Edited Transcript of TECH earnings conference call or prese…


Minneapolis Oct 30, 2019 (Thomson StreetEvents) — Edited Transcript of Bio-Techne Corp earnings conference call or presentation Tuesday, October 29, 2019 at 1:00:00pm GMT

* Charles R. Kummeth

* James T. Hippel

Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst

Janney Montgomery Scott LLC, Research Division – MD, Head of Healthcare Research & Senior Equity Research Analyst

SVB Leerink LLC, Research Division – MD of Life Science Tools & Diagnostics and Senior Research Analyst

Good morning, and welcome to the Bio-Techne Earnings Conference Call for the First Quarter of Fiscal Year 2020. (Operator Instructions) I would now like to turn the call over to Mr. David Clair, Bio-Techne’s Senior Director, Corporate Development. Please go ahead.

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 result of any new information or future events or developments. The 10-K as well as the company’s other SEC filings are available on the company’s website within its Investor Relations section.

During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to the most comparable GAAP measures are available in the company’s press release issued earlier this morning on the Bio-Techne Corporation website at www.bio-techne.com.

I will now turn the call over to Chuck.

Charles R. Kummeth, Bio-Techne Corporation – CEO, President & Director [3]

Thanks, Dave, and good morning, everyone. Thank you for joining us for our First Quarter Conference Call. We started fiscal 2020 on a strong note, with our first quarter organic revenue increasing 13% year-over-year, continuing the double-digit organic growth rate we delivered in fiscal 2019. The double-digit growth was broad across our product segments and geographies with the proteins, antibodies, Simple Western and RNAscope platforms performing exceptionally well. Also rebounding from last quarter, our OEM diagnostics tools business contributed to double-digit growth.

As we look at our performance by geography, I will start with Europe. In Q1, organic revenue increased over 10% for the quarter. As expected, the headwinds we faced last quarter normalized and contributed to the strong performance in the quarter. Recall that the timing of a large order from a European customer was one of the headwinds we experienced in this region last quarter. During Q1, we received this order. Excluding this large order, our European growth was in the high single digits and this is our expectation for the remainder of fiscal 2020.

Initiatives the European team has put in place over the past several years continue to positively impact the business, creating synergies across divisions and implementing creative ways to make it easier for our customers to do business with us. We believe these efforts create the foundation for continued European growth ahead of our industry peers in quarters to come. That said, the popular view regarding Europe is fairly bleak about an economic slowdown there, so we’ll continue to monitor Europe closely for any signs of weakness.

With regards to North America, organic growth was also north of 10%, driven by particular strength in biopharma. There has been a lot of efforts dedicated to our digital market strategies, including the continual enhancements we make to our website, which allow customers to do complex product searches and find solutions for their research needs. However, our digital marketing efforts go well beyond our website, with our search engine optimization efforts increasing brand visibility and driving traffic to our website. These efforts are translating into double-digit increases in our Bio-Techne web traffic, which correlate very strongly with the double-digit revenue growth we have been seeing, especially in our antibody and protein portfolios. We view these digital marketing initiatives as a key component of our forward growth strategy and are very pleased with the continued progress through this important channel.

For China, organic growth was nearly 20% for the quarter, with continued strong performance in both our reagent and instrument products. The life sciences industry is still a high priority in China’s 5-year plan, and we continue to be well-positioned in spite of any local competition and still very underpenetrated in our key growth platforms.

Now let’s dive a little deeper into the performance of our growth platforms, starting with those within the Protein Sciences segment, which grew 13% organically for the quarter. As I’ve already indicated, antibodies and proteins performed extremely well for us in Q1, with both product categories growing in the mid-teens in quarter. In addition to our digital marketing efforts, we recently began the process of validating a growing number of our immunohistochemistry antibodies using ACD-branded in situ hybridization in gene-editing platforms, leveraging a transcriptomic approach to providing high-quality validated IHC antibodies for researchers. This initiative leverages a cross in organizational synergy between our Reagent Solutions Division, our genomics division and our recently acquired B-MoGen Technologies (sic) [Biotechnologies].

For background, as the number of antibody suppliers has increased over the years, the process of validating the quality of numerous antibodies for various suppliers has become increasingly more challenging for customers. There are no rules or quality standards that an antibody reseller must abide by before selling an antibody. Customers are increasingly asking for assurance that an antibody has been tested and shown to be specific for cells known to express the protein in question and not bind to cells where the gene editing sort of — excuse me, where the gene encoding of a specific protein has been knocked out. We anticipate this multi-omic approach to antibody validation to distinguish the quality of R&D Systems and Novus Biologicals’ branded device from our competitors, provide superior service to our customers and ultimately benefit our antibody sales.

We also continue to position ourselves as a tools provider for the coming wave of cell and gene therapies. We still a relatively small portion of our business today, cell and gene therapy will be a very important growth driver for our company in the years to come. With our GMP proteins, Polymer B technology, nonviral vectors and instrumentation to automate process and product monitoring, we can now supply a significant portion of the cell and gene therapy workflow. This potential is already evident in our GMP proteins business, where we experienced growth over 100% in Q1. We broke ground on our new GMP dedicated protein factory in the quarter, and we will be ready to provide GMP proteins in larger scale to our cell and gene therapy customers by the second half of fiscal 2021.

Moving on to our instruments portfolio within Protein Sciences, where the Simple Western platform continues to be the star of the show. With an installed base of over 1,600 worldwide and growing double digits, we saw consumable growth from used instruments that was over 40% higher than last year, further evidence that these instruments are quickly achieving market acceptance. They are not just getting installed, they are getting used.

As I mentioned in my opening comments, our growth in Q1 was balanced between both of our operating segments, with the Diagnostics and Genomics segment also growing double digit in the quarter with 16% organic growth. Here, the OEM diagnostics tool business returned to double-digit increases in nearly all of its major product categories, including clinical controls and specialized reagents. As expected, the OEM order timing was more positive in Q1 than it was in the last quarter, Q4. Also, our glucose controls business stabilized in the first quarter of our fiscal year with sales relatively flat year-over-year. Going forward, we expect this division to be at least a mid-single-digit grower for all of fiscal 2020, with possibly higher growth in future years as new diagnostic instrument platforms and assays by our OEM customers come online.

Also, within the Diagnostics and Genomics segment, RNAscope continued with its growth recovery, with sales increasing over 20% in Q1. During the quarter, we released the RNAscope HiPlex Assay, which enables researchers to gain greater insights into cellular mechanisms and functions by combining a simple workflow with the capability of simultaneously detecting up to 12 RNA targets. The HiPlex Assay is particularly well suited for spatial genomics studies, with the assay requiring minimal sample preparation, while delivering high performance and preserving the morphology of precious tissue samples. It is still early in the RNAscope HiPlex Assay launch, but we believe this will be another growth driver for our genomics portfolio.

Now let’s discuss our liquid biopsy business on exosome diagnostics. Of course, the big news here in Q1 is that NGS, our Medicare administrative contractor, issued a final Local Coverage Decision, or LCD, covering EPI for men who are being considered for an initial prostate biopsy. This major reimbursement milestone is effective for EPI tests administered for Medicare beneficiaries on or after December 1, 2019. Importantly, with this final LCD, more than 60 million Medicare beneficiaries will now be covered for the EPI test.

During the quarter, we also made progress with private payer coverage of EPI. We currently have nearly 30 commercial plans contracted for EPI as well as 38 states covered under Medicaid. We expect the recent Medicare coverage decision to drive increased awareness of EPI within the private payer community, and look forward to updating everyone on additional contract wins going forward.

Following these reimbursement and regulatory milestones, we are positioned for an acceleration in EPI volume. While test counts in the most recent quarter were 34% higher than last year, we used the seasonally slower summer months to revitalize our marketing message and strengthen our sales leadership so that we are well positioned to garner doctor-patient acceptance of the EPI test as a viable alternative to potentially unnecessary prostate biopsies. With over 1 million unnecessary prostate biopsies performed every year just in the U.S., we couldn’t be more excited about serving what has been until now, a very unmet need.

In summary, we are off to a great start in our fiscal 2020, the second fiscal year of what we intend to be many years of double-digit growth. Our core reagent portfolio is performing at its best in over a decade, while our adjacent proteomic and genomic analytical tools are still ramping in very underpenetrated markets. Meanwhile, our liquid biopsy and cell and gene therapy platforms are still in the pregame show of what we believe will be a long 9 innings with many homeruns. That’s the strategy we are marching to, and I’m very proud of the Bio-Techne team and their accomplishments to date.

And with that, I will turn the call over to Jim.

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James T. Hippel, Bio-Techne Corporation – Senior VP of Finance & CFO [4]

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Thanks, Chuck. I will provide an overview of our Q1 current financial performance for the total company as well as provide some color on each of our segments.

Starting with the overall first quarter financial performance. Adjusted EPS was $1.06 versus $0.98 1 year ago, with foreign exchange negatively impacting EPS by $0.02. GAAP EPS for the quarter was $0.37 compared to $0.45 in the prior year. The biggest driver for the decrease in GAAP EPS was the change in fair value of our investment in ChemoCentryx, which negatively impacted the GAAP reported number by $0.26.

Q1 reported revenue was $183.2 million, an increase of 12% year-over-year, with organic revenue increasing 13%. First quarter reported sales include a less than 1% growth contribution from acquisitions and a 1% unfavorable impact from foreign exchange translation.

By geography, the U.S. and Europe both grew north of 10%, while China grew nearly 20%. As for the rest of Asia, organic growth was in the mid-teens. By end market, which includes Asia and our diagnostics division, biopharma increased in the low teens, while academia increased mid-single digits.

Moving on to details of the P&L. Total company adjusted gross margin was 69.5% in the quarter compared to 72% in the prior year. The decrease was due to unfavorable product mix, some factory absorption timing and, to a lesser extent, the impact of recent acquisitions and foreign currency headwinds. Going forward, we expect adjusted gross margins to be comparable to fiscal ’19.

Adjusted SG&A in Q1 was 29% of revenue, relatively flat compared with the prior year, where volume leverage was offset by additional SG&A expense from acquisitions as well as investments in our core business to support growth. R&D expense in Q1 was 8.8% of revenue, 30 basis points lower than the prior year, primarily due to volume leverage. Recall that the Exosome Diagnostics acquisition closed at the beginning of August 2019, so our Q1 2019 included only 2 months of the related Exosome diagnostic expenses, whereas Q1 2020 includes 3 months of their expenses.

The resulting adjusted operating margin for Q1 was 31.8%, a decrease of 210 basis points from the prior year period. However, excluding the extra month that Exosome was included in our results this year as well as the negative impact of foreign exchange, adjusted operating margin was flat to last year.

Looking at our numbers below operating income, net interest expense in Q1 was $5 million, relatively flat with the prior year period.

Our bank debt on the balance sheet as of the end of Q1 stood at $486.1 million, down from $505.2 million at the end of Q4 2019.

Other adjusted nonoperating income was essentially 0 for the quarter compared to $0.8 million of other expense in the prior year quarter, primarily due to differences in the transactional foreign exchange. For GAAP reporting, other nonoperating includes unrealized losses from our investment in ChemoCentryx.

Moving on down to P&L, our adjusted effective tax rate in Q1 was 21.9%, and we expect the adjusted effective tax rate to remain in the range between 21% and 22% for the remainder of the year.

Turning to cash flow and return of capital. $40.5 million of cash was generated from operations in the first quarter, and our net investment in capital expenditures was $10.5 million. $12.2 million of dividends were paid out in the quarter, and average diluted shares stood at 39.3 million shares outstanding.

Next, I’ll discuss the performance of our reporting segments, starting with the Protein Sciences segment. Q1 reported sales were $141 million, with reported revenue increasing 12%. Organic growth was also 12%, with foreign exchange having an unfavorable impact of 1% on revenue growth and acquisitions contributing 1% to revenue growth. As Chuck previously described, the growth in this segment was very broad across almost every major product category and geographic region. Operating margin for the Protein Sciences segment was 42.2%, a decrease of 100 basis points year-over-year due to unfavorable mix and factory absorption and, to a lesser extent, unfavorable foreign exchange and the recent B-MoGen acquisition.

Turning to the Diagnostics and Genomics segment. Q1 reported sales were $42.6 million, an increase of 16% from the prior year. Organically, revenues also grew 16%, with a 1% growth contribution from the extra month we owned Exosome Diagnostics this year, offset by a 1% unfavorable impact from foreign exchange translation. As Chuck mentioned, the contribution to growth in the segment was fairly balanced in the quarter with OEM diagnostic orders swinging quite favorably compared to last quarter, our more run rate hematology controls business growing double digits and our genomics division continuing on its track back to consistent double-digit growth. Going forward, we anticipate less volatility from our OEM diagnostics business and anticipate mid-single-digit growth from this division for both next quarter and the full fiscal year.

With regards to Exosome Diagnostics, and as I’ve stated in prior calls, revenue from EPI tests performed is being recognized on a cash basis. This is the correct accounting treatment, given its recent commercial launch and relatively low penetration of contracted payers. For patients insured by noncontracted private payers, the appeals process for payment by either the insurer or the patient can be quite long, thus the revenue from EPI recorded in our Q1 results was rather minimal.

As Chuck mentioned, we received the final favorable local coverage decision from Exosome Diagnostics Medicare administrative contractor, NGS. After December 1, we anticipate submitting claims in Medicare for tests on covered patients. We do expect there will be a 30-day lag between our submission of claim and the receipt of Medicare cash payments, implying a minimal Medicare contribution to our fiscal second quarter EPI revenue. Despite the favorable final LCD, we will continue to recognize Medicare revenue on a cash collection basis until we have a sufficient history of claims paid. We currently expect to switch from cash to accrual revenue recognition for Medicare claims to occur sometime in early fiscal year ’21.

Moving on to operating margin for Diagnostics and Genomics segment. At 2.1%, the segment’s operating margin was down from 6.9% reported in the prior year. The decrease reflects the extra month of Exosome Diagnostics’ expenses compared to the previous year, partially mitigated by strong volume leverage from the rest of the segment. Excluding the dilution from the extra month of Exosome Diagnostics, Q1 operating margin for the segment was 9%.

In summary, Q1 has played out consistent to the full year guidance we gave at the end of last fiscal year. As a reminder, we discussed on last quarter’s call that our plan was to grow organically this year in the 10% to 12% range and hold adjusted operating margins relatively flat, while investing in our cell and gene therapy strategy. We also explained the impact that the extra 1 month ownership of Exosome was likely to have on our year-over-year margin in Q1, followed by sequentially improving margin in the quarters that follow. And finally, we pointed out the unfavorable impact of foreign exchange is likely to have on the year’s exchange rates.

We are very pleased with the strong start we had in the fiscal year. However, we were helped with some of the timing — helped by some of the timing of the large annual European order Chuck talked in our Protein Sciences segment as well as the favorable OEM order timing in our diagnostics tools business. Thus, even though we started the year with 13% organic growth, we’re still anticipating the full year to be in the 10% to 12% range. We also still expect our adjusted operating margin for fiscal year ’20 to be relatively flat to fiscal year ’19.

Going forward from Q1, the impact of Exosome Diagnostics expenses not being included in our baseline is behind us. At current exchange rates, we expect the unfavorable impact from FX that we realized in Q1 to continue through the remainder of the fiscal year. And even though much of our planned cell and gene therapy investment is still ahead of us, we expect to sequentially improve adjusted operating margin for the remainder of the year.

That concludes my prepared comments. And with that, I’ll turn the call back over to Nicole to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We’ll take our first question from Puneet Souda of SVB Leerink.

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Puneet Souda, SVB Leerink LLC, Research Division – MD of Life Science Tools & Diagnostics and Senior Research Analyst [2]

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A strong quarter here. Just wanted to get a view from you and what are you hearing from your biopharma customers overall as we head into the end of the calendar year. Just give us a sense of what the demand flow is looking like? And overall what’s the expectation here? And you commented a little bit about Europe, I would love to get more of a longer-term trajectory, are you thinking Europe and overall, the business in North America? And then I have a few follow-ups.

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Charles R. Kummeth, Bio-Techne Corporation – CEO, President & Director [3]

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Sure. I’ll start with — the worst of the pack is probably Europe. And it’s kind of a wait-and-see. So even though we started seeing some softness last quarter, we had a really, really good quarter with Europe. But it was — there were a couple anomalies, as we pointed out. I think high single digits for the full year is probably still the expectation. We could do a little better. We’ll see. The instruments side of our platforms is the biggest suspect. I think we’re very strong on the reagents side and overall looking good.

Asia is looking really strong for instruments, and I think it’s probably part of the buying cycles there as well. But we see really no shift or anything coming down off, especially in China. Things are looking really good.

And the U.S., it’s kind of steady as she goes. So we’ve been pretty pretty stable in the U.S. And with the good news from NIH funding, the piece that came out last week, I expect next year should be okay as well. But on the academic side, helping out the biopharma side, but pretty steady.

I think — and we try to put some commentary in around our search engines and our web, and I think we just came off a very, very strong neuroscience show, where we had more leads the first day than we had the entire show last year. So — and our booth has really come a long way. We’ve got all our platforms, our brands all showing up together now. It’s creating an awful lot of interest in the web. The web keeps providing more. So I think that is helping fuel the way for a continued strength in the U.S., which has been double digit here for a while.

So that’s kind of the way the 3 regions shake out for the instruments side of things, and as well as everything else. So pretty good. I think Jim was right on. I think 10 to 12 is where we kind of pegged the year. If we get a really good excellent launch here, we’ll see, it could be better. But that’s probably the range we’re looking at to be safe.

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Puneet Souda, SVB Leerink LLC, Research Division – MD of Life Science Tools & Diagnostics and Senior Research Analyst [4]

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Okay. Great. On the facility build-out, it’s great to see it’s kicking off. But what’s the expectation here for gene and cell therapy workflow products 2 to 3 years from now? And I wanted to get a view from you on what are some of the pieces that you would still like to add into this gene and cell therapy workflow to enhance the product offering to the customers?

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Charles R. Kummeth, Bio-Techne Corporation – CEO, President & Director [5]

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Sure. So as you know, we’re looking forward with our cell and gene therapy workflow to be the nonviral methodology that we expect in now the almost everything in clinical is a viral method. We’ll be supplying GMP proteins for that method. So we’ll be getting business [reissued] as we are today, and we had 100% growth in Q1 with our proteins. So we’re looking good there.

The factory by itself for GMP proteins is — we’re building it to $140 million-plus in 5 years of productivity. It probably has expansion capabilities very easily to $200 million of proteins. We probably will take more than 5 years to get at that level on just proteins.

So from that respect, we kind of look like a mini CDMO. But there’s the rest of the workflow with the beads and with the B-MoGen technology for gene editing. We have more than one instrumentation platform for analysis, both in cell imaging, with the AC technology as well as our Simple Plex immunoassay for, call it, QC testing, if you will.

So all told, it’s a pretty strong workflow. We still are looking for more areas to fill it out. I think we don’t have a leukapheresis instrument to tie it all together. We have certainly relationships that we’re working on to try and collaborate to get that part pulled into the workflow. That’s probably the most critical piece, I think, the box, so to speak, the sterile box that ties it all together.

The bioreactors, of course, are important. We have a very strong relationship locally with that, and we have more than 1. And we have a bit of a secret weapon for that whole part of the workflow. We have approximately had for 4 or 5 years called ProDots. We’re able to actually lyophilize our proteins into small dry components and they can be shipped within the bioreactor or positioned with that workflow for reconstitution in a sterile environment with no loss of bioactivity. So this is really unique to us. We have IP in this area as well, and we are getting eyes wide open when our customers and in preclinical have seen this approach and they want it.

So we think we have a lot of things to offer that nobody else will have for the whole workflow. I think, like you kind of implied, it’s going to take 2 or 3 years to get to that point. We’re in a bunch of preclinicals now, which will then lead to clinicals, and it will grow from there. But this is a 5- to 10-year kind of strategy and it’s going to take a while to get to that level. But hey, whoever thought we’re going to be able to double our protein business, and we’ve been 30 years at it? So I don’t mind taking 5 years to double it.

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Puneet Souda, SVB Leerink LLC, Research Division – MD of Life Science Tools & Diagnostics and Senior Research Analyst [6]

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That’s great. And if I could just squeeze one more, and I’m not sure if you already provided it. What’s the revenue expectation around Exosome for the fiscal year and now that you have Medicare? And could you talk about the plans for FDA or next steps now that you have breakthrough designation for EPI?

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Charles R. Kummeth, Bio-Techne Corporation – CEO, President & Director [7]

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Yes. We’ve done the first submission, and they’ve come back with a long laundry list of questions as expected. So we’re not even really able to give a date when it will be finalized for FDA. But under 1 year, for sure, but it’s going to be a few months at least for that. So — but we’re in process. And the FDA breakthrough status gets us that help from them directly that they promised. So they are helping. So we’ll see what happens with that.

In terms of revenue, we’re right now, trying to figure out where to reach back to for our first submissions for tests previously done. We’re trying to figure out what that date will be. It will be in months and no longer than 1 year worth, so we’re not prepared to give a number on that. But it will be millions of dollars worth of potential, but there’s no guarantee. Going forward, it’s 40% to 50% of the tests, and you kind of had that number in that ramp, so you can kind of guesstimate of what we’re going to be submitting. And those, once we get everything greased here with CMS, which I promise will be December 1, that’s a 30-days-to-pay kind of a future. And then we’ll go to accrual next summer probably with that, so after that amount of time frame.

Revenue, you’ve seen the numbers. I mean we need a full year to get to a $30-million total and a run rate of about $50 million. And at that point, we’re probably breakeven. That’s going to be a 12- to 18-month kind of time frame, we think. But it’s early. We don’t really know yet. We’re going to see how this does ramp. We’ve got to see how we execute. We’ve taken a long time here in the last few months to upgrade our marketing and our sales groups, and we’re still hiring. It takes 6 to 9 months with the new people to really get in the groove. We just hired out in New York, so we won’t be getting a whole lot of traction in New York for probably another 3 to 6 months. It all takes longer than you want, but we’re nearly the only game in town. It works the best of anything out there. We’ve got this thing from start to finish through NGS in 2 years or so, which they tell us is a record. It felt like a long time for us, but we’ll see how it ramps. But I think getting to a level of revenue that we talked about is certainly more than just plausible. So we’re excited to try and feed this beast as we go forward from December 1.

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Operator [8]

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And we’ll take our next question from Catherine Schulte with Baird.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [9]

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First on that EPI Medicare lookback topic, I guess, how have your discussions with NGS gone? And when do you think you’ll find out if you will get those retrospective payments or not?

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Charles R. Kummeth, Bio-Techne Corporation – CEO, President & Director [10]

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We just don’t know. There’s no precedent, as you know, there’s no rule or law around it. It really is up to them what they feel is appropriate and fair. And we have to decide also what date to go back to, and we can make it more problematic for us to get anything by the further back we reach. So we’re trying to pick a fair position, where there’s no like no dispute, no doubt. And you’ve got to remember, when you start out this kind of thing, when you’re starting out with salespeople with unclear practices and processes and data. And we don’t want anything nebulous about what we’re asking for. So we’re going to pick a safe date where we have, from a point, where our processes are really clean and perfect and we have great data and great outcomes. And so there’s no dispute. So we’re trying to figure that out. But it’s going, we think, at least 6 months worth, and that should be a few thousand tests. So we’ll see. And I hope they’re generous.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [11]

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Okay. And then for the upcoming quarter, you have a pretty tough stacked comp in Protein Sciences. What’s your view on that segment next quarter? And what are you assuming in terms of a calendar year-end budget flush there?

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Charles R. Kummeth, Bio-Techne Corporation – CEO, President & Director [12]

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Yes. we’re not hearing much right of budget flush. I mean, the news that just came for looking forward with NIH funding is kind of a record. It looks really good. So we’re excited about this coming year coming forward for academia.

As I mentioned in my previous answer, I think things are pretty steady as she goes with the rest of the business. We’ll see how our processes drive execution. But like you said, it’s a tough quarter. This is — we’re coming into a quarter with a really good one for us last year. And we don’t think we’re going to let anyone down horribly here, but it’s going to be a tough quarter. We’ve got to execute. And that’s the way this business is, right? When you’re staying — you want to be as sustainable and be double digit every quarter going forward, they’re never easy anymore, so…

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [13]

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And then last one for me, can you just give us an update on the general environment that you’re seeing in China? And what are you expecting for growth there for the full year?

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Charles R. Kummeth, Bio-Techne Corporation – CEO, President & Director [14]

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Yes. North of 20%, for sure. And we’re trying to figure out ways to really be at 25%. So I think we’ll be between 20% and 25%. Things look pretty good. The fifth year is concluding there. There will be a bit of a budget flush there. I think all the pull forwards and all the trauma — drama around tariffs, I think, is behind us, even though we don’t have a lot of tariff impact anyway. And I think it’s steady as she goes. We still aren’t that big in China, so it’s just — we’re very underpenetrated, and it’s led by institutions, hundreds of them, that are more or less led by U.S.-Chinese citizens that know our brands and went to school here and grew up with R&D Systems in the lab. So we’re all over it. And it’s been just very stable and very solid since the day I got here over 6 years ago, really.

We’re up to now 150 people-plus in China. It was a dozen when I joined. So we’re becoming a real company there. I made a comment to some groups last week. When I joined, our [RE MD] and our Head of HR were the only ones that spoke English. Two. And trying to hire people for a company that’s a dozen people and 10-ish million dollars, it’s hard. The multinationals grab all the great local talent that are bilingual. And we’re now past that. We crossed that hurdle. We’re — most of our people who are hiring these days are rock stars, and now, they speak English. They’re coming from the multinationals. They’ve grown up and they’ve been trained by somebody else and want to come onboard because of our underpenetration, our growth, our great platform, the synergies they see and the epic culture we’re trying to instill in every subsidiary we have around the world.

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Operator [15]

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We’ll take our next question from Alex Nowak with Craig-Hallum Capital Group.

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Unidentified Analyst, [16]

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This is actually Will on for Alex today. Chuck, Bio-Techne’s built a huge catalog of products and resources for life science researchers. And as you move into the GMP-grade protein production, how can you leverage these existing products and resources to make you successful in the emerging cell and gene therapy area? To ask the question another way, is this another leg of stool that needs to be added? Or can you leverage pieces of the existing businesses into this new growth area?

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Charles R. Kummeth, Bio-Techne Corporation – CEO, President & Director [17]

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Well, we don’t need a very big catalog, because we’re talking probably about 10 products. So as you know, our problem right now, even though we’re experiencing 100% growth in our GMP protein business, we’re set up here for research. We’re the research leader in the world. We have thousands and thousands of products and thousands of just proteins. And so we’re spread a mile wide and inch deep, and that’s the fundamental issue.

We have amazing quality and we have amazing processes here, but it’s not really GMP-qualified, because we can’t make big enough batches to really operate for a production-type environment, for a CDMO, all right? So they’ve all been through. They love us. They love what they see. But you’ve got to be able to make more of it, is what we hear. And so we bought this factory, we’re building it out, and we’ll be making what the world is looking for the next generation GMP proteins, which is the food that these cell therapies are eating, right, basically. And they’re using to improve their yields.

When you look backwards, the spec is kind of IL-2. And everybody can make IL-2. It’s not a difficult protein to make. It’s one of the first ones discovered and discovered by this company. Looking forward, we’re looking at much more complicated proteins as the science gets stronger. And we’re looking at IL-7, 10, 15 and others that we think will position us as the supplier of choice. As you start moving towards more complicated proteins, we’re the ones that are going to be able to make the best and make the highest quality with the best yields with the highest bioactivity.

So we think the future kind of comes straight at us. It’s kind of ours to lose as the #1 protein science manufacturer in the world. And that’s why we’re building this factory. It won’t be a large catalog because it really — it’s not the way GMP proteins work for us for cell therapies. It’s more of a select set. So it’s going to be much more about what flavor of an IL-10 do you provide? And what kind of quality? What kind of bioactivity? What kind of yield your customers get with their cell therapies with your protein? That’s the name of the game.

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Unidentified Analyst, [18]

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Got it. Appreciate the color, that’s interesting. And then just what’s the update on ACD partnerships with Leica? And if you could just talk on the next ACD tests in the pipeline and timing for some launches there?

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Charles R. Kummeth, Bio-Techne Corporation – CEO, President & Director [19]

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Yes. So we just talked more about the pipeline, and they have kind of guide us against that. So they have a good half a dozen things they’re working on. There’s a lot of things. A lot of them are small or orphan-like but they’re very — they’ve big unmet needs. The current business and the HPV tests is growing quite well. It’s strong double-digit growth we’re happy with how they’re really prioritizing it.

So I think our new management team, led by Kim Kelderman, I think has helped a lot. He comes from running genomics for Thermo Fisher. He has strong relationships in the industry. So he’s helped a lot with moving up the food chain, so to speak, in the Danaher organization to try and get more priority on us, and that’s worked very well.

So I think we’re looking forward to be hopefully working with them on a number of things. They’re not the only game in town. Ventana, Roche is also more and more interested on working with things with us. And we’re a ubiquitous platform. It’s a kit technology, it can work on multiple instrumentation platforms. So we’re working all of the issues there. And so far, so good. It’s still largely in RNAscope RUO-based business right now, and the diagnostics side is still less than 10% of it. If you give us 5 years, it will be much more than that.

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Unidentified Analyst, [20]

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Okay. Great. And then congrats on the final LCD for EPI. I just have one more question. If you have any updated plans to kit this product as well as roll out other Exosome Dx-based test in either a lab or a kit format?

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Charles R. Kummeth, Bio-Techne Corporation – CEO, President & Director [21]

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Well we’ll get the FDA breakthrough status, and that will help us — it’ll give us more freedom to do a lot of things plus create a lot of credibility with the private payers and such, but we don’t see any real need to kit it out at this point. It could be that someday, but there’s plenty of unchartered territory for us right now to not worry about that. And you’ve got to remember, we’re also working now on taking in patients and starting a study that’s in the bladder indication, and we’ve kidney rejection ready to go. And we have validated tests that are ready to go to clinical with somebody who wants to work with us on the blood side for lung and for breast. So we’ve got a strong pipeline with this platform that we don’t have to go after any — address a kit-able version of it right now because there’s enough to do.

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Operator [22]

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And we’ll take our next question from Paul Knight from Janney.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division – MD, Head of Healthcare Research & Senior Equity Research Analyst [23]

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Chuck, Paul Knight. Could you talk about your GMP production facility expansion comment, specifically timing? But also, will this be a footprint where you can add additional capacity around it once the initial investment is made?

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Charles R. Kummeth, Bio-Techne Corporation – CEO, President & Director [24]

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Yes. And as I mentioned earlier, some of that answer, but to expand on it, it’s a 50,000-square foot facility. We bought a building so that we could save a year from doing a greenfield somewhere else. That was the main reason, Paul, when we bought it. And in St. Paul proper, it was an absolute awesome facility for the the way it’s laid out for us. So we really just got to fill it with our stuff, which is most of the money, as you know. That stuff is expensive to put in there with the large reactors, all the sterile piping, the in and out rooms, the clean rooms. It looks like a small pharma factory, right? It’s a bioprocessing factory, is what it is. It is ready to go on Phase I to roughly $140 million worth of capacity at today’s kind of pricing goals. And with expansion, easily, the $200 million, if we need to, there’s plenty of room still in that 50,000 that was not utilized.

We’ll be able to do other things there, too. There’s possibly other reagents we can work on there, some antibodies, possibly. There’s stuff we’re looking at. But there’s also some room on the site land right, so we can build out if we need to. So this thing could be really big for us, and we don’t have to worry buying another one for quite some time.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division – MD, Head of Healthcare Research & Senior Equity Research Analyst [25]

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And then regarding ProteinSimple, your 1,600 placements, is your pull-through going up? Could you talk about where you think you are in market penetration as well?

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Charles R. Kummeth, Bio-Techne Corporation – CEO, President & Director [26]

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Well, we’re 10% or less in penetration, we feel. We’ve seen that no matter what’s going on with instruments or whatever, I mean, Simple Western has been a knock out of the park quarter after quarter. I think it’s because we have more than crossed that chasm, and it’s still very underpenetrated. We are bringing back into the fold a lot of big pharma customers that have walked away from a western blot as a process and then going back to us again because this works so well. It’s so fast, it’s so reliable. So we’re actually expanding the market, I think. 1,600 is a good number, but it’s roughly — if you look at it as I compare it to what imagers are out there, less than 10% of installed imagers in the world. So we think there’s a long way to go.

We still have a good split between biopharma and academia. I think we’re not done until we really see people leaving college with this how they learned how to do Western Blot. When this is the methodology that’s taught in schools and becomes a standard, we’ll know that our job is done, and we’re a few years off from that. We have no competition with this, Paul. It’s the only automated Western Blot platform out there, and we see nothing on the horizon.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division – MD, Head of Healthcare Research & Senior Equity Research Analyst [27]

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You have to keep adding to the library with your antibody probes?

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Charles R. Kummeth, Bio-Techne Corporation – CEO, President & Director [28]

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You mean in terms of westerns?

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division – MD, Head of Healthcare Research & Senior Equity Research Analyst [29]

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[You’ll be using kit…]

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Charles R. Kummeth, Bio-Techne Corporation – CEO, President & Director [30]

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Yes. So we’re always adding, right? So we add roughly 1,500 new products a year. It’s split out between antibodies, assays and proteins each and every year. So we’re the company people look to for the newest, hardest-to-make bioactive proteins. We’ve always been the ELISA leader, and we still crank out new ELISAs every year. We are pushing the envelope on other assays, especially multiplexing, so we’re trying to extend that category as multiplexing becomes more and more of the standard.

And antibodies, we supply a lot through Novus. We have it in our catalog over 300,000. We make over 20,000 ourselves. But as you know, antibodies come in all different applications from westerns to flow to whatever. We’re the largest cataloger in the world. We’re not the largest provider, but we’re in the top 5. And we’ve seen double-digit growth for quite a few quarters now and we’re enjoying it, and we think it’s going to continue.

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Operator [31]

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We have no further questions at this time. I would like to turn the conference back over to Chuck Kummeth for any concluding remarks.

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Charles R. Kummeth, Bio-Techne Corporation – CEO, President & Director [32]

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Well, as our analysts move around to different companies, we’re expecting to see more analysts coming back online in the next quarter or 2, so that will be good. But we’ve enjoyed all your questions, and we’re here today and rest of the day and tomorrow for other calls, for one-on-ones, and reach out to David Clair if you have other questions you have. But other than that, we’ll check in with all of you next quarter. Thank you.

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Operator [33]

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And once again, ladies and gentlemen, that does conclude today’s conference. We appreciate your participation today.

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