VIVO (2020 - Q3)

Ladies and gentlemen, thank you for standing by, and welcome to the Meridian Bioscience Fiscal Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to Charlie Wood, Vice President of Investor Relations. Thank you. Please go ahead, sir. Charlie

Thank you, Shelby. Good morning, and welcome to Meridian's fiscal 2020 third quarter earnings call. With me are Jack Kenny, Chief Executive Officer; and Bryan Baldasare, Chief Financial Officer. Please note that our SEC filings, earnings release and slides to accompany this call are available on our Web site at investor.meridianbioscience.com. We will post a copy of these prepared remarks after the call. With regards to our calendar, Jack and Bryan will be participating in the H.C. Wainwright Annual Global Investment Conference in September. The details of that event will be posted to our Web site as they are finalized. Finally, our Q4 and full year fiscal 2020 earnings call is currently scheduled for Friday, November 13, 2020. Before I begin today, let me remind you that the presentation and the company's remarks include forward-looking statements. Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond the company's control, including risks and uncertainties described from time to time in the company's SEC filings. The company's results may differ materially from those projected, and note in particular that these forward-looking statements may be affected by risks related to the COVID-19 pandemic. Meridian makes these statements as of today, August 7, 2020, and undertakes no obligation to publicly update them. Additionally, throughout this presentation, we refer to non-GAAP financial measures, specifically operating expenses, operating income, operating margin, net earnings and diluted earnings per share, each on an adjusted basis. A reconciliation of these non-GAAP financial measures with the most directly comparable GAAP measures and other related discussion are included in our earnings release. And now, I'd like to turn the call over to Jack.

Thanks, Charlie. Q3 was no doubt the most remarkable quarter in our company’s history. In the midst of an unprecedented global health crisis, the diversification of our Meridian business enabled our record setting performance. We were successful in both keeping our employees safe and in delivering flawlessly for our customers, which was our goal heading into this quarter. As anticipated, Diagnostics had its momentum stagnate as a result of the pandemic, with demand at 65% of the same period last year. Meanwhile, demand for our COVID‐19 related raw materials contributed to Life Science delivering revenue in Q3 nearly as high as all of last fiscal year. This balance has allowed us to continue investing in all parts of our business, advancing our strategy to position the company well for when the world emerges from the shadow of this challenging time. While clinical trials were halted for much of the quarter, our R&D teams continued to advance new product development initiatives. The Revogene COVID‐19 assay achieved design lock and has moved into late‐stage development in preparation for a downstream clinical study. The team remains on track to submit for EUA in early Q1 of fiscal 21, in advance of the upcoming respiratory season. Development on the GI panel has completed, now entering the validation phase and the start of clinical trials. On Curian, C. diff clinical trial enrollment started increasing toward the end of Q3 and is gaining momentum. We have begun clinical trials for Campylobacter and started feasibility work on the latest assay added to the pipeline, a combination assay for Strep pneumo and Legionella. We closed the Exalenz transaction at the end of April and our integration efforts are well underway. Operational leadership from Exalenz remains in place, and we have completed the integration of two commercial teams under our U.S. based sales leadership. While the limitations on international travel are challenging, the teams are working well together virtually, including collaborating with the broader Meridian executive team as part of our annual strategic planning process. Our commercial team adapted to the new normal, hosting BreathID training sessions entirely online, and laid the foundation for new virtual sales strategies. Curian received the CE Mark in June, and the platform was officially launched with the first placement. The team also placed the first BreathID Smart System, which received FDA clearance in March. Engagement with our customers improved throughout the quarter, one example being the award and execution of a new molecular agreement with a national group purchasing organization, adding Revogene and its current FDA‐cleared assays. Life Science continues to outperform our expectations. As expected, demand for molecular products peaked in the quarter and demand for our key components used in antibody tests, SARS‐CoV‐2 antigens, exploded in the quarter, as customers included our products in their EUA and CE Marked assays. Subsequent to the end of the quarter, we launched a high sensitivity monoclonal antibody pair that can be used by diagnostics manufacturers to develop the much‐needed rapid antigen tests for COVID‐19. While still early in the validation phase with dozens of our customers, this product could offset some of the expected near-term decline in the demand for the other products while our customers work through their inventory. Now I will hand the call over to Bryan to talk more about the financials for the quarter.

Thank you, Jack. As we reported earlier today, Meridian had the best quarter in the company’s history with consolidated revenues of 85 million, up 75% from 48 million in the third quarter of fiscal 2019. Excluding the impact of foreign currency exchange rate changes, revenues were up 76%. This was record revenue for any fiscal quarter, driven by Life Science, which also delivered record quarterly revenue. Gross profit margin was 66% in the quarter, up from 58% in the third quarter of last year. Similar to last quarter, this is the blend of a dramatic increase in Life Science gross margin and a reduction in Diagnostics gross margin, which I will discuss further in the segment review. On an adjusted, or non‐GAAP basis, third quarter operating income was 30 million with a margin of 36%. Adjusted operating expenses were 25 million, up $6 million year‐over‐year. Also, on an adjusted basis, non‐GAAP net earnings were 24 million and non‐GAAP diluted EPS was $0.55. The year‐over‐year increase in operating expenses includes 2 million in cash incentive comp, reflecting better performance relative to plan at this stage of the year versus the prior year. Additionally, we spent an incremental 2 million in R&D, primarily on new product development and clinical trials and experienced an increase of 1 million in purchase accounting amortization from the acquisition of GenePOC late in the third quarter of fiscal 2019 and the acquisition of Exalenz, which closed this quarter. On a GAAP basis, operating income was 35 million with operating expenses of 21 million. In addition to the aforementioned operating expense drivers, GAAP operating expenses were impacted favorably by a reduction in the contingent consideration obligation for the acquisition of GenePOC of 6 million. This adjustment reflects an expected agreement with the former GenePOC shareholders regarding milestone payments that were impacted by the pandemic. The contingent consideration obligation reduction is partially offset by acquisition-related expenses of 2 million associated with the acquisition of Exalenz that closed in the quarter. GAAP net earnings were 28 million and GAAP diluted EPS was $0.64. Now let’s look at the details of our two operating segments. In Diagnostics, revenues were 22 million, down almost 35% year‐over‐year, with no impact from FX. This decline was primarily attributable to softness in demand across all of our products as a result of stay‐at‐home orders around the globe impacting non‐critical care diagnostic testing. Ultimately, the impact was not quite as bad as our expectations, with our lead products rebounding faster than expected late in the quarter. While demand is rebounding, exiting the quarter, we were still experiencing significant headwinds to demand in most products. BreathID products, acquired with Exalenz, contributed over 1 million in the quarter. In our financials, revenues from BreathID and its H. pylori assay are categorized by platform with non-molecular assays and by disease state with gastrointestinal assays. Gross profit margin for the segment was 52%, down dramatically from 61% in the same quarter last year. The year‐over‐year decrease was driven by lower sales volumes and also affected by the continued pricing pressure on our higher margin H. pylori stool antigen products, which we have mentioned in prior quarters. Diagnostics suffered an operating loss on an adjusted basis of 7 million as we continued to invest in new product development and commercial excellence programs despite the lower sales levels. Diagnostics adjusted operating expenses for the quarter were up 5 million year‐over‐year as a result of planned increases in spending on new product development and clinical trials, costs absorbed from the acquisition of Exalenz, and an increase in intangible asset amortization from both acquisitions. Progress on clinical trials and related product development began to resume late in the quarter, but this spending was still significantly lower than expected. Our Life Science segment recognized revenues of 63 million, delivering nearly as much revenue in the quarter as it delivered in the entirety of fiscal 2019. This performance exceeded our expectations due to robust demand for enzyme mixes used in COVID‐19 PCR tests and the SARS‐Cov‐2 antigens used in high volume antibody tests. We estimate that increased revenue from the pandemic was 48 million, split 32 million for molecular products and 16 million for immuno products. As expected, we saw molecular revenues peak in the early part of the quarter. Gross profit margin exceeded 70% in the quarter, up from 52% in Q3 of last year. This was the result of continued benefit from the large batch sizes for our molecular products, which, as we stated last quarter, does not require a linear increase in cost of goods. Adjusted operating income was 40 million, a margin of almost 64%, demonstrating the leverage this business brings when operating at such a large scale. Turning to the balance sheet. As of June 30, we had 63 million in cash and borrowing capacity of 61 million under our line of credit. During the quarter, we entered into an interest rate swap transaction to fix an additional 25 million of our borrowing under the revolver at 2.02%. Combined with the interest rate swaps already in place, 50 million of the balance outstanding is now fixed at a blended rate of 2.16% for the term of the revolver. Turning to guidance. We had an exceptional quarter, exceeding our expectations on a number of fronts. As a result of that performance, we are raising our guidance for the year. We now expect consolidated net revenue for fiscal 2020 to be between 245 million and 250 million, which implies Q4 revenue of 55 million to 60 million. As we mentioned last quarter, we expect continued demand for our Life Science products to be higher than normal, but lower than Q3. Our guidance assumes COVID‐19 related sales of 12 million to 15 million in the fourth quarter, bringing the total impact for the year to 65 million to 68 million. This contributes to full year revenues for Life Science between 127 million and 130 million and implies revenue in Q4 of 29 million to 32 million. Concern about supply chains led a number of our customers to secure more inventory than usual, contributing to the record demand in Q3. That, combined with the slower than expected ramp of antibody testing, will result in lower demand in Q4, as they work through the inventory, pushing future demand into fiscal '21. This guidance includes a very limited contribution in sales from our new SARS‐CoV‐2 antibody pairs, used in rapid antigen tests. While there are dozens of customers in the validation phase, it is unclear if any will complete their development in time to place any bulk orders in the quarter. We expect revenue for the Diagnostics business to be between 118 million to 120 million for the full year, which implies 27 million to 29 million in Q4. This assumes that diagnostic testing continues to rebound, but still seeing headwinds at roughly 80% of normal volumes. This slight reduction from our prior guidance range reflects the loss of revenue we were expecting from the COVID‐19 antibody test partially offset slightly by more favorable expectations on the rebound of our core Diagnostics business. You should expect that gross profit margin will start to revert back towards normal levels, but still with higher margins for Life Science offset by lower margins for Diagnostics. We expect adjusted operating margin for the year of between 22% and 23% and adjusted diluted EPS of $1.01 to $1.05. Based on our year‐to‐date results, this implies adjusted operating margin for the quarter of between 13% and 16% and adjusted diluted EPS of $0.12 to $0.16. In our calculation of diluted EPS, we are using 42.8 million shares for Q4 and 42.2 million shares for the full year fiscal year '20. Also of note in this guidance is the inclusion of 3 million in R&D spend expected in Q4 as spending on clinical trials continues to pick‐up throughout the quarter. This guidance reflects our current visibility into market conditions and customer order patterns for our products, and our current assumptions about the impacts from the resurgence of COVID‐19 infections in the U.S. and around the globe. And now I will hand the call back over to Jack to offer some final thoughts.

Thanks, Bryan. For many companies in the healthcare industry without COVID‐19 specific products, the June quarter was a real challenge. The results of our Diagnostics segment in the quarter suggest that should have been the case for Meridian as well, but the strength of our diversified business shined through and resulted in the best quarter of our 40-plus-year history. We are trying to maximize our shots on goal during this pandemic. It began with our molecular reagents which are now included in more than 35 assays. We then launched the raw materials necessary for COVID‐19 antibody tests and those are now included in over 10 assays. We plan to continue increasing the number of shots on goal through the addition of the antibody pairs used in COVID‐19 rapid antigen tests and the introduction of our own diagnostic tests. We have the opportunity to benefit when any of these assays see strong market demand, giving us scale and geographic reach beyond what we would be capable of otherwise. However, not all of these shots will score. We planned to bring an antibody test to market through a partner, but that partner voluntarily withdrew its EUA application in July and we no longer have plans to sell their kits in the U.S. In parallel, we have been looking for another partner to bring COVID‐19 rapid antigen test to market and have recently signed an agreement to do so. The test is CE Marked and we are in the process of assisting this new partner in submitting their application for EUA and translating the package insert for distribution in Europe. We will initially sell this test under their brand in Europe and expect to switch to a Meridian private label version upon EUA approval. We anticipate submission to the FDA towards the end of this quarter. So far these shots on goal have delivered great results, more than offsetting the other market headwinds from this pandemic. Our financial position remains strong, enabling us to continue to invest in the business both for the near‐term impact and long‐term growth. The COVID‐19 assay on the Revogene and partner immunoassays, coupled with our Life Science reagents, should position us well into fiscal 21. With that, Shelby, let’s open it up now for any questions that they may have.

[Operator Instructions]. Your first question comes from Andrew Brackmann of William Blair.

Hi, Andrew. How you’re doing?

Good, Jack. How are you?

Doing great.

Thanks for taking the questions. So I guess first, I’d like to start on the guidance for the fourth quarter, mainly on the COVID piece on the Life Science segment. I know you said you’re customers are working through some inventory there, but can you give us maybe an idea of how much inventory is still in the channel here? And then, what are your customers telling you about their burn rate through that inventory and any potential reordering in the back half of the year?

I’ll start, Bryan, and you can wrap broadly. So, Andrew, as the quarter was going, we didn’t know that we had customers – if you remember when this was all taking off in the spring, there was a bit of pandemonium where everybody was trying to secure whatever supplies that they could. And so we saw immense demand, especially for the molecular products in that April, May timeframe. And we were able to scale up and to meet the demand. And we knew that it was several months worth of inventory for these types of customers, which is part of the reason why we said, as we were doing the April call, that we would expect the Q3 to be bigger than Q4. And so that happened exactly as we had thought. The thing that happened a little bit different was that the antibody testing, if you remember in May, June timeframe, the diagnostic companies were scrambling to try to be able to build millions of antibody tests per month. And we were able to supply those customers. We had anticipated the antibody demand would be in Q3, but quite frankly a lot of it in Q4 that would ramp up in later Q3 and be in Q4. There was such huge demand upfront from those diagnostic companies. A lot of that demand came into Q3. And so that is what really pushed it where we saw some more of that coming in Q4. Both on the molecular front and the immunoassay front, on the antibody front that you have inventory, we’re starting to see customers on a molecular front start to reengage to order again, but it’s not in the same crazy environment where they just want to do it. They have a better understanding of kind of the supply that they want going forward. So we are starting to have customers reengage with us and that’s starting to be the case. We’re optimistic that we’ll see orders here in Q4, but quite frankly it will continue on into Q1 assuming the pandemic goes the direction I think everybody sees it going. The antibody tests are a different story. The antibody tests, they are stocked up. They built capacity with millions and millions of tests. And as you know, the antibody test at the end user level did not get out of the gates as fast. We think antibody testing will be relevant in the future and we think it will be an important test, so we think that we’ll start to see demand for that again in fiscal '21, but we don’t expect significant sales on that front in Q4. Bryan, I don’t know if you want to add to that.

Yes. The only thing that I would add to that, Andrew, is I think we believe we are well positioned as a reagent supplier, whether it’s molecular or immunoassay reagent for antibody tests or rapid antigen tests, we believe we’re well positioned to supply the market.

So we do see a little bit of dip here in Q4 as they go through that. The antigen testing would be the thing that would make a difference, but it’s hard to predict when customers – if they validate a test, they have to go through EUA submission, they have to ramp up. We’re optimistic. But the timing of that is not clear at this point and our guidance reflects what we have clarity on.

Okay, perfect. I appreciate all that color. I have some follow-ups on the antigen products here in a moment. But maybe I guess sticking with the theme about sort of the market evolution here and you guys have a pretty unique visibility into different geographic trends here. So maybe I guess the question is, can you talk about how you see the market evolving across the different geographies that you play in here. Is Europe more prone to using one type of product versus another? And then how does that impact your business here as we think about the next few quarters?

So, Andrew, we figured that there would be questions on that front. We have – in our slide deck if you go to – I think it’s near the last slide, Charlie? One of the last slides actually talks to this topic. The cliff-note that I would give you is, is that from a PCR standpoint on the molecular front, we have much more exposure in Europe and then in Asia than we do in the United States. We have some placements with companies here in the United States, but our exposure was stronger in Europe primarily and then a bit in Asia as well. On the antibody front, they were really, in many cases, global companies for the antibody test, but it was really more U.S. based companies in many fronts, less exposure in Europe and really not much exposure in the rest of the world. So it is different geographically if you look through that. We have seen, if you look at the cases in Europe, they have not seen the same spike that they had in the U.S., although they are starting to talk in the UK and other areas of a second wave truly coming in Europe. So as that second wave that hits in Europe as anticipated, we would anticipate to see increased demand on our molecular front for that type of testing. So I think the slide that we have there will walk you through that, but I don’t know, Bryan, if there’s anything you want to add to that.

I think that’s well said.

Okay. I’ll be sure to take a look at that. And then I guess wrapping up here and switching to the diagnostic testing opportunity. First, I know you mentioned some of your customers are validating your antibody pair product, but can you maybe talk about some early performance metrics of those products that you’re seeing? And then secondly, as you think about making this partnership and bringing it in via private label, can you give us an idea of early sensitivity and specificity metrics of that product and your confidence in bringing that true the FDA, EUA process? Thanks, guys.

Yes, I can give you some color. I’ll start with the antibody pairs, Andrew. So the antibody pairs, as we said, we have dozens of customers that are testing that product. Lourdes and team on the Life Science side have been very enthusiastic because the feedback from customers has been very strong that the performance of these antibody pairs is doing very, very well. Comments from several customers as they’re developing their tests that they are very pleased with the performance versus the products that are out there. So I would say that we have strong confidence in the antibody pairs. The question is obviously how many of those companies are effectively able to get through the EUA process? And so that’s a little bit of a wildcard. But we have a lot of shots on goal there, so we feel very good. In regards to the one that we partnered with on the Diagnostics front, it is using the antibody pairs that we’ve talked about, which we have high confidence in. So that was part of it. We wanted to use a product that we felt best about. And I would describe the performance that we’ve seen to be equal to or better than what is published from the BD’s and Quidel’s of the world that are the first ones out there. So we think that this will be a very strong offering. Obviously, we’ve got – we’ll begin selling this product at CE Mark later this quarter. The product is CE approved, so we’ll go into Europe with this product probably late part of this quarter. And the goal would be as we get into Q1 of next year, hopefully they’ll have EUA submission and we’ll be able to begin bringing that product into the U.S. But this product also will not require an instrument. The Quidel version and the BD versions, both are instrument required. And so this will be ability for a rapid test, so you don’t need an instrument as well which we think will be pretty attractive out in the marketplace.

Great. Perfect. And then just last one for the manufacturing capacity that you have on that side of things. Can you just walk us through how the manufacturing of that product will work? Will that be a partner or will that be you guys? And if it is you guys, can you talk about the capacity that you have to manufacture a test? Thank you.

For the rapid antigen, we selected a partner that we felt, number one, had a strong product, right, using the antibody pairs and a strong product, but also one that had the capacity that we felt needed because as you know this is a strong demand. And this is a – the partner that we’ve chosen does have the capability to making a high number, million per week or more type of test capability. So that one of the attractive things of selecting that partner. So we decided in that case to do it with a partner versus ourselves where it would have been harder for us to ramp up the capacity at the level that these folks have. So high-quality product that they had, but in addition to that the ability to ramp up the manufacturing were the two reason why we did this partnership with a third party of the rapid antigen test.

Great. Thanks, guys.

Thanks, Andrew.

[Operator Instructions]. Your next question is from Yi Chen of H.C. Wainwright.

Good morning, Yi.

Hi. Good morning. Thank you for taking my questions. So first question, I know you mentioned that your customers are working through the inventory, but do you think that the COVID-19 related growth is somewhat handicapped by shortages in other testing supplies such as RNA extraction kits?

So we have heard the concern of people that do the RNA extraction kits capacity issues that impact our customers. We have not had significant feedback from our customers that the lack of those RNA extraction kits is impacting them. With that said, theoretically if they can’t do the extraction, then it would impact their ongoing purchases. But, Yi, we have not had significant feedback from customers of that being a limiting factor at this point.

The fiscal fourth quarter as you’ve guided will serve as a baseline to understand quarterly Life Science revenue going forward in fiscal 2021?

Yi, this is Bryan. I think it’s still probably a little early for that. And the reason I say that is we have a line of sight into current orders that we’re trying to satisfy over the next several weeks. But I think there’s still some to play out here from a supply standpoint in the different market channels. So we’ll likely have more to say on that particular question when we do guidance for fiscal '21. We are trying not to get out over our skis, if you will, in terms of how we’re guiding around the business right now.

Okay. Thanks. And my last question is in the current quarter, have you observed any signs or indicators showing that the Diagnostics segment could resume growth as hospitals and labs that are no longer COVID-19 hotpots start to resume their daily activities?

We absolutely have started to see signs of rebound in the Diagnostics business. The initial sign we mentioned was under LeadCare. We started to see it in June where the LeadCare business started to rebound and started to move closer to normal and that has continued on in the early part of this quarter. I would say that the general business has been improving and we have seen improvements as of late, even in the early part of this quarter, which has kind of helped us towards our guide of 80% for the Diagnostics business. We are starting to see significant increased interest from customers in regards to Revogene having to do a bit with the EUA submission that we intend to do in the fall, but also quite frankly with some customers that are in need of other products and other companies because they’re so focus on COVID, they’re not able to supply reagents consistently. So we have significant demand increase recently on our Revogene product as well, which is another good leading indicator for us on the Diagnostics business.

Got it. Thank you.

Thanks, Yi.

There are no other questions in queue.

Thank you. So before we close, as we close this call, I want to take a second to thank our long‐term shareholders for their belief and trust in our business over the long term, but also to welcome the large number of new shareholders that have decided to invest in Meridian. We truly believe that Meridian’s best days remain ahead of us and we look forward to consistently delivering on our promises to our shareholders, both in the near term and in the long term. Thank you all for joining our call today and we look forward to speaking to you again next quarter. Have a great day.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.