Bio-Techne Corporation (TECH) Earnings Call Transcript & Summary

Well, great. Thank you all for joining us at the Citi Conference here. I'm Patrick Donnelly, the Tools and Diagnostics Analyst at Citi. Happy to have Jim Hippel, CFO of Techne; and Dave Clair from the IR team. And we can dive right in, Jim.

I guess, going back a few weeks, you guys reported a pretty clean beat in your fiscal 2Q. Protein Sciences continues to be a source of strength. Maybe just at a high level, we can start with the quarter, maybe talk through kind of the moving pieces and then we can kind of dive into some more specific questions.

Yes. I mean it was a great quarter. It was a very strong broad-based growth quarter as it has been now for many quarters in a row for our business. As you mentioned, the Protein Science, in particular, is very strong. And it's not just any one product line carrying it or any one region carrying it. It really is truly broad-based. I think we had, practically, every one of our product lines, whether it's in the reagents portion of the portfolio or the instrumentation part of the portfolio was double-digit growth. From a regional perspective, same story, both U.S. and Europe, nearly 20% growth. China continues to just kill it with well north of 25% growth, and rest of Asia did well as well also. So really, really broad-based strong growth. There was a few exceptions to talk about, one, of course, will be the academic market, which has been on top of mind for a couple of quarters now, not just us but across the industry. We're still not overly concerned about it. It was relatively soft compared to biopharma. Biopharma is on fire, but we do see this temporary combination of the Omicron variant, having folks stay at home, more holidays in January, combined with the delayed NIH budgets being passed by Congress. But again, we're not overly concerned about that, given that both the House and Senate bills had double-digit increases proposed. So I think, longer term, academic market will be just fine and will come back strong, and you see it more as a tailwind as we continue in the calendar year '22. On our Diagnostics and Genomics side of the business, our spatial biology business continues to get back on track, which for us means very solid, high double-digit growth. This quarter, it was low double-digit growth, but last quarter was only single-digit growth. So it's getting back to that trajectory. But as a reminder, that was also our best performing business last year coming out of COVID where we had 30%, 40% kind of growth rates throughout most of the year. So definitely more of a headwind there. Plus we had -- has more exposure to the academic market than the rest of our portfolio. And we had some key sales positions open in key regions that we're continuing to work on filling. And as we do that, we see that business getting back to 20% kind of growth before we get to the end of the year. Spatial biology is a fast-growing area in general, and we're very well positioned, if not the biggest player in that space. So we feel good about that. And then finally, if I touch upon the Rx, its own business, it's now a -- test rates are now at -- past pre-COVID levels, growing double digit with the management of a former surgeon team now taking the rates of both that business as well as a surgeon combined to one business unit with their expertise in both regulatory and commercialization of diagnostics products. We're already seeing some great results from that and the messaging around the EPI tests in particular, is the strengthening with urologists. So all in all, a great quarter and we see some great quarters ahead of us still for hopefully, years to come, not to mention, I should say, our cell and gene therapy, which is still relatively nascent, but certainly becoming more material for our business. And the GMP proteins, in particular, well over 100% growth yet again this quarter and the overall cell and gene therapy category in a major double-digit growth rates. So just real exciting. We're basically on our strategy. We said all along that we started the year, we'd be in the low teens growth this year despite the tough comps we had last year. We mentioned in our call that we think we're ahead of schedule there. We may in the mid-teens to close out the year this year, which is ahead of our trajectory for our 5-year plan, which is to go from low-teen growth to high-teen growth with an average of mid-teen growth throughout the period. So we're pretty much right on schedule, and we're pretty happy with where we sit.

Okay. That's a great overview, Jim. Maybe we can start, I guess, on the academic as you kind of mentioned maybe it's the one area, it's coming back a little slow. You've hit it well. It's not just you guys, obviously, we heard that up and down the line throughout this quarter. So I guess, maybe just talk about what you're hearing from customers, again, the confidence level with that comes back and the funding seems pretty healthy. Certainly, that should be a good market going forward. But yes, maybe just talk to, I guess, the impact we've seen, is it mainly just COVID kind of easing and the lab should come back? Just talk about your expectations and customer conversations on that front.

Yes. I mean it really is as simple as those 2 things. Omicron dissipating and people getting back in the labs, research is getting back in the labs specifically in the academic sector and of course, the budgets getting passed. We actually talked obviously talked a lot of our customers and the academic are -- bigger academic customers. And it really -- you can't generalize them all as one, right? I mean we have academic customers that had serious double-digit growth this past quarter and talking to them and why it's different is because they have multiyear grants they're working off of. And the current year funding situation is not a concern to them. We have other major customers that were down because they're just -- they're holding back, waiting to see what actually does get approved before they start to implement their next year or multiyear projects. And then across the board, everyone was saying that they were trying to minimize time in the lab, especially over the holidays and shortly after the holidays. So that was kind of a common theme. But no concerns about research activity diminishing or shrinking or anything like that, many of our academic customers, it's more of just a pause period.

And I guess in terms of geographies on the academic side, is there any big difference obviously U.S. with Omicron. Clearly, it was a bit soft. Are you seeing -- what are you seeing in Europe? You guys usually have a pretty good handle on that as well and funding seems pretty stable, but maybe just kind of run us through the geographies and what you're seeing on the academic side?

Yes. I mean, quite simply, it's quite consistent in Europe as well as the U.S. I think Europe might be a little more Omicron-driven than the U.S. was, and little less budget funding concerns in short term than the U.S. was, but the end results were about the same. I mean our academic growth for the first half of the year has been pretty closely identical in Europe as well as it is in the U.S. So seems to be a pretty common theme.

Okay. And then, yes, maybe moving to some of the growth drivers. You mentioned GMP, that's obviously a big focus for investors, big growth area. You guys are ramping up. Maybe just remind us, I guess, where we are today and then the path forward of that has been putting up really big growth rates. And then again, as you guys are building out that capacity, how should we think about it already being spoken for the demand environment, it clearly seems robust. But maybe just talk through that business, again, the build out there as we go through the next couple of years.

Well, I think it's been pretty well published. I think the last number I saw is over 1,300 trials, clinical trials and preclinical trials that are known about. I think that seems just a U.S. number, doesn't count Europe is more in Europe -- or not as many, but it's a big number in Europe as well. So a whole bunch of activity going on, and that's just what we know about. And when we talk to our cell and gene therapy customers, we often find out there's -- for every one that they've made public, there's another 7 or 8 in their pipeline, they haven't made public yet. So there's a ton of activity in this area. We have roughly 150 accounts right now that we're selling GMP proteins into out of this several, call it, a couple of thousand that are globally out there. So we're still very underpenetrated. And it's still very early days for most of these trials. So the -- getting in early is still a relatively easy, but it's not like you're trying to displace someone who's already there. And we think we can double our GMP protein business every year for the next 2 or 3 years just by getting penetrated more and more into these clinicals and preclinicals. There's that many out there to go get. And then obviously, when we talk about 3 to 5 years down the road, as these start to get through the various phases of clinical trials and ultimately, hopefully, become commercialized, that's when you really hit the J curve to where these customers where they're buying tens of thousands of dollars worth and then hundreds of thousands of dollars worth and they get further in their phases, it becomes multimillion accounts once they become commercialized. So that's -- there's a short-term growth and the long-term growth is even more amazing.

Right. Yes. And I think you talked about being kind of at a $35 million, $40 million run rate currently. I guess how does that build through the end of the year? And what kind of growth rate -- you obviously gave a little bit of it in some of the long-term targets at the Analyst Day. Maybe just talk through that long-term growth rate and then the competitive environment, again, it's such an attractive market. Are you seeing more companies come in and compete? Or is it just there's so much demand and so little capacity that there's plenty of room there.

I think it's more of the latter than the former. But I have to say, there's not formal competitors out there still with Miltenyi and CellGenix being leading to -- in the -- particularly in the GMP proteins space. But we are -- R&D systems is well renowned for our proteins. Our factory is a showpiece and the ability to demonstrate that we can provide a ton of supply with lock-to-lock consistency at very high quality, is really resonating with the customers. So we think we're positioned extremely well to capture more and more of that opportunity that's out there. And like I said before, in terms of the growth rates, we expect the growth over the next year or 2 to largely come from being placed more and more in these clinicals and preclinicals because there's so many of them out there to do that in addition to the ones who are already placed moving through the various phases of their trials and as they move through various phases, their volumes continue to increase. So that's where the growth will come in the next couple of years, and we think there's enough out there to get 100% kind of growth rates and double the business every year for the next couple of years. And then from there, hopefully, some of these get commercialized, and that's where the real fun starts.

Yes. Okay. And then the rest of the protein portfolio, obviously, GMP is one of the big headliners, but the rest of the portfolio is also putting up pretty healthy growth. Can you talk about the demand environment there? What you're seeing? And again, the sustainability of some pretty healthy growth here.

Yes. I mean, not to say it's all coming from this, but to elaborate more on the cell and gene therapy called halo effect on the rest of the portfolio. We talk about the $30 million of GMP proteins. But across our company now, we -- from what we can trace back to, it's not always easy to do this, but from what we can tell, roughly $80 million on a run rate basis of our portfolio across the company is now attributable to cell and gene therapy customers. That includes all of our reagents, it includes our instruments portfolio and even some of our ACB applications. So many of our analytical tools that were being used for traditional protein research and so forth are being used in the cell and gene therapy research area as well and for validation of cell development and so forth in that cell and gene therapy process. So I think of it as the industry is moving -- in total moving more and more into cell and gene therapy and stem cell therapies regenerative medicine type therapies. All of our tools are applicable in all of that -- all those research areas, all those clinical trial areas as much or more so than they were in traditional therapeutics and drug therapy. So we're just very well positioned to ride that wave. And in terms of the rest of the portfolio, as I mentioned earlier, things shows up in the numbers. And across our Protein Sciences segment and every single product on, whether it be in protein antibody assays, traditional live assays, any of our -- all of our instrument platforms all experienced double-digit growth in the first half of the year. So it's -- when you see that kind of breadth, it just tells you how well positioned we are.

Yes, absolutely. One of the questions we get is just on the competitive environment. Obviously, a large company came in and bought Pepper Tech. Can you just talk about their offering, if that changes anything, again, having a large balance sheet behind them? Again, it's an attractive market, it's high growth. Should we expect them to be more active? Maybe just your perspective on that would be helpful.

Yes. It's -- Pepper Tech has been around for 20, 30 years. They've been our most formidable competitor in the protein space, although a very distant second in terms of positioning and nothing being under new ownership is going to change our view, change their competitive positioning with us or our competitive position with them. We are the highest quality we'll be demonstrated to have the highest quality. I had the most -- had more citations. All that goes along with that. So there's nothing that's an ownership change is going to do that's going to increase any of that competitive edge for Pepper Tech. If anything, they're #1, I guess, competitive angle with -- against our proteins was price because they are priced half of sometimes 1/3 of what our proteins are. So if anything, it might be an opportunity for us. I think in the short term, there's an opportunity because I'm sure they'll do fine in our Thermo -- and we know Thermo is a profit company and Thermo is very well managed, and they'll make the most of it. But at the end of time, there's always a bit -- a time of unrest whenever a small company gets bought by a larger one. This is a founder-owned company and one company for 20, 30 years. So there's going to be some distraction at the very least. And I think we're positioned to take advantage of some of that short-term distraction, hopefully. But I think longer term, they paid a very nice multiple for that. And if there's any place that they can find room to help pay for that might be in pricing. And if they actually increase pricing that could help our competitive position. But either way, I think in the cell and gene therapy space, which is my -- our best guess is to what Thermo's strategic rationale was purchase -- was to get more positioning in that space. We're not concerned. We are, we believe, well ahead of where Pepper Tech is today, both technically as well as from a capacity perspective. And will they do better under Thermo in that arena, they perhaps will, they will perhaps have more commercial reach. They'll have more funding if they want to expand more in their factories, but there'll be a few years behind us. And cell and gene therapy, it's big. Everyone's going to win, and I'm sure they'll get their piece of it, but I think we'll get more than our fair share.

Okay. That's -- I appreciate that. And then maybe last one on kind of that protein area, particularly GMP. You mentioned cell and gene therapy a bunch, obviously, a big growth area. How do you think about -- have conversations changed at all? We get questions about the funding environment, right? The biotech world has not been the greatest. The funding environment slowed a little bit. Does it feel like it should impact you guys too much, given where we are in the curve, but I figured I would ask just in terms of have any of the conversations changed or any of the planned investments softened? Do you expect customers to be any more conservative with cash, given what's happening in the funding environment, the public market side.

Yes, when this thing -- they almost first came up a couple of weeks ago, we were actually caught surprised by the questions around it because we're clearly not seeing it. We're not hearing about it from our customers. I think -- and then there's also some -- I think there's some opposing views on that as well. We saw a report come out from JPMorgan from the study that was done that January was actually a record month of funding of biotech in the past 2 years. So I think there's still some issues with the actual data and what's really real out there. But irrespective of that, there is kind of a natural flow of the funding and that goes in the biotech, and they clearly have been heavily funded in the past couple of years, but they're also still with a lot of cash and they don't spend all that cash in 1 quarter or 1 year. They're often multiyear projects to fund that cash to get their projects to the next level, whether that's through different phases on clinical trials or proof-of-concepts or what have you, that then generates the next level of funding to take it to the next level. So even if the funding was slowing, which we're not convinced that it is, we believe our biotech customers are very well positioned to have a lot of cash and spend that money over the course of the next 2 or 3 years as they prove out their next wave of research.

Okay. That's helpful. Appreciate it. And then maybe bouncing around the portfolio a little bit, Simple Western, Simple Plex they put up some really big growth numbers. Can you just talk about the demand environment, what we saw during COVID? And then again, the expectations going forward, I mean, it still feels like a pretty underpenetrated market shifting towards the automation. But yes, maybe just lay -- give us the lay of the land there, again, the COVID impact and then as we approach hopefully, a more normalized world, what that looks like.

Yes. I mean to your point, it is still very underpenetrated. I think the benefit that COVID had in our automated analysis platforms was for any data -- that's out there about the efficiency we gain from using our instruments in the lab went by the wayside with COVID, where people couldn't have as much time in lab or couldn't be in the lab at all, but still need to get their research done. Our tools were an amazing asset to help them do that. So it was -- maybe that last shootadrop to really wake everyone up with regards to the productivity our tools add to their workflow. So yes, I think it positioned all of our platforms very well, and we are still very underpenetrated. I think another sign that we're seeing the momentum -- get over that chasm as we talk about that growth chasm is we hardly have to do much in the way of demos anymore. Customers are coming to us, wanting us to show the product to them as opposed to us to kind of go out and push the product to them. There's enough of them out there where they see, their other colleagues and their labs may have an instrument. Now they want one too and when they read a paper that use our instrument and maybe therefore, they want the instrument to be used in their follow-on research. So I don't want to go as far to say it's selling itself, but it is close to that, you're probably ever going to get with an instrument. And even more interesting is that our customers are actually finding new ways to use our instruments and new applications outside of what we say traditional Western blot, for example, which is even more encouraging to find the utility of the instrument even more than what we initially set out to conquer. So I think the market for it is continuing to expand.

Yes. Makes sense. And then maybe just kind of doing a geography chat. I mean, obviously, China is an area of focus for a lot of investors. I mean, you guys continue to put up really strong results there. Maybe just talk about what you've seen over the past couple of quarters, particularly recently, again put up a pretty good quarter recently, and then expectations going forward. I mean, I know you guys are one of the more bullish again, not the biggest base, but putting up some really strong growth numbers going forward. So maybe talk about the confidence level in that region and again, what trends you've seen recently?

Well, the confidence overall in the region, it remains very high. I mean we've been saying this for many years now and nothing has changed the fact that we believe China otherwise sees life science research and health care in general is a top, top priority of that country. And with 1 billion-plus people, the market is just tremendously huge. So the opportunity is as big as ever in China. And we talked about being underpenetrated from a market share perspective across our platforms in the U.S., it's even more so in China. To your point, as a percent of our revenues, the company in China is still relatively small compared to some of the other players in the space. So the combination of the overall macro market being very strong as to consumers with years to come. And our products being relatively underpenetrated and not much in the way of local competition for what we provide as well, allows us to really continue to have very nice growth rates in China, regardless of what is happening around the space in China, whether it's COVID or whether it's trade wars or what have you, we've -- that has been proven time and time again that our products do -- and sell -- to do very well regardless of what else distractions might be going on with other companies or other industries in that region.

Yes. Okay. And again, I guess, in calendar 4Q, you guys didn't see much disruption, if any, from whether it was COVID or blackouts or whatever it may be. I mean, it seems like the momentum continued pretty well for you and the expectations that rolls right through the beginning of this year. Is that right?

Yes. I mean, absolutely. It's -- China has been a great -- now that -- in reality we have a great team in China as well. I mean it's not just the market, it's not just our products. Our commercial team in China is fantastic. Interestingly enough, we've always had relatively low turnover in China relative to other companies and other markets in China. Right now, China is the lowest turnover region we have in the whole company. So it's a very loyal team, very well connected in the life sciences space with their customers, and they're just executing extremely well.

Yes. Okay. And then maybe just on the supply chain side. Obviously, it's topical for everyone. Everyone is seeing some issues. You guys seem to be managing through it pretty well. But maybe just talk to us about what you're seeing is the worst behind us? Is it just kind of plateauing, and it's going to remain an issue for a few quarters, but that's in the numbers. Maybe just talk us through again kind of take us behind the curtain a little bit. And then again, any visibility into -- any sort of normalization, I guess, would be helpful.

Yes. Well, I mean, we've been fortunate. As of yet, we have not missed one customer shipment due to a supply chain issue. It's not to say we haven't had them here and there, but they tend to be relatively minor. I mean as you hear, like chips not like -- for seat gears for cars, something silly like that, we have the same kind of thing where one of our paint suppliers that make paint -- the blue paint on our covers of our instruments couldn't get enough blue paint. I mean, it's weird things like that. But we've also got a really good ops team, and they've done a really good job finding awesome supplies when they need to and stocking up on certain materials that we feel like could be a problem in the future so getting ahead of that curve. So they've done a really good job. And I think we've learned a lot in the last 6 months to be more prepared going forward, should those issues happen. But in general, we're also fortunate that we don't have a lot of issues in general because we have a relatively low material input into our -- to many of our products. And so there's less opportunities for supply chain issues to arise. It's not to say they don't, but there's less opportunity for that. So we're not -- we've never flagged a supply chain issue as a headwind to our business, and we aren't right now either.

Okay. It's good to hear. And then I guess flipping into the Diagnostics business. Maybe on Exo, you have talked about volumes kind of getting back to pre-pandemic levels. Maybe just talk about that recovery path. And then again, obviously, the reimbursement side is a big focus as well. So maybe just update us on what we should be looking for this year and expectations from your side.

Yes. It's really actually a really good story. I mean they're now -- they've now surpassed pre-pandemic levels and still growing here -- in Q2, they did and here already in this quarter growing well in a double-digit growth in terms of test counts. So really starting to see momentum now as people go back to their doctor, the messaging they've been doing for the past year or so via online forums and so forth, it appears to be paying off. But there's also some other subtle leaves that I think are starting to kick in. One is, is that the surgeon team now 9 months into it, running the entire diagnostics piece of our business, bringing that commercial expertise, regulatory expertise of how to tweak the message and how to roll about at the right way with these doctors is starting to help. And then also, the initial message of our prostate test was to avoid biopsies. And so what we've learned is that neurologists do like that biopsy revenue. So that was a bit of a headwind to overcome in promoting the test. We've got enough clinical data now to support the fact that we found that as much as 60% of all patients that are recommended by their doctor, they have a biopsy based off their PSA score, never show up for their biopsy or continue to tick that TAM down the road. And what we're actually finding clinically is that after taking our EPI test, if they happen to score a high score on their EPI test, which would suggest they have a higher chance of having a high-grade cancer. They're much more apt to come in for that follow-up biopsy because they understand now they we've had a test that suggest it could be serious. And so it's actually generating more biopsy revenue for those doctors who are readily using the test and then less biopsy revenue. So that message is also helping doctors with the adoption.

Okay. And then inside the Exo portfolio, obviously, there's ExoTRU I think it was 2 days ago, you kind of announced an agreement with Thermo. Maybe just give us a little bit of color on that agreement and what it means, what we should be looking for going forward from it because obviously, it was good to see that come through.

Yes. I mean, strategically, it's a great deal, win-win for both companies for us. It allows that test to get commercialized likely much faster than it would, if we were to do it alone. And it also puts some big name behind our Exosome platform technology. We've been saying all along, we believe it's a superior technology with millicurie biopsy space. And it's nice to have a very large and reputable partner essentially support it and say the same thing by partnering with us on to test. So strategically, it's very important. From a financial perspective, we think it will be lucrative for both parties. Much of the investment going forward will be done by Thermo Fisher to commercialize it and get the reimbursement. And our financial benefit from that will come in the form of milestone payments as well as a very nice royalty that's basically was on for as long as the product sells. So it will be actually more profitable for us in the world for short term and probably the long term by having a solid partner of Thermo leading the charge. And they're already positioned within the transplant space. They want to expand in that area and get the post-treatment as well as pre-treatment. And so they see it as a nice tool in their bag as well. So we're excited about that partnership.

Okay. And then maybe on some of the long-term initiatives you guys laid out at the Analyst Day. So maybe we can start on the margin side. I think you laid out $800 million of op income, implying 40% or so margins. Can you just talk about the pathway there? Again, the key levers, obviously, even GMP, the margin profile there. Exo feels like it should improve. Obviously, it's been dilutive and should flip as some reimbursement comes in. So can you just talk about the key levers on the margin side? And then again, the confidence and visibility. It feels like I think in our model, we have been getting there a little earlier. So maybe just talk about any conservatism baked in or how we should think about the pathway there?

Yes. If you refer to that chart that we -- that last year we did in the Investor Day, where we had that waterfall chart, the first 3 legs in that waterfall, which is our core reagents, our instruments and then our RNA scope by ACB technology and spatial biology. If you actually have the growth rates of those 3 and stop there, our growth rates for the next 5 years should be comparable with what we've had the last couple of years from a CAGR perspective, which is in the low teens, call it, 13% or so. And there's some puts and takes within those numbers, but you could also argue there's some conservatism there because it has our core reagents in the high single digits. They've been actually closer to low double digits here the last year to 18 months. So we'll see if we can do better than that. Same with the instruments, we have the instruments tagged in the mid-teens or so, and they've been 20-plus for the last 6 to 8 quarters. So -- and there could be some conservatism there. ACB has got 20% growth. But nonetheless, you add that -- those 3 up and you're already at our current growth rates. And then what accelerates -- what allows our growth rate to accelerate in years 3, 4 and 5 is really the cell and gene therapy, and we think the exosome diagnostics is really starting to hit that J-curve with growth. And we've talked about the cell and gene therapy. But again, now we're seeing some really strong signs of life here with the prostate test. And with the ExoTRU being adopted by Thermo, and we think we'll see some nice growth there, and that will be our accelerant to exit 5 years from now hopefully in the high teens. From a margin perspective, middle -- the 40% figure is conservative in the sense that we think where we'll end the year here closer to 38 or so percent. So it's not that big of a stretch to get to 40%. We want to keep our options open. We want to -- if we -- start to hit that 40% earlier, we'd like to look at doing more parallel investments in certain areas, particularly in the Diagnostics area. We can do that. And quite frankly, it's also just kind of at a high level, expectations because we will likely do more -- hopefully do more M&A. Well, the test, of course, next 4 or 5 years. And that M&A will more than likely bring the margins down a bit. So I don't want to -- people get too far ahead of thinking much more beyond 40 as a result of that. That being said, you mentioned Wilson Wolf. Wilson Wolf was not in any of those numbers. It wasn't contemplated at the time. And Wilson Wolf is one of those rare opportunities that will be an adder to that number. We think it will not only provide cushion, but actually provide upside to that figure. And has amazing operating margins and will actually be a tailwind to our operating margin profile. So we're very excited about that addition which will fully consummate, we think, in the next 4 to 5 years.

Yes. Yes. I know Wilson Wolf is one, you and Chuck were both pretty excited about. Maybe just talk a little bit about that one and then what that purchase agreement entails and then we can maybe dive into some future M&A opportunities after that. But yes, maybe just talk through Wilson Wolf a little bit because I know that's a big growth opportunity for you guys.

Yes. So I mean, as anyone follows our company knows that Wilson Wolf has been part of our cell and gene therapy sales consortium. We call it scale-ready for over a year now. It includes Fresenius Kabi as well with the automation device. But -- we also will provide the bioreactor that essentially our GMP proteins and media going to grow of the cells after they've been reengineered, so to speak. Genetically additive, I should say. It's a very interesting deal in the sense that we -- when we form this consortium, we always believe that at some point, we either buy all or part of that consortium or someone else -- or one of the 3 parties would. There were such great synergies between the 3. But none of the 3 we're willing to sell at that point in time, which is why we partnered. John Wilson, the owner of Wilson Wolf, he is unique individual, great individual. He has been in the cell and gene therapy space for over a decade, one of the pioneers in it. He knows all the players. And he's developed this bioreactor that is truly modular. It's very efficient. It works way better than bags do, which is how most of the other bioreactors work because these cells grow much faster and easier on flat surfaces than they do on variable wavy services. And it's growing like crazy. He's an 800 accounts already and growing -- he's just trying to grow that to 100% his revenue. And he's extremely profitable. He's already at 40% EBITDA margins and probably close to 50% before the year is out. So he was looking ahead and saying, he's also dabbles in other therapy companies. He's actually the founder of 2 other therapy companies. That's where his heart really is. And him and Chuck have been friends for 13, 14 years now. He's a local Minnesota guy. And he really cares about his employees, and he really wants his employees to end up someplace he feels comfortable with, and we always felt comfortable with our company and our leadership here, starting with Chuck. And he wants $1 billion. So we weren't willing to pay him $1 billion on what revenue he was generating today. But at the end of the day, he doesn't necessarily want more than $1 billion. And we said, "if you wait 3 or 4 years, the size that you're going to be, I'm not so sure we'll be able to afford you, and you may end up in some other company's hands." And so you said that's not acceptable and basically came back with a proposal that says, let's kind of have a earn-out, so to speak, an option to buy our company. We have an option to sell it to you. It's -- therefore, it's kind of a done deal as long as we hit certain hurdles. And so it's financially attractive for us. He's happy because we'll get paid out more than $1 billion and all those employees will be where he wants them ultimately to be. So it's a really, really unique situation.

Okay. Perfect. And then maybe in the last couple of minutes here, just on the capital allocation story holistically outside Wilson Wolf. How active should we expect you guys, I mean, obviously, you've talked about pursuing some larger deals that went elsewhere. What are the right parameters to say? Obviously, you kind of mentioned you're willing to do margin dilutive. That's -- I mean, that's pretty high bar to get above you guys. So the parameters you look at and then again the size that we should think about and then the activity in the pipeline as well would be helpful.

Pipeline is active as always. I think that we'll see what happens with valuations, but I feel like one of our #1 competitors in M&A in the last 2 years has been IPOs, like frankly. And if nothing else, what's happened with the companies have gone IPO in the last year or 2 recently might give some founders and private equity firm some second thoughts about that as a viable option or a safer option than just selling it to a strategic. So I'm hopeful that because of that, with the reset in the IPO market, that will provide more opportunities for us in a year or 2 to come. It's still our #1 priority, and there's a plethora of opportunities out there. And I've always said because our portfolio touches so many different things, or so many different adjacencies we could go. When people ask, where are you focused on? We're not focused on any one area. What's key is that there's some strategic fit with our core or with our existing portfolio, but our existing portfolio is so vast, it's not that difficult to find strategic fits. But if you keep your focus too narrow, then you might get one deal done every 3 or 4 years. And we like to get back on track to having a sizable deal every year, fast one -- and 2 or 3 smaller deals a year as well. Likelihood of a bigger deal for us is still maybe in the $200 million to $300 million range just because that's typically what's out there. To go a lot bigger than that, you probably would have to pick up something public and then you start getting to public auctions and things like that, and that becomes tough to execute. So I would just say our playbook for the next 5 years should -- won't be that similar than what our playbook was the last 5 years when it comes M&A.

Okay. Perfect. It's a good spot to leave it, Jim. Thank you so much for the time. This was a great overview, and I'm sure we'll talk soon.

Absolutely. Thanks for having me, Patrick. Take care.

Sure. Take care.