NEW YORK (GenomeWeb) – As part of its acquisition of GenePOC announced earlier this week, Meridian expects that firm's technology to replace its current molecular offering for the most part and to dovetail with its emphasis on respiratory and gastrointestinal pathogen testing.
The possibility to develop small molecular panels for the GenePOC system may also give Cincinnati, Ohio-based Meridian Bio a jump on changing market demands related to reimbursement for syndromic testing, according to the company.
In the midst of reporting an 11 percent drop in its fiscal Q2 revenues this week, Meridian said that diagnostics sales dropped 16 percent year over year, which Eric Rasmussen, the company's CFO, said was "significantly driven by competitive pressure in our molecular products, which were down 28 percent."
He added that molecular testing for Clostridium difficile, in particular, has continued to experience "significant volume declines" while planned contractual price reductions in H. pylori implemented in 2019 also contributed to a decline in the overall gastrointestinal revenues. For molecular respiratory testing, the firm said later buying patterns may have also contributed to a 21 percent decline in respiratory product revenues.
Meridian sells one molecular diagnostic instrument — the Illumigene system, which was recently re-branded Alethia — along with a menu of US Food and Drug Administration-cleared and CE-marked tests that focuses on gastrointestinal and respiratory pathogens.
The instrument was cleared by the FDA in 2010 with a C. diff test. It performs rapid, near-patient molecular testing using isothermal amplification, with many tests relying on loop-mediated amplification (LAMP) chemistries licensed from Eiken Chemical.
However, the uptake of Illumigene/Alethia over the past nine years seems to have been impacted by competitive pressures from tests that are faster and easier to use. CEO Jack Kenny previously noted, that testing with the instrument involves more manual steps and the platform is less automated to run higher volumes. Investment analyst William Quirk from Piper Jaffray also previously said that one reason the instrument was never welcomed by the market is that it does not offer a competitive hands-on time.
In particular, there are seven steps in the Illumigene/Alethia workflow, which takes approximately one hour. The first three steps involve pipetting and vortexing, and could conceivably take a matter of seconds. But these steps are then followed by a 10-minute heat treatment and incubation, after which there are two more pipetting steps before the assay goes onto the instrument. This 10-minute walk-away time in the middle of testing isn't really enough to get much else done in the lab, so a technician would basically need to be nearby the instrument for about 15 minutes before testing begins. The instrument also runs up to 10 tests at a time, and handling a full batch could increase the hands-on time as well.
Meridian has been aware that it needed to update its molecular offering, and last year, in its first-ever quarterly earnings call, Kenny declared the company would consider the option of suspending its longstanding dividend and, instead, invest in new products.
However, at that time the company seemed unsure of whether it would develop something new in house or bring on a system through strategic partnership or acquisition.
In announcing the GenePOC acquistion for $50 million, with future milestone-based payments of up to an additional $70 million, Kenny said that Quebec City-based firm's technology is a good fit for Meridian for a number of reasons.
Firstly, the GenePOC system, called Revogene, offers sample-to-result testing. Rather than running isothermal amplification, which perhaps can be somewhat less accurate than traditional PCR, the Revogene system is a real-time PCR device that uses a spinning disk format, somewhat reminiscent of the Simplexa system from DiaSorin.
Importantly, Revogene runs up to eight wedge-shaped tests, called PIEs, simultaneously in about an hour, requiring five processing steps and less than one minute of hands-on time.
GenePOC has also obtained CE-marking for four molecular tests, and FDA clearance on three.
The Revogene instrument was CE-marked in 2017 along with assays for Group B Streptococcus and Clostridium difficile. The GBS test was subsequently cleared by the FDA six months later along with the instrument, followed by clearance of the C. diff test.
A CE-marked Group A Streptococcus test was cleared earlier this year, and the firm has also obtained CE-marking for a drug-resistant bacteria test.
The latter represented a key to the Meridian acquisition.
Kenny highlighted the Palmetto decision last year denying coverage to large multiplex molecular panel tests for respiratory pathogens, except in certain circumstances, which seemed to indicate reimbursement pressures would soon favor small, focused panels over large syndromic panels.
"We firmly believe — before we were even looking at GenePOC [and] the smart panels — that running huge panels for every person that walks through the door is not the appropriate medical approach," Kenny said on the conference call.
Revogene test cartridges are capable of being developed to multiplex PCR assays of up to 12 targets.
And GenePOC has proven it can develop these "smart panels" and get them through the necessary regulatory hurdles. Its carbapenem-resistant enterobacteriaceae cartridge targets resistance genes KPC, OXA, VIM, IMP, and NDM-1, and contains a process control. It was in clinical trials for FDA submission in the second half of last year, and the firm also disclosed at that time that it is developing a GI panel and was pursuing smart panels for respiratory testing and possibly STDs.
GenePOC has also disclosed it is developing an "early call" function that would essentially involve a software upgrade to the Revogene instrument, which it previously said it planned to submit along with the Group A Strep test. This could provide results in as little as 45 minutes.
Strategically, Kenny said that GBS and C. diff make up a large proportion of its Alethia sales, and those customers could potentially be switched over to GenePOC.
The firm expects to drive toward smart panel-based GI and respiratory panel testing as well, he said, noting the firm believes it can exist with some of the larger companies that also provide expertise in gastrointestinal testing.
Pediatric point of care is another Meridian differentiator, Kenny said. "Point-of-care testing is a crowded market. However, in the pediatric point-of-care area, it's rather limited, and the [Magellan] lead-care has a very strong position with over 7,000 pediatrician offices that are using lead-care as part of their practice."
Meridian is developing a next-generation point-of-care system to specifically target this niche "to bring a system that has lead-care testing capabilities as well as other tests that are commonly requested in the pediatrician office," Kenny said.
And finally, Meridian will pursue a dual-platform approach, somewhat akin to that of Quidel, for example, offering both molecular testing, as well as automated immunoassay testing with its in-development Curian platform. And the firm plans to continue to target integrated delivery networks that do purchasing for a varied group of test settings with differing needs that could benefit from getting MDx and rapid tests supplied from a single vendor.
Overall, Meridian plans "to become that primary partner that coexists with some of these large diagnostic companies, that helps these health systems or IDNs from a gastrointestinal perspective and a pediatric point-of-care perspective," Kenny said on the call.
"We're not trying to try to go head-to-head ... to have menu comparisons against the largest diagnostic companies, the Walmarts of diagnostics," Kenny also said. Instead, Meridian envisions itself as "more of a boutique diagnostic firm," that is really focused on gastrointestinal and pediatric point of care testing.
Now, it plans to work to quickly convert its Meridian Alethia installed base and leverage Meridian's "strong commercial infrastructure" in the US and Europe, Kenny said.
"We're going to be managing for cannibalization over the near term, in converting our existing base," Kenny also said, ramping up sales of a new platform while managing that conversion, and "frankly doing our best to sustain Alethia in certain product areas that are still good product areas for us."
Analyst takes
Analyst reaction to Meridian's plan to acquire GenePOC have been generally positive, although the majority seem to also take a "wait and see" approach, in part because GenePOC currently only takes in $1 million of revenue and is scarcely used.
Piper Jaffray raised its rating of Meridian from Underweight to Neutral and lowered the target price from $11.51 to $11.00, citing the GenePOC buy as well as the suspension of the dividend.
In the earnings call, Quirk said that he and his team have had a chance to "kick the tires" on the Revogene instrument, adding in a subsequent analyst note that the instrument is "considerably more user-friendly that Illumigene (aka Alethia)," and that it "offers Meridian a significantly better competitive position."
At Cannacord Genuity, Marc Massaro and his team had previously downgraded Meridian, from Hold to Sell, in early April after the firm's preliminary earnings were released. In response to the GenePOC acquisition and fiscal Q2 report, Cannacord lowered the target price from $11.00 to $9.00.
That said, although Meridian hopes to convert its molecular customers — a base business of between $26 million and $30 million, according to Massaro — to GenePOC, he expects "cannibalization and more share loss to Cepheid and BioFire," particularly noting concerns about a lack of test menu and less brand recognition relative to GeneXpert and FilmArray, which are "very well-known and heavily marketed by parent companies Danaher and BioMerieux."
On the other hand, Brian Weinstein at William Blair praised Meridian for taking a swing and offered management a "virtual pat on the back for these bold moves" to "hit the rest button on the company's molecular offering." Nevertheless, he cited lack of knowledge of GenePOC and lack of confidence in its ability to stabilize Meridian's core business as a motivation to remain at a Market Perform rating.