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China, Biotech Funding Headwinds Impact Bio-Techne Q1 Earnings


NEW YORK – Headwinds from China and a soft funding environment had a greater-than-expected impact on Bio-Techne's fiscal first quarter revenues, company officials said on Tuesday.

For several quarters now, biotechnology and diagnostic firms have noted the effects of China and the challenging funding environment, and during Bio-Techne's first quarter conference call to discuss its financial results, broad economic challenges in China and a particularly soft biopharmaceutical funding environment in North America were the key topics of discussion. According to Bio-Techne CEO Chuck Kummeth, the firm's China business underperformed original expectations, declining in the low-teens percent range as the business climate deteriorated throughout the quarter.

Government funding for life sciences R&D at hospitals and academic institutions in the country has been "significantly lower" than it was last year, and it "remains very difficult to ascertain when R&D funding will stabilize and step back up again," he said.

Private equity funding and venture capital funding have also slowed down in China, "creating more cautious near-term spending patterns for cash-dependent biopharma companies in the region," he added. In the last five years, there has been a drift away from solely using government funding in China, he said, "but it's still such a major portion that it's going to drive the overall size of the business and the overall … pulse of the economy over there," he said.

Although the pause in funding has had a significant impact, Kummeth said the downturn is transitory, as the Chinese government remains focused on modernizing healthcare. "We are as bullish as we have ever been on our long-term opportunities in China," he said, despite his view that these headwinds will "likely linger in the near term before improving."

While there are "some glimmers" of hope that funding in China will return soon, there are "not enough to be material," he said. "There isn't any real evidence right now that there's going to be … recovery at all" in the second half of 2024.

North American revenues grew in the mid-single-digit percent range, and soft biotech funding was a particular drag on that region, CFO Jim Hippel said on the conference call. The US market started to soften in the last few weeks of fiscal Q1 and that trend has continued into October, he said. It is "unknown whether that trend continues beyond [Q2] or whether it stabilizes," he said.

Kummeth noted that biotechnology companies, particularly small to medium-sized firms, are all being careful with spending because money is tight, and Bio-Techne expects that to continue for at least one more quarter. He added that as companies' new budgets for calendar year 2024 get approved, the firm may start to see a pickup in order activity in the biopharmaceutical space, but that it's "a little bit too early to tell at this point."

The Asia-Pacific region, excluding China, was up in the low-single-digit percent range and was affected by government funding constraints in Japan and South Korea. Europe, meantime, saw growth in the mid-teens with strong performance from the biopharmaceutical end market.

The firm's overall first quarter revenues for fiscal year 2024 rose 3 percent year over year.

For the three months ended Sept. 30, the company reported revenues of $276.9 million compared to $269.7 million in Q1 2023, missing analysts' average estimate of $287.8 million. Revenues rose 2 percent on an organic basis, with acquisitions contributing 1 percent.

Minneapolis-based Bio-Techne said its Q1 Diagnostics and Genomics segment revenues rose 4 percent to $72.8 million from $69.9 million in the prior-year quarter. Organic revenue for the segment was flat year over year. The segment was negatively affected by the timing of large reagent orders and laboratory orders of genetic tests, Kummeth said.

ExoDx prostate test volumes rose 49 percent, and revenue from the test increased in the upper teens. That growth was driven by a fortified marketing message, strong clinical data, and an updated local coverage determination from the US Centers for Medicare and Medicaid Services, Hippel said.

Kummeth noted that the company's exosome-based diagnostic technology's platforms are "much broader" than ExoDx Prostate, with the pipeline including single-gene mutation tests for multiple cancers, a colorectal cancer screening test for early detection of cancer and precancerous polyps, and a next-generation prostate cancer rule-in test.

The firm's spatial biology business, meantime, grew in the upper-single-digit percent range, Kummeth said. Lunaphore, which Bio-Techne acquired earlier this year, is expected to contribute about 1.5 percent to overall reported growth in fiscal year 2024, Hippel said.

Its Q1 Protein Sciences segment revenues rose 2 percent to $204.7 million from $199.9 million a year earlier. Organic growth for the segment was also 2 percent. The GMP proteins business saw a 39 percent increase. Kummeth said that the firm is continuing to advance its cell and gene therapy initiatives, increasing its portfolio of cell and gene therapy products and services by 25 percent in the quarter. The company is also expanding its GMP portfolio to include additional media formulations, gene editing engineering capabilities, and antibodies.

Its ProteinSimple business saw 9 percent organic growth, and excluding China, growth was more than 18 percent, led by the Ella automated ELISA instrument, which has an expanding menu of validated assays and a growing installed base, Kummeth said. The company is ready to pursue clinical diagnostic opportunities for the platform, which will open up a large potential market, he added.

Bio-Techne's Simple Western automated western blot solution also increased its market share, Kummeth said, and has seen "robust adoption" in cell and gene therapy applications.

Bio-Techne reported net income of $51.0 million, or $.31 per share, for the quarter compared to $89.6 million, or $.55 per share, in the prior-year quarter. The company reported adjusted EPS of $.41 per share, missing analysts' average estimate of $.44 per share.

Bio-Techne finished the quarter with $148.7 million in cash and cash equivalents.

Kummeth said that M&A is still a priority for Bio-Techne and that the company "would sure like to pick up a few more assets."

"We have lots of purchasing power for our size, and we'll try to use it," he said.

Hippel said that the company is forecasting overall organic revenues to be flat in the second quarter but that the current environment is "too dynamic" to predict beyond the second quarter. The headwinds of inventory destocking should subside by the second half of 2024, but China and biopharmaceutical recovery will not be tailwinds in the second half of the year as was once expected.

The company also announced on Tuesday that its board of directors has agreed to pay a dividend of $.08 per share, payable Nov. 24 to all common shareholders of record on Nov. 10.

In Tuesday afternoon trading on the Nasdaq, Bio-Techne shares were down nearly 4 percent at $54.59.