the order of being roughly $6 million. So it’s like Jim said, it's over 3% all by itself..

Yeah. Maybe just to that point, I’m just thinking about the instrument performance during the quarter but then also what you think you might have in terms of improvement in the back half for Europe.

How does that translate to the 15% to 20% growth rate that you've talked about and that you've been in for the protein simple business that's embedded in protein sciences? Do you still think you can finish the year in that range?.

I do. 15 anyway. I mean, we've been promising and talking, guiding to 15 for the last three or four years. We’ve improved, maybe doing about 20. So this is certainly a -- I think there is some component of us going more direct in Europe and going after those accounts directly and probably having a couple years of more business.

Now we have to focus much more on commercial execution, cross-selling, expanding our subsidiaries, fixing Germany. Germany is definitely too lumpy. We've got to get more critical mass there. It's smaller than the U.K. in size of business and that shouldn't be. We essentially have a sales office there and not enough critical mass.

So there are things we're working on. If you remember I lived in Europe for years of my career and they're getting a lot more help deflanked. But there are a lot of great things too. We worked hard to get Genomics back on track in Europe and it is. And that's one example. ELISAs is lumpy, and it’ll be fine I think.

Our Simple Plex and other assay technologies are really doing okay. I think they'll provide extra growth in Europe. The 32x8 assay is an example, is a great assay with advanced multiplexing that can re-take on the other multiplexing competitors. And that’s in early days in getting launched and getting going. That's another example.

So all in all we still feel pretty good about the whole portfolio. Southern Europe, France, France is just doing great. I mean, since the acquisition of our distributor in France and creating our own subsidiary, we're had near double-digit growth. No loss there. The issues have really been around the U.K. and Germany, which I think we can deal with, so.

Did I get all of your questions?.

You did. A couple of quarters ago, you were talking about how you were looking forward to getting more analytics on the call, so maybe I'll take the opportunity to ask one more for you if I can.

Just on the OEM business overall, how do you think visibility changes there, if at all, or is that just the nature of the beast for the foreseeable future? And then maybe just a big picture question on that point. Obviously, you're moving the Bio-Techne portfolio into new directions.

So as you do that, how important are these OEM components to the overall business? And do you think there's a potential for some strategic actions if you thought that any of it was becoming less core or non-core?.

Yeah, we studied some of that. So first of all, remember, we had a 15% growth quarter last quarter in that business. And usually we guide I think like a negative quarter after one like that which has always been the case. And here we are with positive growth again. So we talked about things moving out, and they are. The pipeline is getting better.

We have big new accounts. Like Sysmex is an example that is getting us more and more business. We’re doing some very strategic things with them. We’re very bullish. And across the board, I think it looks pretty good.

Glucose, the pain is largely behind us and fairly well contained, although it's roughly flattish for the future and mainly even price increase that's holding things okay. But it's becoming a smaller part of the overall. But we feel okay. But in the end this is a roughly a 30% out margin business.

And on the market should we sell; it's a 12 to 15 kind of EBITDA kind of multiple. And we've tested this, and it's hard to get beyond that. And here we are with our multiple, so we're being paid at a -- we're being paid for that business in our portfolio, that’s 30 times plus.

It's hard to make it up by just spinning it off and selling it unless it becomes a drain on opportunity cost or strategic or something. And it just isn't. It's not a hard business. We have one salesperson. And these business leaders kind of do their own thing. It’s a very key product, process and business.

The customers are all mammoth; they're literally on two hands. The count. So, it's just not that big of a brain drain here at the company. And, yeah, it's a 30% out margin business, and now it’s growing fairly well and we’ve seen more things we can do with it. And there are synergies because we are providing diagnostic tools. It’s extremely sticky.

The San Marco unit of that business, it has 100 -- it participates in over 185 10-Ks. It's specked in. So the worst thing about it is the orders are all lumpy and large and to the big guys out there. And we're working at steeling that out and getting more of their wild share. And it's probably never been better.

It's one of the good things of this quarter was that business, actually..

Okay. Okay. Appreciate that. Thanks for the comments, Chuck..

I'll now take our next question from Catherine Schulte with Baird. Please go ahead..

Hi, guys. This is Ty on for Catherine. Just wondering if you could provide any update on how quad’s doing relative to the deal model and maybe some comments on how many clinical trials it's in and what has been the customer feedback so far..

Yeah, well, the whole consortium, the whole JV has already been a really big success. We had -- at the latest trade shows that have been showing this off, we’ve had immense demand and interest. We're involved in an awful lot of -- over a dozen preclinicals. We are being looked at everyday by more.

One of our partners has been involved in over a hundred prequalifications, so this stuff's going to happen. The trouble is it’s just-- It's going to take a while. The viral vector process is the process of record, and ours is non-viral. And we're moving that direction, and we're going to have a piece of it.

It's going to be an everybody wins market as these valuations of, these Al Deverons of the world have shown for a while, so we're pretty pumped. Quad is on track, and we have our lease product. We have new products on the drawing board. We can modify the size and hold consistent size with our bead technology.

And we're coming up with new ways to use this technology. We have a tech counsel approach in the company. We have the scientists of all divisions meet and huddle often. And we're coming up with a whole different set of ideas around different arrays, assays, et cetera as well. It’s cool stuff, a lot of interest.

It was never going to be, the big winner in cell and gene therapy as a possible division someday. We always talked about it being a $50 million or $40 million range five years out. And we see that very, very doable and possibly a lot more if we find other applications for it, so..

Great.

And I know that you guys have said you're not really able to quantify the coronavirus at this point, but are you seeing any sort of early disruption thus far, any sort of qualitative comments on what parts of the business could or could not be impacted by a more significant slowdown or something that's more prolonged?.

Yeah. Well, this is my 28th quarter as CEO here. And I don't think we've had a quarter under 20% in China. I'm sure this next quarter probably will if everybody continues to stay home. Nobody knows where it's going now.

The incidence rate is moving on more of a linear trajectory than an exponential, and that's probably to a large effect that people are quarantined. So that’s going to ride its way out. But I think we’re a long way from anyone claiming victory that this is under control. There's a lot of risks as well.

I'm pretty sure everyone will get a hall pass next quarter in China. I think there is a benefit to us. These kinds of events, these X factors usually create a stimulus to research. And we're already seeing interest and growth in some areas that we typically don't because of this. It's one of those unfortunate things.

Probably not as good as being in the respirator mask business right now, but there's going to be a halo effect for all -- everybody in the fighting-disease business. But this quarter's going to be a tough one probably more than likely. Too early to say but our instrument business, I think will probably not suffer.

And I should say also we had an exceptional start to the quarter in China in general. So that's going to give us a little bit of hedge there. But -- and instruments probably will suffer because that’s not a run rate business. But our run rate businesses, if you're using proteins and antibodies at the bench, but you're not at the bench.

You're at home in the kitchen; those businesses are going to suffer for this quarter. But it's a short-term thing. We’re not worried about it..

Got it. Thanks, guys..

We'll now take our next question from Jacob Johnson with Stephens. Please go ahead..

Hey, thanks for taking the question.

On the recently announced JV with Wilson Wolf and Fresenius Kabi, can you outline or give us some more details on how this partnership will work? I don't know if you’ve disclosed what your ownership interest in that is and then if you'd like to just order any potential financial impact from it as we look out over the next couple of years..

Yeah, sure. This has been nearly two years in the making. As you can imagine, a three-way JV is not easy to negotiate. And these are some powerhouse companies. I mean, Fresenius of course is a big one. And dealing with them has been challenging but good. The Kabi group within Fresenius is five, six years into this. They're a Lobos platform.

Their glucose instrument is becoming a pseudopotential standard already. As I mentioned, it's already been tested in I think over a hundred accounts. It’s -- They're ahead of the rest of us, really, in this consortium. So we really wanted to link up with them.

And one of the big gaps of our total workflow, we have a lot of boxes checked off in our workflow, but having that box to tie it all together is a really important step. And there aren't too many out there. There’s only a few. So we think this is the best one in the market.

The design came off of the early leader with [indiscernible] and I think major improvements to the solution have been designed and proven. So we think it's great. Of course Wolf and Wilson has been a long time, early innovator in cell factories and cell, biocell processing. A brand and a company and a leader that punches well above its weight.

I spent time in thermal, we all know John Wilson in this industry. And he's right here in Minneapolis. Our teams are very close. We've been friends for many years. And this is going to go great. It's not a test of JV in any way, so it isn't like we're losing the revenue.

This is all going to be kind of off and they're in their garage somewhere working away. This is really more of a marketing kind of consortium, a collaboration. We all put in equal funding to drive the entity and we all keep our revenue. We all drive our part of the business, and it comes back home.

There were a lot of things in the contract of how we stay married and long timeframes and milestones to hit. And there are certainly scenarios of possible exits and kind of cover all your bases for all of this if we’re not happy. And how to do mediation.

It's a very complicated contract for that, but that’s what these contracts always are for JV, it's all about solving the what-ifs and small percentage outcomes that are negative. So, nothing's been negative, it's been fantastic. The leaders get along really great.

This has been driven and is the brainchild, really, of Dave Eansor, one of our presidents and a lot of focus on this. You know, the CEO of the entity is Fresenius Kabi, an extremely bright young man who we have a lot of faith in.

I think we have-- we are prepared to talk about what we're going to put in, I think it's around $3 million, and that's an annual number to put in for investment to drive our piece. It could change next year, and we’ll have to see how the business is, but it's by no means intended to be any kind of sinkhole for costs or anything.

So, it's very containable. We already are selling the course, and things are ramping. And I would say, you know, the other 20 are selling more than us right now and it could dramatically shift over three, four, five years out as things like GMP proteins and such become scalable, which we think we will.

There are front end versus back end parts to the business, and even though we're driving the full work flow of being a non-viral approach and we are going to sell GMP proteins to everybody, including the viral vector approach. And we have a ton of interest in our factory and getting allocation, et cetera, and, you know, we're open for business, so….

Got it. That's helpful. And then, just the last question from me, you paid down some debt in the quarter, the balance sheet seems like it's in a really great spot, I'm interested in what you’re seeing in your M&A pipeline right now..

Well, I sure wish I could take credit for being so insightful on ChemoCentryx, but the investment was made here about 20 years ago. We have a lot of faith in Tom Shaw, and they've had a lot of success recently, and I don't think we're done with it yet.

So, we did monetize some, but on top of that, we almost matched that monetization with great collections and cash flow, and we took a hundred million off. We've been averaging around 20 or so million a quarter, and we're at 120 for halfway into the year already, so we're essentially a year ahead of our schedule.

We're now right around 1 1/4 for leverage, so we have a lot of very good balance sheets and liquidity for doing more deals should we find them. We're going to stay on path with that kind of level of drawdowns that we indicated earlier.

Jim, you want to comment further?.

Yeah, no, you spoke well on it. In terms of the M&A pipeline, it's as robust as it's always been, it's more about finding the right deals at the right price. And, you know, right now the ones that are more of greater interest tend to be smaller in nature like they have been more recently.

But as you point out, our balance sheet is in the best shape it's been in a long time, so should a bigger deal make itself available, we'd be happy to participate. .

And we are hunting and we're involved in--- the overt’s probably smaller right now, but nothing's changed there. We're always in the hunt and it's--- as prolific as we've been in acquisitions, believe me, everybody lets us know what’s coming up and what's potentially in the game for us to take a look at. But we're pretty focused right now.

We've got a lot of homework to do. We definitely see Genomics coming back on track from a couple years ago when it went a little bit sideways on us. We’re feeling really good about it. The HiPlex road map is phenomenal and we're going to have a DNA probe product come out soon.

So, I’ve never been more bullish about the ACD technology platform in the Genomics division as I am now. And, of course, it's been tough, but everyone told us it would be tough to get into diagnostics and liquid biopsy's no different and we've never been in better shape than we are now and there's also a lot of partnership interest as well.

We're definitely not going to try to own this whole thing, so we are developing partnership and companion diagnostics opportunities as well as other liquid biopsy solutions that maybe we can help their ordinary rum ball recipe, so to speak.

So, a lot of interest and we're going to grow this thing and we will get reconsideration, we’ll build another map, we'll do something to keep growing the pipeline of new stuff, it's expensive, so we've got to stay focused on that and more than trying to find, you know, another leg on the stool than the big acquisitions, so to speak. So --.

Got it. Thanks for taking the question..

[Operator instructions] We’ll now take our next question from John Leonard from Wells Fargo. Please go ahead..

Thank you.

So, you're coming up here against your toughest comp in the prior-year period of 15% growth in March ‘19, is there anything you’d flag that was maybe one time or lumpy in that prior-year number that we should be cognizant of as we are modeling the forward period here?.

Yeah. I've been waiting for you, John, and I'm sorry you coming back online now this quarter. But, insightful question. And I mentioned in my comments that we do have one more timing issue coming up in that Genomics space. As well as maybe a potential other one in the Simple Plex.

These clinicals that go around Suplex are large cartridge orders and they’re kind of lumpy. We do have some in that number. Nothing like the 6 million, though. So, probably about half of that. 2 million to 3 million is probably something we have to outcome. So, yeah, it’s going to be a tough quarter. I think we were 14% last year this quarter.

So, it’s a tough comp. We’re not going to get much help out of China, obviously. So, I think you can add up all the results of all that. But nice recovery so far in instruments in Europe. We're all over giving them more help in areas like Germany. I think that's going to improve. Genomics is, if anything, getting better.

I think we're in great shape looking forward there, so we've just got to -- we've got to, you know, there's always one-offs, you've got to find more one-offs.

That's what you've got to tell your team, you know? It is a reason, but it's a poor excuse for not showing growth, right? So, we've got to find more big deals, we've got to find more OEMs, we've got to find more key options, like Sysmex is a great example. We have very little Sysmex business, but it's coming on strong for us, as an example so....

Okay, that's helpful color. And then my follow-up for Jim. Jim, it sounds like from your comments around gross margin that you're expecting full-year gross margin might decline about a hundred bips year-on-year.

If that’s so, what's the driver of that? Secondly, do you still expect that EBIT margins could be about flat year-on-year?.

Yeah, so in terms of gross margin, yeah, it's a combination of mix and FX, that's the two biggest drivers in that order, having the overall year-over-year gross margin slightly down. But, you know, as the guide at the start of the year, we thought we’d be roughly flat operating margins for the full fiscal year.

And given our first half performance here, we’re actually ahead of that plan. I won’t go as far as guarantee that we’ll be increasing margins year-over-year, but still flat year-over-year is definitely looking much more easily obtainable and hopefully there’s up side..

I want to say one more thing on that, too. It hasn't come up much, but the revenue looking like it is, and you add back that transactional SF, we’re essentially on consensus.

The operating excellence of our business is on our ability to look midway in this quarter and start to do the right things like good operation leaders do, because we have a very experienced team running these divisions and running these units. They've done an exceptional job and that's why we had the margin result that we did.

And I feel confident we're going to be right on track, as Jim says, to our goals and our -- the guidance we gave for annual for our margins year-end. I think the revenue is harder than the bottom line.

Can’t always predict the top line, but you can predict how you’re going to finish the bottom line, and we’re doing a pretty good job, I think, of managing our costs..

We'll now take our next question from Patrick Donnelly with Citi. Please go ahead..

Great, thanks, guys. Chuck, maybe just a follow up on the M&A questions. What areas make the most sense to add to inorganically? I know you guys obviously talked a lot about areas like cell and gene therapy.

And how far down should we go on that front? Just curious what areas you think are acceptable?.

There's that famous da Vinci caricature that everybody tries to use in cell and gene therapy, and all the pieces of that workflow, which are a good dozen or more. And with our JV consortium, we've got most of the boxes checked.

But there's some -- there are some areas, yeah, I think we could do more to help differentiate that the world is searching for. I think spatial-based Genomics, single-cell Genomics in a spatial capacity is a big area. It’s going to -- there's still a lot of innovation happening there. A lot of small companies are making a lot of progress.

We’re looking at a lot of ideas there. I think reporter systems is another area. The major parts of the workflow, I think, are covered, but there are some things that could help us differentiate, as well. And, of course, we don't have a viral vector approach.

I mean, we could always go more towards where the mainstream is right now, too, should we find an opportunity that made sense. And then we're going to be partnering with a lot of these CROs, so that could be a lot of opportunities. I think that covers the M&A in that direction.

I think -- I still don't see us expanding in the podium -- our podium beyond where we are into like say NAFTAC or HPFC or NMR, things like that. That's not us. There's a lot of competition, it's hard to really be the kind of margins that we'd like to be in to go that direction.

But, again, close to spatial measurements, single-cell analysis, next-generation flow, these solutions that use antibodies with their synergies of us all make sense. So, we're always hunting those directions. We're always in the hunt for expanding our portfolio. They’re smaller but we have -- we're arranging for an NFL.

We have whole cell applications now. There are -- Elisa areas out there that are chunky in nature that expand our assay portfolio. Those all make sense. Smaller antibody companies, should they be there for us at the right price. There’s a few in Europe we like, as an example. They are always interesting to us. .

That's helpful. And then just a quick one on ACB. I think Jim mentioned it got right sized. What’s the right growth number here? Is it kind of 20%? And what are the key drivers there? I know you have things like DNA probes coming out. But just talk to the drivers and that growth level there. .

Yeah, the right number is 20%. Of course, we're going to push them for more. But the number for you is 20%. And I feel really bullish, because RNA scope is still way underpenetrated. We are still building our relationship with LICA, and the numbers are being dramatically better. We are working with Ventana, as well, at this point.

We are looking at other lower-end instant partnerships, or a way to do things to try and go after that lower-level, mid-level hospital or pathologist that really wants to move from IAC antibody world to molecular pathology. I think there's a big opportunity there. So, we have a lot of interest in that.

Our new design basecoat application is finding growth, The DNA scope will come out end of this fiscal year, which we know there’s a ton of interest in. This HiPlex is just getting off the ground and we just filed, as we’ve been talking about for a quarter or so.

A new extension to that HiPlex technology that’s going to get us into the multiples of 12 into targets. You start looking at an assay kit-based approach that can give you single-cell revolution for 40 to a hundred different targets at a time, that becomes really, really interesting to a lot of big companies out there in this space.

So, that's all coming. So, I feel very good about 20%-plus going forward for years..

Appreciate it, Chuck..

And if we flip, we'll make changes because it should be that..

Your next question is from Alex Nowak of Craig-Hallum Partners -- Capitals Group, excuse me. Please go ahead..

Great. Good morning, everyone. Just a follow-up to a couple of questions on here.

Just taking into account the European weakness here, the one-time order time and the Corona Virus in China, is double-digit organic growth here possible over the next two quarters? Or should we be expecting something more on the lines of a high-single digit number?.

Well, as you know, Alex, we don't give guidance. We're still on track for 10% or better for the year. But we have been guiding over the years saying an 8 to 12 kind of a range we want to be in, and we kind of moved that guidance this year for maybe 10 to 12.

But your comments may be prudent that it may be an 8 to 12 for this quarter, given these headwinds we're looking at. The China alone, if we're 2025 moving to say 10 or 15 because of the virus, you can do your own math. But I'm sure it's going to shave a point, I would think, off of the potential we could do this quarter. Everyone's in the same boat.

But, you know, and it's a tough comp for us, the toughest we've ever had. So -- but overall, the business looks pretty good in most categories. And Europe's coming back pretty well, our instant business interest is a good uptick. We mentioned North America is pretty strong. We've got 75% year-over-year lead increases.

Our marketing, our commercial engine is just so much better than it was a couple years ago. And we're spending -- we’re spending on more ad words. We’re getting a $10 to $1 on investment on SEO. So, I’m telling this team keep spending until you get an antidote and we haven't found it yet.

So, for some reason we’re seeing double-digit growth in both proteins and antibodies across the board, especially in North America. We’ve got to get more of that going in the quarter in Europe, which we will. Asia's doing great, Japan's in a good spot, India is accelerating high-double digits.

And China will take a blip here, but it will just be a blip for a quarter, I'm sure..

Okay, understood. And then on -- just to go back on Europe here, I understand the issues in the quarter and they’re one time, but you had mentioned a softer environment in Europe now for a couple quarters.

I'm just curious why next quarter here? Why should that turn and start to become, actually, a better geography for you?.

Well, some of its one-off, some of its serendipity, some of it’s the way these timings on these projects are. We’re just seeing an uptick in these platforms again. But I think they’re still a risk. We’re not out of the woods, I don't think, in Germany overall. I don’t think we’re out of the woods yet on ELISA in Europe.

Our other areas like dual sets, most products are doing pretty well. We are definitely selling an awful lot of bulk, and that usually kind of comes and goes in cycles. But I think the biggest thing is we have to get down to basics with our sales force country by country, going off of and building off of the acquisitions we did.

And then we started working -- getting people to work together and train them and teach them what Bio-Techne is and doing the cross-selling, I'm not happy yet. I think there was -- there was more growth around picking off low-hanging fruit from going direct from depending on distributors than it was about true cross-selling good growth.

And we're also, I think, weak in our inside sales, weaker than we are in the US. We’re going to need to beef that up. Inside sales for our model is very important.

You can depend on your web, and, oh, that's great, but when you're selling over a quarter million different SKUs, and it's a catalog business, you've really got to have a strong inside sales group, as well. And we need to work on that, also, in Europe.

So, there’s a lot of levers we're pulling, but there’s a lot of levers we're going to add and pull harder on. And that’s why I have a little more renewed faith that we can get Europe going again. Now, Europe -- this was a bad quarter, and we've mentioned it for a quarter or two, as you mentioned.

I think the couple years we were at 15% to 20% growth I think that's going to be a reach. But this getting back, as Jim said, to high single-digit growth where Europe should be is, I think, very, very, you know, possible and it should happen. It may take a quarter to get there but I think this quarter will give it a good shot..

Okay, understood, that's helpful. Just real quick, you mentioned progress around partnerships Exosome.

If any of these projects are successful, when should we expect a second Exosome Diagnostics test and then, any update on plans to kit the EPI test?.

Yeah. We’re already focused on kitting this, per se, right now. We are going after FDA approval, but not as a stand-alone non-doctor associated kit. We won't be on TV anytime in the future, okay? Is the one thing. The demand we're creating around direct marketing and web and SEO is going to be pretty dramatic. I think it's going to help a lot.

We are moving on getting patients and starting the studies for both bladder as well as kidney rejection, and of course, they’re off urine, so it's not that hard for us to do. And we're working on partnership ideas to get going on the plasma side.

So, both the lung and the breast indications which are validated, we think they work and are ready for clinicals. So, I think we're looking at a couple years, maybe under two years, for the urine-based one, depending how they go. Again, we have to get studies written and get them included and it would depend on the timing of that.

Probably picking a bigger Mac wouldn't hurt. A little quicker Mac. So, there’s some decisions to make. But one half to two years is the short answer for you, but if you look at five years we're going to have a half a dozen things and hopefully a half a dozen partnerships as well so....

Understood, thank you..

We're going to take our next question from Paul Knight with Janney. Please go ahead. Mr. Knight, your line is open. Mr. Knight, if you'd like to ask a question, your line is open. That seems to be all the questions we have. I'd now like to turn it back to our speakers for any additional or closing remarks..

Well thanks. We appreciate all the interest. Overall a decent quarter, not as we had hoped but I think we have our hand in all the right levers and I think it's just fine for our year end. So all good going forward. Our team is pretty energized. There is a lot of great stuff happening here a lot of great finds and we're excited about it.

So forward to talking to you more next quarter..

This concludes today's call. Thank you for your participation. You may now disconnect..