Good morning, and welcome to Bio-Techne Earnings Conference Call for the third quarter of fiscal year 2019. [Operator Instructions]. I'd now like to turn the call over to Mr. Jim Hippel, Bio-Techne's Chief Financial Officer.

Good morning, and thank you for joining us. On the call with me this morning is Chuck Kummeth, Chief Executive 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 2018 and other SEC filings 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 as a result of any new information or future events or developments. The 10-K as well as the company's other SEC filings are available on the company's website within its Investor Relations section. During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to most comparable GAAP results are available in the company's press release issued earlier this morning on the Bio-Techne Corporation website at www.bio-techne.com. With that, I'll turn the call over to Chuck.

Thanks, Jim, and good morning, everyone. Thank you for joining us for our third quarter conference call. Our fiscal Q3 was a record quarter for Bio-Techne, and I'm extremely pleased with the execution of our plan so far this year. The company delivered 14% organic growth in the quarter with both of our reporting segments growing double-digit. We're performing at levels that we were envisioning just a few years ago. Our acquisitions over this time are integrating well and providing extra organic growth to our ever-improving core reagent businesses. Standouts included our ProteinSimple franchise, which continue to grow north of 25%. Our genomics division, which return to double-digit growth in a big way, also growing north of 25%, while our core antibody business grew north of 15% in the quarter. As we look at our performance by geography, all major regions continued to perform exceedingly well with growth at least in the teens for the quarter. China as we've come to expect were the fastest with growth over 20% in Q3. I'm even more pleased with the continued consistency of our growth rates of the company over the past several quarters. I believe it speaks to the strength of our product portfolio, the scalable market these products addressed and the momentum behind the fine execution of our strategic plan. So now let's talk a bit more about the performance of our products starting with the Protein Sciences segment. We experienced double-digit growth in nearly every single product category. Our instrument business solutions continue to see great acceptance in the market with our automated Western blot solution growing over 40% in Q3 and 35% year-to-date. The biologic iCE platform grew nearly 20% in the quarter and our automated ELISA solution, Ella, grew over 50%. Growth in the Protein Sciences segment also…

Thanks, Chuck. I'll provide an overview of our Q3 financial performance for the total company as well as provide some color on each of our segments. Starting with the overall third quarter financial performance. Adjusted EPS was flat prior year at $1.21 with foreign exchange negatively impacting EPS by $0.10 or 8%. GAAP EPS for the quarter was $1.15, compared to $0.52 in the prior year. Q3 reported revenue was $184.9 million, an increase of 13% year-over-year, with organic revenue increasing 14%. Third quarter reported sales included a 1% growth contribution from acquisitions and a 2% unfavorable impact from foreign exchange translation. By geography, the U.S. grew in the mid-teens, Europe's organic growth was in the low teens, while China grew over 20%. As for the rest of Asia, organic growth was in the low teens led by South Korea and India, the latter growing nearly 100%. High-end market, which excludes Asia and our diagnostics division, biopharma growth was in the mid-teens while academic sales growth was in the mid-single-digit. Moving on to the details of the P&L. Total company adjusted gross margin was down 70 basis points compared to the prior year at 71.3% in Q3, with favorable product mix and operational productivity more than offset by the acquisition of Exosome Diagnostics and foreign currency headwinds. Adjusted SG&A in Q3 was 27.7% of revenue, down 150 basis points from Q2, and 230 basis points higher than the prior year. The volume leverage was more than offset by the additional SG&A added as a result of the Exosome Diagnostics acquisition. R&D expense in Q3 was 8.4% of revenue, relatively flat to the prior year. The resulting adjusted operating margin for Q3 was 35.2%, that's a 270 basis points increase sequentially over Q2, and a decrease of 208 basis points from…

[Operator Instructions]. And we'll go first to Puneet Souda with SVB Leerink.

Maybe first on improvement in ACD and RNAscope business. What's your expectation here going forward for the rest of the year? And maybe now with the business reorganized and operating under new leadership, what your expectation maybe into the next couple of quarters?

Sure. Well, it's the same question we got last quarter. And we said we kind of guided that we'd probably be hopefully back in the teens this quarter with our goal to be going into the next fiscal year in 20% or better. It was really nice to be above 25% this quarter and going forward, we do see 20% or better. Maybe more, we'll know more probably within the coming quarter. We're still kind of scaling all back here with Kim's leadership and few new people and a few replacements and Europe turning back on. We did some integration down there. So I mean, all in all, it's going quite well. China has starting to already lift, we've add some resource there as well Japan, so. Our goal was 30%. We'd be happy with 20-plus as we talked about for this -- for going forward for a while here for you said a couple of quarters, but I'm hoping for better.

Okay. Great.

The demand has never been better. I mean the agreement with Lisen is a good example, we're getting a lot of requests for collaborations. NanoString is another one, so there's never been better demand. So it's really kind of up to us in execution, I think, to really reachieve 25-plus percent.

Okay. Great. And I had a quite broader question in terms of the GMP proteins and the focus you have in building out the capabilities there around cell therapies and other types of products potentially. We saw quite a bit of M&A activity here. I mean GE BioPharma, the Brammer and, I mean, the recent small acquisition of the protein analytical technologies. So maybe just give us your view -- has your view changed at all in terms of how you're looking at the space in terms of acquisitions? And just overall, broadly around the workflow that you want to develop for the GMP proteins and the capabilities around that portfolio.

Well, we feel very strong about it. We know for sure that this is a chance to maybe possibly even double our protein business over the next 5 years just with the onslaught of all the need for GMPs. So instead of being a mile wide and inch deep in research, we're going to be much broader and with things that are more scalable. A lot fewer SKUs but bigger scale so they're in the need for the new factories, so we have bigger everything and of course, it's GMPs so it has to be very, very auditable and confined and high integrity. And so we can do all that. We do it now, just we do it at a much lower scalable level. In terms of the industry and what we saw, I mean, we start talking about this well over a year ago. And I guess it makes me feel better to see the Brammers being picked up by the Thermos. Another, just kind of indicates that we're all on the right path, I think. There's clearly a lot of potential. When we start reading the fun facts about there's a thousand different therapeutics and clinicals, my God, it's, I think, we may end up being throttled 3 to 5 years out by the lack of GMP, proteins, reagents and all the things that people may not be taking into consideration that you've got to have to get this -- these therapies to market. So we're going for it and it's not a ton of capital for this large size company. We don't spend a lot of capital anyway, so it's a very prudent investment and we think the payback will be absolutely huge.

Okay. And last one if I could touch on protein platforms overall. You obviously have delivered strong growth here. As we look forward, obviously the comps are going to get tougher. Maybe just give us a view into how you're -- sort of where the penetration strands currently into the broader sort of the market for Ella and Wes and the overall technologies that you have. Maybe just give us a sense where you stand currently and that should comps be a challenge here or do you see a further growth coming onboard as the penetration is still low?

Well, starting probably two years ago, we were always guiding that this is going to be an asset that 5% to 15% or so kind of organic growth, which is really fantastic, especially for us back then with mid-single-digit growth everywhere else. We have probably concluded 9 out of 12, 10, and something like last quarters of 20%-plus and we're still right up there. It's been really a delight to see the Wes and Jess platform, the Western blot platform exceed 40% organic growth. We've been hoping for 20%, and we keep exceeding it. It's been 30% for quarters in a row here. So getting to 40%. And yet another 100 system quarter here for Wes and Jess is another nice feat for us. So we're definitely starting to hit the mainstream and yet we still think we're probably 10% or less in terms of the market share. So we've got a long way to go there. iCE has recovered nicely. iCE is never going to be probably a 40% grower, but if we can keep it in that mid-teens to 20% growth, it's very solid, very good for us, it's still a big business. It's then lapped now by the Western blot business of that portfolio but it's still sizable. And then don't count out Ella. I mean this is now a very, very important business for us. It's -- it matters and is growing at 50% plus just shows that the great demand for it, it's a great technology. We keep hearing about new applications and new opportunities every week for it. So we're expecting big things from it for a long time yet to come. So going forward, ASD is the new division name. We do see this and this is with assays. So all in, we do see this as a 20 -- way more than 20% grower for the foreseeable future.

Great. Congrats, guys.

On the proteins simple part of it. Assays have been so strong lately, it's hard to know where we're going to end up, but we had an excellent quarter in Assays. All in assays with the multiplexing, with Luminex, we're a 14% grower there as well. So this is just what we exactly wanted. This includes our ELISA. We're worried about ELISA going away, but the whole portfolio growing double-digit quarter-after-quarter is exactly what our strategy was. So that does bring the total ASD a little bit. It's still going to be an awful nice double-digit number.

We'll go next to Catherine Schulte with Baird.

Just curious if you can talk about the path forward for additional test on exosome platform. Any update on when we could see clinical trials for bladder or kidney rejection?

I say, imminent on bladder. I believe we're actually working on getting patients going with different partners in that samples and such. So we do expect, call it about two years from today, we should be in the same spot we are today with EPI, hopefully. And we're going to follow the same kind of LDT strategy. That said, we can't do everything in parallel here. We're probably more open for business than the previous administration of that company in terms of partnering. So we have a lot of interest and certainly on the kidney rejection as well as the blood versions of the technology platform, most likely a first indications for lung and for breast. And we keep pounding forward on our clinical diagnostics part of the business as well. Most of our revenues right now is around that. So we have many, many big pharma paying us money for access and doing validation network right now. So we're really expecting this to be a big platform. It's going to be 3- to 5- to 10-year kind of a future here, especially for the clinical diagnostics piece of it, which will all pay off eventually. First things bladder, it's happening now, so.

Great. And then on the Elpiscience BioPharma agreement. How should we think about economics on this type of collaboration? And should we expect to see more of these therapeutic partnerships going forward?

Yes, I'd classify this and it's really it's shot on goal. It's not as important or material as probably, potentially, as the Micropoint deal with Ella. But if they hit with these and they have access to some very important antibodies of ours and if the work pays off for them, they'll be doing therapeutics with these in China, which are going to be big scale of businesses. We'll receive different rights, royalties and things from that. It'll take some time for it to get to that, but that's why it's nothing imminent there for payback but there is -- there are access revenue piece. So there's milestones and such but the big payout is later when the things hit. And it could be tens of millions of dollars if they hit. So we're couple of years away from really knowing where those end up. I'd like 10 more of these. These are shot-on-goal kind of opportunities. They don't really cost us a lot, there's not a lot of resource needed, it's just really providing our great products to them for their research.

Great. And then last one for me. You had strong results once again in Europe better than what we've seen from some of your peers. So just curious what you're seeing there. Are you seeing any stocking ahead of a potential Brexit?

No. Not at all. We're all biting our nails here for this quarter with Europe. Everybody else posting doom and gloom over there. But once again, we kind came through with some pretty good numbers and pretty good results. I don't think they're at the -- they're not quite as high as they've been, but they're just under and they're very solid for us and we see it continuing more or less. I think the collaboration us selling full solutions, expanding our commercial field across all of Europe, leveraging the small distributor acquisitions we made. We're still in the mid-innings on all that leverage of it, say. So it's going quite well. And on Brexit, we just don't see any impact. We didn't see an impact when there was going to be a Brexit, let alone now when there's probably not going to be a Brexit.

We'll take our next question from Michael Sarcone with Deutsche Bank.

This is Mike Sarcone on for Dan Leonard. So first one just on ACD. Can you just speak to how you guys are thinking about both or where you stand today in terms of research market penetration? And then maybe how you're thinking about clinical market penetration and the timing there?

Yes. Well, it's kind of hard for us to guess the clinical market, it's not really our thing. So we're certainly open for business in partnering and working with a lot of different office like this Lisen who hopefully will have great success. The research side, I think we're moderately penetrated. I mean the very first inning of this technology were for the researchers who want to do work and didn't have an antibody, right? So you go needed to go molecular without an antibody in mind. That said, this has always been a tool, we bought this asset ready for the migration of iCE and -- for pathologists into the molecular space and we're working with automation providers and different tool providers to try and do that and provide better tools for standard everyday pathology along with the therapeutic potential, which there is a lot of potential. So we think this is a big platform. We're nowhere near where we think this is going to end up being in terms of maturity or saturation. Like I said in my earlier comment, we just -- we expect this to be a 30% grower. We're not back to that yet but we have plans to hopefully get there but certainly 20 or better and we'll keep making changes here until we get that because the potential is amazing. We really have a demand -- we have more demand than we have team that work on ideas. The idea -- the requests coming in from customers and research institutions and send KOLs and therapeutics is more than we can handle. So it's a matter of prioritizing this and then getting back in the game to get the growth going, so.

Got it. And can you maybe then speak to how do you think the NanoString partnership impacts that growth trajectory? Do you know maybe any way to frame the revenue opportunity from the NanoString partnership?

Well, I think it's probably more up to Brad and that team than us. I mean they really -- Brad and I got together on this really a couple of years ago. And initially, our teams were a little bit hesitant and -- but when we got them together, they started seeing the light of it. There really is a natural link up. We -- our technology kind of comes after the spatial front end of the research they do with their solutions. And I -- we think there's a lot of upside here. NanoString has potential and we'll ride with that and vice versa. So right now, it's kind of early to say and it's just again, it's another highly prioritized project that we're doing within the genomics business unit of more than we can handle, but it's right up there on priority. We think the world of that team and I think the -- we think it's great science. The instrument is wonderful and we know it works. So we're trying to make it all work altogether.

Got it. That's helpful. And last one for me, can you maybe just elaborate a little more on what you're seeing in the academic and government end markets, maybe in the major geographies?

Yes, we're pretty even with biopharma in Europe. It's was a little softer academia here in the U.S. But I think it's more about timing. I think we've got a little bit of some lumpiness and we watched the NIH funding every month, we get the reports and that's been a little bit up and down. In general, I would say going forward, we see mid-single-digit levels are better with academia and we will stay around the high single-digit to low double-digit in biopharma is what we kind of see.

We'll take our next question from Patrick Donnelly with Goldman Sachs.

This is Charlie on for Patrick. One on exo. I think you mentioned that the test line was being up 14% quarter-over-quarter, which I think is a decel relative to last quarter, which is I think a little surprising to us seeing as you did get NCCN coming online in January. So can you just talk to how that threaded against your model and the puts and takes that you're seeing on the commercial side?

Yes. We noted the number at 4,600 tests. We actually shipped over 5,000. This quarter we see between 6,000 and 7,000. It's kind of up and down a little bit and we have, as you know, a new team, new team leader. We've made a lot of changes and there's been some impact, but there's a lot of timing involved in some of this really. And with that also, there's some seasonality with regards also to the business with. At end of the year -- I should say, at the beginning of the calendar year is when most high deductible plan kicked back in and so you get much more activity towards the end of the year before people have to start using their deductibles again. So seasonality wise, the March quarter is typically the lowest quarters of the year. That being said, our March growth rate versus our -- March growth over our January growth was almost closer to 30%. We did almost 2,000 tests in March. So we're expecting 6,500 or better here for this quarter so with that on top of 4,600 is a pretty big increase. Again, it doesn't step up though until Medicare, right? So having that kind of growth without Medicare we think is wonderful, so.

Noted. So just want to pivot to the cell and gene therapy side again. Can you give us an update on the Quad Tech acquisition? admittedly, gets less air time than Exo. But obviously sits on a market that's really gaining a lot of momentum right now. So can you give us your updated thoughts on where you see Quad fitting within your portfolio and within the broader market, both now and kind of in the future and any update to Quad on any potential synergies there?

Well, we talked probably a bit about the whole cell and gene therapy initiative here we're doing and we're putting, spend some money. But we're trying to build out this whole workflow and that includes the selection activation component which is the quad B technology along with the GMP proteins, along with immunoassay technology of Ella and we are working on some bioreactor as well as other components, gene editing components for the workflow. So we'll be, hopefully, announcing more things soon. That going -- that said, we're trying to get this initiative going into different clinics going as we can. So Quad's involved in quite a few clinicals. All our revenue right now of them is really clinical revenues, so it's going to take a little while. This is -- if you look at we've got our core paying the bills today. We've got ACD ramping, we've got our ASD technology platform also paying the bills and ramping nicely. Exo is really kind of this year and next year starts ramping, but to 2 to 3 years out, that's when you're going to see the cell and gene therapy portfolio start hitting. And that's a part, I would say, is not really baked in anyone's models or numbers. This could be a very, very sizable business for our company. And as I've mentioned, just the GMP proteins alone could double the size of our core protein business. Remember, we're the world leader in protein in research. That gives you an idea of just that component. Quad is a big part of that. So if we can get qualified in a few of these clinicals and it goes into production, we're going to sell a lot of beads. We're not really talking about what those numbers would be. You've looked at the market, you've looked at other beads that are out there, we're going to, hopefully, be replacing a lot of them that are in the market today because we think ours is superior. The customers are saying so. They're lining up, a lot of them are replacing, ours for others and some clinicals currently and we'll have to see. This will be a big year to see how Quad comes through. We didn't -- we bought it pretty early, we didn't pay a lot for. It's a fantastic team, fantastic technologies, fantastic set of IP. And hopefully, next year, we can start talking about it more in line with the complete workflow and we'll start bragging about that once we hopefully complete a few more steps in this whole thing. We're quite there yet, but it's coming together pretty well.

Got it. And then just quick last one for me. I think you guys on the last call were still talking about maybe high single-digit growth for the year inching into double digits. Obviously, 3 quarters, until fiscal year we're well ahead of that rate seem to indicate that maybe double-digit growth is now more reasonable with, I think, year-to-date you're at around 12%. So with that in mind, is there anything that gives you pause or leads you to believe that growth would decel into Q2 such that you wouldn't expect at least 12% to the bar for the full year?

Well, we don't give guidance. We do give annual. And we said all year, our goal was to be 10% or better. As you point out number at 12%, really have to do pretty horribly this quarter to not reach 10% or better this for the year. But we're still pretty set on that. In terms of quarter, there's timing issue, there's OEM order issues, there's the diagnostics component issue. We had a pretty strong quarter of diagnostics, you can almost guess that means probably for the next quarter because that's kind of we've been, very lumpy. So we're going to be in that 8% to 12% range and for the year, will be well over 10%. I'm hoping we can get to 11% for the year. I mean our goal is to become a perennial double-digit grower, this hopefully, will be our first year to do that and we'll see how this quarter goes that all saw a pretty good comp from last year. And as you point out, going forward now they're not all going to be going good comps and we have to continue to do things. Now one think I'll point out in the next year -- if we get Medicare this year, it'll be almost the whole fiscal year, almost all of that revenue coming will be organic for Exosome. So it's going to be a nice padding. So we're really hoping to get that. We will get it, but whenever we do get it is going to be like a step up in terms of revenue recognition for the organic calculation from exo alone. That was the reinvigoration of ACD. We know which has some poor comps going forward. So that's going to help our growth numbers organically. So all in, we're looking towards the next fiscal year being a very good year. I don't think we're promising 12% for the year, but we're hoping to be a perennial double-digit grower from here on end, so. And we have to keep doing things in the portfolio to do that because there are going to be misfires there are going to be things up and down, there's going to be timing issues, there's going to be funding issues. Europe may finally slump for us like it has in most others, but we'll see. China has been great, Japan is decent for us, India is growing 100% for us. At that rate, in 2 years and 3 years, India is going to be material. So we've got other arrows in the quiver here to help us continually make that 10% or better because that's why you have a portfolio, right, because never -- nothing ever really hits all at once. When they do, you get a quarter like this one, 14%.

[Operator Instructions]. We'll take our next question from Alex Nowak with Craig-Hallum capital group.

So just staying on the topic of EPI here. You provided some color on the time line here for reimbursement with NGS. So you mentioned a meeting in June. Do you anticipate NGS to issue a draft LCD in September, which would then go file at a later date here? Or are you expecting the final LCD to come out in September? Just want to clarify that.

Well, the way we understand it is the open meeting is in June, okay? We'll know in May whether it will be in the agenda. We have to be in the agenda to be able to hit that. If we hit that, there's a 45 day, whatever time frame that's in the process. So that's why we're talking on August still. And I think it's from that August to September is when it would be finalized and be complete and be activated. If we miss the June meeting well then there's probably another quarter. So we don't know, they're not -- we don't talk to them. They don't tell us anything. So we know we've done everything we're supposed to do. There's no homework for us to do, there's no data to provide. There's nothing left for us. We're in the guidelines, we know discussion will come out in the guidelines very soon. And we're hoping to be at the top tier in that discussion as the best solution in that and that's also going to help. So we've got all the wind is on our sail that we can, I think, expect to try to get this completed. And even so, I'd like to point out, as my team points out, these things usually takes 3 to 5 years. And that you personally pointed out to us before a couple of quarters ago and we're still on a record clip for the milestones we're hitting with the NCCN guidelines. And if we get our Medicare, our reimbursement in August it'll be like a record in terms of timing. So this is a platform that really works, the data is really good, there are patients really using it and benefiting and we know we need to get more of it. So hopefully these institutions will bless it and let us move on So we'll see.

Yes. Understood. Thanks for the color there. outside of partnering here you've been quiet on the M&A front recently. So when do we expect to see Bio-Techne go back down in to the market and make a new acquisition?

Yes, we just went under 2x leverage and so we recently have a little bit of dry powder. I would say, I think our shareholders and our constituents would like to see us really get the integration complete with Exosome. We just got ACD kind of through integration kind of back on track, so those are 2 big legs in this stool that we paid a lot of money for. So I think staring now, we've got a good pipeline. We've got over 100 things we're always looking at. And as I mentioned, we're hunting, especially for deals in this cell and gene therapy workflow. So we're -- we got quite a few things that we're looking at there, so expect some hopefully some announcements soon in that area, we'll see. We're not looking for another leg in the school -- stool in terms of a new ACD or a new Exosome right now. But you know, you never know. We're open for business and we want to create a very healthy portfolio company of life science tools and diagnostics and we'll just have to see what becomes available. As you know, we are not the big participants in the public auction process. There are more private for us and we're always hunting on building relationships and seeing what we can get for a deal that's beneficial for us as well as whoever owns it and then we don't usually buy things we can't get to a 10% ROIC in 5 years. So it takes a lot fourth due diligence, a lot of hard work and relationship building to define that and get both sides to agree to a price that allows both sides to find value, so don't count us out.

Understood. And just a follow-up to a previous question, I might have missed this. When do you expect to complete the GMP facility buildout here in Minneapolis?

All in about a year.

And Ladies and gentlemen, this time I'll turn back to Chuck Kummeth for any additional or closing remarks.

Well, again, I think we had a -- by the calling count about another record this quarter. So thank you for your interest. It was a great quarter for us. We have an outstanding team here at Bio-Techne. People are committed. Never happy or never worked harder and we're all benefiting from it. So I appreciate your interest and we'll talk to you in the next quarter. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may now disconnect.