Biomerieux SA

PAR:BIM

Earnings Call Transcript 2019-Q3

[Operator]

Good day and welcome to the bioMérieux Q3 2019 Business Review Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Morgeau. Please go ahead, sir.

[Sylvain Morgeau, Investor Relations]

Thank you. Good afternoon, and thank you for joining us to review bioMérieux' performance for this third quarter of 2019. As usual, I am online with Alexandre Mérieux, Chairman and CEO, as well as Guillaume Bouhours, CFO. So before handing the call over to Alexandre for preliminary remarks, please note that this conference call will include forward-looking statements. I would like to remind you of the usual disclaimer saying that the forward-looking statements are based entirely or partially on assessments or judgments that may change or be modified due to uncertainties and risks related to the company's environment, notably those that are described in the 2018 registration document, including but not limited to economic conditions, financial exposure to currency exchange fluctuations, change in government policies or regulation, third-party reimbursement policies, timing of the onset, length and severity of the flu season, and competition. And accordingly, we cannot give any assurance as to whether we will achieve these objectives.I also remind you that today's call is being recorded and that a replay will be available on our website, www.biomerieux-finance.com. I will now hand the call over to Alexandre Mérieux and then we will open the call to discussions and questions.

[Alexandre Mérieux, Chairman & CEO]

Thank you, Sylvain. Good day to everyone. So let's start with the overview of the activity for the third quarter and then we'll go into more details with the performance by a range of products. So in Q3, we recorded strong sales of EUR 653 million, which represents an organic growth of 9.6%. Thanks also to favorable currency fluctuations year-on-year and to the consolidation of the Hybiome and Invisible Sentinel, the reported growth reached almost 13%. In particular, we are very satisfied with the recurring region sales that grew double digit while instrument sales were still soft in the quarter. After 9 months of activity, total consolidated sales are increasing 6.8% with region sales growing 8%, which we see as a good performance.Now let's dig more -- into more details for each range of product, starting with the immunoassay. You have seen that immunoassay displayed a nice growth of 7% in the quarter. This performance was mainly driven by a partial and expected recovery in the Middle East and Africa after a slow start to the year, which was related to challenges in custom clearance and distribution. Otherwise, on top of it, I would say, immunoassay continued to see very swift growth in Asia Pacific.And on the point on PCT in the U.S., the price erosion has been softer over the last 3 months, which also helped regaining better dynamics overall for the immunoassay range. So VIDAS remains a key pillar in bioMérieux' strategy, and we feel encouraged to continue our efforts to renew tests on the VIDAS platforms, such as NEPHROCHECK for acute kidney injury, latent TB or arboviruses to keep differentiating through the menu.Switching now to microbiology. So microbiology displayed a very decent performance at about 5.5% in the quarter. I will be short on this one as this is very well in line with our historical trends. And as it has been seen in the past, the growth was driven by flagship brands such as VITEK and BACT/ALERT, with very consistent growth contributions from all regions, while the micro agglutination was still a drag over the quarter due to the discontinuation of the urine analysis range and the high comps in instruments.On the molecular front, BIOFIRE continued to perform very well with sales over EUR 150 million -- EUR 135 million booked over the quarter, implying an organic growth of 25%. This strong provision has been mainly driven by region sales with mixed instrument sales. The base of installed unit continues to increase but with more placements as opposed to capital sales.Development of industrial sales accelerated in the quarter, representing more than 20% of the total sales. And in Japan, after BCID, we are pleased to announce that authorities have cleared and granted reimbursement to the FILMARRAY Respiratory Panel. So overall a satisfying performance for BIOFIRE FILMARRAY this quarter. But also keep in mind that Q4 of '18 was reasonably strong and will show high comps, pushing the growth rates to likely lessen in the next quarter.Talking about Industry business. So industry -- industrial application regained a decent growth rate particularly with the regions growing high single digits, 7% in Q3, for year-to-date of 6.5%, while instrument sales partly recovered from the softer H1. So dynamics of the region seems good while we still see some delays on the instruments. The microbiology line within Industry remains the key driver associated with a nice pickup of the molecular biology solution, GENE-UP.Even if the Industry division remains below our long-term expectation as [indiscernible], bioMérieux can propose a unique offer to the rest of the growing market of customer safety, both with food and pharmaceutical customers.I would like to conclude this short introduction on an annual objective. As you saw in the press release, we think that the organic growth for the full year should come to around 7%, mainly driven by the slightly slower Q4 as compared to Q3. And this relative softness is expected to be mainly due to partial recovery on instruments, both in industry and clinical, and in Middle East and Africa. It also assumes an average flu season from December.Regarding profitability, we expect bioMérieux to land in the previously set objective between EUR 385 million to EUR 400 million.With this, I propose to move on to the Q&A session.

[Operator]

[Operator Instructions] We will now take our first question from Catherine Tennyson from Bank of America.

[Catherine Tennyson, Analyst]

I have two, if I may. My first one is on the BIOFIRE placements. So as I tracked them, I see that there's been a little bit of a slowdown in Q3. Can you explain what you think your expectations are for the run rate for the remainder of the year as you begin to roll out BIOFIRE placements ex-U.S.?And then my second question is on the pickup in the immunoassay business in the Middle East. Was this more a function of pent-up demand from the slowness in H1? Or what is a reasonable run rate for us to assume for the remainder of the year?

[Alexandre Mérieux, Chairman & CEO]

So let's start with the last question around immunoassay. So, the ramp-up in Q3, you see plus 7% for immunoassays. It's not, I would say, classic figures. Yes, it's mainly due to recovery -- a partial recovery that was expected in Middle East and Africa, where we had a low Q1 -- or low H1 because of the customs and the clearance type of effect, but I would say that's the main reason for the nice pickup. As I mentioned also, immunoassay continues to grow quite well in Asia Pacific, and we see also a diminution of the erosion of price in the U.S. on PCT.To your first question regarding the installed base of FILMARRAY instruments, know this is a growing installed base. I believe we displayed at the end of December last year that we have 8,700 instruments. We have, so far, 9,800 instruments so it's a nice increase. It's true that H1 was quite small in terms of sales of instruments. And in Q3, there is a trend toward seeing an increase of placements towards capital sales, but otherwise I would say the dynamic is good in terms of additional equipment and installed base.

[Operator]

We will now take our next question from Bill Quirk from Piper Jaffray.

[William Robert Quirk, Managing Director and Senior Research Analyst]

First question, I guess, going back to the PCT comments, can you help us think about is this a more stable environment in the U.S. or, I don't know, perhaps we didn't have as many contract renewals in the quarter? Just trying to understand if the environment has changed or if this is perhaps a nice positive blip here, but we unfortunately are going to go back to some more pressure.

[Alexandre Mérieux, Chairman & CEO]

No positive -- no big change. I think the market has more and more players. I would say that the fact that we see in Q3 that there was lighter erosion on price, which is good for us and maybe we're going to a stabilization. I think it's too early to tell. But otherwise, as we mentioned in the different goals or meetings we have, the PCT market in the U.S. is growing and it will grow for the years to come. So it's also [indiscernible]

[William Robert Quirk, Managing Director and Senior Research Analyst]

Very good. And then a follow-up question. Just thinking about your guidance with respect to your expectations around the flu season, can you help us perhaps look at a little scenario analysis here? In the event, certainly our research would suggest that we are actually potentially looking at a fairly severe flu season in the northern hemisphere. Can you help us think a little bit about if we had, say, a 10% increase in flu, what that would mean relative to your guidance here for the fourth quarter?

[Alexandre Mérieux, Chairman & CEO]

When we guide, I think we took into consideration in mind the flu season that will start rather in January, I would say, or mid-December. So we are, I would say, we take the average of flu season in our predictions.

[Guillaume Bouhours]

But better -- better earlier. I would say earlier would make, maybe, a difference.

[Alexandre Mérieux, Chairman & CEO]

It will depend. To be frank, we don't control. We're like you. We see what happens in Australia or another part of the world. But I think it's too early for us to predict the intensity and the earliness of the flu season.

[Operator]

We will take our next question from Maja Pataki from Kepler Cheuvreux.

[Maja Pataki, Head of Med Tech Devices Sector]

This is Maja. I have also a couple of questions regarding the PCT. Alexandre, could you give us maybe a bit of a breakdown? Was the U.S. immunoassay growth for you still negative or is that more in a flat territory? And is there any chance that you could give us a feeling for how much the pickup in the Middle East, APAC sales actually contributed to the 7%?And then a second question with regards to your statement about the support for immunoassay growth going forward. You mentioned latent TB, NEPHROCHECK and other tests. Could you give us a bit of an understanding whether we could already see in 2020 something coming additionally on VIDAS?

[Alexandre Mérieux, Chairman & CEO]

Okay, looking at my colleagues. PCT, in the U.S., I would say we are still negative in the U.S. on the PCT dynamics. I mentioned price erosion but volume, we're also catching up. We lost some customers. We are catching up in the smaller- and medium-sized hospitals, which is our strategy linked to the throughput of the VIDAS platform. Immunoassay, overall -- okay, there's one very good impact from Middle East and Africa. For me, Asia Pacific, the trend is still quite good in countries such as India and China. I think it's a -- we see it as a...

[Guillaume Bouhours]

It's been a trend for the last few years and it's something we want to keep on doing.On your next question around the pipeline, it's true that we mentioned the tests with China in development. That's part of our strategy. So we talked about the latent TB, arbovirus and the AKI. This is part of development we do for the mid -- that's part of our strategy, to be differentiated on immunoassay. On these 3 parameters, the one that we talked about should help us to bring -- to go back to a stronger momentum in immunoassay.

[Maja Pataki, Head of Med Tech Devices Sector]

Also not around NEPHROCHECK?

[Guillaume Bouhours]

Sorry? NEPHROCHECK. NEPHROCHECK will be one of the parameters in the pipeline for VIDAS.

[Maja Pataki, Head of Med Tech Devices Sector]

But that will be probably the first one to come, right?

[Guillaume Bouhours]

Yes, probably.

[Operator]

[Operator Instructions] We will now take our next question from Scott Bardo from Berenberg.

[Scott Bardo, Analyst]

It's Scott Bardo from Berenberg. Just a few questions, please. Just really following up on the discussions that you've had at this point. When we look at your molecular franchise, still obviously seeing very healthy and favorable growth. Also from BIOFIRE. But the growth did decelerate for BIOFIRE in the third quarter as compared to the second from about, what, 31 to 25. I know, still very good growth. And as my colleague mentioned, the placement rate decelerated for instruments, whereas, I think, historically, Q3, you've seen a bit of an uptick. So I just wonder, is this, in a sense, a bit of volatility that one should expect? Or is there any signal in your mind that the competitive environment is getting a bit tougher or that there is some digestion of the new reimbursement framework in the U.S. for the outpatient setting? Just some broader thoughts about this inter-quarterly trend would be very helpful, please.

[Alexandre Mérieux, Chairman & CEO]

Yes. As you've seen, it's still a very nice acceleration for FILMARRAY in Q3. I think it was 25%. It was also -- please keep noting our sales also increased. We have our international sales now of FILMARRAY represent 20% of the total sales, which is a key component. I don't see a deceleration. I see the base getting bigger, so I think this is still quite remarkable to go this fast. On the Q3 compared to Q2, so maybe there's a trend for more placement. Maybe it's a market trend. I would still need more time to internalize. But also Q2 was good and Q2 was also good because the flu season lasted also in April. So it's very important for FILMARRAY in the U.S. and RP to use the comps compared to the year before. Those are the trends. Good competition is coming for sure. We all know many players want to come or are joining, I would say, the syndromic party. At this stage, there is no -- we are monitoring this. I cannot say that it has an impact on our growth. That's something to monitor, on this, on price. But so far, I would say, we keep it -- we're on track.

[Scott Bardo, Analyst]

That's very good. And just following up on BIOFIRE. I recall when you first bought FILMARRAY several years ago, I think you highlighted at the time a medium-term expectation for this asset to drive [ 2 percentage points ] of incremental group growth from the [ 4% or 5% or so ] that you were witnessing previously. Now, of course, you went on to surpass that significantly as an organization and ended up growing more high single-digit, low double digit.Just as we think about sort of extrapolating your comments about the market, in a sense, it has been developed to a certain extent, would you say it's prudent now to revert back to the initial comments that you had back 5 years ago about BIOFIRE being a couple of percentage points of incremental growth? Or in your mind, is there still opportunity to do more than that? Just some longer-term thoughts would be helpful.

[Alexandre Mérieux, Chairman & CEO]

For me, FILMARRAY, I would say, molecular is a long-term driver of growth for the company. I'm sorry, I don't recall the 2% growth, the 2-point growth. If you look at the past 3 to 4 years, I think it has been almost half of the growth coming from FILMARRAY. But now, for us, and we are investing, as you know, in R&D, in new panels, so molecular and FILMARRAY, it's a long-term driver of growth for bioMérieux.

[Scott Bardo, Analyst]

Understood. And last question, please. Obviously, you had some good success getting a relatively broad approval in the U.S. for your Pneumonia Panel. We're now sort of in -- or Q3 was in the sort of cold and wet season, if you like, where pneumonia is often quite prevalent. Have you seen any real change in appetite to use this new innovative test in North America or is it still quite slow?

[Alexandre Mérieux, Chairman & CEO]

It's what we said last time, I think September. It's a soft launch at this stage because it's quite a sophisticated panel. And we need to invest, I believe, a bit more in terms of efforts to generate evidence with our customers on the value of the test. And we are still convinced that's a high-value test. We have to further intensify our efforts on this. We are still convinced that pneumonia will be a stronger driver for the growth of FILMARRAY, but it's a soft start.

[Operator]

[Operator Instructions] There appears to be no further questions. Apologies, we do have a follow-up from Scott Bardo from Berenberg.

[Scott Bardo, Analyst]

Yes, I just wanted to touch upon the Industrial applications business. We see, as you highlight, some relatively nice uptick in growth for that business, more towards a profile that you demonstrated in previous years. So just really a question on sustainability in your mind around that end market. Historically, you've been somewhat acquisitive in that space. Given your strong balance sheet, is now the time to consider further inorganic expansion in that business?

[Guillaume Bouhours]

For us, the Industrial business is core to what we do. That's part of our mission affecting patient disease, but more, I would say, on the consumer, on the safety front. Inorganic, I think you've seen that early this year, we have done an acquisition of Invisible Sentinel. It's a company with starting -- with [ strong revenue ], with a high potential. So we are doing our efforts to develop this franchise.If other opportunities as interesting happen to be open in the market, we'll look at demand. It's really part of our strategy. But so far, we also believe we have quite a good offer, both in food and pharma applications, to tackle the food safety and the pharma quality needs of the customers.

[Operator]

We will now take our next question from Hugo Solvet for Bryan Garnier.

[Hugo Solvet, Equity Research Analyst]

Two quick follow-up on FILMARRAY. First, on the [ internationalization ] of the production, which is ongoing. How much it has been a driver in your decision to maintain the EBIT guidance, if you can comment a little on that? And second, in Japan, should we expect any additional investment in order to deploy FILMARRAY in the region? And do you expect to benefit from the upcoming flu season already?

[Alexandre Mérieux, Chairman & CEO]

Japan, I believe, yes -- Japan is an important market for us. We believe it's the #3 market in the world for in-vitro diagnostics, so we believe that bioMérieux has a strong potential to grow there. Yes, we'll do -- we did some investments already, but now that we have both BCID and RP being approved on reimbursement, we should see this as a key contributor also for us in Japan. So, yes, we'll invest -- we'll keep on investing mindfully to seize the opportunity. Want to take the other question?

[Guillaume Bouhours]

The other question was on the automation of production right?

[Hugo Solvet, Equity Research Analyst]

And linked to the EBIT guidance.

[Guillaume Bouhours]

There's no -- we are -- as you know, we are in the process of slowly step-by-step, with the different steps of the manufacturing, to slowly automate the different steps of production. It's a complex work, but it's ongoing. It did not have any, I would say, significant impact this year on the guidance or the confirmation of the guidance. No major impact, I would say.

[Operator]

We will now take a follow-up question from Maja Pataki from Kepler Cheuvreux.

[Maja Pataki, Head of Med Tech Devices Sector]

Just to get back to BIOFIRE, could you help us understand who is the main competitor that you encounter most when you're trying to close a client? And do you have an understanding of why labs are, if they are, going for a competitive product?

[Alexandre Mérieux, Chairman & CEO]

So I would say, historically, the first competitor was and still is, I believe, GenMark that we see now mainly in the U.S. They're less in Europe. I think they were -- we saw them in Europe. We don't see them anymore in Europe, GenMark. We have many, many competitors. I would say that the recent newcomer is QIAGEN, with QIAstat with cardiac -- on the cardiac clearance for RP -- GI clearance in May, that we start to hear on the market. I believe, so far, not losing customers. So we have to wait and see. I think that that's the start maybe of the intensity of competition. But also important to keep in mind, we have some advance now with FILMARRAY within the installed base. But I would say mainly through the breadth of panel that we have. And I believe it's a key differentiating factor towards competition.

[Operator]

[Operator Instructions] We will now take our next question from Delphine Le Louet from [ So Gen ].

[Delphine Le Louet, Equity Analyst]

Sorry, just to be back on the FILMARRAY BIOFIRE. I know but I'm going to ask the question. I just want to let you know every quarter, guys, if we can have more in-depth breakdown in between allocation of the panel for BIOFIRE, it would be very useful, just for us to have a vision of where the traction is in between the Respi, the GI, the pulmo, the sepsis panel, and everything. So I don't know if you can give us more sensitivity on this one and possibly on a regional base, meaning the U.S. versus Europe. Secondly, can you share with us your long-term view? Now you're going to break the 10,000 BIOFIRE FILMARRAY installed base. It's definitely a gap with your competition. But in your best scenario, what's the plan in terms of installed base?Second question is a follow-up to Scott's question on industrial application. What was the contribution of Invisible Sentinel into the scope -- scope add up 20 million in revenue these 9 months, 1% in organic growth, if I remember well. Was it meaningful or was it still limited?And third question dealing -- yes, sorry -- third question dealing with Asia and effectively in microbial, with the new approval you had for VIRTUO which is a very good news. But could you elaborate a bit more on the potential and the lengthy -- the length of the process of check-up for VIRTUO in China you expect to have.

[Alexandre Mérieux, Chairman & CEO]

Okay, I will start with VIRTUO and then, Guillaume, I need you to do the other one. Asia Pacific, yes, nice growth you see that for us. The needs are there. On microbiology, it's still an area of growth in this country. And I talked about China. I talked about India also. VIRTUO is a good news because for us it's a very automated platform. I think also, with the range in bottles, we believe that it is so far and it will remain, I believe, a key differentiating factor towards our main competitors, which is great news for us. Things don't happen overnight. It takes time to replace existing instruments in the hospital. But for us, we see it as a key driver of growth for the years to come in China. We are expecting -- we have been working hard to get this clearance and we're happy with that. Guillaume?

[Guillaume Bouhours]

Yes, Invisible Sentinel. So the contribution of Invisible Sentinel, out of the 20 million of scope from -- revenues from the scope changes is actually 4 million. And the bulk of the rest is Hybiome, our Chinese acquisition. Just remember that Invisible Sentinel was acquired in February, so it's not full 9 months on Invisible Sentinel. And the panels. So to your question about the different panels inside the BIOFIRE growth. The message remains exactly the same without giving exactly the figures, but we have a very balanced growth. So pretty similar, around 20% to 30% for each of them year-to-date. Of course, from different base, respiratory being the first one and GI the second one, the biggest two in terms of base. But again, in terms of percentage of growth, they are really similar in a 20% to 30% range. And of course, the fifth one is pneumonia. So maybe not relevant to speak about percentage. But -- fast growth but still below our expectations as we already explained that the sophistication of the panel requires medical adoption that is a bit slower than we were expecting. But no worries for the medium and long term.

[Operator]

There appears to be no further questions at this time. I would like to turn the conference back to the host for any additional or closing remarks.

[Alexandre Mérieux, Chairman & CEO]

Thank you very much for your questions and discussions, and we are looking forward to speaking with you either in the next conference or roadshows that will be before the end of the year. Thank you very much. Bye-bye.