Q2 2021 Meridian Bioscience Inc Earnings Call

May 7, 2021

[music].

Good afternoon, and thank you for standing by.

I'll come to the Meridian Bioscience fiscal second quarter 2021 earnings conference call.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you'll need the press star one on your telephone keypad.

Please be advised today's conference is being recorded if you require operator assistance press Star Zero now I would like to hand, the call over to the Vice President of Investor Relations Charlie Wood. Please go ahead.

Holly good morning, and welcome to Meridian's fiscal 2021 second quarter earnings call with me are Jack Kenny Chief Executive Officer, and Brian, but all of US are Chief Financial Officer. Please.

Please note that our SEC filings earnings release and slides to accompany this call are available on our website at Investor Dot Meridian Bioscience Dot com.

Most of copy of these prepared remarks after the call.

With regards to our calendar Jack will be participating in the William Blair growth Conference on June 1st to 3rd and Brian and I will be participating in the Jefferies Healthcare conference of the same dates.

Our Q3 fiscal 2021 earnings call is currently scheduled for Friday August six 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 company's SEC filings the company's results and post pandemic outlook may do.

For 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 may seven 2021, 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 net earnings per diluted share each on an adjusted basis reconciliations of.

These non-GAAP financial measures with the most directly comparable GAAP measures and other related discussion are included in our earnings release I will now turn the call over to Jack. Thank you. Charlie Q2 was another strong quarter for Meridian demand for our life Science products remained high and diagnostics continued to rebound from the headwinds of the pandemic.

I will let Brian go deeper into the financials later in the call and I will start with some of the operational highlights for the quarter.

As you are aware from our prior announcements.

The <unk> Sars COVID-19 two assay saw a setback as we withdrew the EUA application to conduct some further studies as requested by the FDA.

In March we conducted a limit of detection bridging study, which showed a significantly better limit of detection than our initial analysis.

While this is positive news for the performance of the assay. It also meant that we needed to conduct further clinical validation studies before we can resubmit the assay to the FDA.

We expect to complete the clinical validation studies and anticipate resubmitting, our EUA application in June.

Related to the <unk> Sars COVID-19 two assay, we were awarded a second grant of $5 $5 million from the rat ex initiative to ramp up production of the assay manufacturing expansion remains on track with some revisions on manufacturing volume based on the outlook for the maximum capacity needs.

We anticipate initial production on the new lines in Cincinnati happening in our fourth fiscal quarter and.

And our Quebec site, we've been running two shifts two shifts since October of last year and expect to begin our validation processes for the second line. Later this month, followed by manufacturing our first production lots by the end of June.

On the last day of the quarter, our kurian platform had another significant milestone with the five 10-K submission of the kurian can't be assay. This assay is the second assay submitted to the FDA for the platform and the text Cantaloupe actor in human stool, congratulations to the immunoassay R&D team here in Cincinnati, and we look forward to announcing additional submissions from this team in the future.

Commercially we saw a slowdown in orders for the revenue system, which we attribute to a temporary wait and see approach adopted by our customers. While we work toward Resubmission of our <unk> application for the Sars COVID-19 two assay.

In total our diagnostic team installed the net of 37 ravaging instruments, bringing the current install base to 325, and we continue to have a backlog of pending of pending installs lead care was the strongest performer in the quarter posting year over year growth of.

Additionally, lead care two installs were up 20% from the first quarter of 2021 and ahead of our expectations for the second consecutive quarter.

It appears that the blood chemistry business has fully recovered from the headwinds of the pandemic and we are optimistic that the other core products, we're on a similar path and not far behind.

Turning to the life Science segment, Besides the strong financial performance in the quarter. The team also had some exciting operational developments in March life Science launched the first of its sample of specific master mixes. The air-dry of both direct DNA Q PCR blood mix was specifically designed to facilitate the design and manufacture of assays that you.

Crude whole blood serum or plasma samples without the need for extraction.

Its compatibility for use with crude samples coupled with the ability to air dry the assay with our unique mix can accelerate the development and reduce the manufacturing costs for future cancer detection and other blood screening assays the.

This product is part of our approach to simplify to simplifying molecular assay development for our customers by operating mixes optimized for what they're trying to develop a customer needs only to know whether they want to develop of DNA or RNA based assay and what the sample type will be we will point them to the appropriate optimized mix they add their primers and probes and ultimate.

We will reduce the overall development time.

This approach should really benefit our customers and the new post COVID-19 world, where more rapid development of new assays is expected to be the norm overall, a productive quarter for both teams now I will hand, the call over to Brian who will talk about the financial results of the quarter.

Thank you Jack and as Jack mentioned in his opening remarks Q2 was another strong quarter for the company. We reported consolidated revenues of 85 million up 49% year over year, driven by the strong performance from the life Science segment, and partially offset by weakness in the respiratory category of diagnostics.

Excluding the impact of foreign currency exchange rate changes revenues were up 45%.

Consolidated gross profit margin was 68% in the quarter up from 60% in the second quarter of last year. The story continues to be the same as prior quarters with this increase driven by strong improvements in life Science gross margin, primarily as a result of economies of scale from our molecular reagents sales for molecular reagents contributor of that.

Approximately 44% of consolidated revenues for the second quarter of fiscal 'twenty, one compared to approximately 20% for the second quarter of fiscal 'twenty.

On an adjusted or non-GAAP basis first quarter operating income was $32 million with a margin of 38% versus 21% last year adjusted operating expenses were $26 million up a little over $3 million year over year also on an adjusted basis net earnings were 25 million and diluted EPS was <unk> 50.

<unk> growth of 143% from 23 cents in the second quarter of fiscal 'twenty the.

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, particularly for our U S profit sharing of equity award programs on a GAAP basis operating income was 34 million with operating expenses of $24 million.

In addition to the aforementioned operating expense drivers GAAP operating expenses include $1 million in selected legal spending that is offset by a $3 million decrease in our contingent consideration obligation related to the acquisition of Jean Marc GAAP net earnings were $26 million and GAAP diluted EPS was <unk> 60 <unk>.

Now, let's look at the details of our two operating segments diagnostics delivered revenues of almost $32 million. While this was down 9% year over year is important to note that it was up 5% from Q1, continuing the trend of incremental recovery from the lows during the pandemic ex.

For our respiratory products that were adversely affected by a very light respiratory season outside of COVID-19 testing. The other major parts of our diagnostics business Gi and blood chemistry performed near expectations with blood chemistry posted 4% growth year over year.

<unk> was also up 12% year over year, but primarily driven by breath, which.

Which was not a contributor until we close the excellent acquisition in Q3 fiscal 'twenty.

Gross profit margin for the segment was 52% down approximately 200 basis points from Q1 and down approximately 500 basis points from the same quarter last year. The decline in margin from Q1 was driven by inventory reserve provisions for rapid antigen and antibody tests as well as product related to our revenue gene Sars COVID-19 two tests.

From our voluntary withdrawal of the EUA application and.

In addition, the year over year decrease was driven by lower sales volumes and also affected by the continued pricing pressure on our higher margin H pylori stool antigen products, which we have mentioned in prior quarters.

Diagnostics had an operating loss on an adjusted basis of less than $1 million similar to prior quarters. This is the result of our continued investment in new product development and commercial excellence programs. Despite the lower sales levels. In addition to the inventory reserve provisions I just mentioned diagnostics adjusted operating expenses for the quarter were up $1 5 million.

Dollars year over year, driven by spending on new product development programs, including clinical trials and costs absorbed from the acquisition of excellence, including the intangible asset amortization.

Our life Science segment recognized revenues of $53 million, an increase of 139% year over year, we estimate that revenue from COVID-19 products was $31 million of note. This estimate suggest our core revenue was up over 30% year over year, highlighting the initial impact from non COVID-19 new business, we picked up from the customer.

Relationships, we built during the pandemic as well as recovery of our core business gross profit margin was 77% in the quarter of 200 basis points from Q2 of last year. This continues to be driven by economies of scale of our molecular products. The second quarter of fiscal 'twenty was the first one which we saw revenue related to COVID-19.

<unk>, a modest $5 6 million.

The adjusted operating income was $36 million a margin of 68% continuing to demonstrate the leverage this business brings when operating at such a large scale.

Turning to the balance sheet as of March 31, we had $63 million of cash and our borrowing capacity of $110 million under our 160 million of line of credit.

During the quarter, we repaid 9 million of on our revolving credit facility. At this point you can expect we will not reduce our debt balance further due to the interest rate swaps, we have on the remaining portion.

Turning to guidance during.

During the quarter, we had a delay in the timing of a clearance of our <unk> Sars COVID-19 two assay and we continue to explore other partner options for an EUA cleared rapid antigen test given the continued delay in submission from our current partner. Additionally.

Additionally, life science finished the quarter of little behind our expectations as customer orders slowed in March marrying the testing decline seen us the vaccine rollout accelerated.

Despite that we still see good demand for our life science reagents and us are maintaining our life science segment net revenue guidance at this time.

As a result of our voluntary withdrawal of our <unk> Sars COVID-19, two EUA application and expected timing of Resubmission as well as no clear line of sight as to when our current partner will submit its rapid antigen Sars COVID-19 two tests for EUA clearance, we are lowering the diagnostics segment net revenues guidance and the corresponding.

Adjusted diluted EPS contribution to remove any significant contribution from these tests during our second half of fiscal 'twenty. One we now expect consolidated revenues of between 305 and $335 million, reflecting reduced diagnostics revenue expectations by $15 million to between 125% of 134.

$5 million and a reaffirmation of life science revenue expectations of between 180 and $200 million flowing through that reduction of $15 million, resulting in adjusted EPS of between $1 16 of dollars 80 based on the same fully diluted share count of $44 3 million shares. This guidance reflects our current line of sight.

And of the order patterns and assumes that there is no dramatic change in the direction of the pandemic, while lower this guidance is still above the guidance set at the beginning of the year with a range that still overlaps the lower end of the guidance range set last quarter and now I will hand, the call back over to Jack Thanks, Brian overall, a great quarter for Meridian.

Diagnostics continues to advance along the path to recovery and new product development continues despite the timing setback on the revenue and Sars COVID-19. Two assay. We are pleased with the product. The team has developed which is an important step towards the completion of of high quality respiratory panel planned for next year.

The strategy of maximizing our shots on goal continues to deliver strong results for life science. The number of shots continues to climb as customers continue submitting assays for regulatory clearance and their target geographies.

We're excited for some of the assets in our customers' pipelines, including those that address the shift to return to normal testing at the point of need.

While COVID-19 testing appears to be settling in at a lower level. We believe there will be continued durability of this market with a long tail. Our life science business is well situated to provide solutions to the industry as it moves from symptomatic to asymptomatic testing with our comprehensive offering of reagents for Sars COVID-19, two testing, including antigen antibody and <unk>.

<unk> of care of molecular.

As we begin the transition into a post COVID-19 world, we have significant optimism for the future of Meridian, Our life Science, Our life Science segment was transformed by the pandemic and exits with a much larger base and new and fortified customer relationships to fuel future growth. We kept the dogs diagnostics segment on strategy and did not reduce our investment despite the headwinds of the pen.

Demick US testing continues the return to normal diagnostics is positioned to continue the turnaround of that was at the cusp of sustainable growth one year ago, we have generated significant cash adding to our already strong balance sheet and we will continue looking for ways to put our balance sheet to work for both organic and inorganic growth opportunities we.

Your continued interest in the Meridian story and now Brian and I are here to answer any questions that you have Holly can you open it up for questions. Please I'd be glad to ladies and gentlemen, if you would like to ask a question. Please press Star then one on your telephone keypad.

And our first question is going to come from the line of Andrew Brachman with William Blair.

Hey, guys. Good morning, Hey, good morning, Thanks, a lot of merchants.

Maybe to start here on guidance for the balance of the year, Brian I think that you noted that life science has started to slow a little bit in March, but you're maintaining the guidance for the full year, what sort of gives you the confidence in maintaining that and maybe can you talk sort of about the buildup of that maybe the the order book that gives you that kind of confidence in maintaining the thanks, So Andrew I'll start.

And then Brian can wrap around it.

Andrew I think the primary reason I think we've all noted that.

Hospital based testing or the symptomatic type of testing certainly in the United States has really started to level out.

Moving back to more like it was last summer and that type of range and that's what we saw in March.

Because we have different shots on goal, we have a lot of activity and a lot of strong.

Opportunities in regards to antigen based testing and I would say that that is one of the key things we're still seeing good molecular orders. So they continue they won't be at the levels like they were in Q1 and Q2 from of COVID-19 standpoint, but there is still significant but the big difference of why we continue to feel very strong I would say us the antigen based testing where we <unk>.

A number of people that are using our product and we have a number more of that are in the EUA process as we speak Brian I know if you want to add to that the only other thing I would add to that Andrew is that our reagent products work in both symptomatic and asymptomatic channel so the.

We feel that's again, that's the reason we feel good about the back half of the year and maintaining our guidance.

Perfect. Thanks, and then Jack sort of in your closing comments, you talked about how meridian sort of in a much better position net exiting the pandemic than it did entering and sort of the transformation that you saw in the life science side and sort of maintaining the strategy on diagnostics.

Fair in your mind to think that 2022 is really the year, where all of the starts to come together and the underlying business sort of grows at that mid to high single digits on the core basis, excluding the cross ones with the pandemic, Yeah, I would say I would say Andrew that that's a fair assessment the assumption being that.

Testing does continue the COVID-19 doesn't like flare backup in some crazy way when you get into 2022.

We have seen continued improvement of the core.

The acquisition of excellence is just starting to gain momentum.

Finally, now with our sales reps being able to get back out in front of customers and they are wanting to talk about things other than COVID-19 and so we're starting to see a lot more activity in products like the like the breadth of product and so we do anticipate.

A good rebound of the diagnostic business and we think the life science business will be at a much larger base as we go forward because.

COVID-19 testing will continue certainly the life science side, but we picked up and built millions of dollars worth of new relationships because of that that we can start to leverage. So we're optimistic that you'll see us improvement in diagnostics.

And a much larger stronger life science business on the back end of this.

Perfect and then last one for me.

You sort of mentioned capital allocation there at the end of your script, how should we be thinking about that in terms of inorganic means in the back half of the year and then anything that we should be aware of as it relates to sort of additional organic investments that you have planned for the balance of this year and into 'twenty. Two thanks for the questions. So I'll start Brian and you can wrap around if you want.

I would say Andrew that our strategy Hasnt changed.

We are going to use the cash that we're generating to look at opportunities to build a stronger meridian.

We are continuing high levels of R&D. So the organic investment remains high and we're keeping high percentages of of our sales. If you will going back into the R&D side on both of the diagnostics side as well as in the life Science side, and then I think you'll continue to see us look at.

Bolt on opportunities as we've looked at before we were fortunate when we did the excellent acquisition. We kept moving ahead with that we believed it was the right thing to do we essentially funded that fully.

From from the operations last year. So we took on a very nice opportunity in asset there and ultimately we're able to pay for it fully.

In last year's cash that we had and we do believe that we have the opportunity to continue to do things like that so we're actively keeping our eyes out and we will continue our processes that we've been implementing.

So what I would say that we were going to keep running the same course that we were running before we came into it but our financial situation just continues to be even stronger Bryan anything to add to that I don't think there's anything I can add to that Jack okay.

Great. Thanks, guys. Thanks, Andrew.

And our next question will come from the line of.

Ken with H C Wainwright.

Good morning.

Hi.

For taking my questions. Good morning, So I noticed that the <unk>.

COVID-19, immunological products have a bigger drop from fiscal first quarter, two the fiscal second quarter compared to the COVID-19 molecular products do you think that trend will continue.

Through the remainder of 2021.

So we.

There was some ordering patterns and different things that happened in Q1, there was still some antibody purchases and things like that that occurred in Q1. So Q1 was strong Q2 was a little bit lighter on the antigen side, although we would say that we would anticipate you're going to see an improvement in of strengthening on the overall immuno side as we go.

Forward in Q3 and Q4, so we're looking at that being a little bit more of a contributor than it was quite frankly in Q1 and Q2.

From a percentage standpoint, Brian the other thing that I would add is that there are some hotspots around the world outside the United States that.

We're still seeing interest in our molecular reagents as well for COVID-19. So.

You may see some ebbs and flows based on the geographies that we're selling into for the back half of the year.

Got it.

As COVID-19, the best things get wider distribution do you think going forward, especially towards the end of 2021 of the into 2022.

The rep.

Rapid point of care of antigen test could potentially have a bigger.

ROE compared to the PCR testing.

We think that.

Youll, probably start to see something that's a little bit more balanced we don't think it will get bigger than the molecular because we do believe that we've got a good base of large number of people using the molecular tests, but the yield that will level out a little bit. If you will as we go forward and go into 2022, but we do see the antigen kind of ramping the antigen based testing ramping so us right now.

We're maybe three fourths of it is on the molecular side.

The one fourth being the immuno I would say that it will it will move a little bit closer to a more balanced between those two.

As we go forward, we still see strong molecular but youll see an increase on the on the immuno that kind of closing some of that GAAP.

Got it got it.

And with respect to the ravaging covenant testing product when the eventually reaches the market do you see us more to get more utilization of the hospital setting or the point of care setting.

One of the offices.

We do think it has applications in both in both settings I would say that we have a stronger position in the hospital marketplace than we do in the point of care. We do have a position of the point of care and of this will probably help to expand that.

So for US as Brian mentioned, we're not counting on anything significant from the COVID-19 and the remainder of this fiscal year, but it's still an important assay for us because we do believe COVID-19 testing is going to be pretty important as you go into the next flu season, and so for US It was really making sure we have the right product work with the FDA and work to try to secure an EUA approval.

We're prepared for next flu season, and that's really what we're working towards I think youll see us are of higher install bases in the hospital marketplace, but we have seen interest in the in the point of care side of things as well.

Got it thank you.

Thank you.

Again, if you would like to ask a question press star one.

Our next question will come from the line of Steven Mah with Piper Sandler.

Good morning, David Good morning, Hey, Good morning, Hey, Thanks for taking the questions.

Absolutely.

So one follow up question on the life Science Guide.

Given given the push towards point of care antigen testing.

Number of manufacturers got EUA for serial testing and there seems to be a lot more.

Funding from the government.

Is there any upside potential to your life Science guide as we possibly shift towards more look returned to office testing returned to school testing using the antigen testing just maybe get your thoughts on that.

I would say that in our guide.

We do part of the reason that we are holding our guidance is that we do see that that lifestyle. If you will return to normal testing being a part of the reason why we're able to be very confident in holding our guidance.

I would say upside would be more dependent upon a number of different companies. If they were able to secure EUA approval and thats not something that I.

Personally wouldn't want to handicap.

There are a number of people that are working using our products trying to work their way through an EUA process and their success from a number of those in there that would lead towards the upside, but a little bit early to say on that Stephen.

Okay, Yes, no that's fair enough and understandable.

And then maybe moving over to the diagnostics guide.

Q2 2021 Meridian Bioscience Inc Earnings Call

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