Bio-Techne Corp (TECH) 2022 Q3 法說會逐字稿

Good morning, and welcome to the Bio-Techne Earnings Conference Call for the Third Quarter of Fiscal Year 2022. (Operator Instructions)

I would now like to turn the call over to David Clair, Bio-Techne's Senior Director, Investor Relations and Corporate Development. Please go ahead, sir.

Good morning, and thank you for joining us. On the call with me this morning are Chuck Kummeth, Chief Executive Officer; and Jim Hippel, Chief Financial Officer of Bio-Techne.

Before we begin, let me briefly cover our safe harbor statement. Some of the comments made during this conference call may be considered forward-looking statements, including beliefs and expectations about the company's future results as well as the potential impact of the COVID-19 pandemic on our operations and financial results. The company's 10-K for fiscal year 2021 identifies certain factors that could cause the company's actual results to differ materially from those projected in the forward-looking statements made during this call.

The company does not undertake to update any forward-looking statements because of any new information or future events or developments. The 10-K as well as the company's other SEC filings are available on the company's website within its Investor Relations section.

During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to most comparable GAAP measures are available in the company's press release issued earlier this morning on the Bio-Techne Corporation website at www.bio-techne.com.

I will now turn the call over to Chuck.

Thanks, Dave, and good morning, everyone. Thank you for joining us for our third quarter conference call. The Bio-Techne team once again delivered outstanding results across segments and geographies with 17% organic growth, continuing the momentum from the first half of fiscal 2022 into our third quarter. Demand from our biopharma end market remains strong, particularly in cell and gene therapy, where our workflow solutions and GMP proteins continue their fantastic growth trajectory. Other notable growth drivers in the quarter included our biologics instruments as well as our best-in-class portfolio of research reagents and assays.

Additionally, our prostate cancer test, ExoDx Prostate had a record volume quarter as the urologist offices continued the reopening process, and we gained increased mindshare in the benefits of this novel diagnostic offering. Once again, this performance was delivered with a focus on profitability, leading to a 130-basis-point sequential increase in our adjusted operating margin of 39.6%.

On the human capital front, Bio-Techne received 2 important awards during the third quarter. First, Bio-Techne was selected as one of 500 midsized companies on the Forbes 2022 list of America's Best Employers. Additionally, we were included on the Forbes 2022 list of Best Employers for Diversity. These awards are a testament to the epic culture and workplace we've built at Bio-Techne, and I am proud of the team for these achievements.

Awards and recognition like these as well as targeting employee recruitment and retention strategies are fortifying our efforts to build the team necessary to support our future growth plans.

I am pleased to report that we filled several key positions in the company during the quarter, including key business, technical, operational and commercial roles. We are still behind our original hiring plan for the year, but I'm encouraged with the progress we made in the quarter.

Given the state of the global supply chain, let me briefly discuss our operations. Once again, the team did an incredible job effectively managing our supply chain. I am pleased to report that we have had -- not had any supply chain-related issues that impact our ability to fulfill our customer orders. Also, we continue to leverage our strategic pricing model across our portfolio to combat inflationary pressures on the business. As you can see from our margin performance in the quarter, these strategies are bearing fruit and we are leveraging our value proposition to offset rising labor and other costs in the business.

Now let's discuss specifics around our trade performance this quarter, starting with our geographies and end markets. China continued with its banner year, delivering over 30% organic growth in the quarter. This is just tremendous execution by our China commercial team, especially considering the COVID-related lockdowns that took hold late in the quarter in Shanghai. As these lockdowns are still currently being enforced, it is difficult to predict what the temporary impact would be for Q4. The impact of these lockdowns to date are primarily on our recurring research reagent business that is dependent on researchers being at the bench to run experiments. In the end, our China team will persevere, just as they did in the early days of the pandemic 2 years ago when they outperformed all of their peers. And there will likely be a spike of demand when the lockdowns are over and researchers are trying to catch up on their projects. It is also important to mention that we have minimal supply chain and manufacturing exposure in China. So we anticipate any impact on the shutdowns to be isolated to this geography.

Meanwhile, our growth across the rest of Globe continue to be strong. We experienced robust growth in the U.S., where our business increased in the high teens as well as in Europe where we experienced upper single-digit organic growth. From an end market perspective, Global sales to our biopharma customers remains very strong, increasing nearly 20% for the quarter. Meanwhile, academia, markets started to improve, growing mid-single digit as the latest COVID pandemic wave started to wane, and there was more clarity on NIH funding with the federal budget in place.

Now let's discuss our growth platforms starting with the Protein Sciences segment, where we grew 16% organically in the quarter. During the quarter, we continued to further our cell and gene therapy strategy as our portfolio of proteomic reagents, technologies and analytical tools continue to deliver the cost-effective solutions needed to push these therapies forward. During the quarter, we increased the number of commercially available GMP proteins manufactured in our state-of-the-art GMP protein manufacturing facility, adding 2 high-quality lot-to-lot consistent GMP proteins with the scale and capacity to meet current and anticipated demand.

I would also like to highlight the strong performance of our cell culture portfolio, particularly from our Cultrex line of Basement Membrane Extract, BME, Matrix products, which act as scaffolds for the growth of organoid cell structures, induced pluripotent stem cell expansion and other 2D and 3D cell culture applications.

All in, our portfolio of cell and gene therapy workflow solutions increased over 40% in the quarter with both GMP proteins and cell culture specifically growing well ahead of this rate. Once again, demand from our cell and gene therapy customers created a halo effect across our portfolio, driving incremental demand of our proteomic analytical tools and spatial biology solutions. We are incredibly well positioned to benefit across our portfolio as research continues in this area and the rich funnel of these next-generation therapies progress through the regulatory approval process.

Next, I want to provide an update on Wilson Wolf. As a reminder, Wilson Wolf is a manufacturer of the GRx line of single-use devices, which are quickly becoming an industry standard for a fast, easy and cost-effective cell therapy scaling solution. In our second fiscal quarter 2022, we entered into an agreement with Wilson Wolf, where Bio-Techne can make a 20% ownership investment, followed by full acquisition of the company upon achievement of certain milestones. I'm very pleased to report that Wilson Wolf made continued progress in achieving the trailing 12-month $92 million revenue or $55 million EBITDA milestone, which will trigger our initial 20% investment. Wilson Wolf exited the quarter at a $72 million revenue run rate as they continue to execute on their growth plan and approach this important milestone.

Now let's discuss our core research-use-only or RUO proteomic reagents, including our industry-leading portfolio of RUO proteins and antibodies. Here, our growth was also fantastic with these reagents growing at a 20% in the quarter. Researchers continue to rely on our catalog of over 6,000 R&D systems branded proteins for the highest quality, bioactive and lot-to-lot-consistent proteins on the market. Our R&D Systems and Novus-branded antibodies also continue to deliver the reliable and consistent performance needed by researchers globally and are increasingly being selected as a content to enable the emerging class of next-generation proteomic technologies.

Moving on to our proteomic analytical tools, which includes our Simple Western, Simple Plex and biologic instruments as well as our leading portfolio of immunoassay solutions. Our ProteinSimple brand instruments and consumables increased mid-teens in the quarter. This growth is particularly impressive considering the prior year comparison where ProteinSimple increased over 50%. Once again, performance of our biological instrument, namely Maurice, led the way increasing over 30% for the sixth consecutive quarter. Maurice is easy-to-use, cartridge-based format, simplifies protein characterization and charge analysis delivering the ideal tool for our biopharma customers.

The Maurice results reflect ongoing traction within CRO, CDMO, as well as cell and gene therapy end markets. We believe we are taking share not only from competing systems but also converting accounts from high-performance liquid chromatography, or HPLC, where Maurice offers comparatively higher quality data as well as labor and time savings. Our Simple Western portfolio, our fully automated western blot solutions continues to penetrate the large manual Western blot market opportunity, as the reproduce (inaudible) and time savings value proposition continues to resonate within our end markets. We are also seeing building interest in the platform for applications that go beyond traditional western blotting, including cell and gene therapy, protein degradation and even the support of dose response curve.

As a reminder, we introduced the Stellar kits for our Jess Simple Western platform in January. These kits enable the detection of low abundance proteins while multiplexing -- multiple analyze within the same detection lane. In the first partial quarter since launch, Stellar Detection kits surpassed legacy Fluorescent detection kits and contributed to a record quarter for Simple Western consumables.

We continue to develop new cell and gene therapy applications for the Simple Plex or Ella multiplexing immunoassay system. For example, Bio-Techne and Cygnus Technologies is a part of Maravai LifeSciences recently announced the launch of the Simple Plex HEK 293 HCP 3G assay for automated process and purity testing on the Ella immunoassay platform. Purification of viral particles to minimize whole cell protein contaminants is a crucial part of the viral production workflow in cell and gene therapy applications. The Ella assay development roadmap remains very full with additional neurological biomarker, cell and gene therapy, bioprocessing and immuno-oncology assays in the pipeline, layer the untapped clinical opportunity onto this rich assay pipeline, we believe Ella remains in the early innings of reaching its potential.

Now let's discuss the Diagnostics and Genomics segment, where organic growth increased 19% for the quarter. Our spatial biology business, branded ACD, remains the largest spatial biology business globally as our highly sensitive biomarker identification technology with single cell detection, resolution and quantification capabilities continues to enable the transition from discovery to translational research. Spatial biology increased upper single digits in the quarter as a soft academic market and a challenging year-over-year comp weighed on performance.

Encouragingly, we made progress fortifying our North American commercial team with all our one key sales territory now filled. We augmented our commercial efforts with a full slate of conferences, including a presentation at the U.S. and Canadian Academy of Pathology or USCAP Conference as well as the presentation of 2 posters at the American Association for Cancer Research or AACR meeting, and we have a full slate of upcoming conferences, including ASGCT and AGBT.

With our sales territories largely occupied and growing presence on the conference circuit to build awareness and expectations for the academic market to improve following NIH budget clarity, we are expecting steady improvement in our spatial biology growth rates in the upcoming quarters.

Moving on to our Molecular Diagnostics division. Let's start with the significant progress our Exosome Diagnostics business delivered in the quarter. ExoDx Prostate or the EPI test benefited from increasing traffic to the physician office for initial or follow visits, which in turn drove improving diagnostic testing volumes, including PSA test, which is a prerequisite for our EPI test. This improving physician office environment, combined with our digital and traditional marketing initiatives drove over 50% year-over-year for ExoDx Prostate test volume growth as testing levels represented a quarterly record. We have several initiatives in place to build on this momentum, including renewal of our Fight Like Cal marketing campaign with Baseball Hall of Famer Cal Ripken Jr.

As a reminder, Cal Ripken Jr. took the EPI test and opted for a biopsy based on its results, enabling the discovery of his aggressive prostate cancer in its early stages. Mr. Ripken will be an active component of our live presentations at the upcoming American Urology Association Conference and our ongoing digital marketing initiatives.

During the quarter, we continued to publish data supporting the value ExoDx Prostate delivers to men in their prostate cancer journey. A publication in the World Journal of Urology demonstrated the utility of the ExoDX Prostate test to address limitations related to prostate biopsy sampling year, prostate biopsy bias as well as multifocality of the disease with a study of suggesting that the test can be used in the decision for active surveillance and enabling them to avoid unnecessary radical prostatectomy.

Separately, we announced an agreement with Thermo Fisher Scientific to exclusively complete the development and commercialize the ExoTRU kidney transplant rejection assay ExoTRU is a noninvasive, multi-gene, urine-based liquid biopsy assay that provides critical allograft information to assist clinical decision-making in managing kidney transplant patients and optimizing care for these patients.

Financial terms of the agreement were not disclosed but include payments for achieving various milestones as well as an ongoing royalty. The first milestone payment related to the successful technology transfer to Thermo Fisher Scientific was achieved in the quarter.

The legacy Asuragen portfolio, a leading carrier screening and oncology diagnostic kits, continue to gain market traction, including several evaluations of the recently launched AmplideX CFTR kit enabling broad coverage of the Gene variants Linked to cystic fibrosis.

Additionally, we have positioned the business to increase its penetration of the largely untapped European markets, adding to and leveraging our commercial presence in this geography. In addition to the geographic expansion, the Asuragen's pipeline remains full and is positioned for strong growth in the quarters and years to come.

Finally, our diagnostic reagents business continued its trend of steady growth in the quarter, the return of patients to the doctor's office is sparking demand for hematology, coagulation and clinical chemistry test, which is driving demand for our clinical controls and reagents. Improving patient office visits trends, a full pipeline and opportunities to additional share gains within our OEM partners set the stage for sustainable growth in our diagnostic reagents business going forward.

In conclusion, we are incredibly well positioned for the Proteometric evolution that is in the initial stages of unfolding with high demand for our content-rich research reagents and highly sensitive yet, easy -- simple-to-use analytical tools that move our customers' discoveries forward.

Our cell and gene therapy initiatives continue to resonate with our biopharma customers with increasing demand for our GMP proteins, cell culture media products translating into growth across our entire portfolio.

Given Wilson Wolf's current growth trajectory, the pathway to our initial 20% investment stake and eventual acquisition is accelerating. Our diagnostic strategy is gaining momentum as testing volumes continue to improve with the proven ability to find partners that can help drive our next disruptive exosome-based test forward.

I am proud of the team's Q3 accomplishments and look forward to continued execution against our long-term strategic goals.

With that, I'll hand over to Jim.

Thanks, Chuck. Starting with the overall third quarter financial performance. Adjusted EPS was a record $2.14 versus $1.81 a year ago, an increase of 19% over last year. Foreign exchange negatively impacted EPS by $0.03. GAAP EPS for the quarter was $1.48 compared to $1.12 in the prior year. Q3 revenue was $290.4 million, an increase of 19% year-over-year on a reported basis and 17% on an organic basis. Acquisitions had a favorable 3% year-over-year impact and foreign exchange translation had an unfavorable impact of 1% to revenue growth.

From a geographic perspective, China led all geographies growing over 30% followed by the U.S. increasing in the upper teens and EMEA increasing in the upper single digits for the quarter. The rest of the world grew in the mid-single digits. By end market, biopharma remained very strong, growing nearly 20%, while academia increased mid-single digits year-over-year.

Moving on to the details of the P&L. Total company adjusted gross margin was 73.2% in the quarter compared to 73% in the prior year. The increase was primarily driven by favorable business mix, partially offset by the impact of foreign exchange. Adjusted SG&A in Q3 was 26.1% of revenue compared to 25.6% in the prior year while R&D expense in Q3 was 7.5% of revenue compared to 7.0% in the prior year. The increase in SG&A and R&D was due to the acquisition of Asuragen in the fourth quarter of last year as well as investments made to support our long-term strategic growth.

The resulting adjusted operating margin for Q3 was 39.6%, a decrease of 80 basis points from the prior year period but an increase of 130 basis points over Q2. Excluding the impact of the Asuragen acquisition made last April and the impact of foreign exchange, adjusted operating margin was in line with the prior year.

Looking at our numbers below operating income. Net interest expense in Q3 was $2.2 million, decreasing $0.2 million compared to the prior year period. The decrease was due to a continued reduction of our bank debt. Our bank debt and the balance sheet as of the end of Q3 stood at $259 million. Other adjusted net operating expense was $1.1 million for the quarter compared to $4.3 million expense for the prior year, primarily reflecting the foreign exchange impact related to our cash pooling arrangements.

For GAAP reporting, other nonoperating income includes unrealized losses from our investment in ChemoCentryx.

Moving further down the P&L, our adjusted effective tax rate in Q3 was 21.2%. Turning to cash flow and return of capital, $73.1 million of cash was generated from operations in the quarter, and our net investment in capital expenditures was $15.1 million. Also during Q3, we returned capital to shareholders by a way of $60.8 million in stock buybacks and $12.5 million in dividends. We finished the quarter with 41 million average diluted shares outstanding.

Our balance sheet finished Q3 in a very strong position with $231.2 million in cash and short-term available for sale investments, keeping our net debt position negligible.

Next, I'll discuss the performance of our reporting segments, starting with the Protein Sciences segment. Q3 reported sales were $213.2 million with reported revenue increasing 15%. Organic growth for this segment was 16% with foreign exchange having an unfavorable impact of 1%. Within this segment, the growth was very broad-based in nearly all reagent assay and instrument platforms. As Chuck mentioned, cell and gene therapy increased over 40%, our RUO proteomics research reagents grew nearly 20% and our ProteinSimple-branded instruments and consumables increased in the mid-teens on very tough comps. Operating margin for the Protein Sciences segment was 45.4%, a decrease of 250 basis points year-over-year with favorable volume leverage more than offset by strategic investments to support future growth and, to a lesser extent, the impact of foreign exchange.

Turning to the Diagnostics and Genomics segment. Q3 reported sales were $77.7 million, with reported revenue increasing 34%. Organic growth for this segment was 19%, and Asuragen acquisition from last year contributed 15% to growth. Within this segment, the Diagnostics reagents business increased mid-single digits and the ACD-branded spatial biology portfolio delivered upper single-digit growth in the quarter. With increased clarity on academic funding and a sales force that is approaching fully staffed, we anticipate improved growth rates in our Spatial Biology segment going forward.

For Exosome Diagnostics revenue growth accelerated as prostate cancer test counts increased over 50% compared to the prior year period, representing a quarterly test volume record. We are encouraged with the volume trend and anticipate continued improvement as our marketing strategy and value proposition resonates with physicians and patients.

As Chuck mentioned, we earned an initial milestone payment related to the ExoTRU kidney rejection technology transfer to Thermo Fisher Scientific, which the financial details of our agreement were not disclosed.

Moving on to the Diagnostics and Genomics segment. Operating margin at 25% -- 25.0%. The segment's operating margin increased 710 basis points compared to the prior year. The increase reflects the favorable impact of volume leverage and product mix, including the milestone payment for ExoTRU.

In summary, the growth momentum across our business remains consistently strong. Using fiscal year '19 as a pre-COVID baseline, the company's revenue growth CAGR, excluding the impact of acquisitions, FX and milestone payments has been in the low to mid-teens every quarter for the past 7.

As Chuck stated in his closing comments, we believe that we are still in the early stages -- or the initial stages of a proteomics revolution that is ahead of us in the life sciences industry.

In our best-in-class research tools and cell and gene therapy enablers are positioned to be leaders in this revolution for years to come. Layer onto this, an emerging Diagnostics and Genomics portfolio that remains in the early stages of realizing its true potential, and we are incredibly well positioned to deliver on our long-term strategic growth objectives.

That concludes my prepared comments. And with that, I'll turn the call back over to Maria to open the line for questions.

(Operator Instructions)

Our first question comes from Dan Arias with Stifel.

Chuck, can you just talk a little bit more about the scale-up in GMP proteins? Where is demand highest? How is it evolving? And then what you need to do on your end at the end of the year, into the end of the year? And then for the outlook there, you've talked pretty consistently about that piece of the business being on this trajectory where revenues can double for a few years. You're tracking ahead of the initial revenue expectations there. So does the outlook for the doubling still hold on what looks like it will be just a higher base for 2022?

Sure. Well, we launched 2 new proteins, which is still only 2, but we only had 2 or 3 before that. So it's a big percentage increase. These, of course, are -- it's a short catalog for doing proteins for GMP, as you know. We have 40-ish or so on the market total, and most companies, our competitors have less than a dozen. So very different RUO. The difference, of course, is we can make them in the -- at the gram level even. So lots and lots at a very, very high-quality state and very lot-to-lot consistent.

The growth rate while under 100% this quarter, we were over 40% for the category, and we were just under 100% for proteins this quarter. We've been above 100% every quarter before. We'll end the year over 100% probably, the way it looks. And are right around 100 at the very least. I think that's pretty safe. And we told you to be about that. And this should be about that all year. And next year should be the same again.

From that point on, we hope to accelerate as we get into more and more down the road with more clinics, we get more and more pull-through with G-Rex, with Wilson Wolf who has a lot more customers than we do and is involved in a lot more clinicals. And as we work towards, what we call the Holy Grail area, it's -- when we can -- we'll be doing media at some point here and along with a very, very high-quality version of our proteins that can be supplied within G-Rex to the customer in a sterile environment. So consider it all like self enclosed by a closed loop, which should be the only one in the market that can do that, we think. That's a year or so away, but that's what we're after, and that should help accelerate even more growth.

On top of all that, this is all cell and gene therapy, but we're also seeing explosive growth for our GMP proteins in regenerative medicine as well. So we've got a lot of customers that are scaling up around regenerative, and that's equally exciting to us. And it's another large area we don't talk much about but it's growing so much now, and we've got so much more activity we're probably going to need to start talking about it. So we've got additional growth levers and that might help explain why we've been well north of 100% growth all year and for the last couple of years, to be honest. I think that addresses most of what you said.

Yes. It does. And then maybe just on ACD, it looks like there was some sequential deceleration in that business from 2Q levels and you're averaging something in, I guess, like the high singles for the year, and that's down from at least in my model, like 30% plus in 2021. So is the hiring that you did really the key there and once -- now that you have the sales reps in and presumably functional in the market, what do you think the run rate growth can be like going forward there?

Well, the other 2 components around from headcount, of course, are the comp -- super high comp from last year as well as the academic reopening. So everything is coming together at once, along with a full sales force. Again, we're only down to 1, but even 1 is important. This is not a huge sales force, but we're back to, would say, full strength, and it will come on strong now. We should be back to double-digit or higher here, I think, this quarter. We were pretty close to double digit this quarter anyway, but we're getting there.

It's pretty key now that we've got funding kind of out there and open now for academia. That comeback is going to happen. The comps get much easier going forward. That's also a given -- and while we are pretty strong in the U.S., it was softer in Europe and Europe is kind of lumpy back and forth. And the way we see that picking up as well. We're also positioning some more support and some more help in Europe to help them. And all bodes well, but we still see this as a 15% to 20% growth platform going forward, and we're in the early innings.

So we have a new team too, a high-level new team. So all the way to the VP running the division, head of R&D is fairly new, and they're just hitting their stride now already. So that's also going to help.

Our next question comes from Puneet Souda with SVB Securities.

Chuck, congrats on the solid print here. First one, maybe for you and Jim both, when we look at the top line here, you're obviously seeing incredible growth here in the exosome diagnostics with the recovery, Protein segment continues to do well. You mentioned RUO protein, cell and gene therapy, Maurice, Simple Plex, and I mean just across the board, portfolio seems to be working. I mean I hear you on the comps, but just help us understand how should we be thinking about the sort of the top line as we go into fiscal year 2023. Is mid-teens still the right way to sort of think about this, given the acceleration here and potential pickup from cell and gene therapy as well?

Yes, all year. As you know, we don't give quarterly guidance. We give annual targets, and we've given targets all year that we should be in the mid-teens for the year. And I think we're close enough. You guys can see we're going to be in that range for sure.

Real question is, can it be '17 to '19, I think we have to wait on a couple of things. China might have a minor impact in Q4, Q4, but it wouldn't hurt any more after that.

Going to next year, it's mid-teens and up, and I think the -- it comes off first, a strong layer of momentum of our reagents. I mean we're a 20% growth in our proteins and antibodies. We're taking share everywhere. We're in double-digit growth in our assays. We're at over 30% growth in our Luminex line. We're #2 in Luminex now. Who would have ever thought that would have happened.

So we're knocking out of the park on the core. And as long as that core stays, with momentum we're seeing, which we do, then it's a mid-teens and up. And then the accelerator from there, of course, is how do these smaller segments, how do they -- as they scale and they've got the higher growth rates, they will impact the overall portfolio.

So number one, again, cell and gene therapy on a $70 million run rate growing at 30%, 40% next year as a category. That's going to start having the bigger impact. ExoDX is getting really interesting now. So we had a record quarter on tests. We're already seeing a big impact with the Cal Ripken campaign. We didn't really get a fair shake on that being we went into that right in the mouth of the pandemic, and it's been amazing -- the interest. I can't wait to get to AU myself and meet Cal, we're going to do some things together there. And we're expecting a big year going forward.

And ExoTRU, we're working on the next thing now because we've got a great partner. We worked hard. This partner has actually blown our socks off. They're almost doing a great job. They're ahead of our schedule, pushing us. They got the track transfer done quicker than we thought they would. They paid us. It was a good number. We didn't lay it out. We've got more deals to do. So we don't want to talk about those numbers, but we had solid results without the extra payment to be honest. Anyway, so I think that's the future. I think it's all about staying with the momentum in the core, solid execution, which we're doing. What's also helping this whole baseline momentum on our core is our digital backbone, and it just keeps getting better and better.

We've got our one Bio-Techne site up and running. We had something like 80%, 90% attraction rate to that website as we start migrating, a lot of smaller sites into the one, so we can have a one-stop shopping experience for customers, which they've been asking for years. That's all coming together great. We are doing a great job measuring our customers online and helping them with their purchasing decisions in real time, and that's working.

Our AdWords spend continues to grow and continues to give us fabulous payback. So really, all parts of running the company, along with the innovation side are really doing well.

As you know, we have a TECH council that we put all these top scientists of all our divisions together AdWords every month, and working on new platforms together and there is an incredible pipeline. You know that we do an extensive prioritization process here. We just concluded that process. It takes us 3 or 4 months. It helps us roll into our budget plan for next year. And we've analyzed 400 different work streams in this company, which we knew figured out where to draw the line, and we've never had a bigger pipeline of new-to-the-world innovation in this past year. Things are -- we're reaching the size of a company where we're really getting a good collaborative impact across the company. So we're pretty jazzed here.

That's super helpful, Chuck. Jim, on the op margin, obviously, really strong in the quarter, almost 40%. Just wanted to understand in terms of near-term China hiring and other initiatives sort of ongoing, sort of, how should we think about the sustainability of this op margin? And just maybe take us through the puts and takes there in the near term and sort of if you could provide anything on FY '23? And how should we think about op margin sort of longer term? I appreciate it.

Yes. So on the real near term, I mean, we're not only we're coming off of our guidance and target that we started the year with, which is that we'd end the year at the same -- roughly the same adjusted operating margin that we ended fiscal year '21, and we're still on track to do that.

Now I understand that, that would mean from Q3, a sequential decline in operating margin. But however, we are making improvements, vast improvements in our hiring, which we talked about. And the ExoTRU, that piece of it was a bit of a margin lift that won't reoccur next quarter. So we're basically right on track to do as we said we would do in terms of how we expect to finish this year from a margin perspective, FX will be a bit more of a headwind in Q4 than even it was in Q3, but I think we'll overcome that to still hit our year-over-year roughly flat operating margin for Q4.

Looking ahead, obviously, we will give more clarity next quarter as we finish up our operating plans for next year. But it's the same message we've been saying all along, which is that, we expect to be there to be incremental -- slight but incremental margin improvement over the course of the next 4 or 5 years of our strategic plan, and we expect that to start next year as we -- continue next year.

Our next question is from Jacob Johnson with Stephens.

Maybe just, Chuck, I think you touched on it a little bit, but just to flesh out the point. Just on the academic end market, it sounds like it picked up a little bit this quarter and with NIH funding finalized kind of hopefully, it improves from here. And maybe I'm answering the question for you, but what's your outlook for that end market as we think about the next couple of quarters?

Yes. Well, the clarity around NIH funding didn't happen quite in time to really boost U.S. a whole lot, and we were ending up in low single digits. Europe was in teens actually. So the net-net was mid, overall. So that's why I say, looking forward to see the bigger lift in the U.S. going forward this quarter. And if Europe stays in the mid-teens, we'd be thrilled. So I think it's a good story going forward. It's finally starting to break loose. And again, the momentum is there overall. We've got great platforms that have a lot of interest from academia. So that's just -- that's always a fundamental. You've got to have new-to-the-world stuff that gets them excited to do -- go after new academic frontiers, which we continually do in this company. So we have no doubts. We will be fine.

Okay. And then maybe as a follow-up, I appreciate the details on the Wilson Wolf performance in the quarter. If my math is right, it sounds like, if they keep going the way they're going, the kind of Phase 1, 20% ownership, maybe that could happen in the next year. Can you just talk about the timing of owning a piece of that and then owning the entire company?

Yes. The original plan was to be kind of really Q3 next year, but we're ahead of schedule. There's a possibility it could be up this calendar year. I mean, they're on a $72 million run rate now, and they're literally getting record-breaking sales days like every week. So it's hard to say. I too am trying to pin down John Wilson, when it will be, and he's hard to pin down. But there's nothing but good news here, and they're moving towards putting together strong financial execution, so we're seeing all their numbers. We're helping out operationally. So really, the integration has kind of already occurred to be honest, and the teams has worked well together for a couple of years and some now with scale ready anyway. So it's -- so we have a good viewport in how it's coming. And I don't think it will be a year. I think it will be under a year from now.

Our next question comes from Alex Nowak with Craig Hallum.

We talked a little bit about this on the Diagnostics business, but I'd say Diagnostics had a pretty big step up in growth and profitability at least consistent with my expectations. So could you just be a bit more granular on what drove the benefit? ACD sounds good, but consistent. Exosome Diagnostics is doing very well. So it's at the base [smaller there]. So -- and there might have been a onetime item from Thermo Fisher, if I heard you correctly. So just a good -- what's a good revenue run rate here and a good operating margin to assume going forward?

Yes. We aren't breaking out the revenue of that division. It's highly competitive. We've got 2 or 3 competitors, I'm sure, even listening right now. So we don't get into that. But we have talked about the test rates. The 50% up is real. It's still -- largely, we're being paid via Medicare. We're still working the private payer, but we're getting better. It's -- we're very close to going from cash to accrual, that's also going to help, probably next quarter as our goal, maybe, but we'll see. But we're getting there. And we only have a whole new team, Asuragen taking the helm there, especially, commercially. And it's really work wonders. We are seeing record test days again, this area too or pre-pandemic every week. So...

Got it. Understood. And then, Chuck, you just -- it sounds like in the prepared remarks, you mentioned inflation but also the ability to push through price increases. So did I hear you correctly that you are, in fact, pushing some price increases through on the core kits and reagents business? And then just how much headroom do you have there before you worry about competition?

Well, net-net, I always been big on price. It's just in my DNA, and we've put in place processes and structure here years ago, and went after kind of an annual 1% net year kind of target, and we're well above that this year. And we had to be focused on. Obviously, costs are going up, but we've got wage inflation to cover. .

And as Jim pointed out in his numbers, we more than covered what we need to cover with price to give us a strong margins. I don't think there's an upside beyond the steady state we're at right now. But if inflation continues to happen, well, then we'll continue to raise prices like everybody else. We've offset a lot as to with efficiencies and productivity as well. It just can't be -- we can't pass everything on, but there's been a good mix, and we've been doing really well with it -- well north of the 1%, probably 2-ish or better.

Our next question comes from Catherine Schultz with Baird.

I guess, first on China, any way to help us think about the magnitude of the impact of lockdowns for your fiscal fourth quarter? What are you seeing now from customers? And how do you expect that to unfold over the next couple of months?

Yes. We've had a few meetings with our team, obviously, and they're actually very bullish about this quarter yet. They were the same way when we look at the pandemic and China was first to kind of stayed under the jaws of that. And we are all very concerned and then they came roaring back the next quarter beyond any of our belief. And we were -- we outpaced all of our peers, I believe, back then. We expect the same. There'll be -- they may be shut down right now in a lot of sites, but the demand will be pent up. It doesn't affect anything but run rate, reagents. I mean the instruments and stuff, and there's no issue. The orders are there, the bookings are there. We're stacking up bookings right now, and we've got a lot of orders to fulfill once they unlock.

I know there is petitions to the government to be in the first wave of companies that can come out of lockdown. I know we're on that list, along with many of our peers in our industry because we're all considered highly valuable to the economy there and so they're [entertained] by the government. They literally can't do research there if they don't have R&D systems-based proteins. So we'll be ready to go. And I can't imagine this being more than a one quarter blip. And I can't imagine it being more than -- it's hard to even say what the material impact would be. It may be nothing it maybe a couple of points. We don't know enough yet.

Now if the lockdown continues and goes in another quarter or 2, then I think we'll have to have more discussion. But right now, we're not seeing any of that. No one is predicting any of that. The government there seems to be working very hard of trying to unlock even sections of the city, institution-by-institution, if it comes to that. So they really are engaged with the private and the public sectors together there. It appears to us and from our team's point of view. So I think everyone is going to have an impact. But in terms of looking at who has at least more impact that we'll be into the top of that list like usual.

Okay. Got it. And then on the Thermo ExoTRU partnership, what are they doing from a development standpoint for that test? And do you have a sense for when we could see Medicare coverage?

Yes. Well, they'll take it through there, Mac. They'll finish and do another study. We have one off there. We've got a great paper with good data, but they'll want to beef it up with another outcome dataset, and they'll use that to try and get their approval through with their Mac. We have kind of roughed that obviously, you've got a precedent out there in their jurisdiction already. So it's going to be a lot easier process to get qualified than it would be for us going through NGS. So we think it shaves a year off commercialization, if we were going to do it ourselves.

Along with that, they've got a juggernaut of a business unit with that division in Thermo Fisher with a channel, sales force, technical team and regulatory army, everybody -- they're all roaring to go, and they're -- like I said, they're pushing us. So this is fantastic. I think it's roughly a year from now, maybe if we're guessing, I don't know. They'll go as fast as they can. And whatever they do, it will beat us by long and strong ways, I'm sure. It allows us to work on the next one. So we're already working on a couple more. And whether we partner with them or somebody else or do it ourselves remains to be seen. I know that Thermo has 2 other organ rejection tests they'd like us to work on for them. So the pipeline is growing. We have more projects than we have people to work on.

Our next question comes from Patrick Donnelly with Citi.

Chuck, maybe just on Europe. You put up another kind of nice high single digits there. any change in demand from what's happening there on the geopolitical side, any shift in funding or anything that you're seeing on the academic side? Just wondering kind of what the outlook is on the Europe piece.

No, it's been -- Europe is Europe. You get one bad year if you get 2 good ones, no matter what goes on. And it is country-by-country, that's Europe as well. I think on the shift coming out of Brexit, we're working on opening another warehouse site, an export site out of Ireland, which is going to help us with the Mainland. We have pushed employees out of the U.K. because of Brexit back into their home countries. So we have now operating offices in Germany, Italy and France, and we're beefing up all those sites. We're probably the strongest out of Italy because recently we did an acquisition there with our largest distributor in Europe at the time a few years ago. The leadership is solid. We're bringing in more. We have probably tripled in size since I've been here and getting to a bit of a tipping point there, in general.

Funding is pretty stable. Execution, I think, is issue for us, especially in things like spatial biology. And no issue, I don't think on our core reagents and assays, I think it's just steady as she goes. It's another reason we've been so strong overall as a company. Europe has been very stable there. I'd say instrumentation, we probably are a little behind there compared to the U.S., and there's probably some upside there. As you know, that selling proposition is highly technical, and there's one place we're beefing up because you have to have FASs out in the field along with your sales reps and work it that way, longer sales cycle, too, of course. And -- but that's kind of where we're focused on, and what we're trying to improve situation. It's been double digit this year. It's been more mid- to high single digit. I think the next year, hopefully get back to good solid double digit. We'll see it will come down to execution more than just the markets I think. I think the markets are there.

Okay. That's helpful. And maybe on the capital allocation side, obviously, we'll keep an eye on, but can you just talk about general capacity outside of that appetite, what the pipeline looks like for you guys, priorities on that front?

Well, hang tight, we're always working deals and they range from small to midsize. We don't really have any monstrous things going on. I think the whole world is kind of waiting on a new valuation level before things are going to process. The IP -- things that are helping the IPO front is kind of dead. So there's probably more interest at the private level and smaller company founders trying to exit. So we're hopeful. We're still looking at the same kinds of things. Things in cell and gene therapy, cell sorting, other areas like that. There's -- there are 4 or 5 categories we're very interested in. We have, as Jim pointed out, we're about net debt 0. So we've got capacity and then some. We have an [LLC] that's still pretty rich for us to go into, should we want to. And it comes down to finding the targets and getting at the right prices. So we have a decent ROIC with them. So -- but it has not -- it's as good. It's not gotten any worse. I mean, our pipeline is as full as ever and we're pretty active right now. So we'll see.

Our next question is with Paul Knight from KeyBanc.

Chuck, how -- did you get pricing put through in Q1? Or do we see more pricing hit in the subsequent quarters?

Well, like everybody, you've got -- you got pricing on a catalog where you can do what you want. And then you've got a lot of OEM business and supply agreements, you've got to hit certain calendar dates and there's usually an annual event. We hit a lot of those in January 1 and took advantage as best we could. We'll probably be able to do some more come July 1.

In the meantime, on the run rate side of our business, we're always pricing and repricing as we go. As you know, we've got a lot of products with -- we're the only ones in the world and so we can do what we want. And so we have a little more flexibility there than some of the areas where we're more of a commodity where we have to compete, and we have to fight because we have to be a full catalog.

So it's always a complicated balanced portfolio kind of thing. And like I said in the past, we've kind of shot for a 1% net kind of year on year this year. It's probably double that we're shooting for. And so far so good. We're doing -- the team is doing pretty well.

I got to pay for all these midyear wage increases and the higher annual merit rate features that's coming our way. Areas like IT and others are -- we're not talking about 10%, 20% pricing wage increases. It can be as much as 50%.

So it's an interesting time for the war and talent. And so -- but I'm proud of the team and the finance team, in particular. And the marketing teams, they've really done well with this, and you can see by our results, we're covering it and then some.

And then, Chuck, a common discussion right now in the market is, of course, around early-stage biotechnology funding. Do you see that? Or do you see that rolling out as a risk in the future here?

We get asked that a lot. And quite frankly, we're baffled. So we're not seeing -- if anything, it's a strong area for us. So no issue. You know where it's coming from.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would now like to turn the call back over to Chuck for closing remarks.

Well, thanks, everybody, for participating. It was a great quarter, 2 quarters in a row for us at 17%. We've got a good quarter yet to come here and finishing off an outstanding year, and we think we're on track with our strategic plan and look forward to telling you more about that next quarter. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.