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Meridian Bioscience Dx Revenue Woes Likely to Continue Through 2020 Despite Promising Integration of GenePOC

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NEW YORK – In spite of the company's recent acquisition of GenePOC in an effort to fortify its diagnostics business, Meridian Bioscience's CEO said on Tuesday that it could be more than a year before that business reverses its slide.

On Tuesday, the Cincinnati-based firm announced a 6 percent drop in revenues year-over-year for its fiscal third quarter, with a 9 percent decline in its diagnostics business, driven primarily by a 21 percent decline in molecular diagnostics.

On a conference call to discuss its fiscal third quarter earnings, Meridian CEO Jack Kenny said the firm finalized the GenePOC acquisition on June 3, and there is now an "imminent need" to convert the much of the existing molecular customer base from the legacy Illumigene system, now called Alethia, to the GenePOC Revogene.

Kenny further noted that simply stabilizing the diagnostics business is the primary goal, and that the firm will likely not see any growth in 2020, as there is "no quick fix" for the erosion of diagnostics revenues Meridian has been experiencing.

"We are looking at the next 12 to 18 months as being a grind in the diagnostic business that we have to work our way through," he said.

Up to 80 percent of Meridian's decentralized molecular diagnostic assays revenue comes from customers using its Group A Strep, Group B Strep, and Clostridium difficile tests, and Kenny said these will be converted to Revogene. However, some of its lower-volume molecular products, including its new tests for pertussis and cytomegalovirus, which are actually seeing some growth, will remain on the Alethia platform.

When Meridian bought Canada-based GenePOC in April, it did so with the intent of breathing life into its diagnostics franchise, and especially its molecular Dx business.

As Kenny previously described, the GenePOC acquisition has given Meridian immediate access to a "state of the art" sample-to-answer molecular platform with four US Food and Drug Administration cleared tests.

The Revogene "will enable us to protect our current molecular business that has been under attack for the past 12 to 24 months," Kenny said, adding that GenePOC's Quebec-based manufacturing team will support the anticipated volume needs into the foreseeable future.

Meridian's Alethia system has been steadily losing ground to competition in recent years, in part because its front-end sample prep and workflow require more hands-on time than other systems. 

Meridian has worked quickly to integrate GenePOC's team. The only exception was GenePOC's US sales team, with Meridian electing to let them go and instead train its own existing team of 28 reps with US territories in how to sell Revogene.

Kenny said in a few weeks the team placed more Revogene systems than GenePOC had closed in the previous 18 months, and that Meridian has also now also trained its small sales force in the Europe, Middle East, and Africa (EMEA) region.

Investment analysts were generally upbeat about the GenePOC strategy just last quarter, even offering "a virtual pat on the back," and noting that the Revogene will provide Meridian a significantly better competitive position. Following yesterday's financial results, though, some were less enthusiastic.

Cannacord Genuity analyst Mark Massaro, for example, highlighted in an investment note that the quarter marked Meridian's third straight miss on revenues, and third time that Meridian has lowered its guidance, while he reiterated a Sell rating for Meridian with a price target of $9.

The Revogene has a limited test menu, Massaro said, and is also a "less well-recognized brand relative to the GeneXpert and FilmArray brands, which are very well known and heavily marketed by parent companies Danaher and BioMérieux."

Competition for the Alethia and Revogene in the decentralized molecular diagnostics space — which essentially comes from platforms that can potentially be used outside a lab environment but are not necessarily CLIA-waived for point-of-care use — could also come from the the DiaSorin Liaison platform, for example, or the in-development Quidel Savanna.

The GeneXpert has a menu of 19 clinical in vitro diagnostic assays, excluding an Ebola test available under an emergency use authorization. The FilmArray, meanwhile, has respiratory and gastrointestinal panels on the market, as well as a CLIA-waived system running an abbreviated respiratory pathogen panel, and the Savanna is expected to eventually run mini panels as well.

By comparison, the Revogene has four cleared tests, for group B Streptococcus, Clostridium difficile, group A Streptococcus, and a small panel that detects five gene sequences in carbapenem-producing organisms that are most commonly associated with resistance.  

Both GenePOC and Meridian have cited Revogene's ability to run small molecular panel assays of up to 12 targets as a potential differentiator in the market. But, "while panels are going to be an important part going forward, there is still a significant marketplace for individual tests," Kenny asserted during the call.

Unlike Massaro, Brian Weinstein, an analyst at William Blair was a bit more bullish. "While the quarter miss and guidance reduction are doing no favors for a management team attempting to build Street credibility, we do not think this update was as bad as feared from headline numbers and think the stock's small move up following the call is a result of upbeat pipeline and GenePOC commentary," he wrote in a research note.

Meanwhile, William Quirk at Piper Jaffray said that although Meridian's business is not yet at the tipping point, his team believes Revogene "is a catalyst for sustainable growth," and he remained Neutral on shares while maintaining an $11 price target.

Meridian expects to provide placement numbers for Revogene starting next quarter, by which time it hopes to have placed at least 50 instruments.

"We're focusing our efforts on our larger customers that are doing … at least $20,000 worth of business with us," Kenny said. He also emphasized that the first 200 to 300 placements are usually "the toughest" because the customer base in molecular diagnostics is "conservative" and customers tend to be most motivated by reports of positive experiences from their peers. As a result, Meridian is aggressively focusing on getting to that threshold of 200 or so placements in the next 12 to 18 months, Kenny said.

Importantly, at least in the short term, it is placing "90 percent or more" of its systems under reagent rental deals, so there will be no large upfront capital costs to the customer. It is also persuading its customers to sign contracts and anticipates all of the Revogene business will involve contracts stipulating minimum assay purchases.

The installed base of Alethia is in the ballpark of 1,500 instruments, Kenny said, but there are many locations that are running just a few tests and Meridian does not anticipate it will convert these to Revogene. The firm expects the business that it will convert to be in the low-$20 million range, he said.

Meridian also has in the neighborhood of 400 systems with "pretty good revenue running through those boxes" for GAS, GBS, and C. diff, Kenny said, and that is the business the firm will be trying to protect by converting first.

Meridian has often claimed over the past dozen or so quarters that its molecular losses were attributable to "volume declines" in its C. diff products, but it is unclear which competitor might be siphoning away that business.   

The firm has also frequently attributed losses in its diagnostics segment generally to an H. pylori immunoassay test that went off patent and has seen increasing competition. To try to shore up this business, Kenny said the firm executed multiyear supply agreements with two large reference lab customers, Quest Diagnostics and Laboratory Corporation of America, that include "pricing stepping down over time," which he also called "planned price erosion," enabling the firm to keep the business but also leading to a gradual reduction in payments to Meridian to the tune of a few million dollars.

Meridian has also been developing an immunoassay platform called Curian, as well as an unnamed system for point-of-care pediatric testing, and the company is "building a stronger pipeline" in immunoassay and blood chemistry diagnostics, Kenny said. Overall, the firm anticipates launching four new products in 2020 and seven in 2021 that align with its business strategy around gastrointestinal testing and pediatric point-of-care testing, he said.

"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 diagnostic business on a long term basis," Kenny said.

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