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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM
10-K
 
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2019.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FOR THE TRANSITION PERIOD FROM
                    
TO
                    
Commission File No.
 0-14902
 
 
MERIDIAN BIOSCIENCE, INC.
 
3471 River Hills Drive
Cincinnati, Ohio 45244
IRS Employer ID No.
 31-0888197
State of Incorporation
:
 
Ohio
Phone: (513)
271-3700
Securities Registered Pursuant to Section 12(b) of the Act:
         
Title of each class
 
Trading Symbol
 
Name of each exchange of which registered
Common Shares, No Par Value
 
VIVO
 
The NASDAQ Stock Market LLC
 
 
(NASDAQ Global Select Market)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities Registered Pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  
    NO  
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act.    YES  
    NO  
 

Table of Contents  
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
    
YES  
    NO  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
    
YES  
    NO  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
             
Large accelerated filer
 
 
Accelerated filer
 
             
Non-accelerated filer
 
 
Smaller reporting company 
 
             
Emerging 
G
rowth 
C
ompany
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2).
   
 
YES  
    
NO
  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
The aggregate market value of Common Shares held by
non-affiliates
as of March 31, 2019 was $743,730,984 based on a closing sale price of $17.61 per share on March 31, 2019. As of October 31, 2019, 42,741,721 no par value Common Shares were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2020 Annual Meeting of Shareholders, which will be filed within one hundred and twenty days of the fiscal year ended September 30, 2019 (2020 Proxy Statement), are incorporated by reference into Part III of this report to the extent described herein.
 
 
 

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MERIDIAN BIOSCIENCE, INC.
INDEX TO ANNUAL REPORT
ON FORM
10-K
             
 
Page
 
 
 
 
 
 
 
 
 
 
 
Item 1
 
 
 
4
 
Item 1A
 
 
 
11
 
Item 1B
 
 
 
20
 
Item 2
 
 
 
21
 
Item 3
 
 
 
21
 
Item 4
 
 
 
22
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 5
 
 
 
22
 
Item 6
 
 
 
24
 
Item 7
 
 
 
24
 
Item 7A
 
 
 
33
 
Item 8
 
 
 
34
 
Item 9
 
 
 
68
 
Item 9A
 
 
 
68
 
Item 9B
 
 
 
68
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 10
 
 
 
69
 
Item 11
 
 
 
69
 
Item 12
 
 
 
69
 
Item 13
 
 
 
69
 
Item 14
 
 
 
69
 
Item 15
 
 
 
70
 
Item 16
 
 
 
72
 
 
 
 
 
 
 
 
 
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the following sections: “Business” (Part I, Item 1 of this Form
10-K),
“Risk Factors” (Part I, Item 1A of this Form
10-K),
and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Part II, Item 7 of this Form
10-K).
These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures about Market Risk” (Part II, Item 7A of this Form
10-K)
and elsewhere in this Form
10-K.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
  

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PART I.
This Annual Report on Form
10-K
includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties. See “Note About Forward-Looking Statements” above. Factors that could cause or contribute to such risks and uncertainties include those discussed in Item 1A. “Risk Factors.” In addition to the risk factors discussed herein, we are also subject to additional risks and uncertainties not presently known to us or that we currently deem immaterial. If any of these risks and uncertainties develops into actual events, our business, financial condition or results of operations could be adversely affected.
Unless the context requires otherwise, references in this Annual Report on Form
 10-K
to “Meridian,” “we,” “us,” “our,” or “our company” refer to Meridian Bioscience, Inc. and its subsidiaries.
In the discussion that follows, all dollar amounts and share amounts are in thousands (both tables and text), except per share data.
This Annual Report on Form
10-K
refers to trademarks such as Alethia
, Curian
, Immuno
Card
®
, Immuno
Card
STAT!
®
, LeadCare
®
, MyTaq
, PediaStat
, PREMIER
®
, revogene
and SensiFAST
, which are protected under applicable intellectual property laws and are our property. Solely for convenience, our trademarks and tradenames referred to in this Form
10-K
may appear without the
®
or
symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and tradenames. Our molecular diagnostic test platform formerly known under the tradenames
illumi
gene
and
illumi
pro
, has been rebranded under the tradename Alethia. References to Alethia throughout this Annual Report on Form
10-K
refer to our molecular diagnostic tests and instrumentation formerly marketed and sold under the
illumi
gene
and
illumi
pro
brands.
ITEM 1.
BUSINESS
Overview
Meridian is a fully-integrated life science company with principal businesses in: (i) the development, manufacture, sale and distribution of diagnostic test kits, primarily for certain gastrointestinal and respiratory infectious diseases, and elevated blood lead levels; and (ii) the manufacture and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, and bioresearch reagents used by IVD manufacturers and researchers in immunological and molecular tests for human, animal, plant and environmental applications. The Company was incorporated in Ohio in 1976. Our principal corporate offices are located near Cincinnati, Ohio, USA.
Our website is
www.meridianbioscience.com
. We make available our Annual Reports on Form
10-K,
Quarterly Reports on Form
10-Q,
Current Reports on Form
8-K,
Proxy Statements and any amendments thereto, free of charge through this website, as soon as reasonably practicable after such material has been electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). The SEC maintains an internet site containing these filings and other information regarding Meridian at
www.sec.gov
. The information on our website is not and should not be considered part of this Annual Report on Form
10-K.
Reportable Segments
Our reportable segments are Diagnostics and Life Science, both of which are headquartered in Cincinnati, Ohio. Detailed information related to the reportable segments can be found in the following locations within this Annual Report on Form
10-K:
 
- 4 -
 

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Type of Segment Information
 
Location within Annual Report on Form
 10-K
Physical locations and activities
 
Item 2. “Properties”
     
Revenue by geographic region
 
Item 7. “Management’s Discussion and Analysis of Financial Condition & Results of Operations” (hereafter “MD&A”)
     
Financial information
 
Note 9 of Consolidated Financial Statements
 
 
 
 
Diagnostics Segment
Overview of Products and Markets
Our largest source of revenues is clinical diagnostic products, with our Diagnostics segment providing 68% of consolidated net revenues for fiscal 2019. As of September 30, 2019, our Diagnostics segment had approximately 485 employees in ten countries.
Our clinical diagnostic products provide accuracy, simplicity and speed; enable early diagnosis and treatment of common, acute medical conditions; and provide for better patient outcomes at reduced costs. We target diagnostics for disease states that: (i) are conditions where rapid diagnosis impacts patient outcomes; (ii) have opportunistic demographic and disease profiles; (iii) are underserved by current diagnostic products; and/or (iv) have difficult sample handling requirements (e.g., stool). This approach has allowed us to establish meaningful market share in our target disease states, gastrointestinal and respiratory illnesses, and tests for elevated lead levels in blood.
Our clinical diagnostic products span a broad menu of testing platforms and technologies, and also include transport media that store and preserve specimen samples from patient collection to laboratory testing. Our testing platforms include:
 
Real-time PCR Amplification (Revogene brand)
– high-sensitivity, fluorescent molecular platform suitable for automated sample prep and targeted nucleic acid amplification and detection from patient specimens. Assay platform can process
1-8
tests per run in about one hour. Current menu includes four
FDA-cleared
assays. Simple sample prep, footprint and test turnaround time make the Revogene platform suitable for Integrated Delivery Networks (“IDNs”) and hospital systems using a decentralized testing approach.
 
 
 
 
 
Isothermal DNA Amplification (Alethia brand)
– high sensitivity, molecular platform using LAMP (loop-mediated isothermal amplification) technology to process from 1 to 10 tests per run in generally under one hour; and requires no batching of samples. Following the June 2019 acquisition of the Revogene brand, efforts are underway to convert existing Alethia customers using
C. difficile,
Group A
Streptococcus
and Group B
Streptococcus
assays to the Revogene platform.
 
 
 
 
 
Lateral Flow Immunoassay (Curian brand)
– rapid fluorescence-based immunoassay platform highly compatible with detection of infectious agents in human clinical specimens; provides single step sample prep methodology with a rapid
time-to-result
analyzer readout in 20 minutes. The 510(k) application for the Curian instrument and its first assay, a stool antigen test for
H. pylori
, was submitted to FDA in September 2019, and commercial launch of the testing platform is expected in the first half of fiscal 2020.
 
 
 
 
 
Rapid Immunoassay (Immuno
Card
and Immuno
Card
STAT! brands)
single-use
immunoassays that have fast turnaround times (generally under 20 minutes); and can reduce expensive send-outs for hospitals and outpatient clinics.
 
 
 
 
 
Enzyme-linked Immunoassay (PREMIER brand)
– batch immunoassay platform that can process up to 96 tests per run; is highly accurate and economical; and is adaptable to automation.
 
 
 
 
 
Anodic Stripping Voltammetry (LeadCare and PediaStat brands)
– electrical chemical sensor platform for quantitative determination of lead levels in blood.
 
 
 
 
 
- 5 -
 

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Our clinical diagnostic products are comprised of products used principally in the detection of infectious diseases caused by various bacteria, viruses, parasites and pathogens, along with the CLIA-waived LeadCare test for quantitative determination of blood lead levels. These products are grouped into the following product families:
Gastrointestinal Assays
Includes tests for the following, among others:
C. difficile
, Enterohemorrhagic
E. coli
,
Campylobacter jejuni
(Campy),
H. pylori,
Cryptosporidium
, giardia lamblia,
and calprotectin
.
Respiratory Illness Assays
Includes tests for the following, among others: Group A
Streptococcus
(strep throat), Influenza,
M. pneumoniae
(Mycoplasma),
Bordetella pertussis
(whooping cough), and respiratory syncytial virus (RSV).
Blood Chemistry Assays
Tests for elevated lead levels in blood.
Other Assays
Includes tests for the following, among others: Group B
Streptococcus
,
Chlamydia trachomatis
,
Neisseria gonorrhea
, Herpes Simplex Virus Type 1 & Type 2, and Malaria.
Our product portfolio includes over 140 diagnostic tests and transport media, and is marketed to acute care hospitals, reference laboratories, outpatient clinics and physician office laboratories in over 70 countries around the world.
Our current research and development pipeline for immunoassay products includes a new instrument that utilizes fluorescent chemistry, which improves workflow and test result readability. As noted above, this new platform is being branded under the “Curian” name. At the end of fiscal 2019, we submitted a 510(k) application to the FDA for an HpSA rapid immunoassay test for use with the Curian instrument, which we are expecting to introduce to the market during the second quarter of fiscal 2020. We expect to develop additional rapid immunoassay tests for use with the Curian instrument in 2020 and beyond.
Our current research and development pipeline for molecular assays to be run on our Revogene platform includes, among others, a gastrointestinal (“GI”) panel and a respiratory illness (“RI”) panel. We expect the 510(k) applications for the GI and RI panels to be submitted to the FDA in the latter part of fiscal 2020 and first half of fiscal 2021, respectively.
Market Trends
The global market for infectious disease tests continues to expand as new disease states are identified, new therapies become available, and worldwide standards of living and access to health care improve. More importantly, within this market, there is a continuing shift from conventional testing, which requires highly trained personnel and lengthy turnaround times for test results, to more technologically advanced testing, which can be performed by less highly trained personnel and completed in minutes or hours.
The growing global pressures to contain total health care costs have accelerated the increased use of diagnostic testing. With rapid and accurate diagnoses of infectious diseases, physicians can pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and lower overall treatment cost. IDNs in our U.S. market have the goal of increasing the efficiency of health care delivery, reducing spending and improving clinical outcomes. We believe our product portfolio positions us competitively with IDNs and health care systems that are transitioning from
fee-for-service
compensation models to value-based reimbursement. Our
C. difficile
, Group B
Streptococcus
, Group A
Streptococcus
and
H. pylori
products are all examples of how a highly accurate diagnostic test on the front end can mitigate or reduce down-stream costs of antibiotic use, symptom-relieving drugs and hospital stays.
We also continue to see aggregation of buying power in our U.S. market via multi-hospital group purchasing organizations and IDNs, consolidation among reference laboratories, hospital laboratories being operated by large reference laboratories, and acquisition of physician practices by hospitals, health systems and
for-profit
specialty health care companies.
 
- 6 -
 

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Cost containment pressures have also affected health care systems outside the U.S., particularly in Europe, where the health care systems are generally
government-run.
The level of government budget deficits can have an adverse effect on the amount of government health care spend.
Sales, Marketing and Distribution
Our Diagnostics segment’s sales and distribution network consists of the following for each of the broad geographic regions we serve:
Americas
In the Americas, our sales and distribution network consists of a direct sales force complemented by independent distributors. The use of independent distributors allows our products to reach any size health care facility and also provides our customers the option to purchase our products directly from Meridian or through an authorized distributor. Two independent distributors accounted for 10% or more of consolidated revenues in fiscal 2019, 2018 and 2017: Cardinal Health 200 LLC (“Cardinal”) and Fisher Scientific LLC (“Fisher”). Our Diagnostics segment revenues from Cardinal were approximately $18,000, $21,000 and $22,000 during fiscal 2019, 2018 and 2017, respectively. Our Diagnostics segment revenues from Fisher were approximately $17,000, $22,000 and $18,000 during fiscal 2019, 2018 and 2017, respectively.
EMEA
In Europe, the Middle East and Africa (“EMEA”), our sales and distribution network consists of direct sales personnel in Belgium, France and Italy, and independent distributors in other European countries, Africa and the Middle East. We maintain a distribution center near Milan, Italy.
ROW
We generally utilize independent distributors throughout the rest of the world (“ROW”).
Competition
Our major competitors in molecular diagnostics are Cepheid (a Danaher business) and Becton Dickinson, both of which have systems with multiple-assay menus. We also face competition in molecular diagnostics, but to a lesser degree, from companies such as Abbott (former Alere business) and Quidel.
Our major competitors in rapid immunoassay diagnostics are primarily Abbott (former Alere business) and Quidel. In recent years, companies such as bioMerieux have captured market share in our gastrointestinal category via its BioFire multi-plex panel tests. However, since their introduction to the market, payors have raised concerns over reimbursement levels relative to clinical utility, particularly for panels with 12 or more targets. For blood lead testing, we believe we have the only
FDA-cleared,
CLIA-waived
point-of-care
test available commercially. Other blood lead testing systems in use, marketed by our competitors, include Graphite Furnace Atomic Absorption Spectroscopy, which requires a highly-skilled technician and larger laboratory space to operate, in addition to not being portable or suitable for
point-of-care
use. We believe that with the breadth and depth of our product portfolio, we are well positioned for the clinical laboratory.
Research and Development
Our Diagnostics segment’s research and development personnel are organized into three
pre-clinical
teams: immunoassay,
PCR-based
molecular and blood-chemistry. We have a separate team responsible for execution of clinical trials. Our research and development activities are focused on new product and new technology development, new applications for our existing technologies, and improvements to existing products, including assay-menu expansion across our Curian, Revogene and PediaStat instrument platforms. Research and development efforts may occur
in-house
or with collaborative partners. We believe that new product development is a key source for sustaining revenue growth. The products within our Revogene and Alethia molecular platforms,
H. pylori
product family and blood lead testing family were developed solely
in-house,
or substantially so. See “Operating Expenses” section within MD&A on page 28.
 
- 7 -
 

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Manufacturing
Our immunoassay and molecular assay products require the production of highly specialized reagents, primers and enzymes. We produce the vast majority of our own immunoassay requirements. Reagents, primers and enzymes for our Revogene molecular assay products, as well as primers for our Alethia molecular assay products, are purchased from outside vendors. Our blood lead testing products require the production of electrical chemical sensors, which we manufacture using critical raw materials purchased from outside vendors. We believe that we have sufficient manufacturing and sourcing capacity for anticipated growth over the next several years, taking into consideration that we have the ability to add labor shifts and/or production lines as needed.
Intellectual Property, Patents and Licenses
We own or license U.S. and foreign patents, most of which are for select products manufactured by our Diagnostics segment. These patents are used in our manufacturing processes for select products (e.g., method patents) or may relate to the design of the test device technology format (e.g., design patents). In the absence of patent protection, we may be vulnerable to competitors who successfully replicate our production and manufacturing technologies and processes. Our employees are required to sign confidentiality and
non-disclosure
agreements designed to protect our proprietary products.
The patents for our Alethia products, which represented 13%, 16% and 17% of consolidated revenues for fiscal 2019, 2018 and 2017, respectively, are licensed from a third party, Eiken Chemical Co., Ltd., under a
non-exclusive
license agreement and expire between 2020 and 2022. These patents were issued in the U.S., European Union and other countries. The term of our license agreement runs until the last patent expires in 2022, at which point we will be free to practice the patents without any restriction or royalty obligation.
The patents for the Revogene platform and related products acquired as part of the GenePOC business are either wholly owned or licensed from a third party, Laval University and The Regents of California, under an exclusive license agreement. These patents are issued in the U.S., European Union and other countries. The term of our license agreement runs until 2036, after which we will be free to practice the patents without any restriction or royalty obligation. For a description of our acquisition of the GenePOC business, see Note 2 of the accompanying Consolidated Financial Statements.
The patents for our
H. pylori
products, owned by us and which represented approximately 16%, 16% and 15% of consolidated revenues for fiscal 2019, 2018 and 2017, respectively, expired in May 2016 in the U.S. and in May 2017 in countries outside the U.S. We expect competition with respect to our
H. pylori
products to continue to increase, and such competition may have an adverse impact on our selling prices for these products, or our ability to retain business at prices acceptable to us, and consequently, adversely affect our future results of operations and liquidity, including revenues and gross profit. We have executed on a number of measures to address competitive pressures in coming off patent. In October 2018, we entered into a strategic collaboration with DiaSorin to sell
H. pylori
tests, one of only three other companies that market
FDA-cleared
tests to detect
H. pylori
antigen in stool samples in the U.S. market. We have executed multi-year supply agreements with our two largest reference laboratory customers for
H. pylori
tests to secure volume, albeit at lower selling prices. In the first half of fiscal 2020, we expect to launch Curian HpSA, our first assay on the new Curian platform, for which the 510(k) application was submitted to the FDA in September 2019. We expect that this product will help us protect existing rapid assay accounts using the advantages of the Curian analyzer. However, we are unable to provide assurances that we will be successful with any strategy or that any strategy will prevent an adverse effect on our future results of operations and liquidity, including revenues and gross profit.
Government Regulation
Our diagnostic products are regulated by the FDA as “devices” pursuant to the Federal Food, Drug, and Cosmetic Act (“FDCA”). Under the FDCA, medical devices are classified into one of three classes (i.e., Class I, II or III). Class I and II devices are not expressly approved by the FDA, but, instead, are “cleared” for marketing. Class III devices generally must receive
“pre-market
approval” from the FDA as to safety and effectiveness. Our diagnostics manufacturing facilities in Cincinnati and Billerica are subject to periodic inspection by the FDA. See page 25 within MD&A for discussion regarding the FDA’s inspection of our Billerica facility.
 
- 8 -
 

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Each of the diagnostic products currently marketed by us in the United States has been cleared by the FDA pursuant to the 510(k) clearance process or is exempt from such requirements. We believe that most, but not all, products under development will be classified as Class I or II medical devices and, in the case of most of our Class I and all Class II devices, will be eligible for 510(k) clearance; however, we can make no assurances in this regard.
Sales of our diagnostic products in foreign countries are subject to foreign government regulation, which is similar to that of the FDA.
Our Diagnostics facilities are certified to ISO 13485:2016.
Seasonal Factors and Sporadic Outbreaks
Our principal business is the sale of a broad range of clinical diagnostic test kits for common gastrointestinal and respiratory infectious diseases, and elevated blood lead levels. Certain infectious diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as foodborne illnesses or pandemics such as an influenza outbreak. While we believe that the breadth of our diagnostic product lines reduces the risk that infections subject to seasonality and sporadic outbreaks will cause significant variability in diagnostic revenues, we can make no assurance that revenues will not be impacted period over period by such factors.
Life Science Segment
Overview of Products and Markets
Our Life Science segment focuses on the development, manufacture, sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, and bioresearch reagents used by researchers,
agri-bio
companies and IVD manufacturing companies. As of September 30, 2019, our Life Science segment had approximately 175 employees in six countries.
Most of the revenues for our Life Science segment currently come from the manufacture, sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, and bioresearch reagents used by IVD manufacturing companies focused on the development of immunoassay and molecular assay tests. Approximately 80% of Life Science revenues are generated from the industrial market, defined as IVD manufacturers. This continues to be an increasing focus for our molecular reagent products, which historically have been marketed to the academic/research customers that comprise the remaining 20% of Life Science revenues. We utilize direct sales teams in key countries such as the U.S., the U.K., France, Germany, and Australia. In order to further pursue revenue opportunities in Asia, and China in particular, during fiscal 2017 we established a wholly foreign owned enterprise (“WFOE”) location in Beijing, China, after having operated a representative office there since fiscal 2015. The WFOE employs a business development staff and imports product for sale to customers in China. We utilize a network of distributors in other major countries. During fiscal 2019, 24% of third-party revenues for this segment were from two IVD manufacturing customers.
Our Life Science products are marketed to IVD manufacturing customers as a source of raw materials for their immunoassay products, or as an outsourced step in their manufacturing processes. For example, we supply a number of major IVD manufacturers with proteins used to detect hepatitis A virus and rubella virus. Sales efforts are focused on multi-year supply arrangements in order to provide stability in volumes and pricing. We believe this benefits both us and our customers.
We utilize independent distributors to market molecular biology products to academic/research customers. These products are used in measuring DNA and RNA in human, animal, plant and environmental applications. These reagents improve the purity, yield and speed of PCR reactions. Products such as MyTaq and SensiFAST are examples of this type of PCR/qPCR reagent.
Market Trends
As certain global markets become increasingly accessible to us, most notably the Asia-Pacific region, geographic expansion continues to be a significant strategy for our Life Science segment, along with further penetration into industrial markets with our molecular biology products.
 
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Competition
The market for bulk biomedical reagents is highly competitive. Important competitive factors include product quality, price, customer service and reputation. We face competitors, many of which have greater financial, research and development, sales and marketing, and manufacturing resources, and where sole-source supply arrangements do not exist. Customers also may choose to manufacture their biomedical reagents
in-house
rather than purchase from outside vendors such as Meridian.
The academic/research market is highly fragmented. Individual purchases are typically of small quantities. The breadth of product offerings, quality, price and service, including
on-line
capabilities and technical resources, are important factors to building customer loyalty and repeat purchases.
Research and Development
The focus of research and development activities for the Life Science segment is targeted around improving reagents, particularly molecular reagents. For example, our Life Science segment introduced a family of lyophilization-ready reagents that have a number of advantages over prior generation “wet” reagents (e.g., room-temperature shipping and storage and longer shelf-life). See “Operating Expenses” section within MD&A on page 28.
Manufacturing and Government Regulation
Our Life Science facilities are ISO 13485:2016 certified. Additionally, where appropriate, our Life Science facilities comply with Regulation EC 1069:2009.
Acquisitions
Acquisitions have played an important role in the growth of our businesses. Our acquisition objectives include, among other things: (i) enhancing product offerings; (ii) improving product distribution capabilities; (iii) providing access to new markets; and/or (iv) providing access to key biologicals or new technologies that lead to new products. Although we cannot provide assurance that we will consummate additional acquisitions in the future, nor can we provide assurance that any acquisitions will accomplish these objectives, we expect that the potential for acquisitions will continue to provide opportunities for revenue and earnings growth in the future.
During June 2019, we acquired the business of GenePOC Inc. (“GenePOC”). A description of the GenePOC acquisition appears in Note 2 of the accompanying Consolidated Financial Statements.
International Markets
International markets are an important source of revenues and future growth opportunities for both of our segments. For both segments combined, revenues from customers located outside of the United States approximated $76,000 or 38% of consolidated fiscal 2019 revenues, $73,000 or 34% of consolidated fiscal 2018 revenues, and $67,000 or 33% of consolidated fiscal 2017 revenues. We expect to continue to look to key European markets as a source of revenue growth in the future for both business units. For the Life Science segment, we have also focused resources on IVD manufacturing customers in China. To date, we have not experienced any adverse effects from the trade tensions between the United States and China, but we cannot be sure that we will not experience any adverse effects in the future.
Fluctuations in foreign currency exchange rates since fiscal 2018 had an approximate $2,200 unfavorable impact on fiscal 2019 revenues; $1,150 within the Diagnostics segment and $1,050 within the Life Science segment. This compares to
year-to-year
currency exchange rates having an approximate $2,200 favorable impact on revenues in fiscal 2018; $1,400 within the Diagnostics segment and $800 within the Life Science segment. Due to natural hedge relationships with expenses, both cost of sales and operating expenses, the overall impact of exchange rate fluctuations on operating income was not significant during fiscal 2019, 2018 and 2017.
Environmental
We are in compliance with applicable portions of the federal and state hazardous waste regulations and have never been a party to any environmental proceeding.
 
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ITEM 1A.
RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition, cash flows or future results. Any one of these factors could cause our actual results to vary materially from recent results or from anticipated future results. The risks described below are not the only risks facing our company. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may materially adversely affect our business, financial condition and/or operating results.
Risks Affecting Growth and Profitability of our Business
We may be unable to develop new products and services or acquire products and services on favorable terms.
The medical diagnostic and life science industries are characterized by ongoing technological developments and changing customer requirements. As such, our results of operations and continued growth depend, in part, on our ability in a timely manner to develop or acquire rights to, and successfully introduce into the marketplace, enhancements of existing products and services, or new products and services that incorporate technological advances, meet customer requirements and/or respond to products developed by our competition. We cannot provide any assurance that we will be successful in developing or acquiring such rights to products and services on a timely basis, or that such products and services will adequately address the changing needs of the marketplace, either of which could adversely affect our results of operations.
In addition, we must regularly allocate considerable resources to research and development of new or acquired products, services and technologies, and protecting intellectual property. The research and development process generally takes a significant amount of time from research to product launch. This process is conducted in various stages. During each stage, there is a risk that we will not achieve our goals on a timely basis, or at all, and we may have to abandon a product in which we have invested substantial resources, any of which could adversely affect our results of operations.
We may be unable to successfully integrate operations or to achieve expected cost savings from acquisitions we make.
One of our growth strategies is the acquisition of companies and/or products. Although additional acquisitions of companies and products may enhance the opportunity to increase net earnings over time, such acquisitions could result in greater administrative burdens, increased exposure to the uncertainties inherent in marketing new products, financial risks of additional operating costs, disrupted operations, challenges in employee retention, and increased risk of asset impairments if future revenues and cash flows are deficient. The principal benefits expected to result from any acquisitions we make will not be achieved fully unless we are able to successfully integrate the operations of the acquired entities with our operations and realize the anticipated synergies, cost savings and growth opportunities from integrating these businesses into our existing businesses. We cannot provide assurance that we will be able to identify and complete additional acquisitions on terms we consider favorable or that, if completed, will be successfully integrated into our operations. Furthermore, we cannot predict the outcome of goodwill impairment testing and the impact of goodwill impairments on the Company’s earnings and financial results.
Revenues for our Diagnostics segment may be impacted by our reliance upon two key distributors in North America, seasonal factors and sporadic outbreaks, and changing diagnostic market conditions.
Key Distributors
Our Diagnostics segment’s revenues from sales through two U.S. distributors were approximately 26% and 29% of the Diagnostics segment’s total revenues for fiscal 2019 and fiscal 2018, respectively, or approximately 18% and 20%, respectively, of each fiscal year’s consolidated revenues. These parties distribute our products and other laboratory products to
end-user
customers. The loss of either of these distributors could negatively impact our revenues and results of operations unless suitable alternatives were timely found or lost sales to one distributor were absorbed by another distributor. Finding a suitable alternative on satisfactory terms may pose challenges in our industry’s competitive environment. As an alternative, we could expand our efforts to distribute and market our products directly. This alternative, however, would require substantial investment in additional sales, marketing and logistics resources, including hiring additional sales and customer service personnel, which would significantly increase our future selling, general and administrative expenses.
 
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In addition, buying patterns of these two distributors may fluctuate from quarter to quarter, potentially leading to uneven concentration levels on a quarterly basis.
Seasonal Factors and Sporadic Outbreaks
Our principal business is the sale of a broad range of diagnostic test kits for common gastrointestinal and respiratory infectious diseases, and elevated blood lead levels. Certain infectious diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as foodborne illnesses or pandemics such as an influenza outbreak. While we believe that the breadth of our diagnostic product lines reduces the risk that infections subject to seasonality and sporadic outbreaks will cause significant variability in diagnostic revenues, we can make no assurance that revenues will not be negatively impacted period over period by such factors.
Changing Diagnostic Market Conditions
Changes in the U.S. health care delivery system have resulted in consolidation among reference laboratories, hospital laboratories being operated by large reference laboratories, and the formation of multi-hospital alliances, reducing the number of institutional customers for diagnostic test products. Consolidation in the U.S. health care industry has also led to the creation of group purchasing organizations (“GPOs”) and IDNs that aggregate buying power for hospital groups and put pressure on our selling prices. Due to such consolidation, we may not be able to enter into and/or sustain contractual or other marketing or distribution arrangements on a satisfactory commercial basis with institutional customers, GPOs and/or IDNs, which could adversely affect our results of operations.
We could be adversely affected by health care reform legislation.
Third-party payers for medical products and services, including state, federal and foreign governments, are increasingly concerned about escalating health care costs and can indirectly affect the pricing or the relative attractiveness of our products by regulating the maximum amount of reimbursement they will provide for diagnostic testing services. Following years of increasing pressure, during 2010 the U.S. government enacted comprehensive health care reform with the enactment of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, which made changes that significantly impact the pharmaceutical and medical device industries. The Protecting Access to Medicare Act of 2014 requires applicable laboratories to report all private payor reimbursement rates and the volumes for each test they perform. The statute requires that Medicare establish reimbursement rates based on the weighted median of private insurance reimbursement rates effective January 1, 2017. The new Medicare rates would be subject to a maximum reduction of 10% a year for the initial three year period and a maximum of 15% a year for the subsequent three year period. There is no limit on the amount of potential rate increases. As a result, some of our customers in the United States may experience lower Medicare reimbursement rates for our products, which may adversely affect our business, financial condition and results of operations. We are seeing some effect on the reimbursement rates for our products. If reimbursement amounts for diagnostic testing services decrease further in the future, such decreases may reduce the amount that will be reimbursed to hospitals or physicians for such services and consequently, could place constraints on the levels of overall pricing, which could have a material effect on our revenues and/or results of operations.
The Patient Protection and Affordable Care Act includes a medical device excise tax for which a moratorium has been in place. However, this moratorium is scheduled to expire December 31, 2019. Our Diagnostics segment’s products are generally subject to this tax. We are unable to predict if Congress will extend the current moratorium or altogether repeal the tax. Without Congressional legislative action, the medical device excise tax will return effective January 1, 2020.
Additional state and federal health care reform measures may be adopted in the future, any of which could have a material adverse effect on our ability to successfully commercialize our products and on our industry in general. For example, the United States government has in the past considered, is currently considering, and may in the future consider, health care policies and proposals intended to curb rising health care costs, including those that could significantly affect both private and public reimbursement for health care services. Further, state and local governments, as well as a number of foreign governments, are also considering or have adopted similar types of policies. Future significant changes in the health care system in the United States or elsewhere, and current uncertainty about whether and how changes may be implemented, could have a negative impact on the demand for our products. We are unable to predict whether health care policies, including policies stemming from legislation or regulations affecting our business, may be proposed or enacted in the future, what effect such policies would have on our business, or the effect that ongoing uncertainty about these matters will have on the purchasing decisions of our customers.
 
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Efforts to reduce the U.S. federal deficit could adversely affect our results of operations.
As part of the Budget Control Act passed in August 2011 to extend the federal debt limit and reduce government spending, $1.2 trillion in automatic spending cuts (known as sequestration) were implemented in 2013. The sequestration requires a 2% cut in Medicare payments for all services, including our diagnostic tests, which, due to subsequent legislative amendments to the statute, will remain in effect through 2024 unless Congressional action is otherwise taken. Government research funding has also been reduced as a result of the sequestration. On January 2, 2013, the American Taxpayer Relief Act of 2012 also was signed into law, which, among other things, further reduces Medicare payments to providers such as hospitals, imaging centers and cancer treatment centers, and increases the statute of limitations period for the government to recover overpayments to providers from three to five years.
Such reductions in government health care spending or research funding could result in reduced demand for our products or additional pricing pressure. Further, there is ongoing uncertainty regarding the federal budget and federal spending levels, including the possible impacts of a failure to increase the “debt ceiling.” Any U.S. government default on its debt could have broad macroeconomic effects that could, among other things, raise our borrowing costs. Any future shutdown of the federal government or failure to enact annual appropriations could also have a material adverse impact on our business.
Revenues for our Life Science segment may be impacted by customer concentrations and buying patterns.
Our Life Science segment’s revenues from two diagnostic manufacturing customers were 24% and 18% of the Life Science segment’s total revenues for fiscal 2019 and fiscal 2018, respectively; and 8% and 5% of our consolidated revenues for fiscal 2019 and fiscal 2018, respectively. Our Life Science segment has five other significant customers, which together comprised 11% of the segment’s total revenues for each of fiscal 2019 and fiscal 2018. Any significant alteration of buying patterns from these customers could adversely affect our period over period revenues and results of operations.
Intense competition could adversely affect our profitability.
The markets for our products and services are characterized by substantial competition and rapid change. Hundreds of companies around the world supply diagnostic tests and immunoassay and molecular reagents. These companies range from multinational health care entities, for which diagnostics is one line of business, to small
start-up
companies. Many of our competitors have significantly greater financial, technical, manufacturing and marketing resources than we do. We cannot provide assurance that our products and services will be able to compete successfully with the products and services of our competitors.
We expect to face increased competition resulting from expiration of our H. pylori patents.
The patents for our
H. pylori
products, owned by us, expired in May 2016 in the U.S. and in May 2017 in countries outside the U.S. We expect competition with respect to our
H. pylori
products, high margin products which represent approximately 16% of our total revenues, to continue to increase, as we currently are one of only four companies that market
FDA-cleared
tests to detect
H. pylori
antigen in stool samples in the U.S. market, one of which is DiaSorin Inc., with whom we have entered a strategic collaboration agreement to sell
H. pylori
tests. At present, we are also aware of at least one other company that has commenced clinical trials of
H. pylori
products in the U.S. Such competition may have an adverse impact on our selling prices for these products, or our ability to retain business at prices acceptable to us, and consequently, adversely affect our future results of operations and liquidity, including revenues and gross profit. We have executed on a number of measures to address competitive pressures in coming off patent. We have executed multi-year supply agreements with our two largest reference laboratory customers for
H. pylori
tests to secure volume, albeit at lower selling prices. In the first half of fiscal 2020, we expect to launch Curian HpSA, our first assay on the new Curian platform for which the 510(k) was submitted to the FDA in September 2019. We expect that this product will help us protect existing rapid assay accounts using the advantages of the Curian analyzer. However, we are unable to provide assurances that we will be successful with any strategy or that any strategy will prevent an adverse effect on our future results of operations and liquidity, including revenues and gross profit.
 
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We depend on international revenues, and our financial results may be adversely impacted by foreign currency, regulatory or other developments affecting international markets.
We sell products and services into approximately 70 countries. For fiscal 2019, approximately 20% of our consolidated revenues were transacted in currencies other than the U.S. dollar. We are subject to the risks associated with fluctuations in the exchange rates for the Australian dollar, British pound, Canadian dollar, Chinese yuan and Euro. We are also subject to other risks associated with international operations, including longer customer payment cycles, trade wars, increased tariffs, requirements for export licenses, instability of foreign governments, and governmental requirements with respect to the importation and distribution of medical devices and immunodiagnostic and molecular biology reagents, all of which may vary by country.
New tariffs and other trade measures could adversely affect our financial results.
The current U.S. administration has expressed strong concerns about imports from countries that it perceives as engaging in unfair trade practices, and it is possible the administration could impose import duties or other restrictions on products, components or raw materials sourced from those countries, which may include countries from which we import components or raw materials. We are currently not aware of any new import duties imposed on our products. Any such new import duties or restrictions could have a material adverse effect on our business, results of operations or financial condition. Moreover, these new tariffs, or other changes in U.S. trade policy, could trigger retaliatory actions by affected countries. Certain foreign governments have instituted or are considering imposing trade sanctions on certain U.S. goods.
Other foreign governments are considering the imposition of sanctions that will deny U.S. companies access to critical raw materials. A “trade war” of this nature or other governmental actions related to tariffs or international trade agreements or policies has the potential to adversely impact demand for our products, our costs, customers, manufacturers, suppliers and/or the economic environments in which we operate and, thus may adversely impact our businesses. In addition, there may be changes to existing trade agreements, like the North American Free Trade Agreement (“NAFTA”) and its anticipated successor agreement, the U.S.-Mexico-Canada Agreement (“USMCA”), which is still subject to approval by the United States, Mexico and Canada, greater restrictions on free trade generally, and significant increases in tariffs on goods imported into the United States, particularly tariffs on products manufactured in Mexico, among other possible changes. It remains unclear what the U.S. administration or foreign governments will or will not do with respect to tariffs, NAFTA, USMCA or other international trade agreements and policies. Any changes to NAFTA (or subsequent trade agreements) could impact our operations in countries where we manufacture or sell products or source components, or materials, which could adversely affect our operating results and our business.
Risks Affecting our Manufacturing Operations
We are subject to comprehensive regulation, and our ability to earn profits may be restricted by these regulations.
Medical device diagnostics is a highly regulated industry. We cannot provide assurance that we will be able to obtain necessary governmental clearances or approvals, or timely clearances or approvals, to market future products in the United States and other countries. Costs and difficulties in complying with laws and regulations administered by the U.S. Food and Drug Administration, the U.S. Department of Agriculture, the U.S. Department of Commerce, the U.S. Drug Enforcement Agency, the Centers for Disease Control, or other regulators can result in unanticipated expenses and delays, and interruptions to the sale of new and existing products.
Regulatory approval can be a lengthy, expensive and uncertain process, making the timing and costs of approvals difficult to predict. Failure to comply with these regulations can result in delays in obtaining authorization to sell products, seizure or recall of products, suspension or revocation of authority to manufacture or sell products, and other civil or criminal sanctions.
 
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If we or our third-party vendors fail to comply with FDA regulations relating to the manufacturing of our products or any component part, we may be subject to fines, injunctions and penalties, and our ability to commercially distribute and sell our products may be negatively impacted.
Our diagnostics manufacturing facilities, and the manufacturing facilities of any of our third-party diagnostic component manufacturers or critical suppliers, are required to comply with the FDA’s Quality System Regulation (“QSR”), which sets forth minimum standards for the procedures, execution and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage, and shipping of the products we sell, and related regulations, including Medical Device Reporting (“MDR”) regulations regarding reporting of certain malfunctions and adverse events potentially associated with our products. The FDA may evaluate our compliance with the QSR, MDR and other regulations, among other ways, through periodic announced or unannounced inspections which could disrupt our operations and interrupt our manufacturing. If in conducting an inspection of our manufacturing facilities, or the manufacturing facilities of any of our third-party component manufacturers or critical suppliers, an FDA investigator observes conditions or practices believed to violate the QSR, the investigator may document their observations on a Form FDA 483 that is issued at the conclusion of the inspection. A manufacturer that receives an FDA 483 may respond in writing and explain any corrective actions taken in response to the inspectional observations. The FDA will typically review the facility’s written response and may
re-inspect
to determine the facility’s compliance with the QSR and other applicable regulatory requirements. Failure to take adequate and timely corrective actions to remedy objectionable conditions listed on an FDA 483 could result in the FDA taking administrative or enforcement actions. Among these may be the FDA’s issuance of a Warning Letter to a manufacturer, which informs it that the FDA considers the observed violations to be of “regulatory significance” that, if not corrected, could result in further enforcement action.
FDA enforcement actions, which include seizure, injunction, criminal prosecution, and civil penalties, could result in total or partial suspension of a facility’s production and/or distribution, product recalls, fines, suspension of the FDA’s review of product applications, and/or the FDA’s issuance of adverse publicity. Thus, an adverse inspection could force a shutdown of our manufacturing operations or a recall of our products. Adverse inspections could also delay FDA approval of our products and could have an adverse effect on our production, sales and profitability.
We and any of our third-party vendors may also encounter other problems during manufacturing including failure to follow specific protocols and procedures, equipment malfunction, and environmental factors, any of which could delay or impede our ability to meet demand. The manufacture of our product also subjects us to risks that could harm our business, including problems relating to our facilities and errors in manufacturing components that could negatively affect the efficacy or safety of our products or cause delays in shipment of our products. Any interruption or delay in the manufacture of the product, or any of its components could impair our ability to meet the demand of our customers and cause them to cancel orders or switch to competitive products, which could, therefore, have a material adverse effect on our business, financial condition and results of operations.
On June 29, 2017, the FDA, in connection with its Safety Notification related to Magellan (whom we acquired in March 2016) and its lead testing systems for venous blood samples, issued its Form 483, Inspectional Observations, to Magellan. This was followed by the FDA issuing a Warning Letter related to the matter on October 23, 2017. During October 2019, the FDA conducted a
follow-up
inspection of Magellan’s manufacturing facility. In connection with this
follow-up
inspection, the FDA issued five Form 483 observations. In November 2019, we submitted to the FDA our written responses to the five Form 483 observations and have implemented a remediation plan that we are actively working. While we remain committed to strengthening Magellan’s quality system and ensuring that all aspects of the system are in full compliance, we can provide no assurance that our remediation efforts will be successful to a degree acceptable by the FDA.
Additionally, as set forth in Item 3. “Legal Proceedings”, on April 17, 2018, Magellan received a subpoena from the United States Department of Justice (“DOJ”) regarding its LeadCare product line. The subpoena outlines documents to be produced, and we are cooperating with the DOJ in this matter. We maintain rigorous policies and procedures to promote compliance with applicable regulatory agencies and requirements, and are working with the DOJ to promptly respond to the subpoena, including responding to additional information requests. We have executed tolling agreements to extend the statute of limitations. We cannot predict when the investigation will be resolved, the outcome of the investigation, or its potential impact on Meridian.
See a more detailed discussion of these matters within MD&A on page 25.
 
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Significant interruptions in production at our principal manufacturing facilities and/or third-party manufacturing facilities would adversely affect our business and operating results.
Products and services manufactured at facilities we own or lease comprised a majority of our revenues. Our global supply of these products and services is dependent on the uninterrupted and efficient operation of these facilities. In addition, we currently rely on a small number of third-party manufacturers to produce certain of our diagnostic products and product components. The operations of our facilities or these third-party manufacturing facilities could be adversely affected by power failures, or natural or other disasters such as earthquakes, floods, tornadoes or terrorist threats. Although we carry insurance to protect against certain business interruptions at our facilities, there can be no assurance that such coverage will be adequate or that such coverage will continue to remain available on acceptable terms, if at all. Any significant interruption in the Company’s or a third-party supplier’s manufacturing capabilities could materially and adversely affect our operating results.
We depend on sole-source suppliers for certain critical raw materials, components and finished products. A supply interruption could adversely affect our business.
Raw Materials and Components
Our diagnostic products are made from a wide variety of raw materials that are biological or chemical in nature, and that generally are available from multiple sources of supply. We sole-source certain raw materials and components, which makes it time consuming and costly to switch raw materials and components in
FDA-cleared
products. If certain suppliers fail to supply required raw materials or components, we will need to secure other sources which may require us to conduct additional development and testing and obtain regulatory approval. These activities require significant time and resources, and there is no assurance that new sources will be secured or regulatory approvals, if necessary, will be obtained.
We utilize third-party manufacturers for certain of our instrumentation. One third party manufactures our proprietary Alethia Incubator/Reader (instrument), a component of our Alethia molecular system, and upon its commercialization during the first half of fiscal 2020, an additional third party will manufacture our Curian instrument. These instruments are manufactured exclusively for Meridian according to our specifications. While other manufacturers for these types of instruments are available, we source each instrument solely from one manufacturer to limit the costs involved in clearing the system for marketing in the United States. If these third-party manufacturers fail to supply us with instruments, we will need to secure another manufacturer, and it may take as long as 12 months to transfer instrument manufacturing. An interruption in the manufacturing of these instruments could have a material adverse effect on our operating results.
Additionally, one third party manufactures a certain reagent for use with our Alethia assays. While alternative suppliers exist, we elect to utilize this third party exclusively in order to maintain consistency in our materials, which is critical in complying with FDA regulatory requirements. An interruption in the manufacturing of these reagents could have a material adverse effect on our operating results.
Finished Products
We outsource the manufacturing for certain finished diagnostic products to third parties. A disruption in the supply of these finished products could have a material adverse effect on our business until we find another supplier or bring manufacturing
in-house.
Four products manufactured exclusively for us by two separate and independent companies accounted for 11% of consolidated revenues in each of fiscal 2019, 2018 and 2017. Meridian owns all rights and title to the FDA 510(k) clearances for these products.
Activities undertaken by Meridian to reduce the risk of these sole-supplier arrangements include maintaining adequate inventory levels, supplier qualification procedures, supplier audits, site visits, and frequent communication. Additionally, we have identified potential alternate suppliers.
 
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Our ability to meet future customer demand for selected products is dependent upon our ability to successfully manage our manufacturing capacity.
To manage our anticipated future growth effectively, it may become necessary for us to enhance our manufacturing and supply chain capabilities, infrastructure and operations, information technology infrastructure, and financial and accounting systems and controls. Organizational growth and
scale-up
of operations could strain our existing managerial, operational, financial, and other resources. If our management is unable to effectively prepare for our expected future growth, our expenses may increase more than anticipated, our revenue could grow more slowly than expected, and we may not be able to achieve our commercialization, profitability, or product development goals. Our failure to effectively implement the necessary processes and procedures and otherwise prepare for our anticipated growth could have a material adverse effect on our future financial results and condition.
Risks Related to Intellectual Property and Product Liability
We may be unable to protect or obtain proprietary rights that we utilize or intend to utilize.
In developing and manufacturing our products, we employ a variety of proprietary and patented technologies. In addition, we have licensed, and expect to continue to license, various complementary technologies and methods from academic institutions and public and private companies. We cannot provide assurance that the technologies that we own or license provide protection from competitive threats or from challenges to our intellectual property. In addition, we cannot provide assurances that we will be successful in obtaining and retaining licenses or proprietary or patented technologies in the future.
See Item 3. “Legal Proceedings” for a discussion of the status of certain litigation related to our intellectual property.
Product infringement claims by other companies could result in costly disputes and could limit our ability to sell our products.
Litigation over intellectual property rights is prevalent in the diagnostic industry. As the market for diagnostics continues to grow and the number of participants in the market increases, we may increasingly be subject to patent infringement claims. It is possible that a third party may claim infringement against us. If found to infringe, we may attempt to obtain a license to such intellectual property; however, we may be unable to do so on favorable terms, or at all. Additionally, if our products are found to infringe on third-party intellectual property, we may be required to pay damages for past infringement and lose the ability to sell certain products, causing our revenues to decrease. Any substantial loss resulting from such a claim could have a material adverse effect on our profitability, and the damage to our reputation in the industry could have a material adverse effect on our business.
If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may have to limit or cease sales of our products.
The testing, manufacturing and marketing of medical diagnostic products involves an inherent risk of product liability claims. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or cease sales of our products. We currently carry product liability insurance at a level we believe is commercially reasonable, although there is no assurance that it will be adequate to cover claims that may arise. In certain customer contracts, we indemnify third parties for certain product liability claims related to our products. These indemnification obligations may cause us to pay significant sums of money for claims that are covered by these indemnifications. In addition, a defect in the design or manufacture of our products could have a material adverse effect on our reputation in the industry and subject us to claims of liability for injury and otherwise. Any substantial underinsured loss resulting from such a claim could have a material adverse effect on our profitability, and the damage to our reputation in the industry could have a material adverse effect on our business.
 
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Other Risks Affecting Our Business
We incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies in the United States, and failure to comply with these laws could harm our business and the price of our common stock.
As a public company listed in the United States, we incur significant legal, accounting and other expenses. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC, the Public Company Accounting Oversight Board (PCAOB) and the NASDAQ Global Select Market, may increase our legal and financial compliance costs and/or make some activities more time consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If we fail to comply with new laws, regulations and standards, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
Our business could be negatively affected if we are unable to attract, hire and retain key personnel.
Our future success depends on our continued ability to attract, hire and retain highly qualified personnel, including our executive officers and scientific, technical, sales and marketing employees, and their ability to manage growth successfully. If such key employees were to leave and we were unable to obtain adequate replacements, our operating results could be adversely affected.
Our bank credit agreement imposes restrictions with respect to our operations.
Our bank credit agreement contains a number of financial covenants that require us to meet certain financial ratios and tests. If we fail to comply with the obligations in the credit agreement, we would be in default under the credit agreement. If an event of default is not cured or waived, it could result in acceleration of any indebtedness under our credit agreement, which could have a material adverse effect on our business. At September 30, 2019, we had $75,824 outstanding on a $125,000 bank revolving credit facility.
We face risks related to global economic conditions.
We currently generate significant operating cash flows, which combined with access to the credit markets, provides us with discretionary funding capacity for research and development and other strategic activities. However, as an enterprise with global operations and markets, our operations and financial performance are in part dependent upon global economic conditions, and we could be negatively impacted by a global, regional or national economic crisis, including sovereign risk in the event of deterioration in the credit worthiness of or a default by local governments. We are particularly susceptible to the economic conditions in countries where government-sponsored health care systems are the primary payers for health care, including those countries within the European Union that are reducing their public expenditures in an effort to achieve cost savings. The uncertainty in global economic conditions poses a risk to the overall economy that could impact demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers and creditors, including financial institutions. As such, if global economic conditions deteriorate significantly, our business could be negatively impacted, including such areas as reduced demand for our products from a slow-down in the general economy, supplier or customer disruptions resulting from tighter credit markets, and/or temporary interruptions in our ability to conduct
day-to-day
transactions through our financial intermediaries involving the payment to or collection of funds from our customers, vendors and suppliers. While
to-date
such factors have not had a significant negative impact on our results or operations, we continue to monitor and plan for the potential impact of these global economic factors.
In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. The U.K. is currently negotiating the terms of its exit from the European Union (“Brexit”). In November 2018, the U.K. and the European Union agreed upon a draft Withdrawal Agreement that sets out the terms of the U.K.’s departure, including commitments on citizen rights after Brexit, a financial settlement from the U.K., and a transition period to allow time for a future trade deal to be agreed. The U.K. Parliament has not approved the Withdrawal Agreement. As such, the date and the terms of the U.K.’s withdrawal from the European Union remain highly uncertain.
 
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Any impact of Brexit depends on the terms of the U.K.’s withdrawal from the European Union, if it ultimately occurs. The ongoing uncertainty on the status of the final Withdrawal Agreement could lead to economic stagnation until an ultimate resolution with respect to Brexit occurs. If the U.K. leaves the European Union with no agreement, it will likely have an adverse impact on labor and trade in addition to creating further short-term uncertainty and currency volatility. In the absence of a future trade deal, the U.K.’s trade with the European Union and the rest of the world would be subject to tariffs and duties set by the World Trade Organization. Additionally, the movement of goods and personnel between the U.K. and the remaining member states of the European Union will be subject to additional inspections and documentation checks, leading to possible delays at ports of entry and departure. Even if an agreement setting forth the terms of the U.K.’s withdrawal from the European Union is approved, the withdrawal could result in significant changes to the trading relationship between the U.K. and the European Union. These changes to the trading relationship between the U.K and the European Union would likely result in increased cost of goods imported into and exported from the U.K., and may decrease the profitability of our operations. Additional currency volatility could drive a weaker British pound, which could increase the cost of goods imported into the U.K. and may decrease the profitability of our operations. A weaker British pound versus the U.S. dollar may also cause local currency results of our operations to be translated into fewer U.S. dollars during a reporting period. With a range of outcomes still possible, the impact from Brexit remains uncertain and will depend, in part, on the final outcome of tariff, trade, regulatory and other negotiations.
One or more cybersecurity incidents may adversely impact our financial condition, results of operations and reputation.
Our operations involve the use of multiple systems that process, store and transmit sensitive information about our customers, suppliers, employees, financial position, operating results and strategies. We face global cybersecurity risks and threats on a continual and ongoing basis, which include, but are not limited to, attempts to access systems and information, computer viruses, or
denial-of-service
attacks. These risks and threats range from uncoordinated individual attempts to sophisticated and targeted measures. While we are not aware of any material cyber-attacks or breaches of our systems to date, we have and continue to implement measures to safeguard our systems and information and mitigate potential risks, including employee training around phishing, malware and other cyber risks, but there is no assurance that such actions will be sufficient to prevent cyber-attacks or security breaches that manipulate or improperly use our systems, compromise sensitive information, destroy or corrupt data, or otherwise disrupt our operations. The occurrence of such events, including breaches of our security measures or those of our third-party service providers, could negatively impact our reputation and our competitive position and could result in litigation with third parties, regulatory action, loss of business due to disruption of operations and/or reputational damage, potential liability and increased remediation and protection costs, any of which could have a material adverse effect on our financial condition and results of operations. Additionally, as cybersecurity risks become more sophisticated, we may need to increase our investments in security measures which could have a material adverse effect on our financial condition and results of operations.
Natural disasters, war and other events could adversely affect our future revenues and operating income.
Natural disasters (including pandemics), war, terrorism, labor disruptions and international conflicts, and actions taken by the United States and other governments or by our customers or suppliers in response to such events, could cause significant economic disruption and political and social instability in the United States and in areas outside of the United States in which we operate. These events could result in decreased demand for our products, adversely affect our manufacturing and distribution capabilities, or increase the costs for, or cause interruptions in, the supply of materials from our suppliers.
Risks Related to Our Common Stock
Material weaknesses in our internal control over financial reporting could be identified, which if not properly corrected, could materially adversely affect our operations and result in material misstatements in our financial statements.
During fiscal 2017, the Company identified a material weakness in internal control over financial reporting, which has been remediated. However, the Company can make no assurances that a material weakness will not be identified in the future or that, if identified, it will be properly corrected. In the event we are unable to remediate a material weakness identified in the future, we may be unable to provide holders of our securities with required financial information in a timely and reliable manner, and we may incorrectly report financial information. Either of these events could have a material adverse effect on our operations, investor, supplier and customer confidence in our reported financial information, and/or the trading price of our common stock.
 
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The authority of our board to issue preferred stock may discourage takeover bids.
Our board of directors has the authority to issue up to 1,000 shares of undesignated preferred stock and to determine the rights, preferences, privileges and restrictions, including voting rights, of such shares without any future vote or action by the shareholders. The issuance of preferred stock under certain circumstances could have the effect of delaying or preventing a change in control of our company. Ohio corporation law contains provisions that may discourage takeover bids for our company that have not been negotiated with the board of directors. Such provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. In addition, sales of substantial amounts of shares in the public market could adversely affect the market price of our common stock and our ability to raise additional capital at a price favorable to us.
The market price of our common stock may be volatile and fluctuate significantly, which could result in substantial losses for stockholders and subject us to litigation.
The market price of our common stock may be subject to significant fluctuations due to numerous factors, including but not limited to the risks described in this “Risk Factors” section. In addition, the stock market in general, the NASDAQ Global Market and the market for diagnostics companies in particular may experience a loss of investor confidence. A loss of investor confidence may result in extreme price and volume fluctuations in our common stock that are unrelated or disproportionate to the operating performance of our business, financial condition or results of operations. These broad market and industry factors may materially harm the market price of our common stock and expose us to securities class-action litigation. Class-action litigation, even if unsuccessful, could be costly to defend and divert management’s attention and resources, which could further materially harm our financial condition and results of operations.
Our business could be negatively impacted as a result of shareholder activism, an unsolicited takeover proposal or a proxy contest.
In recent years, proxy contests and other forms of stockholder activism have been directed against numerous public companies. If a proxy contest or an unsolicited takeover proposal is made with respect to us, we could incur significant costs in defending our company, which would have an adverse effect on our financial results. Shareholder activists may also seek to involve themselves in the governance, strategic direction and operations of our company. Such proposals may disrupt our business and divert the attention of our management and employees, and any perceived uncertainties as to our future direction resulting from such a situation could result in the loss of potential business opportunities, be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel and business partners, all of which could adversely affect our business. In addition, actions of activist stockholders may cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
There can be no assurance that we will resume the payment of dividends.
The declaration, amount and timing of the Company’s dividends are subject to capital availability and determinations by our board of directors that cash dividends are in the best interest of our stockholders and are in compliance with all respective laws, including the applicable provisions of Ohio law, and our agreements applicable to the declaration and payment of cash dividends. We suspended the payment of quarterly cash dividends effective during the fiscal 2019 second quarter. Any action to resume the payment of dividends will depend upon, among other factors, our cash balances and potential future capital requirements for strategic transactions, including acquisitions, debt service requirements, results of operations, financial condition and other factors beyond our control that our board of directors may deem relevant. Ongoing suspension of our dividend payments could have a negative effect on our stock price.
Changes in the method of determining London Interbank Offered Rate (“LIBOR”), or the replacement of LIBOR with an alternative reference rate, may adversely affect interest expense related to outstanding debt.
Amounts drawn under our credit facility may bear interest rates in relation to LIBOR, depending on our selection of repayment options. On July 27, 2017, the Financial Conduct Authority (“FCA”) in the U.K. announced that it would phase out LIBOR as a benchmark by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve is considering replacing U.S. dollar LIBOR with a newly created index called the Broad Treasury Financing Rate, calculated with a broad set of short-term repurchase agreements backed by treasury securities. If LIBOR ceases to exist, we may need to renegotiate the credit facility and may not be able to do so with terms that are favorable to us. The overall financial market may be disrupted as a result of the
phase-out
or replacement of LIBOR. Disruption in the financial market or the inability to renegotiate the credit facility with favorable terms could have a material adverse effect on our business, financial position, and operating results.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
 
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ITEM 2.
PROPERTIES
Our corporate offices, infectious disease Diagnostics manufacturing facility, and infectious disease Diagnostics research and development facility are located in four buildings totaling approximately 117,000 square feet on approximately seven acres of land in the Village of Newtown, a suburb of Cincinnati, Ohio. These properties are owned by us. Our blood-chemistry manufacturing and research and development operations are located in an approximately 30,000 square foot leased facility in Billerica, Massachusetts, and our
PCR-based
molecular manufacturing and research and development operations are located in an approximately 24,000 square foot leased facility in Quebec City, Canada. We also operate a Diagnostics sales and distribution center near Milan, Italy in an approximately 18,000 square foot building. This facility is owned by our wholly-owned Italian subsidiary, Meridian Bioscience Europe s.r.l. We also rent office space in Paris, France and
Braine-l’Alleud,
Belgium for sales and administrative functions.
Our Life Science operations are conducted in several facilities in Memphis, Tennessee; Boca Raton, Florida; London, England; Luckenwalde, Germany; Sydney, Australia; and Beijing, China. Our facility in Memphis, Tennessee consists of two buildings totaling approximately 44,000 square feet and is owned by us. Our leased facility in Boca Raton, Florida contains approximately 7,500 square feet of manufacturing space. Following are details of our other Life Science facilities, all of which are leased: London – approximately 19,500 square feet of sales, warehouse, distribution, research and development, manufacturing and administrative office space; Luckenwalde – approximately 10,500 square feet of sales, warehouse and manufacturing space; Sydney – approximately 5,000 square feet of sales and warehouse space; Beijing – less than 1,000 square feet of sales and business development space.
ITEM 3.
LEGAL PROCEEDINGS
We are a party to various litigation matters that we believe are in the normal course of business. Aside from the matters discussed below, the ultimate resolution of these matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows, and no material provision has been made in the accompanying Consolidated Financial Statements for these matters.
On November 15, 2017, Barbara Forman filed a class action complaint in the United States District Court for the Southern District of Ohio (the Court) naming Meridian, its former Chief Executive Officer and former Chief Financial Officer (in their capacities as such) as defendants. An amended complaint was filed on April 16, 2018 and the Company believes the essential elements of the amended complaint are the same. On July 9, 2019, a settlement was reached with the plaintiff that provides for a $2.1 million payment by the Company. On October 9, 2019, the Court granted a motion for preliminary approval of the settlement, and on November 7, 2019, the settlement amount was paid from the Company’s Directors and Officers insurance policy into a plaintiff escrow account. The Court has scheduled a final approval hearing for March 2020. Because the settlement was a covered claim under our Directors and Officers insurance policy, no provision for litigation losses has been included within the accompanying Consolidated Statements of Operations for fiscal 2019, 2018 or 2017.
On December 6, 2017, Michael Edelson filed a derivative complaint in the United States District Court for the Southern District of Ohio naming Meridian, its former Chief Executive Officer, former Chief Financial Officer and certain members of Meridian’s Board of Directors and Audit Committee (in their capacities as such) as defendants. The complaint alleges that Meridian made false and misleading representations concerning certain of Magellan’s lead test systems at or around the time of Meridian’s acquisition of Magellan and subsequent thereto, and the complaint alleges that certain members of the Board of Directors and Audit Committee breached their fiduciary duties in their oversight of the Company’s public disclosures and corporate governance matters. The complaint sought compensatory damages, equitable relief relating to corporate governance matters and attorneys’ fees. On October 9, 2019, Court granted plaintiff’s motion for voluntary dismissal. Accordingly, no provision for litigation losses has been included within the accompanying Consolidated Statements of Operations for fiscal 2019, 2018 or 2017.
 
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Approximately $30 and $600 of expense for attorneys’ fees related to the above two class action matters is included within the accompanying Consolidated Statements of Operations for fiscal 2019 and 2018, respectively. Amounts expensed in fiscal 2018 included a $500 deductible under our Directors and Officers insurance policy.
On April 17, 2018, Magellan received a subpoena from the United States Department of Justice (“DOJ”) regarding its LeadCare product line. The subpoena outlines documents to be produced, and the Company is cooperating with the DOJ in this matter. The Company maintains rigorous policies and procedures to promote compliance with applicable regulatory agencies and requirements, and is working with the DOJ to promptly respond to the subpoena, including responding to additional information requests. The Company has executed tolling agreements to extend the statute of limitations. The Company cannot predict when the investigation will be resolved, the outcome of the investigation, or its potential impact on the Company. Approximately $1,585 and $775 of expense for attorneys’ fees related to this matter is included within the accompanying Consolidated Statements of Operations for fiscal 2019 and 2018, respectively.
On October 9, 2018, the Company and DiaSorin Inc. entered into a strategic collaboration to sell DiaSorin’s
Helicobacter pylori
stool antigen test to detect
H. pylori
for use on its automated LIAISON platform under the Meridian brand name worldwide. The new collaboration resulted in the termination of all pending legal disputes between the two parties and will expand the previous agreement between DiaSorin and Meridian, which focused on the sale, by DiaSorin, of
co-developed
products in major countries in continental Europe. Approximately $50, $2,965 and $630 of expense for attorneys’ fees related to this matter is included within the accompanying Consolidated Statements of Operations for fiscal 2019, 2018 and 2017, respectively.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Refer to “Note About Forward-Looking Statements” following the Index in front of this Form
10-K
and Item 1A “Risk Factors” on pages 11 through 20 of this Annual Report.
Market Information
Our common stock trades on the NASDAQ Global Select Market under the symbol VIVO.
Holders of our Common Stock
As of September 30, 2019, there were approximately 600 holders of record and approximately 10,550 beneficial owners of our common shares.
Dividends
“Quarterly Financial Data (Unaudited)” relating to our dividends in Note 11 of the Consolidated Financial Statements are incorporated herein by reference.
Effective during the second quarter of fiscal 2019, the Company suspended the payment of its quarterly cash dividend, which had previously been established at an indicated annual cash dividend rate of $0.50 per share for each of fiscal 2019, 2018 and 2017. The dividend was suspended as part of the Company’s regular evaluation of its capital allocation, with the action taken in order to deploy cash into new product development activities for the Revogene molecular diagnostic platform, as well as the Curian and PediaStat platforms, among other investments, and to preserve capital resources and liquidity for general corporate purposes. The declaration and amount of
 
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dividends will be determined by the board of directors in its discretion based upon its evaluation of earnings, cash flow requirements and future business developments and opportunities, including acquisitions. We paid dividends of $0.25, $0.50 and $0.575 per share in fiscal 2019, 2018 and 2017, respectively.
Stock Total Return Performance
The graph below matches the cumulative
5-Year
total return of holders of Meridian Bioscience, Inc.’s common stock with the cumulative total returns of the NASDAQ Composite index and a customized peer group of eight companies that includes:
Bio-Rad
Laboratories, Inc., bioMerieux S.A., GenMark Diagnostics, Inc., Luminex Corporation, Myriad Genetics, Inc., OraSure Technologies, Inc., Quidel Corporation and Trinity Biotech Plc. We selected the companies in the customized peer group based on various considerations, including, without limitation, industry classifications, the extent to which certain companies may engage in businesses in which we engage, and the extent to which we and/or our investors consider certain companies to be direct or indirect competitors. The graph assumes that the value of the investment in our common stock, in each index, and in the peer group (including reinvestment of dividends) was $100 on September 30, 2014 and tracks it through September 30, 2019.
 
 
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ITEM 6.
SELECTED FINANCIAL DATA
                                         
Income Statement Information (Amounts in thousands, except per share data)
 
   
For the Year Ended September 30,
 
2019
 
 
2018
 
 
2017
 
 
2016
 
 
2015
 
Net revenues
  $
 201,014
    $
 213,571
    $
 200,771
    $
 196,082
    $
 194,830
 
Gross profit
   
118,325
     
130,697
     
124,292
     
127,212
     
121,882
 
Operating income
   
32,699
     
31,584
     
37,382
     
51,378
     
56,060
 
Net earnings
   
24,382
     
23,849
     
21,557
     
32,229
     
35,540
 
Basic earnings per share
  $
0.57
    $
0.56
    $
0.51
    $
0.77
    $
0.85
 
Diluted earnings per share
  $
0.57
    $
0.56
    $
0.51
    $
0.76
    $
0.85
 
Cash dividends declared per share
  $
0.250
    $
0.500
    $
0.575
    $
0.800
    $
0.800
 
Book value per share
  $
4.47
    $
4.14
    $
4.02
    $
3.95
    $
3.96
 
   
Balance Sheet Information
 
   
As of September 30,
 
2019
 
 
2018
 
 
2017
 
 
2016
 
 
2015
 
Current assets
  $
 144,761
    $
 139,053
    $
 133,875
    $
 126,791
    $
 119,422
 
Current liabilities
   
20,914
     
24,173
     
22,887
     
22,571
     
15,251
 
Total assets
   
325,478
     
251,377
     
249,777
     
252,028
     
183,282
 
Long-term debt obligations
   
75,824
     
50,180
     
54,647
     
58,360
     
—  
 
Shareholders’ equity
   
190,967
     
175,418
     
169,585
     
166,472
     
165,873
 
 
 
 
 
 
 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Refer to “Note About Forward-Looking Statements” following the Index in front of this Form
10-K
and Item 1A “Risk Factors” on pages 11 through 20 of this Annual Report.
In the discussion that follows, all dollar amounts are in thousands (both tables and text), except per share data
.
Results of Operations
:
Fourth Quarter
Net earnings for the fourth quarter of fiscal 2019 decreased 24% to $4,103, or $0.10 per diluted share, from net earnings for the fourth quarter of fiscal 2018 of $5,434, or $0.13 per diluted share. The fiscal 2019 fourth quarter results include $1,714 of costs associated with acquisition activities, restructuring activities and selected legal proceedings (combined impact on net earnings of $1,296, or $0.03 per diluted share). The fiscal 2018 fourth quarter results include $4,576 of costs associated with restructuring activities and selected legal proceedings, along with certain
one-time
tax effects of the U.S. tax reform act enacted in December 2017 (combined impact on net earnings of $3,145, or $0.07 per diluted share). Consolidated revenues for the fourth quarter of fiscal 2019 totaled $50,846, a decrease of 4% compared to the fourth quarter of fiscal 2018, also decreasing 3% on a constant-currency basis.
Revenues for the Diagnostics segment for the fourth quarter of fiscal 2019 decreased 9% compared to the fourth quarter of fiscal 2018 (also 9% on a constant-currency basis), comprised of a 22% decrease in molecular assay products and a 6% decrease in immunoassay and blood chemistry assay products. With a 13% decrease in its molecular reagents products and a 21% increase in its immunological reagents products, revenues for our Life Science segment increased 7% in the fourth quarter of fiscal 2019 compared to the fourth quarter of fiscal 2018. On a constant-currency basis, revenues for our Life Science Segment increased 9%.
 
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The fourth quarter Diagnostics revenues reflect continued competitive pressures in a number of our products, particularly
C. difficile
and foodborne, volume and pricing declines in certain gastrointestinal products, and the effects of initially lighter shipments of respiratory products in advance of the upcoming season. Life Science revenues for the fourth quarter reflect double-digit growth from IVD customers purchasing immunological reagents in the EMEA region, as well as China, offset by declines in transitioning our academic business to independent distributors in the Americas region.
Fiscal Year
Net earnings for fiscal 2019 increased 2% to $24,382, or $0.57 per diluted share, from net earnings for fiscal 2018 of $23,849, or $0.56 per diluted share. Fiscal 2019 results include $6,230 of costs associated with acquisition activities, restructuring activities and selected legal proceedings (combined impact on net earnings of $4,760, or $0.11 per diluted share). Fiscal 2018 results include $13,051 of costs associated with restructuring activities and selected legal proceedings, along with certain
one-time
tax effects of the U.S. tax reform act enacted in December 2017 (combined impact on net earnings of $7,856, or $0.18 per diluted share). Consolidated revenues decreased 6% to $201,014 for fiscal 2019 compared to fiscal 2018, decreasing 5% on a constant-currency basis.
In fiscal 2019, revenues for the Diagnostics segment decreased 9% compared to fiscal 2018 (8% on a constant-currency basis). This decrease is comprised of a 22% decrease in our molecular assay products and a 5% decrease in immunoassay and blood chemistry assay products. With a 5% decrease in its molecular reagents business and a 6% increase in its immunological reagents business, revenues of our Life Science segment increased 2% during fiscal 2019 compared to fiscal 2018, increasing 3% on a constant-currency basis.
Update on Lead Testing
On June 29, 2017, the FDA, in connection with its Safety Notification related to Magellan’s LeadCare
testing systems for venous blood samples, issued to Magellan its Form 483, Inspectional Observations. The FDA issued a related Warning Letter on October 23, 2017. As a result of these activities, during our 2017 third fiscal quarter, it was determined that a potential impairment of goodwill recorded in connection with the acquisition of Magellan had occurred (i.e., a “triggering event”). An impairment charge of $6,628, on both a
pre-tax
and
after-tax
basis, was recorded during the fiscal 2017 third quarter as set forth in Note 1(h),
“Summary of Significant Accounting Policies – Intangible Assets”
of the accompanying Consolidated Financial Statements. As also previously disclosed and set forth in Item 3. “Legal Proceedings”, on April 17, 2018, Magellan received a subpoena from the United States Department of Justice (“DOJ”) regarding its LeadCare product line. The subpoena outlines documents to be produced, and we continue to cooperate with the DOJ in this matter, including responding to additional information requests. We have executed tolling agreements to extend the statute of limitations.
Magellan submitted 510(k) applications in December 2018, seeking to reinstate venous blood sample-types for its LeadCare
®
II, LeadCare
®
Plus
and LeadCare Ultra
®
testing systems. In the second fiscal quarter of 2019 the FDA informed Magellan that each of these 510(k) applications had been put on Additional Information hold. On July 15, 2019, we provided responses to the FDA’s requests for Additional Information. These 510(k) applications have since expired and are no longer under FDA review. Further, while Magellan’s LeadCare testing systems remain cleared for marketing by the FDA and permitted for use with capillary blood samples, the FDA advised that it has commissioned a third-party study of Magellan’s LeadCare testing systems using both venous and capillary blood samples. According to the FDA, the results of the field study will be used in conjunction with other information to determine whether further action by the FDA or the Centers for Disease Control and Prevention is necessary to protect the public health. Meridian intends to fully cooperate with the FDA as the third-party study is completed.
During October 2019, the FDA performed a
follow-up
inspection of Magellan’s manufacturing facility. The FDA issued five Form 483 observations. In November 2019, we submitted to the FDA our written responses to the five Form 483 observations and have implemented a remediation plan that we are actively working. While we remain committed to strengthening Magellan’s quality system and ensuring that all aspects of the system are in full compliance, we can provide no assurance that our remediation efforts will be successful to a degree acceptable by the FDA.
 
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During fiscal 2019, 2018 and 2017, we incurred approximately $1,800 in aggregate remediation costs, primarily related to regulatory consultants and studies required to reinstate our venous blood sample claim. In the course of remediation, we may encounter additional matters that warrant notifications to the FDA and/or customers regarding the use of our products. At this time, we do not believe that any such notifications would impact the ability to use the LeadCare systems with capillary blood samples.
While we remain confident in the performance of the Magellan LeadCare testing systems using capillary samples, we do not expect that the FDA will reinstate our venous blood claims. We can provide no assurance that the ongoing investigation and study of the DOJ and FDA, respectively, or future exercise of their respective enforcement, regulatory, discretionary or other powers will not result in findings or alleged violations of federal laws that could lead to enforcement actions, proceedings or litigation and the imposition of damages, fines, penalties, restitution, other monetary liabilities, sanctions, injunctions, settlements or changes to our business practices, product offerings or operations that could have a material adverse effect on our business, financial condition or results of operations; or eliminate altogether our ability to operate our lead testing business, or on terms substantially similar to those on which we currently operate.
REVENUE OVERVIEW
Below are analyses of the Company’s revenue, by reportable segment, provided for each of the following:
- By Geographic Region
- By Product Platform/Type
Revenue Overview- By Reportable Segment & Geographic Region
Our reportable segments are Diagnostics and Life Science. The Diagnostics segment consists of manufacturing operations for infectious disease diagnostic products in Cincinnati, Ohio and Quebec City, Canada, and manufacturing operations for products detecting elevated lead levels in blood in Billerica, Massachusetts (near Boston). These diagnostic test products are sold and distributed in the countries comprising North and Latin America (the “Americas”); Europe, Middle East and Africa (“EMEA”); and other countries outside of the Americas and EMEA (rest of the world, or “ROW”). The Life Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; and Luckenwalde, Germany, and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, and bioresearch reagents domestically and abroad, including a sales and business development facility, with outsourced distribution capabilities, in Beijing, China to further pursue growing revenue opportunities in Asia.
Revenues for the Diagnostics segment, in the normal course of business, may be affected from quarter to quarter by buying patterns of major distributors, seasonality and the severity of seasonal diseases and outbreaks, 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 buying patterns of major customers and foreign currency exchange rates.
See the “Revenue Disaggregation” section of Note 1,
“Significant Accounting Policies”
of the accompanying Consolidated Financial Statements for detailed revenue disaggregation information.
Following is a discussion of the revenues generated by these product platforms/types and/or disease states:
Diagnostics Products
The acquisition of the Revogene molecular diagnostics platform, the development of the Curian immunoassay platform, and the expansion of the related assay-menu for each of these platforms are important steps in addressing competitive pressures in our gastrointestinal and respiratory illness assay families. We are actively converting our existing Alethia install base to the Revogene platform for
C. difficile
, Group A
Streptococcus
and Group B
Streptococcus
assays. During our first 120 days since acquiring the Revogene platform, we have approximately 60 instrument installations. For the Curian immunoassay diagnostics platform, we submitted a 510(k) for the instrument and first assay, a test for
H. pylori
antigen in stool, in September 2019. We believe the advantages of the Curian analyzer will help protect our existing rapid test accounts.
 
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Gastrointestinal Assays
During fiscal 2019, revenues from our gastrointestinal products, which include tests for
C. difficile
,
H. pylori
and certain foodborne pathogens, among others, totaled $68,977. This represents a 13% decrease from fiscal 2018 and follows a less than 1% increase during fiscal 2018. We continue to face pricing and volume pressures within this product category that will carry into fiscal 2020 and beyond for our current products. We have executed multi-year supply agreements with our two largest reference laboratory customers for
H. pylori
tests to secure volume, albeit at lower selling prices. We continue to believe there are ongoing benefits to be realized from our partnerships with managed care companies in promoting: (i) the health and economic benefits of a test and treat strategy; (ii) changes in policies that discourage the use of traditional serology methods and promote the utilization of active infection testing methods; and (iii) physician behavior movement away from serology-based testing and toward direct antigen testing.
Contributing to the competitive pressures being faced in this product category, the patents for our
H. pylori
products, owned by us, expired in May 2016 in the U.S. and in May 2017 in countries outside the U.S. We expect competition with respect to our
H. pylori
products to continue to increase, and such competition may have an adverse impact on our selling prices for these products, or our ability to retain business at prices acceptable to us, and consequently, adversely affect our future results of operations and liquidity, including revenues and gross profit. In October 2018, we entered into a strategic collaboration with DiaSorin to sell
H. pylori
tests, one of only three other companies that market
FDA-cleared
tests to detect
H. pylori
antigen in stool samples in the U.S. market. We are unable to provide assurances that we will be successful with any strategy or that any strategy will prevent an adverse effect on our future results of operations and liquidity, including revenues and gross profit.
Respiratory Illness Assays
Including tests for influenza, RSV, Group A Strep, Pertussis, and Mycoplasma pneumonia, among others, our respiratory illness product revenues decreased 8% in fiscal 2019, following a 21% increase in fiscal 2018. These revenue levels reflect a lighter 2018 – 2019 respiratory season, as compared to the particularly strong 2017 – 2018 respiratory season, as measured by the rate of laboratory-confirmed influenza hospitalizations (published by the CDC).
Blood Chemistry Assays
Revenues from our sale of products to test for elevated levels of lead in blood remained relatively flat during fiscal 2019 at $19,082. This follows fiscal 2018 revenues from such products increasing 5% over fiscal 2017. Nominal favorable pricing offset nominal volume declines in fiscal 2019.
Life Science Products
During fiscal 2019, revenues from our Life Science segment increased 2%, with revenues from molecular reagent sales decreasing 5% compared to fiscal 2018 and revenues from immunological reagent sales increasing 6%. Life Science segment revenues increased 10% in fiscal 2018, with revenues from molecular reagent sales increasing 12% compared to fiscal 2017 and revenues from immunological reagent sales increasing 9%. Our Life Science segment’s growth was impacted by the movement in currency exchange rates since fiscal 2018, with revenues increasing 3% on a constant-currency basis over fiscal 2018. During fiscal 2019, our Life Science segment continued to benefit from sales into China, with such sales totaling approximately $8,400 during fiscal 2019 – representing an approximate 1% increase over fiscal 2018.
Foreign Currency
Fluctuations in foreign currency exchange rates since fiscal 2018 had an approximate $2,200 unfavorable impact on fiscal 2019 revenues; $1,150 within the Diagnostics segment and $1,050 within the Life Science segment. This compares to
year-to-year
currency exchange rates having an approximate $2,200 favorable impact on revenues in fiscal 2018; $1,400 within the Diagnostics segment and $800 within the Life Science segment. Due to natural hedge relationships with expenses, both cost of sales and operating expenses, the overall impact of exchange rate fluctuations on net earnings was not significant during fiscal 2019, 2018 or 2017.
Significant Customers
Revenue concentrations related to certain customers within our Diagnostics and Life Science segments are set forth in Note 9 of the accompanying Consolidated Financial Statements.
 
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Gross Profit:
                                         
 
2019
   
2018
   
2017
   
2019 vs.
2018 
Inc (Dec)
   
2018 vs.
2017
Inc (Dec)
 
Gross Profit
  $
 118,325
    $
 130,697
    $
 124,292
     
(9
%)    
5
%
Gross Profit Margin
   
59
%    
61
%    
62
%    
-2 points
     
-1 point
 
 
 
 
The overall gross profit margin decrease during fiscal 2019 primarily results from the combined effects of: (i) previously-noted pricing changes within our
H. pylori
product line; (ii) mix of products sold, particularly decreased contribution from certain of our higher margin gastrointestinal assays; (iii) production capacity
ramp-up
costs for our newly acquired Quebec facility where Revogene instruments and test devices are made; and (iv) operating segment mix. The overall decrease in the gross profit margin from fiscal 2017 to fiscal 2018 reflects the combined effects of: (i) pricing pressure in our Diagnostics segment; (ii) mix of products sold, particularly decreased contribution from certain of our higher margin gastrointestinal assays; and (iii) operating segment mix.
Operating Expenses -
Segment Detail
                                         
 
Research &
Development
 
 
Selling &
Marketing
 
 
General &
Administrative
 
 
Other
 
 
Total Operating
Expenses
 
Fiscal 2017:
   
     
     
     
     
 
Diagnostics
  $
 13,433
    $
 22,942
    $
 13,268
    $
6,628
    $
 56,271
 
Life Science
   
2,603
     
9,446
     
7,493
     
—  
     
19,542
 
Corporate
   
—  
     
—  
     
10,335
     
762
     
11,097
 
                                         
Total 2017 Expenses
 
$
 16,036
 
 
$
 32,388
 
 
$
 31,096
 
 
$
7,390
 
 
$
 86,910
 
                                         
Fiscal 2018:
   
     
     
     
     
 
Diagnostics
  $
 13,742
    $
 25,002
    $
 19,397
    $
4,032
    $
 62,173
 
Life Science
   
3,047
     
9,466
     
8,111
     
1,240
     
21,864
 
Corporate
   
—  
     
—  
     
7,297
     
7,779
     
15,076
 
                                         
Total 2018 Expenses
 
$
 16,789
 
 
$
 34,468
 
 
$
 34,805
 
 
$
 13,051
 
 
$
 99,113
 
                                         
Fiscal 2019:
   
     
     
     
     
 
Diagnostics
  $
 14,711
    $
 23,058
    $
 19,191
    $
3,446
    $
 60,406
 
Life Science
   
3,237
     
5,388
     
6,034
     
188
     
14,847
 
Corporate
   
—  
     
—  
     
7,777
     
2,596
     
10,373
 
                                         
Total 2019 Expenses
 
$
 17,948
 
 
$
 28,446
 
 
$
 33,002
 
 
$
6,230
 
 
$
 85,626
 
                                         
 
 
 
 
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Operating Expenses -
Comparisons to Prior Year
Periods
                                         
 
Research &
Development
 
 
Selling &
Marketing
 
 
General &
Administrative
 
 
Other
 
 
Total Operating
Expenses
 
2017 Expenses
 
$
 16,036
 
 
$
 32,388
 
 
$
 31,096
 
 
$
7,390
 
 
$
 86,910
 
                                         
% of Revenues
   
8
%    
16
%    
15
%    
4
%    
43
%
Fiscal 2018 Increases (Decreases):
   
     
     
     
     
 
Diagnostics
   
309
     
2,060
     
6,129
     
(2,596
)    
5,902
 
Life Science
   
444
     
20
     
618
     
1,240
     
2,322
 
Corporate
   
—  
     
—  
     
(3,038
)    
7,017
     
3,979
 
                                         
2018 Expenses
 
$
 16,789
 
 
$
 34,468
 
 
$
 34,805
 
 
$
 13,051
 
 
$
 99,113
 
                                         
% of Revenues
   
8
%    
16
%    
16
%    
6
%    
46
%
% Increase
   
5
%    
6
%    
12
%    
77
%    
14
%
Fiscal 2019 Increases (Decreases):
   
     
     
     
     
 
Diagnostics
   
969
     
(1,944
)    
(206
)    
(586
)    
(1,767
)
Life Science
   
190
     
(4,078
)    
(2,077
)    
(1,052
)    
(7,017
)
Corporate
   
—  
     
—  
     
480
     
(5,183
)    
(4,703
)
                                         
2019 Expenses
 
$
 17,948
 
 
$
 28,446
 
 
$
 33,002
 
 
$
6,230
 
 
$
 85,626
 
                                         
% of Revenues
   
9
%    
14
%    
16
%    
3
%    
43
%
% Increase (Decrease)
   
7
%    
(17
%)    
(5
%)    
(52
%)    
(14
%)
 
 
 
Total operating expenses fluctuated during fiscal 2019 and fiscal 2018 primarily as a result of the combined effects of the following:
Fiscal 2019 decrease
  Increased Research & Development costs, reflecting the addition of the GenePOC business expenses for the development of the GI and RI panel assays since the June 3, 2019 date of acquisition being more than offset by the decreased expenditures resulting from the timing of product development projects and the clinical trials for our cCMV test in fiscal 2018;
 
 
 
  Decreased Selling & Marketing costs due to: (i) the effects of the fiscal 2018 organization streamlining initiatives; and (ii) lower sales commissions resulting from the decrease in sales levels;
 
 
 
  Decreased General & Administrative costs, reflecting the effects of the fiscal 2018 organization streamlining initiatives and lower Quality System remediation costs related to our blood-lead manufacturing facility, partially offset by the addition of the GenePOC business expenses, including purchase accounting amortization; and
 
 
 
  Decreased restructuring & selected legal costs, along with the effects of the fiscal 2019 acquisition-related costs (reflected within “Other” in the above tables).
 
 
 
Fiscal 2018 increase
  Increased Selling & Marketing costs, reflecting increased commission and bonus payments made in connection with the increased revenue levels, along with costs associated with the new branding strategy;
 
 
 
  Increased General & Administrative costs due in large part to the cash incentive compensation resulting from the revenue and net earnings results achieved, along with increased Quality System remediation costs related to Magellan;
 
 
 
 
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  Increased restructuring costs, reflecting: (i) compensation and benefits for our previous Executive Chairman and CEO throughout fiscal 2018, the period during which we also have the compensation and benefits of a new CEO; and (ii) the costs of terminations and related expenses incurred in connection with realigning our business structure; and
 
 
 
 
  Increased legal costs related to the matters discussed in Item 3. “Legal Proceedings”.
 
 
 
 
Operating Income
Operating income increased 4% in fiscal 2019, following a 15% decrease in fiscal 2018, as a result of the factors discussed above, including the acquisition-related, restructuring and selected legal costs in each of the fiscal years and the Magellan goodwill impairment charge in fiscal 2017.
Other Income and Expense
Other income and expense in fiscal 2019, 2018 and 2017 includes interest costs on the Company’s long-term borrowings, which are comprised of the following during these fiscal years:
  Draws on the revolving credit facility used to fund acquisition of the business of GenePOC and pay off the term loan used to fund the March 2016 acquisition of Magellan (May 2019 – September 2019), bearing interest at a fluctuating rate tied to, at the Company’s option, either the federal funds rate or LIBOR.
 
 
 
 
  Term loan used to fund the acquisition of Magellan (March 2016 – May 2017), bearing interest at an effective rate of 2.76%.
 
 
 
 
Income Taxes
The effective rate for income taxes was 23%, 21% and 41% for fiscal 2019, 2018 and 2017, respectively. These rates reflect the combined effect of various components of the tax reform act (see Note 6,
“Income Taxes”
of the accompanying Consolidated Financial Statements) including: (i) the lowering of the applicable tax rate; (ii) the accompanying
re-measurement
of deferred tax balances at the lower rate; and (iii) the various foreign-income related items, such as the repatriation transition tax, the tax deduction related to Foreign Derived Intangible Income, and the tax related to Global Intangible
Low-Taxed
Income and foreign tax credits.
Impact of Inflation
To the extent feasible, we have consistently followed the practice of adjusting our prices to reflect the impact of inflation on salaries and fringe benefits for employees and the cost of purchased materials and services. Inflation and changing prices did not have a material adverse impact on our gross margin, revenues or operating income in fiscal 2019, 2018 or 2017.
Liquidity and Capital Resources
:
Liquidity
Our cash flow and financing requirements are determined by analyses of operating and capital spending budgets, debt service, and consideration of common share dividends. We have historically maintained a credit facility to augment working capital requirements and to respond quickly to acquisition opportunities.
We have an investment policy that guides the holdings of our investment portfolio, which presently consists of bank savings accounts and institutional money market mutual funds. Our objectives in managing the investment portfolio are to: (i) preserve capital; (ii) provide sufficient liquidity to meet working capital requirements and fund strategic objectives such as acquisitions; and (iii) capture a market rate of return commensurate with market conditions and our policy’s investment eligibility criteria. As we look forward, we will continue to manage the holdings of our investment portfolio with preservation of capital being the primary objective.
 
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Considering the various worldwide
geo-political
and
geo-economic
conditions (including Brexit, as more fully discussed within the “Risk Factors” section of Part 1A), we do not expect macroeconomic conditions to have a significant impact on our liquidity needs, financial condition or results of operations, although no assurances can be made in this regard. We intend to continue to fund our working capital requirements from current cash flows from operating activities and cash on hand. If needed, we also have an additional source of liquidity through the amount remaining available on our $125,000 bank revolving credit facility, which totaled approximately $49,200 as of September 30, 2019. Our liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within the financial markets tightens for an extended period of time, and such conditions impact the collectability of our customer accounts receivable, impact credit terms with our vendors, or disrupt the supply of raw materials and services.
As of September 30, 2019, our cash and equivalents balance is $62,397 or $2,634 higher than at the end of fiscal 2018. This increase results in large part from the cash flows from operating activities being more than sufficient to cover capital expenditures, shareholder dividends for two quarters and debt service. Net cash flows from operating activities and cash on hand are anticipated to be adequate to fund working capital requirements, capital expenditures and debt service during the next 12 months.
Following the declaration of a $0.125 first quarter cash dividend consistent with the previously established $0.50 per share annual indicated dividend rate, effective for the second quarter of fiscal 2019, we suspended the payment of our quarterly cash dividend. The dividend was suspended as part of our regular evaluation of capital allocation, with the action taken in order to deploy cash into new product development activities for the Revogene molecular diagnostic platform, as well as the Curian and PediaStat platforms, among other investments, and to preserve capital resources and liquidity for general corporate purposes.    
Capital Resources
As described in Note 5,
“Bank Credit Arrangements”
of the accompanying Consolidated Financial Statements, on May 24, 2019, in connection with the acquisition of the GenePOC business, the Company executed a new five-year $125,000 revolving credit facility to replace our previously-existing $30,000 credit facility. The new credit facility is secured by substantially all of our assets and includes certain restrictive financial covenants. To date, we have drawn down $75,824 on this new facility, using the proceeds to repay our previously-existing term loan and, along with cash
on-hand,
fund the acquisition of the GenePOC business.
Our capital expenditures totaled $3,797 for fiscal 2019 and were largely related to laboratory and manufacturing equipment. During fiscal 2020 our capital expenditures are estimated to range between approximately $4,000 to $5,000, with the actual amount dependent upon actual operating results and the phasing of certain projects. Such expenditures may be funded with cash and equivalents on hand, operating cash flows and/or availability under the $125,000 revolving credit facility discussed above.
Known Contractual Obligations
:
In addition to the obligations related to the revolving credit facility noted above and detailed in Note 5,
“Bank Credit Arrangements”
of the accompanying Consolidated Financial Statements, the Company’s known contractual obligations and their related due dates were as follows as of September 30, 2019:
                                         
 
Total
   
Less than 1
Year
   
1-3
Years
   
4-5
 Years
   
More than
5 Years
 
Operating leases
(1)
  $
6,567
    $
1,528
    $
3,711
    $
 1,145
    $
 183
 
Purchase obligations
(2)
   
14,995
     
14,203
     
737
     
55
     
—  
 
Acquisition price holdback and contingent consideration
(3)
   
75,000
     
—  
     
75,000
     
—  
     
—  
 
                                         
Uncertain income tax positions liability and interest
(4)
   
511
     
511
     
—  
     
—  
     
—  
 
                                         
Total
  $
 97,073
    $
 16,242
    $
 79,448
    $
 1,200
    $
 183
 
                                         
 
 
 
 
 
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(1) Meridian and its subsidiaries are parties to a number of operating lease agreements around the world, the majority of which relate to office and warehouse building leases expiring at various dates.
 
 
 
 
(2) Purchase obligations relate primarily to outstanding purchase orders for inventory, including instruments, service items, and research and development activities. These contractual commitments are not in excess of expected production requirements over the next twelve months.
 
 
 
 
(3) Pursuant to the purchase agreement related to the June 3, 2019 acquisition of the business of GenePOC, Meridian’s maximum remaining consideration to be paid totals $75,000. As noted below and detailed in Note 2,
“Acquisition of Business of GenePOC”
of the accompanying Consolidated Financial Statements, this amount is comprised of: (i) a $5,000 purchase price holdback; and (ii) up to $70,000 of payments contingent upon the achievement of certain product development milestones and financial performance targets, the preliminary valuation of which totals approximately $27,200 as of September 30, 2019.
 
 
 
 
(4) Due to inherent uncertainties in the timing of settlement of tax positions, we are unable to estimate the timing of the effective settlement of these obligations.
 
 
 
 
Other Commitments and Off-Balance Sheet Arrangements
:
License Agreements
Meridian has entered into various license agreements that require payment of royalties based on a specified percentage of sales of related products. Approximately 84% of our royalty expenses relate to our Diagnostics operating segment, where the royalty rates range from 3% to 8%. Meridian expects that payments under these agreements will amount to approximately $2,100 in fiscal 2020.
Contingent Consideration for Acquisition of Business of GenePOC
Details of the purchase price holdback and contingent consideration due to be paid pursuant to the purchase agreement related to the June 3, 2019 acquisition of the business of GenePOC are set forth in Note 2,
“Acquisition of Business of GenePOC”
of the accompanying Consolidated Financial Statements.
Off-Balance
Sheet Arrangements
We do not utilize special-purpose financing vehicles or have undisclosed
off-balance
sheet arrangements.
Market Risk Exposure
:
Foreign Currency Risk
We have market risk exposure related to foreign currency transactions from our operations outside the United States, as well as certain suppliers to our domestic businesses located outside the United States. The foreign currencies where we have market risk exposure are the Australian dollar, British pound, Canadian dollar, Chinese yuan and Euro. Assessing foreign currency exposures is a component of our overall ongoing risk management process, with such currency risks managed as we deem appropriate.    
Concentration of Customers/Products Risk
Our Diagnostics segment’s revenues from sales through two U.S. distributors were 26% of the segment’s total revenues or 18% of consolidated revenues for fiscal 2019. Additionally, our three major product families – gastrointestinal, respiratory illnesses and blood chemistry – accounted for 84% of our Diagnostics segment’s third-party revenues during fiscal 2019, and 57% of our fiscal 2019 consolidated revenues.
Our Life Science segment’s revenues from sales of purified antigens and reagents to two diagnostics manufacturing customers were 24% of the segment’s total revenues for fiscal 2019, and 8% of our fiscal 2019 consolidated revenues.
 
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Critical Accounting Policies
:
The consolidated financial statements included in this Annual Report on Form
10-K
have been prepared in accordance with accounting principles generally accepted in the United States. Such accounting principles require management to make judgments about estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Listed below are the accounting policies management believes to be critical to understanding the accompanying Consolidated Financial Statements, along with reference to location of the policy discussion within the accompanying financial statements. The listed policies are considered critical due to the fact that application of such polices requires the use of significant estimates and assumptions, and the carrying values of related assets and liabilities are material.
         
Accounting Policy
 
Location 
Within Consolidated
Financial Statements
 
Examples of Key Estimate Assumptions
Inventories
 
Note 1(f)
 
Slow-moving, excess & obsolete inventories
         
Intangible Assets
 
Note 1(h)
 
Triggering events and impairment conditions
         
Revenue Recognition
 
Note 1(i)
 
Distributor price adjustments and fee accruals
         
Fair Value Measurements
 
Note 1(j)
 
Valuation of contingent consideration
         
Income Taxes
 
Note 1(l) and Note 6
 
Uncertain tax positions and state apportionment factors
 
 
 
 
Recent Accounting Pronouncements
:
A description of accounting pronouncements recently adopted by the Company, as well as accounting pronouncements issued but not yet adopted by the Company, are set forth in Note 1(q) of the accompanying Consolidated Financial Statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Market Risk Exposure and Capital Resources under Item 7 above beginning on page 24.
 
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
         
   
35
 
         
   
36
 
         
   
41
 
         
   
42
 
         
   
43
 
         
   
44
 
         
   
46
 
         
   
47
 
         
   
74
 
 
 
All other supplemental schedules are omitted due to the absence of conditions under which they are required or because the information is shown in the Consolidated Financial Statements or Notes thereto.
 
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Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule
13a-15(f).
The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2019, based on the framework and criteria in the 2013
Internal Control – Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on management’s evaluation and those criteria, the Company concluded that its system of internal control over financial reporting was effective as of September 30, 2019. The Company’s assessment of and conclusion on the effectiveness of its internal control over financial reporting did not include the internal controls of Meridian Bioscience Canada, Inc. (“GenePOC”), which was acquired during fiscal 2019 and the results of which since the date of acquisition were included in the 2019 consolidated financial statements. GenePOC constituted $9,250 or 2.84% of the Company’s total assets as of September 30, 2019, and $75 or 0.04% of total net revenues, for the year ended September 30, 2019.
The Company’s independent registered public accounting firm has issued an attestation report on the registrant’s internal control over financial reporting.
         
/s/ Jack Kenny
 
 
/s/ Bryan T. Baldasare
Jack Kenny
 
 
Bryan T. Baldasare
Chief Executive Officer
 
 
Executive Vice President and
November 26, 2019
 
 
Chief Financial Officer
 
 
November 26, 2019
 
 
 
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Meridian Bioscience, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Meridian Bioscience Inc. (an Ohio corporation) and subsidiaries (the “Company”) as of September 30, 2019 and 2018, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 2019, and the related notes and financial statement schedule listed in the index appearing under Schedule No. II (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of September 30, 2019, based on criteria established in the 2013
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated November 26, 2019 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Distributor price adjustment accrual (rebate reserve)
As described further in Note 1(i) to the consolidated financial statements, revenue is reduced at the date of sale for product price adjustments for certain distributors under local contracts. Management estimates accruals for distributor price adjustments based on local contract terms, sales data provided by distributors, historical statistics, current trends and other factors. The balance of the accrual was $3.4 million at September 30, 2019. We identified the distributor price adjustment accrual (referred to as the rebate reserve) as a critical audit matter.
 
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The principal consideration for our determination that the rebate reserve is a critical audit matter is the high degree of auditor subjectivity necessary in evaluating certain inputs and assumptions made by management in estimating the amount of the rebate reserve. The nature of audit evidence includes unobservable inputs and assumptions used by management in the estimate, and reliance on a customized sales report by product line. The reserve has a high degree of estimation uncertainty given management’s judgments used to determine the reserve, specifically the use of key assumptions such as average selling price, purchasing trends of distributors and historical product sales and product volume data used to predict future sales and volume levels.
Our audit procedures related to the rebate reserve included the following, among others.
  We tested the design and operating effectiveness of controls relating to management’s calculation and review of the reserve which included verifying the completeness of the input data, mathematical accuracy of the calculation and evaluating the reasonableness of key assumptions used in the calculation.
 
 
 
  We tested the reserve calculation prepared by management by performing specific procedures on the key inputs and assumptions such as the monthly sales volume, validity of distributor agreements and applied reserve percentage. The procedures performed are as follows:
 
 
 
  We tested the completeness and accuracy of the historical sales (including average selling price) and volume report used in the calculation of the reserve by agreeing total sales to accounting records and tracing a sample of individual sales to supporting audit evidence, such as purchase orders, shipping documents and invoices.
 
 
 
  We evaluated the existence and validity of distributor agreements by obtaining a sample of issued credit memos and executed distributor agreements to test compliance with the stated terms in the corresponding agreements.
 
 
 
  We analyzed year over year trends in the reserve in comparison with revenue trends to further evaluate reasonableness of the estimate and consistency with expectations.
 
 
 
Valuation of intangible assets and contingent consideration
As described in Note 2 to the consolidated financial statements, the Company completed an acquisition which resulted in goodwill of $35.1 million, intangible assets of $40.4 million, and contingent consideration of $27.2 million. The determination of the fair value of the intangible assets acquired and contingent consideration required management, with the help of a third-party valuation specialist, to make significant estimates and assumptions including the assumed sales growth rate, margin percentages, economic life and discount rate. We identified the valuation of intangible assets and contingent consideration as a critical audit matter.
The principal consideration for our determination that the valuation of intangible assets and contingent consideration associated with the acquisition is a critical audit matter is the subjective auditor judgment required in evaluating the inputs and assumptions used by management in determining fair value. The valuation of the intangible assets and contingent consideration are subject to higher estimation uncertainty due to management judgments in determining key assumptions that include the assumed sales growth rate, margin percentages, economic life and discount rate. Changes in these significant assumptions could have a significant impact on the fair value of the intangible assets and contingent consideration.
Our audit procedures related to the valuation of intangible assets and contingent consideration included the following, among others.
  We tested the design and operating effectiveness of controls relating to the valuation report and allocation of purchase price which included management’s review of the valuation report for the completeness and mathematical accuracy of the data, and evaluating the reasonableness of assumptions used in the calculation such as economic life and discount rate.
 
 
 
  We utilized a valuation specialist to assist in evaluating the appropriateness of the Company’s valuation models developed for acquired assets and evaluating the reasonableness of significant assumptions used including the assumed sales growth rate, margin percentages, economic life and discount rate as compared to industry/market data.
 
 
 
 
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  We evaluated whether the assumptions used were reasonable by considering past performance of similar technological assets, industry data, current market forecasts, and whether such assumptions were consistent with evidence obtained in other areas of the audit.
 
 
 
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2005.
Cincinnati, Ohio
November 26, 2019
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Meridian Bioscience, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Meridian Bioscience, Inc. (an Ohio corporation) and subsidiaries (the “Company”) as of September 30, 2019, based on criteria established in the 2013
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2019, based on criteria established in the 2013
Internal Control—Integrated Framework
issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended September 30, 2019, and our report dated November 26, 2019 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of Meridian Bioscience Canada, Inc. (“GenePOC”), a wholly-owned subsidiary, whose financial statements reflect total assets and revenues constituting 2.84 and 0.04 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended September 30, 2019. As indicated in Management’s Report, GenePOC was acquired during fiscal 2019. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of GenePOC.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
November 26, 2019
 
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CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Meridian Bioscience, Inc. and Subsidiaries
                         
For the Year Ended September 30,
 
2019
 
 
2018
   
2017
 
Net Revenues
 
$
201,014
 
 
$
213,571
   
$
200,771
 
Cost of Sales
 
 
82,689
 
   
82,874
     
76,479
 
                         
Gross Profit
 
 
118,325
 
   
130,697
     
124,292
 
                         
Operating Expenses:
 
 
 
   
     
 
Research and development
 
 
17,948
 
   
16,789
     
16,036
 
Selling and marketing
 
 
28,446
 
   
34,468