Get started. I'm Tycho Peterson from the Life Science Team. It's my pleasure to introduce Bio-Techne. Maybe just to kick it off, we can start with a little State of the Union. Obviously, a lot of volatility around the macro. We were just talking on U.S. NIH academic funding. Maybe just talk a little bit about that, talk about pharma dynamics, and then the evolving situation in China.
Yeah, sure. First of all, Tycho, thanks for having us at the conference. It's been a great conference, always is. It's very dynamic. Dynamics, that's for sure. A lot of uncertainty out there. Some of the greatest uncertainty we've seen in our industry in a while. As we talked about at our last earnings call in terms of our Q3, up to that point, the year was more or less shaping up the way we had predicted three quarters before that in the end of our fiscal year 2024 in terms of recovery in the overall life science tools space in our customer end markets and was progressing quite nicely. Pharma in particular did very, very well. We had double-digit growth in pharma, and it was very widespread across our portfolio and across the geographies, which was great to see.
What had not been a topic of discussion up until April was academic, because academic was kind of steady and doing well. In fact, it was even better than most of calendar 2024 to start our Q3. Actually, it was actually February, not April, sorry, when the cap reductions first started in discussion, indirect cap reductions. Everyone here has been following it. They know that the news has gotten progressively, I do not want to say worse or just more intense with regards to now NIH budget cuts and how much of the cuts are going to be and what is that going to look like. It is anyone's guess where it falls out. What we have done is we have quantified what that impact would be for our company under some worst-case scenarios.
Let's just take a real drastic view of a 40% cut in NIH funding, which I do not think realistically is plausible. For us, it's very difficult to know exactly how much of our US academic comes from NIH. As a reminder, US academics is about 12% of our revenue. Because most of that revenue comes from our core reagents, our core reagents are kind of like an everyday need in the wet lab, whether it's for an NIH-specific project or whether it's for just teaching students in the lab. Understanding how much of those relative low-dollar purchases are actually within an NIH grant is really hard to know. We believe it's not nearly as much as what's perceived out there.
If you take the worst-case scenario, not the most likely, but worst case, which is that those customers who receive NIH grants were to reduce their revenues to us by 40%, and you look at our five-year CAGR going forward, it would have about a negative 1% impact to our projected growth rate. It would be more steep, of course, in year one, which would be fiscal year 2026. Assuming after that the growth rates return to kind of the 3% range, that's what the impact would be to the overall CAGR. Why that's the case is because, again, we're talking about 12% of our revenue overall, and not all that 12% by any means comes from NIH.
Also, our main growth factors that get us a double-digit growth that allow us to overachieve the market by over 500 basis points of growth comes from cell therapy, largely our proteome analytical instrumentation, and also spatial. At least two of those three are definitely highly more concentrated in the biopharma market than they are in the academic. With those growth factors intact, even with that extreme drag on NIH funding, it would still have a relatively immaterial impact to our long-term growth rate. That is kind of the academic environment and how we phrase the downside. Now, again, that is not what we expect, not what we expect in terms of what the ultimate cuts will be. I think that is a draconian case.
Even if it was the case, we do not think that is what the actual impact would be to our academic U.S. sales for the reasons I already stated in terms of other sources of revenue that actually fund the majority, we think, of the purchases of our reagents by those customers. If we look at the other two main end markets, that being pharma and then smaller biotech. Smaller biotech in Q3 was not as strong as we would have liked, but we think they were somewhat impacted by all the noise that occurred with the Trump administration and the threat of tariffs and so forth in the capital markets in general. I think smaller biotechs are just being much more conservative with their money. It is not that they raised a lot of money last year. They have not spent a lot of it that we can see.
There is not a lot of new money coming in right now because of all the concerns in the external markets and macro market right now. They are just being very judicial with their spend. Lastly, pharma. We talked about pharma being strong in Q4, or Q3, sorry. In April, again, with the tariff discussions around pharma, then the discussions around possible MFM pricing, not a lot of clarity around it, but just tweets and discussions, we have seen what I would call a come off the accelerator a little bit in pharma. The growth is still very good, relatively speaking, just not as strong as it was in our Q3. That is why when we look into Q4, we see kind of academic being the same in Q4 as it was in Q3. Nothing has really changed there.
Our growth rates have remained stable for about three months in a row there. Biotech, pretty much the same. Pharma, we have seen the growth rates come down from the double digits down to the mid-single digits. Overall, the company, we think, will fall out somewhere in the low single digits this quarter. It was a mouthful, but that's kind of.
No, that's helpful. Maybe a couple of things to follow up on. I guess pharma, is any of what you saw this past quarter pull forward then with pharma getting ready for tariffs?
No, we don't believe that at all. First of all, our product portfolio is not one that you do much in terms of stocking or pull forward. Again, 70% of our business is run rate reagent business. It's not the type of material that you buy way in advance by any means, and nor do we see that in our instruments. No, we don't believe that. We believe that was the genuine kind of market growth. We are still seeing relatively strong positive growth in pharma. It's just not the same rate we saw in Q3.
You've obviously seen a lot of CapEx announcements really over the next five years, so maybe nothing that impacts this year. How do you think about that for your pharma business?
First of all, our CapEx is our instruments in our CapEx. Remember, our instruments are about 10% of our revenue. Then another 10% of our consumable revenue is tied directly to those instruments. Our instruments are relatively low-cost instruments, and they are not as impacted by fluctuations in CapEx budgets. The amount of productivity they bring to our customers often offsets any constraints you might see in CapEx. For example, even though the CapEx environment has been very constrained this past year, overall, our ProteinS imple, which is the brand for our instrumentation and protein sciences, that franchise has continued to grow mid to high single digits quarter after quarter, even in this environment, because of that very strong consumable pull-through.
I guess why could not academic be a little worse this quarter? I mean, if you think about just the timing of the new administration coming in, you did have an initial kind of freeze on grants, but then you started grant reviews in March. Yeah, why could not it be worse this quarter versus last?
I mean, I guess anything's possible. I believe that some of this is psychology too. You got to remember that the folks making the purchases, especially in academic, are the individuals at the lab. They're impacted, they're more like as much like a consumer than they do like a company or an institution. They're impacted by the noise they hear in the press and on TV, just like any of us are on the consumer side. They behave accordingly and in a lot of cases distracted by it and spending time out of their lab asking their administrators what's going on, what their future might be, et cetera, as opposed to actually working with the money they have today.
We believe actually that the distraction we saw from that in Q3 was actually overexaggerated, the actual impact with regards to the funding they currently have to work with. The fact that it's staying relatively stable now tells us that kind of noise is out of the system. They're kind of operating more normal, although at a lower rate than they were, probably because of the concerns of future funding. All I can say, Tycho, is that for about three months, we watched our daily sales of academic on a daily basis. For three months in a row now, it's been relatively stable despite the increased rhetoric around deeper cuts.
Instruments, 20% or so of the business, you did have upper single-digit growth last quarter, right? Maybe just talk a little bit about were there specific product lines, segments, geographic regions that stood out?
Yeah, so yeah, our instruments, it was the second quarter in a row that we had growth in our actual instruments, which was great because it had been about a year and a half prior since we've seen growth there. It was growth across all the platforms, but it was definitely driven by our Biologix platform, our Maurice instrument, which is one product that we have that's used in bioprocessing as a QC tool. I think we've heard from some of the other peer companies who are more heavily involved in bioprocessing that they're starting to see that come back. We definitely saw that come back fairly strong for that particular product line of instrumentation. We continue to see growth in our Lunaphore instrument as well in spatial. That grew double digit as well for the quarter.
I definitely want to hit on spatial in a minute, but just on bioprocess, so how big is that business for you? Maybe just talk a little bit about exposure to current market, biosimilars, GOPs. How do you think about portfolio mix?
I think our Biologix solution with Maurice is extremely well positioned and is a very unique solution that it has been taking share since its launch almost a decade ago. We have had new iterations of it that have expanded its capabilities and its applications. The market for it continues to grow as well in terms of its applications, very ease of use. Yeah, I mean, I'm sorry, what was the second part of your question? It was.
Just like as we think about newer markets, whether it's biosimilars, whether it's GOPs, I mean, what's your exposure to kind of some of the.
I think those are all opportunities for us for that instrument by far, for sure. Those are all opportunities for it to continue to grow.
Got it. Maybe just touching on tariffs quickly, remind us of your exposure, direct and indirect. How is that impacting supply chain, cost structure, pricing, and what mitigation strategies are in place?
Yeah, as we talked about in our last earnings call, we're fortunate that our exposure to tariffs is relatively very low. To the extent we have exposure, it can be very quickly mitigated. From a sourcing perspective, almost none. We've done a deep dive in all of our supply chains. The only place where there was a possibility for any potential tariff cost increases was on our instrumentation business, but we've done a deep dive there, and there's none to be had there. That's great. The real focus was more on the customer and whether there might be potential tariffs on our products to our customers. Initially, the biggest concern was China when the very high tariffs were initially announced on both our reagents and our instruments.
About a month into the initial tariff escalation, quietly, it was never announced, but it was sent down through the authorities that our specific reagents, in addition to other products, including airline parts, were exempt from the tariff increases. We only ended up experiencing about a month's worth of tariff costs with regards to our reagents. Going forward, that's not a case. With regards to our instruments, we're still exposed to the tariffs, whether they're higher or lower. We make instruments in different parts of the world, and they're very similar in terms of how they're produced. We can very quickly move the product lines that are not currently made in the U.S. to these other countries that can then support the China market from there and be exempt from tariffs. We can do all that within a quarter.
In terms of thinking about the future, because it's still a very uncertain state where this tariff situation ultimately lands, we've been stocking up our inventories on reagents in both Europe and in Asia to give us a very long lead time of supply that can enable us to move, call it the final fit and finish of these products to China and to Europe should the escalation revert or go back to kind of where it was or where it was threatened to go. In doing that, we can very much mitigate any future tariffs because the cost of the raw materials is very, very, very low, and that's the value that would be tariffed.
Where are you moving the manufacturing to?
We haven't been too specific on that, but I will also mention this. We have a facility in Canada, for example, that currently makes some instruments, and that's one of the places that we're looking to move, not looking to. We were actually already in the process of moving some of the instrument, not moving, but duplicating the instrument line there.
Maybe we could spend a minute on China. It's 8% of your revenues. Just talk a little bit about what you're seeing on the ground there. How has customer demand evolved? Any kind of notable trends in purchasing behavior or regulatory dynamics?
Yeah, so that was one area from our initial recovery plan that did not plan out exactly like we thought. We thought China would start to be in recovery mode in Q3, and it did not. It was kind of more the same. Maybe we are just a quarter off. I do not know. I do not want to get too ahead of our skis at this point, but we have been to China recently, talked to a lot of customers, obviously talking to our team there and our distributors there on a routine basis. The tone there is very subtly starting to change. For the last couple of years, it has been nothing but a pessimistic tone. The tone has turned more optimistic here.
Not, I won't say greatly optimistic, but at least it's turned more optimistic with regards to how they're thinking about access to funds in the back half of the year and going into calendar year 2026. We've also seen since this tariff escalation has died down here the last several weeks, we've seen a return to demand in China as well that's encouraging. I don't want to get ahead of our skis because we've had some false starts in China before, but it does appear like in the near term anyways, it's moderating and maybe even slightly improving in China. With regards to the quote-unquote stimulus, for us, it's not that material of a deal for us. It's stimulus. In the past, stimulus in China was like a blank check to pretty much buy whatever you wanted.
This quote-unquote stimulus is a very targeted program to replace old technology with newer technology, and specifically around instrumentation. Most of our instruments in China are already relatively new technology, so there is nothing to replace. We do have some old Wes instruments in our Simple Western platform that are out in the field. Those are the ones that we are targeting to replace with our newer Jess instrument. We should see some upside in that this quarter from those replacements.
I guess, yeah, maybe talk a little bit about portfolio mix within China. I mean, you mentioned Western blots with Protein Simple, but yeah, where is your portfolio strongest in China? I mean, obviously, there's been a lot of focus on substitution, local competition. Where are you seeing the most pressure within the portfolio?
In China, China actually has our heaviest concentration, relatively speaking, of instrument and instrument-related consumable pull-through revenue. Within the instruments, Biologix, the Maurice instrument is by far our strongest and continues to do very well. Simple Western is probably the second. With regards to, from a competitive perspective, similar to globally, we do not have a lot of direct competition with our various instrument platforms. They are fairly unique in their application and their price point. It is mostly, a lot of times it is manual labor that we are competing against as opposed to any other platform. There are some minor other nuances, but that is a general observation on that. Where the most competition in our portfolio in China does reside is in our reagents and our core portfolio of antibodies and proteins, but that has always been the case.
There are formal companies in China that are doing well and are good competitors. What's encouraging for us is whenever you have a situation like we've had in China in the last couple of years where the times were very tough economically, you think, "Oh my gosh, we might be losing share to lower-cost China competitors." It turns out we spent time with customers there in December, both academic and biotech customers, and asked them, "Hey, what's your top criteria for purchasing proteins and antibody reagents?" Almost consistently across the board, what we heard, number one and number two was quality, lot-to-lot consistency, availability. Further down the line was price. Almost last always was China for China.
At the end of the day, that's no different, by the way, than any customer you ask in the U.S. or ask in Europe or anywhere else. What it tells me is that scientists are scientists, regardless of what region they work, where they work, and they want product that's going to work the first time. It's not to say that we don't have competition. There's plenty of it, but there always was, but it hasn't necessarily gotten any worse because of the situation there.
I guess last one on China, what do you think durable longer-term growth is for you guys in China?
We're still bullish on China long-term. I know that's a really unpopular thing to say right now. It might be even hard to believe. At the end of the day, we're bullish on our whole space in life science tools because the mega trend, I think, is still snowballing with regards to our space. At the end of the day, whether you're in China, the U.S., it doesn't matter where you are in the world, populations are getting older. They want to live healthier. I think as important or more importantly, the science behind it is evolving at a rapid rate. If there was a lack of innovation, I'd be more concerned. The innovation is continuing to accelerate. It's like a snowball. In China, that snowball is currently smaller and even has a potential to get even bigger because of the population we're talking about there.
I think the fact that our products, our core reagents, were exempt yet again from the tariff escalations that were announced, I think demonstrates the need for Western life science tools to support ultimately what is a key of strategic importance to China and the Chinese people and their government, and building sustained healthcare. We are bullish on China long-term. Do not ever count China out. They will get through this, just like we will get through this. When they do, I think China will be the fastest-growing territory in the region for the next decade. We firmly believe that.
Maybe we can shift over to liquid biopsy. It's a U.S.-focused business, not yet profitable. Maybe talk about the plans to scale it sustainably. Are there specific strategies to expand geographically, improve margins, and accelerate adoption in clinical workflows?
Sure. That's part of the Exosome platform. When we look at the Excel acquisition I'd had, the lab test that you referenced, which is EPI, and also the technology base around Exosome. The EPI test helps risk stratify somebody that has an elevated PSA score of whether they can do watchful waiting or shouldn't undergo a biopsy for diagnostic purposes. We've built a channel around that. The company, before we acquired it, largely chose that as the way to validate the whole technology platform. I think we've done that. We've grown well over the years, continued to grow, most recently north of 20%. That particular business is one that needs to scale to get to profitability. We've done a lot on the cost basis side to reduce the COGS.
It's still a couple of years from scaling into a profitable company, but it continues to grow well. In a competitive space, we have a differentiated offering. I think the other piece of it that's exciting around liquid biopsy is we've taken the platform itself around Exosomes and have deployed that in a kitted model, which is more consistent with the balance of our business and where we've already got channel established calling on diagnostic labs. End of last calendar, we launched a test for ESR1, which is a target in breast cancer for minimum residual disease monitoring. We have a couple of tests in that same space. It's a great model for us because post-diagnosis on treatment, it's multiple tests over time to follow for recurrence of the disease.
The Exosome as a base to that platform has sensitivity benefits that actually make it very applicable for that space. We have a runway of menu, and that's actually seen very good interest and initial uptake in the field. We have a menu of targets in that same model that we'll deploy the Exosome technology for. Really, we've started to now not just have the laboratory piece, but interpolate the base technology into our kit business and the diagnostic side as well.
Any sense of how big the kit business could be over time?
Minimum residual disease is an area that has existed in some, like in chronic myeloid leukemia with BCR-ABL, which is another one of our tests. Right now, it is really expanding because of the therapeutic options that are being developed there. As the one for ESR1, as those trials read out, I think it is a model for where and how treatment is going to be given. I think we are not sure exactly how big because some of that will be dependent on the success of the drugs in the space. Given the early success that we have seen there, I think it will probably be our growth driver in the oncology segment of the kit business.
Is that more for community setting, you think, or academic?
It'll be in both. That's what we see actually, for instance, with our BCR-ABL test in leukemia, in that for the high-throughput labs, it's actually a great offering because most of our kits focus on a workflow problem or a technology problem for the lab with already existing content that you don't have to validate new content. It's got demand, volume, reimbursement. The labs have trouble doing it, and we'll switch a technology for them. That's for high-throughput labs. The savings that they get on workflow are tremendous. In the community setting, it's a different value proposition because the tests are easy to do and they're quick turnaround time. They can keep the continuum of care in the community.
We've seen adoption by both, not at a physician office, but at a large physician practice with their own lab from there up through, I think, the largest reference labs.
Maybe we can pivot to spatial. You've got the integration of the Lunaphore platform. You launched a combo assay for RNA and protein on the same sample. Obviously, you're pretty well positioned here in the mid-plex spatial market. Can you just talk about how you're differentiating in that 20-40 marker range?
Sure. That is where we see the sweet spots. We play in the translational market in spatial all the way up through clinical. In fact, we have a position in clinical for the molecular reagents in the ACD business. About 10% of our business there is strictly clinical through our partnerships with Leica and Ventana. Going back into the translational side, the multi-omic nature of the questions that researchers are asking, the questions that pharma are asking is, I think, a key driver there. Lunaphore is sort of the centerpiece for that in that the COMET instrument integrates now our, we had basically three separate businesses that we are combining into one offering. We can pull the molecular reagents and the antibody reagents from the protein sciences side of our business all into that same spatial application.
What the field team has really been excited about, and I think what a lot of our customers like, is that when we go in with that full offering, whereas before we'd be talking about one thing or typically just talking about one thing and missing sort of a cross-sell opportunity and not being able to integrate the two, even without the platform, our reagents now will, so we have multi-omic workflows for even manual kits. We are really providing, I think, an end-to-end solution from an automated platform with reagent streams that you can still choose sort of à la carte. Nobody else really offers that combination of molecular and antibody reagents with a platform if that's what you need.
Really, we're seeing that pull from the translational space increasingly into the clinical space, not just from our strict diagnostic business, but the sort of pointy end of the wedge in, for instance, lymphoma, where labs are adopting the platform because they're looking at panels of both antibodies and now molecular targets, and they're actually standing up workflows in the treatment of patients for a standard LDT model, where we're seeing that not just the instrument, but the whole system being pulled into clinical practice.
How about capacity constraints? As demand grows, talk a little bit about expanding the production capacity.
Yeah, we had a pinch point about this time last year where we did have capacity issues. I think we've largely worked through those. The instrument's now been on the market for just under two years. As we've worked through two things, the sort of infant mortality that you have with any kind of instrument platform as you harden it and do the small engineering tweaks to make it more reliable and easier to service, we've also added the multi-omic capabilities, which is a whole nother set of requirements on that instrument. I think we've worked through all of those. The production lines, I think now we have the capacity to meet demand even with the sort of new features on the platform.
That's a space that's gotten pretty busy, fairly crowded. How do you think about competition? Who do you kind of typically go head-to-head with most?
Yeah, so we have, I think, a very competitive platform, not just because of the integration of everything, but the instrument itself is on just about every head-to-head measure, we beat the competition. Mostly here, we're talking about for the instrument, Akoya and Miltenyi are the main competitors. We have a superior box with the complete reagent stream that you can offer on. We have a very high win rate when we're going against the competition.
Great. I know we're almost out of time here. Just maybe two quick ones. Margins. This has been a debate on you guys ever since I've known you. You've got terrific margins. How do you feel about operating margins going forward? Is there a path to drive additional leverage?
We had great margin performance in Q3, almost 200 basis points year over year of improvement. We took some restructuring cost actions late last year, earlier this year to prepare for what could have been a softer year. That allowed for the margin expansion that we saw on 6% organic growth. As we look in the very near term here in Q4, we do see margins contracting by approximately 150 basis points. That is largely driven by the aforementioned tariffs costs that we have already had to spend this quarter, as well as the lower expected growth rate. That being said, as we think about going forward, I think we have demonstrated in this quarter alone, we have demonstrated how great the pull-through of our revenue is.
When you get that revenue growth, how quickly it can expand margins, which is why when we talk about a five-year target of getting north of 35% operating margins, it may seem like a long way for most companies to get there if you're starting at 31% or 32%. For us, it's not that far away with decent organic growth. With the great margin pull-through we have, we believe we get back to the markets get back to normal. We get back to first high single digits, start there, but then ultimately double-digit growth. The margin expansion will rapidly follow on that. We can still invest in growth for the future at the same time.
Great. Right time. I think we'll leave it at that. Appreciate it.
All right. Thank you.
Thanks.