Q4 2019 Earnings Call
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Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on whole. Thanks for your patience.
Ladies and gentlemen, thank you for standing by and welcome to the Marine Bio Science fiscal fourth quarter and full year 2019 earnings conference call. At this time all participants are in listen only mode. After the speakers presentations there will be a question and answer session to ask a question. During this session you only.
Press Star one on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Brian Baldessari CFO . Thank you. Please go ahead.
Good morning, everyone and welcome to Meridians 2019, fourth quarter, and yearend conference call and apologies for the slight delay we were trying to get everybody down as quickly as we said before I've got started here by now you should have access to a copy of the earnings press release that was published earlier this morning.
Im not received a copy please go to the Investor Relations section of our website to access a copy of the press release and this mornings presentation before we begin today, let me remind you that 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, the company's FCC filings.
The company's results may differ materially from those projected a company undertakes no obligation to publicly update any forward looking statements.
[noise]. Additionally throughout this presentation, we refer to non-GAAP financial measures, specifically operating expenses operating income operating margin net earnings and earnings per share each on an adjusted basis. A reconciliation of these non-GAAP financial measures with the most directly comparable GAAP measures.
As yours is included in our press release, which is available on our website.
We turn this over to Jack Thanks, Brian before we get to the financial results I'd like to take a minute to highlight a few of meridians major accomplishments from Q4 this past year.
Let's start with diagnostics in Q4, we took significant steps forward in their execution of our diagnostic strategy. Our commercial team under new leadership is executing well and has made great progress and the turnaround of our diagnostics business in Q4, the diagnostic business stabilize which is a key first step to returning back to growth.
Integration of the gene POC business and ravaging product line has gone better than anticipated our commercial team has executed well in customer acceptance of the product has exceeded our expectations. You placed approximately 60 ravaging systems in Q4, and many of the customers have already implemented and our live within 30 days of receiving the system.
Another key element of our diagnostic strategy was the redesign of our new product development process. We started this in late fiscal 18, and I've been making significant progress to building a strong pipeline of products. One key success for the quarter was the completion of our clinical trials and the FDA submission for our Curian instrument and the first assay using fluorescent chemistry for.
A rapid amino acids stool antigen test for H. pylori.
Let's turn our attention to the life Science segment next our life Science business turned in a record quarter for revenues and profitability was strong contributions from both our global Ivy de customers as well as strong growth from China Importantly, we're seeing very good customer demand for her laugh realisation ready molecular reagents as these products have advantages in rooms.
Sure shipping in storage as well as extended shelf life versus what reagents. We also made further changes to our cost structure in both business units in order to refine the customer focus and prepare for a much heavier investment in diagnostic new product development spending over the next 24 month, we will share more on that later when we discuss our 2020 guidance now.
I'll turn it back over to Brian to walk through Q4 2019 in the full year financial results. Thank you Jack let's move right into our fourth quarter results on slide six as we reported earlier today consolidated revenues for the fourth quarter fiscal 2019 were 50.8 million as compared to 53.1.
In in the fourth quarter of fiscal 2018. This represented a 4% decrease for about a 3% decline excluding the impact of foreign currency exchange rate changes.
On a segment basis, our diagnostics business revenues were down about 9% and our life science business revenues were up 7% for the quarter gross profit margin declined 330 basis points during the quarter with both our diagnostics and life science segments experiencing lower margins similar to our third quarter for our diagnostic segment.
Product pricing, particularly for H. pylori products had an unfavorable impact on margin and for our life Science segment product mix between immuno assay reagent products and molecular reagent products had an unfavorable impact on margin. In addition, gross profit margin for our diagnostics segment was also affected by manufacturing ramp up activity.
These and our newly acquired pulled back facility, where revenue gene molecular diagnostic instruments and test devices are made.
On an adjusted or non-GAAP basis fourth quarter operating income was 7.6 million in a margin of approximately 15% adjusted operating income in margin include approximately three and a half million an operating costs related to the refugee molecular diagnostic platform acquisition by operating costs I mean costs.
The manufacturing as well as research and development N.S. DNA spending.
Our operating expenses during the quarter absent those related to the refugee molecular diagnostics platform acquisition trended similar to earlier periods in 2019, reflecting reductions in our cost structures in both business units from 2000 eighteens restructuring activities.
Also on an adjusted basis net earnings were 5.4 million diluted EPS was 13 cents on a GAAP basis operating income was 5.8 million, including acquisition related restructuring and selected legal costs of approximately 1.7 million in this quarter compared to combined restructuring and selected legal costs.
Of approximately 4.6 million in last year's quarterly results also on a GAAP basis net earnings were 4.1 million diluted EPS was 10 cents.
Now, let's turn to the next slide which highlights our operating segment results for the quarter, starting with diagnostics as previously mentioned diagnostics revenues declined 9% to 33.4 million predominantly driven by continued competitive pressure in our molecular products, most notably C. difficile and also our food borne products with.
Both experiencing significant volume declines.
And although expected in plan contract pricing changes done in 2018 for a number of customers, including our two largest national reference laboratory customers contributed to a 7% decline or April already products for the quarter.
For our respiratory products, we have had lighter shipments in advance of the upcoming season. This year compared to last year, our let care product revenues were flat for the quarter as favorable pricing offset volume declines.
Diagnostics operating income was 3.2 million on an adjusted basis and a margin of 9.5% expectedly. This level of income and margin compared to 2018 were affected by the operating costs related to the ravaging molecular diagnostics platform acquisition of three and a half million.
Including 3.9 million of purchase accounting amortization.
As I stated previously by operating costs, I mean, both manufacturing costs as well as research and development in SDMA spending also affecting operating income in margin on adjusted basis, where the effects of lower pricing for April already products in our reference lab channel as well as volume declines in our molecular products.
Now moving on to life Science Life Science revenues were up 7% in the quarter to 17.4 million or up 9% on a constant currency basis revenue contributions for immunological reagents with IBT customers were strong in the EMEA region as well as China.
Customer order activity in China remained robust during the quarter and actually a bit stronger than in our third quarter revenues for our molecular reagents during the quarter contained to be affected by the transition of our academic business to independent distributors.
Life Science adjusted operating income increased 26% in the quarter to nearly 6 million as a result, a bit higher revenue level and significantly lower costs overall, realizing the effects of restructuring and organizational streamlining activities in 2018.
Adjusted operating margins for life science in the quarter were 34% up over 500 basis points from a year ago.
Now, let's move into our full fiscal year results on slide eight as we reported earlier today consolidated revenues for fiscal 2019 were 201 million as compared to 213.6 million in fiscal 2018. This represented a 6% decrease or about a 5% decline excluding the impact of.
Foreign currency exchange rate changes.
On a segment basis, our diagnostics business revenues were down about 9% and our life science business revenues were up 2% for the year.
Gross profit margin declined 230 basis points with both our diagnostics and life science segments experiencing lower margins similar to our fourth quarter comments for our diagnostics segment product pricing, particularly for our H. pylori products and an unfavorable impact on margin and for our life Science segment product mix between immuno assay reagent products.
Yes, and molecular reagent products had an unfavorable impact on margin. In addition, gross profit margin for our diagnostic segment was also affected by manufacturing ramp up activities in our new newly acquired Quebec facility, where revenue team molecular diagnostic instruments and test devices are made.
[noise] on an adjusted or non-GAAP basis, operating income was 38.9 million in a margin of approximately 19% adjusted operating income and margin include approximately 4.6 million an operating costs related to the rather gene molecular diagnostic platform acquisition again.
Hi, operating costs, I mean, both costs of manufacturing as well as research and development nest DNA spending our operating expenses absent those related to the refugee molecular diagnostic platform acquisition were down substantially from last year, reflecting reductions in our cost structures and both business units from 2000 eighteens restructuring.
Activities.
Also on an adjusted basis net earnings were 29.1 million and diluted EPS was 68 cents on a GAAP basis operating income was 32.7 million, including acquisition related restructuring and selected legal cost of approximately 6.2 million this year compared to combine restructuring.
And selected legal costs of approximately 13.1 million last year.
Also on a GAAP basis net earnings were 24.4 million and diluted EPS was 57 cents.
Moving on to slide nine which highlights our operating segment results for the year, starting with diagnostics as previously mentioned diagnostics revenues declined 9% to 136.7 million predominantly driven by competitive pressure in our molecular products, most notably C. difficile and also our food borne products with both.
Variance in significant volume declines and although expected implant contract pricing changes done in 2018 for a number of customers, including our two largest national reference laboratory customers contributed to a 7.5% decline or h. pylori products for the year.
For our respiratory category. The lighter 2018, 19 season contributed to volume declines in flu and group a strep products.
Our let care Black revenues were flat for the year revenues from sales of let Carrie analyzers were down for the year as a result of several bulk purchases for new accounts in 2018 favorable pricing offset a slight volume decline and consumables.
Diagnostics operating income was 25.8 million on an adjusted basis.
And our margin of nearly 19%.
Expectedly. This level, then come and margin compared to 2018 were affected by the operating costs related to the refugee molecular diagnostic platform acquisition of 4.6 million, including 1.2 million of purchase accounting amortization as I stated previously by operating costs I mean, both manufacturing costs as well as research your.
And SGN a spending.
Also affecting operating income and margin on an adjusted basis, where the effects of lower pricing for April Lori products, and our reference lab channel as well as volume declines in our molecular products now moving on to life Science Life Science revenues were up 2% for the year to 64.3 million after a strong fourth quarter.
Revenue contributions for immunological reagents with Ivy customers were strong in the EMEA region throughout the year and rebounded in China. During the second half revenues for our molecular reagents were affected by the transition of our academic business to independent distributors, particularly in the Americas region.
Life Science adjusted operating income increased 38% to nearly 21 million as a result of the higher revenue level and significantly lower costs overall realized in the effects of restructuring and organizational streamlining activities in 2018, adjusted operating margins for life science in the quarter were 32% up.
850 basis points from a year ago.
Next I would like to move onto our guidance for fiscal 2020, starting on slide 10 Importantly, we're planning for 2020 to be a year of major investment in new product development for our diagnostic segment and this is reflected in our guidance. We expect to begin clinical trials for six essays across three.
Instrument platforms ravaging Curian impeded stat.
None of these clinical trials will crossover into fiscal 2021 in terms of timing of completion with any related new product launches also occurring in fiscal 2021.
For revenues, we are guiding 2020 to be flat to down 3% with our diagnostics segment down 3% to 5% and our life science segment up 2% to 6%.
For our diagnostic segment. This revenue guidance takes into consideration that are rather gene placements over the next 12 months are expected to predominantly be conversions of our existing alif via installed base and also continued competitive pressures, including further price erosion in H. pylori products.
For our life Science segment. This revenue guidance takes into consideration a longer selling cycle in converting current ivy de opportunities to bulk orders.
For our adjusted operating margin, which excludes selected legal spending additional restructuring activities that carried over from our fourth quarter fiscal 2019, we're guiding to 9% to 10%. This adjusted operating margin takes into consideration new product development spending at 27 to 28 million.
Predominantly in our diagnostic segment adjusted earnings per share on diluted basis, which also excludes selected legal spending and additional restructuring activities that carried over from our fourth quarter fiscal 2019.
As expected to be 28 cents to 34 cents per share and assumes a tax rate of 23.5% to 24.5%.
Given the nature of our selected legal spending we're not providing gap based guidance for operating margin earnings per share on a diluted basis. In addition, our guidance excludes the medical device excise tax the moratorium for which is due to expire December 31st 2019, unless Congress chooses to again extends such.
Moratorium or altogether appeals that I would also like to point out that although we do expect our diagnostic segment revenues to be down low to mid single digits for the full fiscal year, we expect revenues for our diagnostics segment for the first fiscal quarter to be down high single digits in line with the second half of fiscal 2019.
Our revenue expectations for our diagnostics segment for the first quarter, along with current customer order patterns for our life Science segment indicate our consolidated revenues for the first quarter could be down mid single digits.
I would like to I would like nets to move to slide 11 to provide further detail on the expected change in year over year adjusted operating income.
Onto slide 11.
This graphic is intended to show you our expected change and adjusted operating income during fiscal 2020, our investments to reinvest our former dividend to transform the company to sustainable revenue and profit growth again in fiscal 2019 with the acquisition of the revenue gene molecular diagnostics platform. However.
One of the curing rapid immuno assay instrument and first asset.
We intend to invest heavily in new product development for the remedying carry npbs that platform simultaneously in order to accelerate our move to sustainable revenue and profit growth in 2021.
Incremental new product development spending in fiscal 2020 is expected to approach 11 million with the largest portion allocated to revenue gene followed by Curian and then Pds Stat importantly, among a majority of this incremental spending is in clinical trials. We also intend to invest in our employees as we work to reshape our call.
Sure it to a high performance organization to deliver on our goals of 4 million investment and incentive compensation includes both our cash bonus program and our equity Award program importantly, the restructuring activities that we have executed during the last two years and the related cost savings have partly provided funding for these.
Vestments, we wished to me.
I will now turn it back over to Jack to update you on our business turnaround efforts for both business units. Thanks, Brian as those who follow Meridian no in late fiscal 2018, we went through a comprehensive strategic planning process for Meridian Bioscience and both of our businesses, we want to spend a few minutes. This morning to refresh you on the focus and share the.
Status of where we are in the process.
As shown on slide 13, there are three overwriting elements driving our strategy as a company first we aim to reshape the financial profile of the company with a new emphasis on driving the growth that is critical to creating sustainable value in the business.
Second we're committed to increasing the investment in the business to drive this growth with a disciplined focused approach that would include both include both higher levels of internal spending in R&D and proactive acquisition activity lastly, with the rising competitiveness in the industry driving organizational fitness with higher levels of performance speed and efficiency.
He will be increasingly important for future success.
Our goal with our strategy is to create a more balanced investment profile and repositioned the company as a higher growth business was strong profitability and returns in and an improved risk profile that addresses the competitive risks of an aging product portfolio.
Let's move over to slide 14.
We started the transformation process of our business in fiscal 2018, we drove a detailed strategic planning process to help set the course for where we want to take the company in our two primary businesses. We knew the risk that we faced with our largest product hps, a being off patent and our product portfolio in need of investment and it was clear that we had to become.
More efficient our organizational changes and cost reduction efforts in 2000 in 2019, 2018, and 19 took over $12 million of costs out of our business, which we abuse to offset the pricing risk and to invest back into our business. We made significant changes within the organization to maximize the current talent into bringing.
Seasoned professionals to help us build a new stronger meridian, we've made great progress in 2018 and 2019, but we still have work to do fiscal 2020 is a year of heavy investment in our product pipeline developing new products across our three main platforms Curian PD, a stat and ravaging.
At the same time, we're building a stronger commercial team that can fully leveraged the breadth of new products, we plan to bring to market over the next 18 to 24 months.
Now, let's spend a few minutes updating you on some of the results of this process and the key elements of the strategy for each of our business units will start first with our diagnostics business.
Let's move to slide 16.
And our strategic process. Our goal is to become the trusted partner to IDN also known as health systems for gastrointestinal testing and pediatric point of care in order to achieve this goal. It was critical for us to improve our position in the molecular side of our business. This led us to our acquisition of the revving system in June of 2019, what are the attractive features the.
Revenue in molecular platform acquisition was the perfect fit between the ravaging system in its current menu of for FDA cleared assays and the eminent need to convert our existing alif your customer base that has been under competitive attack over 80% of our current Lithia revenue comes from group, a strep group B Strep and C. diff assets the ability to immediately go to our installed base.
And offer them a state of the art sample to answer molecular system will enable us to build a strong reference base and provide us a platform for future growth. This is a key part of our focus and we are moving aggressively on this execution. After the first 120 days, we are actively converting customers from our leaky assistant to the ravaging system and the results to date are ahead of expectations.
We see fiscal 2020 to be focused on stabilizing in protecting our base building a strong installed base with will enable us to increased competitive conversions and enable us to leverage the installed base as we bring new assay is onto the system in fiscal 2001 and beyond.
Let's move over to slide 17.
This slide provides a little bit more detail on how we're doing with the commercial execution. During the first 120 days under meridians ownership, we installed approximately 60 instruments above the limited install base that we purchased our goal is to be at 250 or more instruments in our installed base by June Thirtyth of next year as we previously mentioned we expect these.
Placements will predominantly be conversions of existing ALLETE. The accounts. However, we have seen success with new accounts adopting the ravaging platform and adding assets to existing accounts as part of the conversion of the ravaging platform.
Moving to slide 18, our employees in Qubec the manufacturer our revenue in instruments and reagents are actively working to increase production capacity to meet the strong customer order demand. They are transitioning from an organization that largely manufactured to meet new product development needs to an organization that also needs to manufacture to meet commercial needs.
The good news on this front is that our capacity has significantly improved since the acquisition date and we're implementing plans to continue the ramp up of both instruments and reagents.
Turning to page 19.
In our strategic plan, we committed to increasing investment into our diagnostics business. After the acquisition of the wretched ravaging product. We also eliminated our shareholder dividend. This was done to enable us to further invest in strengthening our diagnostic business historically meridians investment into diagnostics R&D was light with mid to high single digits spend into.
R&D after we overhauled the new product development process to improve its effectiveness. It was critical for us to increase our investment we started to do that in fiscal 18 and further increased it in fiscal 19 in fiscal 2020, we have multiple active development programs across all three of our platforms Curian PD, a stat and ravaging this has.
US investing nearly 20% of our revenue back into R&D in fiscal 2020 in fiscal 2008, we will have more than doubled our historic investment into R&D as we refresh our product line and develop set develop several new exciting products, we expect R&D investment as a percent of revenue to come down in fiscal 21 somewhere in the neighborhood of 50.
10% and likely be consistently in the 10% to 12% range overtime. We believe this investment will enable us to build a more sustainable and growing diagnostic business going forward.
Moving now to slide 20 on the previous slide I spoke to our investors are increased investment in R&D in the near term the investments over the past 18 months have started to pay dividends as we work to bring several new products to market. Despite an investment in fiscal 20 in someone in fiscal 2001 is related to significant increases in our clinical trial.
Spending successful clinical trials or the last step before bringing new products to market, we've been making good progress the acquisition of ravaging molecular platform provided us for FDA cleared assays and as previously mentioned, we have completed clinical trials for our carrying instrument in its first assay detection attest for the detection of H. pylori antigen stool.
And we submitted this in September of 2019 importantly, as we look forward to the next two fiscal years, we anticipate to new products to launch in fiscal 2000, the carrying instrument and Curian Hps say and have a strong pipeline of products. We anticipate will launch in fiscal 21 in fiscal 2002, we have built the team to focus on our new product development processes and.
We're committed to delivering new products that align with our business strategy around gastrointestinal testing and pediatric point of care.
Well, we anticipate continued business challenges for diagnostics in the near term we have built a new strong team that is focused on stabilizing this business in the next 12 to 18 months and building a sustainable growth engine for the business on a long term basis.
Next I'd like to provide some comments on our life science business beginning on slide 22.
Progress on our strategic plan for life Science is further along than it is for our diagnostic business over the last 18 months, we have reshaped the cost structure in management team and the results are evident in the significant improvement in profitability as measured by an adjusted operating margin of over 30%. Our focus is now on commercial execution to move this busy.
As to consistent high single digit revenue growth, while also improving operating margin through leverage of higher sales levels.
As an in this strategy is our strong relationships with the major IBT companies around the world, which we look to further leverage with our new molecular products, we have built and more profitable life science business that we now look forward to accelerating the growth through improved commercial execution in portfolio selling across our immuno assay and molecular product offerings.
Wrapping up here on slide 23.
We are well into this in in the midst of transforming meridian.
Over the past two years, we may continue to continual positive progress and we see the next 12 to 18 months as critical to live to delivering on our strategy. We've invested heavily in both in our business both financially and in developing our talent, we're leveraging the synergy across our two businesses well each business remains focused on what they need to get done too.
Realize their business potential we will make this happen.
With that said Lisa I'd like to open it up now to any questions that are listeners may half.
Thank you as a reminder to ask a question press star one on your telephone to withdraw your question, Chris the powder hash key please standby Lincoln pilot Q and a roster.
And our first question comes from the line of Bill Quirk from Piper Jaffray. Your line is open Hey, Bill Good morning, Hi, Good morning, everyone. Thanks, and good morning.
I guess couple of questions right. So on the immunological assets, obviously really nice growth number here recognizing your comments that sounds like order trends may have.
Slowed down a little bit.
Tell us how much of this is kind of selling through into the R&D process versus maybe some stocking from some of your customers.
So.
And I'm, assuming you're referring to the to the life science side, which.
She is more selection.
So.
The life Science, we do have we do have trends in the in that business that there's some ordering patterns. The Q4, our fiscal Q4 is typically a bigger quarter in our life science business versus Q1, partially because many of the diagnostic manufacturers and their fiscal year at the end of December and they always manage their inventory on their stocking levels. So we.
Typically do see higher Q4 for us and lower Q1, and we do believe that that trend is likely to continue.
From previous years.
We did not go through any process to stock.
Stock IBT manufacturers. These large diagnostic companies that we sell to are very very measuring their working capital very aggressively. So it is based on true customer demand, but they typically do manage their working inventories and many of them like Abbott and others have fiscal years that end.
So that December timeframe, we very often see that they manage their inventories.
We have good trends on immuno assay side, we're building the momentum on the molecular side as well, but those it takes 18 to 24 months for new products to go it through the FDA process typically so for example in China on the molecular front, we have a number of customers in China that intend to put our molecular key components into their app.
Todays that are working their way through the FDA approval. So.
Very strong immuno assay in Q4 for sure now we have good growth trends, we believe as we go forward, but we expect a little bit later in Q1, and if you look historically I think thats been pretty consistent for our business overtime.
Understood and then couple a couple of quick questions here. So first is.
How does how should we think about guidance needs to be the flu season, you had some comments about a relatively modest start to that secondly.
How should we think about timing in terms of the cut back plant scaling up and.
Taking a little less of a drag on gross margin and then thirdly.
On led care again, how should we think about that trending throughout the year. Thanks, guys I'll start I'll start off the flu season. It has been a slow start for us September lot of times, you'll have the distributors ordering in material for the flu season.
We did not see any any uptake it was relatively late September for us from a respiratory products standpoint.
And we have not seen significant lift early early on as well so.
We are starting to see the data from the CDC that its creeping up we have not seen any impact from that Brian I'm going to ask you to talk briefly about scale up from the revenue standpoint sure on the scale up for our pullback manufacturing facility you could expect to see essentially margins incrementally getting better with each quarter.
As we as we scale up the manufacturing process throughout 2020 to meet customer order demand, we do think that there will be.
You got higher margin business on the Lithia.
'cause, it's an older product and from a margin standpoint, you have higher margins on that it will be lower when we first convert to the revenue being as we build up the capacity. So we're going to feel some bleed from that in fiscal 2000, which we plan for.
And then the last question that you had their bill was related to lead care our lead care business. We do see that we do believe that that business will grow again in fiscal 2000.
And we believe that we're off to a solid start with that product line overall, we have changed a bit of our commercial focus on that we have reorganized our commercial team a little bit with.
Dedicated focus from a point of care specialists as well as an inside sales team dedicated to focus to work with them that we think will help drive it our led business typically is a little bit later in the winter months and picks up and get heavy in the spring and summer just from the historical patterns from when people are getting that testing done, but we do look.
To a return to growth in our in our lead care business as we head into fiscal 2000.
Got it thanks, guys. Thanks Bill.
Our next question comes from the line of Brian Weinstein from William Blair. Your line is open.
Hi, guys. Good morning. This is actually Andrew Frac went on for Brian Sorry, Trinet background noise here no.
Maybe we can just talk on the R&D increased this year I appreciate the commentary and color that you provided there, but but maybe but just more broadly speaking and strategically thinking how do you guys evaluate sort of the return there can you maybe talk about philosophy of how you guys are determining what projects to go after first.
Thanks.
Sure so.
A couple of different things when we went through our strategic planning process. Andrew If you go back in time, you remember Meridian was building products in there really wasn't much of a strategy to it. It was we think we can make something we think we could sell it.
We are really focusing our teams energy and efforts on things that only fit clearly into the strategy that we have built so a very focused effort.
In that process, we implemented some processes and procedures to vet out investment that we want to make a new product development, we have our commercial team Tony Sarafina, Humana, who runs that element of it.
He had worked for a number of years Siemens and other places brought some new processes into our organization, where we really assess the market size in the market opportunities for any investment that we plan to make from an R&D perspective.
We'll also say that to a certain extent I would characterize our R&D spend as a bit of a half and half half of it is space is based on refreshing and trying to improve the competitiveness of some of our existing products.
Many of the things I'm curious hps a is a good example of that we have a rapid immuno hps eight test, but moving over to curian and be able to put a fluorescent hps say with a bit better performance as well as being able to integrated onto a system. We do believe will add relevance to our our idea and health system customers, So kind of some of our.
R&D money has gone towards protecting the key assays in our in our current product portfolio and updating and taking into the next level and then.
Which we know those businesses pretty well so we can plan for that pretty easily in our spending and that spending plans we have.
The other areas, where we really do a market analysis and determine the opportunities for investment we want to make example, I'll give you there would be c. diff the rapid immuno C. diff area. We do have a few million dollars hurt the business in that area. However, we believe that there's a significant market opportunity there with the changing algorithms.
The guidelines are changing for how the testing is being done for C. diff within many of our customers and we believe a highly competitive product there can compete with the aleres of the world very effectively and so that one is requiring it's a pretty intensive clinical trial for example, but when we ran our protocol to look at the investment that we need to make to bring there.
Product to market, we believe that that was a very attractive product for us to put out to carry and so that will be the second product that we intend to bring on the Curian system, Brian I'll, if they're sending us who want to add from an R&D perspective.
I think hopefully the message is clear that we're starting with a market analysis for the particular product involved and again some of it may be very offensive, where it's a new product kind of in our bag, particularly for revenue gain with the two panels that we've been talking about those are clearly very often some products for us to put in our.
Portfolio, and then as jacket indicated, particularly with with Curian.
Looking at a set of assay is that is probably geared more towards protecting our existing base of business.
Got it thanks guys.
That's helpful color and then just one on guidance the Jeep contribution for the year appreciate sort of the placements that you expect through through the year, but maybe on a revenue basis, how much revenue do you think over the coming from that system as well as we go through 2020. Thanks.
I'll start this bright and clean yet if you need to.
We anticipate the revenue gene product, because we'll be converting over ALLETE, the many alexia customers.
To be in that mid to high single digit million dollars in fiscal 2020.
So in that $6 million to $9 million range I would say is a fair assessment much of that we'll be at the expense of our lease yet because it will be transferring that however, we are also getting competitive conversions and many of the customers that were running at least the have decided to maybe add another test they were running CBS or group, a strep and they've added group piece.
Strep with us when they've moved over to the ravaging product. So we are kind of looking at that overall business as a combined basis and we do expect stabilization of our molecular business as we head into fiscal 20, you'll start to see the mix of elite reagents coming down in revenue in reagents coming up but the overall net of that.
Paying generally flat molecular business in 2020 and also please recognize that.
We are ramping this business up so it's not a straight line look at the revenues from quarter 123, and four it is definitely a stair step throughout the year as we get accounts live and their their purchasing kits.
Got it thanks guys.
Thanks enter.
Again, if you'd like to ask a question that star one on your telephone. Our next question comes from the line of Catherine Schultz from Baird. Your line is open.
Hey, Catherine you guys hi, thanks for the questions. It first Jack you've made a number of organizational changes. This year are there any other refinement can you can make a critical 20.
We just went through a process over the last 60 days and made the changes that we felt that we needed to make to refine.
From a commercial standpoint, one of the big things was carving our lead care business and our focus from a sales standpoint out specifically.
Instead of diluting the efforts of our of our sales reps that are calling in the hospital base. We are really carving that entered into a separate group. So weve implemented those changes as of October 1st we have made other modifications the organization I would foresee that we will evolve and change as the.
Meridian Biossance can learn our ravaging product expands that's going to force us to continually to kind of look at the infrastructure and what we have built there.
And do we need to make investments along the way, but we basically implemented from the summer we work through things and on October Onest, we fully implemented the major plans that we have in place for 2020, right. Then and then ultimately it will depend on how quickly the ramp up is in our molecular space before we see any additional changes.
It sounds like the transition from Louisiana, ravaging seems to be going well. We're at what point do you think you'll transition to going after new customers rather than focusing on transmission transitioning existing customers. So I don't want to characterize that we aren't going after new customers, Let me start.
With that our sales team is calling on existing as well as competitive conversions and we have seen approximately 10% or so of our of our closest be competitive. So we are getting competitive conversions I.
I think the message in my 25 years of leading commercial teams and diagnostics would be the percent of the sales that you have the mix will change over time, we're kind of envisioning a very high percentage the mix being the existing customers converting but I would also say we're not just trying to convert those customers were trying to go get competitive assets.
As pickup group, B, strep and things like that so.
Our team is doing that but what you really want to do is build momentum our competitor our customers are typically conservative folks.
And so being the first one in that in your town with a new system is challenging we're going to leverage the relationships and trust we have with the years, we worked with those customers to put a lot of systems in each town. So you don't have to be the first one in town, you're the sixth or seventh our 10th person in town and so I think you're going to see that mix evolve over time, but we're kind of into.
Dissipating and 90, 95% range in the near term being conversion because it is a competitive marketplace and we want to we want to make sure. Our good loyal customers get our most advanced best product as quickly as we can so thats. There is a lot of energy from our commercial team there first.
Great that makes sense and then last one from me how should we think about gross margins in fiscal 20, and where do you think will settle over time with all these new product introduction.
So I think gross margins for fiscal 2020, we would expect to be in the high Fiftys.
What we have planned for.
And I think settling over time, I wouldn't expect them to be that different.
Than that.
Less something dramatically changed in the reimbursement environment or something like that we are still.
Targeting gross margins when you look at our product portfolio and that high Fiftys low sixties range on an overall basis and let me let me throw a couple of comments on that from a diagnostic standpoint, we've done a pretty good job of holding our margins with the exception of H. pylori as competitive has come in we fully planned that.
We were going to have to step down pricing over time, we've worked with the quest and labcorp of the world to put contracts in place to do that but a lot of our gross margin decline is really plan and we know it.
And we don't see.
Declines in our margins across the entire diagnostics I would say, it's primarily in that space with the exception of moving Elisa to revenue being in the near term is affecting it but we believe that the revenue gene margins can be very very positive very similar to alif overtime as we get volume in that that system and the other thing I would add to that for.
Similarly on the revenue gains side is that as we had the panels come through the commercialization process. Those should have a higher SP than a single assets and that will help our margins as well and then one more comment on this is that hot topic for us obviously.
I would also say that our life science businesses to is it kind of been in that mid Fiftys kind of margins is where we are I mean that the operating margin at the bottom is great, but the gross margins have been in the mid Fiftys. We do believe overtime that we can that we can maintain or increase that overtime as we build scale. So I think you kind of see our diagnostics.
We see a little bit of going down as the Hps say kind of bleeds out if you will the new pricing for that as its more competitive.
But we think that will stabilize and then kind of start turning back up over time and our life Science, we do believe we can hold and or grow so.
I think in general we are optimistic that the high fiftys types of margins are very attainable and beyond as we go forward.
Great. Thank you.
Thanks Catherine.
I'd now like to turn the call back over to Jack Kennedy for closing remarks.
Well. Thank you very much for joining us today. We appreciate you taking the time to spend a little bit of your day to learn more about meridian.
We know that we are a company that is in the midst of a significant change and we have high confidence in the path that we're taking but we know that we've got significant work on the road ahead of US. So we appreciate your support we look forward to talking you again soon thank you and have a great deck.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.