Meridian Bioscience, Inc. (NASDAQ:VIVO) Baird 2016 Global Healthcare Conference September 7, 2016 8:30 AM ET
John Kraeutler - Chief Executive Officer
Catherine Sazdanoff - Robert W. Baird & Co
Good morning, everybody and thank you to Baird for the invitation as always. We've been long-term partners with Baird and we always appreciate coming to their conferences. They seem to get the best meetings and really get PMs that appreciate our story.
Our story is a bit unique; you will see that I have only got two slides today, because most of our conversation is fireside chat. So I don't have to warn that talks about warning you about forward looking statements. So I will warn you verbally that we may be talking about things that may or may not come true in the future, but please take the appropriate heed.
Our business was founded in 1977 so we are coming up on our 40th year and we have been driven by essentially making lab diagnostics much simpler, but also being extremely efficient financially. The company started paying a dividend in 1991 and we paid one every year since then.
Today we are paying at a fairly high rate up north of 80% of earnings, which should tell you two things. One is we are profitable and like many companies in the biomedical space or unlike many companies in the biomedical space, we actually do generate profit.
Very high gross profits in the mid 60s, high operating income around 30% and after tax around 20% and we have been able to sustain numbers like that for at least the last 25 years. We do acquire, but our organic growth rates are expected to be somewhere in the 5% to 7% range, so that when we acquire it's incremental to whatever our organic growth happens to be.
The slide that I’m going to share with you, I think is a slide that allows us to go into a number of directions. We are very specific about the parts of our business and where the growth is coming from. So the slide that you are looking at shows Vivo at about a $200 million rate for this year and we are on a - October 1 begins our new fiscal year. So we are just wrapping up fiscal 2016.
The life science piece of it is important. It is a part of our business that began in 1998, a very small piece back then around $1 million and essentially this business is supplying the biological raw materials to other large diagnostic companies such as Siemens, or Abbot, Roche, or J&J. Also to research laboratories and a lot of work was being done by startup companies that are trying to get into the space.
A good example of that is every time an Abbot instrument anywhere in the world run a Hepatitis A test, Meridian grew that protein and purified it and sold that to Abbot and that becomes integral to their diagnostic test.
Recently Zika Biologicals had become very important for us and you may be familiar with all the companies that are chasing after Zika to try to develop a test we are supplying raw biologicals to many of those companies. I say raw biologicals, they are highly purified biologicals, but they are essentially the biologicals that are used as a basis for those test and Zika has snuck up on us this year and we will do nearly a $1 million in Zika Biologicals in fiscal 2016.
We are not really sure where that market is going, but that's a great example of an emerging market that may never become a huge commercial success other than blood unit screening, but Meridian is at the forefront, because we had the biologicals that are being used by those companies.
So our life science business, well over $50 million this year, it should grow $5 million to $7 million next year organically with a lot of that growth coming from the one I just mentioned Zika. But also a lot of emerging opportunities in China where the Chinese diagnostic companies want to buy their biologicals from the company that supplies the large western diagnostic companies.
Our China business in the life science has grown from about $300,000 four years ago to over $4 million this year and it's growing quite rapidly and it gets in under the reimbursement sealing, because we are supplying part of the diagnostic rather than a finish diagnostic that usually gets collaborate by low reimbursement rates.
We got into the molecular business about six years ago, with a brand called Illumigene, and Illumigene is a very simple platform. It's a piece of equipment that the customer doesn’t pay for, they do 1000 test a year, replace the reader for free in their laboratory and they have got a three year commitment to us to use that reader.
We now have over 1,500 placements and a menu of about 11 tests in Illumigene. So our positioning for Illumigene is different than a lot of the molecular companies that have chosen one or two targets and they have got a single piece of capital equipment and they hope that they are either going to make it or not make it based upon the success of that target.
We have got 11 targets, we are adding three to five a year and we want to Illumigene to end up as the best value molecular system in the laboratory, almost one you can’t do without as oppose to getting into the trading capital equipment, which is drilling on with so many of the businesses.
If you look at the molecular space, it's been very hard for six or seven years. Wall Street has chased a lot of these startup companies, many of them are falling back to earth and you probably saw yesterday that Sofie got acquired. So that’s a consolidations taken place, there is not many other players that have viable systems other than a Meridian or Sofie or something that are embedded like in a Becton, Dickinson.
So molecular should grow also mid to high single digits, somewhere in the 5% to 8% range going forward and there is a number of new products that would be announced going into the future that fit into that with one of the harder new products being our product for malaria diagnostics. Very, very successful sensitive assay, which is doing well in Europe right now, it's beginning to go into the emerging market in Africa, but you have to get into the bureaucracy in of way healthcare has paid for in that marketplace.
Magellan is an acquisition we did in March of this year. Magellan has a proprietary system for doing blood lead levels. Children that are covered by Medicaid at year one and year two, they must be tested for blood lead. Magellan was a business that was owned by a private equity firm for about six or seven years, which made Magellan very financially efficient, but somewhat restricted in its global marketing, they were only in the U.S. pediatrician office.
Our goal with Magellan is to keep them growing on their current trajectory, but also to get Magellan into other specialties in the United States and then get them outside the United States. I mentioned China, China is very opportunistic market for us where the government has said “we believe more than 10% of our children had elevated blood lead levels and we want to do something about it.”
So we are in the process right now are looking for - I shouldn’t say looking for, evaluating a number of distribution partners that have clamored for this particular product.
I’m looking at Magellan as a 10% grower. The number you are looking at is around $16 million that was fiscal 2015, actually this year they will come in somewhere around $17 million to $18 million. So for fiscal 2017 we are looking for another couple of million dollars on top of Magellan and of course if China opens up, then we will recast that number, because it should be much stronger than that.
Tier 1, rapid diagnostic is primarily our H. pylori franchise, H. pylori being the primary cause of peptic ulcers; this is the category that’s grown rapidly at 8% to 10% over the years. We are tuning that one back a little bit, because we come off patent in May of this year and although we haven’t seen much competition, we don’t want to be too aggressive and we will be looking somewhere at 5% growth rate for fiscal 2017.
Tier 2, diagnostic products, these are legacy products, products where there is a lot of generic competition. This year, there has been some erosion in that space $3 million to $4 million in that category. We would probably look at another $3 million to $4 million of erosion going forward just because prices are difficult, we expect more competition and it’s not really a focus area for our business.
So I believe the consensus for 2017 is around $211 million for Meridian, we expect to launch guidance sometimes towards the end of September, this is the first year where we are actually integrate Magellan in, so it’s taken us a few extra weeks to get our guidance ready, but you should expect to see that.
So Catherine if I can, I'll come over and join you.
Q - Catherine Sazdanoff
Thanks okay. So with most excited recent Magellan acquisition, now starting in March, how has that been going for forum as the integration, what are your expectations for the year, are they the same as when first announced?
We have done a series of acquisitions that very often they have very low margins and it took us three to five years to bring the margins up through Magellan comparable margin. Because of private equity group had owned Magellan, they put a tremendous discipline into the business. So going in and cutting costs was really never anything we had to consider. We can look at strictly as a leverageable opportunity.
After we had fixed the price on Magellan, the Flint Michigan crisis broke. So, the number of new customers that were accessing has gone up, the rate has gone up. We expected Magellan to be slightly dilutive this year and it looks like Magellan borrowing the one-time charges is actually going to be slightly accretive this year.
So Magellan currently is running ahead of expectations, we have not articulated at what rate, but they are beating their plan month-by-month. So we think it’s going quite well, you asked about the integration. Magellan is essentially a turnkey for us. They use a sensor based diagnostic technology, which means that its different from Meridian’s other seven or eight diagnostic platforms and if you went to Magellan facility, you would see it is primarily a production facility.
So relatively low G&A overhead and a very, very fine-tuned production facility. Our expectation is that probably within three years, we are going to have to build out in that space for additional production and if China opens up, which will not be in our guidance, but if China opens up, we might have to move faster on that.
So I think, it’s gone extremely well, the management teams have worked well together, we have really yet to explore the leverage potential. One of the things that attracted us to Magellan aside from a well run business was they had 7,500 placements of their LeadCare II instrument in pediatrician offices.
And Meridian’s business, its diagnostic business is primarily a lab-based business. So outpatient labs, hospital labs, reference laboratories. Magellan had a very strong position in point-of-care and our interest in Magellan was to be able to cross-sell Meridian’s diagnostics into the primary care markets. But I would say we are extremely early in that process, but it looks promising.
And the a little bit on your fiscal 2016 guidance then puts and takes there. What is your level of confidence in that guidance and what are the biggest areas of risk for upsides?
Yes I think the 2016 numbers were damaged by two things. One was the Tier 2 diagnostics for legacy products that I mentioned, we did not expect to take a $3 million to $4 million haircut in that space, but we saw generic competition come in early in the year and it continues to be problematic.
And we have also seen panels coming in where instead of the doctor ordering a test for a single target or two targets, the doctor orders a panel that does 12 or 15 assays in the panel. The reimbursement is off the scale for that. So far, reimbursement has been somewhat variable with some third-party payers paying and others protesting loudly. So we think that's going to sort out, but that’s still an area of concern for us.
The other parts of the business are fairly durable. As you could imagine there has been a lot of competition in molecular and in molecular you have companies that are probably winding down and because of that they are I use the term reckless in some of their marketing strategies, where they are going for lowest possible prices, free pieces of capital equipment. Anything to be able to come to Wall Street and say I just got another 20 customers, so they can raise more money and they can stay alive.
So molecular has been a very hot area of interest, it's obviously a focus area for us. But I believe that I’m confident saying that Meridian and Sofie had held their average selling prices worth of $20 a test in molecular, whereas we have seen a number of these younger companies coming in anywhere from the $10 to $15 per test. And for many of them, which rely upon capital equipment, they are probably selling at an overall loss, just to be able to get a toe hold.
Okay. And C. diff. has been a substantial revenue component for you guys historically, where do you envision that market unfolding over the next few years? So pricing dynamics experience is that still an area of growth for you?
C. diff. is an interesting area. Our first C. diff. products were launched in the late 1980s and we have had a commanding market share since that time, but when molecular came into C. difficile, which was about six years ago, we were the only existing company that had significant market share, close to $30 million and see C. difficile that had to flip much of that business to molecular.
So one of the things you don’t see over the last five or six years, is we have actually back filled about $25 million of C. difficile business that was being done by immunoassay that's now being done by molecular. So today our C. difficile business is hanging in at around $30 million, we are optimistic that we might be able to get a couple of points of growth out of it.
But it's a very diversified part of the business where about 75% of the dollars are in molecular, but the other 25% are in the old immunoassays and we are the only company that offers the full armamentarium of tests either immunoassay or molecular, but is it a growth area? No.
And you mentioned in your prepared remarks that H. pylori patent expired in May, haven’t seen increased competition there yet. What actions are you taking to combat potential increased competition in the future and may be talk about the market dynamics for testing that would be centralized and where that’s headed?
Sure our H. pylori business began around 1996, 1997 and prior to that doctors were running a rapid screening test for antibody to see if a person had ever been exposed to H. pylori, but it didn’t tell you whether you had an active infection. So our patented product was a test for active infection, it was a stool based assay that would tell the doctors this person has the H. pylori bacteria in their gut. The recommendation at that point was to test, treat, eradicative infection.
A lot of market development went into it and it grew to be than a $30 million category. About six or seven years ago, we began to have competition in Europe and our growth rate in Europe slowed from around 15% to down to 2% or 3%, because price pressures et cetera, et cetera. So our unit market share has held up nicely in Europe, but prices have come down rapidly in that market.
In the U.S., we were protected through May of this year by our patent and we expected that European competitors that we have been fighting against were going to show up in the U.S. market. To this point, none have come into the United State's market, we still expect them, but it's allowed us to do a couple of things.
One is to build a very defensive posture where our existing customers are doing lots of the longer term contracts, we are you would see talked about centralized versus decentralized, we do have rapid assays that work in 10 minutes. We have been able to decentralize a lot of the testing to hospitals and clinics and as you diversify your customer base, obviously your target becomes more difficult to hit.
But it's also allowed us to build an offensive string, and what I mean by that is we have had another new product in the category approved by the FDA earlier this year and we just started marketing ASR, Analyte Specific Reagent for Clarithromycin resistance H. pylori. So this would be a premium diagnostic that tells the doctor not only does the patient has H. pylori, but also is it resistant to Clarithromycin, which is usually one of the top-line drugs that’s prescribed for eradicating.
There is a third product in development so that would probably see the light in the middle of 2017, which is a combination product of H. pylori diagnostics and something else that we think is material to detect in a stool sample. So we are not caviler about it, as I said we expect next year a 5% growth rate is probably appropriate. We hope that we can do better than that but there is no reason to be bullish in the guidance when we are facing potential competition.
I will say that our largest competitor, which is not unusual is a doctor that treats empirically for stomach pain. And the doctor prescribes an nexium or zantac and never worries about whether there is a bacteria in your gut and this bacteria happens to a class-1 question again. So later in life when you get stomach cancer, remember that when you were 40 years old, your doctor put you on zantac or nexium and you took that your entire life and now the bacteria has done its job.
And then if you go back over the last year, you have launched CT/NG, HSV, you talked about malaria. Can you talk about how those are progressing, as you have been pleased with the launches and if you had to take one and what your more excited about?
Great question, Illumigene which is our molecular platform, because Illumigene doesn’t require a capital investment on the customers’ part. We find that we conclude assets on the system that are relatively low volume, but very high value to the laboratory. So each of the products you mentioned is very different.
Chlamydia and Gonorrhea, our feeling was in the United States, the market was well-served by large automated companies, because with Chlamydia and Gonorrhea, you are talking about primarily screening testing, making up mostly the volume as oppose to what I would consider diagnostic testing. Diagnostic meaning somebody who suspects that they Chlamydia or Gonorrhea versus somewhat who is being screened as either a part of wellness or it’s a prenatal workup or something of that type.
So we said, we are stay away from that, because the FDA wants $5 million to $7 million worth of clinical trials to be run to be approved in United States. We said, but we have got 300 Illumigene customers in Europe and Chlamydia and Gonorrhea would be a great side core product for people that already have the system.
So actually is doing well, but we are talking about hundreds of thousands for dollars. Herpes 1 and 2 is one of those products that its appeal is that about 70% of laboratories in United States, don’t do any Herpes testing, they send them out. And in today’s world where hospital CEOs and hospital Boards have purchased physician offices, they have built satellite clinics, they have added new wings on their hospitals, they are star for revenue. So a send out diagnostic is a revenue opportunity if they can bring that in-house.
So the Herpes products are actually kicking the door open, meaning for us, it allows new placements of Illumigene and then as you might expect with 11 products on the platform, if you open the door with Herpes very often, you can get two to three other assays to be brought in at the same time. Often when we get new C. difficile customer, it’s not because we have opened them up for C. difficile, but we have opened them for hoping whooping cough or Herpes or something else.
The one that I'm most excited about, I think is Malaria, because Malaria has done couple of things for us. Number one is the first Illumigene molecular assay that’s done on blood every other one is done on either stool, or swabs, or wounds or some odd specimen. And the amount of Malaria in the world is just enormous, million children die every year. Malaria has two distinct markets, one is the traveler market.
These are people, who are residents of Europe, but they were probably born in an endemic area and they go back and forth and when they show-up in Europe again with a low fever, they need to be tested right away. So again, we have an existing base of customers, the addition of Malaria onto those customers has been very routine for us. Hundreds of thousands of dollars this year, probably close to a million dollars going into next year.
But the real opportunities how to I get into Senegal and Sierra Leone, et cetera and we have had great - in fact, we just won a award for the most innovative Malaria diagnostic or treatment in the last year. And the issue here is you have to get into the bureaucracy, you have to get your product embedded, approved, put on the list and then dollars have to be appealed for.
So Malaria is going to be maybe mid to late 2017 in terms of large purchases coming out of the endemic areas, but we think it’s going to happen. Malaria has also opened up a brand new strategic category for us that begin as we called that mosquito-borne or tropical diseases, but now it’s been re-identified as insight vector diseases, which allows us to get into line lyme kingella, which causes pediatric arthritis in the joints.
So here Illumigene is going to be used on joint fluid, which is called synovial fluid and begin to see this very and you begin to see this very broad diversified platform that's capable of doing almost any infectious disease diagnostic on any type of sample.
Okay, and then you talked about adding about three to five tests per year. Just wondering if you could paint a picture for the future pipeline, anything in there that is faced through and then how to you think about adding in test for areas in that test field going forward ?
Sure. I want to be respectful of this forum. We tend not to signal where we are going too far in the future, because there are many of our competitors that are taking a different tact when they are looking at market opportunities. They tend to look at where is the highest volume and then we are going after that high volume. What we tend to do is look for the markets that we believe we can help emerge.
And I think the insect vector is a very, very good one. So insect vector takes you into malaria, takes you into Zika, we can do Zika on Illumigene, we can also do Zika in immunoassay, because we believe the market is going to bifurcate. And I don't know if bifurcate is a world, but they will be screening for Zika immunity, they will be screening for Zika in blood units and they will be screening for Zika diagnostic, I think Zika diagnostic will be the smallest volume.
So that's an opportunity. And then things like for Babesia which is a tick-borne disease that is often associated with suspicion of lyme disease. And those of you that are in the New York are Long Island will be - many of the large institutions on Long Island are trying to start there BCF screening in January and we are in early with prototype products. So we think that could be very appealing.
And then the kingella bacteria that I mentioned before is also tick-borne and the children's hospitals that are trying to diagnose arthritis in children are extremely excited about this. This is anecdotal, but the children's hospital will usually try to culture the organism from synovial fluid and their accuracy rate is about 50%.
So in the studies that we have done, we have got an 100% of the Babesia infections. So we believe this can be not only a very viable market for us, but it also helps to define what Meridian is all about.
Okay and then before we wrap up with the last question, I'll change gears and move at your margin so far, I think that's an attractive piece of Meridian. So if you could talk about your integrating molecular manufacturing in-house, how that improves margins and then what else you are doing to drive manufacturing efficiency?
Sure, sure, I mentioned before that very often when we acquire, we will acquire things and have a lower margin profile and then it takes us three to five years to bring them up to a level that's comparable to what the Meridian investor is looking for. When it came to molecular, our job was to get Illumigene into the market as fast as possible and we used a number of outside partners to get that done, which became expensive.
We spent $4.1 million I guess it’s three years ago now to build our own on campus molecular manufacturing facility and the savings on that at 2015 revenue rates was about $2 million a year. So as Illumigene sales go up that number continues to improve. So to Illumigene which had margins in the mid-50s now is up around 65%, 66%. There is another program that we reviewed yesterday morning, which has the potential to save another $2 million on Illumigene, it will probably take us two to three years to get through that.
But I think the point Catherine is constant focus on driving cost down. The molecular space has had the luxury of having higher reimbursements in the United States, but we are expecting that there is going to be broad-brush approaches to reimbursement and molecular is going to be a very opportunistic target. So we want to make sure that our manufacturing costs are the lowest in the industry.
Okay and then one big picture question to wrap it up. When you look at Meridian five years from now, be it Magellan, your appetite for additional M&A, how you plan to expand globally? And what does Meridian looks like five years from now?
I think that all I would tell an investor today is organic growth in the 5% to 8% range is something that we think we can manage at our current size and our current investment profile. We do acquire and we have never leveraged our balance sheet up until this year, when we brought Magellan.
We have spent some time talking about what is our capacity with the bankers and also a little bit with the public markets. We haven't come to you and tried to raise money in quite a while, but we think we have got $150 million to $200 million of easily accessible capital and as long as we follow our formula, we should be in good shape.
So if you take $200 million business and you bandwidth it at 5% growth versus 8% growth that gives you what the core is and then another couple $100 million should buy us another $80 million to $100 million of revenue going forward, very, very rough numbers. But we have done this for 40 years.
We are not trying to convince everybody, we are going to double next year, but if we can convince people that we can grow it 5% to 8% continue to pay a dividend and be smart with our acquisition dollars, I think we will satisfy a lot of investors.
With that, thank you very much.
Catherine, a pleasure. Thank you.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!