DIATIDE INC, 10-Q, 1997-08-13

DIATIDE INC
10-Q, 1997-08-13
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES

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<PAGE> 1

================================================================================
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997

[ ] 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 0-28434

------------------------

DIATIDE, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 04-3078258
- --------------------------------------------------------------------------------------------
STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

NINE DELTA DRIVE, LONDONDERRY, NH 03053
- --------------------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>

603-437-8970
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS 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
----- -----

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, $0.001
PAR VALUE, AS OF AUGUST 8, 1997 WAS 10,515,293.
================================================================================
<PAGE> 2

DIATIDE, INC.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION

ITEM 1 Financial Statements (Unaudited)

Condensed Balance Sheets as of June 30, 1997 and December 31, 1996... 3

Condensed Statements of Operations for the three months ended June
30, 1997 and 1996.................................................. 4

Condensed Statements of Operations for the six months ended June 30,
1997 and 1996, and for the period from February 6, 1990 (date of
inception) to June 30, 1997........................................ 5

Condensed Statements of Cash Flows for the six months ended June 30,
1997 and 1996, and for the period from February 6, 1990 (date of
inception) to June 30, 1997........................................ 6

Notes to Condensed Financial Statements.............................. 7

ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 8

PART II OTHER INFORMATION

ITEM 4 Submission of Matters to a Vote of Security Holders.................. 11

ITEM 6 Exhibits and Reports on Form 8-K..................................... 11

SIGNATURES...................................................................... 12
</TABLE>

2
<PAGE> 3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIATIDE, INC.
(A DEVELOPMENT STAGE COMPANY)

CONDENSED BALANCE SHEETS

JUNE 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 2,698,034 $ 6,004,207
Marketable securities......................................... 7,778,202 10,782,632
Other current assets.......................................... 289,161 443,776
------------ ------------
Total current assets............................................ 10,765,397 17,230,615
Property and equipment, at cost................................. 2,514,395 2,373,540
Less: accumulated depreciation and amortization................. 1,528,064 1,300,051
------------ ------------
986,331 1,073,489
Other assets.................................................... 10,783 10,783
------------ ------------
Total assets.................................................... $ 11,762,511 $ 18,314,887
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses......................... $ 980,168 $ 1,514,905
Accrued clinical expenses..................................... 1,794,603 2,099,826
Current portion of capital lease obligation................... 3,460 3,460
------------ ------------
Total current liabilities....................................... 2,778,231 3,618,191
Capital lease obligation, less current portion.................. 11,455 12,878
Stockholders' equity:
Preferred stock, $0.01 par value
Authorized shares -- 10,591,874
Issued and outstanding shares -- none......................... -- --
Common stock, $0.001 par value
Authorized shares -- 50,000,000
Issued shares -- 10,520,094 (10,404,248 in 1996)........... 10,520 10,404
Additional paid-in capital.................................... 50,327,617 50,140,186
Deferred compensation......................................... (1,119,254) (1,285,483)
Deficit accumulated during development stage.................. (40,246,034) (34,181,265)
------------ ------------
8,972,849 14,683,842
Less: 4,800 shares of common stock in treasury, at cost....... (24) (24)
------------ ------------
Total stockholders' equity...................................... 8,972,825 14,683,818
------------ ------------
Total liabilities and stockholders' equity...................... $ 11,762,511 $ 18,314,887
============ ============
</TABLE>

- ---------------

Note: The balance sheet at December 31, 1996 has been derived from audited
financial statements at that date but does not include all of the
financial information and footnotes required by generally accepted
accounting principles for complete financial statements.

See Notes to Condensed Financial Statements.

3
<PAGE> 4

DIATIDE, INC.
(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Sponsored research............................................ $ 500,000 $ 500,000
License fees.................................................. -- 500,000
Research grants............................................... 30,000 56,073
----------- -----------
Total revenues.................................................. 530,000 1,056,073
Costs and expenses:
Research and development...................................... 3,219,125 3,663,644
General and administrative.................................... 862,302 584,588
----------- -----------
Total costs and expenses........................................ 4,081,427 4,248,232
Loss from operations............................................ (3,551,427) (3,192,159)
Other income (expense):
Interest income............................................... 182,423 108,368
Interest expense.............................................. (452) (6,142)
----------- -----------
Total other income (expense).................................... 181,971 102,226
----------- -----------
Net loss........................................................ $(3,369,456) $(3,089,933)
=========== ===========
Net loss and pro forma net loss per share (Note 4).............. $ (0.32) $ (0.37)
=========== ===========
Shares used in computing net loss and pro forma net loss per
share (Note 4)................................................ 10,478,043 8,464,612
</TABLE>

See Notes to Condensed Financial Statements.

4
<PAGE> 5

DIATIDE, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 6, 1990
SIX MONTHS ENDED JUNE 30, (DATE OF INCEPTION)
------------------------------- TO JUNE 30,
1997 1996 1997
----------- ----------- --------------------
<S> <C> <C> <C>
Revenues:
Sponsored research........................... $ 1,000,000 $ 1,000,000 $ 3,778,388
License fees................................. -- 500,000 1,300,000
Research grants.............................. 110,000 56,073 665,498
----------- ----------- ------------
Total revenues................................. 1,110,000 1,556,073 5,743,886
Costs and expenses:
Research and development..................... 5,990,007 6,192,247 37,377,319
General and administrative................... 1,581,443 1,023,600 10,205,130
----------- ----------- ------------
Total costs and expenses....................... 7,571,450 7,215,847 47,582,449
Loss from operations........................... (6,461,450) (5,659,774) (41,838,563)
Other income (expense):
Interest income.............................. 397,638 224,757 1,834,138
Interest expense............................. (957) (16,176) (241,609)
----------- ----------- ------------
Total other income (expense)................... 396,681 208,581 1,592,529
----------- ----------- ------------
Net loss....................................... $(6,064,769) $(5,451,193) $(40,246,034)
=========== =========== ============
Net loss and pro forma net loss per share (Note
4)........................................... $ (0.58) $ (0.65)
=========== ===========
Shares used in computing net loss and pro forma
net loss per share (Note 4).................. 10,455,377 8,330,108
</TABLE>

See Notes to Condensed Financial Statements.

5
<PAGE> 6

DIATIDE, INC.
(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 6, 1990
SIX MONTHS ENDED JUNE 30, (DATE OF INCEPTION)
--------------------------- TO JUNE 30,
1997 1996 1997
----------- ----------- -------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss......................................... $(6,064,769) $(5,451,193) $ (40,246,034)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization.................. 228,013 196,897 1,566,919
Cancellation of accrued interest............... -- -- 111,438
Amortization of deferred compensation.......... 166,229 167,287 543,746
Compensation associated with stock option
grants...................................... 89,924 -- 165,884
Changes in operating assets and liabilities.... (685,345) 1,766,370 2,435,972
----------- ----------- -------------
Cash used in operating activities........... (6,265,948) (3,320,639) (35,422,075)
INVESTING ACTIVITIES:
Additions to property and equipment.............. (140,855) (322,866) (2,495,037)
Purchases of marketable securities............... (3,995,570) (1,351,749) (20,623,296)
Sales and maturities of marketable securities.... 7,000,000 4,910,094 12,845,094
----------- ----------- -------------
Cash provided by (used in) investing
activities................................ 2,863,575 3,235,479 (10,273,239)
FINANCING ACTIVITIES:
Sale of preferred stock.......................... -- -- 28,255,133
Issuance of convertible notes.................... -- -- 3,508,464
Repayment of convertible notes................... -- -- (315,000)
Issuance of long-term debt....................... -- -- 900,518
Repayment of long-term obligations............... (1,423) (107,050) (904,961)
Sale of common stock............................. 97,623 16,641,958 16,949,218
Repurchase of common stock....................... -- -- (24)
Capitalized financing costs...................... -- -- --
----------- ----------- -------------
Cash provided by (used in) financing
activities................................ 96,200 16,534,908 48,393,348
----------- ----------- -------------
Net (decrease) increase in cash and cash
equivalents.................................... (3,306,173) 16,449,748 2,698,034
Cash and cash equivalents at beginning of
period......................................... 6,004,207 5,084,197 --
----------- ----------- -------------
Cash and cash equivalents at end of period....... $ 2,698,034 $21,533,945 $ 2,698,034
=========== =========== =============
Noncash transactions:
Acquisition of equipment through capital lease
obligation.................................. $ -- $ -- $ 19,358
Conversion of convertible notes and accrued
interest to preferred stock................. $ -- $ -- $ 3,304,902
Deferred compensation associated with stock
options issued at less than fair value...... $ -- $ -- $ 1,663,000
Conversion of preferred stock to common
stock....................................... $ -- $31,559,922 $ 31,559,922
</TABLE>

See Notes to Condensed Financial Statements.

6
<PAGE> 7

DIATIDE, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

1. NATURE OF BUSINESS

Diatide, Inc. (the "Company") was founded in 1990 and is a development
stage biopharmaceutical company engaged in the discovery, development and
commercialization of proprietary disease-specific diagnostic agents and
therapeutics for life-threatening conditions. The foundation of Diatide's
diagnostic imaging products is the Company's proprietary peptide (Techtide(R))
technology.

2. BASIS OF PRESENTATION

The accompanying unaudited financial statements for the three and six
months ended June 30, 1997 and 1996 and for the period February 6, 1990 (date of
inception) to June 30, 1997 have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying financial statements include all adjustments of a
normal recurring nature necessary for a fair presentation of results for these
interim periods. The results of operations for the three and six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the year ending December 31, 1997.

These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1996
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996.

3. PUBLIC OFFERING

In June 1996, the Company completed its initial public offering of
2,200,000 shares of Common Stock raising approximately $16.4 million of net
proceeds after deducting offering costs. Concurrent with the completion of the
initial public offering, all 12,551,928 shares of Series A, Series B, Series C,
Series D and Series E Convertible Preferred Stock (collectively, the
"Convertible Preferred Stock") were converted into 7,531,140 shares of Common
Stock. In connection with this conversion, all such shares of Convertible
Preferred Stock were retired.

4. FINANCIAL INFORMATION

For 1996, pro forma net loss per share is computed using the weighted
average number of outstanding shares of Common Stock and Common Stock
equivalents and assuming the previously outstanding Convertible Preferred Stock
had been converted into common shares effective at the beginning of the
respective period. Common Stock equivalent shares are excluded from the
computation if their effect is anti-dilutive; however, pursuant to the
requirements of the SEC, common shares issued by the Company and common
equivalent shares relating to stock options (using the treasury stock method)
issued during the twelve months prior to the initial public offering are
included whether or not they are anti-dilutive. Historical earnings per share
have not been presented for the six months ended June 30, 1996 since such
amounts are not deemed meaningful due to the significant change in the Company's
capital structure that occurred in connection with the initial public offering.
For the three and six months ended June 30, 1997, net loss per share is computed
using the weighted average number of outstanding shares of common stock. Common
stock equivalents are excluded from the computation since their effect is
anti-dilutive.

The common share amounts and per share dollar amounts have been adjusted
for all periods presented to reflect the effect of the 6-for-10 reverse stock
split effective June 6, 1996.

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share (FAS No. 128), which is required to be adopted for
fiscal years ending after December 15, 1997. At

7
<PAGE> 8

that time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under FAS No. 128,
the dilutive effect of stock options will be excluded in calculating earnings
per share. There is no material impact on the net loss or proforma net loss per
share for the three and six months ended June 30, 1997 and 1996 under FAS No.
128.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The Company is engaged in the discovery, development and commercialization
of proprietary, disease-specific diagnostic agents and therapeutics for
life-threatening conditions. The foundation of Diatide's diagnostic imaging
products is the Company's proprietary peptide (Techtide(R)) technology. To date,
the Company has not received revenue from the sale of products. In order to
commercialize products, the Company will need to address a number of
technological challenges and comply with comprehensive regulatory requirements.
Accordingly, it is not possible to predict the amount of funds that will be
required or the length of time that will pass before the Company receives
revenues from sales of its products. All revenues received by the Company
through June 30, 1997 have resulted from research grants from the National
Institutes of Health (the "NIH") and the Department of Defense (collectively,
the "Research Grants"), fees received for entering into option agreements with a
pharmaceutical company, and research and development support payments and the
P280 and the P829 option exercise payments from Nycomed ASA ("Nycomed") under
the Company's collaborative agreements with Nycomed.

The Company has incurred net losses since its inception. No revenues have
been generated from product sales and no product sales are anticipated for the
next 12 to 18 months. The Company expects to incur additional significant
operating losses over the next 18 to 30 months and expects its cumulative net
losses to increase significantly as the Company's research and development and
clinical trial efforts expand. The Company expects that its personnel and patent
costs will increase in the future. Patent costs also would increase if the
Company became involved in litigation or administrative proceedings involving
its patents or those of third parties. The Company has incurred cumulative net
losses since inception through June 30, 1997 of $40,246,034.

This Quarterly Report on Form 10-Q contains forward-looking statements that
involve a number of risks and uncertainties. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated by such forward-looking statements. These factors include,
without limitation, those set forth in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Certain Factors
That May Affect Future Results" of the Company's Annual Report on Form 10-K as
of December 31, 1996, which are expressly incorporated by reference herein.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1997 AND 1996

Revenues. The Company had revenues of $530,000 and $1,056,073 in the three
months ended June 30, 1997 and 1996, respectively. Revenues in the three months
ended June 30, 1997 were comprised of $30,000 of contract revenues received
under research grants from the NIH, and $500,000 of research and development
support payments received by the Company under its collaborative agreements with
Nycomed. Revenues in the three months ended June 30, 1996 were comprised of
$56,073 received under research grants from the NIH, and $500,000 of research
and development support payments and a $500,000 option exercise payment for P829
received by the Company under its collaborative agreements with Nycomed.

Research and development. During the three months ended June 30, 1997 and
1996, the Company expended $3,219,125 and $3,663,644, respectively, on research
and development activities. The $444,519 decrease in the three months ended June
30, 1997 in comparison with the same period in 1996 resulted from reduced
expenses associated with the timing of initial costs for clinical trials.

General and administrative. The Company's general and administrative
expenses were $862,302 and $584,588 in the three months ended June 30, 1997 and
1996, respectively. The $277,714 increase in 1997 from 1996 resulted from
increases in staffing and outside services to support the Company's growth.

8
<PAGE> 9

Interest. Interest income was $182,423 in the three months ended June 30,
1997 compared with $108,368 in the three months ended June 30, 1996, reflecting
an increase in the Company's cash, cash equivalents and marketable securities
resulting from the proceeds of the Company's initial public stock offering in
June 1996. Interest expense in the three months ended June 30, 1997 and 1996 was
$452 and $6,142, respectively, and was comprised primarily of interest incurred
on borrowings to finance the acquisition of certain equipment and leasehold
improvements. During the third quarter of 1996, the Company repaid its bank
borrowings.

Net loss. As a result of the above factors, the Company incurred net losses
of $3,369,456 and $3,089,933 in the three months ended June 30, 1997 and 1996,
respectively.

SIX MONTHS ENDED JUNE 30, 1997 AND 1996

Revenues. The Company had revenues of $1,110,000 and $1,556,073 in the six
months ended June 30, 1997 and 1996, respectively. Revenues in the six months
ended June 30, 1997 were comprised of $110,000 of contract revenues received
under grants from the NIH and $1,000,000 of research and development support
payments received by the Company under its collaborative agreements with
Nycomed. Revenues in the six months ended June 30, 1996 were comprised of
$56,073 of contract revenues received under research grants from the NIH, and
$1,000,000 of research and development support payments and a $500,000 option
exercise payment for P829 received by the Company under its collaborative
agreements with Nycomed.

Research and development. During the six months ended June 30, 1997 and
1996, the Company expended $5,990,007 and $6,192,247, respectively, on research
and development activities. The $202,240 decrease in the six months ended June
30, 1997 resulted from reduced expenditures associated with the timing of
initial costs for clinical trials in the second quarter of 1997.

General and administrative. The Company's general and administrative
expenses were $1,581,443 and $1,023,600 in the six months ended June 30, 1997
and 1996, respectively. The $557,843 increase in the six months ended June 30,
1997 resulted from increases in staffing and outside services to support the
Company's growth.

Interest. Interest income was $397,638 in the six months ended June 30,
1997 compared with $224,757 in the six months ended June 30, 1996, reflecting
the Company's increased cash, cash equivalents and marketable securities during
1997 resulting from the proceeds of the Company's initial public stock offering.
Interest expense in the six months ended June 30, 1997 and 1996 was $957 and
$16,176, respectively, and was comprised primarily of interest incurred on
borrowings to finance the acquisition of certain equipment and leasehold
improvements. During the third quarter of 1996, the Company repaid its bank
borrowings.

Net loss. As a result of the above factors, the Company incurred net
losses of $6,064,769 and $5,451,193 in the six months ended June 30, 1997 and
1996, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company completed its initial public offering of 2,200,000 shares of
Common Stock in June 1996 raising approximately $16.4 million of net proceeds.
As of June 30, 1997, the Company had $10,476,236 of cash, cash equivalents and
marketable securities and working capital of $7,987,166.

During the six months ended June 30, 1997, the Company's capital
expenditures totaled $140,855, primarily for the acquisition of certain
equipment and furniture and fixtures.

The Company's future capital requirements will depend on many factors,
including continued progress in its research and product development programs,
the magnitude of these programs, the results of preclinical studies and clinical
trials, the time and costs involved in obtaining regulatory approvals, the costs
involved in filing, prosecuting, enforcing and defending patent claims,
competing technological and market developments, the ability of the Company to
establish and maintain collaborative academic and commercial research,
development and marketing relationships, and the costs and success of
commercialization activities and arrangements.

9
<PAGE> 10

Based on its current operating plan, the Company anticipates that its
existing capital resources, including the proceeds of the initial public
offering and interest earned thereon, will be adequate to satisfy its capital
requirements through mid-1998. Substantial additional funds will be required
from external sources to support the Company's operations beyond that time,
although there can be no assurance that additional funds will be available, or,
if available, that such funds will be available on acceptable terms.

The Company intends to seek additional equity, debt and lease financing to
fund future operations, depending upon the terms on which such sources may be
available from time to time. In addition, the Company intends to seek additional
collaborative development and commercialization relationships with potential
corporate partners in order to fund certain of its programs, including the
continued development and commercialization of Sn-117 DTPA.

Except for research and development funding from Nycomed pursuant to its
collaboration with Diatide (which is subject to early termination in certain
circumstances), the Company has no committed external sources of capital, and,
as discussed above, expects no product revenues for a number of years. If the
Company is unable to obtain necessary additional funds, it would be required to
delay, scale back or eliminate certain of its research and development programs
or commercialization efforts or license to third parties certain technologies
which the Company would otherwise pursue on its own.

10
<PAGE> 11

PART II.

OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Company's Annual Meeting of Stockholders held on May 21, 1997, the
following proposals were adopted by the vote specified below:

(a) Election of Class I Directors

<TABLE>
<CAPTION>
FOR WITHHELD AUTHORITY
--- ------------------
<S> <C> <C>
Gustav Christensen 6,302,074 1,530
Hirsch Handmaker, MD 6,302,024 1,580
Donald L. Murfin 6,302,074 1,530
</TABLE>

(b) Ratification of Selection of Independent Auditors

<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
<S> <C> <C> <C>
6,302,604 1,000 -- --
</TABLE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:

(a) Exhibits.
The Exhibits listed in the Exhibit Index immediately preceding such
Exhibits are filed as part of this Quarterly Report on Form 10-Q.

(b) Reports on Form 8-K.
None.

11
<PAGE> 12

DIATIDE, INC.
FORM 10-Q
JUNE 30, 1997

SIGNATURES

Pursuant to the requirements 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.

DIATIDE, INC.

DATE: August 13, 1997

By: /s/ DANIEL F. HARRINGTON
------------------------------------
Daniel F. Harrington
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)

<PAGE> 1

EXHIBIT 11.1

STATEMENT RE: COMPUTATION NET LOSS PER SHARE AND
PRO FORMA NET LOSS PER SHARE

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding..................... 10,478,043 2,588,654 10,455,377 1,531,385
Effect of convertible preferred stock converted at date of
issuance..................................................... -- 5,875,958 -- 6,703,557
Effect of common equivalent shares issued by the Company during
the twelve month period immediately preceding the Company's
initial public offering in June 1996, as if they were
outstanding for all periods presented prior to June 30, 1996
(using the treasury stock method)............................ -- -- -- 95,166
----------- ----------- ----------- -----------
Shares used in computing net loss per share and pro forma net
loss per share............................................... 10,478,043 8,464,612 10,455,377 8,330,108
Net loss....................................................... $(3,369,456) $(3,089,933) $(6,064,769) $(5,451,193)
Net loss per share and pro forma net loss per share............ $ (0.32) $ (0.37) $ (0.58) $ (0.65)
</TABLE>

13
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 5
<CIK>
<NAME> DIATIDE, INC.
<MULTIPLIER> 1
<CURRENCY> U.S.DOLLAR

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 2,698,034
<SECURITIES> 7,778,202
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,765,397
<PP&E> 2,514,395
<DEPRECIATION> 1,528,064
<TOTAL-ASSETS> 11,762,511
<CURRENT-LIABILITIES> 2,778,231
<BONDS> 11,455
0
0
<COMMON> 10,520
<OTHER-SE> 8,962,305
<TOTAL-LIABILITY-AND-EQUITY> 11,762,511
<SALES> 0
<TOTAL-REVENUES> 530,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,081,427
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (452)
<INCOME-PRETAX> (3,369,456)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,369,456)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,369,456)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)

</TABLE>

<PAGE> 1

THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS. FOR
THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF
HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING
THE FOREGOING, THE WORDS "BELIEVES," "ANTICIPATES," "PLANS," "EXPECTS,"
"INTENDS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. THERE ARE A NUMBER OF IMPORTANT FACTORS THAT COULD CAUSE THE
COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARDING-LOOKING STATEMENTS. THESE FACTORS INCLUDE, WITHOUT LIMITATION, THOSE
SET FORTH BELOW UNDER THE CAPTION "CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS."

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

Early Stage of Development; Technological Uncertainty

Diatide was founded in February 1990 and is at an early stage of
development. All of the Company's potential products are in research or
development and will require additional research and development, extensive
preclinical studies and clinical trials and regulatory approval prior to any
commercial sales. The Company must successfully address a number of
technological challenges to complete certain of its development efforts. In
addition, there can be no assurance that the Company will be permitted to
undertake and complete human clinical trials of any of the Company's potential
products, either in the United States or elsewhere, or, if permitted, that such
products will be demonstrated to be safe and efficacious. In addition, there can
be no assurance that any of the Company's potential products will obtain FDA or
other regulatory approval for any indication or that an approved product will be
capable of being produced in commercial quantities at reasonable cost and
successfully marketed. See "Item 1. Business."

The use of synthetic peptides in radiopharmaceuticals, which is central to
the Company's technology, is new to nuclear medicine. The Company is aware of
only one imaging product and no therapeutics based on this scientific approach
that have been approved for sale by the FDA. The products for which the Company
has submitted or currently plans to submit IND applications and all of the
Company's other potential products in research or development may prove to have
undesirable and unintended side effects in humans or other characteristics that
may prevent or limit their commercial use.

Unproven Safety and Effectiveness of Potential Products; Uncertainties Related
to Clinical Trials

Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
each indication. The results from preclinical testing and early clinical trials
may not be predictive of results that will be obtained in large-scale clinical
trials, and there can be no assurance that the Company's clinical trials will
demonstrate the safety and effectiveness of any products or will result in
marketable products. A number of companies have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier trials. The
Company, the FDA or other regulatory authorities may suspend or terminate
clinical trials at any time.

The Company relies on scientific, technical and clinical data supplied by
its academic collaborators and licensors in the evaluation and development of
potential products, including Sn-117m DTPA, which was licensed from BNL. BNL
conducted the Phase I and the Phase II clinical trials of the compound. There
can be no assurance that there are no errors or omissions in such data that
would materially adversely affect the development of such products.

The rate of completion of the Company's clinical trials is dependent upon,
among other things, the rate of patient enrollment. Patient enrollment is a
function of many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical sites and the
eligibility criteria for the study. Delays in planned patient enrollment may
result in increased costs, program delays, or both, which could have a material
adverse effect on the Company.

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<PAGE> 2

The Company relies, in part, on clinical research organizations to conduct
its clinical trials. There can be no assurance that such entities will conduct
the clinical trials successfully.

The Company is currently conducting clinical trials with respect to certain
of its Techtides and plans to continue clinical trials of its therapeutic
radiopharmaceutical, Sn-117m DTPA. There can be no assurance that any of these
clinical trials will be successfully completed within any specified time period,
if at all. There also can be no assurance that the results from any of these
clinical trials will warrant the commencement of further clinical trials or that
the Company will not encounter problems in these or other clinical trials which
would cause the Company or the FDA to delay or suspend the trials. In Phase I
clinical trials of one of its Techtides, P483H for the medical imaging of
infection due to inflammation, the compound concentrated in patients' stomachs
at unexpectedly high levels. As a result, the Company conducted additional
preclinical testing of this compound and alternative compounds in animals to
determine the cause of this phenomenon and recently initiated a new Phase I
clinical trial of a new formulation of P483H. In a pilot study of a compound for
medical imaging of atherosclerotic plaque, the Company determined that the
compound did not exhibit sufficient sensitivity to warrant continuing
development of the compound. The Company currently is synthesizing new compounds
for this application and screening them in animal models. See "Item 1. Business
- -- Products Under Development" and "Item 1. Business -- Government Regulation."

No Assurance of Regulatory Approval; Extensive Government Regulation

The production and the marketing of the Company's products and the
Company's ongoing research and development activities are and will be subject to
extensive regulation by numerous federal, state and local governmental
authorities in the United States. The Company has had only limited experience in
filing or pursuing applications necessary to gain regulatory approvals.
Preclinical testing of the Company's product development candidates is subject
to GLP requirements and the manufacture of any products developed by the Company
will be subject to GMP requirements prescribed by the FDA.

The regulatory process, which includes preclinical studies, clinical trials
and ongoing post-approval testing of each compound to establish or monitor its
safety and effectiveness, takes many years and requires the expenditure of
substantial resources. The Company has limited experience in filing or pursuing
applications necessary to gain regulatory approval. There can be no assurance
that, even after the performance of clinical studies, and the passage of time
and the expenditure of such resources, regulatory approval will be obtained for
any products developed by the Company. The Company's analysis of data obtained
from preclinical and clinical activities is subject to confirmation and
interpretation by regulatory authorities which could delay, limit or prevent FDA
regulatory approval. The Company or the FDA may suspend clinical trials at any
time if the participants in such trials are being exposed to unanticipated or
unacceptable health risks. Moreover, if regulatory approval to market a product
is granted, such approval may entail limitations on the indicated uses for which
it may be marketed. Failure to comply with applicable regulatory requirements
can, among other things, result in fines, suspension or withdrawal of regulatory
approvals, product recalls, seizure of products, operating restrictions and
criminal prosecutions. FDA policy may change and additional government
regulations may be established that could prevent or delay regulatory approval
of the Company's potential products. In addition, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections, and subsequent discovery of previously unknown
problems with a product, manufacturer or facility may result in restrictions on
such product or manufacturer, including withdrawal of the product from the
market. All of the foregoing regulatory matters also will be applicable to
development, manufacturing and marketing undertaken by any strategic partners of
the Company.

There can be no assurance that additional statutes or regulations
applicable to the Company's business will not be adopted, impose substantial
additional costs or otherwise adversely affect the Company's operations.

The use, handling, storage and disposal of products containing
radioisotopes, such as Sn-117m and sources of technetium, are regulated by the
Nuclear Regulatory Commission and by state authorities. Enforcement of existing
laws and regulations or future amendments or limitations thereto could have a

25
<PAGE> 3

material adverse effect on the market for radiopharmaceuticals and on the
Company's business, financial condition and results of operations. See "Item 1.
Business -- Government Regulation."

The Company is also subject to numerous and varying foreign regulatory
requirements governing the design and conduct of clinical trials and the
manufacturing and marketing of its products. The approval procedure varies among
countries and can involve additional testing, and the time required to obtain
approval may differ from that required to obtain FDA approval. The foreign
regulatory approval process may include all of the risks associated with
obtaining FDA approval set forth above, and there can be no assurance that
foreign regulatory approvals will be obtained on a timely basis, if at all.
Approval by the FDA does not ensure approval by regulatory authorities in other
countries and approval by one foreign regulatory authority does not ensure
approval by regulatory authorities in other foreign countries or by the FDA.
There can be no assurance that the Company or its strategic marketing partners
will file for regulatory approvals or receive necessary approvals to
commercialize its products in any market. Delays in receipt of or failure to
receive regulatory approvals, or the loss of previously received approvals,
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Item 1. Business -- Government
Regulation."

Need to Establish Collaborative Commercial Relationships; Dependence On
Partners

Diatide's business strategy includes entering into strategic alliances or
marketing and distribution arrangements with corporate partners, primarily
pharmaceutical companies, for the development, commercialization and marketing
and distribution of certain of its potential products worldwide. To date, the
Company is a party to a collaborative arrangement with only one corporate
partner, Nycomed. There can be no assurance that the arrangement with Nycomed
will be scientifically or commercially successful. In the event that this
arrangement is terminated, such action might adversely affect the Company's
ability to develop, commercialize, market and distribute certain of its
potential products. In addition, the Company does not plan to conduct extensive
Phase II/III clinical trials of Sn-117m DTPA unless it enters into a corporate
collaboration for the completion of the development and the commercialization of
Sn-117m DTPA. There can be no assurance that the Company will be able to
negotiate any additional collaborative or marketing and distribution
arrangements, that such arrangements will be available to the Company on
acceptable terms or that any such relationships, if established, will be
scientifically or commercially successful. The Company's product candidates will
only generate milestone payments and royalties from collaborators upon the
occurrence of significant preclinical and clinical development, requisite
regulatory approvals, the establishment of manufacturing capabilities and
successful marketing.

There can be no assurance that the Company's collaborative partners will
not be pursuing alternative technologies or developing alternative products
either on their own or in collaboration with others, including the Company's
competitors, as a means for developing imaging agents or treatments for the
diseases targeted by these collaborative programs. For example, Nycomed
manufactures and distributes a wide variety of imaging agents for other
modalities that may compete against the products that Nycomed licenses from
Diatide or co-markets with Diatide. The Company's business also will be affected
by the success of its corporate partners in marketing any successfully developed
products within the geographic areas in which such partners are granted
marketing rights. A reduction in sales efforts or a discontinuance of sales of
the Company's products by collaborative or corporate partners, who are not
within the control of the Company, may result in reduced revenues and have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Certain Factors That May Affect Future Results --
Attraction and Retention of Key Management and Qualified Personnel" and "Item 1.
Business -- Products Under Development," "-- Corporate Collaborations" and "--
Marketing and Distribution."

History of Operating Losses and Accumulated Deficit; Uncertainty of Future
Profitability

Diatide has incurred net losses since its inception. At December 31, 1996,
the Company's accumulated deficit was approximately $34.2 million. No revenues
have been generated from product sales, and no product sales revenues are
anticipated for the next 18 to 24 months. The Company expects to incur
additional significant operating losses over the next 24 to 36 months and
expects cumulative losses to increase significantly as the Company's research
and development and clinical trial efforts expand. The Company

26
<PAGE> 4

expects that losses will fluctuate from quarter to quarter and that such
fluctuations may be substantial. The Company's ability to achieve profitability
is dependent in part on obtaining regulatory approvals for its products,
entering into satisfactory agreements with pharmaceutical corporate partners for
research and development and commercialization of its products and developing
the capacity to manufacture, market and sell its products or entering into
satisfactory arrangements for such manufacture, marketing and sale with third
parties. There can be no assurance that the Company will obtain required
regulatory approvals, enter into any additional agreements for drug discovery,
development and commercialization, develop the capacity to manufacture and sell
its products (or enter into arrangements therefor with third parties) or ever
achieve sales or profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General."

Future Capital Needs; Uncertainty of Additional Funding

Based upon its current operating plan, the Company anticipates that its
existing capital resources, will be adequate to satisfy its capital requirements
through mid-1998. The Company anticipates that it may be required to raise
substantial additional funds, including through collaborative relationships and
public or private financings. No assurance can be given that additional
financing will be available, or, if available, that it will be available on
acceptable terms. If additional funds are raised by issuing equity securities,
further dilution to then existing stockholders will result. Additionally, the
terms of the financing may adversely affect the holdings or the rights of the
then existing stockholders. If adequate funds are not available, the Company may
be required to significantly curtail one or more of its research or product
development programs, or obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, product candidates or products which the Company would
otherwise pursue on its own. See "Item 1. Business -- Products Under
Development" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

Intense Competition and Risk of Technological Obsolescence

There are many companies, both private and publicly traded, that are
conducting extensive research and development activities on technologies and
products similar to or competitive with the Company's technologies and proposed
products. For example, many other companies are actively seeking to develop
nuclear medicine imaging agents that will compete with the Company's Techtides.
There can be no assurance that the Company's competitors will not succeed in
developing technology similar to the Company's proprietary process of
radiolabelling peptides with technetium used in the Company's Techtides.

The pharmaceutical industry is characterized by rapid and substantial
technological change and there can be no assurance that the Company's
competitors will not succeed in developing products which are more effective
than any that are being developed by the Company, or which would render
Diatide's technologies and products obsolete and noncompetitive. For example,
diagnostic imaging tests may be developed that are more cost-effective and have
superior imaging quality than the Company's tests or new radiopharmaceuticals
may be developed that have superior targeting and binding qualities than the
Company's Techtides. Certain radiopharmaceuticals already have been approved for
sale for the diagnosis or treatment of the indications targeted by the Company's
products under development. In particular, OctreoScan(R), a peptide-based
radiopharmaceutical, is available for the diagnosis of neuroendocrine tumors,
Ceretec(R), a radiopharmaceutical labelled with technetium, is available for
imaging inflammation due to infection, and Metastron(R) is available for the
reduction of pain due to metastatic cancer to the bone. There are several

27
<PAGE> 5

well-established medical imaging modalities that currently, and will continue
to, compete against nuclear medicine imaging, including x-rays, CT, MRI and
ultrasound, and there are alternative therapeutics available for the treatment
of the cancer indications that are the subject of the Company's therapeutic
programs.

The Company has numerous competitors in the United States and
internationally, which include, among others, pharmaceutical and chemical
companies, biotechnology firms, universities and other research institutions.
Large pharmaceutical companies with significant research, development, marketing
and manufacturing operations in the nuclear medicine field include Du Pont
Merck, Mallinckrodt and Amersham . Many of the Company's competitors have
substantially greater financial, technical and human resources than the Company.
In addition, many of these competitors have significantly greater experience
than the Company in undertaking preclinical studies and human clinical trials of
new pharmaceutical products and obtaining FDA and other regulatory approvals of
products for use in health care. Accordingly, the Company's competitors may
succeed in obtaining FDA or other regulatory approvals for products more rapidly
than the Company. Furthermore, if the Company is permitted to commence
commercial sales of products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it has
limited or no experience.

Uncertainty Regarding Patents and Proprietary Rights

The Company's success will depend in part on its ability to develop
patentable products, enforce its patents and obtain patent protection for its
products both in the United States and in other countries. The Company intends
to file applications as appropriate for patents covering both its products and
processes. However, the patent positions of pharmaceutical and biotechnology
firms, including Diatide, are generally uncertain and involve complex legal and
factual questions. No assurance can be given that patents will issue from any
patent applications owned by or licensed to Diatide or that, if patents do
issue, the claims allowed will be sufficiently broad to protect the Company's
technology. In addition, no assurance can be given that any issued patents owned
by or licensed to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company.

The commercial success of the Company will also depend in part on its
neither infringing patents issued to competitors or others nor breaching the
technology licenses upon which the Company's products might be based. The
Company's licenses of patents and patent applications impose various
commercialization, sublicensing, royalty and other payment, insurance and other
obligations on the Company. Failure of the Company to comply with these
requirements could result in conversion of the licenses from being exclusive to
nonexclusive in nature or termination of the licenses. The Company is aware of
patents and patent applications belonging to competitors, and it is uncertain
whether these patents and patent applications will require the Company to alter
its products or processes, pay licensing fees or cease certain activities.
Competitors of the Company and other third parties hold issued patents and
pending patent applications which may result in claims of infringement against
the Company or other patent litigation. In particular, the Company is aware of
one European patent issued to a pharmaceutical company which, if valid, may be
infringed by P748. The holder of this patent has indicated to the Company that
it is not prepared to offer a license under the patent to the Company. There can
be no assurance that the Company will be able to successfully obtain a license
to any technology that it may require or that, if obtainable, such technology
can be licensed at a reasonable cost or on an exclusive basis. Failure by the
Company to obtain a license to any technology that it may require to
commercialize its products could have a material adverse effect on the Company.
See "Item 1. Business -- Patents, Trade Secrets and Licenses."

The pharmaceutical and biotechnology industries have been characterized by
extensive litigation regarding patents and other intellectual property rights.
Litigation, which could result in substantial cost to the Company, may be
necessary to enforce any patents issued or licensed to the Company and/or to
determine the scope and validity of others' proprietary rights. The Company also
may have to participate in interference proceedings declared by the United
States Patent and Trademark Office, which could result in substantial cost to
the Company, to determine the priority of inventions. Furthermore, the Company
may have to participate at substantial cost in International Trade Commission
proceedings to abate importation of products which would compete unfairly with
products of the Company.

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<PAGE> 6

Diatide engages in collaborations, sponsored research agreements and other
agreements with academic researchers and institutions and United States
government agencies. Under the terms of such agreements, third parties may have
rights in certain inventions developed during the course of the performance of
such collaborations and agreements.

The Company relies on trade secrets and proprietary know-how which it seeks
to protect, in part by confidentiality agreements with its employees,
consultants, members of its Scientific Advisory Board, outside scientific
collaborators and sponsored researchers and other advisors. There can be no
assurance that these agreements will not be breached, that the Company would
have adequate remedies for any breach or that the Company's trade secrets will
not otherwise become known or be independently developed by competitors. Failure
to obtain or maintain patent and trade secret protection, for any reason, could
have a material adverse effect on the Company. See "Item 1. Business -- Patents,
Trade Secrets and Licenses."

Uncertainty of Market Acceptance of Technology and Products

The commercial success of the Company's products, when and if approved for
marketing by the FDA, will depend upon their acceptance by the medical community
and third party payors as clinically useful, cost-effective and safe. The
synthetic peptide-based radiopharmaceutical technology being developed by the
Company is relatively new. To date, the Company is aware of only one imaging
product and no therapeutic products based on this scientific approach that has
been approved for sale by the FDA. Peptide-based radiopharmaceuticals have not
been extensively tested in humans. Market acceptance and thus, sales of the
Company's products, will depend on several factors, including the receipt of
regulatory approval in the United States, Europe, the Far East and elsewhere,
safety, price, ease of administration and effectiveness and extensive physician
education. There can be no assurance that the Company's products will gain
market acceptance. Failure to achieve market acceptance would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Item 1. Business -- Government Regulation."

Absence of Sales and Marketing Experience

Although Diatide plans to rely significantly on collaborative partners for
the marketing and distribution of its products through co-marketing or other
licensing or distribution arrangements, the Company expects to market and sell
certain of its products directly and to engage in certain other marketing
activities in collaboration with its collaborative partners. The Company has no
experience in sales, marketing or distribution. The Company does not expect to
establish a direct sales capability until such time as one or more of its
products in development approaches marketing approval. The Company has not
developed a specific sales and marketing plan with respect to any of its
potential products. Although Diatide plans to have only a small, specialized in
house sales group, it will need to recruit and train appropriate personnel and
develop a supporting distribution capability.

To the extent the Company enters into marketing or distribution
arrangements with collaborative partners, any revenues the Company receives will
depend upon the efforts of third parties. There can be no assurance that any
third party will market the Company's products successfully or that any
thirdparty collaboration will be on terms favorable to the Company. If any
marketing partner does not market a product successfully, the Company's business
would be materially adversely affected. If Diatide's plan to rely on corporate
partners for significant aspects of marketing and selling the Company's products
is unsuccessful for any reason, Diatide may need to recruit and train a far
larger marketing and sales force than it currently anticipates doing, which
would entail the incurrence of significant additional costs.

There can be no assurance that the Company would be able to attract and
build a sufficient marketing staff or sales force, that the cost of establishing
such a marketing staff or sales force will be justifiable in light of any
product revenues or that the Company's direct sales and marketing efforts will
be successful. In addition, if the Company succeeds in bringing one or more
products to market, it may compete with other companies that currently have
extensive and well-funded marketing and sales operations. There can be no
assurance that the Company's marketing and sales efforts would enable it to
compete successfully against such other companies. See "Item 1. Business --
Marketing and Distribution" and "-- Corporate Collaborations."

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<PAGE> 7

Limited Manufacturing Capability; Dependence on Sole Source Supplier

The Company lacks commercial-scale facilities to manufacture its products
in accordance with current GMP requirements prescribed by the FDA. To date, the
Company has relied on a large third party pharmaceutical company for the
manufacture of its peptides for clinical trials and has entered into an
arrangement with a GMP-qualified third party manufacturer for the supply of
Sn-117m for clinical trials. The Company expects to be dependent on third party
manufacturers or collaborative partners for all of its commercial production of
peptides. There are a limited number of manufacturers that operate under GMP
regulations capable of manufacturing the Company's products. In the event that
the Company is unable to obtain contract manufacturing, or obtain such
manufacturing on commercially reasonable terms, it may not be able to
commercialize its products as planned. Where third-party arrangements are
established, the Company will depend upon such third parties to perform their
obligations in a timely manner. There can be no assurance that third parties
depended upon by the Company will perform and any failures by third parties may
delay clinical trial development or the submission of products for regulatory
approval, impair the Company's ability to commercialize its products as planned
and deliver products on a timely basis, or otherwise impair the Company's
competitive position, which could have a material adverse effect on the
Company's business, financial condition or results of operations.

The Company purchases its synthetic peptides from a sole source supplier
and may enter into similar arrangements with respect to other components of its
products. While the Company is aware of alternative sources for its peptides,
the establishment of additional or replacement suppliers could be time consuming
and result in a supply interruption and significant additional regulatory delays
and expense. The establishment of an alternative source of supply or any
significant supply interruption could have a materially adverse effect on the
Company's ability to develop and manufacture its potential products and,
therefore, upon its business, financial condition and results of operations. See
"Item 1. Business -- Manufacturing."

If the Company determines to develop its own manufacturing capabilities, it
will need to recruit qualified personnel and build or lease the requisite
facilities and equipment because it has no experience in manufacturing on a
commercial scale and no facilities or equipment therefor. There can be no
assurance that Diatide will be able to successfully develop its own
manufacturing capabilities or as to the cost thereof or the time required. In
addition, the manufacture of any products by the Company is subject to
regulation by the FDA and comparable agencies in foreign countries. Delay in
complying or failure to comply with such manufacturing requirements could
materially adversely affect the marketing of the Company's products and the
Company's business, financial condition and results of operations.

Hazardous Materials

The Company's research and development involves the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although the
Company believes that its safety procedures for handling, storing and disposing
of such materials and the safety procedures of the third parties who ship such
materials for the Company comply with the standards prescribed by federal, state
and local regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for significant damages and any such liability
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Item 1. Business -- Government
Regulation."

Potential Product Liability Exposure and Insurance

The use of any of the Company's potential products in clinical trials and
the commercial sale of any products may expose the Company to potential product
liability risks which are inherent in the testing, manufacturing, marketing and
sale of human diagnostic and therapeutic products. Product liability claims
might be made directly by consumers, health care providers or by pharmaceutical
companies or others selling such products. There can be no assurance that
product liability claims, if made, would not result in a recall of the Company's
products or a change in the indications for which they may be used. Diatide has
limited product liability insurance coverage, and such coverage is subject to
various deductibles. Such coverage is expensive, and no assurance can be given
that the Company will be able to maintain or obtain such insurance

30
<PAGE> 8

at reasonable cost or in sufficient amounts to protect the Company against
losses due to liability claims that could have a material adverse effect on the
Company.

Uncertainty of Health Care Reform Measures

Federal, state and local officials and legislators (and certain foreign
government officials and legislators) have proposed or are reportedly
considering proposing a variety of reforms to the health care systems in the
United States and abroad. The Company cannot predict what health care reform
legislation, if any, will be enacted in the United States or elsewhere.
Significant changes in the health care system in the United States or elsewhere
are likely to have a substantial impact over time on the manner in which the
Company conducts its business. Such changes could have a material adverse effect
on the Company. The existence of pending health care reform proposals could have
a material adverse effect on the Company's ability to raise capital. Further, to
the extent that proposals have a material adverse effect on other pharmaceutical
companies that are prospective corporate partners for the Company, the Company's
ability to establish collaborative commercial relationships may be adversely
affected. Furthermore, the Company's ability to commercialize its potential
products may be adversely affected to the extent that such proposals have a
material adverse effect on the business, financial condition and profitability
of other companies that are prospective corporate partners with respect to
certain of the Company's proposed products. See "Item 1. Business -- Government
Regulation."

Uncertainty of Pharmaceutical Pricing and Adequate Reimbursement

The Company's ability to commercialize its products successfully will
depend in part on the extent to which appropriate reimbursement levels for the
cost of such products and related treatment are obtained from government
authorities, private health insurers and other organizations, such as health
maintenance organizations ("HMOs"). Third-party payors are increasingly
challenging the prices charged for medical products and services. Also the trend
towards managed health care in the United States and the concurrent growth of
organizations such as HMOs, which could control or significantly influence the
purchase of health care services and products, as well as legislative proposals
to reduce government insurance programs, may all result in lower prices for the
Company's products. The cost containment measures that health care providers are
instituting could affect the Company's ability to sell its products and may have
a material adverse effect on the Company.

There can be no assurance that reimbursement in the United States or
foreign countries will be available for any of the Company's products, or if
available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's products. The
unavailability or inadequacy of third-party reimbursement for the Company's
products would have a material adverse effect on the Company.

Attraction and Retention of Key Management and Qualified Personnel

The Company is highly dependent on the principal members of its management
and scientific staff, particularly Dr. Dean, the Company's President and Chief
Executive Officer, the loss of whose services could have a material adverse
effect on the Company. The Company is a party to an employment agreement with
Dr. Dean that extends through April 2, 1998, subject to automatic extension for
additional one-year periods unless either Dr. Dean or the Company provides
written notice to the contrary to the other party at least six months prior to
the expiration period. In the event Dr. Dean ceases to be employed by Diatide
through August 11, 1997, other than as a result of his death or disability or
termination for cause, Nycomed may terminate its collaboration with the Company,
which would result in a material loss of research and development revenues to
the Company and might adversely affect the Company's ability to develop,
commercialize, market and distribute certain of its potential products. Also,
recruiting and retaining qualified scientific personnel to perform research and
development work in the future will be critical to the Company's success. There
can be no assurance that the Company will be able to attract and retain such
highly skilled personnel on acceptable terms given the competition for
experienced scientists among numerous pharmaceutical, biotechnology and

31
<PAGE> 9

health care companies, universities and non-profit research institutions. The
Company does not carry key-man insurance with respect to any of its executive
officers.

The Company's anticipated growth and expansion into areas and activities
requiring additional expertise, such as clinical trials, governmental approvals,
production and marketing, are expected to require the addition of new management
personnel and the development of additional expertise by existing management
personnel. The failure to acquire such services or to develop such expertise
could have a material adverse effect on the Company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

All financial statements required to be filed hereunder are filed as
Appendix A hereto, are listed under Item 14 (a) and are incorporated herein by
reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is contained in part in the Company's
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 21, 1997 (the "Definitive Proxy Statement") under the caption "Proposal 1 --
Election of Directors," which section is incorporated herein by this reference.
The information required by this item is also contained in part under the
caption "Executive Officers and Significant Employees" in Part I of this Annual
Report on Form 10-K, following Item 4.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is contained in the Definitive Proxy
Statement under the caption "Proposal 1 -- Election of Directors," which section
is incorporated herein by this reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is contained in the Definitive Proxy
Statement under the caption "Stock Ownership of Certain Beneficial Owners and
Management," which section is incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is contained in the Definitive Proxy
Statement under the caption "Certain Transactions," which section is
incorporated herein by this reference.