Meridian Bioscience, Inc. (NASDAQ:VIVO) Q1 2019 Earnings Conference Call January 24, 2019 9:00 AM ET
Jack Kenny - Chief Executive Officer
Eric Rasmussen - Chief Financial Officer
Conference Call Participants
William Quirk - Piper Jaffray
Catherine Schulte - Robert W. Baird & Company
Andrew Brackmann - William Blair and Company
Mark Massaro - Canaccord|Genuity
Good morning, my name is Heidi and I will be your conference operator today. At this time, I would like to welcome everyone to the Meridian Bioscience Fiscal First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Eric Rasmussen, Chief Financial Officer, you may begin your conference.
Thanks, Heidi . By now you should have access to a copy of the earnings press release. If you do not, please go to the investor relations section of our website to access the press release and this morning's presentation.
Before we begin today, let me remind you that the Company’s remarks do include Forward-Looking Statements. Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond the Company's control, including risk and uncertainties described from time-to-time in the Company's SEC filings. The Company's results may differ materially from those projected. The Company undertakes no obligation to publicly update any forward-looking statement.
Additionally, as discussed on Slide 3, we refer to non-GAAP financial measures, specifically operating expenses, operating income, operating margin, net income and earnings per share. A reconciliation of these non-GAAP financial measures with the most directly comparable GAAP measures is included in our press release, which is available again on our website.
With that, I'll jump right into our first quarter results and on Slide Five. As we reported earlier today, total revenues for the first quarter of fiscal 2019 were $51.5 million as compared to $52.3 million in the first quarter of fiscal 2018. This represented a 1.5% decrease in total or about a 1% decline excluding the impact of foreign currency exchange rates and was in line with the preliminary results we announced on January 7th.
This decline was driven by our diagnostic segment where revenues decreased about 2%, as our Life Science business had essentially flat sales in the quarter. Despite the consolidated sales decline, gross profit margin of 61.3% improved slightly, up 10 basis points. As improvement in our Life Science business offset negative pricing and volume impact in diagnostics.
On an adjusted or non-GAAP basis, first quarter operating income increased to $11.1 million, or about 17%, compared to $9.5 million a year ago. This increase was entirely results of lower operating expenses year-over-year, reflecting our cost reduction and consolidation actions in 2018, as well as ongoing expense management discipline.
Sales and marketing expense was down $1.2 million, primarily result of reorganization actions taken in 2018, as well as lower sales commissions. Lower R&D expense largely reflected clinical trial activities related to CMV that took place in first quarter of fiscal 2018 and G&A expenses were also lower, including savings from fiscal 2018 organizational streamlining initiatives.
The non-GAAP operating income in the quarter was 21.6% or 330 basis points improvement over first quarter 2018. On a non-GAAP basis, net earnings of $8.6 million and earnings per share of $0.20 increased 31% and 33% respectively in the quarter. These results reflect the benefit of the full phase in of U.S. Tax Reform in fiscal 2019.
On a GAAP basis, GAAP operating income of $10.6 million included litigation costs of approximately $600,000 in the quarter, compared to combine litigation and restructuring charges of approximately $1.5 million in last year's results. GAAP net earnings and earnings per share in the quarter increased 29% and 27% respectively.
Turning to the next slide, highlighting our operating segment results both of our business units posted operating income and operating margin improvement, compared to the first quarter fiscal 2018 despite software revenues.
As mentioned previously, diagnostic revenues declined 2% to $36.7 million, predominantly driven by an overall revenue decline of 16% in molecular products, including notably C Diff, which experienced significant volume pressure in the quarter.
This pressure combined with pricing related declines in H. pylori drove an 8% revenue decline in GI related products and diagnostics. Continued growth in led products which were up 5% and better availability of certain respiratory products, compared to a year ago partially offset these declines.
Diagnostic operating income increased 2.5% to $8.8 million on a non-GAAP basis. As previously mentioned, lower R&D expense from lower clinical trial activity supported the operating expense reduction, as well as lower sales commissions and costs associated with regaining led testing venous blood claims. Operating margins for diagnostics in the quarter were 24%, up from 23% a year ago, both on a non-GAAP basis.
Turning to the Life Science side, Life Science revenues were about flat in the quarter at $14.8 million as strong growth and molecular reagent products offset a year-over-year decline in immune reagent veterans.
Europe had strong demand in the quarter boosted by both new customers and new products, other regions particularly China had softer than expected customer order activity after the closing our fiscal 2018 on a strong note.
Life Science Non-GAAP operating income increased significantly in the quarter to $5.1 million, as a result of significantly lower cost overall and the result of restructuring and consolidation activities in fiscal 2018. At 34.6%, Life Science operating margin exceeded 30% for the second consecutive quarter on a Non-GAAP basis.
Turning to Slide Seven. We discussed our updated guidance for full-year 2019. Our first quarter results did cause us to reexamine our outlook for the remainder of fiscal 2019 and we are providing updated guidance based on this reexamination.
We are now providing consolidated revenue guidance of flat to 2% growth based on lower growth expectations in diagnostics as well as the softer than expected order patterns in Q1 in our Life Science business.
Revenue guidance is now low-single digit declines in the diagnostics business and high-single digits to low-double digit revenue growth in the Life Science segment. In just a minute, Jack will provide a little more color in some of the major underlying factors that are driving these updated expectations.
We are also adjusting our operating margin guidance, GAAP operating margin guidance is now approximately 19% representing primarily the expectation for litigation expense carryover into fiscal 2019. Non-GAAP operating margin for the Company remains approximately 20% range.
Our guidance and margin contribution between our diagnostics and Life Science businesses has also been updated with stronger Life Science operating margin performance expected to largely match margin pressure in diagnostics as the year progresses.
Well the tax rate was lower than expected in Q1, a result of a profit mix in lower tax jurisdictions. Our tax guidance for the balance of the year remains 25.5% resulting in a full-year tax rate of 24.5% to 25%. Accordingly reflecting the net effect of these changes, our GAAP EPS guidance of $0.72 to $0.74 and our Non-GAAP EPS guidance remains at $0.74 to $0.76 per share.
Lastly, it is important to note that strong demand for respiratory related products in the second quarter of fiscal 2018 will make for difficult comparisons particularly in our diagnostics business in Q2. As a result, our guidance implies revenue growth that is backend weighted in the year.
And with that, I'll turn it over to Jack.
Thank you Eric. And I'm going to start first with the diagnostic business and focus on Page Nine. As we are in the early stages of our new strategic plan, there is much work to be done to build a stronger more sustainable diagnostics business.
Working to rebuild the pipeline and products it's critical to our long-term success, but will not provide significant growth drivers in fiscal 2019. Our R&D investment in underway with significant focus on executing the curing platform and menu as we speak.
This ongoing work will have a positive impact in fiscal 2020 and 2021. As we prepare for fiscal 2016, we built specific strategies to drive near-term performance while reestablishing a strong pipeline of products.
As we came into fiscal 2019, we focused on putting new products into the hands of our sales team. We established partnerships for two new products, the addition of Calprotectin and line test fit well into our existing product portfolio. In addition, we have internally developed product initiatives to drive near-term revenue in our diagnostics business.
We recently received approval for our Novel molecular CMB assay for newborns and have refocused commercial efforts for our led care products to drive sales into our IDN and hospital customers. These two product areas will help us to drive further relevance with our IDN customers to better manage the health of our children.
In addition to those four products, we established a strategic partnership with the DiaSorin in fiscal Q1 to drive collaboration commercially and to drive the sales of Meridian's HPSA assay on the DiaSorin liaison instrument. This exciting new product gives the first fully automated HPSA test in the market and is a highly attractive product offering to reference labs, IDNs and to standalone hospitals.
These five key products were all added to the commercial team's product offering in Q1 and in early Q2, driving sales of these products as fiscal 2019 continues while protecting the base by contracting strategies and rigorous commercial efforts are key for the fiscal year and to bridge towards further new products for our diagnostics business.
Moving over to Page 10. I want to take a minute and talk about the Life Science business. As we look at our Life Science business for fiscal 2019, we continue to see strong growth prospects for the business. This Life Science business has been a good growing business for Meridian on an annual basis. However, we do tend to see more volatility and a quarter-to-quarter basis due to the timing of large bulk orders from our diagnostic manufacturer customers.
This currently has greater impact on the Immunoassays part of the Life Science business, but we do anticipate overtime this will be the case for our molecular business as well as our new strategy is increasingly focused on selling to molecular manufacturers versus academia.
While, we anticipate swings from quarter-to-quarter, we do foresee continued growth for the Life Science business overall and remain extremely optimistic. The business is well positioned for continued growth in 2019 and beyond.
We are excited to launch several new products in the Life Science side of the business. Our new AMH Inhibin B product has strong business potential primarily in the China market, which remains a key growth area for our Life Science business.
We also continue to see strong customer interest in our new tropical disease products around the globe. Our new TRU Block Ultra product is building strong customer interest with large diagnostic companies as this is a key ingredient to build the great Immunoassays tests.
And last but not least, our recent launch of our new Lyo-Ready PCR Enzymes will enable significant benefits for molecular diagnostics customers and is generating strong customer interest worldwide.
We see great customer interest in each of these products as we launched them out to the marketplace and remain optimistic on the sales growth from these new product offerings. We anticipate strong growth in fiscal 2019 and beyond from the impact of these new products in the planned future product offerings currently in development.
Let's move quickly to Page 11. As we look at the overall Meridian business, we are in the early stages of our strategy execution, in diagnostics, this means repositioning the business for growth, while at the same time managing the ongoing competitive pressures this business faces.
We have driven initiatives in 2018 to streamline our organization, which provide us the flexibility to allocate increased investment back into the business and drive future growth. We are ramping up R&D efforts within the organization.
We anticipate further acceleration and investment overtime as these products move through the new product, development stage gates and into clinical trials. We will continue to invest in the reshaping of the diagnostic business for the long-term and execute on initiatives to drive top-line and bottom-line performance in the near-term.
In the near-term, we continue to see our Life Science business as the primary driver of growth for the Company. We see strong prospects for the Life Science business over the coming years and we will work diligently to change the trajectory of the diagnostic business on a sustainable basis.
With that, we wanted to now open it up to any questions that you guys may have.
[Operator Instructions] And your first question comes from the line of Bill Quirk with Piper Jaffray. Please go ahead.
Great, thanks and good morning everybody. So a couple of questions. I guess. First off, just on the pricing pressure across a couple of tests and in particular H. pylori. How should we think about the duration of that, is it something that you would expect to see over the course of 2019 and having revised or updated contracts, we should see that kind of [thereof] (Ph) in 2020, just trying to get a handle on how long we should be thinking about that?
So when we plan for 2019, we did plan for price challenges on the HpSA front. As you know, we have some large diagnostic company, the large reference labs and we did work to secure new contracts with them, which did have some pricing benefits to those customers. So we have kind of planned and modeled for that to occur throughout the year in those large reference lab customers.
We do anticipate some price challenges as well as competition comes in on the ImmunoCard in those other products, but we think that, this year will be the big year for price challenge and then it will be a much lesser degree as we go forward after 2019.
Okay, that’s very helpful. Thank you. And then I guess just a bigger picture question. You certainly talked about a number of moves that you are making here be it new products or new systems, try to reinvigorate growth in the diagnostic side. Could you just talk culturally about what you are doing internally to kind of reinvigorate the growth culture within Meridian and specifically to the diagnostic group?
So, probably the biggest challenge you have coming into an organization like this is to kind of reshape and redefine the culture. Something that we started 12 plus months ago and we continue to do that.
We are trying to drive the organization into more of a growth focused look at the business overall versus short term profitability. Yes, we love having good profitability which we had again this quarter, but we are really pushing the organization towards growth initiatives.
From an R&D perspective on the diagnostic side, we are really overhauling the approach to new product development, really aligning all the different groups that have to come together to build the growth engine overtime. Having your commercial team and the voice of the customer working closely with your R&D team as well as your RA team and your operations team.
All of those things have to kind a come together to kind of reestablish a pipeline. We wanted to ensure that the products we have in development on the R&D front truly will hit the market in the right place and focus in the areas of our strategy. So there has been some work on that front.
Bill we even had to overhaul a little bit of the culture even in the way that we incented the entire corporation. If you look before 2018, the way that an incentive bonus would occur in the company, it was 100% based on earnings per share and how did we do versus what we committed to Wall Street.
We changed that in fiscal 2018 to really focus on three things. The sales growth of the company, earnings per share still being important, and third, being your personal performance in the job. So every individual have how do they perform in their job.
Frontline people have 70% of their bonus based on how they did in their job, are they meeting or exceeding expectations. We really wanted to get everybody rolling in the same direction to start building this strategy for growth.
The only other thing I would say Bill in regards to growth is we are also changing the culture and that we are really taking a more programmatic look at investment into the business. Clearly, we are looking to invest further from an R&D perspective, but also a more programmatic look into mergers and acquisitions and the opportunities that they may bring for the business overtime. That being the case in both diagnostics and in Life Science. So Eric, I don't know if you have anything else to add there.
No. I'm good.
Alright very good. Thanks guys.
And your next question comes from the line of Catherine Schulte with Baird. Please go ahead.
Hey guys thanks for the question, how are you?
Just curious, as you look at your diagnostic portfolio today, how much do you think you can improve the performance by enhancing venue or commercial execution versus meeting the new Korean platform or looking into M&A? I'm just trying to get your assessment on what it would take to get diagnostics back to let's say mid-single digit growth?
So we do believe that there is opportunity from a commercial execution standpoint and general kind of blocking and tackling efforts that are there. But Catherine you know honestly clearly for more sustainable consistent growth in diagnostics, we will need to have some product enhancements that are coming.
One of the things we did in the short-term Catherine was, we have some products as we reorganize the business. for example our led care products we have nearly 7000 pediatrician offices that have led care systems.
We have now engaged 30 or so people that we have on the commercial front calling on hospitals to take those existing products and help those hospital health systems try to put programs in place to manage the led for their - if you look across their health system. Primarily because all of these IDNs are owning many of the hospitals are owning excuse me, most of the physicians. 60% to 65% of the physicians are now owned by these IDNs.
So, we think that there is some short-term opportunities by redirecting the sales team, but for us to get into the diagnostic business and sustainable mid-single digit type growth and beyond enhancing our molecular position is going to be key.
And then we do believe we are on the path of curing and menu that we intend to put on that product that will help us on the immunoassay side. So realistically, firing on all three of the led, immunoassay on the on molecular is going to be the key to get to a high-single digit type of growth business for diagnostics.
Very helpful and then just a quick follow-up to Bill's question. On the diagnostic side, what is the overall pricing headwind that you assumed in guidance?
Well, we assume for some reduction on the overall or on particular in particular products? I mean, HpSA was the primary, it was primary, isolated was the primary area where we assume some price headwinds and price erosion this year and generally assumed a more stable price environment for the broader product line.
Okay. And then on the Life Science side, just given order timing can make these quarters lumpy. Can you just give us some details on how orders looked for this business? And should we be expecting and especially high second quarter similar orders flipped from 1Q?
So, if you look back, we did have a very strong Q4 across the Life Science business. So that was one of those quarters that we really did have significant growth and as Eric mentioned before, for example in China, a lot of those customers did place their large bulk orders in September timeframe. So, we were lighter in China in Q1.
As we look at Q2, we do anticipate a bounce back, but we did have a harder comparable in Q2 from last year. If you look at our quarter-to-quarter Q2, last year was one of our more positive Life Science versus the year before. We had about $16.5 million in the Life Science business in Q2 of last year.
So we do anticipate good growth still in Q2 for Life Science, but we have a higher comp, I think, it was about $16.5 million versus the $14.8 million that we had, if you will in Q1.
Alright, very helpful. Thank you.
Thank you Catherine.
And your next question comes from the line of Brian Weinstein with William Blair. Please go ahead.
This is actually Andrew Brackmann on for Brian. Wanted to first start on the pricing pressures, I know there has been a lot of questions on this and sorry, if you have already talked about this, we missed the first part of the call. But can you maybe talk about what specifically you are doing there to offset these pricing pressures that you are facing? Is there anything that you are offering customers different or is there really nothing that you can do there in the short-term?
So as we said before, the primary pricing impact is on the HpSA front. The other stuff is, I would describe there is more business as usual pricing where you have got - if you are contracting a customer you may give them something benefit. And the bulk of that was really from the large reference labs.
So we have a very good handle as to what the pricing impact from the HpSA would be from those two customers, it's planned throughout the year. Part of that Andrew is our efforts with the partners over DiaSorin is one of the efforts we are taking.
We believe that there will be some price erosion in HpSA, as competition comes in and as that market does, but we think that there is real market growth opportunity there, because we only have about 15% of the H. pylori testing market is being done with still antigen.
So one of the key efforts that we are really focused on Andrew is expanding that pie. The partnership with DiaSorin got very strong initial positive reaction in the marketplace. We do believe that we can not only help customers that want to take that testing in themselves versus sending it to a reference lab, but also quite frankly, find the serum based testing it and other types tests that perhaps they want to convert H. pylori to antigen.
So a lot of it Andrew has to do with realistically increasing the volume. We did perform better than we had anticipated on HpSA in Q1. So we were negative, but we were able to offset some of that negativity from price with some other initiatives that we have an H. pylori front.
Got it. Okay, thanks. And then maybe shifting gears a little bit. Eric, this might be a question for you. Could you maybe talk about what you are seeing on the M&A front right now, the current environment for deals that are coming across your desk? And then when you think about your appetite for M&A are you favoring more towards diagnostics or Life Sciences right now and maybe a little bit more color on the side that we should expect? Thanks.
Yes, sure. Thanks Andrew. listen, I think it's a robust environment, I think there are groups - still a robust environment. Obviously the broader kind of uncertainty in valuations in a broader market and some of the change in the valuations may have changed in some segments of the M&A market, the activity.
But I think the kinds of companies, we have been talking to, the kinds of targets we have been potentially looking at you know it’s a kind of environment where there is motivated as ever to do things.
So, I think still a pretty healthy environment and we are seeing things, we are getting inbound inquiries almost every day on certain things, some things fit, some things don’t and we are evaluating those.
And in terms of the, where our focus is, I think top priority right now is, we are obviously both are important, both looking at the Life Science business and the diagnostics business, I think our bigger priority is to address and reposition, do what we need to do from an acquisition standpoint to help reposition the diagnostics business for growth and finding the kind of products and capabilities that will help us do that and accelerate that through acquisition as well as on top of our own internal development.
So diagnostic is a priority, that’s not to say that we are not also looking on the Life Science side and what I would characterize as we would be looking at smaller kind of niche kind of transactions, very niche transactions on the Life Science side with I think anything more significant would come on the diagnostic side at least for the foreseeable future.
Okay. And then I guess a follow-up to that, as far as timing do you think that we should expect something in the next 12 months or do you think it's further up in that?
You know, it's really hard to say how these things work. I mean you got to find two people willing to dance and be able to find the right and both people that kind of like each other and you get to the right point to. So I think are we hopeful to be finding something within fiscal 2019 that is raised to level that we want to come back to you and talk to you about it. I think we are hopeful that that happens, but obviously it's hard to predict that.
Yes I would think - comments that would be as that. We understand on the molecular front whether internal or external partnership to different strategies that we may take that we need to act in the near future to really stabilize and build a stronger molecular part of our business.
So we have a lot of energy focused in regards to internal and external and other collaborations and what are the go forward plan from a molecular standpoint that we certainly anticipate moving forward in this fiscal year.
Got it okay. Thanks guys.
And your next question comes from the line of Mark Massaro with CanaccordGenuity. Please go ahead.
It's actually [indiscernible] on for Mark. Hey, how is it going? So I see you have rebranded your imaging platform, which is now Alethia. Can you talk about the motivation for the rebrand? And just a general update on the timelines for launches within your molecular system pipeline?
So the [AlumPro] (Ph) platform has obviously been out for a while. There were some reasons from a legal perspective that we need to move that naming over to from AlumPro over to Alethia and so that is the primary driver of moving from AlumPro to Alethia.
From a menu standpoint, the most recent launch of our of congenital CMV on Alethia is the newest product and a very unique product that we are offering to the market, the only automated tests for newborns from congenital CMV standpoint that can be used off of a saliva sample.
So we are pretty excited about that, we are very active in our overall analysis on the molecular front. The molecular front looking at next generation platforms and so we would anticipate that there will be continued effort and energy into the next generation for molecular as we then still look at how does Alethia fit into our overall long-term strategies.
Great. And then can you remind us what is left in the Venus spot remediation process. And are you still expecting remediated product to be back in the market sometime in spring?
So we had significant milestones if you will in the most recent quarter, where we have resubmitted back to the FDA to reinstate the Venus blood claim across the three different platforms that we have. So that was submitted to them in the December timeframe.
And we got our fees in time, so even with government shutdown, we are being told that they are working on our submission. So we have submitted that with the goal of working with the FDA here in Q2, and are hopeful that we will be able to bring that product back later in the fiscal year as planned.
Great. And then one more if I can. So can you just speak to some of the competitive dynamics you are seeing in the respiratory landscape? And what is your initial impression about how this year's flu season is shaping up and kind of your positioning there?
So, I mean the respiratory space is a large market and certainly a crowded market, but we do believe, a nice marketplace and one that we want to continue to participate in. So if you look at our strategic direction, we are going to focus first on our diagnostic business on being a great gastrointestinal and in pediatric point of care.
But we view the respiratory space as a bit of a bridge between the pediatric point of care, where they want respiratory testing like flu and/or group A strap or [RSV] (Ph) test along those lines. But those tests are also in demand on the customer base side in the laboratory as well.
So we do envision respiratory being an important part of our strategy as we go forward, but again, we would characterize that as a competitive marketplace, relatively commoditized marketplace, what we are looking to offer is to offer some solutions that go across both Immunoassays and the molecular front, which we think can provide a level of differentiation versus many of the folks in the marketplace.
When we look at this year's flu season. This clearly has not been the flu season that we had last year, the length and severity, although I will say you that half of our damn office is sick right now. So I feel like in the Ohio area, the flu season has hit us. So in recent weeks, we have certainly seen a spike on that front. But we do anticipate that our flu and overall respiratory business will not enjoy the level of flu season from a business standpoint that occurred in 2018.
Great. That’s it for me. Feel better over there.
Thanks a lot man.
There are no further questions in the queue.
Well, thank you very much for joining us today on this call. We look forward to future calls with you to continue to let you know how our business is progressing, as well as the overall trajectory of our business and thank you again for joining. Have a good day.
This concludes today's conference call. You may now disconnect.