MERIDIAN BIOSCIENCE INC - Annual Report: 2021 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

10-K

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2021.

                    

                    

No. 0-14902

MERIDIAN BIOSCIENCE, INC.

3471 River Hills Drive

Cincinnati, Ohio 45244

No. 31-0888197

State of Incorporation: Ohio

271-3700

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

This Form refers to trademarks such as Alethia, BreathID, BreathTek, Curian, HpSA, Immuno, Immuno 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 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 and , has been rebranded under the tradename Alethia. References to Alethia throughout this Form refer to our molecular diagnostic tests and instrumentation formerly marketed and sold under the and 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

MARKET AND INDUSTRY INFORMATION

Overview

Reportable Segments

Diagnostics Segment

Prior to the onset of the pandemic early in 2020, our largest source of net revenues was clinical diagnostic products, historically representing approximately of our consolidated net revenues. However, primarily due to the effects of the 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.

Card

Card

H. pylori

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 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 testing, as these products provide an alternative testing approach versus stool antigen testing.

Despite the effects of the pandemic and the intense focus on 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 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 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 The level of government budget deficits can have an adverse effect on the amount of government health care spend.

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 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.

point-of-care

point-of-care

H. pylori

H. pylori

H. pylori

The patents for our stool antigen 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 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 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 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.

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 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 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 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 on the BreathTek system was approved by the FDA via the PMA process in 2012. Our 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.

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 clinical customers such as veterinary, food and environmental. The pandemic has provided the opportunity for our Life Science segment to showcase the breadth of its reagent products across not only 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 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.

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 rather than purchase from us.

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 and lyophilization-ready forms, and isothermal reagents in both 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.

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 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 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.

Risk Factors Summary

Risks Related to Our Strategy

Key Distributors

Seasonal Factors and Sporadic Outbreaks

Changing Diagnostic Market Conditions

H. pylori

H. pylori

H. pylori

Risks Related to Our Intellectual Property

Risks Related to Our Operations

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 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 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

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 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.

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 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.

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 based on the third-party study.

During October 2019, the FDA performed a 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 letter for the Warning Letter that FDA issued to Magellan on October 23, 2017. The FDA’s 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 letter also stated that future FDA inspections of Magellan and regulatory activities will further assess the adequacy and sustainability of Magellan’s corrections.

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 pandemic, including the Emergency Temporary Standard (“ETS”) 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 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.

Risks Related to Our Common Stock

General Risk Factors

denial-of-service

Refer to “Note About Forward-Looking Statements” following the Index in front of this Form and Item 1A “Risk Factors” on pages 11 through 24 of this Annual Report.

.

Recent Developments

site-by-site

Our Diagnostics segment manufactures, markets and sells a number of molecular, immunoassay, blood chemistry and urea breath testsfor various infectious diseases and blood-lead levels. Sales volumes for a number of these assays have been adversely affected by the pandemic over the past year and half, as such assays are often used in 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 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 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 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, of the Consolidated Financial Statements).

Lead Testing Matters

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 letter for the Warning Letter that FDA issued to Magellan on October 23, 2017. FDA’s 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 letter also stated that future FDA inspections of Magellan and regulatory activities will further assess the adequacy and sustainability of Magellan’s corrections.

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, and Note 3, of the Consolidated Financial Statements, respectively).

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 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 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 related tests. Revenue from sales of our core Life Science segment products (other than 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 customers who are now using our products for other 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.

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 related tests.

non-COVID-19

REVENUE OVERVIEW

Revenue Overview – By Reportable Segment & Geographic Region

“Revenue Recognition”

Diagnostics Segment Products

year-to-year

“Reportable Segments and Major Concentration Data”

Gross Profit:

Operating Expenses —

Segment Detail and Corporate

“National Institutes of Health Contracts”

“Bank Credit Arrangements”

Liquidity and Capital Resources

“Bank Credit Arrangements”

“National Institutes of Health Contracts”

“National Institutes of Health Contracts”

Contractual Obligations

“Bank Credit Arrangements”

“Contingent Obligations and Liabilities”

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 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, of the Consolidated Financial Statements). Aside from these instruments, we do not utilize special-purpose financing vehicles or have any material undisclosed sheet arrangements.

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 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.

The Consolidated Financial Statements included in this Form 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.

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), of the Consolidated Financial Statements.

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act

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 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.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands)

Meridian Bioscience, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

Meridian Bioscience, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (in thousands)

Meridian Bioscience, Inc. and Subsidiaries