Bio-Techne Corp (TECH) 2014 Q2 法說會逐字稿

Good morning. Welcome to the Techne Corporation's earnings conference call for the second quarter of its FY14. Hosting the call today is Chuck Kummeth, Chief Executive Officer of Techne Corporation.

(Operator Instructions)

It is now my pleasure to introduce, Chuck Kummeth.

Thank you, Chelsea. Thank you, and welcome to Techne's Corporations second-ever quarterly conference call. Today we will discuss the earnings results for the second quarter and the first six months of FY14 that were released earlier this morning.

As stated in this morning's press, I am very pleased with the progress we have made during the past few months of fiscal year-to-date, changes made in our operations, and improved efficiencies in our biotech segments, allowing us to focus more on sales growth. Gross margins have remained strong, and expenses are within our plan as we invest in the people, leaders, technologies and regions.

While sales growth in the second quarter was less than in the first quarter, our progress was steady especially considering the difficult market situation in the academic and government sector. You will hear more about this progress, as we provide greater detail during this call regarding our recent financial results and strategic progress. Kathy Backes, the Company's Controller is with me on the call today. Our plan this morning is for Kathy to provide a review of our financial results for second quarter and first six months of FY14. I will then address several topics, and be open for your questions.

Before discussing the financial details for the quarter, allow me to remind you that some of the statements made during this conference call may be considered forward-looking statements. The Company's 10-K for FY13 and 10-Q that will be filed for the fiscal quarter ended December 31, 2013 identify certain factors that could cause the Company's actual results to differ materially from those projected in any forward-looking statements made this morning. The Company does not undertake to update any forward-looking statements as the results of new information or future events or developments.

The 10-K and 10-Q as well as the Company's other SEC filings are available to through Company or online. During the call, non-GAAP financial measures may be used to provide information pertinent to our ongoing business performance. Tables reconciling these measures to most comparable GAAP measures are available in the Company's press release issued earlier this morning, or on the Techne Corporation website at, www.Techne-Corp.com.

Sales as reported increased 11.9% to $84 million for the second fiscal quarter ended December 31, 2013. Organic sales increased 0.4% in the quarter. These organic sales exclude $8 million of Bionostic product sales, and $643,000 of favorable foreign currency exchange rate fluctuations. Adjusted earnings were $27.8 million or $0.75 per share for the second fiscal quarter of 2014, a 2.4% increase over adjusted EPS of $0.74 in the second quarter of FY13. Adjusted earnings and adjusted earnings per share exclude intangible asset amortization and costs recognized on the sale of inventory that was written-up to fair value as part of acquisitions.

For the six months ended December 31, 2013, sales as reported increased 13.0% to $169.7 million. Organic sales increased 2.8% in the first six months of FY14. These organic sales exclude $14.2 million of Bionostic product sales, and $1.3 million of favorable foreign exchange rate fluctuation. The Bionostic acquisition was completed in July 2013.

Adjusted earnings were $58.5 million or 150 -- excuse me, $1.58 per share for the first two fiscal quarters of 2014, a 7% increase over adjusted EPS of $1.48 in the first two fiscal quarters of 2013. Adjusted earnings and adjusted earnings per share again, exclude intangible asset amortization, costs recognized upon the sale from inventory that was written-up to fair value as part of acquisitions, and professional fees related to the Bionostics acquisition.

The Company operates two reportable segments based on the nature of its products. Our largest segment is the biotechnology segment, a segment that develops, manufactures and sells biotechnology research and diagnostic products worldwide. This segment includes R&D Systems' Biotechnology division, R&D Europe, Tocris, R&D China, BiosPacific and Boston Biochem. The Biotechnology segment sales were $70.6 million for the second fiscal quarter, an increase of 24% after adjustments for foreign currency exchange rate fluctuations, and $143.7 million for the six months ended December 31, 2013, which is an increase of 2.4% after adjustments for foreign currency exchange rate fluctuation.

Our second segment is now called Clinical Control, a segment previously referred to as hematology segment. This segment develops and manufactures controls and calibrators for sales worldwide. The clinical control segment now includes sales made through R&D System's clinical controls division and Bionostics.

Clinical Control sales were $13.5 million for the second fiscal quarter ended December 31, 2013, and $25.9 million for the six month period then ended. The sales growth was 25% for the second fiscal quarter ended December 31, 2013, and 7.0% for the six month period that ended, when sales of Bionostics products are excluded. The difference between the first and second fiscal quarter sales growth rate was mainly the result of the timing of shipments at both the beginning and ending of the first fiscal quarter.

A couple of comments regarding key biotechnology segment customers and geographies may be helpful. About 53% of biotech sales were generated in the United States during the six months ended December 31, 2013. The two biggest US customer groups are the industrial markets, which includes pharmaceutical and biotechnology companies of all sizes, and the academic research market.

Sales to US industrial, pharmaceutical and biotech customers increased by 2.6% in the quarter ended December 31, 2013, as compared to the same period last year. Although this growth rate was lower than achieved in the first fiscal quarter, we have now experienced improving sales from these US customers during each of the past four quarters. We expect and hope that these customers will continue their commitment to research investment.

Sales to US academic customers declined 4.6% during the quarter ended December 31, 2013, as compared to the same period last year. This decline was substantially smaller than the 11.8% decline experienced in the first fiscal quarter, despite the disruption caused by the government shutdown during the first half of October 2013. This is the 10th straight quarter of sales declines in this customer segment.

As you know, the US academic market is highly dependent on funding from the National Institute of Health. Unfortunately, sequestration moved from a threat to a reality last March 1, requiring 8% percent cuts across the NIH budget, and this funding stress was compounded by the two week government shutdown last October.

Europe is our other major biotech market. About 29% of our biotech sales were derived from the Continent during the six months ended December 31, 2013. Like the US, the major customer groups in Europe are the academic market and pharma and biotech companies. Sales in Europe, excluding the impact of currency fluctuations, showed a decline of 2.0% in the second quarter of 2014, after 1.5% of organic growth in the first fiscal quarter.

Our European sales for the first six months of FY14 are basically flat, which is consistent with our FY13 European results, but better than the organic sales declines reported in each quarter of FY12. European academic sales were slightly down during the second fiscal quarter, with the sales to biotech and pharma customers being relatively flat during the three months ended December 31, 2013. Germany, again, showed sales growth in the second fiscal quarter, while slight sales declines were experienced in the UK and France during this period.

Sales in China increased by almost 32% in the quarter ended December 31, 2013, as compared to the same period last year, and excluding the benefit of a slightly stronger Chinese currency. Our China presence has been growing at about 20% or more for each year, since we established an operation there in FY06. This growth improved dramatically in the most recent two fiscal quarters, due to an expanded sales staff and a relatively small base of business. China generated about 6% of consolidated sales during the first half of FY14. Although this is relatively small, the China presence is important to our strategy of global reach and growth.

Pacific Rim sales increased by 7.5% in the quarter ended December 31, 2013, as compared to the same period last year, and increased 10.5% during the first six months of FY14. The strength during the last six months is due to a comparison against weak first two fiscal quarters in FY13, and the emphasis we are placing on Asian sales growth. About 10% of our biotech sales were generated in the Pacific Rim during the first six months of FY14, solely through our distributor partners. Japan, Korea and Taiwan are the leading countries in this geography.

Gross margin adjusted for costs recognized on the sale of acquired inventory and amortization of intangibles were 72.7% and 76.2% for the quarters ended December 31, 2013 and 2012, respectively. The decrease in adjusted gross margin for the quarter was primarily caused by a change in product mix from higher margin biotechnology segment sales to clinical controls segment sales, as a result of the Bionostics acquisition. The impact of the Medical Device Excise tax also slightly reduced gross margin profit.

Selling, general and administrative expenses for the quarter ended December 31, 2013 increased $4.0 million from the quarter ended December 31, 2012. This is similar to the level of expense increase reported in the previous quarter. Selling, general and administrative expenses for the quarter included $1 million of selling general administrative expenses related to Bionostics operations, a $1.1 million increase in intangible asset amortization primarily related to the Bionostics acquisition, and a $541,000 increase in non-cash stock options, stock compensation expense as compared to the same quarter last year. The remaining increase in selling, general and administrative expense for the quarter ended December 31, 2013 was mainly the result of increased executive compensation, and additional sales staff added since the start of fourth quarter FY13.

Selling, general and administrative expenses increased $7.7 million during the six months ended December 31, 2013 versus the same period in the prior fiscal year. This increase in selling, general and administrative expenses included $2.1 million of selling, general and administrative expense related to Bionostics operations following its July acquisition, a $1.5 million increase in intangible asset amortization primarily related to the Bionostics acquisition, $532,000 professional fees related to the Bionostics acquisition, and an $807,000 increase in non-cash stock compensation expense as compared to the same six month period last year. The remaining increase in selling, general and administrative expense for the six-months ended December 31, 2013 was mainly the result of an increased executive compensation, and additional sales staff added since the start of fourth quarter of 2013.

Research and development expenses increased $520,000 or 7.3% for the quarter ended December 31, 2013, and $770,000 or 5.2% for the six month period ended December 31, 2013, versus the comparable periods in the prior fiscal year. The increases are due to research and development expenses related to Bionostics operation, an increase of personnel and supply costs associated with the continuous development and release of new high quality biotech products.

The effective tax rate for both the quarter and six months ended December 31, 2013 were 30.8%, compared to 32.3% for the same prior year period. The decrease in the effective tax rate was primarily the result of decreased tax rates in the UK, and an increased percentage of pretax income from foreign operations which have lower income tax rates than the US. The Company expects the income tax rate for the remainder of FY14 to range between 30% and 32%.

I will conclude today's financial discussion with a few balance sheet and cash flow comments. At December 31, 2013, Techne had $349 million of cash and available for sale and investments, which is up $26 million from September 30, 2013 and we continue to have no debt. We generated $31.3 million from operations in the quarter ended December 31, 2013, and $63.9 million from operations during the six month period that ended. The six-month cash generation is 5.5% more than generated in the same six month period last year.

During the second fiscal quarter ended December 31, 2013, we returned $11.4 million to our shareholders in the form of dividends, and $3.6 million was invested in capital expenditures. Non-cash stock-based compensation expense was $1.3 million. This is an increase over the $569,000 of stock-based compensation expense in the previous quarter, due to options granted to our Board of Directors upon their reelection at our October annual meeting. I will now turn the program back to Chuck Kummeth for additional comments and observations.

Thank you, Kathy. I would like to add a few supplemental comments regarding our financial results for the second quarter FY14, and the markets we serve. I will also make a few comments regarding our product offerings, and a couple regarding progress we are making with our strategic plans.

Our results for the quarter and six month period that ended December 31 supports the belief that our customers are facing a number of stresses, particularly in the US academic market. This customer segment is now down to 12% of our consolidated biotech segment sales. While we have endured over two years of sales declines and uncertainty in this customer segment, we are approaching the anniversary date of sequestration. This should make our compared results a bit easier, but we cannot wait for the markets to strengthen; we need to do more.

The Fisher Scientific distribution agreement that was announced last Friday is one of our strategies to gain deeper penetration into the academic market. The Fisher agreement is for three years, and allows us to leverage Fisher Scientific distribution channels in the United States and Canada. Fisher Scientific is a premier customer channel brand within Thermo Fisher Scientific, and has a leading position in the life sciences market. We believe Fisher Scientific's broad customer reach and proven record of customer service and support will help accelerate our sales growth.

As preferred supplier, we will be able to leverage the commercial strength of the Fisher Scientific channel through its large sales force, and highly-trained life science applications specialists. In addition, we will be well-positioned to take advantage of the many Fisher Scientific marketing programs, including advanced e-commerce solutions that will occupy a prominent position in the Fisher Scientific catalogue. We will continue to market and provide technical support to our existing customers, as well as all new customers introduced through the extent of Fisher Scientific channel. The partnership will expose our products to a greater number of academic, governmental and industrial customers including those in the pharmaceutical, biotechnology and CRO segments.

I also remain encouraged by our strong brand and segment position, and believe we have tremendous upside potential. Our strong brand name has created a business with longevity value. We are a leader in the field of cytokine growth factors and related [immunoassays] and clinical controls. We have a large portfolio of products that are continuously being enhanced with new product introductions, and we are heightening our focus with valued added products, and are focusing less on providing raw materials to our competitors.

The new long-term outlook remains -- the long-term outlook remains favorable. To date, we have increased our focus on channel, direct selling and are being price competitive without seeing a substantial impact on our gross margins. We believe these actions will translate incremental revenue. We are also likely to benefit from the trend of our [RUO] products being converted into diagnostic tools, and the adoption of our products of various testing platforms will allow us to leverage our unique content.

I also believe there is potential M&A activity that could provide additional growth. We do not lack for opportunities, and have a sound balance sheet that provides us with the ability to leverage. This puts us in a strong position to target deals of various sizes. The trick is to find targets that will scale our business, and take us into new markets.

Our goal is to build on Techne's history of product and financial success, and to execute a strategy that prepares us for the changing market landscape. Innovation in core products, acquisitions, and expansion of our geographic footprint will be key to successfully achieving our strategy. These goals will additionally benefit from a newly created key opinion leader network that will strengthen our collaborative science which can translate into new products.

In recognition of the expected increase in size and scale of the organization, we will need to redesign our development and operational and commercial resources to create greater efficiencies in the organization. We will need to retain our talented staff and recruit supplemental personnel as necessary to allow us to successfully implement the strategic vision we have for the Company.

My conclusion is the same as it was three months ago. Techne is an outstanding company that will continue to focus on operating discipline, and the balance sheet and cash flow management needed to fund our growth, and to continue to return cash to shareholders as appropriate. We will also be continuously strengthening our growth program with selected disciplined acquisitions that will enhance our sales growth rate.

Our second quarter results reflect that we are successfully beginning to implement our strategic plan to accelerate sales growth, while at the same time, maintaining superb gross margins, controlling expenses and generating substantial cash flow. We will now turn the program back to our moderator, and entertain your questions and comments. Chelsea?

(Operator Instructions)

Amanda, William Blair.

Hi, good morning. I just had a question on the Thermo Fisher, Fisher Scientific distribution agreement. Could you talk a little bit about how those economics work to the extent that you are able to share? And then also in context of that agreement, how you are thinking about sales force in North America for Techne internally?

Sure. Well as you know Amanda, we had nothing more than inside sales group when I arrived. And now we have an army of five individuals in key markets that are very technically-oriented, and they can help create demand and drive local growth in these mostly larger accounts, as well as prospecting if needed.

But aside from that, it is nice to have a little more chance for it. Now we do have some sales third-party through services from Fisher's (inaudible) tab. But the opportunity is there, and has been there to leverage a -- similar lead to what they do for BD, and they have pretty large force of technical sales specialists that know our model already because of the BD arrangement.

And you know how well -- how neutral Fisher is. This leverages is an army of over 1,000 reps, and in a -- what is called a platinum level arrangement, we are in the top tier category for commission. So we will -- they will be out there trying to really do more for us.

The arrangements are very sound. I can tell you in the past present at Thermo, they are better than any deal I had internally. They are very good. Thermo wants content, and the life tech deal they just did obviously proves that.

And so, they have been really after more product classes like we have in our company for years, and they are really -- it is a high priority for them. Clearly, with the consumables and the instrumentation, they can surround the customer they think with content, and that content, is in their strategy for them. So we were able to sign very good terms, and I am just hoping for a lot of incremental growth.

I won't get into specifics, but I will tell you that, they are largely paid on incremental growth, not on just pure -- on near channel products, in terms of -- what our current means of absorbing a customer. So it is a very good win-win situation both ways, and it is for three years, and I am hoping for some incremental success for us. I don't think it is a double our business or anything, but I am expecting a couple percent out of this, so hopefully per quarter if we can get it.

But it is really and unknown right now. It is -- with this larger sales force, it all comes down to -- which was the same as was when I was at Fisher, it depends on how much they go after it, and how they are treated within the structure of their current arrangements, because they supply like 1 million products, right? So it is complicated. But they are everywhere, so we are expecting good things.

In terms of our sales force, we are making great progress. There definitely delivering, and it is it going quite well. We are very excited. People are now looking for one more in other regions, but we are seeing great results.

As you know, we hired experienced people that could hit the ground running right away, and they are delivering really, within this first month. As they learn the company culture, and our pretty big products that it get even better. But I am very, very encouraged by what we have seen.

I think it is also helping offset other erosion, especially in this -- academic sector we talked about, which is still there and will probably remain there for one more quarter to go here probably.

You could have a follow up question if you would like, Amanda, if we did not cover, we can continue if you would like?

I didn't realize I had to press one again. So okay, my follow up was China. So you had talked previously about branding strategies there, curious if there is any updates on that front?

Yes, we had another very, very strong quarter in China. We are now at year to date, roughly 35% growth. So it is an interesting place as you know. We have probably a little more than doubled our employee count there, and things are going quite well.

We have the office opening in Beijing was a big success. We have some extraordinary talent that we have found in China, I am really impressed in working China for many years, a much bigger organization. So it is very hopeful.

With that all said, we have got to do more. We have to get more local. We have to get local brand identified and we are very close to many of these things. So they are all a work in progress, and reports on us, and probably soon more than that.

But right now we are writing a good growth wave there. It is probably lower hanging fruit, and as has been mentioned the past, it is a lower base for us. But it is now at 6%, but if it keeps at this rate, it will not stay small for long.

Got it.

Our next question comes from Jeff, Robert Baird.

Morning, and thanks for the question. My first question is on operating margin. Obviously, I get the mix shift here -- but can you talk through was 47% the level that you expected, and how should we think about the out margin going forward?

The big shift in gross margin was Bionostic, so the rest of it from there, is really from different -- the way we run our business. Actually, we are well within our expense levels, and we expected to be. We are actually under plan to be honest, so we are fine there in that mix.

We have actually had a slight increase in our gross margin. Our biotech has been (inaudible). I have talked in the past about our operations re-design, and that has allowed us to have a portion of the business, the company are focused on productivity like a factory model should. There has never been one year before.

That has yielded some early results. We have a new arrangements with FedEx. We have lots of efficiency programs in place, and lean programs in place, and there is substantial costings, about $1 million or so year-to-date here, which is improving the gross margins in that part of the segment.

So you asked about the rate we should be at? We would be a little higher with the extra volume if we had it probably, but that is all coming. So I think you have to look at that more on a six-month level than the quarter by quarter.

Got it. Okay.

Also, I should make one comment too, on stock option expense for the Director is seasonal, and this is the quarter that it hit, and that has an (inaudible).

Got it. So it sounds like we could see a small step up in the second half of fiscal year?

We should.

Okay. Just -- on the organic revenues growth, can you talk about what kind of pacing you saw during the quarter? I get that we had the government shutdown. Did you see a step off during the shutdown, and kind of a recovery afterwards, or what did it look like during the quarter?

And then, you talked about seeing a recovery during the current quarter. Can you talk about what you are seeing there now?

Well, the shutdown was October, so it was kind off base right from the very beginning the quarter, and I really don't think that we ever have fully caught up to be honest. And then, the holiday season was a weird year, right, on Wednesday. So we knew we were going to take, really a couple day hit here on that.

So I do not think -- all in all, we probably could have forecasted maybe a little better on the holiday situation, but the shutdown definitely created some. We will see.

Still growth, given the things we saw and the pressure that came here, there is still upside and the near 3% six-month rate, we are probably within the year of our range where I see for moving the model here. So if -- we should -- with Fisher with the things we are putting in place, and all the things that I have talked to you all off-line and stuff on, it should be slowly improving.

I have never said, we should get really above mid level single-digit growth in the quarter here organically, until we get new platforms with extensions and adjacent markets we have talked about and other things. So it is early days here, but staying in the positive territory especially in this hopefully the last season of sequestration I think is a good thing.

Our next question comes from Dan with [Glernick]. Dan, please go ahead.

Thank you. And I have had some technical difficulties, so if I am asking a question that has been asked before, I apologize. But Chuck, a follow up on Amanda's earlier question on the Fisher agreement, what does this mean for incremental margin? So as the deal is structured, so over and above prior sales to given customer A, does Fisher take 30% of that? In thus far, in this year incremental gross margins, they are going to be meaningfully lower?

I want to be careful how I answer this, because one, we are not banking everything Fisher. We have other channels, as well as other partners. I can tell you that the terms are very favorable. Nobody sells completely at list anyway, even us, and so there is definitely room, and the margin loss is a very acceptable, and nearly immaterial really, unless there is some major surprise.

We have been promoting and discounting heavily since -- this company has never done it, and we have talked about the low end of the portfolio here, and our rising competition especially at the easier to make commodity level products. So we have been promoting, and you still have not seen much material difference in our numbers.

It will be likely the same, unless these guys blow it out of the water. I mean, if they come in, and its something 10% above growth off of that, then there may be -- but I would take the trade-off in that kind of growth. But in our models, what we think we see likely for incremental growth, shouldn't be that big of a deal.

Okay. And my follow up, how does this coexist or how are you able to negotiate a coexistence between your product portfolio and what Thermo has now brought on board for Life, who offers a number of the same products?

Great question. I guess, you would have just be an ex-Thermo person to fully really understand the neutrality of Fisher. Fisher is neutral. They stand for convenience and choice to their customers, and to the great frustration of every division president within Thermo Fisher Scientific. They are our partner, but also -- it is a complicated situation.

It is that the channel of choice, but they are also realize they have to compete in that channel like other, like it was another competitor. As an example, when I ran Nalgene Nunc in the lab consumable for Thermo, I had to compete against Corning with my own channel.

It is actually quite healthy, and it works quite well, and their numbers prove it, right, at Thermo. So it is a very successful model. I know it very well, and I know that I -- we can trust this bunch, and they will be very good to us. And it is all about being platinum level, and being a good partner and working with them, in supporting the products, the technical backup, and creating the demand as they work with you.

Life Test will have to earn their place like every other partner within Thermo Fisher scientific. There may be some people who are actually waking up there, after the announcements in life and wondering what has happened. But they will soon realize this is how important Fisher is and how neutral it is, and you have to earn the right to get them playing ball on your side.

Did that help?

Our next question comes from Jeff with Robert Baird. Jeff, please go ahead.

Yes. Thanks for letting me back in. My question is on Bionostics. Can you talk about how the integration is going, and what kind of synergies you been able to achieve on that?

Sure. The large part is, is never a ton of synergies with this It is an OEM model. It is an extension of platform and products related to ours, but the same concept, different product.

In terms of synergy, there is synergy in some of the functional adds and different things like that. But there is not a real sales force per se and things like that to worry about. So I guess on that, we are okay.

On the growth side, I think we are just a little bit less than I would like to have been, but it is within the range of our model. We are very happy with the leadership there and the overall integration into our company and the system, et cetera that part of the integration.

It is not a difficult acquisition to integrate. It is largely bolt-on and incremental. The people there are good, and the location is wonderful where it is at. And we have, they were -- it was owned before, and the leader there, the CEO was grooming a person for years to take over, and that person is in charge for us, and it is going quite well.

Got it. Thanks you.

Our next question comes from Steven with Craig-Hallum. Steven, please go ahead.

Good morning, Chuck, and good morning, Kathy. Thanks for joining us, a new dimensions, another new dimension to the Techne story.

Yes.

In terms of a couple of questions that haven't been asked, in terms of what you are doing in Europe with your direct operations with roots effort with your indirect initiatives through JP, can you update us on what you have tried to do there, and whether or not you think we have started to see some of the benefits of those actions?

In Europe?

In Europe, and then also international with JP?

Oh, I see what you are saying. Okay. Well, Europe is the one place we do have a true commercial model. We have roughly 20 some different reps. We are probably longer-term, starting to be working a little closer and pick up some the distributors we are working, and like we have had in the past with Germany, where we are direct.

We are mostly run out the UK as you know, a 100 plus employees overall. It is kind of up, and it is kind of down. It is definitely in the slightly positive territory year to date here, and we are all banking on hearing about the winds are back in the sails, and Europe is maybe a decent year there.

So we are expecting to ride that as well. So we are little bit better than flat, but it is rising slowly. So it is working, but it is through kind of normal commercial operations. There isn't any real sort of both coverage like what we are trying to pull off here in the US, with adding coverage in [each] regions.

In Asia, with JP there in our [main] distribution that is actually going quite well. He is busy working on, I would say streamlining our distributor partner. We had lots of channel conflict. We had, in some countries too many distributors fighting each other. There were lots of things to work on.

We are down to a distinct strategy now, in some cases a singular dedicated distributors in smaller territories. We are looking at going even direct in some other territories, like Australia as an example, which virtually everybody does. It is just too far away to manage a distributor, as it has been for most companies. India is going quite well, Korea is gong extremely well, Japan we are having a great year.

So we have multiple distributors in Japan. As you know you kind of have to. We have got the very extensive dealer network, that have their loyalty-ship to do with there, and almost in every market class, and we are working that well. JP, being a 20 plus year veteran in Asia is driving that hard, and we are working on some new plans and contracts with these people to get them more what they want, and what we want in terms of support and growth, and so will they will invest more.

That is why you see the numbers picking up. Again, I think it will not be a dramatic overnight. These are still kind of small markets, country by country, except for Japan. And it will take a combined effort of all of this together, to try to move the needle, which I think we will and our strategic plan has us over the next five years more than doubling with -- a percentage of our sales in APAC overall, including China and I think we are on track for that.

China needs to stay above 30, and year-on-year which I am hopefully we can. So far so good. APAC is one of the better stories here so far it in my early tenure with the company.

Great. And then a follow up -- Chuck, can you hear me? I am not sure that I am muted or not?

We can hear you fine.

Okay. And then in terms of the success, you were pointing to with your commercial sales people in the field in the US, has that success so far been driven more by getting deeper into key accounts and better penetrating those full of accounts, or really better covering the whole ecosystem, other customers around the key accounts, feeder accounts? So far what has happened and what do you think happens from here?

I think a little of all of the above. Let me explain a little bit. Also get back to, since we are hiring these rock stars with lots of experience, it kind of depends on what they are like, right, and their relationship. And so, it varies a little bit.

Some of them are little at better prospecting. Some are really good at high level key accounts, whale hunters, bigger deals, pulling in orders of a couple hundred thousand or more. We have a little bit of all of the above.

The original design was to take these inside salespeople that are being worked to death here locally, with $18 million account representations, and try to get the partner out there, in these major markets to work with. That has been working quite well.

So we have divided these territories between the inside professional here, with that external person, and it is a combination of breaking up the relationship with major accounts, to where they both have these relationships established. And then allowing the local person to do the prospecting portion of the workload, okay, and working hand-in-hand with support back here with the inside person, right? It is working fairly well.

I think we are maybe actually short, I think we were looking for a second portion in the Bay Area, and we may look for one in Houston. We may expand Boston. As I have said, I don't see us ever going above 10 or 12 for this model, I think it is fine.

We have to supplement this, of course, with an even better website, which we are working on. There has to be very, very quick and good access to products, with these many, many customers for this model to work. Which is why we have the Fisher agreement, is for its increased accessibility, and we are going to work on the website so we can provide that transaction capability with fewer clicks.

I will also mention a big plus with the Fisher agreement too, is just how our model works. We are not a very large company, and we are working as you know, as we told you on our website. Our level of e-commerce here is roughly a third.

And most companies like ours, you will find all of them the same way, when you are -- getting with customers on a nearly, one per customer, one researcher at a time, it is -- there is a lot of phone and fax and paper still involved in our operations. A lot of institutions, both industrial and academic, the access and use of making a transaction or purchase can vary. And having local lab stock online with systems like Fisher can provide can provide for a lot of incremental fees.

So we want to make it easy. It is called a punch out. We want to make it easy for the local researcher to, if they do not have the time, the old way picking up the catalog and figuring out what to buy, and make the phone call to order their favorite set from us, they can just now order through the punch out on the online lab stock system, and push the big blue Fisher button. It is going -- it should make it much easier to do. That is what we are counting on.

It is all about accessibility, and the fewer clicks the better. So we have got to get a way from paper and fax and phone if we can here, and that is one of our initiatives. It is progressing.

There are no further questions in queue.

(Operator Instructions )

While you guys are thinking, I want to follow up on one of questions about Europe. I will tell you that our -- Germany does remain very strong, and UK and France a little bit weaker, albeit the academic area are still soft. We have still a large pharma issue in Europe as you know it has been moving out.

Our (inaudible) systemic and small pharma and biotech customers, and it is more than mid size levels in Germany, it is related to pack in terms of our success. And I think that is kind near as what I read and what is going on over there. Let's just hope it all continues, and the UK can follow suit. So far, so good. So far is a much better year in Europe, and I expect it will continue to be.

Our next question comes from Steven with Craig-Hallum. Steven, please go ahead.

Just one follow up question. I think I heard in the financial discussion, either from Chuck or Kathy, that you said on an apples-to-apples basis, biotech gross margin was actually up. Are you referencing from a year ago period on an adjusted basis from Q1 period? I guess there is the fundamental question of did I hear you correctly, but maybe you could flesh that just out a little bit more for us?

That would be both, year over year and quarter-on-quarter. It is not a big move, but it is -- we were roughly $1 million, $2 million off in the volume that we wanted to have in expectations, and it would flow to the bottom line. I think that is where the -- any initial adjustment would be, and yet we held really well, and that is because the Bionostics was up in gross margin because of about $1 million in savings on different cost-saving programs, the FedEx deal we did and some other things.

So that has been a little bit of help. That is good. You have to do that. I am a Six Sigma trained kind of guy. As you invest for growth, you have to also do what you can on the savings side, and there is a lot of efficiencies to be done here, which we are working on.

And Kathy, may have something to add here as well.

Right. As regarding the biotech segment, the margins for the quarter ended six months were slightly up from the prior year's, and I believe also from first quarter. But again, they were just slightly.

Our next question comes from Paul with Janney Montgomery. Paul, please go ahead.

Hi, Chuck. I get the answer on the operating margin impact from the Thermo relationship, is that it is unclear at this point. I mean, my concern would be will customers bounce around on the two websites and price shop? What is to prevent that?

It will be almost nearly the same. I mean, it is just -- unless they really blowout their numbers on huge growth, there will be no noticeable change in terms of our margins through, this is my prediction. So that is our [remarks]?

In --

Again, you have got to realize that we structured a deal that gives them what they wanted terms of content, and we are not after just channel swap, right? So we are after incremental growth, and they are really incentivized on true growth.

This is much different model than us shipping a lot of goods and going into their giant automotated-driven warehousing, and we don't see a real report of where things are going to our customers. We are shipping to the customers from here. So we know where does all going. We will know what is due to us, and what is due to them.

So we are able to really, really well manage the scorecard of what they are contributing this model, and how that compensation is incurred, and it is largely based off incremental growth. If, like I said before if there is a material shift in growth from this which I don't expect, then there may be a noticeable decrease in real margin overall. But it is again, at the level we are at, it is trade-off I would love to have to be honest, for that kind of growth.

Do you think incremental margins in the future will be at 48% or higher, kind of at your current level or higher if you have incremental growth above this current level of organic?

Probably in that range, yes, I would say it is not far off. It is hard to know. We are adding a lot of new things here too, and looking at new areas. And as I have stated repeatedly, staying north of the 50% operating margins, and trying to grow back at levels we need to grow was virtually impossible.

Yes. And in the last -- and the other question was the cash per share. I think you said [$349 million]. On the long-term asset on the balance sheet, is that cash or is that ChemoCentryx? And then, and what is going to happen with ChemoCentryx?

ChemoCentryx is in a short -term available for sale investment number. The remainder of the available-for-sale are all mostly municipal bonds, that are liquid but had a lot of (inaudible).

Okay.

In terms of the ChemoCentryx, we are a closer partner than we have been in the previous few years. We have been with them a long time as you know. They have had some bumps in the road. They have had some positive bonds recently, and things are bouncing back.

We are very bullish on ChemoCentryx, with their pipeline of eight different molecules. If any one of those hits, and this is going to be a great story for them and for us with our position. After being involved for over 15 years together, the pain is mostly behind us, I don't see any reason to not just be supportive, and ride this and see where it goes.

We are very supportive. I think we are very -- I think we see success. I don't think it is this year or next year, it could be two or three years. But I -- we believe that what they are doing, and it is cool stuff I think.

And there -- (Multiple Speakers).

We don't need cash for, definitely not for this anyway. So it is a good story I think.

There are no further questions in queue.

(Operator Instructions)

We will give it a minute here. We have five more minutes, but if not, we will start winding up here.

Again, a summing it is a reasonable quarter for us, we feel we are moving a lot of parts here, changing a lot of things, that we are well under plan to our expenses. Our margins are where they are basically expect them to be. They would be a little better here, if we have the extra bit of volume we probably might get. But we are within the range of what I thought, and what we told all of you.

It is not a short-term game here, and we are looking to long-term. We are investing for the long-term, and that is the way we intend to be, to be more strategic. And anyway, thank you for calling in, listening and asking your questions. This is a number two. I promise to be back for a number three, and another quarter. Thank you.