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Edited Transcript of VIVO earnings conference call or presentation 30-Jul-19 2:00pm GMT

Q3 2019 Meridian Bioscience Inc Earnings Call

CINCINNATI Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Meridian Bioscience Inc earnings conference call or presentation Tuesday, July 30, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bryan Baldasare

Meridian Bioscience, Inc. - Interim CFO, CAO, Senior VP, Corporate Controller & Treasurer

* John P. Kenny

Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director

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Conference Call Participants

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* Andrew Frederick Brackmann

William Blair & Company L.L.C., Research Division - Associate

* Catherine Walden Ramsey Schulte

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Mark Anthony Massaro

Canaccord Genuity Corp., Research Division - Senior Analyst

* William Robert Quirk

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Marcella, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Meridian Bioscience Fiscal Third Quarter Earnings Conference Call. (Operator Instructions) Thank you.

Bryan Baldasare, Interim Chief Financial Officer, you may begin your conference.

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Bryan Baldasare, Meridian Bioscience, Inc. - Interim CFO, CAO, Senior VP, Corporate Controller & Treasurer [2]

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Good morning, and welcome to Meridian's 2019 Fiscal Third Quarter Conference Call. I'm on Page 2 of the presentation. By now, you should have access to a copy of the earnings press release. If you have not received a copy, please go to the Investor Relations section of our website to access a copy of the press release and this morning's presentation.

Before we begin today, let me remind you that 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. The company undertakes no obligation to publicly update any forward-looking statements.

Moving to Page 4. Additionally, throughout this presentation, we refer to non-GAAP financial measures, specifically operating expenses, operating income, 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 on our website.

With that behind us, let's move right into our third quarter results on Slide 5. As we reported earlier today, consolidated revenues for the third quarter of fiscal 2019 were $48.4 million as compared to $51.7 million in the third quarter of fiscal 2018. This represented a 6% decrease or by a 5% decline, excluding the impact of foreign currency exchange rate changes. On a segment basis, our Diagnostics business revenues were down about 9%, and our Life Science business revenue were essentially flat for the quarter.

Gross profit margin decline 350 basis points during the quarter with both our Diagnostics and Life Science segments experiencing lower margins. For our Diagnostics segment, product pricing, particularly for our H. pylori products, had an unfavorable impact on margin. And for our Life Science segment, product mix between immunoassay reagent products and Molecular reagent products had an unfavorable impact on margin.

On an adjusted or non-GAAP basis, third quarter operating income decreased to $8.9 million or 18% compared to $10.8 million a year ago. The effect on operating income from the sales decline in our Diagnostics segment was softened somewhat by lower SG&A spending in both our Diagnostics and Life Science operating segments.

Our acquisition of the GenePOC business added approximately $900,000 to our adjusted or non-GAAP basis operating expenses, including approximately $300,000 in purchase price amortization. The adjusted operating margin in the quarter exceeded 18%, which was down from approximately 21% in the third quarter of 2018. Also on an adjusted basis, net earnings of $7 million and diluted EPS of $0.16 decreased 10% and 11%, respectively, in the quarter. On a GAAP basis, operating income of $6.7 million included acquisition-related restructuring and litigation costs of approximately $2.5 million this quarter compared to combined litigation and restructuring costs of approximately $2.1 million in last year's quarterly results. GAAP net earnings and diluted EPS in the quarter decreased 26% and 25%, respectively.

Now let's turn to the next slide, which highlights our operating segment results for the quarter. As previously mentioned, Diagnostics revenues declined 9% to $33.1 million, predominantly driven by: one, significant competitive pressure on our molecular products, most notably C. difficile, which continues to experience significant volume declines; and two, although expected and planned, contract pricing changes done in 2018 for a number of customers, including our 2 largest natural reference laboratory customers, contributed to a 13% decline in our H. pylori products for the quarter. Additionally, our LeadCare products experienced a 5% decline in revenue during the quarter and are flat on a year-to-date basis. The decline in the quarter was driven by a combination of lower instrument capital sales for analyzers and lower kit volumes for consumables, both stemming from selected larger health system customers who are new accounts in 2018 that had onetime analyzer purchases, coupled with bulk kit volumes.

Despite the addition of the GenePOC business for 1 month, operating expenses in our Diagnostics segment were lower during the current quarter as a result of: one, organizational streamlining activities completed in 2018; two, lower FDA quality system remediation costs for our Billerica manufacturing facility in the current quarter; and three, lower compensation costs for sales commissions and corporate incentive bonuses.

Diagnostics operating income decreased 27% to $6.5 million on an adjusted basis. Operating margins on an adjusted basis for Diagnostics in the quarter were 20%, down 480 basis points from a year ago.

Life Science revenues were down 0.3% in the quarter to $15.3 million or up slightly over 1% on a constant currency basis. The flatness in the overall Life Science revenue reflects 5% growth in Immunological reagent products, offsetting a 9% decline in Molecular reagent products. China experienced a rebound in customer order activity during the quarter, resulting in a 14% increase in revenue over the fiscal 2018 third quarter. We expect a similar revenue contribution for China during our current fourth fiscal quarter.

Life Science adjusted operating income increased 16% in the quarter to $4.3 million as a result of significantly lower costs overall, realizing the effects of restructuring and organizational streamlining activities in 2018. Adjusted operating margins for Life Science in the quarter were 28%, up 390 basis points from a year ago.

Now I would like to turn over the discussion to our CEO, Jack Kenny.

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [3]

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Thanks, Bryan. Let's start here on Page 7, with a refresher on the strategic fit and rationale for our recent acquisition. On June 3, we finalized the acquisition of GenePOC and its revogene molecular diagnostics system. This acquisition is an important and critical component of our plans to strengthen the Diagnostics segment of our business. The strategic fit of the revogene platform and the research and development and manufacturing teams in Québec made this a very attractive acquisition.

Having immediate access to a state-of-the-art molecular platform with 4 existing FDA-cleared tests will enable us to protect our current molecular business that has been under attack for the past 12 to 24 months. The manufacturing team and infrastructure in Québec will support our anticipated volume needs into the foreseeable future.

Execution of our plans to convert our current customers using our alethia platform to build a strong, referenceable installed base will enable long-term success for Meridian and fits perfectly into our strategy to be our customers' go-to partner for gastrointestinal and respiratory testing.

Let's now move on to Page 8. As we have discussed before, the revogene platform is truly a state-of-the-art molecular system that enables sample-to-answer capabilities. The technology is able to efficiently run both individual molecular tests, for example, C. difficile, as well as multiplex tests with up to 12 targets, enabling smart panels to be run. The front-end sample preparation for the revogene system is much better compared to our current alethia system and will be attractive to our customer base. Ease-of-use is a common theme that we're hearing from our customers who are currently considering the revogene system. Ease-of-use, high reliability and quality results make this a very attractive platform for our customers considering a decentralized testing model.

Page 9 highlights some of the key elements of the revogene system and consumables which made this very attractive to Meridian. In addition to ease-of-use, compact design and quality that appeal to our customers, the revogene instrument and consumables have low manufacturing costs compared to competitive PCR systems on the market today. The elegant but practical consumable PIE design provides us with competitive advantages around manufacturing cost, which we believe will be helpful in health care environments under cost reimbursement pressures and also provide us with good profitability as we grow the molecular part of our business.

Let's move now to Page 10. One of the attractive features of -- to this acquisition was the perfect fit between the revogene system and its current menu of 4 FDA-cleared assays and the imminent need to convert our existing alethia customer base that has been under competitive attack. Over 80% of our current alethia revenue comes from Group A Strep, Group B Strep and C. diff assays. The ability to immediately go to our existing installed base and offer them a state-of-the-art sample-to-answer molecular system will enable us to build a strong reference base and provides a platform for future growth. This is the key part of our focus, and we're moving aggressively on execution. Although we're very early on in the process, we're actively converting customers from our alethia system to the revogene system, and results to date are ahead of expectations.

Moving now to Page 11. We wanted to provide an update on our integration efforts. Our approach to the integration is what we like to describe as a warm welcome. Our intent was to move aggressively to integrate the GenePOC team and products into the Meridian organization. On the day we closed, June 3, myself and a few other key Meridian employees were in Québec to kick off integration activities. Within a few short weeks, the site was fully branded Meridian and the functional integration teams are well into their projects.

Overall integration activities are off to a strong start with great collaboration. New product development is progressing and several quick wins have taken place since the close on June 3.

On the commercial front, we did not retain the previous U.S. sales team from GenePOC, but rather brought this product to our existing commercial team. We aggressively worked to train our sales teams to execute the strategy and they are having meaningful initial success. To quote our Head of Manufacturing from GenePOC, "Wow. In just a few short weeks, the Meridian team has placed more systems than GenePOC had closed in the previous 18 months. We need to focus on ramping up production."

We remain excited about the revogene platform and the team from GenePOC joining Meridian. This is a critical early step in our turnaround of the Diagnostics business that will help us to build a sustainable, growing business for years to come.

Now let's move to Page 12. While the acquisition of GenePOC was a critical step in our strategy for the Diagnostics business, we also have been working hard at driving improvements in our new product development programs to build a stronger pipeline of new products for immunoassay and blood chemistry. A robust pipeline of new products is critical to the success of our strategy. We've been making good progress. This year, we will enjoy 5 new products with our acquisition of the GenePOC -- excuse me, of the revogene platform. Importantly, as we look forward over the next 24 months, we anticipate 4 new products in 2020 and have a strong pipeline of 7 new products we anticipate in 2021. We have built a new team to focus on our new product development processes and are committed to delivering new products that align with our business strategy around gastrointestinal testing and pediatric point-of-care testing. While we anticipate continued business challenges in the near term, we have built a new, strong team that is focused on stabilizing the business in the next 12 to 18 months and building a sustainable growth engine for the Diagnostics business on a long-term basis.

Let's finally move to Page 13 to discuss our Life Science business. As we have shared before, our Life Science business sells key components to IVD manufacturers for their FDA, CFDA and CE Mark tests. As we pivoted the Life Science business last year, we changed the direction of our efforts on the molecular side of the business to focus on IVD customers as we are in the immunoassay side of our business versus directly selling to researchers.

This year, we moved the focus of our sales team away from academia and into IVD manufacturers. Academia is now being called on by our distribution partners, and our direct sales force is calling primarily on the IVD manufacturers, selling both immunoassay and molecular key components. We remain committed to this strategy and have great confidence in the long-term growth potential with this approach.

In our molecular area, we have many customers interested in our products and working through the validation and approval process. We anticipate ramping of the molecular business within IVD manufacturers over the next 12 months as their products receive FDA, CFDA and CE Mark approvals, and these customers will move into larger bulk orders. We anticipate a return to growth in our Life Science business in Q4 2019 and into fiscal 2020 as the full realization of the strategy kicks in.

With that, Marcella, I'd like to open it up to any questions that our listeners may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Brian Weinstein.

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Andrew Frederick Brackmann, William Blair & Company L.L.C., Research Division - Associate [2]

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This is actually Andrew Brackmann on for Brian. Maybe just kicking this off on GenePOC. Appreciate the commentary on the integration and sort of the transparency moving forward on the number of placements. But now that this asset is sort of under the Meridian umbrella, can you maybe help us frame the opportunity with some numbers around the installed base that you're trying to convert, some annuity per box estimates? What I'm really trying to get to here is your revenue opportunity if you swap out the total installed base.

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [3]

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So I'll start with, first of all, Andrew, as mentioned before, we're off to a good start. We trained our sales force in mid-June. A week after the close is when we trained the sales force. So they've been out as of the late June time frame out talking to customers. Response has been outstanding from customers. In a few short weeks, we had some closes. We anticipate Q4 and beyond that we will provide you a quarterly update on all the placements that we have. So expect in Q4 and going forward, that we'll regularly provide you with the number of placements that we have.

We anticipate, Andrew, that we'll have certainly 50 or more types of placements here in Q4 as we work towards building out this business and to move the installed base. We're focusing our efforts on our larger customers that are doing, at a minimum at least $20,000 worth of business with us, and some of them are much higher than that, could be several hundred thousand dollars that they are doing with us. So when we look at our overall book of business, we have a U.S.-based molecular business that's in the low $20 million -- low $20 million range, $22-ish million business. And the intention is to work aggressively over the coming 12 to 24 months to convert that business over.

Now there is some of that business that will remain on alethia for sure, in products like CMV, our new test that we just had, Pertussis and other types of tests that will remain in that area. So we will have both alethia business and the revogene products as we go forward.

But I think, Andrew, if you start thinking about -- I've alluded to this before. The toughest thing to do is get your first 200 or 300 placements. Because our customer base is a conservative customer base that don't like to be the first ones in town. And so we're really focused aggressively on getting to that first 200, 300 placements over the next 12 to 18 months in the United States and, of course, in Europe and in those markets as well. And then building that to build -- to increase the number of competitive placements that we have.

So I think, Andrew, if you think about, certainly in the near term, 50 or more placements in the quarter is what we think very attainable and certainly, we'll be pushing on that front. And I think you could look at our accounts being somewhere in the neighborhood of $20,000 to $40,000 per instrument kind of range, is probably the type of range that you're going to see from a revenue through these instruments. Hopefully, that helps.

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Andrew Frederick Brackmann, William Blair & Company L.L.C., Research Division - Associate [4]

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That's helpful. Jack. And then maybe just one on GenePOC gross margin. I know you and I have talked about sort of the cartridge design here on the [package]

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provide some color on the gross margin profile for that business in the near term? And then how should we factor some gross margin expansion as we think about the U curve as that plays out?

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [5]

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So I think that we anticipate -- and Bryan, you can clean me up here if I'm off. We anticipate gross margins will have a little bit of dilution early on. You got to build your volume up and get your costs down as you build your manufacturing up. But we believe in the relatively near term that our cost position on GenePOC can be very similar to what we've been enjoyed on the alethia products. So in the next 12 to 18 months, we think we can get into the similar types of costs that we have on that, which would mean your margins, 12, 24 months out, start being very similar to what we have today. We do think that there is further decreases with the PIE design and all that, that we can drive. And some of the work that we're doing, working with our Life Science group as well, to take out costs as well in a very creative way. So Bryan, anything to add?

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Bryan Baldasare, Meridian Bioscience, Inc. - Interim CFO, CAO, Senior VP, Corporate Controller & Treasurer [6]

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That's exactly right, Jack. In the near term over the next few months, we'll have to deal with overhead absorption as we ramp up production. But in the not-too-distant future, once that's behind us, we can expect, I think, comparable margins to what we have in the Diagnostics business today.

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Andrew Frederick Brackmann, William Blair & Company L.L.C., Research Division - Associate [7]

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Okay. And then just one last one on the guide. I don't want to get too bogged down on the near term here. But it does look like the fourth quarter operating margins called down pretty substantially. Any one thing that we should be aware of that might be in the quarter there? Is it the GenePOC acquisition costs or something else?

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [8]

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I'll start with this, and Bryan can add. Our business from a profit standpoint has been better than we anticipated throughout the year. We are trying to make sure that we've taken costs out where appropriate, but continuing to invest in things to help us to build where we want to go. We will see increased cost in the quarter dramatically because we'll have a full quarter of the GenePOC. Instead of $900,000 that we had in this quarter, think of that kind of tripling because you'll have 3 months of run rate for the GenePOC products.

We also see some increases in our spend as we work through expenses in our new product development pipeline as well. So good investments, I think that we anticipate that you'll see that we'll create some short-term profitability challenge versus the previous quarters. Bryan, anything to add?

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Bryan Baldasare, Meridian Bioscience, Inc. - Interim CFO, CAO, Senior VP, Corporate Controller & Treasurer [9]

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Yes. So for fiscal 2019, when we had talked about guidance back in April, when we closed our second fiscal quarter, we were disclosing operating margins on an adjusted or non-GAAP basis of 17% to 18%. As we've come through the third fiscal quarter here and our outlook for the fourth quarter, we think for the year we'll be in the 18% to 19% range on operating margin.

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Operator [10]

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Your next question comes from the line of Bill Quirk.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [11]

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Thanks for all the details, guys, in terms of -- set in place some expectations, leverage, revenue, et cetera. Just a couple of, I guess, kind of clean-up questions on that topic. In terms of the revogene placement, so you're placing those under reagent rental deals, right? There's no capital costs associated with that, that we should be monitoring?

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [12]

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I would say the majority of what we anticipate will be reagent rentals. The market is heavily weighted towards that. I think as we get into fiscal 2020, we'll look at training our sales force to -- a lot of this comes down to how you sell as well. And so we'll be training our sales force to get capital where we can. But I think for the most part, 90% or more of them will be reagent rentals in the near future for sure.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [13]

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Makes sense. That's obviously where the market is going and has been here for a couple of decades. And then just to be clear though, I think in kind of a previous administration with illumigene originally, my understanding was that there wasn't a whole lot of contractual revenue really tied into those placements. I'm assuming, Jack, that every time you're placing a revogene, there are some minimums that these customers are going to have to hit or you're going to take that back, correct?

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [14]

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Bill, that's a great question. So since I joined about 18 months ago, one of our efforts was to really improve our commercial excellence for the overall team. And one of the key focus areas in the 18 to 21 months or whatever I've been here has been contracting our business. We have moved a significant portion of our business that was not contracted to contracted business, and so that continues. And as we rolled out the revogene, we fully anticipate essentially 100% of that business being contracted. And our customers are working with us, and early reception has been positive. Our sales force is, quite frankly doing better than we anticipated with that.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [15]

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Okay. No, that's fantastic news. And then one more house -- one housekeeping one from me and then kind of bigger-picture question. So first on the housekeeping. Apologies, but can you repeat the H. pylori comment in terms of the growth impact as it related to the reference lab pricing dynamics?

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [16]

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So Bill, I'll do some -- Bryan, you can again add to this as appropriate. As we -- as you know, we've had -- well, we own the market for H. pylori. We had patent for a number of years. We're off of patent and there is competitors coming into that space. One of the key initiatives for us about a year ago was really to try to protect and lock up our LabCorp and Quest business, right, the big 2 reference labs. And so we work with those customers to build a contract -- a multiyear contract with them going forward. In those contracts, one of the keys to the contract was, is that there would be pricing stepping down over time. And so we kind of had planned price erosion, is the best way to think of it, and we felt that it was appropriate to win for those customers but also appropriate for us as well.

And so we implemented a lot of that. We anticipate the next round of those price reductions occurring here in the summer and fall. And so when we talk about that business, we do have a few million dollars of price erosion that's planned as we kind of step the pricing down on those products overall. Bryan, anything to add?

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Bryan Baldasare, Meridian Bioscience, Inc. - Interim CFO, CAO, Senior VP, Corporate Controller & Treasurer [17]

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So that's one of the factors that I mentioned previously around our gross profit margin percent when you compare periods. The current year has a price erosion in it; the prior period does not.

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [18]

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So I would also just add to that, Bill, that we planned for this price erosion. We're actually performing better on H. pylori than we had planned because we anticipated price erosion there. And also, in your other products you have non-Quest, LabCorp types of accounts. But we are seeing some level of volume increase that helps offset that a little bit. So one of our strategies is to help build this market because we do believe it's an untapped -- it still has a small percentage of the testing that should be done, moving things from serology or other types of testing, breath and/or no testing whatsoever. So for us, we anticipate continued price erosion over the next couple of years and increased volumes offsetting that, and that's really the dynamic that we're faced in H. pylori.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [19]

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Understood. And just a follow-up there. Is what the -- the pricing dynamic itself, what did that do specifically, I guess, to the overall H. pylori growth in the quarter? I'm just trying to get -- I missed that comment in your prepared remarks.

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [20]

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I believe we're down 13% in the H. pylori in the quarter. I apologize. Bryan can look that up real quick.

We're actually -- so Bill, we were actually down...

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Bryan Baldasare, Meridian Bioscience, Inc. - Interim CFO, CAO, Senior VP, Corporate Controller & Treasurer [21]

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13%.

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [22]

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13%. We had anticipated being down slightly more than that. So it was actually -- that was one of the years that was a little better than we had anticipated.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [23]

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Okay. Understood. And then just, I guess, last question from me is the bigger picture one is, if we think about of all the moving pieces between the new systems, the transition of some of the card immunoassay business and [DLC] and molecular. How should we be thinking about or when should we be thinking rather about the Diagnostics business starting to grow again? Could we see this as soon as 2020? Or do you think some of the pricing dynamics with things like H. pylori would push that to 2021? Jack, how are you -- I'm not trying to get at early guidance here, but just kind of big picture, directionally how close are we to the bottom of the -- of your curve there that I think you had on Slide 10?

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [24]

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We envision that we -- 2020 will still not have growth in our Diagnostics business. We think with the price erosion in HpSA, our molecule stabilization and the other stuff that we're doing, that we will not have growth in 2020.

We do believe that we'll start returning to growth in 2021 as we'll have some new products that have come in with the stabilization of the molecular business, and the price erosion will have worked its way through for the most part on H. pylori. So we are looking at the next 12 months or so, 12 to 18 months quite frankly, Bill, being a grind in the Diagnostics business that we have to work our way through. We have a plan for it. Getting some of these new products through, and we're making good products like we mentioned, but there's no quick fix to this. This is going to be bumpy for the next 12 months at least in Diagnostics. So returning to growth in Life Science will be important for us, and commercial execution on the Diagnostics side is really the focus. And I'm cautiously optimistic on that front, but we've got a lot of work to do.

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Operator [25]

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Your next question comes from the line of Catherine Schulte.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [26]

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On the molecular Life Science business, any color on how many customers you have in pilots or validation on the IVD side?

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [27]

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I don't know that we've got a clear number on the numbers side. I'll give you a little bit of color though. Our Executive Vice President, who runs the Life Science business, was recently in China. And her trips to China, she had -- obviously, we have a large immuno business there, but the molecular business is just developing. Her return from that trip came back to say that we have a number of customers with multiple products, that they got -- currently, that they're putting in front of the CFDA looking for approval. So she came back with multiple customers from China and felt very, very bullish that we have this of bolus of products that are there. And I unfortunately, Catherine, don't have very clear numbers on that. That's something that we can work towards trying to get a little more clarity as we go forward.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [28]

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Okay. And then any thoughts on the CFO search and the potential time line to finding a permanent replacement?

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [29]

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So a couple of different things, very fortunate to have Bryan, who's been with our company about 20 years or so, Bryan?

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Bryan Baldasare, Meridian Bioscience, Inc. - Interim CFO, CAO, Senior VP, Corporate Controller & Treasurer [30]

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20 years now.

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [31]

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A couple of years. He looks like he's 19, but he's been here for 20 years. We're very fortunate to have Bryan, and Bryan has stepped in and done an amazing job over the last month of making sure that we're on track.

We will be looking, as we get into the later parts of the summer internally. Bryan is going to have a very, very strong look at this role for sure, as well as any external candidates with the intention of really, as we get into the fall, probably late fall before we kind of finalize this as we go forward. Have high confidence that -- internally and also that there is external folks that have expressed interest that we will not have issue having a great replacement. But we're in very good hands with Bryan, I can assure you that.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [32]

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Okay. Great. And then going back to revogene, any plans from a commercialization perspective on the international side?

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [33]

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Yes. I didn't mention it in the presentation, but we have actively rolled our training through the EMEA sales group that we've got. So we've got a sales team in EMEA that was trained in early July on the products, and they are now in the last couple of weeks, just started approaching customers. We do believe that carbapenemase is a product that could be very, very important in that market as well as some of the other products on the instrument that we have today.

So we anticipate our bulk of our energy being U.S. followed by EMEA. We're not going to put initial focus on other parts of the globe. We're going to focus our energy on being great in the United States and good in EMEA. That's our plan.

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Operator [34]

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(Operator Instructions) Your next question comes from the line of Mark Marasso (sic) [Mark Massaro].

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [35]

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Yes. So I guess a bunch of questions. My first one, I guess, you certainly managed the bottom line well. And I think you did say in your prepared remarks that there were some salespeople that may have had lower commissions than in the prior year. Looks like whole sales-and-marketing expense came in 21% down year-over-year. Can you just give us an update on the number of direct territory carrying reps you have, notably on the molecular side? And can you just clarify the comment that you did not retain the salespeople on the revogene product?

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [36]

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Absolutely. So a couple of things. First of all, Mark, the 21% reduction in our commercial, a lot of that came from the Life Science side, just to start. So if you look -- if you broke it down, our Life Science side of the business, we could change our go-to-market approach. We used to have a large sales force that was calling on these academia, and they were going out trying to get a researcher to buy $200 worth of product. So moving that over to distribution enables them, with several hundred feet on the street, to go to those markets. It created a short-term problem for us because we have to give them margin at the distributors. That's part of the reason the molecular business was down on the Life Science. So just to give you some perspective. But we have a much more efficient go-to-market on the Life Science side, and that's where some of the savings came. On the Diagnostics side, there were some savings on the SG&A side as well, but it was not as dramatic as it was in the Life Science.

From a Diagnostics standpoint, we have 28 in the United States, sales reps that cover territories that are selling the molecular products as well as our other products. We also have a small group of people that work with IDNs. If you include the management of that, there's another 3 or 4 people that work with some of the larger IDNs that we have. So those 28 people are going to be the key kind of bread-and-butter for us as we roll out revogene.

The folks from GenePOC had a small team in the United States of -- probably in the neighborhood of about 10 people if you added everybody up, and we did not feel the need to bring those 10 people across because we have good coverage with our 28 sales reps and our coverage across the United States. So we anticipate that we'll continue with those 28, and we do believe -- they've all got a good install base to try to go work from initially. And we also, at the same time, are quoting and starting to see competitive activity on the revogene as well that we look forward in Q4 to starting to talk about.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [37]

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Excellent. And I know when you acquired GenePOC, according to my notes, I thought the base molecular business was in the $26 million to $30 million revenue range. I think today, you talked about a low $20 million molecular base. I know that you're molecular business was down, I think, 21% this quarter. Can you just help us frame -- is $20 million call it the base that you're looking to protect?

And then I appreciate the color around the expected throughput per box on revogene. Can you also remind us on the installed base? Going back years ago, I thought you had as many as 1,500 systems on illumigene?

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [38]

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Yes. So let me start a couple of things, first of all. I'll start with the installed base. I think your installed base of illumigene is in the ballpark. We have a ton of illumigenes or what we call alethia now, that have very low volume, that are running just Pertussis or chlamydia and Gonorrhea if it's in Europe. So there's kind of these one-off, smaller tests, malaria, things of that nature. We don't anticipate that, that installed base will all convert.

So from a numbers standpoint, we anticipate our molecular business is going to be, in total, somewhere in the neighborhood of $25 million this year is where it'll end. But when I'm talking in the low-20 kind of range, I'm really talking in the U.S. business. Because we have $3 million or $4 million or so in EMEA of molecular business, and so it's a little different situation there. It's much more stable there than it was in the United States market. It's more flattish in that market. So we do anticipate that Europe can begin to grow as carbapenemase and these other products start to hit that marketplace.

So I think your $20 million-ish range of converting is not an unreasonable number. $18 million to $20 million Group A, C. diff and GBS is probably in the ballpark of the business opportunity that we have to convert. And so we'll be actively working to do that.

I think when you start talking about conversion, we don't necessarily believe that one revogene equals one alethia. In many cases, a revogene system can run more throughput and more capabilities than an alethia could. So we kind of envision that we will replace -- there's several hundred -- put yourself in the neighborhood of 400-or-so systems totally with pretty good revenue running through those boxes that are in Group A, Group B and C diff. And those are the types of targets that we're going after first to try to go protect.

We anticipate we'll continue to keep alethia systems in our customers to run Pertussis. We have a growth that's occurring with our congenital CMV test and some of the other products. So our smaller volume tests on alethia are actually flat or growing. So really, the decline in the molecular business has been in those big 3 tests that we talked about converting. Bryan, anything to add to that?

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Bryan Baldasare, Meridian Bioscience, Inc. - Interim CFO, CAO, Senior VP, Corporate Controller & Treasurer [39]

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I think that's good.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [40]

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Great. And that's super helpful. I know you mentioned that the Diagnostics business is going to take some time to turn around. I wanted to pick your brain, Jack, on just the uptick that you expect on revogene for the big 3 assays: C. diff, Group A and Group B. I guess what I'm getting at is the industry had shifted largely to mini panels for GI and respiratory. I know that those are in your development plans. But can you just speak to your confidence that those assays, notably C. diff, can sort of hold its turf until some of the panels come on the market?

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [41]

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So our early indication from our customers gives us great confidence that we can protect this space. It's actually marked off to a better start, the energy level, the amount of customers that are wanting to work with us on paperwork is moving faster than we had anticipated. So we are more optimistic now then we were before we closed on the deal. I'll just start with that.

While panels are going to be an important part going forward, there's still a significant marketplace for individual tests, like Group A Strep, C. diff, GBS as an example. So the Group A Strep market, we're actually seeing a lot of activity on revogene with Group A Strep because customers are trying to get a platform in place before the Strep season hits, when the kids go back to school in a month or 2. And so we have a lot of customers that are aggressively looking at that. That seems to be our leading thing right now with a sense of urgency with our customers.

The Group B Strep for testing pregnant women will continue. We think that's an important market, and our solution is so much more compelling for our customers that we feel that we can convert those, and quite frankly, start winning competitive business on some of these tests. And then, as you said before, the most important is C. diff and protecting that base.

So Mark, we have high confidence. But as I've alluded to before, you got to get 200, 300 placements out there in the next 12 to 18 months. We've got to get a couple hundred placements because our customers -- and I'm sure you guys have gone out and sat with lab customers. They're conservative folks and knowing that 2 or 3 or 4 other people in town have it and they love it, it makes it that much easier when you're trying to go win those next accounts.

So we do anticipate the panels. The first things that we're focusing on are the gastro and the respiratory panels. We're making good progress on those. And those also have key milestones in our acquisition. So we know that everybody's very incented to driving those products through and trying to deliver those.

When I start talking about growth, Mark, in 2021 and beyond, it's -- we've stabilize our base, if you will. In the next 12 to 18 months, it's stabilized. We're getting some growth from carbapenemase, as we now have that test, and we're going to have a swab carbapenemase as well, which we think will be very compelling in future. And then last, but not least, we're starting to have these incremental new tests, the panels coming out that we can go to our installed base to close and try to add them onto those, but equally important, going to new customers with a broader menu offering. So that's the model we're running here, Mark.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [42]

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Great. And then I don't think I heard you talk about Magellan as it relates to the FDA. But do you have any expectations to relaunch your venous blood-based test by the end of this year? And can you just give us an update on the additional information hold on the product -- on the platform?

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [43]

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So as we disclosed in Q2, I believe it was, we disclosed that the FDA had come in and put an AI hold on our venous blood submissions. We have been working with the FDA on that. There's some studies -- if you look in our 10-Q, you'll see more information in regards to the work that we're doing and that -- what the FDA is doing to do some of their own analysis as well. We do not anticipate the venous blood products coming back in this fiscal year or we're not planning on that in the near term. Can't speak beyond that. But certainly, in the next 6 to 8 months, we don't anticipate any positive movement from that and that product line. Nothing has really changed on that, Mark, from where we were in the spring, in all honesty.

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Operator [44]

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There are no further questions at this time. I turn the call back over to the presenters.

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John P. Kenny, Meridian Bioscience, Inc. - President, CEO, Executive VP of Diagnostics Business Unit & Director [45]

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Well, thank you very much for joining us on this call. We hope that we've been able to provide you an update in regards to our business and where we're going. We look forward to putting our head down and building a stronger business and look forward to talking to you again in the coming quarters. Thank you very much, and have a great day.

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Operator [46]

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