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

On an adjusted or non-GAAP basis, second quarter operating income decreased to $11.2 million or 11% compared to $12.6 million a year ago. The decrease was driven by the sales decline in our Diagnostics segment although was somewhat offset by lower R&D and SG&A spending overall. The adjusted operating margin in the quarter was 22.3%, which was unchanged versus the second quarter of 2018.

Also on an adjusted basis, net earnings of $8.2 million in diluted dollars and diluted EPS of $0.19 per share decreased 8% and 10%, respectively.

On a GAAP basis, operating income of $9.8 million included acquisition transaction costs and litigation costs of approximately $1.4 million in this quarter compared to the combined litigation and restructuring costs of approximately $4.9 million in last year's results.

Turning to the next slide, Slide 6, and highlighting our operating segment results for the quarter, starting with the Diagnostic segment. As mentioned previously, Diagnostics revenues declined 15% to $33.5 million, significantly driven by competitive pressure in our molecular products, which were down 28%, most notably C. diff, which continues to experience significant volume declines.

Although expected and planned contractual price reductions in H. pylori implemented in 2018 also contributed to a decline in our overall gastrointestinal revenues, and later buying patterns for the January through March period of the 2018-2019 respiratory season contributed to a 21% decline in respiratory product revenues.

Our life care products continue to show a positive growth for the quarter. Operating expenses in our Diagnostics segment were lower during the quarter as a result of a number of factors. Organizational streamlining activities completed in 2018, our lower clinical trial cost compared to the same period last year and lower -- and materially lower quality system remediation costs for Billerica manufacturing facility as well as lower compensation costs for sales commissions and corporate incentive bonus.

In total, Diagnostics operating income decreased 30.4% to $7.4 million on an adjusted basis. Operating margins for Diagnostics in the quarter were 22%.

Now looking at our Life Science segment. Life Science posted a meaningful operating income improvement, nearly 50% despite the weaker-than-expected revenue growth as a result of the organizational streamlining activities completed in 2018.

Life Science revenues were up slightly in the quarter to $16.8 million as 8% growth in the immuno-related products offset a 12% decline in Molecular reagent products. This is essentially the reverse of the product mix that occurred in the first quarter and highlights the quarter-to-quarter variability we frequently experience in the second.

As cited in our April 2 press release, China continued to experience softer-than-expected customer order activity during the quarter, and while we are expecting better performance out of China in the second half, growth is likely to be more modest than we expected entering fiscal 2019.

Life Science adjusted operating income increased significantly in the quarter to $5.4 million as a result of significantly lower costs overall and the result of restructuring and organizational streamlining activities in 2018. At 32.2%, Life Science operating margin exceeded 30% for the third consecutive quarter.

Turning to Page 7. In addition to our fiscal second quarter results, this morning, we also announced our agreement to acquire the business of GenePOC Inc. While Jack will go into the strategic rationale and the benefits of the deal for Meridian in just a minute, I will summarize some of the key aspects of the transaction.

Quebec-based GenePOC is a molecular diagnostic company with about 100 employees and is in the early stage of ramping its revenue. We have agreed to a cash purchase price that could be up to $120 million with an initial payment of $50 million at closing and an earn-out structure that includes contingent future payments based on the achievement of development milestones and certain financial performance levels.

We are looking for the transaction to close within 90 days. With the transaction, we will be adding approximately $4 million to $5 million of operating expenses through remainder of this fiscal year 2019 and approximately $9 million to $10 million on a full year basis next year as we integrate GenePOC's strong R&D team and other core activities.

We currently estimate that the transaction will be $0.10 to $0.12 dilutive to our fiscal 2019 EPS for which we provided revised guidance in our press release on April 2. Our expectations are that the acquisition will start to provide a net positive contribution to our run rate molecular revenues and company EBITDA starting sometime in fiscal 2021. We plan to finance the transaction with cash on hand and through a new committed $125 million revolving credit facility.

Importantly, commensurate with our agreement to acquire GenePOC, we are also shifting our philosophy towards capital allocation. The Board of Directors has suspended the quarterly cash dividend as we intend to redirect available capital for reinvestment in the business, including development of our molecular product line. By doing this, our objective is to address the competitive pressures the Diagnostics business is currently facing and to reposition Meridian for a sustainable long-term growth.

Now, I will turn it over to Jack.

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

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Thanks, Eric. As we head to Page 8, I want to take a few minutes to discuss the strong strategic fit that we saw with GenePOC with our overall strategy at Meridian. As we rolled out our strategic vision in our investor call last November, we acknowledged that molecular was a critical component for our new Meridian strategy. In recent months, we have been evaluating all options from a molecular standpoint, including internal development, strategic partnerships or potential acquisitions in order to strengthen our position in molecular.

As we did our diligence of GenePOC, it became clear that GenePOC and the revogene platform are an ideal fit for our strategy to build depth in our customer offerings for gastrointestinal and key respiratory testing. The revogene platform offers sample-to-result testing capabilities for both single analyte PCR tests as well as the capability to multiplex with up to 12 targets at one time. This state-of-the-art platform, along with its 3 FDA cleared and 4 CE mark test, make it a strong solution for our current molecular customers. This great new product, along with Meridian's breadth of other GI and respiratory products, will help us drive further towards our strategic vision.

We are also extremely excited to have the team of GenePOC join our Meridian family. This team has developed an innovative and exciting new platform and multiple assays and gained regulatory approvals for these products and built a strong operations infrastructure to support the growing molecular business. This market-ready molecular business will be ready to grow as we work to quickly convert our Meridian Alethia install base. These great new products can go to market effectively by leveraging Meridian's strong commercial infrastructure in the U.S. and European markets.

Let's move on now to Page 9. The revogene platform as well as its microfluid technology can deliver sample-to-result testing cost effectively and in a small footprint. This system and reagent technology will enable our team to protect our current molecular business and give us the capability to build and grow for years to come. The revogene's simplified sample prep and efficient workflow is best-in-class and fare well against other molecular competitors. The revogene platform also will enable our customers to provide actionable results in a timely manner with positive results available as early as 35 minutes.

Revogene's ability to multiplex with up to 12 targets per specimen will enable appropriate treatment and enhance antibiotic stewardship practices by truly providing improved outcomes for our customers.

Let's move ahead now to Page 10. The revogene platform and the tests that it has FDA and CE Marked today will enable Meridian to immediately improve our position with current customers and competitive opportunities.