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VIVO > SEC Filings for VIVO > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for MERIDIAN BIOSCIENCE INC


9-Aug-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 dollar amounts 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 June 30, 2013

Net earnings for the third quarter of fiscal 2013 increased 18% to $10,159, or $0.24 per diluted share, from net earnings for the third quarter of fiscal 2012 of $8,594, or $0.21 per diluted share. This increase reflects the combined effects of increased sales, consistent gross profit margins and slightly increased operating expenses, along with the negative effect of $438 (pre-tax) of Medical Device Tax that did not exist during fiscal 2012 (see discussion in Medical Device Tax below). Additionally, the fiscal 2012 third quarter included $366 of costs associated with the consolidation of the Saco, Maine operations into the Memphis, Tennessee facility (impact on earnings of $238, or less than $0.01 per diluted share). Consolidated sales increased 12% to $47,108 for the third quarter of fiscal 2013 compared to the same period of the prior year. Increased sales across all of our diagnostic focus product families (C. difficile, foodborne and H. pylori) as well as in our Life Science segment, contributed to this increase. Included within the third quarter 2013 results were sales of our illumigene® molecular platform of products totaling $8,800, representing a 36% increase over the fiscal 2012 third quarter.

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Sales for the U.S. Diagnostics segment for the third quarter of fiscal 2013 increased 14% compared to the third quarter of fiscal 2012, reflecting growth across all of our focus product families - 7% growth in our C. difficile products, 17% growth in our H. pylori products, and 21% growth in our foodborne products. Third quarter fiscal 2013 sales for our European Diagnostics segment decreased 2% compared to the third quarter of fiscal 2012. On an organic basis, which excludes the effects of currency translation, sales of our European Diagnostics segment decreased 4% compared to the 2012 third quarter, reflecting a decline in our C. difficile product sales and growth in our H. pylori and foodborne product sales. Adverse economic conditions in European markets and competitive C. difficile and H. pylori markets have continued to affect our sales. With growth in both its molecular reagent and bulk immunoassay reagent businesses, sales of our Life Science segment increased by 18% during the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012.

Nine Months Ended June 30, 2013

For the nine month period ended June 30, 2013, net earnings increased 16% to $28,882, or $0.69 per diluted share, from net earnings for the comparable fiscal 2012 period of $24,798, or $0.60 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 $877 (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 $1,013 of costs associated with the consolidation of the Saco, Maine operations into the Memphis, Tennessee facility (impact on earnings of $659, or $0.02 per diluted share). Consolidated sales increased 8% to $139,724 for the first nine 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) as well as in our Life Science segment, contributed to this increase. In addition, an increase in sales of our respiratory family of products compared to the first nine months of fiscal 2012 contributed to growth. Included within the fiscal 2013 nine month year-to-date results were sales of our illumigene molecular platform of products totaling $24,200, representing a 44% increase over the comparable fiscal 2012 year-to-date period.

During the first nine months of fiscal 2013, sales for the U.S. Diagnostics segment increased 14% from the comparable fiscal 2012 period. This increase reflects growth across all of our focus product families - 10% growth in our H. pylori products, 11% growth in our C. difficile products and 14% growth in our foodborne products. Sales of our influenza respiratory products increased 102%, or approximately $1,700. Sales of our European Diagnostics segment for the first nine months of fiscal 2013 decreased 6% compared to the first nine months of fiscal 2012. On an organic basis, which excludes the effects of currency translation, sales of our European Diagnostics segment also decreased 6% 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 partially offset by a decline in its bulk immunoassay reagent business, fiscal 2013 nine month year-to-date sales of our Life Science segment increased 3% 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 Nine Months Ended June 30, Ended June 30, 2013 2012 2013 2012 Net Earnings -
U.S. GAAP basis $ 10,159 $ 8,594 $ 28,882 $ 24,798 Facility consolidation costs (1) - 238 - 659

Adjusted earnings $ 10,159 $ 8,832 $ 28,882 $ 25,457

Net Earnings per Basic Common Share - U.S. GAAP basis $ 0.25 $ 0.21 $ 0.70 $ 0.60 Facility consolidation costs (1) - 0.01 - 0.02

Adjusted Basic EPS (2) $ 0.25 $ 0.21 $ 0.70 $ 0.62

Net Earnings per Diluted Common Share - U.S. GAAP basis $ 0.24 $ 0.21 $ 0.69 $ 0.60 Facility consolidation costs (1) - 0.01 - 0.02

Adjusted Diluted EPS (3) $ 0.24 $ 0.21 $ 0.69 $ 0.61

(1) These facility consolidation costs are net of income tax effects of $128 and $354 for the three and nine 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 June 30, 2012 does not sum to the total due to rounding.

(3) Net Earnings per Diluted Common Share for each of the three and nine months ended June 30, 2012 does not sum to the total due to rounding.

Revenue Overview

Our Diagnostics segments provided the largest share of our consolidated revenues, 75% and 76% for the third quarters of fiscal 2013 and 2012, respectively, and 77% and 76% for the first nine months of fiscal 2013 and 2012, respectively. Sales from our focus families (C. difficile, foodborne and H. pylori) comprised 65% and 64% of our Diagnostics segments' revenues during the third quarters of fiscal 2013 and 2012, respectively, and 61% and 62% for the nine month periods ended June 30, 2013 and 2012, respectively.

The global revenue change for our Diagnostics segments during the fiscal 2013 third quarter was an increase of 11%, reflecting growth in our C. difficile (5%), H. pylori (15%) and foodborne (21%) product families. For the first nine months of fiscal 2013, our Diagnostics segments' global revenue increased 10%, reflecting growth in all of our focus product families - 6% growth in H. pylori products, 7% growth in C. difficile products, and 14% growth in foodborne products.

illumigene Molecular Platform Products

Sales from our illumigene molecular platform products increased 36% to $8,800 in the third quarter of fiscal 2013 compared to the third quarter of the prior fiscal year, and increased 44% to $24,200 on a nine month year-to-date basis. We have approximately 1,100 customer account placements. Of these account placements, approximately 925 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 over 160 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, our illumigene Group A Strep (Group A Streptococcus; Strep Throat), which was cleared in September 2012, and our most recently FDA-cleared product, illumigeneMycoplasma (M. pneumoniae; Walking Pneumonia), which was cleared in June 2013.

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Additional illumigene molecular products are in development. These include our fifth test, for Bordetella pertussis (Whooping Cough), which is expected to be available for sale in the U.S. during the first half of fiscal 2014; and our most recently announced tests, for Chlamydia trachomatis and Neisseria gonerrhoeae, which are expected to be available for sale during the second half of fiscal 2014.

We believe that the diagnostic testing market is continuing to move 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 third quarter of fiscal 2012, during the fiscal 2013 third quarter our C. difficile family grew 5% on a global basis - increased 7% for our U.S. Diagnostics segment and decreased 5% for our European Diagnostics segment. On a nine month year-to-date basis, the C. difficile family grew 7% globally, increasing 11% in our U.S. Diagnostics segment and decreasing 8% 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 greater than 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 21% for the fiscal 2013 third quarter and 14% for the first nine months of fiscal 2013.

While historically the primary competition for our foodborne products has been laboratory culture methods, during 2012 one of our competitors, Alere, cleared through the FDA a shiga toxin test that competes with our EHEC test. 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 third quarter and first nine months of fiscal 2013, sales of H. pylori products grew 17% and 10%, 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. Compared to the fiscal 2012 periods, sales of H. pylori products for our European Diagnostics segment on an organic basis increased 9% for the third quarter of fiscal 2013 and decreased 3% on a nine month year-to-date basis. A significant amount of the H. pylori product sales in our U.S. Diagnostics segment are to reference labs, whose buying patterns are not consistent period to period.

Respiratory Products

During the third quarter and first nine months of fiscal 2013, total respiratory sales for our Diagnostics segments decreased 3% and increased 16%, respectively, compared to the respective fiscal 2012 periods, with our influenza product contributing quarterly and year-to-date sales of approximately $100 and $3,700, respectively. The year-to-date increase reflects the strength of this year's influenza season, compared to last year's. Influenza sales were negligible in Europe during both the fiscal 2013 quarterly and year-to-date periods.

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Life Science Segment

Sales for our Life Science segment increased 18% for the third quarter of fiscal 2013, reflecting increases in both our molecular reagent and our bulk immunoassay reagent businesses of 21% and 16%, respectively. For the first nine months of fiscal 2013, sales of our Life Science segments increased 3%, with sales of our molecular reagent business increasing 11% over the comparable prior year period and sales of our bulk immunoassay reagent business decreasing 2%. 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. Our bulk immunoassay reagent business is focusing on improving its operating efficiency and developing revenue opportunities in Asia.

Foreign Currency

During the third 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. On a nine month year-to-date basis, currency exchange rates had an approximate $150 unfavorable impact on revenue; $100 unfavorable within the European Diagnostics segment and $50 unfavorable in the Life Science segment.

Significant Customers

Two national distributors in our U.S. Diagnostics segment accounted for 48% and 49% of total sales for this segment for the third quarters of fiscal 2013 and 2012, respectively, and 51% and 49% during the nine months ended June 30, 2013 and 2012, respectively.

Within our Life Science segment, two diagnostic manufacturing customers accounted for 18% and 11% of the segment's total sales for the third quarters of fiscal 2013 and 2012, respectively, and 18% and 20% during the nine months ended June 30, 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. We currently anticipate that this legislation will result in an excise tax for the Company of up to approximately $1,500 in fiscal 2013, of which little, if any, can be passed on to the customer. The third quarter and year-to-date expense of $438 and $877, respectively, 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 June 30,                      Nine Months Ended June 30,
                                          2013             2012        Inc (Dec)           2013           2012         Inc (Dec)
U.S. Diagnostics                       $    29,535       $ 26,008              14 %     $   90,211      $  79,472              14 %
European Diagnostics                         5,770          5,897              (2 )%        17,166         18,326              (6 )%
Life Science                                11,803         10,010              18 %         32,347         31,431               3 %

Consolidated                           $    47,108       $ 41,915              12 %     $  139,724      $ 129,229               8 %

International -
U.S. Diagnostics                       $     1,563       $  1,420              10 %     $    4,998      $   4,637               8 %
European Diagnostics                         5,770          5,897              (2 )%        17,166         18,326              (6 )%
Life Science                                 7,146          5,737              25 %         19,168         18,535               3 %

Total                                  $    14,479       $ 13,054              11 %     $   41,332      $  41,498              -  %

% of total sales                                31 %           31 %                             30 %           32 %

Gross Profit



                                            Three Months Ended June 30,                 Nine Months Ended June 30,
                                          2013           2012        Change         2013          2012          Change
Gross Profit                           $   30,631      $ 27,417          12  %    $ 90,170      $ 81,507              11  %
Gross Profit Margin                            65 %          65 %       None            65 %          63 %      +2 points

The overall gross profit margin increase for the nine months ended June 30, 2013 primarily results 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; and 3) 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.

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Operating Expenses




                                                                           Three Months Ended June 30, 2013
                                        Research &           Selling &             General &                Plant               Total Operating
                                        Development          Marketing          Administrative          Consolidation              Expenses
2012 Expenses                          $       2,660        $     5,617         $         6,162        $           366         $          14,805

% of Sales                                         6 %               13 %                    15 %                    1 %                      35 %
Fiscal 2013 Increases (Decreases):
U.S. Diagnostics                                  18               (165 )                   671                     -                        524
European Diagnostics                              -                  82                     (13 )                   -                         69
Life Science                                      33                (94 )                   (39 )                 (366 )                    (466 )

2013 Expenses                          $       2,711        $     5,440         $         6,781        $            -          $          14,932

% of Sales                                         6 %               12 %                    14 %                   -  %                      32 %
% Increase (Decrease)                              2 %               (3 )%                   10 %                 (100 )%                      1 %

                                                                            Nine Months Ended June 30, 2013
                                        Research &           Selling &             General &                Plant               Total Operating
                                        Development          Marketing          Administrative          Consolidation              Expenses
2012 Expenses                          $       7,441        $    16,573         $        19,236        $         1,013         $          44,263

% of Sales                                         6 %               13 %                    15 %                    1 %                      34 %
Fiscal 2013 Increases (Decreases):
U.S. Diagnostics                                 388               (209 )                 1,548                     -                      1,727
European Diagnostics                              -                 253                      18                     -                        271
Life Science                                     210                (13 )                   682                 (1,013 )                    (134 )

2013 Expenses                          $       8,039        $    16,604         $        21,484        $            -          $          46,127

% of Sales                                         6 %               12 %                    15 %                   -  %                      33 %
% Increase (Decrease)                              8 %               -  %                    12 %                 (100 )%                      4 %

Overall, total operating expense increased during both the third quarter and first nine months of fiscal 2013 relative to the comparable prior fiscal year periods, but decreased as a percentage of consolidated sales on both a quarterly and 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) increased incentive compensation expense compared to the prior year periods based upon improved year-to-date operating results; and (iv) costs incurred in connection with the consolidation of our Saco, Maine operations into our Memphis, Tennessee location during the three and nine months ended June 30, 2012 of approximately $366 and $1,013, respectively. We expect to have higher levels of Research & Development spending in the fourth quarter of fiscal 2013 and during fiscal 2014 related to clinical trials for our illumigene Chlamydia trachomatis and Neisseria gonerrhoeaeproducts.

Operating Income

Operating income increased 24% to $15,699 for the third quarter of fiscal 2013, and increased 18% to $44,043 for the first nine months of fiscal 2013, as a result of the factors discussed above.

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Income Taxes

The effective rate for income taxes was 35% and 32% for the third quarter of fiscal 2013 and 2012, respectively, and 35% and 34% for each of the nine month year-to-date periods ended June 30, 2013 and 2012. The lower prior year rates reflected a larger effect of adjusting, upon filing of the federal tax return, the previously estimated permanent differences between income for financial reporting purposes and for tax purposes. For the fiscal year ending . . .

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