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

All right. Good morning, everybody. Welcome to Day 3 of the Stephens 2022 Investment Conference. I'm Jacob Johnson, the life science tools and pharma services analyst here at Stephens. Thank you all for being here this morning. And thank you to Bio-Techne for joining us this morning. We have CFO, Jim Hippel. We have Will Geist, who is President of Protein Sciences, and we have Dave Clair from Corpdev/IR. We'll have questions in the middle of this. But Jim, I'll turn it over to you for any introductory comments you'd like to make, and then we'll jump into Q&A.

Yes. Thanks, Jacob. It's always a pleasure being at the Stephens conference, particularly here in Nashville, great place. Yes, opening comments, I'd say, is obviously, there's a lot of -- we're getting a lot of questions throughout the morning around what the macro environment is looking like and how that may impact our space and our company. And I think the [ overriding ] message I'd open up with is that no industry I would argue and very few companies are [ completely ] immune to macroeconomic headwinds. But I think our industry, our space and particularly our company within that space is one of the most resilient you're going to find. And we are very well positioned within that space to ride out any storms should they occur or should they worsen and really no [ novel ] concern at all about achieving our overall longer-term goals. The space, life sciences, in general, but particularly around cell and gene therapy, which I know we'll be talking a lot about has an amazing road ahead of it. And we are positioned extremely well to take more than our fair share of that road. So excited to talk more about that, but we're long term, more encouraged than we've ever been. And we can talk about the short-term [ headwinds distant ] you'd like, but I think everyone's getting a little tired here about the [ truth so ].

That's a great lead in my first question. But I think we have to tackle these things.

Sure, yes.

And I know you're probably tired of us asking and -- but we get asked them and so.

Understood.

That means I pass the buck to you, right? So 1Q '23, maybe a little bit below your initial expectations for the year, but ended the quarter with strong growth in September. So maybe talk about some of the headwinds you faced earlier in the quarter and then maybe how those trended as you exited the quarter?

Yes, sure. And we kind of we're pretty transparent about this at the end of our Q4 conference call about what we were seeing in the month of July. And interestingly enough, there was July and August saw a rather precipitous drop in overall demand, and it was across the board. Even in our run rate business, which is typically pretty resilient in both the U.S. and in Europe and some of the early feedback we were getting from our reps was, well, there's -- knock on the door and no one is -- everyone is on vacation. They're making up for 2.5 years. And admittedly, it's [ skeptical ] seems a bit of an overly simplistic answer to what was going on there. And sure enough, a few months later in September, it came around back, as you alluded to, and we had double-digit growth in both regions. Unfortunately, the trough was deeper in Europe than it was in the U.S. So U.S. was able to recover fairly nicely and still report double-digit growth. But Europe was down year-over-year because of that initial trough. Now with regards to how much of this is "vacation related" versus other macro potential economic concerns or anything business specific, not concerned at all there's anything business specific. In fact, our teams are telling us that their pipelines are as large, if not largest they've ever been. So that's encouraging. When we look at -- we actually did some asking of our customers in a more formatted way in September -- end of September, early October with a questionnaire as I said a number of questions, but the 2 that are most relevant here is, number one, did you spend less in July and August than you typically do? And if so, why? And over 1/3 of our customers responded, yes, we did because we were on vacation. So there's something there. This is more anecdotal, of course, but I like to -- and these guys were tired of hearing me say it. But every year for the last 10 years, my wife and I take a vacation for a week in the month of September in Europe. And even through COVID, we did that, and we picked September because that's usually still warm and a little less busy, right? And through COVID, the only other vacations we always pumped into were fellow Americans. This September, I might have gone in June, July or August. It was just packed and it was all European travelers. So there was something truly there. And in Europe, in particular, we saw that momentum continue in October. So that's encouraging. That being said, there's a confluence with the macro scene and what kind of overhang that may or may not have, especially in Europe. And Chuck and I spent have some time in September with customers, both big pharma and small biotechs. And I guess how I would characterize it is it's not like a hair on fire -- they're reeling everything in and concerned about layoffs or anything like that. But there is definitely -- they are concerned about what this winter will bring with the continued Ukraine crisis and the impact on energy prices and inflation in general. And they admittedly are slowing down their larger purchase type orders. So that's why we're still flagging that as a potential risk, even though we were out of the gates here strong in Q2, and we finished strong in Q1, but I think it'd be irresponsible not to realize that could be a -- that light switch could go on and off. And with regards to the U.S., the bigger question there is, is there any, I'd say, contagion, often these recessionary concerns happen to start in Europe and then they kind of bleed over in the U.S., and so we'll see what happens. But Q1 was very, very strong for the U.S.

Yes. Going to Europe, is that putting your CFO hat on and saying dollar has strengthened. So the one benefit is cheaper to buy things in Europe?

Yes. I mean, definitely got some deals while we were on vacationing, that's for sure. Unfortunately, I'd rather pay more there and have the income in my P&L, but...

Maybe that's the question I should ask. Just on Europe, like heading into the winter, when do you think you have a better idea of kind of the energy impact there? And anything you're keeping an eye on as it relates to kind of your operations?

Well, there's 2 -- how we kind of bifurcate our business and different ways to look at it. But how I've been looking at it particularly more recently in this environment is our core underlying run rate. So 80% of our company is consumables. And a good chunk of those consumables -- I mean our average order size of those consumables is under $1,000. So these are people who buy -- at the bench, they buy 1 or 2 vials at a time, and they do that way because they can get it within 24 hours. So it's not like a stocking -- they don't have to worry about it. And they've never had to worry about supply. All through COVID, we had been able to produce. So it's very much a real-time view of the underlying activity what's going on at the bench. And when we look at those size orders, both in the U.S. and in Europe, we've actually maintained double-digit growth even in Q1, believe it or not, and into Q2. What has slowed down are the larger dollar purchase, which for us, larger dollar is like our instruments, which are still relatively low-cost instruments in the big scheme of things, but for us, relatively they're large. And then our bulk reagents. So our salespeople are focused on the larger reagents for large projects. And those are the ones where we've got some feedback from customers that they're -- even though the pipeline is as large as it's ever been, the time it's taking to go from pipeline or funnel to place in the order has lengthened. And for the reasons we just talked about, that's where the caution is going to always -- you're going to see it first.

Okay. That makes sense. And then just while we're talking to geographies, just China, the lockdown impacts, what's going on there, kind of latest thoughts impact in 1Q, I think, was pretty modest at all?

Yes. So if you step back, and I'll get to try specifically here in a second, when you step back and look at macro wise we grew high single digits, 7% in Q1. And we do see a pathway back to double-digit growth despite these economic concerns because the 2 major headwinds that we had that kept us below double-digit growth in Q1 were the regions of China and Europe. China is 10% of our business and historically has been 20% plus grower for us when it only grows mid-single digits, it's going to be a drag. That being said, the China team there is amazing. They got a great pulse on the market and what's going with customers and what's going on. They predicted 2 quarters ago that they'd be slightly negative and they were when Shanghai pretty much locked down. In this quarter, when the lockdowns became more sporadic, but academic in particular, was not reopening. They said it's going to improve, but probably only been single digits and sure enough it was. They now are feeling much more optimistic about the current quarter, about getting back to double digits and then getting back to the usual 20 plus in the back half. Why? Partly because even though lockdowns are still occurring, they're by block or by apartment building or Disneyland, they're not the whole city being shut down. And so they're just learning how to work around it, quite frankly. That plus they're coming out of the 5-year Congress, there was, as you probably know, the RMB 1.7 trillion stimulus package, which should really start to translate into orders in dollars in the back half of our fiscal year. So our team is really excited about that. So that's a tailwind going forward for us relative to Q1. And then, of course, Europe, which we talked about already was a drag for us in Q1, but knock on wood, we're seeing those conditions improve. And so that should be a continued tailwind.

Just to go back to the point on academic government funding, maybe talk about U.S., Europe and then you, I think, said trillion, if I'm not mistaken.

I said RMB 1.7 trillion.

Okay. Yes, yes.

Which is still like 5x our NIH budget.

Yes. So maybe just flush that out for people, the backdrop in China and kind of broader government funding for...

Yes. So for China, specific -- I mean, China efficient, we talk about our academic and biopharma end markets. We exclude China from all those metrics and numbers because it's so blended. It's everything kind of well-funded academic or government-sponsored biopharma, being honest with you. So that stimulus package is not just for academic institutions. It will be practically for everyone in our space. So -- and again, the magnitude of it is huge. It's literally 4x the size of our NIH budget. It won't all go towards life sciences, it's towards science in general and laboratories. But clearly, a large chunk of that will be in life sciences space, and it is heavily geared at least towards instrumentation. So we definitely expect our ProteinSimple franchise to benefit the most from it. But there's always a follow-through with reagents. So reagents naturally arise with instrumentation. So that's all good news. Honestly, in the U.S. and Europe, it was interesting because in fiscal year '22, academic didn't really light up anywhere, it was actually stronger, believe it or not in Europe than it was in the U.S. in Q1, because of the dynamics we already talked about, Europe was worse than the U.S., but still better than biopharma, believe it or not in Europe. But in the U.S., it's been a little bit frustrating to be honest with you, because it's been kind of staying out in that mid-single-digit growth. It was again in Q1. It's been -- biopharma by far has driven the growth that we've seen frankly, off through COVID and even most recent quarter.

Yes. Which leads to my final macro question, I promise, but we have to ask if biotech funding. Just kind of thoughts about I guess our sense is 2020 and 2021 kind of record levels may be unsustainable funding and now it's down year-over-year, but it's not dissimilar from like 2017 to 2019 as well. So it's still relatively healthy, but still down also. So maybe just kind of on that.

Well, and it's most of the funding isn't just for 1 year. Usually, this funding is for 2- or 3-year type tranches. So the reality is, is that most not all you can't [ capitalize ] everyone, but the majority of these biotechs are still well funded even today. And we've seen these cycles before as you just mentioned, and they do go in cycles. And some of these biotechs, they won't work out, they won't make their end targets and run out of cash and will probably go away. But there will be those that do, and it re-excites and rejuvenates the market, and there's still a lot of VC money out there, and there always will be. So we just see this as a natural cycle and doesn't necessarily translate into what we see in our numbers because by the time they start to run out of money, hopefully, they have enough successes where the new money comes in and the business continues. But a data point -- to give you a real data point, not philosophical, but data. What we sell -- for example, in Q1, similar to what we saw through fiscal year '22. We sell to all of them. All small biotechs, all the way ranging up to big pharma. And we do our best to try to kind of lump these in the buckets to kind of see if we see any trends, particularly now with the concern of biotech funding. And we've seen no discernible differences in the trends with our smaller biotechs as we have with our large pharmas. I think biopharma is a category, all fiscal year '22 was north of 20%, some quarters 25%, 30% growth, it was kind of crazy. It was mid-teens. Did it slow down? Yes, but still pretty damn health in a tough comp. And again, that slowdown, if you want to call it that, was indiscernible between our category of biotechs that we serve and a big pharma. They behave similarly.

Got it. We've got Will here, so I do want to talk proteins. But if I -- Jim, if I can keep you on the hot seat for a couple of more answers, then we'll get to Will, I promise. But just there were some really some good positives in the Diagnostics franchise last quarter.

Thanks for pointing that out.

Yes. I think it was a standout. So maybe I think Exosome is something that probably has taken longer to come to fruition or the way you had hoped initially. But after a slower ramp, there have been some positive developments. So just the amended LCD expanded Medicare coverage for EPI. Can you just talk about what that means for demand for EPI.

And we're excited about that because the 70% growth in tests that we've been seeing, including in Q1 was before that was before that was enacted. So -- and that -- now having our reimbursement guidelines be [ mired ] with our NCCN guidelines. The biggest benefactory of that -- there was a number of things that the restrictions that were taken away that were nuances for the doctor to have to check the box. So that takes down a barrier for getting doctors acceptance. But in terms of addressable market, the key barrier that was removed was the ability to have -- use it as a surveillance test and to have it more than once in your lifetime. In fact, people do it once a year, which is what the intention of the test was. That basically doubled the addressable market from roughly $1 billion to $2 million. So that was huge. But what's been driving the growth this past year for the -- and that was on top of 20% growth last year. First of all, yes, we are 2.5 years or so behind where we thought we'd be, but that's called COVID. I mean the reality is almost going to the doctors, so there was not much testing going on. And with that down, obviously, people going back to see the doctor and that combined with the whole marketing message around the test has changed with the Asuragen team now running it, and they really understand the market, combined with the longer-range studies that we've now done, both economic and clinical utility studies. We've come up with our own stats, but there's other stats being published out there that roughly 60% of patients that are prescribed a biopsy never show up to the doctor. So that has changed our marketing message from being more patient driven, which was take this test to avoid unnecessary biopsies, which is still true. But the patients don't make the decision on whether -- probably the test that doctors do and the doctors see as a threat to their income. So the message is now flipped to, here's a way to get all those patients who never show up for a biopsy that should to get them in there and have confidence that they should have the biopsy. And that has changed the whole dynamics that, combined with less checkbox to fill out, has changed dynamics with the doctor's acceptance. Real quickly mentioned Cal Ripken is a perfect example of this. His story is the poster child, which is why he came to us and said, "Your test saved my life, and I want to partner with you and be a spokesman for your test". Essentially, he had a drifting high PSA score, he had a history in the family, his doctor really wanted him to biopsy and he was refusing it. But as doctors knew about our test and said, "Listen, pee in a cup and let's just see what it says". And it came back with a very high score, which suggests that you have it, but there's really high, we definitely can't rule you out. It scared him into taking the test and he had like stage 4 cancer and would have been dead in a year. So it's -- that's a perfect spotlight or example, that whole marketing message now changing. So it's like I said, grew 70% in test count and the other data stat I'll give you in terms of why we're such in the early days with this. Only 15 -- roughly, I think less than 15% of the urologists out there in the U.S. have actually prescribed our test. So there's a huge education that still needs to occur that can capture 85% of those doctors. But even within those 15%, the average test count per doctor is 4 tests per quarter. Well, we've gone back and looked at our doctors that have been with us from the very beginning, who are early adopters, and their average is over 50 tests per quarter. So there's a tenfold increase that can occur just within the 15% who know about our test as they continue to increase their adoption within their own practice.

So between kind of new LCD, Asuragen running the shows, opportunities, more tests from existing doctors and more docs.

We're -- I'd argue -- I can't put an X on it, but we're in a much, much, much stronger position right now than we were 2.5 years ago pre-COVID. No question.

And you guys don't break it out specifically, but you give us directional volume numbers and I think some revenue numbers. If I'm not mistaken, I think revenues were -- both revenues and volumes were both strong, but I think revenues were up more than volumes. And there's another piece of this, which is reimbursement and also accounting. There's a couple of cross -- can we just -- maybe just talk through those dynamics?

Sure. So specifically on the accounting, we -- initially, we were cash accounting because there was no history for collections. And I think it was about 1.5 years ago. So we had enough data on Medicare to change that to an accrual, so there was a catch-up there. And then this most recent quarter, we had enough data on our private payers for predictability of payment that allowed us to move that to an accounting method. So there -- I think our revenue growth was roughly 100%. Our test growth was 70%. So that delta was the catch-up for the accrual. But now going forward, there will be much more alignment between the revenue and test count growth. With regards to reimbursement, [indiscernible] we already talked about the improved Medicare reimbursement, so that's only an improved story. On the private side, that's also increasing. We continue to chip away contracts, particularly with some of the more smaller regional and the Blues. But even the large payers, it's not like they don't pay anything, they do pay something and it's interesting. And so the average blended collectible sales price continues to ramp and increase. And that's why we've been doing these long-term studies as well as because these -- the big ones, the big 5 in particular, they want to see their own long-term feasibility, economic, clinical studies, all that kind of stuff. And so we're just now starting to get that data and we also have hired some really strong people in the industry who understand how to negotiate this with insurance companies. And so we're feeling pretty good about the ability to get some of the nationals on board here soon. And there's a chicken and the egg thing too. A lot of these nationals are like, well, until we always see good utilization of this test, we're not going to bother with it. And now with the kind of increases we're seeing it's becoming material.

And just one last one on Exosome kind of longer term. You've got EPI, which you've launched and are controlling yourself, but then you had a kidney rejection, which you partnered off. Maybe talk about strategy for EPI going forward? And I think Chuck still believes it could be -- or the team believes it still could be $1 billion unicorn one day.

The platform overall.

Yes, the platform overall.

No question, I mean...

So what's coming next.

Yes. So I mean I think the first one is in terms of the direct to doctor model that we have with our EPI test today that we might to leverage that commercial model that we have with the urologists. So we're going to continue to build out that urology franchise. And one way, for example, we're working -- we are working on a rule-in test, which would probably allow for even greater utility -- clinical utility. But there's also a test kind of downstream, where post biopsy, there's already test out there on the market that we believe the Exosome could perform better on much easier pathway reimbursement because there's already reimbursed tests. So we're going to kind of fill out that franchise. We're working also on a colorectal cancer that we believe can actually identify precancerous pops, not just the cancer itself or much better for early detection. And then you name the cancer, and we pretty much have a solution for it. But for those who we're looking more from a partnering perspective, and/or fast follower, meaning there's tests out there in the market, solid base and liquid-based tumors that there's tests out there. They're not that great, but there the ones that are out there, and they have a reimbursement path. So fast follow with using the Exosome technology that we know is superior and then use our Asuragen sales channel into the labs to sell that under an already existing approved test.

Okay. And then last one on diagnostics, just on ACD. You've built back up the commercial team. I think that was a pain point. Academics improved, which I think has helped too. Right, if I'm not mistaken, it returned to pretty solid growth last quarter. Just how should we think about the long-term growth outlook at ACD from here?

Well, we're excited. Spatial is still a hot area. And it's an emerging application and I guess, you can say, it started with the discovery side of things, [indiscernible] that Tenaxis built in terms of the energy and excitement around it. And we do believe it is a -- has the same kind of application usage and sizes like IHC does today, both in discovery, but also in translational and ultimately the clinic. And what we love about our ACD platform is it fits in that sweet spot, and we are, we think, the #1 player in that sweet spot of translational to clinic. So most of the other players you hear about in spatial of any size or all discovery, and that's why we see them more as partners than adversaries because that discovery ultimately feeds into translation and clinical. And that's still very new. It's kind beachhead of where that -- we are positioned very well in that beachhead. So we think it's a double-digit growing market, and we'll continue to grow double-digit plus.

So moving to the protein side of things and the end market that's near and dear to my heart, cell and gene therapy. I think a modest slowdown in growth in GMP proteins last quarter. With that said, it's been doubling, which is -- it's been really good, but it did slow down somewhat. You talked about some near-term challenges around enrollment. Can you just talk about that issue is and how long you expect those to persist. And I think it's also a lumpy business, is probably the other piece of it.

Yes. I mean -- for sure, and maybe if it's okay, I'll just take a minute just zoom out on kind of the enterprise and how we approach the cell and gene therapy market, right? So when you think about our participation, I think of a regenerative medicine space, an immune cell component, and then there's a gene therapy component. We participated in all 3, the first 2, much more than others. So in the regenerative medicine space, this is kind of replacing cells. So this is the stem cell space. We have a nice market-leading position with our GMP protein. So we offer more than 40 GMP proteins space, 11 of those are really truly unique to Bio-Techne. In addition to that, we offer of antagonist, agonist from our small molecules group, which is Tocris, you might have noticed that had 100% growth this last quarter, that was directly into our regenerative medicine market. And then in addition to that, we're developing GMP stem cell. We already have stem cell, we're evolving those into to GMP. So we have a really nice, what we call, a leadership position and [ beachhead ] that we can leverage. So we've got that component branching into that as well, then we do have our analytical systems, too, which also play a role in characterizing the proteins and output, so that's the Ella platform, the Simple Western platform. If we think about immune cell therapy, where we're playing, right, if you think of that workflow, we're taking this on a few different directions. One, we've invested heavily in building out our GMP protein capacity. We'll leverage that also the regenerative space, which is a nice advantage for us. We've built out a capacity for the wave, last time I know you asked me when the wave is coming, I don't know, but I'll give that one a shot later. So we've built that ahead of that wave. And we're approaching this in a few different ways. We have the enterprise offering actually, ACD. So spatial biology tools are applied in the discovery side of this equation. Our Ella platform is leveraged kind of both in process development and ultimately QC for that. But where we think we've got a really, really nice opportunity is in the cell culture kind of component that workflow. So think about the upcoming acquisition, often our scale-ready partnership, right? [indiscernible] so imagine you've got this highly differentiated incubator -- or excuse me, bioreactor in the marketplace that has seen adoption between 700 to 800 customers are leveraging that. A fraction of those are also our proteins customers. But -- we're partnering closely with them and of course, we'll have an acquisition kind of coming up, both on the development side and also to deliver more value to the customers. So how can we take that system, which is a fairly open system and start closing it down over time, delivering exceptional value to customers in terms of and there's lots of value in close cytokine delivery, delivering kind of the world-class cytokines and then our own -- we have a couple of different medias in development. So it's a -- it's one of those pieces that becomes just highly synergistic, there's tons outside. So I didn't answer your question, so let me add something. So I think the point about the lumpy customer base is really there, right? So we've got about 300 customers buying our proteins in cell and gene therapy, and a fraction of those are big drivers or big movers kind of up and down. Jim has talked to -- I think the team talks about -- [ minnows ] I think said it publicly before, too. But our goal right now is just to expand that base is rapidly as possibly can. We know there's a wave coming. It's all about customer acquisition. But I would say that it's encouraging. We haven't lost any customers, right? So we're not losing them. We're adding kind of every week, every month. to the portfolio. And that's our kind of long-term play.

Got it. Maybe let me follow up there first. You said -- I'll ask you on the waves coming. I mean there's of-quoted [indiscernible] 10 to 20 approvals by 2025, which I think [ Peter Marsh ] has kind of walked down to 10, but I think people kind of view 2025 is like the beginning of the wave but that's for the industry, right? And you guys just have launched GMP proteins last year or so. And presumably, you're seeding things. And you're talking about not losing customers, but there is some lumpiness which would seem to suggest maybe they're kind of earlier stage. So I guess the question I have for you is, I think people have opinions on the wave for the industry, but when is the wave coming for Techne in terms of maybe supporting commercial approvals.

Yes. In terms of supporting -- so there's a couple of components of how we're going after this, right? And again, I can't -- I really -- truly can't tell you when they are coming. It is coming. It is the future of medicine. You'll hear really are executive of our company kind of talk about it, right? It's a huge strategic push and emphasis and investment space for us. We believe that the approach that we're taking is unique and that it will enable those customers who are kind of in that -- they're not a big publicly traded company with tons, tons of room, they get a following on them. We believe that we offer and -- we'll offer a system with the scale-ready Wilson Wolf solution that will much more rapidly and less expensively, get them to their first patients and ultimately to the most efficacious [ cell ]. So derisk that and the strategy is to essentially derisk that as much as we can, help speed up the process for those kind of small emerging customers. The beautiful part is we're already playing broadly. So Wilson Wolf, the GRx is already used in to prove -- true to approve products, right? So it covers that whole spectrum of kind of pre-IND all the way to Phase I, II, III. And so our position is that that's -- we believe that's a big win based on our feedback from our customers. And again, as we deliver more value in that self-culture workflow, and we're not done investing there. There's more to come. As we tighten that up, we'll only kind of improve that. And hey, it's also part of our mission, right? It's not an option here to not deliver that to the customer base.

The other thing I'll add in terms of when does that inflection point happen with commercialization. We share examples -- for example, we've signed a half dozen contracts so far that anticipate that those might be. And we share that just to give really just more of a shock and awe value, to give you a sense for how big this really could be. But the reality is, is that as these customers progress through their clinics, the business grows exponentially with us throughout every phase. So the reality is, is that even numbers that are actually commercialized by the time we get to, say, 2026 is relatively small, and we are not part of that small bit. There will be enough in these trials, I think we'll fill up our factory before we get to that point.

So the other number question, maybe for you, Jim or Will is, remind us how much capacity you currently have for GMP proteins? And then you're talking about maybe GMP media and some other areas, what could that mean in terms of revenue capacity for those things?

I mean I'll throw -- I've heard. I mean with regards to our factory, first of all, when we first kind of had our grand opening of that, we talked about it being somewhere between $140 million to $200 million capacity. As over past years as we moved proteins over and we're getting better and understanding more and more about what kind of yields we can get when we start producing to scale, $200 million is now before. And we're not going to talk externally about how much more it could be because we don't -- I'm not sure we even know, but it's all good news that the -- I mean, it's crazy in terms of the -- I won't quote some numbers, and Will, you can kick me if I'm wrong, but I thought I heard a number there certain proteins were the yield is like 60x greater in the factory than when it was we were producing in our Minneapolis facility. Now we did -- in our numbers, we assumed some yield improvement, but not that kind of yield improvement. So I still unknown exactly how much we'll get out of our factory, but it's -- I hope it's a problem we have. And we're not going to wait until the factory is full before we expand either, so...

So those numbers could move higher, was my sense. Maybe, Will, going back to the one thing I had to like had a double take when I heard it on the call, it was about Tocris, which is not part of the cell and gene therapy portfolio that myself and others have asked about much. You also called it a small molecule solution, which leads the sell side to maybe scratch his head a little bit. So can you talk on what Tocris is and where it plays, the value proposition we're selling to therapy customers.

Yes. Sure. Yes. And I'll just -- you would ask to have macro especially in Europe. So we [ manu ], Tocris is located just outside of Abingdon, Bristol -- in Bristol, U.K. and has never had any issues about -- or ever had any issues with power supply, et cetera, right? And so we're backed up pretty well there. But when we come to that, that's literally a small molecule production facilities. So we make huge range of kind of agonists, antagonists, anything that you would kind of add into a cell-culture mix, right? So a big, big driver for this is actually -- and maybe one of the reasons you don't ask about it is, oftentimes, all of our questions come on the immune cell therapy side, right? We kind of limit the scope of the discussion. And what Tocris has done is we've got this really unique GMP capacity, right? We've built really long-standing partnerships, bridging customers from RUO kind of all the way through. I won't name those, but any player right now who's in regenerative medicine, who's in stem cell culture for the most part, is going to be using a Tocris small molecule as a component of that cell culture. So we literally can't build capacity fast enough, we're ramping the heck out of it. We'll continue to invest in that. You'll note again, 100% growth in that primarily regenerative medicine space. So it's an unreal story. It's a great story for our customers too because it just is a totally different dynamic than somebody coming in with just kind one component, if you will.

And you may have never heard us talk much about our small molecule business before. It is a business unit within our reagents division. We always talk about proteins and antibodies, but there's a small molecules piece of that. And it's always been a nice solid mid-single-digit grower, serving mostly the research market. And so we haven't talked about it a whole lot because it doesn't move the needle one way or the other historically. But it's another example of how GMP can move the needle for just about anything, and it's starting to move the needle now for our small molecule business, which is exciting.

Yes. Maybe one other that has been kind of a question we've received on the protein side of the business, which is especially kind of the legacy reagents. You talked about 9% to 11% growth, if I'm not mistaken, I think it's been north of that in recent years. It's been really strong. And I think there's some questions around the sustainability of that and kind of the longer-term outlook, maybe just kind of get your impression on that.

Well, I'll level set the longer term outlook, but then we do have internal targets there that are higher than what I'll publicly sign up for. But -- and I'll let Will talk about why we think we're seeing elevated expectations around our reagents business. I mean if you remember back in the earlier days, we said our core reagents was a market low single-digit grower, and we hope we can grow mid-single digits. And then a little over a year ago on our Investor Day, we kind of upped the ante there and said, "well, we think maybe it's a mid-single-digit grower and we should be able to at least grow 50% better and be in the high single digits". Somewhere in that range. And to your earlier point, the last 2 years, we've been not -- or it's a year ago Q1, we grew 20% in our core reagents. And again, that was a blow off top from COVID testing, COVID vaccines and all the extra cash our customers had, and we're reinvesting it. So that doesn't blow off the top of thing. But the trend here is real in that proteomics in general, we think is in a phase of growth in terms of the market and then our position in that market will allow us to accelerate even faster. And I'll let Will explain more about what that is.

Yes, for sure. And I think the point about COVID, too, is it wasn't necessarily that we had a bunch of COVID business, right? It was just this overall halo effect that was impacting the market. And you again saw the step-up that we put out in our projections. As we look at this business, right, and we think about -- just put this into a much broader context. And the broader context is, is the 7% to 9% kind of guidance through 2026 at $2 billion. I feel very comfortable about that. But again, if we zoom out to kind of the other trends that are happening, and I'll draw a parallel here. So we go back 15, 20 years ago and kind of the genomics revolution, right? The genome is sequenced. We get this massive bolus of discovery. And then what you've seen since then is practical applications of that, whether it's NIPT, multi-cancer early detection, you kind of name it, it's been deployed in [ its transit ] and there's still lots and lots of runway there, right? Flash forward to what's really taken off these last few years driven by companies like Olink and others with these incredibly accessible high-through proteomics platforms, right, that are driving discovery at another level. We all know proteins are the business end of biology, right? It's not the It's [ blueprint ] it's actually what does stuff, and so it's powerful in that sense, right? There's so much that you don't capture just by methylation type of an assay in the DNA side. That said, they're incredibly complementary. And in fact, I'd argue things like spatial biology and single-cell genomics, which are also nascent. This all ultimately converges, right, into a great outcome really for humanity and certainly for our industry as well, right? So there's kind of a nice virtuous component of that. So think of that really broad discovery. That's driven by our content. There's nobody out there right now who's got a box [ it's so easy ] that doesn't leverage our content. So we've got this wonderful play on the entire trend of high throughput proteomics. The beautiful part is that's RUO only, so we catch it into the translational phase in the diagnostics. So we got a nice opportunity there as this gets deployed more broadly. And what we're starting to see is companies that have done multi-cancer early detection, for example, with genomics are complementing that end with proteomics data to get a more refined and a competitive advantage to others going after those solutions. I will argue that over time that spatial will come in there and the single cell component, will all converge to how do we just get the best answer. It doesn't matter if it's proteomics or genomics. So I think when I look to those next 5 years, like what is the upside from the 7 to 9, it's those breakthroughs in a more active translational phase and we're building out capacity to help customers bridge from their discovery work into whatever is the right tool. And again, I'll finish with a parallel. In genomics, that was an Illumina box, but a lot of the actual work that's done in the translational space is done, [ cell ] sequencing, QPCR, digital PCR, right? And so you need to start translating that. Proteins are different because you have to have the antibody itself, right? That's where we come in. So we got this really beautiful. I think long-term story that ends up again, awesome for our mission, but eventually really drive the exceptional growth over time.

I'll pause there for any questions before I finish on some M&A questions. All right, M&A. Maybe first, Wilson Wolf, remind us first purchase option when you expect to exercise that and maybe how that changes the relationship with them at all?

Yes. I'm not so sure it's going to change relationship so much. I mean, I like. I mean, frankly -- I mean, Will, you and Chuck, and John Wilson will probably talk 3 times a week as it is already. So I don't know that's going to change the relationship so much. But yes, as a reminder, when they hit $92 million of revenue, or $55 million of EBITDA, we invest 20% in the company, roughly $256 million. And it definitely -- definitely, I won't say, nothing definite, but it is very very likely it will happen before the end of the year, somewhere borderline in Q3, Q4 in that time frame as we expect that trigger to be occurred. And then going forward, the trigger to acquire the remaining 80% occurs when they hit $256 million of revenue or $136 million of EBIT. I think that's the right number -- sorry, $226 million in revenue and $136 million, thank you, Dave. That's when the trigger be to acquire the rest. Ironically, it was John Wilson, who also wanted the EBITDA trigger. Most companies we have in these milestones don't want that. He wanted that because he's so profitable, and he's probably going to hit the first trigger first on profitability as opposed to revenue. But it gives you a sense for how quickly it's ramping and how profitable it is. I think the biggest thing will be, I think, for investors who don't get it yet, it will start to become a realization. This is for real, and it's going to be extremely accretive when it ultimately consummates.

Yes, I think it's probably something you're not getting a ton of credit for right now, but ultimately, you will. So Chuck, we're here -- or let me say this. I think Chuck has been clear, he's interested in M&A. I'm guessing...

18 acquisitions in 10 years.

Yes. But I'll ask you, Jim as CFO, with kind of rising interest rate environment, macro uncertainty, does that lead to more opportunities? Or does that change? How you think about M&A?

I think it leads to more opportunities. And I think it doesn't change what we think about it because to me, interest rates has a direct inverse relationship to valuation. So what it makes is it makes things a little more actionable and realistic in terms of the counterparty, what the expectation should be. So the higher interest rate environment by itself does not -- actually get a net positive for it because free money, then all of a sudden, what everything is infinite value. I mean where does this stop? So it actually starts to put some discipline that you can mathematically rationalize what -- I think something that is truly valued.

So I mean, I guess the other question there, like I think Chuck's been talking about M&A would be coming for some time. We've seen some deals, but not really a wave -- to use as well the word, a wave of M&A. Why do you think it is? Where do you think kind of like seller expectations right now?

Yes. I mean I think let's level set for a bit. I mean we'd be probably averaged about roughly 3 acquisitions a year, maybe up until COVID. Then since COVID, I think we've only done 2, that I recall and 2 more recently, Namocell less than a year ago and -- actually, only 1 I think about Namocell, Asuragen. Asuragen a little over a year ago and then Namocell in July, right? So clearly, the pace of executing acquisitions is slow, but it's not because of lack of effort, it gets back to just being disciplined on valuation. It's that simple. And we think with things normalizing there, the opportunity set -- the opportunity to actually close on some deals is going to increase dramatically and to give you some data points, some data points to play with on this in terms of what we've seen. Back to your other point, though, it's still -- so it's moved so fast, right? I mean we're talking about only 6, 9 months or so that these interest rates have gone up and the market has gone down. It takes time for valuation resets to really sink in. Even public company who might be down 80% and they won't accept 100% premium because they were 400% more 6 months ago. So it just takes a while in the private market, it even takes longer. But what's changed is a year ago, 2 years ago, you got to the negotiation table, there was no negotiation. It was here's my price and if you don't like I'm going IPO. That's just now flipped to where now actually targets are coming to us, saying, well, we're kind of -- we're going to need a new round of financing, would you be interested in participating, which is a window to say, how about -- how about buying us outright. And so those -- it's starting a lot more conversations that weren't started before. So we're encouraged by what this means with regards to being closed on deals in the near and intermediate future.

Perfect. Well, with that, I think we've hit our time. So Jim, Will, Dave. Thank you guys so much for being here.

Thank you.

Thanks, Jacob.