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Edited Transcript of TECH earnings conference call or presentation 4-Feb-20 2:00pm GMT

·62 mins read

Q2 2020 Bio-Techne Corp Earnings Call Minneapolis Feb 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Bio-Techne Corp earnings conference call or presentation Tuesday, February 4, 2020 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Charles R. Kummeth Bio-Techne Corporation - CEO, President & Director * David Clair Bio-Techne Corporation - Senior Director of Corporate Development * James T. Hippel Bio-Techne Corporation - Senior VP of Finance & CFO ================================================================================ Conference Call Participants ================================================================================ * Alexander David Nowak Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst * Daniel Anthony Arias Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst * Daniel Louis Leonard Wells Fargo Securities, LLC, Research Division - Senior Analyst * Jacob K. Johnson Stephens Inc., Research Division - Analyst * Patrick Bernard Donnelly Citigroup Inc, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, and welcome to the Bio-Techne Earnings Conference call for the Second 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. -------------------------------------------------------------------------------- David Clair, Bio-Techne Corporation - Senior Director of Corporate Development [2] -------------------------------------------------------------------------------- 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 identify certain factors that could cause the company's actual results to differ materially from those projected in the forward-looking statements made during this call. The company does not undertake to update any forward-looking statements as a result of any new information or future events or developments. The 10-K as well as the company's other SEC filings are available on the company's website within its Investor Relations section. During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to most comparable GAAP measures are available in the company's press release issued earlier this morning on the Bio-Techne Corporation website at www.bio-techne.com. I'll now turn the call over to Chuck. -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [3] -------------------------------------------------------------------------------- Thanks, Dave, and good morning, everyone. Thank you for joining us for our second quarter conference call. Our organic revenue growth for the second quarter increased 6% year-over-year, although adjusting for the impact of certain timing headwinds, our underlying organic growth was closer to our year-to-date growth of approximately 10%. In Q2 of FY '19, we experienced some large favorable orders from a handful of biopharma customers who are launching clinical and/or preclinical drug trials. These large orders mostly impacted our Protein Sciences segment in Europe and work for reagents, our assays, big box instruments and related royalties that did not repeat again in Q2 of this year. However, our end markets remain strong, with our day-to-day retail reagent run rate business growing north of 10%. Our Genomics RNAscope business still growing north of 20%, and China also continued to grow over 20%. Also, our team performed operationally very well in Q2 with adjusted operating margins expanding year-over-year ahead of schedule and we reported record operating cash flow. Now let's cover details for the quarter. Starting with our performance by geography, the North American market continues to be healthy with organic growth in the mid-single digits. Biopharma growth in the region was low double digit, while academia grew mid-single digits. What brought the region's overall growth rate down was the timing of royalty from a few OEM customers. Including a onetime catch-up of royalty payments have benefited the prior year quarter. Excluding the royalty growth and timing impact, growth in the region was over 10% in Q2. Our digital marketing efforts continue to bear fruit, especially for our retail antibody and protein portfolios, with our website driving a double-digit increase in website traffic across our brands, including over 20% increased traffic to our Novus website year-to-date. We're implementing several initiatives to get customers to spend more time on our website and add into their shopping cart once they visit us online. Searching and optimization and continuing to refine our website and digital marketing structure remains a strong order for growth for the company going forward. Separately, we continue to strengthen our presence at industry trade shows, showcasing our products and technologies at our expanded, redesigned biotech booth. With strong customer interest in our reagents and instrument solutions offerings at the 12 trade shows we attended in Q2 and with the 8 additional industry trade shows on the calendar for Q3, including AACR and AEI conferences taking place in April and May, respectively. These trade shows represent a key part of our marketing strategy and generate significant marketing leads for the company. In fact, our leads have increased 75% upon the new investments issued this past year. Moving on to Europe, which was the largest drag on our growth in Q2, down approximately 1% organically from the prior year. Excluding the timing headwinds that impacted Europe, the underlying organic growth in the region was in the mid-single digits, which is the same organic growth rate for the first half of FY '20, not bad, but significantly lower than what our company has been accustomed to perform during the past couple of years. The team in Europe will be redoubling its efforts in the second half of FY '20 on the cross-selling activities that drove double-digit growth for the better part of the last 2 years. Our key growth platform, such as Simple Western, SimplePlex and RNAscope are still relatively underpenetrated in the European market. In addition, we will be supporting the sales effort in Europe with more of the digital solutions practices that have driven a successful double-digit growth we've seen in our North American retail region businesses. Thus, we're expecting Europe sales to grow faster in the second half of FY '20 with growth rates at a targeted high single-digit level. Finally, we had another good quarter in Asia. China especially continues to perform very well with another quarter of more than 20% growth. The growth was broad-based across our reagent and instrument products. The life sciences industry remains a high priority in China's 5-year plan, and we continue to be well positioned and very underpenetrated in our key growth platform. In the near term, the coronavirus situation will cause some disruption in Q3 with extended days for the Lunar New Year holiday and virtual quarantines in some Chinese cities. Obviously, the longer this virus disrupts their life throughout much of China, the more negative impact it will have on our growth rate for China. Long term, it is unfortunate instances such as this outbreak that will likely strengthen China's already firm resolve to promote heavy local investment in the life sciences space for years to come. Now let's dive a little deeper into the performance of our growth platforms, starting with those within the Protein Sciences segment, which grew 4% organically for the quarter. As I've already indicated in my opening comments, Protein Sciences' growth was materially impacted by a handful of large biopharma and OEM customer orders in the second quarter of FY '19 as well as a significant royalty payment, none of which repeated in the most recent quarter. Depending on the customer and the application, these prior year orders were a headwind to our reagent instrument and royalty revenue streams in Q2. Absent these specific situations, the segment's organic growth was in high single digits in Q2, led by our run rate reagent instrument consumables products growing in the low double digits in the quarter. Within Protein Sciences, we recently made a very important leap forward in positioning Bio-Techne as a leading tool and solution provider for the production of cell and gene therapies. In January, we announced the creation of a joint venture between Bio-Techne, Fresenius Kabi and Wilson Wolf, a consortium that can offer a complete and simplified cell and gene therapy workflow solution. We believe the combination of our collective sales and marketing efforts, enormous depth of talent, technical know-how and industry knowledge creates the potential for significant commercial synergies. By combining the novel engineering solutions offered by Fresenius Kabi and Wilson Wolf with our GMP proteins, polymer T cell activation, non-viral vectors and asset technologies, the joint venture is positioned to disrupt the cell and gene therapy production markets. We are very excited to get this initiative off the ground, and there have already been great interest in the cell and gene therapy community. Over the next year, while this new commercial consortium continues to drive awareness of our cell and gene therapy solutions and placements of our products and increased clinical trials, we continue to work on our new dedicated GMP protein factory. Construction remains on track to provide GMP proteins in large scale to our cell and gene therapy customers by the second half of fiscal 2021. Now shifting to our Diagnostics and Genomics segment, which grew 12% organically during the quarter. Here, the OEM diagnostic tools and controls business grew mid-single digits overall, with growth in most of its major product categories. As expected, following double-digit growth in Q1, the [growing] order time was less favorable in Q2 than it was last quarter, although new customer wins when product launches are starting to fuel the large-quantity trend in the business. Also, our genomic earnings growth continued with its 20%-plus growth trajectory in Q2. The initial Q1 launch of the RNAscope HiPlex Assay, which enables the simultaneous detection of up to 12 RNA targets ramped nicely in Q2. We are currently developing additional HiPlex capabilities to address additional genomic studies targeting significant increases from our current 12 plex capabilities. Stay tuned for more product announcements. Now an update on Exosome Diagnostics and the ExosomeDx prostate test. There were several positive developments in Q2, and there is still much to do to make this -- make sure this noninvasive prostate cancer test becomes available to all patients over 50 with elevated PSA levels, who are contemplating a more expensive, risky, painful and invasive tissue biopsy. To begin, the final LCD and NGS went into effect December 1. Since then, we have been billing Medicare for applicable patient tests since and are already seeing payments come in. However the LCD [language] administered by NGS did not near the coverage recommended by the NCCN guidelines. For example, the final LCD does not allow for Medicare reimbursement more than once per patient for ongoing monitoring in order to allow reimbursements for certain ethnicities with -- and many with certain family medical histories. Of course, these populations were included in our clinical study with outcomes consistent with the overall study. The NCCN recognized these population sets could benefit from the ExoDx Prostate test, and we are working to make sure NGS does, too. Thus, we are currently in the reconsideration process with NGS to near the Medicare coverage with the recommendations of the NCCN guidelines. In the meantime, early rate -- the early rate that -- test meet the Medicare criteria is encouraging, and we'll continue to work to expand the indication over coming months. For ExoDx prostate test administered to applicable patients, we've been billing Medicare and getting paid. We started receiving Medicare payments on submitted claims as early as late December, and the pace of payments has increased rapidly throughout January. We also made progress on the private payer front in Q2 with 4 more regional insurers contracted to reimburse ExoDx prostate tests on covered patients. Although the base is still relatively small, our collections from private payers increased by more than 40% sequentially in Q1, while we still have work to do to get the large national private payers signed up for reimbursement, the national payers are taking our [news] with great interest. They are becoming more aware of the health benefit to our customers and plausible financial benefits to their bottom line by avoiding more costly biopsies as well as the unintended infections that can result from them. However, they are being very careful and methodical with regards to agreeing to reimburse any tests. Before considering reimbursement, many large private payers want to see the results from a clinical utility study published in a peer-reviewed journal. Exosome Diagnostics performed such a study before our purchase of the company that was conducted in collaboration with CareFirst Blue Cross Blue Shield in Maryland. This study has been submitted for publication with a peer-reviewed journal and should be released before the end of our fiscal year. Separately, we are in the process of submitting our premarket approval or PMA filing to the FDA. Recall that the ExoDx prostate test received breakthrough device designation from the FDA at the start of the current fiscal year. It is difficult to predict the exact timing of the potential FDA approval, but achievement of the status will deepen our competitive niche and allow us to have a higher priority for reimbursements from private players who classify PMA products as higher quality. Equally important as getting paid for the ExoDx prostate test is expanding the awareness of the benefits of ExoDx and rapidly increasing test comps performed on multiple patients. Since the start of this fiscal year and while we have waited for Medicare coverage, we have slowed any new commercial investment into sales and marketing. Instead, we have focused on retooling our go-to-market strategy and ensuring we have the best commercial talent to execute on that strategy. Even without much new commercial investment, the number of Exosome Diagnostics prostate test performed in Q2 grew double-digit sequentially from Q1 as well as double-digit year-over-year. Going forward, our commercial strategy will include marketing to patients directly in addition to urologists. We want to make sure patients are fully aware of our noninvasive options available to them to assist in the determination of their risk to prostate cancer before deciding whether to proceed with a painful biopsy. We believe the best and most cost-efficient channel for awareness is via digital marketing in abundance. In Q2, we launched a redesigned Exosome Diagnostics website. The new website features portals for patients and physicians, scientific literature and information on the benefits of our ExoDx prostate tests. We will be coupling this enhanced website with digital marketing efforts by leveraging the proven effectiveness of our digital footprint team's expertise to increase awareness of patient demand for ExoDx. These search engine optimization and digital marketing efforts are in the early innings, but we anticipate this campaign, combined with the recent regulatory and reimbursement milestones, will favorably impact ExoDx test volumes by creating patient demand. We remain on the pathway for growing ExoDx volumes and are excited to enable men with ambiguous PSA scores to avoid unnecessary prostate biopsies. With a pipeline of additional tests, companion diagnostic applications and partnership opportunities, there are several different avenues to create value at Exosome Diagnostics. We have a few partnerships in place and are in discussions with several biopharmaceutical companies for potential companion diagnostic applications of Exosome Diagnostics technology. We also believe our proprietary Exosome-based technology has broader diagnostic applications, including improving performance of existing and pipeline tests from other diagnostic companies. In summary, fiscal 2020 remains in good shape. We delivered year-to-date organic growth of nearly 10% and are still aiming for double-digit growth for the fiscal year. Our core reagent portfolio continues to perform very well, while our adjacent proteomic and genomic analytical tools are still ramping in very underpenetrated markets. Meanwhile, our liquid biopsy and cell and gene therapy offerings remain in the very early stages of realizing their potential, with each representing truly transformational opportunities for Bio-Techne. Our competitive position has never been stronger and the team is driving towards even better execution in the second half of our fiscal '20. With that, I will turn the call over to Jim. -------------------------------------------------------------------------------- James T. Hippel, Bio-Techne Corporation - Senior VP of Finance & CFO [4] -------------------------------------------------------------------------------- Thanks, Chuck. I'll provide an overview of our Q2 financial performance for the total company and provide some additional color on the performance of each of our segments. Starting with the overall second quarter financial performance. Adjusted EPS was $1.08 versus $1.06 1 year ago, with foreign exchange negatively impacting EPS by $0.08. Most of the foreign exchange impact was due to transactional FX for invoices collected in Europe by our U.K. entity, which serves as our European commercial operations headquarters. GAAP EPS for the quarter was $3.02 compared to $0.45 in the prior year. The biggest driver for the increase in GAAP EPS was $120.5 million combined realized and unrealized gains on our investment in ChemoCentryx. Q2 revenue was $184.9 million, an increase of 6% year-over-year on a reported and organic basis. Second quarter reported sales include a 1% growth contribution from acquisitions and a 1% unfavorable impact from foreign exchange translation. By geography, the U.S. grew in the mid-single digits, while Europe declined low single digits, and China grew over 20%. As for the rest of Asia, organic growth was in the low single digits. By end market, which excludes Asia, our Diagnostics division and other OEM customers, biopharma growth was in the upper single digits, while academic growth was in the mid-single digits. Moving on to details of the P&L. Total company adjusted gross margin was 70.6% in the quarter compared to 70.9% in the prior year. The decrease was due to unfavorable product mix, foreign currency headwinds and to a lesser extent, recent acquisitions, partially offset by productivity gains. For the remainder of fiscal '20, we expect gross margin to remain fairly consistent with these levels. Adjusted SG&A in Q2 was 28.6% of revenue, a 70 basis point improvement compared to the prior year, with volume leverage and productivity gains partially offset by investments in our core business to drive near- and long-term growth. R&D expense in Q2 was 8.9% of revenue, 20 basis points lower than the prior year, primarily due to volume leverage. The resulting adjusted operating margin for Q2 was 33.4%, an increase of 90 basis points from the prior year period and 150 basis points higher than our first fiscal quarter results. Looking at our numbers below operating income. Net interest expense in Q1 was $4.5 million, decreasing $1 million compared to the prior year period. The decrease was due to a substantial reduction of our bank debt during the quarter. Our bank debt on the balance sheet as of the end of Q2 stood at $383 million, down from $486 million at the end of Q1 fiscal year '20. Recall that Bio-Techne has been a long-term shareholder of ChemoCentryx, a biotechnology company with a portfolio of novel therapeutics targeting a variety of orphan diseases. In our Q2, ChemoCentryx reported favorable top line data from a Phase III trial of Avacopan in antibody associated vasculitis or AAV. This favorable data release drove significant appreciation in our ChemoCentryx investment, and we monetized approximately $50 million of this gain. During the quarter, we applied these proceeds as well as a portion of our strong free cash flow to pay down $103 million of our long-term debt. Other adjusted nonoperating expense was $2.5 million for the quarter, compared to $1 million of other income in the prior year quarter, primarily due to the impact in transactional foreign exchange. For GAAP reporting, other nonoperating income includes realized and unrealized gains from our investment in ChemoCentryx. Moving further down the P&L. Our adjusted effective tax rate in Q2 was 22%, but we expect it to remain fairly consistent in the end of the year. Turning to cash flow and return of capital, a record $72.5 million of cash was generated from operations in the quarter driven by strong customer account collections and favorable timing of tax payments associated with our realized gain on ChemoCentryx. Our Q2 net investment and capital expenditures was $14.6 million, mostly driven by construction of our new GMP protein factory, which is on schedule for completion by the end of the calendar year. $12.2 million of dividends were paid out in the quarter and average diluted shares stood at 39.6 million shares outstanding. Next, I'll discuss the performance of our reporting segments, starting with the Protein Sciences segment. Q2 reported sales were $141.5 million with reported revenue increasing 4%. Organic growth was also 4%, with foreign exchange having an unfavorable impact of 1% on revenue and acquisitions contributing 1% to revenue growth. As Chuck previously described, growth in this segment was negatively impacted by last year's timing of a few large biopharma orders and OEM royalties that will not reoccur in Q2 of the current year. Absent these items, revenue from the thousands of other customers that Protein Sciences serve increased nearly 10%. Operating margin for the Protein Sciences segment was 43%, a decrease of 50 basis points year-over-year due to unfavorable foreign exchange and the recent B-MoGen acquisition. Turning to Diagnostics and Genomics segment. Q2 reported sales were $43.8 million, an increase of 12% from the prior year. Organically, revenues also grew 12%, with foreign exchange translation having a minimal impact on revenue. As Chuck mentioned, our OEM diagnostic tools business increased mid-single digits, and our genomics RNAscope business grew north of 20%. With regard to Exosome Diagnostics, and I stated in prior calls, revenue from ExoDx prostate tests performed, continue to be recognized on a cash basis. As Chuck mentioned, our favorable local coverage decision from Exosome Diagnostics' Medicare administrative contractor, NGS, became effective for test performed on or after December 1. Despite the effect of LCD, we will continue to recognize Medicare revenue on a cash collection basis until there is sufficient history of claims paid. Chuck provided a thorough update on the progress we have made on ExoDx test ramp, public and private reimbursement as well as the continued actions we are taking to accelerate both. While still on a relatively small base, revenue from Exosome were up nearly 60% from last year, and we expect the growth rates to improve from here. Moving on to the operating margins for the Diagnostics and Genomics segment. At 2.2%, the segment's operating margin improved from a negative 2.7% reported in the prior year. The increase reflects stable volume leverage and productivity gains from both our Diagnostics and Genomics divisions as well as slightly less dilution from Exosome Diagnostics. In summary, we believe our year-to-date performance in the top line is most representative of how the majority of our business performed in the second quarter. The commercial focus we are taking in Europe could set us up for even better organic growth in the second half of fiscal year '20. However, the situation in China with the coronavirus is a risk factor that we are unable to quantify this time. That being said, our teams throughout the rest of the world are motivated to maximize the potential in order to achieve double-digit growth for the company's overall fiscal year. On the bottom line, our culture of success-based investing and operational prowess drove our adjusted operating margin in Q2 higher over prior year ahead of schedule. And it drove a strong quality of earnings with record operating cash flow. We expect our operating margin to continue to increase sequentially from here, just as we guided at the beginning of the year. That concludes my prepared comments. And with that, I'll turn the call back over to the operator to open the line for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) We'll now take our first question from Puneet Souda with SVB Leerink. -------------------------------------------------------------------------------- Unidentified Analyst, [2] -------------------------------------------------------------------------------- It's Chuck. So my first question is -- I mean, look, I appreciate the biopharma comparisons that were tough in Europe, but you commented about some recovery here in the quarter. Could you elaborate a little bit on that? And what's your expectation for continued improvement here for -- in Europe? And what's your outlook given the last sort of 2-plus years of strong growth in that geography? -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [3] -------------------------------------------------------------------------------- Sure. Well, I'll give kind of a long answer because I'm sure everyone wants to hear more about Europe than anything else, is that we kind of messaged last quarter things are softening and it didn't disappoint on that for sure. But it was really kind of a lumpy mess. There's -- no, there's not really any one distinct thing that's kind of off. Some things are up and some things are down. Our biggest issue by country is Germany. U.K. is kind of flattish and Germany is pretty hard down. It's a lot of timing, a lot of biopharma. A big comp off on genomics because of a big order timing issue there, we mentioned. In the instrument, which is the biggest area, we had a huge comp from last year in Simple Western, so it came in kind of flattish. So without that growth, it was hard to pick up. We already knew we were kind of up and down in biologics. Biologics didn't have a horrible quarter, but not great. And this is probably the area we've seen the most comeback already this quarter in biologics. It's pretty good already. Simple Westerns got tough comps going forward. But I think as underpenetrated as we are, we're pretty bullish on it still contributing going forward. And SimplePlex is also a big timing issue with a major order. We had another timing issue this quarter as well with SimplePlex. But I think the growth rate, especially instruments, is very encouraging, and we're really focusing now on getting more consumables to drive behind those instruments. So all in all, there is definitely a snapback coming there, and we're off a pretty weak quarter for the instruments side. On the reagent side, it's really kind of a difference between academia and biopharma and one up, one down. We're relatively okay, really, in terms of our reagents, everything works fine there, but this is another area we've been, in the past, up and down in our assays. And live was definitely down in Europe right now. So again, these biopharma projects are kind of in a slump right now. And for us, that's just kind of a weaker period. We have focused a lot understanding we have a little competition here or not. And as you know, we have Abcam coming out after us and eBio certainly has a line of products and others are toying with it too. And it's not really what you'd say is a growing market. And you have multiplexing really taking all the new growth. So that's kind of up and down, but we don't see a huge impact, to be honest. They've got their piece. We've got our piece. So it's just kind of overall kind of mediocre right now for the timing on that. And that's a big chunk of our overall sales in reagents and so forth (inaudible) it's actually in that ASP right now, division, but it also took down that division numbers. But that, too, I think, will recover. And again, we had huge one-timers on royalties. And we have -- when we started putting these royalty situations in place 2, 3 years ago, we had the ability to do third-party audits. And last year, we went through all these audit cycles. And there were some big misses and some big payments. And the [lowball] of the court finally occurring this year, so that addback is a big number all by itself. So all in all, that kind of explains Europe, explains the recovery we're seeing so far in instruments. And we'll see what happens. December was a fantastic month in Europe. It was really more of an October, November, and we'll see if we can continue. -------------------------------------------------------------------------------- Unidentified Analyst, [4] -------------------------------------------------------------------------------- Okay. And if I could ask on ExosomeDx, I didn't catch the contribution in the quarter if you provided that. When do you think you'll have an answer on the reconsideration for the first onetime use of the test? And Chuck, I was hoping if you could maybe take a step back and give us a view of what are your priorities now given this acquisition -- now 2 years into this acquisition. And Jim, if you could remind me, what are you baking in terms of operating margin impact, if any, from Exosome this year? -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [5] -------------------------------------------------------------------------------- Yes. Okay. Well, just start work. As mentioned, we're using this time to really get our kind of ship in order. So we've been upgrading our commercial force, getting our website ready, creating patient demand and staying in our guide rails really for dilution, and we're really ahead of the game there to be honest. We had some payments for Medicare come in even in December, even though we had the LCD in December 1, so that was a really good precedent. We have put in place the TRF policy or the doctor's finding and that signature process has been very positive. And of course with that Medicare quickly pays, and they've been paying. And it's been ramping very quickly. We are expecting revenues this quarter in Medicare to be maybe as high as even $1 million from nothing last quarter. So we're seeing a great ramp. It's coming as expected. So we'll see what happens. Going forward, the priorities of course are, as we ramp, we'll invest. We wanted -- we want to drive this patient demand. It's really important because it's going to take a while for reconsideration. We're going to need go-to levers. That reconsideration process, remember we're talking NGS, so it isn't the most friendly of all the math and it's a next summer activity. So -- and then we have to make the agenda for the meeting and everything else. We feel pretty good about it. But again, they don't help you. They don't tell you anything. We've submitted. All they've given us is that they wished we'd have the utility study data along with the entity guidelines studies, which we were told was enough. So the utility study is done -- has been done, and we're now getting it published. And with that, we'll knock 2 birds in the bush with one stone, one being the reconsideration process and the second being the national insurers. -------------------------------------------------------------------------------- James T. Hippel, Bio-Techne Corporation - Senior VP of Finance & CFO [6] -------------------------------------------------------------------------------- And what I'll add on the margin front, Puneet (sic) [Chuck], is that the Exosome Diagnostics, as you see the cash collections start to ramp here, as Chuck mentioned, where we've seen them ramp here in January, warning though, the cost will not be ramping at the same rate as revenue is, so we should see less and less dilution going forward, although not profitable yet, see less and less dilution going forward from Exosome Diagnostics, and that's partly why we have confidence in our operating margin continuing to increase sequentially from here overall in the company. -------------------------------------------------------------------------------- Unidentified Analyst, [7] -------------------------------------------------------------------------------- Okay. And if I could ask you, Jim, on -- you provided a long-term view at the last Investor Day back in -- late in 2018. You were expecting $1.2 billion in revenue by fiscal year '23, mid-teens organic growth, 40% op margin. Is that still in the line of sight given some of the near-term challenges with Exosome and the European shortfall that you're seeing largely because of compares? So just help us understand any changes in the sort of long-term outlook here. -------------------------------------------------------------------------------- James T. Hippel, Bio-Techne Corporation - Senior VP of Finance & CFO [8] -------------------------------------------------------------------------------- There is no change in the long-term outlook. That we got through with our annual refresh of our 5-year outlook strategy, our internal strategy plan. And if anything else, it gave us even more confidence in those numbers looking outwards. So one quarter doesn't make a trend. There's very specific identifiable items that caused some of the bumps in the road we saw in Q2. But in terms of the underlying markets, we feel like they're very strong. Our run rate and our reagents, and like I said, from the other 100 -- a little over 100,000 customers we serve are still very, very sound and going the right way. So -- and then with the upside potential with both Exosome and cell and gene therapy is still very large, particularly in the out years, looking out to 8 years out. -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [9] -------------------------------------------------------------------------------- So I mean, let me address the specificity around that. So we will be back in New York this fall, giving another update, which we do every other year. And the new 5-year plan will have a number like $1.5 billion, not $1.2 billion. Now if you look back a year to $1.2 billion, certainly, last year, we talked about Exosome Diagnostics. And that was in the number for the $1.2 billion, but we didn't have any cell and gene therapy in those numbers. And there will be some cell and gene therapy by 2023 as well. But all in, for 2024, 5 years out, we're at $1.5 billion because there is a strong -- there's a strong cell and gene therapy component, and we still are on that message of $150 million or more, hopefully, with Exosome Diagnostics. So those 2 growth drivers are still intact. And of course, everything, honestly, has to be as well. I mean, we have never promised more than mid-single-digit growth in our core, and we've been doing materially better than that. So there is some hedge in that for us, so we still feel very bullish about that kind of number, looking out 4 and then 5 years. And there's no acquisitions in that, that's organic. And it's likely we're going to do more stuff. So... -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- (Operator Instructions) We'll now take our next question from Dan Arias with Stifel. -------------------------------------------------------------------------------- Daniel Anthony Arias, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [11] -------------------------------------------------------------------------------- Chuck, just to clarify on a timing-related item that I think got you for 4 points or so. Is that a revenue bolus that you fully expect to fully -- to capture in the second half of the year? -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [12] -------------------------------------------------------------------------------- The one-off, the timing issues you're talking about or what? -------------------------------------------------------------------------------- Daniel Anthony Arias, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [13] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [14] -------------------------------------------------------------------------------- Yes. Well, one of the big components was royalty true-ups that aren't going to happen again. And we're on track with our ready steady state kind of royalty payments and probably improving as our licensees businesses grow, we get more. Other big component, of course, was the OEM orders and stuff we talked about. And those are behind us and I think some of this timing as well and I think that will correct itself. So -- those one-offs are on the order of being roughly $6 million. So like Jim said, it's over 3%, all by itself. -------------------------------------------------------------------------------- Daniel Anthony Arias, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [15] -------------------------------------------------------------------------------- Yes. So maybe just to that point, just thinking about the instrument performance during the quarter, but then also what you think you might add in terms of improvement in the back half for Europe, how does that translate to the 15% to 20% growth rate that you've talked about and that you've been in for the ProteinSimple business that's embedded in Protein Sciences? Do you still think you can finish the year in that range? -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [16] -------------------------------------------------------------------------------- I do. 15, anyway. I mean, we've been promising -- excuse me, talking, guiding to 15 for the last 3 or 4 years. We're currently doing about 20. So this is certainly -- I think there is some component of us going more direct in Europe and going after the accounts directly and probably having a couple of years of more business. Now we have to focus much more on commercial execution, cross-selling, expanding our subsidiaries, fixing Germany. Germany is definitely too lumpy. We've got to get more critical mass. So it's smaller than the U.K. in the size of business, and that shouldn't be. We essentially have a sales office there and not enough critical mass. So there are things we're working on. As you remember, I lived in Europe for 3 years in my career, and they're getting a lot more help at this point. But there are a lot of great things, too. We worked hard to get genomics back on track in Europe than it is. And just one example. ELISA is lumpy, and it will be fine, I think. Our SimplePlex and our other assay technologies are really doing okay. I think they'll continue to provide extra growth in Europe. The 32x8 assay, as an example, is a great assay with advanced multiplexing that can really take on the other multiplex of competitors. And that's in early days of getting launched or getting going. That's another example. So all in all, we still feel pretty good about the whole portfolio. Southern Europe, France. France is just doing great. I mean, since the acquisition of our distributor in France and creating their own subsidiary, we've had near double-digit growth. No loss there. The issue has really been around U.K. and Germany, which I think we can deal with. Did I get all your questions? -------------------------------------------------------------------------------- Daniel Anthony Arias, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [17] -------------------------------------------------------------------------------- You did. A couple of quarters ago, you were talking about how you were looking forward to getting more analysts on the call. So maybe I'll take the opportunity to ask one more for you, if I can. Just on OEM. The OEM business, overall, how do you think visibility changes there, if at all? Or is that just the nature of the beast for the foreseeable future? And then maybe just a big picture question on that point. Obviously, you're moving the Bio-Techne portfolio into new directions. Well, as you do that, how important are these OEM components to the overall business? And do you think there's a potential for some strategic actions if you thought that any of it was becoming less core or noncore? -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [18] -------------------------------------------------------------------------------- Yes, we've studied some of that. So, first of all, remember, we had a 15% growth quarter last quarter in that business. And usually guys are expecting like a negative quarter after one like that, which has always been the case. And here we are with positive growth again. So we talked about things smoothing out, and they are. The pipeline is getting better. We have big new accounts, like Sysmex is an example, that is getting us more and more business. We're doing some very strategic things with them. We're very bullish. And across the board, I think it looks pretty good. Glucose, the pain is largely behind us and fairly well contained, although it's roughly flattish for the future and it's been mainly price increases holding things okay, but it's becoming a smaller part of the overall, but we feel okay. But in the end, this is roughly a 30% op margin business. And on the market, it should be solid. It's a 12 to 15 kind of -- EBITDA kind of multiple. And we've tested this and it's hard to get beyond that. And here we are with our multiple. So we're being paid for that business in our portfolio of 30x plus. It's hard to make it up by just spinning it off and selling it unless it becomes a drain on opportunity cost of strategic or something, and it just isn't. It's not a hard business. We have 1 salesperson. These business leaders kind of do their own thing. It's a very key account-driven process and business. The customers are all mammoths. They're literally on 2 hands, the count. So it's just not that big of a brain drain here at the company. And yes, that's a 30% op margin business and now it's growing fairly well, and we see more things we can do with it. And there are synergies because we are providing diagnostic tools. It's extremely sticky. The San Marcos unit of that business has 100 -- participates in over 185 10-Ks. It's backed in. So the worst thing about it is the orders are all lumpy and large and -- for the big guys out there, and we're working on smoothing that out and getting more of their wallet share. And it's probably never been better. It's one of the good thing to this quarter with that business, actually. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- We'll now take our next question from Catherine Schulte with Baird. -------------------------------------------------------------------------------- Unidentified Analyst, [20] -------------------------------------------------------------------------------- This is actually Tom on for Catherine. Just wondering if you could provide any update on how Quad is doing relative to the deal model. And maybe some comments on how many clinical trials that it's been in and what has been the customer feedback so far? -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [21] -------------------------------------------------------------------------------- Yes. Well, the whole consortium, the whole JV has been already a really big success. We had, at the latest trade show who's been showing us off, we had immense demand and interest. We are involved in an awful lot of -- over a dozen preclinicals. We are being looked at every day by more. One of our partners has been involved in over 100 prequalifications. So this stuff is going to happen. The problem with it is it's just -- it's going to take a while. The viral vector process is the process of record. And ours is non-viral, and we're moving in that direction, and we're going to have a piece of it. It's going to be an everybody-wins market as these valuations of these Aldevrons of the world have shown for a while. So we're pretty pumped. Quad is on track and we have our leased product. We have new products on the drawing board. We can modify the size and hold consistent size with our beam technology. And we're coming up with new ways to use this technology. We have a tech council approach in the company where we have the scientists of all divisions meet and huddle often. And we're coming up with a whole different new ideas -- set of ideas around different arrays, assays, et cetera, as well. It's cool stuff, a lot of interest. It was never going to be the big winner in cell and gene therapy as a possible division someday. We've always talked about it being in the $50 million or so range from 5 years out, and we see that very, very doable and possibly a lot more if we find other applications for it. -------------------------------------------------------------------------------- Unidentified Analyst, [22] -------------------------------------------------------------------------------- Okay. And I know that you guys have said you're not really able to quantify the coronavirus at this point. But are you seeing any sort of early disruption thus far? Any sort of qualitative comments on what parts of the business could or could not be impacted by a more significant slowdown or something that's more prolonged? -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [23] -------------------------------------------------------------------------------- Yes. Well, this is my 28th quarter as CEO here, and I don't think we've had a quarter under 20% in China. I'm sure this next quarter probably will if everybody continues to stay home. Nobody knows what's going on. The incidence rate is moving more of a linear trajectory than exponential, and that's probably due to a large effect that the people are quarantined, so that's going to ride its way out. But I think we're a long way from anyone claiming victory this is under control. There's a lot of risk. So I'm pretty sure everyone will get a hall pass next quarter in China. I think there is a benefit to us. These kinds of events, these x factors usually create a stimulus to research, and we are already seeing interest and growth in some areas that we typically don't because of this. It's just one of those unfortunate things. Probably not as good as being in the respirator mask business right now, but there's going to be a halo effect for all -- everybody in the fighting disease business. But this quarter is going to be a tough one probably, more than likely. It's too early to say. Our reagent business, I think, will probably not suffer. And I should say also, we had a -- we had an exceptional start to the quarter in China in general. So that's going to give us a little bit of hedge there, but the instruments probably will suffer because that's not a run rate business. But in our run rate businesses, if you're using proteins and antibodies at the bench, but you're not at the bench, you're home in the kitchen, those businesses are going to suffer for this quarter. But it's a short-term thing, we're not worried about it. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- We'll now take our next question from Jacob Johnson with Stephens. -------------------------------------------------------------------------------- Jacob K. Johnson, Stephens Inc., Research Division - Analyst [25] -------------------------------------------------------------------------------- On the recently announced JV with Wilson Wolf and Fresenius Kabi, can you outline or give us some more details on how this partnership will work? I don't know if you disclosed what your ownership interest in it is and then if you'd like to just wonder if any potential financial impact from it as we look out over the next couple of years. -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [26] -------------------------------------------------------------------------------- Yes, sure. This has been nearly 2 years in the making. As you can imagine, a 3-way JV is not easy to negotiate. And these are some powerhouse companies. I mean, Fresenius, of course, is a big one. And dealing with them has been -- it's been challenging, but good. The Kabi unit group within Fresenius was 5, 6 years into this. Their [Lobos] platform, their [liquid forensics] instrument is becoming a real potential standard already. I guess I mentioned, it's already been tested in, I think, over 100 accounts. It's -- they're ahead of the rest of us, really, in this consortium. So we really wanted to link up with them. And one of the big gaps of our total workflow. We have a lot of boxes checked off in our workflow, but having that box that ties us all together, it's a really important step and there aren't too many out there. There's only a few. So we think this is the best one in the market. The design came off of the early reader with Miltenyi and I think major improvements to the solutions have been designed and proven. So we think it's great. Of course, we [have worked with both of them] a long time, early innovator in cell factories and cell processing. A brand and a company and a leader punches well above its weight. I spent time at Thermo, we all know John Wilson in the industry, and he's right here in Minneapolis. Our teams are very close. We've been friends for many years. And this is going to go great. It's not a textbook JV in any way. So it isn't like we're losing the revenues, it's all going to be kind of off and in their own garage somewhere working away. This is really more of a marketing kind of consortium, a collaboration of a financial league. We all put an equal funding to drive the entity. And we all keep our revenue. We all drive our car to the business and come back home. There are a lot of things in the contract of how we stay married and long time frames and milestones to hit. And there are certainly scenarios of possible exits and trying to cover all your bases for all of us if we're not happy and positive mediation. It's a very complicated contract for that. But that's what these contracts are always are because it's all about the -- solving the what-ifs and small percentage outcomes that are negative. So nothing has been negative. It's been fantastic. The leaders all get along really great. This has been driven and is the brainchild, really, of Dave Eansor, one of our presidents. And a lot of focus on this. The CEO of the entity is a person from Fresenius Kabi, an extremely bright young man who we have a lot of faith in. I think we have -- we are prepared to talk about what we're going to put in, I think it's around $3 million, and that's an annual number to put in for investment to drive our piece. It could change next year and the year after. I want to see how the business is. But it's by no means intended to be any kind of a sinkhole for cost or anything. So it's very containable. We are already examined, of course, and things are ramping. And I would say the other [20s are showing well enough] right now and it could dramatically shift over 3, 4, 5 years out as things like GMP proteins and such become scalable which we think they will. There are kind of front end versus back end parts of the business. And even though we are driving the full workflow of being a non-viral approach, and we are going to sell GMP proteins to everybody, including the viral vector approach, and we have a ton of interest in our factory and in getting allocation, et cetera, and we're open for business. So... -------------------------------------------------------------------------------- Jacob K. Johnson, Stephens Inc., Research Division - Analyst [27] -------------------------------------------------------------------------------- Got it. That's helpful. And then just the last question for me. You paid down some debt in the quarter. The balance sheet seems to be in a really great spot. I'd just be interested in what you're seeing in your M&A pipeline right now? -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [28] -------------------------------------------------------------------------------- Yes. Well, I sure wish I could take credit for being so insightful around ChemoCentryx, but the investment was made here about 20 years ago. And we have a lot of faith in Tom Schall, and they've had a lot of success recently, and I don't think we're done with it yet. So we did monetize some. But on top of that, we almost matched that monetization with great collections and cash flow. And we took $100 million off. We've been averaging around $20 million or so a quarter. And we're at $120 million halfway into the year already. So we're essentially a year ahead of our schedule. We're now right around 1 1/4 for leverage. So we have a lot of very good balance sheet and liquidity for doing more deals, if we find them, we're going to stay on path with that kind of the level of draw balance that was indicated earlier. Jim, do you want to comment further? -------------------------------------------------------------------------------- James T. Hippel, Bio-Techne Corporation - Senior VP of Finance & CFO [29] -------------------------------------------------------------------------------- Yes. No, I think you said that well. In terms of the M&A pipeline, it's robust as it's always been. It's more about having the right deals at the right price. And right now, the ones that are more of a greater interest tend to be smaller in nature, like they have been more recently. So -- but as you pointed out, our balance sheet is in the best shape it's been in a long time. So should a bigger deal make itself available, we'll obviously have them participate. -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [30] -------------------------------------------------------------------------------- And we are hunting and we're involved in deals that are probably smaller right now, but nothing has changed there. We're always in the hunt. And as prolific as we've been in acquisitions, believe me, everybody lets us know what's coming up and w potentially in the game for us to take a look at. So -- but we're pretty focused right now. We have a lot of homework to do. I think we definitely see genomics kind of back on track from a couple of years ago when it went a little bit sideways on us. We're feeling really good about it. The HiPlex road map is phenomenal, and we're going to have a DNA probe product coming out soon. So I've never been more bullish about the ACD technology platform in the Genomics division as I am now. And of course, it's been tough, but everyone told us it'd be tough to get into diagnostics, and liquid biopsy is no different. And we've never been in better shape than we are now and there's an awful a lot of partnership interest, as you're all aware. We are definitely not going to try to own this whole thing. So we are developing partnerships in companion diagnostics applications as well, other liquid biopsy solutions that maybe we can help their overall recipe, so to speak. So a lot of interest, and we're going to grow this thing and we will get reconsideration. We'll build it under our map. We'll do something to keep growing. The pipeline of new stuff is extensive. So we've got to stay focused on that and more than trying to find another leg in the ski than the big acquisition, so to speak. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- (Operator Instructions) We'll now take our next question from Dan Leonard with Wells Fargo. -------------------------------------------------------------------------------- Daniel Louis Leonard, Wells Fargo Securities, LLC, Research Division - Senior Analyst [32] -------------------------------------------------------------------------------- So you're coming up here against your toughest comp in the prior year period of 15% growth in March '19. Is there anything you'd flagged that was maybe onetime or lumpy in that prior year number that we should be cognizant of as we're modeling the forward period here? -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [33] -------------------------------------------------------------------------------- No. I've been waiting for you, Dan, and I'm really sorry about you coming back online now this quarter, but an insightful question. And I mentioned in my comments that we do have one more timing issue coming up in that genomic space. As well as maybe potentially another one in the SimplePlex. As you know, these clinicals have all -- it seems like a large cartridge orders and they're kind of lumpy. So we do have some in that number. Nothing like a $6 million, though, so probably about half of that. $2 million to $3 million is probably something we have to overcome. So yes, it's going to be a tough quarter. I think we were like 14% last year this quarter. So it's a tough comp. And then we're not going to get much help out of China, obviously. So I think you can add up all the results of all that. But nice recovery so far in instruments in Europe. We're all over giving them more help on areas like Germany, I think that's going to improve. Genomics is, not -- if anything, getting better. I think we're in great shape looking forward there. So we just got to -- there's always one-offs. You've got to find more one-offs. That's what you got to tell your team. It's not a -- it is a reason, but it's a poor excuse for not showing growth, right? So we've got to find more big deals. We've got to find more OEMs. We've got to find more key connections like Sysmex. It is a great example. We have very a little Sysmex business, but it's coming on strong for us, as an example. -------------------------------------------------------------------------------- Daniel Louis Leonard, Wells Fargo Securities, LLC, Research Division - Senior Analyst [34] -------------------------------------------------------------------------------- So okay. That's helpful color. And then my follow-up for Jim. Jim, it sounds like from your comments around gross margin that you're expecting full year gross margin might decline about 100 bps year-on-year. If that's so, what's the driver of that? And then secondarily, do you still expect that EBIT margins could be about flat year-on-year? -------------------------------------------------------------------------------- James T. Hippel, Bio-Techne Corporation - Senior VP of Finance & CFO [35] -------------------------------------------------------------------------------- Yes. So in terms of gross margin, yes, it's a combination of mix and FX, I suppose, are the 2 biggest drivers in that order that's having the overall year-over-year gross margin slightly down. But as we guided in the early part -- at the start of the year, we guided that we'd probably be roughly flat operating margins for the full fiscal year. And given our half year -- first half performance here, we're actually ahead of that plan. So I'm not going to go as far as if we can guarantee that we'll be increasing margins at the end of the day year-over-year, but the flat year-over-year is definitely looking much more easily attainable, and hopefully there's upside. -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [36] -------------------------------------------------------------------------------- I want to say one more thing on that, too. I mean, it hasn't come up much. But the revenue looking like it is, when you add back that transactional FX, we're essentially on consensus. I mean, the operating excellence of our businesses and our ability to look midway in this quarter and starting to do the right thing that good operational leaders do because we have a very experienced team running these divisions and running, as you know, excited. They all did an exceptional job, and that's why we have the margin results that we did. And I feel confident we're going to be right on track, as Jim said, to our goals and our -- the guidance we gave for annual for our margins at year-end. I think the revenue target is in the bottom line. You can't always predict the top line, but you could predict how you're going to finish, bottom line, and we're doing a pretty good job, I think, of managing our costs. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- We'll now take our next question from Patrick Donnelly with Citi. -------------------------------------------------------------------------------- Patrick Bernard Donnelly, Citigroup Inc, Research Division - Research Analyst [38] -------------------------------------------------------------------------------- Chuck, maybe just a follow-up on the M&A questions, that is what areas make the most sense to add to inorganically? I know you guys obviously talked a lot about areas like cell and gene therapy. I mean, how far downstream will you go on that front? Just curious kind of what areas you think kind of they bolt on. -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [39] -------------------------------------------------------------------------------- Well, there's that famous da Vinci caricature that everybody tried to use in cell and gene therapy and all the different pieces of that workflow, which are a good dozen or more. And with our JV consortium, we've got multiple boxes checked. But there are some areas, yes, that we could -- I think we could do more to help differentiate what the world is searching for. I think spatial-based genomics, single-cell genomics in a spatial capacity is a big area. It's going to -- there's still a lot of innovation happening there. A lot of small companies are making a lot of progress. We're looking at a lot of ideas there. I think the [porter] system is another area. But the major parts of the workflow I think are covered, but there are some things that could help us differentiate as well. And of course, and we don't have a viral vector approach. I mean, we could always grow more towards where the mainstream is right now, too, should we find an opportunity that makes sense. And then we're going to be partnering with a lot of these CROs, CDMOs in a lot of fronts, so that could lead to many opportunities. I think that covers the M&A in that direction. I think I don't -- I still don't see us expanding in the proteome (inaudible) and if you -- beyond where we are in terms of, like, say, NASDAQ or HPLC or NMR or things like that. That's not us. There's a lot of competition. It's hard to really be the kind of margins that we'd like to be in to go in that direction. But again, close to spatial measurements in a single-cell analysis, next-generation flow, these solutions that use antibodies, where they have synergies with us, all makes sense. So we're always hunting those directions. We're always on the hunt for expanding our portfolio. They're smaller, but we have in the range of (inaudible) we have wholesale applications now. There are new nichey ELISA areas out there that are chunky in nature to expand our assay portfolio. Those all make sense. Smaller antibody companies, should they be there for sale at the right price, there's a few in Europe we'd like, as an example, are always interesting to us. -------------------------------------------------------------------------------- Patrick Bernard Donnelly, Citigroup Inc, Research Division - Research Analyst [40] -------------------------------------------------------------------------------- That's helpful. And then just a quick one on ACD. You kind of mentioned you have that rightsized, what's the right growth number going forward? Is it kind of 20%? And what are the key drivers there? I know you have things like DNA probes coming out, but can you just talk through the drivers and the right growth level there? -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [41] -------------------------------------------------------------------------------- Yes. The right number is 20%. Of course, we're going to push them for more, but the number for you is 20%. And I feel really bullish because RNAscope is still way underpenetrated. We are still building our relationship with Leica and the numbers are getting dramatically better. We are working with Ventana as well at this point. We are looking at other lower-end instant partnerships for a way to do things to try and go after that lower level, mid-level hospital of pathologists that really wants to move from the IAC antibody world to molecular pathology. I think there's a big opportunity there. So we have a lot of interest in that. Our new design base scope application is finding growth. The DNA scope will come out end of this fiscal year, which we know there's a ton of interest in. This HiPlex is just getting off the ground, and we just filed [Cloudz] IP, as we've been talking about for a quarter or so on our new extension to that HiPlex technology that's going to get us into the multiple of 12 into targets. You start looking at an assay kit-based approach that can give you single-cell revolution for 40 to 100 different targets at a time, that becomes really, really interesting to a lot of big companies out there in this space. So that's all coming. So I feel very good about 20% plus going forward for years. And if we flip, we'll make changes because it should be that. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- We'll ask your next question from Alex Nowak of Craig-Hallum Partners Group -- Capital Group. -------------------------------------------------------------------------------- Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [43] -------------------------------------------------------------------------------- Just a follow-up to a couple of questions on here. Just taking into account the European weakness here, the onetime order time and the coronavirus in China, is double-digit organic growth here possible over the next 2 quarters? Or should we be expecting something more in the lines of a high single-digit number? -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [44] -------------------------------------------------------------------------------- Well, as you know, Alex, we don't give guidance. We're still on track for 10% or better for the year. We have been guiding over the years saying an 8% to 12% kind of range we want to be in, and we kind of move that guidance this year to maybe 10% to 12%. But your comments may be prudent that it may be an 8% to 12% for this quarter, given these headwinds we're looking at. I mean, the China alone, if we're 20%, 25%, moving to, say, 10% or 15% because of the virus, you can do your own math. But I'm sure it's going to shave a point, I would think, off of the potential we can do this quarter. Everyone is in the same boat. But -- and it's a tough comp for us. The toughest we've ever had. So -- but I know overall, the business looks pretty good in most categories. And Europe is coming back pretty well. Our instrument business is on good uptick. We mentioned North America is pretty strong. Hell, we've got 75% year-over-year lead increases. Our marketing, our commercial engine is just so much better than it was a couple of years ago. And we're spending on more ad words. We're getting a $10 to 1 on investment on SEO. So I'm telling this team keep spending until you hit an asymptote, and we haven't found it yet. So some reasons, we're seeing double-digit growth in both proteins and antibodies across the board, especially in North America. We're going to get more of that going in the core in Europe, which we will. Asia is doing great. Japan is in a good spot. India is accelerating high double digits. And China, we'll take a blip here, but it will just be a blip for the quarter, I'm sure. -------------------------------------------------------------------------------- Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [45] -------------------------------------------------------------------------------- Okay. Understood. And then just to go back on Europe here, understand the issues in the quarter and they're one time, but you have mentioned the software environment in Europe now for a couple of quarters. I'm just curious why next quarter here why should that turn and start to become actually a better geography for you? -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [46] -------------------------------------------------------------------------------- Well, some of it is one-off, some is serendipity. Some of it's the way these timing on these projects are -- we're just seeing an uptick in these platforms again. I think there's still a risk now of a little bit of a [lump] in Germany overall. I don't think we're out of the woods yet in ELISA in Europe. Our other areas like dual sets, those products are doing pretty well. We are definitely selling an awful lot of bulk, and that usually kind of comes and goes in cycles. But I think the biggest thing is we have to get down to basics with our sales force, country-by-country, going off of -- and building off of the acquisitions we did, and then we started working, getting people to work together and train them and teach them biotech and doing the cross-selling. I'm not happy yet. I think there was more growth around picking off low-hanging fruit from going direct from depending on distributors than it was about true cross-selling, good growth. And we're also, I think, weak in our inside sales, weaker than we are in the U.S., I mean, we're going to -- we need to beef that up. Inside sales for our model is very important. You can depend on your web, that's great. When you're selling over 0.25 million different SKUs, and it's a catalog business, you really got to have a strong inside sales group as well and you need to work on that often here. So there's a lot of levers we're pulling, but there's a lot of levers we're going to add and pull harder on. And that's why I have a little more renewed faith that we can get Europe going again. In Europe, this is a bad quarter and we message it for quarter 2, as you mentioned. I think a couple of years, we were at 15% to 20% growth, I think that's going to be a reach. But getting this package into the high single-digit growth where Europe should be is, I think, very, very possible and should happen. It may take a quarter to get there, but I think this quarter we'll have a good shot. -------------------------------------------------------------------------------- Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [47] -------------------------------------------------------------------------------- Okay, understood. That's helpful. And then just real quick, you mentioned progress around partnerships with Exosome. If any of these programs are successful, when should we expect to see the second Exosome Diagnostics test launch onto the market? And then just any update around plan to kit the EPI test? -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [48] -------------------------------------------------------------------------------- Yes. We're already with 4% [we're kitting this] as you say, right now. We are going after the FDA approvals but none of the stand-alone nondoctor associated kits. We won't be in TV anytime in the future, okay, for one thing. The demand we're creating around direct marketing and web and then the SEO is going to be pretty dramatic. I think it's going to help a lot. We are moving on getting patients and starting the studies for both bladder as well as tumor rejection, and you'll [go from there off] urine. So it's very -- it's not that hard for us to do. And we're working on partnership ideas to get going on the plasma side so with both the lung and the breast indications which are validated. We think they work and they're ready for clinical. So I think you're looking at a couple of years, maybe under 2 years for the urine-based ones, depending on how they go. Again, we have to get studies working and get included and it will depend on the timing of that, probably picking a better map wouldn't hurt, a little thicker map. So there's some decisions to make, but 1.5 to 2 years are the short answer for you. But if you look out 5 years, we're going to have a half a dozen things and hopefully, half a dozen partnerships as well. So... -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- We'll now take our next question from Paul Knight with Janney. That seems to be all the questions we have. I'd now like to turn it back to our speakers for any additional or closing remarks. -------------------------------------------------------------------------------- Charles R. Kummeth, Bio-Techne Corporation - CEO, President & Director [50] -------------------------------------------------------------------------------- Well, thanks. We went over an hour, the first time we've ever done that. So we appreciate all the interest. Overall, a decent quarter, not as good as we had hoped. But I think we have our hands on all the right levers, and I think things are fine for our year-end. So all good going forward. The team is pretty energized. There's a lot of great stuff happening here, a lot of good signs and we're excited about it. So look forward to telling you more this next quarter, so see you then. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- This concludes today's call. Thank you for your participation. You may now disconnect.