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VIVO > SEC Filings for VIVO > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for MERIDIAN BIOSCIENCE INC


10-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Refer to "Forward Looking Statements" following the Table of Contents in front of this Form 10-Q. In the discussion that follows, all dollars are in thousands (both tables and text), except per share data.

Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of Meridian's financial condition, changes in financial condition and results of operations. This discussion should be read in conjunction with the financial statements and notes thereto beginning on page 1.

Results of Operations

Three Months Ended March 31, 2013

Net earnings for the second quarter of fiscal 2013 increased 6% to $10,249, or $0.24 per diluted share, from net earnings for the second quarter of fiscal 2012 of $9,626, or $0.23 per diluted share. This increase reflects the combined effects of consistent sales, improved gross profit margins and increased operating expenses, along with the negative effect of $439 (pre-tax) of Medical Device Tax that did not exist during fiscal 2012 (see discussion in Medical Device Tax below). Additionally, the fiscal 2012 second quarter included $203 of costs associated with the consolidation of the Saco, Maine operations into the Memphis, Tennessee facility (impact on earnings of $132, or less than $0.01 per diluted share). At $47,265, fiscal 2013 second quarter consolidated sales remained relatively unchanged from the same period of the prior year. These quarterly sales reflect increases in our C. difficile and foodborne diagnostic focus product families, offset by decreases in our H. pylori focus product family and Life Science segment compared to the fiscal 2012 second quarter. In addition, a strong influenza season resulted in an increase in sales of our respiratory family of products compared to the fiscal 2012 second quarter.

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Sales for the U.S. Diagnostics segment for the second quarter of fiscal 2013 increased 7% compared to the second quarter of fiscal 2012, reflecting growth across all of our focus product families - 1% growth in our H. pylori products, 6% growth in our foodborne products, and 8% growth in our C. difficile products. Sales of our influenza respiratory products increased 87%, or approximately $1,000. Second quarter fiscal 2013 sales for our European Diagnostics segment decreased 12% compared to the second quarter of fiscal 2012. On an organic basis, which excludes the effects of currency translation, sales of our European Diagnostics segment decreased 13% compared to the 2012 second quarter, reflecting declines in our C. difficile and H. pylori product sales and growth in our foodborne product family. Adverse economic conditions in European markets and competitive C. difficile and H. pylori markets have affected our sales. With growth in its molecular reagent business being offset by a decline in its bulk immunoassay reagent business, sales of our Life Science segment decreased by 8% during the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012. Our bulk immunoassay reagent business was positively affected during the prior year second quarter by buying patterns from our largest diagnostic manufacturing customer.

Additionally, as a result of accelerating the declaration and payment of the quarterly cash dividend historically declared and paid during the second quarter of the fiscal year, two quarterly cash dividends were declared and paid during the three months ended December 31, 2012, with none occurring during the three months ended March 31, 2013. Quarterly cash dividends are expected to be paid during the remainder of the fiscal year.

Six Months Ended March 31, 2013

For the six month period ended March 31, 2013, net earnings increased 16% to $18,723, or $0.45 per diluted share, from net earnings for the comparable fiscal 2012 period of $16,204, or $0.39 per diluted share. This increase reflects the combined effects of increased sales, improved gross profit margins and increased operating expenses, along with the negative effect of $439 (pre-tax) of Medical Device Tax that did not exist during fiscal 2012 (see discussion in Medical Device Tax below). Additionally, the 2012 year-to-date period included $647 of costs associated with the consolidation of the Saco, Maine operations into the Memphis, Tennessee facility (impact on earnings of $421, or $0.01 per diluted share). Consolidated sales increased 6% to $92,616 for the first six months of fiscal 2013 compared to the same period of the prior fiscal year. Increased sales across all of our diagnostic focus product families (C. difficile, foodborne and H. pylori) contributed to this increase, while a decrease was experienced in our Life Science segment. In addition, a strong influenza season resulted in an increase in sales of our respiratory family of products compared to the first six months of fiscal 2012.

During the first six months of fiscal 2013, sales for the U.S. Diagnostics segment increased 13% from the comparable fiscal 2012 period. This increase reflects growth across all of our focus product families - 7% growth in our H. pylori products, 11% growth in our foodborne products and 12% growth in our C. difficile products. Sales of our influenza respiratory products increased 135%, or approximately $2,000. Sales of our European Diagnostics segment for the first six months of fiscal 2012 decreased 8% compared to the first six months of fiscal 2012. On an organic basis, which excludes the effects of currency translation, sales of our European Diagnostics segment decreased 7% during the fiscal 2013 year-to-date period, reflecting declines in our C. difficile and H. pylori product sales and growth in our foodborne product family. With growth in its molecular reagent business being offset by a decline in its bulk immunoassay reagent business, fiscal 2013 six month year-to-date sales of our Life Science segment decreased 4% from the comparable fiscal 2012 period.

Non-GAAP Information

The tables below provide information on net earnings, basic earnings per share and diluted earnings per share, excluding the effect of costs associated with the consolidation of our Saco, Maine operations into our Memphis, Tennessee facility (fiscal 2012), each of which is a non-GAAP financial measure, as well as reconciliations to amounts reported under U.S. Generally Accepted Accounting Principles. We believe that this information is useful to those who read our financial statements and evaluate our operating results because:

1. These measures help to appropriately evaluate and compare the results of operations from period to period by removing the impact of non-routine costs related to consolidating the Maine operations (fiscal 2012); and

2. These measures are used by our management for various purposes, including evaluating performance against incentive bonus achievement targets, comparing performance from period to period in presentations to our Board of Directors, and as a basis for strategic planning and forecasting.

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Three Months Six Months Ended March 31, Ended March 31, 2013 2012 2013 2012 Net Earnings -
U.S. GAAP basis $ 10,249 $ 9,626 $ 18,723 $ 16,204 Facility consolidation costs (1) - 132 - 421

Adjusted earnings $ 10,249 $ 9,758 $ 18,723 $ 16,625

Net Earnings per Basic Common Share - U.S. GAAP basis $ 0.25 $ 0.23 $ 0.45 $ 0.39 Facility consolidation costs (1) - - - 0.01

Adjusted Basic EPS (2) $ 0.25 $ 0.24 $ 0.45 $ 0.40

Net Earnings per Diluted Common Share - U.S. GAAP basis $ 0.24 $ 0.23 $ 0.45 $ 0.39 Facility consolidation costs (1) - - - 0.01

Adjusted Diluted EPS $ 0.24 $ 0.23 $ 0.45 $ 0.40

(1) These facility consolidation costs are net of income tax effects of $71 and $226 for the three and six month periods, respectively, which were calculated using the effective tax rates of the jurisdictions in which the costs were incurred.

(2) Net Earnings per Basic Common Share for the three months ended March 31, 2012 does not sum to the total due to rounding.

Revenue Overview

Our Diagnostics segments provided the largest share of our consolidated revenues, 77% and 75% for the second quarters of fiscal 2013 and 2012, respectively, and 78% and 76% for the first six months of fiscal 2013 and 2012, respectively. Sales from our focus families (C. difficile, foodborne and H. pylori) comprised 60% and 61% of our Diagnostics segments' revenues for each of the interim periods in fiscal 2013 and 2012, respectively.

The global revenue change for our Diagnostics segments during the fiscal 2013 second quarter was an increase of 3%, reflecting growth in our C. difficile (3%) and foodborne (6%) product families, partially offset by a 5% decrease in sales of our H. pylori products. For the first six months of fiscal 2013, our Diagnostics segments' global revenue increased 9%, reflecting growth in all of our focus product families - 2% growth in H. pylori products, 8% growth in C. difficile products, and 10% growth in foodborne products.

illumigene Molecular Platform Products

Sales from our illumigene molecular platform products increased 35% to $8,000 in the second quarter of fiscal 2013 compared to the second quarter of the prior fiscal year, and increased 48% to $15,400 on a six month year-to-date basis. We have approximately 1,025 customer account placements. Of these account placements, approximately 875 accounts have completed evaluations and validations, and are regularly purchasing product, with the balance of our account placements being in some stage of product evaluation and/or validation. Of our account placements, we have approximately 140 accounts that are regularly purchasing, evaluating and/or validating two or more assays. Our illumigene molecular C. difficile product was cleared by the FDA in July 2010, followed by our illumigene GBS (Group B Streptococcus), which was cleared by the FDA in December 2011, and our illumigene Group A Strep (Group A Streptococcus; Strep Throat), which was cleared in September 2012.

Additional illumigene molecular products are in development. These include a test for Mycoplasma pneumoniae (Walking Pneumonia), which is currently with the FDA pending marketing clearance and is expected to be available for sale in the U.S. during the third quarter of fiscal 2013. Our fifth test, for Bordetella pertussis (Whooping Cough), is expected to be available for sale in the U.S. in late 2013 or early 2014. Our most recently announced tests, for Chlamydia trachomatis and Neisseria gonerrhoeae, are expected to be available for sale during the first half of 2014.

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We believe that the diagnostic testing market is moving away from culture and immunoassay testing to molecular testing for diseases where there is a favorable cost/benefit position for the total cost of healthcare. While this market is competitive, with molecular companies such as Cepheid and Becton Dickinson and new entrants such as Quidel, Great Basin and Quest, we believe we are well positioned to capitalize on the migration to molecular testing. Our simple, easy to use, illumigene platform, with its expanding menu, requires no expensive equipment purchase and little to no maintenance cost. These features, along with its small footprint and the performance of the illumigene assays, make illumigene an attractive molecular platform to any size hospital.

C. difficile Products

Compared to the second quarter of fiscal 2012, during the fiscal 2013 second quarter our C. difficile family grew 3% on a global basis - increased 8% for our U.S. Diagnostics segment and decreased 16% for our European Diagnostics segment. On a six month year-to-date basis, the C. difficile family grew 8% globally, increasing 12% in our U.S. Diagnostics segment and decreasing 9% in our European Diagnostics segment. This overall product family growth is largely driven by the growth of our illumigene C. difficile product, which now represents 70% of total C. difficile revenues. While the C. difficile market continues to be highly competitive, we are the only company that can offer a full range of high performing, FDA cleared, C. difficile testing formats, including toxin, GDH and molecular tests.

Foodborne Products

Although our foodborne products are marketed and sold on a global basis, most of our sales volume is within the U.S. Diagnostics segment. We continue to see demand increases in the United States, as laboratories realize the benefits of increased sensitivity and faster turnaround time with our tests for Enterohemorrhagic E. coli (EHEC) and Campylobacter, compared to traditional culture methods. Sales increases for these products within the U.S. Diagnostics segment were 6% for the fiscal 2013 second quarter and 11% for the first six months of fiscal 2013.

The primary competition for our foodborne products is laboratory culture methods. We believe that our products have two principal advantages versus culture methods: 1) test accuracy, and 2) improved work flow, resulting in a significantly shortened time to test result (20 minutes vs. 24-48 hours for culture).

H. pylori Products

During the second quarter and first six months of fiscal 2013, sales of H. pylori products grew 1% and 7%, respectively, for our U.S. Diagnostics segment. These increases continue to reflect the benefits of our partnerships with managed care companies in promoting the health and economic benefits of a test and treat strategy, and the ongoing effects of such strategy moving physician behavior away from serology-based testing toward direct antigen testing. A significant amount of the H. pylori product sales are to U.S. reference labs, whose buying patterns are not consistent period to period. Compared to the fiscal 2012 periods, sales of H. pylori products for our European Diagnostics segment decreased 18% and 9% on an organic basis for the second quarter and first six months of fiscal 2013, respectively.

Respiratory Products

During the second quarter and first six months of fiscal 2013, total respiratory sales for our Diagnostics segments increased 6% and 22%, respectively, over the comparable fiscal 2012 periods, with our influenza product contributing quarterly and year-to-date sales of approximately $1,800 and $3,600, respectively. These increases reflect the impact of this year's strong influenza season, compared to a relatively mild season in fiscal 2012. Influenza sales were negligible in Europe during both the fiscal 2013 quarterly and year-to-date periods.

Life Science Segment

Sales for our Life Science segment decreased 8% for the second quarter of fiscal 2013 and 4% for the six month fiscal year-to-date period, reflecting increases in our molecular reagent business (2% quarterly and 5% year-to-date) and decreases in our bulk immunoassay reagent business (14% quarterly and 10% year-to-date). Our molecular reagent business, operated through our Bioline Group, continues to benefit from its new product launches and advancements during recent months - most notably its SensiFAST™ and MyTaq™ PCR components. The single-digit growth rates for our Bioline Group during the fiscal 2013 interim periods reflect softness in European markets. The decrease in our bulk immunoassay reagent business, on the other hand, largely results from the timing and size of certain large customers' orders, along with the timing of contract manufacturing work.

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Foreign Currency

During the second quarter of fiscal 2013, currency exchange rates had a negligible impact on revenue; $50 favorable within the European Diagnostics segment and $50 unfavorable in the Life Science segment. This compares to currency exchange having an approximate $325 unfavorable impact on revenue in the second quarter of fiscal 2012. On a six month year-to-date basis, currency exchange rates had an approximate $150 unfavorable impact on revenue, all within the European Diagnostics segment. This compares to currency exchange having an approximate $350 unfavorable impact on revenue in the first six months of fiscal 2012.

Significant Customers

Two national distributors in our U.S. Diagnostics segment accounted for 50% and 49% of total sales for this segment for the second quarters of fiscal 2013 and 2012, respectively, and 53% and 50% during the six months ended March 31, 2013 and 2012, respectively.

Sales to Italian hospital customers accounted for 34% and 32% of the European Diagnostics segment third-party sales during the three months ended March 31, 2013 and 2012, respectively, and 32% and 22% during the six months ended March 31, 2013 and 2012, respectively.

Two diagnostic manufacturing customers in our Life Science segment accounted for 18% and 21% of total sales for this segment for the second quarters of fiscal 2013 and 2012, respectively, and 18% and 24% during the six months ended March 31, 2013 and 2012, respectively. The fluctuation in the percentage of sales in both periods reflects the buying patterns of these customers.

Medical Device Tax

On January 1, 2013, the medical device tax established as part of the U.S. healthcare reform legislation became effective and as a result, the Company made its first required tax deposit near the end of January. As previously disclosed, we anticipate that this legislation will result in an excise tax for the Company of up to approximately $2,000 in fiscal 2013, of which little, if any, can be passed on to the customer. The second quarter expense of $439 is reflected as a component of cost of sales in the accompanying Condensed Consolidated Statements of Operations.

Segment Revenues

Our reportable segments are U.S. Diagnostics, European Diagnostics and Life Science. The U.S. Diagnostics segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostic test kits in the U.S. and countries outside of Australia, Europe, Africa and the Middle East. The European Diagnostics segment consists of the sale and distribution of diagnostic test kits in Australia, Europe, Africa and the Middle East. The Life Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents domestically and abroad. The Life Science segment also includes the contract development and manufacture of cGMP clinical grade proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines.

Revenues for the Diagnostics segments, in the normal course of business, may be affected from quarter to quarter by buying patterns of major distributors, seasonality and strength of certain diseases, and foreign currency exchange rates. Revenues for the Life Science segment, in the normal course of business, may be affected from quarter to quarter by the timing and nature of arrangements for contract services work, which may have longer production cycles than bioresearch reagents and bulk antigens and antibodies, as well as buying patterns of major customers, and foreign currency exchange rates. We believe that the overall breadth of our product lines serves to reduce the variability in consolidated revenues.

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Revenues for each of our segments are shown below.

                                              Three Months Ended March 31,                      Six Months Ended March 31,
                                          2013             2012         Inc (Dec)           2013            2012        Inc (Dec)
U.S. Diagnostics                       $   30,310        $ 28,455                7 %     $   60,676       $ 53,464              13 %
European Diagnostics                        6,093           6,924              (12 )%        11,396         12,429              (8 )%
Life Science                               10,862          11,860               (8 )%        20,544         21,421              (4 )%

Consolidated                           $   47,265        $ 47,239               -  %     $   92,616       $ 87,314               6 %

International -
U.S. Diagnostics                       $    1,662        $  1,732               (4 )%    $    3,435       $  3,217               7 %
European Diagnostics                        6,093           6,924              (12 )%        11,396         12,429              (8 )%
Life Science                                6,668           7,078               (6 )%        12,022         12,798              (6 )%

Total                                  $   14,423        $ 15,734               (8 )%    $   26,853       $ 28,444              (6 )%

% of total sales                               31 %            33 %                              29 %           33 %

Gross Profit



                                          Three Months Ended March 31,                  Six Months Ended March 31,
                                       2013          2012          Change           2013          2012          Change
Gross Profit                         $ 30,743      $ 29,548                4 %    $ 59,539      $ 54,090               10 %
Gross Profit Margin                        65 %          63 %      +2 points            64 %          62 %      +2 points

The overall gross profit margin increases for the three and six months ended March 31, 2013 primarily result from the combined effects of 1) mix of sales from the Company's segments; 2) the lower overall cost structure from the consolidation of our U.S. Life Science manufacturing facilities; 3) improved margins at our Bioline Group; and 4) mix of products sold.

Our overall operations consist of the sale of diagnostic test kits for various disease states and in alternative test formats, as well as bioresearch reagents, bulk antigens and antibodies, proficiency panels, and contract research and development and contract manufacturing services. Product sales mix shifts, in the normal course of business, can cause the consolidated gross profit margin to fluctuate by several points.

Operating Expenses



                                                                           Three Months Ended March 31, 2013
                                        Research &           Selling &             General &                 Plant               Total Operating
                                        Development          Marketing           Administrative          Consolidation              Expenses
2012 Expenses                          $       2,508        $     5,579         $          6,431        $           203         $          14,721

% of Sales                                         5 %               12 %                     14 %                   -  %                      31 %
Fiscal 2013 Increases (Decreases):
U.S. Diagnostics                                 162                (68 )                    337                     -                        431
European Diagnostics                              -                (123 )                    317                     -                        194
Life Science                                     141                 83                      123                   (203 )                     144

2013 Expenses                          $       2,811        $     5,471         $          7,208        $            -          $          15,490

% of Sales                                         6 %               12 %                     15 %                   -  %                      33 %

% Increase (Decrease) 12 % (2 )% 12 % (100 )% 5 %

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Six Months Ended March 31, 2013 Research & Selling & General & Plant Total Operating Development Marketing Administrative Consolidation Expenses 2012 Expenses $ 4,781 $ 10,956 $ 13,074 $ 647 $ 29,458

% of Sales 5 % 13 % 15 % 1 % 34 % Fiscal 2013 Increases (Decreases):
U.S. Diagnostics 370 (44 ) 877 - 1,203 European Diagnostics - 171 419 - 590 Life Science 177 81 333 (647 ) (56 )

2013 Expenses $ 5,328 $ 11,164 $ 14,703 $ - $ 31,195

% of Sales 6 % 12 % 16 % - % 34 % % Increase (Decrease) 11 % 2 % 12 % (100 )% 6 %

Overall, total operating expense increased during both the second quarter and first six months of fiscal 2013 relative to the comparable prior fiscal year periods, increasing as a percentage of quarterly consolidated sales and remaining a consistent percentage of sales on a year-to-date basis. These increases result in large part from the combined effects of our (i) ongoing efforts to control spending in each of our segments while investing the necessary resources in our strategic areas of growth, including increased investment in Research & Development for our molecular platform products;
(ii) increased sales personnel costs in Europe in connection with filling open positions and upgrading talent; (iii) increasing incentive compensation expense compared to the prior year periods based upon improved year-to-date operating results; and (iv) incurring costs in connection with the consolidation of our Saco, Maine operations into our Memphis, Tennessee location during the three and six months ended March 31, 2012 of approximately $203 and $647, respectively. We expect to have higher levels of Research & Development spending during the second half of fiscal 2013 related to clinical trials for our illumigene Chlamydia trachomatis and Neisseria gonerrhoeae product.

Operating Income

Operating income increased 3% to $15,253 for the second quarter of fiscal 2013, and increased 15% to $28,344 for the first six months of fiscal 2013, as a result of the factors discussed above.

Income Taxes

. . .

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