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Company: Meridian Bioscience Inc. (VIVO)
Shop: Meridian Bioscience is a life science company that develops, manufactures, distributes and sells diagnostic test kits primarily for gastrointestinal and respiratory infectious diseases and elevated blood lead levels worldwide. The company has two business areas. The Life Sciences segment develops, manufactures and sells various types of reagents and master mixes, which are the ingredients that go into various infectious disease testing platforms. For example, Meridian is developing some of the ingredients for the liquid component of Covid-19 PCR and antigen tests. The other business segment is the diagnostics business, which provides nearly 200 diagnostic tests and transport media to acute care hospitals, reference laboratories, outpatient clinics and doctor’s offices in over 70 countries around the world.
market value: $1.1 billion ($26.50 per share)
Activist: Impactive Capital
Percentage ownership: 9.93%
average cost: $20.62
Activist Comment: 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 investor (or AESG™) that started with a $250 million investment from CalSTRS and now has $2 billion at its disposal. In just three years they have made a name for themselves as AESG™ investors. Wolfe and Asmar realized there was an opportunity to leverage tools, particularly on the social and environmental side, to drive ROI. Impactive focuses on positive systemic change to build more competitive and sustainable businesses over the long term. Impactive will use all of the traditional operational, financial and strategic tools that activists use, but they will also implement ESG changes that they believe are material to the business and increase company profitability and shareholder value.
What’s happening?
Impactive Capital has announced a 9.93% stake in VIVO for investment purposes.
Backstage:
VIVO is a misunderstood and overlooked company with a strong CEO and unique intellectual property. His Life Sciences business has been a good business made great by the Covid pandemic. It used to make up about a third of the company’s revenue and now accounts for about 60%, going from $64.3 million in 2019 to $190 million today. A large part of this growth is due to them getting onto many more platforms due to their Covid testing materials. In 2018, this company had seven clients that generated sales of $1 million or more. Today it has over 40. While much of that revenue is Covid-related – which will eventually recede – there will likely still be some level of Covid testing well into the future, as flu testing and most pandemic-related revenue is supposed to be continued. The larger impact of the pandemic, however, is that it has resulted in many more customers for this company who will continue to be consumers of the company’s other products. Additionally, since Meridian has high-quality offerings that are critical to the functioning of the client’s product, they are able to make high margins in this business.
The Diagnostics business used to be the company’s core segment, but it’s currently undergoing a turnaround. The company sells user-friendly diagnostic tests with a focus on GI and respiratory diseases. Old management underinvested in capital expenditures and research and development, and this company lost significant ground to its competitors. In 2017 they hired a new CEO to transform this business and recently launched their new Revogene platform. With the right focus and investments, management should be able to not only stop the bleeding in this business, but restart its growth.
That leaves two companies, one with double-digit growth and one that is expected to grow again for the first time in years. However, Meridian trades at a 10x EBITDA multiple, compared to life sciences peers, which trade nearly 20x, and diagnostic peers, which 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 seat on the board, we expect this to be a situation where Impactive will be heavily involved with the company and where they will be able to implement AESG activism , which aligns with their investment thesis – using ESG to increase value creation and profitability.
As a small, under-recognized company, VIVO does not focus on ESG metrics and communications, despite having a very positive ESG footprint. The company’s lyo-ready and air-drying reagents reduce the need for cold chain storage and styrofoam packaging while improving shelf life. This offers a more environmentally friendly and economical solution. Impactive has historically worked with companies like this at shareholder level to set sustainability goals and produce a sustainability report so they can communicate these ESG benefits to the market. In addition, Impactive will likely work with Meridian to enhance its executive compensation plans and add some provisions that tie compensation to the achievement of specific environmental and diversity, equity and inclusion goals. Establishing these practices and communicating them to the market should lead to a much broader universe of interested investors, in addition to potentially more customers.
When a small company like VIVO is receptive to ESG advice, it is of great advantage to attract a shareholder like Impactive. When companies need strategic and financial advice, we always say that engaging an activist is like a freelance investment banker, most focused on shareholder value. Well, when they need ESG advice, with an AESG™ investor like Impactive, they get free, high-quality ESG advice from a shareholder that also focuses on shareholder value. And Impactive has the capabilities to also provide strategic and financial advice when required.
Ken Squire is Founder and President of 13D Monitor, an institutional research service on shareholder activism, and Founder and Portfolio Manager of 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets.