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VIVO > SEC Filings for VIVO > Form 10-K on 29-Nov-2012All Recent SEC Filings

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Form 10-K for MERIDIAN BIOSCIENCE INC


29-Nov-2012

Annual Report


ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Refer to "Forward Looking Statements" following the Index in front of this Form 10-K and Item 1A "Risk Factors" on pages 16 through 23 of this Annual Report.

In the discussion that follows, all amounts are in thousands (both tables and text), except per share data.

Results of Operations:

Fourth Quarter

Net earnings for the fourth quarter of fiscal 2012 increased 28% to $8,573, or $0.21 per diluted share, from net earnings for the fourth quarter of fiscal 2011 of $6,710, or $0.16 per diluted share. This increase reflects the combined effects of both increased sales and increased operating expenses. Additionally, the fiscal 2011 fourth quarter included $1,057 of costs associated with the consolidation of the Saco, Maine operations into the Memphis, Tennessee facility (impact on net earnings of $691, or $0.02 per diluted share - see Non-GAAP Information below). Sales for the fourth quarter of fiscal 2012 were $43,694, an increase of $2,345, or 6%, compared to the fourth quarter of fiscal 2011, reflecting increased sales across all of our diagnostic focus product families:
C. difficile, Foodborne and H. pylori.

Sales for the U.S. Diagnostics segment for the fourth quarter of fiscal 2012 increased 11% compared to the fourth quarter of fiscal 2011, reflecting growth across all of our focus product families - ranging from 9% growth in H. pylori products to 20% growth in our C. difficile product family. Fourth quarter 2012 sales for our European Diagnostics segment decreased 11% compared to the fourth quarter of fiscal 2011 due primarily to a negative currency effect. On an organic basis, which excludes the effects of currency translation, sales for our European Diagnostics segment were flat during the fourth quarter, reflecting growth in H. pylori product sales being offset by a decline in sales of our C. difficile and foodborne product families. Reflecting growth in its molecular reagent business being partially offset by a decline in its core bulk reagent business, sales of our Life Science segment increased by 1% during the fourth quarter of fiscal 2012 compared to the fourth quarter of fiscal 2011.

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Fiscal Year

Net earnings for fiscal 2012 increased 24% to $33,371, or $0.80 per diluted share from net earnings for fiscal 2011 of $26,831, or $0.65 per diluted share. Fiscal 2012 results includes $1,013 of costs associated with the consolidation of the Saco, Maine operations into the Memphis, Tennessee facility (impact on earnings of $659 or $0.02 per diluted share - see Non-GAAP Information below), while fiscal 2011 included $1,057 of costs related to the Maine facility consolidation and $1,240 of costs incurred in connection with the reorganization of our sales and marketing leadership during the second quarter of fiscal 2011 (combined impact on fiscal 2011 net earnings of $1,563 or $0.04 per diluted share). Results of operations for fiscal 2012 compared to fiscal 2011 are discussed below.

Non-GAAP Information

The tables below provide information on net earnings, basic earnings per share and diluted earnings per share, excluding the effect of costs associated with the consolidation of our Saco, Maine operations into our Memphis, Tennessee facility (fiscal 2012 and fiscal 2011), costs of reorganizing our sales and marketing leadership (fiscal 2011) and transaction costs associated with the acquisition of the Bioline Group (fiscal 2010), each of which is a non-GAAP financial measure, as well as reconciliations to amounts reported under U.S. Generally Accepted Accounting Principles. We believe that this information is useful to those who read our financial statements and evaluate our operating results because:

1. These measures help to appropriately evaluate and compare the results of operations from period to period by removing the impact of non-routine costs related to consolidating the Maine operations (fiscal 2012 and fiscal 2011) and reorganizing our sales and marketing leadership (fiscal 2011), and the one-time transaction costs related to the acquisition of the Bioline Group (fiscal 2010); and

2. These measures are used by our management for various purposes, including evaluating performance against incentive bonus achievement targets, comparing performance from period to period in presentations to our Board of Directors, and as a basis for strategic planning and forecasting.

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                                                         2012         2011         2010
 Net Earnings-
 U.S. GAAP basis                                       $ 33,371     $ 26,831     $ 26,647
 Facility consolidation costs (1)                           659          691           -
 Sales & Marketing Leadership Reorganization (2)             -           872           -
 Transaction costs for Bioline Group acquisition (3)         -            -         1,240

 Adjusted earnings                                     $ 34,030     $ 28,394     $ 27,887

 Net Earnings per Basic Common Share-
 U.S. GAAP basis                                       $   0.81     $   0.66     $   0.66
 Facility consolidation costs (1)                          0.02         0.02           -
 Sales & Marketing Leadership Reorganization (2)             -          0.02           -
 Transaction costs for Bioline Group acquisition (3)         -            -          0.03

 Adjusted Basic EPS                                    $   0.83     $   0.70     $   0.69

 Net Earnings per Diluted Common Share-
 U.S. GAAP basis                                       $   0.80     $   0.65     $   0.65
 Facility consolidation costs (1)                          0.02         0.02           -
 Sales & Marketing Leadership Reorganization (2)             -          0.02           -
 Transaction costs for Bioline Group acquisition (3)         -            -          0.03

 Adjusted Diluted EPS                                  $   0.82     $   0.69     $   0.68

(1) These facility consolidation costs are net of income tax effects of $354 and $366 for fiscal 2012 and fiscal 2011, respectively, which were calculated using the effective tax rates of the jurisdictions in which the costs were incurred.

(2) These leadership reorganization costs are net of the $368 income tax effect for fiscal 2011, which were calculated using the effective tax rates of the jurisdictions in which the costs were incurred.

(3) Since the Bioline Group transaction costs were not deductible, there are no income tax effects.

Revenue Overview:

Our Diagnostics segments provide the largest share of our consolidated revenues, 75%, 76% and 81% for fiscal 2012, 2011 and 2010, respectively. The percentage decline from fiscal 2010 to fiscal 2011 results primarily from the addition of the Bioline Group to our Life Science segment in July 2010. Sales from our focus families (C. difficile, Foodborne and H. pylori) comprised 62% of our Diagnostics segments' revenues during fiscal 2012.

The overall revenue change for our Diagnostics segments during fiscal 2012 was an increase of 8%, reflecting growth in all of our focus product families - 7% growth in our H. pylori products, 13% growth in our foodborne products and 21% growth in our C. difficile products. Excluding the effects of currency translation, sales of our European Diagnostics segment increased by 2% in fiscal 2012, reflecting the combined effects of increases in our C. difficile and H. pylori product families, partially offset by a decline in the sales of our foodborne and respiratory products.

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C. difficile Products

Our illumigene® molecular C. difficile product has now been available in markets around the world for over two years. Sales of this product were approximately $22,000 and $9,000 in fiscal 2012 and fiscal 2011, respectively. Approximately 950 clinical laboratories are current customers using our illumigene® platform, which now includes three tests (see below for a discussion of our second and third tests for Group B and Group A Strep). While the majority of these customers have adopted the C. difficile assay, a growing number of customers are purchasing multiple assays for the platform. Our illumigene® molecular C. difficile product has restored the C. difficile product family to positive sales growth, 21% and 10% in fiscal 2012 and fiscal 2011, respectively.

Our major competitors in this product family are Cepheid and Becton Dickinson (molecular) and Alere (immunoassay). We believe that we have two principal advantages versus our competition. First, our molecular instrumentation package has a smaller footprint and significantly lower cost than either Cepheid or Becton Dickinson. We believe that this advantage allows our product to fit into virtually any size hospital or reference laboratory. We believe that our second principal advantage is the breadth of our C. difficile product offerings. With the launch of our molecular product and FDA clearance of our common antigen C. difficile products - Premier C. difficile GDH received FDA clearance in May 2011, and ImmunoCard C. difficile GDH received FDA clearance in December 2011 - we believe we are in a unique position to offer a full line of testing solutions to our clinical laboratory customers around the world to counter the competitive pressures surrounding this market. Additionally, we hold the only FDA-approved claim for C. difficile testing in the pediatric population. These advantages, along with the performance features of the products in our C. difficile portfolio, give us a compelling product offering for any hospital testing method preference.

During fiscal 2012, we received FDA clearance for our second and third molecular tests for the illumigene ® molecular platform - illumigene® GBS (Group B Streptococcus) in December 2011 and illumigene® Group A Strep (Group A Streptococcus) in September 2012. As alluded to above, over 100 customers are now purchasing two assays for the illumigene® platform - the majority being C. difficile and GBS - with revenue generated by our GBS test approximating $1,100 during fiscal 2012. In addition, with the recent introduction of our Group A Strep test, there are a growing number of customers adopting all three of our molecular-platform assays. A test for Mycoplasma pneumoniae (Walking Pneumonia) was recently submitted to the FDA for marketing clearance and is expected to be available for sale in the U.S. during the second quarter of fiscal 2013. Our fifth test on the illumigene® platform is for Bordetella pertussis (Whooping Cough), which is expected to be available for sale in the U.S. during the third or fourth quarter of fiscal 2013. Our development pipeline for illumigene® also includes two sexually-transmitted disease assays, expected to be available for sale in the U.S. during the first half of fiscal 2014.

In addition to Cepheid, Becton Dickinson and Alere, other competitors are beginning to enter the C. difficile market. Quest Diagnostics and Great Basin recently received FDA clearance for a molecular C. difficile test and Quidel received CE marking approval for a molecular C. difficile test for sale within the European Union. Although we believe that the breadth of our C. difficile product offerings and our low cost molecular platform provide key advantages to the offerings of our competitors, selling prices may come under pressure as more competitors enter the market.

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Foodborne Products

Although our foodborne products are marketed and sold on a global basis, most of our sales volume is within the U.S. Diagnostics segment. We continue to see demand increases in the United States, as laboratories realize the benefits of increased sensitivity and faster turnaround time with our tests for Enterohemorrhagic E. coli (EHEC) and Campylobacter, compared to traditional culture methods. Sales increases for these products within the U.S. Diagnostics segment were 15% and 35% during fiscal 2012 and fiscal 2011, respectively. The market acceptance and volume growth of these products has resulted in annual global revenues for this disease family surpassing the $20,000 mark.

We believe that the primary competition for our foodborne products is laboratory culture methods. We believe that our products have two principal advantages versus culture methods. The first principal advantage is test accuracy. Independent evaluations have shown our products to have higher sensitivity than culture methods. The second principal advantage is improved work flow of the testing process, resulting in a significantly shortened time to test result. Our single-use rapid products provide a test result in approximately 20 minutes, whereas culture results can take up to 24-48 hours. Time to test result can be a critical factor in the physician's choice of therapies.

H. pylori Products

During fiscal 2012, sales of our H. pylori products grew 11% for our U.S. Diagnostics segment and increased 3% for our European Diagnostics segment on an organic basis, compared to the year-over-year sales activity these segments experienced in 2011 of 14% growth and 3% decline, respectively. The increase for our U.S. Diagnostics segment continues to reflect the benefits of our partnerships with managed care companies in promoting the health and economic benefits of a test and treat strategy, and the ongoing effects of such strategy moving physician behavior away from serology-based testing toward direct antigen testing. We continue to expect that our efforts with managed care companies in the U.S. will provide low to mid-teens growth opportunities for the next several years. The sales results for our European Diagnostics segment reflect the ongoing impact of pricing pressures from competitive products in European markets.

Respiratory Products

During fiscal 2012, respiratory sales for our Diagnostics segments decreased 3% compared to fiscal 2011, following a 26% year-over-year decrease from fiscal 2010 to fiscal 2011. The dramatic sales fluctuation for this family in recent years is a direct result of the end of the novel A (H1N1) outbreak late in the fiscal 2010 first quarter. Total non-influenza respiratory product sales remained relatively flat compared to fiscal 2011, with sales of such products increasing 4% for our U.S. Diagnostics segment and decreasing 18% for our European Diagnostics segment on an organic basis. At present, we do not expect significant revenue increases from influenza products in fiscal 2013 and expect annual influenza product revenues to be approximately $2,500 to $3,000, consistent with the last two fiscal years.

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Group Purchasing Organizations and Integrated Delivery Networks

In our U.S. Diagnostics segment, consolidation of the U.S. healthcare industry over the last several years has led to the creation of group purchasing organizations (GPOs) and integrated delivery networks (IDNs) that aggregate buying power for hospital groups and put pressure on our selling prices. We have multi-year supply agreements with several GPOs and IDNs.

Life Science Segment

Sales for our Life Science segment increased 11% in fiscal 2012, reflecting increases in both our core bulk reagent business (8%) and our molecular reagent business (15%). The year-over-year increase in the core bulk reagent business largely results from increased orders for Rubella and Hepatitis A proteins. Our molecular reagent business, operated through our Bioline Group, continues to benefit from its new product launches and advancements during recent months - most notably its new SensiFAST™ and MyTaq™ PCR components. Revenues for our Life Science segment are inherently dependent upon customer order patterns and timing of contract manufacturing work. For fiscal 2013, we expect overall revenue growth of our Life Science segment to be in the range of 5% to 6%, led by the Bioline Group, which we expect to generate double-digit increases in sales of its molecular reagent products. We expect sales of our bulk antigen, antibody and reagent products to decline slightly in fiscal 2013 due to a slowing immunoassay demand profile. While we are seeing opportunities in China for our bulk antigen, antibody and reagent products, it will likely take the next year to generate actual revenue.

As a result of the order volume trends in bulk antigens, antibodies and reagents, during the fourth quarter of fiscal 2011, we announced the closure of our Saco, Maine facility, and completed the consolidation of manufacturing operations into our Memphis, Tennessee facility during the second fiscal quarter of 2012. Total costs to complete the consolidation of facilities approximated $2,100, consisting of fixed asset impairments, inventory impairments, stay bonuses and moving costs, among other similar items. During the fourth quarter of 2011, we recognized approximately $1,100 of these costs, and recognized the remaining $1,000 during the first three quarters of fiscal 2012.

Foreign Currency

During fiscal 2012, currency exchange rates had an approximate $1,700 unfavorable impact on revenue; $1,450 within the European Diagnostics segment and $250 in the Life Science segment. This compares to currency exchange having an approximate $600 favorable impact on revenue in fiscal 2011.

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The volatility in the Euro-USD exchange rate increased significantly during the last half of the fiscal year, and this may continue into the foreseeable future until such time as the sovereign debt crisis situation in Europe is resolved. Each one-point decline in the Euro-USD exchange rate (e.g., 1.30 to 1.29) negatively affects the revenues of our European Diagnostics segment by approximately $160. However, we would not expect such exchange rate fluctuations to have a significant impact on operating income. This results from the fact that we are also exposed to foreign currency risk related to the supply of certain European-manufactured diagnostic test kits, which serves to provide a natural hedge against the impact on European Diagnostics revenue.

Significant Customers

Our U.S. Diagnostic segment's sales through two national distributors were 49% of the U.S. Diagnostics segment's total sales for both fiscal 2012 and fiscal 2011, or 30% of consolidated sales, for both fiscal 2012 and fiscal 2011.

Our Life Science segment's sales of purified antigens and reagents to two diagnostic manufacturing customers were 19% of the Life Science segment's total sales for fiscal 2012 or 5% of our consolidated sales for fiscal 2012, compared to 15% and 4% of fiscal 2011 Life Science segment and consolidated sales, respectively.

Segment Revenues:

Our reportable segments are U.S. Diagnostics, European Diagnostics and Life Science. The U.S. Diagnostics segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostic test kits in the U.S. and countries outside of Australia, Europe, Africa and the Middle East. The European Diagnostics segment consists of the sale and distribution of diagnostic test kits in Australia, Europe, Africa and the Middle East. The Life Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents domestically and abroad. The Life Science segment also includes the contract development and manufacture of proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines.

Revenues for the Diagnostics segments, in the normal course of business, may be affected by buying patterns of major distributors, seasonality and strength of certain diseases, and foreign currency exchange rates. Revenues for the Life Science segment, in the normal course of business, may be affected by the timing and nature of arrangements for contract services work, which may have longer production cycles than bioresearch reagents and bulk antigens and antibodies, as well as buying patterns of major customers. We believe that the overall breadth of our product lines serves to reduce the variability in consolidated revenues.

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Revenues for each of our segments are shown below.

                                                                      2012 vs.         2011 vs.
                                                                        2011             2010
                          2012           2011           2010         Inc (Dec)        Inc (Dec)
 U.S. Diagnostics       $ 108,010      $  97,133      $  92,020              11 %              6 %
 European Diagnostics      23,000         24,187         24,041              (5 )%             1 %
 Life Science              42,532         38,403         26,939              11 %             43 %

 Consolidated           $ 173,542      $ 159,723      $ 143,000               9 %             12 %

 International-
 U.S. Diagnostics       $   6,553      $   6,692      $   6,268              (2 )%             7 %
 European Diagnostics      23,000         24,187         24,041              (5 )%             1 %
 Life Science              24,866         22,283         13,082              12 %             70 %

 Total                  $  54,419      $  53,162      $  43,391               2 %             23 %

 % of total sales              31 %           33 %           30 %

Gross Profit:



                                                                    2012 vs.        2011 vs.
                                                                      2011            2010
                          2012           2011          2010        Inc (Dec)        Inc (Dec)
  Gross Profit          $ 109,878      $ 99,298      $ 88,696              11 %             12 %
  Gross Profit Margin          63 %          62 %          62 %      +1 point             NONE

The improvement in our overall gross profit margins from 2010 to 2012 reflects the combined effects of 1) the margin contribution of Bioline Group products; 2) continued operating efficiencies in our Cincinnati, Ohio diagnostic test manufacturing facility; 3) consolidation of our Maine facility into our Tennessee facility; and 4) the year-over-year declines in respiratory product sales. Our respiratory product family generally has a lower gross profit margin than our focus product families (C. difficile, H. pylori and foodborne). Sales of respiratory products during fiscal 2012, 2011 and 2010 were approximately 9%, 10% and 15%, respectively, of our consolidated sales. Specifically, sales of the Company's influenza products during fiscal 2012, 2011 and 2010 represented approximately 1%, 2% and 6%, respectively, of consolidated sales.

Our overall operations consist of the sale of diagnostic test kits for various disease states and in alternative test formats, as well as bioresearch reagents, bulk antigens and antibodies, proficiency panels, and contract research and development and contract manufacturing services. Product sales mix shifts, in the normal course of business, can cause the consolidated gross profit margin to fluctuate by several points.

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Operating Expenses:



                                                                                                                     Total
                                       Research &          Selling &           General &                           Operating
                                       Development         Marketing        Administrative         Other           Expenses
2010 Expenses                         $       8,396       $    18,250       $        19,672       $  1,240        $    47,558

% of Sales                                        6 %              13 %                  14 %            1 %               33 %

Fiscal 2011 Increases (Decreases):
U.S. Diagnostics                                844             1,236                   183            365              2,628
European Diagnostics                             -                143                   156            875              1,174
Life Science
-Bioline Group                                  636             3,293                 5,235             -               9,164
-Core                                           (54 )            (150 )                (363 )          548                (19 )
-Transaction Costs                               -                 -                     -          (1,240 )           (1,240 )

2011 Expenses                         $       9,822       $    22,772       $        24,883       $  1,788        $    59,265

% of Sales                                        6 %              14 %                  16 %            1 %               37 %
% Increase (Decrease)                            17 %              25 %                  26 %           44 %               25 %

Fiscal 2012 Increases (Decreases):
U.S. Diagnostics                                644            (1,068 )               2,439           (365 )            1,650
European Diagnostics                             -                (69 )                 674           (875 )             (270 )
Life Science
-Bioline Group                                   25             1,337                  (874 )           -                 488
-Core                                          (216 )             (50 )                (750 )          465               (551 )

2012 Expenses                         $      10,275       $    22,922       $        26,372       $  1,013        $    60,582

% of Sales                                        6 %              13 %                  15 %            1 %               35 %
% Increase (Decrease)                             5 %               1 %                   6 %          (43 %)               2 %

Overall, the relative stability in total operating expense during fiscal 2012 and the increase in fiscal 2011 result in large part from the combined effects of our (i) fiscal 2012 efforts to control spending in each of our segments while investing the necessary resources in our strategic areas of growth;
(ii) beginning to realize cost savings during 2012 from the consolidation of our Core Life Science operations into one facility; (iii) incurring costs in connection with the consolidation of our Saco, Maine operations into our Memphis, Tennessee location of approximately $1,013 during fiscal 2012, and approximately $1,057 during fiscal 2011 ($548 of an Operating Expense nature);
(iv) incurring during the second quarter of fiscal 2011 approximately $1,240 of costs in connection with the reorganization of our European and Global Sales and . . .

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