Meridian Bioscience, Inc.
Q4 2020 Earnings Call Transcript

Published: 13 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Meridian Bioscience Fiscal Fourth Quarter 2020 Earnings Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Charlie Wood, Vice President of Investor Relations. Thank you. Please go ahead.

[Charlie Wood:]

Thank you, Lindsey. Good morning and welcome to Meridian’s fiscal 2020 fourth quarter earnings call. With me are Jack Kenny, Chief Executive Officer, and Bryan Baldasare, Chief Financial Officer. Please note that our SEC filings, earnings release and slides to accompany this call are available on our website at investor.meridianbioscience.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 Canaccord Genuity MedTech and Diagnostics Forum next Thursday, the Piper Sandler 32nd Annual Healthcare Conference in early December, and the Singular Research Virtual Conference in mid‐December. The details of those events will be posted to our website as they are finalized. Finally, our Q1 fiscal 2021 earnings call is currently scheduled for Friday February 5th, 2021.

[Jack Kenny:]

Thank you, Charlie. Without any doubt, fiscal 2020 has been quite a wild ride. We began the year with expectations of accelerating investment in our new product development pipeline, with our sights set on the diagnostics segment finally turning the corner, and expecting modest growth in the Life Science segment. Through March, that plan for Diagnostics was playing out better than expected with the segment delivering a positive growth quarter for the first time in five quarters and ahead of schedule. As we all know, March saw the shift from COVID‐19 being an epidemic to a pandemic, greatly altering all our lives for the foreseeable future, and turning every company’s plans on its head. While we do not want to lose sight of the damage this pandemic has done across the globe, both to individuals and businesses, I do want to celebrate the heroic response of our team to support the diagnostics industry as well healthcare professionals in such a time of need. In early January, we noticed the growing concern in China from this new coronavirus, prompting our Life Science team to take action. On January 27th we issued a press release highlighting the application of our Lyo‐Ready qPCR master mix in COVID‐19 molecular assay. From there, demand grew rapidly for our molecular master mixes and our teams increased Meridian’s manufacturing capacity to meet the demand through bringing new equipment online, process efficiency enhancements and sheer dedication of time and effort.

[Bryan Baldasare:]

Thank you, Jack. It is a pleasure to recap what was a record year in financial performance for the company. We finished fiscal year 2020 with consolidated revenues of $254 million, up 26% year‐over‐year. Life Science drove that growth with a contribution of $133 million, a whopping 106% growth over fiscal year 2019. COVID‐19 related sales for the year were $72 million. That growth was partially offset by Diagnostics, declining 11% to $121 million. Importantly though, Diagnostics revenue in Q4 was up 38% over Q3, reflecting a rebound in our core assays outside of the respiratory category. Consolidated gross margin was 62% and consolidated operating income on an adjusted basis was $62 million, a margin of 24%. This was a blend of 2% for Diagnostics and 52% for Life Science. GAAP diluted EPS was $1.07, up 88% over fiscal 2019. All of these metrics exceeded our original guidance set in November of last year as well as our revised guidance set in August. If you want to dig deeper into the drivers for the year, please refer to our press release and our 10-K, which will be filed by November 25th.

[Jack Kenny:]

Thanks Bryan. As you can see, fiscal 2021 is shaping up to be another fantastic year for Meridian. Diagnostics is positioned to deliver strong growth, not just as compared to a depressed fiscal 2020, but growth over fiscal 2019. Our key strategic focus areas will be advancing new product development, the launch of an EUA approved COVID‐19 test, completing the integration of Exalenz, expanding Revogene pie production capacity, and executing on a number of operating efficiency initiatives. We plan to complete the clinical trials for the Curian Campylobacter and C. diff assays and begin clinical trials for the Revogene RI and GI panels as well as the Curian Shiga Toxin assay. This will position us to launch four new products in fiscal 2021 and between two to four new products per year in fiscal 2022 and beyond. Life Science will be focused on continuing to meet the demand of our customers driven by the ongoing pandemic as well as delivering new innovative products. We have a number of new master mixes in the pipeline that will raise the bar for performance in molecular assays. Additionally, the team will be hard at work supporting the dozens of customers testing and validating our products in new, non‐COVID assays to fill the funnel for future growth beyond the pandemic. Fiscal 2020 was truly a transformative year for Meridian. All of our hard work over the previous two years prepared us to both weather the storm in Diagnostics and excel as a critical partner to the IVD industry battling a global pandemic in Life Science. We are excited about opportunity that lies ahead. The best is yet to come. Lindsey, with that, let’s open it up now for any questions that the folks may have.

[Operator:]

Our first question comes from the line of Andrew Brackmann with William Blair. Your line is open.

[Brian Weinstein:]

It’s actually Brian Weinstein in Andrew. Andrew is letting me ask questions on the call today. So I appreciate him doing that. So how are you guys doing?

[Jack Kenny:]

Good morning, how you are doing?

[Brian Weinstein:]

I’m good. I’m good. So I appreciate all the commentary here. Maybe you can – just help me bridge a little bit the guidance from kind of where you were this year to where you’re going next year in a little bit more detail? So Life Science is $132 million going to $150 million to $160 million. Can you help just give a little bit more color on maybe the mix there between immunoassay and molecular that you’re thinking there. And you talked about some new products, but just trying to help us get from that $132 million to – let’s call it $155 million at the midpoint, and then the same thing on diagnostics $121 million going to $145 million, just a little bit more color on sort of the buildup to those incremental revenue dollars there?

[Jack Kenny:]

So I’ll start, Bryan, and then you can add to this at the backend. So Brian, first of all, as you know, Life Science started this pandemic and really played a big role in the whole response to COVID and doubling our sales to $132 million was a pretty big move. What we have seen recently and we have continued to increase our overall bullishness in regards to our Life Science business. We see continued demand and we see continued increase in the number of customers. From – Bryan can give you the little bit more on the percentages. But the molecular, reagents on the Life Science side is leading the way. We have picked up a large number of new customers on the molecular side. In our slide deck, we give you a little bit more color about the number of customers that are using our master mixes. And so that is probably the higher percentage. However, we’ve also seen, we took a good amount of share in antibody testing. Unfortunately, that testing has not done – the market hasn’t fully understood how to use antibody testing. We do see that there’ll be a rebound to that as we start seeing a vaccine where people want to see if they got the antibodies after that. But we have also now seen an increased resurgence on the antigen test and there’s a number of companies doing rapid antigen test to increase the overall assessing capacity. So we’ve continued to kind of raise even our internal numbers in regards to the Life Science side. As we’ve seen the demand continued to be very, very strong. In our assumptions, we’re really assuming pretty strong through first Q1 and Q2. We don’t really know what will happen beyond Q3 and beyond, as you know, as the world moves closer towards normalcy over time. And so that’s what I’d say on Life Science and Bryan can come in the backend. On the Diagnostics side, we see the slow but steady continued improvement of kind of returning to normalcy. Our core business has been impacted, but has been rebounding back somewhat slowly but consistently. And that continues as we go forward. So we see in the first half of the year an impact – double-digit impact on the core business, for sure. And in the back half of the year, we are anticipating that will move closer to normal as we go forward. Lead testing was one of the earlier ones that came back that tests like Group D strep for pregnant women really didn’t move a whole bunch. So certain parts of our Diagnostics business are remained pretty strong even in the middle of this pandemic. But what really, really slowed up on the Diagnostics side, Brian was things like Group A strep testing. I think with kids not going to school or taking school from home, we did see a decline in the overall respiratory testing, like for Group A strep and things of that nature. We are anticipating at this point in modest amounts of COVID. We did just notify the FDA today of our intent, as we mentioned on the Revogene. So we’re excited about that. Once we get acknowledgement from the FDA, we would begin shipping to some early customers what we’re going to move slowly and then ramp up, we were ramping up production on that side as well. So think of 10% to 15% of that number being in the Diagnostics side related to SARS-COV-2 and the rest of the business with its recovery, moving back from that $120 million and moving up, that’s how you get to the $145 million. Bryan, do you want to answer that?

[Bryan Baldasare:]

Yes. Let me just add a couple of things on the Life Science side of the business, Brian. So the $80 million to $85 million that we have in our guidance around the COVID-19 reagents, from a mixed perspective, the percentages that I cited for the fourth quarter, the 80%-20%, you can expect a similar mix between molecular and immuno on the $80 million to $85 million on the remaining amounts to get to the guidance of $150 million to $160 million, you know, that translates into $70 million to $75 million. We’re expecting a couple of things to happen there. One, recognize that, in 2019, we were in the mid-60s, so we’ve got growth there. We are expecting our core infectious disease reagents to coming back, like we’ve been talking about with our diagnostics business, and then you also have the effect of just a greater asset penetration for our reagents in general. And even though we are comfortable with that $80 million to $85 million right now, I will say it is becoming a little murkier to break out COVID from non-COVID. And what I mean by that is we are starting to see customers who have, a call it, a second generation respiratory panel assay. So they started with a single COVID test, right? And now they’re looking at developing a respiratory panel with a COVID target included. We are selling the same reagents to that customer. So again, it just gets a little bit murky in terms of what’s COVID and what’s non-COVID. Hopefully that helps.

[Brian Weinstein:]

Yes. That was great. Thank you for that. On the antigen side, any update on timing for EUA capacity considerations and how you’re viewing that market in particular?

[Jack Kenny:]

So we have – as we mentioned in our thing just started, we just got products over to Europe, so we’ve been started to ship the product and to take customer orders in Europe. So it’s pretty early on from that standpoint. We are working with the partner here to help them to get EUA in the United States. I think we’re anticipating that it’s a Q2 when that would come into play for us. We haven’t really gone too deep. We don’t believe that capacity is going to be any kind of issue with this. But we’re a little hesitant to go in. We want to work to make sure that these guys do everything that they can do to get this e-way approved before we get too bullish in regards to what that opportunity can bring. I will say that the performance of the product has worked very, very well in Europe and in testing that has been done. So we’re optimistic about the product in general.

[Brian Weinstein:]

Okay, great. And then last one for me on Revogene, can you just remind me on the ability to obtain CLIA Waiver for that platform and just general thoughts around the competitive environment for this type of platform. We’re seeing a lot of companies starting to move into this space that are going after CLIA Waiver here. So just want to kind of make sure I understand kind of the positioning of the product a little bit more. Thanks guys.

[Jack Kenny:]

Yes, absolutely, Brian, thank you. So we have not – first of all, we do believe that the ease of use and the product itself is very likely to be able to receive CLIA-waivable, it’s an incredibly simple test to run, and we do believe that it can do it. We view that as another plane that we would need to go get. We are going to consider looking at claims like that in the future. But first things first, we wanted to get this EUA product specifically, the COVID EUA and get that out there. So we are considering additional claims in general, different sample types, and we’re considering things like CLIA Waiver, but we have not begun to work on that yet at this point, because we were so focused on bringing this EUA to market.

[Brian Weinstein:]

Great. Thank you guys.

[Operator:]

Our next question comes from the line of Yi Chen with H.C. Wainwright. Your line is now open.

[Yi Chen:]

Thank you for taking my questions. My first question is, with respect to your fiscal 2021 guidance, have you taken into consideration of the potential impact from the market entry of a COVID-19 vaccine?

[Jack Kenny:]

I was assuming you were – you’re referring to them the Diagnostic side of the business taking that into effect.

[Yi Chen:]

Correct. Yes.

[Jack Kenny:]

Yes. So we have accounted – we do have in our target our $140 million to $150 million, we have made an assumption of an approval for the COVID-19 assay. I would describe it as an initial pass of that. We are working towards increasing capacity. So as we get this product out there and we can show the customers the how well the product works and to gain customer acceptance, we’re working to increase the overall capacity. So we have a modest amount of COVID-19 to set about – think about 10% to 15% of our overall number for that $140 million to $150 million is COVID-19 related. And we will update as we work to, number one, now that we’ve submitted the EUA, once we can obtain EUA approval and begin selling the product, I would say that we’ll have much more line of sight on that as we come in Q2.

[Yi Chen:]

Yes, that was – you were talking about the Diagnostics segment, but if the availability of COVID-19 vaccine have an impact on the Diagnostics business of your IVD customers, your Life Science segment could be subject to impact as well, right?

[Jack Kenny:]

Yes. So we – I’m not sure I completely understand the question, Bryan, have you – can you answer that one?

[Bryan Baldasare:]

Yes. I’ll take that one. So I think on the reagent side of our business, from the contacts that we’ve had with our customers, we’re pretty confident in the $80 million to $85 million between molecular and immuno. And I would say the immuno piece of that does not include a large piece for serology testing. And I think the way we have thought about vaccines coming into play that is where we believe that there would be a place for serology testing. So that’s kind of how we’re thinking about – that’s what’s in our guidance. And I think is more comes out around the vaccines for example. We’ll have more to say in the future around what we think the demand will be for reagents that will go on to serology tests.

[Yi Chen:]

Okay. Okay. Got it. Thank you. And also, second question regarding the recent resurging pandemic across the U.S. and Europe. So could you provide any color on the inventory level of the reagents at your IVD customers? I mean, with the COVID-19 resurging, do you think your customers are likely to stock up on reagents in the near-term again, and therefore having a significant – providing a significant driver of your near-term revenue, top line revenue, such as the one you experienced in fiscal third quarter of 2020.

[Jack Kenny:]

Yes. So we are seeing strong demand in this quarter in regards to the Life Science reagents. So as we said in Q4, we expect those customers who were working through inventory, those customers have worked through inventory and we are seeing resurgence of our existing customers with orders, but also then picking up new customers along the way. So we do anticipate a strong start to the year and there’s certainly strong demand for that product line as we go forward in Q1.

[Yi Chen:]

Okay. Okay. And for the Revogene PCR tests, once you get the EUA enter the market, how large is the market opportunity for this product – for this proprietary testing the U.S. considering that essentially you could be competing with your IVD customers, products – testing products as well, right.

[Jack Kenny:]

Sure. So we’re not providing forecast at the product level at this time, but let me give you some data points to help you give an idea of the opportunity. We mentioned before that we have 231 Revogene systems in the field as of September 30. We’ve also seen really strong demand for Revogene with orders outpacing our installation. So we would anticipate that the number of Revogene will continue to climb significantly as we go forward in the next quarter or two in particular. So we’re currently building inventory also for our other assays. One of the things that we’ve learned is some of the other diagnostic companies stopped making other tests. And so we’ve been able to pick up business for other product lines as customers couldn’t get those products from the other manufacturers since they were only making COVID-19. So we had been working while we were preparing for this with our manufacturing to ramp up the capacity and the other products. However, we also knew that we needed to expand our overall capacity. We hired a second shift in Quebec and that shift is up and running now. That gives us capacity of around 80,000 to 100,000 ties per month. And so, we are actively making plans to increase this capacity further as well. And with the launch of Revogene the scale for both instruments and production of the assay really have intensified the plans to build capacity 3 to 4 times of where we are today. So, we anticipate that the – between now and our Q1 call that we do, that we’ll be really pushing forward on trying to drive the capacity initiatives, and we should be able to give a lot more color in regards to the market opportunity there. But think 80,000 to 100,000 ties per month right now, and a high majority of those would be COVID in the near-term.

[Yi Chen:]

Got it. Thank you. And last question, could you provide some color, how the new cancer liquid biopsy solution is trending? The one you recently launched?

[Jack Kenny:]

So we just recently launched that product. We’ve had some initial customer reactions. I would describe it as very early. There has not been any significant revenue uptick from this. We also believe that products like that will take some time to grow. The customers have to do their validations and all the other regulatory work. So we see a slow build on that. That’s really something that can be significant a year or two from now as customers who’ve tested, it started bringing those products to market. So at this point, it’s a pretty limited impact on our financials. We view that more as a longer-term play for our Life Science business.

[Yi Chen:]

Okay. Thank you very much.

[Bryan Baldasare:]

Thank you, Yi.

[Operator:]

Our next question comes from the line of Steven Mah with Piper Sandler. Your line is now open.

[Steven Mah:]

Thanks. How are you doing? Congrats on the quarter.

[Bryan Baldasare:]

Thank you.

[Steven Mah:]

Okay. Yes, so just a few questions, a lot of – covered a lot of ground in the Q&A already. But if you could walk us through the assumptions on the 2021 guide and maybe back the cadence throughout the year? I know you said Diagnostics would probably be backend weighted in the back half of the year. Do you think that’s going to be offset by COVID-19 reagents in the front half of the year? How should we think about the guide as it’s spread out through the four quarters?

[Bryan Baldasare:]

Yes, sure. So this is Bryan. Steven, I think on both the consolidated basis and certainly some of this is Life Science driven the first half of the year, like we were alluding to in our guidance discussion, where we are expecting the first half of the year to be stronger, without a doubt. I think, as you talk about Diagnostics, it’s a little more even quarter to quarter, a little bit more on the backend, but a little more even particularly compared to Life Science. And I think part of that is, you’ve got COVID coming online here late first quarter or beginning in the second quarter for us with this EUA product. And then you really have the recovery of our core Diagnostics business then coming back online, as we mentioned in the second half of the year. So a little more even distribution on Diagnostics at this point and then definitely more in the first half on the Life Science side of the business. And again, that’s based on the current line of sight that we have. And we may have more to say on that come our call after the first fiscal quarter.

[Steven Mah:]

Okay. All right, that’s helpful. And then maybe a follow-up question on the Life Science segment. I know in Q3 you had a big jump because of stocking issues. Do you see that happening again in the future or has Life Science stabilized?

[Bryan Baldasare:]

So I think what we would say right now is we’ve seen – Jack, I think alluded to this in his comments that we have seen some renewed demand here during our first fiscal quarter, kind of similar to what we were seeing in our third fiscal quarter from last year. I think it’s still a little too early to call third quarter of this year, until we get a better line of sight on the second half of the year.

[Jack Kenny:]

In general, Steven, I think that we feel that you’re likely to be strong in Q1 and Q2. We don’t know that we’ll have the same lumpiness, but the Life Science side does tend to have a little more lumpiness with the way that the customer ordered. Because they order a big VAT of the key components that they manufactured over time. But, I would say that, our line of sight into the first half is, it will be a good start to the year for the Life Science business for sure.

[Steven Mah:]

Okay. That’s helpful. Appreciate that. And maybe one question on Revogene. So appreciate – you’re going wait to get the EUA – really pushing on manufacturing. But given that a sort of a land grab in COVID-19, has there been an increase in your sales and marketing activity ahead of the Revogene launch and talking about the respiratory panel?

[Jack Kenny:]

Absolutely. So we – when we announced at the – in the summer, when we had our call in August, we announced that we were working on EUA. We saw a very, very strong customer interest. Customers are struggling to meet the testing demands and it’s unusual in diagnostics, because normally you have one type of vendor that you use for a product that they’re looking to source multiple vendors for COVID because of the supply chain challenges. And so we saw increased demand very, very high in the instrument side with people looking to secure instruments, as well. We’ve been working hard to do that, but we’re also trying to make sure that we don’t over promise and under deliver. So we’re going to – as we build our capacity, we build kits, we’re going to bring more customers onto the COVID products. We don’t want to start somebody and then back order them. So we’re going to try to bring a batch of customers on, be able to supply their needs as we increase our capacity, bring on the next batch of customers and we’re going to go that way. But we have seen very, very strong interest in demand, but we’ve also, as we said, seen demand for the other products as well, because quite frankly, a lot of the manufacturers have making things like group B strep and other products. So we’re helping those customers out with those tests as well.

[Bryan Baldasare:]

And Jack, if I can just add to that. I think on the placements to put some numbers to it, Steven, we saw our fourth quarter placements pick up quite a bit, because we got to the 231 mark as of the end of September. We were sitting on 169 as the end of June, as far as our Revogene placements. And we had, I would say limited activity during the June quarter. And we probably had three – at least 3 times the number of placements in the September quarter as we did in the June quarter.

[Steven Mah:]

Okay. Got it. That’s helpful. Those are all kind of like pre-orders getting the instrumentation. Yes. Okay, that makes a lot of sense.

[Jack Kenny:]

Thank you, Steven.

[Operator:]

That’s all the time we have for questions today. I’ll now turn the call back over to Jack Kenny for closing comments.

[Jack Kenny:]

Thank you, Lindsey. As we close this call, I want to again, thank our team for their hard work this year. They truly helped to deliver the best year in our company’s history and have positioned us to do it again in fiscal 2021. I also want to thank each of you for joining the call today and we look forward to speaking to you again next quarter. Thank you and have a great day.

[Operator:]

This concludes today’s conference call. You may now disconnect.