Q1 2021 Meridian Bioscience Inc Earnings Call
Ladies and gentlemen, this is the operator your conference is scheduled to begin in approximately one minute until that time. Your line is will again be placed on music hold.
Thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the Meridian Bioscience fiscal first quarter 'twenty 'twenty One earnings conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
You ask a question during this time you're on each press Star then one on your telephone.
If you require any further assistance. Please press star then zero.
I would now like to hand, the conference over to your first speaker today, Mr. Charlie Webb Vice President Investor Relations. Please go ahead.
Thank you Amy good morning, and welcome to Meridian's fiscal 'twenty 'twenty, one first quarter earnings call with me are Jack Kenny Chief Executive Officer, and Bryan <unk> Chief Financial Officer.
Please note that our SEC filings earnings release and slides to accompany this call are available on our website at Investor day from Meridian Bioscience Dot 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 Global Life Sciences Conference on March 9th and 10th and our Q2 fiscal 2021 earnings call is currently scheduled for Friday may 7th 2021.
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 Companys 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 February five 2021 and undertakes no obligation to publicly update them. Additionally throughout this presentation, we refer to non-GAAP financial measures specifically operating expenses.
As operating income operating margin net earnings and net earnings per diluted 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 the earnings release and now I'd like to turn the call over to Jack.
Thanks, Charlie I'm excited I'm excited to discuss with you another incredible quarter for Meridian.
Record quarterly revenue and earnings per share, beating out our third quarter of fiscal 2020 in the heat of the first wave of the pandemic.
For life Science segment continues to be the driving force with substantial demand for our COVID-19 related reagents, but strength of the core business should not be overlooked.
Diagnostics continued its recovery from the pandemic driven lows in our third quarter of fiscal 'twenty before hitting a plateau in December notably despite the ramp in resurgence of the virus and the return of some restrictive orders diagnostic results did not retreat and ended posting single digit gains above Q for Brian will elaborate further when he per cent for.
Financials later on the call.
We had a number of business achievements in the quarter I would like to highlight as well as provide an update on initiatives and progress in life Science, We launched the <unk> version of our proprietary here Drybulk Master mix. If you recall, we launched the DNA version about a year ago, but it was not a focus at the time as it was not applicable to the COVID-19 pandemic that was beginning to unfold.
Even though I don't think it is getting enough attention for.
For this innovation that it brings and we believe that this is a game changing situation for the development of molecular assays as manufacturing molecular tests and a dry format reduces transportation and storage complexities.
Attractive feature for IBD companies as well as our customers per.
Previously the only option for delivering a dry form on assay was to use a process called <unk>, which requires owning specialized equipment or sending the kits for a third party both being expensive options that had multiple dollars in cost per test.
Our new mix the first commercially available of its kind facilitates the same end result, but in a much more cost effective and simpler manner using a standard commercial oven.
Over 50 customers have sampled this mix and initial feedback has been outstanding with some reporting even better performance in our highly other highly acclaimed wet or last july's mixes. We think this can really revolutionize the way companies approach from molecular diagnostic development and help us to establish a position in other adjacent markets such as veterinary.
Environmental food and forensic diagnostics.
On the diagnostics side in December we submitted the ravaging Sars Covid two assay to the FDA for emergency use authorization and began shipping kits in January.
This is an important milestone for meridian as it is both the first new assay submitted to the FDA since our acquisition of <unk> and the first RNA based assay on the <unk> platform.
This assay was also developed with funding and other support from the NIH Rad ex initiatives Meridian was one of 47 projects that need to cut and moved to phase one of the programs.
The <unk> Sars Covid two assay is a real time RT PCR test with the same simplified workflow of the other revenue on assays using nasal pharyngeal specimens and returns results in 85 minutes with an early call for positive samples as soon as 47 minutes, we look forward to receiving EUA approval in the coming weeks.
As I mentioned, we recently began shipping the first kiss to select customers in the U S as with any new assay, particularly the first of its kind for a platform. It will take some time to optimize the production further we are taking the approach of maintaining necessary production volumes of the other core revenue on assays to meet the to meet the needs of our customers some of them who.
Some of whom we have won in recent months from competitors that have put their non COVID-19 products on back order or allocation.
We continued to play the long game focus on building strong customer relationships through exceptional customer service and reliable supply.
Anticipation for the ravages Sars Covid two assay, receiving Yue has led to an acceleration of instrument placements, resulting in 57 net new placements in the quarter, bringing the total installed base as of December 31, 2020 to 288 systems and we continue to be in tobacco for situation.
To address the expected demand for the COVID-19 assay, we have developed a plan for ramping production of ravaging pies and I can share some of those details today.
As we announced earlier this week in conjunction with over $5 $5 million of New awards from Phase two of the NIH Rad ex initiative jobs, Ohio, and the village of New town. We are opening a new facility down the street from our corporate headquarters here in Cincinnati.
This new facility will house to automated production lines, coupled with the addition of a second shift and another manual line in Quebec, we are targeting to ramp to a maximum capacity of 800000 pies per month by the end of the calendar year.
This requires new custom machinery, there is still much to do to get this facility online and we will provide further updates on our progress as the year continues.
Diagnostics, new product development continues to progress for clinical trials for gastrointestinal assay continues to be slow due to the challenges in obtaining patient specimens. Despite this challenge we still anticipate starting clinical trials procure and C. Difficile in February while the Korean Cantaloupe actor assay has completed its clinical trials.
Preparation for an expected FDA submission in early Q3.
The <unk> Gi panel continues to be on track to start clinical trials later this year in.
In respiratory the ravaging IRI panel clinical trials are being delayed as a result of the light respiratory season that we're experiencing limiting access to patient specimens as well as the need to redirect resources to focus on the new production ramp plans for the Sars Covid two assay.
This will likely push FDA submission for this assay out of the fiscal year, but with the progress on the other assay still puts us on track to submit for new assays in fiscal 'twenty, one consistent with our strategy to submit two to four new assays per year.
Lastly, I thought it would be good to provide some update on the progress we have made in our billerica facility over the last year, we submitted a number of written responses and worked hard on our remediation plans to address the issues raised by the FDA and the for 83 comments received in June of 2017 and October of 2019.
In October of 2020, the FDA close the inspections from June 2017, and October 2019, the warning letter issued in October 2017 remains outstanding pending a future FDA inspection and we have notified them that we are ready.
While not fully resolved we've made meaningful progress on we look forward to welcoming the FDA to complete their inspection now I'll hand, the call over to Brian to talk about the financials for the quarter.
Jack as Jack mentioned in his opening remarks Q1 was another record quarter for the company, we reported consolidated revenues of $93 million up 96% year over year, driven largely by the strong performance from our life Science segment, excluding the impact of foreign currency exchange rate changes revenues were up 93 per.
On <unk>.
Consolidated gross profit margin was 66% in the quarter up from 58% in the first quarter of last year. The story remains consistent with this increased driven by strong improvements on life Science gross margin, primarily as a result of economies of scale from our molecular reagents.
Sales of molecular reagents contributed approximately 50% of consolidated revenues for the first quarter of fiscal 'twenty, one compared to approximately 11% for the first quarter of fiscal 'twenty on.
On an adjusted or non-GAAP basis first quarter operating income was $37 million with a margin of 40% versus 15% last year adjusted operating expenses were $25 million up a little over $4 million year over year also on on adjusted basis net earnings were 28 million and diluted EPS was.
65.
Growth of 550% from 10 cents for the first quarter of fiscal 'twenty.
The year over year increase in operating expenses was driven primarily by the incremental expenses added by the excellent acquisition, including purchase accounting amortization as well as incentive compensation for our cash bonus and equity award programs on a GAAP basis operating income was 35 million with operating expenses of 27.
In addition to the aforementioned operating expense drivers GAAP operating expenses include $1 2 million and selected legal spending and a $1 million increase in contingent consideration related to the acquisition of Jean Pascal <unk>.
GAAP net earnings were $27 million and GAAP diluted EPS was <unk> 61.
Now, let's look at the details of our two operating segments.
Diagnostics delivered revenues of $30 million, while this was down 13% year over year. It is important to note that it was up 2% from Q4 of last year and up 40% from the lows seen in Q3 of last year during the heat for the first wave of the pandemic.
The early part of the quarter saw continued progress on our recovery in a sense flattened as infection rates climb, but people stayed home more we think it's a positive sign that the recovery only installed into non retreat and we remain optimistic gross profit margin for the segment was 54% an improvement from 53% in Q4.
For though down from 60% on 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 had mentioned in prior quarters diagnostics had an operating loss on on adjusted basis of less than $1 million similar to prior quarters. This was a result of our continued investment in.
New product development and commercial excellence programs. Despite the lower sales levels diagnostics adjusted operating expenses for the quarter were up $2 million year over year, driven by spending on new product development programs, including clinical trial costs and cost absorbed from the acquisition of excellence, including intangible asset amortization on.
Life Science segment recognized revenues of $63 million, an increase of 396% year over year, we estimate that revenue from COVID-19 products was $43 million of note. Our core revenue was up 55% year over year, highlighting the initial impact from non Covid new business, we are picking up from the customer.
<unk> ships, we are building during the pandemic.
Gross profit margin exceeded 72% in the quarter up from 53% in Q1 of last year. This continues to be driven by economies of scale for our molecular products.
Keep in mind that we did not have any COVID-19 revenue contributions in our first quarter of fiscal 'twenty.
Adjusted operating income was $40 million a margin of 64% continuing to demonstrate the leverage this business brings when operating at such a large scale turning to the balance sheet as of December 31, We had 63 million in cash and a borrowing capacity of $101 million under our $60 million line of credit.
During the quarter, we repaid $10 million on our revolving credit facility over the next few quarters, we plan to leverage our strong balance sheet.
For further fortify our production capacity in life science and build out the new rubber gene manufacturing lines, So expect to see significantly higher capital expenditures on our historical average as we make those investments.
Now turning to guidance as mentioned when we pre announced our revenue for the quarter, we expect demand for our life science products to continue to be robust in Q2, while the current level of infection in the U S continues to suppress growth in diagnostics. We are still optimistic that recovery will continue throughout the fiscal year as such we are raising our.
For fiscal year guidance, we now expect consolidated revenues between 320 and $350 million holding diagnostics revenue expectations to between 140 and $150 million and raising life science revenue expectations to between 180 and $200 million.
Like many companies are continues to be difficult for us to forecast. During these uncertain times. We expect that you will notice that the second half of the year is implied to be lower than the first half and life science for forecast for the second half of the year assumes we returned to levels similar to the fourth quarter of fiscal 2020 in anticipation of declining infection.
As the COVID-19 vaccines are administered around the world. Even so we expect this would result in life science revenue significantly above pre pandemic levels and diagnostics revenue contributions from our COVID-19 assays offsetting lingering headwinds from the pandemic.
As we mentioned previously it is becoming more difficult to distinguish between Covid revenue and non Covid revenue in our life science segment as more customers receive product shipments destined for inclusion in both Covid and non Covid assays. We will continue to report this metric as long as we are able to however, we are not going to call out the revenue contribution expected for.
From the pandemic going forward, while we are not quantifying it our guidance raise does contemplate more life science revenue coming from COVID-19 demand than in our original guidance issued back in November.
Adjusted operating margin is expected to be between 31% and 33%. This raise guidance results on an adjusted EPS between $1 70, and $1 90 based on the same fully diluted share count of 44 3 million shares.
This guidance reflects our current line of sight into order patterns and assumes that we do not encounter any significant reductions and manufacturing capacity as a result of the pandemic, causing either partial or full site closures for an extended period of time adversely affecting our supply chain for raw materials or delaying the buildout of our new.
<unk> manufacturing facility and now I will hand, the call back over to Jack.
Thanks, Brian another great quarter on the books and another quarter that demonstrated the continued impact we were having on the global COVID-19 testing demands.
I would like to go back to something Brian mentioned about our life science results not only was there a strong contribution from COVID-19 related products, but our core business was up significantly as well. This speaks to the durability of the business that we are building.
I'm sure you've heard this phrase too many times in the last few weeks, but it is certainly applicable to US we are a COVID-19 beneficiary, but we're not COVID-19 dependent.
In the last few weeks, we received supplier awards from two of the top global IBD companies recognizing us for our partnership during the past year as they manage their COVID-19 business. This is an example of the great relationships. We are building with our life science customers that will continue to produce results long after the pandemic.
We continue to tell our story and are grateful for all the new as well as existing investors that see long term potential and what we're building and continue to support US now Brian Leary here for any questions that you have Amy can we open up the line for questions.
At this time, ladies and gentlemen, if you would like to ask a question. Please press Star then one on your telephone.
Your first question today comes from the line of Andrew Backman with William Blair. Please proceed with your question Andrew Good morning, Hey, guys.
Morning.
Thanks for taking the questions maybe to start Jack obviously, a lot and they start up meridian sort of over the last year, but more broadly can you maybe talk about how you see life Sciences and diagnostics landscape looking from an industry standpoint coming out of Covid and then related to that how does that framework really inform how youre thinking about the.
Business is today versus maybe a year ago at this time in terms of investment and or acquisition. Thanks.
Sure no problem. So I'll start this and Brian if you want to add you can.
I think first of all that.
Certainly the world has changed a lot in the last year.
And.
Covid has certainly for us as well as other companies to really pivot.
With that being said the good news for us in both our life science and diagnostic businesses is we had already been working on our strategy and we didn't really change our strategy at all this really fed into the strategy that we had been working to implement over the last couple of years. So we see ourselves coming out of this COVID-19 pandemic with really an acceleration of the strat.
<unk> that we've been working on over the last couple of years.
We do think that we will see a return of the non COVID-19 related business over the next 12 months that will be kind of a slow steady return as COVID-19 gets brought into more control or whatever that looks like in the future and we do think that will come out of this being stronger and that we have our non.
<unk> business, returning back to growth as well as then a larger position because there will be COVID-19 testing that on <unk> is ongoing.
For both our life science business and for our diagnostic business. So in general I would say that.
For Us. This has we had a good balance sheet coming into this situation. This strengthens our balance sheet and enables us to consider further strategic opportunities that may present themselves over the coming months and we certainly have a more programmatic approach looking at that with the addition of Charlie onto our team and the work that we're doing we're in a position to key.
Our eyes and ears open for strategic acquisitions that really will help us to continue the strategies. We have Brian you want to add to that is just the other thing that I would add Andrew This has really been an opportunity for us to accelerate strengthening our manufacturing on both sides of our business. So from a life science standpoint, increasing that capacity and then very specifically on.
On the diagnostics side were building out automated manufacturing for <unk> that we might have done in the future. This was accelerated our ability to do that and I think puts us on a better position post pandemic going forward.
That's great. Thanks for that guys and then Brian maybe one for you just on guidance real quick. So appreciate sort of your comments on the diagnostics segment here, but if I just sort of annualize what you guys did in the first fiscal quarter. It looks like there's about $20 million of soft growth that's needed for the rest of the year to hit the bottom end of the range. So maybe can you just give us an idea for.
How we should be thinking about that growth between the base recovery and then contribution from <unk> and potentially antigen products.
Sure Yeah, so from a big picture perspective, Andrew the $3 20 to $3 50 range is based on again, we've been talking about visibility over the next three or four months is our best visibility we have less visibility for the second half of the fiscal year. So we're not trying to get too far out in terms of.
Predicting what's going to happen. However, we are confident enough for the life science side of the business just to kind of reiterate we do see the second half being being similar to what we experienced in Q4 of last year. So hopefully that helps you put some framework around.
The life science part of the business I would say on the diagnostic side you know right now we're thinking we're going to see a slow but steady return to pre pandemic volume levels and that's really why we're holding our two or $1 40 to 150 revenue range on the diagnostic side and certainly one of the <unk>.
Implications to that is as we ramp up manufacturing of the Sars Covid two test on the <unk>, that's going to have an impact on the numbers for the second half of the year. In particular, you will see some contribution during Q2, but you would see a higher contribution from that particular platform in Q3 and Q4.
And just to add to that as Brian said, you had a $30 million core business and diagnostics, which we think will improve slightly as we go forward take that times for us $120 million I think that gives you a pretty good idea at a little bit of growth into that in the core business going forward and then take your COVID-19 stuff on top of it and that's why we have.
Such confidence in the $1 40 to $1 50 range that we put out there on the diagnostic side Andrew.
Great. Thanks for that and then last one for me I didn't hear it in the prepared remarks, we're just going to ask if there's any sort of update the timing on bringing me.
Partnering antigen product to the U S. Thanks.
Yes, so so the partnered antigen project.
<unk> continues to move forward, obviously, the we would anticipate that our partner would be submitting to the FDA in the coming weeks and so we have been working closely with that partner, helping them from a regulatory and quality standpoint as they work on their preparation to submit they had been taking the time to do the extra work too.
To really have the data that's needed to get a point of care designation and so they are working towards a submission on that in the coming weeks and then again, we see that being more relevant to US is we probably are Q3 and beyond at this point, but we're still very optimistic about that especially when you start seeing comments from the baidu.
Asian about increased testing and keeping that testing going so we do believe that we'll be able to have a bigger position on that in the second half of the year, we have been selling those products in Europe, that's a smaller market for us, but the feedback has been positive from from our sales team as well as our customers in Europe, and we're looking forward to bringing that into the U S. Here and we think that'll.
Another part of why we are still holding to our guidance and feel confident of the 140 to $1 50.
Great. Thanks, guys.
Thank you Edward.
Your next question comes from the line of Rachel balance at all.
With Piper Sandler. Please proceed with your question.
Rachel.
This is Rachel on for Steve Thanks for taking the questions and congrats on the quarter you guys. Thank you. So first can you talk us through the puts and takes on a life Science Guide can you walk us through any conservatism you tuck and then what are you assuming for waiting throughout the year.
<unk> 40 on for example, so just walk us through what Youre thinking on that.
So Rachel are thinking on that and again, we don't do quarterly guidance. So what we have published is certainly annual guidance and I would reiterate kind of what we've been saying.
One our best visibility that we have into order patterns with our customers is over the next three or four months.
And so we that's why we have commented on Q2 or Q2 being similar to Q1 in terms of the revenue figure that we just reported for life science here in that $60 million range. If you will from a second half perspective, again, we're kind of calling or.
Forecasting right now that the second half would be similar to our Q4 of last year for life Science for I believe we did in the neighborhood of $35 million of revenues to give you. Some order of magnitude around the numbers, that's where our current thinking is we're certainly not trying to say we have the crystal ball around all of this.
That we're trying to not get out over our skis in terms of how we're looking at forecasting the business. During these pandemic times and Rachel I think you'll have it.
We'll have a little bit more clarity on the second half as we get to the next quarter's call, but again.
We did have objective evidence of kind of what when Covid is here, but not rampant and that was our Q4 of last year on the summer before late summer before things got crazy in the fall. So that's that's why we use that as our guide because we feel that that is a reasonable place perhaps.
<unk>, but again, we don't know what's going to happen with regards to the effectiveness of the vaccines of the variance create other problems. There's a lot of other pieces that are out there.
So if anything we we took what we felt very confident with and that's what we put out there at this time.
Other thing that I would just kind of wrap this question up on Rachel is we do expect our mix between on what the molecular her and immuno to continue during the rest of the fiscal year. So you know as we've talked about the higher level of contribution of molecular reagents versus immuno reagents, certainly helps our operating margins.
And that's not just for that day.
Yes, when I say that desktop just for 'twenty, one thing that's something that we're thinking about even in 'twenty 'twenty two and beyond.
Got it okay. That's helpful on.
My next question.
I think you're remedying assay in December.
Do you hear about some delays from EUA approvals at the FDA. So can you just tell us the latest on that and you guys aren't having any dialogue with FDA on what are you assuming for timing of that approval.
So as we mentioned before we submitted the EUA in the December and the.
December timeframe.
Package went into them, we did receive feedback from the FDA a few weeks back before weeks back have responded to the FDA with what I would describe as limited questions that we felt very comfortable to respond.
So we're anticipating in the coming weeks that with that we will hear back from the FDA and we're certainly optimistic on the FDA has a lot on their plate is very active they're getting hit from many angles with the submissions.
So I can tell you that for US we had a very thorough submission and we received positive feedback from the FDA about the quality of our submission. So we.
We do believe that having a highly high quality submission gives you a better chance of them reviewing it and so so we are optimistic in the coming weeks that will that will hear good news from them.
Awesome, that's great and then last question for me can you just talk.
About your thoughts on Covid testing durability beyond 2021, so looking at day 2022 and beyond.
I wish I could tell you exactly what it was I will tell you my thoughts.
I think everybody's got an opinion on this.
We have as we said we're doing our forecasting we're trying to remain conservative with what we have good line of sight to but I will tell you that we do believe that that first and foremost is that this this has changed diagnostics in many ways.
Diagnostic test.
Not ask for by name. This is something that's going to be with us for years to come. So we do think that this COVID-19 testing will continue and have a long tail, whether that means youre kind of like doubling of flu season that certainly is a very viable way people won't just go to get a flu test, though most likely want to get a flu and COVID-19 combo type of tests as we go forward.
So we do think that there'll be a significant in 'twenty two and beyond.
<unk> market that's out there what we really arent clear about is obviously what happens over the next 12 months.
I would say that again, our estimates were conservative with what we have good line of sight too, but we have the good news for us when we look at our business as well we have a lot of different ways.
For example, antibody testing is something that was talked about last summer fell out of favor. We believe is vaccination increases and more people are vaccinated that they're likely to see higher levels of antibody testing being done and so antigens could come down over time, if the disease gets more on control, but the antibody testing is likely to increase that people want to test.
To make sure that they had the vaccine and the vaccine was effective and so on.
Our general view is that this will be a continued continued significant market with COVID-19.
We think of it as almost like a doubling of the flu market in the long term as kind of the way that we're viewing it.
Perfect. That's all my question for you guys.
Very much Rachel Inc.
Your next question comes from the line of Lee Chen with H C. Wainwright. Please proceed with your question good morning.
Good morning.
Thank you for taking my questions.
So my first question is on.
Or your COVID-19 test regions in the life Science segment affected by the mutant streams identified in U K, South Africa, and Brazil with respect to sensitivity and specificity and also is the <unk> COVID-19 SC affected by the mutant streams as well great.
Question. So so first of all let me start on the life Science side I remember on the life science side that that really question is only applicable to the.
The.
The antibodies that we are making for the antigen testing.
Because if you remember on the molecular side, we're making a mix and then other people developed are on primers and probes for that or they bring their own primers and probes as far as as far as our antibody pairs. We have our customers have done extensive testing and we have in dialogue with our customers. We have high confidence that we are not affected by these strains.
The ones that had been identified our test is performing.
At a very at the same level. So we can't speak to future strains is if more variance come out and things of that nature, but of all the ones that had been identified so far our customers are reporting strong performance and no degradation in performance with our with our antibody pairs.
In regards to ravaging very similar answer to that.
Our remedies, we have done extensive testing in regards to the strains that are out there. The U K variant South African et cetera, and we are not seeing an impact from those so we are staying very close on emerging.
Changes that are going on as far as the strains and whats happening, but at this point none of them have had a negative impact on the ability for our test to perform.
Got it so does the company have an assay that can identify or differentiate the mute constraints from the original Sars Covid two and if not is the company currently day by looking for.
I don't know that I've got a great answer on that one.
It's probably one that I will go back to my team to get a little bit more I know, we do not have a current tests to do that whether or not we've got folks that are looking at that that is one that I'm not sure about and full disclosure. So that's one that I'll have to do some research and circle back on.
Got it that's all thank you.
Thank you very much.
And there are no further questions in queue at this time I turn the call back to the presenters for any closing remarks. Thank you very much Amy well first of all thank you for joining US today. We certainly appreciate your support and we're very excited about our future. We look forward to speaking to you again in May have a great day, and we'll talk to you soon.
And this concludes today's conference call. Thank you for your participation you may now disconnect.
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