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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, 2020.
 
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 on 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  ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    YES  ☐    NO  ☒

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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 (or such shorter period that the registrant was required to file such reports), 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 the 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 Growth Company
 
  
 
 
 
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.  ☐
 
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2).    YES  ☐    NO  
The aggregate market value of Common Shares held by
non-affiliates
as of March 31, 2020 was $357,822,024 based on a closing sale price of $8.40 per share on March 31, 2020. As of October 31, 2020, 43,076,077
shares of Common Stock, no par value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2021 Annual Meeting of Shareholders, which will be filed within one hundred and twenty days of the fiscal year ended September 30, 2020 (2021 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
       22  
Item 2
       22  
Item 3
       22  
Item 4
       23  
  
Item 5
       23  
Item 6
       24  
Item 7
       25  
Item 7A
       36  
Item 8
       37  
Item 9
       73  
Item 9A
       73  
Item 9B
       73  
  
Item 10
       74  
Item 11
       74  
Item 12
       74  
Item 13
       74  
Item 14
       74  
Item 15
       75  
Item 16
       77  
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, the
COVID-19
pandemic, or otherwise.

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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
®
, BreathID
®
, 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.
PART I.
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 in vitro diagnostic (“IVD”) manufacturers and researchers in immunological and molecular tests for human, animal, plant and environmental applications.
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. We describe these segments in this “Business” section and in other locations in this report:
 
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 10 of Consolidated Financial Statements
 
- 4 -

Table of Contents
Diagnostics Segment
Products and Markets
Prior to the current year effects of the
COVID-19
pandemic, our largest source of revenues has been clinical diagnostic products, historically representing approximately
two-thirds
of our consolidated revenues. However, primarily due to the effects of the pandemic, our Diagnostics segment provided 48% of consolidated net revenues for fiscal 2020.
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 product portfolio includes approximately 150 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 testing platforms include: Real-time PCR Amplification (Revogene brand); Isothermal DNA Amplification (Alethia brand); Lateral Flow Immunoassay using fluorescent chemistry (Curian brand); Rapid Immunoassay (Immuno
Card
and Immuno
Card
STAT! brands);
Enzyme-linked
Immunoassay (PREMIER brand); Anodic Stripping Voltammetry (LeadCare and Pediastat brands); and urea breath testing for
H. pylori
(BreathID brand).
Our research and development programs are focused on menu expansion for our Curian and Revogene instrument platforms, with disease targets in the gastrointestinal and respiratory areas, as well as next generation blood-chemistry testing. Over the next 12 months, we intend to submit to the FDA at least six new products across both the Curian and Revogene instrument platforms. These new products include the following: Curian – Campylobacter, EHEC Shiga Toxins and
C. difficile
combo common antigen and Toxins A and B; Revogene –
SARS-CoV-2
(emergency use authorization), gastrointestinal panel and respiratory panel. Although at an earlier stage in our research and development program, we are also exploring the merits and viability of a liver function test on the BreathID system. We are also pursuing opportunities to complement our internal research and development programs by securing rights to finished diagnostics tests. Our arrangement with GenBody for access to its rapid antigen
SARS-CoV-2
test is a recent example of this pursuit.
The 2019 acquisition of the GenePOC business and the Revogene platform refreshed our molecular diagnostics product portfolio, stabilized our molecular customer base and provided menu expansion opportunities for
RNA-based
tests and
small-to-mid
sized multi-target panels. This year’s acquisition of Exalenz Bioscience Ltd. (“Exalenz”) and the BreathID system strengthened our position in
H. pylori
testing, as it gives us a second
non-invasive
test (in addition to stool antigen testing).
Market Trends
Despite the effects of the global
COVID-19
pandemic and the near-term focus on
SARS-CoV-2
testing, we believe 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. There is a continuing shift from conventional testing 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. Integrated Delivery Networks (“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.
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.
 
- 5 -

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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 relies on direct sales personnel and independent distribution networks. We have a direct sales force in four countries, covering the United States and certain major markets in the EMEA region. We also use independent distributors either in a complementary manner with our direct sales force (e.g., the United States) or solely to supply our products to
end-users.
Two independent distribution customers in the United States have historically significantly contributed to our revenues, comprising 21% of consolidated revenues as recently as fiscal 2018.
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.
Our major competitor for urea breath testing for
H. pylori
is Otsuka, a pharmaceutical company that also markets and sells a urea breath testing system. We believe that our BreathID system has a competitive advantage in that it: (i) has substantially higher sensitivity and specificity; (ii) has a shorter processing time; (iii) offers full automation; and (iv) connects directly to lab information systems.
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 across all three
pre-clinical
programs. 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. 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
in-house.
See “Operating Expenses” section within MD&A on page 31.
Manufacturing
Our Diagnostics tests are manufactured at four principal sites in Billerica, Massachusetts (blood-chemistry); Cincinnati, Ohio (immunoassays and molecular tests); Modi’in, Israel, (urea breath tests for
H. pylori
); and Quebec City, Quebec, Canada (molecular tests). Our immunoassay and molecular assay products require the production of highly specialized reagents, primers and enzymes, and our BreathID system requires the production of urea in pharmaceutical-grade form. We produce the vast majority of our own immunoassay requirements. Reagents, primers and enzymes for our Revogene molecular assay products, primers for our Alethia molecular assay products, and urea for our BreathID system 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.
 
- 6 -

Table of Contents
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 9%, 13% and 16% of consolidated revenues for fiscal 2020, 2019 and 2018, 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 two third parties, 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 exclusive license agreement and the related patents currently runs through June 15, 2034, 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 the BreathID system and related urea breath test for
H. pylori
are either wholly owned or licensed from a third party, Oridion Medical 1987 Ltd., under an exclusive, royalty free, license agreement. The licensed and wholly owned patents are issued in the U.S., European Union, Israel, Japan, Australia and China. The wholly owned patents have varying expiration dates, with the last being in 2033.
The patents for our stool antigen
H. pylori
products, owned by us and which represented approximately 10%, 16% and 16% of consolidated revenues for fiscal 2020, 2019 and 2018, 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 stool antigen
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 including: (i) in October 2018, we entered into a strategic collaboration with DiaSorin to sell
H. pylori
tests; (ii) 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; and (iii) upon FDA clearance in March 2020, we launched Curian HpSA, our first assay on the new Curian platform, which we expect will help protect our existing customer base using lateral flow tests. We also expect the acquisition of the Exalenz BreathID platform to combat competitive pressures, as we believe that we are now the only company with
FDA-cleared,
non-invasive
assays for both stool antigen and urea breath samples, allowing physicians a choice in test format from a single supplier. 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 are subject to periodic inspection by the FDA. See page 28 within MD&A for discussion regarding the FDA’s inspection of our Billerica facility.
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 (e.g., liver function test on the BreathID system in development, a Class III medical device), 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. Our urea breath test for
H. pylori
on the BreathID system was cleared as a Class I medical device since the urea drug component was approved by the FDA separately via the New Drug Application process. Our
SARS-CoV-2
test on the Revogene platform is expected to be submitted to the FDA under its emergency use authorization program in late November or early December 2020. We notified the FDA of our intent to submit for emergency use authorization on November 13, 2020.
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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.
Following a five-year transition period, sales of our diagnostic tests in the European Union will be subject to new regulations under the In Vitro Diagnostics Regulation of 2017 (“IVDR”) beginning in May 2022. IVDR replaces the previous IVD Regulation (98/79/EC). We have begun our assessment regarding which products will not be sellable under IVDR and the revenue associated with these products is not expected to be material.
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 or the current
COVID-19
pandemic. While we believe that the breadth of our diagnostic product lines normally reduces the risk that infections subject to seasonality and sporadic outbreaks will cause significant variability in diagnostic revenues, the current
COVID-19
pandemic did result in a significant decline in our Diagnostics revenues during the second half of fiscal 2020. Accordingly, we can make no assurance that revenues will not be impacted period over period by such factors.
Life Science Segment
Products and Markets
Our Life Science segment develops, manufactures, sells and distributes bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, and bioresearch reagents used predominantly by IVD manufacturing companies, and to a lesser degree, by researchers and
non-human
clinical customers. The
COVID-19
pandemic has provided the opportunity for our Life Science segment to showcase the breadth of its reagent products across not only
SARS-CoV-2
testing platforms (molecular, rapid antigen and serology), but also RNA and DNA based molecular tests for nearly any infectious disease. For fiscal 2020, approximately 85% of Life Science revenues were generated from the industrial market, defined as IVD manufacturers, and reagents for use in
SARS-CoV-2
tests contributed approximately $71,500 in new revenues. We engage direct sales teams in the U.S., the U.K., France, Germany, China and Australia. During fiscal 2020, 27% of third-party revenues for this segment were from three IVD manufacturing customers.
Our Life Science products are marketed to IVD manufacturing customers as a source of raw materials for their human clinical diagnostics tests, or as an outsourced step in their manufacturing processes. We seek and maintain multi-year supply arrangements to provide stability in volumes and pricing. Independent distributors market our molecular biology products to academic/research customers. These products are used in measuring DNA and RNA in human, animal, plant and environmental applications.
Market Trends
Major IVD manufacturing customers often have global footprints, where we are supplying reagents to specific manufacturing sites around the world. IVD manufacturers in specific countries of the Asia-Pacific region (e.g., China) are increasing their efforts in the development and manufacturing of infectious disease tests. We intend to use the breadth of our product portfolio, particularly molecular reagents, to increase the penetration of our products in IVD manufacturing customers’ tests, regardless of customer class (large multi-national companies or regional companies).
Competition
The market for bulk biomedical reagents is highly competitive with respect to product quality, price, customer service and reputation. Our competitors often have greater financial, research and development, sales and marketing, and manufacturing resources. Customers also may choose to manufacture their biomedical reagents
in-house
rather than purchase from us.
 
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Research and Development
Our research and development activities for the Life Science segment focus on improving molecular reagents, including DNA and RNA master mixes. 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 31.
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.
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 and its territories approximated $122,000 or 48% of consolidated fiscal 2020 revenues, $74,000 or 37% of consolidated fiscal 2019 revenues, and $71,000 or 33% of consolidated fiscal 2018 revenues. For our Life Science segment, the
COVID-19
pandemic resulted in the significantly higher percentage of international revenues for fiscal 2020. 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 2019 had an approximate $1,250 unfavorable impact on fiscal 2020 revenues; $150 within the Diagnostics segment and $1,100 within the Life Science segment. This compares to
year-to-year
currency exchange rates having an approximate $2,200 unfavorable impact on revenues in fiscal 2019; $1,150 within the Diagnostics segment and $1,050 within the Life Science segment.
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.
Human Capital
As of September 30, 2020, our Diagnostics segment had approximately 560 employees in ten countries and our Life Science segment had approximately 190 employees in seven countries. Approximately 58% of our employees are women. In addition, of our U.S. based employees, which represents approximately 60% of our total worldwide workforce, approximately 23% are ethnically diverse.
Below is additional demographic information about our current employee base as of September 30, 2020.
 
Meridian Employees
  
2020
 
Salaried workforce
     537  
Managers and above
     157  
Part-time employees
     27  
Average age
     43  
Average length of service in years
     7  
Employee turnover rate (voluntary)
     13
Fiscal 2020 revenues per employee (in thousands)
   $ 340  
 
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Equal Employment Opportunity Table (by number of employees)
U.S. Employee Diversity as of September 30, 2020
 
Job category
  
Gender
  
White
    
Black/African
American
    
Hispanic/Latino
    
Asian
    
American
Indian/Alaskan
Native
    
Two
or
more
races
    
Total
 
Executive/senior level officials and managers
   Male      11        —          —          —          —          —          11  
   Female      2        —          1        —          —          —          3  
First/mid-level
officials and managers
   Male      38        3        2        3        —          —          46  
   Female      38        4        —          2        —          1        45  
Professionals
   Male      56        2        2        4        1        2        67  
   Female      67        6        4        8        —          2        87  
All other
   Male      48        9        5        4        —          1        67  
   Female      84        13        7        10        —          4        118  
Total
   Male      153        14        9        11        1        3        191  
   Female      191        23        12        20        —          7        253  
We believe that developing a diverse, equitable and inclusive culture is critical to continuing to attract and retain the top talent necessary to deliver on our growth strategy. As such, we are investing in the creation of a work environment where our employees can feel inspired to deliver their workplace best every day. All employees are responsible for upholding the Meridian Values and Meridian Code of Conduct, which form the foundation of our policies and practices. We continue to expand our Human Resources Information System (“HRIS”) and other systems to track key human capital metrics, including workforce demographics, diversity, turnover, engagement and training data.
Diversity, Equity and Inclusion
A diverse and inclusive workforce is a business imperative and key to our long-term success. To champion our efforts in this area, we have recently initiated the “One Meridian Inclusion Diversity and Equity Team,” which is comprised of a group of employees around the world and led by Dr. Lourdes Weltzien, Executive Vice President, Life Science. This team will be developing a mission and a strategy that will look to identify gaps and present suggestions on how we can encourage and enforce an environment in which all employees feel included and empowered to achieve their best. Though we are proud of our efforts in these areas to date, we realize that the voice and ongoing feedback of this newly established team is critical for Meridian to achieve its full potential.
Compensation and Benefits
We strive to provide pay, benefits, and services that are competitive to market and create incentives to attract and retain employees globally. Our compensation package includes market-competitive pay, broad-based stock grants and bonuses, health care and retirement benefits, paid time off and family leave, among others, depending upon locale. We are focused on pay equity globally and are striving to close the gap in pay among similar roles and responsibilities throughout our organization, after accounting for legitimate business factors that can explain differences, such as performance, time at grade level, and tenure. We also continue to advance transparency in our pay and representation data by complying with all applicable statutory filing requirements.
Communication and Engagement
We strongly believe that Meridian’s success depends on employees understanding how their work contributes to the Company’s overall strategy. To this end, we utilize a variety of channels to facilitate open and direct communication, including: (i) quarterly CEO update videos; (ii) open forums or town hall meetings with executives; (iii) regular ongoing update communications; and (iv) employee engagement surveys.
 
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Health, Wellness and Safety
We are committed to the safety of our employees and communities, from operations to product development to supplier partnerships. Our ultimate goal is to achieve zero serious injuries through continued investment in and focus on our core safety programs and injury-reduction initiatives. We provide access to a variety of innovative, flexible, and convenient health and wellness tools.
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
Our financial condition, results of operations and cash flows could be adversely affected by the ongoing coronavirus
(COVID-19)
outbreak.
Any outbreak of contagious diseases, such as
COVID-19,
or other adverse public health developments, could have material and adverse effects on our business operations. Such adverse effects could include diversion or prioritization of health care resources away from the conduct of diagnostic testing, disruptions of or restrictions on the ability of laboratories to process our tests, and delays with respect to or difficulties in patients accessing our tests, including those resulting from an inability to travel as a result of quarantines or other restrictions resulting from
COVID-19.
As
COVID-19
continues to affect individuals and businesses around the globe, we may experience disruptions that could severely impact our business, including:
 
   
decreased volume of testing and related sales of certain of our Diagnostics products as a result of disruptions to health care providers and limitations on the ability of providers to administer tests;
 
   
disruptions or restrictions on the ability of the Company’s, our collaborators’, or our suppliers’ personnel to travel, and temporary closures of our facilities, or the facilities of our collaborators or suppliers;
 
   
limitations on employee resources that would otherwise be focused on the development of our products, the processing of our diagnostic tests, and/or the conduct of our clinical trials, because of illness of employees or their families, or requirements imposed on employees to avoid contact with large groups of people; and
 
   
delays in necessary interactions with local regulators, ethics committees, and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees.
In addition, the continued spread of
COVID-19
globally could adversely affect our manufacturing and supply chains. Parts of our direct and indirect supply chains are located overseas, including in China, and may accordingly be subject to disruption. Additionally, our results of operations could be adversely affected to the extent that
COVID-19
or any other epidemic harms our business or the economy in general either domestically or in any other region in which we do business. The extent to which
COVID-19
affects our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of
COVID-19,
and the actions to contain
COVID-19
or treat its impact, among others, which could have an adverse effect on our business, results of operations and financial condition. To date, we are seeing that the outbreak has slowed our assay instrument placements and sales of related test kits as diagnostic testing sites have turned their attention to critical care testing. We are unable to predict when expected sales volume levels for our instruments and related test kits will return. Also, as a result of the pandemic, certain clinical trials related to our products which were underway or scheduled to begin have been temporarily placed on hold. Such delays will impact our timing for filing applications for product clearances with the FDA, as well as related timing of FDA clearances of such filings. Additionally, the pandemic could slow down our efforts to expand our product portfolio through acquisitions and distribution opportunities, impacting the speed with which we are able to bring additional products to market.
 
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If our essential employees who are unable to telework become ill or otherwise incapacitated, our operations may be adversely impacted.
Consistent with rapidly changing federal, state and local governmental orders and recommendations, we have implemented telework policies wherever possible for appropriate categories of our employees. Employees that are unable to telework continue to work at our facilities, and we have implemented appropriate safety measures, including social distancing, face covering mandates, temperature checking, and increased sanitation standards in an attempt to maintain the health and safety of our workforce. We are following guidance from the Center for Disease Control (“CDC”) and the Occupational Safety and Health Administration (“OSHA”) regarding suspension of nonessential travel, self-isolation recommendations for employees returning from certain geographic areas, confirmed reports of any
COVID-19
diagnosis among our employees, and the return of such employees to our workplace. Pursuant to updated guidance from the Equal Employment Opportunity Commission, we are engaging in limited and appropriate inquiries of employees regarding potential
COVID-19
exposure, based on the direct threat that such exposure may present to our workforce. We continue to address other unique situations that arise among our workforce due to the
COVID-19
pandemic on a
case-by-case
basis. While we believe that we have taken appropriate measures to ensure the health and wellbeing of our employees, there can be no assurances that our measures will be sufficient to protect our employees in our workplace or that they may not otherwise be exposed to
COVID-19
outside of our workplace. If a number of our essential employees become ill, incapacitated or are otherwise unable to continue working during the current or any future epidemic, our operations may be adversely impacted.
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 project 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.
 
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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 23% and 26% of the Diagnostics segment’s total revenues for fiscal 2020 and fiscal 2019, respectively, or approximately 12% and 18%, 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.
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 or the current
COVID-19
pandemic. While we believe that the breadth of our diagnostic product lines normally reduces the risk that infections subject to seasonality and sporadic outbreaks will cause significant variability in diagnostic revenues, the current
COVID-19
pandemic did result in a significant decline in our Diagnostics revenues during the second half of fiscal 2020. Accordingly, 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.
 
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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.
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 three diagnostic manufacturing customers were 27% and 26% of the Life Science segment’s total revenues for fiscal 2020 and fiscal 2019, respectively, with such percentage for fiscal 2019 being concentrated in two of the customers. Sales to these three diagnostic manufacturing customers comprised 14% and 8% of total consolidated revenues for fiscal 2020 and fiscal 2019, respectively. In addition, in excess of 10% of the segment’s total revenues has historically been concentrated among a number of other significant customers. Any significant alteration of buying patterns from these customers could adversely affect our period over period revenues and results of operations.
We expect to face increased competition resulting from expiration of our H. pylori patents.
The patents for our stool antigen
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 stool antigen
H. pylori
products, high margin products which represent approximately 10% 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 including: (i) in October 2018, we entered into a strategic collaboration with DiaSorin to sell
H. pylori
tests; (ii) 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; and (iii) upon FDA clearance in March 2020, we launched Curian HpSA, our first assay on the new Curian platform, which we expect will help protect our existing customer base using lateral flow tests. We also expect the acquisition of the Exalenz BreathID platform to combat competitive pressures, as we believe that we are now the only company with
FDA-cleared,
non-invasive
assays for both stool antigen and urea breath samples, allowing physicians a choice in test format from one supplier. 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 2020, approximately one third 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, Euro, and New Israeli shekel. 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. Over the last year, we have submitted a number of written responses to the FDA regarding the five Form 483 observations issued in the October 2019 inspection, and have worked diligently to execute a remediation plan. During October 2020, the FDA issued Establishment Inspection Reports which closed out the inspections from June 2017 and October 2019 under 21 C.F.R.20.64 (d) (3). The Warning Letter issued in October 2017 remains outstanding, pending a future FDA inspection. 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.
 
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See a more detailed discussion of these matters within MD&A on page 28.
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 an additional third party manufactures 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 7%, 11% and 11% of consolidated revenues in fiscal 2020, 2019 and 2018, respectively. 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.
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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Risks Related to Our Common Stock
The authority of our board to issue preferred stock and the effects of certain provisions of Ohio corporation law 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.
General Risk Factors
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.
 
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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, 2020, we had $68,824 outstanding on a $160,000 bank revolving credit facility.
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.
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.
 
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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 in a transition period relating to its exit from the European Union (“Brexit”). In January 2020, the U.K. and the European Union ratified a Withdrawal Agreement that set out the transition period of eleven months, from February 1, 2020 until December 31, 2020, during which the final terms of the U.K.’s departure would be negotiated. Although the Withdrawal Agreement ensures that a
“no-deal”
or “cliff-edge” Brexit was avoided on January 31, 2020, there is no certainty that a similar effect will be avoided at the end of 2020.
The ongoing uncertainty on the final terms of the withdrawal could lead to economic stagnation until an ultimate resolution with respect to Brexit occurs. If the U.K. and the European Union are unable to negotiate acceptable agreements during the transition period or if other European Union Member States pursue withdrawal, 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 future trade deals, the U.K.’s trade with the European Union and the rest of the world may 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 final terms of the U.K.’s withdrawal from the European Union are 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. In an effort to mitigate the financial impact such an attack might have on the Company, we maintain cyber liability insurance coverage. However, such coverage may be insufficient to cover the full impact of a cyber-attack. 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.
 
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ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
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; our
PCR-based
molecular manufacturing and research and development operations are located in an approximately 26,000 square foot leased facility in Quebec City, Canada; and our BreathID urea breath test manufacturing and research and development operations are located in an approximately 8,000 square foot leased facility in Modi’in, Israel. 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, and space in Manasquan, New Jersey and Changzhou, China to house BreathID technical service and repair 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 13,000 square feet of sales, warehouse and manufacturing space; Sydney – approximately 3,000 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 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 $2,035, $1,585 and $775 of expense for attorneys’ fees related to this matter is included within the accompanying Consolidated Statements of Operations for fiscal 2020, 2019 and 2018, respectively. See “Update on Lead Testing” section within MD&A on page 28.
 
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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 21 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, 2020, there were approximately 570 holders of record and approximately 18,280 beneficial owners of our common shares.
Dividends
“Quarterly Financial Data (Unaudited)” relating to our dividends in Note 12 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 and 2018. 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 and to preserve capital resources and liquidity for general corporate purposes. Any declaration and amount of dividends will be determined by the board of directors in its discretion based upon its evaluation of earnings, cash flow requirements, business developments and opportunities, and any other factors the board of directors determines are relevant to its evaluation. We paid dividends of $0.25 and $0.50 per share in fiscal 2019 and 2018, 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 the index, and in the peer group (including reinvestment of dividends) was $100 on September 30, 2015 and tracks it through September 30, 2020.
 
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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,
  
2020
    
2019
    
2018
    
2017
    
2016
 
Net revenues
   $ 253,667    $ 201,014    $ 213,571    $ 200,771    $ 196,082
Gross profit
     156,248      118,728      131,033      124,833      127,787
Operating income
     61,324      32,699      31,584      37,382      51,378
Net earnings
     46,186      24,382      23,849      21,557      32,229
Basic earnings per share
   $ 1.08    $ 0.57    $ 0.56    $ 0.51    $ 0.77
Diluted earnings per share
   $ 1.07    $ 0.57    $ 0.56    $ 0.51    $ 0.76
Cash dividends declared per share
   $ —        $ 0.250    $ 0.500    $ 0.575    $ 0.800
Book value per share
   $ 5.75    $ 4.47    $ 4.14    $ 4.02    $ 3.95
Balance Sheet Information
 
As of September 30,
  
2020
    
2019
    
2018
    
2017
    
2016
 
Current assets
   $ 162,190    $ 144,761    $ 139,053    $ 133,875    $ 126,791
Current liabilities
     52,524      20,914      24,173      22,887      22,571
Total assets
     405,261      325,478      251,377      249,777      252,028
Long-term debt obligations
     68,824      75,824      50,180      54,647      58,360
Shareholders’ equity
     247,629      190,967      175,418      169,585      166,472
 
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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 21 of this Annual Report.
In the discussion that follows, all dollar amounts are in thousands (both tables and text), except per share data
.
The purpose of Management’s Discussion and Analysis is to provide an understanding of Meridian’s financial condition, changes in financial condition and results of operations. This discussion should be read in conjunction with the financial statements and notes.
Impact of
COVID-19
Pandemic
In December 2019, the
SARS-CoV-2
virus emerged in Wuhan, China and spread to other parts of the world. In March 2020, the World Health Organization (“WHO”) designated
COVID-19
(the disease caused by
SARS-CoV-2)
a global pandemic. Governments around the world implemented lockdown and
shelter-in-place
orders, requiring many
non-essential
businesses to shut down operations throughout a substantial portion of the last five months of our fiscal year, some of which remain in effect as of the date of this filing. Our business, however, was deemed “essential” and we have continued to operate, manufacture and distribute products to customers globally. We have developed a comprehensive plan that enables us to maintain operational continuity with an emphasis on manufacturing, product distribution and new product development during this crisis. We continually assess
COVID-19
related developments and adjust risk mitigation planning and business continuity activities in real-time as needed.
The
COVID-19
pandemic has had both positive and negative effects on our businesses. Our Life Science segment’s products were well positioned to respond to IVD manufacturers’ needs for reagents for molecular, rapid antigen and serology tests. Consequently, our Life Science segment grew its revenues over 100% in fiscal 2020 and delivered record operating income and margin, demonstrating what this business could achieve at a much larger scale. Our Diagnostics segment, on the other hand, reported decreased revenues in our third and fourth fiscal quarters as health systems focused on
SARS-CoV-2
testing over traditional infectious disease and blood-chemistry testing. However, we did see a significant recovery in our Diagnostics business in our fourth fiscal quarter compared to the third fiscal quarter (up 38%).
Employee Safety
We have implemented a work-from-home process for employees whose
on-site
presence is designated as
non-essential
to the ongoing functions of our manufacturing sites, distribution centers, and new product development facilities. We continue to utilize this work-from-home process as needed on a
site-by-site
basis. We also implemented enhanced cleaning and sanitizing procedures and provided additional personal hygiene supplies at all of our sites. We implemented policies for employees to adhere to the Centers for Disease Control and Prevention (“CDC”) guidelines on social distancing, and similar guidelines by authorities outside the United States, and any employees experiencing any symptoms of
COVID-19
are required to stay home and seek medical attention. Any employee who tests positive for
COVID-19
is required to quarantine and is not allowed to return to our facilities without a physician’s release, including a negative active infection test result. Access to our facilities by outside persons not critical to continuing our operations continues to be limited. To date, we have been able to manufacture and distribute products globally, and all of our sites continue to operate without interruption. As the pandemic continues to spread, along with continuing governmental restrictions which vary by locale and jurisdiction, there is an increased risk of employee absenteeism, which could materially impact our operations at one or more sites. To date, the steps we have taken, including our work from home processes have not materially impacted the Company’s financial reporting systems, internal controls over financial reporting or disclosure controls.
 
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Supply Chains
Supply chains supporting our products remain intact, providing access to sufficient inventory of the key materials needed for manufacturing. To date, delays and allocations for certain raw materials of higher demand have been limited and have not had a material impact on our results of operations. We regularly communicate with suppliers, third-party partners, customers, health care providers and government officials in order to respond rapidly to issues as they arise. The longer the current situation continues, it is more likely that we may experience some sort of interruption to our supply chains, and such an interruption could materially affect our ability to timely manufacture and distribute our products and unfavorably impact our results of operations.
Clinical Trial Delays

As a result of the pandemic, certain of our clinical trials which were underway or scheduled to begin were temporarily placed on hold. While we are seeing
“re-starts”
for such clinical trials, they are at a slower pace than normal. Such delays continue to impact our timing for filing applications for product clearances with the FDA, as well as related timing of FDA clearances of such filings. Additionally, the ongoing
COVID-19
pandemic has and could continue to slow down our efforts to expand our product portfolio through acquisitions and distribution opportunities, impacting the speed with which we are able to bring additional products to market.
Product Demand
Our Life Science segment manufactures, markets and sells a number of molecular and immunological reagents to IVD customers, including those who are making both molecular and immunoassay
COVID-19
tests. During the last month of our second fiscal quarter and throughout our third fiscal quarter of fiscal 2020, we experienced unprecedented demand for certain of our molecular reagents (e.g., ribonucleic acid (“RNA”) master mixes and nucleotides), and such demand continued throughout our fourth fiscal quarter, albeit at a lower level than the third quarter. Although we are unable to predict when this demand may subside, we expect revenue levels for these products to be materially higher than historical levels during at least the next twelve months. Our products are used in over 100 approved
COVID-19
related assays around the world. COVID-related reagent revenues totaled approximately $71,500 during fiscal 2020.
Our Diagnostics segment manufactures, markets and sells a number of molecular, immunoassay, blood chemistry and urea breath tests
for various infectious diseases and blood-lead levels. We expect near-term sales volumes for a number of these assays to continue to be adversely affected by the
COVID-19
pandemic as such assays are often used in
non-critical
care settings. The
COVID-19
pandemic also has continued to affect our instrument placements. The launch of our Curian platform has been slower than expected as diagnostic testing sites have turned their attention to critical care testing. However, during our fourth fiscal quarter, we experienced an acceleration in Revogene placements due to the anticipated
SARS-CoV-2
assay under the FDA’s emergency use authorization. We notified the FDA on November 13, 2020 of our intent to submit for emergency use authorization and expect to do so in late November or early December. During our fourth fiscal quarter, Diagnostics sales volumes recovered, up 38% over our third fiscal quarter. However, no assurances can be made that this positive trend will continue.
Asset Impairment Review
Considering the economic impacts of
COVID-19,
we performed an analysis of our businesses to determine if there were triggering events that would require us to further test our long-lived assets for impairment. Based on our review, we do not believe that a triggering event exists at this time and, therefore, we believe that we will be able to realize the full value of our long-lived assets. As such, no impairments or other write-downs related to
COVID-19
have been recorded during fiscal 2020. In addition, we performed our annual test for goodwill impairment as of June 30, 2020 by performing a qualitative assessment pursuant to ASU
2011-08
for each reporting unit. Our qualitative assessment indicated that it is not more likely than not that the fair values of our reporting units are less than their carrying values. Accordingly, a quantitative impairment test for goodwill was not required.
Access to Capital
The impacts of
COVID-19
have adversely affected the ability of many companies to access capital and liquidity on favorable terms or at all. As of September 30, 2020, the outstanding debt balance on the Company’s revolving credit facility was $68,824, leaving $91,176 of available borrowing capacity. In addition, positive cash flows from operating activities are expected to be generated over the next twelve months, which will add to cash on hand. We also maintain a shelf registration statement on file with the Securities and Exchange Commission. The Company believes these resources will provide sufficient liquidity and cash flows to meet its operating and debt service requirements for at least the next twelve months and expects to be in compliance with its financial covenants during this same period. However, given the unusual nature of the
COVID-19
pandemic and the rapidly changing environment, we can provide no assurances in this regard and future impacts may materialize that are not currently known.
 
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Results of Operations
:
Fourth Quarter
Net earnings for the fourth quarter of fiscal 2020 increased 58% to $6,493, or $0.15 per diluted share, from net earnings for the fourth quarter of fiscal 2019 of $4,103, or $0.10 per diluted share. The level of net earnings in the fiscal 2020 fourth quarter were affected by several factors, including most notably the combined effects of the following (amounts presented on a
pre-tax
basis):
 
  (i)
significantly higher revenue in the Life Science operating segment, due to supplying key molecular components and monoclonal antibodies to diagnostic test manufacturers for use in
COVID-19
related PCR and antigen tests (up $16,905);
 
  (ii)
higher research and development spending in the Diagnostics segment under new product development programs (up $1,886);
 
  (iii)
increased cash-based incentive compensation tied to higher revenue and profit levels (up $1,428);
 
  (iv)
an increase in the fair value of the earnout obligation for the acquisition of the GenePOC business (up $1,135);
 
  (v)
decreased restructuring expenses related to the business realignment and streamlining initiatives commenced in fiscal 2018 and largely completed in the first half of fiscal 2020 (down $1,071); and
 
  (vi)
lower gains related to foreign currency (down $1,030).
Consolidated revenues for the fourth quarter of fiscal 2020 totaled $64,153, an increase of 26% compared to the fourth quarter of fiscal 2019, increasing 25% on a constant-currency basis.
Revenues for the Diagnostics segment for the fourth quarter of fiscal 2020 decreased 11% compared to the fourth quarter of fiscal 2019 (also 11% on a constant-currency basis), comprised of a 23% decrease in molecular assay products and an 8% decrease in
non-molecular
assay products. During the fourth quarter, we experienced a rebound from the previously noted impact of the
COVID-19
pandemic on our placement of molecular assay products. This positive activity resulted in 62 net placements of our Revogene system during the fourth quarter of fiscal 2020 and a total Revogene system install base of 231 systems as of September 30, 2020. With a 294% increase in revenues from molecular reagents products and flat revenues from immunological reagents products, revenues for our Life Science segment increased 97% during the fourth quarter of fiscal 2020 compared to the fourth quarter of fiscal 2019. On a constant-currency basis, revenues for the Life Science segment increased 95%. Life Science revenues reflect a significant increase in the sales of key molecular components such as RNA master mixes and deoxyribonucleotide triphosphates (“dNTPs”) to diagnostic test manufacturers for use in
COVID-19
related PCR tests. Also contributing to the record revenue levels during the quarter were sales of recombinant antigens used in
COVID-19
antibody tests and monoclonal antibody pairs used in antigen tests.
Fiscal Year
Net earnings for fiscal 2020 increased 89% to $46,186, or $1.07 per diluted share, from net earnings for fiscal 2019 of $24,382, or $0.57 per diluted share. The level of net earnings in the fiscal 2020 fourth quarter were affected by several factors, including most notably the combined effects of the following (amounts presented on a
pre-tax
basis):
 
  (i)
significantly higher revenue in the Life Science operating segment, due to supplying key molecular components, monoclonal antibodies and recombinant antigens to diagnostic test manufacturers for use in
COVID-19
related PCR, antigen and antibody tests (up $68,203);
 
  (ii)
higher research and development spending in the Diagnostics segment under new product development programs (up $6,909);
 
  (iii)
increased cash-based incentive compensation tied to higher revenue and profit levels (up $6,325);
 
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  (iv)
increased intangible asset amortization, primarily resulting from purchase accounting amortization related to the acquisitions of Exalenz and the GenePOC business in April 2020 and June 2019, respectively (up $3,413);
 
  (v)
increased acquisition-related costs in connection with the fiscal 2020 Exalenz transaction, as compared to those related to the GenePOC transaction in fiscal 2019 (up $2,082);
 
  (vi)
a net decrease in the fair value of the earnout obligation for the acquisition of the GenePOC business (down $6,293); and
 
  (vii)
decreased restructuring expenses related to the business realignment and streamlining initiatives commenced in fiscal 2018 (down $2,152).
Consolidated revenues for fiscal 2020 totaled $253,667, an increase of 26% compared to fiscal 2019, increasing 27% on a constant-currency basis.
Revenues for the Diagnostics segment decreased 11% in fiscal 2020 compared to fiscal 2019 (also 11% on a constant-currency basis), comprised of a 17% decrease in molecular assay products and a 10% decrease in
non-molecular
assay products. Considering the impact of the
COVID-19
pandemic on the placement of our molecular assay products throughout the year and the recent rebound in such activity, we placed approximately 170 Revogene systems during fiscal 2020, resulting in a total Revogene system install base of 231 systems as of September 30, 2020. With a 237% increase in revenues from molecular reagents products and a 32% increase in revenues from immunological reagents products, revenues for our Life Science segment increased 106% during fiscal 2020 compared to fiscal 2019. On a constant-currency basis, revenues for the Life Science segment increased 107%. Life Science revenues reflect a significant increase in the sales of key molecular components such as RNA master mixes and deoxyribonucleotide triphosphates (“dNTPs”) to diagnostic test manufacturers for use in
COVID-19
related PCR tests. Also contributing to the record revenue levels during the year were sales of recombinant antigens used in
COVID-19
antibody tests and monoclonal antibody pairs used in antigen tests.
Update on Lead Testing
As described 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 FDA 483 observations. On March 18, 2020, we participated in a regulatory meeting with the FDA at the FDA’s request to further discuss the Form FDA 483 observations and our remediation efforts. Over the last year, we have submitted a number of written responses to the FDA regarding the five Form 483 observations issued in the October 2019 inspection, and have worked diligently to execute a remediation plan. During October 2020, the FDA issued Establishment Inspection Reports which closed out the inspections from June 2017 and October 2019 under 21 C.F.R.20.64 (d) (3). The Warning Letter issued in October 2017 remains outstanding, pending a future FDA inspection. 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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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/or 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 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 products in Cincinnati, Ohio; Quebec City, Canada; and Modi’in, Israel; and manufacturing operations for blood chemistry products 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 severity of seasonal diseases and outbreaks (including the
COVID-19
pandemic), 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 IVD manufacturing customers, severity of disease outbreaks and foreign currency exchange rates. The severity of the
COVID-19
pandemic contributed $71,500 of new revenue for our Life Science segment during fiscal 2020.
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 acquisitions of the Revogene molecular diagnostics platform and the BreathID breath test system, 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
(“Group A Strep”) and Group B
Streptococcus
(“Group B Strep”) assays. As previously noted, the
COVID-19
pandemic dramatically slowed the placement of our molecular instruments and related assay products throughout the year, resulting in approximately 170 net placements of our Revogene system during fiscal 2020 and a total Revogene system install base of 231 systems as of September 30, 2020. In March 2020, we received clearance from the FDA for the Curian immunoassay diagnostics instrument and its first assay, a test for
H. pylori
antigen in stool. We believe the advantages of the Curian analyzer will help protect our existing rapid test accounts.
 
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Gastrointestinal Assays
During fiscal 2020, revenues from our gastrointestinal products, which include tests for
C. difficile
,
H. pylori
and certain foodborne pathogens, among others, totaled $55,040. This represents a 20% decrease from fiscal 2019 and follows a 12% decrease during fiscal 2019. We continue to face pricing and volume pressures within this product category that will carry into fiscal 2021 and beyond for our current products. Our acquisition of Exalenz and the BreathID system has strengthened our overall position in
non-invasive,
active infection testing for
H. pylori
. 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 stool antigen
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 stool antigen
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 including: (i) in October 2018, we entered into a strategic collaboration with DiaSorin to sell
H. pylori
tests; (ii) 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; and (iii) upon FDA clearance in March 2020, we launched Curian HpSA, our first assay on the new Curian platform, which we expect will help protect our existing customer base using lateral flow tests. We also expect the acquisition of the Exalenz BreathID platform to combat competitive pressures, as we believe that we are now the only company with
FDA-cleared,
non-invasive
assays for both stool antigen and urea breath samples, allowing physicians a choice in test format from a single supplier. 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
Revenues from sale of our respiratory illness products, which include tests for Group A Strep, Mycoplasma pneumonia, Influenza, and Pertussis, among others, remained relatively flat during fiscal 2020, totaling $26,694 and primarily reflecting the
COVID-19
pandemic’s negative effect on demand. These revenue levels follow an 8% decrease in respiratory product revenues in fiscal 2019.
Blood Chemistry Assays
Revenues from our sale of products to test for elevated levels of lead in blood decreased 6% during fiscal 2020 to $17,534. Beginning in the latter part of March 2020, we generally experienced lower demand for our blood-lead test as a result of the
COVID-19
pandemic. However, since the latter part of June and throughout the fourth fiscal quarter, we have seen shipments to our largest independent distributor return to
pre-pandemic
levels. During fiscal 2019, revenues from such products decreased 2%.
Life Science Products
During fiscal 2020, revenues from our Life Science segment increased 106%, with revenues from molecular reagent sales increasing 237% compared to fiscal 2019 and revenues from immunological reagent sales increasing 32%. Life Science segment revenues increased 2% in fiscal 2019, with revenues from molecular reagent sales decreasing 5% compared to fiscal 2018 and revenues from immunological reagent sales increasing 6%. Our Life Science segment’s growth was nominally impacted by the movement in currency exchange rates since fiscal 2019, with revenues increasing 107% on a constant-currency basis over fiscal 2019. The increase in revenues was primarily attributable to the increased demand for key molecular components such as RNA master mixes and dNTPs from diagnostic test manufacturers for use in
COVID-19
related PCR tests, as well as recombinant antigens used in antibody tests and monoclonal antibodies used in antigen tests. Largely as a result of this
COVID-19
related demand, revenue from sales into China totaled approximately $19,000 during fiscal 2020 – representing an increase of approximately 127% over fiscal 2019. COVID-related reagent revenues totaled approximately $71,500 during fiscal 2020.
 
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Foreign Currency
Fluctuations in foreign currency exchange rates since fiscal 2019 had an approximate $1,250 unfavorable impact on fiscal 2020 revenues; $150 within the Diagnostics segment and $1,100 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 2019; $1,150 within the Diagnostics segment and $1,050 within the Life Science segment.
Significant Customers
Revenue concentrations related to certain customers within our Diagnostics and Life Science segments are set forth in Note 10 of the accompanying Consolidated Financial Statements.
Gross Profit:
 
     2020     2019     2018     2020 vs.
2019
Inc (Dec)
    2019 vs.
2018
Inc (Dec)
 
Gross Profit
   $ 156,248   $ 118,728   $ 131,033     32     (9 %) 
Gross Profit Margin
     62     59     61     3 points       -2 points  
The gross profit margin increase experienced in fiscal 2020 results primarily from the positive impacts of a significantly higher percentage of the Life Science segment’s revenue relating to sales of molecular products and the segment’s manufacturing of larger-than-normal batch sizes for the RNA master mixes, both in response to the
COVID-19
pandemic demand, partially offset by 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; and (iii) production capacity
ramp-up
costs for our Quebec facility where Revogene instruments and test devices are made. The overall decrease in the gross profit margin from fiscal 2018 to fiscal 2019 reflects 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 Quebec facility; and (iv) operating segment mix.
Operating Expenses -
Segment Detail
 
    
Research &
Development
    
Selling &
Marketing
    
General &
Administrative
    
Other
   
Total Operating
Expenses
 
Fiscal 2018:
             
Diagnostics
   $ 13,579    $ 24,659    $ 18,120    $ 4,032   $ 60,390
Life Science
     3,034      9,367      10,342      1,240     23,983
Corporate
     —        —        7,297      7,779     15,076
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Total 2018 Expenses
  
$
16,613
    
$
34,026
    
$
35,759
    
$
13,051
   
$
99,449
 
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Fiscal 2019:
             
Diagnostics
   $ 14,545    $ 22,695    $ 17,081    $ 3,446   $ 57,767
Life Science
     3,215      5,300      9,186      188     17,889
Corporate
     —        —        7,777      2,596     10,373
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Total 2019 Expenses
  
$
17,760
    
$
27,995
    
$
34,044
    
$
6,230
   
$
86,029
 
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Fiscal 2020:
             
Diagnostics
   $ 21,454    $ 21,172    $ 23,233    $ (1,916   $ 63,943
Life Science
     2,275      5,314      11,755      200     19,544
Corporate
     —        —        9,357      2,080     11,437
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Total 2020 Expenses
  
$
23,729
    
$
26,486
    
$
44,345
    
$
364
   
$
94,924
 
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
 
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Operating Expenses -
Comparisons to Prior Year
Periods
 
    
Research &
Development
   
Selling &
Marketing
   
General &
Administrative
   
Other
   
Total Operating
Expenses
 
2018 Expenses
  
$
16,613
   
$
34,026
   
$
35,759
   
$
13,051
   
$
99,449
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
% of Revenues
     8     16     17     6     47
Fiscal 2019 Increases (Decreases):
          
Diagnostics
     966     (1,964     (1,039     (586     (2,623
Life Science
     181     (4,067     (1,156     (1,052     (6,094
Corporate
     —       —       480     (5,183     (4,703
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
2019 Expenses
  
$
17,760
   
$
27,995
   
$
34,044
   
$
6,230
   
$
86,029
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
% of Revenues
     9     14     17     3     43
% Increase (Decrease)
     7     (18 %)      (5 %)      (52 %)      (13 %) 
Fiscal 2020 Increases (Decreases):
          
Diagnostics
     6,909     (1,523     6,152     (5,362     6,176
Life Science
     (940     14     2,569     12     1,655
Corporate
     —       —       1,580     (516     1,064
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
2020 Expenses
  
$
23,729
   
$
26,486
   
$
44,345
   
$
364
   
$
94,924
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
% of Revenues
     9     10     17     —       37
% Increase (Decrease)
     34     (5 %)      30     (94 %)      10
Total operating expenses fluctuated during fiscal 2020 and fiscal 2019 primarily as a result of the combined effects of the following:
Fiscal 2020 increase
 
   
Increased Research & Development costs, primarily reflecting the development of the molecular
SARS-CoV-2
assay and molecular GI and RI panel assays for the Diagnostics operating segment, and to a lesser degree, the addition of Exalenz research and development expenses since the April 30, 2020 date of acquisition;
 
   
Decreased Selling & Marketing costs, primarily reflecting the effects of reduced travel from restrictions imposed during the
COVID-19
pandemic and the effect such restrictions have had on general sales and marketing activities;
 
   
Increased General & Administrative costs, primarily reflecting additional investment in incentive compensation, along with the purchase accounting amortization from the acquisitions of Exalenz and the GenePOC business; and
 
   
Increased acquisition costs and decreased restructuring costs, along with a net decrease in fair value of the contingent consideration obligation for the GenePOC business, all of which are reflected within “Other” in the above tables.
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, partially offset by the decreased expenditures resulting from the timing of product development projects and the clinical trials for our cCMV test in fiscal 2018;
 
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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).
Operating Income
Operating income increased 88% in fiscal 2020, following a 4% increase in fiscal 2019, as a result of the factors discussed above.
Other Income and Expense
Other income and expense in fiscal 2020, 2019 and 2018 includes interest costs on the Company’s long-term borrowings. The varying levels of the Company’s interest costs reflects the following approximate levels of average debt outstanding and the interest costs thereon, as detailed in Note 6 of the accompanying Consolidated Financial Statements: (i) fiscal 2020 – $74,560; (ii) fiscal 2019 – $57,938; and (iii) fiscal 2018 – $52,500.
Income Taxes
The effective rate for income taxes was 22%, 23% and 21% for fiscal 2020, 2019 and 2018, respectively. While relatively comparable to the fiscal 2019 and fiscal 2018 rates, the fiscal 2020 tax rate reflects the combined effects of the following: (i) a significantly higher percentage of pretax income being generated in foreign jurisdictions with tax rates lower than the U.S., particularly the United Kingdom; and (ii) the
non-deductibility
of a significant portion of the acquisition-related costs related to Exalenz.
Impact of Inflation
To the extent feasible, we have consistently followed the practice of reviewing our prices to consider the impacts 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 2020, 2019 and 2018.
Liquidity and Capital Resources
:
Liquidity
Our cash flow and financing requirements are determined by analyses of operating and capital spending budgets and debt service. 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.
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 $160,000 bank revolving credit facility, which totaled approximately $91,200 as of September 30, 2020. 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.
 
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During fiscal 2020, we generated a record level of cash flow from operations totaling $47,976. This level of cash resulted from the achievement of record fiscal year revenues, along with well-managed accounts receivable balances, including the requirement of advance payments in certain instances, as illustrated by an approximate 26% increase in consolidated revenues and only an approximate 5% increase in
year-end
accounts receivable balances.
Our levels of inventory increased approximately $21,600 to $61,264 between September 30, 2019 and September 30, 2020. This increase was attributable to inventory builds in both our Diagnostics and Life Science segments to protect against future supply interruptions and to meet
COVID-19
related demand. For our Diagnostics segment, we also have maintained inventory levels in anticipation of a return to
pre-pandemic
diagnostic testing activity and have BreathID inventory on hand for the first time in fiscal 2020 as a result of the Exalenz acquisition. We are actively managing our inventory levels and are expecting reductions during the first half of fiscal 2021.
As of September 30, 2020, our cash and equivalents balance was $53,514 or approximately $8,900 lower than at the end of fiscal 2019. As a result of the cash generated from operations during fiscal 2020 and the financing activities related to the Exalenz acquisition, since the beginning of fiscal 2020, our balance of net debt (defined as bank debt, government grant obligations and total contingent obligations related to the acquisition of the GenePOC business, net of cash and equivalents
on-hand)
has increased approximately $6,700 to approximately $52,300 at September 30, 2020. 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 twelve months.
The impacts of
COVID-19
have adversely affected the capital markets and the ability of many companies to access capital and liquidity on favorable terms or at all. The Company believes it has sufficient liquidity and cash flows to meet its operating and debt service requirements for at least the next twelve months and expects to be in compliance with its financial covenants during this same period. However, given the unusual nature of the
COVID-19
pandemic and the rapidly changing environment, we can provide no assurances in this regard and future impacts may materialize that are not currently known.
In April 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 6,
“Bank Credit Arrangements”
of the accompanying Consolidated Financial Statements and above, the Company maintains a $160,000 credit facility, which is secured by substantially all our U.S. assets and includes certain restrictive financial covenants. The Company also maintains a shelf registration statement on file with the Securities and Exchange Commission.
Our capital expenditures totaled $3,299 for fiscal 2020 and were largely related to laboratory and manufacturing equipment. During fiscal 2021 our capital expenditures are estimated to range between approximately $4,000 and $17,000. Our Diagnostics segment capital expenditures could be as high as $14,000, depending upon the level of manufacturing
scale-up
we execute in anticipation of Revogene
COVID-19
assay production, and our Life Science segment capital expenditures could be as high as $3,000, reflecting manufacturing capacity expansion at various locations. Such expenditures may be funded with cash and equivalents on hand, operating cash flows and/or availability under the $160,000 revolving credit facility discussed above. In addition, a portion of the Diagnostics expansion may possibly be funded by certain grants for which we are applying, none of which we are assured of receiving as of the date of this filing.
 
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Known Contractual Obligations
:
In addition to the obligations related to the above-noted revolving credit facility and the contingent government grant obligations detailed in Note 6,
“Bank Credit Arrangements”
and Note 9,
“Contingent Obligations and
Non-Current
Liabilities”
of the accompanying Consolidated Financial Statements, respectively, the Company’s known contractual obligations and their related due dates were as follows as of September 30, 2020:
 
     Total      Less than 1
Year
    
1-3 Years
    
4-5 Years
     More than
5 Years
 
Operating leases
(1)
   $ 6,968    $ 2,002    $ 3,015    $ 1,669    $ 282
Purchase obligations
(2)
     27,691        26,315      1,376      —        —  
Acquisition price holdback and contingent consideration
(3)
     69,000      5,000      64,000      —        —  
Uncertain income tax positions liability and interest
(4)
     706      706      —        —        —  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 104,365    $ 34,023    $ 68,391    $ 1,669    $ 282
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
(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, as amended during fiscal 2020, Meridian’s maximum remaining consideration to be paid totals $69,000. As noted below and detailed in Note 2,
“Business Combinations”
of the accompanying Consolidated Financial Statements, this amount is comprised of: (i) a $5,000 purchase price holdback; and (ii) up to $64,000 of payments contingent upon the achievement of certain product development milestones and financial performance targets, the valuation of which totals approximately $20,909 as of September 30, 2020.
(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 81% 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 $1,700 in fiscal 2021.
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,
“Business Combinations”
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.
 
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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, Euro, and New Israeli shekel. 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 23% of the segment’s total revenues or 12% of consolidated revenues for fiscal 2020. Additionally, our three major product families – gastrointestinal, respiratory illnesses and blood chemistry – accounted for 82% of our Diagnostics segment’s third-party revenues during fiscal 2020, and 39% of our fiscal 2020 consolidated revenues.
Our Life Science segment’s revenues from sales of purified antigens and reagents to three diagnostics manufacturing customers were 27% of the segment’s total revenues for fiscal 2020, and 14% of our fiscal 2020 consolidated revenues. Additionally, sales of products related to
COVID-19
accounted for 54% of our Life Science segment’s third-party revenues during fiscal 2020, and 28% of our 2020 consolidated revenues.
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 interest rate swap agreements and contingent consideration
Income Taxes   Note 1(l) and Note 7   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 25.
 
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
 
     38  
     39  
     43  
     44  
     45  
     46  
     48  
     49  
     79  
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, 2020, 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, 2020. The Company’s assessment of and conclusion on the effectiveness of its internal control over financial reporting did not include the internal controls of wholly-owned subsidiaries Meridian Bioscience Israel Holding Ltd. and Exalenz Bioscience, Inc. (collectively “Exalenz”), which were acquired during fiscal 2020 and the results of which since the date of acquisition were included in the 2020 consolidated financial statements. Exalenz constituted $75,551 or 18.64% of the Company’s total assets as of September 30, 2020, and $4,206 or 1.66% of total net revenues, for the year ended September 30, 2020.
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 23, 2020     Chief Financial Officer
    November 23, 2020
 
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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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2020, 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, 2020, 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 23, 2020 expressed an unqualified opinion.
Adoption of new accounting standard
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method for accounting for leases in fiscal 2020 due to the adoption of Accounting Standards Codification 842,
Leases
.
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 regarding 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 matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
 
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Valuation of Intangible Assets associated with the Exalenz Acquisition
As described further in Note 2 to the consolidated financial statements, the Company completed its acquisition of Exalenz Bioscience Ltd. (“Exalenz”) for net cash consideration of $51.3 million, which resulted in the identification and recognition of $55.2 million of intangible assets. Intangible assets consisted primarily of customer relationships, technology and trade name (collectively “the identifiable intangible assets”), with the remainder allocated to goodwill. The Company used a discounted cash flow model to measure the customer relationship intangible asset and a relief from royalty model to measure the technology and trade name intangible assets. We identified the valuation of identifiable intangible assets associated with the Exalenz acquisition as a critical audit matter.
The principal consideration for our determination that the valuation of the identifiable intangible assets is a critical audit matter is the complexity associated with auditing the Company’s preliminary valuation of identifiable intangible assets due to the high degree of management subjectivity in the related fair value estimates. The high degree of management subjectivity is primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired business. The significant assumptions used to estimate the fair value of the identifiable intangible assets included certain assumptions that form the basis of the future net cash flows (e.g., assumed growth rates, discount rate, economic lives, royalty rates and margin percentages). These significant assumptions are forward looking and consider anticipated market conditions.
Our audit procedures related to the preliminary valuation of intangible assets 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 preliminary valuation report for the completeness and mathematical accuracy of the data, and evaluating the reasonableness of assumptions used in the calculations, such as assumed growth rates, discount rate, economic lives, royalty rates and margin percentages, as compared to industry/market data.
 
   
We tested the significant assumptions used within the discounted cash flow model to estimate the fair value of the identifiable intangible assets which included certain assumptions such as assumed growth rates, economic lives, and margin percentages as compared to industry/market data.
 
   
We utilized a valuation specialist to assist in evaluating the appropriateness of the Company’s selection of valuation methodology for the identifiable intangible assets and evaluating the reasonableness of certain significant assumptions used, including discount rate, economic lives, and royalty rates.
 
   
We evaluated whether assumptions used were reasonable by considering past performance of similar 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 23, 2020
 
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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, 2020, 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, 2020, 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, 2020, and our report dated November 23, 2020 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 Israel Holding Ltd. and Exalenz Bioscience, Inc., wholly-owned subsidiaries (collectively “Exalenz”), whose financial statements reflect total assets and revenues constituting 18.64% and 1.66%, respectively, of the related consolidated financial statement amounts as of and for the year ended September 30, 2020. As indicated in Management’s Report, Exalenz was acquired during fiscal 2020. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of Exalenz.
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 23, 2020
 
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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,
  
2020
    2019     2018  
Net Revenues
  
$
253,667
    $ 201,014   $ 213,571
Cost of Sales
  
 
97,419
      82,286     82,538
  
 
 
   
 
 
   
 
 
 
Gross Profit
  
 
156,248
      118,728     131,033
  
 
 
   
 
 
   
 
 
 
Operating Expenses:
      
Research and development
  
 
23,729
      17,760     16,613
Selling and marketing
  
 
26,486
      27,995     34,026
General and administrative
  
 
44,345
      34,044     35,759
Acquisition-related costs
  
 
3,890
      1,808     —  
Change in fair value of contingent
 
consideration obligation
  
 
(6,293
    —       —  
Restructuring costs
  
 
687
      2,839     8,706
Selected legal costs
  
 
2,080
      1,583     4,345
  
 
 
   
 
 
   
 
 
 
Total operating expenses
  
 
94,924
      86,029     99,449
  
 
 
   
 
 
   
 
 
 
Operating Income
  
 
61,324
      32,699     31,584
Other Income (Expense):
      
Interest income
  
 
142
      681     418
Interest expense
  
 
(2,632
    (1,945     (1,520
Other, net
  
 
459
      122     (102
  
 
 
   
 
 
   
 
 
 
Total other expense
  
 
(2,031
    (1,142     (1,204
  
 
 
   
 
 
   
 
 
 
Earnings Before Income Taxes
  
 
59,293
      31,557     30,380
Income Tax Provision
  
 
13,107
      7,175     6,531
  
 
 
   
 
 
   
 
 
 
Net Earnings
  
$
46,186
    $ 24,382   $ 23,849
  
 
 
   
 
 
   
 
 
 
Earnings Per Share Data:
      
Basic earnings per common share
  
$
1.08
    $ 0.57   $ 0.56
Diluted earnings per common share
  
$
1.07
    $ 0.57   $ 0.56
Common shares used for basic earnings per common share
  
 
42,855
      42,571     42,325
Effect of dilutive stock options and restricted share units
  
 
319
      328     429
  
 
 
   
 
 
   
 
 
 
Common shares used for diluted earnings per common share
  
 
43,174
      42,899     42,754
  
 
 
   
 
 
   
 
 
 
Dividends declared per common share
  
$
—  
 
  $ 0.250   $ 0.500
Anti-dilutive Securities:
      
Common share options and restricted share units
  
 
893
      1,129     1,007
The accompanying notes are an integral part of these consolidated financial statements.
 
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (dollar amounts in thousands)
Meridian Bioscience, Inc. and Subsidiaries
 
For the Year Ended September 30,
  
2020
    2019     2018  
Net Earnings
  
$
46,186
    $ 24,382   $ 23,849
Other comprehensive income (loss):
      
Foreign currency translation adjustment
  
 
3,884
 
    (802     (1,075
Unrealized gain (loss) on cash flow hedge
  
 
(713
    (1,159     907
Reclassification of amortization of gain on cash flow hedge
  
 
(308
    (102    
Income taxes related to items of other comprehensive income
  
 
252
      465     (263
  
 
 
   
 
 
   
 
 
 
Other comprehensive income (loss), net of tax
  
 
3,115
 
    (1,598     (431
  
 
 
   
 
 
   
 
 
 
Comprehensive Income
  
$
49,301
    $ 22,784   $ 23,418
  
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
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CONSOLIDATED STATEMENTS OF CASH FLOWS (dollar amounts in thousands)
Meridian Bioscience, Inc. and Subsidiaries
 
For the Year Ended September 30,
  
2020
 
  2019     2018  
Cash Flows From Operating Activities
      
Net earnings
  
$
46,186
 
  $ 24,382   $ 23,849
Non-cash
items included in net earnings:
      
Depreciation of property, plant and equipment
  
 
5,823
 
    5,433     4,491
Amortization of intangible assets
  
 
7,744
 
    4,531     3,433
Amortization of deferred instrument costs
  
 
—  
 
    —         764
Stock-based compensation
  
 
3,802
 
    3,251     3,402
Deferred income taxes
  
 
760
 
    (817     (300
Losses on dispositions of long-lived assets
    
64
    632     — 
 
 
 
Change in 
accrued conti
ngent consideration
 
 
 
(6,293
)
 
 
 
 —
 
 
— 
 
Change in the following, net of acquisitions:
      
Accounts receivable
    
(971
    (2,215     (4,370
Inventories
  
 
(18,977
    3,841     (1,142
Prepaid expenses and other current assets
  
 
(153
)
 
    (2,143     246
Accounts payable and accrued expenses
  
 
7,248
 
    (2,315     4,124
Income taxes payable
  
 
1,435
 
    1,793     (524
Other, net
  
 
1,308
 
    (198     814
  
 
 
 
 
 
 
   
 
 
 
Net cash provided by operating activities
  
 
47,976
 
    36,175     34,787