| MERIDIAN BIOSCIENCE INC paragraph, Part I, Item 1A Risk Factors contains a list of uncertainties and risks that may affect the financial performance of the Company |
| -3- _________________________________________________________________ [28]Table of Contents PART I This Annual Report on Form 10-K includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties |
| See “Forward-Looking Statements” above |
| Factors that could cause or contribute to such differences include those discussed in Item 1A In addition to the risk factors discussed herein, we are also subject to additional risks and uncertainties not presently known to us or that we currently deem immaterial |
| If any of these risks and uncertainties develops into actual events, our business, financial condition or results of operations could be adversely affected |
| Unless the context requires otherwise, references in this Annual Report on Form 10-K to “we,” “us,” “our,” “the company,” or “our company” refer to Meridian Bioscience, Inc |
| and all of its subsidiaries and predecessors as a combined entity |
| BUSINESS Overview Meridian is a fully-integrated life science company whose principal businesses are (i) the development, manufacture, sale and distribution of diagnostic test kits, primarily for certain respiratory, gastrointestinal, viral and parasitic infectious diseases, (ii) the manufacture and distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic manufacturers and (iii) the contract manufacture of proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines |
| By exploiting revenue opportunities across research, clinical diagnostics, and therapeutic areas for key biologicals, Meridian can maximize revenues, efficiently invest in research and development, and increase profitability of manufacturing operations |
| The US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostics test kits in the US and countries outside of Europe, Africa and the Middle East |
| The European Diagnostics operating segment consists of the sale and distribution of diagnostics test kits in Europe, Africa and the Middle East |
| The Life Science operating segment consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca Raton, Florida, and the sale and distribution of bulk antigens, antibodies, and bioresearch reagents domestically and abroad |
| The Life Science operating segment also includes contract services, including the contract manufacture of proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines and contract -4- _________________________________________________________________ [29]Table of Contents research and development, which involves growth of proteins as part of the development process |
| Financial information for Meridian’s operating segments is included in Note 9 to the consolidated financial statements contained herein |
| Meridian’s primary source of domestic and international revenues continues to be its core diagnostic products, which represented 79prca of consolidated net sales for fiscal 2006 |
| Meridian’s diagnostic products provide accuracy, simplicity, and speed, enable early diagnosis and treatment of common, acute medical conditions, and provide for better patient outcomes at reduced costs |
| Meridian targets diagnostics for disease states that (i) are acute conditions where rapid diagnosis impacts patient outcomes, (ii) have opportunistic demographic and disease profiles, (iii) are underserved by current diagnostic products, and (iv) have difficult sample handling requirements |
| This approach has allowed Meridian to establish significant market share in its target disease states |
| Meridian’s website is www |
| Meridian makes available its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, free of charge through this website, as soon as reasonably practicable after such material has been electronically filed with or furnished to the Securities and Exchange Commission |
| These reports may also be read and copied at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, DC 20549, phone 1-800-732-0330 |
| The SEC maintains an internet site containing these filings and other information regarding Meridian at http://www |
| US Diagnostics Operating Segment Overview The US Diagnostics operating segment’s business focuses on the development, manufacture, sale and distribution of diagnostic test kits, primarily for certain respiratory, gastrointestinal, viral and parasitic infectious diseases |
| In addition to diagnostic test kits, products also include transport media that store and preserve specimen samples from patient collection to laboratory testing |
| Third-party sales for this operating segment were dlra65cmam721cmam000, dlra53cmam485cmam000 and dlra48cmam153cmam000 for fiscal 2006, 2005 and 2004, respectively, reflecting a compound annual growth rate of 18prca |
| As of September 30, 2006, the US Diagnostics operating segment had 247 employees |
| Meridian’s diagnostic test kits utilize immunodiagnostic technologies, which test samples of blood, urine, stool, and other body fluids or tissue for the presence of antigens and antibodies of specific infectious diseases |
| Specific immunodiagnostic technologies used in Meridian’s diagnostic test kits include enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement fixation, and chemical -5- _________________________________________________________________ [30]Table of Contents stains |
| The enzyme immunoassay technology is used in multiple test formats; the Premierä products for large volume users and the ImmunoCardâ products for rapid, single test, low volume users |
| Meridian’s diagnostic products are used principally in the detection of respiratory diseases, such as pneumonia, valley fever, influenza, and Respiratory Syncytial Virus (RSV); gastrointestinal diseases, such as stomach ulcers (H pylori), antibiotic-associated diarrhea (C difficile) and pediatric diarrhea (Rotavirus and Adenovirus); viral diseases, such as Mononucleosis, Herpes Simplex, Chicken Pox and Shingles (Varicella-Zoster) and Cytomegalovirus (organ transplant infections); and parasitic diseases, such as Giardiasis, Cryptosporidiosis and Lyme |
| The primary markets and customers for these products are reference laboratories, hospitals, and physicians’ offices |
| Market Trends The global market for infectious disease tests continues to expand as new disease states are identified, new therapies become available, and worldwide standards of living and access to health care improve |
| More importantly, within this market there is a continuing shift from conventional testing, which requires highly trained personnel and lengthy turnaround times for test results, to more technologically advanced testing which can be performed by less highly trained personnel and completed in minutes or hours |
| The increasing pressures to contain total health care costs have accelerated the increased use of diagnostic testing |
| With rapid and accurate diagnoses of infectious diseases, physicians can pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and lower treatment expense |
| In addition, these pressures have led to a major consolidation among reference laboratories and the formation of multi-hospital alliances that have reduced the number of institutional customers for diagnostic products and resulted in changes in buying practices |
| Specifically, multi-year exclusive or primary source marketing or distribution contracts with institutional customers have become more common, replacing less formal distribution arrangements of shorter duration and involving lower product volumes |
| Sales and Marketing The US Diagnostics operating segment’s sales and distribution network consists of a direct sales force in the US and independent distributors in the US and abroad |
| The direct sales force consists of one director of sales, three regional sales managers, one director of corporate health systems, one director of managed health care, one international distribution manager, 24 technical sales representatives, and three inside sales representatives |
| Meridian utilizes two primary independent distributors in the US, who accounted for 47prca of the US Diagnostics operating segment’s third-party sales in fiscal 2006 |
| Meridian drives the selling effort for key customers where these independent distributors are utilized |
| -6- _________________________________________________________________ [31]Table of Contents Consolidation of the US healthcare industry is expected to continue and potentially affect Meridian’s customers |
| Industry consolidation puts pressure on pricing and aggregates buying power |
| In response, in the last five years, Meridian has entered into, extended, or renewed several exclusive multiple-year contracts with consolidated healthcare providers and supply agreements with major reference laboratories |
| Products and Markets Meridian has expertise in the development and manufacture of products based on multiple core diagnostic technologies, each of which enables the visualization and identification of antigen/antibody reactions for specific pathogens |
| As a result, Meridian is able to develop and manufacture diagnostic tests in a variety of formats that satisfy customer needs and preferences, whether in a hospital, commercial or reference laboratory or alternate site location |
| Meridian’s product offering consists of approximately 150 medical diagnostic products |
| Meridian’s products generally range in list price from dlra1 per test to dlra33 per test |
| Meridian’s product technologies include enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement fixation and chemical stains |
| Enzyme Immunoassay (EIA)/Rapid tests - Products incorporating the EIA technology achieve extremely high levels of accuracy in detecting disease-related antigens or antibodies through the use of special color-based enzyme-substrate reactions |
| Meridian utilizes this technology in some of its multiple test format, the Premier^TM product for large volume users, and in some of its single test formats, the ImmunoCard^^®, ImmunoCard STAT! |
| ^® and MONOLERT^® products for lower volume users |
| Immunofluorescence - When the microscopic visualization of an antigen/antibody reaction is necessary or desired, immunofluorescence technology is frequently utilized |
| Fluorescing immunochemicals, in the presence of the target antigen or antibody, can be viewed via a fluorescent microscope |
| Meridian utilizes this technology in its MERIFLUOR^® products |
| Particle Agglutination/Aggregation - This technology utilizes microparticles (eg, latex, red blood cells) coated with specific antigens or antibodies that form visible aggregates in the presence of a specimen containing the complementary antigen or antibody |
| This technology is rapid and economical and is used in Meridian’s MERITEC^® and MONOSPOT^® products |
| Other Technologies - Meridian utilizes other technologies that include immunodiffusion, complement fixation, and chemical stains |
| Meridian also manufactures and markets specimen collection, transportation, preservation and concentration products, such as Para-Pak^®, Macro-CON^® and Spin-Con^® |
| Research and Development -7- _________________________________________________________________ [32]Table of Contents The US Diagnostics operating segment’s research and development organization consists of 13 research scientists with expertise in biochemistry, immunology, mycology, bacteriology, virology, and parasitology |
| Research and development expenses for the US Diagnostics operating segment for fiscal 2006, 2005 and 2004 were dlra3cmam342cmam000, dlra3cmam043cmam000 and dlra3cmam151cmam000, respectively |
| This research and development organization focuses its activities on new applications for Meridian’s existing technologies, improvements to existing products and development of new technologies |
| Research and development efforts may occur in-house or with collaborative partners |
| Meridian believes that new product development is a key source for sustaining revenue growth |
| Meridian’s internally developed products include Premierä Platinum HpSA, Premierä Platinum HpSA PLUS, Premierä Toxins A & B, and ImmunoCardÒ Toxins A & B, which together accounted for 36prca of the US Diagnostics operating segment’s third-party sales during fiscal 2006 |
| We believe that the use of collaborative partners in the development of new products will complement our internal research and development staff in a manner that allows us to bring products to market more quickly than if development were to occur solely on an internal basis |
| During October 2006, we executed a license agreement with Eiken Chemical Co, Ltd |
| that provides rights to Eiken’s loop-mediated isothermal amplification technology for infectious disease testing in the United States and 18 other geographic markets |
| This is Meridian’s first look at molecular testing for infectious diseases |
| During August 2006, we entered into a partnership agreement with the Performance & Life Science Chemicals Division of Merck KGaA, Darmstadt, Germany and its American company EMD for the development of new clinical assays |
| Our first product under this agreement is expected to be launched during fiscal 2007 |
| Manufacturing Meridian’s immunodiagnostic products require the production of highly specific and sensitive antigens and antibodies |
| Meridian produces substantially all of its own requirements including monoclonal antibodies and polyclonal antibodies, plus a variety of fungal, bacterial, and viral antigens |
| Meridian believes it has sufficient manufacturing capacity for anticipated growth |
| Intellectual Property, Patents, and Licenses Meridian owns or licenses US and foreign patents for approximately 25 products manufactured by the US Diagnostics operating segment, including Premierä Platinum HpSA and Premierä Platinum HpSA PLUS In the absence of patent protection, Meridian may be vulnerable to competitors who successfully replicate Meridian’s production and manufacturing technologies and processes |
| Meridian’s employees are required to execute confidentiality and non-disclosure agreements designed to protect Meridian’s proprietary products |
| -8- _________________________________________________________________ [33]Table of Contents Government Regulation Meridian’s diagnostic products are regulated by the Food & Drug Administration (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 (ie, Class I, II or III) |
| Class I and II devices are not expressly approved by the FDA, but, instead, are “cleared” for marketing |
| Class III devices generally must receive “pre-market approval” from the FDA as to safety and effectiveness |
| Each of the diagnostic products currently marketed by Meridian in the United States has been cleared by the FDA pursuant to the 510(k) clearance process or is exempt from such requirements |
| Meridian believes that most, but not all, products under development will be classified as Class I or II medical devices and, in the case of Class II devices, will be eligible for 510(k) clearance |
| A 510(k) clearance will be granted if the submitted data establishes that the proposed device is “substantially equivalent” to an existing Class I or Class II medical device or to a Class III medical device for which the FDA does not require pre-market approval |
| The 510(k) clearance process for “substantially equivalent” devices allows product sales to be made in the United States after the filing of an application and upon clearance by the FDA, typically within 90 to 120 days after submission |
| If the FDA requests additional information, the product cannot be sold in the United States until the application has been supplemented and upon acknowledgment by the FDA within 90 to 120 days of the supplemental application |
| In practice, the FDA has been granting clearance in about 90 days following submission of the supplemental information |
| If there are no existing FDA-approved products or processes comparable to a diagnostic product or process, approval by the FDA involves the more lengthy pre-market approval procedures except where the product qualifies for de novo 510(k) |
| Under the Food and Drug Export Reform and Enforcement Act of 1996 (FDERA), unapproved FDA products can, under certain conditions, be sold outside of the United States prior to receiving clearance |
| Sales of Meridian’s diagnostic products in foreign countries are subject to foreign government regulation, the requirements of which vary substantially from country to country |
| The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval and the requirements may differ |
| European Diagnostics Operating Segment The European Diagnostics operating segment’s business focuses on the sale and distribution of diagnostic test kits, manufactured both by the US Diagnostics operating segment and by third-party vendors |
| Approximately 66prca of third-party sales for fiscal 2006 were products purchased from the US Diagnostics operating segment |
| Third-party sales for this operating segment were dlra19cmam828cmam000, dlra17cmam818cmam000 and dlra15cmam412cmam000 for fiscal 2006, 2005 and 2004, respectively, reflecting a compound annual growth rate of 13prca |
| As of September 30, 2006, -9- _________________________________________________________________ [34]Table of Contents the European Diagnostics operating segment had 38 employees, including 16 employees in the direct sales force |
| The European Diagnostics operating segment’s sales and distribution network consists of direct sales forces in Belgium, France, Holland, and Italy, and independent distributors in other European countries, Africa and the Middle East |
| The European Diagnostics operating segment maintains a distribution center in Milan, Italy |
| The primary markets and customers for this operating segment are hospitals and reference laboratories |
| Due to the introduction of new products and improvements in general market conditions, sales in local currency, the Euro, increased 15prca in fiscal 2006, compared to fiscal 2005, and 11prca in fiscal 2005, compared to fiscal 2004 |
| The European Diagnostics operating segment’s functional currency is the Euro |
| The translation of Euros into US dollars is subject to exchange rate fluctuations |
| Life Science Operating Segment Overview The Life Science operating segment’s business focuses on the development, manufacture, sale, and distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic companies, as well as contract development and manufacturing services |
| Third-party sales for this operating segment were dlra22cmam864cmam000, dlra21cmam662cmam000 and dlra16cmam041cmam000 for fiscal 2006, 2005 and 2004, respectively, reflecting a compound annual growth rate of 23prca, including the OEM Concepts acquisition discussed below |
| As of September 30, 2006, the Life Science operating segment had 117 employees |
| Most of the revenue for the Life Science operating segment currently comes from the manufacture, sale and distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic companies |
| During fiscal 2006, 18prca of third-party sales for this segment were to one customer, a substantial portion of which is under exclusive supply agreements that have annual automatic renewal provisions |
| Meridian has a long-standing relationship with this customer, and although there can be no assurances, Meridian intends to renew these supply agreements in the normal course of business |
| The protein production facility serves as an enabling technology for process development and large-scale manufacturing for biologicals used in new drugs and vaccines |
| The size of the facility is intended to accommodate manufacturing requirements for Phase I and Phase II clinical trials |
| The customer base for this aspect of the Life Science business includes biopharmaceutical and biotechnology companies, as well as government agencies, such as the National Institutes of Health |
| Revenues for the Life Science operating segment, in the normal course of business, may be affected from quarter to quarter by the timing and nature of arrangements for contract services work, which may have longer production cycles than bioresearch reagents -10- _________________________________________________________________ [35]Table of Contents and bulk antigens and antibodies, as well as buying patterns of major customers |
| See Note 1(j) to the Consolidated Financial Statements herein for revenue recognition policies |
| Meridian’s revenues for contract services were dlra2cmam537cmam000, dlra3cmam053cmam000, and dlra1cmam528cmam000 in fiscal 2006, 2005, and 2004, respectively |
| Growth Strategies Growth strategies for the Life Science operating segment include (i) development of new product applications from existing technologies and (ii) acquisition or licensing of biologicals and technologies for development of new products |
| Contract manufacturing of proteins and other biologicals used in research for new drugs and vaccines is an example of a significant new product application built from Meridian’s existing expertise in manufacturing bulk antigens and reagents using cell culture techniques |
| The BIODESIGN brand represents monoclonal and polyclonal antibodies, as well as assay reagents |
| The OEM Concepts brand represents contract ascites and antibody production services |
| The Viral Antigens brand represents viral proteins |
| The cGMP biologics brand represents contract development and manufacturing services for drug and vaccine discovery and development |
| The customer base for bulk biomedical reagents (BIODESIGN, OEM Concepts, and Viral Antigens brands) is large and fragmented, and includes other diagnostic manufacturers as well as researchers in academia and the pharmaceutical and biotechnology industries |
| The market segments for drug and vaccine discovery and development are intended to be served via contract manufacturing in the protein production laboratory discussed above |
| Sales and Marketing The Life Science operating segment applies sales and marketing efforts in two different manners that are designed to complement one another |
| An internal sales and marketing staff, as well as a website, have been built to market bulk biomedical reagents directly to a large and fragmented customer base |
| The website provides detailed technical information and capability to submit purchase orders |
| For major bulk biomedical reagent customers, scientific resources have been dedicated to establish sole-source supply arrangements |
| For drug and vaccine discovery and development, management and scientific resources are dedicated to each potential customer |
| Research and Development -11- _________________________________________________________________ [36]Table of Contents The Life Science operating segment’s research and development organization consists of 7 research scientists |
| Research and development expenses for the Life Science operating segment for fiscal 2006, 2005 and 2004 were dlra1cmam457cmam000, dlra823cmam000 and dlra1cmam226cmam000, respectively |
| This research and development organization focuses its activities on the protein production laboratory, and developing new biomedical reagents |
| Manufacturing and Government Regulation The proteins that are produced in the protein production facility are intended to be used as “injectibles” |
| As such, they are produced under cGMP Regulations for Biologics and Human Drugs under the auspices of the FDA Approval and licensing, following clinical trials, of these products is the responsibility of the applicant, who owns the rights to each protein |
| Typically, the customer is the applicant, not Meridian Life Science |
| Competition Diagnostics The market for diagnostic tests is a multi-billion dollar international industry, which is highly competitive |
| Many of Meridian’s competitors are larger with greater financial, research, manufacturing and marketing resources |
| Important competitive factors of Meridian’s products include product quality, price, ease of use, customer service, and reputation |
| In a broader sense, industry competition is based upon scientific and technological capability, proprietary know-how, access to adequate capital, the ability to develop and market products and processes, the ability to attract and retain qualified personnel and the availability of patent protection |
| To the extent that Meridian’s product lines do not reflect technological advances, Meridian’s ability to compete in those product lines could be adversely affected |
| Companies competing in the diagnostic test industry generally focus on a limited number of tests or limited segments of the market |
| As a result, the diagnostic test industry is highly fragmented and segmented |
| Hundreds of companies in the United States alone supply immunodiagnostic tests |
| These companies range from multi-national health care companies, for which immunodiagnostics is one line of business, to small start-up companies |
| Of central importance in the industry are mid-sized medical diagnostic specialty companies, like Meridian, that offer multiple, broad product lines and have the ability to deliver new, high value products quickly to the marketplace |
| Among the companies with which Meridian competes in the marketing of one or more of its products are Abbott Laboratories Inc, Becton, Dickinson and Company, Diagnostic Products Corporation (acquired by Siemens in 2006), Quidel Corporation, and Inverness Medical |
| Life Science -12- _________________________________________________________________ [37]Table of Contents The market for bulk biomedical reagents is highly competitive |
| Important competitive factors include product quality, price, customer service, and reputation |
| Meridian faces competitors, many of which have greater financial, research and development, sales and marketing, and manufacturing resources where sole-source supply arrangements do not exist |
| From time to time, customers may choose to manufacture their biomedical reagents in-house rather than purchase from outside vendors such as Meridian |
| The market for contract manufacturing in a validated cGMP facility such as Meridian’s protein production laboratory is also competitive |
| Important competitive factors include reputation, customer service, and price |
| Although the product application for this facility was built from Meridian’s existing expertise in cell culture manufacturing techniques, Meridian faces competitors with greater experience in contract manufacturing in a cGMP environment |
| Acquisitions Acquisitions have played an important role in the historical growth of Meridian’s businesses |
| Meridian’s acquisition objectives are to, among other things, (i) enhance product offerings, (ii) improve product distribution capabilities, (iii) provide access to new markets, and/or (iv) provide access to key biologicals or new technologies that lead to new products |
| Recent examples of completed acquisitions include Gull Laboratories in fiscal 1999, Viral Antigens in fiscal 2000, and OEM Concepts in fiscal 2005 |
| The Gull acquisition enhanced product offerings, expanded sales and distribution capabilities in Europe, and provided the initial access into the Life Science market for Meridian (through the BIODESIGN business) |
| The Viral Antigens acquisition, coupled with the opening of the protein production facility, solidified Meridian’s entry into the Life Science market |
| The OEM Concepts acquisition strengthened Meridian’s Life Science business by adding custom ascites manufacturing capabilities and diversifying Meridian’s customer base of major diagnostic manufacturing companies |
| Although Meridian cannot provide any assurance that it will consummate any acquisitions in the future, Meridian expects that acquisitions will continue to serve as a source of new revenues and earnings growth in the future |
| International Markets International markets are an important source of revenue for Meridian’s operating segments |
| For all operating segments combined, international sales were dlra34cmam557cmam000 or 32prca of total fiscal 2006 sales, dlra30cmam232cmam000 or 33prca of total fiscal 2005 sales and dlra24cmam916cmam000 or 31prca of total fiscal 2004 sales |
| Domestic exports for the US Diagnostics and Life Science operating segments were dlra14cmam728cmam000, dlra12cmam414cmam000 and dlra9cmam504cmam000 in fiscal -13- _________________________________________________________________ [38]Table of Contents 2006, 2005 and 2004, respectively |
| Meridian expects to continue to look to international markets as a source of new revenues and growth in the future |
| Environmental Meridian is a conditionally exempt small quantity generator of hazardous waste and has a US EPA identification number |
| All hazardous material is manifested and disposed of properly |
| Meridian is in compliance with applicable portions of the federal and state hazardous waste regulations and has never been a party to any environmental proceeding |
| 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 the Company’s actual results to vary materially from recent results or from anticipated future results |
| The risks described below are not the only risks facing our Company |
| Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results |
| Risks Affecting Growth and Profitability of our Business We may be unable to develop new products and services or acquire products and services on favorable terms |
| The medical diagnostic and life science industries are characterized by ongoing technological developments and changing customer requirements |
| As such, our results of operations and continued growth depend, in part, on our ability in a timely manner to develop or acquire rights to, and successfully introduce into the marketplace, enhancements of existing products and services or new products and services that incorporate technological advances, meet customer requirements, and 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 products, services, and technologies |
| The research and development process generally takes a significant amount of time from design stage to product launch |
| This process is conducted in various stages |
| During each stage, there is a risk that we will not achieve our goals on a timely basis, or at all, and we may have to abandon a product in which we have invested substantial resources |
| During 2006, 2005, and 2004, we incurred dlra4cmam799cmam000, dlra3cmam866cmam000, and dlra4cmam377cmam000, respectively, in research and development expenses |
| We expect to continue to invest in our research and development activities |
| -14- _________________________________________________________________ [39]Table of Contents We may be unable to successfully integrate operations or to achieve expected cost savings from acquisitions we make |
| One of our main 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, and financial risks of additional operating costs |
| 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 any 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 |
| Revenues for our diagnostic operating segments may be impacted by our reliance upon two key distributors, seasonal factors and sporadic outbreaks, and changing diagnostic market conditions |
| Key Distributors Our US Diagnostic operating segment sales through two distributors were approximately dlra31cmam003cmam000, or approximately 29prca of total sales, in fiscal 2006, and approximately dlra23cmam756cmam000, or approximately 26prca of total sales for fiscal 2005 |
| These parties distribute our products and other laboratory products to end-user customers |
| The loss of either of these distributors could negatively impact our sales and results of operations unless suitable alternatives were timely found or lost sales to one distributor were absorbed by another distributor |
| Finding a suitable alternative on satisfactory terms may pose challenges in our industry’s competitive environment |
| As an alternative, we could expand our efforts to distribute and market our products directly |
| This alternative, however, would require substantial investment in additional sales, marketing, and logistics resources, including hiring additional sales and customer service personnel, which would significantly increase our future selling, general, and administrative expenses |
| Seasonal Factors and Sporadic Outbreaks Our principal business is the sale of a broad range of diagnostic test kits for common respiratory, gastrointestinal, viral, and parasitic infectious diseases |
| Certain infectious diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as food-borne illnesses |
| While we believe that the breadth of our diagnostic product lines reduces the risk that infections subject to seasonality and sporadic outbreaks will cause variability in diagnostic revenues, we can make no assurance that revenues will not be negatively impacted period over period by such factors |
| Changing Diagnostic Market Conditions -15- _________________________________________________________________ [40]Table of Contents Changes in the healthcare delivery system have resulted in major consolidation among reference laboratories and in the formation of multi-hospital alliances, reducing the number of institutional customers for diagnostic test products |
| 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, which could adversely affect our results of operations |
| Third party payors for medical products and services, including state and federal 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 |
| If reimbursement amounts for diagnostic testing services are decreased 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 sales and/or profit margins |
| Revenues for our Life Science operating segment may be impacted by customer concentrations and buying patterns |
| Our Life Science operating segment’s sales of purified antigens and reagents to one customer were 18prca and 23prca, respectively, of the Life Science operating segment’s total sales for fiscal 2006 and fiscal 2005, or 4prca and 5prca, respectively, of our overall total sales for fiscal 2006 and fiscal 2005 |
| A substantial portion of these sales are under exclusive supply agreements that have annual automatic renewal provisions |
| Although we have a long-standing relationship with this customer, we cannot provide any assurance that we will be able to renew these supply agreements, which could adversely affect our sales and results of operations |
| Our Life Science operating segment has five other significant customers who purchase antigens, antibodies and reagents, which together comprised 20prca and 29prca, respectively, of the operating segment’s total sales for fiscal 2006 and fiscal 2005 |
| Any significant alteration of buying patterns from these customers could adversely affect our period over period sales and results of operations |
| Revenues relating to research, development and manufacturing services for our Life Science operating segment are generated on a contract by contract basis |
| The nature of this business is such that each contract provides a unique product and/or service and corresponding revenue stream |
| Although we believe that future prospects for this business will generate targeted growth rates, there can be no assurance that future contracts will be secured, and if secured, will be profitable |
| Intense competition could adversely affect our profitability |
| The markets for our products and services are characterized by substantial competition and rapid change |
| Hundreds of companies in the United States supply immunodiagnostic tests and purified reagents |
| These companies range from multinational healthcare entities, for which immunodiagnostics is one line of business, -16- _________________________________________________________________ [41]Table of Contents to small start-up companies |
| Many of our competitors have significantly greater financial, technical, manufacturing, and marketing resources than we do |
| We cannot provide any assurance that our products and services will be able to compete successfully with the products and services of our competitors |
| We are dependent on international sales, and our financial results may be adversely impacted by foreign currency, regulatory or other developments affecting international markets |
| We sell products and services into approximately 60 countries |
| Approximately 32prca of our net sales for fiscal 2006 and approximately 33prca of our net sales for fiscal 2005 were attributable to international markets |
| Approximately 49prca of our international sales were made in Euros, with the remaining 51prca made in US dollars |
| We are subject to the risks associated with fluctuations in the US dollar-Euro exchange rates |
| We are also subject to other risks associated with international operations, including longer customer payment cycles, tariff regulations, requirements for export licenses, stability of foreign governments, and governmental requirements with respect to the importation and distribution of medical devices and antigens, antibodies and reagents, all of which may vary by country |
| Risks Affecting our Manufacturing Operations We are subject to comprehensive regulation, and our ability to earn profits may be restricted by these regulations |
| Medical device diagnostics and the manufacture, sale, and distribution of bulk antigens, antibodies, and reagents are highly regulated industries |
| We cannot provide any assurance that we will be able to obtain necessary governmental clearances or approvals or timely clearances or approvals to market future products in the United States and other countries |
| Costs and difficulties in complying with laws and regulations administered by the US Food and Drug Administration, the US Department of Agriculture, the US Department of Commerce, the US Drug Enforcement Agency, or the Centers for Disease Control can result in unanticipated expenses and delays and interruptions to the sale of new and existing products |
| Contract manufacturing of proteins and other biologicals is regulated by the US Food and Drug Administration |
| Regulatory approval can be a lengthy, expensive, and uncertain process, making the timing and costs of approvals difficult to predict |
| The failure to comply with these regulations can result in delay 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 |
| Significant interruptions in production at our principal manufacturing facilities and/or third-party manufacturing facilities would adversely affect our business and operating results |
| Approximately 79prca of our diagnostics revenues and 71prca of our Life Science revenues come from products and services manufactured at our Cincinnati, Ohio, Boca Raton, Florida, Memphis, Tennessee, and Saco, Maine facilities |
| Our global supply of these products and services is dependent on the uninterrupted and -17- _________________________________________________________________ [42]Table of Contents 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 |
| The operations of our facilities or these third-party manufacturing facilities could be adversely affected by power failures, natural or other disasters, such as earthquakes, floods, 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 third-party manufacturing capabilities could materially and adversely affect our operating results |
| We are dependent on sole-source suppliers for certain critical components and products |
| A supply interruption could adversely affect our business |
| Our products are made from a wide variety of raw materials that are generally available from alternate sources of supply |
| However, certain critical raw materials and supplies required for the production of some of our principal products are available only from a single supplier |
| In addition, certain finished products, for which Meridian acts as a distributor, are available only from a single supplier |
| If these suppliers become unable or unwilling to supply the required raw materials or products, we would need to find another source, and perform additional development work and obtain regulatory approvals for the use of the alternative raw materials for our products |
| Completing that development and obtaining such approvals could require significant time and resources, and may not occur at all |
| Any disruption in the supply of these raw materials or finished products could have a material adverse affect on us |
| Risks Related to Intellectual Property and Product Liability We may be unable to protect or obtain proprietary rights that we utilize or intend to utilize |
| In developing and manufacturing our products, we employ a variety of proprietary and patented technologies |
| In addition, we have licensed, and expect to continue to license, various complementary technologies and methods from academic institutions and public and private companies |
| We cannot provide any 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 any assurances that we will be successful in obtaining licenses or proprietary or patented technologies in the future |
| Product infringement claims by other companies could result in costly disputes and could limit our ability to sell our products |
| Litigation over intellectual property rights is prevalent in the diagnostic industry |
| As the market for diagnostics continues to grow and the number of participants in the market increases, we may increasingly be subject to patent infringement claims |
| It is possible that a third-party may claim infringement against us |
| If found to infringe, we may attempt to obtain a license to such intellectual property, however, we may be unable to do so on favorable terms, or at all |
| Additionally, if our products are found to infringe on a third party’s -18- _________________________________________________________________ [43]Table of Contents 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 |
| 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 affect 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 affect on our profitability and the damage to our reputation in the industry could have a material adverse affect on our business |
| Other Risks Affecting Our Business Our business could be negatively affected if we are unable to attract, hire, and retain key personnel |
| Our future success depends on our continued ability to attract, hire, and retain highly qualified personnel, including our executive officers and scientific, technical, sales, and marketing employees, and their ability to manage growth successfully |
| If such key employees were to leave and we were unable to obtain adequate replacements, our operating results could be adversely affected |
| Our bank credit agreement imposes restrictions with respect to our operations |
| Our bank credit agreement contains a number of financial covenants that require us to meet certain financial ratios and tests |
| If we fail to comply with the obligations in the credit agreement, we would be in default under the credit agreement |
| If an event of default is not cured or waived, it could result in acceleration of the indebtedness under our credit agreement and under other instruments that contain cross-acceleration or cross-default provisions, any of which could have a material adverse effect on our business |
| At the present time, no borrowings are outstanding under the credit agreement |
| Should we be unable to renew our bank credit agreement on an ongoing basis, our growth potential could be adversely affected |
| Our bank credit agreement provides us with access to funds that may be used for acquisitions or ongoing operating expenses |
| If we were unable to renew the credit agreement and unable to put into place a similar -19- _________________________________________________________________ [44]Table of Contents agreement, we could become unable to fund future growth and/or take advantage of acquisition opportunities |
| Such limitations on growth could have a material adverse affect on our business |
| Risks Related to Our Common Stock Our board of directors has the authority to issue up to 1cmam000cmam000 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 the common stock |
| In addition, sales of substantial amounts of such shares in the public market could adversely affect the market price of the common stock and our ability to raise additional capital at a price favorable to us |