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Bio-Techne Corp
Earnings Call Analysis
Q2-2024 Analysis
Bio-Techne Corp
Despite an economic landscape marked by funding constraints, the company successfully orchestrated double-digit growth for its ELA platform, reinforcing its standing as the choice platform for high-volume accounts. The ELA platform, backed by a recent ISO 13485 certification and its clinical diagnostic capabilities, is expected to tap into a more extensive end market. In contrast, the Protein Sciences segment navigated through a 4% organic revenue dip, an impact that company leadership attributes to temporary macroeconomic circumstances, rather than a fundamental shift in the cell and gene therapy's industry's viability.
The Diagnostics and Genomics segment saw organic growth despite headwinds from cautious inventory management by core OEM customers, a situation expected to normalize in due course. However, broader concerns such as declining gross margin, impacted by factors including unfavorable product mix and the Lunaphore acquisition, highlight the pressures on profitability. R&D investment remained stable, and SG&A expenses rose, reflecting strategic acquisitions and cost containment efforts across the business.
Despite distress in the biopharma industry and academic sectors showing varied growth rates, Europe's increase in mid-single digits contrasted with China's significant decline and APAC's slight decrease. These variances underscore shifting geographic and sectoral landscapes that the company confronts.
The company's balance sheet remains robust, marked by a strong cash position and conservative leverage below 1x EBITDA. This financial health supports a strategy of capital allocation that prioritizes mergers and acquisitions (M&A) - a testament to the company's commitment to strategic growth and shareholder distribution through dividends and share buybacks.
Looking forward, the company anticipates the Q2 margin to be the lowest point for the year with an expected sequential improvement, aiming to reach mid-30% range by year-end. This margin recovery aligns with the expectation that the rate of growth deceleration observed in recent quarters has concluded, with Q3 growth projected to mirror that of Q2.
Enthusiasm surrounds the successful Lunaphore acquisition, which is already contributing to the company's prominent standing in the profitable Spatial Biology market. The company remains vigilant in seeking additional acquisitions to bolster its Cell and Gene therapy portfolios and reinforce existing growth verticals. These potential deals, governed by disciplined financial criteria, aim to meet or exceed long-term expectations set for Bio-Techne overall.
The company highlighted nearly a 20% surge in consumable sales on its instrument platforms, indicative of robust customer reliance on the company's productivity-enabling tools. This trend, along with discernible demand for new instruments, suggests potential for market expansion as biotech funding recovers. Moreover, operational focus is being honed through level loading across divisions and assessing divestiture possibilities for non-core, non-strategic businesses, which could refine the company's strategic direction and financial profile.
Management expressed satisfaction with the progress of Wilson Wolf and optimism regarding the resiliency of the Cell and Gene therapy markets. Despite recent downturns attributed to early-stage project cancellations, Wilson Wolf is demonstrating recovery with a promising trajectory for the upcoming year based on a stronger pipeline and impending clinical advances.
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Good morning, and welcome to the Bio-Techne Earnings Conference Call for the Second Quarter of Fiscal Year 2024. [Operator Instructions] I would now like to turn the call over to David Clair, Bio-Techne's Vice President of Investor Relations. Thank you. You may begin.
Good morning, and thank you for joining us. On the call with me this morning are Kim Kelderman, Bio-Techne's Chief Executive Officer; Chuck Kummeth, Bio-Techne's former Chief Executive Officer and current senior adviser to the company and Jim Hippel, Chief Financial Officer.
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 2023 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 Biotech Corporation website at www.bio-techne.com. Separately, we will be participating in the Barclays and KeyBank Health Care conferences during the next 3 months. We look forward to connecting with many of you at these upcoming events.
I will now turn the call over to Chuck.
Thanks, Dave, and good morning, everyone. Thank you for joining us for our second quarter conference call. As many of you know, my official tenure as Biotechnics Chief Executive Officer ended yesterday, and Kim Kelderman is now in this leadership role. He's taking over a company that is incredibly well positioned in several of the highest growth life science and diagnostics end markets. I heard Kim lead the Diagnostics and Genomics segment in 2018, and in November of 2023, he was appointed Chief Operating Officer, assuming all operational responsibilities for the company. Prior to Bio-Techne, I worked with Kim for 4 years at Thermo Fisher Scientific.
I'm excited for the future of Bio-Techne as it continues to flourish under Kim's leadership. When I joined Bio-Techne in 2013, we were a much smaller organization, with approximately $300 million in revenue at the time, the business was a leader in its legacy $3 billion total addressable market. Growth has largely stalled at the company. This legacy business of research reagents, immunoassays and diagnostic controls and calibrators, which we refer to as our core accounted for almost $650 million of revenue in fiscal 2023 and grew at a 7% CAGR over that period. Through a combination of 19 acquisitions, prioritized organic investments and execution from our top-notch leadership team, we leverage these core products and capabilities and grew the business to over $1.9 billion in fiscal 2023, while expanding our TAM to an estimated $27 billion.
Under the Bio-Techne umbrella, we now augment this core with high-growth, market-leading franchises in proteomics analytical instruments, cell and gene therapy, spatial biology and molecular diagnostics. Our team of over 3,000 global employees have accomplished a significant growth while maintaining one of the most attractive profitability profile in our industry. It's been a pleasure getting to know many of you on this call today and leading this talented team over the last 11 years. I have never been more confident in the long-term growth potential of this business and look forward to its continued evolution under the Kim leadership. With that, I'll turn the call over to Kim.
Thank you for you again, word, Chuck. And please note that all of us here of Bio-Techne the very best going forward. Now to our Q2 results. The Bio-Techne team continued to execute well in a dynamic and constrained market environment. Our industry has faced several headwinds for over a year now and all and those also impacted our second quarter, which resulted in an organic revenue decline of about 2%. The sources of these headwinds continue to be a very soft Bio-Techne funding environment destocking by our large OEM and pharma customers as well as a broad economic challenge in China, which happens to be historically our high-growth geography. Despite the negative impact from these headwinds, the long-term growth potential of our company remains intact, our strategic growth pillars such as the ProteinSimple branded portfolio of analytical tools for protein, our spatial biology franchise as well as our ExoDx liquid biopsy business all delivered solid growth during the past quarter.
In the years ahead, we will continue to bolster these high-growth businesses with market-leading high-quality content from our core portfolio of research reagents. By the way, our core portfolio with over 6,000 proteins and more than 400,000 antibodies has been a solid growth business by itself by delivering an average growth rate of about 7% over the past decade. We will continue to drive growth in this core portfolio or leverage our unique product catalog as well as our expertise to enable industry discoveries, fortify our existing growth pillars and ultimately, improve global health care.
During my transition period to become CEO, I also spent time understanding the efficiencies of our global operational footprint. We evaluated resource needs across all the businesses we analyzed relatively strategic importance as well as profitability of various product categories across our overall portfolio. As our operating margins show, Bio-Techne is already a very efficient organization. But that said, we have been able to identify opportunities to increase efficiencies throughout the global Bio-Techne operating model. In the face of the current environment, we will remain focused on driving our growth pillars while executing on those aforementioned efficiency increase opportunities.
Before I proceed with the specifics of the quarter, I'd like to officially welcome Matt McManus to Bio-Techne as the President of Diagnostics and Genomics segment. Matt might be familiar name to several of you as he was formally Executive Vice President and Chief Operating Officer for Ezenta. Prior to that role, he was leading Bio-Techne's molecular diagnostics business following our acquisition of Asuragen, where he was the CEO. We are excited to have Matt back at the Bio-Techne family, given his existing knowledge of the business, strong cultural fit and breadth of life science leadership experience. He is the ideal leader to take our Diagnostics and Genomics business through the next stage of growth. Matt runs out the Bio-Techne new leadership team that has deep experience and a proven track record of driving growth through market cycles and I'm excited to lead this talented team going forward.
Now let's start with a discussion on our end markets and geographies. Biopharma. In biopharma, our growth declined low single digits in the quarter. As we noted in the last call, the trajectory for the global biotech sales stepped down at the end of our first quarter and into the early part of our second quarter. This trajectory continued throughout the remainder of that second quarter. The biopharma customers remain very engaged with our sales force. But given the overall funding environment, they took a much more cautious stance on spending in front of their 2024 budget cycles.
On to the academic market. On the academic side, demand remains very consistent and healthy across the geographies. We drove upper single-digit growth in the quarter. And even though we saw a challenging biopharma market, the team has done an excellent job pursuing and converting opportunities in the academic market. From a geographic perspective, Europe grew mid-single digits. Our strengthened European leadership team continues the positive momentum, which we have experienced over the last 4 quarters. The team executed well despite the aforementioned spending behavior from our former customers.
In North America, we experienced a flattish year-over-year performance. It's worth noting that this is the region where we continue to experience the most significant impact from the soft biotech funding environment.
Now moving on to China. You might recall that while exiting our first quarter of the fiscal year, China was highlighted as a geography where we experienced a deceleration in spend mostly impacting our portfolio within the Protein Sciences segment. These headwinds led to a year-over-year decrease of over 20% in the geography for the quarter. The good news is that following a particularly challenging October and November, the run rate stabilized as we close the calendar year, and this trend has continued at the start of calendar 2024. While it's difficult to call the bottom based on 2 months of performance, we are encouraged with the current trends stabilize. Access to improved health care remains the top priority for the China government and we remain very bullish on the long-term prospects of our product portfolio serving researchers in this region. Now let's discuss our growth pillars, starting with those within our Protein Sciences segment. A ProteinSimple branded portfolio of novel productivity-driven analytical tools had a challenging quarter when it comes to new instrument placements. This is related to the budget constraints across biopharma evident in China. However, there were a number of green shoots within that portfolio, namely the consumables used specifically on the ProteinSimple platforms.
For the fourth quarter in a row, these consumables have grown by at least 20%, which means that our customers are utilizing our instruments at record levels even when budgets are constrained. Another green shoot has been our Simple Plex platform, an automated multiplexing ELISA instrument branded ELA. Overall, the platform experienced double-digit growth in Q2 as ELA is becoming the go-to platform in high-volume accounts, such as CROs and cell therapy QC labs. These accounts perform large translational studies that increasingly rely on the high sensitivity and ease of use of the platform for their multiplexing ELISA needs.
As a reminder, we recently received ISO 13485 certification of our Wallingford, Connecticut facility. With this important certification in hand, we are now ready to pursue clinical diagnostic opportunities on this instrumentation platform. This will open up a large potential end market for this fast highly sensitive and easy-to-use multiplexing immunoassay instrument. We are encouraged by the number of discussions we're having, the potential diagnostic partners, and we are taking steps to further position ELA as the platform of choice for high-value diagnostic application.
The third green shoot [ winero ] proteinsimple growth pillar has been our biologics platform, branded Marine. Excluding China, this platform grew over 20% in Q2. We see significant traction of the recent launch of Maurice Flex, specifically in biological drug development and drug production. This makes a lot of sense because in addition to protein charge, protein size and identity capabilities, this next-generation platform is also an easy-to-use replacement for the legacy mass spectrometry fractionation methods, including an exchange chromatography.
Following the Maurice Flex launch in March of last year, we are seeing a growing number of publications, which is driving awareness and demand for this implement. I'll shift now to our other major growth pillars within the Protein Sciences segment.
Cell and gene therapy. This business vertical includes our portfolio of proteomics agents as well as scalable workflow solutions that enable our customers to accelerate progress towards the commercialization of their next-generation cell and gene therapies. To customers for these solutions and mainly biotech companies and our Q2 results were therefore equally impacted by the same funding constraints that I talked about earlier. However, short-term fund income strains have not changed our conviction that cell and gene therapy is here to stay. In fact, we believe that these technologies will play a significant role in treating and curing terrible diseases, and therefore, we will continue to invest in the strategic growth pillar.
During the quarter, we filed the first drug math to file or DMF, for an animal-free accelerate GMP expansion medium. This filing joins a growing list of almost 3 filings that span our GMP product portfolio. These DMFs enable our cell therapy customers to cross reference that filing when submitting to the FDA, making their IND process much easier. This way, our products are effectively getting specked into our customers' workflow. We are also expanding our market-leading GMP portfolio to include additional media formulations, gene engineering capabilities and GMP antibodies. These activities will further solidify Bio-Techne's market position in this rapidly growing industry.
In addition, we are finalizing a closed [ sphero ] immune cell therapy manufacturing solution, which pairs our GMP proteins and our GMP media with the Wilson Wolf GX. Overall, the Protein Sciences segment experienced a 4% organic revenue decrease in the quarter. It has been impacted by the current biotech funding landscape the order timing among a handful of large biopharma customers as well as the constrained macro environment in China. But as the green shoots that I discussed already indicate this segment is positioned for accelerated growth than the macro funding challenges abate.
Now let's discuss the growth pillars within our Diagnostics and Genomics segment, starting with our spatial biology franchise. This decision includes our ACD branded products as well as the Lunaphore branded Spatial Biology automated solution. ACD's RNA scope continues to play an important role in advancing gene therapy, neurosciences and cancer research. Despite the challenging macro environment, this portfolio remains in high demand, growing mid-teens globally for the quarter. We're also excited about the traction we are experiencing with the recently acquired Lunaphore platform. As a reminder, we are currently commercializing the COMET instrument fully automated high higher-plex platform that does not require use of conjugated primary antibodies. COMET's high-value proposition is resonating with the translational research community, which is driving significant interest and rapid growth in our installed base. In fact, demand for the COMET instrument exceeded our manufacturing capacity, which created a backlog during this quarter.
We are currently scaling our COMET production capacity to meet this strong demand. The final note around our Spatial Biology business is that we recently announced the upcoming lounge with fully automated, spatial multiomics workflow with detection of RNA and protein markers on the same tissue section. This workflow bears ACD's RNAscope technology have Lunaphore fully automated COMET platform, and we will be showcasing this complete solution at the upcoming AGBT next week in Orlando.
Now let's discuss our other growth pillar within DGS, the molecular diagnostics business. Our ExoDx prostate test provides valuable information on whether a man with a gray zone PSA score should proceed with their invasive and potentially dangerous prostate biopsy or not. With 30% volume growth in our second quarter, the value of this test continues to resonate with both patients and physicians. Our exosome-based development pipeline includes single G mutation test for monitoring various cancer markers as well as the colorectal cancer screening test designed for early detection of both colorectal cancer and precancerous pillars.
We look forward to sharing additional data on this exciting pipeline in the coming quarters. Overall, the Diagnostics and Genomics segment grew by 5% organically in the quarter, but was muted by the destocking and strict inventory management from our core diagnostics OEM customers. As these OEM customers return to normalized buying patterns, the results from our Spatial Biology and molecular diagnostic growth pillars will become more visible at the segment level.
In summary, I'm extremely proud of the team's ability to navigate the transitory challenges that are impacting both Bio-Techne and the broader life sciences tool industry. A portfolio of [ COLI ] agent our growth pillars in proteomic analytical tools, in cell and gene therapies, in Spatial Biology and in molecular diagnostics are well positioned to improve the quality of life by catalyzing advances in sciences and medicine.
Thank you very much.
And with that, I'll turn it over to Jim. Jim?
Thank you, Kim. I'll start with some additional detail on our Q2 financial performance, then give some thoughts on the financial outlook. Starting with the overall second quarter financial performance. Adjusted EPS was $0.40 compared to $0.47 in the prior year quarter. Foreign exchange benefited EPS by $0.02. GAAP EPS for the quarter was $0.17 compared to $0.31 in the prior year. Q2 revenue was $272.6 million, a decrease of 2% year-over-year on an organic basis and was flat on a reported basis. Foreign exchange translation had a favorable 1% impact while acquisitions also contributed 1% to reported growth.
Looking at our organic growth by region and end market in Q2 North America declined slightly year-over-year. Europe increased mid-single digits, and China declined over 20% in the quarter. As Kim mentioned, the soft biotech funding environment combined with overall conservatism from our biopharma customers, we're both a drag on our North American business, and, to a lesser extent, also represented a headwind to our European performance relative to more recent quarters. APAC outside of China decreased low single digits overall, with government funding constraints in South Korea, partially offset by growth in Japan and India.
For China, the soft government funding environment continued to impact the region. Following many months of decelerating run rates in China, we experienced a stabilization in our run rate business in December. Encouragingly, this stabilization has continued as we begin calendar 2024. It is challenging to call the bottom in this dynamic geography that we are optimistic that headwinds going forward will be less severe. It will likely be a while before we return to the kind of growth rates that we historically achieved in China, but we remain confident that China will still be the fastest-growing major region in the world for life science tools over the long term.
By end market in Q2, excluding China, biopharma declined low single digits while academia grew upper single digits. Below revenue on the P&L, total company adjusted gross margin was 69.7% in the quarter compared to 71.7% in the prior year. The decrease was primarily driven by lower volume leverage, unfavorable product mix and the impact of the Lunaphore acquisition. Adjusted SG&A in Q2 was 31.2% of revenue compared to 27.9% in the prior year while R&D expense in Q2 was 8.4% of revenue compared to 8.3% in the prior year. The increase in SG&A was driven primarily by the Lunaphore acquisition, partially offset by diligent cost management across the business. The price increases implemented during fiscal year '23 continue to offset the dollar impact of inflation on operating income with pricing also largely offsetting the inflationary impact on our operating margin in Q2. Adjusted operating margin for Q2 was 30.1%, a decrease of 540 basis points from the prior year period. Excluding the Lunaphore acquisition, which closed at the beginning of Q1, adjusted operating margin was 300 basis points lower than the prior year due to the impact of unfavorable volume leverage and product mix.
Looking at our numbers below operating income. Net interest expense in Q2 was $3.4 million, increasing $1.2 million compared to the prior year period due to higher debt levels. Our bank debt on the balance sheet at the end of Q2 stood at $447 million, an increase of $7 million compared to last quarter. Other adjusted nonoperating income was $3.1 million in the quarter, an increase of $3.1 million compared to the prior year primarily reflecting our 20% share of Wilson Wolf adjusted net income and the foreign exchange impact related to our cash pooling arrangements.
Moving further down the P&L, our adjusted effective tax rate in Q1 was 22% and flat sequentially, but up 100 basis points compared to the prior year due to geographic mix.
Turning to cash flow and return of capital, $83.1 million of cash was generated from operations in the quarter our net investment in capital expenditures was $14.9 million. Also during Q2, we returned capital to shareholders by a way of $12.5 million in dividends and completed $8 million buyback of 1.4 million shares. We finished the quarter with $160.1 million average diluted shares outstanding. Our balance sheet finished Q2 in a strong position with $135.6 million in cash, and our total leverage stood below 1x EBITDA. Going forward, M&A remains a top priority for capital allocation.
Now I'll discuss the performance of our reporting segments, starting with the Protein Sciences segment. Q2 reported sales were $197.7 million, which reported revenue decreasing 3% compared to the prior year period. Organic revenue decreased 4%, with foreign exchange having a 1% favorable impact. As a reminder, is our Protein Sciences segment has the most exposure to the China geographic region as well as the biotech end market. Operating margin for the Protein Sciences segment was 40.3%, a decrease of 350 basis points compared to prior year quarter as unfavorable volume and product mix were partially offset by cost management initiatives.
Turning to the Diagnostics and Genomics segment. Q2 reported sales were $75.4 million, with reported growth increasing 11% compared to the same quarter last year. Organic revenue growth for the segment was 5%, with acquisitions having a 5% impact and foreign exchange having a favorable impact of 1%. As Kim previously mentioned, organic growth was driven by our spatial biology and molecular diagnostic growth pillars, partially muted by the destocking and order timing of our core diagnostic reagent OEM customers.
Moving on to the Diagnostics and Genomics segment operating margin. At 6%, the segment's operating margin decreased compared to the prior year's 12.2%, due primarily to the impact of Bloomfor acquisition. However, Q2 operating margin improved 530 basis points sequentially from Q1 due to improving volume leverage and favorable mix. As we turn the page on Q2 and look ahead to the back half of our fiscal year, there are still reasons to remain cautious, but there are also some reasons or green shoots as can call them for optimism in the near term. On the macro front, biotech funding has not dramatically started flooding back, nor has the Chinese economy and funding the life science research returned to its pre-COVID strength. But inflation and interest rates appear to have stabilized. And according to some analyst reports, Biotech funding has already been reduced to a level not seen since 2016. Having recently bended China in Q2, Kim, Chuck and I all witnessed the local economy on the move with crowded streets and restaurants and busy regional airports. After several years of COVID shutdown, the local economy is starting to bustle once again and likely generating tax revenue for their government.
As for Bio-Techne, our growth pillars are continuing to shine even these typical macro conditions. We are closely monitoring sequential run rates in our reagents business to help determine where we are at in the [indiscernible] process. It's early in the new quarter, but thus far, we are encouraged that the worst may be behind us. This does not mean we expect a quick acceleration of growth. But we do expect that the trend of decelerating growth that has been pervasive throughout this macroeconomic cycle may have subsided. Down cycles like we've experienced over the past 18 months or so are never fun. With the resiliency of our growth pillars throughout this cycle has given us even greater confidence that our company will grow at a double-digit growth rate when markets normalize in the longer term. As our markets start to normalize, and prepare for the inevitable return to growth, we will continue to diligently manage our cost structure and invest in the business for the future. As Kim mentioned in his opening comments, we continue to identify opportunities for efficiencies and by executing on these opportunities. We'll protect and even grow our adjusted operating margin sequentially for the remainder of the fiscal 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.
[Operator Instructions] Our first questions come from the line of Puneet Souda with Leerink Partners.
Chuck, it was really great working with you and good look ahead. And Kim, welcome onboard again. It's good to have you in the role, leading the company. And Matt, I'm really glad to have you back at Bio-Techne as well. So maybe let me ask my question is really around sort of the headwinds that have existed for the last few quarters. You have known them we have seen that across the industry, China, biopharma. I think the question really here is what changed in the quarter within your assumptions you were expecting a flat result in this quarter, you ended up down 2%. So maybe just walk us through, is there something in the portfolio? Is it specific to customer orders? Or is there something in the forecasting process that's not working well that yielded this result versus what you were expecting? And then I have a follow-up.
Thanks for your kind words towards our team. Great question. I, of course, have an opinion on which of these headwinds are going to be more significant going forward. But in [ every mirror ], we have -- we certainly have a good understanding of which ones are most significant. So I'll let Jim talk about that.
Yes, Puneet, is the 1 that called that forecast, so to speak. So I think I need to speak to it. As we ended last quarter, we were pretty transparent on the call that in the last couple of weeks, as we closed Q1 in the first few weeks, as we opened Q2 that we've seen a step down in deceleration in our biotech especially, but even a bit pharma and so the reality is, and we've talked about this in various conferences throughout that, that trend had continued. And the time of the call, a few weeks doesn't necessarily make a trend. So we took a a view on our growth rates decelerating from where they were in Q1. But obviously, that trend ends up being longer and deeper than we anticipated. So that's kind of how and why we ended up where we did. That being said, as we look forward, and again, more optimistic view coming out of last quarter and going into this quarter than we did prior quarter in that run rate, as we talked about, it stabilized in China. And we're just seeing an overall stabilization in our business as we enter this quarter relative to how we entered Q2. But I will temper that a bit by saying just like last quarter, a few weeks or even a month doesn't necessarily make a trend either. But we definitely have to see a bit of a momentum shift or at least stabilization from where we are at this point going into this quarter versus last quarter.
Okay. That's helpful. Maybe on the guide, Jim, I just wanted to clarify that you expect this quarter to be a low point based on the comments you mentioned about China early signs and stabilization there and biopharma remaining sort of a status quo. Maybe just help us think about the next 2 quarters or for the full year, just in terms of where models are -- if you could walk us through your assumptions and how you're thinking about the growth rate here? I appreciate any context on that.
Sure. Well, I would say this. I mean, I talked about that we have a sense that the deceleration is slowing and perhaps stopping. And so what I mean by that is, and I think you've heard this from many of our peers already that kind of expect our Q3 to be somewhat similar to our Q2 in terms of organic growth. Beyond that, it's difficult to call this the whole bottoming process has been difficult to call. But I pretty much agree with what's being set out there by -- with our larger companies who have even greater overall market access that it feels like the first half of calendar year '24 will be more difficult than the second half. But we'll obviously get into our planning process here in about 3 or 4 months, and we have more to talk about our fiscal year '25 following that. But that's -- I pretty much we put -- our view is pretty much consistent with what you're hearing from our peer companies.
Our next questions come from the line of Jacob Johnson with Stephens.
Maybe just first to unpack the biopharma commentary. The release would suggest those kind of headwinds increase in December. Can you just talk to kind of what you saw then? What caused that or what you think caused that, maybe the [ evil ] CFO, Jim? And then just as we look ahead Kind of what are you seeing from that end market to start the year? Have you seen any kind of change in customer behavior as the calendar has turned?
I'll start off and then let him comment perhaps since you mentioned the Evil CFO comment, I think that's partly what it was. In the sense that I talked about in some prior conferences that in talking to our customers the interest is as high, if not highest it's ever been in our products. But getting purchases through particularly any larger purchases through their internal purchasing departments or the finance departments was difficult and there was a sense of hold off until the next calendar year and calendar year budgets are set. And so we'll see if that actually materializes this quarter, but there was definitely that -- those conversations going on with our customers. But I think quantitatively, there's been a number of reports put out there by analysts who file very closely the biotech funding, and they all basically say that biotech funding was down over 20% in the December quarter, and I think down sequentially like in the mid-teens even. So there was definitely a drop off in biotech funding, and that's a decent chunk of our business. So I think that's -- I think that goes without saying that was a clear driver for what occurred within the quarter.
Yes. Let me add to that. Obviously, biopharma market has been constrained by lower funding than usual. If not mistaken, we probably hit the lowest point since 2016. And However, our portfolio is well positioned, right? So we have, in the core, the highest quality products that will could use and give you the best results. So you don't have to repeat your experiments, which, of course, is important in a constrained environment like this.
And secondly, our insuentation portfolio is to optimize efficiency. So to have to have fewer people in the laboratory to automate clunky processes that will give you the efficiencies you need and the reproducibility in your results that you need. So overall, our portfolio is tailored to a constrained environment like this one. And I think, therefore, that we will come out strong, once funding normalize.
And I'll just reiterate what Kim talked about in his opening comments to reinforce that is that our consumables on our instrument platforms were up again, this quarter, nearly 20%, and they've been up 20% or more every quarter for the past 4 quarters in this -- has been a declining market overall in the past year. So I think that -- it's a clear sign of how our tools provide the productivity that our customers need in an environment like this, not to mention the potential pent-up demand for new instruments once funding becomes more prevalent.
Got it. And then just my follow-up. Kim, you mentioned earlier this year and then on this call again that given the current environment, you could look more internally at your footprint and efficiencies, I think there was a restructuring charge in the quarter as well. Can you just elaborate on that statement and kind of how -- what efforts are you taking right now? And maybe for Jim, how we should think about the impact of those on margins?
Yes. Thanks, Jacob. As I think about the constrained environment, you're always going to make sure that you tailor your organization to be most efficient in such environment. Not only to protect the bottom line but also to make sure that you're most efficient coming out of such constrained period. So yes, we have looked at level loading the capacity of our employees over certain businesses in certain buckets, volumes and revenues are more down than others. So we, of course, want to make sure that we do the right things there from a horsepower point of view. And then secondly, it's a good time to look at which businesses are core and strategic to you. And in our case, we found some businesses where there is here a growth profile and/or a bottom line profile that doesn't fit our long-term financial strategies and expectations and/or businesses that take disproportional amount of management attention and that do not have synergies with our current channels or products. So those are businesses that we will evaluate. And over time, we'll divest.
Sorry, go ahead, Jim. Sorry.
I was going to say with regards to the impact to margins. So what this does is some of the actions we're taking gives us a much higher level of confidence that the margins we reported this quarter will be the low point for the year. And we'll progress sequentially going forward. And I know you're going to ask me how much and I think we're targeting to get back into the mid-30% range by the end of the year for Q4.
Got it. Congrats to Chuck on the retirement. I'm not sure I saw my first day of retirement [indiscernible] that's just me.
Our next questions come from the line of Dan Arias with Stifel.
Kim or Chuck, can you just maybe talk a little bit about the antibodies business and the antibodies market. just given that there are a decent number of moving parts in the mix when it comes to pharma spending, the Abcam deal, et cetera. It would just be great to get some color on what you think is relevant when it comes to the portfolio, pricing, share changes, et cetera.
Yes, Dan, thank you so much for your question. Our antibody business has done quite well. I think it's been running at the low single digits even in this environment. So with the headwinds in biopharma, we certainly have to make sure that some of our sales force focuses on academic markets and and make sure that they close deals over there, and we get better in that space. Our quality of our antibodies is world renowned and we know that we we can compete even at higher prices with other antibody companies, and we are really confident that we will be able to continue to do so. Of course, we have had some headwinds in addition from destocking where people would have fewer or less antibodies on the shelf. However, we feel confident that symptom is now towards the end of its pace so that we feel that headwind will abate.
Okay. Helpful. And then, Jim, I hate to ask about 2025 since the second half of this year is tough to call. But if I go back to the Analyst Day and I think about the growth platforms that you guys highlighted 4 or 5 of them had double-digit market growth rates attached to them. So does it feel like 6 to 12 months from now, your growth verticals are ramped up enough and the comps are favorable enough to where a 2-digit growth number that's more typical of what you've done in the past, comes back into the picture?
Yes. What I'd say is this, Dan, is that we have a high level of confidence given our relative performance of our growth pillars even in this environment. that once the market gets back to its long-term 4% to 6%, call it, mid-single-digit growth trajectory that we will be well in the double-digit growth once our core is back up there and then, of course, the growth pillars on top of that. So to ask me how long it takes to get there is also asking how long it takes for the market -- overall market to normalize. And I don't have a crystal ball on that. But assuming it does normalize as we get into the end of calendar year '25 and hopefully, by then, then the answer would be yes.
Our next questions come from the line of Patrick Donnelly with Citi.
And Chuck, I second my congrats there. Maybe, Jim, on the near term, just 3Q piece, we got a good amount of questions just in terms of how to think about it. Is it flat is kind of -- is that the right organic kind of year-over-year number to think about 3Q? If you can just help us kind of frame up the near term, it would be helpful on the organic growth side.
Yes. I mean, specifically, right now, our base case is that the growth rate we experienced in Q3 will be similar to the growth rate we saw in Q2. So the deceleration of our growth rate that we've seen -- the deceleration of our growth rate that we've seen in the past 3 or 4 quarters, we think is behind us.
Yes. Understood. Okay. And then maybe in China, it sounds like, obviously, I know Jim, we chatted and you were over there. Maybe just talk about your expectations for the recovery in that region? I know in the past, whether it was government or whatever it may be, you guys saw some real snapbacks quarter-to-quarter last time we chatted, it sounded like that was a little less likely, maybe a little more of a stability into a gradual recovery. But maybe just talk to us about what you saw over there and again, the expectations over the next few quarters relative to some of the past cycles that we've seen?
Thank you, Patrick. I'm going to hand this over to Kim. I know we feel exactly the same way about this, but he was there actually more recently than even I was. So go ahead, Kim.
Yes, Patrick. Well, thanks for the question. What we feel is that, obviously, China is an important country to us, right? 10% of our revenues come from there. We have been able to outgrow most of our peers over the last half decade. But that also made it tough over the last couple of quarters where China truly came to a standstill. And we feel that the the activity in China is stabilizing. We do not see a clear light at the end of the funnel. -- our comparables are going to be a little bit better in the coming quarters, but not for instruments, right? So it's not that we are over that hump. We do think, though, that China is going to be a fast-growing market in the future. We do expect that China will have a kind of a bias towards China for China. Therefore, we are building a local GMP facility to serve the local market. And then at the end of the day, we feel that our products with the high quality and the automation aspects will increase efficiency and we'll find a -- or continue to find a real good spot in China. And I think that the current pull-through of our consumables shows that the instruments are getting used yes, at a record pace at the moment. As I mentioned, we are long-term believers in China, and we believe that China will get back to normalized funding. And and use the funds to prioritize health care. So we're very optimistic over time. But if you ask when or what will trigger a V-shape recovery that I won't be able to answer. We think it will be a slower recovery than usually.
Our next questions come from the line of Dan Leonard with UBS.
I just want to make sure I understand the decline in the Protein Sciences business. You commented on the antibody trends to Dan Arias low single-digit growth. But can you speak to the growth rate of core reagents in aggregate, so your antibodies, proteins, ELISA -- and how steep was the decline in instrument revenue?
Yes. I'll jump on this and then Kim can comment further, Dan. Thank you for the question. We're not going to give specifics at that level of detail. But what I would say is that in general, overall, our reagents were down year-over-year. even though any bodies were slightly up. And our instruments were down as well given the capital constraints in particular from our customers. However, again, as I'll mention again, the cartridges and consumables that are used specifically on those instruments were up nearly 20%. Cell and gene therapy is a big user of our reagents and also a high concentration of our biotech customers. And so that also impacted, we think, temporarily our reagent sales within the quarter.
Understood. And Jim, possible you could comment on the growth rate for the CNG therapy portfolio, specifically either just GMP proteins or more holistically as you measure all the touch points you have in that market?
Yes. Well, it was down year-over-year. I'm not going to give the specifics to how much it was down. But I think an encouraging point is that the actual number of orders invoices et cetera, that we sold was still at an all-time record level. So what that tells us is that the customers were being more conservative in their purchases in terms of quantities, but still very active in their research within the cell and gene therapy.
I can add some information there. I think that -- as Jim mentioned, the volume of orders was higher than usual, but we did have a couple of larger orders push out. The thing that we can do as a company is make sure that we have new product introductions and the team is set to add 5 new GMP proteins to be released in the coming quarters so that we have a broader portfolio that serves more customers and and we'll also increase share of wallet.
Our next questions come from the line of Matt Larew with William Blair.
Just wanted to go back to the biopharma comments because, obviously, you referenced sort of a further deterioration in the quarter, which you had set up on the last call. But in the press release mentioned conservatism from a subset of biotech customers. So I guess if I just think about sources of the headwind being funding related versus being perhaps budget-related at biopharma companies that may have commercial assets, but again, pretty [ discussed ] the budget process. What do you view as more of the gating factor? Are you waiting for turnaround in funding? Or is it more just budget had to get put in place and now there might be more constructive conversations.
Yes. I think for us, given our weighting of customer base, the biotech funding was the biggest driver. I think the conservatism from pharma was secondary and hopefully, much more transitory. So that's -- I think that's our view. Kim?
Yes. No, I would agree.
Okay. Fair enough. And then obviously, you referenced M&A continuing to be a high priority, and it looks like some deals are starting to get done. Just curious, obviously, you had the Lunaphore acquisition here recently either from a size portfolio perspective, what are you seeing out there that's interesting? And are you starting to see valuations move more in line with public markets?
Yes. No, thanks for the question. To quickly jump on to the Luna for acquisition. It's obviously -- we are very, very happy with the acquisition itself, the assets. The team is amazing. Integration is going well. And of course, it will give us a fantastic position in the lucrative and fast-growing Spatial Biology market. As you know, this instrument, the comment will give us fully automated capabilities and multiomic aspects where we can look at proteins and RNA in the same slide, and then combining that with the ACD portfolio and our antibodies here in R&D Systems, it's an unbelievable value proposition.
We would love to do more of those. So we are always on the lookout. We have interest in looking at filling out our Cell and Gene therapy portfolios. -- we would like if there's opportunities to strengthen our core. We've talked about the 4 growth verticals. And if we can bolt something on to make those even stronger and get our positions more differentiated. That would be fantastic. And any opportunity that pulls through our core agents is really on our list. And -- as you know, we always maintain a long list, but we will be disciplined in picking opportunities that would meet or exceed our financial expectations over time, which is basically contributing to the financial expectations that we've all set to Bio- Techne overall. And whether this would be a small or a large or a public or a private company, we really don't select between that. We are open to any of -- any target that fits the mall that I just described.
Our next questions come from the line of Catherine Schulte with Baird.
Congrats to Chuck on the retirement. Maybe first, in pharma and biotech, I think you said down low single digits outside of China. Can you just talk a little bit about what you're seeing from emerging biotech versus kind of midsized and large customers and how you see those 2 groups playing out going forward?
Yes. Catherine, it's Jim. Thanks for the question. It's difficult to ascertain exactly small, sometimes smaller and larger biotechs, as you know, many are private companies, knowing how big they are is to always need it to determine. But I would just say, and generally speaking, the smaller the biotech, usually the more difficult the funding situation is. That being said, we haven't met the JPMorgan conference, call it another green shoot perhaps, but the level of activity that we saw around VC firms, private equity firms in general out sniffing around for all kinds of investment opportunities, whether it was in tools or whether it was in biotech, et cetera, was some of the highest levels that I've seen in many years there. So again, it's encouraging that perhaps the drought in funding is at its low point and might come back this calendar year, and that will obviously benefit our smaller biotech customers.
Yes. And if I can add to that. I think that the smaller and newer biopharma companies obviously are in a different life cycle. So they typically still have to build out their labs and define their processes and validate their -- the way they measure things. So that's where we see our automation platforms, of course, being placed. And then the midsized ones are off and running, and they might have repositioned a number of projects that we run in parallel, but certainly, they typically already have our instrumentation and a little bit more consumable oriented because they are pulling through these consumables. And then large pharma has gone through a phase where that we positioned the portfolio just as well. And there, we see a mix, right? So there is a capacity expansion by buying more instruments. And there's, of course, a pull-through in consumables. So that's how I look at the influence versus size.
Okay. Got it. And then you talked about these decelerating trends, hopefully being behind you here and 3Q organic growth looking similar to the second quarter. do you think we could see a return to positive organic growth in 4Q? Or is that more likely going to be a fiscal '25 event?
Anything is possible, Catherine Sure. I mean, it's that within of possibilities, yes. In fact, the tides turn in some momentum in China truly stabilizes, I think there's a potential for it. I'm not -- I would say -- I'd met it by saying it would be slight growth probably, but I think there's a potential for it. We're seeing sequential improvement in our businesses, so that's encouraging.
Our next questions come from the line of Alex Nowak with Craig-Hallum.
How is Wilson Wolf progressing since you made that investment there. Just curious where they deployed the cash, the cash infusion and just how they're handling the biotech funding environment?
Yes. Thank you for the question. So Wilson Wolf has tremendous or has behind them now in this last year. Overall, the year was hard because the -- some of the early-stage activities and clinical projects have been canceled. So overall, they're down mid-single digits. But the last quarter and last has been much, much better back in the black. And we do see a progress in the pipeline. We see that there are various clinical studies rolling into next phases. And we even see an approval upcoming where the [ GDX ] is specked in. So overall, we believe that Wilson Wolf will be doing great again. And we know that John Wilson has invested in activities that bolster the adoption of our G-Rex and the Wilson Wolf franchise. As you know, we have a very genius deal structure around the Wilson Wolf and at the latest is the end of calendar year 2027 that Wilson Wolf will be fully part of the Bio-Techne family.
I'll just add to with regards to their financial performance. They had a tough calendar year '23 like we all have. But they actually did see significant sequential improvement in their December quarter and are expecting continued sequential improvement from there. So that's encouraging also. Given there they have even much wider visibility into the cell and gene therapy market than we do.
Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Kim Kelderman for any closing remarks.
Yes. Thank you, and thanks, everyone, for joining the call. Of course, 1 last time, thank you, Chuck, for your leadership over the last decade plus. As you can hear, I'm excited about the long-term position and our prospects as a company. We have a great strategy in place. I'm also very proud of the Bio-Techne team for executing so well in this constrained environment. And I'm absolutely looking forward to navigating these constraints. And I'm looking forward to speaking again at our next earnings release.
That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.