All right, we'll get started. Thanks everyone for joining us. I'm Patrick Donnelly, the Tools and Diagnostics Analyst here at Citi. Happy to have Jim Hippel with us, CFO of Bio-Techne. You know, a lot to cover, but obviously some topical news this morning just in terms of you guys closing or sorry, starting to close Wilson Wolf.
Yep.
Yeah, maybe just a quick update on what triggered it and your thoughts.
Sure. As a reminder for those who may not have followed it closely, you know, we had a deal with the owner of Wilson Wolf, John Wilson. Wilson Wolf makes the G-Rex, which is a critical component in we think is the future of cell and gene therapy manufacturing. Kind of like a bioreactor that's essentially the size of your laptop as opposed to something the size of a half a room. Where our proteins, our GMP proteins are used in addition with media to grow up cells after they've been re-engineered, so to speak, but before they're put back in the body.
We've been partnering with Wilson Wolf and their G-Rex on a joint venture called ScaleReady, also with Fresenius Kabi, on kind of an alternative system, closed system for cell and gene therapy manufacturing now for I think a couple of years. It's been a more of a sales consortium joint venture where we share a shared sales group to sell our products as a solution. We always saw Wilson Wolf as a great fit with our company. It obviously melds very well with our proteins.
I think it was a year and a half ago, we struck an agreement with John Wilson to eventually acquire his company, which first with an option that we paid him to buy 20% of the company once they hit certain financial thresholds, and those financial thresholds was either $92 million of revenue or $55 million of EBITDA. Yes, that's $55 million of EBITDA on $92 million of revenue. Very highly profitable company. That would trigger us buying 20% of the company. Once we bought 20% of the company, it was pretty much a locked-in deal that when they hit $226 million in revenue or $136 million in EBITDA, we would purchase the remaining 80%.
That 80% would be a price tag of around $1 billion. The initial 20% is like $236 million, something like that. That was the arrangements of the deal. We also said, "Hey, we wanna make sure that if it doesn't hit those thresholds at the end, that we can still buy this company at some sort of price." It was agreed to that if by fiscal year 2027, if those targets aren't met, we would purchase the company at 4.4x trailing revenue. The good news today that was announced was that that very first threshold was hit. They hit $55 million of EBITDA in the month of January on a TTM basis. We are now going through the legal process of closing that first 20% purchase.
It takes the optionality now completely off the table, and it's a done deal. We will own 20% of it, and we are locked in on our earn out to purchase the remaining 80% one way or the other, whether they hit those targets or whether time-based in 5 years or so, they don't, we lock in at 4.4x revenue, which is a hell of a multiple considering their very strong profitability. That's really, really exciting. That's the exciting news for us this week is anyone who, and understandably so would have thought, "Hey, there's still some concern or some questions of whether that deal will actually happen." It's, it's happening, so.
Yep. Okay. Yeah, I guess going back to the call, I mean, my take, which was obviously wrong, was, you know, Chuck seemed like maybe things were getting pushed out a little bit. I mean, was it just a big ramp in February for them? What kind of played out?
The reality is it's lumpy. You know, in all these emerging markets, cell and gene therapy, you could argue liquid biopsy, even spatial biology, these are all emerging markets. I think everyone believes these are gonna be huge markets 5, 10 years from now. They're still emerging, they're still in their infancy, and they're lumpy in by nature in the early days. You might have a couple of big orders that you don't repeat that same time frame of the previous order, and so it's lumpy, and that's how it has been for his business.
He had some, you know, based on his visibility of what customers are ordering, it's swayed over the past year of being as early as, you know, maybe September, October of last year to being as late as, you know, July or August of next year. All of a sudden, you know, December came in very strong for him, and we went through the analysis of his results, and he was still just shy of missing it. He knew January was gonna be a bit stronger, and it was gonna be just enough to push it over, and we validated that these past few weeks, so.
Okay.
That's really the reason for the variability is simply because of the lumpiness in the early days of this business. It's, you know, it's not small business by any means, given they hit $55 million EBITDA, but relative to what it's going to be, it's still small and lumpy.
Okay. That makes sense. All right, maybe we can jump to kind of the core business. You know, you guys reported a few weeks ago. I know it was a little light of what you were hoping. Maybe you can talk through maybe some of the moving pieces in the quarter, and then we can kind of bridge that to the go forward.
Yeah.
Maybe we cover the quarter first.
Yeah, sure. Well, I mean, first of all, I mean, China is 10% of our revenue. It's historically almost like clockwork, a 20%-25% grower for us, and it grew like 4%. You know, that's a $5 million or $6 million kinda headwind right there. We'll talk about China separately. I'm sure we will. We'll leave that off the table for a moment. You know, I'll talk about the positives first because we have a high level of confidence in the underlying strength of our end markets and our position, not just in the future, but even today.
What gives us some confidence, and one of the things we track very closely is something we call our run rate business. As you know, a very high percentage of our revenue profile is consumables. Within those consumables, particularly within our reagent business and our assay business, the average order size is under $1,000. Every day we are selling, you know, tens of thousands of products to hundreds of thousands of customers. Understanding how they're buying real time gives us a sense of how strong the underlying fundamentals of the market are. We track that, and we track what order size. We've arbitrarily picked, like $10,000 order size. If it's under $10,000, it's considered hand-to-mouth kind of run rate.
If it's over $10,000, they're probably buying it for a project or something larger. Bottom line is that, and that by the way, that run rate business of our consumables I just talked about, our proteins, our antibodies, our assays, it's roughly 75% of that total is run rate business. That run rate business has been double-digit growth for us the past 2 quarters, the first half of fiscal year 2023, despite our reported results. Where we've had headwinds from a year-over-year perspective has been on our large reagent orders and on our instrument side of the business. In some ways, they act similarly, similar in that they're large orders, so they require approval processes internally and so forth.
When we actually looked at the reagent side and dug deeper, it was really interesting to kind of see that literally there was a half a dozen or so orders that occurred last year that were over $1 million a piece that did not reoccur again this year. Those, you know, one was an antibody order, there was an assay order, there was a couple protein orders. The only common thread was that they were all smaller biotechs. One was for a vaccine startup, one was for a therapeutic startup. You know, what they were working on, they felt like if they had success, those orders would continue. But apparently, they didn't either have success or they prioritized to something else. I think only one of those six companies that we know of actually went out of business.
The rest are still buying stuff on a daily run rate basis. Your next question might be, well, you know, how did you not have more visibility to this? You know, frankly, that large reagent order business is probably the piece of our business we had the least forward visibility on. The reason for that is behavior of our customers. When they want to buy a very large order of reagents from us, unless it's custom, they know we have it in stock 'cause it's still not very much volume, it's in our freezer. They'll come at the very end of the quarter and place an order on us, and they know they can get it without having to tell us way in advance. That's part of the reason we didn't have the visibility.
You know, the good news is that as we looked at last year and started looking at these large orders we have from these handful of small biotechs, they do become less as the year progresses. As we get into Q3 and Q4, there's less of them. The headwinds become less going forward. They're still there, but there's less of them. Flipping over to the instruments. We look at our instrument growth last year across our 3 main platforms, which is the Maurice, the Biologics platform, Simple Plex platform, Simple Western platform. Collectively, all 3 of those grew 30% last year. We've never messaged that, you know, our instruments will go 30%. It was a kind of a crazy quarter for us. You step back even more big picture.
You look about a year ago, what was going on? vaccines were at their all-time peak. COVID testings were at their all-time peak. Private equity money or equity money in general flowing into small biotechs were at its all-time peak. Our customers, particularly in biotech, were flush with cash, and they were pulling in research projects. They were doing additional research projects. It wasn't normal.
Mm-hmm.
What's happened now, a year later, is we're getting back to normal. You know, it's not that biotech's fallen off a cliff. It's back to where it was pre-COVID, honestly. Our run rate business within the biotech is just as good as it's always been. It's as good as anything else. It's just, last year was just abnormal for the reasons I just mentioned, and it was reflected in our instrument portfolio. We went and looked at our instruments. 40% of our growth last year in instruments came from the small biotechs. A lot of those were going into vaccine stuff and, you know, like I just mentioned, for the large bulk reagents. I see it as very positive for our business and our, and the industry as a whole, that we were able to we didn't shrink.
We were actually able to hold our own year-over-year, despite the, those biotech customers not reordering instruments this year. They're ordering consumables, but not ordering instruments.
Mm-hmm.
We were able to replace those with new customers.
Mm-hmm.
hold ourselves even while we get past that difficult comp.
Yep.
you know, that's really what's playing out. It's tough comps, but I'm trying to give you some color as to why they're tough comps.
Yep.
Why underneath, once we get past those tough comps, the underlying momentum of business will shine through.
Yep.
-ultimately.
Okay. No, a lot to, lot to go through there. I guess kind of picking up right where you left off there in terms of that underlying growth, right? You kind of removed some of the moving pieces. You removed the comp. You said we're getting back to normal. I guess what is normal? You know, I think when you look at, your guys' long-term guide-
Yep.
it's the teens, right? In terms of the revenue side. Is that what you're seeing kind of, as you said, like the reagents piece that's growing, you know, still that and then you just have some noise on the instruments and the large piece? What's the right way to?
Well, I'll say for, you know, I wouldn't maybe call it, you know, biotech normal, but I mean by that it's more like the funding environment for biotech.
Yeah.
It's kind of back to where it was. I'd say for us, it's more about what our longer-term expectations were and are we still following that trajectory of those longer-term expectations. Two years ago, when we initially came out with our revised five-year plan, we said, "Hey, in the first half of this five-year plan, we'll be low double-digit growth." When these emerging markets of cell and gene therapy and in particular as well as liquid biopsy will really start to hit their inflection point in the outer part of that five-year period, that's when you'll see the growth accelerate. I guess what I'm saying is that if you look at it on a multi-year CAGR basis, and you take out the anomaly of last year, we're actually on that same trajectory that we thought we would be.
Okay. Yep. Okay. I guess another kind of logical jumping off point is just that small biotech piece, right? Maybe just talk through what the exposure looks like there. Obviously, that's been a focus for a little while now just in terms of funding. How do we think about your exposure? Where is it kind of most pronounced, and what is it for the whole company?
I mean, well, I think we have a decent exposure. I say exposure, it sounds like it's a bad thing. We actually see it as a good thing.
Yeah.
You know, but academic is tomorrow's biotech. Biotech's tomorrow's big pharma, right? We don't necessarily see it as a negative. But yeah. I mean, let me put it this way. Our source of revenue from smaller biotechs relative to a lot of other life science companies in our space is a lot higher. We're in a discovery mode. And we have highly valued products by those customers, close relationships with them like we do with academic, and so it's a natural translation for us. Essay compared to like some, you know, call it Thermo, for example, where they are much more heavily bent downstream towards bioprocessing, things of that sort.
They're gonna have, as a percentage of their revenue, a much higher proportion of big pharma. That all being said, what I'd like to tell you, we obviously sell to all the big pharma as well. Our top 30 or so pharma customers had over 30% growth last quarter. We're doing very well there too. It just happens that our mix is slower, is more on the biotech. We are still foremost a discovery-based company, and that's where more discovery in totality happens in biotech than it does in pharma.
Mm-hmm. Okay. Then you were kinda talking through obviously the comp set dynamic last year, maybe some of the, I don't wanna say overpurchasing, but, you know, money was a lot, a lot easier to come across back then.
Yeah.
I guess, where do you think we are in the digestion period of that, right? You know, I think two quarters ago, you guys had some issues in China. It was Europe. You know, looking back in hindsight, was some of that, you know, related to this and we're almost out of it? What's the right way to think about just the visibility into. Is it just getting through the comps? How do you think about just the recovery path of those markets?
I mean, I do think it is about getting past that bolus of, I call it COVID halo revenue. You know, we weren't one of those companies that called out COVID specifically, even though we could have tried to come up with something. The reality is, we had a halo effect like others have as well, indirectly, if not directly. It's a matter of getting really over that hump. As it pertains to these larger reagent orders, we see less of those in the back half of our fiscal year than we had in the first half. In the case of our instruments, you know, the good news about our instruments is that the actual funnel for our instruments is the largest it's ever been.
The interest in our instruments is as high as it's ever been. You may have heard you know, Chuck or one of us mention in the last earnings call that the cycle for closing that funnel has lengthened.
Mm-hmm.
You gotta kinda step back and say, "Relative to what?" Right. Relative to what it was pre-COVID, it's probably about the same. Relative to what it has been the last couple years, yeah, it's lengthened because it was abnormally short the last couple years because everyone was, like, desperate to get what they could because they were afraid they couldn't get it. In the case of our instruments, which provided massive productivity into their labs, if they couldn't be in their labs five days a week, they wanted that instrument to get that productivity up, and they wanted to get it now as opposed to wait four or five months because they weren't sure. They were concerned that maybe they wouldn't get it four or five months if the parts weren't gonna get. Even though we never gave them a reason for that concern.
Mm-hmm.
I think that's. It's really about getting past that anomaly of halo that we had last year.
Yep. Okay. Then maybe on the, kind of on the biotech orders, I know in Protein Sciences you called out some of the kind of the bulk orders, you know, that haven't been necessarily reordered. You talked a little bit about that. I mean, do you have visibility into, you know, when that kind of comes back a little bit? Is it, is it dependent on, you know, biotech funding? What's, what's the right way to think about kind of as you analyze and look and say, "All right. You know, that happened last year. Maybe it just doesn't come back, and we just get back to a normal baseline.
Well, again, it's not to say you know, we still have bulk orders, right?
Yeah.
25% of our, call it our wet reagent business and the assays is still bulk orders. It's just to have that size and concentrated few is what was unusual.
Mm-hmm.
You know, I think, those are the type of orders that we would expect to see a few years out when cell and gene therapy really starts to max and you get some really big volume orders.
Yep.
Not necessarily, you know, not necessarily now when most stuff's in preclinical and early clinical stage.
Yep.
You know, I think that's what we expected all along, and that's kind of what we expect going forward. Some of this stuff was, I wouldn't say pulled in, 'cause most of it wasn't even cell and gene therapy. It was other types of therapeutic drugs that were being explored. There was just a lot of maybe speculative stuff going on because there was a lot of money flushing around.
Yeah.
Right?
Okay. Makes sense. China, you know, obviously a big, big topic with you guys.
Yep.
When that recovers, what it looks like. I think, Chuck, we were joking about it earlier. I think he used the word explosive.
Explosive.
It's, it's coming.
Yeah.
I guess, what do you guys see in there? Have we bottomed out? What's the recovery path look like? Again, obviously Chuck is thinking it's pretty steep, but why don't you talk about what you're seeing there?
I mean, I think it could be very steep. I mean, you know, why would Chuck say that is if you step back and look at. There's obviously two or three factors to this. The first is, if history is any lesson, and usually it's a good lesson to start with, go back to the spring of 2020 when COVID first hit in China. You know, China was basically shut down for a quarter, and then COVID quickly faded away from China, and they immediately reopened. We went from -6% growth to 50% growth in one quarter, practically in one quarter. There was this massive pent-up demand to get caught up in their research projects and so forth.
I think we think our customers were working double shifts and everything else.
Mm-hmm.
If they're working, they're buying our stuff, they're using our stuff, right? We've seen that happen in the past, and I think why, you know, we're even more bullish about coming out of what's happened here recently is because this wasn't a one-quarter shutdown. This has effectively been a two to three-quarter rolling shutdown, first caused by the government-
Yep.
-shutdowns, and then finally by COVID itself.
Mm-hmm.
You could argue the pent-up demand is even greater and will take longer for that pent-up demand to even get caught up. If, using the analogy, people are working double shifts to get caught up, it will take longer to catch up from where they were. The third piece of this is, for me is, the, you know, integrity of our team there in China. They've been spot on through this whole entire crisis with regards to the ups and the downs, the ebbs and the flows. They told us at the end of Q2 that we got one more tough quarter in Q3.
Mm-hmm.
It's gonna be a tough quarter because people are still sick. They're getting well, but they're still sick. By the time most of them start getting well, we'll be well into Chinese New Year.
Right.
No one's coming back until after Chinese New Year. It's gonna be a heck of a deficit the first half of the quarter. Their bet was it'll become roaring back in the second half of the quarter, just not enough to make the quarter look good.
Okay.
It sets up very well for Q4.
Mm-hmm.
Here we are, whatever it is, two weeks or so, past that Chinese New Year kind of coming back, and that's exactly how it's playing out so far, knock on wood.
Okay.
It gives us a lot of optimism.
Yep.
Then you add on top of that the whole stimulus.
Yeah.
-potential, which is more around our instrument business in China, and that's another layer of tailwind that we see more so as we get into fiscal year 24.
Right. Okay. Kind of as you were saying, right, January you had between COVID and the New Year, very low growth, as Chuck kind of talked about on the call, but since we've seen kind of the quote, "reopen," things are tracking well in terms of that sharp ramp that you guys-
Correct. Correct.
Okay. I know, you know, even in terms of in-house, I think you guys talked about like 80%-90% of employees had COVID.
Mm-hmm.
What are you seeing kind of inside your own company? Then again, just the trends generally that you're watching. What are the right metrics we should be looking at in terms of China recovery?
Yeah, I mean, I don't know what metrics were made public to really, to follow. We're fortunate we got a, you know, 200 person sized team there that is a good barometer, and they have a very good insight into their customer base. Everything we've learned all along is that, you know, what's consistent with what's happening with our employees there is really consistent with what's happening with our customers.
Mm-hmm.
You know, yes, up to 90% of our employees at one point all had COVID.
Mm-hmm.
They said as far as they could tell, all their customers were the same way.
Yep.
Fortunately, very fortunately, you know, none of our employees lost lives. Unfortunately, some of them did lose some of their loved ones, but no lives were lost. They were hearing the same from their customers. If you're hearing about a less, you know, fatality rate, all that, all that appears to be true based off of our small sample size, which is all good news as well. Again, what our teams are telling us is that people are rapidly getting well. In fact, there's way more people well now than there is sick. They're also saying that locally they believe there might not even be a wave 2 or a wave 3, that wave 1 was so big that it kinda took care of itself.
That's kind of what they're saying, and they're saying that it's gonna come back strong following the reopening after Chinese New Year. Again, we're only a couple weeks into it, but.
Yeah.
So far so good.
Okay. Maybe just remind us just in terms of the exposure in China, what you guys, what you guys sell over there relative to the corporate average?
Mm-hmm.
Anything jump out that's worth talking through?
Yeah. I mean, within our Protein Sciences segment, we sell everything we sell in Europe and U.S., we sell there, as well as our spatial biology platform and [DNGs] we sell there. We are more instrument focused there. Even though as a company our instruments are like 10%, in China it's closer to 50% of our revenue is instruments, actually. Why that's interesting or perhaps important in the near term is because the stimulus that they're coming out with, which was like $1.7 trillion, more importantly, I think RMB 200 billion is earmarked towards life science instrumentation. You know, given that that's a large percentage of our profile there, that bodes well for us in terms of our absolute China growth.
Yep.
opportunity in fiscal year 2024.
Yep. Yeah, maybe on that stimulus point, I mean, is some of that baked into guidance? How do you think about, you know, capturing as much of that as you can? What's the right way to think about how you guys are approaching that in terms of strategy?
Well, we're gonna go after it if we can, of course. I think, you know, we'll be able to quantify this a lot more, definitely by the end of our fiscal year here.
Mm-hmm.
We'll just be kicking off our planning process next month. In real time, what we're hearing is that tenders are starting to come in. Our team did tell us, they said they expected tenders to start flowing in after the Chinese New Year. That's starting to happen.
Mm-hmm.
By the time we get to the end of our planning process in May, June, like, they should have a pretty good handle on what that volume looks like, what the pace trajectory is, what the customer mix looks like, and what that then means for 2024, and we'll message that, you know, as softly as we do.
Yeah.
at the end of the fiscal year.
Yep. Okay. the stimulus part, probably more fiscal 2024, just given where.
Yeah. I mean, I think we talked about it. Some of it could be pulled into the end of Q4, the reality is that it can be a 3 to 5 to 6-month tendering process 'cause you first gotta go out. You got to determine what you want to get. You got to get quotes for what you want to get. You got to submit it to the government for an application, it is government, that takes time for that to come back with an approval and then an order. Yeah.
Yeah.
That's why it's a 3-5 month cycle.
Okay. All right. Sounds encouraging on China. Maybe on Europe, you know, I know that had some issues over the last couple of quarters as well here and there.
Yeah.
You know, you guys actually performed really well there over the prior few years. Maybe just update us on what you're seeing there. I think you're opening a new facility in Ireland, things like that. Maybe just kind of updated thoughts on Europe, what you're expecting in the next quarter or 2.
Yeah. I mean, Q1 and Q2 was a little bit tale of two different quarters for Europe. You know, Q1 was a very rough quarter for Europe. We, as we said, we shrank up the mid-single digits. I think what was unique there was 2x. One was the whole situation around energy concerns around that with the Ukraine war and so forth. That really tightened the reins on spending across the board in Europe. I think that was a bit unique to them versus, say, North America. We talked about this vacation impact that I think was real. I think that was more pronounced in Europe than it was in the US, so that was something a little more unique to them.
In Q2, they rebounded very nicely and had mid-single digit growth as opposed to, you know, downward growth in Q1. Obviously, the vacation headwind was behind them, and arguably, the energy concerns were abated. You know, they haven't gone away, but it didn't pan out to be nearly as bad as what they were worried about. I think that was a tension release that allowed funding to free up in general. You know, I think, you know, they're now behaving more similar to, call it North America, which is, you know, they have the same challenges in biotech that North America has. That's not a North America unique situation. They're strong in pharma, just like our U.S. business is strong in pharma. Interestingly enough, their academic business is actually stronger than our academic in the U.S.
That's actually held up pretty nicely. It's Europe, and it's always an area that because it's not one entity like the U.S. is, it can be a lot more variability. You know, we do feel like the worst is behind us in Europe as well.
Yeah. Just the funding over there, you feel pretty good about the visibility. I know there's some questions over the past six months about just generally, but to your point, given the energy, potential crisis seems, you know, mostly.
As long as that stays abated, I don't see anything unique outside of, you know, at the end of the day, they're pharma companies or global pharma companies, just like U.S. global pharma companies. Their biotech is going through the same, you know, funding normalization that our U.S. biotech is. If there's any differences because it's based off of government funding, it would be on the academic side. Like I said before, their academic has actually been more or less stronger than the U.S., actually.
Yeah.
Interestingly enough. Yeah, I barring any deterioration there in the macro environment.
Yeah.
see any major headwinds ahead of them.
Okay. No. I mean, it sounds like both geographies doing pretty well. Obviously, the U.S., we have a pretty good handle on. I mean, I think there were some concerns after the quarter. Yourself, probably your biggest fear, both that kind of subdued results, and there's this fear that whole market is kind of pulling back. I mean, it doesn't sound like that's your belief. It sounds like it's more comp dynamics and things should recover.
I'll go back to what I started with, which is that's why we monitor that run rate business so tightly, 'cause if we feel like that really does give us a good handle on fundamentally what's going on, as well as our order book or our funnel, so to speak, for our instruments.
Mm-hmm.
Those dynamics are still very, very strong to support a double-digit growth rate in the intermediate and longer term.
Yeah.
It gives us confidence that. You know, it's one thing to say you have a tough comp.
Mm-hmm.
It's another thing to really understand why it's a tough comp and, you know, why it won't necessarily repeat. I think we have a much better handle on that now, arguably, than we did last year when it was actually occurring and, you know, and that maybe didn't, you know, start to drink your own Kool-Aid a little bit in terms of the good times last forever. You know, I think our 5-year plan was based on very fundamental longer-term macro conditions within our industry and our more importantly, our position.
Mm-hmm.
The strength of our platforms and the low market penetration, and that hasn't changed.
Yep.
Right?
Okay. That's good to hear. Maybe just we can flip over to Exo for a bit, and I definitely wanna get to the margins.
Yep.
and stuff with you as well. Maybe on ExoDx, just talk about the trends you've seen. It seems like the volumes are doing pretty well. I think you have some expansion on some coverage last week or two weeks ago. Maybe just talk about that business, what you're seeing and some expectations there.
Yeah. I mean, that's by far the bright star, you know, we have in our entire portfolio right now. It's maybe 3 years behind schedule than we thought we'd be initially when we bought Exosome. We had faith in that platform, with that technology, and we had faith in our team to be able to execute. Once we could particularly pass these COVID headwinds, we're really seeing it start to materialize in a big way. Yeah, you mentioned 70% growth, more than 70% growth in our test counts. That's been consistent now for 4 or 5 quarters in a row. More than 100% growth in our revenue. The reason why the revenue growth is higher is because we're getting more tests. We're getting more and more private coverage.
It's helping that average test price come up. you know, we talked before about what's driving this. It takes time, but it also takes the right message, the right marketing. We have the right team with the legacy of senior management team now in control of it. It's just, it's really just rapidly getting implemented into the urologist workflow. you know, what excites me the most is still the untapped potential of it. Despite these growth rates we've had the past year and a half, we're still, like, barely scratching the surface of what's opportunity is out there. We estimate that, you know, somewhere between 15%-20% max of all urologists out there have even tried our product once. There's a whole 85% to go after there.
Even taking that off the table for a minute, I call that upside. The reason why I call that upside is because if you actually look at the urologists who have used our test more than once, which means they're starting to adopt it into their workflow. The average test per doctor per quarter is right around five tests per quarter. You look at our doctors that have been with us the longest, it approaches 30, 40, 50 tests per quarter. We're talking about a potential, you know, somewhere between 5x and 10 x potential improvement just within the doctors that we currently serve as they continue to adapt that into their workflow.
Yeah.
It's gonna be huge. You know, on top of that, I'll mention we just recently got the approval from Medicare for the, you know, the re-recurring monitoring use of this test. Even after you've had a negative biopsy, if the parameters for taking this test still persist, you can still have this test done every year, and that opens up another 1 million patient per year opportunity for us.
Okay. maybe just on like the private payer, ramp, like you said-
Uh-huh.
It's been a little slower than expected initially, but I guess talk through where we are. Maybe it's percentage of tests getting paid, whatever it is, and how you continue to build that out over the next few years and where we can get to in the near term.
Sure. I mean, the biggest, I think the biggest catalyst or lever we have for us going into next year has been a recent hire that we did in the last three or four months, where we really got some really strong expertise in the industry who comes from the other side of the big five players and knows exactly how they think and what it takes to get this over the goal line. I mean, already this individual is getting meetings with the big nationwide insurers that we could never get a meeting in. He knows the exact steps we need to take, what process you have to follow, what they're gonna ask for, what we need to provide them.
He knows them all, and he's got a reputation, personal relationships, which goes a long way in this area.
Mm-hmm.
We were able to recruit him in and because he saw the upside potential of it all. We're very encouraged that we'll see some inflection points there as well in the next year to 18 months on that private payer side.
Yep. Okay. Exo is a pretty natural progression to margins since.
Uh-huh.
Has caused some noise in there. I guess maybe we can start there. How do you think about the Exo? Obviously, it's been a headwind. It's getting, you know, better and better. What's the right way to think about that impact on margins? Then we can kind of segue into, to the full-.
Well, as ExoDx continues to grow like it has been, it's no secret that it's still not making money, it's still losing money. You know, relative to what other diagnostic companies lose, I'm telling you, it's a drop in the bucket. We intend to keep it that way, meaning not get ever get worse than that and soon return or soon get to profitability. The reason why we have confidence in that is even just with the with the prostate test, which is gonna be our main revenue driver for the next five years, hands down, that, you know, there's not a whole lot of additional investment we need to make there to make that successful. The good thing about the urology market is that it's very centralized in key centers throughout the country.
I think we actually paused hiring in our sales force all through COVID 'cause there was no point.
Mm-hmm.
In the last, you know, six, nine months, we've almost doubled our sales force. We're not talking about hundreds of people. We're talking about 50.
Yeah.
Right? Our team believes that's pretty much all it takes.
Mm-hmm.
To get the right coverage. There's not a whole lot of additional investment that's needed commercially.
Mm-hmm.
As that revenue ramps, you know what that means is that at a very high gross margin, by the way, you're talking about 80% gross margin on those kits, much of that drops to the bottom line. you know, we see, you know, within a, I'd say within a year or so, a break even, and then beyond that, you know, some nice contribution to the bottom line.
Okay. Then, you know, that was obviously one variable in the quarter, in recent quarters, in terms of a headwind. The bigger that becomes, the headwind is kind of notable. Maybe just talk through the other moving pieces in terms of the margins. Obviously, pricing is one that's kind of on your side.
Yep.
Things like inflation. You mentioned hiring.
Yep.
You guys were hiring aggressively, couldn't even find enough people. Maybe just talk through the moving pieces and that kind of...
Yeah. I'll kind of explain, you know, even though our margins in Q2 were slightly better than they were in Q1, and we've talked about it improving going forward, they were down year-over-year. As a reminder as to why they're down year-over-year, it's not as simple as just one thing. It'd be nice and easy if life was that simple. It's a number of things. You know, one is we did do the Lunaphore acquisition, so we have that acquisition that wasn't there last year, and that's a temporary drag on margins. We have FX, which has been a major drag on margins, 'cause the FX headwinds that you see on the top line, you know, 80% or so of that from a margin perspective falls to our bottom line.
That's a big headwind on margins. The inflation dynamic, I call it inflation pricing dynamic, has been a headwind. You know, wage inflation was obviously very real this past year. To be competitive, we had to pay up, but we've also raised prices to cover that. We've covered it on a dollar basis, not necessarily on a margin basis. We're covering our inflation dollars for dollar, but when you cover it dollar for dollar, that's a drag on margins, right? We have that headwind. A couple of other small nuances, but I'll mention another major driver, which is the profile of our hiring.
You know, last year everyone was still in the midst of not being able to hire fast enough, retention issues, and we had a growth plan to hire, you know, 350 or some people like that last year. Throughout the year, almost all of them came in the last four months of the year. I mean, that's when finally, you know, some of that retention was starting, you know, issue was starting to get better. We were starting to break loose on getting some good hires, and we caught up quite significantly, but we caught up in the very back end of the year. None of that was in our...
Said another way, you could argue our margins were a little bit artificially higher last year in the first half of the year because we had planned to have those headcount and they weren't there. We had a lot more folks leave the company than we anticipated also. You could argue that That part of our decline is more about last year being a little bit overinflated as opposed to this year being under. Those are the three main components of why the margin's lower year-over-year. More importantly, looking ahead, we've been consistent on this message, we see it improving as the year progresses. FX, while still a headwind in Q3, it's a little bit less so.
In Q4 it becomes much more minimal year-over-year impact because a lot of the drop in the foreign exchange rates occurred in like June of last year. The price and inflation dynamic will be with us still, but the biggest driver will be that headcount that was not in our run rate the first two and a half quarters of last year will be in our run rate last year. Meanwhile, if nothing else, seasonably, our revenue in the back half of the year is always higher than it is in the first half of the year. With higher revenues and kind of holding our headcount relatively consistent, we'll automatically see some margin improvement.
You may ask, "Well, keeping your headcount relatively consistent, you know, why is that?" Well, obviously our growth is slower. That's a reason. A more important reason is we hired all these people at the tail end of last year, and it's actually more than just these 350 people. Because retention was so difficult for everyone last year. It's like a big rotation. They call it... It's really the great rotation is what it was. You know, not, you know, people leaving work, the workforce. It was that they were all rotating, especially young people. We ended the year, and we still have today roughly 3,000 people. We actually hired 1,000 last year, but only netted 350.
You know, the fact that we were actually able to accomplish what we did last year with 1,000 people moving around was quite incredible. Luckily, that's stabilized a lot, but now it's about getting that 1,000, a third of our workforce integrated, getting them productive, both on the innovation side and the commercial side. There's really not a need for any kind of massive investment in new headcount right now.
Mm-hmm.
Because of that, we'll see our margins expand as our revenue continues to lift from here.
Yep. Yeah, I guess as you look into kinda next year and beyond, you know, it seems like you took on a lot of margin headwinds this year. I mean, it seems like it's almost spring-loaded for 2024. How do you think about that path? I think you guys have the 40% number out there. How do you think about that path near term? Is it just these headwinds abating? Exo obviously is probably a pretty big variable, but maybe just talk about that path.
Yeah, I know I'll be able to give much more, you know, near term view on that as we get through our planning cycle for this year and see what people wanna do for investments in that return. You know, if we end the year in that 38% range or so, like we believe we will, you know, that's not that far from 40%.
Mm-hmm.
I think we can still make some, you know, the investments we need to fund our future growth and be able to squeak out enough margin expansion each and every year to get to that 40%.
Yeah.
We can make conscious decisions to get to 40% overnight almost if we want to.
Yeah.
You know, we're balancing margin with growth, and we've always taken that very seriously. You know, we don't grow just for the sake of growing at the expense of margins, but we also will make the right investments to make sure we are a growth company.
Yep.
I like to tell our leaders and our employees, it's one thing to grow, it's a whole other thing to have quality of growth. That's something that we pride ourselves on. One thing you can always count on with Bio-Techne is we will always take very seriously quality growth, not just growth for the sake of growth.
Maybe on that point, you know, if you do see, you know, let's say China comes roaring back and you see some nice top-line upside, how should we think about kind of letting some of that flow through to the bottom line versus investments? What's kinda the thought process there?
Yeah, we're going through our prioritization process as we speak to get a sense of how the investment ideas rack and stack and you know, what makes sense. I really can't give any more color than that.
Sure.
until we get through that process.
Okay.
Except to tell you what our overriding philosophy is and theme is. I think our track record for the nine years proves that out.
Yeah.
You know, we've made 15 some acquisitions, which for a lot of companies that would destroy their margins.
Mm-hmm.
For us, yeah, we've had temporary dips in margins, but they've always come back as we've, you know, grown those businesses the right way and You know, we make money when we grow.
Yeah.
not just grow.
Maybe one quick last one just on M&A, obviously the Wilson Wolf deal. I mean, how do you think about your strategy here? Does that eat up some capital when you're on the sidelines? Are you still kind of looking, and what is the pipeline look like?
Well, we got plenty of dry powder still.
Yeah.
Even with the upcoming 20% purchase of Wilson Wolf.
Mm-hmm.
We've got a line of credit of $1 billion.
Mm.
We barely tapped into that. We got still plenty of powder and the opportunity set is the largest. It's always been active, but what's different feels different now is that there's more of a what I call actionable bucket or potentially actionable bucket. Whereas in the past it was, you know, last two, three years of COVID, it was, "Yeah, we'll talk to you. Here's the price. If you don't like it, you know, we're gonna go for our next series round or IPO.
Yeah.
There was no real discussion after that.
Mm-hmm.
Now there's real meaningful discussions around how you can grow together, create synergies, you know...
Yeah.
-be part of something bigger, and so it's kinda like it was pre-COVID, so it's feeling a lot more opportunistic in terms of the opportunity.
Okay. We'll leave it there. Thanks, Jim.
Okay, you bet. Thank you.
Thanks.
All right.