Q2 2022 Meridian Bioscience Inc Earnings Call
Let me remind you that the presentation and the company's remarks include forward looking statements forward looking statements are subject to numerous risks and uncertainties many of which are beyond the company's control, including risks and uncertainties described from time to time in the company's SEC filings.
The company's results may differ materially from those projected.
<unk> makes these statements as of today may six 2022 and undertakes no obligation to publicly update them. Additionally, the company's remarks also include market data based on managements knowledge of the industry in good faith estimates of management. The market data referenced involves a number of assumptions and limitations and you are cautioned not to give undue weight to such estimates.
And we believe the estimated market position market opportunity and market size information is generally reliable such information, which in part is derived from management's estimates and beliefs is inherently uncertain and imprecise and has not been verified by any independent source.
Lastly 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. A reconciliation of these non-GAAP financial measures with the most directly comparable <unk>.
Terrible GAAP measures and other related discussion are included in our earnings release, and now I would like to turn the call over to Jack.
Thank you Charlie Q2 was a fantastic quarter for Meridian and another all time record for revenue would makes it even better at both business units. We're firing on all cylinders individually producing record quarterly revenue, Andy who joined US in February we'll go over the financial results in more detail later in the call.
Overall, we saw growth with strong demand for COVID-19 products from both life science and diagnostics segments due to the omicron Varian however outside outside of sales of the COVID-19 antigen test diagnostics also saw growth in other respiratory products and in our urea breath test for H pylori.
As others have reported we too saw demand for COVID-19 product subside in the last few weeks of the quarter as one would expect as <unk> cases have decreased around the world consistent with the typical end of respiratory season.
In parallel we are seeing laboratory diagnostics increased focus on their core business of non COVID-19 testing, which bodes well for a new normal in the endemic stage for the virus.
In February we completed the work necessary to bring lead care two assay back to the market. Six weeks ahead of schedule. The team is still working through a backlog of orders, but the good news is that demand is high with customers and they are excited to be able to use our point of care led test for their patients again.
In early March we completed work on the <unk> <unk> assay and submitted our analysis to the FDA as part of the dialogue with the FDA. They requested some additional data we have provided some of the data and are in the process of conducting the additional studies necessary to complete their request we expect to finish those studies in the next few weeks and are hopeful for an expedited review, bringing.
This assay to market remains essential for the <unk> instrument as customers continue to wait for to begin shipping before installing new instruments. The <unk> install base as of the end of the quarter was 375 up from 370 at the end of Q1.
As I mentioned in our last earnings call, our new <unk> manufacturing line in Cincinnati completed validation of the first line and began producing group a strep kits, we've already noticed a positive impact from the automated manufacturing in Cincinnati as it requires fewer staff to produce the same number of kits per ship then enter Quebec facility.
The upcoming second manufacturing line in Cincinnati, we will have even greater production efficiency and capacity and is expected to be online. Later. This year also in the quarter. The Cincinnati team will begin began validation of the second ravaging assay C. Diff, we expect to complete the validation and begin producing those kits and our new manufacturing facility by the end of the quarter.
With regards to the new product to new product development, you will notice in our slides some changes to the FDA submission and expectations for the fiscal year all.
All the assays, we plan to submit this year were expected late in the fiscal year with recent delays in starting clinical trials for the <unk> gastrointestinal panel and Korean ceded it is clear that we will not be able to submit those this fiscal year. Additionally, there was another limited flu season, which impacted the timing of the clinical for the <unk> respiratory panel and delayed into the next respiratory season.
That said carrying sugar toxin is currently in clinical and is still on track for submission late in September .
New to the chart in February we submitted a new claim to the FDA for urea breath test on the breath I'd platform. The current package insert states that the test may not be performed if the patient has been taking proton pump inhibitors or PPI is within the last two weeks.
The new requested labeling modification informs clinicians that they May act. Upon a positive test result in patients that were using PPI within two weeks of the breath test.
In the event of a negative test result, the test will need to be repeated after two weeks of discontinuing use of Ppas. We believe this new claim will improve marketability and patient usage of the product. The FDA has indicated it could take up to nine months to review our submission and we will provide more details after receiving feedback from the FDA congratulations to our team in Israel for getting that work completed.
Turning to life Science earlier this week, we announced the acquisition of new protein a company in New Jersey that specializes in the design and manufacture of recombinant proteins. They have quickly integrated into our R&D team and will help us accelerate our pipeline of new immunoassay reagents. We're excited to welcome your protein into the Meridian family and we'll share more about what they are working on in the coming quarters.
Additionally, we expanded the sample specific master mix portfolio with the launch of the Lisle ready blood specific master mix and launched a new detergent free Taco antigen ideal for large lab based immunoassay systems.
Continuing with the format I introduced last quarter I would like to take a few minutes to dive deeper into our life science business in an effort to highlight the opportunity ahead of us.
As a reminder, when I joined Meridian there were two business units that made up what today what is today known as our life Science segment and each was run separately with different strategies immuno business had decades of experience selling to the largest diagnostic companies in the world, whereas the molecular business was mainly focused on research and academia. We merge these two segments into one.
And at the end of fiscal 2018, we decided to pivot the molecular business to focus on large diagnostic companies that essentially required an overhaul of the sales team as well as creation of an entirely new molecular product line designed for the designed for the needs of global diagnostic companies those strategic shifts were timed perfectly and the company was well positioned.
<unk> at the beginning of 2020 to meet the unprecedented testing demands of a global pandemic.
The pandemic accelerated the need to develop assays quickly measured in weeks and not months R&D scientists turned to a ready made Q PCR master mixes to accelerate their development timelines Meridian's master mixes.
I'm extremely popular due to their performance and our ability to quickly supply the large quantities that will require.
The pandemic unfolded, there were shortages of RNA extraction kits necessary to process patient samples and response our team developed the first commercially available inhibitor tolerant mix that did not require RNA extraction that means you can take the patient sample direct to the assay without further extraction steps.
It was this experience that has shaped our unique strategy to support the diagnostics industry, we view ourselves as a partner to R&D teams around the world with the goal of supplying them. The best performing master mixes optimized for their specific need in order to accelerate the development of world class assets.
We became extremely focused on disrupting the way asses are developed and creating a series and created a series of master mixes engineered to address inhibitors and the various types of patient samples. We developed ultra sensitive master mixes that R&D departments do not need to optimize and come and formats for a variety of devices, our R&D team focused on addressing.
The most clinically relevant patient samples such as saliva sputum blood serum plasma urine and stool. In addition, we also developed master mixes to target the AG bio and food market, where the sample is plant or food material.
Leveraging our proprietary buffer systems and expertise in using excipient to suppress inhibitors, we set out to create a series of master mix is optimized for each of the sample types. We currently have the only portfolio of sample specific master mix is on the market and by the end of this fiscal year fiscal year. We will have built out the portfolio to include mixes for all key Sam.
Types across both Q PCR and lamp Chemistries, we are disrupting molecular assay development by offering master mixes that did not require any optimization. All you have to do is add your primers and probes and you have a final assay with direct from sample detection and the flexibility of our wet lyophilize or air dried format. This is disruptive in the sense that you can Philip assay is very key.
And save time on optimizing and troubleshooting due to difficult sample types that can decrease the sensitivity of an assay.
This is a unique approach.
Within the industry and is resonating well with our customers. We have almost 200 customers using these novel mixes year to date and what is really exciting is the diversity of what they are sampling.
Our blood mixes have been the most popular followed by a saliva stool urine and plant not only does this bodes well for our approach, but it is also a clear signal that the focus has shifted away from building COVID-19 assays and back to all other diseases that impact of global population year in year out.
Lastly, I would like to touch on I'd like to touch on format types. As this is another area, where we differentiate assays can be delivered in either a wet format or a dry format. The advantage of dry down assays is that they are stable at room temperature, removing the need for cold chain shipping and storage not only does this lower the cost of shipping and storage for our customers and their customers.
But it is also more environmentally friendly reducing the use of electricity and styrofoam.
We have developed versions of each of our mixes to work in either a wet or dry format to meet the needs of our customers historically, the only way to dry and assay was through a process called <unk> lateralization requires capital invents investment and expensive equipment or multiple days to send their kids to a third party with the right capabilities. This can add upwards of one to $3.
As to the production of a single test in 2020, we introduced an urge liable formulation that enables drawing using inexpensive commercial evidence. We believe meridian is the only company in the world that has commercialized air Drybulk Master mixes for Q PCR and land.
As you can see our licensed our life science teams approach is disrupting traditional approaches to assay development not only do these innovations benefit our customers financially, but they enabled the development of the highest quality assays to improve patient care with the added benefit of reducing the environmental impact of diagnostic testing.
In addition to developing products that help our customers be more environmentally friendly meridian is also dedicated to two important goals.
First advancing diagnostics to better to enable better patient outcomes in some helping people and second ensuring that our culture is inclusive diverse and equitable those words, Carrie great, meaning at meridian, and we've been intentional and thoughtful about listing them in that order as we believe that you first have to be inclusive to attract and retain a diverse team.
We're in the early stages of our ESG journey excited about the prospects and look forward to sharing more with you as we achieve meaningful progress and now it's my pleasure to.
To introduce you to our new CFO , Andy to provide more details on our financial results for the quarter Hello, everyone. It's great to be speaking with you today I've had a chance to meet a few of you and I look forward to meeting more of you at conferences in the coming months.
As Jack mentioned this was a great quarter not only for meridian in total, but also for each of the operating segments.
Consolidated net revenues were $111 million up 30% year over year, and a new quarterly high for the company Diagnostics segment net revenues grew 29% to $41 million also a record for the segment.
Growth was driven by urea breath testing for H pylori and the respiratory category in particular respiratory included a significant contribution from the Gen body COVID-19 antigen test.
Life Science also had a record quarter with net revenues of $70 million up 32% year over year.
This growth was driven primarily by sales of immunological reagents, particularly Lowe's those related to COVID-19 testing.
It is notable that molecular also saw growth year over year in the quarter given that we know theres been a shift away from molecular testing for COVID-19 in favor of antigen testing.
Non COVID-19 related immuno sales were roughly flat year over year attributable to the timing of orders for some of our core native antigen products limited demand in China due to Lockdowns and a one off project in the second quarter of last year that did not repeat this year <unk>.
Consolidated gross margin was 62% with the diagnostics margin of 50% and our life science margin of 68%.
Diagnostics gross margin was down moderately year over year due to the drag of lead care still being off the market for half of this quarter.
Life Science gross margin was down due to product mix as a higher concentration of immunological sales carries a lower margin than our molecular reagents.
Adjusted operating expenses were $32 million up $6 million year over year, primarily due to increases in accruals for incentive compensation tied to financial performance in the current fiscal year.
GAAP operating expenses were also $32 million up $9 million versus the prior year driven by incentive compensation related to the current year's outperformance moderate increases in G&A sales and marketing, which were primarily offset by lower spend in R&D.
Consolidated operating income on an adjusted basis was 37 million a margin of 33%.
This breaks down to an adjusted operating margin of 58% for life science and 4% for diagnostics.
Operating profit for diagnostics was primarily driven by the incremental revenue generated in the quarter and we expect diagnostics to continue generating quarterly operating profit in the quarters ahead.
The lower operating margin for life science, primarily flow through impact of a lower gross margin.
Due to product mix.
Adjusted diluted earnings per share was <unk> 66 per share compared to <unk> 56 per share in the second quarter of fiscal year 2021.
While GAAP diluted earnings per share was <unk> 65 in Q2 of 2022 compared to <unk> 60 in Q2 of 2021.
If you'd like to dig deeper into the drivers for the second quarter of fiscal year 2022. Please refer to our press release press release, and our 10-Q, which were both filed today.
Turning to the balance sheet as of March 31, we had $76 million in cash during the quarter. We also repaid $25 million on our line of credit.
This leaves us with borrowing capacity of $175 million since joining meridian I have been impressed with the strength of our balance sheet I have encourage the team to continue to leverage that in order to fortify our inventory of raw materials to minimize or eliminate.
The risks in the global supply chain as the team has successfully done throughout the pandemic.
Additionally, I have been working with our operations and procurement teams to further derisk potential supply chain issues through contractual guarantees on lead times and reliability with our key suppliers, adding additional suppliers and optimizing amounts and locations of inventories among other things between the cash on hand and capacity on our line of credit we have.
Adequate resources to fund investments and opportunities that accelerate growth and provide good returns on capital for our shareholders.
Turning to guidance, we are raising our consolidated net revenue expectations to between 330 and $345 million. This includes holding diagnostics net revenue expectations between $145 to $150 million and raising life science net revenue expectations to between $185 to $195 million.
We anticipate the adjusted operating margin to be between 22, 5% and 23, 5%, resulting in adjusted net earnings per share of between $1 30, and $1 40.
You will notice that while we've raised life science guidance, we're essentially holding our expectations back for the back half of the year in line with our previous guidance.
<unk> heard another commentary regarding the pandemic COVID-19 testing demand has slowed in parallel with infection rates as we exit the respiratory season.
This is consistent with our expectations, which will result in a lower second half for our life Science Division consistent with other more modest quarters, we have seen following significant waves of the virus.
Now I'll turn the call back to Jack to offer some closing remarks. Thank you Andy.
I want to add to Andy's comments regarding the guidance as I've mentioned before we see COVID-19 entering the endemic phase we believe that COVID-19 testing will continue for years to come but with higher levels of demand in our first and second quarters aligning with the typical respiratory season, while we cannot control the spread of the virus and the resulting demand for testing remember that our reagents are in over one.
<unk> hundred regulated assays and whenever there is demand for testing we will benefit.
So it does not include the dozens of respiratory panels were in which we believe will be an important revenue driver in future periods.
Looking ahead to next fiscal year, we continue to believe that COVID-19 has become endemic and we will see increases in cases and testing align with the respiratory season annually.
This will continue to follow the pattern, we're expecting for this year with higher life science revenue in the first two quarters of the fiscal year, followed by lower revenues in the last two quarters, while we do not expect to repeat the record levels seen this year the adoption of our master mixes for uses beyond COVID-19 testing coupled with strong growth of our of our blocker products and other non COVID-19 immunoassay.
Hey regions gives us confidence that we have an ongoing life science business with revenues believed to be approximately $150 million and generating operating margins of at least 50% diagnostics has shown signs of returning to growth and profitability and with both businesses performing strongly again, we're bullish on radians future in the post Covid World now Andy and I are here for any questions you may.
Have Doug can you open it up for questions. Please.
Certainly ladies and gentlemen at this time, we will begin.
And answer session.
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Our first question comes from the line of Justin's Carnage.
Blair. Please proceed with your question.
Good morning, Doug.
Good morning, guys. This is buffalo on for Brian .
For the first question I know you gave a little bit of guidance for long term and life Sciences segment.
It looks like in the back half of this year, you kind of annualize LN $130 million in the second half.
Is it fair to assume that this business is going to grow double digits organically.
All of this in 2023.
Yes, we do believe that we have a double digit growing life science business. So.
The Big question for everybody of course is Where's your jump off point with Covid. So our general view of the approximately $150 million business is you have some element of Covid in there and then you've got.
The underlying rest of the business, but we are anticipating a low double digit growing life science business. As we go forward. We believe we've got that in the tank and then some.
Great. Thank you.
Along with <unk>.
I know you can't really guide to the second quarter.
But it looks like you beat us by segment.
<unk> kept the guidance.
I'd now like care was on there and came back a little sooner than earlier.
Just wondering what's going on on the back half of the year, So Carlos concern.
So our diagnostic business.
We're at about $74 million at the midpoint of the year and we're guiding to that being essentially at the 50 week, 50% point of our guidance, if you will and the.
We look at it Justin first of all is that we have some elements of seasonality in our diagnostic business and Andy you can add to this at the end if you want but we certainly have a stronger respiratory season typically in our diagnostic business. So that kind of decreases in it as you move into Q3 and Q4, but as we get into Q4, we do see some seasonality with some of the <unk>.
Food products as well as lead care and other things so.
We do feel that the guidance, we have where we're holding it for the year, we think that it is on track for that but.
Hi, <unk> types of quarters is kind of what we see in these in these Q3 Q4 types of.
Quarters going forward still Andy alone.
I would say one thing I've noticed is that the breadth of products that the team has brought on in the last two or three years has really performed well and I think theres strength to build on so it doesn't seem to be any issue to be to be hitting that those numbers Jackson.
Okay.
And then commentary on M&A and wondering if you can give us a little more perspective on that.
What youre seeing in the landscape right now for all the deals, especially on the life Sciences segment.
It seems like the market is particularly.
Fragmented.
Yes, so we've.
Over the last three plus years, we've really worked to build a more consistent approach to M&A and.
This is our fourth acquisition now in about three years that we've done so we have a more programmatic approach to our M&A Charlie it's been a big part of helping us to build that out and we've got the systems in place to to assess opportunities to build the funnel and to really work them through the funnel and as well as of course, then integrating them on the backend for the ones that we do decide to acquire.
So we're very excited about your protein, it's a small bolt on situation for us, but it's a technology.
Enhancement, that's going to really help us in our business. So we're excited to bring that one on.
We do have a continual funnel that we're looking for in a life science, whether it be small bolt ons. There are also some large assets that are out there that we certainly will look at to see if they if they make sense for us.
Life Science valuations have historically been a bit challenging so we're kind of keeping an eye on some of those valuations as we go forward, but I think you can expect us to continue to look to use our cash to acquire things to strengthen the overall life science business, Andy I don't if you want to add I'm sorry.
Okay. Thank you guys.
Thanks, Doug.
Our next question comes from the line of <unk> Chen with H C. Wainwright. Please proceed with your question.
Good morning.
Hey, everyone safe.
On behalf of <unk>.
Congratulations on all the progress.
You've already answered.
A few of my questions in your previous response.
I was just wondering if you could perhaps summarize all the catalysts or events across both business units that we should definitely keep an eye out for in the coming months. This year. Thank you.
So I'll throw some Andy and you can wrap around me. So first of all on the life science side of things.
As you guys know as we move into the endemic phase, we're going into a new phase on the life science side of the business. So for us it will be harder to predict what happens with COVID-19 part of our business because we're not exactly sure what will happen in the endemic environment, but for US there are some key things that work that we're doing on the life science side.
This acquisition of <unk> protein is a good signal that we believe that there's real opportunities for us not just on the on the molecular side of things our mixes master mixes continue to do great in the market. We think there's real opportunity on the immunoassay side of the business as well and so strengthening our capabilities with recombinant proteins, and bringing bringing new products to market there.
They're looking at.
Non animal derived products over time are something that we're that we're working on as well to move to more recombinant in general and moving away from native antigens. So we see strong growth in our life science business clearly from the master mixes that we have as we work to get them into more and more assays non COVID-19 related assays.
Those are happening as we speak but as you know the regulatory process. It's a long process. So we have a lot in the funnel that we're working there and then the immunoassay piece is really the other key growth area that we wanted to accelerate with this acquisition on.
On the diagnostic side of things for us getting the lead care to back and getting it back early was really important to us as you know we have the only point of care led testing available on the market and there is really a strong need in the marketplace for this type of testing and so we were really excited to get that back we're actively working with our customers to make sure that they are up and running again.
They are utilizing the technology and so for us it's about what can be produced in the near term, but ultimately going back to focusing on the organic growth. So we are optimistic that we are seeing a significant number of placements of new systems in that area that we look forward to reporting as we go forward. So I think that that's going to be a continued nice area for us the lead care should provide a.
Nice tailwind for us as we go forward in the coming years. Andy also mentioned the urea breath testing that is a huge area for us we have a strong H pylori franchise between H pylori stool antigen and the urea breath testing and our position. There is one that we think that can provide good tailwind to us in that business. So.
You have you have other forms of testing like we talked about.
That we can convert over to urea breath testing that we think can provide continual.
Tailwind if you will to that business. So those are a couple of key areas of course getting getting the <unk> Covid assay is important for us we have a lot of customers in those smaller hospitals that really still are looking for this technology and so I think that will open up things for us. So those are some of the key things Andy that I jumped all over there and I took them all but.
Well look I will tell you. This we're excited about both businesses.
And thankfully, we invested heavily in diagnostics over the last couple of years, even when we knew the business was going to suffer during COVID-19 and now we're starting to see the fruits of that at this point with our direct business starting to flourish. So were extremely optimistic for both of our businesses as we go forward.
Excellent. Thank you so much.
Thank you very much to it.
There are no further questions in the queue.
I hand, the call back over to.
Mr. Kenny for closing remarks.
Thank you very much Doug well. Thank you all for joining the call today, we really enjoyed speaking with you again. This quarter. This was an exciting quarter for meridian and certainly we have a bright future ahead of US we look forward to sharing with you at future conferences or quite frankly on these calls as we go forward have a great day. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
May disconnect your lines at this time and have a wonderful day.