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This column was originally published on RealMoney on Aug. 28 at 2:30 p.m. EDT. It's being republished as a bonus for readers.

Fears of a recession got you down? Feeling overinvested in real estate? Join the club. If you get sick over it, there's a chance you'll end up needing one of

Meridian Biosciences'


diagnostic tests.

I can't reliably predict the future of the stock market, so I'm focusing my energy on finding great recession-resistant businesses that provide shareholder value. Meridian fits the mold.

The company sells a variety of diagnostic test kits in the U.S. and Europe for a wide range of infectious diseases such as influenza and the potentially harmful bacteria C. difficile and H. pylori. Its success over the last few years has been driven by broad-based product growth.

Meridian's C. difficile test has been the belle of the ball recently, delivering impressive revenue growth. By my estimates, its C. difficile products will account for roughly 25% of its worldwide diagnostic revenue in fiscal 2006, growing roughly 40% from fiscal 2005. C. difficile can cause severe diarrhea and more serious intestinal problems such as colitis, and it is easily spread among hospital patients. Infections can force many patients to remain in the hospital and undergo surgery for intestinal perforations, and can even lead to death. The bacteria have become more resistant and virulent as well, and breakouts over the last couple of years in the Midwest and Canada have made headlines.

Meridian has developed a rapid diagnostic test that is highly accurate and delivers results within 15 minutes. Because it sells for three times the price of its batch diagnostic test, it has reaped strong revenue growth from existing customers who have migrated to using the rapid diagnostic. The increasing incidence of C. difficile infections and a strong marketing push by



for its antibiotic treatment have set up a perfect storm to drive demand for Meridian's C. difficile franchise.

Meridian's C. difficile test has had a halo effect on sales of its other hospital-based diagnostics. I estimate that its revenue from these products in the U.S. has had midteens percentage growth over 2005 year to date.

The company has drivers that will keep revenue growth rolling as the benefits from the shift of sales to its rapid C. diff. test begin to wane over the next couple of years.

I believe that the company will do well with products to test for H. pylori, a bacterium that has been implicated in causing acid reflux. Every year, doctors prescribe billions of dollars' worth of drugs called proton pump inhibitors, such as Nexium, Prilosec and Protonix, to treat acid reflux without running a diagnostic to determine if acid reflux is really the source of patients' problems. In reality, many of these patients have been infected with H. pylori and should be treated with antibiotics, not proton pump inhibitors.

Meridian hopes to make some nice profits while saving the health care system money. A small amount of the company's U.S. sales come from H. pylori products today, but the company has recently hired a national account manager to help it land more meaningful managed-care accounts. Any substantial contracts should have a meaningful impact on a small company like Meridian.

Meridian is in solid shape financially, and I believe it's a reasonable value at its current price. It holds over $1.25 a share in net cash and turns all of its net income into free cash flow. While the company wants to make some strategic acquisitions to complement its franchises, it continues to return a solid portion of its free cash flow to investors through dividends. Its current dividend yield is about 2%, and I expect that if it follows past practices, it will increase its dividend in early 2007, which should push the yield to nearly 2.5% at current prices.

Earlier this month, it raised sales guidance for fiscal 2007 to between $118 million and $123 million, 10% to 15% higher than the $107 million consensus estimate. It also said it expects earnings per share between 83 cents and 87 cents, which would be a 24% to 30% advance over the 67 cent consensus estimate for fiscal 2006.

The company has historically been reasonably conservative, and I believe its guidance is very achievable.

The stock has surged recently along with the market. I feel comfortable buying Meridian's stock in the low $20s per share, considering its growth outlook, healthy dividend and commitment to shareholder value.

At the time of publication, Ferayorni was long Meridian Biosciences, although positions may change at any time.

Justin Ferayorni, CFA, is the founder and principal of Tamarack Capital Management and was an analyst and portfolio manager at Bricoleur Capital. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ferayorni appreciates your feedback;

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