DIATIDE INC, 10-Q, 1999-08-16

DIATIDE INC
10-Q, 1999-08-16
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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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, 1999
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 0-28434

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DIATIDE, INC.

(Exact name of registrant as specified in its charter)

DELAWARE 04-3078258
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

NINE DELTA DRIVE, LONDONDERRY, NH 03053
(Address of principal executive offices) (Zip Code)

(603) 437-8970
(Registrant's telephone number, including area code)

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

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 / /

The number of shares outstanding of each of the issuer's classes of Common
Stock, $0.001 par value, outstanding at August 5, 1999 was 10,614,924 shares.

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DIATIDE, INC.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS (Unaudited)

Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....................... 3

Condensed Statements of Operations for the three months ended June 30, 1999 and 1998..... 4

Condensed Statements of Operations for the six months ended June 30, 1999 and 1998, and
for the period from February 6, 1990 (date of inception) to June 30, 1999................. 5

Condensed Statements of Cash Flows for the six months ended June 30, 1999 and 1998, and
for the period from February 6, 1990 (date of inception) to June 30, 1999................. 6

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

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

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk....................... 13

PART II OTHER INFORMATION

ITEM 4 Submission of Matters to a Vote of Security Holders.............................. 14

ITEM 6 Exhibits and Reports on Form 8-K................................................. 14

SIGNATURES..................................................................................... 15

EXHIBIT INDEX.................................................................................. 16
</TABLE>

2
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PART I. FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

DIATIDE, INC.
(A DEVELOPMENT STAGE COMPANY)

CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30, 1999
(UNAUDITED) DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 2,631,758 $ 6,663,654
Marketable securities....................................................... 1,600,504 1,000,000
Accounts receivable......................................................... 979,284 555,861
Inventories................................................................. 766,676 477,740
Other current assets........................................................ 219,405 207,405
------------- -----------------
Total current assets............................................................ 6,197,627 8,904,660
Property and equipment, at cost................................................. 3,701,855 3,619,520
Less: accumulated depreciation and amortization................................. 2,568,053 2,262,220
------------- -----------------
1,133,802 1,357,300
Other assets.................................................................... 10,783 10,783
------------- -----------------
Total assets.................................................................... $ 7,342,212 $ 10,272,743
------------- -----------------
------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....................................... $ 1,970,130 $ 2,226,514
Accrued clinical expenses................................................... 429,010 674,765
Accrued promotion and royalty expenses--related party....................... 1,193,355 807,527
Current portion of long-term debt........................................... 187,388 187,388
------------- -----------------
Total current liabilities....................................................... 3,779,883 3,896,194
Long-term debt, less current portion............................................ 185,225 250,572

Stockholders' equity:
Preferred stock, $0.01 par value
Authorized shares--10,591,874
Series A convertible preferred stock: Authorized shares--1,300,000 Issued
and outstanding shares--1,210,256 (Liquidation value of $11,800,000)...... 12,103 12,103
Series B convertible preferred stock:
Authorized shares--830,000
Issued and outstanding shares--825,309 (None in 1998)
(Liquidation value of $5,999,996)......................................... 8,253 --
Common stock, $0.001 par value
Authorized shares; 50,000,000
Issued shares--10,603,944 (10,585,216 in 1998) 10,603 10,585
Additional paid-in capital.................................................. 67,796,544 61,731,596
Deferred compensation....................................................... (173,172) (241,272)
Deficit accumulated during the development stage............................ (64,277,203) (55,387,011)
------------- -----------------
3,377,128 6,126,001
Less: 4,800 shares of common stock in treasury, at cost..................... (24) (24)
------------- -----------------
Total stockholders' equity...................................................... 3,377,104 6,125,977
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Total liabilities and stockholders' equity...................................... $ 7,342,212 $ 10,272,743
------------- -----------------
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</TABLE>

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Note: The balance sheet at December 31, 1998 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
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DIATIDE, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------
<S> <C> <C>
1999 1998
------------- -------------
Revenues:
Product sales..................................................................... $ 400,119 $ --
Sponsored research................................................................ -- 500,000
License fees...................................................................... -- 2,000,000
Research grants................................................................... 45,462 95,960
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Total revenues...................................................................... 445,581 2,595,960

Costs and expenses:
Cost of products sold............................................................. 76,790 --
Research and development.......................................................... 2,494,320 3,312,367
Selling, general and administrative............................................... 2,857,541 1,469,012
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Total costs and expenses............................................................ 5,428,651 4,781,379

Loss from operations................................................................ (4,983,070) (2,185,419)

Other income (expense):
Interest income................................................................... 82,059 221,592
Interest expense.................................................................. (12,980) (256)
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Total other income (expense)........................................................ 69,079 221,336
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Net loss............................................................................ $ (4,913,991) $ (1,964,083)
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Net loss per share.................................................................. $ (0.46) $ (0.19)
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Shares used in computing net loss per share......................................... 10,583,843 10,559,946
</TABLE>

See Notes to Condensed Financial Statements.

4
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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
1999 1998 JUNE 30, 1999
------------- ------------- -------------------
<S> <C> <C> <C>
Revenues:
Product sales............................................... $ 693,928 $ -- $ 871,108
Sponsored research.......................................... -- 1,000,000 6,778,388
License fees................................................ -- 2,000,000 7,300,000
Research grants............................................. 62,962 129,801 965,939
------------- ------------- -------------------
Total revenues................................................ 756,890 3,129,801 15,915,435

Costs and expenses:
Cost of products sold....................................... 165,157 -- 253,774
Research and development.................................... 4,959,814 6,041,564 58,397,800
Selling, general and administrative......................... 4,698,127 2,561,947 24,373,927
------------- ------------- -------------------
Total costs and expenses...................................... 9,823,098 8,603,511 83,025,501

Loss from operations.......................................... (9,066,208) (5,473,710) (67,110,066)

Other income (expense):
Interest income............................................. 203,527 427,716 3,110,877
Interest expense............................................ (27,511) (628) (278,014)
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Total other income (expense).................................. 176,016 427,088 2,832,863
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Net loss...................................................... $ (8,890,192) $ (5,046,622) $ (64,277,203)
------------- ------------- -------------------
------------- ------------- -------------------

Net loss per share............................................ $ (0.84) $ (0.48)
------------- -------------
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Shares used in computing net loss per share................... 10,586,153 10,553,315
</TABLE>

See Notes to Condensed Financial Statements.

5
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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
1999 1998 JUNE 30, 1999
------------- ------------- -------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss...................................................... $ (8,890,192) $ (5,046,622) $ (64,277,203)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization............................. 305,833 230,272 2,606,908
Cancellation of accrued interest.......................... -- -- 111,438
Amortization of deferred compensation..................... 68,100 68,328 902,797
Compensation associated with stock option grants.......... 43,860 60,600 423,945
Changes in operating assets and liabilities............... (840,670) (2,577,534) 1,577,492
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Cash used in operating activities....................... (9,313,069) (7,264,956) (58,654,623)

INVESTING ACTIVITIES:
Additions to property and equipment........................... (82,335) (520,832) (3,223,799)
Purchases of marketable securities............................ (1,604,112) (945,478) (38,225,098)
Proceeds from sales of marketable securities.................. 1,003,608 7,000,000 36,624,594
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Cash provided by (used in) investing activities......... (682,839) 5,533,690 (4,824,303)

FINANCING ACTIVITIES:
Sale of preferred stock, net.................................. 5,959,996 -- 45,768,910
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............................ (65,347) (1,876) (1,005,961)
Sale of common stock.......................................... 69,363 121,644 17,253,777
Repurchase of common stock.................................... -- -- (24)
------------- ------------- -------------------
Cash provided by financing activities................... 5,964,012 119,768 66,110,684
------------- ------------- -------------------
Net increase (decrease) in cash and cash equivalents.......... (4,031,896) (1,611,498) 2,631,758
Cash and cash equivalents at beginning of period.............. 6,663,654 3,857,973 --
------------- ------------- -------------------
Cash and cash equivalents at end of period.................... $ 2,631,758 $ 2,246,475 $ 2,631,758
------------- ------------- -------------------
------------- ------------- -------------------
Noncash transactions:
Acquisition of equipment through capital lease
obligation.............................................. $ -- $ -- $ 478,056
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................................. $ -- $ -- $ 1,075,969
</TABLE>

See Notes to Condensed Financial Statements.

6
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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
specialty pharmaceutical company engaged in the discovery, development, and
commercialization of patented, disease-specific imaging agents and therapeutics
for life-threatening conditions.

2. BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements for the three and
six months ended June 30, 1999 and 1998 and for the period from February 6, 1990
(date of inception) to June 30, 1999 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 condensed 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, 1999 are not necessarily indicative of
the results to be expected for the year ending December 31, 1999.

These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1998
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.

3. INVENTORIES

The components of inventory consist of the following:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
Raw Materials.................................................. $ 475,589 $ 274,758
Finished Goods................................................. 291,087 202,982
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$ 766,676 $ 477,740
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</TABLE>

4. SUBSEQUENT EVENTS

On August 3, 1999, the Company received approval of the Company's New Drug
Application ("NDA") for NeoTect-TM- (for the detection of malignant tumors in
the lung) from the U.S. Food and Drug Administration ("FDA"). The Company
expects to begin marketing NeoTect in the U.S. in September 1999. Under the
Company's collaborative agreements with Nycomed Imaging AS, the Company has
earned a $2,000,000 milestone fee for this event, which it received on August
12, 1999.

On August 13, 1999, the Company closed a $5 million term loan agreement with
two institutional investors. The Company expects the loan to be funded on or
before August 20, 1999 and is subject to the Company's compliance with customary
funding conditions including the perfection of security interests. The loan
would be payable in monthly installments over three years and the payments will
be determined based on the U.S. Treasury rate plus a premium. The loan is
secured by substantially all assets of the Company and includes prepayment
penalties. In conjunction with this loan, the lenders will receive warrants to
purchase an aggregate of approximately 200,000 shares of Diatide common stock.

5. RECLASSIFICATIONS

Certain reclassifications were made to prior year statements to conform to
the current year presentation.

7
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Diatide is a specialty pharmaceutical company engaged in the discovery,
development and commercialization of patented imaging and therapeutic drugs. In
September 1998, we received marketing approval from the FDA of our
Techtide-Registered Trademark- AcuTect-TM- for imaging of acute venous
thrombosis in the lower extremities. We began marketing AcuTect in the U.S. in
October 1998 with our corporate partner Nycomed. On August 3, 1999 we received
marketing approval from the FDA for our Techtide NeoTect-TM- (formerly P829) for
the detection of malignant tumors in the lung. We expect to begin marketing
NeoTect in the U.S. in September of 1999 with our corporate partner Nycomed.

All revenues received by Diatide from inception through June 30, 1999 have
resulted from research and development support payments and the option exercise
payments and the milestone fees for AcuTect and NeoTect from Nycomed under the
Company's collaborative agreements with Nycomed, research grants from the
National Institutes of Health ("the NIH") and the Department of Defense, fees
received for entering into option agreements with a pharmaceutical company and,
beginning in the fourth quarter of 1998, product sales of AcuTect.

Diatide has incurred cumulative net losses since its inception through June
30, 1999 of $64,277,000. We expect to incur additional significant operating
losses over the next 12 to 24 months. We also expect cumulative net losses to
increase during the initial marketing of AcuTect and NeoTect and as the
Company's research and development and clinical trial efforts continue. We
expect that research and development expenses during 1999 will be less than 1998
levels as we have reassessed our research priorities. We have taken actions,
including a reduction in workforce in the second quarter of 1999, to reduce
research and development expenses by more than $4.0 million from planned levels
for 1999. Research and development expenses would increase in the future if the
Company obtained funding for any of its programs through arrangements with
collaborative partners. We expect manufacturing, marketing, sales and
distribution costs will increase in the future to support the commercialization
of AcuTect and NeoTect. Patent costs also would increase if Diatide became
involved in litigation or administrative proceedings involving its patents or
those of third parties.

This Quarterly Report on Form 10-Q contains forward-looking statements that
involve a number of risks and uncertainties. All statements, trends, analyses
and other information contained in this report, as well as other statements,
including words such as "anticipate," "believe," "plan," "estimate," "expect"
and "intend" and other similar expressions, constitute forward-looking
statements. There are a number of important factors that could cause our 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--Risk Factors" of Diatide's Annual Report on Form 10-K as of December
31, 1998, which are expressly incorporated by reference herein.

8
<PAGE>
RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1999 AND 1998

REVENUES. Diatide had revenues of $446,000 and $2,596,000 in the three
months ended June 30, 1999 and 1998, respectively. Revenues in the three months
ended June 30, 1999 were comprised of $400,000 of AcuTect product sales and
$46,000 of contract revenues received under research grants from the NIH.
Revenues in the three months ended June 30, 1998 were comprised of $96,000 of
contract revenues received under research grants from the NIH, and $500,000 of
research and development support payments and $2,000,000 received as a milestone
fee for the FDA filing of an NDA for NeoTect under our collaborative agreements
with Nycomed. Nycomed has terminated its obligation to make further research and
development support payments to Diatide, effective December 31, 1998.

RESEARCH AND DEVELOPMENT. During the three months ended June 30, 1999 and
1998, Diatide expended $2,494,000 and $3,312,000, respectively, on research and
development activities. The $818,000 decrease in the three months ended June 30,
1999 over the same period in 1998 reflects higher clinical and regulatory costs
associated with the preparation and filing of an NDA for NeoTect in 1998 offset
by costs associated with increased research activity for therapeutic programs
and AcuTect phase 4 clinical studies in 1999.

SELLING, GENERAL AND ADMINISTRATIVE. Diatide's selling, general and
administrative expenses were $2,857,000 and $1,469,000 in the three months ended
June 30, 1999 and 1998, respectively. The $1,388,000 increase in 1999 from 1998
resulted from increases in promotional costs, including staffing and consulting
services, shared with Nycomed under our co-promotional agreements, to support
the marketing of AcuTect and NeoTect.

INTEREST. Interest income was $82,000 in the three months ended June 30,
1999 compared to $222,000 in the three months ended June 30, 1998, reflecting a
decrease in the level of cash, cash equivalents and marketable securities during
the second quarter of 1999 compared to the same period in 1998.

NET LOSS. As a result of the above factors, Diatide incurred net losses of
$4,914,000 and $1,964,000 in the three months ended June 30, 1999 and 1998,
respectively.

SIX MONTHS ENDED JUNE 30, 1999 AND 1998

REVENUES. Diatide had revenues of $757,000 and $3,130,000 in the six months
ended June 30, 1999 and 1998, respectively. Revenues in the six months ended
June 30, 1999 were comprised of $694,000 of AcuTect product sales and $63,000 of
contract revenues received under research grants from the NIH. Revenues in the
six months ended June 30, 1998 were comprised of $130,000 of contract revenues
received under research grants from the NIH, and $1,000,000 of research and
development support payments and $2,000,000 received as a milestone fee for the
FDA filing of an NDA for NeoTect under our collaborative agreements with
Nycomed. Nycomed has terminated its obligation to make further research and
development support payments to Diatide, effective December 31, 1998.

RESEARCH AND DEVELOPMENT. During the six months ended June 30, 1999 and
1998, Diatide expended $4,960,000 and $6,042,000, respectively, on research and
development activities. The $1,082,000 decrease in the six months ended June 30,
1999 over the same period in 1998 reflects higher clinical and regulatory costs
associated with the preparation and filing of an NDA for NeoTect in 1998 offset
by costs associated with increased research activity for therapeutic programs
and AcuTect phase 4 clinical studies in 1999.

SELLING, GENERAL AND ADMINISTRATIVE. Diatide's selling, general and
administrative expenses were $4,698,000 and $2,562,000 in the six months ended
June 30, 1999 and 1998, respectively. The $2,136,000 increase in 1999 from 1998
resulted from increases in promotional costs, including staffing and consulting
services, shared with Nycomed under our co-promotional agreements, to support
the marketing of AcuTect and NeoTect.

9
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
INTEREST. Interest income was $204,000 in the six months ended June 30, 1999
compared to $428,000 in the six months ended June 30, 1998, reflecting a
decrease in the level of cash, cash equivalents and marketable securities during
the first half of 1999 compared to the same period in 1998.

NET LOSS. As a result of the above factors, Diatide incurred net losses of
$8,890,000 and $5,047,000 in the six months ended June 30, 1999 and 1998,
respectively.

LIQUIDITY AND CAPITAL RESOURCES

On August 13, 1999, the Company closed a $5 million three-year, term loan
agreement. The Company expects the loan to be funded on or before August 20,
1999 and is subject to the Company's compliance with customary funding
conditions including the perfection of security interests. The loan would be
payable over three years at an interest rate which is a premium over the U.S.
Treasury Rate, includes prepayment penalties, and is secured by substantially
all assets of the Company. The loan agreement also calls for the lenders to
receive warrants to purchase an aggregate of approximately 200,000 shares of
Diatide common stock. In addition, on August 12, 1999, the Company received a $2
million milestone payment for the FDA approval of NeoTect under its
collaborative agreements with Nycomed.

In January 1999, Diatide issued 825,309 shares of Series B convertible
preferred stock and warrants to purchase 123,795 shares of common stock to two
institutional investors in a private offering, raising $6.0 million of net
proceeds. In September 1997, we issued 1,210,256 shares of Series A convertible
preferred stock and warrants to purchase 181,538 shares of Common Stock to three
institutional investors in a private offering, raising $11.6 million of net
proceeds. Diatide 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, 1999, we had $4,232,000 of cash, cash equivalents and
marketable securities and working capital of $2,418,000.

During the six months ended June 30, 1999, Diatide's capital expenditures
totaled $82,000, primarily for the acquisition of certain laboratory equipment
and software.

Our future capital requirements will depend on many factors, including:

- revenues and margins on sales of AcuTect and NeoTect;

- continued progress in our research and product development programs, as
well as the magnitude of these programs;

- the scope and results of preclinical studies and clinical trials;

- the time and costs involved in obtaining regulatory approvals;

- competing technological and market developments;

- our ability to establish and maintain collaborative academic and
commercial research, development and marketing relationships;

- the costs and success of commercialization activities and arrangements;

- the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other patent-related costs, including
litigation costs; and

- the costs of obtaining any required licenses of third parties'
technologies.

Based upon our current operating plan, we anticipate that our existing
capital resources, including the $5 million to be borrowed under the term loan
in August 1999 and the $2 million received from Nycomed

10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
as a milestone payment for NeoTect, together with anticipated product revenues
from sales of AcuTect and NeoTect, will be adequate to satisfy our capital
requirements through the first half of 2000. However, the timing and extent of
our capital requirements will be materially dependent on the actual level of
product sales and the margin on such sales. In the future, we may be required to
raise additional funds, including through collaborative relationships and public
or private financings. Such additional financing may not be available to us or
may not be available on acceptable terms.

With the termination of the research and development relationship with
Nycomed, Diatide has no committed external sources of capital, and as noted
above, expects to incur significant operating losses over the next 12 to 24
months. We intend to seek additional equity, debt and lease financing to fund
future operations, depending upon the terms on which such sources of funding may
be available from time to time. In addition, Diatide intends to seek additional
collaborative development and commercialization relationships with potential
corporate partners in order to fund certain of its programs, including the
future development and commercialization of its Techtide programs (other than
the programs covered by Nycomed's options), its Sn-117m DTPA program and its
Theratide program. If we are unable to obtain adequate funding on a timely
basis, we may be required to further curtail our research or product development
programs or reduce our marketing and sales initiatives, or we also could be
required to seek funds through arrangements with collaborative partners or
others that may require us to relinquish rights to certain of our technologies,
product candidates or products which we would otherwise pursue on our own.

IMPACT OF YEAR 2000

The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This includes our scientific and manufacturing equipment containing
computer-related components. This could result in a system failure or
miscalculations causing disruptions of operations or inaccuracies in computer
output.

We have developed a strategy to address the potential exposures related to
the impact of our computer systems and equipment for the year 2000 and beyond.
Our plan to resolve the Year 2000 Issue involves the following four phases:
assessment, remediation, testing, and implementation. In 1998 we completed the
implementation of enterprise-wide business information systems to support
commercial operations at a cost of approximately $512,000 to date. These systems
are Year 2000 compliant. We have completed our assessment of other information
and operational systems, including scientific and manufacturing control systems
and equipment, that could be significantly affected by the Year 2000. That
assessment indicated that software and hardware (embedded chips) used in certain
of our scientific equipment could be significantly affected by the Year 2000
Issue. We are 60% complete on the remediation phase for this equipment. We
expect to complete remediation efforts no later than September 30, 1999. Testing
and implementation of affected equipment is expected to be complete by November
30, 1999.

Because Diatide has relationships with, and is to varying degrees dependent
upon, a large number of third parties that provide information, goods and
services to Diatide, we are also subject to risks associated with such third
parties' Year 2000 issues. These third parties include financial institutions,
customers, distributors, suppliers, vendors, research partners and governmental
entities. If significant numbers of these third parties experience failures on
their computer systems or equipment due to Year 2000 non-compliance, it could
affect our ability to process transactions, manufacture products, or engage in
similar normal business activities. We have instituted programs, including
internal records review and use of external questionnaires, to identify key
third parties, assess their level of Year 2000 compliance, update

11
<PAGE>
IMPACT OF YEAR 2000 (CONTINUED)
contracts and address any non-compliance issues. To date, we are not aware of
any third party Year 2000 issue that would materially impact Diatide's results
of operations, liquidity or capital resources. However, Diatide has no means of
ensuring that external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely fashion could
materially impact Diatide. The effect of non-compliance by external agents is
not determinable. We have contingency plans for certain critical applications
provided by third parties and are working on such plans for others. These
contingency plans involve, among other actions, manual workarounds, increasing
inventories, and adjusting staffing strategies.

The total cost of the Year 2000 systems assessments and conversions,
excluding the recently implemented business information systems, is funded
through operating cash flows. Diatide is expensing or capitalizing these costs
as appropriate in accordance with generally accepted accounting principles. We
currently expect such amount to be less than $100,000. The actual financial
impact could, however, exceed this estimate.

Our plans to complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, and other
factors. Estimates on the status of completion and the expected completion dates
are based on costs incurred to date compared to total expected costs. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those plans. Specific factors that might
cause such material differences include, but not limited to, the availability
and cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties.

ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Diatide is exposed to changes in interest rates primarily from its
investments in certain available-for-sale securities and long term obligations
under capital leases. Under our current policies, we do not use interest rate
derivative instruments to manage exposure to interest rate changes.

12
<PAGE>
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 14, 1999, the
following proposals were adopted by the vote specified below:

(a) Election of Class III Directors

<TABLE>
<CAPTION>
WITHHELD
FOR AUTHORITY
---------- -----------------
<S> <C> <C>
Richard T. Dean............................................... 3,242,380 97,554
Robert S. Lees................................................ 3,243,646 96,288
</TABLE>

The following directors did not stand for reelection as their terms in office
continued after the Annual Meeting:

Gustav Christensen
Hirsch Handmaker
Joseph F. Lovett
Donald L. Murfin

(b) Approval of the adoption of the 1999 Stock Incentive Plan

<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
- ---------- --------- ----------- ----------------
<S> <C> <C> <C>
2,430,343 135,511 8,625 765,455
</TABLE>

<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
- ---------- ----------- ----------- ---------------------
<S> <C> <C> <C>
3,324,392 9,917 5,625 --
</TABLE>

ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K:

<TABLE>
<S> <C>
(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 None.
Form 8-K.
</TABLE>

13
<PAGE>
DIATIDE, INC.
FORM 10-Q
JUNE 30, 1999

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.

<TABLE>
<S> <C> <C>
DIATIDE, INC.

DATE: August 13, 1999 BY: /s/ RICHARD T. DEAN
-----------------------------------------
Richard T. Dean
President and Chief Executive Officer
</TABLE>

14
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION SEQUENTIAL NUMBER
- ------------------- ----------------------------------------------------------------------------- -----------------------
<C> <S> <C>
27 Financial Data Schedule (EDGAR)

99 Pages 39 through 49 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 as filed with the SEC (which is not deemed filed
except to the extent that portions thereof are expressly incorporated by
reference herein).
</TABLE>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DIATIDE,
INC. FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,631,758
<SECURITIES> 1,600,504
<RECEIVABLES> 979,284
<ALLOWANCES> 0
<INVENTORY> 766,676
<CURRENT-ASSETS> 6,197,627
<PP&E> 3,701,855
<DEPRECIATION> 2,568,053
<TOTAL-ASSETS> 7,342,212
<CURRENT-LIABILITIES> 3,779,883
<BONDS> 185,225
0
20,356
<COMMON> 10,603
<OTHER-SE> 3,346,145
<TOTAL-LIABILITY-AND-EQUITY> 7,342,212
<SALES> 693,928
<TOTAL-REVENUES> 756,890
<CGS> 165,157
<TOTAL-COSTS> 9,823,098
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,511
<INCOME-PRETAX> (8,890,192)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,890,192)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,890,192)
<EPS-BASIC> (0.84)
<EPS-DILUTED> (0.84)

</TABLE>

<PAGE>
RISK FACTORS

WE ARE AT AN EARLY STAGE OF DEVELOPMENT

We were founded in February 1990 and only introduced our first product into
the market in October 1998. All but two of our products are in research or
development. The products that we have not yet completed developing will require
additional research and development, extensive preclinical studies and clinical
trials and regulatory approval prior to any commercial sales.

WE ARE SUBJECT TO TECHNOLOGICAL UNCERTAINTY IN OUR DEVELOPMENT EFFORTS

We must successfully address a number of technological challenges to
complete the development of certain of our potential products. These products
may not be efficacious or may prove to have undesirable or unintended side
effects, toxicities or other characteristics that may prevent or limit
commercial use. The use of synthetic peptides in radiopharmaceuticals, which is
central to our technology, is new to nuclear medicine. We believe that the FDA
has granted marketing approval of only two imaging products, including AcuTect,
based on this scientific approach and has not approved any therapeutic products
based on this approach.

THERE ARE UNCERTAINTIES RELATED TO CLINICAL TRIALS

In order to obtain regulatory approvals for the commercial sale of any of
our products under development, we will be required to demonstrate through
preclinical testing and clinical trials that the product is safe and
efficacious. We currently are conducting preclinical tests and clinical trials
of a number of potential products. The results from preclinical testing and
early clinical trials of a product that is under development may not be
predictive of results that will be obtained in large-scale later clinical
trials. We may not be able successfully to complete those clinical trials that
we initiate. In addition, we may not be able to complete such trials on a timely
basis.

Two examples of ways in which the results of early clinical trial can affect
development of product candidates are:

- In Phase I clinical trials of one of our Techtides, P483H for medical
imaging of infection due to inflammation, the compound concentrated in
patients' stomachs at unexpectedly high levels. As a result, we conducted
additional preclinical testing of this compound and alternative compounds
in animals to determine the cause of this phenomenon. We recently
initiated a Phase I clinical trial of a new formulation of P483H.

- In a pilot study of a compound for medical imaging of atherosclerotic
plaque, we determined that the compound did not exhibit sufficient
sensitivity to warrant continuing development. We synthesized new
compounds for this indication and screened them in animal models.

The rate of completion of our clinical trials is dependent on 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 and program delays. For
example, patient enrollment in our Phase 2 clinical trial of Tin-117m DTPA has
been slower than anticipated because of the reluctance of prospective patients
who are suffering from pain due to metastatic cancer to the bone to receive a
placebo.

THERE IS NO CERTAINTY THAT WE WILL OBTAIN REGULATORY APPROVALS; THE APPROVAL
PROCESS IS COSTLY AND LENGTHY

The production and the marketing of our products and our ongoing research
and development activities are subject to extensive regulation by federal, state
and local governmental authorities in the

13
<PAGE>
United States and other countries. Clearing the regulatory process for the
commercial marketing of a pharmaceutical product takes many years and requires
the expenditure of substantial resources. We have had only limited experience in
filing and prosecuting applications necessary to gain regulatory approvals.
Thus, we may not be able to obtain regulatory approvals to conduct clinical
trials of or manufacture or market any of our potential products.

Factors that may affect the regulatory process for our product candidates
include:

- Our analysis of data obtained from preclinical and clinical activities is
subject to confirmation and interpretation by regulatory authorities,
which could delay, limit or prevent regulatory approval.

- We or the FDA may suspend clinical trials at any time if the participants
are being exposed to unanticipated or unacceptable health risks.

- Any regulatory approval to market a product may be subject to limitations
on the indicated uses for which we may market the product. These
limitations may limit the size of the market for the product.

If we fail to comply with applicable regulatory requirements, we may be
subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions and criminal prosecutions.

As to products for which we obtain marketing approval, we, the manufacturer
of the product (if other than us) and the manufacturing facilities will be
subject to continual review and periodic inspections by the FDA. The subsequent
discovery of previously unknown problems with the product, manufacturer or
facility may result in restrictions on the product or manufacturer, including
withdrawal of the product from the market.

The FDA may change its policies as to regulatory matters in the future.
Also, additional statutes or regulations applicable to our business may be
adopted. Such policy changes or additional statutes or regulations impose
substantial additional costs or otherwise adversely affect our operations.

The Nuclear Regulatory Commission and state authorities regulate the use,
handling, storage and disposal of products containing radioisotopes, such as
Tin-117m DTPA and sources of technetium. We must comply with these regulations
in connection with the testing, manufacturing and marketing of or products and
product candidates.

We also are subject to numerous and varying foreign regulatory requirements
governing the design and conduct of clinical trials and the manufacturing and
marketing of our products. The approval procedure varies among countries. The
time required to obtain foreign approvals often differs from that required to
obtain FDA approval. Approval by the FDA does not ensure approval by regulatory
authorities in other countries. For example, although the FDA has granted an NDA
permitting us to market AcuTect in the United States, Nycomed withdrew the MAA
filed with the EMEA relating to AcuTect because of the unfavorable preliminary
response of the EMEA to such application.

We may not receive regulatory approvals to conduct clinical trials of our
products or to manufacture or market our products. In addition, regulatory
agencies may not grant such approvals on a timely basis or may revoke previously
granted approvals. All of these events may have a material adverse effect on our
business, financial condition and results of operations.

All of the foregoing regulatory matters also are applicable to development,
manufacturing and marketing undertaken by our licensees and other collaborators.

THERE IS UNCERTAINTY AS TO THE MARKET ACCEPTANCE OF OUR TECHNOLOGY AND PRODUCTS

The commercial success of our products that are approved for marketing by
the FDA will depend upon their acceptance by the medical community and third
party payors as clinically useful, cost-effective

14
<PAGE>
and safe. The synthetic peptide-based radiopharmaceutical and other peptide
based technology that we are developing is relatively new. As a result, peptide
based radiopharmaceuticals have not been extensively tested in humans or used in
the medical community. These factors may make it more difficult for us to
achieve market acceptance of our products, particularly the first products that
we introduce to the market based on this new technology.

Other factors that we believe will materially affect market acceptance of
our products include:

- The timing of the receipt of marketing approvals and the countries in
which such approvals are obtained;

- The safety, efficacy and ease of administration of the product; and

- The success of physician education programs.

WE NEED TO ESTABLISH COLLABORATIVE COMMERCIAL RELATIONSHIPS; WE ARE DEPENDENT ON
OUR COLLABORATIVE PARTNERS

An important element of our business strategy is entering into strategic
alliances or marketing and distribution arrangements with corporate partners for
the development, commercialization, marketing and distribution of certain of our
potential products. To date, we have only entered into one such arrangement with
only one corporate partner, Nycomed. In August 1998, Nycomed terminated the
research and development portion of its alliance with us, effective December 31,
1998. We are actively seeking additional collaborations with respect to our
Techtide programs that are not subject to Nycomed's options and our Theratide
and Tin-117m DTPA therapeutic programs. Although we are engaging in limited
clinical development of our Techtides and Tin-117m DTPA and preclinical
development of our Theratides in order to generate sufficient data to enter into
discussions with potential collaborative partners, we do not intend to engage in
any significant clinical trials of our Techtides or Theratides without first
obtaining financial support from a collaborative partner unless our existing
capital resources increase significantly.

We may not be able to negotiate any additional collaborative or marketing
and distribution arrangements. Moreover, the terms of any such arrangement may
not be favorable to us. If we are unable to establish additional collaborative
arrangements, our business may be adversely affected.

Our existing collaboration with Nycomed and any future collaboration
arrangement that we may enter into with other third parties may not be
scientifically or commercially successful. In particular, it is likely that a
significant portion of any payments due from the collaborator to us will be
contingent upon completion of development milestones or be based upon a
percentage of net sales.

The factors that may affect the success of our collaborations include:

- Our collaborative partners may be pursuing alternative technologies or
developing alternative products, either on their own or in collaboration
with others, that may be competitive with the product as to which they are
collaborating with us. For example, Nycomed manufactures and distributes a
wide variety of imaging agents for other imaging modalities that may
compete against the products that Nycomed licenses from us or co-markets
with us.

- The success of our corporate partners in marketing any successfully
developed products within the geographic areas in which such partners are
granted marketing rights will materially affect our commercial success.
For example, Nycomed has primary responsibility for the promotion of
AcuTect in the United States and, subject to obtaining final marketing
approval from the FDA, will have such responsibility for the marketing of
NeoTect in the United States. A reduction in sales efforts or a
discontinuance of sales of the our products by collaborative or corporate
partners may result in reduced revenues to us.

15
<PAGE>
- Our collaborative partners generally will have various rights to terminate
the collaboration with us. If a collaborator terminates such a
collaboration, it may be difficult for us to attract a new collaborator to
work with us as to the particular product. In addition, the announcement
of the termination can adversely affect the perception of us in the
business and financial communities.

WE HAVE NOT BEEN PROFITABLE

We have incurred net losses since our inception. At December 31, 1998, our
accumulated deficit was approximately $55.4 million. We received our first
revenues from product sales only in October 1998. We expect to incur additional
significant operating losses over the next 12 to 24 months and expect cumulative
losses to increase during the initial marketing of AcuTect and as the Company's
research and development and clinical trial efforts continue. We expect that our
losses will fluctuate from quarter to quarter and that such fluctuations may be
substantial.

WE EXPECT TO REQUIRE ADDITIONAL FUNDING

Our future capital requirements will depend on many factors, including:

- continued progress in our research and product development programs, as
well as the magnitude of these programs;

- the scope and results of preclinical studies and clinical trials;

- the time and costs involved in obtaining regulatory approvals;

- competing technological and market developments;

- the ability of the Company to establish and maintain collaborative
academic and commercial research, development and marketing relationships;

- the costs and success of commercialization activities and arrangements;

- the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other patent-related costs, including
litigation costs; and

- the costs of obtaining any required licenses of third parties
technologies.

Based upon our current operating plan, we anticipate that our existing
capital resources, will be adequate to satisfy our capital requirements through
1999. In the future, we may be required to raise additional funds, including
through collaborative relationships and public or private financings. Such
additional financing may not be available to us or may not be available on
acceptable terms.

If we raise additional funds by issuing equity securities, further dilution
to our then existing stockholders will result. In addition, the terms of the
financing may adversely affect the holdings or the rights of such stockholders.
If we are unable to obtain adequate funding on a timely basis, we may be
required to significantly curtail one or more of our research or product
development programs or reduce our marketing and sales initiatives, or we also
could be required to seek funds through arrangements with collaborative partners
or others that may require us to relinquish rights to certain of its
technologies, product candidates or products which we would otherwise pursue on
our own.

WE FACE SIGNIFICANT COMPETITION

The pharmaceutical and biotechnology industries are highly competitive and
characterized by rapid and substantial technological change. Our competitors
include pharmaceutical and chemical companies, biotechnology firms, universities
and other research institutions. Many of these competitors are conducting
extensive research and development activities on technologies and products
similar to or competitive with our technologies and products.

16
<PAGE>
Particular competitive factors that we believe may affect us include:

- Many other companies are actively seeking to develop nuclear medicine
imaging agents that will compete with our Techtides. These competitive
products may be more effective than our products or may render our
technologies and products obsolete or noncompetitive.

- Certain radiopharmaceuticals already have been approved for sale for the
diagnosis or treatment of the indications targeted by our products. In
particular, OctreoScan-Registered Trademark-, a peptide based
radiopharmaceutical, is available for the diagnosis of neuroendocrine
tumors, Ceretec-Registered Trademark-, a radiopharmaceutical labeled with
technetium, is available for imaging inflammation due to infection, and
Metastron-Registered Trademark- and Quadramet-Registered Trademark- are
available for the reduction of pain due to metastatic cancer to the bone.

- There are several well-established medical imaging modalities that compete
against nuclear medicine imaging, including x-rays, CT, MRI and
ultrasound.

- Many of our competitors have substantially greater financial, technical
and human resources than we have, including greater experience and
capabilities in undertaking preclinical studies and human clinical trials,
obtaining FDA and other regulatory approvals and manufacturing and
marketing pharmaceuticals. Our principal competitors include such large
companies as Du Pont Merck and Mallinckrodt.

In addition, there are alternative therapeutics available for the treatment
of the cancer and cardiovascular indications that are the subject of our
Theratide programs. These competitive development activities include
radiolabeled monoclonal antibodies (MABs) for non-Hodgkins lymphoma and
neuroendocrine tumors, vaccines for non-small cell lung cancer, and
non-radiolabeled MABs which target changing the physiology that supports tumor
growth.

OUR SUCCESS DEPENDS ON OUR PROTECTING OUR PATENTS AND PATENTED RIGHTS

Our success depends in significant part on our ability to develop patentable
products, to obtain patent protection for our products, both in the United
States and in other countries, and to enforce these patents. The patent
positions of pharmaceutical and biotechnology firms, including us, are generally
uncertain and involve complex legal and factual questions. As a result, patents
may not issue from any patent applications that we own or license. If patents do
issue, the claims allowed may not be sufficiently broad to protect our
technology. In addition, issued patents that we own or license may be
challenged, invalidated or circumvented. Our patents also may not afford us
protection against competitors with similar technology.

Our success also depends on our not infringing patents issued to competitors
or others. We are aware of patents and patent applications belonging to
competitors and others that may require us to alter our products or processes,
pay licensing fees or cease certain activities.

We may not be able to obtain a license to any technology owned by a third
party that we require to manufacture or market one or more products. Even if we
can obtain a license, the financial and other forms may be disadvantageous.

Our success also depends on our maintaining the confidentiality of our trade
secrets and patented know-how. We seek to protect such information by entering
into confidentiality agreements with our employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors. These
agreements may be breached by such parties. We may not be able to obtain an
adequate, or perhaps, any remedy to remedy such a breach. In addition, our trade
secrets may otherwise become known or be independently developed by our
competitors.

17
<PAGE>
WE ARE A PARTY TO A PATENT INTERFERENCE RELATING TO AN ELEMENT OF ACUTECT

In December 1998, at our request the United States Patent and Trademark
Office declared an interference between a patent application filed by us and a
patent issued to RhoMed Incorporated, a wholly-owned subsidiary of Palatin
Technologies, Inc. This proceeding will determine the patentability of the
technology that is the subject matter of the interference as well as which party
first developed this technology. If the technology is patentable, the party that
first developed the technology will be awarded the United States patent rights.

The process of resolving an interference can take many years. If the
technology that is the subject of this proceeding is found to be patentable and
RhoMed is found to be the party that first developed the technology, we may not
be able to manufacture or market AcuTect in the United States without a license
from RhoMed. RhoMed would be under no obligation to grant us such a license or
to do so on commercially acceptable terms. Accordingly, an adverse outcome in
this proceeding could materially adversely affect our business, financial
position and results of operations.

WE MAY BECOME INVOLVED IN ADDITIONAL PROCEEDINGS RELATING TO INTELLECTUAL
PROPERTY RIGHTS

The pharmaceutical and biotechnology industries have been characterized by
significant litigation and interference and other proceedings regarding patents,
patent applications and other intellectual property rights. In addition to the
interference proceeding with RhoMed, we may become parties to additional patent
litigation and other proceedings in the future. The types of situations in which
we may become parties to such litigation or proceedings include:

- We may initiate litigation or other proceedings against third parties to
enforce our patent rights.

- We may initiate litigation or other proceedings against third parties to
seek to invalidate the patents held by such third parties or to obtain a
judgment that our products or processes do not infringe such third
parties' patents.

- If our competitors file patent applications that claim technology also
claimed by us, we may participate in interference or opposition
proceedings to determine the priority of invention.

- If third parties initiate litigation claiming that our processes or
products infringe their patent or other intellectual property rights, we
will need to defend against such proceedings.

An adverse outcome in any litigation or other proceeding could subject us to
significant liabilities to third parties and require us to cease using the
technology that is at issue or to license the technology from third parties. We
may not be able to obtain any required licenses on commercially acceptable terms
or at all. Thus, an unfavorable outcome in any patent litigation or other
proceeding could have a material adverse effect on our business, financial
condition or results of operations.

The cost to us of any patent litigation or other proceeding, even if
resolved in our favor, could be substantial. Some of our competitors may be able
to sustain the cost of such litigation and proceedings more effectively than we
can because of their substantially greater resources. Uncertainties resulting
from the initiation and continuation of patent litigation or other proceedings
could have a material adverse effect on our ability to compete in the
marketplace. Patent litigation and other proceedings may also absorb significant
management time.

OUR PATENT LICENSES ARE SUBJECT TO TERMINATION IN CERTAIN CIRCUMSTANCES

We are a party to a number of patent licenses that are important to our
business and expect to enter into additional patent licenses in the future.
These licenses impose various commercialization, sublicensing, royalty,
insurance and other obligations on us. If we fail to comply with these
requirements, the licensor will have the right to terminate the license.

18
<PAGE>
WE HAVE ONLY LIMITED SALES AND MARKETING EXPERIENCE

We introduced our first product to the market in October 1998 and have only
limited product sales, marketing and distribution experience. Although we plan
to rely significantly on collaborative partners for the marketing and
distribution of its products through co-marketing, other licensing or
distribution arrangements, we expect to market and sell certain of our products
directly and to engage in certain other marketing activities in collaboration
with our partners. For example, under our United States co-promotion agreement
with Nycomed, we have primary responsibility for promotion of the products
covered by such agreement to commercial radiopharmacies.

Our strategy of relying on collaborative partners to market and distribute
our products will result in our being dependent upon the success of the efforts
of these collaborators in performing such functions. The terms of these
marketing and distribution arrangements may not be favorable to us. In addition,
our partner may not successfully market our products. In many instances we may
have little or no control over our partners' activities in marketing and
distributing our products.

If our plan to rely on corporate partners for significant aspects of
marketing and selling our products is unsuccessful for any reason, we may need
to recruit and train a far larger marketing and sales force than we currently
anticipate doing. In such event, we would face a number of additional risks,
including:

- we may not be able to attract and build a sufficient marketing staff or
sales force;

- the cost of establishing such a marketing staff or sales force may not be
justifiable in light of anticipated product revenues; and

- the Company's direct sales and marketing efforts may not be successful.

WE HAVE ONLY LIMITED MANUFACTURING CAPABILITIES AND WILL BE DEPENDENT ON THIRD
PARTY MANUFACTURERS

We lack commercial scale facilities to manufacture our products in
accordance with current GMP requirements prescribed by the FDA. We have relied
on a large third party pharmaceutical company for the manufacture of our
peptides for clinical trials and for commercial sale of AcuTect. Similarly, we
have entered into an arrangement with a GMP-qualified third party manufacturer
for the supply of Tin-117m for clinical trials.

We expect to be dependent on third party manufacturers or collaborative
partners for all of our commercial production of peptides. There are a limited
number of manufacturers that operate under GMP regulations capable of
manufacturing our products. In the event that we are unable to obtain contract
manufacturing, or obtain such manufacturing on commercially reasonable terms, we
may not be able to commercialize our products as planned.

We are dependent upon our third party suppliers to perform their obligations
in a timely manner. If such third party suppliers fail to will perform their
obligations, we may be adversely affected in a number of ways, including:

- we may not be able to meet commercial demands for our products;

- we may not be able to initiate or continue clinical trials of products
that are under development; and

- we may be delayed in submitting applications for regulatory approvals of
our products.

We have no experience in manufacturing on a commercial scale and no
facilities or equipment to do so. If we determine to develop our own
manufacturing capabilities, we will need to recruit qualified personnel and
build or lease the requisite facilities and equipment. We may not be able to
successfully

19
<PAGE>
develop our own manufacturing capabilities. Moreover, it may be very costly and
time consuming for us to develop such capabilities.

The manufacture of products by us and our suppliers 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 our products and our business, financial
condition and results of operations.

WE ARE DEPENDENT UPON A SOLE SOURCE SUPPLIER FOR OUR PEPTIDES

We purchase our synthetic peptides from a sole source supplier. We may enter
into similar arrangements with respect to other components of our products.
While we are aware of alternative sources for our peptides, the establishment of
additional or replacement suppliers could be time consuming, result in a supply
interruption or cause significant regulatory delays and expense. The
establishment of an alternative source of supply or any significant supply
interruption could have a materially adverse effect on our ability to develop
and manufacture our products.

HAZARDOUS MATERIALS THAT WE HANDLE IN OUR BUSINESS

Our research and development involves the controlled use of hazardous
materials, chemicals and radioactive compounds. There are risks of accidental
contamination or injury from our handling , storing and disposing of these
materials. In the event of an accident, we could be held liable for significant
damages

WE WILL BE EXPOSED TO PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN
ADEQUATE PRODUCT LIABILITY INSURANCE

Our business exposes us 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 by consumers,
health care providers or pharmaceutical companies or others that sell our
products. If product liability claims are made with respect to our products, we
may need to recall such products or change the indications for which they may be
used.

We have only limited product liability insurance coverage. This coverage is
subject to various deductibles. Product liability coverage is expensive. In the
future, we may not be able to maintain or obtain such product liability
insurance at a reasonable cost or in sufficient amounts to protect us against
losses due to liability claims. Accordingly, such claims could have a material
adverse effect on the Company's business, financial condition and results of
operations.

UNCERTAINTY OF PHARMACEUTICAL PRICING, REIMBURSEMENT AND HEALTHCARE REFORM
MEASURE

The availability of reimbursement by governmental and other third party
payors affects the market for any pharmaceutical product. These third party
payors continually attempt to contain or reduce the costs of healthcare by
challenging the prices charged for medical products and services. In certain
foreign countries, particularly the countries of the European Union, the pricing
of prescription pharmaceuticals is subject to governmental control.

In both the United States and certain foreign jurisdictions, there have been
a number of legislative and regulatory proposals to change the healthcare
system. Further proposals are likely. The potential for adoption of these
proposals affects or will affect our ability to raise capital, obtain additional
collaborative partners and market our products.

If we or our collaborators obtain marketing approvals for our products, we
expect to experience pricing pressure due to the trend toward managed health
care, the increasing influence of health

20
<PAGE>
maintenance organizations and additional legislative proposals. We may not be
able to sell our products profitably if reimbursement is unavailable or limited
in scope or amount.

WE NEED TO ATTRACT AND RETAIN OF KEY MANAGEMENT AND QUALIFIED PERSONNEL

We are highly dependent on the principal members of our management and
scientific staff, particularly Dr. Dean, our President and Chief Executive
Officer. The loss of the services of these individuals could have a material
adverse effect on our business. We are a party to an employment agreement with
Dr. Dean that extends through April 2, 2000, subject to automatic extension for
additional one-year periods unless either Dr. Dean or we provide written notice
to the contrary to the other party at least six months prior to the expiration
period.

Recruiting and retaining qualified scientific personnel to perform research
and development work in the future will be critical to the Company's success. We
may not be able to attract and retain highly skilled personnel on acceptable
terms given the competition for experienced scientists among pharmaceutical,
biotechnology and health care companies, universities and non-profit research
institutions. We do not carry key-man insurance with respect to any of our
executive officers.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following table provides information about Diatide's financial
instruments that are sensitive to changes in interest rates as of December 31,
1998. For investment securities and debt obligations, the table presents
principal cash flows and related weighted-average interest rates by expected
maturity dates. Additionally, we assumed our available-for-sale securities,
comprised of cash management investment funds and corporate bonds, are similar
enough to aggregate those securities for presentation purposes.

INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST RATE
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
1999 2000 2001 TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Available-For-Sale Securities.................................................. $ 7,472 -- -- $ 7,472
Average Interest Rate.......................................................... 5.2% -- -- --
Long-term Debt, including Current Portion (Fixed Rate)......................... $ 137 $ 157 $ 144 $ 438
</TABLE>