Company: Meridian Bioscience Inc. (VIVO)
Business: Meridian Bioscience is a life science company that develops, manufactures, distributes, and sells diagnostic test kits primarily for gastrointestinal and respiratory infectious diseases, as well as elevated blood lead levels worldwide. The company has two business segments. The Life Sciences segment develops, manufactures, and sells different types of reagents and master mixes, which are the ingredients that go into various testing platforms for infectious diseases. For example, Meridian develops some of the ingredients for the liquid component of Covid-19 PCR and antigen tests. The other business segment is its diagnostic business, which provides almost 200 diagnostic tests and transport media to acute care hospitals, reference laboratories, outpatient clinics and physician office laboratories in over 70 countries around the world.
Stock market value: $1.1B ($26.50 per share)
Activist: Impactive Capital
Percentage Ownership: 9.93%
Average cost: $20.62
Activist Commentary: Impactive Capital is an activist hedge fund founded in 2018 by Lauren Taylor Wolfe and Christian Alejandro Asmar. Impactive Capital is an active environmental, social and governance (or AESG™) investor that launched with a $250 million investment from CalSTRS and now has over $2 billion. In just three years, they have made quite a name for themselves as AESG™ investors. Wolfe and Asmar realized that there was an opportunity to use tools, notably on the social and environmental side, to drive returns. Impactive focuses on positive systemic change to help build more competitive, sustainable businesses for the long run. Impactive will use all the traditional operational, financial and strategic tools that activists use, but they will also implement ESG change that they believe is material to the business and drives profitability of the company and shareholder value.
Impactive Capital has reported a 9.93% interest in VIVO for investment purposes.
Behind the scenes:
VIVO is a misunderstood and under-followed company with a strong CEO and unique intellectual property. Its life sciences business was a good business that became great due to the Covid pandemic. It used to comprise about one-third of the company’s revenues and now provides approximately 60%, going from $64.3 million in 2019 to $190 million today. A large part of this growth is due to getting on many more platforms because of their Covid testing materials. In 2018, this business had seven clients that generated $1 million or more in sales. Today, it has over 40. While a lot of this revenue is Covid-related — which will come down at some point — there will likely still be Covid testing to some degree well into the future like flu testing and most of the pandemic-related revenue should continue. But the bigger impact of the pandemic is that it led to many more clients for this business who will continue to be consumers of the company’s other products. Moreover, since Meridian has high quality offerings that are critical to the functioning of the customer’s product, they are able to have high margins in this business.
The Diagnostics business used to be the core segment of the company, but it’s undergoing a turnaround right now. The business sells easy-to-use diagnostic tests with focus areas in GI and respiratory. Old management was underinvesting in capex and research and development, and this business lost significant ground to its competitors. In 2017, they hired a new CEO to turn around this business and recently launched its new Revogene platform. With the proper focus and investment, management should be able to not only stop the bleeding in this business but also resume its growth.
This will leave it with two businesses, one which is growing at double digits and one which should continue growing again for the first time in years. However, Meridian trades at a 10x EBITDA multiple compared to life sciences peers that trade close to 20x and diagnostic peers that trade in the teens based on normalized 2024 EBITDA.
Impactive always has an ESG thesis in each of their investments and this is no exception. While this is not necessarily a situation where Impactive will take a board seat, we expect this to be a situation in which Impactive is heavily involved with the company and one where they will be able to implement AESG activism that is consistent with their investment thesis — using ESG to drive value creation and profitability.
As a small, lesser followed company VIVO does not focus on ESG metrics and communication despite having a very positive ESG footprint. The company’s lyo-ready and air-dryable reagents reduce the need for cold chain storage and Styrofoam packaging while improving shelf life. This provides a solution that is more environmentally friendly and economical. Impactive has a history of working with companies like this from a shareholder level to set sustainability goals and create a sustainability report so they can communicate these ESG benefits to the market. Moreover, Impactive will likely work with Meridian to improve its executive compensation plans to add some provisions that tie compensation to achieve certain environmental and diversity, equity and inclusion goals. Establishing these practices and communicating them to the market should lead to a much wider universe of interested investors, in addition to potentially more clients.
When a small company like VIVO is receptive to ESG advice, it is a huge advantage for them to get a shareholder like Impactive. When companies need strategic and financial advice, we always say that having an activist involved is like having a free investment banker who is most focused on shareholder value. Well, when they need ESG advice, having an AESG™ investor like Impactive gives them free, high quality ESG advice from a shareholder who is also focused on shareholder value. And, Impactive has the skills to provide the strategic and financial counsel as well if necessary.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.