Meridian Bioscience, Inc.
10-K on 11/23/2021   Download
SEC Document
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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, 2021.
 
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 an 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, 2021 was $1,132,216,391 based on a closing sale price of $26.25 per share on March 31, 2021. As of October 31, 2021, 43,364,448 shares of Common Stock, no par value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2022 Annual Meeting of Shareholders, which will be filed within one hundred and twenty days of the fiscal year ended September 30, 2021 (2022 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
 
  
 
5
 
Item 1A
 
  
 
11
 
Item 1B
       24  
Item 2
       24  
Item 3
       24  
Item 4
       25  
 
  
Item 5
 
  
 
25
 
Item 6
 
  
 
26
 
Item 7
 
  
 
26
 
Item 7A
 
  
 
37
 
Item 8
 
  
 
38
 
Item 9
 
  
 
74
 
Item 9A
 
  
 
74
 
Item 9B
 
  
 
75
 
  
Item 10
 
  
 
75
 
Item 11
 
  
 
75
 
Item 12
 
  
 
76
 
Item 13
 
  
 
76
 
Item 14
 
  
 
76
 
Item 15
 
  
 
76
 
Item 16
 
  
 
78
 
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 novel coronavirus
(“COVID-19”)
pandemic, or otherwise.
Unless the context requires otherwise, references in this Annual Report on
Form 10-K
(“Form
10-K”)
to “Meridian,” “we,” “us,” “our,” “Company,” or “our company” refer to Meridian Bioscience, Inc. and its subsidiaries.

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In the discussion that follows, all dollar amounts and share amounts are in thousands (both tables and text), except per share data.
This Form
10-K
refers to trademarks such as Alethia
®
, BreathID
®
, BreathTek
®
, Curian
®
, HpSA
®
, Immuno
Card
®
, Immuno
Card
STAT!
®
, LeadCare
®
, MyTaq
, 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 Form
10-K
refer to our molecular diagnostic tests and instrumentation formerly marketed and sold under the
illumi
gene
and
illumi
pro
brands. Such references are not intended to indicate, in any way, that we will not assert, to the fullest extent permitted by law, our rights to our trademarks.
WEBSITE AND SOCIAL MEDIA DISCLOSURE
We use our website (
www.meridianbioscience.com
) and our corporate Facebook, Instagram, LinkedIn, Twitter, Vimeo and YouTube accounts as channels of distribution of company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, Securities and Exchange Commission (“SEC”) filings and public conference calls and webcasts. The contents of our website and social media channels are not, however, a part of this report.
MARKET AND INDUSTRY INFORMATION
Market data used throughout this Form
10-K
is based on management’s knowledge of the industry and good faith estimates of management. All of management’s estimates presented herein are based on industry sources, including analyst reports and management’s knowledge. We also relied, to the extent available, upon management’s review of independent industry surveys and publications prepared by a number of sources and other publicly available information. We are responsible for all of the disclosures in this Form
10-K
and while we believe that each of the publications, studies and surveys used throughout this Form
10-K
are prepared by reputable sources, we have not independently verified market and industry data from third-party sources.
All of the market data used in this Form
10-K
involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the estimated market position, market opportunity and market size information included in this Form
10-K
is generally reliable, such information, which in part is derived from management’s estimates and beliefs, is inherently uncertain and imprecise and has not been verified by any independent source. Projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Item 1A. Risk Factors” of Part I of this Form
10-K
and elsewhere in this Form
10-K.
These and other factors could cause results to differ materially from those expressed in our estimates and beliefs and in the estimates prepared by independent parties.
 
- 4 -

Table of Contents
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 testing systems and kits, primarily for certain gastrointestinal and respiratory infectious diseases, and elevated blood lead levels; and (ii) the manufacture and distribution of bulk antigens, antibodies, immunoassay blocking reagents, specialized Polymerase Chain Reaction (“PCR”) master mixes, and bioresearch reagents used by other diagnostic test 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 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 Form
10-K.
Reportable Segments
Our reportable segments are Diagnostics and Life Science, both of which are headquartered in Cincinnati, Ohio. We describe these reportable segments in this “Business” section and in other locations in this report:
 
Type of Segment Information
 
Location within 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   Item 8. “Note 15 of Consolidated Financial Statements”
Diagnostics Segment
Products and Markets
Prior to the onset of the
COVID-19
pandemic early in 2020, our largest source of net revenues was clinical diagnostic products, historically representing approximately
two-thirds
of our consolidated net revenues. However, primarily due to the effects of the
COVID-19
pandemic, our Diagnostics segment provided 40% of consolidated net revenues for fiscal 2021, following 48% of consolidated net revenues for fiscal 2020. In 2022, we expect our Diagnostics segment to contribute approximately 50% of our consolidated net revenues.
Our clinical diagnostic products provide accuracy, simplicity and speed; enable early diagnosis and treatment of 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 just under 200 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 brands); and urea breath testing for
H. pylori
(BreathID and BreathTek brands).
 
- 5 -

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Our diagnostic assay 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. Currently pending clearance at the U.S. Food and Drug Administration (“FDA”) is a 510(k) application for the Curian Campylobacter assay. Our current new product development pipeline includes gastrointestinal and respiratory multi-plex assays on our Revogene instrument platform, and EHEC Shiga Toxin and
C. difficile
combo common antigen and Toxins A and B on our Curian instrument platform. In addition, we have other assays on both platforms moving through our upstream marketing assessment processes that are expected to add to the development pipeline. For our BreathID platform, we are actively looking at the feasibility of combining Urea and Citrica into a single sachet or pouch, which would meaningfully improve our cost of manufacturing BreathID assays. We are also pursuing opportunities to complement our internal research and development programs by securing rights to finished diagnostics tests that we can immediately commercialize.
The April 2020 acquisition of Exalenz Bioscience Ltd. (“Exalenz”) and the BreathID system, along with the July 2021 acquisition of the BreathTek business, strengthened our position in
H. pylori
testing, as these products provide an alternative
non-invasive
testing approach versus stool antigen testing.
Market Trends
Despite the effects of the
COVID-19
pandemic and the intense 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.
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 (“U.S.”) and certain major markets in the EMEA region (i.e., in Europe, the Middle East and Africa). We also use independent distributors either in a complementary manner with our direct sales force (e.g., the U.S.) or solely to supply our products to
end-users.
We have two independent distribution customers and a reference laboratory customer that together comprised 33% of Diagnostics segment net revenues in fiscal 2021, with each contributing 10% or greater of the Diagnostics segment’s net revenues.
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.
 
- 6 -

Table of Contents
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. See product recall discussion included in “Lead Testing Matters” beginning on page 29 within MD&A.
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.
Manufacturing
Our diagnostics products 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 and BreathTek products require 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 and BreathTek systems 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.
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 applicable to our Alethia products, which represented 4%, 7% and 12% of consolidated net revenues for fiscal 2021, 2020 and 2019, respectively, have been and continue to be licensed from a third party, Eiken Chemical Co., Ltd., under a
non-exclusive
license agreement, with the last remaining U.S. patent expiring in 2022.
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 (“EU”) 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. In September 2021, the U.S. Patent and Trademark Office granted to Meridian Bioscience Canada Inc. (a wholly owned subsidiary) and Laval University a patent for our current Revogene test device and its microfluidic use in our Revogene instrument.
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., EU, Israel, Japan, Australia and China. The wholly owned patents have varying expiration dates, with the last being in 2033.
 
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The patents for our stool antigen
H. pylori
products, owned by us and which represented approximately 7%, 9% and 17% of consolidated net revenues for fiscal 2021, 2020 and 2019, respectively, expired in May 2016 in the U.S. and in May 2017 in countries outside the U.S. As a result, competition with respect to our stool antigen
H. pylori
products has increased, adversely impacting our selling prices for these products, and/or our ability to retain business at prices acceptable to us. To mitigate certain of the pricing and volume pressures we face within the gastrointestinal product category, we have: (i) operated under a strategic collaboration agreement with DiaSorin to sell
H. pylori
tests; (ii) adjusted selling prices to secure volume; and (iii) upon FDA clearance in March 2020, launched Curian HpSA, our first assay on the Curian platform, which we expect will help protect our existing customer base using lateral flow tests. We also expect the BreathID and BreathTek products to mitigate competitive pressures, as these products provide an alternative
non-invasive
option to stool antigen testing. 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 net 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” (“PMA”) from the FDA as to safety and effectiveness. Our diagnostics manufacturing facilities are subject to periodic inspection by the FDA. See page 29 within MD&A for discussion regarding the FDA’s inspection of our Billerica facility.
Each of the diagnostic products currently marketed by Meridian in the U.S. has been cleared, approved or authorized for use by the FDA or are exempt from such requirements. The majority of such products have been cleared by the FDA pursuant to its 510(k) clearance process, with our BreathTek product having been approved under the FDA’s PMA process. In the case of our Revogene
SARS-CoV-2
test, it has not been FDA cleared or approved but rather has been authorized by the FDA for emergency use under its Emergency Use Authorization (“EUA”) process. We believe that most 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 urea breath test for
H. pylori
on the BreathTek system was approved by the FDA via the PMA process in 2012. Our
SARS-CoV-2
test on the Revogene platform was submitted to the FDA under its EUA program on June 25, 2021, with EUA being granted on November 9, 2021.
Sales of our diagnostic products in foreign countries are subject to foreign government regulation, which is similar to that of the FDA. Our Diagnostics segment facilities are certified to ISO 13485.
Following a five-year transition period, sales of our diagnostic products in the EU 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). In October 2021, the European Commission submitted a proposal to the European Parliament that would move back the May 2022 implementation date for diagnostic tests that are currently CE Marked to dates ranging from May 2025 to May 2028, depending on the risk classification of the diagnostic test. We have completed an assessment of needed remediation activities to comply with IVDR and also determined that several products will not be sellable under IVDR. The net revenues associated with these products are not expected to be material. New diagnostic products launched after May 2022 are required to comply with IVDR.
Life Science Segment
Products and Markets
Our Life Science segment develops, manufactures, sells and distributes bulk antigens, antibodies, immunoassay blocking reagents, specialized PCR master mixes, isothermal reagents, enzymes, nucleotides, and bioresearch reagents used predominantly by in vitro device (“IVD”) manufacturing companies, and to a lesser degree, by researchers and
non-human
clinical customers such as veterinary, food and environmental. 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 2021, approximately 87% of Life Science segment net revenues were generated from the industrial market, defined as IVD manufacturers, and reagents for use in
SARS-CoV-2
tests contributed approximately $111,900 of net revenues, following $71,500 in fiscal 2020. We engage direct sales teams in the U.S., the United Kingdom (“U.K.”), France, Germany, China and Australia. During fiscal 2021, 22% of net revenues for this segment were from three IVD manufacturing customers.
 
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Our Life Science segment 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. Selectively, 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 detecting 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 continue 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, such as Thermo Fisher, 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.
Research and Development
Our research and development activities for the Life Science segment focus on molecular reagents for use in PCR and isothermal chemistries in detecting both DNA and RNA. Our new product development programs are progressing through sample-specific (e.g., blood, saliva, urine, stool, and plant) mixes in both
air-dryable
and lyophilization-ready forms, and isothermal reagents in both
air-dryable
and lyophilization-ready forms. We also have enzyme development programs that meet the EU Registration, Evaluation, Authorization, and Restriction of Chemicals regulation. See “Operating Expenses” section on page 33 within MD&A.
Manufacturing and Government Regulation
Our Life Science segment facilities are ISO 13485 certified, and where appropriate, our Life Science segment facilities comply with Regulation EC 1069.
International Markets
International markets are an important source of net revenues and future growth opportunities for both of our reportable segments. For both reportable segments combined, net revenues from customers located outside of the U.S. and its territories approximated $173,000 or 55% of consolidated 2021 net revenues, $122,000 or 48% of consolidated 2020 net revenues, and $74,000 or 37% of consolidated 2019 net revenues. Since the outbreak of the
COVID-19
pandemic in fiscal 2020 and throughout fiscal 2021, a significantly higher percentage of our Life Science segment’s net revenues have been generated from international markets, and we expect to continue to look to key European and Asian markets as a source of revenue growth. For the Life Science segment, we also continue to focus resources on IVD manufacturing customers in China, India, Japan and Korea. To date, we have not experienced any adverse effects from the trade tensions between the U.S. and China, but we cannot be sure that we will not experience any adverse effects in the future.
Fluctuations in foreign currency exchange rates in fiscal 2021 compared to fiscal 2020 had an approximate $9,200 favorable impact on consolidated 2021 net revenues; $1,300 within the Diagnostics segment and $7,900 within the Life Science segment. This compares to
year-to-year
currency exchange rates having an approximate $1,250 unfavorable impact on consolidated net revenues in 2020; $150 within the Diagnostics segment and $1,100 within the Life Science segment. In fiscal 2019, the unfavorable effect on net revenues totaled $2,200; $1,150 within the Diagnostics segment and $1,050 within the Life Science segment.
 
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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, 2021, our Diagnostics segment had approximately 560 employees in ten countries, our Life Science segment had approximately 200 employees in seven countries, and Corporate had five employees, all in the U.S. Approximately 55% of our employees are women. In addition, of our U.S. based employees, which represents approximately 60% of our total worldwide workforce, approximately 25% are ethnically diverse.
Below is additional demographic information about our current employee base as of September 30, 2021.
 
Meridian Employees
  
2021
 
Salaried workforce
     543  
Managers and above
     159  
Part-time employees
     27  
Average age
     43  
Average length of service in years
     7  
Employee turnover rate (voluntary)
     19
Fiscal 2021 net revenues per employee (in thousands)
   $ 415  
 
Equal Employment Opportunity Table (by number of employees)
U.S. Employee Diversity as of September 30, 2021
 
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      12        —          —          —          —          —          12  
   Female      3        —          1        —          —          —          4  
First/mid-level
officials and managers
   Male      41        4        2        3        —          —          50  
   Female      36        4        —          4        —          1        45  
Professionals
   Male      60        4        4        5        —          1        74  
   Female      71        9        5        9        —          2        96  
All other
   Male      59        11        8        5        —          1        84  
   Female      83        18        7        8        —          2        118  
Total
   Male      172        19        14        13        —          2        220  
   Female      193        31        13        21        —          5        263  
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 continue to invest in the creation of a work environment where our employees can feel inspired to deliver their workplace best every day. 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
In 2020, we 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 has developed a mission statement and promotes awareness so we can encourage and support an environment in which all employees feel included and empowered to achieve their best.
 
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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 packages include market-competitive pay, cash 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 in certain locations within our organization, after accounting for legitimate business factors that can explain differences, such as performance, time at grade level, and tenure. We intend to conduct market surveys every two years to assess market compensation levels from a total compensation perspective. 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) One Meridian Company-wide intranet; (ii) quarterly CEO update videos; (iii) open forums or town hall meetings with executives; (iv) regular ongoing update communications; and (v) employee engagement surveys.
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.
Risk Factors Summary
Risks Related to Our Strategy
 
   
Our financial condition, results of operations and cash flows could be adversely affected by the ongoing and evolving
COVID-19
pandemic.
 
   
Net revenues for our Diagnostics segment may be impacted by our reliance upon large customers in North America, seasonal factors and sporadic outbreaks, and changing diagnostic market conditions.
 
   
Net revenues for our Life Science segment may be impacted by customer concentrations and buying patterns.
 
   
Intense competition could adversely affect our profitability and operating results.
 
   
We expect to continue to face increased competition resulting from the expiration of our
H. pylori
patents.
Risks Related to our Intellectual Property
 
   
We may be unable to protect or obtain adequate patent protection for intellectual property that we utilize or intend to utilize.
 
   
Product infringement claims by other companies could result in costly disputes and could limit our ability to sell our products.
Risks Related to our Operations
 
   
We may be unable to develop new products or acquire products on favorable terms.
 
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We may be unable to successfully integrate operations or to achieve expected cost savings from acquisitions we make.
 
   
The effective tax rate of the Company may be negatively impacted by changes in the mix of earnings as well as future changes to tax laws in global jurisdictions in which we operate.
 
   
Significant interruptions in production at our principal manufacturing facilities and/or third-party manufacturing facilities could adversely affect our business and 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.
 
   
Our ability to meet future customer demand for selected products is dependent upon our ability to successfully manage our manufacturing capacity and supply chains.
 
   
Increased prices for, poor quality of, or extended inability to source raw materials or services used in our products, and supply chain disruptions, could adversely affect profitability.
Risks Related to Legal, Regulatory and International Matters
 
   
We are subject to comprehensive regulation, and our ability to earn profits may be restricted by these regulations.
 
   
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.
 
   
We incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies in the U.S., and failure to comply with these laws could harm our business and the price of our common stock.
 
   
We could be adversely affected by health care reform legislation.
 
   
Efforts to reduce the U.S. federal deficit could adversely affect our results of operations.
 
   
Global market, political, environmental, and economic conditions, including those related to the financial markets, could have a material adverse effect on our operating results, financial condition, and liquidity.
 
   
We depend on international net revenues, and our operating results may be adversely impacted by foreign currency, regulatory or other developments affecting international markets.
 
   
New tariffs and other trade measures could adversely affect our operating results.
 
   
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.
Risks Related to Our Common Stock
 
   
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.
 
   
Our business could be negatively impacted as a result of shareholder activism, an unsolicited takeover proposal or a proxy contest.
 
   
The authority of our board to issue preferred stock and the effects of certain provisions of Ohio corporation law may discourage takeover bids.
General Risk Factors
 
   
One or more cybersecurity incidents may adversely impact our financial condition, results of operations and reputation.
 
   
Our business could be negatively affected if we are unable to attract, hire and retain key personnel.
 
   
Our bank credit agreement imposes restrictions with respect to our operations, which could adversely impact our business.
Risks Related to Our Strategy
Our financial condition, results of operations and cash flows could be adversely affected by the ongoing and evolving
COVID-19
pandemic.
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:
 
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decreased volume of testing and related sales of certain of our Diagnostics segment 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. Over the course of the
COVID-19
pandemic, we have generally seen a slowing of our assay instrument placements and sales of related test kits, as diagnostic testing sites 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
COVID-19
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
COVID-19
pandemic could slow down our efforts to expand our product portfolio through acquisition opportunities, impacting the speed with which we are able to bring additional products to market.
Net revenues for our Diagnostics segment may be impacted by our reliance upon large customers in North America, seasonal factors and sporadic outbreaks, and changing diagnostic market conditions.
Key Distributors
Our Diagnostics segment’s net revenues from sales through three customers, including two key distributors, were approximately 33%, 32% and 31% of the Diagnostics segment’s total net revenues for 2021, 2020 and 2019, respectively, or approximately 13%, 15% and 21%, respectively, of each year’s consolidated net revenues. The loss of any one of these customers could negatively impact our net revenues and results of operations unless suitable alternatives were timely found or in the case of distributor customers, 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 customers 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
COVID-19
pandemic. While we believe that the breadth of our Diagnostics segment product lines normally reduces the risk that infections subject to seasonality and sporadic outbreaks will cause significant variability in Diagnostics segment net revenues, the
COVID-19
pandemic has had a significant adverse impact on our Diagnostics segment net revenues since it began in fiscal 2020. Accordingly, we can make no assurance that net revenues will not be negatively impacted period over period by such factors.
 
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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.
Net revenues for our Life Science segment may be impacted by customer concentrations and buying patterns.
Our Life Science segment’s net revenues from three diagnostic manufacturing customers were 22%, 30% and 27% of the Life Science segment’s total net revenues for 2021, 2020 and 2019, respectively. Sales to these three diagnostic manufacturing customers comprised 13%, 16% and 9% of consolidated net revenues for 2021, 2020 and 2019, respectively. In addition, in excess of 10% of the Life Science segment’s total net revenues has historically been concentrated among a number of other significant customers. Any significant alteration of buying patterns from these customers resulting from the decline in
COVID-19
related demand, or otherwise, could adversely affect our period over period net revenues and results of operations.
Intense competition could adversely affect our profitability and operating results.
The markets for our products and services are characterized by substantial competition and rapid change. Hundreds of companies around the world supply diagnostic tests and immunoassay and molecular reagents. These companies range from multinational health care entities, for which diagnostics is one line of business, to small
start-up
companies. Many of our competitors have significantly greater financial, technical, manufacturing and marketing resources than we do. We cannot provide assurance that our products and services will be able to compete successfully with the products and services of our competitors.
We expect to continue to face increased competition resulting from the 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. As a result, competition with respect to our stool antigen
H. pylori
products, high margin products which represent approximately 7% of our total net revenues has increased, adversely impacting our selling prices for these products, and/or our ability to retain business at prices acceptable to us. To mitigate certain of the pricing and volume pressures we face within the gastrointestinal product category, we have: (i) operated under a strategic collaboration agreement with DiaSorin to sell
H. pylori
tests; (ii) adjusted selling prices to secure volume; and (iii) upon FDA clearance in March 2020, launched Curian HpSA, our first assay on the Curian platform, which we expect will help protect our existing customer base using lateral flow tests. We also expect the BreathID and BreathTek products to mitigate competitive pressures, as these systems provide an alternative
non-invasive
option to stool antigen testing. 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 net revenues and gross profit.
Risks Related to Our Intellectual Property
We may be unable to protect or obtain adequate patent protection for intellectual property 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.
 
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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 life science and diagnostic industries. 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 future results of operations and liquidity, including net revenues and gross profit.
Risks Related to Our Operations
We may be unable to develop new products or acquire products 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 net 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 net earnings and results of operations.
The effective tax rate of the Company may be negatively impacted by changes in the mix of earnings as well as future changes to tax laws in global jurisdictions in which we operate.
We are subject to income taxes in the U.S. and various other global jurisdictions. Our effective tax rate could be adversely affected by changes in the mix of earnings by jurisdiction and the valuation of deferred tax assets and liabilities. Recently, the current U.S. presidential administration committed to tax reform, and if enacted, the impact could be material to our tax provision and value of deferred tax assets and liabilities. We recognize deferred tax assets and liabilities based on the differences between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities. Significant judgment is required in determining our provision for income taxes. We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. If we are unable to generate sufficient future taxable income, if there is a material change in the actual effective tax rates, or if there is a change to the time period within which the underlying temporary differences become taxable or deductible, we could be required to increase our valuation allowance against our deferred tax assets, which could result in a material increase in our effective tax rate.
 
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Changes in tax laws or tax rulings could have a material impact on our effective tax rate. Many countries in the EU, as well as several other countries and organizations such as the Organization for Economic Cooperation and Development, are actively considering changes to existing tax laws. Certain proposals could include recommendations that could increase our tax obligations in those countries where we do business. Any changes in the taxation of our activities in such jurisdictions may result in a material increase in our effective tax rate.
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 net 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, including interruptions that have resulted from product recall activities like those currently being experienced in our Billerica facility (see “Lead Testing Matters” beginning on page 29 within MD&A) could materially and adversely affect our results of operations.
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 U.S. 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 results of operations.
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 results of operations.
 
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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 6%, 7% and 11% of consolidated net revenues in 2021, 2020 and 2019, 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.
Our ability to meet future customer demand for selected products is dependent upon our ability to successfully manage our manufacturing capacity and supply chains.
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 net revenues 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 consolidated financial condition and results of operations.
Increased prices for, poor quality of, or extended inability to source raw materials or services used in our products, and supply chain disruptions, could adversely affect profitability.
Our profitability is affected by the prices of the raw materials used in the manufacture of our products. These prices fluctuate based on a number of factors beyond our control, including changes in supply and demand, general economic conditions, labor costs, fuel-related delivery costs, competition, import duties, tariffs, currency exchange rates, and, in some cases, government regulation. Significant increases in the prices of raw materials, similar to the inflationary increases we have experienced in the second half of 2021, that cannot be recovered through increases in the price of our products and/or offset by savings in other areas, could adversely affect our results of operations and cash flows.
We cannot guarantee that the prices we are paying for raw materials today will continue in the future, or that the marketplace will continue to support current prices for our products, or that such prices can be adjusted to fully or partially offset raw material price increases in the future. Any increases in prices resulting from a tightening supply of these or other commodities could adversely affect our profitability. We do not engage in hedging transactions for raw material purchases, but we do enter into some fixed-price supply contracts.
Our dependency upon regular deliveries of supplies and the quality of those supplies upon delivery from particular suppliers means that interruptions, stoppages, or deterioration of quality in such deliveries could adversely affect our operations until arrangements with alternate suppliers could be made. Several of the raw materials used in the manufacture of our products currently are procured from a single source. In some cases, we also outsource certain services to suppliers, including but not limited to, engineering, assembly, shipping, and commissioning services. If a supplier were unable to deliver these materials or services, or if the quality of these materials or services declined, for an extended period of time as a result of financial difficulties, catastrophic events affecting their facilities, or other factors, including recent supply chain disruptions we have experienced, or if we were unable to negotiate acceptable terms for the supply of materials or services with these suppliers, our business could be adversely affected. We may not be able to find acceptable alternatives, and any such alternatives could result in increased costs. Extended inability to source a necessary raw material or service could cause us to cease manufacturing one or more products for a period of time, which could also lead to loss of customers, as well as reputational, competitive, or business harm, which could have a material adverse effect on our business, consolidated financial condition, and results of operations.
 
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Risks Related to Legal, Regulatory and International Matters
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 U.S. and other countries. Costs and difficulties in complying with laws and regulations administered by the FDA, the U.S. Department of Agriculture, the U.S. Department of Commerce, the U.S. Drug Enforcement Agency, the Centers for Disease Control and Prevention (“CDC”), 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 cost 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.
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, net revenues 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, consolidated financial condition and results of operations.
 
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As described in Item 3. “Legal Proceedings”, on April 17, 2018, the Company’s wholly owned subsidiary Magellan received a subpoena from the U.S. 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 that have followed receipt of the subpoena in April 2018. The Company has executed tolling agreements to extend the statute of limitations. In March and April 2021, DOJ issued two subpoenas calling for witnesses to testify before a federal grand jury related to this matter. The March 2021 subpoena was issued to a former employee of Magellan, and the April subpoena was issued to a current employee of Magellan. In September and October 2021, DOJ issued additional subpoenas to individuals seeking testimony and documents in connection with its ongoing investigation. The Company cannot predict when the investigation will be resolved, the outcome of the investigation, or its potential impact on the Company. Approximately $2,803, $2,035 and $1,585 of expense for attorneys’ fees related to this matter is included within the Consolidated Statements of Operations for the years ended September 30, 2021, 2020 and 2019, respectively.
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 February 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 the Company’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 CDC is necessary to protect the public health. The Company intends to fully cooperate with the FDA or CDC on any
follow-up
based on the third-party study.
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. Since the inspection, we have submitted a number of written responses to the FDA regarding the five Form FDA 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).
During June 2021, the FDA performed an inspection of Magellan’s manufacturing facility. As a result of this inspection, the FDA issued one Form 483 observation. On August 3, 2021, FDA sent Magellan a
close-out
letter for the Warning Letter that FDA issued to Magellan on October 23, 2017. The FDA’s
close-out
letter notified Magellan that FDA has completed an evaluation of Magellan’s corrective actions in response to FDA’s Warning Letter, and based on FDA’s evaluation, Magellan has addressed the issues identified in the Warning Letter. FDA’s
close-out
letter also stated that future FDA inspections of Magellan and regulatory activities will further assess the adequacy and sustainability of Magellan’s corrections.
We incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies in the U.S., 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 U.S., 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.
 
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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 U.S. 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 net revenues and results of operations.
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 U.S. 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 U.S. 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.
Any reductions in government health care spending or research funding in an effort to reduce the U.S. federal deficit 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 consolidated financial condition, and results of operations.
Global market, political, environmental, and economic conditions, including those related to the financial markets, could have a material adverse effect on our operating results, financial condition, and liquidity.
Our business is sensitive to changes in general economic, political and environmental conditions, both inside and outside the U.S. Conditions such as the following, among others, may create additional risk to our results of operations: (i) continuing uncertainties in the eurozone; (ii) the effects of climate change regulation; (iii) the global effects of the ongoing
COVID-19
pandemic, including the Emergency Temporary Standard (“ETS”)
COVID-19
workplace vaccination and testing mandate from the Occupational Safety and Health Administration (“OSHA”); (iv) unanticipated implications from the voluntary exit of the U.K. from the EU; and (v) uncertainties in China and emerging markets.
Instability in the global economy and financial markets can adversely affect our business in several ways, including limiting our customers’ ability to obtain sufficient credit or pay for our products within the terms of sale. Competition could further intensify among the manufacturers and distributors with whom we compete for volume and market share, resulting in lower net revenue due to steeper discounts and product
mix-down. In
particular, if certain key or sole suppliers were to become capacity constrained or insolvent, it could result in a reduction or interruption in supplies or a significant increase in the price of supplies.
 
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The U.K. left the EU on January 31, 2020. While all EU rules and laws continued to apply to the U.K. through the transition period, which ended December 31, 2020, the U.K. and the EU reached a free trade agreement on December 24, 2020, which was ratified on April 28, 2021 and went into effect on May 1, 2021. The agreement includes regulatory and customs cooperation mechanisms, as well as provisions supporting open and fair competition. Under the trade agreement, the U.K. is free to set its own trade policy and can negotiate with other countries that do not currently have free trade deals with the EU. Although the full impact of the trade agreement is uncertain, it is possible that the recent changes to the trading relationship between the U.K. and the EU due to the trade agreement could result in increased cost of goods imported into and exported from the U.K., which 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. Given the lack of comparable precedent, it is unclear what financial, trade, regulatory and legal implications the trade agreement will have on our business; however, Brexit and its related effects could potentially have an adverse impact on our consolidated financial condition, and results of operations.
We depend on international net revenues, and our operating 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 2021, approximately 40% of our consolidated net 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. In addition, we have manufacturing operations, suppliers, and employees located outside the U.S. Since our growth strategy depends in part on our ability to further penetrate markets outside the U.S., we expect to continue to increase our revenue and presence outside the U.S., including in emerging markets.
Our international business is subject to risks that are often encountered in
non-U.S.
operations, including:
 
   
interruption in the transportation of materials to us and finished goods to our customers, including conditions where recovery from natural disasters may be delayed due to country-specific infrastructure and resources;
 
   
differences in terms of sale, including payment terms;
 
   
local product preferences and product requirements;
 
   
changes in a country’s or region’s political or economic condition, including with respect to safety and health issues;
 
   
trade protection measures and import or export licensing requirements;
 
   
unexpected changes in laws or regulatory requirements, including unfavorable changes with respect to tax, trade or sanctions compliance matters;
 
   
limitations on ownership and on repatriation of earnings and cash;
 
   
difficulty in staffing and managing widespread operations;
 
   
differing labor regulations;
 
   
difficulties in enforcing contract and property rights under local law;
 
   
difficulties in implementing restructuring actions on a timely or comprehensive basis; and
 
   
differing protection of intellectual property.
Such risks may be more likely or pronounced in emerging markets, where our operations may be subject to greater uncertainty due to increased volatility associated with the developing nature of their economic, legal, and governmental systems.
If we are unable to successfully manage the risks associated with expanding our global business or to adequately manage operational fluctuations, it could adversely affect our business, financial condition, or results of operations.
 
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New tariffs and other trade measures could adversely affect our operating 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 U.S., Mexico and Canada, greater restrictions on free trade generally, and significant increases in tariffs on goods imported into the U.S., 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 business and results of operations.
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 results of operations.
Risks Related to Our Common Stock
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 consolidated financial condition and results of operations.
 
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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.
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.
General Risk Factors
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 consolidated 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 consolidated financial condition and results of operations.
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 results of operations could be adversely affected.
 
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Our bank credit agreement imposes restrictions with respect to our operations, which could adversely impact our business.
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, 2021, we had $60,000 outstanding on a $160,000 bank revolving credit facility.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our corporate offices are located in the Village of Newtown, a suburb of Cincinnati, Ohio. Our Newtown campus includes sites for diagnostic test manufacturing and distribution, immunoassay research and development and administrative functions. Our Newtown campus also includes a new facility where we are expanding and automating our Revogene diagnostic test device manufacturing. We also have diagnostic test manufacturing and distribution sites in Billerica, Massachusetts (blood-chemistry), Modi’in, Israel (BreathID and BreathTek urea breath testing systems), and Quebec City, Quebec, Canada (Revogene diagnostic test device and instrument manufacturing). Our sites in Billerica, Modi’in and Quebec City also include research and development functions. We also operate a Diagnostics sales and distribution center near Milan, Italy and 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. Manufacturing of molecular reagents occurs in our London and Luckenwalde sites. Manufacturing of immunoassay reagents occurs in our Memphis and Boca Raton sites. Our site in London also includes our primary research and development function.
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 consolidated financial position, results of operations or cash flows, and no material provision has been made in the Consolidated Financial Statements for these matters.
On April 17, 2018, the Company’s wholly owned subsidiary Magellan received a subpoena from the 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 that have followed receipt of the subpoena in April 2018. The Company has executed tolling agreements to extend the statute of limitations. In March and April 2021, DOJ issued two subpoenas calling for witnesses to testify before a federal grand jury related to this matter. The March 2021 subpoena was issued to a former employee of Magellan, and the April subpoena was issued to a current employee of Magellan. In September and October 2021, DOJ issued additional subpoenas to individuals seeking testimony and documents in connection with its ongoing investigation. The Company cannot predict when the investigation will be resolved, the outcome of the investigation, or its potential impact on the Company. Approximately $2,803, $2,035 and $1,585 of expense for attorneys’ fees related to this matter is included within the Consolidated Statements of Operations for 2021, 2020 and 2019, respectively. See “Lead Testing Matters” beginning on page 29 within MD&A.
 
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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
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, 2021, there were approximately 550 holders of record and approximately 24,030 beneficial owners of our common shares.
Dividends
During 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 fiscal 2019. 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. At this time, we do not expect to resume paying cash dividends. We paid dividends of $0.25 per common share in 2019.
Stock Total Return Performance
The graph below compares the cumulative
5-Year
total return realized by shareholders on Meridian Bioscience, Inc.’s common stock relative to the cumulative total returns of the NASDAQ Composite index and two customized peer groups of six companies and ten companies, respectively, whose individual companies are listed in footnotes 1 and 2 below. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in the index and in each of the peer groups (including reinvestment of dividends) on September 30, 2016, and its relative performance is tracked through September 30, 2021.
 
  1.
The six companies included in the Company’s first customized peer group (“2020 Peer Group”) are:
Bio-Rad
Laboratories, Inc., bioMerieux S.A., Myriad Genetics, Inc., OraSure Technologies, Inc., Quidel Corporation, and Trinity Biotech Plc.
 
  2.
The ten companies included in the Company’s second customized peer group (“2021 Peer Group”) are:
Bio-Rad
Laboratories, Inc.,
Bio-Techne
Corporation, bioMerieux S.A., DiaSorin S.p.a., Hologic, Inc., Myriad Genetics, Inc., OraSure Technologies, Inc., Qiagen N.V., Quidel Corporation, and Trinity Biotech Plc.
 
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ITEM 6.
INTENTIONALLY OMITTED
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 24 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 the financial condition, changes in consolidated financial condition and results of operations of Meridian Bioscience, Inc. (“Meridian”, the “Company”, “We”). This discussion should be read in conjunction with the Consolidated Financial Statements and notes. It should be noted that the terms revenue and/or revenues are utilized throughout the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) to indicate net revenue and/or net revenues. In addition, throughout the MD&A, we refer to certain product tradenames and trademarks, which are protected under applicable intellectual property laws and are our property. Solely for convenience, these tradenames and trademarks are referred to without the
®
or
symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent of the law, our rights to these tradenames and trademarks.
 
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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, immunoassay blocking reagents, specialized Polymerase Chain Reaction (“PCR”) master mixes, isothermal mixes, enzymes, 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.
Recent Developments
Impact of
COVID-19
Pandemic
During the latter half of fiscal 2020 and throughout fiscal 2021, the
COVID-19
pandemic has had both positive and negative effects on our business.
Our Life Science segment’s products have been well positioned to respond to in vitro device (“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 segment could achieve at a much larger scale. This higher-than-historical level of growth in the Life Science segment continued in fiscal 2021, with full year revenues, operating income and operating margin increasing 43%, 67% and nine percentage points, respectively.
Our Diagnostics segment, on the other hand, has been negatively impacted by the health systems’ increased focus on
COVID-19
testing over traditional infectious disease testing. The impacts of the
COVID-19
pandemic are most dramatically evident in the 34% year-over-year decline in revenues from respiratory illness assays in fiscal 2021, following flat year-over-year revenue levels being experienced in fiscal 2020.
Despite these recent
COVID-19
pandemic related trends, due to the many uncertainties surrounding the
COVID-19
pandemic, we can provide no assurances with respect to our views of the longevity, severity or impacts to our consolidated financial condition of the ongoing
COVID-19
pandemic.
Employee Safety
While our employee base in the U.S. has returned to working
on-site
at our facilities, we have recently implemented a hybrid work-from-home program for certain personnel, and we continue to utilize a work-from-home process as needed on a
site-by-site
basis outside the U.S. for those employees whose
on-site
presence has been deemed to be
non-essential.
We have also implemented enhanced cleaning and sanitizing procedures and provided additional personal hygiene supplies at all our sites. We have implemented policies for employees to adhere to Centers for Disease Control and Prevention (“CDC”) guidelines on social distancing, and similar guidelines by authorities outside the U.S. To date, we have been able to manufacture and distribute products globally, and all our sites have continued to operate with little, if any, impact on shipments to customers to date. As the
COVID-19
pandemic continues, 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.
Supply Chains
Supply chains supporting our products have generally remained intact, providing access to sufficient inventory of the key materials needed for manufacturing. To date, delays and allocations for raw materials have been limited and have not had a material impact on our results of operations. From time to time, we identify alternative suppliers to address the risk of a current supplier’s inability to deliver materials in volumes sufficient to meet our manufacturing needs; or we may choose to purchase certain materials in bulk volumes where we have supply chain scarcity concerns. It remains possible 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. See LeadCare product recall discussion beginning on page 29.
 
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Product Development and Clinical Trials
Our Diagnostics segment’s new product development programs are progressing at a slower pace than normal, in part, as the prevalence of certain infectious diseases has been much lower than normal during the
COVID-19
pandemic. For example, the relative lack of a respiratory illness season in 2020-2021 has significantly impacted the availability of influenza samples, thereby affecting the pace of development of our molecular respiratory panel for the Revogene system. These matters continue to impact our timing for filing applications for product clearances with the U.S. Food and Drug Administration (“FDA”), as well as related timing of FDA clearances of such filings. Additionally, the ongoing
COVID-19
pandemic has slowed 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. Since late in the second quarter of fiscal 2020, we have generally experienced unprecedented demand for certain of our molecular reagents (e.g., ribonucleic acid (“RNA”) master mixes and nucleotides), including a resurgence in such demand during our fiscal 2021 fourth quarter. While we are expecting a continuation of this trend for the foreseeable future, this expectation will certainly be impacted by infection rates and the responses to such levels of infection varying by country based on their individual
COVID-19
case statistics, infection rates and vaccine programs. We believe that our reagent products for
COVID-19
have applications in many alternative,
non-hospital-based
channels (e.g., airports, schools, etc.). Our products are used in over 200 regulatory agency approved
COVID-19
related assays around the world.
COVID-19
related reagent revenues totaled approximately $111,900 and $71,500 for the years ended September 30, 2021 and 2020, respectively.
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. Sales volumes for a number of these assays have been adversely affected by the
COVID-19
pandemic over the past year and half, as such assays are often used in
non-critical
care settings. However, we have seen indications of a return to more normal pre-pandemic levels, including with respect to our respiratory illness assays during the fourth quarter of 2021. The
COVID-19
pandemic also has depressed instrument orders and placements for our BreathID, Curian and Revogene platforms. Order activity for our Revogene platform was affected by the delay in obtaining emergency use authorization (“EUA”) for our
SARS-CoV-2
assay, as we believe customers have taken a “wait and see” approach throughout our entire EUA application process, which culminated in receipt of the EUA on November 9, 2021. This follows our voluntary withdrawal of the application on February 23, 2021 and its resubmission on June 25, 2021. Despite the situation encountered with our EUA application for the
SARS-CoV-2
assay, we have proceeded with the process of increasing our capacity to produce these tests, as well as other tests on the Revogene system, at our facilities in Quebec and Cincinnati. Specifically, we are: (i) adding a second production line at our Quebec manufacturing facility; and (ii) installing two additional production lines in a leased facility near our corporate headquarters in Cincinnati. With approximately $10,900 expended in the year ended September 30, 2021, it is expected that these expansion efforts will be completed during calendar 2021 at a total cost of approximately $19,600, which is expected to be partially offset by the $5,500 National Institutes of Health Rapid Acceleration of Diagnostics (“RADx”) initiative grant entered into on February 1, 2021, $1,500 of which had been received as of September 30, 2021 (see Note 14,
“National Institutes of Health Contracts”
of the Consolidated Financial Statements).
Impact of Brexit
The United Kingdom (“U.K.”) left the European Union (“EU”) on January 31, 2020. While all EU rules and laws continued to apply to the U.K. through the transition period, which ended December 31, 2020, the U.K. and the EU reached a free trade agreement on December 24, 2020, which was ratified on April 28, 2021 and went into effect on May 1, 2021. The agreement includes regulatory and customs cooperation mechanisms, as well as provisions supporting open and fair competition. Under the trade agreement, the U.K. is free to set its own trade policy and can negotiate with other countries that do not currently have free trade deals with the EU. Although the full impact of the trade agreement is uncertain, it is possible that the recent changes to the trading relationship between the U.K. and the EU due to the trade agreement could result in increased cost of goods imported into and exported from the U.K., which 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. Given the lack of comparable precedent, it is unclear what financial, trade, regulatory and legal implications the trade agreement will have on our business; however, Brexit and its related effects could potentially have an adverse impact on our consolidated financial position and results of operations.
 
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The U.K.’s withdrawal from the EU could also adversely impact the operations of our vendors and of our other partners. Our management team has identified areas of concern and implemented strategies to help mitigate these concerns. It is possible that these strategies may not be adequate to mitigate any adverse impacts of Brexit, and that these impacts could further adversely affect our business and results of operations.
Lead Testing Matters
On September 1, 2021, the Company’s wholly owned subsidiary Magellan announced the expansion of the Class I voluntary recall of its LeadCare test kits for the detection of lead in blood, which it had initiated in May 2021 after identifying an ongoing issue with the testing controls included in certain manufactured lots of its LeadCare test kits. As a result of the identified issue, impacted test kit lots could potentially underestimate blood lead levels when processing patient blood samples. The Company is working closely with the FDA in its execution of the recall activities, which include Magellan notifying customers and distributors affected by the recall and providing instructions for the return of impacted test kits. Although evaluation of the recall and the related notification process is ongoing, approximately $5,100 has been estimated and accrued as of September 30, 2021, to cover the currently anticipated costs of the recall. In total, approximately $5,600 of recall-related expense has been included within the Consolidated Statement of Operations for the year ended September 30, 2021. Anticipated recall-related costs primarily include product replacement and/or refund costs, mailing/shipping costs, attorneys’ fees and other miscellaneous costs.
As described in Item 3. “Legal Proceedings”, on April 17, 2018, the Company’s wholly owned subsidiary Magellan received a subpoena from the U.S. 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 that have followed receipt of the subpoena in April 2018. The Company has executed tolling agreements to extend the statute of limitations. In March and April 2021, DOJ issued two subpoenas calling for witnesses to testify before a federal grand jury related to this matter. The March 2021 subpoena was issued to a former employee of Magellan, and the April subpoena was issued to a current employee of Magellan. In September and October 2021, DOJ issued additional subpoenas to individuals seeking testimony and documents in connection with its ongoing investigation. The Company cannot predict when the investigation will be resolved, the outcome of the investigation, or its potential impact on the Company. Approximately $2,803, $2,035 and $1,585 of expense for attorneys’ fees related to this matter is included within the Consolidated Statements of Operations for the years ended September 30, 2021, 2020 and 2019, respectively.
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 the Company’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 CDC is necessary to protect the public health. The Company intends to fully cooperate with the FDA or CDC on any
follow-up
based on the third-party study.
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. Since the inspection, we have submitted a number of written responses to the FDA regarding the five Form FDA 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).
 
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During June 2021, the FDA performed an inspection of Magellan’s manufacturing facility. As a result of this inspection, the FDA issued one Form 483 observation. On August 3, 2021, FDA sent Magellan a
close-out
letter for the Warning Letter that FDA issued to Magellan on October 23, 2017. FDA’s
close-out
letter notified Magellan that FDA has completed an evaluation of Magellan’s corrective actions in response to FDA’s Warning Letter, and based on FDA’s evaluation, Magellan has addressed the issues identified in the Warning Letter. FDA’s
close-out
letter also stated that future FDA inspections of Magellan and regulatory activities will further assess the adequacy and sustainability of Magellan’s corrections.
Results of Operations
Fourth Quarter
Net earnings for the fourth quarter of fiscal 2021 increased 3% to $6,657, or $0.15 per diluted share, from net earnings for the fourth quarter of fiscal 2020 of $6,493, or $0.15 per diluted share. The level of net earnings in the fourth quarter of fiscal 2021 was adversely affected by approximately $5,600, or $0.10 per diluted share, of LeadCare product recall expenses and a $4,596, or $0.08 per diluted share, upward adjustment to the fair value of acquisition consideration related to GenePOC, offsetting the impact of higher revenues and resulting gross profit. Other key events occurring in the fourth quarter of 2021 include the acquisition of the BreathTek business in July 2021 and the August 2021 settlement of the contingent acquisition consideration related to GenePOC (see Note 4,
“Business Combinations”
and Note 3,
“Fair Value Measurements”
of the Consolidated Financial Statements, respectively).
Consolidated revenues for the fourth quarter of fiscal 2021 totaled $76,204, an increase of 19% compared to the fourth quarter of fiscal 2020 (17% increase on a constant-currency basis).
Revenues from the Diagnostics segment for the fourth quarter of fiscal 2021 increased 15% to $34,301, compared to the fourth quarter of fiscal 2020 (also 15% increase on a constant-currency basis), comprised of a 22% increase in molecular assay products and a 14% increase in
non-molecular
assay products. The fourth quarter of fiscal 2021 represents the second consecutive quarter our Diagnostics segment has shown positive revenue growth versus the same quarter of fiscal 2020, an achievement not experienced since the early stages of the
COVID-19
pandemic. Our Diagnostics segment generated an $11,900 operating loss for the fourth quarter of fiscal 2021, a $7,700 larger operating loss than the fourth quarter of fiscal 2020, largely due to the aforementioned $5,600 of LeadCare product recall expenses and $4,596 upward adjustment to the fair value of acquisition consideration related to GenePOC.
With a 16% increase in revenues from molecular reagents products and a 33% increase in revenues from immunological reagents products, revenues for our Life Science segment increased 22% to $41,903 during the fourth quarter of fiscal 2021 compared to the fourth quarter of fiscal 2020. On a constant-currency basis, revenues for the Life Science segment increased 19%. Life Science segment revenues reflect an increase in demand from diagnostic test manufacturers for the reagents utilized in
COVID-19
related tests. Revenue from sales of our core Life Science segment products (other than
COVID-19
related contributions) experienced growth of approximately $1,800, or 11%, compared to the fourth quarter of fiscal 2020. This growth resulted in large part from obtaining business from
COVID-19
customers who are now using our products for other
non-COVID-19
related purposes, as well as a rebound in volumes of core immunological products. Our Life Science segment generated $23,200 of operating income, or a margin of 55%, for the fourth quarter of fiscal 2021, an increase of $6,000 from the fourth quarter of fiscal 2020.
Fiscal Year
Net earnings for fiscal 2021 increased 55% to $71,407, or $1.62 per diluted share, from net earnings for fiscal 2020 of $46,186, or $1.07 per diluted share. The level of net earnings in fiscal 2021 was affected predominantly by the strong increase in revenues and operating income in our Life Science segment, stemming primarily from the demand for reagents used in
COVID-19
related tests.
Consolidated revenues for fiscal 2021 totaled $317,896, an increase of 25% compared to fiscal 2020 (22% increase on a constant-currency basis).
 
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Diagnostics segment revenues increased 5% to $127,760 in fiscal 2021 (4% increase on a constant-currency basis), comprised of a 13% decrease in molecular assay products and a 10% increase in
non-molecular
assay products. Our Diagnostics segment generated an $8,100 operating loss in fiscal 2021, compared to operating income of $3,900 in fiscal 2020. This year over year decline in operating income resulted primarily from the combined effects of: (i) lower gross profit margins, as detailed in the “Gross Profit” section below; (ii) the aforementioned $5,600 of LeadCare product recall expenses in fiscal 2021; and (iii) the $6,293 decrease in the fair value of contingent acquisition consideration related to GenePOC included in fiscal 2020 and settled in fiscal 2021 (as discussed above). These factors contributing to the decline in operating margin were partially offset by the decrease in acquisition costs resulting from the Exalenz transaction in fiscal 2020.
With a 66% increase in revenues from molecular reagents products and a 10% increase in revenues from immunological reagents products, revenues for our Life Science segment increased 43% to $190,136 during fiscal 2021 compared to fiscal 2020. On a constant-currency basis, revenues for the Life Science segment increased 38%. Fiscal 2021 Life Science segment revenues reflect a significant increase in 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 increased revenue levels during fiscal 2021 were sales of monoclonal antibody pairs used in
COVID-19
antigen tests and, to a lesser degree, recombinant antigens used in
COVID-19
antibody tests. In addition, revenue from sales of our core Life Science segment products (other than
COVID-19
contributions) experienced growth of approximately $16,100, or approximately 26%. This growth resulted in large part from obtaining business from
COVID-19
customers who are now using our products for other
non-COVID-19
related purposes, as well as a rebound in volumes in core immunological products. Our Life Science segment generated $115,300 of operating income in fiscal 2021, an increase of $46,400 over fiscal 2020.
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
Revenues for the Diagnostics segment, in the normal course of business, may be affected from year to year by buying patterns of major distributors and reference laboratories, 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 year to year by buying patterns of major IVD manufacturing customers, severity of disease outbreaks (including the
COVID-19
pandemic), and foreign currency exchange rates. The
COVID-19
pandemic contributed $111,900 of new revenue for our Life Science segment during fiscal 2021, and $71,500 during fiscal 2020.
See Note 2,
“Revenue Recognition”
of the 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 Segment Products
The Diagnostics segment’s overall 5% growth in revenue during fiscal 2021 primarily results from the combined effects of the following:
 
   
Volume growth in the gastrointestinal product family benefitting from: (i) a full year of revenue from sales of BreathID instruments and tests, acquired in the April 2020 Exalenz acquisition; and (ii) two months of revenue from sales of the BreathTek product, acquired in late July 2021;
 
   
Ongoing pricing pressure on our
H. pylori
stool antigen tests, which contributed approximately $2,700 of unfavorable price variance from customers in the U.S.;
 
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Volume declines from sales of respiratory illness products, comprised of tests for Group A Strep, Mycoplasma pneumonia, Influenza, and Pertussis, among others, reflecting the decreased focus on testing for these illnesses throughout the
COVID-19
pandemic; and
 
   
Volume declines from sales of blood chemistry products due to the ongoing LeadCare product recall, which commenced in May 2021 ($2,136 decrease in revenue in fiscal 2021, compared to fiscal 2020).
Life Science Segment Products
The tripling of the Life Science segment’s revenues since fiscal 2019, including the 43% year-over-year growth in revenue during fiscal 2021, primarily results from the combined effects of the following:
 
   
Unprecedented demand for the Life Science segment’s products by diagnostic test manufacturers for use in
COVID-19
related tests, resulting in
COVID-19-related
reagent revenues totaling $111,900 in fiscal 2021, compared to approximately $71,500 in fiscal 2020; and
 
   
Revenue from core Life Science products increasing approximately 26% over fiscal 2020, due in large part from obtaining business from
COVID-19
customers who are now using our products for
non-COVID-19
related purposes, as well as a rebound in volumes of core immunological product sales.
Foreign Currency
Fluctuations in foreign currency exchange rates in fiscal 2021 compared to fiscal 2020 had an approximate $9,200 favorable impact on fiscal 2021 consolidated net revenues; $1,300 within the Diagnostics segment and $7,900 within the Life Science segment. This compares to
year-to-year
currency exchange rates having an approximate $1,250 unfavorable impact on consolidated net revenues in fiscal 2020; $150 within the Diagnostics segment and $1,100 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 15,
“Reportable Segments and Major Concentration Data”
of the Consolidated Financial Statements.
Gross Profit:
 
     2021     2020     2021 vs. 2020
Inc (Dec)
 
Gross Profit
   $ 201,148     $ 156,248       29 %
Gross Profit Margin
     63     62     1 point  
Overall gross profit margins during both fiscal 2021 and 2020 have been favorably impacted by greater contributions from our Life Science segment’s molecular reagent products, which are some of our highest margin products. During fiscal 2021, which included the peak of the
COVID-19
pandemic, approximately 41% of consolidated revenues related to sales of molecular reagent products, compared to approximately 31% during fiscal 2020.
Overall gross profit margins in fiscal 2021 have been unfavorably impacted in our Diagnostics segment by production capacity
ramp-up
and scrap costs in our Quebec facility, where Revogene instruments and test devices are made, inventory reserve provisions for short-dated products stemming from depressed sales levels during the
COVID-19
pandemic, and the impacts of the previously discussed LeadCare product recall (see “Lead Testing Matters” above).
 
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Operating Expenses —
Segment Detail and Corporate
 
    
Research &
Development
    
Selling &
Marketing
    
General &
Administrative
    
Other 
(1)(2)
   
Total Operating
Expenses
 
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  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Fiscal 2021:
                                           
Diagnostics
   $ 21,406      $ 21,430      $ 24,915      $ 5,079     $ 72,830  
Life Science
     2,505        5,350        13,265        —         21,120  
Corporate
     —          —          11,361        2,803       14,164  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Total 2021 Expenses
   $ 23,911      $ 26,780      $ 49,541      $ 7,882     $ 108,114  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
 
(1)
Diagnostics segment fiscal 2020 reflects negative expense amount due to $6,293 adjustment to fair value of the acquisition consideration related to GenePOC.
(2)
LeadCare product recall expenses are included within the Diagnostics segment’s fiscal 2021 Other expenses.
Operating expenses in fiscal 2021 increased $13,190 to $108,114. Major components of this increase were as follows:
 
   
$5,600 in LeadCare product recall expenses within our Diagnostics segment;
 
   
$1,400 increase in purchase accounting amortization within our Diagnostics segment, stemming from both the Exalenz and BreathTek acquisitions;
 
   
a full year of administrative expenses within our Diagnostics segment related to the Exalenz acquisition completed in April 2020;
 
   
higher commercial insurance costs for Directors & Officers and Property & Casualty coverages within Corporate; and
 
   
the adjustment to the fair value of the acquisition consideration as the result of the settlement in fiscal 2021 resulting in a $5,384 year-over-year increase in expense within our Diagnostics segment.
Offsetting these increases was lower spending for acquisition transaction costs, stemming from the Exalenz acquisition.
Operating Income
Operating income increased 52% in fiscal 2021, following an 88% increase in fiscal 2020, as a result of the factors discussed above.
Other Expense
Other expense, net primarily includes interest costs on the Company’s long-term borrowings and contingent grant obligations due to the Israel Innovation Authority, currency gains and losses, and in fiscal 2021, grant income under the RADx initiative (see Note 14,
“National Institutes of Health Contracts”
of the Consolidated Financial Statements). Interest costs related to the revolving credit facility with a commercial bank were $1,420 and $2,464 in fiscal 2021 and 2020, respectively. The varying levels of interest costs on the revolving credit facility reflect the following approximate levels of average debt outstanding, as detailed in Note 10,
“Bank Credit Arrangements”
of the Consolidated Financial Statements: (i) fiscal 2021 - $56,505; and (ii) fiscal 2020 - $74,560.
 
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Income Taxes
The effective rate for income taxes was 21% and 22% for fiscal 2021 and 2020, respectively. The decline in effective tax rates relates primarily to the increasing allocations of taxable income in certain foreign jurisdictions with tax rates lower than the U.S., particularly the U.K. Additionally, the fiscal 2021 effective rate was favorably impacted by a larger-than-prior-year effect of current year restricted share unit lapses and stock option exercises occurring on dates when the share price of Company stock was significantly higher than the share price on the date such equity awards were granted.
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 2021 or 2020.
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, and such sources are anticipated to be adequate to fund working capital requirements, capital expenditures and debt service during the next twelve months. However, 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 $100,000 as of September 30, 2021. The Company also maintains a shelf registration statement on file with the SEC. Our liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within the financial markets tightens for an extended period, and such conditions impact the collectability of our customer accounts receivable, impact credit terms with our vendors, or disrupt the supply of raw materials and services.
As of September 30, 2021, our cash and cash equivalents balance was $49,771 or $3,743 lower than at the end of fiscal 2020. This modest decrease primarily results from generating $66,865 of cash flow from operations, an increase of 39% over fiscal 2020, and the use of cash to fund certain rather significant uses of cash during the year, most notably the following:
 
  (i)
payment of consideration holdback and contingent consideration settlement related to the fiscal 2019 GenePOC acquisition ($25,000);
 
  (ii)
acquisition of the BreathTek business, net of $1,000 holdback ($18,585);
 
  (iii)
funding of capital expenditures, which were primarily comprised of manufacturing expansion related to Revogene, net of $1,500 RADx grant monies received ($16,812); and
 
  (iv)
net paydown on revolving credit facility and Israeli government grant obligations ($8,824 and $5,297, respectively).
Considering these factors, our balance of net debt (defined as bank debt, government grant obligations and total contingent obligations related to acquisitions, net of cash and cash equivalents
on-hand)
decreased approximately $36,300 to approximately $17,000 at September 30, 2021.
 
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Capital Resources
As described in Note 10,
“Bank Credit Arrangements”
of the Consolidated Financial Statements, the Company maintains a $160,000 credit facility, which is secured by substantially all our U.S. assets and includes certain restrictive financial covenants. This credit facility was amended in October 2021 to increase its capacity to $200,000 and extend its term to October 25, 2026. The Company also maintains a shelf registration statement on file with the SEC.
Our capital expenditures totaled $18,312 for fiscal 2021, $1,500 of which was offset by receipts under the RADx grant initiative (see Note 14,
“National Institutes of Health Contracts”
of the Consolidated Financial Statements), and which largely related to expanding manufacturing capacity. During fiscal 2022 our capital expenditures are estimated to total approximately $15,000, comprised of approximately $12,000 and $3,000 in the Diagnostics and Life Science segments, respectively. Included within the Diagnostics segment capital expenditures estimate is approximately $8,700 related to completion of the manufacturing capacity
scale-up
and automation initiatives for Revogene assay production. Such expenditures may be funded with cash and cash equivalents on hand, operating cash flows, and/or availability under the $200,000 revolving credit facility discussed above. In addition, a portion of the Diagnostics segment expansion may be funded by $4,000 remaining under the previously noted RADx grant entered into on February 1, 2021 (see Note 14,
“National Institutes of Health Contracts”
of the Consolidated Financial Statements).
Contractual Obligations
:
In addition to the obligations related to the above-noted revolving credit facility and the contingent government grant obligations detailed in Note 10,
“Bank Credit Arrangements”
and Note 13,
“Contingent Obligations and
Non-Current
Liabilities”
of the Consolidated Financial Statements, respectively, the Company’s contractual obligations and their related due dates were as follows as of September 30, 2021:
 
     Total      Less than 1
Year
    
1-3 Years
    
4-5 Years
     More than
5 Years
 
Operating leases
(1)
   $ 6,239      $ 2,194      $ 2,736      $ 1,244      $ 65  
Purchase obligations
(2)
     51,295        49,537        1,554        204        —    
Acquisition price holdback
(3)
     1,000        —          1,000        —          —    
Uncertain income tax positions liability and interest
(4)
     870        870        —          —          —    
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 59,404      $ 52,601      $ 5,290      $ 1,448      $ 65  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
(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 machinery and equipment, 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 July 31, 2021 acquisition of the BreathTek business, Meridian’s remaining consideration to be paid totals $1,000 and is comprised solely of a purchase price holdback.
(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.
 
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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, with such percentages generally ranging from approximately 3% to 10%. During fiscal 2021, royalty expense totaled approximately $5,200, with 25% and 75% of such expense relating to our Diagnostics and Life Science segments, respectively. This compares to a total of approximately $1,850 of royalty expense in fiscal 2020, with 81% and 19% relating to our Diagnostics and Life Science segments, respectively. Meridian expects that payments under these agreements will amount to approximately $3,000 in fiscal 2022.
Off-Balance
Sheet Arrangements
We utilize foreign currency exchange forward contracts to limit exposure to volatility in foreign currency gains and losses related to financial assets denominated in other than the holding subsidiary’s functional currency. These contracts are generally settled within a
30-day
time frame and are not formally designated or accounted for as accounting hedges. We also utilize interest rate swap agreements to limit exposure to volatility in the LIBOR interest rate in connection with the revolving credit facility. The interest rate swap agreements are designated and accounted for as accounting hedges (see Note 3,
“Fair Value Measurements”
of the Consolidated Financial Statements). Aside from these instruments, we do not utilize special-purpose financing vehicles or have any material undisclosed
off-balance
sheet arrangements.
Market Risk Exposure
:
Foreign Currency Risk
We have market risk exposure related to foreign currency transactions from our operations outside the U.S., as well as certain suppliers to our domestic businesses located outside the U.S. 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 to three customers were 33% and 32% of the Diagnostics segment’s total net revenues for fiscal 2021 and 2020, respectively, or 13% and 15% of consolidated net revenues in each fiscal year. Additionally, our three major Diagnostics segment product families – gastrointestinal, respiratory illnesses and blood chemistry – accounted for 80% and 82% of our Diagnostics segment’s net revenues during fiscal 2021 and 2020, respectively, or 32% and 39% of each year’s consolidated net revenues.
Our Life Science segment’s revenues from sales to three diagnostics manufacturing customers were 22% and 30% of the Life Science segment’s total net revenues for fiscal 2021 and 2020, respectively or 13% and 16% of consolidated net revenues in each fiscal year. Additionally, sales of products related to
COVID-19
accounted for 59% and 54% of our Life Science segment’s net revenues during fiscal 2021 and 2020, respectively, or 35% and 28% of each year’s consolidated net revenues.
Critical Accounting Policies
:
The Consolidated Financial Statements included in this Form
10-K
have been prepared in accordance with U.S. generally accepted accounting principles. 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 Consolidated Financial Statements, along with reference to location of the policy discussion within the Consolidated 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.
 
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Accounting Policy
 
Location
Within Consolidated
Financial Statements
 
Examples of Key Estimate Assumptions
Goodwill   Note 1(h)   Discounted cash flow assumptions (e.g., long-term growth rates, discount rate, EBITDA)
     
Revenue Recognition   Note 1(i)   Distributor price adjustments and fee accruals
     
Income Taxes   Note 1(l) and Note 11   Uncertain 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(s),
“Summary of Significant Accounting Policies- Recent Accounting Pronouncements”
of the Consolidated Financial Statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Capital Resources and Market Risk Exposure above within Item 7, beginning on page 35.
 
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
 
     39  
   
     40  
   
     44  
   
     45  
   
     46  
   
     47  
   
     49  
   
     50  
   
     80  
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, 2021, 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, 2021.
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, 2021       Chief Financial Officer
        November 23, 2021
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Meridian Bioscience, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Meridian Bioscience, Inc. (the Company) as of September 30, 2021, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year then ended, and the related notes and consolidated financial statement schedule listed in the Index to Annual Report on Form 10-K at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
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, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 23, 2021, expressed an unqualified opinion thereon.
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 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 the financial statements are free of material misstatement, whether due to error or fraud. Our audit 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 audit 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 audit provides 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 consolidated 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 consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated 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 account or disclosure to which it relates.
 
  
Evaluation of Goodwill Impairment for the Diagnostics Reporting Unit
Description of the Matter
   At September 30, 2021, the Company has recorded goodwill of $94.9 million within the Diagnostics reporting unit (within the Diagnostics reportable segment). As discussed in Note 1 to the consolidated financial statements, goodwill is tested for impairment annually at the beginning of the fourth quarter, or more frequently if indicators of potential impairment exist. Auditing management’s annual goodwill impairment test related to Diagnostics reporting unit was especially challenging due to the complexity of forecasting the long-term cash flows of the Diagnostics reporting unit and the estimation uncertainty of certain assumptions included within such forecasts. The estimation uncertainty was primarily due to the sensitivity of the Diagnostic reporting unit’s fair value to changes in the significant assumptions used in the income approach, such as forecasted net revenues, earnings before interest, taxes, depreciation and amortization (EBITDA) margins, long-term growth rates, and discount rates. These significant assumptions require a high degree of estimation and judgment based on an evaluation of historical performance, current industry and macroeconomic conditions.
 
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How We Addressed the Matter in Our Audit
  
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s annual goodwill impairment process, including controls over management’s review of the significant assumptions described above and controls over management’s review of its financial forecasts and carrying value of the Diagnostics reporting unit.
 
To test the estimated fair value of the Diagnostics reporting unit, we performed audit procedures that included, among others, involving an internal valuation specialist to assist in our evaluation of the methodologies and certain significant assumptions used by the Company. We assessed the reasonableness of the Company’s assumptions around forecasted net revenues, EBITDA margins, long-term growth rates, and discount rates by comparing those assumptions to recent historical performance, current economic and industry trends, and financial forecasts. We also assessed the reasonableness of estimates included in the Company’s Diagnostics reporting unit financial forecast by evaluating how such assumptions compared to economic, industry, and peer expectations. We evaluated management’s historical accuracy of forecasting Diagnostics reporting unit net revenues and EBITDA margins by comparing past forecasts to subsequent actual activity. We performed various sensitivity analyses around these significant assumptions to understand the impact on the fair value calculation.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2020.
Cincinnati, Ohio
November 23, 2021
 
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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 sheet of Meridian Bioscience, Inc. (an Ohio corporation) and subsidiaries (the “Company”) as of September 30, 2020, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the years ended September 30, 2020 and 2019, and the related notes (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 the results of its operations and its cash flows for the years ended September 30, 2020 and 2019, in conformity with accounting principles generally accepted in the United States of America.
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 Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We served as the Company’s auditor from 2005 to 2020.
Cincinnati, Ohio
November 23, 2020
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Meridian Bioscience, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Meridian Bioscience, Inc.’s (the Company) internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of September 30, 2021, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year then ended, and the related notes and consolidated financial statement schedule listed in the Index to Annual Report on Form 10-K at Item 15 and our report dated November 23, 2021, expressed an unqualified opinion thereon.
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.
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.
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/ Ernst & Young LLP
Cincinnati, Ohio
November 23, 2021
 
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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,
  
2021
    2020     2019  
Net Revenues
  
$
317,896
    $ 253,667     $ 201,014  
Cost of Sales
  
 
116,748
      97,419       82,286  
    
 
 
   
 
 
   
 
 
 
Gross Profit
  
 
201,148
      156,248       118,728  
    
 
 
   
 
 
   
 
 
 
Operating Expenses:
                        
Research and development
  
 
23,911
      23,729       17,760  
Selling and marketing
  
 
26,780
      26,486       27,995  
General and administrative
  
 
49,541
      44,345       34,044  
Product recall costs
  
 
5,596
                   
Selected legal costs
  
 
2,803
      2,080       1,583  
Acquisition-related costs
  
 
392
      3,890       1,808  
Change in fair value of acquisition

consideration
and settlement
  
 
(909
    (6,293         
Restructuring costs
  
 
  
      687       2,839  
    
 
 
   
 
 
   
 
 
 
Total Operating Expenses
  
 
108,114
      94,924       86,029  
    
 
 
   
 
 
   
 
 
 
Operating Income
  
 
93,034
      61,324       32,699  
       
Other Income (Expense):
                        
Interest income
  
 
  
      142       681  
Interest expense
  
 
(1,878
    (2,632     (1,945
RADx grant income
  
 
1,000
                   
Other, net
  
 
(1,705
    459       122  
    
 
 
   
 
 
   
 
 
 
Total Other Expense, Net
  
 
(2,583
    (2,031     (1,142
    
 
 
   
 
 
   
 
 
 
Earnings Before Income Taxes
  
 
90,451
      59,293       31,557  
       
Income Tax Provision
  
 
19,044
      13,107       7,175  
    
 
 
   
 
 
   
 
 
 
Net Earnings
  
$
71,407
    $ 46,186     $ 24,382  
    
 
 
   
 
 
   
 
 
 
Earnings Per Share Data:
                        
Basic earnings per common share
  
$
1.65
    $ 1.08     $ 0.57  
Diluted earnings per common share
  
$
1.62
    $ 1.07     $ 0.57  
       
Common shares used for basic earnings per common share
  
 
43,259
      42,855       42,571  
Effect of dilutive stock options and restricted share units
  
 
753
      319       328  
    
 
 
   
 
 
   
 
 
 
Common shares used for diluted earnings per common share
  
 
44,012
      43,174       42,899  
    
 
 
   
 
 
   
 
 
 
Dividends declared per common share
  
$
 
 
    $        $ 0.25  
       
Anti-Dilutive Securities:
                        
Common share options and restricted share units
  
 
203
      893       1,129  
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands)
Meridian Bioscience, Inc. and Subsidiaries
 
For the Year Ended September 30,
  
2021
    2020     2019  
Net Earnings
  
$
71,407
    $ 46,186     $ 24,382  
Other Comprehensive Income (Loss):
                        
Foreign currency translation adjustment
  
 
1,780
      3,884       (802
Unrealized gain (loss) on cash flow hedge
  
 
510
      (713     (1,159
Reclassification of amortization of gain on cash flow hedge
  
 
(154
    (308     (102
Income taxes related to items of other comprehensive income (loss)
  
 
(78
    252       465  
    
 
 
   
 
 
   
 
 
 
Other Comprehensive Income (Loss), Net of Tax
  
 
2,058
      3,115       (1,598
    
 
 
   
 
 
   
 
 
 
Comprehensive Income
  
$
73,465
    $ 49,301     $ 22,784  
    
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
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CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Meridian Bioscience, Inc. and Subsidiaries
 
For the Year Ended September 30,
  
2021
    2020     2019  
Cash Flows From Operating Activities
                        
Net earnings
  
$
71,407
    $ 46,186     $ 24,382  
Non-cash items included in net earnings:
                        
Depreciation of property, plant and equipment
  
 
6,510
      5,823       5,433  
Amortization of intangible assets
  
 
8,776
      7,744       4,531  
Stock compensation expense
  
 
4,156
      3,802       3,251  
Deferred income taxes
  
 
(3,835
    760       (817
Losses on dispositions of long-lived assets
  
 
9
      64       632  
Change in fair value of acquisition consideration and settlement
  
 
(909
    (6,293         
Change in the following, net of acquisitions:
                        
Accounts receivable
  
 
(12,766
    (971     (2,215
Inventories
  
 
(7,800
    (18,977     3,841  
Prepaid expenses and other current assets
  
 
(3,711
    (153     (2,143
Accounts payable and accrued expenses
  
 
6,346
      7,248       (2,315
Income taxes payable
  
 
(329
    1,435       1,793  
Other, net
  
 
(989
    1,308       (198
    
 
 
   
 
 
   
 
 
 
Net cash provided by operating activities
  
 
66,865
      47,976       36,175  
    
 
 
   
 
 
   
 
 
 
Cash Flows From Investing Activities
                        
Purchase of property, plant and equipment
  
 
(18,312
    (3,299     (3,797
RADx grant proceeds offsetting cost of equipment
  
 
1,500
                   
Payment of acquisition consideration holdback
  
 
(5,000
                 
Disposals of property, plant and equipment
  
 
  
               669  
Acquisitions, net of cash acquired and holdback
  
 
(18,585
    (51,299     (45,324
    
 
 
   
 
 
   
 
 
 
Net cash used in investing activities
  
 
(40,397
    (54,598     (48,452
    
 
 
   
 
 
   
 
 
 
Cash Flows From Financing Activities
                        
Proceeds from revolving credit facility
  
 
10,000
      50,000       75,824  
Payment of acquisition consideration
  
 
(20,000
                 
Payment on revolving credit facility
  
 
(18,824
    (57,000         
Payment on government grant obligations
  
 
(5,297
                 
Payment of debt issuance costs
  
 
  
      (116     (489
Payments on term loan
  
 
  
               (50,250
Proceeds from exercise of stock options
  
 
3,052
      3,559       443  
Dividends paid
  
 
  
               (10,612
    
 
 
   
 
 
   
 
 
 
Net cash (used in) provided by financing activities
  
 
(31,069
    (3,557     14,916  
    
 
 
   
 
 
   
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
  
 
858
      1,296       (1,005
       
Net (Decrease) Increase in Cash and Cash Equivalents
  
 
(3,743
    (8,883     1,634  
       
Cash and Cash Equivalents at Beginning of Period
  
 
53,514
      62,397       60,763  
    
 
 
   
 
 
   
 
 
 
Cash and Cash Equivalents at End of Period
  
$
49,771
    $ 53,514     $ 62,397  
    
 
 
   
 
 
   
 
 
 
Supplemental Cash Flow Information:
See Notes 1(g), 3, 9, 10 and 11.
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
- 46 -

Table of Contents
CONSOLIDATED BALANCE SHEETS (in thousands)
Meridian Bioscience, Inc. and Subsidiaries
 
As of September 30,
  
2021
     2020  
Assets
                 
Current Assets:
                 
Cash and cash equivalents
  
$
49,771
     $ 53,514  
Accounts receivable, less allowances of $1,078 and $513, respectively
  
 
53,568
       38,512  
Inventories, net
  
 
76,842
       61,264  
Prepaid expenses and other current assets
  
 
12,626
       8,900  
    
 
 
    
 
 
 
Total Current Assets
  
 
192,807
       162,190  
    
 
 
    
 
 
 
Property, Plant and Equipment:
                 
Land
  
 
989
       991  
Buildings and improvements
  
 
32,765
       32,188  
Machinery, equipment and furniture
  
 
78,410
       69,854