Q3 2020 Meridian Bioscience Inc Earnings Call
And answer session to ask a question during the call you when you 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 Charlie would Vice President of Investor Relations. Thank you. Please go ahead Sir.
Thank you show me good morning, and welcome to Meridians to school Twentytwenty third quarter earnings call.
With me are Jocketty, Chief Executive Officer, Brian involves our Chief Financial Officer. Please.
Please note the recipe filings earnings release and slides to accompany this call are available on our website under investor Dot Meridian Bio science dotcom.
Supposed to be are these prepared remarks after the call.
With regard short calendar, Jack and Brian will be participating in the H.C. Wainwright annual Global investment conference in September.
Tales of out of that will be posted to our website as they are finalized.
Finally, our Q4 and for your fiscal 2020 earnings call is currently scheduled for Friday November 13th 2020.
Before we 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 RPC filings. The company's results may differ materially from those Purdue.
Acted and note in particular that these forward looking statements may be affected by risks related to the Covidien pandemic RIDEA makes these statements as of today August Southernsun 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 adjusted basis. A reconciliation of these non-GAAP financial measures with the most directly comparable GAAP measures and other related discussion or included in our earnings release now I'd like to turn call over to John.
Thanks, Charlie Q3 was no doubt the most roar remarkable quarter in our company's history in the midst of an unprecedented global health crisis, the diversification of our meridian business and able to a record setting performance. We were successful in both keeping your employees safe and in delivering flawlessly for our customers, which was our goal heading into this quarter.
As anticipated diagnostic said its momentum stagnate as a result of the pandemic with demand at 65% of the same period last year. Meanwhile, demand for covert 19 related raw materials contributed to life science delivering revenue 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.
Clinical trials were halted for much of the core R&D teams continue to advance new product development initiatives. The ravaging Cobot 19 assay achieved design lock and had moved into late stage development in preparation for downstream clinical study.
The team remains on track to submit for either way in early Q1 fiscal 21 in advance of the upcoming respiratory season.
Development of on the G.I. panel has completed now entering the validation phase and the start of clinical trials I'm curious on 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.
Moment Legionella [noise].
We closed the excellence transaction at the end of April and our integration efforts are well underway.
Operational leadership from Exelons remains in place and we have completed the integration of two commercial teams under our U.S. based sales leadership well 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.
The new normal costing breast I'd training sessions entirely online and laid the foundation for new virtual sales strategies.
Purion received the CE Mark in June and the platform was officially launched with the first placement.
The team also placed the first Brett I'd Smarts system, which received FDA clearance in March engagement with our customers improve throughout the quarter. One example, being the award and execution of a new molecular agreement with the National group purchasing organization, adding ravaging and is currently is current FDA cleared assets.
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 the antibody test Sars koby to antigens exploded in the quarter as customers included our products and their view a in CE Mark assay.
Subsequent to the ended the quarter, we launched the high sensitivity monoclonal antibody pair that can be used by diagnostic manufacturers to develop the much needed rapid antigen test for cobot 19, while still early in the validation phase with dozens of our customers. This product could offset some of the expected near term decline and the demand for the other products, while our customers worked through their inventory.
Now I want to hand, the call over to Brian to talk more about the financials for the quarter.
Thank you Jack as we reported earlier today murder and had the best quarter and the company's history with consolidated revenues of 85 billion up 75% from 48 million in the third quarter fiscal 2019.
Excluding the impact of foreign currency exchange rate changes revenues were up 76%. This was record revenue for any fiscal quarter, driven my life Science, which also delivered record quarterly revenue.
Gross profit margin was 66% in the quarter up from 58% <unk> third quarter 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 adjusted basis non-GAAP net earnings were 24 million and non-GAAP diluted EPS was 55 cents.
The year over year increase in operating expenses includes 2 million in tax 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 and R&D, primarily on new product development and clinical trials and experienced an increase of one mill.
Purchase accounting amortization on the acquisition of gene Pocs late in the third quarter fiscal 2019, and the acquisition of excellence was closed this quarter on a GAAP basis operating income was 35 million was operating expenses of 21 million. In addition to the aforementioned operating expense drivers GAAP operating expenses.
As were impacted favorably by a reduction in the contingent consideration obligation for the acquisition of deep pockets 6 million. This adjustment reflects an expected agreement with the former gene Park shareholders regarding milestone payments that were impacted by the pandemic. The contingent consideration obligation reduction is partially offset by acquisition.
And related expenses of 2 million associated with the acquisition of excellence and closed in the quarter GAAP net earnings were 28 million and GAAP diluted EPS was 64 cents now let's look at the details of our two operating segments and 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 and 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 led products rebounding faster than expected late in the quarter.
On demand is rebounding exiting the quarter, we were still experiencing significant headwinds done demand and most products breast I'd products acquired with our acquired with excellence contributed over 1 million in the quarter in our financials revenue from breath, I'd and it takes to l'oreal say or categorize white. Please.
For one 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 a year over year decrease was driven by lower sales volumes and also affected by the continued pricing pressure on our higher margin H. pylori still engine products, which we have mentioned in prior quarters.
Diagnostic suffered an operating loss on adjusted basis, a 7 million as we continue 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 result of planned increases in spending on new product development and clinical.
Files cost absorbed from the acquisition of excellence and an increase of 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 recognize revenues of 63 million delivering nearly as much revenue in the quarter as a delivered in the entirety of fiscal 2019. This performance exceeded our expectations due to robust demand for enzyme mixes used in coven 19, PCR test and the Sars Koby two engines used in high volume Annabel.
Any test we estimate that increased revenue from a pandemic was 48 million split 32 million for molecular products.
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 continued benefits from the large back 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.
Almost 64% demonstrating the leverage this business brings when operating at such a large scale.
Turning to the balance 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 them our borrowing under the revolver at 2.02 person.
Combined with the interest rate swaps already in place 50 million in the balance outstanding is now fixed at a blended rate of 2.16% for the turn of the revolver.
Turning to guidance, we had an exceptional quarter exceeding our expectations on a number of fronts. As a result about performance, we're raising our guidance for the year. We now expect consolidated net revenue for fiscal 2020 to be between 245, and 250 million, which implies Q4 revenue of 55.
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 covert 19 related sales of 12 to 15 million in the fourth quarter, bringing the total impact for the year to 65 to 68 million.
This contributes to full year revenues for life science between 127, and a 130 million and implies revenue in Q4 29 to 32 million concerned about supply chains led a number of our customers to secure more inventory than usual contributing to the record demand in Q3.
Combined with a slower than expected ramp of antibody testing will result in lower demand in Q4 as they work through the inventory pushing future demand in the physical 21. This guidance includes a very limited contribution in sales from our new Sars Koby, two antibody theres usten rapid antigen tests, while there are dozens of.
Customers in the validation phase is unclear if any will complete their development and time to place in the bulk orders in the quarter.
We expect revenues for the diagnostics business to be between 180 to 120 million for the full year, which implies 27 to 29 million in Q4. This assumes the diagnostic testing continues to rebound, but still seeing headwinds at roughly 80% of normal volumes.
Right reduction from our prior guidance range reflects the loss of revenue, we're expecting from the covert 19 antibody test, partially offset slightly by more favorable expectations on the rebound of our core diagnostics business.
But 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 one dollar one to one dollar plot.
Based on our year to date results. This implies adjusted operating margin for the quarter of between 13% and 60% and adjusted diluted EPS of 12 cents to 16 cents.
And our calculation of diluted EPS, we are using 42.8 million shares for Q4, and 42.2 million share 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 and 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 cobot 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, Brian for many companies in health care industry without.
Slide 19 specific products. The June quarter was a real challenge the results of our diagnostic segment in the quarter suggest that should have been the case from meridian as well, but the strength of our diversified business shine 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 assets. We then launch the raw materials necessary for Cobot 19 antibody test and those are now included in over 10 assets.
We plan to continue increasing the number of shots on goal through the addition of the antibody pairs Houston Cobot 19, rapid antigen test and the introduction of our own diagnostics tests.
We have the opportunity to benefit when any of these assay see strong market demand, giving a scale and geographic reach beyond what we would be capable of otherwise.
However, not all of these shops will score we plan to bring an antibody test to market through a partner, but that partner voluntarily withdrew its eway 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 cobot 19 rapid antigen test market and have recently signed an agreement to do so.
The test is CE, Mark and we are in the process of assisting this new partner and submitting their application for USA 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 he way approval, we anticipate submission to the FDA towards the end of this quarter.
So far the shots on goal have delivered great results more than offsetting the other market headwinds from this pandemic our financial position remained strong enabling us to continue to invest in the business both for the near term impact and long term growth. The cobot 19 assay on the revenue gene and partner amino acids, coupled with our life science reagent should position us.
Well into fiscal 21 with that Shelby, let's open it up now for any questions that they may have.
As a reminder, if you'd like to ask a question you may do so by pressing Star then the number one on your telephone keypad again that is star one to ask a question.
Your first question comes from Andrew Brochmann of William Blair.
Hi, Andrew.
Good day area.
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 corporate piece lifestyle segment. I know you said your customers are working through some inventory there, but can you give us maybe an idea how much inventory is still in the channel here and then what are your customers telling you about the burnt their burn rate through that inventory and any potential real.
And the backup that year.
I'll start Brian and you can you can wrap Romney so so Andrew we as the quarter was going we didnt know that we had customers. If you remember when when this was all taking off in.
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 and.
Which is part of the reason why we said in to be in Q as we're doing the just the April call that that we would expect the Q3 to be bigger than Q4, and so that happened to exactly as we had thought.
The thing that happened a little bit different wasn't that the antibody testing. If you remember in the May June timeframe. The diagnostic companies were scrambling to try to be able to build millions of antibody test 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 bolt on the molecular front any immuno assay front on the antibody front they do have inventory.
We are 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 it will 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 test or different story, the antibody test they are stocked up they build capacity to be millions and millions of test and as you know the antibody test at the end user level I did not get out of the gates as fast we think antibody testing will be relevant in the future and we think it'll be an important test. So we think that will start to see demand for that again in.
In fiscal 2001, but we don't expect significant sales on that front in Q4, Brian on if you want to add to that the only thing that I would add to that Andrew is that I think we believe we are well positioned as a reagent supplier, whether its molecular or immuno assay reagents for antibody test a rapid antigen test, we believe we'll roll position to.
To supply the market. So we do see a little bit of a dip here in Q4 as they go through that and the Inogen testing would be the thing that would make a difference, but it's hard to predict when customers. If they if they validated test they have to go through you a submission they have to ramp up we just you know we're optimistic but the timing of that is not clear at this.
Point and our guidance reflects what we have clarity.
Okay perfect I appreciate all that color out some follow ups on the antigen product here in a moment, but maybe I guess sticking with the theme about sort of the market evolution here 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 different geographies that you play and here is in Europe more prone to using.
One type of product versus another and then how did that impact your business here as we think about the next few quarters.
So Andrew we.
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 talked to this topic. The clipped note that I would give you 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 of both 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.
I never really many cases global companies for the antibody test, but it was really more a U.S. based companies and 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 if 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 this slide that we had there will be will walk you through that but I don't know, Brian if there's any.
You want to add to that I think thats wall side.
Okay perfect I appreciate taking a look at that and then I guess wrapping up here and switching to the diagnostic testing opportunity.
Well 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.
Makings partnership and bring it to then the private label.
Can you can you give us an idea of early sensitivity and specificity metrics of that product in Europe.
Competence and bringing that through yet.
Thank you I can give you I 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.
Lotus 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 that they're developing their test that they're 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 those customers how many of those companies are effectively.
Able to get through the way process, and so thats a little bit of the wildcard, but we have a lot of shots on goal. There. So we feel very good in regards to the.
The one that we partnered with on the diagnostic front.
It is using the antibody pairs that we've talked about which we have high confidence in so 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 bts and quite as 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 to will begin selling this product a CE Mark later this quarter. So 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 who have they'll have you a submission will be able to begin bringing that product into the.
Yes.
But this product also will not require an instrument.
The quite L. version in the BD versions, both our instrument required and so this will be ability for rapid test and you don't need an instrument as well, which we think will will be pretty attractive out in the marketplace.
Perfect and then just last one on that.
Manufacturing capacity that you have on that side of things can you just walk walk us through how the manufacturing of that product for work with up your partner or would that be you guys and if it did you guys can you talk about the capacity that you have.
Manufacturer, Jeff Thank you for the.
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 of making a high number of million per week or more type of test capability. So that was 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 to the capacity at the level that these these.
Okay have so high quality product that they had but in addition to that the ability to ramp up the manufacturing where the two reasons why we did this partnership with the third party on the rapid antigen test.
Great. Thanks, guys.
Thanks, Andrew.
As a reminder, if he would like to ask a question. Please press star one there next question is from each one of H.C. Wainwright.
Good morning.
Hi, Good morning, Thank you for taking my questions.
So first question I know you mentioned that your customers is working through the even trade, but do you think that the covenants related growth is somewhat handicapped by shortages in other testing supply citrus R&D expression kits.
So we.
We have heard the the concern of people that do the.
Arnie extraction kit capacity issues that impact our customers, we have not had significant feedback from our customers that the lack of those aren't extraction kits is impacting them with that said theoretically if they can't do the extraction then it would impact our ongoing purchases but.
We have not had significant feedback from customers of that being a limiting factor at this point.
Got it thank you.
And do you think the.
Fiscal fourth quarter as you've guided.
Would serve as a baseline to understand quarterly life science revenue going forward in fiscal 2021.
See this is Brian I think it's still probably a little early for that and the reason I'd say that as we have a line of sight and into current orders that were 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 channel.
Yes, so will likely have more to say on that particular question when we do guidance for fiscal 21.
We're 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.
Well, that's questionnaires in the current quarter heavy observed any.
Scientists are indicators are showing that the diagnostic segment could Brazil grows as hospitals the labs, but on the longer cobot right can cross box start to resume their drilling activity.
We absolutely have started to see signs of rebound in the diagnostic business the.
The initial sign we mentioned was on the led care, we started to see it in June where the led care 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 improvement as of late even in the early part of this quarter, which has helped us towards our guide up 80% for the diagnostic business.
We are starting to see significant increased interest from customers in regards to revenue gene.
Having to do a bit with the way.
Ambition 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 there are so focused on cobot are not able to supply reagents consistently. So we have significant demand increase recently on our revenue and product as well, which is another good leading indicator for us on the diagnostic business.
Got it thank you.
Thank you.
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 in trust in our business over the long term, but also to welcome. The large number of new shareholders side have decided to invest in meridian. We truly believe that meridians 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, we look forward to speaking to you again next quarter have a great debt.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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