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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 000-21873
BIOSITE DIAGNOSTICS INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Delaware 33-0288606
[State or other jurisdiction [I.R.S. Employer
of incorporation or organization] Identification No.]
11030 Roselle Street
San Diego, California 92121
[Address of principal executive offices] [Zip Code]
Registrant's telephone number, including area code: (619) 455-4808
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 of the Registrant's Common Stock, $0.01 par value,
outstanding at
October 31, 1997 was 12,816,809
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BIOSITE DIAGNOSTICS INCORPORATED
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of September 30, 1997 (Unaudited)
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Statements of Income (Unaudited) for the three months and nine months
ended September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . 2
Condensed Statements of Cash Flows (Unaudited) for the nine
months ended September 30, 1997 and 1996 . . . . . . . . . . . . . . . . 3
Notes to Condensed Financial Statements (Unaudited) . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Quantitative and Qualitative Disclosure about Market Risk . . . . . . . . . Not Applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . 17
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . Not Applicable
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOSITE DIAGNOSTICS INCORPORATED
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,826,814 $ 1,609,861
Marketable securities, available-for-sale 36,467,874 8,305,663
Accounts receivable 5,784,255 4,608,072
Receivable from stockholder 1,277,934 869,535
Inventories 2,219,544 1,732,180
Other current assets 2,730,881 1,864,298
------------ ------------
Total current assets 53,307,302 18,989,609
Property, equipment and leasehold improvements, net 7,065,738 4,140,163
Patents and license rights, net 3,879,103 4,292,277
Other assets 1,088,048 2,666,569
------------ ------------
$ 65,340,191 $ 30,088,618
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,260,680 $ 967,974
Accrued salaries and other 1,840,589 1,950,800
Accrued contract payable 630,283 751,544
Current portion of long-term obligations 1,379,837 1,012,073
------------ ------------
Total current liabilities 5,111,389 4,682,391
Long-term obligations 3,803,521 3,252,944
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares and 8,328,847 shares
authorized at September 30, 1997 and December 31, 1996, respectively;
8,328,847 shares issued and outstanding at December 31, 1996
-- 83,288
Common stock, $.01 par value, 25,000,000 shares and 12,000,000 shares
authorized at September 30, 1997 and December 31, 1996, respectively;
12,810,326 and 1,473,573 shares issued and outstanding at September 30, 1997
and December 31, 1996, respectively
128,103 14,736
Additional paid-in capital 53,369,398 22,094,711
Unrealized net gain (loss) on marketable securities, net of related tax
effect 15,578 (2,754)
Deferred compensation (345,258) (427,345)
Retained earnings 3,257,460 390,647
------------ ------------
Total stockholders' equity 56,425,281 22,153,283
------------ ------------
$ 65,340,191 $ 30,088,618
============ ============
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes.
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BIOSITE DIAGNOSTICS INCORPORATED
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 8,079,163 $ 7,247,379 $ 23,409,100 $ 20,224,976
Cost of sales 1,693,255 1,549,153 4,930,506 4,317,648
------------ ------------ ------------ ------------
Gross profit 6,385,908 5,698,226 18,478,594 15,907,328
Operating Expenses:
Research and development 3,022,469 2,544,358 8,441,900 6,515,097
Selling, general and administrative 3,036,944 2,186,808 8,108,438 6,116,484
Settlement of patent matters -- -- -- 2,368,282
------------ ------------ ------------ ------------
6,059,413 4,731,166 16,550,338 14,999,863
------------ ------------ ------------ ------------
Operating income 326,495 967,060 1,928,256 907,465
Other income:
Interest and other income 630,640 198,006 1,508,790 585,015
Contract revenue-related party 197,740 302,350 777,767 856,880
------------ ------------ ------------ ------------
Income before benefit (provision) for income taxes 1,154,875 1,467,416 4,214,813 2,349,360
Benefit (provision) for income taxes (266,000) 588,744 (1,348,000) 264,000
------------ ------------ ------------ ------------
Net income $ 888,875 $ 2,056,160 $ 2,866,813 $ 2,613,360
============ ============ ============ ============
Net income per share $ 0.07 $ 0.19 $ 0.22 $ 0.24
============ ============ ============ ============
Shares used in calculating per share amounts 13,454,000 11,101,000 12,926,000 10,833,000
============ ============ ============ ============
</TABLE>
See accompanying notes.
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BIOSITE DIAGNOSTICS INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 2,387,154 $ 1,099,736
INVESTING ACTIVITIES
Proceeds from sales and maturities of marketable securities
21,268,180 11,605,384
Purchase of marketable securities (49,399,837) (8,705,962)
Purchase of property, equipment and leasehold improvements
(4,477,333) (1,378,923)
Patents, license rights, deposits and other assets 1,215,682 (3,963,357)
------------ ------------
Net cash used in investing activities (31,393,308) (2,442,858)
FINANCING ACTIVITIES
Proceeds from issuance of financing obligations 3,109,408 1,364,137
Principal payments under financing obligations (1,191,067) (955,100)
Proceeds from issuance of stock, net 30,304,766 68,302
------------ ------------
Net cash provided by financing activities 32,223,107 477,339
------------ ------------
Increase (decrease) in cash and cash equivalents 3,216,953 (865,783)
Cash and cash equivalents at beginning of period 1,609,861 2,276,403
------------ ------------
Cash and cash equivalents at end of period $ 4,826,814 $ 1,410,620
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 238,233 $ 212,329
============ ============
Income taxes paid $ 859,550 $ 103,874
============ ============
</TABLE>
See accompanying notes.
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BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements 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 of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying financial statements reflect all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, considered necessary for a fair presentation of the results for
the interim periods presented. Interim results are not necessarily indicative
of results for a full year. The Company has experienced significant quarterly
fluctuations in operating results and it expects that these fluctuations in
sales, expenses and net income or losses will continue.
The financial statements and related disclosures have been prepared with the
presumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements and the related notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
MARKETABLE SECURITIES
Effective January 1, 1994 the Company adopted Financial Accounting Standards
Board ("FASB") Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities", which requires that investments in equity securities
that have readily determinable fair values and investments in debt securities
be classified in three categories: held-to-maturity, trading and
available-for-sale. The Company's accounting policy for and classification of
investments are consistent with those of 1996. Based on the nature of the
assets held by the Company and management's investment strategy, the Company's
investments have been classified as available-for-sale. Management determines
the appropriate classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date.
Securities classified as available-for-sale are carried at estimated fair
value, as determined by quoted market prices, with unrealized gains and losses,
net of tax, reported in a separate component of stockholders' equity. At
September 30, 1997, the Company had no investments that were classified as
trading or held-to-maturity as defined by the Statement.
The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income. Realized gains and losses are
included in interest income. The cost of securities sold is based on the
specific identification method. Interest on securities classified as
available-for-sale is included in interest income.
2. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of common
shares and common equivalent shares outstanding during each period. Common
equivalent shares are computed using the treasury stock method and consist of
common stock which may be issuable upon exercise of outstanding common stock
options, when dilutive. Pursuant to the requirements of the Securities and
Exchange Commission, common stock issued by the Company during the twelve
months immediately preceding the Company's initial public offering, plus the
number of common equivalent shares which became issuable during the same period
pursuant to the grant of stock
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BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
options, have been included in the calculation of the shares used in computing
net income per share as if these shares were outstanding for all periods
presented using the treasury stock method. In addition, the calculation of the
shares used in computing net income per share also includes convertible
preferred stock which converted into 8,328,847 shares of common stock and an
outstanding $1.0 million convertible debenture and related accrued interest
which converted into 92,575 common shares (based on the initial public offering
price of $12.00 per share) upon the completion of the initial public offering,
as if they were converted into common stock as of the original dates of
issuance.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("Statement No.
128"). Statement No. 128 applies to entities with publicly held common stock
or potential common stock and is effective for financial statements issued for
periods ending after December 15, 1997. Statement No. 128 replaces APB Opinion
15, Earnings per Share ("EPS"). Statement No. 128 requires dual presentation
of basic and diluted earnings per share by entities with complex capital
structures. Basic EPS includes no dilution and is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution of securities that could
share in the earnings of the entity. The Company plans to adopt Statement No.
128 beginning with its financial statements for the quarter and year ended
December 31, 1997. The impact of Statement No. 128 is expected to result in
the calculation of basic net income per share of $0.07 and $1.41 for the
quarters ended September 30, 1997 and 1996, respectively, and a calculation of
basic net income per share of $0.27 and $1.84 for the nine months ended
September 30, 1997 and 1996, respectively. The Company has not yet determined
what the impact of Statement No. 128 will be on the calculation of diluted net
income per share.
3. BALANCE SHEET INFORMATION
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
---------- ----------
<S> <C> <C>
Raw materials $ 776,698 $ 441,719
Work in process 1,251,549 1,125,608
Finished goods 191,297 164,853
---------- ----------
$2,219,544 $1,732,180
========== ==========
</TABLE>
4. INITIAL PUBLIC OFFERING
In February 1997, the Company completed its initial public offering of
2,760,000 shares of common stock (including an exercised underwriters'
over-allotment option for 360,000 shares) at a price of $12.00 per share,
providing the Company with net proceeds of approximately $29.8 million, after
deducting underwriting discounts and commissions of approximately $2.3 million
and offering costs of approximately $973,000. Additionally, all outstanding
shares of preferred stock were converted into 8,328,847 shares of common stock
and an outstanding $1.0 million convertible debenture and related accrued
interest was converted into 92,575 common shares (based on the initial public
offering price of $12.00 per share) upon the completion of the initial public
offering. Upon completion of the initial public offering, the certificate of
incorporation of the Company was amended to provide that the authorized number
of shares of common and preferred stock issuable by the Company was 25,000,000
shares of common stock and 5,000,000 shares of preferred stock.
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<PAGE> 8
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of cash, cash equivalents and
available-for-sale securities by balance sheet classification at September 30,
1997:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents:
Cash $ 1,452,456 $ -- $ -- $ 1,452,456
Money Market Fund 1,182,169 -- -- 1,182,169
Commercial Paper 2,192,189 -- -- 2,192,189
------------ ------------ ------------ ------------
4,826,814 -- -- 4,826,814
Marketable securities:
Certificates of Deposit 2,093,704 1,041 (207) 2,094,538
U.S. Treasury Securities 4,008,449 8,441 -- 4,016,890
Corporate Debt Securities 30,339,756 31,335 (14,645) 30,356,446
------------ ------------ ------------ ------------
36,441,909 40,817 (14,852) 36,467,874
------------ ------------ ------------ ------------
Total cash, cash equivalents and marketable securities $ 41,268,723 $ 40,817 $ (14,852) $ 41,294,688
============ ============ ============ ============
</TABLE>
The amortized cost and estimated fair value of available-for-sale
securities at September 30, 1997, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Marketable securities:
Due in one year or less $20,029,195 $20,031,335
Due after one year through two years 16,412,714 16,436,539
----------- -----------
$36,441,909 $36,467,874
=========== ===========
</TABLE>
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<PAGE> 9
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The matters discussed in this Management's Discussion and Analysis of
Financial Condition and Results of Operations contain forward-looking
statements that involve risks and uncertainties, including the timely
development, approval, introduction and acceptance of new products, such as the
Triage Cardiac Panel and Triage C. diff Panel, , dependence on others, the
impact of competitive products, patent issues, changing market conditions and
the other risks detailed under "Factors that May Affect Results," and
throughout the Company's Annual Report on Form 10-K for the year ended December
31, 1996. Actual results may differ materially from those projected. These
forward-looking statements represent the Company's judgment as of the date of
the filing of this Form 10-Q and Form 10-K, respectively. The Company
disclaims any intent or obligation to update these forward-looking statements.
OVERVIEW
Since the Company's inception in 1988, the Company has been primarily
involved in the research, development, manufacturing and marketing of rapid
diagnostic tests. The Company began commercial sales of the Triage Panel for
Drugs of Abuse ("Triage DOA") in February 1992 and currently markets the
product worldwide primarily through distributors supported by a small direct
sales force. The Company is engaged in research and development of additional
rapid diagnostic products in the microbiology, cardiology and therapeutic drug
monitoring fields.
In February 1997, the Company completed its initial public offering of
2,760,000 shares of Common Stock (including an exercised underwriters'
over-allotment option for 360,000 shares of Common Stock) at a price to the
public of $12.00 per share, providing the Company with net proceeds of
approximately $29.8 million, after deducting underwriting discounts and
commissions of approximately $2.3 million and offering expenses of
approximately $973,000. Additionally, all outstanding shares of Preferred
Stock were converted into 8,328,847 shares of Common Stock and an outstanding
$1.0 million convertible debenture and related accrued interest was converted
into 92,575 shares of Common Stock upon the completion of the initial public
offering.
RECENT DEVELOPMENTS
Research and Development
During the third quarter, the Company completed its clinical trials related
to the Triage Cardiac Panel. In August, the Company filed a pre- market
notification, known as a 510(k), with the U.S. Food and Drug Administration
("FDA"), seeking clearance to market the assay device component of the Triage
Cardiac Panel in the United States. In October, the Company was granted such
clearance by the FDA. The Triage Cardiac Panel product may aid in the detection
of Acute Myocardial Infarction (AMI) and provide physicians with the ability to
make treatment decisions in a timely manner. Used in conjunction with the
Triage Meter, the Triage Cardiac Panel is a rapid diagnostic product that would
quantitatively measure, in a single test device, the level of CK-MB, Troponin I
and Myoglobin from a whole blood sample. Prior to the actual launch of the
Triage Cardiac product, the Company will need to file and obtain clearance for
two additional 510(k)'s, related to test quality control and calibration, as
well as obtain clearance of a 510(k) for the Triage Meter, which was filed in
September.
The Company also successfully completed feasibility studies for the Triage
Neoral Assay under its antibody license agreement with Novartis Pharma AG
("Novartis"). As a result of this milestone achievement, Novartis will invest
an additional $500,000 in Biosite by January 1998.
Product Distribution Negotiations
With the potential launch of new products from the Company's development
pipeline, the Company is evaluating distribution alternatives for its current
products and potential new products. As a result, the Company plans to
increase the size of its sales force in the U.S. and is negotiating to
potentially expand its distributor alliance with the Fisher Healthcare Division
("Fisher") of the Fisher Scientific Company, the Company's U.S. distributor in
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<PAGE> 10
the medical market. The long-term distribution arrangement being negotiated
with Fisher, if executed, may expand Fisher's role to include the distribution
of certain of the potential new products in the U.S. medical market.
The Company also is negotiating with Merck KGaA ("Merck") for the
reacquisition of certain international distribution rights for the Triage DOA
product line and certain development and distribution rights for the Triage
Cardiac Panel product in development. Concurrently, the Company is evaluating
product distribution alternatives for the international markets, including,
among other things, the establishment of European operations with a direct
sales force in certain countries. The reacquisition of the development and
distribution rights for the Triage Cardiac Panel product in development may
require a cash payment and forgiveness of amounts owed to the Company by Merck
related to the development of the Triage Cardiac Panel product.
The Company anticipates that it may, if appropriate, enter into additional
distribution agreements with respect to its products currently under
development and products that it develops in the future, if any of such
products receive the requisite regulatory clearance or approvals.
There can be no assurance that the Company will be able to enter into
agreements with Fisher and Merck or other distribution agreements on acceptable
terms, if at all. If the Company elects to distribute products directly, there
can be no assurance that the Company's direct sales, marketing and distribution
efforts would be successful. A failure to enter into acceptable distribution
agreements and a failure of the Company to successfully market its products
would have a material and adverse effect on the Company.
Litigation
In September, the Company was named in a lawsuit filed by Behring
Diagnostics GmbH and Behring Diagnostics, Inc. alleging that the Company's
Triage(R) DOA products infringe on U.S. Patent 4,366,241 held by the
plaintiffs. The plaintiffs seek to recover damages of an unspecified amount
and to enjoin future sales of the Triage DOA products by the Company. The
Company has reviewed the cited patent and believes it has meritorious defenses.
The Company intends to vigorously defend its position, and it may incur
significant legal costs in executing its defense. If the Company's Triage DOA
products were found to infringe such patents, and if an acceptable license was
not available, the Company would be materially and adversely effected. The
filing of the lawsuit is not expected to impact the development of the
Company's potential new products.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of net
sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales .................................. 100% 100% 100% 100%
Cost of sales .............................. 21% 21% 21% 21%
---- ---- ---- ----
Gross profit ............................... 79% 79% 79% 79%
Operating Expenses:
...................................... 37% 35% 36% 32%
Research and development
...................................... 38% 30% 35% 30%
Selling, general and administrative
...................................... 0% 0% 0% 12%
---- ---- ---- ----
Settlement of patent matters
Total operating expenses ................... 75% 65% 71% 74%
---- ---- ---- ----
Income from operations ..................... 4% 13% 8% 5%
Interest and other income, net ............. 10% 7% 10% 7%
---- ---- ---- ----
Income before benefit (provision) for income 14% 20% 18% 12%
taxes
Benefit (provision) for income taxes ....... (3)% 8% (6)% 1%
---- ---- ---- ----
Net income ................................. 11% 28% 12% 13%
==== ==== ==== ====
</TABLE>
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<PAGE> 11
Net Sales. Net Sales for the three and nine months ended September 30, 1997
increased to $8.1 million and $23.4 million, respectively, up 11% and 16%,
respectively, compared to the same periods of 1996. The increase is primarily
attributable to the continued market acceptance of the Company's Triage DOA
products. In particular, sales of the higher-priced Triage DOA Plus TCA
product increased 34% to $4.5 million for the third quarter of 1997 from $3.4
million for the third quarter of 1996. On a year-to-date basis, sales of
Triage DOA Plus TCA were $12.2 million, 30% higher than the comparable period
of 1996. The Company believes that the growth in sales of Triage DOA products
will slow as the available U.S. market becomes saturated and competitive
pressures become more prominent in a maturing market.
Gross profit. Gross profit for the three months and nine months ended
September 30, 1997 was $6.4 million and $18.5 million, respectively,
representing increases of 12% and 16%, respectively, over the comparable
periods of 1996. The increased gross profit resulted primarily from increased
sales of the Triage DOA product line. Gross margins remained at 79% for both
the third quarter and first nine months of 1997, which was consistent with the
gross margins for the same periods of 1996. The Company expects that gross
margins may decrease in the future, primarily as a result of the potential
introduction of new products. Such potential new products are expected to
realize lower gross margins during the early stages of commercialization of
these products.
Research and Development Expenses. Research and development expenses for the
three months and nine months ended September 30, 1997 were $3.0 million and
$8.4 million, respectively, representing increases of 19% and 30%,
respectively, from the comparable periods of 1996. These increases resulted
from the expansion of the Company's research and development and manufacturing
scale-up efforts associated with its cardiac, microbiology, and therapeutic
drug monitoring assays under development. During the third quarter, the
Company continued to expend significant efforts on activities related to the
Triage Cardiac Panel and the Triage C. diff Panel, two products under
development which the Company believes are closest to commercialization, while
continuing other research and development activities. Clinical investigations
of the Triage C. diff Panel were initiated in the first half of 1997 and are
expected to continue into the fourth quarter of 1997. The Company expects that
its research and development expenses will continue to increase in 1997, as
compared to 1996 levels, and may continue to increase in 1998. The increased
expenditures are expected to primarily relate to hiring additional personnel,
preclinical and clinical studies, product development efforts and manufacturing
scale-up activities. The timing of such increased expenditures and their
magnitude are primarily dependent on the success of the research and
development and the timing of potential product launches. With the FDA
approval of the assay device component of the Triage Cardiac Panel Product,
manufacturing scale-up activities are expected to continue to increase in the
fourth quarter of 1997 and first quarter of 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months and nine months ended September
30, 1997 were $3.0 million and $8.1 million, respectively, representing
increases of 39% and 33%, respectively, from the comparable periods of 1996.
The 1997 increases were primarily a result of the cost of expanding the
Company's in-house marketing and administrative functions to support the
Company's expanded operations. During the third quarter of 1997, the Company
continued to implement certain marketing programs designed to spur greater
sales of its Triage DOA products in the workplace testing market and secure
long-term commitments from customers in the clinical market. Additionally,
preparatory marketing activities related to the potential launch of new
products were initiated or expanded during the third quarter. The Company
expects selling, general and administrative costs to increase significantly in
the fourth quarter of 1997 and into 1998, as the Company continues to expand
its level of operations and in anticipation of potential changes in its
operations resulting from, among other things, the potential introduction of
new products, patent litigation, and the Company's obligations as a public
reporting entity. Associated with the potential introduction of new products
are increased costs related to the Company's plans to expand its sales force in
the U.S. and abroad, increased marketing activities, and the addition of
administrative personnel to support expanded manufacturing and sales
activities. The timing of such increased expenditures and their magnitude are
primarily dependent on the success of the development of new products and the
timing of their commercialization, distribution strategies and sales growth.
Settlement of Patent Matters. In September 1996, the Company reached a
settlement with Abbott Laboratories, with respect to all claims set forth in a
lawsuit filed by Abbott Laboratories in May 1994. The lawsuit alleged that
Triage DOA infringed a patent licensed to Abbott Laboratories. The Company
vigorously defended the lawsuit.
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However, to avoid protracted litigation, the Company settled the patent matter
in September 1996, paid $2.0 million as a settlement of the litigation and, for
an additional $3.5 million and the agreement to pay certain royalties, obtained
a license to certain technology. Future amortization of the license fee will be
charged to cost of sales over the life of the license. The $2.0 million
litigation settlement payment, as well as the amortization related to prior
fiscal years and related legal defense costs were charged to settlement of
patent matters in the first quarter of 1996.
Interest and Other Income. Interest and other income increased $433,000 and
$924,000 for the three and nine months ended September 30, 1997, respectively,
from the comparable periods in 1996. The increases resulted primarily from the
higher average balances of cash, cash equivalents and marketable securities
during the first three quarters of 1997 as compared to the same period in 1996.
In February 1997, the Company received net proceeds from its initial public
offering of approximately $29.8 million.
Benefit (Provision) for Income Taxes. The Company's provisions for income
taxes for the three months and nine months ended September 30, 1997 were
$266,000 and $1.3 million, respectively. The Company's effective tax rates
were 23% and 32% for the three and nine months periods ended September 30,
1997, respectively. The lower effective tax rate for the third quarter resulted
primarily from increases in the estimated federal and state tax credits to be
generated in 1997 from research and development and certain capital
expenditures. For the three months and nine months ended September 30, 1996,
the Company recorded a benefit for income taxes of $589,000 and $264,000,
respectively. The benefit for income taxes resulted primarily from a reduction
in the valuation allowance for deferred taxes of $1.1 million in the three
months ended September 30, 1996, as the realization of such assets became
probable.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through private
placements of equity securities, revenues from operations, debt and capital
lease financing and interest income earned on the net proceeds from the private
placements. Since its inception, the Company has raised over $21.7 million in
net cash proceeds from the private placement of equity securities and $1.0
million from the issuance of convertible debentures. In February 1997, the
Company raised approximately $29.8 million in net cash proceeds from its
initial public offering of 2,760,000 shares of Common Stock. At September 30,
1997, the Company had cash, cash equivalents, and marketable securities of
approximately $41.3 million compared to $9.9 million at December 31, 1996.
The increase in cash, cash equivalents, and marketable securities during the
nine months ended September 30, 1997 is largely attributable to the net
proceeds, of approximately $29.8 million, raised in the Company's initial
public offering in February 1997. Additionally, the Company generated cash of
$2.4 million from operating activities for the nine months ended September 30,
1997 as compared to net cash of $1.1 million generated from operating
activities for the nine months ended September 30, 1996. Net cash provided by
operating activities for the nine months ended September 30, 1996 included the
payment of $2.2 million for a license right accrued as of December 31, 1995 and
the payment of $2.0 million to settle patent litigation with Abbott
Laboratories. Other significant sources and uses of cash for the nine months
ended September 30, 1997 included the expenditure of $700,000 to acquire
licenses to certain in-process technologies, $4.5 million for capital equipment
and leasehold improvements and the receipt of $3.1 million in proceeds from
financing obligations. Other significant sources and uses of cash for the nine
months ended September 30, 1996 included the acquisition of license rights from
Abbott Laboratories for $3.5 million, the generation of $2.9 million in cash as
a result of maturing marketable securities which were not reinvested, the
expenditure of $1.4 million for capital equipment and leasehold improvements
and the receipt of $1.4 million in proceeds from equipment financing.
The Company's primary short-term needs for capital, which are subject to
change, are for expansion of its manufacturing capacity for potential new
products, expansion of its direct sales force and marketing programs related to
potential new products, potential repurchase of certain development and
distribution rights, potential procurement and enforcement of patents,
resolution of patent disputes, and the continued advancement of research and
development efforts. The Company utilizes credit arrangements with financing
companies and leasing companies to finance the purchase of capital equipment.
As of September 30, 1997, the Company had equipment financing lines of credit
with financial institutions totaling $3.5 million, of which approximately $2.5
million was available for future borrowing. The $500,000 and $3.0 million
lines of credit expire on March 30 and June 30,
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<PAGE> 13
1998, respectively. Additionally, the Company utilizes cash generated from
operating activities to meet its capital requirements.
The Company believes that its available cash, cash from operations and funds
from existing credit arrangements will be sufficient to satisfy its funding
needs at least through 1998. Thereafter, if cash generated from operations is
insufficient to satisfy the Company's working capital and capital expenditure
requirements, the Company may be required to sell additional equity or debt
securities or obtain additional credit facilities. There can be no assurance
that such additional capital, if needed, will be available on satisfactory
terms, if at all. Certain future funding arrangements may require the Company
to relinquish its rights to certain of its technologies, products or marketing
territories. Furthermore, any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may include restrictive
covenants. The Company's future liquidity and capital funding requirements
will depend on numerous factors, including the extent to which the Company's
products under development are successfully developed, gain market acceptance
and become and remain competitive, results of clinical investigations, the
timing and results of regulatory actions regarding the Company's potential
products, the costs and timing of expansion of sales, marketing and
manufacturing activities, facilities expansion needs, procurement and
enforcement of patents important to the Company's business, and resolution of
patent disputes. The failure by the Company to raise capital on acceptable
terms when needed could have a material adverse effect on the Company's
business, financial condition and results of operations.
FACTORS THAT MAY AFFECT RESULTS
This report includes certain forward-looking statements about the Company's
business and results of operations which are subject to risks and uncertainties
that could cause the Company's actual results to vary materially from that
indicated from such forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere herein and in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996. The factors discussed below should be read
in conjunction with the risk factors discussed in the Company's Annual Report
on Form 10-K, which are incorporated by reference.
- - Limited History of Profitability, Potential Quarterly Fluctuations in Future
Operating Result
The Company first achieved profitability in fiscal 1994 and prior to that
time incurred significant operating losses. The Company experienced operating
profits on a quarterly basis in 1995. However, the Company incurred an
operating loss for the first quarter of 1996 and then returned to operating
profitability for the remaining quarters of 1996. There can be no assurance
that the Company will remain profitable on a quarterly or annual basis in the
future. The Company believes that future operating results will be subject to
quarterly fluctuations due to a variety of factors, including whether and when
new products are successfully developed and introduced by the Company, market
acceptance of current or new products, regulatory delays, product recalls,
manufacturing delays, shipment problems, seasonal customer demand, the timing
of significant orders, changes in reimbursement policies, competitive pressures
on average selling prices, changes in the mix of products sold and patent
conflicts. Operating results would also be adversely affected by a downturn in
the market for the Company's current and future products, if any, order
cancellations or order rescheduling. Because the Company is continuing to
increase its operating expenses for personnel, including the expansion of its
sales force, manufacturing scale-up costs and new product development, the
Company's operating results would be adversely affected if its sales did not
correspondingly increase or if its product development efforts are unsuccessful
or subject to delays. The Company's limited operating history makes accurate
prediction of future operating results difficult or impossible. Although the
Company has experienced growth in recent years, there can be no assurance that,
in the future, the Company will sustain revenue growth or remain profitable on
a quarterly or annual basis or that its growth will be consistent with
predictions made by securities analysts.
- - Near-term Dependence of the Company on Triage DOA
To date, sales of Triage DOA have accounted for all of the Company's sales.
The Company expects its revenue and profitability will substantially depend on
the sale of Triage DOA for the foreseeable future. A reduction in
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<PAGE> 14
demand for Triage DOA or an adverse outcome in patent infringement litigation
with respect to Triage DOA could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
believes that growth in sales of Triage DOA will slow as the available U.S.
market becomes saturated. Competitive pressures could also erode the Company's
profit margins for Triage DOA. Additionally, most of the Company's customers
are healthcare providers facing continuous cost containment pressure, which
could also erode the Company's profit margin for Triage DOA. The Company's
continued growth will depend on its ability to successfully develop and
commercialize other products, gain additional acceptance of Triage DOA in new
market segments or transition customers to higher-margin products of the Triage
DOA product line, such as Triage DOA Plus TCA. There can be no assurance that
the Company will be able to successfully develop and commercialize new products
or that the Company will be able to maintain or expand its share of the drug
testing market. Technological change or the development of new or improved
diagnostic technologies could result in the Company's products becoming
obsolete or noncompetitive.
- - Dependence on Development and Introduction of New Products for Revenue Growth
and Profitability
Except for Triage DOA, all of the Company's products are still under
development, and there can be no assurance that such products will be
successfully developed or commercialized on a timely basis, if at all. The
Company believes that its revenue growth and profitability will substantially
depend upon its ability to complete development of and successfully introduce
these new products. In addition, the successful development of some of these
new products will depend on the development of new technologies, including the
Triage Meter (a fluorescent meter) and assay devices. The Company will be
required to undertake time-consuming and costly development activities and seek
regulatory approval for these new products. There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new products, that
regulatory clearance or approval of any new products will be granted by the
U.S. Food and Drug Administration or foreign regulatory authorities on a timely
basis, if at all, or that the new products will be successfully commercialized.
The Company has limited resources to devote to the development of all its
potential products and consequently a delay in the development of one product
may delay the development of other products. In order to successfully
commercialize any new products, the Company will be required to establish and
maintain reliable, cost-efficient, high-volume manufacturing capacity and a
cost effective sales force and adminstrative infrastructure and an effective
product distribution system for such products. If the Company is unable, for
technological or other reasons, to complete the development, introduction or
scale-up of manufacturing of any new product or if any new product is not
approved for marketing or does not achieve a significant level of market
acceptance, the Company's business, financial condition and results of
operations would be materially and adversely affected.
- - Dependence on Key Distributors; Limited Direct Sales Experience
The Company relies upon distributors and its own sales force to distribute
Triage DOA and may rely upon distributors to distribute products under
development. Triage DOA is currently marketed pursuant to exclusive
distribution agreements in the U.S. medical market by Fisher and in certain
countries in Europe, Latin America, the Middle East, Asia and Africa by Merck
KGaA. The loss or termination of either of these distributors could have a
material adverse effect on the Company's sales and operating income unless
suitable alternatives can be arranged.
The Fisher distribution agreement has minimum quarterly sales milestones which
have not been met and gives the Company the option to terminate the agreement
without payment of a termination fee. Fisher would be obligated to pay to
Biosite a portion of the penalty Fisher incurred in 1996, and the Company would
be allowed to appoint a new distributor or to sell Triage DOA directly in the
U.S. medical market. The Company has not exercised its right to terminate the
agreement and is currently negotiating a new distribution agreement. The
long-term distribution arrangement being negotiated with Fisher, if executed,
would expand Fisher's role to include the distribution of certain of the
potential new products in the U.S. medical market. There can be no assurance
that a new distribution agreement will be executed. The current Fisher
distribution agreement provides for a six-month transition period in the event
of termination.
Merck currently distributes Triage DOA and has an agreement with Biosite to
distribute the Triage Cardiac Panel in development, in certain countries in
Europe and Latin America and in South Africa. As a result of Merck's
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<PAGE> 15
decision to refocus away from certain aspects of the human diagnostics
business, Biosite is negotiating the reacquisition of certain international
distribution rights for the Triage DOA product line and certain development and
distribution rights from Merck for the Triage Cardiac Panel product in
development. Concurrently, the Company is evaluating product distribution
alternatives for the international markets, including the establishment of
European operations with a direct sales force in certain countries. The
reacquisition of the development and distribution rights for the Triage Cardiac
Panel product in development may require a cash payment and forgiveness of
amounts owed to the Company by Merck related to the development of the Triage
Cardiac Panel product. There can be no assurance that, if the rights are
reacquired by Biosite, the Company can make successful alternative distribution
arrangements.
The Company anticipates that it may enter into additional distribution
agreements with respect to its products currently marketed, when appropriate
and potential products that it is developing or may develop in the future, if
any such products receive the requisite regulatory clearance or approvals.
There can be no assurance that the Company will be able to enter into such
agreements on acceptable terms, if at all, or if the Company elects to
distribute new products directly that the Company's direct sales, marketing and
distribution efforts would be successful.
If any of the Company's distribution or marketing agreements are terminated
and the Company is unable to enter into replacement agreements or if the
Company elects to distribute new products directly, the Company would have to
invest in additional selling, general and administrative resources, including
additional field sales personnel, which would significantly increase future
sales and marketing expenses. The Company currently has limited experience in
direct sales, marketing and distribution of its products. There can be no
assurance that the Company's direct sales, marketing and distribution efforts
would be successful or that revenue from such efforts would exceed expenses.
Further, there can be no assurance that Biosite would be able to enter into new
distribution or marketing agreements on satisfactory terms, if at all.
- - Uncertainty of Patent and Proprietary Technology Protection; Potential
Inability to License Technology from Third Parties
The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology, and to
operate without infringing the proprietary rights of others or to obtain rights
to such proprietary rights. Biosite has U.S. and foreign issued patents and is
currently prosecuting patent applications in the United States and with certain
foreign patent offices. There can be no assurance that any of the Company's
pending patent applications will result in the issuance of any patents, that
the Company's patent applications will have priority over others' applications,
or that, if issued, any of the Company's patents will offer protection against
competitors with similar technologies. There can be no assurance that any
patents issued to the Company will not be challenged, invalidated or
circumvented in the future or that the rights created thereunder will provide a
competitive advantage.
Litigation may be necessary to enforce any patents issued to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. In March 1996, the Company settled a potential patent infringement
claim by obtaining a license to the contested patent in return for a one-time
payment of $2.2 million. In September 1996, the Company settled a patent
infringement lawsuit filed by Abbott Laboratories and obtained a license to the
contested patent in return for the payment of $5.5 million and the agreement to
pay certain royalties. There can be no assurance that the Company will not in
the future become subject to other patent infringement claims and litigation in
addition to those referred to below, or to interference proceedings conducted
in the U.S. Patent and Trademark Office ("USPTO") to determine the priority of
inventions.
On September 9, 1997, the Company was sued for patent infringement by
Behring Diagnostics GmbH and Behring Diagnostics, Inc. (together "Behring").
Behring alleges that the Company's Triage DOA products infringe a U.S. patent
held by the plaintiffs and they seek unspecified damages and to enjoin future
sales of the Triage DOA products by the Company. The Company has reviewed the
cited patent and believes it has meritorious defenses. The Company intends to
vigorously defend its position, and it may incur significant legal costs in
executing its defense.
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<PAGE> 16
The Company has received correspondence from Becton Dickinson and Company
("B-D"), a major manufacturer of medical supplies, devices and diagnostic
systems, offering to license a U.S. patent held by B-D to the Company. B-D did
not propose any license terms in its correspondence. The Company has reviewed
such patent and believes that it has defenses to any infringement claim under
such patent. In addition, the Company has received a letter from Spectral
Diagnostics, Inc. ("Spectral"), a manufacturer of rapid-format
cardiac-diagnostic panels, informing the Company that Spectral holds U.S.
patents covering a kit for diagnosing and distinguishing chest pain. This
letter stated that Spectral has not yet determined its position with respect to
the licensing of its technology. Spectral subsequently informed the Company
that it received a notice of allowance from the USPTO with respect to another
patent application. The Company has asked Spectral for a clarification of its
position, but Spectral has refused to state whether it will or will not allege
infringement of its patent by the Triage Cardiac Panel once that product is
launched. The Company is continuing its review of the issued patent cited in
this letter and other materials with respect to the allowed patent application
and is evaluating their potential impact on the Triage Cardiac Panel. There
can be no assurance that B-D or Spectral will not initiate litigation alleging
that Triage DOA or the Triage Cardiac Panel, respectively, infringe claims
under such manufacturer's patents. Such litigation, if initiated, could seek
to recover damages as a result of any sales of such products and to enjoin
further such sales.
The Behring litigation and any such litigation with B-D or Spectral may
result in significant expenses to the Company regardless of the outcome. The
outcome of litigation is inherently uncertain and there can be no assurance
that a court would not find the third-party claims valid and that the Company
had no successful defense to such claims. An adverse outcome in litigation or
the failure to obtain a necessary license could subject the Company to
significant liability and could prevent the Company from selling Triage DOA or
the Triage Cardiac Panel, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The defense and prosecution of intellectual property suits, USPTO
interference proceedings, and related legal and administrative proceedings will
result in substantial expense to the Company and significant diversion of
effort by the Company's technical and management personnel. An adverse
determination in litigation or interference proceedings to which the Company
may become a party could subject the Company to significant liabilities to
third parties. Further, either as the result of such litigation or proceedings
or otherwise, the Company may be required to seek licenses from third parties
which may not be available on commercially reasonable terms, if at all.
Triage DOA and products under development may incorporate technologies that
are the subject of patents issued to, and patent applications filed by, others.
The Company has obtained licenses for certain technologies. However, there can
be no assurance that the Company will be able to obtain licenses for technology
patented by others on commercially reasonable terms, if at all, that it will be
able to develop alternative approaches if unable to obtain licenses or that the
Company's current and future licenses will be adequate for the operation of
Biosite's business. The failure to obtain necessary licenses or to identify and
implement alternative approaches would prevent the Company from commercializing
certain of its products under development and would have a material adverse
effect on the Company's business, financial condition and results of
operations.
Biosite is aware of a U.S. patent owned by Celltech Limited ("Celltech")
relating to the manufacture of antibodies, such as those developed or being
developed by Biosite for several products, including Triage Cardiac. Biosite is
also aware that this patent is the subject of an interference proceeding in the
USPTO which was initiated in February 1991 with a patent application filed by
Genentech, Inc. ("Genentech"). In September 1996, the European Patent Office
("EPO") invalidated, following an opposition, certain claims under Celltech's
corresponding EPO- granted patent that may be relevant to Biosite's products
and products under development. Celltech has indicated that it will appeal such
decision. If Celltech does appeal, such claims can be reinstated, at least
until a final decision is rendered. If it is determined that aspects of the
manufacturing of Biosite's antibodies are covered by patent claims stemming
from the interference or if Celltech were to have such claims upheld on appeal,
or if patent infringement litigation is brought against the Company by either
Celltech or Genentech, Biosite may be required to obtain a license under such
patents and corresponding patents in other countries. There can be no
assurance that a license would be made available to Biosite on commercially
reasonable terms, if at all. If such license is required and not obtained the
Company might be prevented from using certain of its manufacturing
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<PAGE> 17
technologies. The Company's failure to obtain any required licenses could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company also relies upon trade secrets, technical know-how and continuing
invention to develop and maintain its competitive position. There can be no
assurance that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the
Company's trade secrets or disclose such technology, that the Company can
meaningfully protect its trade secrets, or that the Company will be capable of
protecting its rights to its trade secrets.
Others may have filed and in the future are likely to file patent
applications that are similar or identical to those of the Company. To
determine the priority of inventions, the Company may have to participate in
interference proceedings declared by the USPTO that could result in substantial
cost to the Company. No assurance can be given that any patent application of
another will not have priority over patent applications filed by the Company.
The commercial success of the Company also depends in part on the Company
neither infringing patents or proprietary rights of third parties nor breaching
any licenses that may relate to the Company's technologies and products. The
Company is aware of several third-party patents that may relate to the
Company's technology. There can be no assurance that the Company does not or
will not infringe these patents, or other patents or proprietary rights of
third parties. In addition, the Company has received and may in the future
receive notices claiming infringement from third parties as well as invitations
to take licenses under third party patents. Any legal action against the
Company or its collaborative partners claiming damages and seeking to enjoin
commercial activities relating to the Company's products and processes affected
by third party rights, in addition to subjecting the Company to potential
liability for damages may require the Company or its collaborative partner to
obtain a license in order to continue to manufacture or market the affected
products and processes. There can be no assurance that the Company or its
collaborative partners would prevail in any such action or that any license
(including licenses proposed by third parties) required under any such patent
would be made available on commercially acceptable terms, if at all. There are
a significant number of U.S. and foreign patents and patent applications in the
Company's areas of interest, and the Company believes that there may be
significant litigation in the industry regarding patent and other intellectual
property rights. If the Company becomes involved in such litigation, it could
consume a substantial portion of the Company's managerial and financial
resources, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
- - Intensely Competitive Industry; Rapid Technological Change
The market in which the Company competes is intensely competitive. Biosite's
competitors include health care companies that manufacture laboratory-based
tests and analyzers, as well as clinical reference laboratories and
hospital-based laboratories. Currently, the majority of diagnostic tests used
by physicians and other health care providers are performed by independent
clinical reference laboratories and hospital- based laboratories. The Company
expects that these laboratories will compete vigorously to maintain their
dominance of the testing market. In order to achieve market acceptance for its
products, the Company will be required to demonstrate that its products are
attractive alternatives to tests performed by clinical reference laboratories
and hospital-based laboratories. This will require physicians to change their
established means of having such tests performed. There can be no assurance
that the Company's products will be able to compete with the testing services
provided by these laboratories. In addition, companies with a significant
presence in the diagnostic market, such as Abbott Laboratories, Boehringer
Mannheim GmbH, Chiron Diagnostics, Clinical Diagnostic Systems, a division of
Johnson & Johnson, DADE International, and Roche Biosciences, Inc., have
developed or are developing diagnostic products that do or will compete with
the Company's products. These competitors have substantially greater financial,
technical, research and other resources and larger, more established marketing,
sales, distribution and service organizations than the Company. Moreover, such
competitors offer broader product lines and have greater name recognition than
the Company, and offer discounts as a competitive tactic. In addition, several
smaller companies are currently making or developing products that compete with
or will compete with those of the Company. There can be no assurance that the
Company's competitors will not succeed in developing or marketing technologies
or products that are more effective or commercially attractive than the
Company's current or future products, or that would render the Company's
technologies and products obsolete. Moreover, there can be no assurance that
the Company will have the financial resources, technical expertise or
marketing, distribution or
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<PAGE> 18
support capabilities to compete successfully in the future. In addition, there
can be no assurance that competitors, many of which have made substantial
investments in competing technologies that may be more effective than the
Company's technologies, will not prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets.
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PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS
In September, the Company was named in a lawsuit filed by Behring
Diagnostics GmbH and Behring Diagnostics, Inc. alleging that the Company's
Triage DOA products infringe on U.S. Patent 4,366,241 held by the plaintiffs.
The plaintiffs seek to recover damages of an unspecified amount and to enjoin
future sales of the Triage DOA products by the Company. The Company has
reviewed the cited patent and believes it has meritorious defenses. The
Company intends to vigorously defend its position, and it may incur significant
legal costs in executing its defense. The filing of the lawsuit is not
expected to impact the development of the Company's potential new products.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Changes in Securities
On October 22, 1997, the Board of Directors of the Company adopted a
Stockholder Rights Plan. Under the terms of the Rights Plan, stockholders of
record as of November 3, 1997 will receive a dividend of one Preferred Stock
Purchase Right for each share of Common Stock held on that date. The Rights
will expire 10 years after issuance, and will be exercisable only if a person
or group becomes the beneficial owner of 15% or more of the Common Stock (such
person or group, a "15% holder") or commences a tender or exchange offer which
would result in the offeror beneficially owning 15% or more of the Common
Stock. Each Right will entitle stockholders to buy one one-thousandth of a
share of Series A Participating Preferred Stock of the Company at an exercise
price of $50.00, subject to certain antidilution adjustments.
If a person or group accumulates 15% or more of the Common Stock, each
Right (other than Rights held by a 15% holder and certain related parties,
which will be voided) will be adjusted so that upon exercise the holder will
have the right to receive that number of shares of Common Stock (or in certain
circumstances, a combination of securities and/or assets) having a value of
twice the exercise price of the Right. In addition, if following the public
announcement of the existence of a 15% holder the Company is involved in a
merger or business combination or a sale of 50% or more of the Company's assets
or earning power, each Right (other than Rights held by a 15% holder and
certain related parties, which will be voided) will represent the right to
purchase, at the exercise price, common stock of the acquiring entity having a
value of twice the exercise price at the time. The Board of Directors will
also have the right, following the public announcement of the existence of a
15% holder, to cause each Right (other than rights held by the 15% holder) to
be exchanged for one share of Common Stock.
The Board of Directors is entitled to redeem the Rights at $.01 per
Right at any time prior to the public announcement of the existence of a 15%
holder.
(d) Use of proceeds
The Company sold 2,760,000 shares of common stock, par value $.01 per
share, pursuant to a Registration Statement on Form S-1 (File No. 333-17657),
which was declared effective by the Securities and Exchange Commission on
February 10, 1997. The managing underwriters of the offering were Cowen &
Company and Alex. Brown & Sons. The aggregate gross proceeds of the offering
were $33,120,000. The Company's total expenses in connection with the offering
were $3,291,629, of which $2,318,400 was for underwriting discounts and
commissions and $973,229 was for other expenses paid to persons other than
directors or officers of the Company, persons owning more than 10 percent of
any class of equity securities of the Company, or affiliates of the Company
(collectively Affiliates). The Company's net proceeds from the offering were
$29,828,371. As of September 30, 1997, the Company has expended approximately
$3,976,000 of such net proceeds for the purchase of property, equipment and
leasehold improvements, $7,550,000 for research and development, and $4,699,000
on sales and marketing activities. The Company also utilized approximately
$5,133,000 for working capital and general corporate purposes. As of September
30, 1997, the Company has expended an aggregate of approximately $21,358,000 of
such net proceeds. The Company invested, from time to time, the balance of
such net proceeds primarily in marketable securities and money market funds.
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<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None
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<PAGE> 21
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.
Dated: November 10, 1997 BIOSITE DIAGNOSTICS INCORPORATED
By: /s/ CHRISTOPHER J. TWOMEY
-----------------------------------
Christopher J. Twomey
Vice President, Finance and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
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<PAGE> 22
Exhibit Index
Exhibit
Number Description
27.1 Financial Data Schedule
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONDENSED FINANCIAL STATEMENTS (UNAUDITED) AS OF AND FOR THE
QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONDENSED FINANCIAL STATEMENT (UNAUDITED) INCLUDED IN THE COMPANY'S
REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,827
<SECURITIES> 36,468
<RECEIVABLES> 5,784
<ALLOWANCES> 0
<INVENTORY> 2,220
<CURRENT-ASSETS> 53,307
<PP&E> 13,313
<DEPRECIATION> 6,247
<TOTAL-ASSETS> 65,340
<CURRENT-LIABILITIES> 5,111
<BONDS> 3,804
<COMMON> 128
0
0
<OTHER-SE> 56,297
<TOTAL-LIABILITY-AND-EQUITY> 65,340
<SALES> 8,079
<TOTAL-REVENUES> 8,908
<CGS> 1,693
<TOTAL-COSTS> 6,059
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,155
<INCOME-TAX> 266
<INCOME-CONTINUING> 889
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 889
<EPS-PRIMARY> 0.07<F1>
<EPS-DILUTED> 0.07<F1>
<FN>
<F1>EARNINGS PER SHARE IS CALCULATED USING THE WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON EQUIVALENT SHARES OUTSTANDING DURING THE PERIODS. SEE
NOTE 2 OF NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED).
</FN>
</TABLE>
