MERIT MEDICAL SYSTEMS INC (MMSI) Business

Merit Medical Systems, Inc. is a leading manufacturer and marketer of proprietary disposable medical devices used in interventional, diagnostic and therapeutic procedures, particularly in cardiology, radiology, oncology, critical care and endoscopy. We strive to be the most customer-focused company in healthcare. Each day we are determined to make a difference by understanding our customers’ needs and innovating and delivering a diverse range of products that improve the lives of people and communities throughout the world. We believe that long-term value is created for our customers, employees, shareholders, and communities when we focus outward and are determined to deliver an exceptional customer experience.

Merit Medical Systems, Inc. was founded in 1987 by Fred P. Lampropoulos, Kent W. Stanger, Darla Gill and William Padilla. Initially we focused our operations on injection and insert molding of plastics. Our first product was a specialized control syringe used to inject contrast solution into a patient's arteries for a diagnostic cardiac procedure called an angiogram. Since that time, our sales and product lines have expanded substantially, both through internal research and development projects and through strategic acquisitions.

Our business strategy focuses on five target areas as follows:

• enhancing global growth and profitability through research and development, sales model optimization, cost discipline and operational focus;

• optimizing our operational capability through lean processes, cost effective environments and asset utilization;

• targeting high-growth, high-return opportunities by understanding, innovating and delivering in our core product groups;

• maintaining a highly disciplined, customer-focused enterprise guided by strong core values to globally address unmet or underserved healthcare needs, and

• creating sustainability of our business for our employees, shareholders and community.

We conduct our operations through a number of domestic and foreign subsidiaries. Our principal offices are located at 1600 West Merit Parkway, South Jordan, Utah, 84095, and our telephone number is (801) 253-1600. See Item 2. “Properties.” We maintain an Internet website at www.merit.com.

We design, develop, market and manufacture, through our own operations and contract manufacturers, medical products that offer a high level of quality, value and safety to our customers, as well as the patients they serve. Our products are used in the following clinical areas: diagnostic and interventional cardiology; interventional radiology; neurointerventional radiology; vascular, general and thoracic surgery; electrophysiology; cardiac rhythm management; interventional pulmonology; interventional nephrology; orthopaedic spine surgery; interventional oncology; pain management; outpatient access centers; intensive care; computed tomography; ultrasound; and interventional gastroenterology. During the years ended December 31, 2018, 2017 and 2016, net sales generated by our top ten selling products accounted for approximately 33%, 37% and 39%, respectively of our total net sales. Sales of our inflation devices (including our Big60® device sold within our endoscopy segment and kits and packs which include inflation devices, but also include other products) accounted for approximately 10.8%, 11.4% and 12.7% of our net sales for the years ended December 31, 2018, 2017 and 2016, respectively.

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The success of our products is enhanced by the extensive experience of our management team in the healthcare industry, our experienced direct sales force and distributors, our ability to provide custom procedural solutions such as kits, trays and procedural packs at the request of our customers and our dedication to offering facility-unique solutions in the markets we serve worldwide.

Our products are offered for sale in six core product groups: peripheral intervention, cardiac intervention, cardiovascular and critical care, interventional oncology and spine, breast cancer localization and guidance, and endoscopy. A number of our products are marketed within multiple product groups; accordingly, we do not maintain separate measures of profitability by product group. Based on industry data and our internal market information, we estimate that the addressable market opportunities (in terms of annual net sales), that we are targeting with our current or newly released product portfolios, for each of our core product groups are as follows:

• Peripheral Intervention: $3.1 billion (global)

• Cardiac Intervention: $1.8 billion (global)

• Cardiovascular and Critical Care: $5.5 billion (global)

• Interventional Oncology and Spine: $1.4 billion (global)

• Breast Cancer Localization and Guidance: $1 billion (global)

• Endoscopy: $484 million (U.S. domestic)

We currently conduct our business through two financial reporting segments: cardiovascular (which includes our peripheral intervention, cardiac intervention, interventional oncology and spine, cardiovascular and critical care, and breast cancer localization and guidance product groups) and endoscopy. For information relating to our business segments, see Note 13 to our consolidated financial statements set forth in Item 8 of this report.

Our peripheral intervention products support the minimally invasive diagnosis and treatment of diseases in peripheral vessels and organs throughout the body, excluding the heart. Our peripheral intervention product line is organized into product portfolios as follows: Access, Angiography, Intervention, Drainage, Biopsy and Solutions. The main products we offer under these portfolios are identified below.

We offer a broad line of medical devices used to gain and maintain vascular access. These products include our micropuncture kits, angiographic needles, our family of Prelude® sheath introducers and a wide range of guide wires and safety products. Additionally, we offer hemodialysis and peritoneal dialysis catheters and grafts which provide dialysis access options across a continuum of disease states. Our principal dialysis and graft offerings include:

• our HeRO® (Hemodialysis Reliable Outflow) Graft, a fully subcutaneous vascular access system, which is intended for use in maintaining long-term vascular access for chronic hemodialysis patients,

• our CentrosFLO® Long-Term Hemodialysis Catheter and ProGuide® Chronic Dialysis Catheter,

• our peritoneal dialysis catheters, accessories and implantation kits, and

• our Surfacer® Inside-Out® Access Catheter System, an innovative approach to restore access and to preserve treatment options for hemodialysis patients with occluded veins. The Surfacer Inside-Out is sold through our distribution agreement with BlueGrass Vascular Technologies.

Our angiography products are used to identify blockages and other disease states in the blood vessel. Our angiography products include:

• our extensive line of Merit Laureate® Hydrophilic Guide Wires, a smooth-surface guide wire designed to minimize friction and promote rapid catheter exchanges,

• our InQwire® Diagnostic Guide Wires and InQwire® Amplatz guide wires, and

• our Performa® and Impress® Diagnostic Catheters, designed for traversing difficult to access peripheral blood vessels.

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Our intervention products are chiefly used to remove blood clots, retrieve foreign bodies in blood vessels and assist with placing balloons and stents to treat arterial disease.

On May 18, 2018, we entered into a distribution agreement with QXMédical, LLC ("QXMédical") for the exclusive global distribution rights to the Q50® PLUS Stent Graft Balloon Catheter. The Q50 PLUS is used in abdominal and thoracic endovascular aneurysm repair procedures to repair abdominal aortic aneurysms and thoracic aortic aneurysms.

On December 14, 2018 we acquired the intellectual property rights, inventory and certain other assets of Vascular Insights, LLC ("Vascular Insights"). The primary assets are the ClariVein® IC and ClariVein OC specialty infusion and occlusion catheter systems utilized in more than 120,000 cases to treat superficial venous disease, particularly below the knee and in venous leg ulcers. In addition to our Q50 PLUS, ClariVein IC and ClariVein OC specialty infusion and occlusion catheter systems, our intervention offerings include:

• our Advocate™ Percutaneous Transluminal Angioplasty ("PTA") Catheter and Dynamis AV™ PTA Dilatation Catheter, used to correct failing or thrombosed dialysis fistulae,

• our Fountain® Infusion System and Mistique® Infusion Catheters, used to treat arterial and hemodialysis graft occlusions and deep vein thrombosis,

• our low profile and standard ASAP® Aspiration Catheters, a safe and efficient catheter used to remove fresh, soft emboli and thrombi from vessels,

• our extensive line of EN Snare® and One Snare® Endovascular Snare Systems, snares designed to manipulate, capture and retrieve foreign material in the body,

• our line of inflations devices, including our basixTOUCH™ Inflation Device, BasixCompak™ Inflation Device and Blue Diamond™ Digital Inflation Device, designed to accurately measure pressures during balloon and stent deployment. and

• our new high-pressure basixTOUCH40™ Inflation Device, introduced in 2018, which features a quick-release handle with a 40-atmosphere pressure capacity.

Our drainage products are used to drain fluids from body cavities to relieve pain and discomfort and lessen trauma. On February 14, 2018, we expanded our drainage product line through our acquisition of the divestment assets of Becton, Dickinson and Company ("BD") in connection with BD’s recently completed acquisition of C.R. Bard, Inc. ("Bard") in which we acquired the Aspira® Pleural Effusion Drainage and Aspira® Peritoneal Drainage Systems. The Aspira system provides a compassionate home treatment option for end-stage cancer patients with malignant pleural effusion or malignant ascites, allowing patients to spend more time at home by eliminating the need for frequent hospital visits to treat their symptoms. In the same acquisition, we acquired soft tissue core needle biopsy products sold under the trade names Achieve® Programmable Automatic Biopsy System, Temno® Biopsy System and Tru-Cut® Biopsy Needles.

In addition to our Aspira® products, we offer a broad line of drainage access products. Our drainage access products include:

• our One-Step™ and Valved One-Step™ Drainage Catheters, sold individually and in kits, for emergency drainage procedures, quickly removing unwanted fluid accumulation,

• our ReSolve® Locking and Non-Locking Drainage Catheters, Resolve Biliary Catheter and related products including tubing sets and drainage bags, and

• our Revolution™ Catheter Securement Device and StayFIX® Fixation Device, used to stop migration, movement and accidental removal of a percutaneous catheter.

In addition to the soft tissue core needle biopsy products we acquired from BD, our biopsy product offerings also include:

• our innovative CorVocet® Biopsy System, introduced in 2018, for soft tissue biopsy procedures, designed to cut a full-core of tissue, providing large specimens for pathological examination, and

• our Madison™, Huntington™, Kensington™, Preston™ and Westbrook™ bone and spine biopsy products, now fully launched in the U.S.

Our solutions products conveniently package an assortment of peripheral intervention products in trays, packs and kits.

We manufacture and sell a variety of products designed to treat various heart conditions. Our cardiac intervention product group is organized under the following product portfolios: Access, Angiography, Hemostasis, Intervention, and Electrophysiology and Cardiac Rhythm Management. The main products we offer under these portfolios are identified below.

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Our cardiac intervention access products used to gain access to the heart include:

• our Merit Advance® needles, arm boards with radiation scatter protection, scalpels and guide wires, and

• our family of Prelude Introducer Sheaths, for both radial and femoral access, features our new Prelude Ideal™ Hydrophilic Sheath Introducer, introduced in 2018, an ultra-thin wall introducer sheath that provides more room for the insertion of catheters and other devices in the radial artery.

Our angiography products identify blocked or narrowed coronary arteries and overlap with our peripheral intervention angiography products. Our angiography product offerings include:

• our InQwire® Guide Wires and complete line of manifolds, syringes, and stopcocks,

• our Performa® Diagnostic Catheter, known for its superior torque, high shaft strength for pushability and a large inner diameter for improved flow rates; and

• our MIV™ Radial Ventriculogram Pigtail Catheter, a catheter specifically designed for radial artery access.

Our hemostasis products assist clinicians in obtaining and maintaining hemostasis or stopping the flow of blood following arterial catheterization. Our cardiac intervention hemostasis product offerings include:

• our SafeGuard Pressure Assisted Device and Safeguard Radial Compression Device, a comfortable hemostasis device which delivers adjustable active compression and enables immediate pressure adjustment and

• our new and innovative PreludeSYNC™ Hemostasis Device and PreludeSYNC Distal, introduced in early 2019, a comfortable hemostasis device with colorful band designs.

Our cardiac intervention products for coronary catheterization procedures include:

• our new FLO40XR™ and FLO50™ Hemostasis Valves, introduced in 2018, and our full line of hemostasis valves including the MAP™ Merit Angioplasty Packs, Honor®, PhD™, AccessPLUS™, Access-9™, DoublePlay™, MBA™ and the Passage®,

• our new basixTAU™ Inflation Device, introduced in 2018, which features a fold-out handle, reducing physician fatigue by reducing the rotational force applied by physicians when performing multiple inflation procedures, along with our legacy inflation devices, including our BasixCompak™, Blue Diamond™ and BasixTouch™,

• our pericardiocentesis kits, which combines the necessary medical devices for pericardial drainage procedures,

• our Ostial PRO® Stent Positioning System, a stent alignment tool for precise stent implantation in aorto-ostial lesions,

• our ConcierGE® Guiding Catheters with a large inner lumen and soft tip used to gain access to the heart, and

• our Merit SureCross® Support Catheters, support catheters used to reach and cross tight, difficult lesions.

Cardiac rhythm management (“CRM”) is the field of cardiac disease therapy that relates to the diagnosis and treatment of cardiac arrhythmias or the improper beating of the heart. Electrophysiology is the study of diagnosing and treating abnormal electrical activities of the heart. We offer innovative solutions in the rapidly-expanding cardiac rhythm management and electrophysiology markets including:

• our Worley™ Advanced LV Delivery System, used to aid in the insertion and implantation of left ventricular pacing leads, shown to reduce lead implant failures, improve target lead location and reduce procedure times,

• our HeartSpan® Transseptal Needle, for left-heart access procedures, exceptionally responsive with transparent handle allowing direct visualization, and

• our newest generation HeartSpan® Steerable Sheath Introducer, introduced in 2018, featuring a neutral position indicator and tactile click to help physicians identify curve orientation.

Our cardiovascular and critical care products treat patients with life-threatening diseases, protect healthcare providers from exposure to bloodborne pathogens and provide medical devices designed for efficiency and effectiveness, improving a patient's experience, while simplifying the challenges of clinical care.

Our cardiovascular product offering includes:

• our DualCap® Disinfection Protection System, which protects and disinfects needleless valves with isopropyl alcohol, designed to reduce healthcare-associated infections in hospitals,

• our Medallion® Syringes, a medication syringe, available in assorted colors for easy medication identification,

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• our Pen and Label Medication Labeling Systems, for labeling syringes, bowls and other medical containers,

• our ShortStop® Temporary Sharps Holders, to hold needles and prevent accidental needlestick injuries to hospital staff, and

• our family of BackStop® Disposable Basins, for holding contaminated fluid waste, for safe and quick waste elimination.

Blood pressure monitoring products are vital to critical care. Our extensive portfolio of monitoring devices and fluid management devices provide valuable information to physicians to assist and accelerate patient recovery, which include:

• our Meritrans DTXPLUS® Pressure Transducers, used to identify a patient's blood pressure and cardiovascular status,

• our Safedraw® Closed Arterial Blood Sampling System, for easy blood sampling, which reduces unnecessary blood discard,

• our RadialFlo™ Arterial Catheter, introduced in 2018, which controls blood flow with an integral switch and is silicone-coated for smooth insertion,

• our TRAM® Manifolds with an integral pressure transducer to measure blood pressures, and

• our Careflow® Central Venous and Arterial Catheters for high flow rate infusions.

Our interventional oncology and spine products treat vertebral compression fractures, metastatic spinal tumors, liver cancer, uterine fibroids, benign prostatic hyperplasia, arteriovenous malformations and hemostatic embolization for certain markets outside of the U.S. Our interventional oncology and spine product line is organized into product portfolios as follows: Delivery Systems, Embolotherapy, Spine Ablation and Vertebral Compression Fracture. The main products we offer under these portfolios are identified below.

Our delivery systems portfolio includes a variety of microcatheters and guide wires for targeted access, control and selective infusion of diagnostic, embolic, or therapeutic agents into vessels. Our interventional oncology delivery systems include:

• our new Merit Pursue™ Microcatheter, introduced in 2018, a small microcatheter designed for pushability and trackability through small and tortuous vessels,

• our SwiftNINJA® Steerable Microcatheter, an advanced microcatheter with a 180-degree articulating tip, sold through our exclusive worldwide distribution agreement (excluding Japan) with Sumitomo Bakelite Co., Ltd.,

• our Merit Maestro® Microcatheter, designed for small vessels, providing reliable embolization,

• our True Form™ Reshapable Guide Wire, which can be shaped and reshaped multiple times, reducing the need for multiple guide wires, and

• our Tenor® Steerable Guide Wire, which facilitates navigation in challenging anatomy during embolic procedures.

Our embolotherapy products treat disease by blocking or slowing the flow of blood into the arteries or delivering chemotherapy drugs in the treatment of primary and metastatic liver cancer. In 2017, we received FDA approval for prostatic artery embolization ("PAE") providing a non-surgical treatment option for millions of men who suffer from BPH or benign prostatic hyperplasia. Our embolotherapy products include:

• our Embosphere® Microspheres, a highly studied, round embolic for consistent and predictable results,

• our new EmboCube™, introduced in 2018, a pre-loaded syringe filled with gelatin foam which speeds up procedure preparation,

• our Bearing nsPVA® Embolization Particles, non-spherical embolic particles,

• our QuadraSphere® Microspheres, a precisely calibrated embolic for controlled, targeted embolization, and

• our HepaSphere™ Microspheres, offered outside of the U.S., for the treatment of primary and metastatic liver cancer.

Our spine systems are used to treat painful vertebral compression fractures caused by osteoporosis or cancer by injecting a bone cement through a small hole in the skin into a fractured vertebra. Our vertebral compression fracture products include:

• our StabiliT® Vertebral Augmentation System, which treats pathological fractures by delivering bone cement with a consistent viscosity using radio-frequency energy,

• our StabiliT MX Vertebral Augmentation System, using our industry-leading inflation devices to deliver bone cement,

• our StabiliT VP Vertebroplasty System, which combines a simple cement preparation and controlled delivery of high-viscosity cement, and

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• our Osseoflex® products, which are part of our unique brand of directional devices that allow users to navigate and target specific anatomy within the spine. Our Osseoflex products include access kits, steerable needles, steerable and straight balloons, as well as cement mixing and delivery systems.

Our tumor ablation portfolio is represented by the STAR™ Tumor Ablation System. The STAR system is designed to provide palliative treatment of painful metastatic spinal tumors in cancer patients by targeted radiofrequency ablation.

On November 13, 2018, we completed the acquisition of Cianna Medical, Inc. ("Cianna Medical"), a privately held company dedicated to the innovative treatment of early-stage breast cancer. Following the Cianna Medical acquisition, we began selling our SAVI® Brachytherapy Breast Radiation and our SAVI SCOUT® Radar Localization System , a wire-free breast tumor localization system, designed to produce audible and visual indicators surgeons can use to mark cancerous tissue during lumpectomy and biopsy procedures.

Our endoscopy division, Merit Endotek™, markets products for gastrointestinal and pulmonary conditions. On April 6, 2018 our endoscopy product offering was expanded to include the NvisionVLE® Imaging System through a worldwide distribution agreement with NinePoint Medical, Inc. This innovative system uses an optical signal acquisition and processing method to create high-resolution cross-sectional images and mark tissue visible under white light endoscopy, designed to help clinicians evaluate 100% of the tissue allowing targeted biopsies in the esophagus.

We offer a variety of non-vascular stents to treat pulmonary and gastrointestinal disease including:

• our AERO®, AEROmini® and AERO DV® Fully Covered Tracheobronchial Stents, for the treatment of tracheobronchial strictures produced by malignant neoplasms,

• our Alimaxx-ES™ and EndoMAXX®, Fully Covered Esophageal Stents, intended for maintaining esophageal luminal patency in esophageal strictures caused by intrinsic and/or extrinsic malignant tumors and for occlusion of esophageal fistulae, and

• our Alimaxx-B® biliary stent systems, intended for the palliation of malignant strictures in the biliary tree.

We offer dilation balloons to endoscopically dilate strictures. Our balloon dilators products include:

• our Elation® Fixed Wire and Wire Guided Balloon Dilators, intended for use in the alimentary tract,

• our newly-added Elation Pulmonary Balloon Dilator, for the dilation of strictures of the trachea and bronchi, and

• our BIG60® Inflation Device, a 60-mL syringe and gauge designed to inflate and deflate non-vascular balloon dilators while monitoring and displaying inflation pressures up to 12 atmospheres.

We also offer a variety of kits and accessories for endoscopy and bronchoscopy procedures, including:

• our MAXXWIRE™ Guide Wire, used to position catheters and other interventional devices within the gastrointestinal tract and the tracheobronchial tree,

• our Brighton® Bipolar Probe, used to provide hemostasis throughout the gastrointestinal tract,

• our BiliQUICK™ Cholangiography Rapid Refill Continuous Injection Kit, a combination kit designed to deliver contrast media quickly and efficiently,

• our TIO™ Three-in-One, a combination oral airway, bite block and oxygen administration device,

• our BAL (bronchoalveolar lavage) Convenience Kit™, designed to save time and improve specimen quality during bronchoalveolar lavage procedures, and

• our Aspira® Drainage System, acquired from BD, sold in partnership with our peripheral intervention sales team.

We provide coating services for medical tubes and wires under original equipment manufacturer (“OEM”) brands in addition to many of the products identified above. We offer coated tubes and wires to customers on a spool or as further manufactured components like hypotubes, guide wire components, coated mandrels/stylets and coated needles. We operate a hypotube manufacturing facility in Galway, Ireland, which provides advanced laser cutting and ablation, passivation, cleaning and other hypotube manufacturing processes.

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Customers and clinicians often have unique needs when performing procedures, and we work closely with customers to create standard and customized trays, packs, and kits to enable clinicians to more effectively perform clinical procedures.

We also manufacture and sell microelectromechanical systems sensor components consisting of piezoresistive pressure sensors in various forms, including bare silicon die, die mounted on ceramic substrates, and fully calibrated components for numerous applications both inside and outside the healthcare industry.

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Target Market/Industry. Our principal target markets are peripheral intervention, cardiac intervention, interventional oncology, critical care and endoscopy. Within these markets our products are used in the following clinical areas: diagnostic and interventional cardiology; interventional radiology; neurointerventional radiology; vascular, general and thoracic surgery; electrophysiology; cardiac rhythm management; interventional pulmonology; interventional nephrology; orthopedic spine surgery; interventional oncology; pain management; breast cancer surgery, outpatient access centers; intensive care; computed tomography; ultrasound and interventional gastroenterology.

According to U.S. government statistics, cardiovascular disease continues to be a leading cause of death and a significant health problem in the U.S. Treatment options range from dietary changes to surgery, depending on the nature of the specific disease or disorder. Endovascular techniques, including angioplasty, stenting and endoluminal stent grafts, continue to represent important therapeutic options for the treatment of vascular disease. Breast cancer is the most commonly diagnosed cancer in women and is the second leading cause of cancer death among women. We derive a large percentage of our revenues from sales of products used during percutaneous diagnostic and interventional procedures such as angiography, angioplasty and stent placement, and we intend to pursue additional sales growth by building on our existing market position in both core technology and accessory products.

Marketing Strategy. As part of our product sales and marketing efforts, we attend major medical conventions throughout the world pertaining to our target markets and invest in market development including physician training, peer-to-peer education, and patient outreach. We work closely with major healthcare facilities and physicians involving our primary target markets in the areas of training, therapy awareness programs, clinical studies and ongoing research.

In general, our target markets are characterized by rapid change resulting from technological advances and scientific discoveries. We plan to continue to develop and launch innovative products to support clinical trends and to address the increasing demands of these markets.

Product Development Strategy. Our product development is focused on identifying and introducing a regular flow of profitable products that meet customer needs. To stay abreast of customer needs, we frequently seek suggestions from health care professionals working in the fields of medicine in which we offer, or are developing, products. Suggestions for new products and product improvements may also come from engineers, marketing and sales personnel, physicians and technicians who perform clinical procedures.

When we believe that a product suggestion demonstrates a sustainable competitive advantage, meets customer needs, fits strategically and technologically with our business and has a good potential financial return, we generally assemble a “project team” comprised of individuals from our sales, marketing, engineering, manufacturing, legal and quality assurance departments. This team works to identify the customer requirements, integrate the design, compile necessary documentation and testing, and prepare the product for market introduction. We believe that one of our marketing strengths is our capacity to conceive, design, develop and introduce new products.

U.S. and International Sales. Sales of our products in the U.S. accounted for approximately 56%, 58% and 61% of our net sales for the years ended December 31, 2018, 2017 and 2016, respectively. In the U.S., we have a dedicated, direct sales organization primarily focused on selling to end-user physicians, hospitals and clinics, major buying groups and integrated healthcare networks.

Internationally, we employ sales representatives and contract with independent dealer organizations and custom procedure tray manufacturers to distribute our products worldwide, including territories in Europe, the Middle East, Africa, Asia, Oceania, Central and South America and Canada. In 2018, our international sales grew approximately 26% over our 2017 international sales, and accounted for approximately 44% of our net sales. China represents our most significant international sales market with net sales of approximately $92.7 million, $73.4 million, and $59.9 million for the years ended December 31, 2018, 2017 and 2016, respectively. With the recent and planned additions to our product lines, we believe our international sales will continue to increase.

Our largest non-U.S. market is China, which represented approximately 10.5% of our net sales in 2018. We maintain a distribution center and administrative office in Beijing. We also have small sales offices in Shanghai, Guangzhou, and Hong Kong. We sell our products through more than 500 distributors in mainland China, who are responsible for reselling the products, primarily to hospitals. We employ sales personnel throughout China who work with our distributors to promote the clinical advantages of our products to clinicians and other decision makers at hospitals. Under this “modified direct” sales approach, our salespeople are involved with promoting the advantages of our products to clinicians and other customers, while the distributors handle sales transactions and address issues related to fulfillment and inventory management. With respect to our business activities in the rest of the Asia-Pacific region, in 2018 we continued to increase our sales presence and related new business development activities.

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In Europe, the Middle East and Africa, we have both direct and modified direct sales operations. Our corporate sales operations are active throughout the region, including the largest markets of the UK, France, Germany, Russia and Turkey.

Our direct sales personnel are principally engaged in each of our product groups. Marketing teams responsible for each product group operate clinical education programs, often directed by leading subject matter personnel, who provide technical instruction on techniques and therapies to physicians, nurses and technologists. We are currently conducting education programs specific to radial access, spinal intervention, surgical grafts and electrophysiology.

We require our international dealers to store products and sell directly to customers within defined sales territories. Each of our products must be approved for sale under the laws of the country in which it is sold. International dealers are responsible for compliance with applicable anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act, as well as all applicable laws and regulations in their respective countries.

In Australia and Canada, we have both a direct sales force and distributors and we operate distribution centers in those countries. In connection with our acquisition of the critical care division of Argon, we have implemented a modified direct sales approach (similar to the approach we are pursuing in China) to market and sell the majority of our products in Japan.

We consider training to be a critical factor in the success of our sales force. Members of our sales force are trained by our clinical marketers, our staff professionals, consulting physicians, and senior field trainers in their respective territories.

OEM Sales. Our global OEM division sells components and finished devices, including molded components, sub-assembled goods, custom kits and bulk non-sterile goods, to medical device manufacturers. These products may be combined with other components and products from other companies and sold under a Merit or customer label. Products sold by our OEM division can be customized and enhanced to customer specifications, including packaging, labeling and a variety of physical modifications. Our OEM division serves customers with a staff of regional sales representatives based in the U.S., Europe and Asia, and a dedicated OEM Engineering and Customer Service Group.

We provide products to hospitals and clinic-based physicians, technicians and nurses. Hospitals and acute care facilities in the U.S. purchase our products through our direct sales force, distributors, OEM partners, or custom procedure tray manufacturers who assemble and combine our products in custom kits and packs. Outside the U.S., hospitals and acute care facilities generally purchase our products through our direct sales force, or, in the absence of a sales force, through independent distributors or OEM partners.

In 2018, 38% of our net sales to U.S. hospitals and clinics were derived through our direct sales force and approximately 8% of our net sales through other channels, such as U.S. custom procedure tray manufacturers and distributors. We also sell products to other medical device companies through our U.S. OEM sales force, which accounted for approximately 10% of our 2018 net sales. The remaining 44% of our 2018 net sales was attributable to sales made to international markets by our direct sales force, international distributors, and our OEM sales force. Sales to our largest customer accounted for approximately 2%, 2% and 3% of net sales during the years ended December 31, 2018, 2017 and 2016, respectively.

Our research and development operations have been central to our historical growth, and we believe they will be critical to our continued growth. In 2018, our commitment to innovation led to the introduction of several new products, improvements to our existing products and expansion of our product lines, as well as enhancements and new equipment in our research and development facilities.

We continue to develop new products and make improvements to our existing products utilizing many different sources. Our Chief Executive Officer and our Executive Vice President of Global Research & Development work closely with our sales and marketing teams to incorporate feedback from physicians and clinicians in the field, which can lead to innovative new products and improvements to our existing products.

Currently, we have research and development facilities in:

• Aliso Viejo and San Jose, California

• Dallas and Pearland, Texas

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• Jackson Township, New Jersey

• Malvern, Pennsylvania

• South Jordan and West Jordan, Utah

• Galway, Ireland

• Paris, France

• Singapore

• Tijuana, Mexico

• Venlo, The Netherlands

We manufacture many of our products utilizing our proprietary technology and our expertise in plastic injection and insert molding. We generally contract with third parties for the tooling of our molds, but we design and own most of our molds. We utilize our experience in injection and insert molding technologies in the manufacture of most of the custom components used in our products. We have received International Standards Organization (“ISO”) 13485:2016 certification for our facilities in California, Pennsylvania, Texas, Utah, Ireland, France, Mexico, The Netherlands and Singapore. We have also received ISO 9001:2015 certification for our coatings facility in Venlo, The Netherlands and our Merit Sensor Systems, Inc. (“Merit Sensors”) facility in South Jordan, Utah. Merit Sensors develops and markets silicon pressure sensors and presently supplies a substantial portion of the sensors we utilize in our digital inflation devices and blood pressure sensors.

Given the specialization of our manufacturing personnel and processes in our Utah and Ireland facilities, we possess the capability to strategically shift the manufacture of more technologically advanced products to those facilities and utilize the manufacturing capacity of our other facilities for more commoditized products. The actual determination of manufacturing location will be based upon multiple factors, including technological capabilities, market demand, acquisition and integration activities and economic and competitive conditions.

We currently produce and package all of our embolic products. Manufacturing of our embolic products includes the synthesis and processing of raw materials and third-party manufactured compounds.

We have packaging and manufacturing facilities located in Chester, Virginia; Galway, Ireland; Joinville, Brazil; Malvern, Pennsylvania; Melbourne, Australia; Paris, France; Pearland, Texas; Singapore; South Jordan and West Jordan, Utah; Tijuana, Mexico; and Venlo, The Netherlands. See Item 2. “Properties.”

We have distribution centers located in Auckland, New Zealand; Bangalore, India; Beijing and Hong Kong, China; Chester, Virginia; Johannesburg, South Africa; Joinville, Brazil; Maastricht, The Netherlands; Malvern, Pennsylvania; Melbourne, Australia; Toronto, Canada; Podolsk, Russia; Seoul, South Korea; South Jordan, Utah; Tijuana, Mexico; and Tokyo, Japan. Additionally, in early 2019 we opened a distribution center in London, United Kingdom.

We believe that our variety of suppliers for raw materials and components necessary for the manufacture of our products, as well as our long-term relationships with such suppliers, promote stability in our manufacturing processes. Historically, we have not been materially affected by interruptions with such suppliers; however, we are experiencing a growing trend from suppliers of polymer resins to refuse to supply resin to medical device manufacturers or require that we assume additional risks due to the potential for product liability claims. We seek to develop and have relationships with potential back-up suppliers for materials and components in the event of supply interruptions. Additionally, there are a limited number of third parties that supply sterilization services for our medical devices. There are no assurances that we will not experience supply or sterilization service disruptions in the future. If we are unable to obtain raw materials or sterilization services, we may have to suspend product manufacturing which could materially harm our ability to meet customer demand.

The medical products industry is highly competitive. Many of our competitors are much larger than us and have access to greater resources. We also compete with smaller companies that sell single or limited numbers of products in specific product lines or geographies. We compete globally in several market areas, including diagnostic and interventional cardiology; interventional radiology; neurointerventional radiology; vascular, general and thoracic surgery; electrophysiology; cardiac rhythm management; interventional pulmonology; interventional nephrology; orthopedic spine surgery; interventional oncology; pain management; outpatient access centers; intensive care; computed tomography; ultrasound; and interventional gastroenterology.

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The principal competitive factors in the markets in which our products are sold are quality, price, value, device features, customer service, breadth of line, and customer relationships. We believe our products have achieved market acceptance primarily due to the quality of materials and workmanship of our products, clinical outcomes, their innovative design, our willingness to customize our products to fit customer needs, and our prompt attention to customer requests. Our products are priced competitively, but generally not below prices for competing products. Some of our primary competitive strengths are our relative stability in the marketplace; a comprehensive, broad line of ancillary products; and our history of introducing a variety of new products and product line extensions to the market on a regular basis.

In the interventional cardiology, interventional radiology, gastroenterology, endoscopy, general surgery, thoracic surgery and pulmonology markets we compete with large international, multi-divisional medical supply companies such as Cordis Corporation (a Cardinal Health company); Boston Scientific Corporation ("Boston Scientific") (including the operations previously conducted by BTG plc); Medtronic plc ("Medtronic"); Abbott Laboratories; Teleflex Incorporated; Becton, Dickinson and Company ("BD"); Cook Medical Incorporated ("Cook Medical"); Guerbet Company; Stryker Corporation ("Stryker"); 3M Company; ICU Medical, Inc. and Terumo Corporation ("Terumo"). Medium-size companies we compete with include B. Braun Melsungen AG; UreSil LLC; Olympus Corporation; Edwards Lifesciences; Argon Medical Devices, Inc.; ConMed Corporation; AngioDynamics, Inc.; Medical Components, Inc. and U.S. Endoscopy.

Within the breast cancer therapy space, we believe we are a market leader in the U.S. in wire-free breast tumor localization. Currently, we compete with Leica Biosystems Nussloch GmbH and Hologic, Inc.

Based on available industry data, with respect to the number of procedures performed, we believe we are a leading provider of digital inflation technology in the world. In addition, we believe we are one of the market leaders in the U.S. for analog inflation devices. We believe we are a market leader in the U.S. for control syringes, waste-disposal systems, tubing and manifolds. Although we believe our recent and planned additions to these product lines will help us compete even more effectively in both the U.S. and international markets, we cannot give any assurance that we will be able to maintain our existing competitive advantages or compete successfully in the future.

We derive a substantial majority of our revenues from sales of products used in diagnostic angiography, interventional cardiology and radiology procedures. We believe medical professionals are starting to use new interventional methods, procedures and devices, as well as drugs, for the treatment and prevention of cardiovascular disease. These new methods, procedures, devices and drugs may render some of our products obsolete or limit the markets for our products. However, with the advent of our vascular stents and other procedures, we have experienced continued growth in sales of our products.

In the vertebral augmentation market, our main competitors are Medtronic and Stryker. Both Medtronic and Stryker offer products to treat vertebral compression fractures, but only Medtronic offers products to treat metastatic spine tumors.

Within the field of uterine fibroid embolization ("UFE") and PAE, we believe we are a market share leader. Based on both research and clinical studies conducted on our product for UFE and PAE, we believe we offer physicians consistent and predictable product performance, ease of use, targeted delivery, and durable vessel occlusion, and therefore satisfactory short- and long-term clinical outcomes validated by peer-reviewed publications, when compared to our competitors.

Our primary embolotherapy product has been Embosphere Microspheres. In the microsphere and embolic particle market we compete with Boston Scientific (including the operations previously conducted by BTG plc); Cook Medical; Terumo; and Pfizer Inc.

We rely on a combination of patents, trade secrets, trademarks, copyrights and confidentiality agreements to protect our intellectual property. We have a number of U.S. and foreign-issued patents and pending patent applications, including patents and rights to patent applications acquired through strategic transactions, which relate to various aspects of our products and technology. The duration of our patents is determined by the laws of the country of issuance and, for the U.S., is typically 20 years from the date of filing of the patent application. As of December 31, 2018, we owned or had a license to more than 1,500 U.S. and international patents and patent applications. Additionally, we hold exclusive and non-exclusive licenses to a variety of third-party technologies covered by patents and patent applications. In the aggregate, our intellectual property assets are critical to our business, but no single patent, trademark or other intellectual property asset is of material importance to our business.

The Merit® name and logo are trademarks in the U.S. and other countries. In addition to the Merit name and logo, we have used, registered or applied for registration of other specific trademarks and service marks to help distinguish our products, technologies and services from those of our competitors in the U.S. and foreign countries. See “Products” above. The duration of

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our trademark registrations varies from country to country; in the U.S. we generally can maintain our trademark rights and renew any trademark registrations for as long as the trademarks are in use. As of December 31, 2018, we owned over 400 U.S. and foreign trademark registrations and trademark applications.

There is substantial litigation regarding patents and other intellectual property rights in the medical device industry. At any given time, we may be involved as either a plaintiff or a defendant, as well as a counter-claimant or counter-defendant, in patent, trademark, and other intellectual property infringement actions. If a court rules against us in any intellectual property litigation we could be subject to significant liabilities, be forced to seek licenses from third parties, or be prevented from marketing certain products. In addition, intellectual property litigation is costly and may consume significant time of employees and management.

U.S. Regulation. The Food and Drug Administration (“FDA”) and other federal, state and local authorities regulate our products and product-related activities. Under the Federal Food, Drug, and Cosmetic Act (“FDCA”) and accompanying regulations, the FDA regulates the design, development, clinical trials, testing, manufacture, packaging, labeling, storage, distribution and promotion of medical devices. We believe our products and procedures are in material compliance with all applicable FDA regulations, but the regulations are subject to change. We cannot predict the effect, if any, that these changes may have on our business. In addition, if we experience regulatory problems with a product or manufacturer, we could become subject to fines, delays or suspensions of regulatory clearances, seizures or recalls of products, operating restrictions, and criminal prosecution. Such actions could have a material adverse effect on our business, financial condition or results of operations.

In October 2016, we received a subpoena from the U.S. Department of Justice seeking information on certain of our marketing and promotional practices. We are in the process of responding to the subpoena, which we anticipate will continue during 2019. The investigation is ongoing and at this time we are unable to predict its scope, duration or outcome. Investigations such as this may result in the imposition of, among other things, significant damages, injunctions, fines or civil or criminal claims or penalties against our company or individuals.

Overview of the FDA Regulation of Devices. The FDCA establishes a risk-based classification system for medical devices and applies regulatory controls commensurate with the risk posed by a device:

• Class I devices are those for which safety and effectiveness can be reasonably assured by adherence to the FDA’s general regulatory controls, which include compliance with the applicable portions of the FDA’s Quality System Regulations (QSRs), facility registration and product listing, reporting of certain adverse medical events and malfunctions, and compliance with the FDA’s restrictions against misbranding and adulteration. While most Class I devices are exempt from the 510(k) premarket notification process (assuming they are within the limitations of the exemption), some Class I devices also require 510(k) clearance by the FDA.

• Class II devices are subject to the FDA’s general controls, including the design control requirements of the QSRs, and any other special controls deemed necessary by the FDA to provide reasonable assurance of the safety and effectiveness of the device. While most Class II devices require premarket review and clearance by the FDA through the 510(k) premarket notification procedure, some Class II devices are exempt from the 510(k) premarket notification process (assuming they are within the limitations of the exemption).

• Class III devices are those deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or those devices deemed not substantially equivalent to a legally marketed predicate device. Class III devices include those devices for which the FDA has determined that general and special controls alone are insufficient to assure the safety and effectiveness of the device.

FDA Premarket Review. In general, we cannot introduce a new medical device into the market until we obtain market clearance through a 510(k) premarket notification or approval through a premarket approval (“PMA”) application. Some devices, typically lower-risk devices, are subject to specific exemptions from premarket review. In addition, in limited cases, devices may come to the market through alternative procedures, such as a de novo classification request or humanitarian device exemption.

To obtain 510(k) clearance, a device manufacturer must submit a premarket notification to the FDA demonstrating that the device is substantially equivalent to another legally marketed predicate device. A predicate device is a device that has been cleared through the 510(k) process; a device that was legally marketed prior to May 28, 1976; a device that has been down-classified by the FDA to Class I or Class II; or a device that the FDA has previously determined to be exempt from the 510(k) process. To be substantially equivalent, the notification must show that the new device has the same intended use and the same

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technology as the predicate device, or, if the new device has different technology, that the device is as safe and effective as the predicate device and does not raise different questions of safety and effectiveness. Performance testing is generally required to demonstrate substantial equivalence, and, for some devices, clinical data may be required. The standards and data requirements necessary for the clearance of a new device may be unclear or may be subject to change. In addition, the FDA may publish or adopt special controls it deems necessary to provide a reasonable assurance of the safety and effectiveness of a device, which might include standards for the testing and clearance of a new device. The 510(k) clearance procedure usually takes between three months and one year from the date a 510(k) notification is submitted, but it may take longer. The FDA may find that substantial equivalence has not been shown and, as a result, require additional clinical or non-clinical testing to support a 510(k) or require the submission of a de novo classification request or PMA application for the device.

A de novo classification is an alternate pathway to classify novel devices that are low to moderate risk but for which no substantially equivalent predicate device exists. Clearance of a de novo request generally takes six months to one year from the time of submission of the de novo request, although it can take longer.

A PMA application is required for Class III devices. The application must demonstrate that there is reasonable assurance that the device is safe and effective for its intended use based on valid scientific evidence. The PMA application process can be expensive, generally takes several years to complete and typically includes, among other things, human clinical trials, manufacturing facility inspection, bench tests and laboratory and animal studies, which can be costly to conduct. There is also a substantial “user fee” that must be paid to the FDA in connection with the submission of each PMA application. The FDA may determine that additional information, including clinical data, be submitted before a determination is made, which could significantly delay the introduction of new devices. If the FDA approves the PMA application, it may place restrictions on the device. If the FDA's evaluation of the PMA application is not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA may also require additional testing or clinical trials prior to approval or as a condition of approval.

If human clinical trials of a medical device are required for FDA clearance or approval and the device presents a significant risk, the sponsor of the trial must file an investigational device exemption (“IDE”) application with the FDA prior to commencing human clinical trials in the USA. Submission of an IDE application does not ensure that the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine that the data derived from the trials support the safety and effectiveness of the device or warrant the continuation of clinical trials. An IDE supplement must be approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. For clinical trials involving a device that does not present a significant risk, the sponsor is not required to obtain approval of an IDE, but the sponsor must obtain the review and approval of an institutional review board. Both significant risk and non-significant risk trials are subject to additional FDA regulations, including a requirement to obtain informed consent and reporting and recordkeeping requirements. We, the FDA, or the institutional review board, may suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits.

The FDA clearance and approval processes for medical devices are expensive, uncertain and lengthy. There can be no assurance that we will be able to obtain necessary regulatory clearances or approvals for any product on a timely basis or at all. Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition or results of operations. In addition, if the FDA discovers that an applicant has submitted false or misleading information, the FDA may refuse to review submissions until certain requirements are met pursuant to its Application Integrity Policy, which specifies procedures that the FDA personnel should follow to ensure the integrity of data and information in applications submitted for FDA review and approval.

Clinical Trials. We conduct clinical trials to obtain PMA approval or 510(k) clearance from the FDA and to obtain CE Marking approval and other international equivalents. In order for us to obtain the desired regulatory approvals, we will need to complete the trial(s) and submit positive clinical data to the regulatory authority. If we cannot enroll study subjects in sufficient numbers to complete the necessary studies, if there is a disruption in the supply of materials for the trials, if there is a change in the standard of care or available competing therapies, or depending on other factors, we will likely not be able to complete the trial(s). Even if we complete the clinical trial(s), the regulatory authority may require us to undertake additional testing, or the trial results may not be sufficient to obtain regulatory approval for other reasons, including inconclusive or negative results of our trials or those conducted by our competitors or other third parties. If we do not obtain regulatory authority approval of the product use claimed in a clinical trial, we will not be able to sell, distribute or promote the subject product for the indicated treatment of the specific disease or condition.

Changes in Cleared or Approved Devices. Certain modifications to our marketed devices, including certain manufacturing changes, product enhancements and product line extensions, require new 510(k) clearance or approval of a PMA

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supplement. For devices marketed under an approved PMA, we must submit a PMA supplement to the FDA for review and approval prior to making a change to the device that affects the safety or effectiveness of the device, including changes to the design, manufacturing or labeling of the device. Likewise, for 510(k)-cleared devices, we must obtain new FDA 510(k) clearance when there is a major change or modification in the intended use or indications for use or a change or modification of the device that could significantly affect the safety or effectiveness of the device. In some cases, clinical data may be required to support a PMA supplement or 510(k) premarket notification for a device modification. The FDA may determine that a modified device is not substantially equivalent to the marketed device or may require that additional information, including clinical data, be submitted before a determination is made, either of which could significantly delay the introduction of modified devices.

Foreign jurisdictions have similar requirements that necessitate submission and review when changes are made to currently available devices, including product line extensions. These requirements vary between regions and are subject to ongoing change by their respective regulatory bodies. Prior review and approval in these regions may be required prior to making a change to the device that affects the safety or effectiveness of the device, including changes to the design, manufacturing or labeling of the device. In some cases, clinical data may be required. The process to obtain approval of a modified devices could significantly delay its introduction.

Quality System Requirements. The FDCA requires us to comply with the Quality System Regulation (“QSR”) and various foreign regulations require compliance with ISO 13485 or national law requirements pertaining to all aspects of our product design and manufacturing processes, including requirements for packaging, labeling, record keeping, personnel training, supplier qualification, design controls, complaint handling, corrective and preventive actions and internal quality system auditing. The FDA and foreign regulators enforce these requirements through periodic inspections of medical device manufacturers. These requirements are complex, technical and require substantial resources to remain compliant. Our failure or the failure of our suppliers to maintain compliance with these requirements could result in the shutdown of our manufacturing operations or the recall of our products, which would have a material adverse effect on our business. If one of our suppliers fails to maintain compliance with our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. We also could be subject to injunctions, product seizures, or civil or criminal penalties.

Labeling and Promotion. Our labeling and promotional activities are also subject to scrutiny by the FDA and foreign regulators. Labeling includes not only the label on a device, but also includes any descriptive or informational literature that accompanies or is used to promote the device. Among other things, labeling violates the law if it is false or misleading in any respect or it fails to contain adequate directions for use. Moreover, product claims that are outside the approved or cleared labeling violate the FDCA and other applicable regulations. If the FDA determines that our promotional materials constitute promotion of an uncleared or unapproved use, or otherwise violate the FDCA, it could request that we modify our promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a notice of violation, a warning letter, injunction, seizure, civil fines or criminal penalties. Allegations of off-label promotion can also result in enforcement action by federal, state, or foreign enforcement authorities and trigger significant civil or criminal penalties, including exclusion from the Medicare and Medicaid programs and liability under the False Claims Act, discussed further below.

Our product promotion is also subject to regulation by the Federal Trade Commission (the “FTC”), which has primary oversight of the advertising of unrestricted devices. The Federal Trade Commission Act prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce, as well as unfair or deceptive practices such as the dissemination of any false or misleading advertisement pertaining to medical devices. FTC enforcement can result in orders requiring, among other things, limits on advertising, corrective advertising, consumer redress, rescission of contracts and such other relief as the FTC may deem necessary.

In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims.

Import Requirements. To import a medical device into the U.S., the importer must file an entry notice and bond with the U.S. Bureau of Customs and Border Protection (“CBP”). All devices are subject to FDA examination before release from the CBP. Any article that appears to be in violation of the FDCA may be refused admission and a notice of detention and hearing may be issued. If the FDA ultimately refuses admission, the CBP may issue a notice for redelivery and assess liquidated damages for up to three times the value of the lot. Additionally, the laws of the U.S. require imported articles to have their labels accurately marked with the appropriate country of origin, the violation of which may result in confiscation, fines and penalties.

Export Requirements. Products for export are subject to foreign countries' import requirements and the exporting requirements of the exporting countries’ regulating bodies, as applicable. In particular, international sales of medical devices manufactured in the U.S. that are not approved or cleared by the FDA for use in the U.S., or are banned or deviate from lawful performance standards, are subject to FDA export requirements and we may not be able to export such products.

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Foreign countries often require, among other things, an FDA certificate for products for export, also called a Certificate to Foreign Government. To obtain this certificate from the FDA, the device manufacturer must apply to the FDA. The FDA certifies that the product has been granted clearance or approval in the U.S. and that the manufacturing facilities were in compliance with the QSR at the time of the last FDA inspection.

Additionally, the export of our products to certain countries is subject to restrictions due to trade and economic sanctions imposed by the U.S., the European Union (the "EU") and other governments and organizations. The U.S. Departments of Justice, Commerce, State and Treasury and other federal agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for violations of economic sanctions laws, export control laws, and other federal statutes and regulations, including those established by the Office of Foreign Assets Control (“OFAC”). Under these laws and regulations, as well as other export control laws, customs laws, sanctions laws and other laws governing our operations, various government agencies may require export licenses and may seek to impose modifications to business practices, including cessation of business activities in sanctioned countries or with sanctioned persons or entities.

Additional Post-Market Requirements. Medical device manufacturers are also subject to other post-market requirements in multiple jurisdictions, including product listing, establishment registration, Unique Device Identification ("UDI"), reports of corrections and removals and other requirements. Medical Device Reporting required by the FDA, medical device vigilance reporting requirements under the European Medical Devices Directive and similar regulations in other foreign markets, require manufacturers to report to the FDA or an equivalent foreign regulatory body any incident in which their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur. Our obligation to report a complaint is triggered on the date on which we become aware of an adverse event and the nature of the event. If we fail to comply with our reporting obligations, the FDA could issue warning letters or untitled letters, take administrative actions, commence criminal prosecution, impose civil monetary penalties, revoke our device clearances, seize our products, or delay the clearance of our future products. Other regulatory authorities could take similar actions within their jurisdictions.

The FDA regularly inspects companies to determine compliance with the QSRs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations can result in an FDA Form 483 (which is issued by the FDA at the conclusion of an inspection when an investigator has observed any conditions that may constitute violations), public warning letters, monetary penalties against a company or its officers and employees, suspension or withdrawal of regulatory approvals, operating restrictions, total or partial suspension of production, injunctions, product recalls, product detentions, refusal to provide export certificates, seizure of products and criminal prosecution. Other regulatory authorities, including EU Notified Bodies, regularly audit companies to determine compliance with ISO 13485 and their respective regulations. They may take similar actions as FDA within their jurisdictions.

Foreign Regulations. Medical device laws and regulations are also in effect in many countries outside of the U.S. These laws and regulations vary significantly from country to country and range from comprehensive device approval requirements for some or all of our medical device products to more basic requests for product data or certification. The number, scope, complexity and cost of these requirements are increasing.

Foreign regulatory approval processes for medical devices are expensive, uncertain and lengthy. There can be no assurance that we will be able to obtain necessary regulatory approvals for any product on a timely basis or at all. Delays in receipt of or failure to receive such approvals, the loss of previously received approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition or results of operations.

The regulatory framework for medical devices in the European Economic Area underwent a significant revision in 2017, which has introduced new regulatory requirements to obtain CE Mark approval. The new Medical Device Regulations (“MDR”) include a three-year transition period which is scheduled to end in May 2020. The MDR includes increasingly stringent requirements in multiple areas, such as pre-market clinical evidence (some of which are now in effect), review of high-risk devices, labeling and post-market surveillance. Under the MDR, pre-market clinical data will now be required to obtain CE Mark approval for high-risk, new and modified medical devices. We believe these new requirements have the potential to be expensive and time-consuming to implement and maintain and could have a material adverse effect on our business.

Reimbursement. Our products are generally used in medical procedures that are covered and reimbursed by governmental payers, such as Medicare, and/or private health plans. In general, these third-party payers cover a medical device and/or related procedure only when the payer determines that healthcare outcomes are supported by medical evidence and the device or procedure is medically necessary for the diagnosis or treatment of the patient’s illness or injury. Even if a device has received clearance or approval for marketing by the FDA or a similar foreign regulatory agency, there is no certainty that third-party payers will cover

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and reimburse for the cost of the device and related procedures. Because of increasing cost-containment pressures, some private payers in the U.S. and government payers in foreign countries may also condition payment on the cost-effectiveness of the device or procedure. Even if coverage is available, third-party payers may place restrictions on the circumstances in which they provide coverage or may offer reimbursement that is not sufficient to cover the cost of our products. If healthcare providers such as hospitals and physicians cannot obtain adequate coverage and reimbursement for our products or the procedures in which they are used, this may affect demand for our products and our business, financial condition, results of operations, or cash flows could suffer a material adverse impact.

Patient Protection and Affordable Care Act. The Patient Protection and Affordable Care Act (“Affordable Care Act”) has changed the way healthcare in the U.S. is financed by both governmental and private insurers and has significantly affected the medical device industry. This law contains a number of provisions, including provisions governing enrollment in federal healthcare programs, reimbursement changes, the increased funding of comparative effectiveness research for use in healthcare decision-making, and enhancements to fraud and abuse requirements and enforcement, that we believe affect existing government healthcare programs and result in the development of new programs. The Affordable Care Act imposed on medical device manufacturers a 2.3% excise tax on U.S. sales of certain medical devices, which adversely affected our gross profit and earnings for our marketed products in 2015. The U.S. Congress suspended the excise tax for the 2016-2018 tax years and recently extended the suspension until January 1, 2020. We cannot predict whether any new action will be taken and whether the suspension will continue past 2020. If the excise tax is not repealed or further suspended, it will likely adversely impact our future results of operations.

Additionally, the long-term viability of the Affordable Care Act, and its impact on our business and results of operations, remains uncertain. For instance, in December 2017, the U.S. enacted the Tax Cuts and Jobs Act, which, among other things, eliminated the tax penalty for not obtaining health coverage (beginning in 2019). Additionally, members of the U.S. Congress have suggested other changes that may impact individual insurance marketplaces. These and other legislative and executive initiatives may significantly change the scope and impact of the Affordable Care Act and, in turn, the medical device industry. See Note 6 of the notes to our consolidated financial statements for further information on the Tax Cuts and Jobs Act.

The U.S. Physician Payment Sunshine Act, and similar state laws, also include annual reporting and disclosure requirements for device manufacturers aimed at increasing the transparency of the interactions between device manufacturers and healthcare providers. Reports submitted under these new requirements are placed in a public database. Other jurisdictions outside the U.S. have also adopted or begun adopting similar physician transparency laws. In addition to the burden of establishing processes for compliance, if we fail to provide these reports, or if the reports we provide are not accurate, we could be subject to significant penalties.

Anti-Corruption Laws. Anti-corruption laws are in place in the U.S. and in many jurisdictions throughout the world. In the U.S., the Foreign Corrupt Practices Act (the "FCPA") prohibits corruptly offering, paying, or promising to pay anything of value to foreign officials for the purpose of obtaining or maintaining business. Anti-corruption laws present particular challenges in the medical device industry because in many countries including China, hospitals are state-owned or operated by the government, and doctors and other hospital employees are considered foreign government officials. The FCPA also requires that we maintain fair and accurate books and records and devise and maintain an adequate system of internal accounting controls. Among other requirements to implement compliance, we are required to train our U.S. and international employees, and to train and monitor foreign third parties with whom we contract, e.g., distributors, to ensure compliance with these anti-corruption laws. Failing to comply with the FCPA or any other anti-corruption law could result in fines, penalties or other adverse consequences. In addition, the Chinese government has also sponsored anti-corruption campaigns from time to time, which could have a chilling effect on any future marketing efforts by us to new hospital customers. There have been occurrences in which certain hospitals have denied access to sales representatives from medical device companies because the hospitals wanted to avoid the perception of corruption. If this attitude becomes widespread among our potential customers, our ability to promote our products to hospitals may be adversely affected.

As we expand our operations in China and other jurisdictions internationally, we will need to increase the scope of our compliance programs to address the risks relating to the potential for violations of the FCPA and other anti-corruption laws. Our compliance programs will need to include policies addressing not only the FCPA, but also the provisions of a variety of anti-corruption laws in multiple foreign jurisdictions, including China, provisions relating to books and records that apply to us as a public company, and include effective training for our personnel and relevant third-parties.

Anti-Kickback Statutes. The federal healthcare Anti-Kickback Statute prohibits persons from, among other things, knowingly and willfully offering or paying remuneration, directly or indirectly, to a person to induce the purchase, order, lease, or recommendation of a good or service for which payment may be made in whole or part under a federal healthcare program such as Medicare or Medicaid, unless the arrangement fits within one of several statutory exemptions or regulatory “safe harbors.”

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The definition of remuneration has been broadly interpreted to include anything of value, including, for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash and waivers of payments. Violations can result in significant penalties, imprisonment and exclusion from Medicare, Medicaid and other federal healthcare programs. Exclusion of a manufacturer would preclude any federal healthcare program from paying for the manufacturer’s products. In addition, kickback arrangements can provide the basis for an action under the False Claims Act, which is discussed in more detail below. A party’s failure to fully satisfy a regulatory “safe harbor” provision may result in increased scrutiny by government enforcement authorities.

Government officials continue their enforcement efforts on the sales and marketing activities of pharmaceutical, medical device and other healthcare companies, including the pursuit of cases against individuals or entities that allegedly offered unlawful inducements to potential or existing customers to procure their business. Settlements of these government cases have involved significant fines and penalties and, in some instances, criminal pleas.

In addition to the Anti-Kickback Statute, many states have their own anti-kickback laws. Often, these laws closely follow the language of the federal law, although they do not always have the same exceptions or safe harbors. In some states, these anti-kickback laws apply with respect to all payers, including commercial health insurance companies.

False Claims Laws. The False Claims Act prohibits any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false statement to get a false claim paid. Manufacturers can be held liable under false claims laws, even if they do not submit claims to the government, if they are found to have caused submission of false claims. Under the Affordable Care Act, a violation of the Anti-Kickback Statute is deemed to be a violation of the False Claims Act. The False Claims Act also includes whistleblower provisions that allow private citizens to bring suit against an entity or individual on behalf of the U.S. and to recover a portion of any monetary recovery. Many of the recent, highly publicized settlements in the healthcare industry relating to sales and marketing practices have been cases brought under the False Claims Act. Most states also have adopted statutes or regulations similar to the federal laws, which apply to items and services reimbursed under Medicaid and other state programs. Sanctions under the Federal Claims Act and state laws may include civil monetary penalties, exclusion of a manufacturer's products from reimbursement under government programs, criminal fines and imprisonment.

Labor Standards Laws. We are also subject to corporate social responsibility (“CSR”) laws and regulations which require us to monitor the labor standards in our supply chain, including the California Transparency in Supply Chains Act, the UK Modern Slavery Act, and U.S. Federal Acquisition Regulations regarding Combating Trafficking in Persons. These CSR laws and regulations may impose additional processes and supplier management systems and have led certain key customers to impose additional requirements on medical device companies, including audits, as a prerequisite to selling products to such customers, which could result in increased costs for our products, the termination or suspension of certain suppliers, and reductions in our margins and profitability.

Privacy and Security. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), and accompanying rules, require certain entities, referred to as "covered entities" (including most healthcare providers and health plans), to comply with established standards, including standards regarding the privacy and security of protected health information (“PHI”). HIPAA further requires that covered entities enter into agreements meeting certain regulatory requirements with their “Business Associates,” as such term is defined by HIPAA, which, among other things, obligate the Business Associates to safeguard the covered entity's PHI against improper use and disclosure. In addition, a Business Associate may face significant statutory and contractual liability if the Business Associate breaches the agreement or causes the covered entity to fail to comply with HIPAA. Additionally, many state laws regulate the use and disclosure of health information and require notification in the event of breach of such information.

Although we do not believe we are a “covered entity” under HIPAA and do not meet the definition of Business Associate, we are committed to maintaining the security and privacy of patients’ health information and believe that we meet the expectations of the HIPAA rules in all material respects. However, to the extent we become subject to HIPAA, whether through a change in our business model or an enforcement action brought by the U.S. government, we would be directly subject to a broader range of requirements under HIPAA, HITECH, the rules issued thereunder and their respective civil and criminal penalties.

The EU has adopted a single EU privacy regulation, the General Data Protection Regulation (“GDPR”), which went into effect May 25, 2018. The GDPR extends the scope of the EU data protection law to all companies processing personal data in the context of the activities of an establishment of a controller or a processor in the EU, regardless of whether the processing takes place in the EU or not. In addition, it applies to the processing of personal data of data subjects who are in the EU by a controller or processor not established in the EU, where the processing activities are related to: (a) the offering of goods or services, irrespective of whether a payment of the data subject is required, to such data subjects in the EU; or (b) the monitoring of their behavior as far as their behavior takes place within the EU. The GDPR provides for a harmonization of the data protection regulations throughout

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the EU. It imposes a strict data protection compliance regime with severe penalties of up to the greater of 4% of worldwide sales or €20 million and includes new rights such as the “portability” of personal data. Although the GDPR will apply across the EU without a need for local implementing legislation, it contains a number of opener clauses enabling the EU member states to provide for additional legislation. In addition, local data protection authorities will still have the ability to interpret the GDPR, which has the potential to create inconsistencies on a country-by-country basis. We have implemented changes to our business practices to comply with the GDPR.

We post on our websites our privacy policies and practices regarding the collection, use and disclosure of user data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any applicable regulatory requirements or orders, or privacy, data protection, information security or consumer protection-related privacy laws and regulations in one or more jurisdictions, could result in proceedings or actions against us by governmental entities or others, including class action privacy litigation in certain jurisdictions, subject us to significant fines, penalties, judgments and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and adversely affect our business. Data protection, privacy and information security have become the subject of increasing public, media and legislative concern. If our customers were to reduce their use of our products and services as a result of these concerns, our business could be materially harmed. As noted above, we are also subject to the possibility of security and privacy breaches, which themselves may result in a violation of these privacy laws.

Environmental, Health and Safety Regulations. We are subject to various federal, state, local and foreign laws and regulations relating to the protection of the environment, as well as public and employee health and safety. In the course of our business, we are involved in the handling, storage and disposal of certain chemicals. The laws and regulations applicable to our operations include provisions that regulate the release or discharge of hazardous or other regulated materials into the environment. These environmental laws and regulations may impose “strict liability,” rendering a person liable without regard to negligence or fault on the part of such person. Such environmental laws and regulations may expose us to liability for the conduct of, or conditions caused by, others, or for acts that were in non-compliance with all applicable laws at the time the acts were performed. Failure to comply with applicable environmental laws could have a material adverse effect on our business. Our operations are also subject to various laws and regulations relating to occupational health and safety. We maintain safety, training and maintenance programs as part of our ongoing efforts to ensure compliance with applicable laws and regulations. Compliance with applicable health and safety laws and regulations has required and continues to require expenditures. Environmental, health and safety legislation and regulations change frequently. Changes in those regulations could have a material adverse effect on our business, operations or financial condition.

Our worldwide sales have not historically reflected a significant degree of seasonality; however, customer purchases have historically been lower during the third quarter of the year, as compared to other quarters. This reflects, among other factors, lower demand during summer months in countries in the northern hemisphere.

We are engaged and passionate about continually innovating solutions to produce the highest quality medical products while reducing our global environmental footprint. Each year, we track and measure our environmental performance, holding ourselves accountable and continually looking for ways to improve.

We have designed programs to reduce waste including:

• our major program to reduce film thickness in kit packaging, without compromising on quality,

• our transition to re-usable pallets and methods to move products in bulk containers, significantly reducing intra-company shipping materials,

• our packaging design, which allows our products to ship to customers in its original packaging, eliminating the need for additional shipping materials, such as boxes and plastic bubble wrap,

• our transition from paper to electronic work orders in our facilities worldwide, from which we expect to reduce our paper usage by approximately 2.8 million pieces and 20,000 plastic sleeves annually,

• our GreenChoice™ program for our kits and packs, which now gives our customers the option to choose eco product alternatives—such as trays and natural fiber towels—that can be included in their order,

• our Employee Recycling Program, in which our employees recycle as many materials as we can, including paper, cardboard, food and beverage containers, scrap metal, and pallets,

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• our partnership with companies who can use our plastic waste that surrounds a finished molded part and

• our investment in a line of fully compostable “to-go” containers made from plant starch and sugarcane and our program to transition to reusable cutlery at all of our dining facilities worldwide, reducing the amount of cutlery and plates waste sent to landfills.

We have been awarded Silver LEED (Leadership in Energy and Environmental Design) certification for our Bean Building, the newest addition to our Salt Lake City campus.

As of December 31, 2018, we employed 5,783 people. None of our U.S. employees are subject to collective bargaining agreements; however, certain of our European employees are subject to such agreements. We believe our employee relations are generally good. Although our European employees will likely continue to be subject to collective organizing and bargaining activities, we do not expect such activities to materially affect our future operations.

None.

We file annual, quarterly and current reports and other information with the SEC. These materials can be inspected and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Copies of these materials may also be obtained by mail at prescribed rates from the SEC’s Public Reference Room at the above address. Information about the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the SEC’s Internet website is www.sec.gov.

We make available, free of charge, on our Internet website, located at www.merit.com, our most recent Annual Report on Form 10-K, our most recent Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K filed since our most recent Annual Report on Form 10-K, and any amendments to such reports as soon as reasonably practicable following the electronic filing of such report with the SEC. In addition, we provide electronic or paper copies of such filings free of charge upon request.

For financial information relating to our foreign and domestic sales see Note 2 and Note 13 to our consolidated financial statements set forth in Item 8 of this report.