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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________to _________
Commission file number 0-28194
DIGENE CORPORATION
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(Exact name of registrant as specified in its charter)
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Delaware 52-1536128
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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1201 Clopper Road
Gaithersburg, Maryland 20878
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 944-7000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share
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(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
Based upon the last sale price of the registrant's Common Stock on
September 8, 2000, the aggregate market value of the 11,415,351 outstanding
shares of voting stock held by non-affiliates of the registrant was
$475,877,445.
As of September 8, 2000, 16,196,577 shares of the registrant's Common
Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this
Report on Form 10-K:
1) The registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be filed not later than 120 days after the
close of the fiscal year (incorporated into Part III).
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TABLE OF CONTENTS
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Part I
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Item 1. Business......................................................... 1
Item 2. Properties.......................................................30
Item 3. Legal Proceedings................................................30
Item 4. Submission of Matters to a Vote of Our Stockholders..............30
Executive Officers of Digene.....................................31
Part II
Item 5. Market For Our Common Equity and Related Stockholder Matters.....32
Item 6. Selected Consolidated Financial Data.............................33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......38
Item 8. Financial Statements and Supplementary Data......................39
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................56
Part III
Item 10. Directors and Executive Officers.................................56
Item 11. Executive Compensation...........................................56
Item 12. Security Ownership of Certain Beneficial Owners and Management...56
Item 13. Certain Relationships and Related Transactions...................56
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..57
Signatures......................................................................59
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PART I
ITEM 1. BUSINESS
We develop, manufacture and market our proprietary DNA and RNA testing
systems for the screening, monitoring and diagnosis of human diseases. We have
developed and are commercializing our patented Hybrid Capture(R) Gene Analysis
System and tests in three areas: women's cancers and infectious diseases, blood
viruses, and genomics and pharmaceutical research. Our primary focus is in
women's cancers and infectious diseases where our lead product is the only
FDA-approved test for human papillomavirus, or HPV, which is the cause of
greater than 99% of cervical cancer cases. Our HPV Test is used in the United
States as an adjunct to the Pap smear for cervical cancer screening and in
selected countries internationally as a primary cervical cancer screen, either
in conjunction with or separate from the Pap smear. Our product portfolio also
includes DNA tests for the detection of chlamydia, gonorrhea and other sexually
transmitted infections. We believe our Hybrid Capture technology platform
represents a significant improvement over existing technologies because of its
accuracy, speed, ease of use and ability to quantitate DNA and RNA. In the
United States, we market our products through a direct sales force and in other
countries through distributors. Abbott Laboratories, one of the world's leading
medical diagnostic companies, markets and distributes all of our women's cancers
and infectious diseases and blood virus products in Europe, Africa and the
Middle East.
Our commercial objective is to become the world leader in gene-based
testing for women's cancers and infectious diseases. We are working to establish
our HPV Test as the standard for cervical cancer screening, the world's largest
cancer screening market. Virtually all cases of cervical cancer are preventable
if detected in the precancerous stage. Currently, the Pap smear is a test used
to screen for cervical cancer. The Pap smear is a subjective, labor intensive
test that has limited sensitivity and diagnostic accuracy leading to equivocal
test results and false negative diagnoses, which result in significant costs to
the healthcare system due to over-treatment or under-diagnosis.
Our HPV Test allows physicians to identify women who are most at risk of
having or developing cervical disease and cervical cancer. We intend to
capitalize on our leadership position in HPV testing to obtain a significant
share of the global cervical cancer screening market, both as a primary
screening test and as a follow-up to the Pap smear. We are targeting this global
opportunity primarily by marketing our disease management strategy for cervical
cancer screening to managed care providers in the United States and
government-funded national screening programs outside the United States. In
addition, we have developed a network of women's health advocates, public health
providers and physician organizations to communicate the diagnostic and
cost-effective benefits of HPV testing to physicians, reimbursement providers,
testing laboratories and the public. Beginning in calendar 2000, a number of
national laboratories in the United States are making our Hybrid Capture II HPV
Test available for testing specimens with inconclusive, or "ASCUS" (Atypical
Squamous Cells of Undetermined Significance) Pap smear results. In March 2000,
the FDA granted us clearance to market our High-Risk HPV Test, which is
designed to detect the 13 key types of HPV that cause cervical cancer.
We have applied our Hybrid Capture technology to provide for the
simultaneous detection of chlamydia, gonorrhea and other sexually transmitted
infections, in addition to HPV, from a single patient sample. We also can use a
liquid-based Pap smear sample for our DNA tests and have FDA approval to use the
specimen provided by Cytyc Corporation's ThinPrep(R) Pap Test(TM) for our HPV
Tests. We believe the ability to perform multiple tests from a single patient
specimen provides greater convenience to patients and their physicians and
reduces healthcare costs by decreasing the frequency of patient visits and
testing. For example, using our HPV Test, physicians can order reflex testing of
inconclusive results from a ThinPrep Pap Test specimen without the need to
procure an additional patient sample.
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Our tests for the simultaneous detection of chlamydia and gonorrhea were
cleared by the FDA for marketing in the United States in March 2000. We expect
Abbott, our distributor of these products in the United States, to launch these
products in the United States during fiscal 2001.
Our second major focus is in blood viruses where we have developed unique
testing products using our Hybrid Capture System to detect the presence of
hepatitis B virus (HBV) and cytomegalovirus (CMV). These blood viruses are
leading causes of morbidity and death. Our tests detect and measure the amount
of virus in a patient sample, helping physicians determine disease prognosis and
optimize the efficacy of antiviral therapies. The sensitivity of our blood virus
tests, along with their ability to quantitate viral load, provide a competitive
advantage over other methods. Our CMV Test is the only DNA test cleared for the
detection of CMV by the FDA. Abbott, one of the world's leading providers of HBV
tests, is selling our HBV and CMV products in Europe, Africa and the Middle East
where we believe that our HBV Test is the leading HBV DNA test.
Our Hybrid Capture System utilizes signal amplification and combines the
accuracy of nucleic acid probe diagnostics with the ease of use and mass-market
capabilities of the antibody-based immunodiagnostic systems that are used
routinely by clinical laboratories today. Our Hybrid Capture technology uses RNA
probes to bind specific DNA sequences to create hybrid DNA:RNA molecules. The
captured hybrids are then reacted with our proprietary signal amplification
system which uses antibodies to detect DNA:RNA hybrids. The Hybrid Capture
System and tests are sensitive, rapid, accurate, objective, non-invasive and
easy to use, and can be performed by laboratory staff using standardized testing
equipment. Recently, we have developed an automated, microplate-based Hybrid
Capture testing system. In the genomics and pharmaceutical research area, we are
utilizing the capabilities of our Hybrid Capture System to identify, develop and
validate new gene-based testing opportunities. As a result of the high
throughput capability of the Hybrid Capture System, Applied Biosystems (formerly
PE Biosystems) entered into an exclusive technology license and marketing and
distribution agreement with us to address opportunities in high throughput
gene expression screening for pharmaceutical drug discovery.
We have established a strong proprietary position in our Hybrid Capture
technology. We have an exclusive license to a patent covering the use of the
monoclonal antibodies, which are central to the Hybrid Capture detection system.
Additionally, in July 1999, the European Patent Office allowed a broad patent
covering the entire Hybrid Capture System and in July 2000 we received a notice
of allowance for this patent from the U.S. Patent Office. We have exclusive
licenses and co-exclusive cross-licenses with the Institut Pasteur to issued and
pending patents covering the use of HPV genetic sequences from six of the
thirteen key cancer-causing HPV types, including one license obtained in April
2000. We believe that these patents create a unique proprietary position for
Digene in the HPV testing field.
We have achieved a number of important regulatory milestones over the
past two years. Our next-generation Hybrid Capture II HPV Test received
premarket approval (PMA) from the FDA in March 1999 and in March 2000 we
received marketing clearance from the FDA for the Hybrid Capture II HPV Test for
high-risk testing only. In 1999 our portfolio of women's cancers and infectious
disease tests was cleared for sale in almost every major European country and in
Brazil and Argentina, and in February 2000 the United Kingdom National Health
Service announced a pilot use of our Hybrid Capture II HPV Test as part of its
cervical cancer screening program. Our Hybrid Capture II CT Test received 510(k)
clearance from the FDA in October 1999; our Hybrid Capture II Gonorrhea Test
received 510(k) clearance from the FDA in December 1999; and our combination
Hybrid Capture II Chlamydia/Gonorrhea Test received 510(k) clearance from the
FDA in March 2000. In the blood virus area, our Hybrid Capture CMV Test received
510(k) clearance from the FDA in October 1998, and our Hybrid Capture II HBV
Test received marketing approval in France and Switzerland in February 2000.
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In addition, we received ISO 9001 certification in June 1999 and validation
approval from the FDA in April 2000 to manufacture our products in our new
facility in Gaithersburg, Maryland.
We also have achieved a number of important commercial milestones in the
past eighteen months. We entered into a marketing and distribution alliance with
Abbott in May 1999 and into a marketing alliance with 3M Pharmaceuticals in
November 1999. We also significantly increased the number of U.S. clinical
laboratories using our Hybrid Capture II HPV Test, including national labs such
as Quest Diagnostics, Laboratory Corporation of America, Unilab and American
Medical Laboratories, Inc. Our Hybrid Capture HPV Tests were used in numerous
clinical trials and the results of such trials were published in peer-reviewed
publications. We also continue to pursue a program to expand reimbursement
coverage for our products, resulting in coverage in a number of European
countries for our products and in the United States for our Hybrid Capture HPV
Tests from significant managed care providers, including Kaiser Permanente,
government programs and other insurers. Our efforts and accomplishments over the
last year have resulted in continued revenue growth from $17.5 million in fiscal
1999 to $23.0 million in fiscal 2000.
WOMEN'S CANCERS AND INFECTIOUS DISEASES
We have initially focused on two major disease areas, cervical cancer and
sexually transmitted infections. Cervical cancer is the second most common
cancer among women worldwide. Currently, the primary cervical cancer screening
test is the Pap smear. Although the Pap smear has successfully reduced deaths
caused by cervical cancer in the United States, cervical cancer remains
prevalent in the United States. In addition, cervical cancer rates have remained
at high levels outside the United States. If detected in the precancerous stage,
virtually all cases of cervical cancer are preventable. The treatment of
cervical cancer after it reaches the invasive stage may require chemotherapy,
radiation treatment or surgery, including hysterectomy. These treatments are
expensive and often unsuccessful. Recently, it has been established that HPV, a
sexually transmitted virus, is the primary cause of cervical cancer and that 99%
of cervical cancers contain cancer-causing HPV sequences. Studies have shown
that our HPV Test is 95% to 98% sensitive for detection of women with disease.
The Pap smear cannot detect HPV. Furthermore, the Pap smear is a subjective,
labor intensive test that has limited sensitivity and diagnostic accuracy
leading to equivocal test results and false negative diagnoses. These
limitations have contributed to continuing high rates of cervical cancer.
Chlamydia is the most common sexually transmitted disease in the United
States and is a major health problem worldwide, with approximately 89 million
new cases reported annually. Genital chlamydia infection, if left untreated, has
serious potential consequences, such as infertility, ectopic pregnancy,
cervicitis and pelvic inflammatory disease. Gonorrhea, which affects 62 million
people worldwide, is the second most common sexually transmitted disease in the
United States and may result in severe genital complications in both women and
men if left untreated. If properly detected, both chlamydia and gonorrhea are
easily treatable with low-cost antibiotic therapy. However, routine and
broad-based screening for chlamydia and gonorrhea has been limited by the
insufficient sensitivity of some culture methods, the invasive and cumbersome
specimen collection methods frequently employed, and the time and cost
associated with performing these tests.
We believe our Hybrid Capture HPV Tests could revolutionize cervical
cancer screening around the world by allowing early detection of HPV. Our Hybrid
Capture tests also represent the first effort to accurately detect HPV and the
other major sexually transmitted infections from a single specimen. This may
reduce the overall cost of patient management and help eliminate these serious
health threats. Our Hybrid Capture tests detect the presence of both chlamydia
and gonorrhea in women from cervical swabs, as well as in men through the
collection of urine samples. Preliminary clinical studies on women have
indicated that our Hybrid Capture II Chlamydia Test is capable of detecting
chlamydia in up to 98%
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of the cases in which the disease is present, while our Hybrid Capture II
Gonorrhea Test is capable of detecting gonorrhea in up to 92% of the cases in
which it is present. Routine and broad-based screening for chlamydia and
gonorrhea have been limited by the insufficient sensitivity of some culture
methods, the invasive and cumbersome specimen collection methods frequently
employed and the time and cost associated with performing these tests.
To implement our strategy in the area of women's cancers and infectious
diseases, we intend to:
- create a marketing distribution infrastructure and
marketing communications program appropriate to each
market;
- establish ourselves as the leader in single-sample testing
for women's cancers and infectious diseases;
- validate our products through clinical trials with
respected academic institutions and healthcare providers;
- communicate the diagnostic and cost-effective benefits of
HPV testing to managed care providers, physicians and
government-funded national screening programs and continue
to develop a network of women's health advocates, public
health providers and physician organizations to help
communicate our message to physicians, testing laboratories
and the public; and
- expand reimbursement for our HPV Tests from managed care
organizations, third party payors and government-funded
insurance programs.
DISTRIBUTION INFRASTRUCTURE
We have established distribution infrastructures that we believe are
appropriate to each geographic territory. In the United States, we have an
eight-person sales force directed toward achieving reimbursement for our
products from health insurance providers and increasing sales with our
laboratory customers. These sales professionals also work with the sales forces
of our clinical laboratory customers to assist these clinical laboratories in
effectively educating physicians about our Hybrid Capture products.
A key element of our commercialization strategy is to partner our
marketing and sales efforts with established leaders in the field. We have
established a marketing alliance with Abbott for all of our women's cancers and
infectious disease products and certain of our blood virus testing products.
Under this alliance, Abbott is responsible for sales and marketing of these
Hybrid Capture products in Europe, Africa and the Middle East and of our Hybrid
Capture II Chlamydia and Gonorrhea Tests in the United States, when launched,
which is expected to occur during fiscal 2001. We are working together with
Abbott to promote the use of HPV testing for primary screening in the European
market. In Europe, Abbott is responsible for marketing activities directed
toward obtaining laboratory endorsements and routine use of HPV testing, and we
are responsible for marketing activities directed toward obtaining governmental
endorsement of HPV testing, institutional reimbursement, and maximizing consumer
awareness and education of the benefits of HPV testing.
The initial term of our marketing and distribution agreement with Abbott
extends until December 31, 2003 with respect to our HBV and HPV Tests. The
initial term of the agreement with respect to our Chlamydia and Gonorrhea Tests
expires at the end of the fifth full calendar year after such tests receive
510(k) marketing clearance from the FDA; are delivered by us to Abbott for
resale in the United States; and satisfy designated specifications and are
validated by us under applicable protocols.
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The Abbott agreement establishes net sales thresholds for each of our
HBV, HPV and Chlamydia and Gonorrhea Tests. If the net sales thresholds are
satisfied for our HBV Tests or Chlamydia and Gonorrhea Tests, the term of the
agreement will be extended automatically with respect to such test for
successive one-year periods.
With respect to our HPV Tests, even if the applicable net sales
thresholds for our HPV Tests have been satisfied, at a designated time we (or in
one case, Abbott) have the right to terminate the agreement or convert Abbott's
distribution rights to non-exclusive for a designated period if the net sales
fall within one of several specified ranges. In each such case, if the agreement
is terminated with respect to our HPV Tests, we will be obligated to make a
residual payment to Abbott for a period of five years.
If Abbott fails to achieve the net sales thresholds at intervals
specified for our HBV Tests or Chlamydia and Gonorrhea Tests, then we may, in
our sole discretion, elect to convert Abbott's distribution rights from
exclusive to non-exclusive in the applicable territory with respect to such test
for a designated period of time thereafter. The agreement will terminate with
respect to any test for which Abbott acts as a non-exclusive distributor after
the expiration of the designated period. Abbott will not be required to satisfy
any net sales thresholds for our Chlamydia and Gonorrhea Tests until after the
events described above are satisfied.
If Abbott does not meet the established net sales thresholds for our HBV
Tests for calendar year 2003, or for our HPV Tests in calendar years 2000, 2001,
2002 or 2003, we have the option, in our sole discretion, to terminate the
agreement with respect to the tests for which the applicable net sales
thresholds were not achieved.
SINGLE-SAMPLE SYSTEM
We are the first to develop tests that detect HPV, chlamydia and
gonorrhea from a single patient specimen. In addition, tests that detect herpes
simplex virus are currently in development. We believe the ability to perform
multiple tests from a single specimen provides greater convenience to patients
and physicians and reduces healthcare costs by decreasing the frequency of
patient visits and testing. Our single-sample system is now available in Europe
and South America for the detection of HPV, chlamydia and gonorrhea, and we
expect that the system will be available in the United States during fiscal
2001. Our tests also are cost efficient in that they can be performed using
commercial liquid-based Pap smear collection devices, such as the Cytyc
Corporation ThinPrep Pap Test.
CLINICAL TRIAL VALIDATION
Clinical evidence published in medical journals and presented at
important medical meetings has validated our products and technology platform,
the Hybrid Capture System, and the role of HPV in cervical cancer. These studies
include:
- July 1999: a study involving 1,518 European women published
in The British Journal of Cancer which confirmed the high
sensitivity (98%) of our HPV Test;
- August 1999: a 22-country study completed by the
International Agency for Cancer Research confirming that
HPV is the cause of cervical cancer in 99.7% of cases
worldwide;
- September 1999: a study involving 2,988 women in the United
Kingdom published in The British Journal of Cancer reported
the high sensitivity of our
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test (95%) compared to the Pap smear (79%) in screening
women over age 35 for cervical disease;
- November 1999: a study involving 118 women published in the
New England Journal of Medicine confirmed that persistent
HPV infection causes cervical cancer and a test for HPV DNA
can predict the risk of cervical cancer among women with
normal Pap smears;
- December 1999: a German study involving 247 women published
in The Lancet supports that self-collection of cervical
specimens by women is a reliable method of testing for HPV
using our HPV Tests;
- January 2000: the Journal of the American Medical
Association (JAMA) reported that two independent studies,
one performed by the National Cancer Institute (involving
8,539 women in Costa Rica) and the other by Columbia
University (involving 1,415 women in Cape Town, South
Africa) showed HPV testing was significantly more reliable
for detecting high-grade cervical lesions; and
- March 2000: preliminary results of a National Cancer
Institute ALTS (ASCUS/LSIL Triage Study) study showed that
HPV testing for women with ASCUS Pap smear results was 96%
sensitive for women with disease, while the sensitivity of
the Pap smear was 85%.
In addition, we are participating in HPV clinical trials involving more
than 90,000 women on five continents. Successful completion, and publication of
the results, of these clinical trials should help to accelerate further adoption
of our HPV Tests. The following is a summary of these trials:
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Country Lead Investigator Trial Description Size Target Completion
Date
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United States National Cancer Institute ALTS Borderline Pap Trial 7,000 Completed*
Canada Newfoundland Department of Health HPV Primary Screening 3,000 Completed**
Mexico Johns Hopkins; Mexican Government HPV Primary Screening 7,500 Completed**
Netherlands Free University of Amsterdam HPV Primary Screening 40,000 December 2001
United Kingdom Imperial Cancer Research Fund HPV Primary Screening 10,000 December 2000
Germany University of Tubingen HPV Primary Screening 8,000 Completed**
Russia University of Turku, Finland HPV Primary Screening 12,000 December 2001
Brazil University of Rio Grande do Sul HPV Primary Screening 2,000 December 2000
Argentina Institut Papincolau HPV Primary Screening 1,000 Completed**
China Cleveland Clinic Foundation HPV Primary Screening 2,500 Completed**
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* Trials have been completed and preliminary results published; awaiting
publication of final results.
** Trials have been completed and the results are being prepared for
publication.
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IMPROVING WOMEN'S HEALTH AWARENESS
We actively support the efforts of the American Medical Women's
Association and the National Cervical Cancer Public Education Campaign to inform
women about the link between HPV and cervical cancer. During fiscal year 2000
the results of multiple clinical studies confirming the benefits of HPV testing
using our HPV Tests were presented at the 10th World Congress of Cervical
Pathology and Colposcopy in Buenos Aires, Argentina; the EUROGIN 2000 Conference
(Global Challenge of Cervical
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Cancer Prevention) in Paris, France; and, subsequent to the end of the fiscal
year, the 18th International Papillomavirus Conference in Barcelona, Spain. In
the United Kingdom, our HPV Tests are being used as part of a pilot program to
use HPV testing as part of the national screening program for cervical cancer.
In the United States, physician groups such as Physicians for Women's Health,
the nation's largest women's health group practice, announced revised guidelines
making our HPV Tests the preferred method of evaluating patients with ASCUS Pap
smear results. During the fiscal year, we began a program with leading U.S.
academic centers that we call the HPV Centers of Excellence program, a program
designed to facilitate the education of healthcare providers and women about the
clinical applications of HPV DNA testing. The initial participants in the HPV
Centers of Excellence program include Yale University Medical Center, the
Cleveland Clinic Foundation, and the Johns Hopkins University.
INCREASING REIMBURSEMENT COVERAGE
We are working to expand reimbursement coverage for our HPV Tests through
targeted clinical studies and outcome-oriented research. These studies are being
performed in conjunction with managed care organizations, university-based
clinicians and governmental authorities worldwide. Our efforts to increase
reimbursement coverage were boosted in May 1999 when an FDA advisory panel
recommended expanded labeling for our Hybrid Capture tests to incorporate the
signal amplification description. We expect this expanded labeling to provide a
distinct competitive advantage in the market, because reimbursement levels for
amplified tests are up to two times the level for non-amplified tests.
The Health Care Financing Administration (HCFA), administrator for
Medicaid and Medicare, has established reimbursement for our HPV Test, and the
American Medical Association has assigned specific CPT codes (necessary for
reimbursement) for HPV testing. Third party payors and managed care entities
that provide health insurance coverage to 140 million people currently authorize
reimbursement for our HPV Test, up from 50 million people in fiscal 1999.
BLOOD VIRUSES
Blood viruses, such as HBV, CMV and HIV, are leading causes of morbidity
and death and, until recently, were untreatable. Rapid, accurate and ongoing
detection of blood viruses and monitoring of viral load is essential for
effective patient management. Over the last several years, antiviral therapies
have been developed to treat these diseases. To maximize the efficacy of these
expensive and sometimes toxic therapies, physicians rely on viral load
monitoring to measure the level of virus present in the patient's system. By
precisely measuring viral load and identifying patients who are not responding
to therapy early in their treatment, physicians are better able to tailor
antiviral therapies by more precisely monitoring individual responses,
recognizing when a patient develops drug resistance and projecting how quickly
the infection will progress to chronic disease.
The commercialization strategy for our blood virus business is to develop
tests for the hepatitis, transplant and AIDS testing markets where the
sensitivity and viral load monitoring capabilities of our Hybrid Capture System
provide a competitive advantage over other methods, and where our products can
be marketed to laboratories through an established market participant such as
Abbott in the case of HBV and CMV in Europe or through our own marketing and
sales efforts. Our Hybrid Capture System utilizes signal amplification and can
detect and quantitate as few as 100 molecules of the HIV virus and as many as
one billion copies of the hepatitis B virus.
We believe our Hybrid Capture HBV Tests are the leading HBV DNA tests in
the European market. These tests are used to monitor viral load to determine
disease prognosis and optimize the efficacy of the antiviral therapy. Currently,
our HBV Tests are used by more than 250 laboratories
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worldwide. We expect that demand for HBV DNA testing will continue to grow as
new hepatitis treatment guidelines incorporating viral load monitoring are
implemented. Our second important blood virus testing product is our Hybrid
Capture CMV Test, which delivers both qualitative and quantitative viral load
information to accurately differentiate active from latent CMV infection for
AIDS, transplant and other patients with impaired immune systems. We market our
CMV Test for patients receiving CMV antiviral therapy, select transplant
patients with active CMV infection needing protective therapy, and AIDS patients
at risk of developing CMV-related organ disease who could benefit from
preemptive therapy.
We have developed a prototype Hybrid Capture HIV Test based on our Hybrid
Capture technology for HIV viral load monitoring. Our HIV Test has been shown in
independent studies to provide highly sensitive, accurate, reproducible and
reliable measurements of HIV viral load. We are not actively developing or
attempting to commercialize our HIV Test at this time.
GENOMICS AND PHARMACEUTICAL RESEARCH
With the completion of the sequencing of the human genome in June 2000,
there are significant opportunities to develop new gene analysis products for
genome research, for pharmaceutical companies working to develop new
therapeutics and for companies such as Digene who seek to develop new and
innovative in vitro diagnostic products. We are working to commercialize our
Hybrid Capture technology in these new markets. Our strategy is to extend our
core technology to allow testing of the estimated 100,000 human genes, and the
genes of the bacterial and viral genomes that have been identified, using the
signal-amplified, antibody-based methods incorporated in our Hybrid Capture
technology. We believe that products based on Hybrid Capture will have
significant competitive advantages in terms of performance, speed, ease of use,
and cost. We expect to commercialize our technology to researchers and
commercial laboratories who desire to perform gene detection on microarray
chips, and to pharmaceutical companies who wish to perform millions of tests for
a subset of specific genes. Ultimately, based on knowledge gained from these
efforts, we expect to identify and commercialize innovative, new gene-based
tests to help maintain our leadership position in the women's cancers and
infectious disease market and to help us enter new diagnostic testing markets.
During fiscal 2000 we also entered into an alliance with 3M Pharmaceuticals, a
leader in the treatment of genital warts, to promote the use of HPV screening
and the use of 3M's products for the diagnosis and treatment of external genital
warts.
We approach the genomics and pharmaceutical research market by seeking to
enter into strategic partnerships that enable us to identify, develop and
validate our technologies for new gene-based testing opportunities. The first
such partnership is our exclusive technology and marketing partnership with
Applied Biosystems, one of the world leaders in this field. Our partnership was
formed to address opportunities in high-throughput gene expression screening for
pharmaceutical drug discovery. Our second initiative is in the area of microchip
arrays. We have successfully applied Hybrid Capture as a detection system for
microchip arrays and we are working to commercialize a family of products in
this area in the future. In addition, we are expanding our leadership position
in cervical cancer disease management through an active in-licensing program for
potential new genetic markers and through collaborations with vaccine and drug
development programs of major pharmaceutical companies.
PRODUCTS
Our Hybrid Capture System, which is the basis for all of our gene
analysis testing systems, is a rapid, accurate, easy to use, ultra-sensitive
technology that can be used in virtually any laboratory with standard equipment.
We believe that our Hybrid Capture System is a significant improvement over
other detection technologies because of its specificity, rapid processing time,
improved accuracy and ability to
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quantitate viral load. We have developed two versions of our Hybrid Capture
technology, the Hybrid Capture I and Hybrid Capture II Systems. The Hybrid
Capture I System, our first generation DNA hybrid detection system, tests
samples individually in polystyrene tubes and has been approved by the FDA for
the follow-up screening of HPV in women with equivocal Pap smears and for
detection of CMV DNA. The Hybrid Capture II System, which was approved by the
FDA for the detection of HPV in March 1999, cleared by the FDA for the detection
of chlamydia in October 1999, cleared by the FDA for the detection of gonorrhea
in December 1999, and cleared by the FDA for the simultaneous detection of
chlamydia and gonorrhea in March 2000, uses a 96-well microtiter plate format
that permits simultaneous screening of multiple samples from a single plate and
is designed to be more efficient, less expensive and easier to use than the
Hybrid Capture I System. Our Hybrid Capture products are now used by more than
1,000 laboratories worldwide.
The following table summarizes the commercial and regulatory status and
potential worldwide market of our Hybrid Capture tests:
HYBRID CAPTURE TESTS(1)
<TABLE>
<CAPTION>
Potential
---------
Outside Worldwide
------- ---------
Disease Target United States United States Market
-------------- ------------- ------------- ------
<S> <C> <C> <C>
Women's Cancers
and Infectious
Diseases
HPV Approved and marketed as an Marketed as a primary 150
adjunct to Pap smears for test for cervical cancer million(2)
cervical cancer screening. screening. Distributed
in Europe, Africa and the
Middle East by Abbott.
Chlamydia and Approved by the FDA in March Marketed. Distributed in 89 million(3)
Gonorrhea 2000. U.S. marketing launch Europe, Africa and the (chlamydia)
by Abbott in fiscal 2001 Middle East by Abbott. 62 million(3)
(gonorrhea)
Herpes simplex Under development. Under development. 107
million(3)
Blood Viruses
HBV Available for research use Marketed. Distributed in 300
only. Europe, Africa and the million(4)
Middle East by Abbott.
CMV Cleared and marketed for Marketed. Distributed in 1 million(5)
diagnosing infection in organ Europe, Africa and the
transplant, bone marrow Middle East by Abbott.
transplant and HIV-positive
AIDS patients.
</TABLE>
--------------------
1 As described herein, certain of our products have not received marketing
approvals or clearance from the FDA or certain foreign authorities. There
can be no assurance that any such products will receive approvals on a
timely basis, if at all.
2 Represents estimate of the total number of Pap smears performed annually.
3 Represents estimated number of new cases worldwide on an annual basis.
4 Represents estimated number of cases worldwide of chronic HBV infection.
5 Represents estimated number of cases worldwide of active CMV infection.
SALES AND MARKETING
Our sales and marketing strategy focuses on achieving broad market
acceptance of our Hybrid Capture technology in the areas of women's cancers and
infectious diseases and blood virus testing. We
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sell our Hybrid Capture products either directly or through strategic partners
or distributors to clinical laboratories and healthcare providers worldwide.
Acceptance of our Hybrid Capture technology requires improving awareness,
both in the United States and in international markets, of the prevalence and
the severity of cervical cancer and sexually transmitted diseases among women,
and, more importantly, identifying our Hybrid Capture tests as a cost-efficient
means of helping to prevent disease. We believe that increased education and
awareness will create a powerful consensus that diseases that are preventable
with the help of a commercially available and cost-effective test should be
targeted by physicians and managed care providers alike. We intend to promote
increased awareness through our active sponsorship of educational programs,
including programs with affiliated Centers of Excellence, and through links from
our world wide web site to the web sites of organizations dedicated to educating
the public and physicians about improvements in healthcare. Additionally, we
intend to continue our public relations campaign, conducted through our
expanding network of women's health advocates, public health providers and
physicians organizations, carrying our message of low cost prevention to
physicians, laboratories and the public.
Currently, we sell our products either directly or through strategic
partners or distributors to more than 1,000 laboratories worldwide, including
national labs such as Quest Diagnostics, Laboratory Corporation of America,
Unilab and American Medical Laboratories.
NORTH AMERICAN MARKET
We currently market our products in the United States and Canada to
substantially all clinical reference laboratories through a direct sales force
supported by technical and customer service representatives.
Adoption of our Hybrid Capture HPV Tests by managed care providers and
the laboratory testing market is essential for rapidly achieving broad-based
market acceptance. We have made significant progress in both of these areas.
HCFA has established reimbursement for our HPV Test, and the American Medical
Association has assigned specific CPT codes (necessary for reimbursement) for
HPV testing. Third party payors and managed care entities that provide health
insurance coverage to 140 million people currently authorize reimbursement for
our HPV Test.
In addition, substantially all major clinical reference laboratories in
the United States offer our HPV Test. We work closely with clinical reference
laboratories, third party payors, healthcare providers and their affiliated
physicians to help accelerate the adoption of our HPV Test. As part of this
effort, we collaborated with Kaiser Permanente in a study published in JAMA
resulting in Kaiser's use of our HPV Test for patient management of women with
ASCUS Pap smear results. We are marketing the data from that study and
additional clinical trial validation data to other managed care providers,
physicians and government-funded national screening programs. As part of this
effort, we have established a Centers of Excellence program with a group of the
top academic medical centers in the United States. We also participated in a
7,000 patient National Cancer Institute study designed to establish the clinical
utility and cost effectiveness of HPV testing of women with ASCUS Pap smear
results. The preliminary results of this trial were released in March 2000
indicating that our HPV Test was 96% sensitive for detection of women with
disease while the sensitivity of the Pap smear was 85%. We expect the final
publication of these results to help change the standard of care for ASCUS
patient management in the United States to incorporate HPV testing.
We market our HPV Test to physicians through joint marketing programs
with clinical reference laboratories and through co-marketing arrangements with
other strategic partners. For example, we currently market our HPV Test together
with Cytyc Corporation's ThinPrep Pap Test, a sample
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preparation system that allows for the automated preparation of cervical cell
specimens. The collaboration with Cytyc is designed to provide physicians with a
cost-effective and practical procedure for better management of those patients
with equivocal Pap smears. The combined single-sample approach, approved by the
FDA in September 1997, enables the use of our HPV Test with the Cytyc ThinPrep
Pap Test to eliminate the need for a return office visit to collect a second
sample for HPV DNA testing.
INTERNATIONAL MARKETS
Internationally, we are working to establish HPV testing as the standard
of care for primary cervical cancer screening. We have entered into a marketing
and distribution agreement with Abbott for the distribution of certain of our
products in Europe, Africa and the Middle East. Abbott is one of the world's
leading diagnostic companies. We are working together with Abbott to promote the
use of HPV testing for primary screening in the European market.
In Brazil, our products are sold by Digene do Brazil LTDA, a
majority-owned subsidiary. We use independent distributors in the rest of South
America, Asia and the remaining countries in which we sell our products. In
Japan, Mitsubishi Chemical Company acts as our distributor. Mitsubishi is
working to obtain regulatory approval and reimbursement for our Hybrid Capture
HPV, Chlamydia and Gonorrhea Tests.
TECHNOLOGY
Our Hybrid Capture System utilizes signal amplification and combines the
accuracy of nucleic acid probe diagnostics with the ease of use and mass-market
capabilities of antibody-based immunodiagnostic systems that are routinely used
by virology and immunology laboratories today. Our Hybrid Capture technology
uses RNA probes to bind specific DNA sequences to create hybrid DNA:RNA
molecules. The captured hybrids are then reacted with our proprietary signal
amplification system, which uses antibodies to detect DNA:RNA hybrids. Our
Hybrid Capture technology offers a rapid, accurate and easy-to-use detection
system that can be performed in any laboratory with standard equipment. These
capabilities are particularly important in the commercial markets we have
targeted.
We have established a strong proprietary position in our Hybrid Capture
technology with approximately 100 patents and pending patent applications for
our technology and the gene sequences used in our products. We have an exclusive
license to a patent covering the use of the monoclonal antibodies that are
central to the Hybrid Capture System. Additionally, in July 1999, the European
Patent Office granted us a broad patent covering the entire Hybrid Capture
System. We have exclusive licenses and co-exclusive cross licenses with the
Institut Pasteur to issued and pending patents covering the use of HPV genetic
sequences from six patented cancer-causing HPV types, including one license
obtained in April 2000. We believe that these patents create a unique
proprietary position for us in the HPV testing field.
Our Hybrid Capture technology has been applied successfully to a number
of testing formats including individual tubes (Hybrid Capture I), 96-well
microtiter plates (Hybrid Capture II), 384-well test arrays and DNA gene chips.
Our Hybrid Capture I and II test formats are used in our commercially available
testing products. Using these test systems, it is possible to economically
process between 4 and 360 clinical specimens in a single technician shift. As
part of our partnership efforts, Applied Biosystems offers our EAS(TM) gene
expression tests based on Hybrid Capture technology as products and services to
the pharmaceutical drug discovery, biotechnology and agricultural markets for
high-throughput gene expression screening. The automated Hybrid Capture gene
expression screening services offered by Applied Biosystems employ high-capacity
automation capable of running 100,000 tests per day.
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The following diagram illustrates the key elements of the Hybrid Capture
System.
[Diagram with explanatory notes showing how our Hybrid Capture technology
platform allows for the detection of specific DNA and RNA sequences and
therefore has potential applications for a variety of diagnostic and
monitoring tests.]
RESEARCH AND DEVELOPMENT
One of our key goals is to expand continually our core technology and
expertise in molecular diagnostics in order to remain at the forefront of DNA
testing for infectious diseases and to capture new high-growth and high-margin
market opportunities. To achieve this goal, we have invested aggressively in
research and development and particularly in clinical trials to validate the
performance of our new products.
Our research programs are geared to deliver continuing improvements in
the detection of cervical cancer and sexually transmitted infections, including
chlamydia, gonorrhea and herpes, and we seek to increase our technological
leadership position in these areas. We are developing a high-throughput
automation system for our Hybrid Capture II tests - the Rapid Capture(TM)
System. The new system, which is expected to be commercially launched during
fiscal 2001, is expected to allow processing of 360 tests in a six-hour shift.
Further, we are working to make it possible for a physician to order all four of
these tests and cytology results simultaneously. Our single-sample system is now
available in Europe and South America for the detection of HPV, chlamydia and
gonorrhea. We are continuing development of our herpes test. We have developed
our tests so that they can be performed on samples collected for routine
liquid-based Pap smears, and we have developed our proprietary single patient
sample system for HPV, chlamydia and gonorrhea testing which we expect to
introduce in the United States during fiscal 2001. Our basic research programs
are directed to the continued expansion of our single-sample strategy. We are
developing a Universal Collection Medium (UCM), which will allow simultaneous
DNA testing for the infection agents highlighted above, liquid cytology
capabilities, gene expression analysis and detection of proteins by immunoassay
methods. The UCM system is being designed to provide compatibility with the
major automated liquid cytology methods that are commercially available today.
We intend to continue our investment in the women's cancers and
infectious diseases and blood virus areas and to expand efforts to automate our
existing tests. We expect that the first of these tests, our automated Chlamydia
and Gonorrhea Test, will be introduced in the United States by Abbott during
fiscal 2001.
MANUFACTURING
Manufacturing our products involves combining more than 200 biological
reagents, inorganic and organic reagents and kit components (such as vials and
packaging material) into finished test kits. Biological reagents include DNA and
RNA probes, antibodies and detection reagents. These biological reagents are
currently manufactured in our new facility in Gaithersburg, Maryland, which
received validation approval from the FDA in April 2000. We believe that we
currently have sufficient manufacturing capacity for our existing demand and
that the new facility will allow us to expand our production capability for the
foreseeable future.
We have established a quality control program, including a set of
standard manufacturing and documentation procedures intended to ensure that,
where required, our products are manufactured in accordance with quality service
regulations (QSR). We received ISO 9001 certification in June 1999.
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COMPETITION
The medical diagnostics and biotechnology industries are subject to
intense competition. Our competitors in the United States and abroad for
gene-based diagnostic probes include Roche Diagnostics, Bayer Corporation,
Chiron Corporation and Gen-Probe Incorporated. We also compete with Abbott, even
though they act as our marketing partner in Europe, Africa and the Middle East.
We believe the primary competitive factors in the market for gene-based
probe diagnostics and other screening devices are clinical performance and
reliability, ease of use, cost, proprietary position, the competitor's share of
the existing market, regulatory approvals and availability of reimbursement.
Other companies, including large pharmaceutical and biotechnology
companies, may enter the market for gene-based probe diagnostics. Some of our
products compete against existing screening, monitoring and diagnostic
technologies, including the tissue culture and antigen-based diagnostic
methodologies. In marketing our HPV Tests for the follow-up screening of women
with equivocal Pap smears in the United States, we compete with well-established
follow-up procedures, such as Pap smear re-testing, colposcopy and biopsy, which
are widely accepted and have a long history of use. Additionally, in the event
we are able to obtain FDA and applicable foreign approvals to market our HPV
Tests for primary cervical cancer screening, either in conjunction with or
separate from the Pap smear, our products will compete against the Pap smear,
which is widely accepted as an inexpensive and, with regular use, adequate
screening test for cervical cancer. Future technological advancements designed
to improve quality control over sample collection and preservation and to reduce
the Pap smear test's susceptibility to human error may serve to increase
physician reliance on the Pap smear and solidify its market acceptance. Further,
if marketed as an adjunct to the Pap smear test for primary screening in the
United States, our HPV Tests may be seen as adding unnecessary expense to the
accepted cervical cancer screening methodology. Consequently, our HPV Tests may
not be able to attain market acceptance as primary screening tests.
We face competition from a variety of technologies in the blood virus
area. There are several advanced technologies commercially available for the
detection and viral load measurement of HBV and CMV. Thus, our tests for HBV or
CMV may not be able to gain or maintain market acceptance.
Our existing and potential competitors may be in the process of seeking
FDA or foreign regulatory approval for their respective products or may also
enjoy substantial advantages over us in terms of research and development
expertise, experience in conducting clinical trials, experience in regulatory
matters, manufacturing efficiency, name recognition, sales and marketing
expertise and distribution channels. In addition, many of these companies may
have established third-party reimbursement for their products. We may not be
able to compete effectively against existing or future competitors, which may
have a material adverse effect on our business, financial condition and results
of operations.
GOVERNMENT REGULATION
The medical devices to be marketed and manufactured by us are subject to
extensive regulation by the FDA and, in some instances, by foreign governments.
Pursuant to the Federal Food, Drug, and Cosmetic Act, and the related
regulations, the FDA regulates the clinical testing, manufacture, labeling,
distribution and promotion of medical devices. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recalls or seizures of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing approvals, and criminal
prosecution. The FDA also has the authority to request repair, replacement, or
refund of the cost of any device that we manufacture or distribute.
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In the United States, medical devices and diagnostics are classified into
one of three classes (class I, II or III), on the basis of the controls deemed
necessary by the FDA to reasonably assure their safety and effectiveness. Under
FDA regulations, class I devices are subject to general controls (for example,
labeling and adherence to QSR), and class II devices are subject to general and
special controls (for example, performance standards, postmarket surveillance,
patient registries and FDA guidelines). Generally, class III devices are those
which must receive premarket approval (PMA) by the FDA to ensure their safety
and effectiveness (for example, life-sustaining, life-supporting and implantable
devices, or new devices which have not been found substantially equivalent to
legally marketed devices).
Before a new device can be introduced into the market, the manufacturer
generally must obtain marketing clearance through the filing of either a 510(k)
notification or a PMA application. A 510(k) clearance will be granted if the
submitted information establishes that the proposed device is "substantially
equivalent" to a legally marketed class I or II medical device or to a
preamendment class III medical device (i.e. on the market on or before May 28,
1976) for which the FDA has not called for a PMA. It generally takes from four
to twelve months from submission to obtain a 510(k) clearance, but it may take
longer. The FDA may determine that a proposed device is not substantially
equivalent to a legally marketed device or that additional information or data
is needed before a substantial equivalence determination can be made, either of
which could delay market introduction of a new product. A request for additional
data may require that clinical studies of the device's safety and effectiveness
be performed. Additionally, modifications or enhancements that could
significantly affect the safety or effectiveness of the device or that
constitute a major change to the intended use of the device will require new
510(k) submissions or a PMA filing.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed class I or class II device or if it is a
preamendment class III device for which the FDA has called for a PMA. A PMA
application must be supported by valid scientific evidence, including
preclinical and clinical trial data, to demonstrate the safety and effectiveness
of the device. The PMA application must also contain the results of all relevant
bench tests, laboratory and animal studies, a complete description of the device
and its components, a detailed description of the methods, facilities and
controls used to manufacture the device in addition to device labeling and
advertising literature.
If a PMA application is accepted for filing, the FDA begins an in-depth
review of the submission. FDA review of a PMA application generally takes one to
two years from the date the PMA application is accepted for filing, but may take
significantly longer. The PMA review process includes an inspection of the
manufacturer's facilities to ensure that the facilities are in compliance with
the applicable QSR requirements. In addition, an advisory committee made up of
clinicians and/or other appropriate experts is typically convened to evaluate
the application and make recommendations to the FDA as to whether the device
should be approved. The PMA process can be expensive, uncertain and lengthy. A
number of devices for which FDA approval has been sought by other companies have
never been approved for marketing.
Modifications to a device that is the subject of an approved PMA, its
labeling or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, but limited to the
information necessary to support the proposed change.
Although clinical investigations of most devices are subject to the
investigational device exemption (IDE) requirements, clinical investigations of
in vitro diagnostic (IVD) tests are exempt from the IDE requirements, including
FDA approval of investigations, provided the testing meets certain exemption
criteria. IVD manufacturers must also establish distribution controls to assure
that IVDs
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distributed for the purpose of conducting clinical investigations are used only
for that purpose and not improperly commercialized. Pursuant to current FDA
policy, manufacturers of IVDs labeled for investigational use only (IUO) or
research use only (RUO) are encouraged by the FDA to establish a certification
program under which investigational IVDs are distributed to or utilized only by
individuals, laboratories, or health care facilities that have provided the
manufacturer with a written certification of compliance indicating that the IUO
or RUO product will be restricted in use and will, among other things, meet
institutional review board and informed consent requirements.
Export of products subject to the 510(k) notification requirements, but
not yet cleared to market, are permitted provided certain requirements are met.
Unapproved products subject to the PMA requirements must be approved by the FDA
for export under certain circumstances. To obtain FDA export approval, certain
requirements must be met and information must be provided to the FDA, including,
with some exceptions, documentation demonstrating that the product is approved
for import into the country to which it is to be exported and, in some
instances, safety data for the devices. The FDA may not grant export approval
when such approval is necessary, and countries to which the devices are to be
exported may not approve the devices for import. Failure on our part to obtain
export approvals when required, could significantly delay and impair our ability
to export our products and could have a material adverse effect on our business,
financial condition and results of operations.
In April 1995, we obtained a PMA approval for our HPV Test to detect the
presence of HPV in women with equivocal Pap smears. In August 1997, we obtained
FDA approval of a PMA supplement for the use of our HPV Test using the Cytyc
sample collection system. We received FDA marketing clearance for our Hybrid
Capture II HPV Test in March 1999. We also intend to submit PMA supplements to
the FDA to obtain market approval for use of our Hybrid Capture II HPV Test as a
primary cervical cancer screening test either in conjunction with or separate
from Pap smear testing. We anticipate that a substantial amount of clinical data
will be required to support the PMA supplements. The data we submit may not be
adequate to support the use of the Hybrid Capture II HPV Test as a primary
cervical cancer screening test in the United States. Failure to obtain FDA
approval for the use of the Hybrid Capture II HPV Test as a primary cervical
cancer screening test because of inadequate data or for any other reason could
have a material adverse effect on our business, financial condition and results
of operations.
We received FDA marketing clearance for our Hybrid Capture I CMV Test in
October 1998, and received three FDA marketing clearances for our Chlamydia and
Gonorrhea Tests: one for our Hybrid Capture II Chlamydia Test in October 1999,
one for our Hybrid Capture II Gonorrhea Test in December 1999, and the last for
our combination Hybrid Capture II Chlamydia/Gonorrhea Test in March 2000.
We are developing a test for HBV that is a class III device that will
necessitate the collection of extensive clinical data and the eventual
filing and approval of a PMA application. We may not be able to collect
adequate data to support a PMA application for the HBV Test, and if a PMA
application is filed, FDA approval may not be granted in a timely manner, if
at all.
We are exporting our HPV Test as a primary cervical cancer screening test
prior to obtaining PMA approval for this use in the United States. We are also
exporting our HBV Test for clinical use abroad prior to pursuing PMA approval in
the United States. Exportation of the HPV Test as a primary cervical cancer
screening test and export of the HBV Test can be undertaken without prior FDA
approval of a PMA provided, among other things, that:
- the marketing of these tests is not contrary to the laws of the
country to which they are intended for import,
- they are manufactured in substantial conformance with the QSR and
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- we have valid marketing authorization by any member country of the
European Union, Australia, Canada, Israel, Japan, New Zealand,
Switzerland or South Africa.
We also must provide the FDA with simple notification indicating the
products to be exported and the countries to which they will be exported. FDA
approval must be obtained for exports of products subject to the PMA
requirements if these export conditions are not met. We may not be able to
obtain and maintain valid marketing authorization for these tests from one of
the listed countries and the FDA may not grant specific export approval. Our
failure to obtain and maintain valid marketing authorization from one of the
listed countries, or otherwise meet the FDA export approval requirements, could
have a material adverse effect on our business, financial condition and results
of operations.
We have developed viral and bacterial tests that we distribute in the
United States on a RUO basis. Failure by us or recipients of our RUO devices to
comply with the regulatory limitations on the distribution and use of RUO
devices could result in enforcement action by the FDA that would adversely
affect our ability to distribute the tests prior to obtaining FDA clearance or
approval for them.
Any products manufactured or distributed by us pursuant to FDA clearances
or approvals are subject to pervasive and continuing regulation by the FDA,
including recordkeeping requirements and reporting of adverse experiences with
the use of the device. Device manufacturers are required to register their
establishments and list their devices with the FDA and are subject to periodic
inspections by the FDA and certain state agencies.
The FDA actively enforces regulations prohibiting the promotion of
devices for unapproved ("off label") uses and the promotion of devices for which
premarket clearance or approval has not been obtained. Failure to comply with
these requirements can result in regulatory enforcement action by the FDA and
possible limitations on the promotion of our products.
Our products and we are subject to a variety of state laws and
regulations in those states and localities where our products are or will be
marketed. Any applicable state or local regulations may hinder our ability to
market our products in those states or localities. Manufacturers are also
subject to numerous federal, state and local laws relating to such matters as
safe working conditions, manufacturing practices, environmental protection, fire
hazard control and disposal of hazardous or potentially hazardous substances. We
may be required to incur significant costs to comply with such laws and
regulations now or in the future and such laws or regulations may have a
material adverse effect on our business, financial condition and results of
operations.
The introduction of our developmental stage test products in foreign
markets will also subject us to foreign regulatory clearances, which may impose
additional substantial costs and burdens. International sales of medical devices
are subject to the regulatory requirements of each country. The regulatory
review process varies from country to country and many countries also impose
product standards, packaging requirements, labeling requirements and import
restrictions on devices. In addition, each country has its own tariff
regulations, duties and tax requirements.
The approval by the FDA and foreign government authorities is
unpredictable and uncertain, and the necessary approvals or clearances may not
be granted on a timely basis or at all. Delays in receipt of, or a failure to
receive, such approvals or clearances could have a material adverse effect on
our business, financial condition and results of operations.
Changes in existing requirements or adoption of new requirements or
policies could adversely affect our ability to comply with regulatory
requirements. Failure to comply with regulatory requirements
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could have a material adverse effect on our business, financial condition and
results of operations. We may be required to incur significant costs to comply
with laws and regulations in the future, and laws or regulations may have a
material adverse effect upon our business, financial condition and results of
operations.
The Federal Food, Drug, and Cosmetic Act requires devices to be
manufactured in accordance with QSRs which impose certain procedural and
documentation requirements upon us with respect to manufacturing and quality
assurance activities. Noncompliance with QSRs can result in, among other things,
fines, injunctions, civil penalties, recalls or seizures of products, total or
partial suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing approvals,
and criminal prosecution. The FDA also has proposed changes to the QSRs that, if
finalized, would likely increase the cost of compliance with the requirements.
Any failure by us to comply with QSR requirements could have a material adverse
effect on our business, financial condition and results of operations.
We must comply with similar registration requirements of foreign
governments and with import and export regulations when distributing our
products to foreign nations. Each foreign country's regulatory requirements for
product approval and distribution are unique and may require the expenditure of
substantial time, money and effort. The regulation of medical devices in a
number of such jurisdictions, particularly in the European Union, continues to
develop and new laws or regulations may have a material adverse effect on our
business, financial condition and results of operations. Noncompliance with
state, local, federal, or foreign regulatory requirements can result in fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, delay or denial or withdrawal of premarket clearance
or approval of devices and criminal prosecution.
The IVD directive promulgated by the European Union went into effect in
June 2000 and we must be in full compliance with such directive by 2003. One of
the critical components of such compliance is ISO 9001 certification, which we
received in June 1999.
LICENSES, PATENTS AND PROPRIETARY INFORMATION
Our success will depend in part on our ability to obtain and maintain
patent protection for our technologies, products and processes, preserve our
trade secrets, and operate without infringing the proprietary rights of other
parties. Because of the substantial length of time and expense associated with
bringing new products through development to the marketplace, the biotechnology
industry places considerable importance on obtaining and maintaining patent and
trade secret protection for new technologies, products and processes. Despite
these precautions, it may be possible for unauthorized third parties to utilize
our technology or to obtain and use information that we regard as proprietary.
The laws of some countries do not protect our proprietary rights in our
technologies, products and processes to the same extent as do the laws of the
United States.
We hold four issued U.S. patents relating to HPV types 35, 43, 44 and 56.
These patents expire in 2007. We have also filed corresponding foreign patent
applications in certain countries. The patents relating to HPV types 35, 43 and
56 have been licensed to Institut Pasteur (see cross license discussion below).
In addition, we are the exclusive, worldwide licensee of a U.S. patent
application and certain corresponding foreign patents and patent applications
relating to HPV type 52 and a U.S. patent and certain corresponding foreign
patents relating to the use of the L1 gene sequence to detect specific HPV types
(see Georgetown license discussion below) as well as certain trade secrets
relating to HPV type 58 (see Kanebo license discussion below).
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Through a cross license with Institut Pasteur, we have obtained a
worldwide license to U.S. patents and patent applications and corresponding
foreign patent applications relating to HPV types 39 and 42 and foreign patents
and applications relating to HPV type 33. In return, we have granted to Institut
Pasteur a worldwide license to our three U.S. patents and corresponding foreign
patents and applications relating to HPV types 35, 43 and 56. We have granted
Institut Pasteur the right to extend the scope of the cross license to include
the U.S. patent and corresponding patent applications relating to HPV type 44 at
such time as Institut Pasteur shall have discovered and developed an additional
HPV type which is equivalent in value to HPV type 44. In return for such an
extension, we will receive a license to the new HPV type discovered and
developed by Institut Pasteur. The cross license is co-exclusive, except that
Institut Pasteur has sublicensed its rights without the right to grant
sublicenses to Beckman Instruments, Diagnostic Pasteur, and their affiliates. A
sublicensee may use its rights under the cross license to develop additional
products or services that compete with our products. We believe that the cross
license terminates on the last to expire of the underlying patent rights. Any
prior termination of the cross license could have a material adverse effect on
our business, financial condition and results of operations.
On April 5, 2000, we entered into an exclusive worldwide license with
Institut Pasteur relating to a U.S. patent issued November 9, 1999 claiming the
genetic sequence of HPV types 68 and 70 and the detection of HPV 68 and 70 using
DNA testing methods. Under the license we can use our rights to develop and sell
products using the licensed technology and pay royalties on such products. The
term of the license expires upon expiration of the licensed patent, except that
it continues for the commercial life of the products in countries where there is
no licensed patent.
Through a license with Georgetown University, we have obtained exclusive,
worldwide rights to a U.S. patent application and corresponding foreign patents
and patent applications relating to HPV type 52 and to a U.S. patent and
corresponding foreign patents relating to the use of the L1 gene sequence to
detect specific HPV types. Unless terminated earlier, the Georgetown license
will terminate upon the last to expire of the licensed patent rights. All of the
issued foreign patents relating to HPV type 52 and the L1 related patent will
expire in 2008. We are obligated to make certain royalty payments to Georgetown
University based on the percentage of net sales of products incorporating the
licensed technologies.
Through a license with Kanebo, Ltd., we have obtained exclusive,
worldwide rights (except for Japan where Kanebo, Ltd. retained the right to
grant a non-exclusive sublicense to Toray Industries, Inc.) to a foreign patent
application relating to HPV type 58. Unless terminated earlier, the Kanebo
license expires on the later to occur of January 1, 2010 or the expiration of
any patent relating to HPV type 58.
We have filed U.S. patent applications relating to certain aspects of our
Hybrid Capture technology and in July 2000 we received a notice of allowance
from the U.S. Patent Office. A foreign filing of this patent has been granted in
Australia and was allowed by the European Patent Office in July 1999. We have an
exclusive license with the University of Hawaii for a patent covering monoclonal
antibodies for the detection of DNA: RNA hybrid complexes. We have also filed
U.S. patent applications in the areas of direct DNA probe labeling, signal
amplification and biotin-avidin probe chemistry and our continuous amplification
reaction amplification method. The inventions claimed by these applications may
be used in our DNA probes and any patents that issue from such applications may
provide some ancillary protection for certain aspects of our products. Under
current law, patent applications in the United States are maintained in secrecy
until patents are issued and patent applications in some foreign countries are
maintained in secrecy for a period of time after filing. A U.S. patent or any
foreign patents relating to our Hybrid Capture technology may not be issued to
us on a timely basis, or at all.
We have received inquiries regarding possible patent infringements
relating to, among other things, certain aspects of our Hybrid Capture
technology. We believe that the patents of others to which these inquiries
relate are either not infringed by our Hybrid Capture technology or are invalid.
However
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we may be subject to further claims that our technology, including our Hybrid
Capture technology, or our products infringe the patents or proprietary rights
of third parties. The defense of any such claims, if made, could be time
consuming and expensive, even if the outcome is favorable. An adverse outcome
could subject us to significant liabilities to third parties, require us to
obtain licenses from third parties, or require us to cease sales of related
products. Any licenses required under any such third party patents or
proprietary rights may not be made available on commercially reasonable terms,
if at all.
In June 1999, Enzo Biochem, Inc. ("Enzo") filed an action in the U.S.
District Court for the State of New York against Chugui Pharmaceutical Co., Ltd
and its subsidiaries Chugui Pharma U.S.A., Inc. and Gen-Probe Incorporated,
bioMerieux, Inc. and Becton Dickenson and Company for infringement of Enzo's
United States patent covering genetic probes for detecting Neisseria
gonorrhoeae. In October 1999, Enzo contacted Digene to determine whether
Digene's Hybrid Capture II Gonorrhea Test might infringe such patent. We have
evaluated this matter and its potential impact on our Gonorrhea Test. After
consultation with our patent counsel, we believe that the Enzo United States
patent is invalid. Our discussions with Enzo are continuing. We cannot assure
you that we will not become involved in litigation with Enzo.
The U.S. Patent and Trademark Office or any foreign patent office may not
grant patent protection for the subject matter of any pending patent
applications, and present or future patents may not provide commercially
significant protection to our present or future technologies, products, or
processes. Furthermore, others may develop independently substantially
equivalent proprietary information not covered by patents to which we have
rights or obtain access to our know-how, and others may be issued patents that
may prevent the sale of one or more of our products, or require licensing and
the payment of significant fees or royalties by us to third parties in order to
enable us to conduct our business. Such licenses may not be available or, if
available, may not be on terms acceptable to us or we may not be successful in
any attempt to redesign our products or processes to avoid infringement. Our
failure to obtain these licenses or to redesign our products or processes would
have a material adverse effect on our business, financial condition and results
of operations. Legal standards relating to the scope of claims and the validity
of patents in the biotechnology field are still evolving, and no assurance can
be given as to the degree of protection any patents issued to or licensed by us
will not be infringed by the products of others. Defense and prosecution of
patent claims can be expensive and time consuming, regardless of whether the
outcome is favorable to us, and can result in the diversion of substantial
resources from our other activities. An adverse outcome could subject us to
significant liabilities to third parties, require us to obtain licenses from
third parties, or require us to cease any related research and development
activities or product sales. In addition, the laws of certain countries may not
protect our intellectual property.
Our success is also dependent upon the skill, knowledge, and experience
of our scientific and technical personnel. To help protect our rights, we
require all employees, consultants, advisors and collaborators to enter into
confidentiality agreements that prohibit the disclosure of confidential
information to anyone outside Digene and require disclosure and, in most cases,
assignment to Digene of their ideas, developments, discoveries and inventions.
These agreements may not provide adequate protection for our trade secrets,
know-how or other proprietary information in the event of any unauthorized use
or disclosure.
THIRD-PARTY REIMBURSEMENT
Hospitals, physicians and other healthcare providers rely on third-party
payors, such as government entities, managed care organizations and private
insurance plans, to reimburse the costs and fees associated with the use of
diagnostic tests. Successful sales of our products in the United States and
other markets will depend, in part, on the availability of adequate
reimbursement from third-party payors such as government entities, managed care
organizations and private insurance plans. There is significant
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uncertainty concerning third-party reimbursement for the use of any medical test
incorporating new technology. Reimbursement by a third-party payor may depend on
a number of factors, including the payor's determination that the uses of our
tests are clinically useful and cost-effective, not experimental or
investigational, medically necessary and appropriate for the specific patient.
Since reimbursement approval is required from each payor individually, seeking
such approvals is a time consuming and costly process which requires us to
provide scientific and clinical support for the use of our tests for their
approved indications to each payor separately. Third-party reimbursement may not
be consistently available for our existing products for their approved
indications or any of our other products or indications that may be developed
and such third-party reimbursement may not be adequate. Federal and state
governmental agencies are increasingly considering limiting healthcare
expenditures. For example, the United States Congress is currently considering
various proposals to significantly reduce Medicaid and Medicare expenditures.
Such proposals, if enacted, could have a material adverse effect on our
business, financial condition and results of operations.
Outside the United States, we rely on a network of distributors to
establish reimbursement from third-party payors in their respective territories.
Our distributors have established reimbursement for our HPV Test in Germany, the
Czech Republic and Brazil. Accordingly, the establishment of reimbursement from
third-party payors in such countries is outside our control. Healthcare
reimbursement systems vary from country to country and, accordingly, there can
be no assurance that third-party reimbursement will be made available for our
products under any other reimbursement system. In Europe, Africa and the Middle
East, we are working closely with Abbott on advocacy efforts and work with
government and/or ministry officials to establish appropriate reimbursement
coverage for our products in the major countries in such territories.
Third-party payors are increasingly limiting reimbursement coverage for
medical diagnostic products and in many instances are exerting significant
pressure on medical suppliers to lower their prices. Lack of or inadequate
reimbursement by governmental and other third-party payors for our products
could have a material adverse effect on our business, financial condition and
results of operations.
PRODUCT LIABILITY
Our business is subject to product liability risks inherent in the
testing, manufacturing and marketing of our tests that are currently being
marketed and sold, as well as our other products in development. There can be no
assurance that product liability claims will not be asserted against us, our
collaborators or licensees. We currently maintain product liability insurance
coverage with a combined single limit of $6,000,000. This coverage may not be
adequate to protect us against future product liability claims, and product
liability insurance may not be available to us in the future on commercially
reasonable terms, if at all. Furthermore, we may not be able to avoid
significant product liability claims and the attendant adverse publicity.
Consequently, a product liability claim or other claim with respect to uninsured
or underinsured liabilities could have a material adverse effect on our
business, financial condition and results of operations.
EMPLOYEES
At September 15, 2000, we employed 148 persons, including 42 in research
and development, 47 in manufacturing, including quality assurance, 28 in sales
and marketing and 31 in accounting, finance, administration and regulatory
affairs. We are not a party to any collective bargaining agreements, and we
believe our relationships with our employees are good.
PRINCIPAL EXECUTIVE OFFICES
We were incorporated in Delaware in 1987. Our principal executive offices
are located at 1201 Clopper Road, Gaithersburg, Maryland 20878.
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ADDITIONAL CONSIDERATIONS
WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE WE WILL INCUR CONTINUED
LOSSES FOR THE FORESEEABLE FUTURE.
We have had substantial operating losses since incorporation in 1987 and
we have never earned a profit. At June 30, 2000, our accumulated deficit was
approximately $55.5 million. These losses have resulted principally from: (1)
expenses associated with our research and development programs; (2) the
expansion of our manufacturing facilities; and (3) the expansion of our sales
and marketing activities in the United States and abroad.
We expect that these operating losses will continue for the foreseeable
future. Our future profitability depends, in part, on:
- acceptance of our products by the medical community and
third-party payors;
- the success of our product development efforts;
- obtaining regulatory approvals for our product candidates from the
FDA and foreign regulatory authorities;
- our ability to expand our manufacturing capabilities to meet any
increase in demand for our products; and
- our sales and marketing activities.
OUR OPERATING RESULTS HAVE, AND MAY CONTINUE TO, FLUCTUATE SIGNIFICANTLY.
Our quarterly operating results have fluctuated significantly in the
past. We believe that they may continue to fluctuate significantly in the future
with lower product revenues in our first and second fiscal quarters (July 1
through December 31) as compared with our third and fourth fiscal quarters of
each year. The lower demand for certain women's health-related medical
procedures during the summer months and the December holiday season in the
United States and Europe primarily causes this fluctuation.
In addition, our quarterly operating results, as well as our annual
results, may fluctuate from period to period due to:
- the degree of market acceptance of our products;
- the timing of regulatory approvals and other regulatory
announcements;
- variations in our distribution channels;
- the timing of new product announcements and introductions of new
products by us and our competitors; and
- product obsolescence resulting from new product introductions.
Due to any one or more of these or other factors, in one or more future
quarters our results of operations may fall below the expectations of securities
analysts and investors.
OUR PRODUCTS MAY NOT BE FULLY ACCEPTED BY THE MARKET.
We cannot predict whether the worldwide medical community will accept our
technology to the extent we believe is appropriate or to the extent that is
required for us to operate profitably. Our success depends, in part, upon the
acceptance by third-party payors, clinical laboratories and healthcare providers
of our Hybrid Capture technology as a clinically useful and cost-effective
detection, screening and monitoring method in the areas of women's cancers and
infectious diseases and blood viruses.
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In addition, our growth and success will depend upon market acceptance by
the medical community of our HPV Tests as a primary cervical cancer screening
method and as a follow-up screening method for women with equivocal Pap smears.
This entails acceptance of our HPV Tests as a clinically useful and
cost-effective alternative to well-established follow-up procedures, such as Pap
smear re-testing, colposcopy and biopsy. HPV testing, in general, or our HPV
Tests, in particular, may not achieve market acceptance on a timely basis and,
in fact, may never achieve market acceptance.
Furthermore, technological advancements designed to improve quality
control over sample collection and preservation, and to reduce the Pap smear
test's susceptibility to human error, may serve to increase physician reliance
on the Pap smear and solidify its market acceptance. If marketed as an adjunct
to the Pap smear test for primary screening in the United States, our HPV Tests
may be seen as adding unnecessary expense to the accepted cervical cancer
screening methodology. Consequently, we can provide no assurance that our HPV
Tests will be able to achieve market acceptance as a primary screening test on a
timely basis, or at all.
OUR SALES TO INTERNATIONAL MARKETS ARE SUBJECT TO ADDITIONAL RISKS THAT ARE
BEYOND OUR CONTROL.
Our international sales and operations may be limited or disrupted by:
- the imposition of government controls;
- export license requirements;
- economic and political instability;
- price controls;
- trade restrictions;
- changes in tariffs; and
- difficulties with foreign distributors.
Generally, the extent and complexity of regulation of medical products
are increasing worldwide, with regulation in some countries already nearly as
exhaustive as that in the United States. We anticipate that this trend will
continue and that the cost and time required to obtain approval to market in any
given country will increase with no assurance that such approval will be
obtained. Additionally, fluctuations in currency exchange rates as well as
increases in duty rates and difficulties in obtaining required licenses and
permits may materially and adversely affect our business, financial condition
and results of operations.
We may not be able to successfully commercialize any of our products in
any foreign market beyond the level of commercialization we have already
achieved. In addition, the laws of some countries do not protect our proprietary
rights to the same extent as those of the United States.
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE.
We have limited sales and marketing experience and may be unable to
successfully establish and maintain a significant sales and marketing
organization. Due to the relatively limited market awareness of our products, we
believe that the marketing effort may be a lengthy process.
We intend to continue using a direct sales force as well as a network of
distributors to market and sell our HPV Tests, Chlamydia and Gonorrhea Tests and
blood virus tests. Our direct sales force may not succeed in promoting our
products to third-party payors, clinical laboratories, healthcare providers and
government entities. The risks of pursuing this strategy include:
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- we may be unable to recruit and retain skilled sales, marketing,
service or support personnel;
- agreements with distributors for U.S. and foreign sales may not be
available on terms commercially reasonable to us, or at all; and
- our sales and marketing efforts may be unsuccessful.
OUR SALES ARE HIGHLY DEPENDENT ON A SINGLE INTERNATIONAL DISTRIBUTOR.
In May 1999, we entered into a marketing and distribution agreement with
Abbott Laboratories. Under this agreement, Abbott is exclusively responsible for
sales and marketing of certain of our Hybrid Capture products in Europe, Africa
and the Middle East and our Hybrid Capture II Chlamydia and Gonorrhea Tests in
the United States. We expect that sales to Abbott will constitute a significant
portion of our total revenues for the foreseeable future. We could be materially
adversely affected by:
- the loss of Abbott's sales and marketing infrastructure;
- a significant decrease in product shipments to or an inability to
collect receivables from Abbott; or
- any other adverse change in our relationship with Abbott.
OUR SALES ARE HIGHLY DEPENDENT ON REIMBURSEMENTS FROM THIRD-PARTY PAYORS.
Sales of our products in the United States and other markets will depend,
in part, on the availability of adequate reimbursement from third-party payors,
such as government insurance plans, including Medicare and Medicaid in the
United States, managed care organizations and private insurance plans.
Third-party payors often express reluctance to reimburse healthcare providers
for the use of any medical test incorporating new technology, such as ours.
Reimbursement by a third-party payor may depend on a number of factors,
including the payor's determination that our products are clinically useful,
cost-effective, not experimental or investigational, and medically necessary and
appropriate for the specific patient.
Because each payor individually approves reimbursement, seeking such
approvals is a time consuming and costly process that requires us to provide
scientific and clinical support for the use of each of our products to each
payor separately. In addition, third-party payors are increasingly limiting
reimbursement coverage for medical diagnostic products and in many instances are
exerting pressure on medical suppliers to lower their prices. Thus, third-party
reimbursement may not be consistently available for our products or financially
adequate to cover our costs and achieve profitability.
Outside the United States, the responsibility for obtaining reimbursement
approval from third-party payors is handled by our distributors and, therefore,
is out of our direct control. Healthcare reimbursement systems vary from country
to country and, accordingly, we cannot guarantee that third-party reimbursement
will be available for our products under any other reimbursement system.
WE HAVE LIMITED MANUFACTURING EXPERIENCE.
We have limited commercial-scale manufacturing experience and
capabilities. In April 2000, we relocated our manufacturing operations to our
new facility in Gaithersburg, Maryland. Our new facility will remain subject, on
an ongoing basis, to a variety of quality systems regulations, international
quality standards and other regulatory requirements, including requirements for
good manufacturing practices, which are commonly referred to as "cGMP." The
integration of our manufacturing operations into our new facility may result in
problems involving production yield and quality control and assurance. We
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may encounter difficulties expanding our manufacturing operations in accordance
with these regulations and standards, which could result in a delay or
termination of manufacturing.
WE MANUFACTURE ALL OF OUR PRODUCTS IN A SINGLE FACILITY.
We face risks inherent in the operation of a single facility for
manufacture of our products. These risks include unforeseen plant shutdowns due
to personnel, equipment or other factors, and the possible inability of our
facility to produce products in quantities sufficient to meet customer demand.
Any delay in the manufacture of our products could result in delays in product
shipment.
FUTURE LEGISLATION COULD AFFECT OUR ABILITY TO ACHIEVE PROFITABILITY.
One of our ongoing concerns is that from time to time, Congress has
considered restructuring the delivery and financing of healthcare services in
the United States. We cannot predict what form of legislation, if any, may be
implemented or the effect of this legislation on our business. It is possible
that future legislation will contain provisions that may adversely affect our
business, financial condition and results of operations. It is also possible
that future legislation could result in modifications to the nation's public and
private healthcare insurance systems, which could negatively affect
reimbursement policies or encourage integration or reorganization of the
healthcare industry in a manner that could negatively affect us. We cannot
predict what legislation, if any, relating to our business or to the healthcare
industry may be enacted.
OUR STRATEGY FOR THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS AND
PRODUCT CANDIDATES IS DEPENDENT IN PART ON COLLABORATIONS WITH THIRD PARTIES.
We have entered into and intend to continue to enter into corporate
collaborations for the development of new products, clinical collaborations with
respect to trials using our products and product candidates and strategic
alliances for the distributions of our Hybrid Capture System and tests. Our
success depends in large part on the efforts of these third parties in
performing their responsibilities. We cannot assure you that we will be able to
enter into arrangements that may be necessary in order to develop and
commercialize our products or that we will realize any of the contemplated
benefits from these arrangements. Furthermore, we cannot assure you that any
revenues or profits will be derived from our collaborative and other
arrangements.
WE FACE INTENSE COMPETITION IN THE BIOTECHNOLOGY INDUSTRY.
The medical diagnostics and biotechnology industries are subject to
intense competition. We can provide no assurance that we will be able to compete
successfully against existing or future competitors. For certain of our tests,
we also compete against existing detection, screening and monitoring
technologies, including the Pap smear, tissue culture and antigen-based
diagnostic methodologies.
Our existing and potential competitors may be able to develop
technologies that are as effective as, or more effective or easier to interpret
than those offered by us, which would render our products noncompetitive or
obsolete. Moreover, many of our existing and potential competitors have
substantially greater financial, research and development, marketing, sales,
manufacturing, distribution and technological resources than us.
In addition, many of these companies may have established third-party
reimbursement for their products. In marketing our HPV Tests for primary
cervical cancer screening either in conjunction with or separate from the Pap
smear, our tests will compete against the Pap smear, which is widely accepted as
an inexpensive and, with regular use, adequate screening test for cervical
cancer. Additionally, in marketing
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our HPV Tests for the follow-up screening of women with equivocal Pap smears in
the United States, we compete with well-established follow-up procedures, such
as Pap smear re-testing, colposcopy and biopsy, which are also widely accepted
and have a long history of use.
We face competition from a variety of technologies in the blood virus
area. There are several advanced technologies commercially available for the
detection and viral load measurement of HIV and hepatitis B virus. Additionally,
there are several emerging DNA probe amplification technologies to detect CMV
being developed by competitors.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS, PERMITTING COMPETITORS TO
DUPLICATE OUR PRODUCTS AND SERVICES.
Patent protection for our technologies and products will be a crucial
factor in our ability to develop and commercialize our products. Because of the
substantial length of time and expense associated with bringing new products
through development to the marketplace, the medical diagnostics and
biotechnology industries place considerable importance on obtaining and
maintaining patent and trade secret protection for new technologies, products
and processes. Large pharmaceutical companies consider a strong patent estate
critical when they evaluate whether to enter into a collaborative arrangement to
support the research, development and commercialization of a technology. Without
the prospect of reasonable patent protection, it would be difficult for us or
any corporate partner to justify the time and money that is necessary to
complete the development of a product.
We have obtained rights to certain patents and patent applications and
may, in the future, obtain, or seek rights from third parties to additional
patents and patent applications. We can provide no assurance that patent
applications relating to our products or technologies will result in patents
being issued, that any issued patents will afford adequate protection to us, or
that such patents will not be challenged, invalidated, infringed or
circumvented. Furthermore, we can provide no assurance that others have not
developed, or will not develop, similar products or technologies that will
compete with our products or technologies without infringing upon our
intellectual property rights.
Any success in protecting our proprietary rights will depend in large
part on our ability to:
- obtain, maintain and enforce patent protection for our products
and technologies both in the United States and internationally;
- license rights to patents from third parties;
- maintain trade secret protection;
- operate without infringing upon the proprietary rights of others;
and
- prevent others from infringing our proprietary rights.
Any licenses we may be required to secure under any patents or
proprietary rights of third parties may not be made available on terms
acceptable to us, if at all. Moreover, the laws of certain countries may not
protect our proprietary rights to the same extent as United States law.
In addition to the risk that we could be a party to patent infringement
litigation, the U.S. Patent and Trademark Office, or its foreign counterparts,
could require us to participate in patent interference proceedings that it
declares. These proceedings are often expensive and time-consuming, even if we
were to prevail in such a proceeding. We may also be forced to initiate legal
proceedings to protect our patent position or other proprietary rights. These
proceedings typically are costly, protracted and offer no assurance of success.
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We have received inquiries regarding possible patent infringements
relating to, among other things, certain aspects of our Hybrid Capture
technology. We believe that the patents of others to which these inquiries
relate are either not infringed by our Hybrid Capture technology or are invalid.
Nevertheless, we cannot be sure that our patents and patent applications will
adequately protect our Hybrid Capture technology. We can provide no assurance
that we will not be subject to further claims that our technology, including our
Hybrid Capture technology, or our products, infringe the patents or proprietary
rights of third parties.
Our success also is dependent upon the skill, knowledge and experience of
our scientific and technical personnel. To help protect our rights, we require
all employees, consultants, advisors and collaborators to enter into
confidentiality agreements that prohibit the disclosure of confidential
information to anyone outside our company and require disclosure, and in most
cases, assignment to us of their ideas, developments, discoveries and
inventions. We can provide no assurance, however, that these agreements will
provide adequate protection for our trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND MAY NOT BE ABLE TO OBTAIN
REGULATORY APPROVALS.
The FDA product clearance process is unpredictable and uncertain. We can
provide no assurance that the necessary approvals or clearances for our product
candidates will be granted on a timely basis, or at all. In particular:
- we may be unable to collect adequate data to support a premarket
approval for our HBV Test or to receive approval for the test in a
timely manner;
- we may be unable to collect adequate data to support a premarket
approval for our HPV screening Test or to receive approval for
such screening test in a timely manner;
- we may be unable to obtain or keep valid marketing authorization
from one or more of the countries to which we export our products;
- we, or recipients of our products that are limited to research use
only, may fail to comply with the user certification requirements
and other regulatory limitations placed on the distribution and
use of these devices, which could result in an enforcement action
by the FDA against us; or
- we may lose previously received approvals, particularly the
approvals for our HPV Tests using our Hybrid Capture I and II
technologies.
Further, we must comply with similar requirements of foreign governments
and with import and export regulations when distributing our products to foreign
nations. Each foreign country's regulatory requirements for product approval and
distribution are unique and may require the expenditure of substantial time,
money and effort. The regulation of medical devices in a number of
jurisdictions, particularly in the European Union, continues to develop.
CLINICAL TRIALS FOR OUR PRODUCT CANDIDATES ARE EXPENSIVE AND THEIR OUTCOME IS
UNCERTAIN.
Conducting clinical trials is a lengthy, time-consuming and expensive
process. Before obtaining regulatory approvals for the commercial sale of any
products, we or our corporate partners must demonstrate through preclinical
testing and clinical trials that our product candidates are safe and
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effective for use in humans. We have incurred and will continue to incur
substantial expense for, and devote a significant amount of time to, preclinical
testing and clinical trials.
Historically, the results from preclinical testing and early clinical
trials have often not predicted results of later clinical trials. A number of
new medical devices have shown promising results in clinical trials, but
subsequently failed to establish sufficient safety and efficacy data to obtain
necessary regulatory approvals. Data obtained from preclinical and clinical
activities is susceptible to varying interpretations, which may delay, limit or
prevent regulatory approval. In addition, regulatory delays or rejections may be
encountered as a result of many factors, including changes in regulatory policy
during the period of product development.
Clinical trials conducted by us, by our collaborators or by third parties
on our behalf may not demonstrate sufficient safety and efficacy to obtain the
requisite regulatory approvals for our product candidates. Regulatory
authorities may not permit us to undertake any additional clinical trials for
our product candidates.
Completion of clinical trials may take several years or more. The length
of time can vary substantially with the type, complexity, novelty and intended
use of the product candidate. Our commencement and rate of completion of
clinical trials may be delayed by many factors, including:
- our inability to manufacture sufficient quantities of materials
used for clinical trials;
- our inability to recruit patients at the expected rate;
- the failure of clinical trials to demonstrate a product
candidate's efficacy; - our inability to follow patients
adequately after treatment;
- our inability to predict unforeseen safety issues; and - the
potential for unforeseen governmental or regulatory delays.
If a product candidate fails to demonstrate safety and efficacy in
clinical trials, this failure may delay development of other product candidates
and hinder our ability to conduct related preclinical testing and clinical
trials. As a result of these failures, we may also be unable to find additional
collaborators or to obtain additional financing.
A SINGLE SUPPLIER PROVIDES CERTAIN KEY COMPONENTS OF OUR PRODUCTS.
Several key components of our products come from single source suppliers.
These suppliers are subject to many strict regulatory requirements regarding the
supply of these components. We cannot be sure that these suppliers will comply,
or have complied, with applicable regulatory requirements or that they will
otherwise continue to supply us with the key components we require. If suppliers
are unable or refuse to supply us, or will supply us only at a prohibitive cost,
we may not be able to access additional sources at acceptable prices, on a
timely basis, if ever.
We acquire these components on a purchase-order basis, meaning that the
supplier is not required to supply us with a specified quantity of product
within a given time period or set-aside part of its inventory for our orders. We
have not arranged for alternative supply sources.
In the event that we cannot obtain sufficient quantities of these
components on commercially reasonable terms or in a timely manner, we would not
be able to manufacture our products on a timely and cost-competitive basis.
In addition, if any of the components of our products are no longer
available in the marketplace, we may be forced to further develop our technology
to incorporate alternate components. The
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incorporation of new components into our products may require us to seek
necessary approvals from the FDA or appropriate foreign regulatory agencies
prior to commercialization. We can provide no assurance that this development
would be successful or that, if developed by us or licensed from third parties,
any alternative components would receive requisite regulatory approval on a
timely basis, or at all.
The success of our products based on our Hybrid Capture technology will
depend, in part, on our ability to arrange for the distribution to our customers
of luminometers and related software and equipment with the capability to
analyze the results of our tests. Two suppliers currently provide us with all of
our luminometers. We may be unable to locate other suppliers if our current
suppliers fail to produce luminometers for us in accordance with specifications,
in accordance with applicable regulations and on a timely basis. Even if we
could locate an alternate supplier, that supplier may be more expensive than our
current suppliers and may require substantial lead-time. Any of these events
could significantly inhibit our ability to market our Hybrid Capture products.
RAPID GROWTH MAY PLACE SIGNIFICANT DEMANDS ON OUR PERSONNEL.
We currently have limited management, technical and administrative
resources. If we are successful in implementing our business strategy, we may
experience a period of rapid growth and expansion that could place significant
additional demands on our management, technical and administrative resources.
WE ARE EXPOSED TO PRODUCT LIABILITY CLAIMS FOR WHICH OUR INSURANCE MAY BE
INADEQUATE.
We may be exposed to liability claims arising from the use of our
products and the commercial sale of our products as well as from use of our
products or product candidates in clinical trials. Consumers, our collaborators
or licensees or parties selling our products may bring these claims. We
currently carry product liability insurance coverage but we can provide no
assurance that this coverage will be adequate to protect us against future
product liability claims or that product liability insurance will be available
to us in the future on commercially reasonable terms, if at all. Furthermore, we
can provide no assurance that we will be able to avoid significant product
liability claims and the attendant adverse publicity.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION CONCERNING ENVIRONMENTAL
MATTERS.
We are subject to a variety of local, state and federal government
regulations relating to the storage, discharge, handling, emission, generation,
manufacture and disposal of toxic, infectious or other hazardous substances used
to manufacture our products. We cannot completely eliminate the risk of
accidental contamination or injury from these materials. Moreover, we cannot be
sure that our collaborative partners are currently complying with the governing
standards. We also cannot be sure that our collaborative partners and we will be
in compliance with such standards in the future or that we will not incur
significant costs to comply with environmental laws and regulations in the
future. If we were to fail to comply with any of these regulations, this failure
could subject us to significant liabilities.
WE NEED TO SPEND SUBSTANTIAL FUNDS TO BECOME PROFITABLE.
We have spent, and expect to continue to spend in the future, substantial
funds to complete our planned product development efforts, expand our sales and
marketing activities and expand our manufacturing operations. We expect that our
existing capital resources will be adequate to fund our operations through
calendar year 2001, but we cannot guarantee that this will be the case.
28
<PAGE> 31
Our future capital requirements and the adequacy of available funds will
depend on numerous factors, including:
- the successful commercialization of our existing products;
- progress in our product development efforts;
- progress with regulatory affairs activities;
- the cost and timing of expansion of manufacturing operations;
- the expansion of our European, African and Middle Eastern sales
operations with Abbott;
- the growth and success of effective sales and marketing
activities;
- the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights; and
- the development of strategic alliances for the marketing of our
products.
If funds generated from our operations, together with our existing
capital resources, are insufficient to meet current or planned operating
requirements, we will have to obtain additional funds through equity or debt
financing, strategic alliances with corporate partners and others, or through
other sources. We do not have any committed sources of additional financing, and
we cannot provide assurance that additional funding, if necessary, will be
available on acceptable terms, if at all. If adequate funds are not available,
we may have to delay, scale-back or eliminate certain aspects of our operations
or attempt to obtain funds through arrangements with collaborative partners or
others. This may result in the relinquishment of our rights to certain of our
technologies, product candidates, products or potential markets. Therefore, the
inability to obtain adequate funds could have a material adverse impact on our
business, financial condition and results of operations.
CONTROL BY MANAGEMENT
As of September 8, 2000, our Chairman and Chief Executive Officer and our
President, Chief Operating Officer and Chief Financial Officer beneficially own
an aggregate of approximately 32% of our outstanding shares of common stock. As
a result, these officers, acting together, effectively control the election of
directors and matters requiring approval by our stockholders.
ANTITAKEOVER CONSIDERATIONS
Our board of directors has the authority, without further action by the
stockholders, to issue from time to time, up to 1,000,000 shares of preferred
stock in one or more classes or series, and to fix the rights and preferences of
such preferred stock. Our Certificate of Incorporation also provides for
staggered terms for members of the board of directors. We are subject to
provisions of Delaware corporate law which, subject to certain exceptions, will
prohibit us from engaging in any "business combination" with a person who,
together with affiliates and associates, owns 15% or more of our common stock
(referred to as an interested stockholder) for a period of three years following
the date that such person became an interested stockholder, unless the business
combination is approved in a prescribed manner. Additionally, our Bylaws
establish an advance notice procedure for stockholder proposals and for
nominating candidates for election as directors. These provisions of Delaware
law and of our Certificate of Incorporation and Bylaws may have the effect of
delaying, deterring or preventing a change in our control, may discourage bids
for the common stock at a premium over market price and may adversely affect the
market price, and the voting and other rights of the holders, of the common
stock.
29
<PAGE> 32
ITEM 2. PROPERTIES
On March 2, 1998, we entered into a lease for a new facility in
Gaithersburg, Maryland, comprising a total of approximately 90,000 square feet.
We relocated our operation to this new facility beginning in January 2000 and
completed the relocation in April 2000. The lease for the new facility has a
term of ten years, and we have two options to extend the term for a five-year
period each.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings and are not aware of
any threatened litigation that could have a material adverse effect on our
business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF OUR STOCKHOLDERS
Not applicable.
30
<PAGE> 33
EXECUTIVE OFFICERS OF DIGENE
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------
<S> <C> <C>
Evan Jones(1) 43 Chief Executive Officer and Chairman of the Board
Charles M. Fleischman(2) 42 President, Chief Operating Officer and Chief Financial Officer
Robert McG. Lilley(3) 55 Senior Vice President, Global Sales and Marketing
Attila T. Lorincz, Ph.D(4) 45 Senior Vice President and Chief Scientific Officer
Jeanmarie Curley(5) 40 Vice President, Manufacturing
William J. Payne, Jr., Ph.D.(6) 49 Vice President, Research and Development
Donna Marie Seyfried(7) 42 Vice President, Business Development
Joseph P. Slattery(8) 35 Vice President, Finance
</TABLE>
---------------------
(1) Mr. Jones has served as our Chief Executive Officer since Armonk Partners
acquired a controlling interest in Digene in July 1990 and as Chairman of
the Board since September 1995. He previously served as our President
from July 1990 until June 1999.
(2) Mr. Fleischman has served as our President since June 1999, as Chief
Financial Officer since March 1996 and as Chief Operating Officer since
September 1995. He previously served as our Executive Vice President from
July 1990, when Armonk Partners acquired a controlling interest in
Digene, to June 1999.
(3) Mr. Lilley has served as our Senior Vice President, Global Sales and
Marketing since June 1999, and before that as Vice President, Sales and
Marketing at Digene from July 1998 until June 1999, and as General
Manager for Digene Europe from March 1997 until July 1998. From September
1994 to February 1997, Mr. Lilley was General Manager for Europe, Middle
East & Africa for Alltel Healthcare Information Services.
(4) Dr. Lorincz has served as our Senior Vice President and Chief Scientific
Officer since January 2000. He previously served as our Vice President,
Research and Development and Scientific Director from December 1990 to
January 2000. His research career includes postdoctoral fellowships at
the University of California. He also serves on a number of advisory
committees and is an Adjunct Associate Professor in the Georgetown
University Medical School Department of Pathology.
(5) Ms. Curley has served as our Vice President, Manufacturing since April
1998, and from December 1990 until April 1998, she was our Director of
Manufacturing.
(6) Dr. Payne has served as our Vice President, Research and Development
since January 2000. He previously served as our Vice President,
Development from July 1997 to January 2000. From August 1995 to July
1997, he was Vice President, Research and Development in the IVD Medical
Diagnostic division of Sigma Diagnostics and from July 1993 to July 1995,
he was Director of Research and Development in the IVD Diagnostic Medical
division of Sanofi Diagnostic Pasteur.
(7) Ms. Seyfried has served as our Vice President, Business Development since
October 1996. Ms. Seyfried served as Senior Director, Business
Development of The Perkin-Elmer Corporation from March 1993 to September
1996.
(8) Mr. Slattery has served as our Vice President, Finance since July 1999
and as Controller from February 1996 to July 2000. From March 1995 to
February 1996, Mr. Slattery was Director, Business Management, for I-NET,
Inc., a computer services company.
31
<PAGE> 34
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since our initial public offering of common stock on May 22, 1996, our
common stock has been traded on the Nasdaq National Market under the symbol
"DIGE." The following table sets forth, for the fiscal quarters indicated, the
high and low bid prices for our common stock, as reported by the Nasdaq National
Market.
<TABLE>
<CAPTION>
Fiscal 2000 High Low
----------- ---- ---
<S> <C> <C>
Fourth quarter............................................ $51.625 $25.250
Third quarter............................................. 58.500 15.750
Second quarter............................................ 20.125 11.250
First quarter............................................. 14.500 8.250
Fiscal 1999
-----------
Fourth quarter............................................ $15.125 $6.250
Third quarter............................................. 9.125 5.250
Second quarter............................................ 7.125 5.625
First quarter............................................. 11.000 6.500
</TABLE>
On September 8, 2000, the closing sale price for our common stock, as
reported by the Nasdaq National Market, was $41.6875. As of September 8, 2000,
our common stock was held by 177 holders of record.
We have never paid dividends on our common stock and do not anticipate
paying any cash dividends on our common stock in the foreseeable future.
(a) Recent Sales of Unregistered Securities.
On December 23, 1999, we and certain of our stockholders completed a
private placement of 1,500,000 shares of common stock to selected institutional
and other accredited investors in a transaction which was exempt from
registration pursuant to Section 4(2) of the Securities Act and Rule 506
promulgated under the Securities Act. Of these shares, 900,000 were sold by us
and 600,000 were sold by the selling stockholders. The net proceeds to us, after
placement agent fees and expenses, were approximately $10,354,000.
(b) Use of proceeds from Registered Securities.
Not applicable.
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<PAGE> 35
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
Digene's Consolidated Statements of Operations for the fiscal years ended June
30, 1998, 1999 and 2000 and with respect to Digene's Consolidated Balance Sheets
at June 30, 1999 and 2000 are derived from the audited Consolidated Financial
Statements of Digene which are included elsewhere in this Form 10-K.
Consolidated Statements of Operations data for the fiscal years ended June 30,
1996 and 1997 and Consolidated Balance Sheet data at June 30, 1996, 1997 and
1998 are derived from Consolidated Financial Statements of Digene not included
herein. The selected consolidated financial data set forth below is qualified in
its entirety by, and should be read in conjunction with, the Consolidated
Financial Statements, the related Notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this Form 10-K.
FISCAL YEAR ENDED JUNE 30,
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
--------------------------------------------------------------
(in thousands, except per share loss)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
Product sales $ 6,359 $ 9,434 $ 11,980 $ 17,014 $ 22,287
Research and development
contracts 381 626 29 453 757
------- --------- -------- --------- ----------
Total revenues 6,740 10,060 12,009 17,467 23,044
Costs and expenses:
Cost of product sales 2,895 3,441 3,848 6,112 7,641
Research and development 2,430 4,131 5,285 4,643 6,123
Selling and marketing 2,095 5,236 10,057 10,531 10,930
General and administrative 1,792 4,412 5,690 5,957 6,346
Amortization of intangible assets 248 241 386 150 150
------- --------- -------- --------- ----------
Loss from operations (2,720) (7,401) (13,257) (9,926) (8,146)
Other income (expense) 40 (36) (83) (184) 513
Interest expense (207) (84) (164) (30) --
Interest income 252 1,527 1,378 985 1,050
------- --------- -------- --------- ----------
Loss from operations before income
taxes (2,635) (5,994) (12,126) (9,155) (6,583)
Provision for income taxes -- -- 48 149 184
------- --------- -------- --------- ----------
Net loss before cumulative effect
of a change in accounting principle (2,635) (5,994) (12,174) (9,304) (6,767)
Cumulative effect of a change in
accounting principle -- -- (1,915) -- --
------- --------- -------- --------- ----------
Net loss $(2,635) $ (5,994) $(14,089) $ (9,304) $ (6,767)
======= ========= ======== ========= ==========
Basic and diluted net loss per
share(1) $ (1.71) $ (0.53) $ (1.06) $ (0.65) $ (0.44)
======= ========= ======== ========= ==========
Weighted average shares
outstanding(1) 1,545 11,394 13,236 14,354 15,296
</TABLE>
<TABLE>
<CAPTION>
At June 30,
1996 1997 1998 1999 2000
--------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital $29,616 $ 21,299 $ 28,428 $ 20,499 $ 24,268
Total assets 33,174 30,207 35,440 28,108 35,785
Long-term debt, less current
maturities 152 553 -- -- --
Accumulated deficit (19,333) (25,327) (39,416) (48,720) (55,487)
Total stockholders' equity 30,119 24,266 31,099 23,687 29,425
</TABLE>
(1) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
33
<PAGE> 36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our Consolidated Financial
Statements and the related Notes to such Consolidated Financial Statements also
included in this Form 10-K. Some of the information that follows are not
statements of historical fact, and reflect our intent, belief or expectations
regarding the anticipated effect of events, circumstances and trends. Such
statements should be considered as forward looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Although we believe
that our expectations are based on reasonable assumptions within the bounds of
our knowledge of our business and operations, there can be no assurance that
actual results will not differ materially from our expectations. Factors that
might cause or contribute to such differences include: uncertainty of future
profitability and cash generation from operations; uncertainty of clinical trial
results for our products under development; uncertainty of market acceptance of
our products by the worldwide medical community; risks inherent in international
transactions, including those relating to our expansion in Europe, Brazil and
elsewhere; our limited sales and marketing experience; the extent of future
expenditures for sales and marketing programs; dependence on third-party
reimbursement from government entities, managed care organizations, and private
insurance plans; dependence on Abbott Laboratories as our principal European
distributor and our distributor for certain products in the United States; delay
in or failure to obtain regulatory approvals for our products in development;
uncertainty regarding patents and proprietary rights in connection with our
products; our ability to obtain requisite additional financing to fund our
operations beyond calendar year 2001; and other factors as set forth under the
caption "Additional Considerations" beginning on page 22.
OVERVIEW
We develop, manufacture and market our patented Hybrid Capture(R) Gene
Analysis System and tests, and we are commercializing these Hybrid Capture
products in three areas: women's health testing, blood virus testing and
genomics and pharmaceutical research. Our primary focus is in women's health
where our lead product is the only FDA approved DNA test for human
papillomavirus, or HPV, which is associated with more than 99% of cervical
cancers. Our product portfolio also includes DNA tests for the detection of
chlamydia, gonorrhea and other sexually transmitted infections. We are the
world's leading supplier of HPV tests. Our Hybrid Capture II HPV Test received
PMA marketing approval from the FDA in March 1999. Internationally, our
portfolio of women's health tests is now cleared for sale in almost every major
European country and in Brazil and Argentina and is cleared by the FDA for
marketing in the United States. Our objective in the women's health area is to
become the world leader in gene-based testing for women's cancers and infectious
diseases. We have also developed a family of unique blood virus testing products
based on our Hybrid Capture System, including tests for cytomegalovirus (CMV)
and hepatitis B virus (HBV). Our CMV Test, for which we received 510(k)
clearance in October 1998, is the only CMV DNA test cleared by the FDA.
Internationally, we are working to establish our HPV Test as the standard
for cervical cancer screening. Pursuant to a Marketing and Distribution
Agreement that became effective in May 1999, our women's health and blood virus
tests are marketed in Europe by Abbott Laboratories and our chlamydia and
gonorrhea tests will be marketed by Abbott Laboratories in the United States
beginning during fiscal 2001. We currently market our Hybrid Capture products in
the United States through a direct sales force supported by technical and
customer service representatives. In the United States, we are currently
marketing our HPV Test for the follow-up screening of women with equivocal Pap
smears. In the genomics and pharmaceutical research market we are using the
unique capabilities of our Hybrid Capture System to provide us access to
complimentary early-stage technologies and to link our tests with novel
therapeutics and vaccines.
34
<PAGE> 37
We have incurred substantial operating losses since inception, resulting
principally from expenses associated with our research and development programs,
including preclinical studies, clinical trials and regulatory submissions for
our products and the expansion of our manufacturing facilities and our global
sales and marketing activities. We expect such annual operating losses to
continue at least through fiscal 2001 as we continue our product development
efforts, seek FDA and foreign regulatory approvals of our products, expand our
manufacturing capabilities and expand our sales and marketing activities.
Beginning in January 2000, we relocated our research and development, corporate
and manufacturing activities into a new facility which we lease in Gaithersburg,
Maryland. This new facility will result in increased operating expenses.
Our quarterly operating results have fluctuated significantly in the past
and we believe that they may continue to fluctuate significantly in the future
with lower product revenues in the first and second fiscal quarters as compared
with the third and fourth fiscal quarters, primarily attributable to the lower
demand for certain women's health-related medical procedures during the summer
months in the United States and Europe, and during the December holiday season.
In addition, our quarterly operating results, as well as annual results, may
fluctuate from period to period due to the factors discussed in the first
paragraph of this Management's Discussion and Analysis of Financial Condition
and Results of Operations, many of which are outside our control. Due to one or
more of these factors, in one or more future quarters, our results of operations
may fall below the expectations of securities analysts and investors. In that
event, the market price of our common stock could be materially and adversely
affected.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEAR ENDED JUNE 30, 2000 TO FISCAL YEAR ENDED JUNE
30, 1999
Product sales increased to $22,287,000 in fiscal 2000 from $17,014,000 in
fiscal 1999. The increase was due primarily to increased sales of our Hybrid
Capture tests, primarily HPV and HBV tests and related equipment, partially
offset by lower sales of our non-core products. We anticipate that sales of our
HPV tests will account for a substantial portion of our product sales for at
least the next two fiscal years.
Research and development contract revenues increased to $757,000 in
fiscal 2000 from $453,000 in fiscal 1999 due primarily to our performance of
services on several new contracts. We anticipate that fiscal 2001 research and
development contract revenues will remain approximately the same as they were in
fiscal 2000 or increase moderately.
Cost of product sales increased to $7,641,000 in fiscal 2000 from
$6,112,000 in fiscal 1999 due primarily to increased sales volume. Gross margin
on product sales increased to 65.7% in fiscal 2000 from 64.1% in fiscal 1999.
This increase was due primarily to increased sales volume of our Hybrid Capture
tests, partially offset by lower average unit prices. We expect gross margins to
fluctuate moderately based on product mix during fiscal 2001.
Research and development expenses increased to $6,123,000 in fiscal 2000
from $4,643,000 in fiscal 1999 due primarily to increases in facilities costs,
clinical trials, outside professional fees and laboratory supplies. We expect
research and development expenses to increase moderately for the next few fiscal
years.
Selling and marketing expenses increased to $10,930,000 in fiscal 2000
from $10,531,000 in fiscal 1999 due primarily to increased royalty expenses as a
result of increases in product sales, as well as increases in travel and outside
professional fees, partially offset by decreases in personnel costs. We expect
selling and marketing expenses to increase over the next fiscal year as a result
of increased royalty expenses.
35
<PAGE> 38
General and administrative expenses increased to $6,346,000 in fiscal
2000 from $5,957,000 in fiscal 1999, due primarily to increases in personnel
costs and professional fees, partially offset by relatively lower facility costs
as compared to the prior year when accrual for expenses related to the
occupation of our new facility peaked. We expect general and administrative
expenses to increase for the following few fiscal years.
Amortization of intangible assets remained constant at $150,000 in fiscal
years 2000 and 1999. We expect amortization of intangible assets to remain
constant in the next fiscal year.
Interest expense decreased to $0 in fiscal 2000 from $30,000 in fiscal
1999 due primarily to the repayment in December 1998 of debt incurred in
February 1997. We do not anticipate any material interest expense in the coming
fiscal year.
Interest income increased to $1,050,000 in fiscal 2000 from $985,000 in
fiscal 1999 due primarily to higher average cash and cash equivalents balances
primarily as a result of the investment of the proceeds of our private placement
completed in December 1999, partially offset by negative cash flows from
operations.
COMPARISON OF FISCAL YEAR ENDED JUNE 30, 1999 TO FISCAL YEAR ENDED JUNE
30, 1998
Product sales increased to $17,014,000 in fiscal 1999 from $11,980,000 in
fiscal 1998. The increase was due primarily to increased sales of our Hybrid
Capture tests, primarily HPV tests and related equipment, partially offset by
lower sales of our non-core products.
Research and development contract revenues increased to $453,000 in
fiscal 1999 from $29,000 in fiscal 1998 due primarily to our performance during
the entire fiscal year under a major research contract with the National
Institutes of Health for the development of tests for herpes simplex virus.
Cost of product sales increased to $6,112,000 in fiscal 1999 from
$3,848,000 in fiscal 1998 due primarily to increased sales volume. Gross margin
on product sales decreased to 64.1% in fiscal 1999 from 67.9% in fiscal 1998.
This decrease was due primarily to increased sales of lower-margin equipment and
increased write-offs for inventory obsolescence, partially offset by improved
manufacturing efficiencies and product pricing.
Research and development expenses decreased to $4,643,000 in fiscal 1999
from $5,285,000 in fiscal 1998 due primarily to reductions in expenditures for
clinical trials and laboratory supplies, partially offset by higher personnel
costs.
Selling and marketing expenses increased to $10,531,000 in fiscal 1999
from $10,057,000 in fiscal 1998 due to increases in European sales and marketing
programs, partially offset by decreases in expenditures in the United States
associated with lower personnel costs.
General and administrative expenses increased to $5,957,000 in fiscal
1999 from $5,690,000 in fiscal 1998, due primarily to costs associated with the
January 2000 move to our new facility in Gaithersburg, Maryland, as well as
increases in professional services expense, partially offset by a reduction in
bad debt expense.
Amortization of intangible assets decreased to $150,000 in fiscal 1999
from $386,000 in fiscal 1998, due primarily to the write-off of certain
intangible assets in fiscal 1998, partially offset by amortization expense
attributable to goodwill associated with our acquisition of Viropath, B.V. on
July 1, 1998.
36
<PAGE> 39
Interest expense decreased to $30,000 in fiscal 1999 from $164,000 in
fiscal 1998 due primarily to the repayment in December 1998 of debt incurred in
February 1997.
Interest income decreased to $985,000 in fiscal 1999 from $1,378,000 in
fiscal 1998 due primarily to lower average cash and cash equivalents balances
primarily as a result of negative cash flows from operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our expenses have significantly exceeded our revenues,
resulting in an accumulated deficit of approximately $55.5 million at June 30,
2000. We have funded our operations primarily through the sale of equity
securities. At June 30, 2000, we had cash, cash equivalents and short-term
investments aggregating approximately $20,214,000. Net cash used in our
operating activities was $8,410,000 for the fiscal year ended June 30, 2000.
Capital expenditures increased to $2,307,000 in fiscal 2000 from $934,000
in fiscal 1999, due primarily to expenditures associated with our occupation of
our new leased facility in Gaithersburg, Maryland.
In December 1999, we established an equipment leasing facility with
Mellon US Leasing with a total commitment of $750,000. We used such facility to
fund furniture and equipment leases, including telecommunications equipment, for
our new leased facility in Gaithersburg, Maryland. As of June 30, 2000, when
this commitment expired, we had used approximately $571,000 of the commitment.
In February 2000, we received an equipment loan facility of $1,000,000
from the State of Maryland. Approximately $503,000 worth of fixed asset
additions, previously financed with cash, was converted to this facility during
July 2000. The remaining $497,000 in funding available was applied for during
August 2000.
On December 23, 1999, we completed a private placement of 900,000 shares
of our common stock, the net proceeds of which, after placement agent fees and
expenses, were $10,354,000.
On March 24, 2000, we completed the sale of our Molecular Biology
Reagents ("MBR") product line and related assets to KD Medical, Inc. This
transaction involved the sale of our MBR product line and the associated
manufacturing equipment, as well as the raw material and finished goods
inventory for the product line. As consideration for this sale, we received
$200,000 in cash and a promissory note in the amount of $400,000 payable in
monthly installments of $20,000 plus 8% accrued interest from July 1, 2000
through February 1, 2002. A gain of approximately $515,000 was recorded on the
sale of this product line and is included in the Other income (expense) line of
our Consolidated Statements of Operations.
We anticipate that working capital requirements will increase moderately
for the foreseeable future due to increasing accounts receivable as a result of
expected revenue growth. We have incurred negative cash flows from operations
since our inception, and have expended, and expect to continue to expend in the
future, substantial funds to complete our planned product development efforts,
expand our sales and marketing activities and expand our manufacturing
capabilities. We expect that our existing capital resources will be adequate to
fund our operations through calendar 2001. We cannot give assurances that we
will not need to consume a significant amount of our available resources more
rapidly than we presently anticipate. Our future capital requirements and the
adequacy of available funds will depend on numerous factors, including the
successful commercialization of our products, progress in our product
development efforts and the magnitude and scope of such efforts, progress with
preclinical studies and clinical trials, progress in our regulatory affairs
activities, the cost and timing of expansion of our manufacturing capabilities,
the development and maintenance of effective sales and marketing activities, the
cost of filing,
37
<PAGE> 40
prosecuting, defending and enforcing patent claims and other intellectual
property rights, competing technological and market developments, and the
development of strategic alliances for the marketing of our products. To the
extent that our existing capital resources and funds generated from operations
are insufficient to meet current or planned operating requirements, we will be
required to obtain additional funds through equity or debt financing, strategic
alliances with corporate partners and others, or through other sources. We do
not have any committed sources of additional financing, and there can be no
assurance that additional funding, if necessary, will be available on acceptable
terms, if at all. If adequate funds are not available, we may be required to
delay, scale back or eliminate certain aspects of our operations or attempt to
obtain funds through arrangements with collaborative partners or others that may
require us to relinquish rights to certain of our technologies, product
candidates, products or potential markets. If adequate funds are not available,
our business, financial condition and results of operations will be materially
and adversely affected.
On July 1, 1998, we purchased all of the outstanding capital stock of
Viropath B.V., a company with limited liability registered in Amsterdam, The
Netherlands, for total consideration of 181,884 shares of our common stock. In
addition, we are obligated to pay royalties, not to exceed $1,000,000, on future
sales of Viropath's licensed HPV products in the field of cervical cancer
testing. We also granted options to purchase an aggregate of 50,000 shares of
our common stock to the three Viropath individual shareholders in connection
with their execution of consulting agreements with us. The options were
compensatory options and were valued on July 1, 1998 at approximately $316,500.
One of these optionholders died in February 2000, and his unvested options
expired. The remaining value of all unexpired options as of June 30, 2000 is
$96,000.
YEAR 2000 COMPLIANCE
During 1999, we completed the process of preparing for the potential
impact of the Year 2000 date change on the ability of our computerized
information programs and systems and certain manufacturing and other equipment
to accurately process information that may be date-sensitive. We did not
experience any difficulties related to the Year 2000 date change on December 31,
1999, and we have not experienced any such difficulties to date in calendar year
2000. Although considered unlikely, unanticipated problems in our core business
processes, including problems associated with non-compliant third parties and
disruptions to the economy in general, could still occur despite our efforts to
date to remediate affected systems and develop contingency plans. We will
continue to monitor all business processes, including interaction with our
customers, vendors and other third parties, throughout calendar 2000, and we
will address any issues that arise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Digene is subject to market risk associated with changes in foreign
currency exchange rates and interest rates. Our exchange rate risk is limited to
our operations in Europe and South America. We do not believe that the impact
from foreign currency exchange rate fluctuations will have a material impact on
our financial statements. The net impact of foreign exchange activities on
earnings was immaterial for the years ended June 30, 1998, 1999 and 2000.
Interest rate exposure is primarily limited to the $12.7 million of short-term
investments owned by us. Such securities are debt instruments that generate
interest income for Digene on excess cash balances. We do not actively manage
the risk of interest rate fluctuations; however, such risk is mitigated by the
relatively short term, less than 12 months, nature of certain investments. We do
not consider the present rate of inflation to have a significant impact on its
business.
38
<PAGE> 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
DIGENE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............................. 40
Consolidated Balance Sheets................................................... 41
Consolidated Statements of Operations......................................... 42
Consolidated Statements of Stockholders' Equity............................... 43
Consolidated Statements of Cash Flows......................................... 44
Notes to Consolidated Financial Statements.................................... 45
</TABLE>
39
<PAGE> 42
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Digene Corporation
We have audited the accompanying consolidated balance sheets of Digene
Corporation as of June 30, 1999 and 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 2000. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Digene
Corporation at June 30, 1999 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2000, in conformity with accounting principles generally accepted in
the United States.
As discussed in Note 2 to Consolidated Financial Statements in 1998 the Company
changed its method of accounting for costs related to start-up activities.
/s/ Ernst & Young LLP
Washington, DC
August 18, 2000
40
<PAGE> 43
DIGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------
1999 2000
--------------------- --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,934,415 $ 7,534,998
Short-term investments 4,347,084 12,678,819
Accounts receivable, less allowance of approximately $170,000 and $263,000 4,787,278
at June 30, 1999 and 2000, respectively 2,356,537
Note receivable, short-term (Note 6) - 240,000
Inventories (Note 7) 2,894,210 4,400,297
Prepaid expenses and other current assets 1,388,224 907,877
--------------------- --------------------
Total current assets 24,920,470 30,549,269
Note receivable, net of current portion (Note 6) - 160,000
Property and equipment, net (Note 8) 1,737,078 3,032,088
Intangible assets, net (Notes 2 and 5) 1,350,774 1,200,687
Deposits and other assets 100,157 842,922
--------------------- --------------------
Total assets $ 28,108,479 $ 35,784,966
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,503,387 $ 3,828,138
Accrued expenses 809,811 1,026,600
Accrued payroll 1,108,236 1,426,604
--------------------- --------------------
Total current liabilities 4,421,434 6,281,342
Deferred rent - 78,756
Commitments (Notes 10, 11 and 16)
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued and
outstanding - -
Common stock, $0.01 par value, 50,000,000 shares authorized, 14,565,937 and
16,173,538 shares issued and outstanding at June 30, 1999 and 2000, respectively 161,735
145,659
Additional paid-in capital 72,514,583 84,846,747
Deferred stock compensation (253,200) (96,411)
Accumulated deficit (48,719,997) (55,487,203)
--------------------- --------------------
Total stockholders' equity 23,687,045 29,424,868
--------------------- --------------------
Total liabilities and stockholders' equity $ 28,108,479 $ 35,784,966
===================== ====================
</TABLE>
See accompanying notes.
41
<PAGE> 44
DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------------
1998 1999 2000
---------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Revenues:
Product sales $ 11,980,445 $ 17,013,735 $ 22,287,483
Research and development contracts 28,500 453,364 756,487
---------------------- ---------------------- -----------------
Total revenues 12,008,945 17,467,099 23,043,970
Costs and expenses:
Cost of product sales 3,847,725 6,111,774 7,641,304
Research and development 5,284,761 4,643,458 6,123,027
Selling and marketing 10,057,596 10,531,187 10,929,506
General and administrative 5,689,783 5,956,911 6,346,145
Amortization of intangible assets 385,679 150,086 150,086
---------------------- ---------------------- --------------------
Loss from operations (13,256,599) (9,926,317) (8,146,098)
Other income (expense):
Other income (expense) (83,047) (183,394) 513,322
Interest expense (163,625) (30,144) (320)
Interest income 1,377,665 984,708 1,050,258
---------------------- ---------------------- --------------------
Loss from operations before income taxes (12,125,606) (9,155,147) (6,582,838)
Provision for income taxes 48,463 149,069 184,368
---------------------- ---------------------- --------------------
Net loss before cumulative effect of a change in accounting (6,767,206)
principle (12,174,069) (9,304,216)
Cumulative effect of a change in accounting principle (1,914,499) - -
---------------------- ---------------------- --------------------
Net loss $ (14,088,568) $ (9,304,216) $ (6,767,206)
====================== ====================== ====================
Basic and diluted net loss per share $ (1.06) $ (0.65) $ (0.44)
====================== ====================== ====================
Weighted average shares outstanding 13,235,901 14,353,720 15,295,798
====================== ====================== ====================
</TABLE>
See accompanying notes.
42
<PAGE> 45
DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL DEFERRED TOTAL
COMMON STOCK
------------ PAID-IN STOCK ACCUMULATED STOCKHOLDERS'
------------------------
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 11,579,530 $115,795 $49,477,621 $ - $(25,327,213) $ 24,266,203
Issuance of Common Stock, net of offering costs 2,250,000 22,500 20,631,915 - - 20,654,415
Exercise of Common Stock options 287,778 2,878 263,774 - - 266,652
Net loss - - - - (14,088,568) (14,088,568)
---------------------------------------------------------------------------------
Balance at June 30, 1998 14,117,308 141,173 70,373,310 - (39,415,781) 31,098,702
Exercise of Common Stock options 266,745 2,667 326,595 - - 329,262
Issuance of Common Stock in connection with
the acquisition of Viropath 181,884 1,819 1,498,178 - - 1,499,997
Issuance of Common Stock options
to non-employees - - 316,500 (316,500) - -
Compensatory stock options earned -
by non-employees - - 63,300 - 63,300
Net loss - - - - (9,304,216) (9,304,216)
---------------------------------------------------------------------------------
Balance at June 30, 1999 14,565,937 145,659 72,514,583 (253,200) (48,719,997) 23,687,045
Exercise of Common Stock options 707,601 7,076 2,088,539 - - 2,095,615
Issuance of Common Stock, net of offering costs 900,000 9,000 10,344,905 - - 10,353,905
Compensatory stock options canceled - - (101,280) 101,280 - -
Compensatory stock options earned 55,509 55,509
by non-employees - - - -
Net loss - - - - (6,767,206) (6,767,206)
---------------------------------------------------------------------------------
Balance at June 30 , 2000 16,173,538 $161,735 $84,846,747 $ (96,411) $(55,487,203) $ 29,424,868
---------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
43
<PAGE> 46
DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------
1998 1999 2000
-------------------- -------------------- ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (14,088,568) $ (9,304,216) $ (6,767,206)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization of property and equipment 1,068,211 951,364 1,011,973
Amortization of intangible assets 385,679 150,086 150,087
Compensation expense related to stock options - 63,300 55,509
Cumulative effect of a change in accounting principle 1,914,499 - -
Gain on sale of product line - - (514,979)
Changes in operating assets and liabilities:
Accounts receivable 647,918 715,687 (2,430,741)
Inventories (1,132,122) 1,547,736 (1,591,108)
Prepaid expenses and other current assets (114,338) (827,518) 480,347
Deposits and other assets 37,648 (3,241) (742,765)
Accounts payable 330,352 79,142 1,324,751
Accrued expenses (229,973) 267,747 216,789
Accrued payroll 152,935 352,746 318,368
Accrued rent (46,278) (54,340) -
Deferred rent (25,338) (11,980) 78,756
-------------------- -------------------- ------------------
Net cash used in operating activities (11,099,375) (6,073,487) (8,410,219)
INVESTING ACTIVITIES
Purchases of short-term investments (14,634,204) (8,183,962) (24,244,627)
Sales of short-term investments 18,513,915 11,018,450 15,912,892
Capital expenditures (2,480,907) (933,934) (2,306,983)
Proceeds from the sale of a product line - - 200,000
Additions to goodwill and intangible assets (4,321) - -
-------------------- -------------------- ------------------
Net cash provided by (used in) investing activities 1,394,483 1,900,554 (10,438,718)
FINANCING ACTIVITIES
Net proceeds from issuance of Common Stock 20,654,415 - 10,353,905
Exercise of Common Stock options 266,652 329,262 2,095,615
Principal repayments on debt (1,338,236) (552,717) -
-------------------- -------------------- ------------------
Net cash provided by (used in) financing activities 19,582,831 (223,455) 12,449,520
-------------------- -------------------- ------------------
Net increase (decrease) in cash and cash equivalents 9,877,939 (4,396,388) (6,399,417)
Cash and cash equivalents at beginning of year 8,452,864 18,330,803 13,934,415
-------------------- -------------------- ------------------
Cash and cash equivalents at end of year $ 18,330,803 $ 13,934,415 $ 7,534,998
==================== ==================== ==================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 206,000 $ 30,000 $ 1,000
==================== ==================== ==================
</TABLE>
See accompanying notes.
44
<PAGE> 47
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Digene Corporation (the "Company" or "Digene") was incorporated in the state of
Delaware in 1987. The Company develops, manufactures and markets its proprietary
DNA and RNA testing systems for the screening, monitoring and diagnosis of human
diseases. The Company has developed and is commercializing its patented Hybrid
Capture(R) Gene Analysis System and tests in three areas: women's cancers and
infectious diseases, blood viruses, and genomics and pharmaceutical research.
The Company's lead product, the Hybrid Capture II HPV Test is the only
FDA-approved test for the detection of human papillomavirus ("HPV"), which is
the cause of greater than 99% of cervical cancer cases. In addition, Digene has
developed and launched tests internationally for the detection and viral load
monitoring of major blood viruses, including cytomegalovirus and hepatitis B
virus ("HBV"), and tests for the detection of two of the most common sexually
transmitted infections, chlamydia and gonorrhea.
On June 28, 1996, the Company entered into a joint venture agreement with a
Brazilian national to establish Digene do Brasil LTDA, a majority-owned
subsidiary of the Company. On October 29, 1997, the Company established a wholly
owned subsidiary, Digene B.V., for the distribution of the Company's products in
Europe. On March 3, 1998, the Company established a wholly owned subsidiary,
Digene Europe, Inc., for the marketing of the Company's products in Europe. On
July 1, 1998, the Company acquired Viropath B.V., a company with limited
liability, registered in Amsterdam, The Netherlands.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of Digene and its
subsidiaries. All significant intercompany transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents, which are stated at cost, consist of highly liquid investments
with original maturities of three months or less.
SHORT-TERM INVESTMENTS
The Company classifies its short-term investments as available-for-sale.
Investments in securities that are classified as available-for-sale and have
readily determinable fair values are measured at fair market value in the
consolidated balance sheets. As of June 30, 1999 and 2000, short-term
investments are stated at cost, which approximates market.
45
<PAGE> 48
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for credit losses, and such losses have been within management's
expectations.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that long-lived assets or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation were required, the estimated future undiscounted
cash flows associated with the asset would be compared to the asset's carrying
amount to determine if a write-down is required. If a write-down were required,
the Company would prepare a discounted cash flow analysis to determine the
amount of the write-down.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment of goods. Revenue from
research and development contracts is recognized as research and development
activities are performed.
SIGNIFICANT CUSTOMERS
For the years ended June 30, 1998, 1999 and 2000, the Company generated 42%,
50%, and 39%, respectively, of total revenues from a single customer.
COMPREHENSIVE INCOME
Comprehensive income (loss) includes all changes in equity during a period
except those resulting from the issuance of shares of stock and distributions to
stockholders. For the years ended June 30, 1998, 1999 and 2000, the Company's
net loss approximates its comprehensive loss; accordingly, no separate
disclosure of comprehensive loss is presented.
FOREIGN CURRENCY VALUATION
The local currency is the functional currency for most of the Company's
international subsidiaries and, as such, assets and liabilities are translated
into U.S. dollars at year-end exchange rates. Income and expense items are
translated at average exchange rates during the year. Translation adjustments
resulting from changes in exchange rates are not considered material and have
been recognized in the Consolidated Statements of Operations.
RESEARCH AND DEVELOPMENT
The Company expenses its research and development costs as incurred.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs amounted
to approximately $215,000, $309,000 and $76,000 during fiscal 1998, 1999 and
2000, respectively.
46
<PAGE> 49
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company provides for income taxes in accordance with the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
NET LOSS PER SHARE
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share", which requires the Company to
present basic and fully diluted earnings per share. The Company's basic and
diluted loss per share is calculated by dividing the net loss by the weighted
average number of shares of common stock outstanding during all periods
presented.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation in accordance with the
provisions of APB No. 25 and has provided the pro forma disclosures of net loss
and net loss per share in accordance with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") in
Note 13 to these Financial Statements.
CHANGE IN ACCOUNTING PRINCIPLE
In April 1998, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants issued Statement of Position
98-5, "Reporting the Costs of Start-up Activities" ("SOP 98-5"), which requires
that costs related to start-up activities be expensed as incurred. Prior to
1998, the Company capitalized $2,497,172 for the acquisition of HPV customer
lists from International Murex Technologies Corporation (together with its
affiliates, "Murex") pursuant to a Customer Transfer Agreement (See Note 4).
Effective April 1, 1998, the Company elected early adoption of SOP 98-5. The
effect of adoption of SOP 98-5 was to increase net loss by $1,914,499 to expense
costs that had been capitalized prior to 1998.
NEW SEC INTERPRETATIONS
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB
101") which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective the
first fiscal quarter of fiscal years beginning after December 15, 1999 and
requires companies to report any changes in revenue recognition as a cumulative
change in accounting principle at the time of implementation in accordance with
APB Opinion No. 20, "Accounting Changes." The adoption of SAB 101 is not
expected to have a material impact on the Company's consolidated financial
statements.
47
<PAGE> 50
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. MARKETING AND DISTRIBUTION AGREEMENT
On April 17, 1998, Abbott Laboratories ("Abbott") and Murex entered into an
agreement pursuant to which Abbott acquired all of the outstanding shares of
Murex's common stock. Effective May 7, 1999, the Company entered into a
Marketing and Distribution Agreement ("Abbott Agreement") with Abbott, which
formed an exclusive marketing alliance for the Company's women's health and
blood virus testing products in certain geographic areas. The Abbott Agreement
calls for Abbott to assume sales and marketing responsibility for all of the
Company's Hybrid Capture products in Europe, the Middle East and Africa and for
the Company's Hybrid Capture II chlamydia and gonorrhea tests in the United
States. The Abbott Agreement replaces all previous agreements between the
Company and Murex. In connection with these previous agreements, Murex owned an
equity interest in the Company. This equity interest was sold by Murex during
fiscal 1998. Abbott will act as the sole distributor for the Company's HBV and
HPV products in Europe, the Middle East and Africa through at least December 31,
2003. Abbott will act as the sole distributor in the United States for the
Company's Hybrid Capture chlamydia and gonorrhea tests for at least five
calendar years after their commercial launch in the United States.
4. CUSTOMER TRANSFER AGREEMENT
Effective February 1, 1997, the Company acquired Murex's HPV customer lists for
approximately $2,500,000 in exchange for promissory notes in the aggregate
amount of $1,702,750 and cash of $1,000,000 pursuant to a Customer Transfer
Agreement. In accordance with an agency agreement, which was superseded by the
Abbott Agreement, the Company agreed to pay to Murex costs of approximately
$853,000 over eleven months, which costs were expensed during the year ended
June 30, 1997. The intangible asset recorded to account for the Murex customer
lists was written off during 1998 (See Note 2 - "Change in Accounting
Principle").
The unsecured notes payable to Murex in conjunction with the Company's
acquisition of Murex's HPV customer list were noninterest-bearing and were
discounted at 10%. The Company made payments totaling $1,420,000 and $557,750
and incurred interest expense of $128,830 and $20,326 for the years ended June
30, 1998 and 1999, respectively.
5. ACQUISITION OF VIROPATH B.V.
On July 1, 1998, the Company issued 181,884 shares of its Common Stock, par
value $0.01 per share, as consideration for its purchase of all of the
outstanding capital stock of Viropath B.V., a company with limited liability,
registered at Amsterdam, The Netherlands ("Viropath"). The 181,884 shares of the
Company's Common Stock were recorded at $8.247 per share, in accordance with the
Stock Purchase Agreement, and resulted in total consideration of approximately
$1.5 million. In accordance with the Stock Purchase Agreement, seventy percent
of these shares were held in escrow until July 1, 1999. The Company held the
remaining thirty percent of these shares in escrow until January 1, 2000. In
addition, the Company is obligated to pay royalties on future sales of
Viropath's licensed products, not to exceed $1 million. Through June 30, 2000
the Company has not been required to pay any such royalties. The acquisition was
accounted for using the purchase method and resulted in an excess of purchase
price over the fair value of net assets acquired of approximately $1.5 million,
which the Company recorded as goodwill, which will be amortized over ten years
using the straight-line method. As of June 30, 2000, goodwill and the related
accumulated amortization were $1,500,860 and $300,173, respectively. The results
of operations of Viropath have been consolidated with those of the Company since
the date of acquisition. The operating results of Viropath are not considered
material to the consolidated financial statements of the Company, and
accordingly, pro forma financial information has not been presented for this
acquisition.
In addition, the Company granted options to purchase an aggregate of 50,000
shares of its Common Stock to the three Viropath individual shareholders in
connection with their execution of consulting agreements with the Company. The
options are exercisable in equal installments on each of June 30, 1999, 2000,
2001, 2002 and 2003 at an exercise price of $9.75 per share. The options expire
on June 29, 2008. The options were compensatory options
48
<PAGE> 51
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. ACQUISITION OF VIROPATH B.V. (CONTINUED)
and were valued on July 1, 1998 at approximately $316,500. This amount will be
expensed over the vesting period of the options. During fiscal 1999 and 2000,
the Company recognized $63,300 and $55,509 of compensation expense related to
these options, respectively. In February 2000, one of these option holders died
and his unvested options expired. The total amount of the expired options, which
was $101,280, was reversed from deferred stock compensation.
6. SALE OF A PRODUCT LINE
On March 24, 2000, the Company completed the sale of its Molecular Biology
Reagents ("MBR") product line and related assets to KD Medical, Inc. This
transaction involved the sale of the Company's MBR product line and the
associated manufacturing equipment, as well as the raw material and finished
goods inventory for the product line. As consideration for this sale, the
Company received $200,000 in cash and a promissory note in the amount of
$400,000 payable in monthly installments of $20,000 plus 8% accrued interest
from July 1, 2000 through February 1, 2002. A gain of approximately $515,000 was
recorded on the sale of this product line and is included in the Other income
(expense) line of the Consolidated Statements of Operations.
7. INVENTORIES
Inventories are stated at the lower of cost or market on a first-in, first-out
basis.
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1999 2000
------------------- --------------------
<S> <C> <C>
Finished goods $ 1,100,661 $ 1,737,163
Work in process 1,636,552 2,622,741
Raw materials 894,537 1,295,015
------------------- --------------------
3,631,750 5,654,919
Obsolescence reserve (737,540) (1,254,622)
------------------- --------------------
$ 2,894,210 $ 4,400,297
=================== ====================
</TABLE>
8. PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at cost and
depreciated or amortized using the straight-line method over the estimated
useful lives of three to five years. Leasehold improvements are amortized over
the lesser of the related lease term or the useful life.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1999 2000
------------------- -------------------
<S> <C> <C>
Furniture, fixtures and office equipment $ 1,413,735 $ 1,769,017
Machinery and equipment 3,287,618 5,098,655
Leasehold improvements 925,415 103,798
------------------- -------------------
5,626,768 6,971,470
Accumulated depreciation and amortization (3,889,690) (3,939,382)
------------------- -------------------
$ 1,737,078 $ 3,032,088
=================== ===================
</TABLE>
49
<PAGE> 52
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
Significant components of the provision for income taxes of operations consist
of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1998 1999 2000
---------------- ----------------- ----------------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State - - -
Foreign 48,463 149,069 184,368
---------------- ----------------- ----------------
Total current 48,463 149,069 184,368
Deferred:
Federal - - -
State - - -
Foreign - - -
---------------- ----------------- ----------------
Total deferred - - -
---------------- ----------------- ----------------
Total provision for income taxes $48,463 $149,069 $184,368
================ ================= ================
</TABLE>
There is no net tax benefit recorded for the change in accounting principle
because such benefit creates a deferred tax asset, which the Company has fully
reserved.
The components of income (loss) from operations before income taxes are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1998 1999 2000
------------------- ------------------ -------------------
<S> <C> <C> <C>
United States $ (9,971,255) $(9,018,900) $(6,968,850)
Foreign (2,154,351) (136,247) 386,012
------------------- ------------------ -------------------
$(12,125,606) $(9,155,147) $(6,582,838)
=================== ================== ===================
</TABLE>
The following is a summary of the items which caused recorded income taxes
attributable to continuing operations to differ from taxes computed using the
statutory federal income tax rate for the years ended June 30, 1998, 1999, and
2000:
<TABLE>
<CAPTION>
JUNE 30,
1998 1999 2000
------------------- -----------------------------------
<S> <C> <C> <C>
Tax benefit at statutory rate $(4,244,000) $(3,204,000) $(2,290,000)
Effect of:
State income tax, net (606,000) (458,000) (327,000)
Foreign tax 48,463 149,069 184,368
Options (1,005,000) (863,000) (863,000)
Other 114,000 55,000 (271,000)
Foreign losses not used 861,000 37,000 -
Valuation allowance 4,880,000 4,433,000 3,751,000
------------------- -----------------------------------
Provision for income taxes $ 48,463 $ 149,069 $ 184,368
=================== ===================================
</TABLE>
50
<PAGE> 53
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (CONTINUED)
The Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1999 2000
-------------------- -------------------
<S> <C> <C>
Net operating loss carryforwards $ 16,840,000 $ 20,180,000
Research and development credits 1,083,000 1,295,000
Patent costs, net 491,000 365,000
Research and developmental deferral, net 1,125,000 986,000
Murex customer lists 857,000 754,000
Reserves 369,000 814,000
Other 1,199,000 1,321,000
-------------------- -------------------
Deferred tax assets 21,964,000 25,715,000
Valuation allowance (21,964,000) (25,715,000)
-------------------- -------------------
Net deferred tax assets $ - $ -
==================== ===================
</TABLE>
The Company recognized a tax provision of $149,069 and $184,368 for the years
ended June 30, 1999 and 2000, respectively, which related to the Company's
foreign operations. At June 30, 2000, the Company had tax net operating loss
carryforwards for income tax purposes of approximately $50 million.
Approximately $9.8 million of the net operating loss carryforwards is
attributable to exercised stock options, the benefit of which, when realized,
will directly increase additional paid-in capital. At June 30, 2000, the Company
also had research and development credit carryforwards of approximately
$1,295,000. In 1990, the Company experienced a change in ownership pursuant to
Section 382 of the Internal Revenue Code, which will cause the utilization of
pre-change losses and credits to be limited. Subject to this limitation, the
Company's net operating loss carryforwards and tax credits expire, if unused, at
various dates from 2003 through 2020. Realization of total deferred tax assets
is contingent upon the generation of future taxable income. Due to the
uncertainty of realization of these tax benefits, the Company has provided a
valuation allowance for the full amount of its deferred tax assets.
10. LEASE COMMITMENTS
In January 2000, the Company moved into a new facility in Gaithersburg,
Maryland, compromising a total of approximately 90,000 square feet. The lease
for the new facility has a ten-year term and the Company has two consecutive
rights to extend the term of the lease for five years each. The former
Beltsville executive office and manufacturing facility lease expired upon
completion of the move to the new facility. In addition, the lease on the
Company's research and development facility in Silver Spring, Maryland
terminated upon the Company's relocation of those activities to the new facility
in January 2000.
In December 1999, the Company established an equipment leasing facility with
Mellon US Leasing with a total commitment of $750,000. The Company used such
facility to fund furniture and equipment leases, including telecommunications
equipment, for its new leased facility in Gaithersburg, Maryland. As of June 30,
2000, when this commitment expired, the Company had used approximately $571,000
of the commitment. All of the equipment and furnishings leased under this
agreement have been accounted for as operating leases.
In February 2000, the Company received an equipment loan facility of $1,000,000
from the State of Maryland. Approximately $503,000 worth of fixed asset
additions, previously financed with cash, was converted to this facility during
July 2000. The remaining $497,000 in funding available was applied for during
August 2000.
On July 6, 2000, the Company entered into a rental agreement to renew the lease
of its London, England facility. The term of the lease is for 4 years and 7
months beginning July 1, 1999 and ending January 31, 2004.
51
<PAGE> 54
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LEASE COMMITMENTS (CONTINUED)
Future minimum rental commitments under these and other operating lease
agreements are as follows as of June 30, 2000:
<TABLE>
<S> <C>
2001 $ 2,782,321
2002 2,828,159
2003 2,782,122
2004 2,607,820
2005 2,550,991
Thereafter 12,784,735
---------------------
$ 26,336,148
=====================
</TABLE>
Rent expense under these leases was $763,126, $678,394, and $2,144,945 for the
years ended June 30, 1998, 1999 and 2000, respectively.
11. EMPLOYMENT AGREEMENTS
The Company has executed employment agreements with certain key executives under
which the Company is required to pay the following base salaries over the next
three years:
<TABLE>
<S> <C>
2001 $ 427,500
2002 124,493
2003 -
-------------------
$ 551,993
===================
</TABLE>
12. COMMON STOCK
On December 23, 1999, the Company and certain of its stockholders completed a
private placement of 1,500,000 shares of Common Stock to selected institutional
and other accredited investors at $13.00 per share. Of these shares, 900,000
were sold by the Company and 600,000 were sold by the selling stockholders. The
net proceeds to the Company, after placement agent fees and expenses, were
approximately $10,354,000.
13. COMMON STOCK OPTIONS
In March 1996, the Company adopted the Digene Corporation Omnibus Plan (the
"Omnibus Plan"). Pursuant to the Omnibus Plan, officers or other employees of
the Company may receive options to purchase Common Stock. The Omnibus Plan is
administered by the Compensation Committee. 2,000,000 shares have been reserved
for issuance under the Omnibus Plan.
In October 1996, the Company adopted the Digene Corporation Directors' Stock
Option Plan (the "Directors' Plan"). Pursuant to the Directors' Plan, directors
of the Company may receive options to purchase Common Stock. The Directors' Plan
is administered by the Board of Directors. 500,000 shares have been reserved for
issuance under the Directors' Plan.
In September 1997, the Company adopted the Digene Corporation 1997 Stock Option
Plan (the "1997 Stock Option Plan"). Pursuant to the 1997 Stock Option Plan,
consultants and other non-employees of the Company may receive options to
purchase Common Stock. The 1997 Stock Option Plan is administered by the Board
of Directors. 500,000 shares have been reserved for issuance under the 1997
Stock Option Plan.
52
<PAGE> 55
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMON STOCK OPTIONS (CONTINUED)
In October 1999, the Company adopted the Digene 1999 Incentive Plan (the "1999
Plan"). Pursuant to the 1999 Plan, employees of the Company and its
subsidiairies may receive options to purchase Common Stock and other Common
Stock awards. The 1999 Plan is administered by the Compensation Committee.
1,000,000 shares have been reserved for issuance under the 1999 Plan.
Prior to March 1996, the Company had adopted Stock Option Plans (the "Option
Plans") under which 2,622,821 shares of Common Stock were reserved for issuance
upon exercise of options granted to employees, officers and consultants of the
Company. The Option Plans provide for grants of stock options to employees
(including officers and employee directors), directors and consultants of the
Company. The Option Plans were previously administered by the Board of Directors
and presently are administered by the Compensation Committee, which determined
recipients and types of awards to be granted, including the exercise price,
number of shares subject to the award and the exercisability thereof. The
Company does not intend to grant further options under these Option Plans.
The terms of all stock options granted may not exceed ten years. The exercise
price of options granted, as determined by the Compensation Committee,
approximates fair market value at the time of the grant.
Common Stock options activity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------------------------------------
1998 1999 2000
------------------------------ ----------------------------- ------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------- --------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,812,333 $5.43 2,712,162 $6.42 3,177,529 $7.31
Options granted 486,500 11.69 933,250 8.77 607,500 16.38
Options exercised (287,778) 0.93 (266,745) 1.23 (707,601) 2.96
Options canceled or expired (298,893) 11.15 (201,138) 10.17 (82,341) 11.29
------------- ------------- -------------
Outstanding at end of year 2,712,162 6.42 3,177,529 7.31 2,995,087 10.06
============= ============= =============
Options exercisable at year-end 1,131,492 1.81 1,434,192 4.72 1,278,648 7.54
============= ============= =============
</TABLE>
The following table summarizes information about fixed-price stock options
outstanding at June 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- ----------------------------------------
RANGE OF EXERCISE NUMBER OUTSTANDING AVERAGE REMAINING WEIGHTED-AVERAGE NUMBER EXERCISABLE WEIGHTED-AVERAGE
PRICES AT JUNE 30, 2000 CONTRACTUAL LIFE EXERCISE PRICE AT JUNE 30, 2000 EXERCISE PRICE
---------------------- --------------------- ------------------- ----------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
$0.010-$2.00 132,859 0.5 $1.28 132,859 $1.28
$2.01-$5.00 156,855 0.5 2.31 146,786 2.28
$5.01-$8.00 318,857 7.8 6.50 140,293 6.36
$8.01-$11.00 1,594,416 6.8 9.55 831,810 9.49
$11.01-$15.00 692,600 8.7 13.07 26,900 13.16
$15.01-$39.38 99,500 9.7 32.60 - -
--------------------- ---------------------
2,995,087 6.8 10.06 1,278,648 7.54
===================== =====================
</TABLE>
53
<PAGE> 56
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMON STOCK OPTIONS (CONTINUED)
If compensation cost for the Company's stock option plans had been determined
based upon the fair market value at the grant date for awards under the plans
consistent with the methodology prescribed under SFAS No. 123, the Company's net
loss in fiscal 1998, 1999 and 2000 would have been approximately $16,574,000,
$12,842,000, and $13,251,000 or $1.25, $0.89, and $0.86 per share, respectively.
The effect of applying SFAS No. 123 on 1998, 1999 and 2000 pro forma net loss as
stated above is not necessarily representative of the effects on reported net
loss for future years due to, among other things, (1) the vesting period of the
stock options and (2) the fair market value of additional stock options in
future years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing fair value model with the following
weighted-average assumptions used for grants:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------
1998 1999 2000
--------------- --------------- --------------
<S> <C> <C> <C>
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 73% 77% 77%
Risk-free interest rate 6.5% 6.0% 6.0%
Expected life of the option term (in years) 5.5 6.1 5.8
</TABLE>
The weighted average fair values of the options granted during the years ended
June 30, 1998, 1999 and 2000 were $7.99, $6.26, and $11.84, respectively.
14. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1998 1999 2000
-------------------- ------------------ -----------------
<S> <C> <C> <C>
Numerator:
Net loss $(14,088,568) $(9,304,215) $(6,767,206)
==================== ================== =================
Denominator:
Denominator for basic and diluted earnings per
share--weighted-average shares 13,235,901 14,353,720 15,295,798
==================== ================== =================
Basic and diluted net loss per share $ (1.06) $ (0.65) $ (0.44)
==================== ================== =================
</TABLE>
54
<PAGE> 57
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. NET LOSS PER SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1998 1999 2000
------------------ ------------------ ------------------
<S> <C> <C> <C>
Basic and diluted loss per common share
Continuing operations $(0.92) $(0.65) $(0.44)
Cumulative effect of a change in accounting
principle (0.14) (0.00) (0.00)
------------------ ------------------ ------------------
Net loss $(1.06) $(0.65) $(0.44)
================== ================== ==================
Weighted average number of common shares outstanding:
Basic and diluted 13,235,901 14,353,720 15,295,798
================== ================== ==================
</TABLE>
15. RETIREMENT PLAN
The Company sponsors a 401(k) Profit Sharing Plan (the "Plan"), which covers all
employees who have completed 90 days of service. The Plan stipulates that
employees may elect an amount between 1% and 20% of their total compensation to
contribute to the Plan. Employee contributions are subject to Internal Revenue
Service limitations. All employees who have completed 1,000 hours of service
during the plan year and are employed by the Company on the last day of the plan
year are eligible to share in discretionary Company contributions. Employees
vest in employer contributions over five years. No contributions were made by
the Company during the years ended June 30, 1998, 1999 and 2000.
16. OTHER COMMITMENTS AND CONTINGENCIES
The Company's access to various probes, diagnostic techniques and a key product
component were acquired under agreements requiring the Company to pay future
royalties up to approximately 4.0% of applicable future net sales on certain
products. During fiscal 1998, 1999 and 2000, total royalties amounted to
$769,930, $655,062, and $947,628, respectively.
17. SEGMENT REPORTING
The Company operates one business segment which develops, manufactures and
markets proprietary DNA and RNA testing systems for the detection, screening and
monitoring of human diseases. Worldwide operations are summarized by geographic
region in the following table:
<TABLE>
<CAPTION>
1998 1999 2000
------------------------------------ ------------------------------------ ------------------------------------
ASSETS REVENUES ASSETS REVENUES ASSETS REVENUES
---------------- ----------------- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
North America $34,396,189 $ 4,776,036 $27,575,447 $ 5,930,026 $34,568,195 9,880,710
Europe 445,434 4,938,758 165,583 9,055,571 610,883 9,957,338
South America 597,915 1,619,334 367,449 1,860,242 605,888 1,746,724
Pacific Rim - 674,817 - 621,260 - 1,459,198
---------------- ----------------- ----------------- ---------------- ----------------- -----------------
$35,439,538 $12,008,945 $28,108,479 $17,467,099 $35,784,966 $23,043,970
================ ================= ================= ================ ================= =================
</TABLE>
55
<PAGE> 58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No change of accountants and/or disagreements on any matter of accounting
principles or financial statement disclosures has occurred within the last two
years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- Directors. The information with respect to directors required by
this item is incorporated herein by reference to Digene's
definitive Proxy Statement for its Annual Meeting of Stockholders,
scheduled to be held on October 26, 2000, which shall be filed
with the Securities and Exchange Commission within 120 days from
the end of the Digene's fiscal year (the "2000 Proxy Statement").
- Executive Officers. The information with respect to executive
officers required by this item is set forth in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by
reference to the 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by
reference to the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the 2000 Proxy Statement.
56
<PAGE> 59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) - Consolidated Financial Statements of Digene Corporation:
Report of Independent Auditors
Consolidated Balance Sheets as of June 30, 1999 and 2000
Consolidated Statements of Operations for the fiscal years
ended June 30, 1998, 1999, and 2000
Consolidated Statements of Stockholders' Equity for the
fiscal years ended June 30, 1998, 1999, and 2000
Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 1998, 1999 and 2000
Notes to Consolidated Financial Statements
- Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts and
Reserves
All other schedules for which provision is made in the
applicable accounting regulation of the Commission are not
required under the related instructions or are inapplicable
and therefore have been omitted.
- Exhibits:
3.1 Amended and Restated Certificate of Incorporation of
Digene.**
3.2 Amended and Restated Bylaws of Digene. (Incorporated by
reference to Exhibit 3.2 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended June 30, 1999 and
filed with the SEC on September 28, 1999.)
4.1 Specimen Common Stock Certificate.**
10.3 1990 Stock Option Plan.**
10.4 1991-A Stock Option Plan.**
10.5 1991-B Stock Option Plan.**
10.6 1996 Omnibus Plan.**
10.14 License Agreement dated September 1, 1995 between Digene
and Institut Pasteur.**
10.15 Cross-License Agreement dated April 1, 1990 among Life
Technologies, Inc. and Institut Pasteur.**
10.16 License Agreement dated December 1, 1983 between Bethesda
Research Laboratories, a division of Life Technologies,
Inc. and Georgetown University.**
10.18 License Agreement dated December 19, 1990 between Digene
and Life Technologies, Inc.**
10.26 Registration Rights Agreement dated as of May 24, 1996
between Digene, Armonk Partners, Murex Diagnostics
Corporation and Certain Other Stockholders.**
10.28 License Agreement dated September 27, 1995 between Digene
and Kanebo, Ltd.**
10.29 ! Employment Agreement dated as of September 3, 1996 between
Digene and Donna Marie Seyfried. (Incorporated by reference
to Exhibit 10 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996.)
10.30 Director's Stock Option Plan. (Incorporated by reference to
Exhibit A of Digene's Proxy Statement filed pursuant to
Section 14(a) of the Securities Exchange Act, dated
September 20, 1996.)
57
<PAGE> 60
10.31 ! Employment Agreement dated as of July 11, 1997 between
Digene and William J. Payne. (Incorporated by reference to
Exhibit 10.1 to Digene's Registration Statement on Form
S-3, File No. 333-35463, dated November 12, 1997.)
10.32 1997 Stock Option Plan. (Incorporated by reference to
Exhibit 99 of Digene's Registration Statement on Form S-8,
dated November 24, 1997.)
10.33 Stock Purchase Agreement dated as of June 30, 1998 by and
among Digene and Stichting Researchfonds Pathologie, Ewald
C.R.M. Keijser, Christophorus J.L.M. Meijer and Jan M. M.
Walboomers. (Incorporated by reference to Exhibit 10.37 of
Digene's Annual Report on Form 10-K for the fiscal year
ended June 30, 1998.)
10.34 Lease dated as of March 2, 1998 by and between Digene and
ARE - Metropoliton Grove I, LLC. (Incorporated by reference
to Exhibit 10.1 of Digene's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.)
10.35 ! Employment Agreement dated as of December 22, 1998 between
Digene and Joseph P. Slattery. (Incorporated by reference
to Exhibit 10.2 of Digene's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1998.)
10.36 ! Employment Agreement dated as of December 22, 1998 between
Digene and Jeanmarie P. Curley. (Incorporated by reference
to Exhibit 10.1 of Digene's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1998.)
10.37 *** Marketing and Distribution Agreement between Digene and
Abbott Laboratories, dated May 7, 1999. (Incorporated by
reference to Exhibit 10.41 of the Registrant' Annual Report
on Form 10-K/A for the fiscal year ended June 30, 1999 and
filed with the SEC on December 21, 1999.)
10.38 1999 Incentive Plan. (Incorporated by reference to Exhibit
A to the Registrant's Proxy Statement filed pursuant to
Section 14(a) of the Securities Exchange Act dated October
1, 1999.)
10.39 * License Agreement dated April 5, 2000 between Digene and
Institut Pasteur.
****
21 * Subsidiaries of the Registrant.
23.1 * Consent of Ernst & Young LLP, Independent Auditors.
27 * Financial Data Schedule.
--------------------
* Filed herewith.
** Incorporated by reference to the like-numbered exhibits to Digene's
Registration Statement on Form S-1, File No. 333-2968, dated March 29,
1996.
*** Confidential treatment has been granted for certain portions thereof
pursuant to a Commission Order granted December 21, 1999. Such provisions
have been filed separately with the Commission.
**** Confidential treatment has been requested for certain provisions thereof
pursuant to a Confidential Treatment Request filed September 28, 2000.
Such provisions have been filed separately with the Commission.
! Constitutes a management contract or compensatory plan required to be
filed as an exhibit to this Form 10-K.
(b) Reports on Form 8-K.
None.
58
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DIGENE CORPORATION
September 28, 2000 By: /s/ Evan Jones
-------------------------
Chairman and Chief
Executive Officer
We, the undersigned directors and officers of Digene Corporation, do
hereby constitute and appoint each of Evan Jones and Charles M. Fleischman, each
with full power of substitution, our true and lawful attorney-in-fact and agent
to do any and all acts and things in our names and in our behalf in our
capacities stated below, which acts and things either of them may deem necessary
or advisable to enable Digene Corporation to comply with the Securities Exchange
Act of 1934, as amended, any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Annual Report on
Form 10-K, including specifically, but not limited to, power and authority to
sign for any or all of us in our names, in the capacities stated below, any and
all amendments (including post-effective amendments) hereto; and we do hereby
ratify and confirm all that they shall do or cause to be done by virtue hereof).
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Evan Jones Chairman and Chief Executive September 28, 2000
---------------------------------------- Officer (principal executive officer)
Evan Jones
/s/ Charles M. Fleischman President, Chief Operating Officer, September 28, 2000
---------------------------------------- Chief Financial Officer and
Charles M. Fleischman Director (principal financial officer)
/s/ Joseph P. Slattery Vice President, Finance September 28, 2000
---------------------------------------- (principal accounting officer)
Joseph P. Slattery
/s/ Wayne T. Hockmeyer Director September 28, 2000
----------------------------------------
Wayne T. Hockmeyer
/s/ John H. Landon Director September 28, 2000
----------------------------------------
John H. Landon
/s/ Joseph M. Migliara Director September 28, 2000
----------------------------------------
Joseph M. Migliara
/s/ John J. Whitehead Director September 28, 2000
----------------------------------------
John J. Whitehead
</TABLE>
59
<PAGE> 62
EXHIBIT INDEX
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation of Digene.**
3.2 Amended and Restated Bylaws of Digene. (Incorporated by reference
to Exhibit 3.2 of the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1999 and filed with the SEC on
September 28, 1999.)
4.1 Specimen Common Stock Certificate.**
10.3 1990 Stock Option Plan.**
10.4 1991-A Stock Option Plan.**
10.5 1991-B Stock Option Plan.**
10.6 1996 Omnibus Plan.**
10.14 License Agreement dated September 1, 1995 between Digene and
Institut Pasteur.**
10.15 Cross-License Agreement dated April 1, 1990 among Life
Technologies, Inc. and Institut Pasteur.**
10.16 License Agreement dated December 1, 1983 between Bethesda Research
Laboratories, a division of Life Technologies, Inc. and Georgetown
University.**
10.18 License Agreement dated December 19, 1990 between Digene and Life
Technologies, Inc.**
10.26 Registration Rights Agreement dated as of May 24, 1996 between
Digene, Armonk Partners, Murex Diagnostics Corporation and Certain
Other Stockholders.**
10.28 License Agreement dated September 27, 1995 between Digene and
Kanebo, Ltd.**
10.29 ! Employment Agreement dated as of September 3, 1996 between Digene
and Donna Marie Seyfried. (Incorporated by reference to Exhibit 10
of the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996.)
10.30 Director's Stock Option Plan. (Incorporated by reference to
Exhibit A of Digene's Proxy Statement filed pursuant to Section
14(a) of the Securities Exchange Act, dated September 20, 1996.)
10.31 ! Employment Agreement dated as of July 11, 1997 between Digene and
William J. Payne. (Incorporated by reference to Exhibit 10.1 to
Digene's Registration Statement on Form S-3, File No. 333-35463,
dated November 12, 1997.)
10.32 1997 Stock Option Plan. (Incorporated by reference to Exhibit 99
of Digene's Registration Statement on Form S-8, dated November 24,
1997.)
10.33 Stock Purchase Agreement dated as of June 30, 1998 by and among
Digene and Stichting Researchfonds Pathologie, Ewald C.R.M.
Keijser, Christophorus J.L.M. Meijer and Jan M. M. Walboomers.
(Incorporated by reference to Exhibit 10.37 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30,
1998.)
10.34 Lease dated as of March 2, 1998 by and between Digene and ARE -
Metropoliton Grove I, LLC. (Incorporated by reference to Exhibit
10.1 of Digene's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998.)
10.35 ! Employment Agreement dated as of December 22, 1998 between Digene
and Joseph P. Slattery. (Incorporated by reference to Exhibit 10.2
of Digene's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998.)
10.36 ! Employment Agreement dated as of December 22, 1998 between Digene
and Jeanmarie P. Curley. (Incorporated by reference to Exhibit
10.1 of Digene's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998.)
10.37 *** Marketing and Distribution Agreement between Digene and Abbott
Laboratories,
60
<PAGE> 63
dated May 7, 1999. (Incorporated by reference to Exhibit 10.41 of
the Registrant's Annual Report on Form 10-K/A for the fiscal year
ended June 30, 1999 and filed with the SEC on December 21, 1999.)
10.38 1999 Incentive Plan. (Incorporated by reference to Exhibit A to
the Registrant's Proxy Statement filed pursuant to Section 14(a)
of the Securities Exchange Act dated October 1, 1999.)
10.39 * License Agreement dated April 5, 2000 between Digene and Institut
Pasteur.
****
21 * Subsidiaries of the Registrant.
23.1 * Consent of Ernst & Young LLP, Independent Auditors.
27 * Financial Data Schedule.
--------------------
* Filed herewith.
** Incorporated by reference to the like-numbered exhibit to Digene's
Registration Statement on Form S-1, File No. 333-2968, dated March 29,
1996.
*** Confidential treatment has been granted for certain portions thereof
pursuant to a Commission Order granted December 21, 1999. Such provisions
have been filed separately with the Commission.
**** Confidential treatment has been requested for certain provisions thereof
pursuant to a confidential Treatment Request filed September 28, 2000.
Such provisions have been filed separately with the Commission.
! Constitutes a management contract or compensatory plan required to be
filed as an exhibit to this Form 10-K.
61
<PAGE> 64
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Digene Corporation
We have audited the consolidated financial statements of Digene Corporation as
of June 30, 1999 and 2000 and for each of the three years in the period ended
June 30, 2000 and have issued our report thereon dated August 18, 2000 (included
elsewhere in this report). Our audits also included the financial statement
schedule listed in Item 14(a) of this report. The schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Washington, DC
August 18, 2000
62
<PAGE> 65
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF END OF
CLASSIFICATION PERIOD ADDITIONS DEDUCTIONS PERIOD
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended June 30, 1998 61 150 (2) (1) 209
Year ended June 30, 1999 209 - (39) (1) 170
Year ended June 30, 2000 170 220 (127) (1) 263
Reserve for inventory obsolescence:
Year ended June 30, 1998 339 - - 339
Year ended June 30, 1999 339 399 - 738
Year ended June 30, 2000 738 517 - 1,255
</TABLE>
(1) "Deductions" represent accounts written off during the period less
recoveries of accounts previously written off.
63
