Bio-Techne Corporation (NASDAQ:TECH) Q3 2024 Earnings Call Transcript

Bio-Techne Corporation (NASDAQ:TECH) Q3 2024 Earnings Call Transcript May 1, 2024

Bio-Techne Corporation beats earnings expectations. Reported EPS is $0.48, expectations were $0.46. Bio-Techne Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Bio-Techne Earnings Conference Call for the Third Quarter of Fiscal Year 2024. At this time, all participants have been placed in a listen-only mode and the call will be open for questions following management’s prepared remarks. During our Q&A session, please limit yourself to one question and one follow-up. I would now like to turn the call over to David Clair, Bio-Techne’s Vice President, Investor Relations. Please go ahead.

David Clair: Good morning and thank you for joining us. On the call with me this morning are Kim Kelderman, President and Chief Executive Officer; and Jim Hippel, Chief Financial Officer of Bio-Techne. Before we begin, let me briefly cover our safe harbor statement. Some of the comments made during this conference call may be considered forward-looking statements, including beliefs and expectations about the company’s future results. The company’s 10-K for fiscal year 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 pertinent to ongoing business performance. Tables reconciling these measures to the most comparable GAAP measures are available in the company’s press release issued earlier this morning on the Investor Relations section of our Bio-Techne Corporation website at www.bio-techne.com. Separately, we will be presenting at the Bank of America, Benchmark, Leerink, William Blair, Jefferies and Scotiabank conferences in the coming weeks. We look forward to connecting with many of you at these upcoming events. I will now turn the call over to Kim.

Kim Kelderman: Thanks, Dave, and good morning, everyone. Thank you for joining us for our third quarter conference call. I’m pleased to report that our third quarter outperformed our initial expectations as several of the green shoots we’ve discussed during our last earnings call continue to sprout and combined with excellent execution by our Bio-Techne team contributed to delivering 2% year-over-year organic revenue growth. We’re looking forward to seeing these green shoots further develop as the headwinds we have faced, namely the biotech funding and the macroeconomic challenges in China continue to stabilize and eventually improve. Our team demonstrated that our product portfolio can show relative strong performance in the stabilizing but still challenging end markets.

And therefore, we are confident that we can perform extremely well when our end markets fully recover. Additionally, we delivered this quarter’s growth while we continue to focus on profitability. The recent initiatives to drive efficiencies across the organization while investing to position the business for future growth are taking hold. And this shows by our adjusted operating margin increasing sequentially by 290 basis points to 33%. Our growth pillars within our portfolio continue to lead to our strong performance with a new quarterly record for our GMP reagents business, a continued increase in adoption of our ExoDx Prostate test, robust utilization trends across our proteomic analytical tools portfolio and strong demand for Comet, a fully automated special biology instrument.

I will double-click on these highlights and encouraging trends later in the call. First, I’d like to bring to your attention. The Bio-Techne’s recent recognition by CiteAb, a reagent search and data services company. Bio-Techne did not receive just one, but two awards. The first award I would like to mention was received for being the ELISA Kit Supplier of the Year. This important designation is awarded to the ELISA kit manufacturer that receives the most citations throughout the year. Citations are an important indicator of market adoption, particularly within academia. We are proud of our leading portfolio of ELISA kit stemming from a long history of innovation. CiteAb also recognized Bio-Techne’s RNAscope HiPlex 12 with the Innovation Award.

That is acknowledging its role in enabling spatial detection of RNA in tissue. Our overall spatial biology efforts were also recognized as Bio-Techne was highly commended for Educational Initiative of the Year, which is related to our ongoing work to enhance spatial biology research and education. This recognition is representative of our company’s vision to work together with our customers to unlock the possibilities of science. The second topic I want to highlight is related to artificial intelligence. Given the significant potential that AI and machine learning bring to the advancing science, I want to describe an example of one of the many ways our team is proactively and safely, leveraging these important tools. As you already know, Bio-Techne is the global leader in research use only proteins.

Researchers from around the world rely on our portfolio of highly bioactive proteins for many important laboratory workflows. Some examples of these workflows include cell growth and differentiation, antibody production and screening as well as biomarkers in disease monitoring. We are leveraging AI capabilities to create new patentable, hyperactive designer proteins and other reagents with new functionalities. For over 40 years, Bio-Techne has been on the leading edge of protein development and bioactivity. Today, we are using the power of AI to increase that lead even further. Now let’s get deeper into our quarterly results, starting with an overview of our end markets followed by our geographies. Our biopharma end market performance led by our cell and gene therapy growth vertical improved sequentially with a low single-digit increase compared to the prior year quarter.

Industry reports point to a recovery in biotech funding during the first calendar year of 2024 with estimates suggesting significantly higher funding levels compared to pre-COVID periods. However, this increase in funding comes after a December quarter that was an eight-year low. So it may be too early to call this a new trend. But nonetheless, it’s a green shoot that appears to be taking root. And if so, could blossom into meaningful revenue growth as we get into our fiscal year 2025. On the academic side, we delivered low single-digit revenue growth, even though we had a tough comparable from robust mid-teens performance in Europe last year. Within the U.S. and Europe, academic budgets remain stable and their spatial biology and proteomic instrument growth pillars outperformed in these end markets.

Now I will discuss the three geographies. North America improved sequentially with year-over-year growth in the low single-digits. This improvement was led by a strong performance in cell and gene therapy. Europe declined mid single-digits as mid-teens growth in the prior year period created a challenging comp for the geography. However, on a multiyear CAGR basis, Europe has performed well, mid single-digit growth. Last but not least, I will discuss China, which saw revenue decline in the mid single-digits versus prior year. We mentioned in our last earnings call that we saw a stabilization of revenues in December and January and we called for revenues in Q3 to be similar to Q2, and that was indeed in line with how the quarter played out, which is a confirmatory sign that the bottom may have been reached in China.

With the deceleration of revenue in China seemingly behind us, we also saw some green shoots in the region with China’s State Council’s introduction of a broad economic stimulus plan. This plan is focused on upgrading equipment across several industry to support innovation. While the specifics of this $70 billion lending program remain fluid, we anticipate that this will be a multiyear program that will eventually have a positive impact on our insulin business. Improving healthcare remains a priority for the Chinese government in our portfolios of bioactive reagents, proteomic analysis and spatial biology technologies will remain important tools for the modernization of healthcare in China. Now let’s discuss our segments and their growth pillars, starting with our Protein Sciences segment, where revenue declined 1% year-over-year on an organic basis.

This is a sequential improvement from our second quarter and reflects the stabilizing of the biopharma and Chinese end markets. Our Protein Sciences segment is where we have the most exposure to these end markets and stands to benefit the most from the green shoots taking root. Utilization of our protein simple branded portfolio of proteomic analytical tools remain very strong as consumables used on those instruments continued its long streak of double-digit growth. This growth was broad-based and was further enhanced by the growing installed base and expanding applications of these productivity tools. Examples of new applications are fractionation on MauriceFlex as well as QA and QC applications for gene therapies across our platforms, such as Maurice Simple Western and Simple Plex.

Our Simple Western platform of automated western blot solutions continues to gain share as demonstrated by the low double-digit growth for this quarter. The platform performance if it comes to ease of use, speed and reproducibility, compares very well to manual methods, which resonates with both our biopharma and academic end users. Customers continue to expand the Simple Western use case and workflows as we can see from increased utilization in gene therapy, potency release and quantitative immunoassay application. We are encouraged with the uptake of this novel instrument and given its low mid-teens market penetration and its expanded use cases, we see a long runway for adoption of this technology. Now let’s discuss the promising opportunity for our multiplex ELISA instrument branded Ella as a clinical diagnostic platform.

Following the recent ISO 13485 Certification, we are now ready to pursue clinical diagnostic opportunities on the Ella platform. This opens up a large potential end market for this highly sensitive, fast and easy to use multiplexing immunoassay instrument. The recently announced partnership with Novomol-Dx is a great example of this opportunity. Their Bio-Marker Pathfinder, or BMP kit utilizes Ella, its consumables as well as Bio-Techne’s reagents as the basis for their point-of-care [indiscernible] test. Novomol-Dx will initially launch the BMP kit in India that has potential to deploy this test more globally in the future. Moving on to the performance of the next growth pillar within Protein Sciences, which is cell and gene therapy. This novel portfolio of reagents, media, analytical and workflow solutions enables our customers to further their therapeutic development to progress through clinical trials and to make continued inroads towards the commercialization of these next-generation therapies.

Collectively, our portfolio of cell and gene therapy products and services increased over 30% in the quarter. GMP reagents, including GMP proteins and small molecules, remain a cornerstone of our cell therapy offering. We experienced continued traction during the quarter, especially in regenerative medicine applications. In the current quarter, we will be strengthening our GMP reagent portfolio with the launch of GMP antibodies, which are designed for cell selection and activation in cell therapy workflows. Overall, our portfolio of GMP reagents grew over 40%, which resulted in a record revenue quarter. Now let’s shift to our Diagnostics and Genomics segment, which reported 10% organic growth for the quarter. Starting with our spatial biology growth pillar, which includes both our ACD business as well as our Lunaphore acquisition.

The single molecule sensitivity, unrivaled specificity and subcellular resolution offered by the RNAScope ISH technology is driving utilization in cancer, neuroscience, immunology, cell and gene therapy and regenerative medicine applications. This broad utilization has enabled RNAScope to become the most referenced spatial biology technology in the industry as the number of our customers publications recently surpassed 10,000. Importantly, over 50% of these publications were released in the last three years as increasing global awareness and expanded market adoption further solidify ACD’s leadership in spatial biology applications. Jumping to a Lunaphore platform. Demand for our fully automated high throughput hyperplex spatial biology platform called Comet once again outpaced our manufacturing capacity in the quarter.

However, across divisional project to rapidly scale up Lunaphore’s instrument production capacity is on track to meet current and future platform demand. We also remain on track to launch ACD’s RNAScope HiPlex Pro on the Comet at the end of our current fiscal year. This will enable a novel, highly differentiated multiomic spatial biology platform capable of visualizing up to 12 RNA and 24 protein biomarkers simultaneously in one tissue sample. Moving on to our fourth and final growth pillar, which is the liquid biopsy based molecular diagnostics business. Our ExoDx prostate test provides valuable information on whether a man with a gray-zone PSA score should proceed with an invasive, potentially dangerous prostate biopsy or not. With over 25% volume growth in Q3, the value of this test continues to resonate with both patients and physicians.

I’d also like to highlight the continued traction we are experiencing with our surgeon carrier screening and oncology kit business. A surgeon’s ability to solve complex molecular diagnostic challenges continues to resonate with their clinical laboratory partners as growth for this business approached 30% during Q3. Also, we continue to execute on technology synergies within our molecular diagnostics division. We are developing exosome-based single gene mutation tests for monitoring various cancer markets. These kits leverage our ExosomeDx technology and will be distributed through our surgeon laboratory channel. We expect this first monitoring test to be launched in the upcoming quarter. Before I hand the call over to Jim to walk you through the financials in more detail, I would summarize the key takeaways for Q3 as such.

Biopharma end markets as well as the China region stabilized relative to the previous quarter and there are early indications that these markets will improve in the back half of the calendar year. Our growth pillars, which are comprised of cell and gene therapy, proteomic analysis solutions, spatial biology technology and our liquid biopsy platform, all continue to outperform the market with their superior portfolio positioning and by the excellent execution of our team. These growth pillars enabled by our leading portfolio of proteomic reagents and assays remain incredibly well positioned to enable our customers to improve the quality of life by catalyzing advances in science and medicine for years to come. With that, I’ll turn the call over to Jim.

Jim?

Jim Hippel: Thank you, Kim. I’ll start with some additional detail on our Q3 financial performance and then give some thoughts on the financial outlook for the remainder of the fiscal year. Starting with the overall third quarter financial performance. Adjusted EPS was $0.48 compared to $0.53 in the prior year quarter, with foreign exchange having a material impact on EPS. GAAP EPS for the quarter was $0.31 compared to $0.43 in the prior year. Q3 revenue was $303.4 million, an increase of 2% year-over-year on an organic basis and a 3% increase on a reported basis. Acquisitions contributed 1% to reported growth. Looking at our organic growth by region and end market in Q3. North America increased low single digits year-over-year, while Europe and China decreased mid-single digits.

As Kim mentioned, we noticed an improvement in demand from our biopharma customers, which benefited growth in both our North American and European regions. Overall, Europe had a challenging year-over-year comp as both academic and biopharma increased mid-teens last year. APAC outside of China decreased low single digits overall, with government funding and macro constraints in Japan and South Korea, partially offset by growth in India. For China, the soft government funding environment continued to impact the region. Although the stabilization we experienced in our run rate business in December continued in Q3. This stabilization led to year-over-year growth in our core reagents as well as our spatial biology business in the region. It appears as though the worst of the China slowdown is behind us at this point.

And over the long-term, we remain confident that China will still be the fastest-growing major region in the world for life science tools. However, the path back to accelerated growth, we think will take longer than previous down cycles. By end market in Q3, excluding China, biopharma grew low single digits in the quarter, while academic was relatively flat with a challenging double-digit growth comps in Europe. Below revenue on the P&L, total company adjusted gross margin was 71.9% in the quarter, a significant improvement from Q2, but lower than the 72.6% in the same quarter of the prior year. The year-over-year decrease was primarily driven by the impact of the Lunaphore acquisition in this fiscal year. Adjusted SG&A in Q3 was 30.3% of revenue compared to 27.9% in the prior year, while R&D expense in Q3 was 8.5% of revenue compared to 7.7% in the prior year.

The increase in SG&A and R&D was driven primarily by the Lunaphore acquisition. Our strategic pricing strategy continues to offset the dollar impact of inflation to operating income, with pricing also largely offsetting the inflationary impact on our operating margin in Q3. Adjusted operating margin for Q3 was 33%, a decrease of 400 basis points from the prior year period but an increase of 290 basis points sequentially. Excluding the Lunaphore acquisition, which closed at the beginning of Q1, adjusted operating margin was 160 basis points lower than the prior year due to the impact of unfavorable volume leverage and to a lesser extent, strategic investments to position the business for future growth. Looking at our numbers below operating income.

Net interest expense in Q3 was $3.1 million, increasing $2.9 million compared to the prior year period due to higher debt levels associated with our acquisition of Lunaphore earlier this year. Our bank debt on the balance sheet as of the end of Q3 stood at $389 million, a decrease of $58 million compared to last quarter. Other adjusted non-operating income was $1.6 million in the quarter, an increase of $1.5 million compared to the prior year, primarily reflecting our 20% share of Wilson Wolf’s adjusted net income and the exchange impact related to our cash pooling arrangements. Moving further down the P&L. Our adjusted effective rate in Q3 was 22%, flat sequentially, but up 100 basis points compared to the prior year due to geographic mix.

Turning to cash flow and return of capital. $81 million of cash was generated from operations in the quarter and our net investment in capital expenditures was $16.4 million. Also during Q3, we returned capital to shareholders by a way of $12.5 million in dividends. We finished the quarter with $160.5 million average diluted shares outstanding. Our balance sheet finished Q3 in a strong position with approximately $140 million in cash on hand and our total leverage ratio was 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 Protein Sciences. Q3 reported sales were $214.6 million, with reported revenue decreasing 2% compared to the prior year period.

As we discussed last quarter, following a strategic review of our portfolio, we have decided to divest the fetal bovine serum or FBS business. FBS has approximately $10 million annual revenue business with an operating margin profile and long-term growth rate below the company average. The exclusion of FBS unfavorably impacted reported segment revenue growth by 1%. Thus, organic revenue decreased 1%. As a reminder, it is our Protein Sciences segment that has the most exposure to the China geographic region as well as to the biotech end market. Operating margin for the Protein Sciences segment was 44.2%, a decrease of 90 basis points compared to the prior year quarter as unfavorable volume and product mix were partially offset by cost management and structural alignment initiatives.

On a sequential basis, Protein Sciences segment operating margin increased 390 basis points as a result of these cost initiatives and improved volume leverage. Turning to the Diagnostics and Genomics segment. Q3 sales were $87.5 million, with reported growth increasing 16% compared to the same quarter last year. Organic revenue growth for the segment was 10% with the Lunaphore acquisition having a 6% impact. Growth was solid across the entire segment with our Molecular Diagnostics division leading the way. Moving on to the Diagnostics and Genomics segment operating margin at 9.3%, the segment’s operating margin decreased compared to the prior year’s 15.2% due primarily to the impact of the Lunaphore acquisition. However, Q3 operating margin improved 330 basis points sequentially from Q2, due to improving volume leverage and favorable product mix.

As we close out our fiscal year, we expect our Q4 to look similar to our Q3 that just ended with markets remain stable, namely the biotech end market in the China region. Our growth pillars should continue to drive outperformance relative to the overall market with incremental sequential improvement in revenue. With the expectation of incremental revenue in Q4, together with our cost management actions, we should also see incremental improvement in our adjusted operating margins in Q4 relative to Q3. However, we are also facing tougher year-over-year revenue growth comps in Q4 than we did in Q3, especially in China where we grew in the mid-teens in Q4 of last fiscal year. While these more difficult comps may be headwinds to our organic growth in Q4 relative to Q3, we are pleased that the trajectory of the business is improving.

As we progress to the end of our fiscal year, we will be monitoring very closely what impact the recent increases in biotech funding as well as the longer-term stimulus announced recently by the Chinese government may have in our fiscal 2025 outlook and operating plans. At our next earnings call, we look forward to updating you on the progress of these green shoots taking root. That concludes my prepared comments. And with that, I’ll turn the call back over to the operator to open the line for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] The first question comes from the line of Puneet Souda with Leerink Partners. Please go ahead.

Puneet Souda: Hi Kim, Jim, thanks for taking my questions. So first of all, look, congrats on the quarter, and it’s really good to see some recovery here in the core business. But based on what you’re seeing today, I know it’s still a bit nascent, but wondering if, Jim, if we can start to get to potentially sort of high single-digit, if not 10% plus organic growth in fiscal year 2025 as we – as you turn the chapter here for the next year and comps do get easier as well. So just wondering, when you look at the accounts, what would you like to see in order to potentially see a line of sight to that high single-digit or maybe 10% plus?

Jim Hippel: Yes, Puneet, thanks for the question. Like as we said before, you look at our track record, both during the COVID era upswing, but also during last almost a couple of years, what we call the COVID hangover, our organic growth rates have been consistently between 500 basis points to 1,000 basis points better than the overall market when you combine it. And this quarter appears to be no different. And so that gives us confidence in our portfolio, positioning gives us confidence in our team’s execution. And bottom line is that when market returns back to its historical growth rates of mid-single digit, we expect that gap in our performance relative to the market to be at least the same, if not better. So the real question is when do the markets get that mid-single-digit growth?

And when they do, we believe we’ll be if not high single-digit, will be well in double-digit kind of growth territory. And that’s an open question. And the analysts and our peers, and we all debate that. But the good news is that there’s green shoots ahead of us as opposed to perceived headwinds. And so that’s exactly why we’ll be monitoring that very closely here as we prepare our own operating plans to prepare for that. But I’m not going to sit here and try to predict exactly when the markets come back to their kind of normal rate. But the sentiment is definitely going to be improving. And at least from the analyst reports that are out there, the dollars seem to be behind it as well.

Puneet Souda: Okay. That’s helpful. And then maybe, Kim, when you look at the biopharma customers, just wondering, I mean, obviously, there’s some excitement with funding in the first quarter. As you look at the early-stage customers as you had the conversations, wondering how much of those dollars could potentially come to the discovery stage where you are more stronger versus the developmental stages of therapeutics. And then on the cell and gene therapy side, could you elaborate a bit more on the 40% growth that you’re seeing in GMP, how sustainable is that, just given the sort of the environment we’re in currently?

Kim Kelderman: Yes. Thank you, Puneet. Regarding pharma and the early funding, thank you, you and I have discussed in earlier this quarter, I do believe that funding would be seen to flow through earliest for the consumables part, right? So we do believe that CapEx, larger events will have a little bit longer of a lead time before their fundings flow through. We also do know like we mentioned earlier, that there is a couple of months that we now have seen good funding for the pharma, biopharma areas. And we do know that there’s usually two quarters or so of a delay before that funding flows into the business. I think that overall, this looks very good right now. But as I also mentioned, those are only trends for three months, and we had some disastrous months at the end of the calendar year.

So yes, good indication. It looks like a green shoot, looks like things are going up, but it’s early days, and therefore, we want to be careful that prognosis. The cell and gene therapy, it has been outpacing our overall company’s growth for a long time. I think it’s a very strong product line as are all four of our verticals. And I think that we are having a great opportunity there. We have the best reagents to place in that space. And as you know, we have a real good opportunity to consolidate all our reagents into the GRx [ph] for the cell and gene therapy space. So we’re very bullish on it. We do know that some of these quarters can be very – can be a little bit lumpy because of the larger orders from the companies that are food in their pipeline and that really can make a quarter swing.

However, we saw really strong growth in the earlier-stage companies. And that will give us a better foundation because if more of these 400 customers or so that we have started ordering earlier in their pipelines that will give us a more stable foundation to continue to put up great numbers. But for now, we are, of course, very encouraged with our play in cell and gene therapy and are very glad to see here some momentum building in that end market.

Operator: Thank you. Mr. Souda please rejoin the queue for more questions. Next question comes from the line of Jacob Johnson with Stephens Inc. Please go ahead.

Unidentified Analyst: Good morning. This is Mac on for Jacob. Just a few quick ones for me. I appreciate the commentary around biopharma in China. There’s been some muted commentary from most of your peers recently, but also the prospect around the stimulus that you mentioned earlier. So I’m curious as to what you’re watching for to signal an improved backdrop in that country at this point in time?

Kim Kelderman: Yes. Thanks, Mac. As you know, we are big believers of the situation in China improving over time and that this will be as it used to be a true growth driver for the business. As you know, we also had three real tough quarters in China right now, and that’s mainly paced by the lack of funding. We do hear there also some green shoots of funding efforts. And yes, we are keeping our eye to the floor there that the momentum will continue build, specifically for instrumentation. We know that the $70 billion funding that’s laid out or the loan that the government is laying out is aimed at improving and innovating the instrumentation base. And we think we can benefit from that funding. And in the meantime, we hear positive – positivity from our sales force.

They talk to their customers and the customers are getting more interested about hearing the benefits our automation brings. And our automation brings consistency, it’s very efficient and it’s got fast results. So that value proposition fits really, really well with the new funding potentially flowing through into China.

Unidentified Analyst: And then just quickly, is there anything that you think you need to change or could change to better capitalize on opportunities in the current environment? Or as it relates to your go-to-market strategy? Or do you think a reacceleration in growth largely depends on the macro environment?

Kim Kelderman: Yes, I think it’s the latter. The – it’s clear that we have a very efficient sales force in China. We’ve always done really well in the region. We feel we have the right coverage, direct versus indirect. And I think that we’ve got the right product positioning. In addition to that, we are, as you know, investing in China for China GMP plant, which will also come in line over the coming quarters. And with that, I think we have the right portfolio, the right value proposition as well as the right go-to-market channels. So I’m very happy with the situation that we currently have there.

Operator: Thank you. Mr. Johnson [ph], please rejoin the queue for more questions. Next question comes from the line of Patrick Donnelly with Citi. Please go ahead.

Patrick Donnelly: Hey guys. Thanks for taking the questions. Maybe just one for you, Jim, just on the guidance piece. Can you talk about the margin side? It sounds like up sequentially, maybe in that mid-30s range for 4Q. Is that the right number to build off of as you think about next year? And then I just wanted to clarify on the revenue side? Is it the dollars are up sequentially in 4Q and the growth rate is similar to this 2% organic. I just want to make sure I have that right.

Jim Hippel: Yes, sure. Thanks, Patrick. So first on the margin question. We talked about for a couple of quarters now that our goal was to get that to mid-30s type margin by the time we exit this fiscal year. It’s not a slam dunk to do that. We still got a ways to go to get from 33 [ph] to that point, but it’s not out of reach at this point. So I think, honestly, where the consensus has us right now feels about right for Q4, which gives us a nice launching pad into fiscal year 2025. And it’s really going to depend on the revenue where the markets are and what – I’ve already talked about our expectation of growth above and beyond the market growth. So as you saw from Q2 to Q3, the amount of margin expansion we had on the increased volume and much of that is seasonal.

We have amazing pull-through, amazing gross margins in our products. So when you get that volume it contributes tremendously to the bottom line. And of course, we continue to invest because we’re investing for the long term. We’ve got these amazing growth pillars that we have to continue to kind of feed those bees so they can reach their full potential five years, 10 years down the road. So we’ll be balancing that as we go through our operating plan this year and look forward to providing you some more insight to that next call. With regards to the revenue question, to be clear, have clarity on that. As I mentioned, we do believe that revenues will be slightly higher in Q4 than Q3. But the organic growth percentage year-over-year might be a bit challenged, mainly because of the tough comp we have in China.

If you think about China last year, we had mid-teens growth versus where it’s running right now, being 8% to 10% of our business, that’s up 1.5 points of headwind just in itself. So that’s kind of where we’re at right now in terms of the range of organic growth.

Patrick Donnelly: Okay. Understood. And then, Kim, maybe just on – I think it was last week, you guys announced the expanded Fisher agreement into Europe. Can you just talk about the opportunity there, how impactful that could be as we work our way to 2025 for you guys? Just trying to wrap my head around that agree.

Kim Kelderman: Yes. Thank you, Patrick. Thermo Fisher Scientific has a ton of capabilities, but one of the big ones is the Fisher Scientific channels, and that channel provides great reach and ease of use for transactions for our customers. As you might know, we’ve had a distribution agreement, a very similar one in the U.S. since 2014, so for about 10 years now. And we’re very, very comfortable and used to collaborating with the Fisher channel. I can expect a similar trend and a similar setup in Europe, where our European customers can benefit from the commercial footprint, the reach and also the ease of transactions that come with dealing with the Fisher Scientific channel. And of course, this convenience and this reach is very important for us as well.

And therefore, we can – we hope that we can serve our customers better. Nonetheless, of course, Bio-Techne will maintain and grow our direct channels as we have done in the U.S.A. as well. And we will make sure that we fine-tune and work really well together with the Fisher channel and collaborate to eventually optimize our customers’ convenience and the reach we have as a company.

Operator: Thank you. Mr. Donnelly, please rejoin the queue for more questions. Next question comes from the line of Justin Bowers with Deutsche Bank. Please go ahead.

Justin Bowers: Hi. Good morning. I just want to pivot back to the cell and gene end market and the strength there. Can you talk about sort of what you’re seeing in that customer cohort? And is the durability of that growth over the next couple of quarters, supported by existing programs and customers? Or do you need to see sort of new customer activity? Or is that just sort of like greenfield for you on the go forward?

Kim Kelderman: Yes. Thank you, Justin, for the question. As I mentioned earlier, I think our cell and gene therapy play is just very strong because of the different products we sell into it, right? As you know, we have a 20% stake in Wilson Wolf, and Wilson Wolf have this GRx, which is a container that makes it really easy and efficient to grow – to grow T cells. To grow these T cells, you would need our core products. So we have our GMP proteins, cytokines, chemokines to make sure that you can fine-tune the growth of these T cells. And these are all very high-value ingredients to the cell and gene therapy market. We do know that, for example, the GRx is in about half let’s say, 45% of all the clinical trials that are going on in this space, we know that we are obviously very keen on making sure that all our ingredients are being used in that setup just as well.

So we create the pull-through. We’ve seen fantastic growth in our GMP proteins and that are now on basing at an annualized revenue of about $60 million. And yes, we’re very proud that we had a record quarter. As I mentioned earlier, it can be a little lumpy because they are the larger customers that are in the back end of their clinicals where volumes go higher, and that will create some variation of results quarter-over-quarter. But overall, we have seen consistent very high growth within this space. And we know that more and more companies are entering the race because cell and gene therapy has been shown to be able to cure diseases we previously not have been able to find any solutions for us, so we’re very excited about this space.

Justin Bowers: Okay. So it sounds like increased pull-through and scaling up? And then on Wilson Wolf what are trends like there? Is that still stable? Or is it starting to grow again? Any commentary there would be helpful?

Kim Kelderman: Yes, Wilson Wolf, as I mentioned, participate in 45% of all the clinicals. There are several of these companies that we collaborate with that have now reached the finish line and are commercializing, which is a very good indication, and we’re over half of those. And then last but not least, overall, the company started growing again in double digits, it’s – it’s sitting this quarter in around 14%, and it has a fantastic run rate. And as you can imagine, really, really high margins north of 72%, and yes, we’re very, very happy to see that Wilson Wolf is having such traction in this important market, specifically because we know that Bio-Techne will definitely benefit from it with our reagent. But also over time, we will own the company, and we will then have the data benefit as well.

Operator: Thank you. Mr. Bowers, please rejoin the queue for more questions. Next question comes from the line of Dan Arias with Stifel. Please go ahead.

Dan Arias: Hey, good morning guys. Thanks. Kim, on the spatial business, what do you see as the time line for getting production on Comet? Where it needs to be in order to meet demand? And then it’s firming up the manufacturing plan and you’re getting ready to pay ACD and Lunaphore. Can you just maybe refresh the view on what you think the spatial portfolio should grow at going forward?

Kim Kelderman: Yes. Thank you, Dan. The production constraints are really, really facing the output right now. We are really happy, first and foremost, that we see the demand that we would like, right, and then actually exceeding expectations. So that’s the most important fundamental. We do believe that during this quarter, the quarter we’re currently in that we will get very close to what our book is. But the real status quo where we can produce as many Comets as that get ordered will be in our first fiscal year quarter. So the third calendar quarter and then we will continue to reel in the backlog in the first half of our fiscal year. You asked about my enthusiasm in spatial, it’s huge. Obviously, it’s a very fast-growing market, and you’ve been – you’ve gotten used to ACD being a real winner in the reagent space, with all the benefits that we know about it.

And then Comet, it’s early days. But if we compare the system to other peer systems in the field, we know that Comet is the only instrument that has a full workflow automation, right? So there’s no manual interference or manual steps in the workflow. The Comet you can use any antibodies that you’ve used to utilize in your workflow. We have 50,000 RNA targets, a truly multiomic machine. So you can see your protein and your RNA targets sanely in the same slide. As you know, Bio-Techne has 400,000 antibodies. So there’s plenty of choice to pick from in order to boost our pull-through on the instrument. And as you know, we can run four slides in parallel, and there we have the highest throughput in the market. So I’m extremely pleased with our positioning from a reagent as well as from an automation point of view, and we will continue to work to make our reagents, our antibodies as what the system seamlessly working together from some preparation [ph] all the way to image analysis to eventually make it most convenient for our customers to perform their special biology test.

Dan Arias: Okay. And then, Jim, just maybe to round out your comments related to the finish to the fiscal year here. You touched on margins. I just wanted to ask about the top line. It sounds like you’re expecting similar conditions, but you have the slightly tougher comp overall, China notably hard. Does that translate to some modest growth in 4Q? What’s the outlook there?

Jim Hippel: Yes, we’re absolutely – we absolutely are helping on – stay in the black for sure, so in terms of growth.

Operator: Thank you. Mr. Arias, please rejoin the queue for more questions. Next question comes from the line of Matt Larew with William Blair. Please go ahead.

Matt Larew: Hi. Good morning. I wanted to follow-up on Lunaphore. And the investments you’re making today to scale up manufacturing, would you say that generally they’re within the bounds of what you expected to make just perhaps they’re pulled forward? Or I guess the flip side of that would be; do you have different or worse expectations about the long-term margin potential. So just trying to get a sense for whether this is scale up to meet accelerated demand or perhaps something you discovered once you did the deal?

Kim Kelderman: That was a very good question, Matt. No, fortunately, it’s not something we discovered. It’s truly an outpacing of the orders versus our initial projections. And we had lofty projections but the traction in the market is just overwhelming. And that means that we have to increase our in-house capacity, which, of course, is something that we’re very used to do. We have a fantastic operations team in Switzerland that gets supported by operations teams from the U.S. just as well and from across other businesses such as the ProteinSimple business, very much used to producing high-volume instrumentation. So I’m very confident we can increase that capacity. But as you can imagine, the pull-through also hit some of the vendors.

So also there, we have to make sure that we help out with the upscaling of certain critical parts that the vendors are having to get used to these new volumes, right? So overall, we just have to beef up the capacity. It’s a great thing. By now, it’s a good problem to have, and we’re very confident that we can resolve this and there is no other underlying constrained or issue that we are aware of.

Matt Larew: Okay. That’s great to hear. The next question is about ScaleReady and the components of that. So your own GMP protein business, partnership and Wilson Wolf; just curious now that it’s been out there for a little while. What kind of feedback you’ve been getting if there’s any way to talk about how that’s translated to win rates? Is that a driver of some of the pickup in GMP proteins? And obviously, Wilson Wolf has been some market leading technology. I think there probably is some looming competition out there. Beyond just integration to offer a more full and automated solution like you’re trying to do already, are there also additional areas for platform improvement with GRx or that broader suite as well?

Kim Kelderman: Yes. Thank you for the question. I just have to say that when I talk to our customers in the cell and gene therapy space, ScaleReady has a real good reputation. So it’s truly a brand now in that particular space. And of course, it has a full solution for cell and gene therapy customers. And that’s why I believe that you see such traction in not only the volume of the G-Rex and the revenue associated with it, but also in the pull-through of proteins the cytokines and chemokines that we – customers end up using in that setup. It’s a complete solution. It’s scalable, and it’s relatively easy to implement compared to some of the competitive workflows. And yes, I think that is a chicken and the egg, right?

ScaleReady is doing really well because that’s a fantastic solution. And the other way around, the customers do get to enjoy the solution because the ScaleReady team is really efficient in bringing it to market and educating our customers about the benefit of the solution we have.

Operator: Thank you. Mr. Larew, please rejoin the queue for more questions. Next question comes from the line of Catherine Schulte with Baird. Please go ahead

Catherine Schulte: Hey guys, thanks for the questions. Organic growth came in about four points better than what you’ve guided. You talked about China stabilizing, but that sounded like it played out as you expected. So can you just talk through what drove that upside versus your expectations? Was it really broad-based? Or was there a particular product category or end market that’s surprised?

Jim Hippel: Yes. Hi, Catherine, this is Jim. Thanks for the question. Yes. I mean, I think generally speaking, the broad-based market performed as we expected. As you mentioned, China overall those as we expected as well. I think there is – if you look within the Protein Sciences, it gets back to our growth pillars and how resilient they are even in this down cycle we’ve been in. So a two point I’d call out would be one was cell and gene therapy. So we always said that when biotech funding came back, we believe that cell and gene therapy will be one of the first places you’d see it. And I’m not saying there’s a direct correlation there, but definitely a positive sign. And it was a bit of a surprise for us how quickly cell and therapy rebounded for us here in the third quarter.

And again, we saw the same thing over, as Kim mentioned, in Wilson Wolf as well. So that was very encouraging. It was not necessarily in our outlook a quarter ago. The other growth pillar within Protein Sciences was within our instrument, proteomics instrument portfolio and even more specifically, Simple Western. Simple Western performed extremely well and actually grew double digit in instruments as well as consumables. So also a very good sign because we always figured that when the instrument market came back, that would be the first part of our portfolio that we would see it given it’s a broad base of applications. It’s also very used widely in cell and gene therapy, and it’s very the most underpenetrated of our three platforms. So that was not necessarily in our outlook a quarter ago, and it was very nice to see that come back so strong here this quarter.

And then if I turn over to our diagnostics and genomics business, there is, I’d call out the surgeon business. As we talked about the growth rates there, we’re pretty much nearing our EPI test with Exosome. And – so very – one of the highest growth rates we’ve seen with the surgeon since we’ve owned the company and they got some new product launches out there are performing extremely well, and we think that momentum will continue. So that was also very nice to see.

Catherine Schulte: All right, great. Thank you. And then was there any stocking contribution from the European Fisher deal in the quarter? Or will there be any in the fiscal fourth quarter just given the timing of when you signed – just curious if there’s any stocking related to that partnership.

Kim Kelderman: Catherine, thank you for the question. No, there were no such influences in this past quarter and don’t expect them in the next quarter either, specifically because the setup is that Fisher will bring in the leads, and we will ship directly from our warehouse. So you will not see any of those dynamics, if that makes sense.

Operator: Thank you. Ms. Schulte, please rejoin the queue for more questions. Next question comes from the line of Sung Ji Nam with Scotia Bank. Please go ahead

Sung Ji Nam: Hi, thanks for taking the question and congratulations on the quarter. Maybe just on the academic end market perspective at this juncture. Just kind of curious, if you guys have visibility into that market, especially in the U.S. and Europe. Obviously, you’re seeing continued stable growth there, but potentially more difficult comps ahead. So just kind of curious what your outlook might be for the coming quarters.

Kim Kelderman: Yes. I think that academic markets have – we’ve done pretty well in there. And overall, I must say we see a relatively stable environment, right, with the Horizon funding in Europe as well as in the U.S. So it’s a stable market. Of course, with the lull in the biotech industry, some of our innovative sales reps have found their way into some of the academic accounts as well and have started refocusing there. So there is a nice bump up for us by just having the right focus and the connections further developing between the customers in academic as well as the sales rep. So at the end of the day, I think this is not a something that is just for one quarter or two quarters. I think as long as the academic funding stays as it is or gets better, we will continue to see a benefit from that end market, and we will continue to be good or even better at serving it. So – and that’s what I expect for the coming quarters.

Sung Ji Nam: Got it. And then I also have a follow-up on Lunaphore and spatial bio. Just kind of curious, it may be early, but are you seeing competitive wins on Lunaphore currently? And just for the spatial bio addressable market in general, just kind of curious what’s driving the – other than your performance there, just from an end market standpoint, are there a disproportional funding going towards your addressable market, current environment, do you think? Or – just kind of any color would be great. Thank you.

Kim Kelderman: Yes. Thanks for your question around spatial biology end markets. I do believe that end market is under less pressure than other end markets. It’s just such an important tool into determining which biomarker you’re going after. It’s just a new way of doing your research and validating your results. So it’s here to stay, and that market will continue to grow significantly, and we believe that it will grow double digits for the foreseeable future. Yes, we see competitive wins, as I mentioned earlier, when Dan asked the question, there are tremendous benefits from a Comet automation system over other systems that are in the market are reagents, their antibodies are also in the lead and very unique in that market.

So that combination is just very strong. And if I look at some of the trends in the market, yes, we have been able to sell Comets into accounts that have experience with other systems. But an even stronger signal is the moment we found that customers want a second Comet, right? And then now we have several larger pharma companies that have ordered the third one. So that means it’s not only a good value proposition at the moment you buy it, but it’s still a really good value proposition the moment you use it, and that gives them real first-hand experience, and that gives me confidence that, that workflow is indeed a real strong value position compared to the other solutions in the market.

Operator: Thank you. Ms. Ji Nam [ph], please rejoin the queue for more questions. Next question comes from the line of Paul Knight with KeyBanc Capital Markets. Please go ahead

Paul Knight: Hi, yes Kim, thanks for the time and Jim as well. The Protein Simple business, could you kind of highlight one of the fastest-growing portions of the product line. How large is Protein Simple now as well? And just a refresh there would be great.

Jim Hippel: Yes. Paul, this is Jim. So thanks for the question. Good to hear from you. Not given the size of so much on the by product line anymore. We try to avoid that from a competitive perspective. But as I highlighted in earlier – as an answer to earlier question, I think the Simple Western platform specifically was a highlight of that portfolio this quarter with double-digit growth overall and double-digit growth in both instrument placements as well as consumables. That being said, our entire instrument portfolio has been very resilient through this downturn. Despite struggles with the instrument placements the last several quarters, the consumables on all three platforms continue to offset that to keep those product lines in a very stable state overall.

So we’re very pleased with how those – our instrument portfolio has performed and gives us that kind of great confidence that when the market normal, as no [ph] markets normalize, we’ll see accelerated growth in that portfolio once again.

Paul Knight: And then you mentioned in the past potential revenue, the GMP facility or maybe expressed as capacity and dollar revenue. Where are you – where is your thinking now on capacity of your GMP business?

Jim Hippel: Capacity is not – yes, capacity is no longer an issue. We’re probably stop talking about it because I think we have capacity could last as a decade or more, to be honest with you at least as it pertains to our GMP proteins for the CAR-T for the immunotherapy market. We still have some capacity that we need to build out for our regenerative medicine side of our – the GMP protein business. But as it pertains to what that facility was specifically built for, which is the immunotherapy side of cell therapy market. Capacity will not be an issue for a decade or more to come.

Operator: Thank you. Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Kim Kelderman for closing comments.

Kim Kelderman: Yes. Thank you, and thank you, everybody, for joining the call today and for the insightful questions. I’m extremely proud of the Bio-Techne team’s accomplishments in this dynamic environment, and I’m also proud of the results we’ve been able to deliver in this quarter. Our differentiated portfolio addresses some of the highest growth markets in life sciences and is positioned to deliver best-in-class performance, for all our stakeholders going forward. Thank you very much for joining the call.

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