Bio-Techne - Q3 2023

Transcript

Operator (participant)

Good day, welcome to the Bio-Techne Corp Q3 fiscal 2023 Earnings Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask your question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to David Clair. Please go ahead.

David Clair (VP of Investor Relations and 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, as well as the potential impact of the COVID-19 pandemic on our operations and financial results. The company's 10-K for fiscal year 2022 identifies certain factors that could cause the company's actual results to differ materially from those projected in the forward-looking statements made during this call. The company does not undertake to update any forward-looking statements because of any new information or future events or developments.

The 10-K as well as the company's other SEC filings are available on the company's website within its investor relations section. During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to most comparable GAAP measures are available in the company's press release issued earlier this morning on the Bio-Techne Corporation website at www.bio-techne.com. Separately, we will be participating in the B of A, RBC Capital Markets, Benchmark, Craig-Hallum, and Jefferies Healthcare conferences in May and June. We look forward to connecting with many of you at these upcoming conferences. I will now turn the call over to Chuck.

Chuck Kummeth (CEO)

Thank you for joining us for our Q3 Conference Call. As we expected, message in last quarter's call, our Q3 top line year-on-year revenue growth was similar to the growth we reported in Q2. The year-on-year growth rate and tough comps from last year were similar in both quarters, the underlying performance of the business improved quarter and quarter when considering the large ExoTRU Kidney milestone payment received from Thermo Fisher last year in Q3. The team did a great job this quarter furthering several of our key growth drivers as physician uptake and utilization of our ExoDx Prostate test accelerated. Demand for our cell therapy workflow solutions, including GMP proteins, remain strong, our spatial biology business returned to double-digit growth.

These growth drivers are partially offset by the continued challenges of COVID in China, lower biotech funding, and OEM destocking from supply chain disruption concerns last year. As we look ahead to finishing this fiscal year and kicking off fiscal year 2024, we see China coming back strong. With COVID now in the rearview mirror, destocking by our OEM customers eventually unwinding and moving beyond the tough prior year comps from our smaller biotech customers. Before I get into the specifics of the quarter, I'd like to take this opportunity to welcome Peter Schuessler as the new leader of our European organization and business. Peter has over 20 years of experience leading commercial organizations, including very relevant experience successfully growing businesses and leading European-based teams in large life science tools companies.

Under Peter's leadership, we are looking forward to continuing to grow our European presence and delivering the tools the region relies on to enable scientific discoveries. An overview of our performance by geography and end market. Starting with Europe, where the team delivered high single-digit growth, order growth in the quarter, the macro environment continued to stabilize and overall research activity increased sequentially within our core biopharma and academic end markets. Our new Dublin warehouse to support mainland Europe is now fully functional and fulfilling customer orders. With a new leader in place, a new distribution center, and an improved ERP system, we are positioned to serve our customers even better in the region. In North America, we also saw sequential improvement with order growth increasing mid-single digits in the quarter.

Here, the impact of a lower biotech spend is the greatest, and the year-on-year comp is the toughest, with over 25% growth in biopharma last year. Finally, there is China, which was a tale of two chapters this quarter. Prior to the Lunar New Year, most people in China were still recovering from COVID, and its citizens were directed by the government to essentially stay home until after the new year holiday. Up until this point in the quarter, sales were practically nonexistent in China. But after everyone was well and came back from holiday, sales accelerated dramatically, and our China team was able to finish the quarter with revenue growth in low single digits. This was on top of a comp where China grew over 30% last year. This was a remarkable effort by our team in China.

With COVID now in the rearview mirror for China, we hope for good, we see China's growth continuing to accelerate from here perhaps to more than 40% growth next quarter. Let's discuss our growth platform, starting with our protein sciences segment, where organic revenue increased 5% for the quarter on top of a strong comp from last year when the segment grew 16%. During the quarter, we continued to make progress with our portfolio of cell therapy workflow solutions, including our GMP reagents, specialty cell culture media, along with cell culture matrices and DMEM, which collectively grew over 20% in our Q3.

Our GMP proteins remain in high demand across cell therapy spectrum as biopharma customers developing products for the regenerative medicine and immune cell therapy markets continue to rely on our portfolio of over 40 GMP grade cytokines and growth factors, including several that are only available from Bio-Techne, to effectively scale their therapies. Our GMP protein business had its second consecutive record-breaking quarter. Given our industry-leading menu of highly bioactive, lot-to-lot consistent and pure GMP proteins, we are positioned to remain a leader in this rapidly growing market. In addition to the ongoing progress of expanding the GMP proteins menu, we are manufacturing in our state-of-the-art St. Paul facility. We are also experiencing significant yield improvements as we scale production at this facility.

We originally estimated GMP protein capacity at the facility was $140 million annually, which we increased to over $200 million as we manufactured initial protein batches from this new facility. As the team continues to launch additional GMP proteins, we have been able to achieve product yield as much as 50 times higher compared to legacy methods used to manufacture smaller batches in our headquarters. In fact, these productivity and yield gains have been so significant that we now estimate the capacity of this facility is at least $500 million and potentially higher than $1 billion, depending on the mix of GMP proteins ultimately manufactured from this facility. We also reached a significant milestone in our cell therapy strategy in Q3 with our initial investment into Wilson Wolf.

As a reminder, Wilson Wolf is a manufacturer of the proprietary line of cell production bioreactors called G-Rex, which provide an ideal amount of oxygen and nutrients to effectively scale immune cell therapies. Wilson Wolf and Fresenius Kabi have both been key partners of our Bio-Techne through the ScaleReady commercial joint venture since 2020, with the three companies collectively offering tools and technologies for cell culture, cell activation, gene editing and cell processing. During the quarter, Wilson Wolf reached its trailing 12 months EBITDA milestone, triggering Bio-Techne's $257 million investment for a 20% ownership stake into Wilson Wolf.

We see tremendous synergies with the eventual ownership of Wilson Wolf and are already developing a one of a kind, standardized, closed cell and gene therapy manufacturing system that integrates G-Rex, Bio-Techne's GMP proteins and T-cell culture media into an FDA compliant, patient-ready, off-the-shelf production process that will save end users significant time and money as they pursue meaningful clinical data and eventual commercialization of these novel cell therapies. Following this initial investment, Bio-Techne has the right to acquire the remainder of Wilson Wolf for $1 billion upon its achievement of additional milestones, or for 4.4 times trailing 12-month revenue if these milestones are not achieved by December 31, 2027. We look forward to continuing near term pipeline development work with Wilson Wolf and eventually having this rapidly growing, highly profitable industry standard fully under Bio-Techne's growing umbrella of cell therapy products.

Let's discuss our portfolio of proteomic research reagents, including our RUO proteins, antibodies and small molecules, which collectively grew low single digits in the quarter coming off of a challenging year-over-year comp where we grew about 20% in Q3 of last year. I'd like to elaborate on the OEM phenomenon we've experienced in our year-over-year comps for the past couple of quarters. Recall that a year ago, supply chains were constrained and several companies, including Bio-Techne, stocked up on certain components that were critical to meeting customer demands. Bio-Techne has an industry-leading catalog of over 6,000 proteins and over 425,000 different antibody types that researchers around the globe rely upon as a basis for their research, enabling scientific discoveries, enabling new therapeutic and diagnostic discoveries to further healthcare.

This same catalog of bioactive reagents also serves as the enabling content for several products from other diagnostic and life science tools companies. Without this content, a number of their assays will not work. Last fiscal year, a handful of these OEM customers stocked our reagents to ensure their ability to continue to meet demand for products. Best we can tell right now it will take another quarter or two before this destocking to unwinds. After that, these headwinds should become tailwinds as these OEM customers resume their normal ordering patterns of our reagents in fiscal 2024. Moving on to the performance of our Protein Simple brand of portfolio of analytical solutions, we delivered low double-digit growth in the quarter as all three of our primary instrument platforms increased in the quarter.

The rapidly growing installed base growth we experienced over the last two years continues to drive increased consumable utilization across our Protein Simple instrument platform as our Simple Western, Simple Plex and Maurice instruments become more ingrained in research workflows. The ease of use and flexibility offered by our proteomic analytical tools are leading to expanding applications across three platforms. These expanding applications, particularly for cell and gene therapy, QA/QC, is translating into higher total addressable market opportunities for these platforms as our legacy proteome mechanical tools TAM expands from $2 billion-$3 billion to firmly above $3 billion. Order funnels remain very strong across these three instrument platforms. Budget conservatism from a subset of biotech end users has led to an overall lengthening of the order closing cycle.

Our Simple Plex branded multiplexing immunoassay platform, Ella, led instrument growth, increasing over 25% in the quarter. The sub-picogram sensitivity and cost advantages offered by this fully automated ELISA platform, combined with an expanding menu of over 250 analytes to support therapeutic areas across neuroscience, cell and gene therapy, immunology and cancer, continues to resonate with both biopharma and academic customers. This traction and acceptance in both industry and academia is apparent in the growing number of instruments in the field as Ella crossed an important milestone in the quarter with over 1,000 instruments now in the field.

In neuroscience, Ella's high level of sensitivity positions it as an ideal instrument for biomarker detection and discovery, making this a prime area for future menu expansion. We also continue to make progress preparing Ella to penetrate the clinical diagnostic market as our ISO 13485 audit of our Wallingford facility continues to progress. With a growing installed base, a rapidly expanding menu, and an untapped clinical diagnostic market opportunity, we continue to see incredibly bright future for Ella. Let's discuss our biologics platform, Maurice, which enables protein purity, charge, and identity analysis in five minutes in an easy-to-use cartridge-based instrument. Recall that we recently expanded on Maurice's capabilities with the launch of Maurice Flex, which adds image capillary isoelectric focusing fractionation capabilities to the instrument.

Fractionation is a front-end step in mass spectrometry. Maurice Flex addresses the labor-intensive and time-consuming challenges of using legacy fractionation methods, including ion exchange chromatography. This new application enters Maurice into a new $300 million market. Initial biopharma interest in Maurice Flex has been strong. We had multiple initial instrument placements in the quarter. Our Simple Western platform continues to penetrate the Western blot market as its ability to automate the time-consuming and cumbersome Western blot process with a sample-to-answer route solution resonates within our biopharma and academic research end markets. Similar to our other platforms, applications for Simple Western are expanding, including quantitative immunoassays for both cell signaling and rare protein detection in complex lysates and rare tissues.

Additionally, our biopharma customers are increasingly relying on Simple Western in their gene therapy workflows, as its ability to detect protein-related impurities, viral titer, and identity information, and empty versus full capsid information provides critical QA/QC information for these workflows. Gene therapy remains a nascent but rapidly growing application for Simple Western, and we experienced 30% growth in this area during Q3. We also partnered with Cell Signaling Technology, or CST, to expand the number of Simple Western validated antibodies for various targets and across multiple disciplines. CST is a leader in the development of antibodies and other related Western blotting reagents used to elucidate cell signaling pathways that dictate cellular behavior and impact human health. We are excited about the addition of these new antibodies to the Bio-Techne catalog of validated antibodies and are encouraged by the market response following the announcement.

Let's shift to our Diagnostics and Genomics Segment, where organic revenue declined by 2%. Adjusting for the exosome milestone payments from Thermo Fisher Scientific that we received in the comparable quarter last year, but did not repeat in the current quarter, segment growth was up for single digits. Starting with our molecular diagnostics business, where we continue to experience increased physician adoption and utilization of our ExoDx Prostate test, leading to over 70% test volume growth for the fifth consecutive quarter and an associated revenue increase of over 85% in the quarter.

We continue to see positive momentum on the key performance indicators we track for our ExoDx Prostate test, including year-over-year and sequential growth in the number of physicians ordering the test, record test volume from physicians new to ExoDx Prostate, as well as a record number of doctors ordering more than 25 tests in a quarter. We are pairing this volume momentum with continued progress in strengthening our coverage with private payers, as our recently bolstered market access group continues to improve access to the large national payers, positioning ExoDx Prostate for expanded future coverage. The team is doing an excellent job managing a rapid growth in ExoDx Prostate test volume, and we continue to experience record volumes in our Q4 to date.

During the quarter, an expanded local coverage determination from National Government Services, who is our Medicare administrative contractor, covering our Massachusetts-based Exosome Diagnostics CLIA certified laboratory, went into effect. This updated policy now covers the ExoDx Prostate test for men with a prior negative biopsy, who are thought to be at high risk for prostate cancer and are considering a repeat biopsy. Following this update, the LCD now mirrors the National Comprehensive Cancer Network, or NCCN, guidelines and enables reimbursement for ExoDx Prostate as a monitoring tool in populations with and without a prior prostate biopsy, effectively increasing the total addressable market opportunity by approximately 50% for the test. Our spatial biology business, branded ACD, increased low double digits in the quarter, with adoption in our flagship RNAscope assay remaining strong.

This gold standard RNA in situ hybridization assay enables industry-leading sensitivity and specificity transcriptome analysis while retaining tissue morphology. We furthered this industry-leading capability with the recent introduction of our new exceptionally bright, vivid fluorophores, enabling customers to easily detect and visualize both abundant RNAs as well as RNAs of very low abundance in a tissue sample. More recent additions to the ACD portfolio are also getting traction, including BaseScope and miRNAscope, as these novel solutions enable visualization and evaluation of therapeutic biodistribution, safety, and efficacy of gene therapy delivery vectors, and oligonucleotide therapies. BaseScope and miRNAscope are both relatively small contributors to our spatial biology business today, are growing rapidly and becoming progressively more accretive to the growth of this business.

Continuing with spatial biology, we recently announced an important strategic partnership with Lunaphore to develop the first fully automated spatial multi-omics workflow with same-slide Hyperplex detection of protein and RNA biomarkers on Lunaphore's COMET instrument. This solution will enable users to easily visualize both cell types and their activation states in tissue. Combining COMET's highly flexible custom antibody panel design with RNAscope's library of 45,000 cataloged probes. Our in-house custom probe design capabilities will give customers the ultimate flexibility in achieving their study goals. In summary, our Q3 performance was in line with our expectations. As China growth snaps back and the temporary headwinds created by reagent destocking from a handful of OEM partners subside, we believe we are well-positioned to accelerate growth next quarter and beyond.

One thing is certain, our portfolio of cell and gene therapy workflow solutions, a best-in-class liquid biopsy platform, novel proteomic analytical tools, spatial biology capabilities, all coupled with an industry-leading catalog of bioactive content, positions Bio-Techne to remain a leader in some of the most rapidly growing life science tools markets. We look forward to continuing to execute our strategic growth plan and deliver on the vast opportunity in front of us. With that, I'll turn it over to Jim.

Jim Hippel (EVP and CFO)

Thanks, Chuck. I'll start with recapping the overall Q3 financial performance. Adjusted EPS was $0.53, consistent with the prior year quarter. Foreign exchange negatively impacted EPS by $0.01 or -2% in the quarter. GAAP EPS in Q3 was $0.43 compared to $0.37 in the prior year. The biggest driver for the increase in GAAP EPS was a non-recurring loss on our previously held ChemoCentryx investment in the prior year period. Q3 revenue was $294.1 million, an increase of 3% year-over-year on an organic basis, and 1% on a reported basis. Foreign exchange translation had an unfavorable impact of 2% and acquisitions had an immaterial impact on revenue growth. Chuck called out the temporary headwinds we faced in Q3, and I will quantify their impact to overall company growth.

Starting with prior year's ExoTRU milestone payment, the impact of this one-time revenue recognition last year in Q3 was approximately a 3.5% headwind to our overall growth this year. The COVID infections and corresponding shutdowns in China this quarter was an additional headwind to overall company growth of approximately 2.5%. The OEM destocking of RUO reagents we estimate to be another 1.5% headwind to our overall company growth rate. The accumulation of these specific and temporary headwinds is approximately 7.5%, which, when added back to our reported organic growth, brings us to an adjusted organic growth rate of over 10%.

The normalization of smaller biotech customer spend following a red-hot funding environment the past couple of years is more difficult to quantify, it is also a headwind that may take more time to work through. Biotech research is not going away. It is often the important innovative bridge between academic discovery and big pharma therapy commercialization. In the meantime, Bio-Techne will continue to serve all these customers in the life science change that ultimately brings quality of life to patients with innovative products that improve their likelihood of success and in the most productive way possible. The double-digit growth we see in our key growth platforms, cell and gene therapy, Exosome Diagnostics, spatial biology, and ProteinSimple branded automated assays, demonstrate this is already the case. Moving on to our organic growth by region and end market in Q3, North America grew mid-single digits.

Europe demand increased upper single digits. China grew low single digits, while APAC declined low single digits due to prior year government stimulus in Japan not repeating this year. By end market, biopharma grew high single digits, while academia grew mid-single digits. Both were partially offset by the impact of destocking by a handful of OEM customers. Further down the P&L, total company adjusted gross margin was 72.6% in the quarter, compared to 73.2% in the prior year. The decrease was primarily driven by unfavorable foreign exchange and product mix. Adjusted SG&A in Q3 was 27.9% of revenue, compared to 26.1% in the prior year, while R&D expense in Q3 was 7.7% of revenue, compared to 7.5% in the prior year.

The increase in SG&A and R&D was driven by strategic growth investments made in Q4 of fiscal year 2022 and the acquisition of Namocell. The business has implemented strategic price increases during the first half of fiscal year 2023 to offset the dollar impact of inflation to operating income, with pricing largely offsetting the inflation impact on our operating margin as well in Q3. Adjusted operating margin for Q3 was 37%, a decrease of 260 basis points from the prior year, but 150 basis point improvement sequentially. The impact of the non-recurring ExoTRU milestone payment in the prior year period decreased margin by 130 basis points. Foreign exchange decreased adjusted operating margin by another 50 basis points, while the acquisition of Namocell and other strategic growth investments drove the remainder of the margin dilution for the quarter.

As our top line headwinds start to subside, we will continue to make strategic investments in our key growth platforms to ensure their long-term momentum. By doing so, we expect operating margins in Q4 to be comparable to Q3. Looking at our numbers below operating income, net interest expense in Q3 was $0.2 million, decreasing $2 million compared to the prior year period due to lower debt levels and higher interest income earned on cash deposits. Our bank debt on the balance sheet as of the end of Q2 stood at $370 million, an increase of $170 million compared to last quarter, with the increase reflecting our investment in Wilson Wolf, which was funded partially with debt and cash on hand.

I would note, given the timing of the Wilson Wolf investment, which took place at the very end of our fiscal Q3, we anticipate our net interest expense to increase sequentially to approximately $2.7 million in Q4. Other adjusted non-operating income was $0.1 million in the quarter, an increase of $1.2 million compared to the prior year, primarily reflecting the foreign exchange impact related to our cash point arrangement. Moving further down the PNL, our adjusted effective tax rate in Q3 was 21%. Turning to cash flow and return of capital, $50.5 million of cash was generated from operations in the quarter, and our net investment in capital expenditures was $11.7 million. Also, during Q3, we returned capital to shareholders by way of $12.6 million in dividends.

We finished the quarter with 161.6 million average dilute shares outstanding. Our balance sheet finished Q3 in a strong position with $157.2 million in cash and short-term available for sale investments. Our total leverage ratio remains below one turn. Going forward, M&A remains a top priority for capital allocation. Next, I'll discuss the performance of our reporting segments, starting with the protein sciences segment. Q3 reported sales were $218.9 million, with reported revenue increasing 3% compared to the same period last year. Organic growth for this segment was 5%, with foreign exchange having an unfavorable impact of 2%. Despite the temporary headwinds and the tough year-over-year comps, I will highlight that the longer-term 5-year CAGR for this segment is approximately 12%.

Operating margin for the protein sciences segment was 45.1%, a decrease of 30 basis points year-over-year, with operational productivity more than offset by foreign exchange and the impact of the Namocell acquisition. Turning to the diagnostics and genomics segment, Q3 reported sales were $75.7 million, with reported revenue decreasing 3%. Organic revenue decreased 2%, with foreign exchange having an unfavorable 1% impact. As Chuck mentioned earlier, adjusting for the ExoTRU milestone payment we received in Q3 of last year, which should not repeat again this year, organic growth was upper single digit for the segment. Our Exosome Diagnostics business remained incredibly strong in the quarter as our fortified marketing message strengthened commercial team and the recently updated Medicare LCD drove record test volume and revenue growth.

Our spatial biology business returned to double-digit growth in the quarter, with strong performances in our RNAscope, BaseScope, and micro RNA product line, partially offset by relative softness from a few biotech customers. Moving on to Diagnostics and Genomics Segment operating margin. At 15.2%, the segment's operating margin decreased 980 basis points compared to the prior year. The segment's operating margin was unfavorably impacted primarily by prior year revenue related to the ExoTRU milestone payment and to a lesser extent, net inflation and strategic growth investments. Before we get to Q&A, we would summarize our fiscal year up to this point, our most recently completed quarter, and our view looking forward as follows. For much of the first half of our fiscal year, how customers were going to behave in a post-COVID pandemic world was rather murky.

This included behaviors such as customers taking pent-up vacations last summer and fall, a more risk-off mentality for smaller biotech investing, government-induced shutdowns in our highest growth region, China, and a realization of the stocking that took place during the COVID-induced supply chain crunch that is now unwinding. These behavioral outcomes became clearer as we exited Q2 and gave us more visibility going forward. Through it all, and as Q3 demonstrated, our growth platforms are still winning with double-digit growth. As we enter Q4, some of the headwinds should diminish, especially in China, but some are likely to remain, namely the OEMD stocking and smaller biotech rationalized spending. Looking further ahead into fiscal year 2024, these remaining headwinds should further diminish and the double-digit revenue increases we see in our strategic growth platforms should once again be reflected in our headline numbers.

In the meantime, we expect Q4 overall momentum to continue to improve from Q2 and Q3, with an overall growth rate likely similar to how we started this fiscal year in Q1. That concludes my prepared comments. With that, I'll turn the call back over to the operator to open the line for questions.

Operator (participant)

Thank you very much. We will now begin the Q&A session. To ask a question, you may press Star, then one on your telephone keypad. If you're using a speakerphone, please pick up the handset before pressing the keys. If your question has been answered and you wish to withdraw your question, please press Star then two. We will pause for one moment to assemble our roster. Our first question today comes from Puneet Souda of SVB Securities. Please proceed with your question.

Puneet Souda (Senior Research Analyst)

Hi, Chuck Kummeth, Jim Hippel, thanks for the questions. First one on biotech funding. Obviously, you know, there have been quite a bit of noise out there from bioprocessing. You highlighted a number of things and trends that you're seeing as well as the headwinds. You know, if the headwinds were to prolong, where do you think the business is more defensible and where you think where the pressures could be felt more? I think what Jim Hippel was implying is Q1 is about 7% growth that you delivered. I assume that's what you're expecting for Q4. What does this mean for...

You know, could you get back to sort of the mid-teens levels as we head into the sort of the first and Q2 of 2024? Would really appreciate sort of a color on that because I think that's sort of the key question given these biotech questions and emerging biotech headwinds.

Chuck Kummeth (CEO)

Sure, Puneet. Thanks. Well, I think first and foremost, I think we're kind of talking about the comeback a little more quickly than others are talking about it. We bridge for you the just docking component, and a lot of it's docking. We know the customers, and we know what they're at, and they've been very clear with us, so we know when they're coming back for more. It really is in Q1. There will still be funding pressures for sure. I mean, the public information out there on the amount of biotech funding reductions are, you know, double digit and beyond. It is, it's impactful. We're, you know, we're kind of circumventing a lot of that with, you know, surgical work here within our own OEM sector, which is coming back.

let's not forget that, you know, we were mid-teens in our run rate business supporting, you know, biopharma and our academic platform. This quarter, we were low teens still in our run rate business, so for our consumables. That's all speaks very positive to the current environment. Going forward, we just think it starts getting better. as you pointed out, we got 1 more tough quarter, a really tough Q4 comp. we had a blowout last couple weeks last year in Q4. Kind of wish that would've been in Q1 now. you're right, it's in that seven high, you know, high single digit number is kind of our range. China's a big factor too. I mean, we see China roaring back.

We were just over there, first time in three and a half years. The team is in great spirit, full spring, seeing all their customers and things are ramping extremely fast. I wasn't kidding with 40% or better. That should be kind of in the range for us for China. You know, that gives us a good base across the company to start building on a, an overall growth rate.

Puneet Souda (Senior Research Analyst)

Jim, you know, in terms of, a recovery back to sort of, you know, mid-teens, I just wanted to clarify, you meant, Q4, should be in line with Q1 or for the full year?

Chuck Kummeth (CEO)

In line with Q1.

Puneet Souda (Senior Research Analyst)

Okay. Just if I could, you know, ask a little bit on the closed loop system that you highlighted? You know, what's the timeline on that? What's the sort of investment needed there, and sort of how it differentiates from the rest of the platforms in the market, Cocoon and other ones? You know, do you have enough pieces already in terms of the consumables product, to sort of, you know, fulfill the entire closed loop system there?

Chuck Kummeth (CEO)

We actually have made great progress there. As you know, we've got a factory that's, we're putting new programs into every month. We have the G-Rex platform, which is already in de facto standard out there. The last real missing component is integration of media. We have a couple different formulations of media that we're going out with. We've been in media forever, but in more regenerative medicine type approaches. This is a little more different. We're looking at kind of the make versus buy, how to. It's all about time and scale. We think within a year here, we're out with a closed system, so roughly about a year. It's probably a little mushy right now. Could be sooner, could be a little later.

Depends on how much we wanna go it ourselves with our own capital and asset versus partnering.

Puneet Souda (Senior Research Analyst)

Okay, great. Okay.

Chuck Kummeth (CEO)

You know, we have IP, and we have solutions for how to actually integrate with Indeed or G-Rex already. Some real novel solutions that, and some of them John Wilson himself has been involved in.

Puneet Souda (Senior Research Analyst)

Got it. Okay. All right. Thank you.

Operator (participant)

Our next question comes from Jacob Johnson from Stephens. Please proceed with your question.

Jacob Johnson (Equity Research Analyst)

Hey, thanks. Good morning. Chuck, maybe following up on that last question, just now that you own 20% of Wilson Wolf, does this change anything about that relationship? Does it allow for kind of more collaboration between the two of you? Does it create additional opportunities? Just curious if anything changes from that standpoint.

Chuck Kummeth (CEO)

That's a great question. We have a great relationship. We talk every week. The teams have been totally together. As I pointed out, one of the keys to the deal was the fact that he wanted us to take over and do more operations as he's exploding in growth. He kind of is more of a KOL out there with all the docs and therapeutics and the institutions. That's where he wants to more or less live. You know, he just put out a big press release last week here of Cell-Ready.

He's building a new company, a CDMO type model, working with assets from Marker Therapeutics to try and build all that, you know, more quickly, get to customers real quickly, save a lot of time, a lot of money with startups and with professors with their cell ideas, et cetera. Guess what the workflow is that's gonna drive that whole mechanism? It's scale. It's our ScaleReady JV workflow. That means our proteins, G-Rex. It'll of course use the Fresenius hardware as well and of course we'll use all our instruments for QC. We'll have our media. We'll have a whole workflow will come in. That makes us tighter even yet because he wants to make sure that we're integrating for the future too as he builds out these new ideas.

He's already kind of, you know, understanding that we're at 20%, this deal's gonna happen. He's starting to, you know, really focus on what else can go and wrap around, you know, the, the Wilson Wolf franchise to make it even bigger and better, which is all good for us together long term. If anything, we're talking more and we have more ideas for the future together to build the next multi-billion dollar, you know, adventure.

Jacob Johnson (Equity Research Analyst)

Got it. Thanks for that, Chuck. Maybe just click on the cell and gene therapy front. You know, I think there's been kind of varying commentary about that end market, but it sounded like you had a pretty good quarter there on the GMP protein side. Can you just talk about how much of that is new customer wins, you know, any of these customers kind of scaling up? Maybe if you could kind of remind us where that customer base stands in the clinical trial process right now.

Chuck Kummeth (CEO)

Yeah, we had a 45% quarter and that's off of another strong comp last year. 21% or 22% overall for the category. Really strong. It's still growing. It's becoming, you know, close to material by next year for sure. I think overall, we just keep accelerating. I think we're roughly around 200 customers now. We've even got a couple more I'd say large. They're all kind of scaling a little more. We're trying to keep filling the funnel, and it's about, you know, turning these minnows into tuna and then into whales, right? In a couple years, we hope to have a couple dozen whales, and it won't take many to really get this factory humming. They're coming.

Jacob Johnson (Equity Research Analyst)

Perfect. I'll leave it there. Thanks, Chuck.

Operator (participant)

Our next question comes from Dan Arias with Stifel. Please proceed with your question.

Dan Arias (Managing Director)

Morning, guys. Thanks for the questions. Chuck, maybe on ACD, what's the growth outlook there and how is that evolving as we digest the biotech spending environment? In spatial overall, you've now got these two partnerships here with Akoya and Lunaphore. What, if anything, does the incremental revenue contribution potential look like for you guys on those?

Chuck Kummeth (CEO)

Yeah. Well, we're thrilled that it's come back to double digits. It should stay there. We'll see. There's a lot of opportunity and you realize also this is not an, a category that's like only Biotech or only Pharma. There's a lot of academia, you know, with that franchise. And our academia's been, you know, kind of mid-single digit area, so it's one of the hurdles to get over is to keep raising academia. We also have a service component with that business, and that's been up and down, and it was better this quarter. We gotta make sure we keep pounding away on that service.

That service element is how we find a lot of new customers, we'll start with a service contract then we blow them away with the data, then they come on board, they start ordering probes and go from there. It all works together. You know, Akoya is very different, you know, than the Lunaphore model. The Lunaphore model that program is for co-detection protein and RNA together on a single slide. You know, it's still single morphology, whereas the Akoya is all RNA only. They're a little bit different. We've been pretty clear about being ubiquitous from a high level, you know, Ventana, Leica, all the way down to the lower automation with these guys.

We even play with, you know, with NanoString and others in the middle trying to support them. The more they do in discovery, the more rolls our way in translational later. It's all good. You know, I just came from the AACR conference and the theme was spatial, and it was a record turnout by about 40% more people. Spatial is hot and it's there's more coming. There's a lot more innovation. There's more companies coming. There's more ideas and, you know, we're thrilled to be one of the leaders, and we're working with all the leaders in hardware and automation. As you know, we've got some multiplexing capability coming and now with co-detection as well. That's gonna be...

It's gonna fill a big gap, you know, out there for what people are looking for, you know, identifying what they're really after in this tissue.

Dan Arias (Managing Director)

Okay. Do you have a view on just long-term growth there and what you might end up looking like as we head towards the longer term targets? That is one of the businesses that I think is sort of kind of like a wild card in terms of whether or not $2 billion or something below that is a reasonable target going forward.

Chuck Kummeth (CEO)

Yeah. As you know, it's a little $100 million kind of run-rate business right now. We've always talked about it being a $300 million plus business, but that's with discovery, but also with pathology. Having Lunaphore and having these other relationships allows us to really give pathologists more what they're looking for. If they're not working on a single slide under a scope, you know, with one analyte at a time here, and it's difficult. Let's not forget, we've launched a whole set of new dyes, fluorescence, fluorophores we call VIVID, and they are really, you know, lighting up the slides, and they're getting a lot of great acceptance as well.

You start adding where we're going with translational, riding the heels of all the discovery guys, and with these new players helping us automation-wise, getting this into pathology, you know, five to 10 years out, this is well beyond $300 million. This is a double-digit growth rate. Needs to be, gotta be. When it isn't, we make changes here. It's been as high as, you know, 30+% on some quarters and, we hope to be in double digits, you know, going forward. It's. You know, there are academics, there's funding issues this year. It's been a little bit lumpy. We're double digits this quarter. I think it looks pretty solid. We're excited about the relationship.

I think we're quite a few months away from actually having revenue on a platform like that, but it's all coming, so.

Dan Arias (Managing Director)

Okay. Just a follow-up from me, if I could. Chuck, I have to admit, as I was listening to you welcome Peter in Europe, it occurs to me that as we're pushing towards June here, we're unfortunately coming up on you being a year away from moving on to the next endeavor. The speculation on the street is that you're starting a band. I don't know if you wanna comment on that, but if not, can you just maybe update us on what, if anything, a conversation at the board level sounds like in terms of just an executive search, internal versus external candidates, timing on announcement, that sort of thing? Anything for us to think about there?

Chuck Kummeth (CEO)

Yeah. It's still 14 months away, so just stuck with me for three or four more quarters. It's ongoing and I will not be joining a band. You've not heard me sing. But there is. Obviously, I've done my job with grooming, I think, three excellent internal candidates. All could carry the water here for quite a while, I think. The board is looking outside as well. They have a fiduciary responsibility. The fundamental reason of taking the time and looking broad is that, you know, under my watch for 10 years, we've, I guess we've increased the sales here 400% or 500%, something like that. In the next 10 years, we want another 400% or 500%.

We're up six, seven, eight X in valuation in 10 years, 10 years, we wanna be up another five, six, seven, eight times in valuation. That puts us at needing somebody to run a $60 billion market cap company at, you know, at $5 billion-$6 billion in revenue. That's the goal, that's the plan, that's where we're operating to. I will remain on the board, hopefully, you know, board willing. I'm not totally missing this all.

Operator (participant)

Our next question comes from Dan Leonard from Credit Suisse. Please proceed with your question.

Dan Leonard (Managing Director and Research Analyst)

Good morning. Thank you for the time. Chuck, can you elaborate further on the visibility you have into the OEM destocking dynamics?

Chuck Kummeth (CEO)

Well, I think we did a pretty good job bridging it. It's about 1.5%. The best thing about this destocking OEM component, we're not talking about across the board problem. We're talking about a half a dozen or so different customers that are all in the $ millions of purchases last year, and this year are at 0. They won't remain at 0. Some won't come back. A lot are gonna come back hard and heavy, and then we're really building a funnel with new ones. You know, it's a beautiful thing about biotech is every year there's a whole new, you know, a slate of new, new people with ideas that wanna buy new juice from leaders like us to try things out. It's building, it's coming back. It's, it's identifiable.

I guess, if there's more numbers, I let Jim comment, but I think 1.5% is pretty clear.

Dan Leonard (Managing Director and Research Analyst)

A follow-up question for Jim. I wanna make sure I understood your summary comments appropriately. Did you say that Bio-Techne would return to double-digit growth in Fiscal 2024?

Jim Hippel (EVP and CFO)

Well, we're in the process of building our plan right now for next year, right? What I was trying to indicate in my closing remarks was that if you take out these very isolated events, OEM destocking China, as an example, the ExoTRU deal, the rest of our business collectively is at double digit already. Our key growth programs, which are going to carry us to $2 billion and beyond, are also all growing well in the double digits. So, you know, it suggests that we get past these headwinds during fiscal year 2024. This underlying double-digit growth we're seeing not only in our core, but definitely in our growth programs, growth platforms, will start to once again resonate, and you'll see it in the overall company results. That's our goal.

Chuck Kummeth (CEO)

Let me put a little ribbon on that. I mentioned our run rate. We watch our run rate and how we're doing digitally with our catalog, because we're first and foremost a catalog business for life sciences across the board, biopharma down through academia. That remaining in team tells us that, you know, things are okay. You look for where the other holes and we bridge it for you. This OEM thing is gonna come and go. You pull that back, we're back to normality. On top of that, you have these growth programs. Our three top growth areas all had spectacular quarters. Spatial had double digits, 45% gene sequencing, 20%+ in cell and gene therapy overall, and in exosome at 87%. They're not material enough right now to carry the average.

By next year, they're gonna be a lot more material, and they're gonna carry the average. With all that stuff fundamental coming back on top of these growth programs, you know, we don't give guidance, but, you know, we won't be very happy here if we're not at double-digit growth events then, so.

Operator (participant)

Our next question comes from Patrick Donnelly with Citi. Please proceed with your question.

Patrick Donnelly (Managing Director)

Hey, guys. Thanks for taking the questions. Chuck, maybe dive a little deeper on China. It's encouraging to hear that 40% number thrown around for this quarter. Can you just talk a little bit about the trends you saw maybe in March and then into April with then only a really nice recovery, kinda post the Lunar New Year. You know, how do you kind of think about the go forward there, you know, looking back to maybe the last time this happened with the COVID lockdown? Is there this big pent-up demand and it's 1/4 of really good growth, or do you see real durability as we work our way into fiscal 2024 here, where it should be a nice stretch in China?

Chuck Kummeth (CEO)

Yeah, we were just there, and that was absolutely one of the questions, almost per word, what we asked the team in our reviews there. I don't think we're seeing the extreme kickback that came off that COVID quarter roughly three years ago now. It's just coming back strong and hard. Now, again, this is an easy comp from last year for China. you know, this last quarter, two months of the quarter, nobody was at work, like 0. We had 90%+ people sick with COVID. We had a very strong March because they all came back and there was pent-up demand. People wanna get back to work and restart. We're a run rate business, people aren't at work in their lab. They're not running experiments. They're not running experiments. They're not using our juice, you know?

Now they're all back and they want more, and they're hungry, and they're trying to catch up. Some level of that we saw a few years ago will happen, but I think it's more steady. It's more steady, too, because the instruments component of that. It's also coming back and resurging well. We see really good, strong growth going forward. We were, you know, one reason we did have some growth is a lot of it is an instrument side of things there, and that's obviously a longer sales cycle. You know, that's one of our business regions where we have stronger percentage of portfolio is in instruments, and we see that continuing. You know, going forward, we're 200+ people strong there.

The leader, Kim Kelderman, worked with me at Thermo Fisher. He's solid. He's got many years left to go. He's well-respected in the industry. He's built businesses in his past that are five, 10 times bigger than this is still right now. We've got a long way to go. The salespeople are great. Our leader in instruments is still the original leader that came with ProteinSimple way back when. Is more energetic and, you know, engaged than ever. We love this guy. He knows the market, he knows every customer. The relationships are fantastic. He's been able to build a big team under him from when he was in a smaller company. It's all looking pretty good. We also had a very large reception.

We got to really meet and talk to, like, literally most of the folks there. We weren't there many days, so we wanted to really maximize our time and get to know everybody again. You know, China is an area you wanna get there and touch them, you know, once every year if you can. Three years is too long not to be there. Businesses can drift, and in places like China, they can drift, and you can find surprises. We didn't find any surprises. The morale of this team has been fantastic. The engagement's been good. A lot of new people, only about 25% the last couple years are new there. I always ask that. I ask for a show of hands and who was in the last year and who's before that.

Attrition's been very good, and we're just holding the fort down. At the day, it's a $100 million business, 10% or a little more or a little less of our company. Back to growing 20%+ percent next year, we think is a no-brainer. We won't say 40%+. This quarter's anomaly, but next year, you know, we're gonna probably work with them on a plan that's 20%+ percent for sure. I see no reason why not to, and maybe more. We'll get back to you as we get a plan.

Patrick Donnelly (Managing Director)

Okay. No, that sounds good. Jim, maybe on the margin, I think you kind of framed up Q4 looking similar to Q3. As we work our way into 2024, is that exit rate kind of the right number to think about building off of? Can you just remind us any moving pieces as we work our way into next year? Obviously, some of the headwinds, you know, hit margins as well as we work our way hopefully back to that double-digit growth number you, Chuck talked about. Should be some nice leverage in the model. Maybe just frame up the margin piece, you know, exiting out of Q4 here.

Jim Hippel (EVP and CFO)

Again, I'll be able to provide more clarity, excuse me, I'll be able to provide more clarity on our margin and margin profile for next year as we get through our plan in our next earnings call. I guess at a high level, I would say, I would expect is, you know, if you look at our margin profile historically, it tends to dip in Q1 and then gradually increase throughout the rest of the year just due to seasonality. Q1 is typically a lower revenue quarter for us, and the cost base is usually higher coming off our Q4 Fiscal year, the prior year. In terms of that 37% increasing sequentially into Q1, I would say probably not.

If you look at the full year of where we finish fiscal year 2023, looking ahead to fiscal year 2024, at this point in time, I don't see any material headwinds to margin as to why we wouldn't, you know, at least expect some, you know, some incremental margin improvement year-over-year for the year.

Operator (participant)

Our next question comes from Catherine Schulte with Baird. Please proceed with your question.

Catherine Schulte (Senior Research Analyst)

Hey, guys. Thanks for the questions. I guess first, on exosome, sounds like you're seeing impressive uptake on your ExoDx prostate test. Any comments you can give just on the path to profitability or margin profile for that business?

Chuck Kummeth (CEO)

Sure. Well, as you know, we've taken a, you know, a I wouldn't say a conservative, but a, you know, a careful approach to their expansion and growth. We've had a dilution level that we've been able to live with, you know, the last four or five years, whatever it's been now. I would say that dilution level's down by 30%, 40% what it was, 'cause we're investing. We're at full strength or near to it, so we've almost doubled that sales force. We've added a new, a team for really, an experienced team to really go after the five, the larger private payers. We had to get big enough to attract the right players and people and talent to do this.

I would say the size of the business is up headcount-wise, roughly 30%, 40%, maybe even a little more from a year or two ago. You know, we've talked about where is the break-even point, and we talked in past, you'll find it in records, I suppose, on calls, but we bought it thinking it'd be $30 million in revenue and then found out quickly and talked to all you know, more like $60 million or $70 million in revenue would be a break-even point. This team and under Lynn thinks it's much better than that. You know, it's another year or so, 1.5 years, I think we're at into the break-even point in profitability. You know, maybe we will or maybe we won't.

Maybe we'll decide to invest harder and stay at the dilution levels we're at. I mean, I'm not saying we'll put ads on TV for the prostate test yet. You know, I think this team is starting to accelerate even more and, you know, we're, you know, we hit 11,000 tests last quarter, which is pretty remarkable. As you know, we've got the full NCCN guidelines now into our reimbursement equation. That means we can go back after patients that have had their first test done or had a biopsy and can have it again and use this for surveillance. In the entire period before last quarter, I think we had 15 tests done that were a repeat. In the last quarter, we had over 240.

We're going back after the surveillance patients, which is an added, which really is an added TAM, right? That's one thing we've been seeing, I think, the growth even accelerate. I don't even think we hit a tipping point yet. I tell the team I'm looking for, you know, something north of 100% growth. I think that day will come, so.

Catherine Schulte (Senior Research Analyst)

All right, great. Can you quantify what you expect the OEM destocking headwind to be in Q4? I guess if adjusted Q3 growth was 10%, you have in Q4, you know, China's turning into a tailwind, you know, why shouldn't organic growth be a little bit better than that 7% number you talked about, even if you see similar levels of destocking?

Jim Hippel (EVP and CFO)

I would say this is Jim. I'd say the OEM headwind is almost exactly the same for Q4 that it is for Q3. At least that's what we're predicting as of right now. As are the general biotech softness headwinds still are with us until we get past the last year, very tough comps.

Chuck Kummeth (CEO)

You know, as Chuck pointed out, the comp for Protein Sciences was the same in Q4 as it was Q3 last year. They're both equally difficult comps. Yeah, China will be better. You won't have the ExoTRU, at the end of the day, you know, I think the overall headwinds facing Protein Sciences segment are the same in Q4 as they were in Q3 with the exception of China. And we expect Diagnostics and Genomics to be better because they don't have the ExoTRU in it next year. Again, that's only, you know, in total about 25% of our business. The incremental China and the lack of ExoTRU, like, you know, gets the overall company growth rate from, call it 3% to hopefully north of seven.

Operator (participant)

Our next question comes from Justin Bowers with Deutsche Bank. Please proceed with your question.

Justin Bowers (Equity Research Analyst)

Hey, good morning. Just wanted to follow up on some of the last couple of questions. One, on the OEM, is that headwind that you're talking about in the back half, is that sort of like the full year headwind as well? Then just taking a step back, if we go, you know, if we go to pre-COVID, is the business and the sales cycle to that similar to the runway business, or is there some seasonality and lumpiness to that business?

Chuck Kummeth (CEO)

In which area?

Justin Bowers (Equity Research Analyst)

Sorry, for the OEM channel.

Chuck Kummeth (CEO)

For the OEM. Well, I think COVID's had an effect on everything OEM. I think it's affecting environment, it's affecting funding, and it's affecting conservatism, and all the above. People have been stocking and being careful through the supply chain risk environment we were in last year. The, what you call the back half would be the front half of our next fiscal year. We see it improving for us, starting in Q1. Others have been online here recently saying it's an all year event. I don't know their business as well as I know ours. I think we've got some large OEMs that are running out of stock. They're not insolvent, they were conservative, and they've stocked up.

We have a few that are new and coming and growing, and we have a few that are shrinking and going away and being bought and whatever. I think the net of it all, we see an improving OEM, you know, first half of our fiscal year from what we know right now. We're just being transparent what we see right now. Next quarter, maybe it'll all change. I don't know. Maybe something else will happen. That's what we see right now. We're pushing on these customers to start buying again. I mean, obviously at some point they start to run out of inventory. We're trying to model as best we can when we think that will happen.

We do think at some point in the first half, the first half of fiscal year 2024, you know, As long as they continue to have sales, they're gonna need to start restocking some more inventory.

Justin Bowers (Equity Research Analyst)

Got it. then just?

Chuck Kummeth (CEO)

Don't forget that. We're not happy with a handful of large customers. We've got hundreds of customers. We want all 100 to be large.

Operator (participant)

Our next question comes from Alex Nowak with Craig-Hallum. Please proceed with your question.

Alex Nowak (Partner and Director of Health Care Research)

Okay, great. Good morning, everyone. I was just curious if there's any product lines out there that are just not working in the portfolio because to a prior question and in the prepared remarks, you talked about cell and gene therapy, GMP proteins, for simple spatial, exosome, all these being up very massively in the quarter, but just not enough to drive the average. I'm just trying to understand, is there a product line that is just struggling from competition and change in pure demand by your customers? Or is really the only thing that's struggling is really just macro China, macro OEM destocking?

Chuck Kummeth (CEO)

It's mostly macro, but, I'd say, you know, we've not been happy with academia for the last year. It's more or less low to mid-single digits. Europe's been up and down a little bit. But, you know, China was like a big zero, practically. That's a big impact. APAC wasn't strong either. You know, that's this quarter, which is timing and missing stimulus in Korea and Japan. Those things kind of weigh into that. When you add all that, you know, back in, I think things are fine, Alex. There's no real issue there. I would say in product categories, what I'm most worried about, it's kind of what I'm always most worried about. It's ELISA. It's assets. That's why we bought Simple Plex. We're big in Luminex. We've got an assay portfolio that is together.

It's high single-digit growth, hopefully back to double digit here soon when it all comes. Ella's up and down, low, mid, high single digits. That's kind of where it lives, and it's still a big part of our business. You know? You know, it's kind of that.

Alex Nowak (Partner and Director of Health Care Research)

Okay. Makes sense. The path to $2 billion in sales from the Analyst Day, I mean, looks like we're gonna need about 22% annualize growth to get us there. It sounds like maybe teens for next year. That really weighs on Wilson Wolf, GMP protein, spatial to be massive accelerators in fiscal 2025, 2026. Is that right, or does the full $2 billion number need to be updated?

Chuck Kummeth (CEO)

We're not ready to update that yet because we were ahead of the game here less than a year ago from the accelerated growth that we had, because we are more or less ahead of everybody expected. Yes, this year we've given some back. Yes, we've still got a few years to go. We need, we need cell and gene therapy to light it up. We need spatial to keep going in double digits, and we need Exosome to, you know, remain in this high growth accelerated level it is, so they become material enough to help us get there. We're growing faster than we need over the aggregate. The aggregate number in both Exosome as well as cell and gene therapy to hit that number is 50% growth in roughly that area.

We're, you know, we're about there in the proteins and stuff, and we're well exceeding that in the cell and gene or in exosome. Spatial needs to be, you know, needs to be solid double-digit as well. I'd say we're a little behind where we need to be there. But we have new things coming as well. You know, it's too soon to say it's going to be 1.9 or 1.95. It could easily right now still be 2.1. Wilson Wolf, that whole area is a big, is a big kicker, icing on the cake, right? You know, and a lot of this stuff takes 10 years.

That's, you know, we're just in a lot of things are gonna take a while to develop, but that they really hit their stride three, four years out, so.

Operator (participant)

Thank you very much. This concludes our Q&A session. I would now like to turn the conference back over to Chuck Kummeth for any closing remarks.

Chuck Kummeth (CEO)

Well, great. Thanks everyone for attending. I'm glad that we kind of hit the expectations set last quarter and a little better on the bottom line. I can say we're in great shape looking forward in this quarter. The team's in great shape. We're raring to go, and the energy's high, and we'll talk to you then. Thank you.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.