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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 March 31, 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 Identification No.]
of incorporation or organization]
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) Yes X No ___ and (2) has been
subject to such filing requirements for the past 90 days. Yes ___ No X
The number of shares of the Registrant's Common Stock, $0.01 par value,
outstanding at May 1, 1997 was 12,736,995
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BIOSITE DIAGNOSTICS INCORPORATED
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements:
Condensed Balance Sheets as of March 31, 1997 (Unaudited) and
December 31, 1996 .......................................... 1
Condensed Statements of Income (Unaudited) for the three months
ended March 31, 1997 and 1996 ............................... 2
Condensed Statements of Cash Flows (Unaudited) for the three
months ended March 31, 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 ....................................... 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................. Not Applicable
Item 2. Changes in Securities ......................................... 13
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 .............................. 13
Signatures .............................................................. 14
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOSITE DIAGNOSTICS INCORPORATED
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,239,426 $ 1,609,861
Marketable securities, available-for-sale 31,613,890 8,305,663
Accounts receivable 4,266,890 4,608,072
Receivable from stockholder 1,335,524 869,535
Inventories 1,884,549 1,732,180
Other current assets 2,463,511 1,864,298
------------ ------------
Total current assets 49,803,790 18,989,609
Property, equipment and leasehold improvements, net 4,751,756 4,140,163
Patents and license rights, net 4,179,674 4,292,277
Other assets 2,241,306 2,666,569
------------ ------------
$ 60,976,526 $ 30,088,618
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,127,667 $ 967,974
Accrued salaries and other 916,093 1,950,800
Accrued contract payable 751,544 751,544
Current portion of long-term obligations 1,397,912 1,012,073
------------ ------------
Total current liabilities 4,193,216 4,682,391
Long-term obligations 2,671,320 3,252,944
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
and 8,328,847 shares authorized at March 31,
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 March 31, 1997
and December 31, 1996, respectively; 12,731,660,
and 1,473,573 shares issued and outstanding at
March 31, 1997 and December 31, 1996,
respectively 127,317 14,736
Additional paid-in capital 53,086,734 22,094,711
Unrealized net loss on marketable securities, net
of related tax effect of $(54,765) and $(1,837)
at March 31, 1997 and December 31, 1996,
respectively (84,903) (2,754)
Deferred compensation (400,284) (427,345)
Retained earnings 1,383,126 390,647
------------ ------------
Total stockholders' equity 54,111,990 22,153,283
------------ ------------
$ 60,976,526 $ 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 MARCH 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 7,533,068 $ 6,206,664
Cost of sales 1,624,246 1,370,699
------------ ------------
Gross profit 5,908,822 4,835,965
Operating Expenses:
Research and development 2,737,946 2,066,386
Selling, general and administrative 2,303,220 1,913,364
Settlement of patent matters -- 2,368,282
------------ ------------
5,041,166 6,348,032
------------ ------------
Operating income (loss) 867,656 (1,512,067)
Other income:
Interest and other income 323,816 187,361
Contract revenue-related party 336,007 312,229
------------ ------------
Income (loss) before benefit (provision) for income taxes
1,527,479 (1,012,477)
Benefit (provision) for income taxes (535,000) 372,809
------------ ------------
Net income (loss) $ 992,479 $ (639,668)
============ ============
Net income (loss) per share $ 0.08 $ (0.06)
============ ============
Shares used in calculating per share amounts 11,886,000 10,423,000
============ ============
</TABLE>
See accompanying notes.
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BIOSITE DIAGNOSTICS INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities $ 232,548 $ (1,485,505)
INVESTING ACTIVITIES
Proceeds from sales and maturities of marketable securities 3,593,626 4,227,313
Purchase of marketable securities (27,038,767) (4,008,166)
Purchase of property, equipment and leasehold improvements (1,119,797) (559,576)
Patents, license rights, deposits and other assets 136,424 126,769
------------ ------------
Net cash used in investing activities (24,428,514) (213,660)
FINANCING ACTIVITIES
Proceeds from issuance of financing obligations 1,169,503 618,556
Principal payments under financing obligations (365,288) (282,667)
Proceeds from issuance of stock, net 30,021,316 14,073
------------ ------------
Net cash provided by financing activities 30,825,531 349,962
------------ ------------
Increase (decrease) in cash and cash equivalents 6,629,565 (1,349,203)
Cash and cash equivalents at beginning of period 1,609,861 2,276,403
------------ ------------
Cash and cash equivalents at end of period $ 8,239,426 $ 927,200
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 83,493 $ 89,245
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Accrued liability for license rights acquired $ -- $ 3,500,000
============ ============
</TABLE>
See accompanying notes.
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BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997 (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 incorporated by
reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
2. NET INCOME (LOSS) PER SHARE
Net income (loss) 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 initial public offering, plus the
number of common equivalent shares which became issuable during the same period
pursuant to the grant of stock options, have been included in the calculation of
the shares used in computing net income (loss) 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 (loss) per
share also includes the 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 duel
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 (loss) 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 (loss) per share of $0.15 and $(0.46) for the
quarters ended March 31, 1997 and 1996, respectively. The Company has not yet
determined what the impact of Statement No. 128 will be on the calculation of
fully diluted net income (loss) per share.
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BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997 (UNAUDITED)
3. BALANCE SHEET INFORMATION
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- ----------
<S> <C> <C>
Raw materials $ 489,130 $ 441,719
Work in process 1,182,045 1,125,608
Finished goods 213,374 164,853
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$1,884,549 $1,732,180
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</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 authorized number of shares of common and
preferred stock issuable by the Company was amended to 25,000,000 shares of
common stock and 5,000,000 shares of preferred stock.
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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,
introduction and acceptance of new products, 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
point-of-care diagnostic tests. The Company began commercial sales of 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
point-of-care 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.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of net
sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
------ ------
<S> <C> <C>
Net sales 100% 100%
Cost of sales 22 22
---- ----
Gross profit 78 78
Operating Expenses:
Research and development 36 33
Selling, general and administrative 30 31
Settlement of patent matters -- 38
---- ----
Total operating expenses 66 102
Income (loss) from operations 12 (24)
Interest and other income, net 8 8
---- ----
Income (loss) before benefit (provision)
for income taxes 20 (16)
Benefit (provision) for income taxes (7) 6
---- ----
Net income (loss) 13% (10)%
==== ====
</TABLE>
Net Sales. Net Sales increased 21% to $7.5 million for the three months
ended March 31, 1997 from $6.2 million for the three months ended March 31,
1996. The increase is primarily attributable to the continued market acceptance
of the Company's Triage DOA products and a shift in sales from other Triage DOA
products to the
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higher-priced Triage DOA Plus TCA product. Sales of Triage DOA Plus TCA
increased 32% to $3.5 million for the first quarter of 1997 from $2.7 million
for first quarter of 1996. As a result of the market acceptance of Triage DOA
Plus TCA, a shift from other Triage DOA products occurred as customers converted
their orders to the Triage DOA Plus TCA product. Historically, the Company has
experienced an end of the year increases in sales, related primarily to annual
milestones and sales goals of the Company's U.S. distributor in the clinical
market. Such year-end increases in sales has lead to a historical sales trend of
which fourth quarter sales are generally followed by lower first quarter sales
and rebounding sales in following quarters. There can be no assurance that such
a trend will continue in the future.
Gross profit. Gross profit increased 22% to $5.9 million for the first
quarter of 1997 from $4.8 million for the same period in 1996 as a result of
increased sales of the Triage DOA product line. Gross margins remained constant
at 78% for both periods.
Research and Development Expenses. Research and development expenses
increased 33% to $2.7 million for the three months ended March 31, 1997 from
$2.1 million for the same period in 1996. This increase resulted from the
expansion of the Company's research and development and manufacturing scale-up
efforts on its microbiology, cardiac, and therapeutic drug monitoring assays
under development. During the first quarter of 1997, the Company expended
significant efforts related to activities for its Triage C. diff and Triage
Cardiac products under development. The Company expects its research and
development expenses to increase significantly in 1997 as compared to 1996
levels, reflecting increased expenditures primarily related to hiring additional
personnel and preclinical and clinical studies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 20% to $2.3 million for the first quarter of
1997 from $1.9 million for the first quarter of 1996. This increase was
primarily a result of the cost of expanding the Company's in-house marketing and
administrative functions to support the Company's expanded operations. The
Company expects selling, general and administrative costs to increase
significantly 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 and the Company's obligations
as a public reporting entity. In particular, the Company expects activities
related to the potential launches of Triage C. diff and Triage Cardiac to result
in increases in selling, general and administrative expenses in 1997 as compared
to 1996 levels.
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. 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 income increased 73% to $324,000
for the three months ended March 31, 1997 from $187,000 for the same period in
1996. The increase resulted primarily from the higher average balance of cash
and marketable securities during the first quarter 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 provision for
income taxes increased to $535,000 for the first quarter of 1997 from a benefit
for income taxes of $373,000 for the same period in 1996. The Company's
effective tax rate was 35% and 37% for the three month periods ended March 31,
1997 and 1996, respectively. The decrease in the Company's effective tax rate
resulted primarily from increases in the estimated research and development
credits and a state tax benefit attributable to credits for certain capital
expenditures.
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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 March 31, 1997, the
Company had cash, cash equivalents, and marketable securities of approximately
$39.9 million compared to $9.9 million at December 31, 1996.
The increase in cash, cash equivalents, and marketable securities
during the three months ended March 31, 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 from
operating activities of $233,000 for the quarter ended March 31, 1997 as
compared to net cash used in operating activities of $1.5 million for the
quarter ended March 31, 1996. Net cash used in operating activities for the
quarter ended March 31, 1996 included the payment of $2.2 million for a license
right accrued as of December 31, 1995. Significant sources and uses of cash for
the quarter ended March 31, 1997 included the expenditure of $600,000 to acquire
licenses to certain in-process technologies, $1.1 million for capital equipment
and leasehold improvements and the receipt of $763,000 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 to adequately deliver
new products, expansion of its direct sales force and marketing programs related
to new products, potential procurement and enforcement of patents 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 March 31, 1997, the Company had a $2.5
million equipment financing arrangement with a financial institution, of which
approximately $1.5 million was available for future borrowing. The line of
credit expires on December 31, 1997. 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 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 and gain market
acceptance, the timing 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, results of clinical
investigations and competition. 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
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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 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
Sales of Triage DOA have to date 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
demand for Triage DOA would 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. The Company's continued growth will depend on its
ability to successfully develop and commercialize other products, to gain
additional acceptance of Triage DOA 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 CareLink System's 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
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 for such products. If the
Company is unable,
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<PAGE> 12
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 the Fisher Healthcare
Division ("Fisher") of the Fisher Scientific Company 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, if the milestones are not met, gives the Company the option to
terminate the agreement without payment of a termination fee, obligates Fisher
to pay to Biosite a portion of the penalty Fisher incurrred in 1996, and allows
the Company to appoint a new distributor or to sell Triage DOA directly in the
U.S. medical market. The Fisher distribution agreement provides for a six-month
transition period in the event of termination.
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 sales and marketing 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 patent infringement claims and litigation or
interference proceedings conducted in the USPTO to determine the priority of
inventions.
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
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<PAGE> 13
patent and believes that it has defenses to any infringement claim under such
patent. In addition, Biosite has received a letter from Spectral Diagnostics,
Inc. ("Spectral"), a manufacturer of rapid-format cardiac-diagnostic panels,
informing the Company that Spectral holds a U.S. patent covering a kit for
diagnosing and distinguishing chest pain and that it received a notice of
allowance from the U.S. Patent and Trademark Office ("USPTO") with respect to a
second patent application. This letter states that Spectral has not yet
determined its position with respect to the licensing of its technology. The
Company is currently reviewing the issued patent cited in this letter and the
materials provided by Spectral with respect to the allowed patent application
and is evaluating their potential impact on Triage Cardiac. There can be no
assurance that B-D or Spectral will not initiate litigation alleging that Triage
DOA or Triage Cardiac, 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
outcome of litigation is inherently uncertain and there can be no assurance that
a court would not find such 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 Biosite from selling Triage DOA or Triage Cardiac 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 June 1996, the European
Patent Office ("EPO") invalidated, following an opposition, certain claims under
Celltech's corresponding EPO-granted patent which 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 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.
-11-
<PAGE> 14
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 and hospital-based
laboratories. Currently, the majority of diagnostic tests used by physicians and
other health care providers are performed by independent clinical 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 an attractive alternative to testing performed
by clinical 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 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.
-12-
<PAGE> 15
PART II. OTHER INFORMATION.
ITEM 2. CHANGES IN SECURITIES.
On various dates from January 1, 1997 through March 31, 1997, the
Company issued 76,665 shares of its Common Stock to 38 non-officer employees
pursuant to the exercise of options granted under its 1989 and 1996 Stock Plans
between April 11, 1991 and January 31, 1997. The exercise prices per share
ranged from $0.24 to $7.25, for an aggregate consideration of $82,040.50. The
Company relied on the exemption provided by Rule 701 under the Securities Act of
1933.
The recipients of the above-described securities represented their
intention to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock certificates
issued in such transactions. All recipients had adequate access, through
employment or other relationships, to information about the Company.
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> 16
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: May 8, 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> 17
Exhibit Index
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE REGISTRANT'S
CONDENSED FINANCIAL STATEMENTS (UNAUDITED) AS OF AND FOR THE QUARTER ENDED MARCH
31, 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 MARCH 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 8,239
<SECURITIES> 31,614
<RECEIVABLES> 5,602
<ALLOWANCES> 0
<INVENTORY> 1,885
<CURRENT-ASSETS> 49,804
<PP&E> 9,955
<DEPRECIATION> 5,203
<TOTAL-ASSETS> 60,977
<CURRENT-LIABILITIES> 4,193
<BONDS> 2,671
0
0
<COMMON> 127
<OTHER-SE> 53,985
<TOTAL-LIABILITY-AND-EQUITY> 54,112
<SALES> 7,533
<TOTAL-REVENUES> 8,193
<CGS> 1,624
<TOTAL-COSTS> 5,041
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,527
<INCOME-TAX> 535
<INCOME-CONTINUING> 992
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 992
<EPS-PRIMARY> .08<F1>
<EPS-DILUTED> .08<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>
