Bio-Techne Corp

NASDAQ:TECH

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, and welcome to the Bio-Techne Earnings Conference Call for the Second Quarter of Fiscal Year 2022. [Operator Instructions]

I would now like to turn the call over to David Clair, Bio-Techne's Senior Director, Investor Relations and Corporate Development.

[David Clair, Senior Director, IR and Corporate Development]

Good morning, and thank you for joining us. On the call with me this morning are: Chuck Kummeth, Chief Executive Officer; and Jim Hippel, Chief Financial Officer of Bio-Techne. Before we begin, let me briefly cover our safe harbor statement. Some of the comments made during this conference call may be considered forward-looking statements, including beliefs and expectations about the company's future results, as well as the potential impact of the COVID-19 pandemic on our operations and financial results.

The company's 10-K for fiscal year 2021 identifies certain factors that could cause the company's actual results to differ materially from those projected in the forward-looking statements made during this call. The company does not undertake to update any forward-looking statements because of any new information or future events or developments. The 10-K as well as the company's other SEC filings are available on the company's website within its Investor Relations section. During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to most comparable GAAP measures are available in the company's press release issued earlier this morning on the Bio-Techne Corporation website at www.bio-techne. com.

I will now turn the call over to Chuck.

[Chuck Kummeth, CEO]

Thanks, Dave and good morning, everyone.

Thank you for joining us for our second quarter conference call. The Bio-Techne team once again executed our global growth strategy at a high level, continuing the momentum from last quarter and the last fiscal year. We crossed an important milestone during Q2 as our trailing 12-month revenue exceeded $1 billion for the first time in the company's 44-year history.

Our 17% second quarter growth rate reflects continued robust demand for our portfolio of high-quality products and unique analytical solutions, especially within the biopharma end user base. Within biopharma, our positioning with self and gene therapy customers continues to accelerate, with this end market growing north of 80% and our GMP proteins grew over 180%.

Our portfolio of innovative reagents, tools and solutions remain incredibly well positioned to enable the biologics revolution currently underway as transformative technologies like cell and gene therapy, facial biology, and genetic and proteomic biomarkers drive research discoveries, the emergence of transformative diagnostics and therapies and ultimately impact better patient care and outcomes.

I'm extremely proud of our team of scientists that continue to develop innovative technologies necessary to advance and enable next-generation diagnostics and therapeutics. This performance in Q2 was once again delivered with a focus on driving profitability as our adjusted operating margin increased 50 basis points sequentially to 38.3%.

While the demand for human capital remains high and the pace of our own hiring to meet current customer demand and support our future growth programs remains challenging, we continue to make progress in adding talented people to our organization at all levels in each of our businesses.

During the quarter, we filled several key open positions within our technical and commercial organizations. We are utilizing referral bonuses, career fairs as well as leveraging industry awards like our recent recognition in Inc. Magazine's inaugural list of best led companies to attract and retain talent.

At the most senior level in our company, I'm very pleased to have Will Geist and Brenda Everson join our leadership team. Will is our new President of Protein Sciences and most recently served as Chief Operating Officer for Quanterix. Prior to that, Will held multiple leadership positions running large business units for Thermo Fisher Scientific. Will’s transitioning into his new role from Dave Enzer who will be retiring in Q3. Brenda is our new Senior Vice President of Human Resources, with extensive experience successfully leading HR functions at large organizations, including 18 years at Apple.

Brenda will be transitioning into renew role from Struan Robertson, who will also be retiring in Q3. The contributions of both Dave and Struan have made to the dynamic growth and culture of Bio-Techne over the past eight years have been immeasurable. And I wish him all the best in the retirement. It is largely due to the legacy created by Dave and Struan and the remainder of Bio-Techne's 2,700 strong employees that has enabled our company to attract such great talent to lead our businesses on to a decade of success.

Now let's get to some of the specifics around Bio-Techne's spectacular business performance for the quarter, starting with our regions and end markets. We once again experienced global strength across the portfolio. China led all territories where the team delivered yet another quarter of organic growth above 20%. Close behind with the US growth also north of 20% and Europe was in the mid-teens. As I mentioned earlier, this growth was driven by a very strong BioPharma market as it has been for many quarters, and we don't see that momentum slowing down.

Similar to Q1, academic growth was significantly lower than BioPharma, where Omicron-induced do shutdowns occurred over the holidays and lack of funding clarity impacted larger bulk orders. However, our daily run rate reagent demand from academic customers was strong for most of the quarter, indicating a healthy underlying academic research environment. We anticipate this relative low and academic growth will gradually accelerate the remainder of the calendar year as the Omicron peaks the size and the spending budget is finally passed in Congress.

Now let's discuss the performance of our growth platforms, starting with Protein Sciences, where we delivered organic growth of 19% in the quarter. As I mentioned in my opening comments, we continue to experience broad acceptance of our innovative tools, reagents and analytical solutions to improve the efficiencies within the cell and gene therapy workflow. During the quarter, we initiated commercial availability of GMP proteins, manufactured in our state-of-the-art GMP protein manufacturing site and are now actively shipping to our customers from this facility.

We will continue to expand the number of GMP proteins manufactured in this facility, focusing first on scaling the GMP proteins with the highest anticipated demand within our catalog of over 30 GMP protein. However, our cell and gene therapy business extends far beyond GMP proteins and includes serum and media for cell growth. Our non-viral gene editing technology as well as our cloud polymer-B-cell separation technology.

In addition to uptake with our cell, our core cell and gene therapy products, we are experiencing a halo effect on several other Bio-Techne product lines, including our proteomic analytical tools and spatial biology franchises. We also continue to explore external opportunities to expand our cell and gene therapy offering in addition to our organic efforts.

In December, we struck an agreement with St. Paul, Minnesota-based Wilson Wolf for a future investment and eventual acquisition of this rapidly growing company. As background, Wilson Wolf manufactures a GRx product line, a leading single-use cell culture device, which has enjoyed rapid adoption and is quickly becoming the cell and gene therapy industry standard for. bioreactors

Wilson Wolf is a very synergistic fit with Bio-Techne with GRx cell culture devices requiring GMP proteins is a key input to scale immune cell growth. Terms of the agreement include the right to make a 20% ownership investment upon Wilson Wolf for each $92 million in trailing 12-month revenue or $55 million in EBITDA. This is followed by an agreement to fully acquire the company upon achieving $226 million in revenue or $136 million in EBITDA for an additional $1 billion, representing a total acquisition price of $1.26 billion. If these milestones are not reached by the end of calendar year 2027, Bio-Techne has the right to purchase Wilson Wolf at a set multiple of 4.4 times trailing 12-month revenue.

As a reminder, Wilson Wolf along with Fresenius Kabi, are already biotech partners in a scale-ready cell and gene therapy joint venture. Today, Wilson Wolf annualized revenue is greater than $50 million and growing rapidly. We are looking forward to them hitting their milestones and eventually becoming official members of the Bio-Techne team.

With all the excitement around cell and gene therapy opportunities, we haven't taken our eyes off the ball of the core of our company, RUO proteins and antibodies. Our core research use only protein antibody businesses continued to perform extremely well, growing double-digits in the quarter.

Our broad catalog of RUO proteins is widely recognized as the industry-leading portfolio with our R&D Systems brand delivering the highest level of quality, bioactivity and lot-to-lot consistency. In fact, we created a category of research use cytokines more than 35 years ago and have amassed a catalog of over 6,000 proteins over this time frame, including several hundred that are exclusive to Bio-Techne.

Our in-house expertise and broad offering in both proteins antibodies creates opportunities for Bio-Techne to participate broadly in emerging applications, including high-throughput proteomics and the development of engineered proteins and positions us to possibly expand into adjacent opportunities, including mRNA and plasma DNA manufacturing.

Moving on to our proteomic analytical tools, where the team once again delivered robust growth across our portfolio of novel instruments and leading immunoassay solutions, our ProteinSimple branded instrument portfolio increased 25% as Biologics, Simple Western and Simple Plex all grew north of 20% in the quarter. Biologics once again led the way, growing over 30% year-over-year.

Recall our biologics instruments, namely our Maurice platform, enable the identification, purity testing and charge analysis of proteins and bioprocessing. Maurice is also gaining traction in cell and gene therapy applications with its ability to characterize capsid proteins enabling AAV serotype identity and stability testing.

Our fully automated Western blotting solution, Simple Western continues to gain acceptance within the research community as its ability to convert the messy, cumbersome and unreliable process of a manual western blood into a three-hour highly accurate push button process and continues to resonate, particularly with our biopharma customers.

Simple Western is also gaining significant traction for cell and gene therapy applications with stem cell therapy, regenerative medicine, gene-modified cell therapy and gene therapy customers all using Simple Western for viral vector identification, purity testing, an empty versus full capsid detection.

The recent launch of the stellar NIR/IR detection models for our just Simple Western system is a great example of enhancements we continue to deliver on this platform. Stellar fluorescence modules enable the detection of low abundance proteins and the multiplexing of multiple targets, including multicolor immunoassays alongside total protein staining within the same detection lane. Following the commercial availability of Stellar modules, just now offers low picogram sensitivity in both chemical luminescence and fluorescence channels.

For Simple Plex, for Ella, we are also experiencing increased demand in the cell and gene therapy applications with the instrument increasingly being used to detect wholesale-related impurities. The Ella assay development road map remains very full with additional neurological biomarkers, cell and gene therapy, bioprocessing and immuno-oncology assays in the pipeline, layer the untapped clinical opportunity onto this rich assay pipeline, and we believe Ella remains in the early stages of reaching its potential.

Now let's discuss the Diagnostics and Genomics segment, where organic revenue increased 6% for the quarter. Our spatial biology business, branded ACD, increased 10% in the quarter. While this growth is not up to our long-term expectations, it was a nice improvement over Q1, which was impacted by key open commercial positions, a higher exposure to a softer academic market and a tougher year-over-year comp.

All those same headwinds remain in Q2. However, we did make progress in filling some of the open commercial positions and expect for continued progress in growth rates as new commercial team members on board and the academic environment improves.

As a reminder, over recent quarters, we have expanded our spatial biology portfolio beyond RNA scope, adding kits for the visualization and quantification of DNA, microRNA, short RNA targets as well as higher plexing RNA capabilities. We are also very encouraged with the continued market traction we are experiencing with base school, a kit for the detection of short RNA targets, 50 to 300 basis, enabling the detection of splice variance to circular RNA and gene fusion.

Our menu of probes is now greater than 50,000 targets over many species and publications that have almost crossed 5500, demonstrating the growing interest in this platform. Cell and gene therapy has also been a new market for our spatial biology business with ACD being used to track genes of interest in the cellular environment and determine the quantity of gene uptake in therapeutic cells.

We recently announced a nonexclusive partnership with fellow spatial biology company, Akoya Biosciences, pairing our RNA scope HiPlex V2 assay for RNA imaging with Akoya's protein imaging assays to run on Akoya's phenocyclar fusion system. This single cell spatial multiomic workflow has potential to accelerate scientific understanding of human health and complex diseases like cancer, unlock new biomarker diagnostic signatures, improve patient stratification and ultimately improve treatment outcomes. We are excited about the automation of the RNAscope HiPlex V2 assay enabled by the Akoya partnership.

Moving on to other parts of our diagnostics and genomics portfolio within our molecular diagnostics division. Our ExoDx prostate cancer test continued to make progress in the quarter, as patients returning to the doctors for routine checkups or followers, led to a strong improvement in diagnostic testing volumes. Q2 test volumes for ExoDx prostate cancer test returned to pre-pandemic volumes and have continued to increase year-over-year by strong double digits as we begin Q3.

In addition to the ExoDx prostate test, we continue to advance our pipeline of innovative exosome-based diagnostic tests, including our noninvasive kidney transplant rejection assay, ExoTRU Kidney. As a reminder, ExoTRU is a noninvasive multigene urine-based liquid biopsy assay that provides critical, allograft health information to assist clinician decision-making in managing kidney transplant patients in optimizing patient care. We continue to work a dual pathway for the ExoTRU commercial launch, focusing on discussions with potential commercial partners and taking steps to prepare for potential commercialization on our own.

With regards to the products with from the legacy surgeon business, our leading portfolio of genetic and oncology molecular diagnostic products, including our kits for FMR1 and BCR-ABL continue to gain market traction. During the quarter, we strengthened our genetic kit offering with the launch of the AMPODEX-PCRC-CFTR kit. Cystic fibrosis is a life-limiting autosomal recessive disease caused by variants in the CFTR gene. This research-use-only kit provides broader coverage of the diverse US population than any other commercially available targeted CFTR testing assay.

Finally, our Diagnostics Reagents business delivered its tenth consecutive quarter of growth, with organic revenue increasing in the upper single digits. The pandemic-related headwinds that impacted this business in recent quarters continue to diminish, and we are experiencing a reacceleration in the chemistry, blood gas and hematology control product lines. Improving doctor office visit trends and the resulting diagnostic test volumes, combined with new product launches and additional penetration within existing OEM customers, position this business for sustainable growth going forward.

In conclusion, the favorable trends we experienced in recent quarters continued in our Q2 as execution from the global team, favorable end market conditions and robust demand for our portfolio proteomic research reagents, analytical tools and molecular diagnostic products remain strong.

Our cell and gene therapy initiatives are resonating with our biopharma customers. There's increasing demand for our GMP proteins, cell culture and media products are translating into demand across our portfolio, particularly for our protein simple branded proteomic and analytical solutions.

We have our sights firmly focused on hitting our $2 billion 2026 revenue target and following the signing of the Wilson Wolf purchase agreement, I'm even more confident in our ability to deliver and potentially exceed this goal.

With that, I'll hand the call over to Jim.

[Jim Hippel, CFO]

Thanks, Chuck.

I will provide an overview of our Q2 fiscal 2022 financial performance for the total company, provide some additional details on the performance of each of our segments and give some thoughts on the remainder of the fiscal year.

Starting with the overall second quarter financial performance, adjusted EPS was a record $1.88 versus $1.62 one year ago, an increase of 16% over last year. Foreign exchange negatively impacted EPS by $0.04.

GAAP EPS for the quarter was $1.94 compared to $1.15 in the prior year. The biggest driver for the increase in GAAP EPS, other than from business operations, was unrealized gains on our investment in ChemoCentryx.

Q2 revenue was $269.3 million, an increase of 20% year-over-year on a reported basis and 17% on an organic basis. Acquisitions contributed 3%, and foreign exchange translation had an immaterial impact to revenue growth.

From a geographic perspective, we experienced a strong and balanced performance with China and the US growing over 20% and EMEA increasing in the mid-teens for the quarter. The rest of the world grew in the upper-single-digits. By end market, biopharma remained very strong, growing 30%, while Academia increased low-single-digits year-over-year.

Moving on to the details of the P&L. Total company adjusted gross margin was 72.3% in the quarter compared to 71.5% in the prior year. The increase was primarily driven by volume leverage and favorable segment mix.

Adjusted SG&A in Q2 was 26.5% of revenue compared to 25.2% in the prior year, while R&D expense in Q2 was 7.5% of revenue, in line with the prior year. The increase in SG&A and R&D was due to the acquisition of a surgeon in the fourth quarter of last year as well as investments made to support our long-term strategic growth.

The resulting adjusted operating margin for Q2 was 38.3%, an increase of - I'm sorry, a decrease of 50 basis points from the prior year period but an increase of 50 basis points over Q1. Excluding the impact of the Asuragen acquisition made last April, adjusted operating margin was in line with the prior year.

Looking at our numbers below operating income, net interest expense in Q2 was $2.6 million, decreasing $0.8 million compared to the prior year. The decrease was due to a continued reduction of our bank debt. Our bank debt on the balance sheet as of the end of Q2 stood at $282.1 million.

Other adjusted non-operating expense was $1.9 million for the quarter compared to $1.3 million expense in the prior year, primarily reflecting the foreign exchange impact related to our cash pooling arrangements.

For GAAP reporting, other non-operating income includes unrealized gains from our investment in ChemoCentryx. Further down the P&L, our adjusted effective tax rate in Q2 was 21.4%.

Turning to cash flow and return of capital. $101 million of cash was generated from operations in the quarter, compared to $89.3 million in the prior year quarter.

In Q2, our net investment in capital expenditures was $10.2 million, and during Q2, we returned capital to shareholders by a way of $41.3 million in stock buybacks and $12.6 million in dividends. We finished the quarter with 41.2 million average diluted shares outstanding. Our balance sheet finished Q2 in a very strong position with $279 million in cash and short-term available-for-sale investments, bringing our net debt position to near zero.

Next, I'll discuss the performance of our reporting segments, starting with the Protein Sciences segment. Q2 reported sales were $205 million, with reported inorganic revenue, both increasing 19% compared to the prior year. Within this segment, the strong growth was very broad-based in nearly all assay and instrument platforms.

As Chuck mentioned, cell and gene therapy increased almost 80%, including growth of over 180% in our GMP protein products, while Biologics grew over 30%, Simple Western and Simple Plex both increased over 20% and proteins and antibodies all grew low double-digits. Operating margin for the Protein Sciences segment was 45.5%, a decrease of 120 basis points year-over-year due primarily to favorable volume leverage more than offset by the timing of strategic investments to support future growth.

Turning to Diagnostics and Genomics segment, Q2 reported sales were $64.5 million, with reported revenue increasing 23%. Organic growth for the segment was 7%, with acquisitions contributing another 16%. The Diagnostics Reagents business increased upper single-digits, and the ACD-branded spatial biology portfolio improved sequentially, achieving double-digit year-over-year growth in the quarter.

For Exosome Diagnostics revenue growth was hampered by the timing of companion diagnostic projects with big pharma, but importantly, prostate cancer test counts improved almost 30% compared to the prior year period, now surpassing pre-pandemic levels. We are encouraged with the volume trend and anticipate continued improvement as patients return to their physicians for checkups and our sales force gets more in-person interaction with the physician community.

Moving on to the Diagnostics and Genomics segment, operating margin, at 16.9%, the segment's operating margin increased 140 basis points compared to the prior year. The increase reflects the favorable impact of volume leverage and product mix, partially offset by the impact of strategic investments to support future growth.

In summary, our research-oriented end markets remain strong and the diagnostics end market continues to improve. As our Q2 performance shows, our research reagents and analytic tools remain in high demand, and we are executing extremely well in serving these markets.

Our comps become increasingly more challenging in the second half of this fiscal year as they reflect the massive rebound that occurred last year from the COVID lows the year before. However, given our strong performance during the first half of our fiscal 2022, we have increasing confidence that we can achieve an overall organic growth rate in the mid-teens for the full fiscal 2022.

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

[Operator]

[Operator Instructions] Our first question comes from the line of Puneet Souda with SVB Leerink. Please proceed with your question.

[Puneet Souda, SVB Leerink]

Hi, Chuck, Jim, thanks for taking the question. So first one, really, I think Jim already covered some of that as really mid-teens growth that you expect here for the year despite the tougher comps. I just wanted to clarify, Jim, on the op margin side, given the hiring that's been somewhat delayed, how should we expect hiring to - how should we account for hiring through the year and op margin performance throughout the year within this context?

[Jim Hippel, CFO]

We more or less expect the hiring to continue at the pace that it has been. But how that translates into adjusted operating margin? We said at the beginning of the year that we expected to end the year in Q4 at the same relative operating margin that we ended Q4 of last fiscal year, and we still see that as being the case. So that's really only about 50 basis points higher from where we ended Q2. So we see a continued gradual towards that mark.

[Puneet Souda, SVB Leerink]

And on capital deployment, I just wanted to understand. Obviously, you have the new a $400 million buyback that you placed. Given - traditionally, Bio-Techne has prioritized growth M&A, and I think that continues to remain a priority. But just trying to understand how are you balancing that versus the buyback? If you could just walk me through the puts and takes this year?

[Chuck Kummeth, CEO]

I'll take that, Puneet. So up to this point, we've been doing buybacks for stock option dilution, which is minor. And we've done 16, 17 acquisitions the last eight years, but we've never gone beyond two times leverage. We've never been able to. We've never done well in the public auctions, and we tend to do them with things more private and which tends to be more smaller.

Currently, valuations still remain quite high, and they might be getting cheaper, but we'll wait a few months for settling until we even know that. But today, they're very high. So we thought that was - given the status of our stock price, we feel very undervalued. We thought it was probably appropriate our Board, especially to make that message and since we have an extra 2 or 2.5 that we never use anyway. So we've got - as Jim pointed out, we're net debt zero. It's time to act and do something here and put some leverage to work.

[Puneet Souda, SVB Leerink]

Got it. That's super helpful.

[Chuck Kummeth, CEO]

It's really important you guys understand that we're not changing our priority on our capital plan, still M& A. We - but us going to 3.5, 4 times leverage is probably not a high - not likely. So we've got room here. It's still number one though.

[Puneet Souda, SVB Leerink]

Okay. Thanks for that. Yes. That makes sense. Chuck, a question that we've been getting from investors is about demand - in overall demand in GMP proteins and the recent acquisition in the space. As you saw, there was an acquisition of GMP cytokine manufacturer by one of your larger peers. Given the valuation paid for that asset, it appears that the interest is going to be likely going to be scaling of GMP proteins business and by that peer. So just wanted to understand, how do you see your competitive position now in that market and the overall demand you're seeing in that market with the one potential competitor scaling up as well? Thanks.

[Chuck Kummeth, CEO]

Well, we think we're years ahead for starters. That entity hasn't been very up to date with their work, and they're like fourth or fifth on the list out there. So that's one issue. They don't have a lot of assets in place. Their expansion has been real slow. I mean, they've been trying to be sold for the last two years, they haven't been doing much.

We have hundreds of proteins they can't even make. We think over time the drift in GMP proteins would be like - like the drift has been in RUO proteins and towards quality, lot consistency, bioactivity, et cetera. I think we'll be uniquely positioned in, say, 5, 10 years to probably have again, proteins that nobody else can even make more than likely.

We're going to go well beyond the IL-10s and IL-15s, we think as this industry matures and people get smarter and use these proteins for different things. We just think that we're in the best position we have been. We've been at this for four years or five years now. And you can - I think the move on the Wilson Wolf even more than strengthens that because we'll be able to position full solutions to the industry, bioreactors that have proteins already embedded sterilely. So we're going to have novel innovative concepts to actually improve the whole cell and gene therapy workflow. And again, a new landlord for these guys, it's not going to help them. So they have no domain knowledge in the space beginning. So they all have money to help them with, but again, there are years behind us, we feel.

[Puneet Souda, SVB Leerink]

Got it. Okay. Super helpful. And congrats on the Wilson Wolf deal, guys. Thanks for taking my questions.

[Chuck Kummeth, CEO]

Thanks.

[Operator]

Thank you. Our next question comes from the line of Dan Arias with Stifel. Please proceed with your question.

[Dan Arias, Stifel]

Good morning, guys. Thanks for the question. Chuck, on GMP proteins and to your last point on scaling there, I'm just curious how many proteins that you make are driving the bulk of the demand? Is there like an 80-20 rule that we should think about? Or is it more diverse than that? And then relatedly, when you think about what's important over the next 12 months or so for growth, is it more a critical factor related to just scaling up the ones that you make now? Or is it expanding the menu? I mean, I'm sure it's both, but I'm just sort of looking for each one is a bigger lever on growth this year?

[Chuck Kummeth, CEO]

Yes. Thanks for the question. It's a very good one. We started early trying to expand and have the largest breadth catalog in GMP protein. We went to beyond 50. We have now since moved that back to roughly 30, 35. There just isn't a lot of demand right now. It's a very embryonic nascent industry. And you're right, there's literally a dozen that are really being made and sold, and that's about it.

We have got our first three totally launched in multiple lots, a lot consistency verified and in the middle of selling them and also having them audited by customers. These are the IL-7, 10, 15, 2 is coming. We have a vent coming soon. So we're going to go after first double in the first year or two years, probably. I doubt we'll ever scale across the board to 30, 40, 50 plus for probably years to come. I doubt anyone will. It will depend on how the industry - how that workflow matures and what they're looking for, I guess.

The big deal for us, of course, for everyone, is to how to make how to make these and beyond an RUO fashion, so in lots that are sizable and then lot-to-lot consistency, which is near perfect. And that's where the focus has been. That's what we're good at the RUO level, and we've been able to replicate that now at an extreme multiple in lot size with this factory. And that's what we're known for. And that's what we think is going to differentiate us.

And so far, the customer input and the audits have been stellar. They're blown away, quite frankly, what they see for the ability of our quality and lots - a lot consistently at the size of lots we can produce. They want to be assured that if they come out of clinicals, and they go into therapeutics, they can buy millions of dollars of a single protein in a near perfect consistency. And we're able to do that.

[Dan Arias, Stifel]

Yes. Okay, I appreciate that. And then maybe just on ACD. Can you just help us with how you see that business trending across the year? I mean, you had been pretty confident in a rebound. Last quarter, which I guess you saw a little bit of, but this quarter was slightly softer than what we were looking for, what I think you were looking for.

So, number one, how much of what you saw in the quarter was related to sales force versus market factors? And then two, can you maybe help us with the landing zone for growth this year, just given that list in our model, this is kind of like one of the wing segments?

[Chuck Kummeth, CEO]

Well, we were mid-single-digits last quarter, and we were double-digits. So we like the recovery, especially when taking into account that there was an Omicron factor. There is an academic tenancy to this franchise. There's a lot of academic customers and that was softer. The comp on top of that is near 30% and that's continuing for a while.

So, as we go through the rest of this year and then last, of course, is the sales force, spatial biology is all the rage, right? There's a lot of - and we're the biggest business out there in it right now. So, guess for other up-and-comers target. But we've had - especially this business is located in the Bay Area, we've had some attrition.

I mentioned that last quarter, we've covered over half of that back. We're in pretty good shape now. And the results reflect that, especially when you take in account comp and where Academia is a little bit softer still. And another even in that area have also mentioned the same kinds of market conditions.

So, throughout the rest of the year, we see improvements, continued improvements. And we still have always said we've had brief periods of 20% and 30% growth. We've always said this is a 15% to 20% grower for many years. We still stand by that. I think we're on our way back to that, and we're not too worried to be honest. It's kind of on plan.

[Operator]

Thank you. Our next question comes from the line of Jacob Johnson with Stephens Inc. Please proceed with your question.

[Jacob Johnson, Stephens Inc.]

Chuck, a lot of focus on GMP proteins and understandably so. But I think in your opening comments, you mentioned serum and media as an opportunity cell and gene therapy market. Are those candidates for GMP manufacturing 1 day? And when could that occur?

[Chuck Kummeth, CEO]

We're working on expanding our Atlanta facility for BME right now. We have exploding growth there, primarily because the market leader is kind of tripped recently and so we're finding out of business. So, we're expanding on that now. But yes, regular GMP media will be putting into the current GMP factory now proteins. We're going to probably do GMP antibodies and GMP media there.

And probably in parallel, probably a little bit some here, some at the headquarters, but over the next year, we'll be getting all that online. We see that as a natural adjacency to GMP proteins and part of the workflow. So - and we're being asked. Customers are asking, why can't you do this, too?

So - and we are selling some. It's just like we were doing GMP proteins in the last few years. We're doing all this in our research facility and kind of make do GMP type of quarters, we have to scale itself. So, the way to scale is to put it in our GMP factory where we have the room.

[Jacob Johnson, Stephens Inc.]

Thanks for that Chuck. And then maybe following up on Puneet's question on capital allocation. Chuck, I think you - that at some point last year that at some point, interest rates are going to rise and maybe multiples will come down and you would be ready to act. Obviously, we've seen some of this play out in the public markets. But do you think it's flowed through on the private side? And do you think you'll see more opportunities come to you as a result of this?

[Chuck Kummeth, CEO]

Do you think in terms of M&A?

[Jacob Johnson, Stephens Inc.]

Yes, in terms of M&A.

[Chuck Kummeth, CEO]

I mean I think every - humans are human. Nobody is going to take their current price of where it is today versus a month ago and say that's our value. I doubt anyone will, no matter what size of the company. So things have to settle out. And probably acquirers aren't going to be that, that mean anyway. They're probably going to wait as well, knowing it's probably foolish even try and just upset the target. But if interest rates go up, it affects your check treasury yield, it affects the DCS out there. The model they all come down, our too, if this is the new world that your shaving 10 points off their multiple, then we'll deal with it. But we'll deal with it effectively like we always have.

During Trump, there was 2.5%, 3% interest rates, and we were carrying at times of 40 multiple. There is a flight to quality too. I mean we're a company that makes money, double-digit growth, stable unicorns. It's just - we're hoping that this will end up being a winner in all this when things do settle. Right now, I think we're all still in a bit of a don't-catch-a-falling-knife kind of scenario, right?

So - but we know there's a lot of interest. There's a lot of - we get a lot of reasons our company for people to be interested and we'll be ready to capitalize and M&A as well. And believe me, I'm looking forward to acquiring things at a little better price tag as well. So Jim, do you want to add anything else?

[Jim Hippel, CFO]

Yes. I think the only thing I would add would be that if anything, what it might do in make the environment more favorable for M&A is one of our big competitors in the past 1.5 years hasn't been other companies, it's been going IPO. And this volatility that we're experiencing now, particularly with the IPO market might make owners think twice about that being a viable option and make a private deal more accessible.

[Chuck Kummeth, CEO]

To be honest, you actually had some inbound inquiries from potential targets that said they were more into an IPO and they've called back.

[Operator]

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

[Patrick Donnelly, Citi]

Thanks for taking the question. Chuck, maybe just to expand on some of the kind demand questions earlier on things like GMP. Obviously, people keep a pretty close eye on general biopharma funding and you kind of mentioned the IPO market, areas like that. Curious how you're feeling about kind of the sustainability of the demand, obviously, at your Analyst Day, talked about a few years of really strong growth from some of those high-growth more biologic areas. So just curious, if conversations have changed at all? Or do you still feel really confident sustainability of strength from some of those markets?

[Chuck Kummeth, CEO]

I feel better ever. Can I say 180% growth one more time?

[Patrick Donnelly, Citi]

Yes.

[Chuck Kummeth, CEO]

It's - we're killing it. We can't keep up, and we can't get this off the ground fast enough. We're being throttled actually. And the most exciting thing you saw in the transcript, you put a lot of extra detail around the applications for cell and gene therapy from the rest of our portfolio. All the way - we're finding all our instruments are being - we're having an incredible growth. Biologics isn't supposed to be growing continue at 30%. We kept digging, why is this happening? It's being used in specked inferred cell and gene therapy applications. AAV purity and stuff.

And on all 3 of our platforms are being specked in the cell and gene therapy applications going well beyond the TAMs that we are positioning these instruments for in the beginning. So yes, we see this being a juggernaut for years. And our $2 billion target out there in 2026, the largest component of that was cell and gene therapy. And guess what? It's just gotten a lot bigger when you add Wilson Wolf revenue to it.

So it's going to be - it could be roughly half the company or more by then, which should take a well beyond $2 billion too. So ,yes. And the new things coming, we're definitely going to do media. We're definitely doing antibodies. We have more and more demand for antibodies that are being used in these areas as well. This halo effect is - it's broad.

And it's because I think we did all the right things starting four years ago with doing more than a one-trick pony-type of approach. We have about 10 different products that can affect the workflow of cell and gene therapy. And then the things we couldn't get, we created the JV to give us more power in the channel and it's really working. Both of those entities Wilson Wolf and Fresenius are doing quite well.

[Patrick Donnelly, Citi]

Okay. That's helpful. Yes. And then speaking maybe a sustainable growth. China has been a great spot for you guys, again, over 20% again this quarter in spite of maybe some minor dislocations with things like the rolling blackouts. Can you just talk about the strength there? And then again, expectations for that to continue as we go throughout this year and even next?

[Chuck Kummeth, CEO]

China is - yes. China is rinse and repeat. It was 22%, and it's going to be there 2022, 25% in that range, we think, for some time. We'll cross $100 million this year, which is great for our company and for the size we're at, but it's only $100 million in China. So when we're out there at $2 billion plus as a company, it's going to be twice that or more. So I see nothing stopping the growth of China - unless - if the entire country shuts down and locks up and stuff there may be a momentary blip, but I don't - nothing is going to change the long term.

And the geopolitical things, too, just like before with - in the Trump era, all the product stoppages and stuff, it didn't affect us. We're the only game in town. They aren't local suppliers there. So if they want to do research in China, they're going to have to buy our stuff. They knew that, then they'll now continue going forward. So no issues.

[Patrick Donnelly, Citi]

Okay. That's helpful. Maybe just a quick last one on Exo. You mentioned prostate at pre-pandemic level volumes, that's certainly encouraging. Can you just talk through, I guess, the catalyst set there over the next quarters in terms of payers coming on board and continuing to ramp the reimbursement side, what we should...

[Chuck Kummeth, CEO]

Yes, sure. So we're something like 96 million lives total, and we're under 1 million for private payers. So we're continuing to grind away in private payers. We're seeing good growth. We've touched 3,500-or-so urologists, of which about 3/4 of our repeat purchasers. So we're not even one-third of the way through the domain of the doctors out there. So it's a continual issue.

So we are now starting to ramp and go after. We're seeing these results without still expanding our sales force. We're just starting to get to that now. We have, as you know, a new leadership, a new team in place with Asuragen and it's already have an immediate effect. But we got to get at new putting more people on the street and going after with urologists. They forget fast and you've got to stay on to even be repeat purchasers. So we are now across 75,000 tests total sold. So it's not a surprise now. It's starting to become real and we're seeing the growth for it.

But we did have a little bit reverse engines with Omicron, and we're not all the way back here with patients yet. It's coming, though. And again, it's, for sure, a $1 billion platform entirely. And that we're going to do a combination of things ourselves. We're going to have partnerships before anyone asks the ExoTRU program. We definitely are able to do it ourselves. We're talking NGS now, but we are very, very close to a very, very good partnership. And I actually feel very strong that we'll get it here.

And if we don't get that one, we've got one or two others waiting in the wings for a shot, so a lot of interest in this platform. And a lot of interest in the other things we have on the drawing board that are already validated assays, things in blood as an example. So it's coming and this is the best quarter in well over a year for Exo.

[Patrick Donnelly, Citi]

All right. Thanks Chuck. Look forward to some of those announcements.

[Operator]

Thank you. Our next question comes from the line of Catherine Schulte with Baird. Please proceed with your question.

[Catherine Schulte, Baird]

Thanks for the questions. I guess, first on your comments on the academic end market. Can you just quantify the impact Omicron has had on customer activity levels? And any regional differences that you're seeing there?

[Chuck Kummeth, CEO]

Yes. I've got a very insightful question. So it isn't - we've had our academic ranged from flat to double digit. It depends on the product. It depends on the regions. We have some academic accounts are fully funded. They're multiyear grants, and there's no issue. Some are not, and they are waiting, and they're waiting on new grants. Some are pulling back because there's no budget yet and they're being careful. We've got all these answers back from our field people because we've dug in hard.

The net-net of it all is roughly mid-single digits, maybe a little better than that, roughly like last quarter, but there was no doubt a significant impact from Omicron. They send people home longer than the time period over Christmas, and they haven't come back yet. And just like our own company, we brought people back and we send them all back home again. It's everywhere. So we're not worried. It's coming, right? And this is on top of some regions that are pretty good as well. And the overall macro environment looks good.

And then the budget that was already passed in the house is 15%. You add $3 million - $3 billion on top for the ARPA and you've got - that's where you get the 21% number. It's going to be something - in double digits will be a great budget. But Congress a little late this year and getting stuff done as we all know, and they've got to get it done. We hear it's a February deadline, but we'll see.

So I think we'll start seeing an uptick in the academic going forward. Even so, we've worked hard in this company mitigating academic risk. It's way smaller than our biopharma segments now. And with the result of biopharma, we are totally swapping out any effect from academia. This is by design, it’s because of this very reason.

So going forward, we're not too concerned. It's going to be - it's going to improve the rest of the year, academia. And hopefully, there BA2, variance is not a big deal, and we will get back to normality here by summer or at least get a few months off. And then I think you'll see quite a big snapback everywhere in academia, personally.

[Catherine Schulte, Baird]

Okay, got it. And then with Will taking over the Protein Sciences segment, any changes in strategy or opportunities that you see there with the change in leadership?

[Chuck Kummeth, CEO]

Well, there's only one Dave in there, and you'll be thoroughly missed, but I won't miss the sparring with them. He's got an edge to them, as we all know. Everyone knows Dave, but Will come with a great pedigree. He has very strong domain knowledge, if not stronger than Dave's in biology. So for us, that's really critical that our leadership here understands science all the way up and down. He's been here a few weeks. He's still residing in California, but he's had a great start. And I just - with quite a long search. We spent a couple of years looking for the right individual for Dave's in retirement, and I think we found them.

[Catherine Schulte, Baird]

Okay. Thank you.

[Chuck Kummeth, CEO]

We have not made any changes yet. It won't be long. I'll ask for something they all do.

[Operator]

Thank you. Our next question comes from the line of Alex Nowak with Craig-Hallum Capital Group. Please proceed with your question.

[Alex Nowak, Craig-Hallum Capital Group]

On Wilson Wolf, I think we all understand how strong of a company that is. But I guess what risk do you see in that direct bioreactor business from being the rocket ship that it could be? Just figuring out what could go wrong as you're on track to buy that business?

[Chuck Kummeth, CEO]

I think, by far, the biggest risk is you've got John Wilson, who is more of an R&D scientist type of KOL collaborator than an operations guy. So, him not finding a partnership somewhere, getting beyond $100 million of these guys tend to run a trouble growing the company beyond that level. So they're right down the street, they're already integrated because of scale ready JV already. So I've known him for over a decade, and tried buying first time Thermo Fisher 14 years ago. We've been friends ever since.

I think this thing is with a customer base of 800, he has, I think, over 20 customers that have already - already over $1 million of annual purchases. There isn't anything out there even remotely close to his level of clinical integration, I don't think, anywhere from anybody. So this is the de facto standard of the future.

Are there new ways to do this? Are there going to be copycats? Are there going to be copy cats? Are there going to be people doing crazy new things with bags and stuff? Sure. But the beautiful thing about GRx and it's the way it works, and it's hard wall surface. It's really, really gentle on T cells and NK cells like it.

So there are a lot of people chasing this technology with bioreactors that simply aren't going to be - they're going to work very well for T cells and for NK cells, just in fact being. So John learned this years ago. And so he's got a head start. We're not going to let them fail for sure. And - it's a marvelous business. It's growing like crazy. He's got a great team. They work with our great team here. And I've been waiting years for this, to be honest. So we're ecstatic.

[Alex Nowak, Craig-Hallum Capital Group]

Yes. No, that's great. And then just going back to China, saw the Eminence impairment in the P&L. Just curious what happened there if that impacts China on a go forward or at least in the next couple of quarters?

[Chuck Kummeth, CEO]

Well, it's China. We have a lot of cash in China. We took a swing. We know media is going to be big. We looked at two other entities, and we walked away from. We didn't think the management was stable. We picked this one. Guess what? The management wasn't stable. So it's at a point where we're definitely going to do the write-down. We got it more than covered, it's really immaterial.

It's not all a loss. There's liquidation. There's assets. We've got a nice spot in the business park there. So there's - there's way to regroup. But at this point, all we can say is that we're just taking the next step of the responsible thing we need to do with the impairment, and then we'll go from there and let you know more later as we see what our options are with that small assets.

[Alex Nowak, Craig-Hallum Capital Group]

Okay.

[Chuck Kummeth, CEO]

As a reminder, Alex, our results that we report for China don't include anything from Eminence, right? So it has a material impact on our growth in China.

[Operator]

[Operator Instructions] Our next question comes from the line of [Mike Rowe] with KeyBanc Capital Markets. Please proceed with your question.

[Unidentified Analyst]

Hi, Chuck, just following up on the Wilson Wolf., I mean, in your due diligence, do you think that the current operations there that they have the capacity and then the kind of expertise to reach that $100 million level?

[Chuck Kummeth, CEO]

Can I give you a dollar for asking that? I can - you just wouldn't believe what he did at the site. He bought a 100,000 square foot site and it's - he bought over a year, a year-and-a-half of supplies early on for the supply chain risk. Even they're all-in, he decked out facility for his people, it's beautiful.

And you can still park a couple of airliners in there with the empty space. It's - there’s - its just a wonderful positioning. So we're not worried at all. I think, if I had to guess - I don't know for sure, I don't want to get too crazy, but it would scale many multiples of their current revenue rate, I'm sure.

[Unidentified Analyst]

And then just, I guess, following up on a couple of the questions around GMP proteins. Are customers coming to you knowing exactly what they want, whether it's IL-2, IL-5 or what other IL protein there is?

[Chuck Kummeth, CEO]

Yes.

[Unidentified Analyst]

Or is it more of a consultative process? And given your experience in the industry and your work with other customers in this space, are you really driving customers to the best protein for their process?

[Chuck Kummeth, CEO]

Yes. Another great question. So the answer is mixed here. One, we talked about - we have a lot of interest and a lot of our products are actually going into regenerative medicine as well as cell and gene therapy. So that is a very collaborative effort with the customer at our site.

So we are doing other kinds of proteins as well. And I mentioned [Indiscernible] is one example. But in terms of the classic T-cell type of work going on for clinicals, we're not the first of the game. You've got Meltani and, CellGenix out there right now in most of the clinicals, right? And we're coming up fast.

So these customers come to us looking for equivalency, looking for a U.S. supplier, looking for R&D systems brand lot to lot consistency and they want to do equivalency testing. So they already know what they want, and they're what you'd expect. They're the IL-2 710, 715s to start, of which - and by the way, a learning for us, you need like all - three out of the four at least really get people seriously doing equivalently because no one is using just one.

They're using two or three of these, and they don't want to do also the effort on just one when they - and they can't get all three. So we're just getting started into that now, because we really - we've been open for a few months, but now we're just at the point of working on our fourth one for inventory. So we're at that level of now getting serious lot equivalency. Does that make sense?

[Operator]

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Kummeth for any final comments.

[Chuck Kummeth, CEO]

Okay. Well, thanks all for attending the call. We really love being a $1 billion company and we're on our way to $2 billion and well - with a great quarter, and we think we have some more ahead of us here. So we'll talk to you next quarter. Thanks. Bye.

[Operator]

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.